This article first appeared in The Edge Financial Daily on September 21, 2017

Hibiscus Petroleum Bhd
(Sept 20, 65 sen)
Initiate coverage with outperform and target price (TP) of RM1.06: Hibiscus Petroleum Bhd continues to deliver production from its first producing field, the Anasuria Cluster in the UK with an average about 3,500bbls/day, anchoring its position more prominently amongst its oil peers.

We remain positive on the group’s performance, reaffirmed by its ability and perseverance to continue securing producing assets.

In October 2016, the group announced another milestone, the conditional sale and purchase agreement (SPA) for the group to acquire the 50% stake of the North Sabah Enhanced Oil Recovery (EOR) production-sharing contract (PSC).

We are initiating coverage on Hibiscus with an outperform call with a TP 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 based on our discounted cash flow valuation with an 11% weighted average cost of capital. After a close review of its upcoming North Sabah acquisition based on its proven and probable reserves only, we believe it would add another 48 sen to the group’s fair value.

Petronas Carigali Sdn Bhd has waived its pre-emption rights under a joint operating agreement. Petronas has provided approval to Shell, which is conditional for the assignment of interest to the PSC in favour of Hibiscus.

We believe the acquisition is in the bag, and is expected to complete by the end of the year at the latest. Assuming the 50% conversion of the field’s 2C (proved and probable contingent resources) into 2P (proved and probable) reserves, we are estimating the asset’s fair value to be worth 86 sen (Hibiscus’ portion).

We understand the concerns of the group’s frequent rounds of private placement initiatives. This is largely related to the cost of equity to be cheaper relative to the traditional cost of borrowings for certain oil and gas activities.

Hibiscus’ placement exercises are not entirely dilutive as they have translated into the better performance of the group with improving Ebitda and stronger cash flows.

Our outperform recommendation is premised on the undervaluation of the Anasuria Cluster which has already been secured, and the potential upside from the North Sabah PSC on Hibiscus’ valuation.

It also takes into consideration further potential upside from conversion of 2C to 2P reserves for North Sabah which has not yet been factored into our valuation, lower operating expenditure cost which would ensure the viability of its producing fields, and opportunities for cheaper assets in a lower oil price environment, whereby Hibiscus has demonstrated to have the ability to identify and secure high-value assets from large companies. — PublicInvest Research, Sept 20