MISC (3816) - MISC Bhd - Is contango still in play?
Target RM9.10 (Stock Rating: ADD)
Crude oil’s contango has narrowed in recent weeks, which should lead to a slowdown in new tankers being hired as oil storage until it widens again. MISC has nonetheless successfully locked in one of its VLCCs for storage purposes, and with 1Q15 tanker rates being stronger than the already-stellar 1Q14 rates, its 1Q15 tanker pretax profits may well exceed that seen in 1Q14. We maintain our Add rating and mostly keep our forecasts and SOP-based target price unchanged. Brighter petroleum tanker prospects and better relations with Petronas are key potential re-rating catalysts.
What Happened
Our recent discussions with MISC reveal that one of MISC’s 13 VLCCs is currently hired for oil storage purposes. The ship was hired for 12 months early this year by either an oil major or oil trader. Separately, crude oil's contango has narrowed in recent weeks as spot oil prices rose faster than future prices, making oil storage a less profitable proposition.
What We Think
The spread between spot crude Brent prices and long-dated crude futures (contango) have narrowed in recent weeks to US$3.6/bbl for 6-months futures and US$6.4/bbl for 12-months, insufficient to cover storage and financing costs in an oil storage play, in our view. We estimate the required breakeven contango to be US$6-12/bbl for a 6-12 months oil storage play, and hence believe there should see a temporary halt in new VLCCs being hired for storage purposes until the contango widens again. Tankers already locked-in for storage purposes will, however, continue to stay out of the oil transportation market, helping to keep tanker rates relatively firm. WTI's 6-12 months contango is also relatively more attractive at US$5.4/bbl to US$7.9/bbl.
Tanker freight rates have done exceptionally well so far in 1Q15, as unlike in 1Q14 when rates gradually softened as the quarter progressed, rates in 1Q15 have mostly been sustained at the high levels seen earlier this year. Average VLCC, suezmax and aframax rates have improved by 37-77% yoy on the back of oil stockpiling activities in Asia and incidences of tankers hired as offshore oil storage. Although only ~40% of MISC's overall tanker fleet trades on the spot market, we see reasons for 1Q15 tanker pretax profits to exceed 1Q14's US$11m.
What You Should Do
Add. The tide is in its favour this year, thanks to favourable market conditions for petroleum tankers and higher offshore profits due to the full-year contribution of FPSO Cendor in 2015 and a step-up in FPS Gumusut's rates.
Source: CIMB Daybreak - 30 March 2015
Target RM9.10 (Stock Rating: ADD)
Crude oil’s contango has narrowed in recent weeks, which should lead to a slowdown in new tankers being hired as oil storage until it widens again. MISC has nonetheless successfully locked in one of its VLCCs for storage purposes, and with 1Q15 tanker rates being stronger than the already-stellar 1Q14 rates, its 1Q15 tanker pretax profits may well exceed that seen in 1Q14. We maintain our Add rating and mostly keep our forecasts and SOP-based target price unchanged. Brighter petroleum tanker prospects and better relations with Petronas are key potential re-rating catalysts.
What Happened
Our recent discussions with MISC reveal that one of MISC’s 13 VLCCs is currently hired for oil storage purposes. The ship was hired for 12 months early this year by either an oil major or oil trader. Separately, crude oil's contango has narrowed in recent weeks as spot oil prices rose faster than future prices, making oil storage a less profitable proposition.
What We Think
The spread between spot crude Brent prices and long-dated crude futures (contango) have narrowed in recent weeks to US$3.6/bbl for 6-months futures and US$6.4/bbl for 12-months, insufficient to cover storage and financing costs in an oil storage play, in our view. We estimate the required breakeven contango to be US$6-12/bbl for a 6-12 months oil storage play, and hence believe there should see a temporary halt in new VLCCs being hired for storage purposes until the contango widens again. Tankers already locked-in for storage purposes will, however, continue to stay out of the oil transportation market, helping to keep tanker rates relatively firm. WTI's 6-12 months contango is also relatively more attractive at US$5.4/bbl to US$7.9/bbl.
Tanker freight rates have done exceptionally well so far in 1Q15, as unlike in 1Q14 when rates gradually softened as the quarter progressed, rates in 1Q15 have mostly been sustained at the high levels seen earlier this year. Average VLCC, suezmax and aframax rates have improved by 37-77% yoy on the back of oil stockpiling activities in Asia and incidences of tankers hired as offshore oil storage. Although only ~40% of MISC's overall tanker fleet trades on the spot market, we see reasons for 1Q15 tanker pretax profits to exceed 1Q14's US$11m.
What You Should Do
Add. The tide is in its favour this year, thanks to favourable market conditions for petroleum tankers and higher offshore profits due to the full-year contribution of FPSO Cendor in 2015 and a step-up in FPS Gumusut's rates.
Source: CIMB Daybreak - 30 March 2015
