MISC Berhad (MISC) Earnings Call Transcript & Summary

[Audio Gap] Ms. Eslin Halimi, Chief of Financial Reporting, Governance and Budget, Finance; Mr. Emram Othman, Vice President, Corporate Planning; Mr. Vincent Ng, General Manager, Corporate Planning; and Mr. 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 the 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 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, the update on MISC's second quarter financial year 2020 financial performance. Eslin, over to you.

Good evening, everyone. Thank you, Rozainah. Thank you to the participants for joining MISC Berhad's quarter 2 financial year 2020 analyst briefing. Bring your attention to Page 3 of our AB pack. Lower revenue for the quarter, mainly due to lower revenue from Heavy Engineering due to yard suspension during MCO and border restriction as well as lower revenue from Petroleum segment, mainly due to lower blended TCE for mid-sized tankers. Lower profit before tax from operations during the quarter mainly due to lower revenue, as mentioned above. And as for the nonrecurring items in the current quarter, they were mainly due to an impairment of an LNG vessel as well as impairment for Heavy Engineering segment on the property, plant and equipment as well as right-of-use assets. And gain on disposal of a Petroleum vessel. I would like to reiterate nonrecurring items in the previous quarter, mainly due to the provision for litigation claims of about USD 251 million recorded, which includes the all-in provision for claims payable to SSPC as far as write-off of trade receivables where it relates to daily charter rate during the distributed start date period and loss on remeasurement of finance lease receivables related to the adjustment of the start date as well as to reflect the lower variation work's daily charter rate decided by the 3 tribunal amounting to USD 224 million. On Page 4 of our AB pack, lower revenue coming from -- lower revenue from Heavy Engineering mainly due to the yard suspension during MCO as mentioned earlier. However, this was offset by the higher revenue from Petroleum, mainly due to higher TCE rates for mid-sized tankers. Lower profit from operations recorded during the quarter, mainly due to the lower revenue, as mentioned above. Moving on to Page 5 of our AB pack. Despite the volatility in our profit, cash flow from operations continuously recorded a stable level comparing between preceding and corresponding quarters. Higher net inflows in the LNG and Petroleum improved operating performance, helped to stabilize our cash flow from operations as well as in quarter 1 2020, we received time-charter income pay in advance by one of our customers. In addition, the healthy cash balance is supported by the steady cash flow generated from the offshore and LNG segments portfolio of long-term contracts. On Page 6, our debt balances hovering around $3.2 billion since June 2019. Now moving on to financial performance by business segment. On Page 7, revenue and profit before tax for LNG segment were quite stable between the comparative quarters. Stable revenue and profit before tax, mainly due to secure income we see for the long-term contract portfolio for LNG segments. On Page 8, lower revenue recorded as compared to preceding quarter, mainly due to lower TCE rates for midsized tankers. However, higher revenue recorded as compared to corresponding quarter, mainly due to higher TCE rate for midsized tankers as explained in Slide 4 earlier. In addition, lower profit before tax for Petroleum segment as compared to preceding quarters mainly due to lower-blended TCE mentioned above. However, this was offset by lower voyage and charter higher costs. On Page 9 for Offshore business segment. The revenue reported as compared to preceding and corresponding quarter are quite stable. Main movement for the revenue for both quarters are mainly due to the reducing finance lease income in the respective quarter. In addition, increased profit before tax for quarter 2 2020 as compared to the preceding quarter, mainly due to the provision for Gumusut Kakap arbitration results, which was provided in quarter 1, as explained earlier. Finally, in the last segment on Page 10, revenue recorded for both preceding and corresponding quarters mainly due to revenue from ongoing Heavy Engineering projects. In addition, Heavy Engineering segment recorded a loss before tax as compared to preceding and corresponding quarters, mainly due to impairment for Heavy Engineering on property, plant and equipment and right-of-use assets in light of the current oil and gas downturn and the expected prolonged recovery of the industry. I will now pass to Vincent for market environment and business update. Thank you.

