Investment Highlights

• We maintain BUY on Hibiscus Petroleum (Hibiscus) with an unchanged sum-of-parts based fair value of RM3.23/share (Exhibit 2). Our fair value, including a premium of 3% for an ESG rating of 4-star, implies an enterprise value (EV)/proven and probable reserve (2P) valuation of US$7.82/barrel, at a discount of 37% to the regional average of US$12.51/barrel (Exhibit 3).

• No change to our earnings forecast.

• Hibiscus’ 11.7%-owned Australian associate, 3D Oil, recently provided a 3QFY23 activities update. We note significant progress for the Offshore Otway Basin development for which 3D Oil has 2 exploration permits, VIC/P79 and T/49P. These are held on 20:80 joint-venture arrangement with the operator, ConocoPhillips Australia.

• ConocoPhillips Australia is currently in the midst of preparing an environmental plan (EP) to be submitted to the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) to seek approvals for its planned exploration programme. Given that the public consultation period has ended, we expect submission to occur sometime in 1QCY24.

• Upon receiving regulatory approvals, the exploration program is expected to commence operation and will consist of seabed surveys and drilling of up to 6 exploration wells (Exhibit 1). The earliest start date for the seabed survey will be no earlier than 1 April 2024. Additionally, we gather that each well may take up to a maximum 90 days for initial drilling, after accounting for extreme weather and potential delays. Further drillings may be required to determine any available commercial quantities. The company plans for the entire programme involving a proposed latest finish date to be completed by 2028.

• Notably, in anticipation of the drilling works required, ConocoPhillips has contracted Transocean Equinox to provide a harsh-environment semi-submersible drilling rig for the campaign for 2 wells, which is expected to arrive by 1QCY25. -The contract with Transocean Equinox will be part of a 16-wells binding award with 3 other operators within the surrounding area (in a consortium) valued at US$184mil for a period of 380 days (implying a day rate of US$484,210 per day).

• Should the programme prove to be successful, ConocoPhillips is expected to prepare an offshore project proposal (OPP) detailing the future developmental plans, particularly on production of the wells.

• Ongoing seismic studies has so far indicated positive results with regards to estimated prospective resource:
  - VIC/P79 contains 3 prospects: Essington and the La Bella Complex with a combined best estimate of 501 billion cubic feet (Bcf) natural gas resource. The largest structure, Monarch has yet to be fully characterised due to seismic imaging issues.
  - T/49P contains several prospects, of which the Flanagan prospect has an estimated 1.3 trillion cubic feet (Tcf) of natural gas resource. As for the rest along the central corridor, further analysis is currently being made to ascertain revised estimates.

• Given the long lead time towards productivity, we do not expect the development to be accretive to earnings within our FY24-FY26 forecast period, and hence remain neutral on its impact to Hibiscus. Moreover, despite the large amount of capex that may be required for the exploration program, we do not expect 3D Oil to be negatively impacted for now as Conoco Phillips is expected to bear 3D Oil’s portion of the well costs of US$35mil for VIC/P79 and US$30mil for T/49P as part of the farm-out agreement. Assuming the charter expense amounts to US$43.6mil (based on a total 90 days drilling period), we believe the amount will be more than sufficient to cover Hibiscus’ portion in associate 3D Oil’s charter contract for the Transocean Equinox rig.

• Hibiscus currently trades at an EV/2P reserve of US$6.87/barrel, at a discount of 8% to its closest peer, UK-listed EnQuest, and 45% to the regional average (exhibit 3).

Source: AmInvest Research - 26 Oct 2023