Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a higher sum-of-parts-based fair value of RM0.85/share (from an earlier RM0.79/share), which implies an enterprise value/proven and probable reserves (2P) valuation of US$7.10/share (from an earlier US$6.10/barrel). This is at discounts of 22% to EnQuest's US$9.12/barrel and 39% to regional average of US$11.60/barrel, and reflects a 3% premium for a 4-star ESG rating.

• The higher valuation stems largely from the 12% increase in FY21F production assumption to 2.7mil barrels of oil for North Sabah production sharing contract together with a US$5/barrel increase in crude oil price to US$60/barrel for FY22F onwards. This raised our FY21F–FY23F earnings by 6%–21%.

• Hibiscus’ 9MFY21 core net profit of RM61mil was above expectations, accounting for 82% of consensus and almost reaching our earlier FY21F earnings. This was mainly due to its 50%-owned North Sabah production sharing contract’s (PSC) 9MFY21 sales rising 28% YoY to 2.1mil barrels.

• Even though 3QFY21 average crude oil prices rose by 32% QoQ to US$54/barrel for North Sabah PSC and surged 52% QoQ to US$60/barrel for the group’s 50%-owned Anasuria concession, the 9MFY21 average of US$46/barrel is still in line with our FY21F estimate of US$50/barrel.

• QoQ, the group’s 3QFY21 net profit surged 2.7x to RM35mil mainly due to the higher crude oil prices and partly from 18% lower operating costs, partly offset by a 31% drop in North Sabah’s sales to 600K barrels.

• YoY, Hibiscus’ 9MFY21 net profit fell 42% YoY from the 23%–24% drop in crude oil price to US$46/barrel due to the Covid-19- inflicted demand collapse last year, partly offset by a 20% sales volume increase to 2.8mil barrels.

• By the end of 2022, Hibiscus may be looking to achieve first oil from its recently acquired 70% interest in the Teal West field together with an 85% working interest and operational control of the nearby Eagle pre‐producing area, which was a farm-in arrangement with EnQuest. This will be achieved via a tie-back to Anasuria’s facilities and FPSO. Meanwhile, production commencement from its 50% equity stake in Block 15/13a of the Marigold and Block 15/13b of the Sunflower concessions, which were acquired for US$37.5mil cash from Caldera Petroleum in October 2018, could be delayed to late 2023.

• Based on the enterprise value for the group’s existing 2P reserves, Hibiscus is currently only trading at US$5.09/barrel, at a discount of 44% to its closest peer, UK-listed EnQuest and less than half of the regional average (Exhibit 6). This is compelling given the higher Brent crude oil price of US$68/barrel currently vs our US$60/barrel assumption, while the group’s valuation can be driven even further by a significant regional asset acquisition.

Source: AmInvest Research - 25 May 2021