Value Investing Hibiscus Petroleum Berhad (5199.KL) |
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| Hibiscus Petroleum Berhad (5199.KL) Posted: 06 Apr 2020 08:05 PM PDT Download PDF of this article here: https://docdro.id/6eLgUPo In light of the recent fall in oil prices due to the Saudi-Russian dispute and dampening demand for oil due to the lockdowns implemented globally, O&G stocks have taken a severe beating, falling approximately 50% from their highs at the beginning of the year. Not spared from this onslaught is Hibiscus Petroleum Berhad (Hibiscus), a listed oil and gas (O&G) exploration and production (E&P) company. Why invest in O&G stocks in this particularly uncertain period? For one, valuations of these stocks have fallen to multi-year lows, bringing the potential ROI on these stocks to attractive levels. Oil prices are cyclical, and are bound to return to the mean given a sufficiently long time horizon. The trick is to find those companies who can survive through this downturn and emerge into "normal" profitability once oil prices rebound. In this article, I will explore the upsides and downsides of investing in Hibiscus. I will do my best to cater this report to newcomers to the O&G industry – rather than address exclusively experts and veterans of the O&G sector. As an equity analyst, I aim to provide a view on the company primarily, and will generally refrain from providing macro views on oil or opinions about secular trends of the sector. I hope you enjoy reading it! Stock code: 5199.KL Stock name: Hibiscus Petroleum Berhad Financial information and financial reports: https://www.malaysiastock.biz/Corporate-Infomation.aspx?securityCode=5199 Company website: https://www.hibiscuspetroleum.com/ Company SnapshotHibiscus Petroleum Berhad (5199.KL) is an oil and gas (O&G) upstream exploration and production (E&P) company located in Malaysia. As an E&P company, their business can be basically described as: · looking for oil, · drawing it out of the ground, and · selling it on global oil markets. This means Hibiscus's profits are particularly exposed to fluctuating oil prices. With oil prices falling to sub-$30 from about $60 at the beginning of the year, Hibiscus's stock price has also fallen by about 50% YTD – from around RM 1.00 to RM 0.45 (as of 5 April 2020). While the company is domiciled in Malaysia, its two main oil producing fields are located in both Malaysia and the UK. The Malaysian oil field is commonly referred to as the North Sabah field, while the UK oil field is commonly referred to as the Anasuria oil field. Hibiscus has licenses to other oil fields in different parts of the world, notably the Marigold/Sunflower oil fields in the UK and the VIC cluster in Australia, but its revenues and profits mainly stem from the former two oil producing fields. Given that it's a small player and has only two primary producing oil fields, it's not surprising that Hibiscus sells its oil to a concentrated pool of customers, with 2 of them representing 80% of its revenues (i.e. Petronas and BP). Fortunately, both these customers are oil supermajors, and are unlikely to default on their obligations despite low oil prices. At RM 0.45 per share, the market capitalization is RM 714.7m and it has a trailing PE ratio of about 5x. It doesn't carry any debt, and it hasn't paid a dividend in its listing history. The MD, Mr. Kenneth Gerard Pereira, owns about 10% of the company's outstanding shares. Reserves (Total recoverable oil) & Production (bbl/day)To begin analyzing the company, it's necessary to understand a little of the industry jargon. We'll start with Reserves and Production. In general, there are three types of categories for a company's recoverable oil volumes – Reserves, Contingent Resources and Prospective Resources. Reserves are those oil fields which are "commercial", which is defined as below: As defined by the SPE PRMS, Reserves are "… quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions." Therefore, Reserves must be discovered (by drilling, recoverable (with current technology), remaining in the subsurface (at the effective date of the evaluation) and "commercial" based on the development project proposed.) Note that Reserves are associated with development projects. To be considered as "commercial", there must be a firm intention to proceed with the project in a reasonable time frame (typically 5 years, and such intention must be based upon all of the following criteria:) - A reasonable assessment of the future economics of the development project meeting defined investment and operating criteria; Contingent Resources and Prospective Resources are further defined as below: - Contingent Resources: potentially recoverable volumes associated with a development plan that targets discovered volumes but is not (yet commercial (as defined above); and) In the industry lingo, we generally refer to Reserves as 'P' and Contingent Resources as 'C'. These 'P' and 'C' resources can be further categorized into 1P/2P/3P resources and 1C/2C/3C resources, each referring to a low/medium/high estimate of the company's potential recoverable oil volumes: - Low/1C/1P estimate: there should be reasonable certainty that volumes actually recovered will equal or exceed the estimate; Hence in the E&P industry, it is easy to see why most investors and analysts refer to the 2P estimate as the best estimate for a company's actual recoverable oil volumes. This is because 2P reserves ('2P' referring to 'Proved and Probable') are a middle estimate of the recoverable oil volumes legally recognized as "commercial". However, there's nothing stopping you from including 2C resources (riskier) or utilizing 1P resources (conservative) as your estimate for total recoverable oil volumes, depending on your risk appetite. In this instance, the company has provided a snapshot of its 2P and 2C resources in its analyst presentation: Basically, what the company is saying here is that by 2021, it will have classified as 2P reserves at least 23.7 million bbl from its Anasuria field and 20.5 million bbl from its North Sabah field – for total 2P reserves of 44.2 million bbl (we are ignoring the Australian VIC cluster as it is only estimated to reach first oil by 2022). Furthermore, the company is stating that they have discovered (but not yet legally classified as "commercial") a further 71 million bbl of oil from both the Anasuria and North Sabah fields, as well as the Marigold/Sunflower fields. If we include these 2C resources, the total potential recoverable oil volumes could exceed 100 million bbl. In this report, we