We attended Hibiscus Petroleum’s (Hibiscus) Investor Day 2023 and came away confident with its growth strategy toward achieving 35,000 barrels oil equivalent per day (boe/d) by 2026, from 23,000 currently (in 2023). We view this as a realistic target based on its strong acquisition track record, and healthy balance sheet for enhancing existing production to support both organic and inorganic growth. This also complements its strategy of building a resilient portfolio by increasing natural gas reserves in their assets, in view of increasing awareness of green energy transition. Despite of our confidence in its growth strategy, we maintain our Neutral call and TP of RM1.18 as we see elevated global recession risks currently weighing on sentiment of Brent Crude Price over the near term, which is now trading at USD73, a 15-month low.

• Accessibility to major players. Being the first listed SPAC in Malaysia in 2011, Hibiscus as small player was hardly known in the market as it focused on exploration in +USD100/bbl oil price environment. However, the first asset acquisition of Anasuria in 2016 opened the doors to major players including Shell, Exxon and Repsol, which has led into another 2 successful acquisitions (North Sabah and Peninsula Hibiscus). We believe the strong established relationship with these major players will retain its advantageous position in sourcing future deals as any asset disposal from these players would be less price sensitive, and more focused on the buyer’s technical capabilities, employees’ welfare, and contingent liabilities assurance. Hibiscus has demonstrated its capabilities and deliverables to these players thus far.

• Strong balance sheet. As a result of its past diligence in acquisitions, Hibiscus’ cash reserves have grown more than 18-fold since 2016 and currently stands at RM532m. Hibiscus also has USD149m debt facilities ready to be utilised for capital expenditure (capex) to enhance its production and value accretive acquisitions in the future. We believe this provides sufficient headroom when good opportunities emerge, especially during depressed crude oil price environment.

• Enhancing asset performance. Since the first acquisition, Hibiscus has always been looking toward increasing the reliability and uptime of its assets. It has managed to halt sharp decline in production after the transfer of operatorship. Hibiscus remains committed to continuing to enhance its asset performance by determining a total of USD245m of capex to be spent on drillings of 4 development wells, 6 producer wells and 7 water injector wells across its producing assets.

• Transition towards gas weighted. A recent keynote address by Jan Laubjerg, Global Head of Natural Resources at HSBC Bank highlighted the belief that oil and gas will remain as a significant part of future energy mix, with increasing attractiveness of gas in energy transition, which has less emission than oil. Thus, it is sensible for small exploration and production (E&P) players like Hibiscus to increase its gas portfolio in the future. Due to significant untapped gas reserve in PM3 CAA, Hibiscus has initiated discussion to extend the license beyond 2027. The extension will allow Hibiscus to spend more capex in the field and increase the gas production.

• Outlook. Although we are confident on its overall growth strategy, we remain cautious on its near-term outlook given negative sentiment on Brent Crude Oil Price amidst elevated global recession risk. The sentiment is echoed by the recent OPEC forecast citing potential downside risk from rapid rate hikes despite growth in oil demand from China’s reopening. Hence, we maintain our Neutral call and TP of RM1.18.

Source: PublicInvest Research - 21 Mar 2023