Investment Highlights

• We maintain BUY on Hibiscus Petroleum (Hibiscus) with a higher sum-of-parts-based fair value of RM1.48/share (from RM1.30/share previously) after updating Anasuria assets’ daily oil production rate assumption, which also reflects a premium of 3% for an unchanged ESG rating of 4 stars.

• It also implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$8.45/barrel, at a discount of 37% to EnQuest's US$13.5/barrel and 44% to the regional average of US$15.0/barrel (Exhibit 3).

• We raise FY25F earnings by 5% to account for higher earnings from Anasuria assets alongside the higher share of net entitled oil production following the increase of ownership in the Teal West field to 100%. However, our FY23F-24F earnings are unchanged given that the oil field will only start contributing meaningful earnings in 2HCY24 (corresponding to the beginning of Hibiscus’ FY25F).

• Hibiscus’ stake in Block 21/24d held under UK Petroleum License P2535, which contains the developing oil field Teal West, has risen to 100% from 70% previously as its partner Neo Energy (ZPL) Ltd. officially withdrew from the license.

• To recap, Hibiscus’ wholly-owned Anasuria Hibiscus UK Ltd. (Anasuria Hibiscus) and Neo Energy were awarded interest in the license during UK’s 32nd Offshore Licensing Round back in early 2021. Anasuria Hibiscus previously held a 70% interest and was the appointed operator for Block 21/24d, with NEO Energy taking up the remaining 30% interest.

• Subsequently, on 8 July 2022, Neo Energy expressed its intention to withdraw from License P2535. In view of the advanced stage of technical works completed as well as the lucrative value accretion to be derived from the Teal West field, Anasuria Hibiscus decided to proceed with the development of Block 21/24d on a 100%-interest basis.

• Also recall that the Teal West field is contiguous to the Teal field and located 4km from Anasuria cluster’s manifold. The developing oil field is planned to be produced by the Anasuria FPSO – located 4km away – where the well fluids will be processed and exported via the Anasuria infrastructure.

• We also understand that the Teal West field, which carries 2C contingent resources of 5.7mil barrels of oil equivalents based on a 100% stake, is scheduled to commence drilling its first well in 3QCY23, with the target to achieve the first oil by 2QCY24.

• Upon the commencement of production activities in 2HCY24, the oil field is expected to boost Anasuria’s net daily production rate by an additional 4.3K-5.0K barrels of oil per day (bopd) or 2.0-2.3x from 2,199 bopd in FY22.

• The pipeline of organic growth strategies have also been planned for the Teal West field, which would involve drilling a water injection well as well as the second production well from 2025 onwards, in the event of discovering potential for higher production volume. This implies a further improvement in Teal West’s earnings profile in the best-case scenario.

• While knowing that a higher ownership in the Teal West field would mean Hibiscus now needs to take on a higher capex commitment and assume greater operational risk in developing the oil field into a producing asset, we are positive on this development backed by the group’s proven track record in growing its assets. In terms of financial impact, the 5% rise in FY25F net profit from the increase of daily oil production rate would lift Hibiscus’ SOP valuation by an additional 18 sen.

• Going forward, Hibiscus remains ambitious in growing its asset portfolio with a combination of organic and inorganic growth strategies. The group also targets to achieve FY23F sales of 7.2–7.5mil barrels of oil, condensate and gas (+57-63% YoY) via the recent acquisition of Repsol’s assets and production enhancement strategies.

• Currently, Hibiscus is trading at an unjustified EV/2P reserve of US$5.30/barrel, at a discount of 60% to its closest peer, UK-listed EnQuest, and 65% to the regional average (Exhibit 3).

Source: AmInvest Research - 17 Oct 2022