Hibiscus plans to drill five wells

by **Cals** Sun 08 Mar 2015, 22:05

Hibiscus plans to drill five wells

Saturday, 7 March 2015
BY: CECILIA KOK

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Pereira: ‘We want to be able to participate in at least three offshore wells a year.

Junior O&G company to spend RM145mil on exploration works
HIBISCUS Petroleum Bhd has earmarked a total capital expenditure (capex) of about US$40mil (RM145mil) for drilling of five exploratory wells this year.
Of the total capex, the company says US$10mil will be allocated to drill four oil wells in Norway, while the remainder will be spent on drilling a unit in Australia. The expenditures are payable on a staggered basis over the year.
“For a small company, five wells (to work on in a year) is a very good number,” Hibiscus managing director Dr Kenneth Pereira tells StarBizWeek.
According to Pereira, Hibiscus will part-finance its capex requirement with funds raised from a proposed private placement. The exercise, which involves an issuance of up to 89.2 million new shares or 10% of its share capital, is expected to raise about US$25mil (RM90mil), Pereira says.
The company is set to embark on a fresh capital-raising exercise this year to finance its capex requirement and expansion programme. It will be seeking its shareholders’ approval for an additional 10% for private placement at its upcoming AGM that will be held in the second quarter of this year.
Hibiscus’ cash position stood at RM27.9mil as at end-December last year, compared with RM87.5mil at end-September 2014. Its cash position will likely deplete further, even after taking into account the proceeds from the placement, if the drilling programme is implemented as planned. Nevertheless the company remains confident that it will be able to tide through the situation.
Meanwhile, drilling works have already started in one of its assets in Norway under the licence PL338C, which is operated by Lundin Petroleum Norway AS in the North Sea. Hibiscus has a 30% participating interest in PL338C, which it acquired less than a week ago.
By June, Hibiscus says, drilling works will start in two other oil wells in Norway – PL591 and PL616, in which the company has participating interests of 25% and 5%, respectively – as well as its Australian asset called Sea Lion, in which it has a stake of 75%. And by November, drilling works will begin in another oil well licenced in Norway, PL708, in which Hibiscus has a participating interest of 10%.

