This article first appeared in The Edge Financial Daily on April 4, 2018

Hibiscus Petroleum Bhd
(April 3, 81.5 sen)
Maintain outperform with an unchanged target price (TP) of RM1.08: Hibiscus Petroleum Bhd has finally announced the completion of its North Sabah asset acquisition (50% interest) through wholly-owned SEA Hibiscus. While long awaited, the outcome was never much in doubt and solidifies our confidence in the longer-term value of the group. With economic benefits (and costs) accruing to the group dating back to Jan 1, 2017, a relatively large negative goodwill amount will likely be recognised considering crude oil prices now are significantly higher than when the deal was being negotiated in 2016.

Ongoing initiatives to constantly increase production levels to enhance shareholder value affirm our “outperform” call on the group, with TP kept unchanged at RM1.08. Our earnings estimates are also left unchanged, having already accounted for this previously. While the recent listing of its free warrant issue may be dilutive in near term, we see potential uplifts to valuation from the conversion of contingent resources (2C) to proven and probable (2P) reserves in this North Sabah field, which we have not accounted for in our computations. Assuming a 50% conversion, we are estimating the group’s overall TP to be bumped up to RM1.17 (post-dilution).

The acquisition entails operatorship of four oil-producing fields (St Joseph, South Furious, SF 30, and Barton) offshore Sabah, the Labuan Crude Oil Terminal, and all other equipment and assets related to the production sharing contract. US$15 million (RM57.9 million) had been paid as at March 31, 2018, with further payments of US$5 million each due on March 31, 2019 and March 31, 2020. As at Jan 1, 2018, the fields had 40.9 million barrels of 2P reserves that were readily exploitable, and 79 million barrels of 2C which could be tapped on, depending on capital expenditure and regulatory approvals. The North Sabah field has production rights running up to 2040, with the remaining 50% interest held by Petronas Carigali Sdn Bhd.

With this, the group now has an additional revenue stream in addition to the Anasuria Cluster and bumps up current production to a combined 9,500 barrels per day (bpd), putting the group firmly on course toward achieving its 2021 mission of hitting 20,000 bpd. While the target would more than likely be supplemented by other asset acquisitions, management stresses it is in no hurry to do so at this point. On a separate note, SEA Hibiscus has entered into an offtake agreement for the sale of its entitlement of crude oil with Trafigura Pte Ltd on a three-year (+ two-year extension) term. — PublicInvest Research, April 3