Investment Highlights

• We maintain BUY on Hibiscus Petroleum (Hibiscus) with an unchanged sum-of-parts-based fair value of RM1.40/share, which also reflects a premium of 3% for an ESG rating of 4 stars.

• It implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$8.46/barrel, at a discount of 38% to EnQuest's US$13.60/barrel and 42% to the regional average of US$14.5/barrel (Exhibit 3).

• Our forecasts are unchanged as we deem Hibiscus’ 1QFY23 core net profit (CNP) of RM123mil (excluding RM13mil unrealised forex gains) within expectations despite accounting for 22% of our FY23F earnings and 24% of street’s estimates.

• This is backed by expectations of seasonally higher sales volume in 2HFY23 across all producing assets given that most maintenance and turnaround activities have been completed. Also, the QoQ weaker 1QFY23 earnings were partly due to a reduction in North Sabah production sharing contract’s (PSC) offtake delivery.

• Hibiscus’ 1QFY23 revenue soared 2.5x YoY to RM605mil mainly driven by additional contributions from Repsol assets that more than offset lower revenue from North Sabah PSC with only 1 offtake sold during the quarter (vs. 2 offtakes in 1QFY22). Recall that North Sabah sells its oil in 7 offtakes annually (typically 300K barrels of oil each), and will occasionally record weaker sales with only 1 offtake delivery.

• Likewise, 1QFY23 CNP surged 2.9x YoY, backed by stable profit margins and a lower effective tax rate by 17%-point (mainly due to PM3 CAA’s tax credit from an overprovision of tax for CY2021 amounting to RM40mil and Kinabalu PSC’s lower tax expense after being offset by brought forward tax losses).

• QoQ, 1QFY23 revenue declined by 30%, dampened by lower contribution from all assets. Particularly, North Sabah’s revenue fell by 54% QoQ from a single offload delivery vs 2 in 4QFY22 while revenue from Repsol assets also decreased by 16% on lower sales volume and realised oil/gas prices.

• In tandem with the lower revenue, the group’s 1QFY23 CNP plunged by 43%, further dragged down by lower profit margins from lower realised crude oil prices and sales volume, despite lower depreciation expenses and finance costs.

• Operation-wise, North Sabah’s average daily net production increased 6% QoQ to 4,732 barrels of oil per day (bopd) in 1QFY23 supported by higher uptime of 93%, compared to 85% in 4QFY22 which was impacted by ongoing planned major maintenance campaign from March till September this year.

• UK’s Anasuria, on the other hand, registered a 22% QoQ drop in daily production rate to 1,468 bopd amid lower uptime of 53% (vs 61% in 4QFY22) stemming from the persistent malfunction of a subsea riser pipe and planned offshore turnaround of the Anasuria FPSO. However, we foresee a sequential uptick in Anasuria’s daily production rate as both issues have been resolved in the current quarter.

• There is also an additional RM7mil deferred tax liability arising from the imposition of the Energy Profits Levy (EPL) in 1QFY23. Recall that the UK government announced the EPL back in May 2022, which introduced an additional 25% levy on oil and gas producers’ profits on top of the ring fence corporation tax and supplementary charge, which led to a marginal tax rate of 65%. In early November this year, the UK government further raised the levy rate by 10% to 35%, which will come into effect from 1 January 2023. This means the UK upstream oil and gas players will face a 75% marginal rate of tax. Nevertheless, management expects a minimal impact from the EPL since the levy includes investment allowance which can be offset by spending higher capex.

• Meanwhile, the daily production rate for Kinabalu decreased 22% QoQ and PM3 CAA by 14% QoQ due to planned major maintenance campaigns. We gather that these maintenance activities have been completed, thus implying higher production in the upcoming quarters.

• We continue to see near-term strength in Hibiscus’ earnings given the enlarged producing asset portfolio from the Repsol assets as well as elevated oil price environment. The group also kept its target to achieve FY23F sales of 7.2–7.5mil barrels of oil, condensate and gas (+57-63% YoY), mainly banking on incremental output from the full-year contribution of Repsol assets and production enhancement strategies.

• Currently, Hibiscus is trading at an appealing EV/2P reserve of US$5.70/barrel, at a discount of 58% to its closest peer, UK-listed EnQuest, and 61% to the regional average (Exhibit 4).

Source: AmInvest Research - 23 Nov 2022