shall explore all valuation scenarios giving consideration to both 2P and 2C resources. The company further targets a 2021 production rate of 20,000 bbl (LTM: 8,000 bbl), which includes 5,000 bbl from its Anasuria field (LTM: 2,500 bbl) and 7,000 bbl from its North Sabah field (LTM: 5,300 bbl). This is a substantial increase in forecasted production from both existing and prospective oil fields. If it materializes, annual production rate could be as high as 7,300 mmbbl, and 2021 revenues (given FY20 USD/bbl of $60) could exceed RM 1.5 billion (FY20: RM 988 million). However, this targeted forecast is quite a stretch from current production levels. Nevertheless, we shall consider all provided information in estimating a valuation for Hibiscus. To understand Hibiscus's oil production capacity and forecast its revenues and profits, we need to have a better appreciation of the performance of its two main cash-generating assets – the North Sabah field and the Anasuria field. North Sabah oil field Hibiscus owns a 50% interest in the North Sabah field together with its partner Petronas, and has production rights over the field up to year 2040. The asset contains 4 oil fields, namely the St Joseph field, South Furious field, SF 30 field and Barton field. For the sake of brevity, we shall not delve deep into the operational aspects of the fields or the contractual nature of its production sharing contract (PSC). We'll just focus on the factors which relate to its financial performance. These are: · Average uptime · Total oil sold · Average realized oil price · Average OPEX per bbl With regards to average uptime, we can see that the company maintains relative high facility availability, exceeding 90% uptime in all quarters of the LTM with exception of Jul-Sep 2019. The dip in average uptime was due to production enhancement projects and maintenance activities undertaken to improve the production capacity of the St Joseph and SF30 oil fields. Hence, we can conclude that management has a good handle on operational performance. It also implies that there is little room for further improvement in production resulting from increased uptime. As North Sabah is under a production sharing contract (PSC), there is a distinction between gross oil production and net oil production. The former relates to total oil drawn out of the ground, whereas the latter refers to Hibiscus's share of oil production after taxes, royalties and expenses are accounted for. In this case, we want to pay attention to net oil production, not gross. We can arrive at Hibiscus's total oil sold for the last twelve months (LTM) by adding up the total oil sold for each of the last 4 quarters. Summing up the figures yields total oil sold for the LTM of approximately 2,075,305 bbl. Then, we can arrive at an average realized oil price over the LTM by averaging the average realized oil price for the last 4 quarters, giving us an average realized oil price over the LTM of USD 68.57/bbl. We can do the same for average OPEX per bbl, giving us an average OPEX per bbl over the LTM of USD 13.23/bbl. Thus, we can sum up the above financial performance of the North Sabah field with the following figures: · Total oil sold: 2,075,305 bbl · Average realized oil price: USD 68.57/bbl · Average OPEX per bbl: USD 13.23/bbl Anasuria oil field Doing the same exercise as above for the Anasuria field, we arrive at the following financial performance for the Anasuria field: · Total oil sold: 1,073,304 bbl · Average realized oil price: USD 63.57/bbl · Average OPEX per bbl: USD 23.22/bbl As gas production is relatively immaterial, and to be conservative, we shall only consider the crude oil production from the Anasuria field in forecasting revenues. Valuation (Method 1)Putting the figures from both oil fields together, we get the following data: Given that we have determined LTM EBITDA of RM 632m, the next step would be to subtract ITDA (interest, tax, depreciation & amortization) from it to obtain estimated LTM Net Profit. Using FY2020's ITDA of approximately RM 318m as a guideline, we arrive at an estimated LTM Net Profit of RM 314m (FY20: 230m). Given the current market capitalization of RM 714.7m, this implies a trailing LTM PE of 2.3x. Performing a sensitivity analysis given different oil prices, we arrive at the following net profit table for the company under different oil price scenarios, assuming oil production rate and ITDA remain constant: From the above exercise, it becomes apparent that Hibiscus has a breakeven oil price of about USD 41.8863/bbl, and has a lot of operating leverage given the exponential rate of increase in its Net Profit with each consequent increase in oil prices. Considering that the oil production rate (EBITDA) is likely to increase faster than ITDA's proportion to revenues (fixed costs), at an implied PE of 4.33x, it seems likely that an investment in Hibiscus will be profitable over the next 10 years (with the assumption that oil prices will revert to the mean in the long-term). Valuation (Method 2)Of course, there are a lot of assumptions behind the above method of valuation. Hence, it would be prudent to perform multiple methods of valuation and compare the figures to one another. As opposed to the profit/loss assessment in Valuation (Method 1), another way of performing a valuation would be to estimate its balance sheet value, i.e. total revenues from 2P Reserves, and assign a reasonable margin to it. From the above, we understand that Hibiscus's 2P reserves from the North Sabah and Anasuria fields alone are approximately 44.2 mmbbl (we ignore contribution from Australia's VIC cluster as it hasn't been developed yet). Doing a similar sensitivity analysis of different oil prices as above, we arrive at the following estimated total revenues and accumulated net profit: Let's assume that the above average of RM 9.68 billion in total realizable revenues from current 2P reserves holds true. If we assign a conservative Net Profit margin of 15% (FY20: 23%; past 5 years average: 16%), we arrive at estimated accumulated Net Profit from 2P Reserves of RM 1.452 billion. Given the current market capitalization of RM 714 million, we might be able to say that the equity is worth about twice the current share price. However, it is understandable that some readers might feel that the figures used in the above estimate (e.g. net profit margin of 15%) were randomly plucked from the sky. So how do we reconcile them with figures from the financial statements? Fortunately, there appears to be a way to do just that. Intangible Assets I refer you to a figure