This article first appeared in The Edge Financial Daily on February 23, 2018

Hibiscus Petroleum Bhd
(Feb 22, 97 sen)
Maintain outperform with a target price (TP) of RM1.08: Hibiscus Petroleum Bhd’s first half of financial year 2018 (1HFY18) pre-tax profit of RM22.8 million was 30.6% higher year-on-year (y-o-y), reflective of higher average crude oil prices recognised during the period. Reported net profit was 76% lower y-o-y, however, due to a huge reversal in deferred tax liabilities in the previous corresponding period in 1HFY17. We remain positive on Hibiscus’ long-term prospects given its ongoing initiatives to constantly increase production levels in enhancing shareholder value. Our outperform call is affirmed, with our TP lifted slightly to RM1.08 from RM1.06 previously as we roll over our discounted cash flow-based valuations to FY19, while also making slight adjustments to our foreign exchange and crude oil price assumptions.

Its revenue of RM134.9 million for the period was an increase of 14.2% y-o-y largely due to higher average crude oil prices due to a planned shutdown of the Anasuria floating production storage and offloading (FPSO) for 31 days. The current quarter also saw a temporary interruption in production of the Cook-P1 well and temporary failure of a gas compression facility, both of which dampened second quarter of FY18 (2QFY18) uptime to 57% for a cumulative 1HFY18 average of 63% versus 90% in 1HFY17.

The period under review saw the completion of an offshore turnaround of the Anasuria FPSO, and the GUA-P4 gas lift project. The production rate is anticipated to improve to 350 barrels per day net to Ahuk from 60 barrels per day. We gather that production has actually been better than expected.

Meanwhile, incremental contributions from the contract of a sixth generation semi-submersible rig to drill the Guillemot-A, GUA-P2 sidetrack, are already anticipated to occur from July 2018. The drilling of this sidetrack is anticipated to realise net proved and probable (2P) reserves of 1.01 million barrels, potentially enhancing valuations further.

Regarding Hibiscus’ proposed acquisition of a 50% participating interest in the 2011 North Sabah Enhanced Oil Recovery Production Sharing Contract from Sabah Shell Petroleum Company Limited and Shell Sabah Selatan Sdn Bhd, we remain comforted that the commercial agreement for net economic benefits and risks in the asset to accrue to SEA Hibiscus from Jan 1, 2017 remains in place. We continue to be excited over this impending acquisition, though we acknowledge that this has mostly been priced in at current levels. The entitlement of a minimum additional 6,000 barrels per day produced by the North Sabah operations is expected to aggregate about 9,500 barrels per day for the group.

Hibiscus’ planned free warrant issue of one warrant for every existing five ordinary shares essentially expands its share base by 20% upon full exercise of the warrants over the next three years. While this may be dilutive, we are leaving our sum-of-parts derived RM1.08 valuation unchanged for now given the potential uplift from the conversion of the best estimate of contingent reserves (2C) to 2P reserves for the North Sabah field, which we have not accounted for in our computations. — PublicInvest Research, Feb 22