Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with an unchanged sum-of-parts-based fair value of RM1.18/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.

• We maintain our forecasts following an analyst briefing yesterday with these salient highlights:
  • Hibiscus will not be proceeding with a proposed 5-year US$ bond issuance for the proposed US$212.5mil Repsol acquisition as the interest rates offered by financial institutions ranged over 8% which management deemed excessive given the company’s B1 rating from Moody’s Investors Service and B+ from S&P Global Ratings.
  • Instead, the group expects the deal to be funded from operational cash generated from the proposed Repsol assets commencing on 1 January 2021, US$80mil Trafigura prepayment facility (which has a more acceptable implied interest rate of below 4%) extension to Dec 2023 and RM204mil convertible redeemable preference shares which were issued in November last year. In 1H2021, the combined Repsol assets registered an EBITDA of US$80mil when Brent crude oil prices averaged at US$65/barrel vs over US$80/barrel currently.
  • The group hopes to secure the necessary approvals from the Malaysian and Vietnamese authorities to complete the Repsol deal by January 2022. If the deadline is missed, the sale and purchase agreement can be extended to June next year without incurring any penalties. In our view, a delay may be positive for Hibiscus given the continued accumulation of cash arising from the Repsol assets’ operations.
  • The group is currently pitching for an FPSO-based development plan for its 87.5%-owned Marigold and Sunflower (M&S) fields in Licence P198 at the North Sea vs Ithaca Energy’s tieback solution to the Repsol/Sinopec JV’s Piper B platform that could defer first oil by a year to 2025.
  • While awaiting the decision of UK’s Oil & Gas Authority for the M&S development plan, Hibiscus remains on an accelerated schedule to develop its 70%-owned Teal West discovery in Licence P2535 which will deploy a subsea pipeline tieback to the nearby Anasuria FPSO. Teal West, which has 4mil barrels of oil reserves, is still targeted to achieve first oil by late 2023.
• Even though Hibiscus’ 1QFY22 production volumes were affected by Covid 19 execution delays in the 50%-owned North Sabah production sharing contract and subsea riser malfunction in Anasuria, output is expected to improve going forward. North Sabah’s production is poised to normalise as average uptime improved from 81% in 1QFY22 to 91% in October 2021, raising daily net production from 5,311 barrels to over 6k barrels. North Sabah will continue to be the main earnings generator, accounting for 78% of the group’s 1QFY22 net profit, lower than 89% in FY21 on Anasuria’s improved earnings.

• 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 triple the group’s daily production to 26.8K barrels of oil equivalent 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$4.60/barrel, at an unjustified discount of 65% to its closest peer, UK-listed EnQuest and 70% of regional average (Exhibit 3).

Source: AmInvest Research - 12 Nov 2021