in the financial statements which provides a shortcut to the valuation of 2P Reserves. This is the carrying value of Intangible Assets on the Balance Sheet. As of 2QFY21, that amount was RM 1,468,860,000 (i.e. RM 1.468 billion). Quite coincidentally, one might observe that this figure is dangerously close to the estimated accumulated Net Profit from 2P Reserves of RM 1.452 billion we calculated earlier. But why would this amount matter at all? To answer that, I refer you to the notes of the Annual Report FY20 (AR20). On page 148 of the AR20, we find the following two paragraphs: E&E assets comprise of rights and concession and conventional studies. Following the acquisition of a concession right to explore a licensed area, the costs incurred such as geological and geophysical surveys, drilling, commercial appraisal costs and other directly attributable costs of exploration and appraisal including technical and administrative costs, are capitalised as conventional studies, presented as intangible assets. E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. The Group will allocate E&E assets to cash generating unit ("CGU"s or groups of CGUs for the purpose of assessing such assets for impairment. Each CGU or group of units to which an E&E asset is allocated will not be larger than an operating segment as disclosed in Note 39 to the financial statements.) Hence, we can determine that firstly, the intangible asset value represents capitalized costs of acquisition of the oil fields, including technical exploration costs and costs of acquiring the relevant licenses. Secondly, an impairment review will be carried out when "the carrying amount of an E&E asset may exceed its recoverable amount", with E&E assets being allocated to "cash generating units" (CGU) for the purposes of assessment. On page 169 of the AR20, we find the following: Carrying amounts of the Group's intangible assets, oil and gas assets and FPSO are reviewed for possible impairment annually including any indicators of impairment. For the purpose of assessing impairment, assets are grouped at the lowest level CGUs for which there is a separately identifiable cash flow available. These CGUs are based on operating areas, represented by the 2011 North Sabah EOR PSC ("North Sabah", the Anasuria Cluster, the Marigold and Sunflower fields, the VIC/P57 exploration permit ("VIC/P57") and the VIC/L31 production license ("VIC/L31").) So apparently, the CGUs that have been assigned refer to the respective oil producing fields, two of which include the North Sabah field and the Anasuria field. In order to perform the impairment review, estimates of future cash flow will be made by management to assess the "recoverable amount" (as described above), subject to assumptions and an appropriate discount rate. Hence, what we can gather up to now is that management will estimate future recoverable cash flows from a CGU (i.e. the North Sabah and Anasuria oil fields), compare that to their carrying value, and perform an impairment if their future recoverable cash flows are less than their carrying value. In other words, if estimated accumulated profits from the North Sabah and Anasuria oil fields are less than their carrying value, an impairment is required. So where do we find the carrying values for the North Sabah and Anasuria oil fields? Further down on page 184 in the AR20, we see the following: Included in rights and concession are the carrying amounts of producing field licenses in the Anasuria Cluster amounting to RM668,211,518 (2018: RM687,664,530, producing field licenses in North Sabah amounting to RM471,031,008 (2018: RM414,333,116)) Hence, we can determine that the carrying values for the North Sabah and Anasuria oil fields are RM 471m and RM 668m respectively. But where do we find the future recoverable cash flows of the fields as estimated by management, and what are the assumptions used in that calculation? Fortunately, we find just that on page 185: 17 INTANGIBLE ASSETS (CONTINUED) (a Anasuria Cluster) The Directors have concluded that there is no impairment indicator for Anasuria Cluster during the current financial year. In the previous financial year, due to uncertainties in crude oil prices, the Group has assessed the recoverable amount of the intangible assets, oil and gas assets and FPSO relating to the Anasuria Cluster. The recoverable amount is determined using the FVLCTS model based on discounted cash flows ("DCF" derived from the expected cash in/outflow pattern over the production lives.) The key assumptions used to determine the recoverable amount for the Anasuria Cluster were as follows: (i Discount rate of 10%;) (ii Future cost inflation factor of 2% per annum;) (iii Oil price forecast based on the oil price forward curve from independent parties; and,) (iv Oil production profile based on the assessment by independent oil and gas reserve experts.) Based on the assessments performed, the Directors concluded that the recoverable amount calculated based on the valuation model is higher than the carrying amount. (b North Sabah) The acquisition of the North Sabah assets was completed in the previous financial year. Details of the acquisition are as disclosed in Note 15 to the financial statements. The Directors have concluded that there is no impairment indicator for North Sabah during the current financial year. Here, we can see that the recoverable amount of the Anasuria field was estimated based on a DCF of expected future cash flows over the production life of the asset. The key assumptions used by management all seem appropriate, including a discount rate of 10% and oil price and oil production estimates based on independent assessment. From there, management concludes that the recoverable amount of the Anasuria field is higher than its carrying amount (i.e. no impairment required). Likewise, for the North Sabah field. How do we interpret this? Basically, what management is saying is that given a 10% discount rate and independent oil price and oil production estimates, the accumulated profits (i.e. recoverable amount) from both the North Sabah and the Anasuria fields exceed their carrying amounts of RM 471m and RM 668m respectively. In other words, according to management's own estimates, the carrying value of the Intangible Assets of RM 1.468 billion approximates the accumulated Net Profit recoverable from 2P reserves. To conclude Valuation (Method 2), we arrive at the following:
