Hibiscus Petroleum (Hibiscus) has received Petronas Carigali Sdn Bhd’s (PCSB) unconditional consent under the joint operating agreement (JOA) to the assignment of Shell’s 50% interest in the 2011 North Sabah Enhanced Oil Recovery (EOR) production sharing contract (PSC). We are elated by this news, knowing that the deal is another step closer to completion. Our current valuation of Hibiscus includes the North Sabah acquisition based on its proven and probable (2P) reserves only, which we believe would add another RM0.48 to the Group’s underlying fair value of RM0.58. With this announcement, our Outperform call with TP of RM1.06 premised on our sum-of-parts valuation is reaffirmed further, as we believe the acquisition has an even higher probability of coming to pass now.

• The JOA, to recap, is for its indirect wholly-owned subsidiary, SEA Hibiscus Sdn Bhd (SEA Hibiscus) to acquire a 25% operating interest in the 2011 North Sabah EOR PSC from Sabah Shell Petroleum Company Limited and a further 25% non-operating interest in the PSC from Shell Sabah Selatan Sdn Bhd. PCSB is the other PSC partner and will retain a 50% non-operating interest.

• North Sabah PSC consists of 4 producing oil fields and and operatorship of all its associated equipment and assets including the Labuan Crude Oil Terminal. The acquisition will entail SEA Hibiscus becoming the operator of the PSC, and includes i) production of petroleum from 4 existing oil fields, namely St Joseph, South Furious, SF30 and Barton; and ii) an existing pipeline infrastructure, the Labuan Crude Oil Terminal, and all other equipment and assets relating to the PSC. The total oil production (on a 100% PSC basis) is c.18,000bbls/day in 2015. The PSC also provides long-term production rights until 2040 with identified future development opportunities.

• Potentially more upside. Assuming a 50% conversion of the field’s 2C contingent resources into 2P reserves, we are estimating the North Sabah asset’s fair value to be worth RM0.86 (Hibiscus’ portion), to bump the Group’s overall fair value up to RM1.44.

• Our Outperform recommendation is premised on the improving performance of the Anasuria Cluster which has already been secured, and the potential upside from the North Sabah PSC on Hibiscus’ valuation. It also takes into consideration i) further potential upside from conversion of 2C to 2P reserves for North Sabah but which has not yet been factored into our valuation, ii) lower OPEX cost which would ensure the viability of its producing fields, and iii) opportunities for cheaper assets in a lower oil price environment, whereby Hibiscus has demonstrated to have the ability to identify and secure high value assets from large companies.

Source: PublicInvest Research - 6 Dec 2017