This article first appeared in The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020

A fundraising programme by Hibiscus Petroleum Bhd to raise up to RM2 billion through convertible redeemable preference shares (CRPS) could signal a return of mergers and acquisitions (M&A) in the oil and gas (O&G) industry.

As advances in the development of Covid-19 vaccines continue to gather pace, consumer sentiment is increasing globally and, with that, the forecast demand for O&G.

This has pushed petroleum prices northwards. M&As in O&G have started to pick up momentum from the second quarter.

According to GlobalData — a consultancy that provides data-driven analysis in various industries worldwide — M&A deals in the sector in 2Q2020 increased 114.2% from the preceding quarter to US$23.95 billion.

However, this is still some 68.8% lower than the US$76.8 billion average over the preceding four quarters. During 2Q2020, the Middle East and Africa region topped the list, with total announced deals of US$11.29 billion.

Against this backdrop, Hibiscus is seizing the opportunity to raise funds to acquire producing assets in Southeast Asia. Although the programme aims to raise RM2 billion, Hibiscus is issuing the CRPS in tranches, with the first two issued for a sum of RM203.6 million.

At a media briefing to announce the success of Hibiscus’ issuance and listing of the first tranche of its CRPS worth RM203.6 million last Monday, group managing director Dr Kenneth Gerard Pereira said the quality of assets sought by Hibiscus in the region are those that can triple or quadruple its current production rate.

“These are not assets that require a white knight or anything. These are strong, stand-alone assets with strong cash flows, good IRRs (internal rates of return). We are trying to find one that will make a material change to the company.

“We need it to be a material change of three to four times our current production,” he said.

Hibiscus produces about 10,000 barrels of oil equivalent per day, mostly from its assets in North Sabah and the North Sea in the UK. The company also has assets in Australia, but the block has been underperforming.

Based on projections of higher oil prices, Hibiscus believes the next six months will be a window of opportunity for the acquisition of producing assets to ride the upward trend.

Forecasts for the price of crude oil differ from one agency to another, but all agree that prices are rising.

In the Short-Term Energy Outlook released on Nov 4, the US Energy Information Administration (EIA) forecasts that Brent crude oil will average US$47 per barrel in 2021.

Canada’s National Energy Board has a more optimistic projection of US$69.50 per barrel, whereas the International Monetary Fund’s average of US$47.97 per barrel is similar to the EIA’s. Barclays’ prediction is US$53 per barrel average.

As at last Wednesday, Brent crude was trading at US$48.48 per barrel while the West Texas Intermediate crude benchmark was at US$45.37 and the OPEC basket at US$44.75 barrel. Malaysia’s own Tapis was trading at US$46.20 per barrel.

The movement of oil prices will depend on factors such as when the Covid-19 vaccines can be delivered to market and the behaviour of the major oil-producing countries, said Hibiscus chairman Zainul Rahim Mohd Zain during the media briefing.

The group expects that oil prices will be more stable in the second half of 2021 and continue to strengthen, barring any hiccups in the way the pandemic is managed globally.

“I think OPEC+ will get their act together, [as] they have seen the trouble they got themselves into when they were overproducing in the early part of the year,” Zainul said.

He pointed out that many American shale producers are also in dire straits. “I will not predict the price, but it is definitely going to be higher than what we see today.”

Brent crude for the December contract has rallied since Oct 30, when it was trading at US$37.94 per barrel, fuelled by news that the developmemt of Covid-19 vaccines had made significant progress.

Hibiscus is reportedly one of the bidders for ExxonMobil’s assets in Peninsular Malaysia, which have been on the market for the past one year. The value of these assets is said to range from US$2 billion to US$3 billion.

Pereira declined to confirm whether the group was bidding for ExxonMobil’s assets, but said Hibiscus was already in talks with several asset owners in Southeast Asia.

He added: “Looking at the price projection and the number of opportunities in the market right now, our target would be to bid for assets over the next six months, and then they will take whatever time it takes for them to decide, whether we are successful or not.

“But there are several already in the market now. We are engaged in the processes, and these will take about six months.”

While Hibiscus will be raising a total of RM2 billion from the CRPS, Pereira said any acquisitions would be funded via a combination of equity and debt, adding that a 50:50 debt-to-equity is a healthy ratio to fund an acquisition.

This means Hibiscus could be looking at raising a total of RM2 billion from debt financing to acquire producing assets in Southeast Asia for a total war chest of RM4 billion.

“What we are trying to do, if you look at the initial size of the CRPS, the proposal and approval for RM2 billion worth of CRPS, will indicate [the size of the assets to be acquired]. Any acquisitions will have a debt element to it; it is not going to be all equity-funded.

“So, you can imagine that there is potential for a very material acquisition, and that is what we are trying to do. It is not a small acquisition that we could have funded by a simple placement.

“This is something we wanted to raise funds [for] specifically and, coupled with some debt, you would be able to do something material and bring a step change to the company,” added Pereira.

Hibiscus’ share price has been rising since Nov 2, when it was trading at 43.5 sen. It closed last Wednesday at 62 sen.

The Islamic CRPS is one of a kind, as it is probably one of the rarest offerings in both the local and global Islamic equity capital market, said CIMB Investment Bank’s senior managing director Mohamad Safri Shahul Hamid.

During the media briefing, Safri said the Islamic equity capital market has been relatively under-tapped where fundraising is concerned, unlike the Islamic debt capital market.

Malaysia has been a well-recognised global leader in the sukuk market for almost two decades now. The Malaysian Islamic debt market made up 41.5% of the global sukuk market in the first half of the year.

Since more than 75% of the stocks listed on Bursa Malaysia are now classified as shariah-compliant, Safri said it was imperative for those companies to consider Islamic equity fundraising as an option.

“The beauty of doing an Islamic fundraising is obvious. It appeals to both the Islamic and conventional sets of accounts, therefore creating a much wider investor base. We are hopeful that the Islamic CRPS transaction by Hibiscus will help raise much-needed awareness in the market.”

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