Highlights

We arranged a tour yesterday to Scomi Energy’s (SES) Oil & Gas Global Research and Technology Centre (GRTC) in Shah Alam. The visit was attended by 15 buy-side analysts and fund managers. GRTC encompasses training, research, product development and technical service laboratories. It commenced in Sep 05 and was fully functional in Feb 06.

SES intend to expand its traditional drilling fluid into high performance based DF with higher margin (~10-20% higher). To recap, 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. The company has started field test with local oil major and the market size is estimated at around US$1.8bn.

We understand that the company is in the vanguard of the development of Microwave technology for the treatment of oil contaminated drill cuttings and has developed a unique 5- panel shaker for the land rig market. The commercialization of this product in 1Q15 (vs 1H14 previously) might be the game changer and new growth driver for the company.

According to management, drilling waste management (DWM) revenue size is only 10-15% of drilling fluid (DF) in Malaysia. In North Sea, the DWM business size is larger than DF.

Comments

We came away from the visit more positive given the strong prospect from DF and vastly untapped DWM market. Currently, SES has 7% market share in the Eastern market and expects to double to 14% in next 7 years by product cross selling and enter into new markets.

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. 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. DWM will be the main booster for long term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea.

The company is also involved in the bidding for one of the RSC field. We conservatively do not include the potential award in our forecasts. To note, if SES wins the RSC, our target price will be raised from RM1.02 to RM1.18. Currently, Scomi Group is trading at 48% discount to its SOP of RM0.86. By pegging at 20% holding company discount, we derive a fair value for Scomi Group of RM0.70 (provides 66% upside from current price). Hence, it is a cheaper proxy to 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;

Valuation

We maintained our HOLD call with an unchanged TP of RM1.02 (based on unchanged 16x FY03/15 EPS of 6.3sen/share).

Source: Hong Leong Investment Bank Research - 5 Mar 2014