News

According to The Edge Weekly, Scomi Energy (SES) and its Australian partner Octanex will soon be awarded their first risk service contract (RSC) for the Ophir oilfield.

SES will hold a 30% stake in the consortium while Octanex 50% and Vestigo Petroleum hold the remaining 20%.

The capex is estimated at between US$130m to US$200m with 5.1m barrels of recoverable oil.

Financial Impact

With assumptions of: i) 5m barrel of recoverable oil; and ii) 30% stake, we estimate the RSC contract to contribute RM40-50m (~49-62% of FY14 PAT) to Scomi Energy’s bottomline.

Comments

We are positive on the potential RSC award as this will transform SES into an E&P services provider in addition to its current core drilling fluid and drilling waste management products.

To note, if SES wins the RSC for Ophir field, our target price will be raised from RM1.12 to RM1.28 (~28.6% potential upside from current price and we only factored in half year contribution in CY15 given the first oil is only expected in 2H15).

If the contract materialise, this will be the first RSC contract that Vestigo partnered with local O&G player. We understand there are more potential marginal fields to be developed under Vestigo and local O&G players stand to be the beneficiary.

Latest orderbook stand at RM5.3bn (~3.7x of FY14 revenue) with 48% contract value from Petronas. SES is targeting to expand its orderbook to RM7-8bn in the next 12-18 months.

In addition to expand its core drilling fluid business, we see multiple growth drivers from: i) new product – graphene nanofluids; ii) microwave cutting treatment; and iii) integrated project management (RSC, brownfield and EOR).

Graphene nano fluids will set to be a game changer for the company. SES has commercialised graphene drilling fluids and the market size is estimated at around US$2bn. We expect the new products (including base oil, production chemical and shale’s chemical) to strengthening SES’s foothold in oilfield fluid market and improve margin going forward.

Another new product, microwave cutting treatment is progressing well and expected to commercialize in 1QCY15.

Forecasts

We raise our FY16/03 earnings by 13% after factored in improve margin on the oilfield services due to prudent cost management and higher mix of better margin product (grapheme drilling fluids). To note, we have not include any earnings from RSC contract yet.

Catalysts

• Contract win in DWM business given the potential addressable market size of US$2.0bn.
• A marginal field contract win.

Risks

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

Valuation

We upgrade from HOLD to BUY with TP raised from RM1.02 to RM1.12 (based on unchanged 16x CY15 EPS of 7sen/share, post earning upgraded).

Source: Hong Leong Investment Bank Research - 9 Jun 2014