Highlights

• Following are the salient points from analyst briefing on last Friday. Oilfield revenue was up QoQ due to stronger chemical sales to Indonesia and Turkmenistan. On the other hand, weaker drilling activities in Malaysia, Thailand, Myanmar and Vietnam had partially offset the positive impact. Overall, drilling activity was down significantly YoY with Drilling Fluid (DF) rig count declining by 37% to 34 rigs in Dec 15 since beginning of Jan 15.

• Cost-cutting initiative by the group started to bear fruit with its OPEX down to RM37.9m (-18%) in Q3FY16. The group expects to bring the costs down further through more outsourcing of non-core business functions (i.e. warehousing or logistics) and this would put the group in a stronger position to weather the current downturn in the O&G industry.

• Marine segment is expected to continue registering losses for the time being as majority of its vessels are idle with lack of jobs available in the market. Out of the USD80m book value for its Marine division, only USD35m comprises of OSV assets. We believe the impairment would not be too significant assuming that its vessels are older vessels.

• For its Ophir marginal field, field development is still ongoing with EPCIC contract for its wellhead platform awarded to Muhibah in Nov 2015. However, start-up of the field would be delayed to 1Q17. The economics of the marginal field is still viable under the current oil price scenario with breakeven cost lowered further to USD30-35/bbl from >USD40 previously as the group had renegotiated its contracts during the oil price slump. At oil price of USD40/bbl, CAPEX on the project could be recovered in 1.5 years, decent asset risk profile given current industry condition.

• Its orderbook stands at USD1.1b with current tenders at USD833.8m. Focus of tenders would be directed to Middle East targeting Saudi Aramco (Saudi) and KOC (Kuwait) in expectation of resilient drilling activities in the region in conjunction with OPEC’s intention to freeze oil output at high levels.

• While we are encouraged by the management’s actions to cut costs and new product initiatives (i.e. introduction new chemical products and providing more value added services), medium term outlook for the company remains bleak amid persisting weak oil prices for the year.

Forecasts

• Unchanged.

Catalysts

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

• Product penetration into new countries.

Risks

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

Valuation

We maintain our HOLD call with a TP of RM0.210 based on unchanged 8x CY16 P/E given lack of immediate catalyst.

Source: Hong Leong Investment Bank Research - 7 Mar 2016