MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC's First Quarter Financial Year 2020 Analyst Briefings Conference Call. Rozainah from MISC Investor Relations team will run through the agenda for today's briefing. Rozainah, over to you.

Thank you, Akarin. A very good evening, ladies and gentlemen. Thank you for participating in our first quarter financial year 2020 analyst briefing. We would like to apologize for the delay in the release of our financial quarterly results and also for the short notice of our postponement of this MAB conference call. We have with us today Mr. Raja Azlan Shah Raja Azwa, VP Finance; Ms. Eslin Halimi, Chief Financial Reporting, Governance and Budget, Finance; Mr. Emran Othman, VP, Corporate Planning; Mr. Vincent Ng, General Manager, Corporate Planning; and Suhaimi Saad, General Manager, Corporate Planning. We will now proceed with the presentation on financial highlights for the quarter's performance, which will be presented by Ms. Eslin, followed by market outlook and business update by Mr. Vincent. At the end of the presentation, we will open the line for a Q&A session. Our event manager will later provide instructions on the Q&A process. Before we start with the presentation, I would like to bring to your attention to the disclaimer slide. During the presentation, we may make some forward-looking statements in reference to our plans and expectations, and actual results could differ due to unknown risks, uncertainties and other factors that are, in many cases, beyond MISC's control. With that, I pass the session to Ms. Eslin for our next agenda, to update on MISC's first quarter financial year 2020 financial performance. Ms. Eslin, over to you.

Good evening, everyone. Thank you, Rozainah. Thank you to the participants for joining MISC Berhad quarter 1 FY 2020 analyst briefing. I'll bring your attention to Page 3 of our AB pack. Higher revenue for the quarter mainly due to higher revenue from petroleum, mainly due to higher TCE for mid-sized tankers. Higher revenue from LNG due to the higher earning days in the current quarter, and higher revenue from heavy engineering mainly contributed by the higher revenue from ongoing projects. Higher PBT from operations during the quarter due to the higher revenue, as mentioned above. I would like to bring your attention to the noncurrent items during the current quarter. The first one is the provision for litigation claims of $251 million recorded by MISC, which includes all-in provision for claims payable to SSPC. Secondly, write-off of trade receivables where it relates to daily charter rate during the disputed chartered period. And third one, loss on remeasurement of finance lease receivables related to the adjustment of start date as well as to reflect the lower variation work's daily charter rate decided by the tribunal, both write-off of trade receivables and the loss on remeasurement amounting to USD 224 million. In the previous quarter, there was an impairment on petroleum, LNG and offshore vessels, which you may refer to our Bursa announcement. On Page 4 of our AB pack, higher revenue coming from higher revenue from petroleum mainly lead to higher TCE for mid-sized tankers. Higher revenue from LNG due to the higher earning rates as well as higher revenue from heavy engineering mainly contributed by the higher revenue from ongoing projects. On Page 5 of our AB pack, on the cash flow from operations. Despite the volatility in our profit, cash flow from operations continuously recorded a stable level comparing between preceding and corresponding quarters, mainly due to the net inflows received from the LNG, Petroleum and Heavy Engineering segments from the improved operating performance, as mentioned before. Page 6 on cash and debt balance. Our debt balances will bring around USD 3.2 billion since March 2019. This is mainly due to the quarterly repayment and drawdown for the project, which is in the pipeline. Now moving on to the Page 7, financial performance by business segment. Before I proceed further, profit before tax or loss before tax during the quarter is inclusive of the nonrecurring items. For LNG, higher revenue and profit before tax between the comparative quarters mainly due to the vessel higher earning days, as mentioned earlier. Moving on to Page 8, petroleum shipping. Higher revenue recorded as compared to both quarters mainly due to higher TCE rates for mid-sized tankers. For the profit before tax for Petroleum segment as compared to preceding and corresponding quarters, the variance was mainly due to the higher blended TCE rates as well as lower voyage and charter higher costs. On Page 9 for Offshore business. Lower revenue reported as compared to the preceding quarter mainly due to the onetime reinvestment cost, which we received in the preceding quarter. In addition, loss before tax for the quarter compared to preceding and corresponding quarter mainly due to the GKL arbitration results, as mentioned earlier. And finally, Heavy Engineering segment, Page 10 of the slide. Higher revenue recorded as compared to both preceding and corresponding quarters were mainly due to increase in revenue from ongoing heavy engineering projects. In addition, profit before tax also improved due to the performance in Heavy Engineering, as mentioned above. I will now pass to Vincent for the market environment and business update. Thank you.

