• MYR1.84 FV, based on EV/2P oil reserves of USD10.00/boe, 39% discount to regional peers. Despite surging 80% YTD, Hibiscus Petroleum’s valuation remains undemanding, at 5.5x FY23F (Jun) P/E – below its 5-year mean (9x), and Bursa Malaysia Energy Index (18x). It ought to deliver solid earnings growth of 79-261% in FY22F-23F riding on strong oil prices and production boost from the newly acquired Repsol assets. Further re-rating catalysts: The Marigold Field Development Plan (FDP) approval and extension of Repsol’s production sharing contract (PSC).

• Acquisition of Repsol’s assets to boost production and reserves. Following the acquistion of Repsol’s offshore assets in Vietnam and Malaysia, net probable reserves/contingent resources (2P/2C) are lifted by 63%/175% to 77.3mboe/73.2mboe while production is estimated to increase by 13-14kboepd or 2x. The gas to oil ratio for its 2P reserves has been lifted to 17:83 from 2:98, which is a crucial step of its energy transition journey to achieve net zero emissions by 2050. Further integration with existing Sabah operations could lower net opex/boe and potential extension of the PSC will increase its 2P/2C.

• Elevated oil prices to support valuation. Being a pure upstream E&P player listed in Malaysia, HIBI is deemed a proxy to oil prices given its direct exposure to oil prices. The share price is 73% positively correlated to Brent oil prices. Our sensitivity analysis also suggests that every 1% increase in oil prices will lift FY22F-24F earnings by 1.5-2%. We estimated Brent oil prices to remain at average USD100.00/bbl in 2H22 and USD85.00/bbl in 2023, which would continue to support its valuation. We do not discount the possibility of the oil price uptrend to persist longer than expected as we have yet to see the turning point given global supply remains tight. This is assuming a protracted crisis, with the conflict contained within the Ukrainian borders and Russia does not weaponise its oil and gas resources and supply to Europe.

• Strong earnings boost in FY22F-23F. We expect FY22F-23F earnings to grow by 79-261% with average oil prices forecast of USD88.00-94.00/bbl and contribution of new acquired assets. Subsequently, FY24F earnings is projected to decline by 20% due to lower oil price assumption of USD80.00/bbl. Financial position wise, HIBI’s net cash position is expected to strengthen further in FY22F-24F on the back of strong free cash flow generation. We derive a FV of MYR1.84, based on EV/2P oil reserves of USD10.00/boe, which is a 39% discount to the broader regional peer average of USD16.50/boe. The FV implies 5.5x FY23F P/E, which is below its 5-year mean valuation (9x) as well as lower than the Bursa Malaysia Energy Index (18x).

• Risks: Higher-than-expected operating costs, weaker-than-expected oil prices, weaker-than-expected production, and lower-than-expected reserves.

Source: RHB Research - 23 May 2022