Hibiscus-20130920Share prices of Hibiscus Petroleum and its warrant rose on Friday on talk of oil find by a company it has stake in. Hibiscus's share rose RM0.39 to RM2.02, while its warrant, Hibiscs-wa, rose RM0.33 to a limit up level of RM1.39

Hibiscus-WA-20130920

Duqm Port of Masirah Shore Base, Oman is where the action for Hibiscus Petroleum Bhd will be taking place some 10 weeks from now.

Dyas and his team have more or less completed the groundwork needed for Hibiscus’ oil drilling programme which commences in 10 weeks. Hibiscus is spending some US$35mil (RM100mil) to drill two wells. 

After much thought, Dyas and his team have decided that the selected well locations are suitable for the positioning of a mat-based or independent leg jack-up drilling rig.

A success in striking black gold is important for Hibiscus. Since its listing in July 2011, Hibiscus Petroleum’s sense of identity has been focused on this one activity that will be its defining moment of existence - that of a respected oil and gas exploration and production company.

A failure, however, will see repercussions with rippling effects.

First, it will be RM100mil down the drain. A failure to see oil spurting out into the Oman air will see investors being more wary in investing in a shell company with no track record.

Though Hibiscus has a balanced portfolio, for example it has Australian assets which have proven reserves and will start delivering revenue by 2014. However, the drilling in Oman is more or less make or break for Hibiscus’ profile.
A commercial discovery will shut naysayers up. Hibiscus has been talking a lot about its proprietary Rex Technology package - a really sophisticated gizmo that has the ability to locate potential oil reserves.

So striking oil will have a twofold impact. Firstly, Hibiscus starts delivering earnings. Secondly, it shows that the Rex technology works. This will then be disruptive for the upstream oil and gas sector.

Hibiscus is marketing the Rex technology package via HiRex Petroleum Sdn Bhd, a 50:50 joint venture formed earlier 2013 between Hibiscus and Rex South East Asia Ltd. The purpose of this venture is to pursue investments using Rex’s proprietary technology in 11 countries within the Asia-Pacific region.

The company is currently evaluating 12 prospects and is targeting to seal at least two prospects by the year-end (2013).

If It Succeed …

So what happens if Hibiscus succeeds and crude oil flows through the wells of Masirah North North 1 and Masirah North East 1?

These are the two prospective areas that have been selected for drilling after in-depth technical evaluation and verification using the proprietary Rex Virtual Drilling technology, in addition to the confirmations provided via conventional methodology.

Hibiscus has internally estimated that these prospects have prospective resources of about 160 million barrels or a value of some US$1bil (RM3.3bil). Should Hibiscus strike oil, its 22% net share of this would be worth some US$220mil (RM722mil).

Hibiscus and its jointly controlled entity, Lime Petroleum, had awarded a drilling rig contract to Aban 7 Pte Ltd for the execution of this drilling programme. Aban 7 is an international drilling contractor that owns and operates a fleet of 18 drilling rigs.

The contract will be effective for a minimum period of 50 working days, which is expected to commence between mid-October and mid-November 2013. If the wells yield successful discoveries, then production could potentially be expected to begin by the first half of 2014.

Assuming the drilling activity starts in mid-October 2013, the result of whether striking oil will be known by end-December 2013.

Successful drilling effort would initially lift the share price. Should all its reserves prove commercially viable, the shares could provide big returns to shareholders.

Based on a blue sky scenario of 60% probabilities of success on its Middle East concessions and assuming that the value of the concessions is assessed based on US$5 per barrel of oil, the share price of Hibiscus can be pegged at RM5.20.

Hibiscus via its 35% stake in Lime Petroleum Plc, has four concessions in the Middle East and another four concessions in the Norwegian Continental Shelf.

If It Fails …

While many are aware that Hibiscus has balanced its portfolio in the last one year (2012), the share price trajectory will still more or less be determined by the drilling programme.

As the value per share of Hibiscus is closely correlated to its probability of success, projections suggest that the shares could be worth as low as RM1.18, if its drilling campaign in Oman Block 50 ends in failure.

Moreover if Hibiscus failed to strike oil, the sentiment on the other SPACs would also be affected. It won’t just be Hibiscus’ share price falling. The other oil and gas SPACs will also feel the heat. As for the new oil and gas SPACs which are seeking a listing on Bursa Malaysia, raising money may not be as easy anymore.

While there is a moratorium period for the management team, on paper though, they are already psychologically rewarded via the share price. Technically speaking, the promoters are already rewarded without having to deliver yet.

So for upcoming SPACs, investors will pay even closer attention to the quality of management. They will question whether these people are really in it for the business, or out to make a quick buck.

In any case, buffering Hibiscus’s drilling ambitions in Oman is its 50.1% interest in the petroleum exploration permit VIC/P57 in the Gippsland Basin and 13% equity interest in the Australian listed 3D Oil Ltd.

This is Hibiscus’ way of diversifying its earnings profile, as the West Seahorse oilfield in this area already has proven reserves of 9 million barrels of oil. This field is awaiting its production licence by the year-end (2013), and ought to be producing by the middle of 2014.

So, even without Oman, Hibiscus will start delivering revenue by end 2014. If Oman delivers, then revenue will start coming in from mid-2014.

Secondly, Hibiscus has been shortlisted for the second round of Newfield Exploration Co’s oil and gas assets in Malaysia and China, with bids expected to be submitted by Sept 26 2013.

Only a handful of the 65 firms that had initially expressed interest in Newfield assets, worth some US$1.7bil (RM5.27bil), have been selected for the second round.