We expect a significant QoQ earnings decline in Hibiscus’s upcoming 1QFY23 results, predominantly due to two main reasons: (i) lower average Brent crude oil spot prices of USD98/bbl throughout the quarter (vs. USD112/bbl in 4QFY22); and (ii) significantly lower offtake volume of 1.6m boe for 1QFY23 (vs. 2.0m boe for 4QFY22). Also, we highlight that the subsea riser replacement in the group’s Anasuria asset will progressively boost the group’s production by 500-700 bpd. On a separate note, we understand that the group is expecting only a minimal or zero additional tax payment with regards to the EPL (UK’s windfall tax) as there would be an additional 80% investment allowance on the levy – where the capex spending on its Marigold and Teal West assets would be sufficient to mitigate the impact of EPL. All-in, we maintain BUY on Hibiscus with a TP of RM1.56/share.

Significant QoQ earnings decline to be expected in 1QFY23 – due to lower offtake volume scheduled. We are expecting a significant QoQ earnings decline for Hibiscus in its upcoming 1QFY23 (FYE June) results – predominantly due to two main reasons: (i) lower average Brent crude oil spot prices of USD98/bbl throughout the quarter (vs. USD112/bbl in 4QFY22); and (ii) significantly lower offtake volume of 1.6m boe for 1QFY23 (vs. 2.0m boe for 4QFY22) – see Figure #1 for more details. We note that the group also incorporated a recognition of deferred tax assets amounting to RM56.0m in its previous quarter 4QFY22.

Anasuria asset’s subsea riser replacement update. From our recent meeting Hibiscus, we note that the faulty subsea riser in Anasuria has already been replaced. Based on our understanding, we note that this would progressively boost the group’s production by 500-700 bpd – which has already been imputed into our forecasts for FY23.

In discussion to extend PM3CAA asset’s license. We highlight that the group is currently in discussion with Petronas and PetroVietnam to extend the recently acquired PM3CAA’s license by another 10 years (till 2037). We expect the outcome of the discussion to be finalised by end-2023. If approved, Hibiscus aims to drill more wells for the asset in 2024-2025.

UK’s windfall tax (Energy Profits Levy) impact. On 26 May 2022, the UK government announced a new tax on the profits of oil and gas companies operating in the UK and the UK Continental Shelf. With effect from that date, the EPL increases the headline rate of tax on those profits from 40% to 65%. However, the new levy includes a generous new additional 80% investment allowance if oil companies were to invest in oil and gas extraction in the UK. Based on our understanding, the upcoming capex spending on its Marigold and Teal West assets will be sufficient to mitigate the impact of EPL – where the group is expecting only a minimal or zero additional tax payment for this development.

Forecast. Relatively unchanged (only minor housekeeping tweaks).

Maintain BUY, TP: RM1.56/share. We maintain BUY on Hibiscus Petroleum with a marginally higher TP of RM1.56/share after some housekeeping tweaks. Our TP of RM1.56/share is derived based on NPV of all its producing assets’ future free cash flows (FCF) – after accounting for each asset’s targeted lifespan. At about only 4x FY24F P/E, we believe that Hibiscus is a compelling case and is conspicuously undervalued given its strong foothold in the upstream energy space.

Source: Hong Leong Investment Bank Research - 10 Nov 2022