Investment Highlights

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

• This implies an enterprise value (EV)/proven and probable reserve (2P) valuation of US$8.86/barrel, at a discount of 28% to the regional average of US$12.36/barrel (Exhibit 2).

• Our forecasts are unchanged as we remain sanguine on Hibiscus’ near-term earnings given the enlarged producing asset portfolio from Repsol assets as well as the still-resilient oil price of above US$80/barrel currently.

• We also reckon that the Hibiscus will gradually ramp up daily production via organic expansion projects in North Sabah, Anasuria and Peninsular Hibiscus. The group is planning to spend a substantial amount of US$345mil (RM1.5bil) for the development of new production wells over the next 2-3 years, which mainly entail US$100mil for the SF30 Waterflood Phase 2 project in North Sabah and US$170mil for the Teal West project in Anasuria.

• Both expansion projects, which are scheduled to be completed in 2HCY24, would increase Hibiscus’ daily production by 5K-6K barrels of oil equivalent per day (boe/day) or 26%-32% to 26K boe/day. Our FY24F-25F earnings have largely factored in incremental earnings from the higher daily production.

• Over the medium term, Hibiscus also envisions to achieve a daily production of 35K-50K boe/day by 2026. While existing assets are anticipated to reach daily production of only 23K boe/day in 2026, we note that the incremental 12K-27K boe/day would be made up by exploration and development opportunities within the group’s portfolio as well as the addition of new assets via acquisition and bidding of new licenses.

• On the M&A front, there are more than US$5bil of upstream assets available for sale across Southeast Asia, according to Rystad Energy. These assets, which collectively account for 4mil boe of resources and 270K boe/day of production, could potentially involve national oil companies (such as Chevron, ExxonMobil, TotalEnergies and Shell) amid efforts to transition away from emission-heavy assets and lessen capex needed to maintain operations.

• On a separate note, the group is also committed towards carrying out its energy transition strategy to become a net zero emissions producer by 2050. Its strategy is underpinned by 3 main pillars, which are: (i) increase of natural gas exposure within its portfolio, (ii) decarbonisation of its assets (particularly focused on Peninsular Hibiscus which contribute 90% of group’s total emissions), as well as (iii) investment in low-carbon projects including energy efficiency improvement and renewable energy projects.

• We note that the group has identified numbers of decarbonisation projects, including increased usage of solar and wind energy, optimisation of production equipment, as well as exploring carbon storage feasibility in PM3 CAA. These initiatives are expected to reduce the group’s emissions by 1.2mil tonnes per annum, which represents a 19% decrease from Scope 1 & 2 net greenhouse gas emissions of 6.5mil tonnes in FY22.

• The group is also well 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$6.79barrel, at a discount of 13% to its closest peer, UK-listed EnQuest, and 45% to the regional average (Exhibit 2).

Source: AmInvest Research - 17 Apr 2023