Hibiscus, Sabah govt issue will take time to resolve, says HLIB

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KUALA LUMPUR: There could be lengthy negotiations ahead as Hibiscus Petroleum Bhd and the Sabah state government attempt to resolve the impasse over the payment of Sales and Service Tax (SST) in the state.

According to Hong Leong Investment Bank (HLIB) research analyst Jeremie Yap, who attended a briefing conducted by Hibiscus, the oil producer seems unwilling to budge on the issue.

"Post-briefing, we came to an opinion that the entire debacle will require more time to solve and is inconclusive at the moment, pending further negotiations with the Sabah state government," he reported in a briefing update.

"From the tone of the key management team throughout the entire discussion, Hibiscus sounded rather bent on assessing its options rather than caving in to pay the SST.

"The group views the total sum of about RM70mil to be paid annually to be a pretty hefty sum (based on the assumption of US$100/boe lifting price) as it can be used in other meaningful ways."

As reported previously, the Sabah state government has demanded that Hibiscus pay a total sum of RM97.3mil comprising of RM66mil in SST and RM31.3mil in late-payment penalties.

Hibiscus has not paid SST for its North Sabah assets since the implementation of the tax in April 2020 and recently announced that its newly owned FIPC Kinabalu assets will not continue to pay SST under protest.

Following the analyst briefing, Yap said the company's leadership were emphatic that they have received written advice from its legal advisors that support the argument that it is exempt from the SST.

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Hibiscus has argued that the oil, while extracted and produced in Sabah, is sold in Labuan, which lies beyond the jurisdiction of the Sabah state government.

Hibiscus is the only company landing oil in Labuan, which has a maritime border and jurisdiction of its own.

Furthermore, Hibiscus claimed the RM66mil tax bill stemming from non-payment for the North Sabah oilfield is far off the actual figure, although it did not specify the exact sum, according to Yap.

On the issue of the Sabah state government threatening to revoke work permits to Hibiscus subsidiaries Repsol Oil & Gas Ltd and SEA Hibiscus Sdn Bhd in the event of non-payment, Yap said the group expects operational hiccups to occur should they be terminated.

Nevertheless, about a quarter of the Hibiscus workforce are Sabahans, who will not be affected by the termination of the work permits as they only affect non-Sabahan workers.

"So, even on a worst-case scenario, there will not be a complete shutdown of operations assuming work permits are not renewed.

"However, the group expects capex and maintenance planning to be deferred and delayed if this problem persists in the long term," said Yap.

Following the update, Yap maintained a "buy" call on Hibiscus as it believes it to be conspicuously undervalued, but lowered its target price to RM1.54 a share after factoring in the heightened risk premium from the Sabah SST development.