It will continue to press on in the traditional energy sector, while looking out for opportunities in renewables

 

EVEN as renewable has emerged as the energy sector&rsquo s hottest buzzword, fossil fuels are still far from being relics of a bygone age &ndash and remains MTQ Corporation&rsquo s best bet for growth.

 

&ldquo The glory days when everyone reported huge orders are probably over,&rdquo admitted Kuah Boon Wee, the engineering, repair and maintenance services group&rsquo s chief executive officer.

 

But MTQ capped off its 2023 financial year with the highest annual revenues recorded from its Bahrain segment since it moved into the Middle East over a decade ago.

 

The oilfield equipment services company is still focused on supporting players in the oil and gas sector. Specifically, it is training its sights on the Middle East.

 

Revenues were up to S$83.8 million for FY2023 ended March. This marked a 61.2 per cent jump from S$52 million in the preceding financial year, mostly driven by the continued pickup in Bahrain.

 

&ldquo Of course, you must embrace all the new activities in (the renewables) space, and we will do our part,&rdquo said Kuah. &ldquo But the conventional space needs to remain stable and steady, so that we can eventually all transition to a low carbon future&hellip it&rsquo s not going to disappear overnight.&rdquo

 

In FY2023, the group reported a net profit of S$3.7 million, nearly trebling its S$1.3 million net profit in FY2022.

 

The headline-grabbing growth numbers posted in the last financial year are unlikely to be repeated, said Kuah, as they were boosted by pent-up demand in the pandemic years. Still, with the Middle Eastern boom, he said: &ldquo I do expect that there will be steady growth for us.&rdquo

 

Eyes on the price

In addition to increasing existing capacity, MTQ is considering a geographical expansion beyond Bahrain in the Middle East, potentially setting up plants in other countries. &ldquo There&rsquo s enough critical mass&rdquo , said the group CEO, considering the number of assets deployed.

 

Recently, the region has been a hub for oil activity, with national oil companies &ndash that do not need to contend with the dearth of funding from banks in the &ldquo dirty&rdquo industry &ndash leading the growth.

 

Middle Eastern national oil companies are &ldquo probably the biggest revenue contributors to their countries&rdquo , he noted.

 

In the 2022 fiscal year, Saudi Arabia, for example, recorded its first budget surplus in nearly 10 years, owing to the uplift provided by earnings from oil. The Saudi government&rsquo s oil giant, Aramco, reportedly earned a historic US$161.1 billion net income in FY2022.

 

&ldquo When the price of oil is reasonably high or reasonably attractive, then some form of investment and development will happen,&rdquo Kuah said, referencing the oil price surge following Russia&rsquo s invasion of Ukraine and the subsequent Western sanctions on Russian oil.

 

&ldquo Every time you sell a barrel of oil&hellip you have to find a new barrel of oil to maintain (a supply of energy),&rdquo he added.

 

When these Middle Eastern nations reinvest in assets and double down on drilling activity, that is where MTQ comes in &ndash to provide the components and repair and maintenance works for their equipment.

 

&ldquo I suspect, over time, any new infrastructure that is going to be built will be built in the Middle East,&rdquo he said. 

 

Moving away from home

The Middle East now contributes more to MTQ&rsquo s revenues than Singapore. In FY2023, external sales in both regions grew on the year, but the Bahrain segment came up to S$40.3 million, against S$38.7 million in Singapore. And Kuah expects the gap to widen.

 

The Singapore business was supported by spillover effects from the Middle East last year &ndash but these will likely taper off, he explained.

 

In 2012 and 2013, towards the tail end of the last industry boom, companies in South-east Asia such as Keppel built many oil rigs, some on speculation, Kuah said. Then, the market corrected itself in 2014 and 2015, and they were left with undelivered assets.

 

&ldquo In the last couple of years, some of these rigs had found homes, most of them in the Middle East,&rdquo he continued. MTQ, with its experience and familiarity with the specs of equipment in the Middle Eastern market, was able to pick up a &ldquo fair chunk of work&rdquo , modifying and repurposing these oil rigs for overseas use.

