Hibiscus – the story of a successful SPAC

THE story of Hibiscus Petroleum Bhd ’s growth is an interesting one, considering its funding needs have virtually all come from private investors. The debt-free independent exploration and production company has achieved a few notable milestones.

Not only has it survived making expensive acquisitions before the oil price crash (when it lived as a special-purpose acquisition company or SPAC), it also went through the oil crash and has come out smiling, by being cashflow positive.

No doubt, there have been investors who lost money along the Hibiscus journey, but there have been a number of investors who have rode its recovery well and are sitting pretty.

Among them are Singapore-based Pheim Asset Management and Polo Investments Ltd, a fund linked to Datuk Michael Tang of Mettiz Capital Ltd.

Polo first took up a block of 90 million new shares for US$5mil or 23.5 sen each in December 2015.

It went on to take up additional shares via a second round of placement exercise in mid-2016. Based on the company’s register of shareholding as at end-September last year, Polo’s total shares in the company was 138.9 million or a 9.22% stake, making it the second-largest shareholder after Kenneth Pereira and the management team, who holds 11.19% via Hibiscus Upstream Sdn Bhd.

At last look, Hibiscus was trading at 97.5 sen, giving the stock a market capitalisation of RM1.54bil.

Polo’s total investment in the stock is today worth RM135.42mil or US$34.46mil at the current exchange rate.

A market participant says Polo’s entry was seen as a “lifeline and boosted confidence in the stock” at a time when no bank was willing to fund the company and no investor was sourced by the placement agent.

“Polo managed to convince a few earlier shareholders to hang on and not exit when there seemed to be no light at the end of the tunnel during the oil price rout.

“Since then, the company has managed to complete the North Sea acquisition and then secured the Sabah deal from Shell, which is now unconditional and pending completion. Hibiscus will soon become a full-fledged offshore operator as a partner of Petroliam Nasional Bhd (Petronas),” says the observer.

In the case of Pheim, it is understood that when the fund took up a placement back in 2016, the share price was trading at around 18 sen.

The value of that stake now makes up a substantial value of Pheim’s portfolio holdings in Malaysia, according to data on institutions that hold Hibiscus available on The Wall Street Journal.

Pheim’s founder Tan Chong Koay, when contacted, says that in that period, oil prices were trading at an average of US$45 per barrel and are nearly US$70 this month.

“We saw that oil prices have come down and the stock is trading at one of its lowest levels. Plus, the company has relatively low gearing.

“It is our philosophy not to buy into highly-geared companies,” says Tan.

Moreover, he adds that its management is not bad even though it had made some mistakes in the past.

Hibiscus shares started moving up towards the latter part of 2016 and picked up pace from the middle of last year.

One factor that helped this is that it is a liquid stock that offers direct exposure to the recovering oil and gas (O&G) sector in developed oil-producing jurisdictions. Besides Hibiscus Upstream and Polo, the company’s other substantial shareholder is Mohd Zulkefli Mohd Abdah with a 5.9% stake.

But there are other factors that differentiate the stock vis-a-vis other O&G plays.

One is that the company has no bank borrowings as the banks were not willing to lend to it.

And it managed to successfully undertake placements from funds like Polo and Pheim for working capital. It has also provided for many of its early investments.

On the other hand, peers like Sapura Energy Bhd are bogged down by heavy debt, while Reach Energy Bhd is in Kazakhstan, which is perceived to be a riskier operating environment.

Hibiscus is already drilling and currently producing an average of 3,500 barrels per day (bbls/day).

Its main operating asset, a 50% stake in the Anasuria Cluster – a concession in the North Sea off Britain’s northern coast – was bought in March 2016. It is understood that Hibiscus is now drilling to unlock 1.01 million barrels from its current 29.2 million barrels of 2P reserves and move it closer to its target of achieving 5,000 bbls/day by 2020 from the Anasuria Cluster.

Its net cash generated amounted to close to RM50mil as at end-2017.

For the second quarter ended Dec 31, 2017, the company made a net profit of RM11.04mil, slightly up from RM10.67mil in the same period a year ago due to the higher average crude oil prices recognised.

Observers note that the company has impressively delivered eight consecutive quarters of profitability since it acquired the Anasuria Cluster.

Public Invest Research in a note this week says it remains positive on Hibiscus’ long-term prospects, given its ongoing initiatives to increase production levels. The research firm, which has an “outperform” call on the stock, has raised the stock’s target price slightly to RM1.08 from RM1.06 previously.

Operation-wise, the company anticipates to complete its proposed acquisition of a 50% interest in the 2011 North Sabah Enhanced Oil Recovery Production Sharing Contract by the end of next month.

It is buying that stake from Sabah Shell Petroleum Co Ltd and Shell Sabah Selatan Sdn Bhd for US$25mil.

Public Invest says the entitlement of an additional 6,000 bbls/day production from these North Sabah operations net to Hibiscus is expected to aggregate about 9,500 bbls/day production for the group.

Hibiscus recently announced plans to undertake a free warrant issue on the basis of one for every five existing ordinary shares held, subject to shareholder approval.

This will expand its share base by 20% upon full exercise of the warrants over the next three years. Hibiscus should not only be applauded for being the first SPAC, but also a successful one.

Oil & Gas , hibiscus , pheim , polo