Investment Highlights

• We reiterate BUY on Hibiscus Petroleum (Hibiscus) and its sum-of-parts-based fair value at RM1.42/share, which also reflects a premium of 3% for an ESG rating of 4 stars.

• It also implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$7.70/barrel, at a discount of 46% to EnQuest's US$14.2/barrel and 53% to the regional average of US$16.3/barrel (Exhibit 4).

• We maintain FY23F–FY24F earnings despite Hibiscus’ FY22 core net profit (CNP) of RM339mil (excluding RM317mil negative goodwill from Repsol asset acquisition, RM47mil impairment of Australian concessions, and RM4mil unrealised forex gains) exceeding our forecast and street’s by 17–19%. This is largely on expectations that higher sales volume from the addition of Repsol assets will be offset by lower average realised oil prices following the recent pullback in oil prices.

• FY22 CNP surged 3x from RM114mil in FY21 while revenue escalated 2x to RM1.7bil on the back of Repsol assets’ additional earnings contributions coupled with stronger performance from the North Sabah profit sharing contract (PSC) and Anasuria. Repsol assets began contributing earnings in 25 Jan 2022, making up 34% of FY22 group revenue and 35% of group core net profit.

• Similarly, 4QFY22 CNP soared 7x QoQ to RM214.4mil from RM31mil in 3QFY22. Notably, the higher earnings also stemmed from an exceptionally lower effective tax rate of 27.4% compared to an estimated 39.8% in 3QFY22 (based on Kinabalu PSC’s normalised LBT of RM30mil after taking out negative goodwill). This was mainly due to one-off deferred tax provision reversal of RM59mil arising from the accounting of previously unrecognised deferred tax assets.

• In 4QFY22, North Sabah PSC sold 612K barrels of crude oil in 2 offtakes with an average realised price of US$119.80/barrel compared to 300K barrels in only 1 offtake with an average realised price of US$89.58/barrel in 3QFY22. As previously highlighted, North Sabah PSC typically undertakes 6–7 offtakes each year and will occasionally experience lumpy earnings with certain quarters attaining only a single offtake.

• North Sabah’s average daily net production decreased 5% QoQ to 4,460 barrels in 4QFY22 due to the ongoing planned major maintenance campaign from March till September this year while the UK’s Anasuria also posted a similar 5% drop in daily production rate from the unresolved malfunction of a critical component of its subsea riser pipe.

• Meanwhile, Kinabalu PSC sold its first post-acquisition offtake of 350K barrels in a single offtake at an average realised oil price of US$121.15/barrel. The PM3 CAA PSC also recorded a higher sales volume of 293K barrels of crude oil (+3x QoQ) and 3,429 million standard cubic feet (+34% QoQ).

• All in, the addition of Repsol assets substantially boosted Hibiscus’ daily production rate by 33% QoQ to 12,140 barrels per day from 9,145 barrels per day in 3QFY22. However, it is still below management’s earlier guidance of a daily production rate of 18.5K barrels of oil equivalents (boe) upon the completed acquisition of Repsol assets due to delays in planned drilling of wells coupled with temporary production rate declines in North Sabah and Anasuria amid technical issues.

• Moving forward, Hibiscus remains committed to growing its asset portfolio with a combination of organic and inorganic growth strategies. The group’s FY23F target sale of 7.2–7.5mil (+57-63% YoY) barrels of oil, condensate and gas. These comprise 4.4–4.7 mil barrels of oil and condensate plus 2.8mil barrels of oil equivalent (boe) of gas. Hence, despite the short-term weakness in oil prices, we expect the group to sustain earnings growth backed by consistent expansions of production capacity.

• Currently, Hibiscus is trading at an unjustified EV/2P reserve discount of 64% to its closest peer, UK-listed EnQuest, and 68% to the regional average (Exhibit 4)

Source: AmInvest Research - 25 Aug 2022