FinancialsBy now, we have established the basic economics of Hibiscus's business, including its revenues (i.e. oil production and oil price scenarios), costs (OPEX, ITDA), profitability (breakeven, future earnings potential) and balance sheet value (2P reserves, valuation). Moving on, we want to gain a deeper understanding of the 3 statements to anticipate any blind spots and risks. We'll refer to the financial statements of both the FY20 annual report and the 2Q21 quarterly report in this analysis. For the sake of brevity, I'll only point out those line items which need extra attention, and skip over the rest. Feel free to go through the financial statements on your own to gain a better familiarity of the business. Income Statement First, we'll start with the Income Statement on page 135 of the AR20. Revenues are straightforward, as we've discussed above. Cost of Sales and Administrative Expenses fall under the jurisdiction of OPEX, which we've also seen earlier. Other Expenses are mostly made up of Depreciation & Amortization of RM 115m. Finance Costs are where things start to get tricky. Why does a company which carries no debt have such huge amounts of finance costs? The reason can be found in Note 8, where it is revealed that the bulk of finance costs relate to the unwinding of discount of provision for decommissioning costs of RM 25m (Note 32). This actually refers to the expected future costs of restoring the Anasuria and North Sabah fields to their original condition once the oil reserves have been depleted. Accounting standards require the company to provide for these decommissioning costs as they are estimable and probable. The way the decommissioning costs are accounted for is the same as an amortized loan, where the initial carrying value is recognized as a liability and the discount rate applied is reversed each year as an expense on the Income Statement. However, these expenses are largely non-cash in nature and do not necessitate a cash outflow every year (FY20: RM 69m). Unwinding of discount on non-current other payables of RM 12m relate to contractual payments to the North Sabah sellers. We will discuss it later. Taxation is another tricky subject, and is even more significant than Finance Costs at RM 161m. In gist, Hibiscus is subject to the 38% PITA (Petroleum Income Tax Act) under Malaysian jurisdiction, and the 30% Petroleum tax + 10% Supplementary tax under UK jurisdiction. Of the RM 161m, RM 41m of it relates to deferred tax which originates from the difference between tax treatment and accounting treatment on capitalized assets (accelerated depreciation vs straight-line depreciation). Nonetheless, what you should take away from this is that the tax expense is a tangible expense and material to breakeven analysis. Fortunately, tax is a variable expense, and should not materially impact the cash flow of Hibiscus in today's low oil price environment. Note: Cash outflows for Tax Paid in FY20 was RM 97m, substantially below the RM 161m tax expense. Balance Sheet The balance sheet of Hibiscus is unexciting; I'll just bring your attention to those line items which need additional scrutiny. I'll use the figures in the latest 2Q21 quarterly report (2Q21) and refer to the notes in AR20 for clarity. We've already discussed Intangible Assets in the section above, so I won't dwell on it again. Moving on, the company has Equipment of RM 582m, largely relating to O&G assets (e.g. the Anasuria FPSO vessel and CAPEX incurred on production enhancement projects). Restricted cash and bank balances represent contractual obligations for decommissioning costs of the Anasuria Cluster, and are inaccessible for use in operations. Inventories are relatively low, despite Hibiscus being an E&P company, so forex fluctuations on carrying value of inventories are relatively immaterial. Trade receivables largely relate to entitlements from Petronas and BP (both oil supermajors), and are hence quite safe from impairment. Other receivables, deposits and prepayments are significant as they relate to security deposits placed with sellers of the oil fields acquired; these should be ignored for cash flow purposes. Note: Total cash and bank balances do not include approximately RM 105 m proceeds from the North Sabah December 2019 offtake (which was received in January 2020) Cash and bank balances of RM 90m do not include RM 105m of proceeds from offtake received in 3Q21 (Jan 2020). Hence, the actual cash and bank balances as of 2Q21 approximate RM 200m. Liabilities are a little more interesting. First, I'll draw your attention to the significant Deferred tax liabilities of RM 457m. These largely relate to the amortization of CAPEX (i.e. Equipment and capitalized E&E expenses), which is given an accelerated depreciation treatment for tax purposes. The way this works is that the government gives Hibiscus a favorable tax treatment on capital expenditures incurred via an accelerated depreciation schedule, so that the taxable income is less than usual. However, this leads to the taxable depreciation being utilized quicker than accounting depreciation, hence the tax payable merely deferred to a later period – when the tax depreciation runs out but accounting depreciation remains. Given the capital intensive nature of the business, it is understandable why Deferred tax liabilities are so large. We've discussed Provision for decommissioning costs under the Finance Costs section earlier. They are also quite significant at RM 266m. Notably, the Other Payables and Accruals are a hefty RM 431m. What do they relate to? Basically, they are contractual obligations to the sellers of the oil fields which are only payable upon oil prices reaching certain thresholds. Hence, while they are current in nature, they will only become payable when oil prices recover to previous highs, and are hence not an immediate cash outflow concern given today's low oil prices. Cash Flow Statement There is nothing in the cash flow statement which warrants concern. Notably, the company generated OCF of approximately RM 500m in FY20 and RM 116m in 2Q21. It further incurred RM 330m and RM 234m of CAPEX in FY20 and 2Q21 respectively, largely owing to production enhancement projects to increase the production rate of the Anasuria and North Sabah fields, which according to management estimates are accretive to ROI. Tax paid was RM 97m in FY20 and RM 61m in 2Q21 (tax expense: RM 161m and RM 62m respectively). RisksThere are a few obvious and not-so-obvious risks that one should be aware of before investing in Hibiscus. We shall not consider operational risks (e.g. uptime, OPEX) as they are outside the jurisdiction of the equity analyst. Instead, we shall focus on the financial and strategic risks largely