This article first appeared in The Edge Malaysia Weekly on October 10, 2022 - October 16, 2022

HIBISCUS Petroleum Bhd is one of the prime beneficiaries of the high crude oil price environment that started at the end of last year, posting record profits in the financial year ended June 30, 2022 (FY2022).

The oil and gas (O&G) exploration and production company saw its net profit surge almost six times year on year to an all-time high of RM613.06 million in FY2022, as revenue leapt 111% y-o-y to RM1.7 billion. A back-of-the-envelope calculation shows that Hibiscus had a net profit margin of 36% in the financial year.

However, the group is not resting on its laurels. The volatility in global crude oil prices has prompted Hibiscus to take a more cautious approach to its growth.

Over the past two years, the price of the benchmark Brent crude traded as low as US$19 per barrel in 2020 before rising to hit a high of US$139 per barrel this year.

Hibiscus founder and managing director Dr Kenneth Gerard Pereira says the group is looking to invest in projects that have short payback periods amid the oil market volatility.

“We expect our capital expenditure (capex) programme to be approximately US$500 million to US$600 million over the next five years but given volatile trends, we will invest in projects with reasonably short payback periods. We will factor in cancellation provisions into our contracts, which are long term in nature,” he tells The Edge.

Pereira notes that over the past seven years, the group has evolved through the timely acquisition of mature assets with identifiable opportunities that may be exploited by an efficient operator to enhance value.

“Given the macro-level volatility that is currently being observed globally, the current corporate direction is to be vigilant of risks that may negatively impact the group and to identify, monitor and mitigate them as far as is practicable.

“This approach will provide a strong business foundation from which to pursue our (fundamentally) organic growth plans,” he adds.

The estimated capex is larger than the group’s market capitalisation of RM1.97 billion, based on last Thursday’s closing price of 98 sen per share.

Asked if Hibiscus intends to raise capital through the capital market to fund its capex programme, especially for its newly acquired O&G production asset from Spain-based Repsol, Pereira says the group has sufficient cash flow for working capital and capex requirements generated from its current operations.

“We do not anticipate any equity fundraising in the foreseeable future,” he adds.

In Hibiscus’ 11th year of operations under the leadership of Pereira, the group acquired Repsol’s producing fields in Malaysia and ­Vietnam for US$212.5 million. It described the acquisition as “transformative” for the group.

Earlier this year, Hibiscus completed the acquisition of Fortuna International Petroleum Corp (FIPC) from Repsol. The asset has tripled Hibiscus’ net production from 8,000 boe (barrels of oil equivalent) per day to 23,000 boe per day. It is also expected to double Hibiscus’ earnings before interest, taxes, depreciation and amortisation (Ebitda) to US$193 million from US$92 million currently.

Moving forward, Pereira expects the group’s growth to be supported by its brownfield assets in Malaysia, Vietnam and the UK.

“In the coming years, these projects should add about 10,000 boe per day to our existing production of about 20,000 boe per day. We also hope to be able to pursue some near-field exploration activities in both Peninsular Malaysia and North Sabah if market conditions permit,” he says.

Last week, Hibiscus announced its plan to undertake a capital reduction exercise worth RM800 million to offset RM690.6 million in accumulated losses as at June 30, 2022.

“The accumulated losses were mainly contributed by one-off impairment losses on our non-producing assets mainly in the Middle East and Australia, which were acquired in the earlier years of 2012 and 2013,” Pereira says.

“It is a positive step for the group to reset their equity position, which signals that they plan to make future profits and declare dividends,” says an accountant who asked not to be named.

The proposed exercise entails a reduction of the issued share capital of Hibiscus via the cancellation of its paid-up capital of RM966.01 million. The credit arising from the cancellation will be used to offset the accumulated losses and expenses for the exercise, and the remaining RM108.53 million will be credited to the retained earnings of the group, which will be used to facilitate a proposed share buyback.

Hibiscus said that the rationale of this exercise was to help eliminate the accumulated losses, allowing it to further enhance its ability to declare dividends and be better positioned to undertake the proposed share buyback.

Still, Pereira maintains that its current operations in Sabah, Vietnam and the UK are more than sufficient to contribute to the group’s retained earnings to declare dividends and offset its accumulated losses.

“Such dividends have not been declared as cash generated from the subsidiaries have been, and will continue to be, retained to grow their operations,” he says.

Hibiscus declared a dividend of 1.5 sen per share for FY2021, and plans to dish out two sen per share for FY2022, subject to shareholders’ approval.

The group had also resolved its tax debacle with the Sabah state government, paying a total of RM85.7 million. The state sales tax was imposed on revenues from petroleum products sold by SEA Hibiscus Sdn Bhd under the North Sabah production sharing contract (PSC) and Hibiscus Oil & Gas Malaysia Ltd (previously known as Repsol Oil & Gas Malaysia Ltd) under the 2012 Kinabalu Oil PSC.

With this issue resolved, the group is expected to pay a 5% Sabah sales tax annually going forward, said PublicInvest Research. Its projection suggests that Hibiscus is expected to pay an estimated RM44.8 million per year, assuming crude oil sales of around 2.1 mbbls (thousand barrels of oil) from North Sabah and 700 mbbls from the Kinabalu field.

This has subsequently led to the research firm cutting its earnings forecasts on Hibiscus for FY2023 to FY2025 by an average of 10.2%.

Nonetheless, PublicInvest Research has upgraded its call on Hibiscus to “trading buy” owing to its attractive upside potential arising from its lucrative earnings from the consolidation of Repsol assets’ earnings, which it believes the market has yet to price in.

“We view this development positively as it removes the lingering uncertainty in its Sabah operations. The dispute with the Sabah government may potentially cause prolonged disruptions to its Sabah operations with issues involving manpower movement and shortages, which eventually will limit its operational efficiency, affecting its output,” it says in an Oct 5 report.

Pereira believes that the tax payment would not have a significant impact on the group’s performance.

Maybank Investment Bank Research analyst Liaw Thong Jung estimates that the state sales tax would impact about 8% to 9% of Hibiscus’ annual profit forecast starting from FY2023.

“We see many positives from this. It offers closure on this overhang issue, which has affected sentiment and price performance and disrupted its operations unnecessarily in the past. This settlement appears the most realistic outcome to move forward,” he tells The Edge.

With oil estimated to go above US$100 per barrel due to production cuts by the Organization of the Petroleum Exporting Countries and its allies (Opec+), Hibiscus may continue to ride the oil boom. According to its FY2021 annual report, its net unit production cost stood at US$20 boe, which shows that the group has ample buffer against any shock in the oil market.

“Hibiscus remains the best play for a cyclical, strong energy price market,” says Liaw.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.