Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a slightly higher sum-of-parts-based fair value of RM1.18/share (from an earlier RM1.16/share). This already assumes the value accretion from the proposed acquisition of Repsol’s assets commencing in January 2022 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$13/barrel and 57% discount to regional average of US$16/barrel.

• Our higher valuation stems from the 9%–15% increase in Hibiscus’ FY22F–FY23F earnings with the raising of our average crude oil assumptions by US$5/barrel to US$70/barrel.

• This is in line with the lower range of our projected average of US$70-US$75/barrel for 2021 and 2022 against the backdrop of Brent oil prices over $80/barrel currently. However, we maintain oil price at US$60/barrel for FY24F onwards on expectations of a normalisation in global supply-demand dynamics. Also, the recently announced Prosperity Tax in 2022 will not have any impact on Hibiscus’s Petroleum Income Tax rate of 38%.

• Hibiscus’ 1QFY21 net profit of RM42mil (+3.5x YoY) was above expectations mainly due to higher crude oil prices albeit partly offset by lower production volumes. Excluding any earnings projections from the proposed Repsol acquisition in 2HFY22, we estimate that the results accounted for 30% of our earlier FY22F net profit of RM219mil.

• On a QoQ comparison, 1QFY22 revenue dipped 3% QoQ largely from a 12% reduction in total sales volume to 757k barrels, partly offset by higher realised oil prices (+4% for North Sabah and +22% for Anasuria).

• While 50%-owned Anasuria concession’s North Sea production will continue to be impacted by the subsea riser malfunction until 3QCY22, daily net production still rose 34% QoQ to 2,206 barrels, which may be indicative of the output prospects over the next 3 quarters. While still under discussion, the net repair costs of US$8mil is likely to be capitalised while the expected shutdown of 8-10 days seems manageable.

• Covid-19 substantively impacted the execution of contractors for the group’s 50%-owned North Sabah production sharing contract, which lowered its sales volume by 7% QoQ and drove up operating expenses by 22% QoQ to US$19/barrel, the highest over the past 3 years.

• Together with 1QFY 22 effective tax rate rising 8%-point to 44.5% due to absence of 4QFY20 overprovisions, Hibiscus’ 1QFY21 net profit decreased 21% QoQ.

• However, North Sabah’s output is expected to normalise as average uptime improved from 81% in 1QFY22 to 91% in October 2021, increasing daily net production from 5,311 barrels to over 6k barrels. North Sabah continues to be the main earnings generator, accounting for 78% of the group’s 1QFY21 net profit, lower than 89% in FY21 on Anasuria’s improved earnings.

• With North Sabah’s production volumes expected to normalise, we expect stronger quarterly earnings delivery underpinned by higher oil prices. This will be further supported by the recent extension of a US$80mil prepayment facility with Trafigura to Dec 2023, which will be used for capex, working capital and partly fund the Repsol acquisition.

• We remain positive on Hibiscus’ proposed acquisition of Repsol’s assets for US$212.5mil cash, still aimed for completion by January 2022. Recall that this will double the group’s 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$4.80/barrel, at an unjustified discount of 64% to its closest peer, UK-listed EnQuest and 69% of regional average (Exhibit 3).

Source: AmInvest Research - 11 Nov 2021