This article first appeared in The Edge Malaysia Weekly on July 22, 2024 - July 28, 2024

OIL and gas (O&G) exploration and production (E&P) outfit Hibiscus Petroleum Bhd (KL:HIBISCS) has come a long way since listing as a special purpose acquisition company (SPAC) in 2011. Now, it is an established niche player among the oil majors and is still growing.

Led by founder and managing director Kenneth Gerard Pereira, the company was the first SPAC to list on Bursa Malaysia and made its first asset acquisition within a year. Of the five SPACs that have listed since, only two — Hibiscus and Reach Energy Bhd (KL:REACH) — have graduated with asset acquisitions.

Introduced in the local market in 2009, SPACs are cash shells or blank cheque firms formed by a group of individuals to raise funds through an initial public offering (IPO) with the aim of using the proceeds to acquire assets or businesses.

Over the years, Hibiscus has evolved into a different animal altogether and is the only O&G company in the E&P space listed on Bursa. In the past, the E&P sector was mainly led by oil majors like Petroliam Nasional Bhd, Shell, ExxonMobil, Aramco and BP due to the high capital expenditure (capex) required up front.

In an interview with The Edge, Pereira talks about how Hibiscus found its niche among the oil behemoths and its proposed acquisition of TotalEnergies EP (Brunei) BV (TotalEnergies Brunei) for US$259.4 million (RM1.21 billion).

“For a company like Hibiscus, our risk-reward is different from that of the oil majors — they go into high risk, high reward types of investments. If you look at the life cycle of an O&G producing asset, at certain points of the asset as it becomes a very mature field — mid-life towards late life when production is declining — the asset needs a little bit more care. From a technical integrity point of view, the opportunities to be chased are smaller, so it fits more on the profile of activities of a smaller company,” he says.

“Smaller companies are willing to dedicate capital and resources to smaller opportunities. While large companies with their resources would want to dedicate themselves to larger opportunities, where the risk-reward balance is slightly different.”

TotalEnergies Brunei has an operating interest of 37.5% in the Block B Maharajalela Jamalulalam (MLJ) gas field off Brunei. Pereira expects the acquisition, if it goes through, to give Hibiscus a major production boost, even though Maybank Investment Bank Research is less bullish as it believes the acquisition would place a huge debt burden on the company.

Even so, Hibiscus remains keen on the deal. Pereira estimates that the acquisition will turbocharge the company’s production by 66% next year to 35,000 barrels of oil equivalent per day (boe/d) from 21,000 presently.

“This acquisition is something that we have been working hard on for a long time. We identified this opportunity nearly two years ago,” he says.

“From an acquisition criteria perspective, we wanted an asset that had a lot of gas in it … This one [TotalEnergies Brunei] has 85% gas. We wanted an asset that is in a safe legal jurisdiction, especially in Southeast Asia. Brunei ticks the boxes. This will bring the company’s gas production portfolio to almost 50%, in line with the group’s energy transition strategy.”

Its portfolio currently comprises about 35% gas and 65% oil.

While Hibiscus will be the operator of the gas field, the remaining interests in the field are held by Shell (35%) and Brunei Energy (27.5%). The concession was awarded in November 1989 and is due to expire in November 2029, with an option to extend it by another 10 years.

Hibiscus’ current production assets are in three fields — the Anasuria Cluster in the UK, the North Sabah field and the Peninsula Hibiscus field (formerly Repsol’s O&G assets) off the east coast of Peninsular Malaysia.

In 2022, the company completed the acquisition of Peninsula Hibiscus for US$212.5 million, which doubled its production from 8,000 boe/d in 2021. It also marked the group’s entry into the Vietnam market.

Hibiscus also has interest in an exploration licence for an area in the abundant oil and gas producing province of the Bass Strait of Australia, and an 11.67% stake in 3D Energi Ltd, which is listed on the Australian Securities Exchange. 3D Energi has five exploration licences — for the Gippsland Basin, T/49P and VIC/P79 in the Otway Basin, WA-527-P in the Bedout sub-basin and GSEL 759, an onshore field 20km southeast of Mount Gambier.

As for the capital requirement for the latest acquisition, Pereira says it will be funded by internally generated funds and a debt facility raised earlier, meaning no fresh capital will be raised.

