Understanding Hibiscus

Some investors are still in a maze with regards to Hibiscus. Yes, you have the oilfields now, but don't you still have to get some oil? I approached the company with as much cynicism as the next guy. I have met the top 3 management team and grilled them, looked over their decision making process and the oilfields they ended up with - I came away feeling optimistic. 



They have parlayed their expertise, and basically partnered with a much sought after group (who have recently ventured on their own - they actually created a unique way of locating "decent oilfields" by way of analysing gravity and matter in the prevailing seabed). Did you know that the sea levels are not the same all over the world? 


Thats because the gravity differs, in India it could be 30m-50m higher than somewhere else. The scientist team deciphered that that can be traced to the the kind of seabed underneath which gives rise to "potential for locating oil resources"). Their technology was highly sought after and they sold their company, but was barred from doing similar work till now, so they are striking out on their own. The fact that Hibiscus team got to work with them was a stroke of confluence of events, they needed the funding and oil price was weaker in the first half of 2011.



Hence you can say their jv with Lime was a pretty good move. There will be three catalysts coming for the stock:
1) the upcoming acquisition of anoedther significant oilfield
2) the listing of Lime on London exchange, which in effect allows buyers of Hibiscus to be in the position of pre-IPO investors at a good price, likely to be done sometime June 2012
3) actually striking oil, which I think is highly  likely than not base don the available data and pre-selection process by the Lime group (the Lime group had their pick of whichever oil fields they wanted based on their reputation and technology expertise in the past)


That is why I think, as some who know more about what they are doing, Hibiscus is a pretty good thing. I keep seeing initial big shareholders loading up more shares and the entry of a couple of significant new shareholders as well from Singapore. Suffice to say, I am pretty confident that the share should be closer RM1.00 by year end, just based on the above fundamentals.


Hibiscus : Adding some zest    (RHB Research)                                                                                                    
Visit Note 
-          Hibiscus announced its “qualifying acquisition” (QA) involving a 35% equity stake in an early-stage exploration company called Lime Petroleum with three assets in the UAE and Oman for a total cash consideration of US$55m (or RM172.1m). The proposal – subject to approvals from Securities Commission and shareholders (excluding management’s 20%) – is expected to be completed by 1HCY12. 
-          After the QA is approved, we believe Hibiscus’ higher risk profile comes with potential significant upside arising from the development of Lime’s estimated 200.7mmboe risked recoverable resources. Other than E&P risks, other risks include: 1) Rex’s (Lime’s originator for the Middle East assets) proprietary exploration technology is commercially unproven; and 2) Lime’s funding for its work plan is sufficient only for FY12. 

-          We estimate Hibiscus’ 35% stake could be worth RM1.01-1.33/share based on the successful 50% commercialisation of resources from the four wells to be drilled in 2012 work programme and the implied NAV/boe range of US$4.9-6.5/boe. This implies 33.2-76.1% upside to Hibiscus’ current share price. 
-          Hibiscus’ proposed QA is exciting on two counts: 1) the significant risked resources identified relative to the size of the company; and 2) the relatively inexpensive entry cost into the assets vs. its potential value (based on NAV/boe). There are also the potential upsides from new concessions to be acquired in the future, including the Fujairah block in 2012. 
 
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees. The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Hibiscus Flowering

Hot from the desk of RHB:

 
Hibiscus announced that it has entered into a conditional share subscription agreement (proposed subscription for 76.9m new shares and 22.1m existing shares) with Lime, representing in aggregate 35% of the enlarged issued and paid up share capital for a total cash consideration of USD55m.
 
Lime Group currently owns 100% of three concessions in UAE and Oman i.e. RAK North Concession, Sharjah Concession and Block 50 Oman Concession. Based on Aker Geo valuation on the concession the current net risked recoverable resource for the three concessions is 200.7mmboe.
 
Based on prevailing dollar/boe 2P reserves for the oil majors, we derived the current average NAV/boe of US$5/boe. 2P reserves suggest higher potential of discoverable reserves as compares to the fields own by Lime Group which are still in the development and appraisal stage. We note that industry is currently factoring in 50-70% discount to the $/boe 2P reserves and thus this imply a $1.50 - $2.50/boe range for Lime Group reserves. Based on this valuation, this suggest a potential valuation of RM326m – RM544m (share price range of RM0.78 to RM1.30) for Hibiscus (35% stake in Lime Group). This presents a potential upside of 16-93% from current price level. Please refer to following for the workings:
 

