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$9.33/barrel, at a discount of 20% to EnQuest's US$11.60/barrel and 36% to the regional average of US$14.55/barrel (Exhibit 4).

• Our forecasts are unchanged as we deem Hibiscus’ 1HFY23 core net profit (CNP) of RM266mil (excluding RM15mil unrealised forex losses, RM32mil one-off net tax charge and RM13mil adjustment to inventory cost) within expectations at 47% of our FY23F earnings but above consensus at 58% of street’s estimates. The group declared a first interim dividend of 0.8 sen (-25% YoY), as expected.

• We expect a sequential sales volume increase of 12%-20% in 2HFY23 across the group’s producing assets, backed by higher daily production rates from lower maintenance and turnaround activities. The group is on track to achieve its targeted sales volume of 7.2mil–7.5mil barrels of oil and oil equivalents (boe) in FY23F, premised on sales volume of 3.4mil boe achieved in the 1HFY23 coupled with another 3.8mil boe scheduled for delivery in the 2HFY23.

• Hibiscus’ 1HFY23 revenue surged 2.5x YoY to RM1.3bil, mainly driven by additional contributions from Repsol assets that more than offset lower revenue from North Sabah PSC with only 3 offtakes during the period (vs. 4 offtakes in 1HFY22). In tandem with the higher revenue, 1QFY23 CNP climbed 2.9x YoY, backed by stable profit margins.

• QoQ, 2QFY23 revenue grew by 18%, mainly due to higher contributions from North Sabah. In 2QFY23, North Sabah’s revenue increased by 64% QoQ from 2 offtake delivery vs 1 in 1QFY23 while revenue from Repsol assets also decreased by 19% on lower realised oil/gas prices.

• Sequentially, the group’s 2QFY23 CNP rose by a similar 17% QoQ as lower realised crude oil and gas prices were offset by higher sales volume.

• Operation-wise, North Sabah’s average daily net production was relatively flat at 4,626 barrels of oil per day (bopd) in 2QFY23 while Anasuria’s daily production rate doubled QoQ to 3,009 bopd following the completed replacement of subsea riser pipeline back in September 2022.

• Meanwhile, the daily production rate for Kinabalu also increased by 33% QoQ to 3,279 bopd and PM3 CAA by 3.9x QoQ to 8,790 bopd due to lower maintenance and turnaround activities. Note that the first quarter of the year is typically a maintenance-heavy quarter, which would subsequently result in lower daily production rates.

• We also understand that a total of RM114mil one-off deferred tax liability for UK’s Energy Profit Levy has been recognised as at end-1HFY23. However, we take comfort from the fact that most of the tax liabilities are noncash in nature. This is premised on the group’s ongoing capex project in Anasuria, which enables the utilisation of investment tax allowances to reduce tax charges.

• 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 7.2mil–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.

• Meanwhile, the expansion projects in North Sabah, namely South Furious 30 Water Flood Phase 2, together with Teal West in Anasuria are gradually making headway, which ensures sustainable production growth over the coming 2-3 years.

• Currently, Hibiscus is trading at an appealing EV/2P reserve of US$4.14/barrel, at a discount of 64% to its closest peer, UK-listed EnQuest, and 72% to the regional average (Exhibit 4).

Source: AmInvest Research - 17 Feb 2023