Small Trading Upside On Tanker Market Recalibration
The recalibration of crude flows due to recent geopolitical events and the expected
return of Iranian and Venezuela crudes in the medium term may offer some support on
a gradual tanker recovery. We raise forecasts by 5% and expect trading upside as
MISC’s petroleum fleet may be a beneficiary. Global bonds are expected to support
capex and refinancing, while MISC had enhanced decarbonisation targets and
greenhouse gas disclosure. Maintain HOLD with a higher target price of RM7.15.
WHAT’S NEW
• Geopolitical events may support certain segments of tanker earnings. The sanctions
arising from the Russia-Ukraine conflict is expected to impact most of the 3.2m bpd of
Russian crude exports that travel by sea. While tanker markets may take months to
recalibrate the trade routes, the rush for energy security especially from crude importers like
Europe, have pushed up US crude demand to substitute for sanctioned Russian cargoes.
Very Large Crude Carriers’ (VLCC) earnings have improved but still incur losses on spot
routes; however the smaller Aframax and Suezmax segments exposed to the US Gulf routes
benefitted the most from this. Aframax spot rates in those longer-haul routes were last heard
to have improved significantly to US$37,000-47,000 per day.
• We turned slightly more positive given MISC’s dominant exposure in Aframax fleet.
MISC operates 28 Aframaxes (out of 59 for petroleum) and most of the Aframaxes serve in
the US Gulf region. Even though the spike on tanker rates due to Russia sanction may be
short-lived, an early return of Iranian and Venezuela crude barrels may further support
tanker demand. Still, industry tanker recovery will remain gradual for 2022. This comes amid
higher bunker fuel costs, and potential oil demand disruptions from China’s COVID-19
lockdowns and higher inflation pressures.
• Key updates from 2021 Annual Report (AR). As per guidance in MISC’s 4Q21 briefing,
approximately 83%/72% of MISC’s long-term/total borrowings of RM8.7b/RM17.0b in 2021
are of fixed rates. The AR also revealed that a RM3.0b term loan was reclassified to current
liability as certain conditions were not fulfilled. This is the outstanding loan for a significant
local offshore platform that started the 25-year charter since Oct 14. The condition requires
“quiet enjoyment consent” from the client, and this was impacted by the ongoing litigation
with the client on cost disputes that started since 2016.
• We understand this is not a financial covenant default even though accounting
standards mandate the change. The client continues to pay the charter, given that the field’s
production remains healthy, while a Phase 3 expansion on the field is also underway. A key
risk however, is that the banks may choose to exit the financing. Channel checks suggest
that such conditions are typical for long-term charters (including FPSO).
• We assume a small financial risk on the project, even if the litigation prolongs. As
mentioned, repayment remains uninterrupted, and this can be observed as the loan has
been reduced from the initial amount of US$1.1b (RM4.7b) in 2015. In the event that the
financiers choose to “exit”, MISC stated it has available options to refinance the RM3b loan.
Recently, its subsidiary MISC Capital Two Labuan issued US$1b bonds into the market, split
into a three-year US$400m and a five-year US$600m respectively.
• This is the first drawdown from a US$3b unsecured global bond programme, intended
for capex and refinancing of existing loans, which we think may include the bridging loan of
FPSO Mero-3. Assuming none of the bonds are used for refinancing/retained as cash, the
secured debt portion from 76% in 2021 may drop to 58% (according to Moody’s), and net
gearing may surge to 39% at our 2022 forecast. We largely expect peak gearing in 2022 as
Mero-3 approaches the tail-end of construction, before a target divestment to potential equity
partners (to 50% stake) by 2023.
• Stepped up on ESG roadmap. Its 2021 sustainability report estimates an emission
reduction pathway to involve: a) 42% from liquefied natural gas (LNG) and petroleum
shipping, via fleet renewal plans and carbon removal technology, b) 46% from offshore
platforms with low-carbon emission and higher renewable energy, and c) 12% from “offset”
via nature-based solutions (like mangrove rehabilitation). Although the fleet renewal plan is
not mentioned, >30% of MISC’s fleet may approach 15 years old and may not comply with
tougher green shipping regulations. It is expanding emission reporting from just assets within
operational control (previously no disclosure from offshore division). The new disclosure is
more detailed, including indirect (Scope 3) emissions to cover for assets that are: a) in chartered or leased to other parties, b) of minority ownership, and c) of short-term leases.
EARNINGS REVISION/RISK
• Increased 2022-24 earnings by 4-5%, after slight upgrades in average tanker rates and
adjustments to offshore earnings. We expect small losses in petroleum for 2022, followed by
a stronger recovery from 2023, assuming tightening global tanker tonnage as older vessels
which are unable to comply with green shipping regulations will likely be retired.
VALUATION/RECOMMENDATION
• Maintain HOLD, raise target price to RM7.15 (from RM6.75), implying 21x 2022F PE (at
+1SD of five-year average PE band). We raised per-share petroleum valuation from RM1.21
following higher P/B from 0.7x, partly offset by higher net debt (LNG loans increased yoy
from RM3b to RM5b). Offshore equity increased yoy, though offset by a 15% discount on
Gumusut due to litigation uncertainties. EBITDA and dividends are expected to be stable.
Despite retaining HOLD, we see a possible trading upside to RM7.75 (which assumes
petroleum P/B re-rating to 1x) if near-term crude tanker rates continue to be strong.