 

But the next financial year will be unlikely to see the same boost. &ldquo All the excess &ndash we&rsquo re talking about 2012, 2013, 2014 commitments &ndash pretty much, they&rsquo ve all been absorbed into the market,&rdquo said Kuah. &ldquo So there are no leftover rigs waiting to be deployed.&rdquo

 

Maintenance and servicing works for these equipment in Singapore are also out of the equation: &ldquo Once (the equipment) goes there, it won&rsquo t come back.&rdquo

 

Furthermore, the market for MTQ&rsquo s services is smaller in Singapore, labour costs are up, and workers are harder to hire.

 

Similar to other labour-intensive industries in the Republic, Kuah struggles with manpower, with older workers approaching retirement and young people uninterested in manufacturing jobs. The company has had to lean on foreign workers, primarily from Malaysia and China.

 

These factors have prompted consolidation in the industry. MTQ began moving out of its Pandan Loop facility into its new, larger premises at Tuas South last year, buying over the property from equipment manufacturer and Schlumberger company Cameron International.

 

MTQ expects to finalise the move by end-June. Temporarily working out of two facilities has caused an increase in operating costs, due to the additional overheads. Costs related to the Pandan property came in at S$1.1 million in FY2023 relocation cost MTQ S$0.8 million.

 

But on top of a longer JTC lease at the new location, the group has taken over the revenue streams of Cameron&rsquo s existing business at the facility, as well as the manpower there. The resulting business has a bigger footprint and more economies of scale, Kuah said.

 

&ldquo (Locally), our challenge is to maintain what we have, look for replacements &ndash but not really trying to grow,&rdquo said Kuah. &ldquo If there are other opportunities to consolidate, I wouldn&rsquo t be averse to that.&rdquo

 

Transition from tradition

While MTQ remains focused on its bottom line, the heat is on to reduce the reliance on the carbon-intensive oil and gas industry. To make its business more sustainable, the group has already installed solar panels on the roofs of its Singapore facilities: &ldquo We&rsquo ve got to a point where 30 per cent to 40 per cent of our energy comes from that.&rdquo

 

But diversifying to service the renewable energy sector will not be easy. While MTQ knows the drill when it comes to traditional energy, renewable sources of energy are not its area of expertise.

 

&ldquo When you think about wind turbines or solar farms, they have very different driving components compared to drilling&hellip it&rsquo s a very, very different configuration,&rdquo said the CEO. MTQ has also considered a shift to batteries, or &ldquo electronics-driven things&rdquo .

 

&ldquo But again, running a plant to do that is quite different, and I don&rsquo t even know where the technology is heading,&rdquo Kuah confessed.

 

A few years ago, MTQ made an attempt to get into the marine services space, but exited after struggling to survive in the industry, which was experiencing consolidation.

 

&ldquo I guess we&rsquo ll keep looking,&rdquo Kuah said. &ldquo The way I look at it is: no matter what we all do in the renewables space, the fossil fuel space is going to have to remain &ndash reducing, but still a significant piece of the pie &ndash for 20, 30 years.&rdquo

 

As at Mar 31, 2023, MTQ&rsquo s cash and cash equivalents stood at S$13.6 million. It proposed a final cash dividend of S$0.005, representing a payout ratio of about 29.1 per cent of its profit attributable to shareholders.

 

On Jun 16, its shares closed at S$0.38, up S$0.21 or 123.5 per cent from its record-low share price of S$0.17 in October 2020. Based on Bloomberg data, its market capitalisation stood at S$85.5 million with a price-to-book ratio of 1.32.

 

&ldquo We&rsquo re not going to grow like the old days we&rsquo re going to focus on utilisation. A lot of what we do is really on maintenance, keeping things in use,&rdquo Kuah concluded. &ldquo I don&rsquo t see what&rsquo s wrong with that.&rdquo