Thanks, Eslin. Good evening, participants. Thanks for joining us on this call. I'll go and take you through the other slides, starting with the market environment. On Page 12, we can see that the LNG rates for the quarter has dipped. If you remember, traditionally, a year-end peak season, the LNG spot rates would decline. It has declined to about $54,000 a day, amidst the COVID-19 outbreak, mild winter and high inventory level. This condition is expected to persist in the second quarter as well, which is also a seasonally low-demand quarter in a normal year. So this year, it could be exacerbated by the lockdowns and the business interruptions due to the pandemic. Referring to the following page, Page 13, you can see that this chart shows the deliveries of newbuild vessels coming up in the next few years. And you can see that for 2020 and '21, there are 89 new vessels, which is a relatively high number. So we expect that this could apply some downward pressure on charter rates going forward. Also given the oversupply of LNG in the market since last year, and depending on how fast the economy can recover following the COVID situation, the rate of FIDs for new LNG liquefaction plants could be affected and which may affect the number of vessels -- or new vessels that are required in the next couple of years. On the other hand, with a cheaper LNG that may encourage some additional demand, so it remains to be seen whether that happens. Having said that, I think I wanted to say that MISC, our fleet, is fully employed at the moment. We have our vessels on time charter -- long-term charter, except for 4, which are trading in the spot market. And these 4 vessels are actually fully employed on short-term charters at the moment. Okay. Moving on to the Petroleum segment. We had an unusually strong quarter in the first quarter of 2020, following a very positive fourth quarter for 2019. Usually, the first quarter average spot rates are much lower than the fourth quarter spot rates, but -- due to seasonal reasons. But of course, you can see on the chart that, also, all the 3 segments that the rates only dipped slightly. If you look at a month-to-month basis, actually, the rates were falling in January and February, but everything changed in early March once the oil price war started -- or erupted between Saudi Arabia and Russia. So with the expected flood of the large amount of oil -- cheap oil at that, there was a certain surge in demand for tankers. In fact, April spot rates for all 3 classes have trended slightly higher compared to March. Although the major oil suppliers have subsequently agreed in April to some significant production cuts going forward from May onwards, this is not seen by the market as sufficient to balance with the slump in the demand due to COVID-19. So with a huge gap between supply and demand for oil, there has been a lot of oil that has been going into inventory. As the land-based inventory starts to fill up and gets full, then this has led to demand for tankers for floating storage. So this has also added more support to charter rates going forward and -- currently, rather. That's from the demand point of view. If you look at Page 15 to look at the supply side of the equation, you can see that the scheduled newbuild deliveries for tankers will decline in 2020 and stay stable in 2021. So based on this, we expect fleet growth to be moderate. And at the same time, demolition activity has been very, very -- very small, very little in the first quarter, similar to last year. And we think this is likely due to shipowners deferring any scrapping of their old vessels to enjoy the high charter rates at the moment. And at the same time, we also noted that, for some of the recycling centers, they were affected by the lockdowns measures, so they could not operate as normal. Going to the next slide, Slide 16, referring to Offshore sector. As you are already aware that with the very, very low oil price environment, a number of the oil majors have announced CapEx cuts. So we see that, that has been happening across the board for many companies. And as a result of which, they are probably reviewing a number of their projects and especially those with high cost. And if you look at the following slide on Page 17, this is the latest revised projections that we have obtained. You can notice that the number of potential floating production system awards in 2020 is much lower than it was when we presented it in the last quarter's briefing. So it's about 1 account is 9 -- approximately 9, that's obviously an estimate at this stage compared to over -- something like 28 that was originally projected for 2020. So we expect quite a number of projects to be deferred. I will show you on the next slide what the 9 represent. So this is the picture at the moment for new projects. On Page 18, this breaks down the 9 in 2 regions. So we see that other than 9 -- actually 4 of the projects are Brazil. So we -- and that includes Mero as well. So we see that some of these projects, because they are at very advanced stage, will proceed. I think that concludes the market environment. I will now go on to the business update. For the business updates for LNG, we continue to explore new opportunities, and not just conventional LNG shipping, but also for nonconventional LNG solutions to diversify our revenues and strategy going forward. So at the moment, as I mentioned, we have full employment on our ship. And we have 4 more vessels joining the fleet between 2021 and '23 and also LNG bunkering vessel. For Petroleum business, the portfolio mix is 71:29 between term to spot. This is pretty much the same as it was last quarter, so nothing really major has changed there. Part of our vessels are on term. In terms of our VLCCs, almost -- in terms of operating days in the first quarter, 97% of VLCCs was operating on term and only 3% on spot in terms of operating days. As for Suezmax, 65% was on spot and Aframax, 34% on spot during the quarter. We have made an announcement recently this month that AET has won a long-term charter for 2 LNG dual-fuel VLCCs for our customer, Total. This charter is expected to commence in the first quarter 2022. We also took delivery during the quarter of the 2 DPSTs for Equinor, which is Eagle Blane and Eagle Balder, and this will be deployed in the Barents Sea. During the quarter, if you remember, last year, we signed an agreement to 7 -- to sell 7 of our A-class chemical tankers. We have delivered 5 of them last year, and the remainder 2 were delivered in this quarter, so we have actually completed the sale of all the 7 vessels. And we also redelivered 2 in-charter vessels, MR2 vessels, Eagle Milan and Eagle Melbourne during the quarter. Going to the next page. We continue to pursue new opportunities for FPSOs in Asia Pacific as well as Atlantic. That includes Mero-3 as well. In terms of the Gumusut Kakap, or GKL, case, I think I will not go through this lengthy item on Page 21 to 23 because the disclosures there are what we have also disclosed in the Bursa announcement today and also previously on -- a few weeks ago. The only thing I would raise is that the last paragraph on Page 23 that we intend to pursue an application to set aside a substantial portion of the award that was given by the tribunal. So we believe we have grounds to challenge that award and some significant portion of the claims that were made to SSPC. So that's our legal position at the moment. Going to Page 24. Again, I won't read this the PCPP and MOMPL case because there are no further developments, still the same as it was last quarter. Finally, on Page 25 on Heavy Engineering. Just to mention that we have completed the construction of FSO Golden Star, the external turret, and we were also awarded a contract for onshore fabrication and onshore modification services for CPOC, which is Carigali-PTTEPI Operating Company during the quarter. In terms of our Marine business, we completed repair and maintenance of 15 vessels, and we secured 24 new jobs. And order book backlog as at end of March is MYR 2.7 billion. This compares against MYR 2.9 billion in the fourth quarter of 2019. Ongoing tenders, we have MYR 17 billion worth of tenders ongoing, which compares against approximately MYR 13 billion in the previous quarter. I think that's what covers it for my end of it. I will now hand you back to Rozainah.

