Rising Decommissioning Costs And Regulatory Risks Will Drain Value

Key Takeaways

• Heavy reliance on mature oil and gas assets and minimal diversification exposes the company to market, regulatory, and sustainability risks.
  
• Anticipated declines in oil demand, stricter ESG standards, and high decommissioning costs threaten future margins and cash flow stability.
  
• Strong reserves growth, disciplined cost management, and strategic diversification position the company for sustained production, revenue, and earnings stability despite a volatile oil market.

Catalysts

Engages in the exploration, development, and sale of oil and gas.

• Despite Hibiscus Petroleum's recent strong reported cash flows and reserves extension, the accelerating global transition to renewable energy and the rapid uptake of electric vehicles threaten to undermine long-term oil and gas demand, setting up a secular decline in revenue and potentially stranding newly acquired reserves over the next decade.
  
• The company's dependence on mature, declining fields in Malaysia and the UK North Sea now extended through the PM3 CAA and other clusters exposes Hibiscus to rising decommissioning costs and falling production volumes, which will pressure net margins and elevate capex requirements, impairing long-term earnings growth.
  
• Heavily overweight in upstream oil and gas and with limited diversification into lower-carbon or renewable businesses, Hibiscus is especially vulnerable to stricter ESG regulations and heightened carbon taxes, both of which are expected to raise compliance costs and restrict access to capital, squeezing margins and cash flow.
  
• Sustained bearish pressure on oil prices from global oversupply or weakening demand, combined with high headline tax rates (ranging up to 78% in the UK and 55% in Brunei), will make it increasingly difficult for Hibiscus to maintain historical EBITDA margins above 50%, leading to more volatile earnings and reduced dividend-paying ability.
  
• Large-scale, long-dated production ramp-up plans in Malaysia and Brunei assume stability in regulatory and fiscal regimes, yet political and regulatory risks remain high; any adverse changes could necessitate asset write-downs, depress revenue projections, and increase the probability of impairments, directly hitting the bottom line.

Hibiscus Petroleum Berhad Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hibiscus Petroleum Berhad compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hibiscus Petroleum Berhad's revenue will decrease by 11.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.2% today to 9.7% in 3 years time.
• The bearish analysts expect earnings to reach MYR 162.6 million (and earnings per share of MYR 0.21) by about July 2028, up from MYR 151.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.3x on those 2028 earnings, down from 7.6x today. This future PE is lower than the current PE for the MY Oil and Gas industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.6%, as per the Simply Wall St company report.

Hibiscus Petroleum Berhad Future Earnings Per Share Growth

Risks

• The 20-year extension of the PM3 CAA Production Sharing Contract will add 26 million barrels of reserves and contingent resources at zero consideration, supporting significant long-term production growth and directly enhancing future revenue streams.
  
• Operating cash flows increased by 144% year-on-year, reaching over MYR 1.5 billion for the most recent nine-month period, demonstrating robust cash generation that strengthens both reinvestment capacity and potential earnings stability.
  
• Hibiscus has maintained exceptionally high EBITDA margins-comfortably above 50% across all major assets-despite lower oil prices and timing effects on crude sales, indicating underlying cost discipline that can protect and improve net margins over the long term.
  
• Strategic acquisitions, including the Brunei asset, are delivering material benefits, with Brunei now contributing 23% to total quarterly revenue and full-year contributions expected going forward, thus enabling additional earnings and production diversification.
  
• The company's reserves replacement ratio of 231%, set to rise to 267% with the PM3 extension, far exceeds industry averages and implies ongoing ability to increase production and sales, providing a foundation for sustained revenue and potential profit growth.

Valuation

• The assumed bearish price target for Hibiscus Petroleum Berhad is MYR1.53, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hibiscus Petroleum Berhad's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR2.72, and the most bearish reporting a price target of just MYR1.53.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MYR1.7 billion, earnings will come to MYR162.6 million, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of MYR1.57, the bearish analyst price target of MYR1.53 is 2.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.