Oil Price Stability And Brunei Expansion May Counter Revenue Decline And Margin Pressures

Key Takeaways

• Strategic acquisitions and expansion into Brunei are expected to boost production, reserves, and revenue, enhancing overall net margins.
  
• Strong cash flow and cash position enable share buybacks and potential dividend hikes, driving higher earnings per share and investor returns.
  
• Operational inefficiencies, unfavorable currency impacts, oil price uncertainty, and financial strain from high CapEx threaten Hibiscus Petroleum's revenue and margin growth.

Catalysts

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

• Expectation of oil prices remaining between $70 to $80 due to geopolitical factors, which should stabilize revenue from oil sales and improve net margins with efficient cost management.
  
• Completion of major maintenance activities suggests improved production efficiency and higher revenue streams moving forward, likely boosting earnings and cash flow.
  
• Expansion into Brunei with increased production from new acquisitions is set to significantly increase total production and reserves, positively impacting overall revenue and net margins.
  
• Successful completion of ongoing projects, such as SF30 Water Flood Phase 2 and future Teal West development, promising higher production and asset value, thereby enhancing earnings potential.
  
• Strong cash flow generation and cash position allow for continued share buybacks and possible dividend increases, which should lead to higher earnings per share (EPS) and provide additional investor returns.

Hibiscus Petroleum Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hibiscus Petroleum Berhad's revenue will decrease by -2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.9% today to 15.8% in 3 years time.
• Analysts expect earnings to reach MYR 359.7 million (and earnings per share of MYR 0.44) by about February 2028, down from MYR 388.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR528.2 million in earnings, and the most bearish expecting MYR160.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, up from 3.6x today. This future PE is lower than the current PE for the MY Oil and Gas industry at 10.0x.
• Analysts expect the number of shares outstanding to grow by 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Hibiscus Petroleum Berhad Future Earnings Per Share Growth

Risks

• Planned maintenance activities and production inefficiencies, including delays in restarting equipment, led to a 17% drop in production and an increase in operational expenses per barrel, which could negatively impact both revenue and net margins.
  
• Unfavorable currency exchange rates resulted in unrealized foreign exchange losses amounting to MYR 20 million pretax and MYR 11 million post-tax, which negatively impacted their earnings.
  
• There is uncertainty regarding oil prices, with realized prices dropping by 7% which, despite the company's hopeful outlook on oil prices, could affect revenue if prices do not stabilize or rise as expected.
  
• Increased competition and market dynamics, including bearish sentiments in the oil and gas sector, could create pressure on operational margins and revenue growth, as evidenced by low P/E ratios relative to service companies in the same sector.
  
• High CapEx commitments and potential for debt due to recent acquisitions and future projects could strain cash flow and earnings if anticipated revenue and cash flow targets are not met.

Valuation

• The analysts have a consensus price target of MYR2.41 for Hibiscus Petroleum Berhad based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR3.4, and the most bearish reporting a price target of just MYR1.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR2.3 billion, earnings will come to MYR359.7 million, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of MYR1.84, the analyst's price target of MYR2.41 is 23.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.