Okay. Thank you, Eslin and Vincent, for the presentation on financial performance and business updates. With the completion of the presentation, we will now proceed with the Q&A session. Before I hand over the call to the event manager, I would like to inform the participants that there could be some slight pauses or delays in our response during the Q&A session, as some of us are dialing in from home, whilst a few of us in the team who are dialing in from the office. Hence, we may need some time to collaborate our answers. We will try our best to provide our replies promptly, but we truly appreciate your understanding and patience on these matters. With that, I would now like to hand over the call to the event manager, who will guide and manage the Q&A session. Akarin, over to you.

[Operator Instructions] Our first question, we have Ho Meng from UOB Kay Hian.

I have a few questions. Firstly, I want to ask on the impairments just to summarize. Are you guys expecting any more impairments going forward or all the impairments related to the Gumusut Kakap is already all done in this quarter? And my second question is, I think, previously, you were guiding that these provisions should have both cash and noncash impact. But when I look at your -- so I'm just trying to understand, when looking at the balance sheet, I saw that your -- I see your cash has actually increased and your financings is stable. There's not much changes there. So I want to understand how does this provision affected your balance sheet and also your cash flow in this sense? And certainly, also, I want to get some guidance in terms of your lease income for Gumusut Kakap. After this provision, do you expect the lease income per year to be reviewed? And can you guide us what is the reduction amount of the lease income going forward? And my fourth question is, can you also comment on your bidding for Mero-3? Are you still bidding with the same project partners and the same terms? And if -- let's say, if Petrobras wants to negotiate for a lower pricing, what is your maximum buffer that you can -- the maximum detail you can allow because, previously, you were guiding for a minimum project ROE of 10%? And my next question is also on the LNG. Can you comment on the LNG, whether the high level of earnings days that you see here, is it sustainable? Or do you see some weakness in the upcoming quarters? And also on the offshore earnings and JV income, it was -- on a recurring basis, it was higher. Can you kindly comment what contributed to the higher income in the offshore earnings level?

