Bursa Malaysia (KLSE) Stock Investment Portal

PETALING JAYA: Hibiscus Petroleum Bhd surged by 39.78%, or 18.5 sen, in very heavy trading yesterday after Public Investment Bank (PIB) initiated coverage on the stock with an “outperform” call.

The counter was the most actively traded stock on the Bursa Malaysia, closing at its highest level in almost two years at 65 sen.

PIB pegged a target price of RM1.06 for Hibiscus with an expected return of more than 100% from the current trading price.

The research house said its outperform recommendation is premised on the undervaluation of the Anasuria Cluster which has already been secured, and the potential upside from the North Sabah production sharing contract (PSC) on Hibiscus’ valuation.

This also considers the further potential upside from the conversion of 2C to 2P reserves for North Sabah which has not yet been factored into its valuation, the lower operating expenditure costs which would ensure the viability of its producing fields and potential opportunities for cheaper assets in a lower oil price environment.

“Hibiscus has demonstrated to have the ability to identify and secure high value assets from large companies,” the report said.

“We are initiating coverage on Hibiscus with a target price of RM1.06 premised on our sum-of-parts valuation.

“Our valuation is based on the relative undervaluation of Hibiscus’ Anasuria Cluster asset valued at 58 sen,” it said.

The valuation is based on its discounted cash flow valuation with a 11% weighted average cost of capital and after a review of its upcoming North Sabah acquisition based on its 2P reserves only, which it believes would add another 48 sen to its fair value.

The 48 sen assumes the production of its 2P remaining reserves of 62mbbls, no additional capital expenditure investment, operating expenditure cost of US$12.90 per barrel through the remaining lifespan of the production rights of 24 years up to the year 2040.

It noted that Petronas Carigali Sdn Bhd (PCSB) has waived their pre-emption rights under the joint operating agreement (JOA), and with Petronas providing its approval to Shell which is conditional for the assignment of interest to the PSC in favour of Hibiscus.

With this, it believes the acquisition is “in the bag”, and is expected to complete by end-2017 at the latest.

“Assuming the 50% conversion of the field’s 2C contingent resources into 2P reserves, we are estimating the asset’s fair value to be worth 86 sen (for Hibiscus’ portion),” PIB said.

The research house said it had understood the concerns of Hibiscus’ frequent rounds of private placement initiatives but this is largely related to the cost of equity being cheaper compared to the traditional cost of borrowing for certain oil and gas activities.

“Hibiscus’ placement exercises are not entirely dilutive as it has translated to the better performance of the group with improving earnings before interest, taxes, depreciation and amortisation and stronger cashflows,” it said.

It also highlighted of Hibiscus’ core mission which is to ensure that it has access to a base of proven and probable reserves, 2P of 50 thousand barrels of oil (mbbls) by 2018 (net entitlement to Hibiscus).

“We also understand that the company has mid-term internal targets to secure access to at least a base of proven and probable reserves of 2P 100mbbls (net entitlement to Hibiscus) by 2021.

“By this time, the company targets a production rate of at least 20,000 barrels of oil equivalent per day,” it said.