Hibiscus Petroleum (Hibiscus) reported core net profit of RM70.5m in the 2QFY23 as compared to RM49.4m in 2QFY22. This is on the back of higher revenue reported during the quarter (+150.7% YoY), boosted by the consolidation of Repsol’s assets. However, on a QoQ basis, the Group’s core net profit dropped by 42.5% mainly due to an RM104.0m deferred tax liability charge arising from Energy Profits Levy (EPL). Although it is a non-cash item and distorts the bottomline, we deem this as part of core earnings and assume the reversal in future as part of our blended effective tax assumption in our discounted cash-flow (DCF) modelling of its UK asset. Overall, the Group’s 1HFY23 core net profit meets our FY23 estimates at 47.8% of full-year numbers, though lagging consensus at 39.8%. We maintain our Neutral call and TP of RM1.18 due to the lack of immediate catalysts for the Brent crude oil price to break above USD90/bbl, in our view.

• Distorted by deferred tax liability. On a YoY basis, the Group’s core net profit grew by 42.7% on the back of higher revenue from the consolidation of Repsol’s assets. However, on a QoQ basis, core net profit dropped by 42.0% arising from an RM104.0m deferred tax liability charge due to changes in the EPL regime. EPL was first introduced with effective date of 26 May 2022 at a rate of 25%. However, the UK government revised the EPL regime to 35% with longer effective tenure for the period of 1 Jan 2023 until 31 Mar 2028. We deem this one-off as part of core earnings and assume the reversal in future as part of our blended effective tax assumption in our discounted cashflow (DCF) modelling of its UK assets, although it distorts 2QFY23 bottomline.

• Strong QoQ operational statistics. The Group recorded higher revenue (+17.9%) on a QoQ basis with higher oil volume sold (+31.2% to ~2.0MMboe) although it recognised lower oil price of USD76.60/boe as compared to USD88.60/boe in the previous quarter. This is underpinned by higher production of ~20.0 Mboe/day, higher by 18.7% QoQ. Notably, Anasuria cluster achieved 92% average uptime (vs 53%) following the completion of riser replacement project which malfunctioned since May 2021. It also achieved a more efficient cost structure with lower OPEX/boe of USD16.40/boe (vs USD20.50/boe).

• Outlook. The recent surprise announcement from Russia on 10 Feb to cut 0.5m bbl/day of oil production beginning March has failed to spur optimism on the Brent crude oil price to break above USD90/bbl. Both the International Energy Agency (IEA) and OPEC are expecting balance surplus at least for the 1H2023 due to lack of macroeconomic fundamentals to drive the demand.

Source: PublicInvest Research - 17 Feb 2023