Highlights

We recently met with the management of Scomi Energy (SES) for an update on the company after it secured two contracts worth total RM165m recently.

SES aims to double its drilling fluid and waste management’s market share from current 7% to 14% in next 7 year by product cross selling and enter into new market.

Besides growing core business, management shares its long term strategy to expand its product range (such as well completion, sub-surface, wireline and operations and maintenance) and aims to be an integrated oilfield services provider like Schlumberger and Halliburton.

By building its integration capability which includes project management, SES can handle projects from marginal, brownfield and enhanced oil recovery which presents enormous opportunity. Potential markets are Malaysia, Indonesia and Pakistan.

We also understand that the operations in Malaysia should deliver stronger result if not because of the delay in commencing some of the drilling programme due to shortage of rig (which benefit UMW O&G and Perisai).

SES is confident of securing several job orders in South East Asian region as well as Middle East in short term to add to outstanding orderbook of RM5.3bn currently.

Comments

We came away from the meeting feeling positive given the current prospect on the drilling fluid and waste management business. We also applaud the company’s long term strategy to become an integrated oilfield services provider as national oil companies and oil majors are outsouring turnkey projects due to shortage of talents.

The company is also involved in the bidding for the 3rd round of RSC. We gather from management that the prospect look promising. We conservatively do not include the potential award in our forecasts.

We expect the upcoming 3Q FY14 results to be inline with our forecast albeit some margin pressure due to ramp up in initial cost for new projects. Margin should rebound from 4QFY14 onwards. Drilling fluid and waste management should continue to register strong result but partly offset by sluggish coal business.

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 14x CY15 P/E versus UMW Oil and Gas at 23x CY 15 P/E. We expect high UMW O&G valuation driving up the P/E multiple of drilling related stocks such as SES.

Catalysts

• 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 RM1.02 based on unchanged 16x CY15 EPS of 6.4sen/share.

Source: Hong Leong Investment Bank Research - 10 Feb 2014