Hibiscus Petroleum Bhd is clearly riding nicely on the upcycle of oil prices. On Thursday it posted a second-quarter profit that beat analysts’ expectations. And as Maybank Investment Bank (Maybank IB) Research points out, the profits have yet to take into account earnings from the recently completed acquisition of assets from Spain’s Repsol.
“Hibiscus will consolidate Repsol’s earnings from the third quarter of the financial year 2022 (Q3‘FY22). We are positive on this transaction. The deal was done at an undemanding price and instantly lifts Hibiscus’ production by three times. It also offers Hibiscus the prospect to diversify its assets portfolio to 17% gas (versus 2% gas previously) – a crucial aspect, in its environmental, social, and governance and energy transition quest,” Maybank IB analyst Liaw Thong Jung says in a post-results report yesterday.
Hibiscus’ net profit for the Q2 of FY22 quadrupled to RM48.49mil, while earnings before interest, taxes, depreciation and amortisation or Ebitda stood at RM139.9mil. For the six-month period ended Dec 31, 2021, net profit rose to RM90.01mil, from RM22.05mil in the same period before.
The pure upstream oil and gas (O&G) player with a portfolio of assets in Malaysia, North Sea and Oceania, did not declare a dividend for the quarter.
Considering this rise in cash flows, coupled with the rising oil price and earnings contributions from Repsol, will Hibiscus declare more dividends going forward?
Hibiscus says this is a possibility.
“We paid a total dividend of 1.5 sen in respect of the financial year 2021. This dividend was declared during a period when oil prices were not as strong as they are now.
“Crude oil prices have only recently strengthened and we hope that they remain stable at these levels. If they do for an extended period of time and we provide adequately for any capital expenditure commitments for projects that we have in the pipeline, the board may consider declaring dividends of a higher quantum,” managing director Dr Kenneth Gerard Pereira tells StarBizWeek. It is interesting to note that Hibiscus profitability in the Q2 of FY22 was based on an average crude oil price of US$72 (RM301.28) to US$75 (RM313.84).
Oil prices are now on a tear, which is making analysts become more bullish on the earnings potential of oil and gas companies like Hibiscus.
Notes Maybank IB, “Oil is nearing US$100 (RM418.45). The demand-supply mismatch in the oil market is prevalent, strained by prolonged under-investment since 2014. The adverse situation will extend over the next two to three years, resulting in oil prices sustained at elevated levels.”
As a result, Maybank IB has raised earnings estimates for Hibiscus from FY22-FY24 by 36%, 35% and 28% respectively, noting that the group should be generating strong free cash flows during those financial years.
The Repsol element
In the middle of last year, Hibiscus announced that it was buying Spanish energy major Repsol Exploración SA’s upstream assets in Malaysia and Vietnam for US$212.5mil (RM889.48mil). The deal, which comprised five production-sharing contracts with Vietnam being a new market for Hibiscus, was completed late last month.
On how much Repsol’s acquisition will contribute towards Hibiscus, Pereira says that a third-party expert, RPS Energy Consultants Ltd, estimates that the total revenue contribution from the new assets would reach US$271mil (RM1.13bil) in 2022.
As for Ebitda, RPS Energy in its mid-2021 report estimates that it could be in the range of US$135mil (RM564.91mil) for the new assets. With oil prices now north of US$90 (RM376.61), further upside could be possible.
“As an operator of the newly acquired assets, we are well-positioned to build on our successful operational track record to further enhance value in 2022 and beyond,” he says. The group expects to produce about 2.5 million barrels of oil equivalent (boe) for the period between the completion and the end of FY22 from the acquired assets, on top of its production in North Sabah and the Anasuria oilfield in the United Kingdom.
Refreshed five-year mission
Having recently “refreshed” its mission for the 2022-2026 period, Hibiscus aims to achieve a target production of 35,000 to 50,000 barrels of oil equivalent per day and maintain its proven and probable (2P) reserves at about 100 million barrels of oil equivalent by 2026. It also aims to become a net-zero emission producer by 2050.
Under its previous five-year plan covering the period of 2017-2021, Pereira describes the group has having “materially delivered” on its mission. This was to achieve production of about 20,000 barrels of oil per day and build a 2P reserves base of 100 million barrels.
In its pursuit of growth, Hibiscus intends to maintain a geographic focus in the North Sea and South-East Asia.
“We will continue to assess future growth opportunities in these area, but at these oil price levels, we will also be cognisant of the downside oil price risks,” he says, adding that the group also intends to address environmental concerns associated with its business and “this will be done in a meaningful and financially responsible manner”.
Recalling the last two years, Pereira says capital discipline and fiscal prudence enabled it to ride out the challenges of Covid-19 and the low oil price environment.
“We continued to deliver positive cashflows. Mainly, we deferred discretionary capital expenditure to preserve cash.
“We also felt it was important to keep all our team fully employed throughout the period and to pay our contractors promptly. And we did so,” he shares.
With business activities returning to normalcy, Pereira says the main priority now is to integrate the acquired Repsol assets into the group’s day-to-day operations to maximise value. Over at the UK, a Hibiscus subsidiary project, namely the Anasuria Hibiscus’ Marigold cluster in the North Sea fields, has been identified as one of six projects to be fast-tracked for approvals by its government.
Pereira says the group is “pleasantly surprised” by the development and will be meeting the regulators there in the coming weeks to understand their expectations.
“We are extremely bullish about the Marigold opportunity and at current oil prices, it is much more valuable than when we initially made the acquisition. The Marigold project provides us with a material, long-term growth opportunity in the UK North Sea,” he says. The group’s merger and acquisition track record has caught the attention of the investing community.
The company’s shares had risen about 40% since the start of the year, closing at RM1.18 yesterday. Market capitalisation stood at RM2.37bil.
BIMB Securities Research has a RM1.40 target price on the stock, pegged at 1.3 times price-to-book to its FY23 forecast book value. This is fair, according to the research firm with Hibiscus in asset acquisition drive amidst foreign PSC leaving the country.
Meanwhile, AmInvestment Bank Research said based on the enterprise value (EV) for the group’s expanded 2P reserves, the stock is currently trading at US$5.86 (RM24.52) a barrel, which was an unjustified discount of 55% to its closest peer, UK-listed EnQuest and 64% of regional average. It has RM1.30 fair value on the stock. PublicInvest Research has a 12-month target price of RM1.31, while Maybank IB’s target price is RM1.70.
Maybank IB says the stock is the most leveraged O&G play to capitalise on the strong energy push given its relatively low lifting cost.“Our target price is conservatively pegged to US$10 (RM41.86)/boe of EV/2P valuation, which is undemanding vis-à-vis its peers that trade at higher multiples”. The research firm says it prefers this valuation method over others for it captures the cyclical nature of the operations and takes into account balance sheet and cashflows aspects.