Investment Highlights

• We maintain BUY on Hibiscus Petroleum (Hibiscus) with a higher sum-of-parts based fair value (FV) of RM3.41/share (from RM3.23 previously), which implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$7.95/barrels of oil (bbl), a slight premium to EnQuest's US$7.27/bbl but close to the regional average of US$8.17/bbl (Exhibit 4). It also reflects a premium of 3% based on our in-house ESG rating of 4-star.

• The higher FV is to account for stronger net present value contribution from North Sabah production sharing contract (PSC) and Anasuria Cluster concession, which we expect to see a rise in net oil production per day following the execution of key growth projects. Accordingly, we tweak our FY24F-FY25F earnings higher by 3%-5%.

• Hibiscus’ 1QFY24 core net profit (CNP) of RM156.5mil came in above expectations at 36% of our FY24F earnings and 34% of consensus forecast. For reference, 1Q accounted for 31% of FY23 CNP.

• The group declared a first interim dividend per share (DPS) of 2 sen which translates to a payout of 26%. We understand that Hibiscus intends to distribute a minimum total DPS of 7.5 sen for FY24F, a 30% rise following the 1:2.5 share consolidation exercise on 20 Oct.

• YoY, 1QFY24 revenue rose by 24%, mainly driven by North Sabah PSC which delivered 2 offtakes of crude oil (vs. 1 offtake in 1QFY23) amounting to 594k bbl. Likewise, CNP rose by 28%, further supported by group EBITDA margin improving by 4%-point to 54% together with lower supplemental and tax payments for North Sabah PSC.

• QoQ, 1QFY24 revenue increased by 48% driven by a broadbased increase in all segments due to higher total sales volume which rose by 15% to 1.4mil barrel of oils (MMbbl) and 0.6mil barrel of oil equivalent (MMboe) of gas, coupled with higher average realised oil prices. Coupled with lower finance costs and depreciation expense, CNP rose by a larger 85% despite EBITDA margin declining by 11%-point.

• Notably, the weaker EBITDA margin was primarily attributable to higher costs from planned CY23 major maintenance programme across the group’s Malaysian operations and other one-off repair works which took place throughout April to September 2023. This is reflected in the higher opex/bbl for most assets, which rose by close to 25% except for North Sabah PSC which was flattish as its campaign ended earlier by mid-Q1FY24.

• The group delivered a total net sales volume of 2.0MMboe in 1QFY24. Management estimates this figure to moderate to 1.9MMboe in 2QFY24 and 1.8MMboe in 3QFY24 (Exhibit 3), with full-year sales volume in the range of 7.5- 7.8MMboe (vs. FY23 of 7.1MMboe). Premised on this, we expect to see a sequentially moderate topline performance led by a slight decline to flattish performance for North Sabah and Anasuria Cluster PSC, offset by a stronger showing from Peninsular Hibiscus (PM3 CAA, Kinabalu and PM305/PM314 PSC).

• Hibiscus achieved an average 1QFY24 net production volume of 20kboe/day, which is mainly contributed by the Peninsular Hibiscus (66%), followed by North Sabah (23%) and the Anasuria Cluster (11%).

• Other key highlights from the analyst briefing yesterday:
  ➢ The group is currently pursuing 4 exploration targets within the North Sabah (3) and PM3 CAA (1) PSC areas. Drilling activities commenced on 29 October in North Sabah. Following this, the assigned rig is expected to move to PM3 CAA (1) by 2HCY24.
  ➢ For 2QFY23, management expects to see total oil sold for the Anasuria Cluster PSC range at 170k bbl to 180k bbl. Notably, the PSC is expected to register a drop in production due to storm Babet and unplanned maintenance which had led to a total downtime of 8-9 days in October 2023.
  ➢ Hibiscus informs that the first oil for the Teal West development could be delayed to mid-2025 (vs. initial expectation of 2024). The delay is mainly attributable to supply chain issues in the form of potential delays of parts crucial in hooking up for the tie-back installation. The process may be expedited upon delivery of the parts and availability of a vessel required for the installation which we gather may cost an estimated US$20mil. Total capex for the entire development is estimated at US$111.5mil.
  ➢ Following the farm-in exercise for the Fyne field on 11 October, management expects to submit a concept select report to the NSTA by end-2023, which identifies the Anasuria FPSO as the selected development option with a subsequent submission of the field development plan (FDP) in 2024.
  ➢ The group also expects to submit the FDP for the unitised Marigold field development by early-2024.

• We expect to see the group’s earnings growth trajectory underpinned by ongoing organic expansions, namely the SF30 Waterflood Phase 2 project in North Sabah and Teal West project in Anasuria. Both projects, which are scheduled to be completed in 2HCY24, are estimated to increase Hibiscus’ daily production by an additional 5K-6K barrels of oil equivalent per day (boe/day) or 26%-32% to 26K boe/day.

• The group also targets to reach a daily production of 35K-50K boe/day by 2026, which hinges on an aggressive pipeline of exploration and development opportunities within the existing portfolio as well as the addition of new assets via acquisition and bidding of new licenses.

• Currently, Hibiscus is trading at an appealing EV/2P reserve of US$5.13barrel, a 29% discount to its closest peer, UK-listed EnQuest, and 37% to regional average.

Source: AmInvest Research - 23 Nov 2023