Thank you, Eslin, and good evening to all the participants on the call. We'll start with the LNG Shipping segment. As you can see from the chart and also from the historical precedent, the second quarter is typically lower demand quarter, lower season. But in this quarter, in particular, we have been also affected by lower demand due to the COVID-19 pandemic. So this has exacerbated the situation for the current quarter. As you can also have noted there has been cargo cancellations and as well as output cuts by producers, mainly in the U.S. as a result. This situation is expected to persist going into the third quarter as well. Going into the next slide, on Page 13. This shows the new build deliveries for the next few years. This picture has been relatively stable. Last quarter, we reported 89 new vessels. And this quarter, 90 new vessels for the next few years, so there's not a lot of change here. With the -- on the longer-term picture with the global economy expected to be weak for some time, it is anticipated that the new liquefaction projects will be deferred. And therefore, the demand for new vessel requirements for these projects will be lower for the next few years. Nevertheless, as Eslin mentioned earlier, MISC has this portfolio of long-term charters, which will provide this revenue going forward, which are on a more stable basis. Moving on to Petroleum segment. If you recall, after the huge rare lead of spot rates that happened around March and April, rates have started to fall. VLCC rates have held up quite well during the quarter. However, you can see from the charts that Suezmax rates and Aframax rates have fallen and have continued to fall throughout the month, right? This is due to low demand, weak demand from the COVID-19 as well as the production cuts that were implemented by OPEC+ as well and also the U.S. shale output cuts. The declining trend is expected to continue in line with the seasonal trend. The third quarter is typically a slower season anyway and this will be exacerbated by ample supply. Moreover, with more vessels coming out of floating storage, they will be joining the active fleet and therefore, adding more pressure to spot rate for the third quarter. Going over to the next slide, on Page 15. There is some silver lining on the petroleum side. As you can see there, the order book for 2020, '21, '22 are rather stiffly lower compared to 2019. So this will provide some support to charter rates going forward. In the meantime, you will also see on the chart on the right, there has been very little demolition activity throughout the whole half year from quarter 1 to quarter 2 and as mentioned in the previous quarter, this is most likely due to a lot of the shipowners capitalizing on the high demand for tankers during this period for floating storage, and therefore, they are delaying the demolition of their older tankers. Looking further ahead, I think the assessment is that charter rates will remain under pressure for a while. And it will depend very much on the pace of economic recovery and recovery in all demand. On the Offshore side, which is on Page 16, again, there is not much change in this picture compared to last quarter. We still expect fewer -- much fewer awards of floating production systems for this quarter. And a lot of projects will be postponed to next year or possibly future years. On the next slide, which is Page 17. Again, we focus on the projects that are for -- placed for award in this current year. So you will see that the bulk of the awards that are still on the table are mostly in Brazil and Africa or FPSO. That concludes the market environment and I will now go on to business update. On Slide -- on Page 19. You would have noticed that last month, we made an announcement that MISC has entered into memorandums of agreement with Zhejiang Satellite Petrochemical Company to acquire 6 Very Large Ethane Carriers, VLECs. And concurrently, we also signed Time Charter Parties with the company for -- charter of the 6 vessels for 15-year charter period. And the vessels are supposed to be delivered starting from fourth quarter of this year and extending into the first quarter of next year. The VLEC contracts represent a new segment that MISC is entering into under our unconventional solution, and we will be 1 of the only 3 owners of such vessels in the world. So it's a new segment with growth opportunities for MISC going forward. In the Petroleum business, just to share that our portfolio mix for the quarter is at 76:24. This is a little bit different from what we reported last quarter. In the first quarter, it was 71:29. So as you can see that we have increased the proportion of vessels in the term charter period -- term charter mix. This has happened for not just the VLCCs but also for the Suezmax and the Aframax. Just to share the breakdown for the term-to-spot ratio for each of the segments. For VLCC, it's 96:4; for Suezmax, it is 91:9; Aframax is 71:29. In terms of vessel deliveries during the quarter, we had the delivery of Eagle Petrolina, which is the first of 4 Suezmax DPSTs for Petrobras. And in July, which is just after the quarter, we took a delivery of another DPST, which is Eagle Petrolina. So just to remind that we have another -- 3 more DPSTs to be delivered for the rest of the year. During the quarter, we also sold one old VLCC, which is Bunga Kasturi. On the following page, on Page 20. Offshore business, we continue to pursue opportunities in the Atlantic Basin and also in the Asia Pacific region so -- and hopeful that we can secure some contracts for the next few months. In terms of the Gumusut Kakap legal case, as we previously mentioned that we are taking action to challenge the arbitration decision. And on 7th of July, we filed 2 court applications. The first one is an Originating Summons to set aside part of the Arbitral Award that was decided by the arbitration panel. And the second one is an injunction to restrain Sabah Shell, or SSPC, from setting off the sums that GKL was ordered to pay to SSPC under the award. Subsequent to that filing, the hearing for the injunction Notice of Application has been scheduled for 6th of October while the hearing date for the setting aside originating summons has yet to be determined. If you turn to Page 22, the other development on the Gumusut Kakap is that during that period also, SSPC had filed for an ex-parte application to the core to recognize and enforce the award. And this award was -- and this was still -- sorry, was first on GKL. In response, GKL has filed its application to set aside the ex-parte order on the 27th of July, and a case management of -- for this application has been scheduled. Moving on to Page 23 and also Page 24. I won't spend time to read through this portion, I think, you can read for yourself. Suffice to say that there are some positive progress on this case in terms of the arbitration as well as proceedings in court. Finally, on Page 25. On Heavy Engineering, just to report that the order book backlog for the quarter as of June is MYR 2.6 billion while the Heavy Engineering tender submitted as of June was worth approximately MYR 12.5 billion. As you know also that because of the MCO, this has affected the operations at MHB, the Heavy Engineering segment, which included yard closure for a period of time. And subsequently, even after the resumption of operations, given the new normal and restrictions, the progress of work has been slower than originally. And currently, the MHP is working towards catching up on progress and to complete the projects that are on hand. In the meantime, they will continue to pursue existing business of their current segments as well as to expand new opportunities in terms of modular fabrication and offshore wind fund. That concludes my briefing, and I pass you back to Rozainah.