Ho Meng, Azlan here. I'll take your questions one by one. The first question, you were asking whether there will be more impairment or more provisions. We believe that what we have provided for here will be sufficient. If you look at the provision, we booked in a USD 250 million provision relating to the legal litigation and a $220 million provision in relation to impairment of our trade receivable and our finance lease receivables. We believe that, in so far as litigation, based on advice from our legal counsel, we believe that we have booked in a sufficient amount of provision, and we should -- barring any adverse outcomes, we think that we have got a sufficient provision in time. Then number two, your question was on the cash and noncash impact. The litigation provision will have a cash impact when we settle the litigation. However, the finance -- the impairment items will not have any cash impact. Then your third question was about what is the impact to the finance income for GKL going forward. Because we have to extend the period of the VO for another -- sorry, the period of the lease contract by another 8 months, going forward, there will be an additional USD 2 million finance income for GKL every year.

Sorry, what is it? Is it addition or reduction? Is it an addition or reduction?

It's an addition because we have to extend the lease period by another 8 months.

Okay. Okay.

Yes. And before...

So is the $2 million per year, right, just to double check, $2 million per year?

USD 2 million, correct, per year.

Okay. All right.

Okay. Number four, your question was in regards to Mero. Yes, we are currently in the negotiations with Petrobras on this. Of course, in terms of pricing and our tolerance level and all that, we can't really say much at this juncture. But we are in the process of negotiating on this -- for this contract. Your fifth question on LNG. Yes, basically, there will be a lower amount of dry docking days this year compared to last year. So for this year, we anticipate a higher revenue on LNG.

And on the offshore and JV income, what contributed to the higher level of offshore and JV income?

That's because of a one-off contract renewal for a Vietnam project, of which we are a 49% shareholder.

Can you kindly -- can you comment on what is the -- what was the one-off amount? Is it only the first quarter?

Yes. It was about USD 10 million fair value gain that we booked in this one to the contract extension.

Okay. Okay. And just with Gumusut, where you mentioned about the cash impact from customer, right? Around this quarter, do you expect that to happen? And how much of the amount that if you can remind us?

Yes. Again, this is a legal case. And if we take it all the way, it will take 3 years to take this. So of course, we try to see whether we can come to some kind of lending. I really don't know when we will be able to settle this now. But if you take it all the way to court, it will take 3 years.

Okay. But not likely to be this year...

We never know. If we are able to settle it, maybe we can.

Our next question, we have Yen Ling from Maybank.

First question, just to follow up on the offshore, the gain from the extension of the Vietnam contract. Is that a JV level or at a subsidiary level? Secondly, could you give us some update on Seri Balhaf and Balqis? Is that up for renewal? So do you expect a lower charter rate for these? Will it impact your LNG earnings going forward for the next 2 quarters? And thirdly, on petroleum tankers, any of it came off charter in first quarter? And do you expect more to come on charter in the coming quarters? That's all for me.

Okay. So Yen Ling? Thank you very much for your question, Yen Ling. In regards to your first question, it is at the JV level. But the profit -- our share of the profit is USD 10 million.

Okay. Could you also comment on the core business? Your offshore margin actually jumped to 87% -- pretax margin 87%. So your normal offshore pretax margin is about 40% to 50%, and that's a big jump this quarter.

Please give us 1 minute, Yen Ling. There was a onetime reimbursement cost on engineering works in the current quarter, so that's why the margin has gone up.

Could you share the amount? How much was it?

It was about USD 2 million.

Okay. But it still doesn't explain the big jump. Even if I take up the $2 million -- if I take out the $2 million, the pretax margin is 83%.

One minute, one minute. Okay. If you look at it, what -- the onetime reimbursement of $2 million to $3 million accounts for half of the increase in the operating profit for offshore. And then there was a decline in revenue because of the reducing finance lease income. Yes. So there are 2 things going on. And then your next question was on Seri Balhaf and Balqis? One minute. Yes, on the question on Seri Balhaf and Seri Balqis, there might be a slight reduction in one of the vessels. And for the other one, we expect to maintain. Sorry, I didn't get, what was your third question, yes?

