Highlight Hibiscus share slumps after failure to get commercial oil in Oman; Credibility/technology issues in focus

by **Cals** Thu 26 Dec 2013, 18:01

Highlight Hibiscus share slumps after failure to get commercial oil in Oman; Credibility/technology issues in focus

Business & Markets 2013

Written by Ho Wah Foon of theedgemalaysia.com

Thursday, 26 December 2013 16:20

KUALA LUMPUR (Dec 26): The bad news that Hibiscus Petroleum Bhd’s associate and partners have failed to extract commercial oil in Oman has caused its share price to slump to a three-month low today.

At 3.17 pm today, the stock plunged 31 sen or 17% to RM1.53 after hitting a low of RM1.40 or a loss of 24%. Its warrant Hibiscus-WA also lost 33 sen or 23% to RM1.02, after touching a low of 94 sen. Both were in the list of top five losers on the stock exchange.

But the damage caused to this SPAC (Special Purpose Acquisition Company) is not just the 24% plunge in its share price and a possible write-off of some RM50 million; it is also its credibility.

Indeed, days before its trading halt on Dec 23 pending a “material announcement”, Hibiscus share had already fallen by 28%.

“The Hibiscus management will have to rebuild credibility with investors. It is clear that there was heavy selling in the week before the announcement,” a fund manager told theedgemalaysia.com.

“The company’s share price has seen some sharp declines recently, likely due to an expectedly material announcement which was anticipated to be earnings enhancing but which has turned out otherwise -- emblematic of SPAC-type listings which may or may not be successful in its acquisition and or execution strategies,” commented Public Investment Bank.

In addition, the RVD technology used by Rex International Holdings Bhd – the partner of Hibiscus in the Oman project – could also be an issue of debate.

The bad news announced on the quiet evening of Chrismas Eve was that Masirah Oil Ltd, a jointly-controlled entity of Lime Petroleum Plc (Hibiscus’s associate company), suspended its first exploration well (MNN #1) in Oman 50 Block on Dec 19 “for safety reasons”.

This announcement by Hibiscus added that the MNN#1 well was drilled to about 1,000 metres below mean sea level. But mud losses in two carbonate sections of the well prevented Masirah Oil from reaching its targeted depth.

“A comprehensive data acquisition, coring and logging programme of the formations that were drilled was completed on Dec 21. Data analysis indicates presence of non-commercial hydrocarbons,” said Hibiscus, without stating any loss to the company.

But Public Investment Bank estimated the suspension of this drilling program (MNN#1) could cause some RM50 million being written off from Hibiscus.

To mitigate the negative impact of the news, Hibiscus also said on Dec 24 that the information acquired has assisted all partners in the Oman Block 50 project to identify a second exploration well as the next drilling location. “It is anticipated that drilling at this location will commence within the next two weeks”.

But obviously this more “positive” second information did not help the stock much.

Indeed, in anticipation that technology could be an issue of concern, Hibiscus Petroleum’s managing director Dr Kenneth Pereira added on Dec 24: “The RVD technology has been tested exhaustively on 41 locations in Norway and has performed successfully on 40 occasions.”

“The results of these tests are in the public domain. It is a tool that is and will continue to drive a great deal of growth in Lime Norway and is expected to do the same elsewhere for us and our partners, Rex International Holdings.”

But a detailed analysis of Rex International Holding by DBS Group Research on Dec 23 suggests that investors should be mindful of the Rex technology. It said in its report:

“Rex Technologies has not led to successful well yet. To date, the group is yet to drill a well based on location arrived at after using Rex Technologies suite of software… However, we would like to point out that the technology has had 85% success in predicting drilling results.

“Rex Technologies may not work if data is inaccurate. The accurate use of Rex Technologies depends on the quality of raw seismic data, which may not be always verifiable beforehand.

“Given that this is the first offshore well Rex would be drilling with the use of its Virtual Drilling technology, significant failure to find oil here could dampen investor sentiment.”

Hibiscus Petroleum acquired a 35% stake in Lime for US$55 million as its Qualifying Acquisition in April 2012 due to its portfolio of assets and access to Rex Virtual Drilling (RVD) Technology.

The block 50 Oman concession is jointly owned by Lime with a 64% stake and Petroci Holdings, a national oil company of Ivory Coast which holds the remainder of the 36%.

The Block 50 Oman concession is estimated to have risked resources of almost 390 million barrels of oil based on the Q4 2011 study by an independent petroleum sub-surface consultant, Aker Geo AS of Norway, according to DBS Group Research.