Investment Highlights

• We maintain our HOLD recommendation on Hibiscus Petroleum (Hibiscus) with an unchanged sum-of-parts based fair value of RM1.42/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$7.40/barrel, at a discount of 49% to EnQuest's US$14/barrel and 59% to the regional average of US$18/barrel.

• Hibiscus has decided to stop paying the 5% state sales tax (SST) to the Sabah state government for the sale of oil produced from the Kinabalu Oil production sharing contract (PSC), a concession owned by Repsol. We gather that the discontinuation of the SST payment will begin from a lifting of 350,236 barrels of crude oil that was effected on 24 May 2022.

• Typically, crude oil produced from the Kinabalu PSC will first be transported to the Labuan crude oil terminal (LCOT), and subsequently offloaded and sold via crude oil tankers at the LCOT single buoy mooring that is located 5km offshore from the terminal.

• This forms Hibiscus’ basis for the discontinuation of the SST payment as the sale of crude oil takes place within the Federal Territory of Labuan, which is outside Sabah’s jurisdiction. Notably, for the same reason, Hibiscus’ 50%-owned North Sabah PSC has not been paying SST on its crude production since the Sabah state government began collecting sales tax on petroleum products back in 2020.

• Assuming a crude oil price of US$100/barrel as well as an annual production of 1.2 million barrels of oil produced from the Kinabalu PSC, we estimate that Hibiscus will be able to record a negligible 1% increase in FY23F EBITDA and core net profit from the discontinuation of the SST payment. Thus, we make no changes to our forecast and fair value.

• While we expect the coming 4QFY22 to stage a sharp earnings recovery with an additional North Sabah shipment and the full contribution of Repsol assets (which doubles the group’s daily production to 18.5K boe and increases its 2P reserves by 72% to 81mil boe), sentiments could remain soft until actual earnings delivery against the backdrop of erratic production volumes.

• Hence Hibiscus is likely to continue trading over the next quarter at an EV/2P reserve discount of 49% to its closest peer, UK-listed EnQuest and 59% to regional average (Exhibit 2).

Source: AmInvest Research - 8 Jun 2022