Thank you, Eslin and Vincent, for the presentation on financial performance and business update. With the completion of the presentation, I would now like to hand over the call to the event manager who will guide and manage the Q&A session. Akadi, over to you.

[Operator Instructions] So we'll begin with the first question. We have Kong Ho Meng from UOB Kay Hian.

I have 5 questions. I think I'll go through them just one by one, if it's okay for you.

Ho Meng, sorry, your voice is a bit unclear. Can you speak a bit louder and not too quickly, please, and one by one? Can we address your questions one by one?

Okay. My first question, can you repeat again, what is your long-term mix for VLCC, Suez and Aframax again? I missed that.

Ho Meng, yes. VLCC term to spot ratio is 96:4; for Suezmax, it is 91:9; and Aframax, it is 71:29.

Okay. My second question, I want to -- I wanted to clarify on your tanker earnings. Your petroleum earnings declined on a quarter-on-quarter basis, and it was quite a big drop whereas other tanker companies like Euronav and DHT, who have a higher spot mix than yours, their profit in the quarter actually was a big improvement and yours is a quarter-on-quarter decline. So how -- I'm trying to understand what happened here. Because your long-term mix technically should not have much changes in earnings, so it should be coming from your spot. Do you -- is it because do you lock-in quite a lot of your new spot vessels towards the end of the second quarter? Or how do I think this because you -- what you have reported, it's very different from what our competitors are reporting.

