Moody's assigns first-time ratings to Hibiscus; outlook stable

In a filing with Bursa Malaysia, Hibiscus said the condition precedent formed part of the approvals required in respect to the conditional sale and purchase agreement entered into by the group with Repsol for the proposed acquisition of the entire equity interest in Repsol’s subsidiary Fortuna International Petroleum Corp.

KUALA LUMPUR: Moody's Investors Service has assigned a provisional (P)B1 corporate family rating (CFR) to Hibiscus Petroleum Bhd, which is the first time by ratings agency. The outlook is stable.

The rating agency said on Monday it also assigned a provisional (P)B1 rating to the proposed US$-denominated senior secured bonds to be issued by its unit Hibiscus Capital Ltd.

The proposed bonds are irrevocably and unconditionally guaranteed by Hibiscus and some of its subsidiaries, and are secured by capital stock of Hibiscus Capital Ltd, rights in the interest reserve account and rights in the escrow account.

Moody’s said the ratings are provisional and hinge on the successful completion of (1) Hibiscus' planned acquisition of a portfolio of oil and gas assets in Malaysia and Vietnam (Repsol Malaysia) from Repsol S.A. (Baa2 stable) and (2) its proposed bond issuance.

Proceeds from the proposed bond will be initially kept in an escrow account and will ultimately be used to fund the planned acquisition and other general working capital purposes.

The rating agency said should the acquisition of Repsol Malaysia fails to complete, Hibiscus Capital will redeem the bond in full along with early redemption premium of 1% and accrued interest which will mostly be funded by proceeds in the escrow account.

"The (P)B1 CFR reflects Hibiscus' credit profile incorporating the proposed acquisition and the funding plan. The provisional rating benefits from the company's strong credit metrics post-acquisition, but is constrained by Hibiscus' small, albeit improving, scale of production and reserves with significant geographic concentration, modest reserve life and exposure to volatile oil prices," says Hui Ting Sim, a Moody's analyst.

On June 2, 2021, Hibiscus announced that it will acquire Repsol Malaysia for US$212.5mil before working capital adjustments.

In addition, Hibiscus will also take over the contingent tax liability and net decommissioning liability with estimated total at around RM550mil as part of the transaction.

The proceeds from the proposed bonds will provide cushion to absorb these additional payments in case they materialiae.

Moody’s said the transaction is subject to regulatory approval from Petroliam Nasional Bhd (Petronas, A2 stable) and Vietnam Oil and Gas Group (PetroVietnam), as well as approval from Hibiscus' shareholders.

Hibiscus expects to close the transaction by the end of this year.

Sim said while the acquisition will be transformative and involve a degree of execution risk, but given that the assets being acquired are in and around Malaysia, “we view such risks to be partly mitigated by management team's track record of operating in the region and its recent history of being able to transition operatorship”.

The stable rating outlook reflects Moody's expectation that Hibiscus will successfully integrate the assets being acquired with long term funding that provides sufficient cushion to absorb additional payments, if they materialise and still maintain very good liquidity.

At the same time, the stable outlook reflects Moody's expectation that Hibiscus will be financially prudent as it pursues growth.

Importantly, the acquisition will transform Hibiscus' operating profile.

Post-acquisition, the company's net production will more than double to a round 25-30 thousand barrels of oil equivalent per day (kboepd) and its proved reserves will grow by 14-17 million barrels of oil equivalent(mmboe).

The transaction will also reduce Hibiscus' strong reliance on crude oil, as its proportion of production attributed to gas will grow to 25%-30% from 3%-5%.

The company's production and reserves, however, will remain geographically concentrated after the acquisition and it will remain exposed to oil price volatility.

The four oil and gas blocks at Repsol Malaysia are located in and around Malaysia, and Hibiscus' proportion of production in the area will increase to around 75%-80% post-acquisition from around 70%.

Most of Hibiscus' sale of oil and gas under its existing assets as well as at Repsol Malaysia will be via long-term contracts that are linked to oil price indexes.

Hibiscus has a track record of transitioning operatorship at its acquisitions. This is demonstrated by the improvement in operations and production profile at Anasuria and North Sabah after Hibiscus' participation.

To reduce transition risks, the company will retain employees at Repsol Malaysia for at least two years post-acquisition under its sale and purchase agreement with Repsol, and Hibiscus will be signing a transition services agreement with Repsol.

Hibiscus' leverage, as measured by adjusted debt/EBITDA, will increase to 1.0x-1.5x from 0.3x after the proposed bond issuance and its acquisition of Repsol Malaysia.

Despite the increase in leverage, the credit metrics will remain strong for its rating level.

Moody's also expects the company's adjusted retained cash flow (RCF)/debt and adjusted earnings before interest, tax, depreciation and amortisation (Ebitda)/interest to be strong at 45%-55% and 9.0 times -11.0 times, respectively.

Moody's projections are based on its medium-term Brent crude price assumptions of US$50-US$70 per barrel.

Moody's estimates that Hibiscus' proved reserve life will be at around five years following the acquisition, and the company will likely increase capital investments over the next three years to maintain or boost its reserve life.

The company aims to grow its net proved and probable reserves to over 100 mmboe by 2025 from its estimated 81 mmboe post-acquisition.

The capital investment required to reach these goals will be more than currently incorporated in Moody's cash flow projections.

Higher investment spending could increase execution risk, but will also lead to increased cash flows and asset base that could reduce leverage if the spending is funded by Hibiscus' cash reserves following its proposed bond issuance.

Moody's also expects the company to be financially prudent in its approach to investments.

Pro forma for the proposed bond and acquisition, Hibiscus' liquidity is very good over the next 12-18 months. Moody's forecasts Hibiscus will generate RM550mil to RM600mil of operating cash flow over the next 18 months.

This amount, together with the company's cash balance and proceeds from the proposed US dollar bond, will be more than sufficient to cover costs associated with its acquisition of Repsol Malaysia, as well as capital spending and dividends of around RM700mil.

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