outside the control of management. The main ones are: · Oil prices remaining subdued for long periods of time · Fluctuation of exchange rates · Customer concentration risk · 2P Reserves being less than estimated · Significant current and non-current liabilities · Potential issuance of equity Oil prices remaining subdued Of topmost concern in the minds of most analysts is whether Hibiscus has the wherewithal to sustain itself through this period of low oil prices (sub-$30). A quick and dirty estimate of annual cash outflow (i.e. burn rate) assuming a $20 oil world and historical production rates is between RM 50m-70m per year, which considering the RM 200m cash balance implies about 3-4 years of sustainability before the company runs out of cash and has to rely on external assistance for financing. Table 1: Hibiscus EBITDA at different oil price and exchange rates The above table shows different EBITDA scenarios (RM 'm) given different oil prices (left column) and USD:MYR exchange rates (top row). Currently, oil prices are $27 and USD:MYR is 1:4.36. Given conservative assumptions of average OPEX/bbl of $20 (current: $15), we can safely say that the company will be loss-making as long as oil remains at $20 or below (red). However, we can see that once oil prices hit $25, the company can tank the lower-end estimate of the annual burn rate of RM 50m (orange), while at RM $27 it can sufficiently muddle through the higher-end estimate of the annual burn rate of RM 70m (green). Hence, we can assume that as long as the average oil price over the next 3-4 years remains above $25, Hibiscus should come out of this fine without the need for any external financing. Customer Concentration Risk With regards to customer concentration risk, there is not much the analyst or investor can do except to accept the risk. Fortunately, 80% of revenues can be attributed to two oil supermajors (Petronas and BP), hence the risk of default on contractual obligations and trade receivables seems to be quite diminished. 2P Reserves being less than estimated 2P Reserves being less than estimated is another risk that one should keep in mind. Fortunately, the current market cap is merely RM 714m – at half of estimated recoverable amounts of RM 1.468 billion – so there's a decent margin of safety. In addition, there are other mitigating factors which shall be discussed in the next section ('Opportunities'). Significant non-current and current liabilities The significant non-current and current liabilities have been addressed in the previous section. It has been determined that they pose no threat to immediate cash flow due to them being long-term in nature (e.g. decommissioning costs, deferred tax, etc). Hence, for the purpose of assessing going concern, their amounts should not be a cause for concern. Potential issuance of equity Finally, we come to the possibility of external financing being required in this low oil price environment. While the company should last 3-4 years on existing cash reserves, there is always the risk of other black swan events materializing (e.g. coronavirus) or simply oil prices remaining muted for longer than 4 years. Furthermore, management has hinted that they wish to acquire new oil assets at presently depressed prices to increase daily production rate to a targeted 20,000 bbl by end-2021. They have room to acquire debt, but they may also wish to issue equity for this purpose. Hence, the possibility of dilution to existing shareholders cannot be entirely ruled out. However, given management's historical track record of prioritizing ROI and optimal capital allocation, and in consideration of the fact that the MD owns 10% of outstanding shares, there is some assurance that any potential acquisitions will be accretive to EPS and therefore valuations. OpportunitiesAs with the existence of risk, the presence of material opportunities also looms over the company. Some of them are discussed below: · Increased Daily Oil Production Rate · Inclusion of 2C Resources · Future oil prices exceeding $50 and effects from coronavirus dissipating Increased Daily Oil Production Rate The first and most obvious opportunity is the potential for increased production rate. We've seen in the last quarter (2Q21) that the North Sabah field increased its daily production rate by approximately 20% as a result of production enhancement projects (infill drilling), lowering OPEX/bbl as a result. To vastly oversimplify, infill drilling is the process of maximizing well density by drilling in the spaces between existing wells to improve oil production. The same improvements are being undertaken at the Anasuria field via infill drilling, subsea debottlenecking, water injection and sidetracking of existing wells. Without boring you with industry jargon, this basically means future production rate is likely to improve going forward. By how much can the oil production rate be improved by? Management estimates in their analyst presentation that enhancements in the Anasuria field will be able to yield 5,000 bbl/day by 2021 (current: 2,500 bbl/day). Similarly, improvements in the North Sabah field is expected to yield 7,000 bbl/day by 2021 (current: 5,300 bbl/day). This implies a total 2021 expected daily production rate from the two fields alone of 12,000 bbl/day (current: 8,000 bbl/day). That's a 50% increase in yields which we haven't factored into our valuation yet. Furthermore, we haven't considered any production from existing 2C resources (e.g. Marigold/Sunflower) or any potential acquisitions which may occur in the future. By management estimates, this can potentially increase production by another 8,000 bbl/day, bringing total production to 20,000 bbl/day. While this seems like a stretch of the imagination, it pays to keep them in mind when forecasting future revenues and valuations. Just to play around with the numbers, I've come up with a sensitivity analysis of possible annual EBITDA at different oil prices and daily oil production rates: Table 2: Hibiscus EBITDA at different oil price and daily oil production rates The left column represents different oil prices while the top row represents different daily oil production rates. The green column represents EBITDA at current daily production rate of 8,000 bbl/day; the orange column represents EBITDA at targeted daily production rate of 12,000 bbl/day; while the purple column represents EBITDA at maximum daily production rate of 20,000 bbl/day. Even conservatively assuming increased estimated annual ITDA of RM 500m (FY20: RM 318m), and long-term average oil prices of $50 (FY20: $60), the estimated Net Profit and P/E ratio is potentially lucrative at daily oil production rates of 12,000 bbl/day and above. 