Highlights

We attended a lunch meeting with  Steve Bracker, President of  Oilfield Services together with   head of integrated  project management  team,  who  is  a  brownfield  turnaround specialist  with  a  wealth  of  experienc e  from  North  Sea, Russia,  Central  Europe,  Gulf  of  Mexico  and  West  Africa. Following  is the salient points from  the meeting.

SES  is  actively  expanding  its  team  on  integrated  project management  (IPM).  By  building  up  its  integrated  capability which  includes  drilling  management,  sub  surface, production,  facilities  management  and  operation  and maintenance,  SES  can  handle  projects  from  marginal, brownfield  and  enhanced  oil  recovery  which  pres ents enormous  opportunity.  Potential  markets  are  Malaysia, Indonesia  and  Myanmar.   We  understand  that  securing Ophir  RSC  is  just  a  beginning  of  the  ga me,  we  are confident  that SES will   secure more RSC s   and  venture into brownfield or EOR  business es   in the  near future.

On  its  Ophir  marginal  field,  mobilising  works  are  on  trac k with drilling expected  to  start  in mid of 2015 and  scheduled to  hits  oil  by  end  of  2015.   As  mentioned  in  our  1QFY15 results  report,  drilling  activities  in  Malaysia  has  picking  up with rig counts increased from 4  rigs in June  14 to 6 rigs in Sept 14 and expect to hits 12 rigs by end of  FY15.

To recap, SES has proposed a renounceable rights issue of up  to  RM141m  nominal  value  of  5  year  redeemable convertible  bonds  (RCB)  on  the  basis  of  RM6  in  nominal value  for  every  100  existing  shares.  The  RCB  is  non tradable. To put it in a simple w ay, shareholders will pay RM6  for  every  100  existing  share s,  and  will  have  the right  to  convert  into  8  mother  shares  (a ssume conversion  price  of  RM0.75  per  share).   We  deem  the proposed  RCB  favourable  and  attractive   to  existing shareholder as it will earn s emi-annual coupon rate and able to  convert  to  mother  share  at  a  conversation  price discount  after  2 nd anniversary  of  issue  date.  We  are positive  on  the  RCB  as   RM45m  will  be  used  to  pay  for equity  stake  in  Ophir  RSC  while  the  remaining  ~RM100m is sufficient  for 1-2  additional  potential  RSC contracts.

We see multiple  growth catalysts going forward: i) potential expanding  orderbook  from  RM5.5bn  to  RM7bn  due  to increasing  market  share  regionally;  ii)  commercialise graphene  nanofluids  and  microwave  treatment  products; and  iii)  potential  securing  integrated  project  management (IPM)  contracts.  Thus,  we  see  potential  upside  risks to  our earnings forecast  at  3 year CAGR of  50% with P/E  to  fell to only 7x in CY16.

Catalysts

• Contracts  win  in  DWM  business   given  the  potential addressable  market size of US$2.1bn;  IPM contracts win.

Risks

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

Valuation

• We maintained our  BUY  call with  unchanged  TP  of  RM1.23 (based  on unchanged  16x CY15 EPS of 7.67sen/share).

Source: Hong Leong Investment Bank Research - 2 Oct 2014