Yes. Ho Meng, Azlan here. Basically, the decline quarter-on-quarter, you're right, is mainly coming from our midsized tankers. And the drop in the spot rates was quite significant because these sectors are mainly on spot.

Yes. But you see the other tanker companies have a very high spot mix relative to your spot mix and yet, they are reporting higher profits actually on a quarter-on-quarter basis. So it is very different for what you're reporting.

Okay. Let us come back to you on that point, Ho Meng.

Just to understand, is it because your spot rate -- I mean, is it because the spot vessels have locked in quite a lot of the spot rates, as in newer -- let's say, they renew the contract, do you lock-in a lot of your new spot contracts towards the end of the second quarter?

Basically...

Ho Meng, give us a minute.

Okay, sure.

Okay, Ho Meng, sorry. Basically, for the midsized tankers, it has increased. The term to spot ratio actually has increased over time, such that in the second quarter, it's even going up to 90% for midsized.

Okay. So how do I think that your profit actually declined quite significantly on a...

If I may just add, Ho Meng, I mean what we're trying to say is that when we moved more of the portfolio towards terms, we had to expect lower rates at that point in time, if you recall, because spot rates were still relatively high. So -- but the trade-off that we are having is that as we go forward when spot rates are really going to go much lower, we are more protected on the downside. So we are taking a longer-term view rather than taking the volatility. So some companies, we -- actually, we can't comment about the other company that you quoted because we're not aware how they earn their revenue. But from our point of view, I think that the explanation as Raja Azlan has given is basically to do with the mix of the -- and the types of vessels that we are in.

I see, noted on the trade-off, but I recall your long-term mix on an overall basis, in the last quarter was 71, this quarter your total mix is 76. So it's not a very big change in terms of the term to spot ratio, is that enough to really bring us a big trade-off in your earnings, which actually fell almost half on a quarter-on-quarter basis?

There was a big movement in Suezmax.

Yes. Actually, if you look at it, if you actually can refer to Page 14, you can see that the spot rates are way, way above term charter rates anyway. So if -- the impact would have been quite great to move vessels on our spot into term. It's quite disproportionate to -- you know what I mean? But spot rates were really, really, much, much higher. So every time you move one vessel across, you're taking a trade-off on the daily rate. But what you're buying is that you're protecting the rates going forward.

Okay. And in terms of the long-term rates itself, right, your average long-term rates, is it still the same or has it also started to decline versus the last quarter and moving forward as well?

I think if you look at the chart, in general, you can compare on a year-on-year where we're too higher.

Okay. Okay. So I just follow the chart to see the trend for the long-term rate.

So I think long-term rates are still okay if you compare a year ago. You can't compare on a quarter-to-quarter for long-term rates. But if you look at it a year ago, they are better off now.

Okay. I'll just go to my third question. On your JV and associated income, it is around MYR 48 million this quarter. It's a very big drop. What happened there? And what project was this?

Yes. That was because in the corresponding quarter in the last year, there was a one-off gain relating to a contract extension for Project Ruby, our Vietnamese vessel.

Okay. This quarter itself, is there any one-off items or it's a very clean quarter for the JV income?

It's quite clean, yes. It's clean for this quarter.

Okay. My next question is on your loan. I noticed you have refinanced -- sorry, not refinanced -- I noticed your long-term loans have actually increased quite a bit. Is this refinancing to capture lower interest rates? Or is this due to say new project loans for new projects coming in? Or -- can you share a bit of color there?

Is there refinancing?

Okay. And is the average interest rate also going to be low going forward?

Yes, yes. I mean this year's weighted average cost of debt is much lower compared to last year.

Are you going to share a bit of color how much savings you're able to capture on the...

At least 50 to 30 basis points.

Okay. Okay. Okay. My last question for now. I just wanted a little bit of color on the LNG. I know last time, you mentioned that time charter should not be affected. But in view that currently, the LNG export in the region has actually followed quite a lot, has that affected your utilization and the time charter? Let me -- utilization is a factor. Has your customers been still honoring the time charter payments? Or have these charters been renegotiated?

