Hibiscus (Episode IV): A New Hope?
HIBISCUS shares are a completely different animal today from just 12 months ago. Are they still undervalued? That depends: Will Oil Prices stay above $XX/bbl?
After rising +40% YoY and +100% from when I first wrote about their shares, is HIBISCUS still undervalued? That depends on whether oil prices can remain above XX/bbl.
There is an extremely bullish LT secular macro thesis for O&G, which some analysts say may last for decades - resulting from recent geopolitical tensions and the radical paradigm shift amongst developed nations towards Renewables as an energy source.
Anyone who has been following the stratospheric rise of O&G prices over the past 6 months will be intimately familiar with the biggest contributing factor to their recent spike - the Ukraine War. Europe’s huge reliance on Russian O&G supply and their subsequent energy sanctions on Russian Urals have led to O&G prices spiking to infinite and beyond - resulting in Brent oil prices hovering between $100-$120 for most of the past quarter.
Amidst these incredibly tight energy supply chains, the biggest beneficiaries were the O&G companies - which rose to stardom after a half-decade of “lower-for-longer” oil prices. With O&G fields in Malaysia, the UK and now Vietnam, investors of Hibiscus were also rewarded immensely with their aforementioned +40% YoY performance.
Another reason behind this outperformance was their recent completion of the Repsol acquisition - which was consolidated into their books on January 2022. This Repsol acquisition is estimated to have increased their existing 2P O&G reserves by +64% - most notably their 2P Gas reserves, a highly prized commodity by the Eurozone right now:
With O&G prices close to all-time highs, Hibiscus’ eventual outperformance was a no-brainer - and their recent share prices reflected that optimism. However, Brent oil prices took a swan-dive about two weeks ago after CNN reported that Putin had considered the restoration of pre-war Russian-Ukraine relations inevitable - on assumptions of a potential relieving of energy sanctions much sooner than consensus had expected. It is also worth remembering that in the event of a Cold-War style splintering between the 1st World and 2nd World, the significant majority of oil-producing nations will likely side with the latter alliance - making oil a significant bartering tool at the negotiating table. And it is also no secret to industry observers that the Saudi Crown Prince owes a debt to China for the latter’s face-saving offer to rescue Saudi Aramco’s $2T listing at one point.
Couple that with the immense tailwinds behind the fossil fuel industry resulting from the need to support the rapid shift towards Renewables as an energy source, and the potential upside volatility in oil prices is stratospheric. In the Bloomberg article below, JP Morgan estimates that in the worst-case scenario of a Russian cut in Ural exports resulting from the recently suggested G7-imposed price cap on Urals, oil prices could reach as high as $380/bbl:
Also, it’s worth mentioning how after the recent fall in Hibiscus’ share price, its major shareholders (including their MD) recently took the opportunity to increase their stake in the company. If you’ve been following my blog for awhile, you’ll know that this is a common thread in many of the companies I’ve written about before.
In light of the multitude of new developments, I thought it was worth relooking into whether Hibiscus was still undervalued - especially since my last report about them was written in Oct 2021, before their Repsol acquisition was even finalized. There have been plenty of material developments over the past 9 months - so strap in for a rollercoaster ride as volatile as their share price!
Paid subscribers can download this 1-page summary sheet + a 300-row Excel financial model of Hibiscus’ historical three statements - at the bottom of this report!
Do refresh your memory with my previous stock reports about Hibiscus below!
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Paid subscribers can download Innature's 1-page summary sheet & a robust 300-row Excel model of their historical three statements (FY16-FY22) at the bottom of this report.
Hibiscus - A Completely Different Beast
As previously mentioned, Hibiscus share price is already up +40% YoY and over +100% since my first report about them in Apr 2020. Hence, shareholders have already been rewarded immensely by their incredible outperformance - kudos if you were one of them. However, the Margin of Safety involved in this trade has also eroded considerably due to this higher valuation since the last time we looked at it (oil price: ~$80/bbl). Coupled with the consolidation of their Repsol assets structurally changing their balance sheet and the Ukraine war turning the global O&G sector upside-down, Hibiscus’ shares have basically turned into a completely different animal in the space of less than a year.
As luck would have it, their 1Q22 results were also recently announced on 25 May. This quarter’s report added a lot of incremental insight, since their Repsol assets which increased their existing 2P O&G reserves by +64% were only consolidated onto their books in 1Q22:
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