• Hibiscus is striving to maintain its positive operating cash flow by partially hedging its oil production through collaboration with Trafigura while striving to cut its opex by c.20-22%.

• Overall, we view the measures positively as it will avoid the risk of shutting-in well due to lack of buyers as well as ensuring business continuity of the company.

• We cut our FY20-22F earnings forecast by 58-117% as we revisit our oil price and sales volume assumptions.

• Downgrade to HOLD (from BUY) with a new RM0.54 (from RM1.15) DCF-derived TP. We think the sharp drop in the stock price has fairly reflected a challenging market condition.

Collaborating with Trafigura

Hibiscus has partnered with Trafigura, a leading commodity trading house, for the latter to undertake crude oil offtakes from Hibiscus’ assets as well as to provide potential funding for future projects and asset acquisition. For a start, it has locked-in with Trafigura a future sale of 750,000 bbls of crude oil from North Sabah at an average price of USD35/bbl in 1HFY21. We are positive with this collaboration as it effectively secures Hibiscus’ oil sales hence avoiding the risk of shutting-in wells due to lack of buyers. This also marks the start of its hedging activity.

Strives to maintain positive operating cash flow

To weather current difficult time, management aims to achieve c.20- 22% reduction in its opex/bbl by deferring some non-critical opex activities as well as managing its general and admin expenses. The targeted opex at both Anasuria and North Sabah are USD18.5/boe and USD15/bbl respectively (Chart 1). Including the decommissioning cost of c.USD7/bbl, its cash breakeven cost is c.USD22-25/bbl.

Earnings revision

The low oil price prompted Hibiscus to defer one planned crude oil offtake in 4QFY20 to 1QFY21 to achieve higher realised price. This reduces the company’s FY20 sales volume target to 3.2m bbls (1H20: 1.53m bbls). We cut our FY20-22F earnings forecast by 58-117% as we revisit our oil price and sales volume assumptions (Table 1). We forecast that Brent to trade at USD35/bbl in FY21 and rise by +USD5/bbl every year until terminal value of USD60/bbl in 2026.

Downgrade to HOLD; TP reduced to RM0.54

We downgrade Hibiscus to HOLD (from BUY) with a lower TP of RM0.54 (from RM1.15) following our earnings downgrade. Our valuation is derived using finite DCF methodology based on WACC of 9%. We think the sharp drop in the stock price has fairly reflected challenging market condition. Buy on dip.

Source: BIMB Securities Research - 5 May 2020