Highlights

Recently, Scomi Energy (SES) has entered into an exclusive product formulation and marketing agreement with Graphene NanoChem (listed in UK’s AIM Exchange) to deliver a range of formulated PlatDrill series for the oilfield chemical market.

According to the company, the graphene-based PlatDrill enhanced fluids deliver superior performance with lower environmental impacts as well as better lubricity, load bearing capacity and higher viscosity stability.

Graphene NanoChem manufactures performance speciality chemicals and advanced nanomaterials from renewable sources including waste material. The company operates 2 manufacturing sites in Senawang and Lahad Datu.

Comments

With this agreement, NanoChem will be able to supply its PlatDrill products to a larger oilfield market by leveraging on SES’s presence in more than 25 countries worldwide. Graphene NanoChem is already supplying a PlatDrill derivative to SES, utilised in oil reservoir drill-in fluids, which has been successfully deployed downhole Turkmenistan this year.

We expect the collaboration to strengthening SES’s foothold in drilling fluid market and improve margin due to increasing mix of high margin products. The company will continue to expand its product range into high margin drilling fluid, completion services, sub-surface studies and wireline services via partnership.

The company is also involved in the bidding for the 3rd round of RSC. We gather from the management that the prospect looks promising. While we have not included the potential award in our forecasts, a potential marginal field win will conservatively raise our TP range to between RM1.02 and RM1.14 based on 0-50% debt to equity ratio funded (vs. norm of 70% debt to equity ratio).

DWM will be the main booster for long-term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea. We understand that the company is in the vanguard of the development of Microwave technology for the treatment of oil contaminated drill cuttings. The commercialization of this product in 2014 might be the game changer and new growth driver for the company.

SES is trading at 13x CY 14 P/E versus UMW Oil and Gas at 27x CY 14 P/E. We expect high UMW O&G valuation driving up the P/E multiple of drilling related stocks such as SES.

Forecasts

Unchanged.

Catalysts

• Potential to secure RM400m worth of contracts on top of its already huge orderbook of RM5.2bn.
• Contract win in DWM business given the potential addressable market size of US$2.1bn.
• A marginal field contract win.

Risks

Global recession hitting O&G price; Technology advancement; Relaxing of drilling waste management regulations.

Valuation

We maintained our BUY call with an unchanged TP of RM0.90 (based on unchanged 16x FY03/15 EPS of 5.6sen/share).

Source: Hong Leong Investment Bank Research - 12 Dec 2013