More Potential Trading Upside On Contract Wins (LNG)
While surging tanker rates may have largely priced in current market expectations, we
believe contract wins could be the next leg of trading upside, akin to the 2019 case.
Petronas may have to decide soon on its 14 LNG newbuilds amid limited yard space.
This is not well-guided from MISC’s angle, as it is still subject to speculation and
competition. After evaluating market conditions, we raised our valuation for more
potential contract wins. Maintain HOLD, with adjusted target price of RM8.00.
WHAT’S NEW
• Petronas may have to decide soon on LNG newbuilds. Several articles from industry
shipping source Tradewinds highlighted the massive rush of LNG producers to secure the
limited yard space for new LNG ship deliveries. Petronas itself had been evaluating for the
past year for up to 14 of its LNG newbuilds between three Korean yards and a Chinese yard.
MISC is among the shortlisted nine shipowners. The dilemma for Petronas is only
increasing, as they require these newbuilds for fleet replacement, but berths are running out
for 2025/26 deliveries. At the same time, LNG newbuild costs surged to an all-time high
(>US$220m, vs US$185m yoy) owing to cost inflation. Charter rates and tenures are not
revealed. Please see table on next page for further details.
• Petronas LNG newbuilding potential is not explicitly guided by management or major
newsflows, except for Tradewinds. We believe this cautiousness may be due to: a)
uncertainties in capex and IRR, as costs have surged, and b) competition remains tight
given the decision for Petronas to evaluate nine shipowners for 14 vessels. Both Petronas
and MISC had signalled strong intentions to diversify the business for LNG. MISC had been
securing new contracts via non-Petronas charterers since 2019. Petronas had also
demonstrated the same by not prioritising MISC for LNG newbuilds. In 2021, the LNG
producer inked a long-term charter with Hyundai LNG for three newbuild 174,000 cbm
vessels, which are earmarked for 2Q24 delivery and to be used for LNG Canada’s cargo
exports. Petronas has chartered a fleet of 27 LNG vessels worldwide.
• Contract win potential may be the next leg for trading upside. While surging tanker
rates may be largely priced in (as per our previous note highlighting a trading upside to
RM7.75), we now believe the high tanker rate is sustainable, moreover the share price may
have yet to factor market’s speculation for the next contract wins. Historically, MISC had
traded at >RM8.00 in 2019, when the group’s bidding appetite was revealed to be as high as
US$4b for FPSO Mero-3 (Brazil) and LNG ships. Ahead of its 1Q22 results on 26 May 22,
management appeared to be less optimistic on guiding such new bidding appetite. But in our
view, the US$3m global bond programme (US$1m issued so far) is an indirect but strong
indication of future opportunities across LNG, FPSO and petroleum.
ESSENTIALS
• Traditionally, LNG ships support trades for long-term gas offtake agreements, although those contracts are entirely separate vs the charter agreements. As per our O&G sector report in Apr 22, the rush for energy security may give producers some leverage to negotiate for higher long-term LNG prices, unlike the past few years whereby buyers were demanding flexibility. The last long-term offtake prices by Qatar was done at 10% slope (ie proportion) to Brent prices in 2021, and Beijing Gas at <13% to Brent in Jan 22. Under oil price parity, oil-linked LNG prices are usually locked in coefficients of 10-17% to Brent. If future long-term LNG prices are locked in at >17% to Brent, it may imply the return of US$20/MMBtu in pre-2014 periods (vs the low of US$4-5/MMBtu). Potentially, the corresponding LNG charter agreements can afford higher rates/IRR.
• MISC will need the fleet replacement for as many as 13 LNG vessels (out of 30), whereby the long term charters will expire in 2023-27. Out of these, about 10 vessels are of 130,000 cbm capacity and running on steam turbines, which means they are obsolete and the likelihood of recharter is low. Although we have no details on the exact dates, if we assume the ship expiries are timed closely with the offtake expiries in Bintulu terminals and Petronas’ portfolio contracts (as per O&G sector report), the expiries may be spread at 3/5/2/3 for 2024-27 respectively. This means up to eight will need to be ordered now for 2025 deliveries, to ensure no net fleet reduction. Our rough back-of-envelope calculations suggest a LNG ship (US$200m capex) with a 15-year charter and 9% IRR offers DCF upside of RM0.15/share, although the real IRR/capex is still uncertain at this point.
• Raised new contract win potential to RM1.10/share from RM0.50/share. Our previous assumption (excluding FPSO Mero-3, under its own separate segment) is now too conservative, given that MISC should be benefiting on tightening LNG and FPSO markets, while green shipping is increasingly crucial. Our new assumption is a base case of four LNG newbuildings (>US$200m) under long-term charters, and more contract potential from FPSO and petroleum (AET) division. MISC is competing with Yinson and Bumi Armada on FPSO bids like Cameia (Angola). Similarly, AET is expected to secure contracts like the long-term shuttle tankers, in order to meet its 2025 target of long-term EBITDA mix of 73%. MISC is evaluating other LNG producers’ offers and other gas vessel types.
EARNINGS REVISION/RISK
• Increased 2022F earnings by 10%, leaving other forecasts unchanged. Although industry tanker rates may still gradually recover, we now view that MISC’s predominantly Aframax-heavy fleet will enjoy a more decent recovery for 2022 and assume profit position for petroleum (vs small loss in previous 2022F forecast). We account that the tankers will continue to benefit from the upcoming 1m bpd US strategic petroleum reserve release effective May 22, which may be attractive to Asian refineries due to the price differentials to Brent. We also account recent tanker M&A trends like Frontline-EuroNav M&A (combined global fleet of 67 VLCC), which will hasten the industry’s consolidation and improve breakevens.
VALUATION/RECOMMENDATION
• Maintain HOLD, new target price of RM8.00 (from RM7.15), implying 21x 2022F PE (at +1SD of five-year average PE band). We raised petroleum valuation from RM1.64 following higher P/B to 1.1x (as we now expect tanker to be at profit position), and higher contract wins. These are partly offset by higher net debt as we factor in more bond proceeds, and an unchanged 15% discount on Gumusut due to litigation uncertainties (this may be a risk for the global bonds, if utilised to refinance the loans). The recent share price re-rating had largely factored in positive tanker sentiment. Having said, the strong tanker rates for MISC’s routes may appear sustainable, and like the 2019 case, we now see further trading upside to factor in potential new contracts. A bull case trading target price may be at RM8.90, which assumes MISC securing >50% of Petronas’ LNG newbuilding demand (>7 vessels).