Hibiscus still seeking value

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WITH losses accumulating at Hibiscus Petroleum Bhd, investors are abandoning ship, pushing its share price lower even as the junior oil and gas exploration company is undertaking another round of fundraising.

Since graduating from special purpose acquisition company status in early 2012, following the acquisition of a qualifying asset, Hibiscus has done one round of fundraising, collecting RM100.9 million. Nevertheless, the disappointing results of its exploration activities highlight the risks associated with junior oil and gas companies where outcomes can be costly.

Closing at 98 sen last Thursday, Hibiscus is down 63.43% from its all-time high of RM2.68 registered on Dec 13 last year. By comparison, the company’s latest proposed private placement to raise RM130.18 million is based on an indicative issue price of RM1.46 each.

“We are of the firm belief that any fundraising performed, even in the current market, will only enhance the company’s value as the proceeds will be used for value-accretive projects and establish long-term business sustainability,” says Hibiscus managing director Dr Kenneth Pereira in an email response.

In August 2012, Hibiscus proposed its first issuance of 210 million new convertible redeemable preference shares (CRPS) of one sen each at an issue price of RM1 per CRPS for working capital and future synergistic acquisitions. At the time, those who subscribed for the CRPS may have seen it as a lucrative investment as Hibiscus was trading above RM1.

However, Hibiscus only raised RM100.9 million from the issue, falling far short of the targeted RM210 million. And in May this year, 100.93 million of the CRPS were converted into 56.98 million new Hibiscus shares.

Dr Pereira says the CRPS instrument was chosen as it allowed the company to raise funds without paying interest costs and provided new investors with safeguards regarding the utilisation of the proceeds. “At the same time, the CRPS minimised the dilution of the existing shareholders’ stakes as they were issued at up to a 10% premium to the share price.”

In July this year, the proceeds from the group’s first CRPS fundraising were used for the acquisition of a 50.1% stake in the VIC/P57 production licence located in Australia’s Gippsland Basin, which contains the West Seahorse discovered oilfields.

In October last year, Hibiscus had proposed another issue of 500 million CRPS at RM1 each for the same reasons as in the previous exercise.

A month later, the group proposed the private placement of 56.53 million new ordinary shares of one sen each at an indicative issue price of RM2.10 apiece, which was mainly for exploration activities. However, it decided not to proceed with the second CRPS exercise and proposed private placement as it was considering a different fundraising exercise for 2014.

Last month, Hibiscus announced a proposed private placement that took into account its enlarged share capital from the exercise of its warrants. This meant that it could undertake a larger private placement.

The proceeds of RM130.18 million from the latest private placement of 89.16 million new shares at an indicative price of RM1.46 each are intended for the development of the West Seahorse oilfield in Australia.

Dr Pereira says the timing of the final pricing of the placement will depend on market conditions, demand and funding requirements.

Questions arise as to whether, after several fundraising exercises and acquisitions, Hibiscus will finally strike oil and register a revenue from oil production.

Dr Pereira points out that in July this year, the company signed an agreement to acquire 25% of the producing Kitan oilfield in the Joint Petroleum Development Area between Timor Leste and Australia. “This project will generate revenue for us when completed. Completion of the transaction is subject to approvals from the governments of Australia and Timor Leste. So far, we have received approval from the Australian authorities and are awaiting the final decision from Timor Leste’s authorities to conclude the transaction.”

He adds that the group is working towards first oil production in the first half of 2016 in its West Seahorse development as drilling activities are expected to start at the end of next year. “We also have an aggressive exploration drilling schedule set for 2015. We expect to drill at least four exploration wells, one in Australia, probably three in Norway and, hopefully, one more in the United Arab Emirates.”

Commenting on Hibiscus’ Block 50 Oman concession — its first exploration well to be drilled — Dr Pereira says, “We are not able to disclose a detailed update as we are bound by very strict confidentiality obligations in the agreement with the Omani authorities.

“At this stage, all that we are able to reassure our investors is that we have been actively working towards an early production system to monetise our discovery in Oman.”

The company posted a net loss of RM9.27 million in its third quarter ended Sept 30, 2014, compared with a net profit of RM12.64 million in the previous year. This was on the back of lower revenue of RM2.17 million (RM3.04 million previously).

Notes accompanying its results show that the decline in earnings was due to lower project management, technical and other service fees from its subsidiaries and increased project management activity for the preparation of the second-well drilling programme in Oman.

When asked if the group had a contingency plan should the crude oil drilled turn out to be of non-commercial value, Dr Pereira says the occurrence of dry wells is part and parcel of exploration activity. “With a five-well drilling programme planned for 2015, a discovery in even half the wells drilled would be considered a success and transformational for the group.”

This article first appeared in The Edge Malaysia Weekly, on December 15 - 21, 2014.