Management provided more details pertaining to the recent acquisition from Repsol Exploración, S.A. (Repsol) during the investor briefing conducted over the weekend. It entailed i) information about the assets i.e. current production, 2P reserves, life of assets, etc, ii) sources of funding, and iii) other salient terms such as pricing, capital expenditure, operating expenses, and 2C reserves. Overall, we view this development as timely in light of the favourable oil price environment, with significant impact to the Group’s production and earnings immediately upon completion. These assets are expected to increase the Group’s production rate including gas to 26,800 boe/day with oil production rate to increase from 9,000 bbls/day to 18,500 bbls/day. Meanwhile, there is access to 34.5 mmboe of 2P reserves, i.e. 20.6 mmbbl of oil reserves and 83.6 bscf for gas reserves. We adjust our FY22/23 earnings forecast accordingly, with the Group’s bottom line to enhance by >100%. We maintain Outperform with a revised DCF based TP to RM1.05 (from RM0.76 previously) on fully diluted basis.

• Recap. Hibiscus reported that it had on 1 June 2021, signed a sale and purchase agreement to acquire 100% of Fortuna International Petroleum Corporation (FIPC) from Repsol Exploración, S.A. for a purchase consideration of USD212.5m or ~RM879.5m. FIPC holds participating interests in four production sharing contracts within Malaysian and Vietnamese waters, consisting

i) 60% interest in the 2012 Kinabalu Oil PSC located off the coast of Sabah, Malaysia,

ii) 35% interest in PM3 CAA PSC located between Malaysia and Vietnam,

iii) 60% interest in each of the PM305 and PM314 PSCs located off the eastern coast of Peninsular Malaysia in the Malay Basin, and

iv) 70% interest in Block 46 (Cai Nuoc), a tie-back asset to the PM3 CAA PSC located in Vietnam.

• Production enhanced two-fold, almost at target. Post-acquisition, these assets are expected to increase the Group’s production rate including gas by 17,400 boe/day to 26,800 boe/day with oil production rate to increase two-fold, from 9,000 bbls/day to 18,500 bbls/day. Based on independent technical and asset assessment, there is access to 34.5 mmboe of 2P reserves, i.e. 20.6 mmbbl of oil reserves while 83.6 bscf for gas reserves. With this acquisition, the Group is almost set toward achieve its target to produce 20,000 bbls/day of oil by 2021. We understand that there are two more bids that are still on-going, though management indicates there is no rush for the other new assets for now.

• Funding. The assets are valued at USD212.5m or ~RM879.5m, with partial deposit of USD7.5m (or equivalent to RM31m) to be paid upon execution of the SPA. Funding sources will come from i) the net proceeds raised from the placement of the first and second tranche of CRPS of about RM197.7m, ii) potential funds to be raised from the new issuance of CRPS c. RM200m, while the remaining RM400m will be from funds available in the FIPC Group at closing, internally generated funds, and bank borrowings.

• Investment to maintain production. There is no guidance on 2C reserves for now as independent assessment is still on-going. Management guided that it would allocate c. USD115m from internally generated funds from the operations for capital expenditure in three years from 2021 to 2023 to maintain stable production. Management also guided that operating cost (opex) will be about USD10/bbl, which is at the lower end of North Sabah opex (USD10/bbl - USD15/bbl). As the Group will be the operator for the assets, it will be responsible for the day-to-day operations and management of the work activities, providing significant levels of financial control and decision-making in the operational management. Based on its track record in operating the North Sabah field, it has successfully increased the daily production levels and reduced operating costs by ~30% from the previous operator.
   
• Acquisition to boost earnings. Overall, we view this development as timely in light of favourable oil price environment, with significant impact to the Group’s production and earnings immediately upon completion. Currently, the Group is producing c. 9,000 bbls/day of oil through its two assets i.e. Anasuria Cluster and North Sabah. This addition will see an additional 9,500 bbls/day to existing production. Earnings momentum will also be supported by the current favourable oil price at >USD60/bbl. Meanwhile, there is access of 2P reserves of 20.6 mmbbl of oil reserves and 83.6 bscf for gas reserves. We adjust our FY22/23 earnings forecast accordingly, seeing the Group’s bottom line enhanced by c. 149.3% / 250.5% with an incremental value to our DCF based valuation of RM0.52 based on 10% discount rate. Our TP revised to RM1.05 (from RM0.76 previously) on fully diluted basis, incorporating RM200m new issuance of CRPS with conversion price of RM0.60.

Source: PublicInvest Research - 8 Jun 2021