Highlights

We attended a meeting with Shah Hakim, CEO of Scomi Energy, Steve Bracker, President of Oilfield Services and Dr. Fazrie, a brownfield turnaround specialist.

The Ophir RSC contract has 7 years tenure with production volumes estimated at 5.1m barrels. The development cost is estimated at US$135m with up to 120% recoverable and first oil expected to be produced in 18 months or Dec 15.

We understand that first 30% of revenue will be distributed to Petronas with the remaining 70% to cover; i) Opex; ii) Capex reimbursement; and iii) remuneration fee per barrel. The remuneration fee is linked to production volumes, capex multipliers and schedule performance.

Ophir field have 3 production wells, single wellhead and production platform and linked to a FSO. SES will continue to build its capability and looking at brownfield and marginal field opportunity in Malaysia and regional like Indonesia and Russia.

Graphene nano fluids will set to be a game changer for the company. This will help the company to offer new products such as formulation and chemicals ingredient. The global market value for both segments is around US$21bn and account for 4% of the global oilfield chemicals and services market. SES expects to complete the product testing with Petronas and Myanmar in 3Q14 which will lead to product commercialisation.

In the marine segment, the new accommodation barge (~300 pax) is expected to be delivered in July 14 and expect to put to work by end 14. SES will continue to reduce its presence in coal logistic business.

Comments

We came away from the visit feeling more positive given the strong orderbook, earnings growth from RSC and new products (graphene nanofluid and microwave cutting treatment) going forward.

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.

Latest orderbook stand at RM5.4bn (~3.8x of FY14 revenue) with 48% of contract value from Petronas. SES is targeting to expand its orderbook to RM7-8bn in the next 12-18 months.

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

Unchanged.

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 unchanged TP of RM1.24 (based on unchanged 16x CY15 EPS of 7.75sen/share).

Source: Hong Leong Investment Bank Research - 4 Jul 2014