2C Resources Since we're on the topic of improved daily oil production rate, it bears to pay in mind the relatively enormous potential from Hibiscus's 2C Resources. North Sabah's 2C Resources alone exceed 30 mmbbl; while those from the yet undiagnosed Marigold/Sunflower fields also reach 30 mmbbl. Altogether, 2C Resources exceed 70 mmbbl, which dwarfs the 44 mmbbl of 2P Reserves we have considered up to this point in our valuation estimates. To refresh your memory, 2C Resources represents oil volumes which have been discovered but are not yet classified as "commercial". This means that there is reasonable certainty of the oil being recoverable, as opposed to simply being in the very early stages of exploration. So, to be conservative, we will imagine that only 50% of 2C Resources are eligible for reclassification to 2P reserves, i.e. 35 mmbbl of oil. This additional 35 mmbbl of oil represents an 80% increase to existing 2P reserves. Assuming the daily oil production rate increases similarly by 80%, we will arrive at 14,400 bbl/day of oil production. According to Table 2 above, this would yield an EBITDA of roughly RM 630m assuming $50 oil. Comparing that estimated EBITDA to FY20's actual EBITDA:
Hence, even conservatively assuming lower oil prices and higher OPEX/bbl (which should decrease in the presence of higher oil volumes) than last year, we get approximately the same EBITDA as FY20. For the sake of completeness, let's assume that Hibiscus issues twice the no. of existing shares over the next 10 years, effectively diluting shareholders by 50%. Even without accounting for the possibility of the acquisition of new oil fields, at the current market capitalization of RM 714m, the prospective P/E would be about 10x. Not too shabby. Future oil prices exceeding $50 and effects from coronavirus dissipating Hibiscus shares have recently been hit by a one-two punch from oil prices cratering from $60 to $30, as a result of both the Saudi-Russian dispute and depressed demand for oil due to coronavirus. This has massively increased supply and at the same time hugely depressed demand for oil (due to the globally coordinated lockdowns being implemented). Given a long enough timeframe, I fully expect OPEC+ to come to an agreement and the economic effects from the coronavirus to dissipate, allowing oil prices to rebound. As we equity investors are aware, oil prices are cyclical and are bound to recover over the next 10 years. When it does, valuations of O&G stocks (including Hibiscus's) are likely to improve as investors overshoot expectations and begin to forecast higher oil prices into perpetuity, as they always tend to do in good times. When that time arrives, Hibiscus's valuations are likely to become overoptimistic as all O&G stocks tend to do during oil upcycles, resulting in valuations far exceeding reasonable estimates of future earnings. If you can hold the shares up until then, it's likely you will make much more on your investment than what we've been estimating. ConclusionWrapping up what we've discussed so far, we can conclude that Hibiscus's market capitalization of RM 714m far undershoots reasonable estimates of fair value even under conservative assumptions of recoverable oil volumes and long-term average oil prices. As a value investor, I hesitate to assign a target share price, but it's safe to say that this stock is worth at least RM 1.00 (current: RM 0.45). Risk is relatively contained and the upside far exceeds the downside. While I have no opinion on the short-term trajectory of oil prices, I can safely recommend this stock as a long-term Buy based on fundamental research. [link] [comments]  | ||||||||||||||||||||||||||
| A Conversation with Charlie Munger and Michigan Ross - 2017 Posted: 07 Apr 2020 03:35 AM PDT | ||||||||||||||||||||||||||
| Pershing Square Capital 2019 Annual Report Posted: 06 Apr 2020 04:28 PM PDT | ||||||||||||||||||||||||||
| Posted: 06 Apr 2020 10:08 PM PDT I have been attracted to tanker stocks recently following recent events in the oil market. The basic thesis:
These combined factors have led to exploding charter rates which should lead to nice Q1 and Q2 earnings. However, I recognize that tanker stocks are generally a bad long term investment (just look at the share price chart of any tanker stock) and this will be a short term investment: Let's say sell after Q2 results. After doing some basic analysis on financials and valuation you can see that nearly all trade below book value and have significant debt (2.5x – 8x EBITDA). Generally, I would have preferred to invest in an ETF here since I think it is hard to make a good call on management and capital structure but I couldn't find an ETF so let's have a quick look at individual names: I have grouped tankers into 3 categories (big crude, mixed and product) based on the size of tankers (e.g. VLCC, Suezmax, Product Tankers). However, my understanding is that rates for various types tend to generally move together while fluctuating on a day-to-day basis. Frontline (mixed): The chairman and 40% owner of Frontline John Fredriksen is a billionaire so clearly they know what they are doing. However, valuation is rather high (price / book) and based on a short review of the annual report there are some significant related party transactions with other entities owned by the Fredriksen. I decided to pass here Euronav (big crude / mixed): Looked most solid given size and relatively low leverage. Governance looks good with dividend policy in place. Slight premium seems reasonable. International Seaways (mixed): Valuation seems attractive compared to other mixed players. Looks overlevered based on interest coverage – however, they recently announced refinancing reducing interest expenses by 25%. Went long – boom or bust this is a short term trade DHT (big crude): VLCC pure play likely benefiting from storage demand for large crude tankers. Governance ok and some premium warranted. Also announced some nice long-term charters Teekay (mixed): Decided to pass despite low valuation and nice youtube market updates. I didn't like the additional complexity through the Teekay structure and related transactions DSST (mixed / product): Looks overlevered but trading at significant discount to book. Governance looks ok. Scorpio (product): Invested here, but clearly overlevered and I actually do not like the governance structure (insider majority in board, related party dealings). However, the chairman bought call options. NAT (mixed): Looks relatively expensive with no VLCC exposure. Governance ok Although I have looked at tankers before, I am definitely no expert in this sector. However, the basic thesis seems reasonable and I will keep following this for a few quarters. Risks:
