• Reservoir Link is a niche player in upstream well services specialising in well perforation service. The pre-requisite to have an explosive licence provide some form of barrier to entry.
• Perforation service is cushioned from cyclical effect of O&G sector due to demand from low-capex production enhancement project as well as rising demand from decommissioning works.
• The company plans to grow its earnings by enhancing its offering in well testing and electric wireline services as well as venturing into solar RE business via acquisition of Founder Energy.
• We derive the fair value for RL at RM0.83/share premised primarily on its successful venture into solar RE business. Currently, we have a NOT RATED recommendation on the stock.

A leading local player in well perforation service

Established in 2009, Reservoir Link has accumulated 11 years of experience in providing well perforation services to Production Sharing Contract (PSC) operators. The pre-requisite to have an explosive licence provide some form of barrier to entry into well perforation service. Meanwhile, the demand for perforation services is not severely impacted by the downturn in O&G capex spending as it is required in many types of offshore activities including drilling, production enhancement as well as plug and abandonment.

Building up new capabilities for expansion

RL has a good growth prospect in the long term potentially from gaining more market share from foreign player due to local content policy. Currently, well services are dominated by foreign giant services players such as Halliburton and Schlumberger. As part of Malaysianisation plan, the company entered into a JV with Petrotechnical to provide well testing services. The arrangement requires the company to purchase 1 full set of well testing equipment which is financed using IPO proceeds. Besides that, it also JV with Archer to provide perforate, wash and cement (PWC) services which are required for plug and abandonment activities, as part of its effort to increase its perforation service revenue.

Diversifying into solar RE business

The company recently acquired 51% equity in Founder Energy SB for RM22m. Founder Energy is one of the largest local subcontractor companies in solar project. Its main clients are largely solar EPCC players such as Solarvest, Samaiden and Cypark. The acquisition comes with a profit guarantee of RM13.8m within 2 years.

A niche player in well services…

Reservoir Link Energy Bhd (RL) is a niche player in oil and gas upstream well service. Its local peer companies are Uzma and Deleum while Vantage Oilfield and Geowell SB are the unlisted competitors. These companies are also directly competing with foreign well services companies including Schlumberger and Halliburton for local O&G projects.

...particularly in well perforation

RL’s bread and butter is in well perforation service, boasting more than 11 years experience since its establishment in 2009. It is also the largest local company in providing well perforation services to PSC companies whereas Uzma and Deleum specialise in wireline services which is a deployment method to bring tools down the well. Specifically, Uzma’s core competency is in coiled tubing unit and electric wireline whereas Deleum is strong in slickline service. Hence, there is minimal direct competition between these companies in perforation service whereby RL’s perforation service may also be required by its competitors to perform respective wireline services.

Expanding service offering for growth

Post-IPO, the company looks to enhance its well testing service as well as venturing into electric wireline service as part of its growth strategy in upstream well services. Currently, RL is acquiring 1 full set of well testing equipment which is estimated to cost about RM18m. By utilising its own staff and equipment, this will help the company to garner better profit margin from this service as opposed to current practice of being too dependent on Petrotechnical to render such service to its clients. The company expects to generate maiden income from its own well testing equipment by 4QFY21.

Financial Highlights

Over FY16-20, RL’s revenue has grown rapidly by introducing more types of well services to its clients. In 2017, it generated its maiden income from well leak repair contract that it secured from Petronas Carigali (Chart 1). In the same year, it also secured its maiden contract in well testing services as well as perforate, wash and cement (PWC) contract from Roc Oil Sarawak following the distribution agreement signed with Archer Malaysia. For PWC contract, RL is entitled to 5% distribution fee from the total contract value of wash and cement workscope in addition to the income from perforation services.

Currently, RL derives bulk of its profits from well perforation and well leak repair services, representing about 90% of its gross profits (Chart 2). The profit contribution from well testing services is low because most of the workscope are actually carried out by its technical partner, Petrotechnical. The well testing service profit margin will be higher once RL is able to deploy its own staff and equipment to complete the job expected in 4Q21 onwards.

Potential transfer listing to Main Market

Based on its latest audited statement of FY18-20, it has accumulated an uninterrupted profit of 3 financial years with aggregate after-tax profit of RM25.4m. These were generated from the same core businesses – well perforation, well leak repair, well testing, wash and cement, wireline and O&G production enhancement service - over the same period. Hence, this could qualify the company to seek for a transfer listing to Bursa Malaysia Main Market in near future which would further boost its corporate image among the investor fraternity.

Valuation

Based on its relative valuation of peer companies, we derive its fair value at RM0.83/share (Table 2) with offers potential return of 53.7% from current market price. The potential upside is premised primarily on successful venture into solar RE business.

Source: BIMB Securities Research - 15 Sept 2021