This article first appeared in The Edge Financial Daily on January 24, 2018 - January 30, 2018
Hibiscus Petroleum Bhd
(Jan 23, RM1.07)
Downgrade to hold with a higher target price (TP) of RM1.05: We recently met management and left reassured that Hibiscus Petroleum Bhd is on track to complete the long-awaited acquisition. Management explained that it had received all necessary regulatory approvals and is now left with only ironing out operational matters. With agreement for the transfer of Shell’s interest to Hibiscus, signed on Dec 22, 2017, management guided for acquisition to be completed by March 31, 2018.
With the economic benefit of North Sabah production sharing contract (NSPSC) accrued to Hibiscus effective Jan 1, 2017 (note that in the agreement, Shell would operate the fields on behalf of Hibiscus up to the sale and purchase agreement [SPA] completion), we roughly estimate that Hibiscus’ net economic benefit over about 15 months amounts to at least US$20 million (RM78.6 million). This implies that it could accrue about US$7.5 million worth of cash after offsetting against the remaining initial consideration of US$12.5 million, effectively lowering the deferred consideration amount to only US$2.5 million.
Upon completion of the NSPSC SPA, Hibiscus would be adding about 31 million barrels (mmbbls) of proved and probable (2P) reserves to its existing portfolio. This would enlarge its 2P reserves to about 60.2 mmbbls from the current 29.2 mmbbls and enhance total average daily production level to about 10,000 barrels per day (bpd). This marks another milestone along its journey towards achieving 100 mmbbls of 2P reserves and 20,000 bpd of oil production by 2021.
Hibiscus has completed the Anasuria floating production, storage and offloading’s (FPSO) planned shutdown from mid-September 2017 to mid-October 2017, a period of about 31 days. Following the exercise, management expects to improve the average unplanned facilities availability of the Anasuria FPSO facilities to above 85% over next two years. In order to minimise the impact of complete facilities shut down during the turnaround, management guided that future maintenance will also be conducted over two quarters, the next turnaround is scheduled for September 2019 to October 2019.
To recap, Hibiscus undertook two projects in calendar year 2017 (CY2017) both souring and installation of gas lifts systems to increase production from the fields which is estimated to raise output to 3,800bpd from 3,200bpd by end financial year 2017 (FY17). Based on management’s guidance, we could expect the increased production to start filtering through in second quarter FY18 (2QFY18) before achieving the desired target from 3QFY18 onwards.
In order to halt production decline, more production enhancement programmes are in the pipeline with the total planned capital expenditure (capex) estimated to be worth about £45 million (RM246.6 million). These should boost average production to 5,000bpd by 2019. The planned capex would involve drilling of infill wells at Guillemot A, side-tracking projects, as well as Cook Water injector installation led by Ithaca Energy at Cook field. Management guided these projects would boost 2P reserves by another 6.2 mmbbls to 24.9 mmbbls (our estimate as at 1QFY18).
We downgrade Hibiscus to “hold” with a higher discounted cash flow (DCF)-derived TP of RM1.05 (from 85 sen) assuming weighted average cost of capital (WACC) of 9%. The change in our TP reflects our views in our base case scenario assumptions mainly due to to the improving crude oil price outlook, additional 2P reserves from Anasuria upon successful conversion of 2C (proved and probable contingent resources) contingent resources through capex projects that will be undertaken during 2018 to 2019, stronger ringgit against the US dollar but weaker than British pound.
Note that under our base case scenario, we have imputed the conversion of North Sabah’s 40% 2C contingent resources to 2P reserves as guided by management. This will be done through capex expenditure amounting US$100 million in next four to five years. Hence, we view recent run-up in Hibiscus’ share price as fully reflective of the potential benefits from acquisition of North Sabah.
Key catalysts to our TP and recommendations are higher realised crude oil price as a result of continuous declining global oil inventories, better cost containment in operating oil fields and West Seahorse field development. Key risks to our TP and recommendations are unplanned shutdown in the production of its assets and a sharp drop in crude oil price which could be due to various reasons including geopolitical and natural disasters that may affect its earnings. — BIMB Securities Research, Jan 23