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Focus on drilling
Hibiscus - which made its debut as a special purpose acquisition company, or SPAC, in 2011 before graduating into a junior oil and gas exploration and production company the following year – currently has assets spanning Australia, Norway and the Middle East.
In Australia, its assets are the West Seahorse field, where the field development plan has already been approved and VIC/P57, which contains the Sea Lion exploration area. Both are located offshore southeast the state of Victoria. These are held through its wholly owned subsidiary Carnarvon Hibiscus Pty Ltd. The group has a 100% stake in West Seahorse and 75% interests in VIC/P57.
Hibiscus’ portfolio of assets in Norway, encompassing 15 oil well licences, is held through its 35%-owned unit Lime Petroleum plc.
Through Lime, Hibiscus also has participating interests in two exploration wells in the Middle East, namely Oman Block 50 and Sharjah Offshore, in which the group has stakes of 22% and 35% respectively.
Hibiscus does not have any producing oil fields at the moment but had proposed to buy one.
Last year, the company proposed to buy into the Kitan oil field from Talisman Resources Pty Ltd in a deal worth US$18mil.
Located offshore Timor Leste, Kitan oilfield is currently producing 10,000 barrels of oil a day, which will translate into 2,500 barrels of oil as per Hibiscus’ 25% stake in the oilfield.
However, Pereira notes that with global crude oil prices in the doldrums, Hibiscus’ focus this year will remain on drilling activities, rather than oilfield development and production. This, he says, is to take advantage of the current low service rates, which have fallen by around 25% from a year ago.
Low costs
“Our idea is to do that which is cheaper now, given the limited capital that we have,” Pereira says.
“We reckon that we should take advantage of the recent decline in drilling costs by doing all the necessary drilling in our assets, especially in high-cost countries such as Norway and Australia, instead of development works that will only give us a very small margin (under the current low crude oil price environment),” he explains.
The breakeven price of oil production for Hibiscus varies according to different projects. As a benchmark, Pereira points to the average breakeven for production at West Seahorse in Australia at US$40-US$50 per barrel.
Global benchmark Brent crude oil is currently trading around US$61.50 per barrel, down from the 2014 peak of US$115 per barrel in June.
Hibiscus, which has spent around RM500mil to date to build up its portfolio of assets since making its debut four years ago, clarifies that it has not been significantly impacted by the recent collapse in global crude oil prices because the group has yet to start producing oil. In addition, it does not have much debt in its books.
Conversely, the collapse in global crude oil prices has brought about the positive effects of low drilling and seismic service fees that benefit Hibiscus. It has also made it easier for Hibiscus to acquire oil assets as larger oil and gas companies look to reducing their positions to minimise risk under the current environment.
“The current environment has allowed companies that are agile and could make decision fast (such as Hibiscus) to find good opportunities to partner with large companies by taking up equity stakes,” Pereira says.
Hibiscus has only responded to the slump in global crude oil prices by holding back its development plan for West Seahorse, which has proven reserves of eight million barrels of oil.
“For West Seahorse, we have re-tendered contracts for works on the field to take advantage of the current lower costs,” Pereira says.
The production cost of the West Seahorse field is estimated at US$150mil to be financed by debt and equity.
The company has already obtained approval for its field development plan and a production licence for West Seahorse. It is expected to begin production from the field only in the first half of 2017, when global crude oil prices are expected to strengthen to at least US$75 per barrel.
Hibiscus expects production at West Seahorse to be able to generate sufficient free cash flow for the group to fund at least three wells a year.
“We want to be able to participate in at least three offshore wells a year,” Pereira says, noting that he expects each well to be able to generate about US$30mil free cash flow for the group.
As for Hibiscus’ assets in the Middle East, drilling is scheduled to start at the Sharjah block latest by the first quarter of 2016, while appraisal work on the Oman Block 50 is still ongoing for the company to determine the optimal solution to produce oil from the field.
Hibiscus announced last March that it had discovered oil in its Oman asset after drilling the well at an approximate depth of 10,000 ft. A 48-hour test saw light oil flow to the surface at a rate of up to 3,000 stock tank barrels per day with no water production.
On Hibiscus’ exposure to Norway, Pereira says the company is attracted by the country’s incentive offered for exploration activities.
“The good thing about drilling in Norway is that the costs are part subsidised by the Norwegian government. It is an incentive that enables us to leverage our capital,” he points out.
Under the Norwegian Petroleum Tax Act, 78% of eligible exploration expenditure is reimbursed annually, regardless of whether production is achieved.
Cyclical factor
Hibiscus holds the view that falling oil prices are cyclical and the industry will be able to adapt to the current environment.
Going by consensus view, Hibiscus believes oil prices will rebound from the second half of this year onwards, noting that the market will eventually find an equilibrium, as global economic growth will boost demand, while current cutbacks by oil majors is already creating a future shortfall of the commodity.
“Once in a while, the industry will go through a ‘detox’ process,” Pereira says.
“There have been excesses built up over the years, so we need to go through a process to clean out these occasionally,” he explains.
The company notes that the industry estimate is that global oil prices will rebound to around US$60-US$65 per barrel in the second half of this year, before moving further upwards to US$70-US$80 per barrel in 2016 and US$85-US$90 per barrel by 2017.
For the financial year ended Dec 31, 2014, Hibiscus booked a net loss of RM28.9mil, or 4.16 sen per share, compared with a net profit of RM14.5mil, or 3.17 sen per share, in the preceding year. The losses were partly attributable to the group’s recognition of gain on the dilution of interest in HiRex (Australia) Pty Ltd from 100% to 41% and negative goodwill arising from subscription of shares in 3D Oil Ltd.
During the period in review, Hibiscus saw its revenue declined 16.7% to RM13.1mil from RM15.7mil in the previous corresponding period due largely to lower fees for project management, technical and other services from Lim arising from the completion of the drilling and testing programme in Block 50 Oman in March 2014.