Please comment, looking for additional insight in this space! Also, I started a blog to capture my thoughts: https://valueinstocks.com/tanker-stocks-overview/ Totally newbie in blogging, so please let me know if you have any tips! [link] [comments]  | ||||||||||||||||||||||||||
| Big Short's Michael Burry joins Twitter with pleas to end COVID-19 lockdown Posted: 06 Apr 2020 04:35 AM PDT | ||||||||||||||||||||||||||
| Implenia AG – Unrecognized Real Estate Value with near-term Catalyst Posted: 06 Apr 2020 11:48 AM PDT Summary
Introduction Implenia is a swiss construction and construction services company that operates in four segments: buildings, civil engineering, specialties and development. Division buildings focuses on the integrated conception and construction of complex new buildings, as well as the modernization of existing properties. The division is the second biggest by revenue and EBITDA (CHF 2,242 million and CHF 51.5 million). Civil engineering encompasses tunnel construction, special foundations and Implenia's regional business, which includes road and railway construction. Division civil engineering is positioned to profit from the mobility and infrastructure investment megatrends. Civil engineering is the biggest division by revenue and EBITDA (CHF 2,300 million and CHF 77.2 million). Division specialties brings together Implenia's niche services, including timber construction, formwork, facade and prestressing technology, energy management and construction logistics. The range of activities also includes integrated gravel, concrete and bitumen plants, interior construction, and an innovation hub that acts as an accelerator for new services. This division is the third largest by revenue and the smallest by EBITDA (CHF 242 million and CHF 19.2 million). The development division specializes in value-oriented development of properties and sites. Land is acquired in Switzerland's premium locations and properties are developed into residential real estate, offices and hotels. Currently this division operates mainly in Switzerland, but the goal is to expand beyond the home market. This is the smallest division by revenues and the third largest by EBITDA (CHF 133 million and CHF 44.5 million). It also operates with the least amount of employees out of all the divisions by a wide margin (76 employees in development out of 10,168 employees total). The focus of the investment thesis will be on the value inherent to the real estate portfolio of this division. The company experienced major operational challenges in its international business in 2018, resulting in a big hit to profitability (reducing EBITDA from CHF 174 million in 2017 to CHF 89.7 million in 2018), due to value adjustments of CHF 70 to CHF 90 million as a result of one-time write-downs. Consequently, the dividend was cut from CHF 2.00 per share in 2018 to CHF 0.50 per share in 2019. Although the company claimed that the issues were isolated to certain international projects and the loss of profitability was a one-time effect, the stock price declined more than 66%, from CHF 80 per share in mid 2018 to CHF 26 per share in mid 2019. After showing a stabilization of earnings in the first half of 2019 and confirming EBITDA guidance of CHF 150 million, the stock price rebounded to around CHF 40 per share. It stayed around there for a while before going to CHF 50 per share in February 2020 after presenting full year results and plans to spin-off the real estate portfolio associated with the development division. The stock price has recently fallen with the rest of equity markets to CHF 34 as of April 3. With concrete plans for the spin-off of the real estate portfolio in place, the risk/reward appears to be even better than it was in mid 2019. Spin-off of Real Estate Portfolio The real estate assets are currently valued at historic acquisition costs of CHF 189 million on the balance sheet. According to an independent real estate consulting and valuation firm, Wüest Partner AG, the actual current market value is more than CHF 600 million. In June of this year Implenia intends to spin-off 50% of the real estate assets at a market value of approx. CHF 300 million into the newly founded Ina Invest AG. Shareholders have voted and approved a special distribution by way of dividend in kind at the recent General Annual Meeting on March 24. Implenia shareholders will receive one share of Ina Invest AG for every five shares of Implenia. Source: Information brochure for Implenia shareholders After the spin-off, Ina Invest will hold a portfolio of high-quality real estate assets in prime locations across Zurich/Winterthur, Basel, and Lake Geneva. The transferred development projects are mostly residential real estate (54%), Offices (31%) and Hotels (9%). Source: Information brochure for Implenia shareholders The transaction is supposed to crystalize the true value of the real estate portfolio and create immediate revaluation gains for Implenia shareholders of over CHF 200 million (CHF 94.5 million real estate book value compared to estimated market value of CHF 300 million) with potential future revaluation gains for the retained assets that will likely be transferred at a later point as well. Concurrently to the spin-off Ina Invest will raise new equity of approx. CHF 100 million. Implenia shareholders will receive non-tradeable subscription rights to acquire the new shares of Ina Invest. Swiss Life Group, the biggest life insurer in Switzerland, intends to acquire a significant stake of up to 15% in the new company. Here's the timeline of events as it currently stands: Source: Information brochure for Implenia shareholders At the current share price of CHF 33.50, as of market close on April 3, the company is valued at CHF 618 million. I don't include the net cash position of over CHF 200 million in my enterprise value calculation, because I assume that the cash is tied up in operations due to the working capital dynamics in the construction business. I also disregard potential dilution from the subordinated convertible bond due for repayment in June 2022. The bond is convertible into 2.3 million shares at a price of CHF 76.05. Not a single conversion has been exercised since the issuance of the bond in June 2015. After adding minority interest of CHF 28 million, the enterprise value is CHF 