Hibiscus – what now

Since the last post on 7/11/21, much has happened:

• Oil price zoomed up from usd 83 to today usd 101 (May 22 contract)
• Hibiscus price also zoomed up from 91 sen to RM 1.22 (today)
• Russia invaded Ukraine

In 17/10/21, it was estimated that Hibiscus value - RM 1.46 and FY2022 earning, EPS (fully diluted) might be RM 0.24.

Incorporating the following (from latest reports on Hibiscus web-site):

1. latest Q2 FY22 result
2. subsea component failure affecting Anasuria production until Q3 CY22
3. Completion of the Repsol deal on 24/1/22 with expected production for FY22 at 2.5 million barrels oil equivalent
4. Management guidance, Anasuria + North Sabah total production for FY22 would 2.7 million barrels of oil equivalent
5. Total daily production is now around 23,000 bpd compared with 8,000 bpd before.

Few comments on above and assumptions made:

1. Anasuria + North Sabah production
   1. Up to Q2 FY22, 1^st half, a total 1.6 mb have been produced. Following Management guidance of total 2.7 mb will mean 2^nd half production is 1.1 mb, i.e., 6074 bpd. This is far below the 8,000bpd production and is thus deemed too conservative. Instead about 8,000bpd is used.
   2. The 90,000 barrels over-lift is discounted in the 2^nd half production calculation
   3. Hence, total production is about 3 million barrels.
2. 1^st Jan to 23^rd Jan production from Repsol asset is not included
3. Negative goodwill of RM 35.79 million was included in q3 in Repsol’s estimate
4. While oil price is now around usd 101, this is ignored and conservative price of usd 90 was used for Q3 and 88 for Q4.

This resulted in the total production of about 5.6 million barrels compared with 6.2 million barrels in the October 2021 estimate, a drop of about 15%.

Price of oil used now is about 17% more than that of Oct 2021.

Combined – lower production but slightly higher oil price led to lower earnings of RM 0.172 compared with RM 0.241, a 29% reduction.

Lower profitability was used for Repsol’s estimate to account for lower efficiency and not fully into Hibiscus work pace.

Potential cash from operation is about RM 870 million. Deducting, say, RM 370 million for purchases of equipment and intangibles, leaves RM 500 million, just about clear the RM 519.3 million balance for Repsol (usd 123.65 x 4.2 = 519.33). Potentially, whatever loan from Trafigura might be repaid by the end of this fiscal year.

This estimate is of course crude, but it provides some range of possibilities. One can muck around with the profitability, oil price, etc., to come up with earnings that meet one’s requirement.

What now

Current price (1.22) is about 84% of target price of 1.46.

What should I do: -

1. take profit, if so, how much – 20%, 50% of Hibiscus holding?
2. wait till it hit 1.46 then sell 50%
3. when it hit 1.46, sell all?

It is a dilemma. Have been asking the following questions –

1. will oil price appreciate further, 110 to 120 range?
2. From 1.2 to 1.46, there is an appreciation of about 18%
3. Are there other counters that might give similar returns (+18%) or better going forward (within a year)?

These charts from Hibiscus’s September 2021, December 2021 and February 2022 presentation slides swayed me to take some profit.

In September 2021, Hibiscus price value (market cap) was below Brent oil price. By December 2021, it has more or less caught up that included the surge in October 2021. There was another price surge in February 2022. Missed taking profit in October 2021 and because of FOMO, is taking profit now.

Uncertainties in oil price was another factor that pushed towards profit taking. These are the uncertainties:

1. The nuclear deal with Iran (expected Q1 CY2022)
2. Steady increasing rigs in USA despite the ESG issues, increased production (expected towards Q2 CY2022)

These uncertainties if and when it becomes facts could push oil price down to between 80 and 85.

So, basically, one bird in hand is better than two in the bushes.

Of course, Russian incursion into Ukraine complicated matters more. Thinking at the beginning is that it will be short – like a week. Now, maybe not - a month?

Winston Churchill said "In wartime, truth is so precious that she should always be attended by a bodyguard of lies."

As usual day to day, things changed and the behaviour of Hibiscus price is also erratic.

Without the Ukraine war, fundamental supply and demand currently is forecasted to build inventories (i.e., supply exceed demand). Coming EIA’s weekly reports and OPEC monthly reports will give clues to this supply demand dynamic.

Now with war, supply could be less than demand. That is, any disruption to supply from Russia (being one of the three largest oil producers in the world) would be a disaster – causing oil price to spike.

Should oil price is maintained above 100, Hibiscus price might be RM 2??

Another question is what do one do with the profit taken out. Never ending, this ……

Peace

Disclaimer:

I wrote this myself without pay. I and my families own Hibiscus shares. This is not an advice to buy / sell Hibiscus or any other equities / securities / assets.