Hibiscus has committed US$207 million in capex this year, of which US$117 million is for Malaysia and US$90 million for its UK operations. Another US$225 million has been allocated for next year.

The bulk of the capex for this year, US$80 million will be for the development in Teal West, which is tied to Anasuria, in the UK North Sea and US$60 million for its Sabah assets.

When asked about Hibiscus’ exposure in the UK given the recent change in government and windfall tax imposed in the country, Pereira says: “The investment in Teal West will offset against the windfall tax, but the Labour government has said it will look into it.”

Nevertheless, the development is going on as planned and he expects Teal West to strike first oil by end-2025.

As for the proposed Brunei asset, Pereira says the operation would not require much in terms of capex at the initial stage. “At this point in time, there is no big capex requirement. Maintenance capex, yes. But no new project capex. Additional capex may come in around 2028 or 2029.”

Despite the high capex commitments, Pereira prefers not to raise capital so as to not dilute the interests of existing shareholders.

“We feel that the company is undervalued … so we would not just give [issue shares in] the company … At the moment, we have a lot of debt capacity, our gearing is low and our cash flow is strong,” he says.

Hibiscus’ share price closed at RM2.36 last Thursday, giving the company a market capitalisation of RM1.9 billion. At that price, the stock is trading at a forward price-earnings ratio of 3.9 times, which is lower than the average PER of local O&G counters on Bursa.

Five of the six analysts covering the company have a “buy” call on the counter, with an average target price of RM3.17.

Hong Leong Investment Bank Research, which has a “buy” recommendation, said the counter is currently trading at a FY2024 PER of five times, which it deems undervalued given the company’s successful track record in extracting tremendous value from previous acquisitions and its strong execution capabilities as a pure-play upstream E&P player.

Maybank IB Research is the only house with a “hold” call and a lower target price of RM2.31. It does not favour the acquisition of TotalEnergies Brunei, noting in a June 17 report that if the company proceeds with the acquisition, its target price will be reduced to RM1.99.

Maybank IB Research said this is based on the following assumptions: natural field production to decline 4% annually from FY2028, an exchange rate of RM4.60 against the US dollar, an abandonment capex of US$70 million in FY2040E for this field, new debt of RM1.2 billion to fund the acquisition, completion of acquisition at end-1HFY2025, an operating cost of US$6.50/boe, an annual capex of US$10 million and a tax rate of 55%.

“The incremental net present value of US$195.7 million (RM900.2 million) will be overshadowed by an increase in the group’s net debt position to RM1.1 billion [from a net cash position of RM98.6 million as at end-FY2025], which will be captured in our valuation matrix,” Maybank said in a report last month after Hibiscus announced the proposed acquisition.

For the nine months ended March 31, 2024, Hibiscus posted a 22.7% jump in net profit to RM358.44 million, from RM277.24 million a year earlier, on the back of higher revenue of RM1.98 billion, from RM1.84 billion previously.

During the period in review, the company generated a cash flow of RM1.02 billion in earnings before interest, taxes, depreciation and amortisation. This compares with RM943.22 million a year earlier.

At end-March, Hibiscus had a cash position of RM793.84 million. It also had long-term borrowings of RM546.63 million and short-term debt commitments of RM208.93 million.

The group announced a total dividend of six sen per share during the period, four times higher than the 1.5 sen it dished out a year earlier. Much of its expansion and capex are premised on oil prices remaining at current levels.

Pereira expects crude oil prices to remain elevated for the next three to four years because of underinvestment in the sector over the last decade.

“At this point in time, I think we will see stable oil prices for a while. I think that’s what people mostly want — stability. If it goes too high, it will cause inflation around the world and everything else slows down, then demand drops. If it’s too low, then you will find that people are not investing in the industry and end up with even more supply issues,” he says.

Brent crude is currently trading at US$80 to US$82 a barrel. This compares with the group’s operating cost of US$19 a barrel on average.

Hibiscus has sizeable 2P (proven and probable) oil resources of 49.9 million boe, 2P gas resources of 11 million boe and 2C (contingent) resources of 59.1 million boe. The company expects its 2P resources to jump 36% to 82.6 million boe if the Brunei asset acquisition is successful. 

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