They are continuing to honor the contract.

Okay. So no risk of, say, discounts or putting your vessel on standby rate of Aframax?

Not at the moment.

Okay. And how about the spot? Can you remind us how much spot you have again and are those spots LNG utilized?

We have 4 vessels. What we call spot, now like I said, it actually means short-term charters.

Okay. And that few have been on charter, right? No, no...

Yes. They are all gainfully, yes. Some of them are, in fact, only expiring early next year.

Okay. So no expiry for the rest of this year, for any of the LNG, right?

One. Only one. Out of the 4, one will expire this year.

Our next call comes in from Raymond Yap of CIMB.

So just wanted to clarify on the slide. It says that the current portfolio mix is 76:24 for Petroleum. When you say current, do you mean the average for the second quarter or the end of the second quarter or in August? So that's question number one.

Okay. Maybe I will address one question at a time, easier. The 76% to 24% is actually calculated throughout the quarter for the 3 months based on the operating days spent on each type of charter.

Okay. So basically, it's the average...

It's not a point in time. It is actually throughout the quarter, yes.

Okay. All right. Okay. In terms of the $251 million litigation claims, which you provided for last quarter, I think we had a discussion last quarter about the interest rate on the award being 6.65%. Considering the filings that you have made in court, are you still -- or do you -- are you accruing the 6.65%? Or is everything held in a band until the court decides, not really sure about the legal implications.

Yes. We have not accrued additional interest costs, but we believe that inside our provision in the last quarter, there is some buffer there. And if you note, based on our announcement on the update of our setting aside and our injunction, we are actually trying to recoup about $330 million. And if we were to succeed in getting that $330 million then certainly, there will be a huge write back of the provision that we made.

Okay. I get you. I get you. Okay. So -- but going back to the 6.65% interest, is that ultimately payable to Sabah Shell? Or is that being sort of kept aside right now until the court decides on your setting aside filings? I'm not very clear whether do you still ultimately have to pay this? I mean taking aside the $330 million, but do you still actually have to pay the 6.65% interest?

Yes. There are some -- there is some clauses inside the agreement in which live in our liabilities. So we have put forward those arguments in our recent setting aside order. So let's wait and see how it pans out. As I said, we believe that we have sufficient provisions in -- that we made in the last quarter.

Okay. Sure. All right. And my last question is on the very large ethane carriers that you recently signed with Zhejiang Satellite. So in terms of the CapEx financing, could you share how many percent will be on debt? Or are you taking everything on equity? And the other thing is ethane is -- ethane gas is well subject to whether the shale oil and shale gas wells in the U.S. continues to be drilled. I think there was some shut-ins earlier this year when the oil price fell. And I'm not sure to what extent will ethane be available at all times in sufficient supply to send over to China. So in the event of some shortage of ethane, for instance, and Zhejiang is not able to get the supply. Are they still obligated to honor the charter hire with you, even though perhaps if they may not actually fully utilize their vessels?

Yes. Raymond, I'll take the first question first. The debt proportion of debt financing is between 60% to 65%. And on second one, they are obligated to pay for the charters.

Okay. So you've built in the contract protections to ensure...

Yes. There are some guarantees in place.

The next question in the question queue is Alex Goh from AmBank.

I've got 2 main questions. The first is just on the -- on your impairment of LNG vessel, could you tell us which vessel was that? And also on the disposal of your Petroleum vessel, how many other vessels are you planning to put it on the market? That's my first question.

Yes. I think we don't -- we're not really going to disclose to you what is the vessel that we have impaired, but the amount is negligible anyway. It's only MYR 5 million to MYR 6 million or USD 1.4 million. And on your second question, there's a plan to sell 3 VLCCs.

Three more. How much do you plan -- do you think you'll gain out of that? I mean...

Again, we can't -- we are in the midst of a negotiation. So we can't give you the detail, Alex.