Scomi Energy Services Bhd … dated July 2013

SES provides products and services for the entire DWM process such as solids control, containment handling, treatment and disposal, and water treatment. The main function for DWM services is to reduce the waste generated during drilling activities to acceptable environmental levels.

Its Drilling Waste Management (DWM) division is expected to grow in tandem with drilling activity and increasingly strict global and domestic environmental regulation.

The company’s SCM-PrimaG 4P Linear Motion Shale Shaker (Ref Figure 1) main function is to remove solids from circulated drilling fluids to allow them to be reused. The 3 panels shaker cost around US$40,000 – US$50,000 and normally required total 4 units in a drilling platform.

During the drilling process, huge amounts of drilling wastes are produced including mud and cuttings. Handling drilling waste is one of the most important challenges in the petroleum industry. Old solutions such as simply dumping on or offshore are not acceptable as pollutants are destroying wildlife and contaminating the water supply. Given the dangers, globally, legislation is trending towards zero discharge as adopted in the Caspian and North Seas.

Currently (July 2013), local regulation bans dumping and expects regulation to become more stringent following global trends. Thus, industry observers see a huge potential for DWM business.

The addressable drilling waste market size for SES is estimated to be US$2.1 bn in 2012. This market includes Asia, Russia, the Middle East and West Africa. DWM only contribute to ~5% of SES’s RM5bn orderbook. As the legislation is trending towards zero discharge, expect DWM to grow faster than drilling fluid (DF).

Market observers prefer Scomi Energy Services over the parent – Scomi Group due to i) risk of forex losses and project delays in Scomi Engineering and ii) SEB currently loss making and iii) holding company discount.

Potential catalysts include to secure RM400m worth of contracts on top of its already huge orderbook of RM5bn. Contract win in DWM business given the potential addressable market size of US$2.1bn.

Scomi Energy Services Bhd has returned to the black with a pre-tax profit of RM137.15 million for the 15 months ended March 31, 2013 (FY13) compared with a pre-tax loss of RM87.74 million for the 12 months ended Dec 31, 2011 (FY11). Revenue for the 15-month period amounted to RM1.48 billion against RM1.55 billion in FY11.

Scomi Energy, a subsidiary of Scomi Group Bhd, is the amalgamation of the oil and gas businesses of Scomi comprising the oilfield services and marine services. The merger was successfully completed on March 12, 2013 with the unanimous approval from shareholders.