Hibiscus Petroleum Bhd caught the market by surprise this week with its massive RM2bil fundraising exercise, twice the size of its market capitalisation.
The oil and gas (O&G) producer announced on Wednesday that the fundraising via a private placement of new shares is to “acquire good-value and high-quality producing O&G assets”.
The market, though, did not take the news well as Hibiscus shares dipped by more than 12% following the announcement.
Hibiscus has had frequent rounds of private placement exercises over the past years. In October 2014, the group raised RM130mil from placing out almost 90 million new shares.
This was followed by placements of 35 million in August 2015 and a massive issuance of 326 million new shares in January 2016.
In 2018, the group placed out another 144 million new shares.
The same year, Hibiscus issued 317 million free warrants to shareholders, which are expiring in March 2021.
The warrants’ exercise price is at RM1.12 per share, which could further raise money for the company and expand its share base.
Interestingly, Hibiscus has not raised much debt all this while. It has only RM14.4mil debt compared with O&G peer Sapura Energy Bhd that has RM10bil in borrowings.
Hibiscus is also in a net cash position, something that is rare in the O&G industry. As of June 30,2020, it had a cash pile of RM77mil.
So, the question is why hasn’t Hibiscus raised much debt, especially in the current low-interest rate environment?
According to a former investment banker, companies in the O&G sector have been facing difficulties in raising funds in the debt market as banks are fearful of the volatility of the oil prices.
“Companies in the O&G sector, even good ones, have difficulty raising funds in the bond market. This is because of the weak oil market and the high number of loan defaults by O&G companies globally, ” he tells StarBizWeek.
In terms of placement pricing, the banker reckons that Hibiscus share price is currently “undervalued” and that issuing the placement at the current levels could be disadvantages to shareholder value.
“Unless, of course, the proposed acquisitions are attractive and high value-added, ” he adds.
Hibiscus has proposed the issuance of up to two billion units of convertible redeemable preference shares (CRPS) at an issue price of RM1 apiece, which is based on the most common denominator.
The CRPS, it said, may be placed out in single or multiple tranches.
For the first tranche, the conversion price of the CRPS has been fixed at 66 sen, representing a premium of about 10% over the five-day volume-weighted average mid prices (VWAMP) of Hibiscus shares up to Wednesday at 59.72 sen.
“If there are subsequent tranches of CRPS being placed out, the conversion price for the subsequent tranches of CRPS will be fixed at a premium of up to 10% over the five-day VWAMP up to and including the market day immediately before the price-fixing date, ” it says.
The company plans to place out the CRPS to both local and foreign investors to be identified at a later date by way of book-building.
Hibiscus says the proposed placement of CRPS is for the firm to raise funds upfront to optimise the chances of acquiring attractive assets in a timely manner, particularly assets sold via bidding rounds with tight timelines for completion.
“Such acquisitions, if they materialise, would likely contribute positively to earnings potential in the near future, ” it says.
While many view the O&G sector negatively as oil majors cut down their expansion, Hibiscus is certainly taking a contrarian view.
Hibiscus intends to utilise the net proceeds of RM1.94bil to buy three O&G assets in South-East Asia.
The company says in its filing with Bursa Malaysia that it expects the O&G sector to improve as the global economy starts to recover from the crippling effects of the Covid-19.
“The pandemic and low oil price environment initially slowed down merger and acquisition activities globally but with the ramp-up of economic activity globally, the outlook for the O&G sector is also improving.
“With that in mind, the group has accelerated its asset acquisition plans. Hibiscus sees acquisition opportunities for good-value and high-quality producing assets, ” its adds.
It is noteworthy that Hibiscus is favoured by some equity analysts due to its positive cash flow and low operating cost.
Public Invest Research says the proposed placement is likely to be dilutive in the near to medium term, with significant earnings from its new portfolio asset only likely to come in from 2022 onwards.
Overall, the research house says it likes the longer-term prospects of the group despite concerns about the fund-raising exercise.
AllianceDBS Research says Hibiscus has managed to keep its operating expenditure per barrel at a very “commendable level” of below US$15 for both its north Sabah and Anasuria oil fields since the virus outbreak.
“We remain positive on Hibiscus and believe that its share price should rebound as oil prices gradually recover, ” it says.
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