• Hibiscus Petroleum (Hibiscus) is taking over TotalEnergies’ Brunei operation for USD259.4mn. This includes an operating stake of 37.5% in Maharajalela Block B gas field that contains a 2P reserves of 24.2mn boe and 6,600 boepd of gas production.

• The purchase price implies an acquisition cost of USD10.7/boe. While it is not cheap, we view it as fair given elevated oil price and a more favorable fiscal regime in Brunei.

• More importantly, we think this will further strengthen its credential and put the company as a favorite counterparty to oil major amidst their exodus from the region.

• Maintain Hibiscus as a BUY with an unchanged DCF-derived TP of RM3.40. We believe the latest asset acquisition will provide the much-needed catalyst to its stock price.

Acquiring Producing Asset from TotalEnergies

Hibiscus entered into SPA with TotalEnergies Holdings International BV (TotalEnergies) to acquire 100% of TotalEnergies EP Brunei (TEB) for USD259.4mn. TEB currently operates Block B Maharajalela Jamalulalam (MLJ) field in Brunei. It holds 37.5% interest in MLJ field while the remaining interests are held by Shell and Brunei stateowned company with 35% and 27.5% interest respectively. The acquisition will be funded using internally generated fund and existing debt facilities. Management targets to complete the acquisition by 2QFY25.

Enhancing its Credential

We are positive with this acquisition as it boosts its profile as a credible E&P player in the region. Notably, this marks its maiden entry into Brunei. Given the exodus of oil major from the region, we believe this will put the company in good position for future acquisitions. Besides that, this will boost its production by 32% to 28k barrels of oil equivalent per day (boepd) and add its 2P reserves by 36% to 82.6mn boe. Overall, this aligns with its 2026 growth target to double its production to 35-50k boepd and achieve 100mn boe of 2P reserves.

Less Attractive but Still Fairly Priced

Based on 2P reserves of 24.2mn boe, the purchase price implies an acquisition cost of USD10.7/boe. This is higher than previous Repsol’s FIPC acquisition cost of USD6.2/boe. Besides that, it is also more expensive with higher gas portion at 85% of total reserves whilst FIPC is only at 40%. However, we deem it as fair considering (i) the asset is valued at USD250mn based on Competent Person’s Report (i.e. prepared by RPS Energy), (ii) the transaction is based on oil price assumption of USD75-85/bbl, (iii) it is a cash-generating asset with limited work commitment, and (iv) favourable fiscal regime that allows operator to gain the upside from higher oil/gas price.

Favorable Fiscal Regime

Brunei Fiscal Regime is considered more favourable than Malaysia owing to (i) lower royalty payment of 8%, (ii) no cost recovery element and profit sharing of higher oil and gas prices with the host country, and (iii) no requirement to set aside some fund for decommissioning during initial operation. However, the company will be charged an income tax of 55% and there is capital allowance on capex spending. At this juncture, the decommissioning liability is expected to be USD70mn which will be incurred in 2040.

Purchase Consideration and Source of Funding

The total purchase consideration of USD259.4mn includes (i) purchase price of USD245mn, and (ii) net working capital of TEB as at 31st Dec 2022 of USD14.4mn. However, the final price will be adjusted for the following: (i) all net cashflows from 31st Dec 2022 (effective date) will be accrued to Hibiscus, (ii) USD17mn for time value amount from effective date to and include 14th Oct 2024 (equivalent to interest rate of 5% p.a.) will be payable to TotalEnergies, (ii) pre-closing dividend and any estimated leakage amount. Note that Hibiscus has paid a deposit of USD49mn during the signing of the SPA. The company plans to pay the remaining consideration using internally generated funds as well as existing debt facilities of USD240mn. Management also reassured that the funding requirement will not affect its ability to maintain its dividend payout.

MLJ Field Profile

The field is located at the border of Brunei and Malaysia and in close proximity to Hibiscus’ Kinabalu field (Chart 1). It was discovered in 1989 while production commenced in 1999. The production right is until 23rd Nov 2029 and it can be extended for another 10 years until 2039 subject to agreement with other JV partners. In 2023, its average production stood at 16k boepd, which represent approximately 15% of Brunei total gas production. The gas is sold to Brunei LNG Sdn Bhd which liquefy into LNG and market it to the buyer. The field is operated remotely via 3 unmanned platforms (Chart 2), hence reducing the logistic cost and overall opex cost to USD5-6/boe.

Earnings Forecast

No changes to our earnings forecast as we have not included the earning contribution from TEB into Hibiscus’ earnings forecast at this juncture.

Maintain BUY with TP RM3.40

We maintain Hibiscus as a BUY with a DCF-derived TP of RM3.40 Our TP implies 0.9x FY24F P/B and 6x FY24F P/E. We like the company’s proven track record in delivering growth while maintaining prudent financial management.

Source: BIMB Securities Research - 18 Jun 2024