The lower tanker shipping freight rates in particular for the liquefied natural gas (LNG) may affect MISC Bhd’s earnings for the remaining quarters of this year, said CGS-CIMB Research.
As Covid-19 has severely impacted demand for LNG, the rates have corrected significantly to their multi-year lows.
The firm said tanker rates had fallen in May and June mainly due to the Organisation of the Petroleum Exporting Countries (OPEC) and other producers principally Russia cut production by at least 10 million barrels per day (bpd) in an effort to restore oil prices.
The number of oil tankers engaged in floating storage has also declined as the oil price contango flattened and the gradual recovery in global oil demand.
The demand for floating storage declined due to the sharp recovery in spot crude oil prices.
The difference between the 12-month forward Brent price of US$44.90 per barrel and the spot price of Brent at US$42.50 per barrel is now only US$2.60 per barrel.
“As floating storage has a lot more room to decline, and as OPEC output cuts have been extended to end July 2020, we believe tanker earnings may remain weak for the rest of the year,” CGS-CIMB Research said in a report today.
CGS-CIMB said it was reported recently that Petrobras was closing its upstream contract, awarding MISC its first floating production storage and offload vessels (FPSO) job in Brazil for the Mero-3.
“This involves a 21-year firm contract for an FPSO that will be able to process up to 180,000 barrels per day of oil and 12m cubic metres per day of natural gas, commencing in 2024.
“Although MISC would celebrate its first major FPSO contract win after a long hiatus, we are cautious because of the high 40 per cent local content requirement for the Mero-3 project, and MISC’s relative inexperience in executing large FPSO projects, especially those abroad.”
Among the upside risks to CGS-CIMB “Reduce” call on MAiSC are the potential for tanker rates to exceed expectations in second-half of the year due to some unforeseen event, such as US sanctions on various countries’ tanker fleets, or if OPEC+ increases production to meet stronger-than-expected global demand later this year.
It added that MISC had relatively small exposure to short-term LNG vessel charters, with the Seri Balquis, Seri Balhaf, Seri Anggun and Seri Bakti on short-term charters.
However, it said 25 other LNG vessels were fixed on long-term charters.
“MISC will be exposed to lower spot LNG shipping rates once the four charters expire. The Seri Balhaf will expire at the end of second-quarter (Q2) of the financial year 2020, the Seri Balquis at end fourth-quarter of 2020, while the Seri Anggun and Seri Bakti charters will expire sometime during first-half of financial year 2021.”
In the crude tanker shipping space, CGS-CIMB said time-charter equivalent (TCE) rates had corrected significantly.
During the first-quarter of this year, it said MISC’s crude and chemical tanker shipping arm, American Eagle Tankers (AET) had spot exposure for 65 per cent of its 6 suezmaxes, 34 per cent of its 36 aframax fleet, and 3.0 per cent of its 14 very large crude carriers (VLCCs).
“With one VLCC coming off time charter only in Q2 and another one in the third-quarter this year, AET may have missed the sharp, but relatively short-lived super-spike in VLCC rates during March and April 2020.
“The relatively higher spot exposures in its aframax and suezmax fleets mean that AET may not do as well in subsequent quarters as it had in first-quarter when AET delivered a pretax profit of US$71 million.”
Traditionally, VLCCs are used as the primary vehicle for floating storage.
But as floating storage requirements spiked from mid-March, suezmaxes and aframaxes increasingly participated in floating storage due to the shortage of VLCCs.
Source: New Straits Times Press