Current Valuation of E&P players based on reserves
Dollar/boe 2P reserves (oil and gas)
Company	Upstream NAV ($m)	SEC Proved 1P (mmboe)	Wood Mackenzie 2P reserves (mmboe)	Upstream NAV/1P Reserves ($/boe)	Upstream NAV/2P Reserves ($/boe)
Exxon Mobil	308,638	24,853	47,331	12.42	6.52
Chevron	186,217	10,545	29,181	17.66	6.38
ConocoPhillips	85,281	8,310	16,118	10.26	5.29
Occidental	63,294	3,363	7,693	18.82	8.23
Marathon	18,226	1,640	3,983	11.11	4.58
Hess	21,399	1,537	4,199	13.92	5.10
Murphy	8,443	456	1,559	18.52	5.42
Suncor	34,749	3,899	9,357	8.91	3.71
Canadian Natural	27,541	3,824	8,319	7.20	3.31
BP	98,747	18,071	34,194	5.46	2.89
RD Shell	169,204	14,273	37,472	11.85	4.52
Total	84,347	10,676	21,207	7.90	3.98
			Average	12.00	4.99
* Source: Wood Mackenzie
Sensitivity Analysis
Discount to NAV/2P	NAV/Net risked recoverable ($/boe)	Net risked recoverable resources (mmboe)	Hibiscus Stake in Lime	Valuation in RMm	Share Price (RM/shr)	Upside to current price of RM0.675
30%	3.49	200.7	35%	761.1	1.82	170%
40%	3.00	200.7	35%	652.3	1.56	131%
50%	2.50	200.7	35%	543.6	1.30	93%
60%	2.00	200.7	35%	434.9	1.04	54%
70%	1.50	200.7	35%	326.2	0.78	16%
*current field under development and appraisal (akin to Lime's assets) are valued at $1.50-2.50/boe by analysts.

  

A special purpose vehicle cannot be valued on its listing, which is why I said nothing. You ride on the management's perceived networking skill, experience and ability to deliver what they said they aim to do. There is always ample time to move into Hibiscus. Naturally, I think the management team is highly qualified.

Managing director Dr Kenneth Gerard Pereira has 21 years in the oil and gas industry and started off as a field engineer in Schlumberger. Independent non executive director Zainol Izzet bin Mohamed Ishak was previously CEO of Sapuracrest, and is now CEO of Perisai Petroleum. Head of Petroleum Engineering Dr Pascal Josephus Petronella Hos, and Petroleum Economist Ir Mohd Iwan Jefry Abdul Majid have held extensive positions in many oil and gas companies.


Hibiscus will acquire 35% equity stake in Lime Petroleum for US$55 million
 Lime Petroleum has 3 concessions in 2 countries in the Middle East and is expected to add, at least, another concession before the end of this year
 Hibiscus will manage Lime Petroleum Group’s operations, which allows the company significant influence in the delivery of its business objectivesthree assets in two countries, which are Oman and the UAE

The Middle East contains more than 50% of the world’s oil reserves and approximately 40% of the world’s gas reserves. The Middle East has a strong refining capacity of 7.9 million bbls per day (as of 2009) and a well developed oil and gas infrastructure. UAE is the third largest oil and gas liquids producer in the Middle East and the world’s fourth largest net oil exporter with a daily production of around 3.2 billion bbls per day. 


Oman is the largest non-OPEC producer in the Middle East with a daily production of around 800,000 bbls liquids and 2.4 billion cubic feet of gas in 2009. Crude oil output in Oman has increased year-on-year since 2008. Most of the oil and gas production in Oman is onshore with increasing focus on gas production in recent years, while offshore fields remain largely unexplored.


Shares and warrants are subject to SC moratorium up to the QA for management. Under their 3-year service contracts, any member of the management or non independent directors who resign or dispose of their shares can only do so at a 30% discount to the market price, and sell only to the remaining management team members. The team cannot participate in the distribution of proceeds from the QA or the liquidation of the SPAC. No directors’ fees will be paid until the QA is completed and there will be no adjustment to the remuneration package or introduction of performance
incentive schemes prior to the QA.

The terms of the deal appears to satisfy all of the important guidelines:
• IOR (Improved Oil Recovery) / Service Agreement 
• Proven basin
• Good data availability
• Good fiscal terms
• Political stability of country of location
• Stable Partners

From raising cash in a listed vehicle, we now have the projects, which appear to be "reasonably good". They are not in some gawd-forsaken place. They have reputable partners (including Schroders). They have management contracts which will mean direct management of the projects.


The deal can be termed as a good platform and as such should lure in fresh institutional investors. Now that the wheels are turning, the warrants, which are exercisable at 50 sen, will soon be converted and plough back into the company for further investments.


You still cannot value where the shares should be trading at, but certainly not at current levels now that they have a decent proposal. 

