• Hibiscus finally completed the acquisition of the North Sabah PSC (NSPSC), marking its first Malaysian asset. It plans to invest up to US$50m using debts and internal funds to boost output.
• NSPSC will add 20.5 MMstb of 2P reserves to Hibiscus’ portfolio and raise production by c.7,300 bpd to 10,500 bpd. Based on our assumption of US$67.5/bbl at RM3.90/US$, the new asset provides a structural earnings growth which may boost profits by RM200m.

• We upgrade Hibiscus to BUY (from HOLD) with an unchanged TP of RM0.97. Its recent share price weakness is a good opportunity to gain direct exposure to crude oil price recovery.

Completed NSPSC acquisition

Hibiscus completed the NSPSC acquisition for US$25m and assumed ownership of the asset on 31 Mar 2018 after it met all the conditions and precedents under the SPA. The economic benefit accrued to the company was from 1 January 2017, which would partially offset the total purchase consideration that is payable to Shell.

Capex plan underway to boost production

NSPSC’s production has been declining at c.10% per annum over 2015-2017 as natural pressure at the wells decline. We understand that plans are underway to spend up to US$50m worth of capex over 2-3 years to boost output. The capex would be financed by internal funds and bank borrowings.

Set to stage structural growth in earnings

We are excited with the company’s prospect as the field is expected to contribute to its bottomline from 4QFY18 (Jun YE) onwards and adds c.RM200m per annum based on production flow rate of 8,000 bpd. We estimate that this would enhance Hibiscus’ earnings to sustain over RM300m or by 13-fold over FY18-20 from the levels seen in FY17.

Upgrade to BUY; TP RM0.97

We upgrade to BUY following the recent share price weakness while we believe fundamentals are intact amidst our expectations of crude oil price stabilising at US$65-70/bbl in 2018 and US$70-75/bbl in 2019. Our DCF-derived (WACC: 9%) TP is unchanged at RM0.97.

Update from North Sabah

Post analyst briefing, we remained positive on the company’s long-term outlook with the completion of the NSPSC acquisition on 31 Mar 2018. Key highlights from Hibiscus’ recent analyst briefings are as follow: ?

• Hibiscus is half-way through in achieving its 5-years goal. With the inclusion of NSPSC into its asset portfolio, Hibiscus is 50% away to achieve its 2017-2021 target of having: (i) 100 MMstb of 2P reserves and (ii) production of 20,000 bpd. NSPSC adds 20.5 MMstb of 2P reserves, bringing the total to 49.7 MMstb while enhancing production to c.10,500 bpd. ?
• NSPSC’s output declines at 10% p.a. over 2015-2017. Management updated that NSPSC’s average production level has declined to 14,700 bpd in 2017 from 18,000 bpd in 2015. This implies a natural decline rate of c.10% p.a.
• Hibiscus to invest US$50m over next 2-3 years to boost production. To boost well output, Hibiscus plans to spend up to US$50m of capex over the next 2-3 years. The capex includes several production enhancements and 2C conversion programs which would be funded by internally generated funds and borrowings. 

Still the best proxy to higher crude price

We forecasted Hibiscus’ earnings to grow by 13-fold over FY18-20 from levels seen in FY17. The growth is underpinned by structural production boost from NSPSC and higher crude price. Our key assumptions for NSPSC (Table 1) assumes average output to hit 9,500 bpd by FY20F on the back of several production enhancement programs to be carried out over the next 2-3 years.

Upgrade to BUY; TP RM0.97

We upgrade to BUY following the recent share price weakness while we believe fundamentals are intact amidst our expectations of crude oil price stabilising at US$65- 70/bbl in 2018 and US$70-75/bbl in 2019. Our DCF-derived (WACC: 9%) TP is unchanged at RM0.97.

Source: BIMB Securities Research - 3 Apr 2018