Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a sum-of-parts-based fair value of RM0.79/share, which implies an enterprise value/proven and probable reserves (2P) valuation of US$6.77/barrel. This is at discounts of 26% to EnQuest's US$9/barrel and 45% to regional average of US$11.80/barrel.

• Hibiscus entered into a sale & purchase agreement (SPA) with UK-listed EnQuest for a farm-in arrangement which secures an 85% working interest and operational control of the United Kingdom Continental Shelf Petroleum Production Licence Number P238 Block 21/19a, Eagle Pre‐Producing Area (Eagle field).

• The consideration is a nominal US$1 on the completion of the SPA plus the cost of the group’s carry of EnQuest’s remaining non-operating stake of 15% from the completion of the SPA by 2Q2021 to first oil. This means that Hibiscus will bear the full development cost, which we estimate at US$50mil for the Eagle field given that EnQuest’ 15% portion could reach US$7.5mil (RM30mil).

• As the field is located 6.4km to 15km from Hibiscus’ 50%- owned Anasuria concession’s facilities (Exhibit 1), the group envisages a potential subsea tie-back to the Anasuria floating, production, storage and offloading (FPSO) vessel which could extend its economic life. We expect Hibiscus to conduct more geological surveys and exploratory drills to assess the field’s feasibility as neither the group nor EnQuest has revealed any estimates on potential reserves.

• Based on a cost of US$1.51/barrel, which is the US$37.5mil price Hibiscus paid for a 50% equity stake in Block 15/13a of the Marigold and Block 15/13b of the Sunflower (M&S) concession on October 2018 from India-based rig operator Aban Offshore’s wholly-owned Caldera Petroleum, we estimate that the field could have potential reserves of 33mil barrels. For now, we are mildly positive on this development, which does not entail any upfront cost at this juncture.

• Hibiscus is reviewing the development sequence of either its recently acquired 70% interest in the Teal West field or its 50% equity stake in the M&S concessions. Even so, based on the enterprise value for the group’s existing 2P reserves, Hibiscus is currently only trading at US$6.12/barrel – at a discount of 33% to its closest peer, UK-listed EnQuest and half of regional average (Exhibit 5). This is compelling given the more optimistic crude oil price environment.

• Additionally, Hibiscus is listed in the FTSE4Good Bursa Malaysia Index with the highest 4-star environmental, social and governance (ESG) rating, which ranks amongst the top 25% in the FBM Emas Index.

Source: AmInvest Research - 26 Feb 2021