Bumi Armada, Badass Or Goodfella

Valuation and prospects wise, the new owners of Bumi Armada have done well to instill both in the company. Those with better memories know that minorities got the raw end of the deal when it was privatised. We can sit and complain or reassess the Bumi Armada that is in front of us.

FinanceAsia: Bumi Armada, a Malaysian oil and gas services company, has started bookbuilding for what looks set to become the country’s biggest initial public offering since Petronas Chemicals raised $4.15 billion in November last year. It will also be the second-biggest listing in Southeast Asia this year after the Singapore IPO of Hutchison Port Holdings Trust, which raised $5.45 billion.

The company and its existing shareholders are seeking to raise between M$2.46 billion and M$2.77 billion ($802 million to $903 million) from the sale of a 30% stake, ignoring a challenging market environment that. The shaky markets have forced the withdrawal of 19 IPOs in Hong Kong, Europe and the US during the past month.

But sources say there is significant domestic interest for the transaction, which is backed by Malaysian billionaire Ananda Krishnan, and this might convince international investors to take part as well.

“Domestic funds pretty much have to buy this,” one banker said, citing the size of the deal and the fact that the company is the country’s largest provider of ships and floating platforms used by the energy industry.

The list of cornerstone investors shows demand from non-Malaysian funds as well. As per the term sheet, Singapore’s Great Eastern and UK-based Prudential, both life insurance companies with a large presence in the region, have joined Malaysia’s Hong Leong Group, HwangDBS and state-owned investment company Permodalan Nasional in buying a combined 300 million shares. Based on the mid-point of the price range, their investment amounts to about $291 million, or about 34% of the total deal size. The cornerstones will be locked up for six months.

Also supporting the deal is the fact that equity investors generally like Malaysia and Southeast Asia. Together with Indonesia and the Philippines, Malaysia’s stock market is one of the best performers in Asia year-to-date and Dealogic data show equity issuance from Southeast Asia up 21% to a three-year high of $11.2 billion in the first half. Malaysia accounts for 17.2% of the total issuance. Notably, six of the 10 companies that have debuted on Malaysia’s main board this year have also gained from their IPO price. By comparison, 12 of Hong Kong’s 18 IPOs above $100 million are still under water.

Investors who bought into the $269 million IPO of Malaysian sugar refiner MSM Malaysia Holdings, which closed two weeks ago, will most certainly have no regrets after the stock surged 39.7% on its first day of trading Tuesday. It gained another 3% intraday yesterday before easing back to finish 3.8% lower.

Bumi Armada is a classic Ananda Krishnan deal in that the company has already been listed once. It was privatised by Krishnan in 2003, one year after he bought control of the company together with a partner — a business model favoured by the Malaysian tycoon as he seeks to grow his companies without having to answer to minority shareholders. The idea is that once a company has reached a decent size, or after it has been restructured, it will be relisted.

The initial intention was to relist Bumi Armada in 2008, but the IPO was delayed due to the financial crisis.

The company has set aside 9.1% of the offering for retail investors, while the remaining 90.9% will be offered to institutional investors. Approximately 42.2% of the institutional tranche will go to ethnic Malay investors, also called Bumiputera investors, leaving 57.8% for other buyers. That latter portion also includes two-thirds of the cornerstone tranche, however, which means only 261.9 million shares, or about $254 million (at the mid-point of the price range) of the deal, will be available for other institutional investors, including international accounts.

Some 73.3% of the deal is made up of new shares, while the rest are secondary shares sold by existing shareholders. The company will use the proceeds to repay bank borrowings, for capital expenditure and for working capital requirements.

The order books will remain open until July 8 and the final price is due to be fixed on that same day. The trading debut is scheduled for July 21.

CIMB, Credit Suisse and Maybank are joint global coordinators as well as joint bookrunners together with CLSA, RHB and UBS.

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Upcoming IPO Ratings

Too many IPOs in such a short time. I can only gauge their business model, prospects, follow through investors after IPO. 10 is the best upside potential.

Bumi Armada: 8/10

Inari: 6/10 (solid business, not terribly large float, management looks OK)

OldTown: 4/10 (very low barriers to entry, everyone can rattle off at least 3 names doing similar stuff, first mover advantage yes but the other similar players are basically cannabalising the market for all, dubious business plan sustainability)

Peter Labs - 6/10 (in the right industry, the group makes and trades animal health and nutrition products which include animal feed additives, environment maintenance products, biological and veterinary pharmaceuticals)

Hibiscus Petroleum: 3/10 (let the rating speaks for itself, or do more research on it yourself)

Catcha: 3/10 (I rather not say all bad things in one posting, the rating will suffice for now)



NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.