Investment Highlights

• We maintain our HOLD recommendation on Hibiscus Petroleum (Hibiscus) with an unchanged sum-of-parts-based fair value of RM1.42/share, which also reflects a premium of 3% from our ESG rating of 4 stars.

• It also implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$7.40/barrel, at a discount of 49% to EnQuest's US$14/barrel and 59% to the regional average of US$18/barrel.

• Britain announced a 25% windfall tax on oil and gas producers’ profits yesterday, alongside a £15bil (US$18.9bil) package of support for households struggling to meet soaring energy costs.

• While UK Finance Minister Rishi Sunak said that the levy will be temporary and targeted against energy profits, it will have a new investment allowance for companies to reinvest their profits.

• This is expected to raise £5bil over the next 12 months and will be phased out with the normalization of oil and gas prices. However, a new investment allowance will double the tax relief available for new oil & gas investments.

• Based on the group’s 50% equity stake in the UK-based Anasuria concession which has 2P reserves of 23.6mil barrels, we estimate that raising Hibiscus’ effective tax rate from 40% to 65% could shave the group’s FY23F earnings by 7% and reduce its SOP to RM1.40/share from RM1.42/share currently.

• However, we retain our forecasts and fair value for now pending greater clarity on the potential tax relief that Hibiscus may secure with its ongoing capex programmes.

• Recall that the 3QFY22 revenue in the UK-based Anasuria dropped 41% QoQ as the previous quarter included an overlift volume of 90K barrels. However, the gross profit was included in 3QFY22, which caused this segment’s net profit to increase 17% QoQ to RM20mil.

• Anasuria also experienced an average daily net production decline of 20% QoQ to 1,983 barrels in 3QFY22 due to a continuing production riser malfunction, which is now expected to be rectified by August this year.

• In terms of 3QFY22 realised crude oil prices, Anasuria managed to capture the upcycle much better with a 70% QoQ surge to US$122/barrel vs. North Sabah’s 19% increase to US$90/barrel, which missed a shipment from 2 in the previous quarter.

• While we expect the coming 4QFY22 to stage a sharp earnings recovery with an additional North Sabah shipment and the full contribution of Repsol assets (which doubles the group’s daily production to 18.5K boe and increase its 2P reserves by 72% to 81mil boe), sentiments could remain soft until actual earnings delivery against the backdrop of erratic production volumes. Hence Hibiscus is likely to continue trading over the next quarter at an EV/2P reserve discount of 49% to its closest peer, UK-listed EnQuest and 59% to regional average (Exhibit 2).

Source: AmInvest Research - 27 May 2022