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$9.17/barrel, at a discount of 19% to EnQuest's US$11.37/barrel and 36% to the regional average of US$14.28/barrel (Exhibit 2).

• Hibiscus announced that its wholly-owned Hibiscus Oil & Gas Malaysia (formerly known as Repsol Oil & Gas Malaysia) has received a notice of arbitration from a Sarawak-based oil and gas services provider, Oceancare Corporation (Oceancare), claiming a total principal amount of RM36.6mil (2% of Hibiscus’ market cap).

• This is related to a completed contract for the provision of integrated well services for intervention, workover & abandonment works to Hibiscus Oil & Gas Malaysia earlier. We also understand that Oceancare’s claim is based on variations to the contract’s original scope of works, which was denied by Hibiscus Oil & Gas Malaysia.

• Note that via Hibiscus Oil & Gas Malaysia, the group holds a 22.3% participating interest in PM3 CAA production sharing contracts (PSC), 60% in Kinabalu Oil PSC, and 60% in PM305/314 PSC.

• We gather that the group has been engaged in discussions with Oceancare since 2021 to resolve the issues without a satisfactory outcome, leading to the legal dispute. Nevertheless, the group believes it is in a good position to defend itself in the coming lawsuit, after taking advice from its legal counsel.

• Overall, we are negative on this development which may result in a substantive provision for losses. Under the worstcase scenario of Oceancare winning the lawsuit, we estimate the principal claim may erode the group’s FY23F earnings by a significant 6.4%.

• Pending an analyst briefing later today to further explain the legal dispute, we keep our forecasts unchanged for now.

• In terms of outlook, we continue to see near-term resiliency in Hibiscus’ earnings given the enlarged producing asset portfolio from the Repsol assets as well as the still-strong oil prices of above US$80/barrel.

• The group remains on track to achieve the targeted 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.

• 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 71% to the regional average (Exhibit 2).

Source: AmInvest Research - 6 Mar 2023