Highlights

Following is the salient points from analyst briefing on last Friday. Despite declining oil price, drilling campaign from Petronas has picked up with rig count increased from 4 rigs in Jun 14 to 6 rigs in Sep 14 and further increase to 12 rigs in Nov 14. Given this, it expects gross margin for oilfield services to gradually improve from 24% in 2QFY15 to 26% in subsequent quarters. Malaysia, Indonesia and Thailand are growing steadily while West Africa was experiencing slower rig activity in Nigeria due to rig demobilis ation.

Marine business swung from profit to losses mainly due to lower coal tonnage carried arising from new tax rules imposed by Indonesian government which resulted in production halt of a customer. After the electi on, it expects the operation to improve. The new accommodation work barge is expected to secure work in 1Q15.

SES is targeting the 15 planned EOR projects in Malaysia and Indonesia by providing green chemicals and water treatment system. Microwave thermal cutting treatment product will be commercialised in Jun 15.

Comments

In the long run, there are still plenty of room for growth for the company through: i) inc reasing mark et share regionally with new product offering; ii) commercialise graphene nanofluids and microwave treatment products; and iii) potential securing integrated project management (IPM) contracts.

We also understand that national oil companies (NOCs) comprise around 65% of SES’ revenue. NOCs have traditionally been able to better withstand the impact of declining oil price with long term capex plan. This will help to cushion SES earning amidst declining oil price environment.

On its Ophir marginal field, mobilization works are on track with drilling expected to start in mid of 2015 and sched uled to hit oil by end of 2015. We understand the company is still looking for opportunity in RSCs, brownfield and EOR businesses in the near future. Channel check, marginal oilfields are still viable given its average breakeven price at US$60/barrel. SES aims to reduce c apex required to achieve lower cost per barrel. Existing orderbook of RM5.5bn (4x of FY14 revenue) will help SES to ride through the period of volatility in oil price.

Forecasts

• FY15 and FY16 earnings are reduc ed by 24% and 11% respectively after reduce earnings from marine segment coupled with lower contribution from West Africa.

Catalysts

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

Risks

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

Valuation

• We maintained our BUY call with TP reduced from RM1.07 to RM0.93 based on unchanged 14x P/E post earnings adjustment.

Source: Hong Leong Investment Bank Research - 24 Nov 2014