646 million. If the real estate assets are in fact worth over CHF 600 million, you're getting the core business for CHF 46 million, a fraction of EBITDA. Obviously, the basic thesis is predicated on the real estate assets being actually worth CHF 600 million or more than 3x book value. How do we know that's right? One way to find out is to look at the actual real estate sales closed by the company in the past. I've gone back and looked at all the real estate transactions disclosed in the annual reports since 2014. On average sales have been closed at a 100% premium to the carrying amount on the books. Applying the premium from historic transactions to the current assets, values today's real estate portfolio at about CHF 378 million. However, since the current real estate portfolio is comprised of only the highest quality assets in terms of property and location, it's not unreasonable to assume a higher market value compared to past sales. It's likely the portfolio was purposely distilled down to the best assets by selling of the lower quality properties and retaining the best ones. Nonetheless, in order to be conservative, I will assume different premiums to book value in my valuation. But first let's look at the value of Implenia's core operations after the spin-off is completed. Full year 2019 EBITDA was CHF 186.77 million, plus one-time cost associated with the issues in 2018 of CHF 20 million, less half of the EBITDA contributed by the development division that will be spun-off, equals a post spin normalized EBITDA of CHF 184.52 million. Historically the company has traded at 6.11 times EV/EBITDA going back to 2009, some European comps are trading at 8 times EV/EBITDA. Putting a 5 to 7 times multiple on the normalized EBITDA and subtracting minority interests and the transferred book value of the real estate assets, translates to an equity value per Implenia share of CHF 43.33 to CHF 63.31 for the core business. As for the real estate value, I assume different premiums to book value in my valuation: i) 3.17 (Wüest Partner AG), ii) 2.00 (based on historic transactions) and iii) 1.00 (assigning no premium to book value at all). Further, I consider a revaluation of transferred as well as retained assets. Applying the different premiums, I arrive at an equity value per Implenia share for the transferred assets of CHF 5.12 to CHF 16.24 and a potential revaluation gain for the retained assets of CHF 5.12 to CHF 11.18. The sum of the parts analysis shows a band of plausible valuations, ranging from CHF 48.45 to CHF 90.68 per share, depending on your combination of assumptions about the EV/EBITDA multiple for the core business, the premium for the real estate assets and whether you apply a premium to the retained assets as well. Even with the most conservative assumptions (that can still be considered plausible) you end up with significant upside from the current share price. The mean target is CHF 69.27, implying more than 100% upside from the current share price. Conclusion In conclusion, the current setup looks like a promising risk/reward opportunity with potential upside of more than 100% and limited downside due to the hard asset value of the real estate portfolio. Additional upside may come from EBITDA margin expansion (currently 4.22% compared to mid-term guidance of 6.25% to 6.75%) and the increased capacity for cheap financial leverage in the new entity. Due to the its low equity ratio and the working capital dynamics in the construction business, Implenia has been constraint in the amount of debt it could employ. Ina Invest will be able to take better advantage of the zero-interest rate environment to accelerate the acquisition and development of new projects. In its core business, Implenia is well positioned to profit from megatrends in urbanization, mobility, and infrastructure development. But all of that is additional optionality. For the investment thesis to work out you only need to believe a very conservative set of assumptions. As of today, a lot of details about the rights offering aren't available yet. I especially hope to get more information about insider participation. According to Implenia's head of investor relations, an official prospectus will be published about the spin-off and the rights offering by Credit Suisse (underwriter) in the next weeks. Once it's available I will do a follow up post. https://concentratedcapital.com/implenia-ag-unrecognized-real-estate-value-with-near-term-catalyst/ [link] [comments]  | ||||||||||||||||||||||||||
| Wedgewood Partners Q1 2020 Letter Posted: 06 Apr 2020 10:03 AM PDT | ||||||||||||||||||||||||||
| Jamie Dimon 2019 Annual Letter Posted: 06 Apr 2020 10:02 AM PDT | ||||||||||||||||||||||||||
| Posted: 06 Apr 2020 11:04 AM PDT | ||||||||||||||||||||||||||
| The Prudence of the Superfluous Man[ager] Posted: 06 Apr 2020 02:17 PM PDT This is just kind of a self-serving rambling, but I'd like some feedback so bare with the shitpost. Pretty much all of the managers that are idolized by careful or ambitious investors are getting their teeth kicked in right now. Buffett is getting reamed on airlines and oil, no one knows what exposure Marks and Oaktree have to shit loans, RenTech lost big, and Dalio is going through the same thing Keynesians were in 70s. Maybe social distancing is making me lose it, but the only way to make sure you don't lose is to make sure you're never widely celebrated. If the disclosure of your portfolio positions don't regularly cause deep discomfort in the stomachs of the public, you're going to be exposed to the same risk as someone taking no precautions. And the person that is doing that isn't going to rise through the ranks of IBs or hedge funds to manage large sums of money unless they were already wealthy. The managers people should be seeking out should be trimmed from the ranks of companies before they can provide their benefit. And then after they do have their moment, like Themistocles or Petraeus, they end up self destructing. The very thing that allowed them to avoid the societal delusion is diminished while their faults are still alive and well. Meanwhile the lessons that should be learned from their action is codified into law as regulators perpetually try to fight the last war instead of looking at why the mispricing was noticed by a few people. TLDR: The prudence required to run money happens in people that lack prudence in the areas required to rise to the top of a financial institution. ps: pls don't perform Freudian analysis on me lol [link] [comments]  |
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