Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a higher sum-of-parts-based fair value of RM1.42/share (from an earlier RM1.30/share), which also 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$7.72/barrel, 42% below EnQuest's US$13/barrel and a 53% discount to the global exploration & production average of US$16/barrel.

• Our higher valuation stems from an earnings increase of 12% for FY22F and 47% for FY23F given that crude oil prices are currently trading above US$110/barrel.

• We have raised 2022 oil price projection to US$90–95/barrel from US$70–75/barrel following Russia's surprising invasion of Ukraine that could trigger cascading sanctions, substantive global supply chain disruptions and elevated risk premiums for commodities.

• Meanwhile, supply shortfall risks are escalating with major oil exporting nations unable to ramp up production to prepandemic levels due to chronic under-investment over the past 5 years amid investors' persistent energy transitiondriven prerogatives.

• For 2023, we raise our projection to US$80–85/barrel, softer than our expectation for this year as higher prices could dampen global demand while spurring fresh investments into the sector and raise production expectations.

• As such, we have raised Hibiscus’ FY22F crude oil price by US$5/barrel to US$85/barrel together with a weighted average crude oil price (WAO) increase of 20% to US$65 per barrel of oil equivalent (boe) for the group’s new Repsol assets which commenced contribution from 25 January this year. For FY23F, we have raised crude oil price by US$10/barrel to US$90/barrel and WAO by US$7/boe to US$58/boe.

• However, we have largely maintained FY24F earnings with an unchanged oil price of US$60/barrel thereafter on expectations of a normalisation in global supply-demand dynamics. Recall that the recently announced prosperity tax in 2022 will not have any substantive impact on Hibiscus’s income tax rate of 38%.

• We remain positive on the upcoming contribution of Repsol assets which 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 trading at only US$6.85/barrel, half of its closest peer, UK-listed EnQuest and 60% below global average (Exhibit 3).

Source: AmInvest Research - 3 Mar 2022