Fundamental
Surging workload to support margin improvement
With a rebound in oil price, upstream oil companies graduallyreactivate their projects, leading to an increase in orders for oilservices companies. SPT management expressed that the Companyhas ~RMB1.6bn orders on hand as of early May 18, up by ~60-70%yoy. As SPT retained most of their talent during the down-cycle（FY15-17）， operating margin set to improve amid surging workload.
Multi year growth opportunities from shale gas projects andunderground gas storage facilities in the PRC
To support domestic gas consumption, PRC government plan to putmore effort in developing shale gas throughout 2018-20, and weexpect private oil service companies including SPT would take acrucial role in such development. SPT commenced the integratedturnkey project of drilling and well completion services in Sichuanshale gas area in 2Q18. The project covered 14 wells with a contractvalue of RMB428 million. Management stated that SPT currentlyemploys 4 drilling rigs in that area, and expect the workload to occupy~10 rigs by 2020. SPT adopt an asset-light approach in the PRC andtend to lease the equipment, hence limited CAPEX is required.
Moreover, in late Apr 18, NDRC announced a document whichrequired gas upstream suppliers to have a gas storage capacity for>10% of their contracted annual sales volume by 2020. It is expectedthat such requirement would fuel the development of underground gasstorage facilities. Management shared that the Company used to have~70% market share in well completion of underground gas storageproject, and target to obtain RMB200-300mn orders from this area bylate 2018 to early 2019, and expect more to come in 2020.
Catalyst
1H18 results; News flow on new orders
Valuation
Multi-year recovery story still underappreciated; Trading BUY
While global oil price recently retreat from its 3 years high, it is stillsubstantially higher than the trough during 2015-17. Although shortterm supply-demand balances are relatively dynamic, we argue thatglobal oil market has been stabilized given that OECD crude oilinventories returned to 5-year average, which should provide anormalized business environment for oil service companies. Besides,SPT would also benefit from the development of shale gas andunderground gas storage facilities in the PRC. SPT is trading at 11.2XFY18E PER based on our estimation, we view that the multi-yearrecovery story is still underappreciated.