One reason to own Hibiscus Petroleum

Company Snapshot

Listed in 2011 on the Main Market of Bursa Malaysia. The company has come away as first SPAC status company in Bursa to O&G company. Hibiscus also the first E&P player on Bursa. For the past five years the company did not boded well with their investment in Australia, Norway and middle east that caused the company a few hundred million impairment. In the past, this type of company will not come across my mind. For the past few quarters, the company started to deliver some positive results, that's when it started to catch my eyes. I asked myself, will this be another turn around fairy tale company.

As far as I believe this time the company got it right with joint operator and the owner of Anasuria Cluster of producing field (50%), a significant cash and profit generating business in the UK North Sea.

During the current three-month period (“current quarter”), the Group recorded a profit before taxation of RM10.0 million, an increase of RM2.5 million as compared to a profit before taxation of RM7.5 million in the preceding three-month period ended 30 September 2016 (“preceding quarter”).

The Anasuria Cluster contributed higher gross profit during the current quarter when compared to the preceding quarter by RM14.7 million. This was due to higher volume of oil and gas sold and lower operating costs (“OPEX”) per barrel of oil equivalent (“boe”).

We can referred to the table below from Oct to Dec 2016 average oil price was USD$41.70 was considered relative low, but generated higher gross profit due to higher volume oil production from 3,032 to 3,934 (volume increased by 29%) and lower operating cost from USD$18.39 to USD$12.97 (cost lower by 29%).

2 ways to increase profitability of the oil producing company

1. increase oil production volume

2. lower operating costs

From the table below we can see that the company is on the right track.

My estimation

From January to March 2017, average oil price as USD$52.50, increased by 26% compare to preceding quarter, if the volume maintain as 3,934/day, so revenue should be increased by 26%, it will come up to around RM79mil revenue, PBT will be around RM12.64mil (base on 16%). The company definitely will benefit from rising oil price.

But be prepare the company share price will be very volatile due to

1)tension in middle east, usually oil price will surge, considered good to company

2)coming OPEC meeting, if output cut extended then the oil price will increase, if fall off then be prepare for another sell down, this become my biggest worry

Source: Public Investment Research estimates this company as RM0.60

DCF Valuation On Anasuria Cluster

Cost of Debt 5.0%

Cost of Equity 12.7%

Risk Free Rate 3.8%

Market Risk Premium 9.1%

Beta 1.0

Equity 77.8%

Debt 22.2%

Terminal rate 2.0%

WACC * 11.0%

Total DCF 419.9 No. of Shares ('000) 1443

Fair Value (USD) 0.29 Fair Value (RM) @ 4.10 1.19

Hibiscus Portion (50% interest) RM 0.60

If I valued the company as RM0.60, the current price RM0.47, upside about 27%, to me not really attractive. Right?

Reason for me to after this stock

Yes, this is the reason. In fact this was an old news on 12^th Oct 2016.

To me, the company has great potential upside, once the company acquired this piece of asset.

North Sabah

The recent disclosure by the Group that its wholly owned subsidiary, SEA Hibiscus had on 12 October 2016 executed conditional transaction documents to acquire a 50% participating interest in the 2011 North Sabah Enhanced Oil Recovery Production Sharing Contract also bodes well for the future. An overview of this asset is tabulated below.

This asset has the potential to:

 Increase the oil production output of the Group by a factor of up to three times; (estimate will increase total output to 12k bbls/day, currently around 4k bbls/day)

 Provide the Group with a second revenue stream, independent of the Anasuria Cluster

Source: Public Investment Research estimates North Sabah as RM0.55

DCF Valuation On North Sabah EOR PSC

Cost of Debt 5.0%

Cost of Equity 12.7%

Risk Free Rate 3.8%

Market Risk Premium 9.1%

Beta 1.0

Equity 77.8%

Debt 22.2%

Terminal rate 2.0%

WACC * 11.0%

Total DCF 386.6 No. of Shares ('000) 1443.0

Fair Value (USD) 0.27 Fair Value (RM) @ 4.10 1.10

Hibiscus Portion (50% interest) RM 0.55

The valuation of the company become

RM0.60 (Anasuria Cluster)+ RM0.55 (North Sabah) = RM1.15

Maybe I am too optimistic on this valuation, how about 30% discount

RM1.15 x 30% = RM0.80 still has 70%+ upside on current price

Risks:

1)the company expose to oil price risk, but as long as the brent oil price above USD30 the company still look good to me, I expect that the proposed listing of Saudi Aramco to be a catalyst of maintaining oil price stability.

2)if North Sabah acquisition failed to materialized, then you have to consider should Anasuria Cluster alone justified the price you paid for the company

2)coming OPEC meeting, will output cut extended ? 

*For sharing purpose, not a recommendation to buy or sell on the company mentioned above