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Investment Highlights
We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with an unchanged sum-of-parts-based fair value of RM0.85/share, which reflects a premium of 3% from our ESG rating of 4 stars. This implies an enterprise value/proven and probable reserves (2P) valuation of US$6.77/barrel, and discounts of 27% to EnQuest's US$9.32/barrel and 41% to regional average of US$11.45/barrel.
As we have been indicating in our past reports, Hibiscus has entered into a conditional sale and purchase agreement (SPA) to acquire Repsol Exploración, S.A.’s (Repsol) entire equity interest in Fortuna International Petroleum Corporation for US$212.5mil (RM878mil) which involve these production sharing contracts (PSC):
60% interest in 212 Kinabalu Oil PSC off Sabah, Malaysia,
35% interest in PM3 CAA PSC within the Commercial Arrangement Area between Malaysia and Vietnam,
60% interest in each PM305 and PM314 PSCs in the Malay Basin off the eastern coast of Peninsular Malaysia, and
70% interest in Block 46 (Cai Nuoc), a tie-back asset to PM3 CAA PSC in Vietnam.
Repsol’s sale is part of its strategic plan to focus on geographic locations with the greatest competitive advantages. Upon SPA execution, a partial deposit of US$7.5mil (RM31mil) will be paid to Repsol with completion expected by this year, subject to waivers of pre-emption rights from Petronas Carigali and PetroVietnam Exploration & Production Corp.
While a more detailed announcement on reserves and production could be provided later, we understand that these assets being acquired have a higher daily production compared to Hibiscus’ current 9.4k barrels from North Sabah and Anasuria. Additionally, consultant Rystad has estimated that Repsol’s assets being tendered for sale could have reserves of 78mil barrels of oil equivalents, divided almost equally between oil and gas.
Hence, this value-accretive transaction translates to an attractive US$2.72/boe, half of Hibiscus’ existing EV/2P reserve of US$5.36/boe and an even deeper 71% discount to US$9.32/boe for the group’s closest peer, UK-listed Enquest (Exhibit 1).
Recall that Hibiscus has already issued RM204mil convertible redeemable preference shares (CRPS), the initial tranches of a proposed RM1bil programme to fund such an acquisition.
Assuming a conservative valuation of US$4.06/boe for the reserves, based on US$5.40/boe and US$2.72/boe for the oil and gas portions respectively, and RM0.60/unit conversion price for the estimated RM674mil CRPS to be raised, we estimate that our diluted SOP will increase by 11 sen or 13% by to RM0.96/share (Exhibit 2).
Based on the enterprise value for the group’s existing 2P reserves precluding any new acquisitions, Hibiscus is currently only trading at US$5.40/barrel – at a discount of 41% to its closest peer, UK-listed EnQuest and half of regional average (Exhibit 5). This is compelling given the more optimistic crude oil price environment.
Source: AmInvest Research - 3 Jun 2021