Daya Materials is optimistic despite the gloom in the oil and gas industry
THE general mood in many oil and gas (O&G) firms has been muted since the decline in world oil prices. But there is a feeling of optimism when one steps into the office of Daya Materials Bhd in the thriving cosmopolitan enclave of Solaris Dutamas.
For starters, Daya has successfully renegotiated the term rates for two of the vessels it currently charters for upstream subsea services - a move that will bring about significant savings.
Cost-related issues matter in a soft market, and any reduction will translate straight to the bottomline for the company, which is looking to reverse the RM35.7mil net loss it made last year. This was the first full-year loss in the history of the company.
Daya is currently chartering two vessels – Siem Daya 1 (SD1) and Siem Daya 2 (SD2) – from Norway-based Siem Offshore Inc for five years, with options to purchase. The vessels are deployed mostly in the North Sea,
“The charter rate contracts that Daya had signed in the past where most operators were operating with a US$100 cost structure, are considered premium under today’s scenario.
“When vessels are left idle, they incur running costs that offset rising revenues,” explains group chief executive officer Datuk Lim Thean Shiang, in his first media interview after being appointed to the helm in March.
Daya suffered low vessel utilisation in the fourth quarter of financial year 2014, due mainly to the weakening offshore environment. This dragged down its earnings despite a good performance from its downstream O&G segment.
It has now brought down the daily time-charter rates a vessel from US$67,000 to US$55,000 when it is deployed, and to US$45,000 when left idle. This works out to about US$10mil a vessel a year in savings, according to the company.
This feat is perhaps the first under Lim’s new management. However, it has come at a price.
Lim has spent a lot of time outside the country since coming on board, his last stint being almost a month away.
Lim, who is popularly known as T.S. Lim in corporate circles, is Daya’s major shareholder with a 6.1% stake.
And if everything goes according to plan, Daya looks set to make strong inroads into an Asia-Pacific country in the near future.
According to Lim, the company has been invited by the country’s Government to explore opportunities in the O&G sector, comprising supply-based industries and onshore marginal field exploration, among others. “We’ve had meetings and are awaiting the official letter,” he says, without wanting to reveal more.
The urgency has basis. Even before last year’s oil price decline, Daya was falling off the radar of investors, who were unhappy with its surprise loss and divestment of shares by Datuk Mazlin Md Junid - the single largest shareholder then.
Mazlin is said to have left because of differences with shareholders’ aspirations and gone on to do a reverse takeover of Perduren Holdings Bhd, which is now known as Enra Group Bhd. Enta will also have a focus in O&G.
There were also concerns that the company was taking longer than expected to execute some of the strategies that had been formulated several years back.
Daya was primarily involved in the downstream businesses of technical services and specialised polymer. In late-2012, it shifted its focus to the upstream business of subsea services. It made a mark when it secured jobs in the North Sea – the sea area in northern Europe known for its harsh working conditions.
However, the company suffered from a large cost overrun in its first offshore project in Malaysia. While it was able to flush out most of the cost-related issues and complete the project, it had to write off RM13mil at the end of 2014.
The episode was a setback, considering Daya’s streak of record profits previously.
What followed was a revamp that saw the infusion of new blood at the boardroom level and the redesignation of other board members. Rayburn Azhar Ali was promoted to deputy group CEO, while Nathan Tham was made vice-chairman from managing director previously.
Lim says the bulk of senior personnel involved in that project, comprising mainly expatriates, have left and Daya has since recruited local talent to cut overhead costs.
The company is also clearing the decks of any legacy issues and streamlining the upstream business, while growing the profitable downstream segment.
At the same time, it is looking to sell several businesses which it has identified as non-core. This includes the polymer division, which is the sector it initially started off with. The business has become small relative to the rest, contributing only marginally to profitability.
Currently, O&G contributes 58% to revenue, while technical services provides 39%.
Daya at crossroads
Daya is shifting to be “asset-heavy”, with the US$120mil (RM449mil) purchase of vessel SD1. The move will increase its borrowings, but Lim says it is able to gear up, given that its current gearing, at 0.24 times, is considered low by O&G standards. The company has RM138.1mil in short-term and long-term borrowings, while cash stands at RM75mil.
It will issue up to US$30mil in convertible bonds to buy SD1 and part-finance it with the sale of its technical services arm, Daya CMT Sdn Bhd. The company says it is “naturally hedged” as upstream income is largely in US dollar.
“It is true that we used to adopt an asset-light business model. But as we secure long-term contracts in the North Sea, it is better for us to consider buying the vessels used for those contracts,” says Lim.
According to him, the company has negotiated the terms for the sale of SDI and is getting it at US$120mil as opposed to US$140mil initially.
The company had initially planned to buy both SD1 and SD2 but has cancelled the purchase of the latter for now.
“We are now more robust in our investment evaluation, as we can’t be as aggressive as in the past under current market conditions.”
PublicInvest Research, in a report, noted that SD2 suffered low utilisation during the first quarter ended March 31, which saw 55 days off-hire after the completion of its Qatar project. SD1, meanwhile, was fully utilised for this period,
On a brighter note, the research firm expects a better second half, considering that both vessels have resumed deployment in the North Sea. It is also pursuing opportunities in Africa for the coming winter season to brace itself from fluctuating seasonal changes.
Daya’s strength is its downstream segment, which has not been badly affected by the downturn in the oil price. This division provides chemicals, lifting services and other specialised engineering services to refineries and petrochemical plants. According to Lim, the chemical sub-segment is expected to do better this year and has, as at the end of May, exceeded net profits made last year.
On the heavy lifting side, it has won back most of the term contracts for Petroliam Nasional Bhd or Petronas jobs in the east coast areas of the peninsula in the last six months.
The bulk of downstream income is derived locally, but it has a strategy to grow outside the country. “There is potential in markets like Indonesia, Myanmar and Papua New Guinea, which we are eyeing,” says Lim.
Financially, Daya expects a turnaround in financial year 2015, but is preparing for two years down the road. “We believe there would be a sector recovery in 2017, and potentially shortage in O&G services,” says Lim. Its current order book stands at RM2.1bil, anchored on SD1 and SD2 projects.
As for tenders, the company is bidding for RM750mil worth of jobs.
On its small stake in REACH ENERGY BHD, Lim says Daya’s entry level at the pre-initial public offering level was low and it is another avenue to expand its O&G earnings base via concessions or production-sharing contracts. However, the special-purpose acquisition company listed in the middle of last year has yet to secure an asset.
Daya’s shares are gradually climbing back from a low of 9.5 sen in mid-June. At last look, the counter was trading at 11.5 sen, giving it a market capitalisation of RM206.48mil.
However, the stock is still about 20% down year-to-date.
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