Yes, some guidance on the petroleum tankers. Any came off charter in first quarter? And will there be more coming off charter?

I'll take that question. In terms of VLCCs, there will be 2 VLCCs coming off charter in quarter 2 and quarter 3.

Could you provide some update also on VLCC? Are there any on spot? Or do you just put -- when you -- what's the strategy? Will you put it on spot market or you are locking for 1- to 3-year term?

I think it's dynamic. So I can't really speak for the -- because the things are changing very rapidly. So -- but broadly on strategy -- in terms of strategy, we are actually wanting to put it on term charter rather than spot. In between term charter, we may deploy some of the special on short voyages, which is why you see it like there's a small portion of spot in this VLCC for the first quarter, but that is mainly because of between the time charter renewals. So I think it's a very dynamic process. I can't really answer that question definitively. I can only say our strategy is broadly to put as much vessels as we can on term charter provided the charter rates are good. We are not strategically wanting to play in the spot market.

Our next question, we have Ajay from JPMorgan.

Two questions from me. The first one is I just wanted to confirm the numbers you shared on the percentage of the portfolio being spot, which is 34% Aframax, 65% Suezmax and 3% VLCC. You did mention a couple of VLCCs that are coming off-line. But should we expect in Q2 and Q3 that spot exposure to be roughly the same? Or are you expecting that to materially change in the coming quarters? If you could just help us better understand on that one, firstly?

Ajay, the last bit of your question was not so clear, but I think you were trying to understand what could be the strategy in terms of the spot for the next quarter. Is that right, the gist of your question?

Correct. Correct. 2Q and 3Q, please.

Yes. I think it's a similar answer to what I gave to Yen Ling. I can only say from a broad strategy point of view, we will have a smaller proportion in spot. That is our strategy. Having said that, there are opportunistic positions we may take. So it's hard to answer given that the rates are so volatile. So it really depends on how the tanker market progresses. But for the moment, we know that it's very strong. And it's also for short term, time charter is strong because of the potential for floating storage. But how long it will remain that way, it's an open question at the moment. So I believe the commercial team from AET will be looking at it very closely to make the appropriate decisions based on the information that they have, which is, like I said, very dynamic. So broadly, they may not change that much from today, but there could be some opportunistic positions that they take.

And if I can just clarify, you mentioned that 2 VLCCs are coming off-charter. That's 2 in each quarter or 2 in total over the next 2 quarters?

Two in total.

Two in total. And just lastly, can you give us any time lines on the likely Mero update in terms of move forward? From a Petrobras standpoint, is there any indicated time lines we can expect on -- any tentative update on that?

For Mero-3?

Correct.

Sorry. No specific time line. All we can say is that they have invited us for discussions recently. And so we are in the midst of discussing with them. So no specific time line that we can quote.

And just lastly, in terms of 2Q and 3Q, traditionally, they are very weak quarters for your Petroleum tanker business. Is it fair to say it will be relatively strong? Is that a fair assumption?

I think for Petroleum business, we think that quarter 2 will be good, perhaps not as good as quarter 1.

Our next question, we have Alex from AmBank Research.

I have 3 questions. The first is regarding your impairments. I just want to just double-confirm that the impairments includes the reversal of your lease revenue where your handover of the Gumusut Kakap FPS was in question. I mean I understand there was about 8 months' revenue that had to be reversed out? Was that included in your provision? All right. That's the first one. And my second one is regarding your appeal to the court regarding this provision. How much do you think would you be claiming against that? And has that amount been netted off against the provisions that you have made in this first quarter? All right. And my third question is regarding your Petroleum chemical -- Petroleum business. Could you just run through again what was the percentage of Suezmax to the spot market? Because if I'm looking at your current portfolio mix currently, that's 29% to spot, yet the impact seems to be quite significant in terms of your -- the bottom line impact. I'm just trying to -- wonder if the charter were to be at this level, do you think second quarter would be just as strong if -- I'm just assuming that the spot charter rates were, on average, the same in the first quarter compared to the second quarter. Was there any one-off elements in the Petroleum results that I'm just -- that you could perhaps give a bit more clarity on?