Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a raised sum-of-parts-based fair value of RM0.98/share (from an earlier RM0.85/share) which incorporates the additional NPV of US$216mil from the new assets being acquired from Repsol Exploración, S.A. (Repsol) (Exhibit 4).

• This also assumes capex of US$80mil in 2022, the issuance of additional convertible redeemable preference shares of RM200mil with a conversion price of RM0.70/share and net cash flow adjustment of US$50mil to the purchase price US$212.5mil (RM878mil) as the transaction will be deemed effective 1 January this year.

• Our valuation also reflects a premium of 3% from our ESG rating of 4 stars and implies an enterprise value/proven and probable reserves (2P) valuation of US$6.70/barrel, translating to discounts of 28% to EnQuest's US$9.32/barrel and 40% to regional average of US$11/barrel.

• While our forecasts have not been revised pending the completion of the transaction, expected by the end of December 2021, our model assumes that oil will account for 75% of the new revenue stream and the balance from gas.

• Assuming an average price of US$60/barrel for the daily crude oil production of 9.5K barrels and US$3.90/mcf for the annual gas output of 17bcf, we estimate that the acquisition of Repsol’s exploration & production assets in Malaysia and Vietnam could boost Hibiscus’ FY23F EBITDA by 121%. This is in line with management’s 2022 EBITDA guidance of US$135mil and 5-year (2021–2025) net cash flow of US$255mil.

• However, we expect depreciation charges to be high, assuming an average useful life of 7–8 years based on the expiry of the production sharing contracts (PSC) for PM3 CAA by Dec 2027 and 2012 Kinabalu by Dec 2032, with these 2 fields accounting for almost all of RPS Energy’s NPV valuation of US$285mil, 34% higher than the purchase price of US$212.5mil. Together with higher finance charges from the additional RM340mil debt arising from the purchase, this will dampen the increase in Hibiscus’ FY23F net profit to 49%.

• After additional announcements and the analyst briefing recently, we remain positive on Hibiscus’s conditional sale and purchase agreement to acquire Repsol’s entire equity interest in Fortuna International Petroleum Corporation which involves 5 production sharing contracts (PSC) as follows:

• 60% interest in 212 Kinabalu Oil off Sabah, Malaysia (expiry on 25 Dec 2032) which produces an effective 5K boe/day;

• 35% interest in PM3 CAA within the Commercial Arrangement Area between Malaysia and Vietnam which produces an effective 12.4K boe/day (expiry on 31 Dec 2027);

• 70% interest in Block 46 (Cai Nuoc) (expiry on 31 Dec 2027), a tie back asset which only produces around 500 barrels/day for PM3 CAA in Vietnam; and

• 60% interest in each PM305 (expiry on 26 Nov 2029) and PM314 (expiry on 30 March 2033) in the Malay Basin off the eastern coast of Peninsular Malaysia, which have ceased production in 2019 and currently in the process of being abandoned. The proposed acquisition involving 10 producing fields – Bunga Orkid, Bunga Pakma, Bunga Raya, Bunga Kekwa, ASCU, Bunga Seroja, Kinabalu Main, Kinabalu East, Cai Nuoc and Bunga Tulip – as well as 205 dry-tree wells, 17 platforms and 32 pipelines covering over 650km (Exhibits 2 & 4).

• We understand that consultant Rystad’s reserve estimate of 78mil barrels of oil equivalent (boe), 2.3x RPS Energy’s current 2P assessment of 34.5mil boe, could stem from the inclusion of 2C resources, which are still being evaluated and could be included later in the circular to shareholders.

• With the doubling of the group’s daily production to 18.5K boe and 72% increase in 2P reserves to 81mil boe, the group has almost achieved its 2017–2021 mission target of a daily net production of 20K boe and reserves of 100mil boe. While there are still 2 more active E&P bids in which Hibiscus is involved in this region, management is currently focused on delivering value enhancement from the new acquisition in terms of raising production levels and lowering operating costs by leveraging the group’s current North Sabah facilities while its manpower will more than double to 1,210.

• Based on the enterprise value for the group’s expanded 2P reserves, Hibiscus is currently only trading at US$3.08/barrel – at a discount of 67% to its closest peer, UK-listed EnQuest and 72% of regional average (Exhibit 1). This is compelling given the more optimistic crude oil price environment.

Source: AmInvest Research - 8 Jun 2021