News

Scomi Energy (SES) announced that its subsidiary Scomi D&P together with its JV partners, Octanex Pte Ltd and Vestigo Petroleum has signed a 7 year small field risk service contract with Petronas to develop and produce petroleum from the Ophir field, offshore Malaysia.

The development cost is estimated at US$135m with first oil expected to be produced in 18 months.

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

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 and in line with our expectation. This contract win will transform SES into an E&P services provider in addition to its current core drilling fluid and drilling waste management products.

To note, this is 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 14% after incorporated the new contribution from RSC. To note, we only factored in 6 months contribution for FY16/03 earnings. Early oil production will prompt us to raise our earnings forecasts.

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 maintained our BUY call with TP raised from RM1.12 to RM1.24 (based on unchanged 16x CY15 EPS of 7.75sen/share, post earning upgraded).

Source: Hong Leong Investment Bank Research - 12 Jun 2014