Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a higher sum-of-parts-based fair value of RM1.16/share (from an earlier RM0.98/share). This incorporates the value accretion from the acquisition of Repsol’s assets and reflects a premium of 3% from our ESG rating of 4 stars. It also implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$6.70/barrel, half of EnQuest's US$14/barrel and regional average of US$13/barrel.

• Our higher valuation stems from the 10%–18% increase in Hibiscus’ FY22F–FY23F earnings after raising our average crude oil assumptions by US$5/barrel to US$65/barrel given that crude oil is currently trading again around US$70/barrel.

• Hibiscus’ FY21 core net profit of RM114mil (+60% YoY) was above expectations, coming in 26% above our and consensus estimates due to a 41% YoY jump in sales volume with 4 more cargo shipments from the group’s jointly-owned concessions – 3 from North Sabah and 1 from Anasuria concessions. This was an additional shipment vs management’s earlier FY21 guidance of 12.

• While we expect repairs to the riser system to the Anasuria floating production, storage and offloading (FPSO) vessel by the end of 2021 to slightly moderate UK production output, which fell 42% QoQ and YoY to 1,642 barrels/day in 4QFY21, we expect higher oil price of US$70/barrel currently vs. US$50–US$52/barrel in FY21 to support stronger FY22F earnings delivery.

• The group’s 4QFY21 core net profit rose 53% QoQ to RM53mil mainly from the higher average crude oil prices which rose by 19% QoQ to US$72/barrel for North Sabah PSC and 16% QoQ to US$63/barrel for the group’s 50%- owned Anasuria concession. This was partly offset by a 7% QoQ decline in Anasuria’s production, which was undertaking a 2-week planned turnaround maintenance programme on the FPSO.

• Hibiscus’ development plans for its 70% interest in the Teal West field and a proposed 85% working interest and operational control of the nearby Eagle pre‐producing area (which was a farm-in arrangement with EnQuest) have been delayed with first oil now likely towards 2H2023, from an earlier target of end-2022. This stems from the rejection by the UK’s Oil and Gas Authority (OGA) on EnQuest’s request to extend the Eagle field licence, which expires in late 2022. Hibiscus is now hoping to secure the licence directly from the OGA by aborting the farm-in agreement with EnQuest and expediting the development process.

• We remain positive on Hibiscus’ proposed acquisition of Repsol’s assets for US$212.5mil cash, which will double its daily production to 18.5K boe and increase its 2P reserves by 72% to 81mil boe. Based on the EV for the group’s expanded 2P reserves, Hibiscus is currently only trading at US$3.37/barrel, at an unjustified discount of 76% to its closest peer, UK-listed EnQuest and 74% of regional average (Exhibit 1).

Source: AmInvest Research - 27 Aug 2021