• Hibiscus’s 2QFY18 core earnings was flat as unit production costs offset gains from higher crude oil prices.

• 2QFY18 oil production rate fell to 2,071 bpd level (1QFY18: 2,575 bpd) due to production hiccup at Guillemot A.

• We cut FY18 earnings by 45% due to the production shortfall and take a more conservative stance on FY19/FY20 with a 5%/4% reduction respectively.

• Maintain HOLD with lower DCF-derived TP of RM0.97 (from RM1.05). We still see Hibiscus as the best proxy to the sector direct exposure to production while we look forward to the structural earnings growth from the NS acquisition.

Disappointing operational performance

Hibiscus’ 2QFY18 came in below our expectation as production was interrupted by a temporary hiccup, exacerbating production decline due to a planned total shutdown of the Anasuria FPSO. As such, 2QFY18 core EBITDA fell 23% yoy to RM31.2m, negated by higher ASP and inventory drawdown. Revenue rose 21% yoy as it sold 275k bbl (comprise of estimated net production of 186k bbl and 90k bbls from inventories) of crude oil at US$62.9/bbl (1Q17: 299k bbl @ $41.7/bbl). Overall, 1H18 core profit was only 29%/16% of ours/consensus FY18 estimate respectively.

Lower production volume at Guillemot A (GUA) field

Recall that Hibiscus undertook a planned FPSO total shutdown from mid-Sep for 31 days. Production was further affected by disrupted GUA field production due to: (i) interruption at Cook-P1 field which reduced gas availability used for gas-lift at GUA, and (ii) mechanical problem on gas compression facility aboard the Anasuria FPSO. As such, this reduced facilities uptime to just 57% (1QFY18: 70%) and the average crude oil production volume fell to 2,071 bpd in 2QFY18 (1QFY18: 2,576 bpd).

Cut our forecast

Due to lower-than-expected average production in 1HFY18, we cut our FY18 earnings forecast by 45%. In light of the unexpected production setback, we take a more conservative approach to our production assumptions for FY19 and FY20 which led to a 7% and 5% cut respectively. The lower reduction for these years (vs FY18) is lower as we factored in contribution from the NS field.

Maintain HOLD call with lower TP at RM0.97

Consequently, our DCF-derived TP is lowered to RM0.97 (from RM1.05) which is based on 9% WACC. While we see limited upside to current crude oil price due to potential supply boost from US shale players, we remain excited on the potential structural earnings from the North Sabah (NS) field acquisition which is expected to complete by end Mar 2018.

Source: BIMB Securities Research - 22 Feb 2018