MISC (FV RM7.45 - BUY) Company Update: Tanker Rates on The Rise

Tanker rates are rising due to strong demand from China, the return of the Libyan barrels and the build-up of tensions in Iran as oil is sourced from elsewhere. We believe the tanker market hit bottom in 3Q, noting that forward freight agreement (FFA) rates have been inching up since end-Sept 2011. This increases the possibility of the tanker segment recovering faster than expected by early 2014.  We are still of the view that at current levels, MISC is trading at an attractive P/B of less than -2 std deviations. With a 37% upside to our fair value of 1.5x P/B, we still advocate a Buy on MISC, with its FV unchanged at RM7.45. 

VLCC tanker rates up sharply. The daily returns for VLCCs in the benchmark Saudi Arabia to Asia route soared to a 13-month high of USD41,093 (up 114% m-o-m, 76% yo-y), spurred by strong demand from China. Note that rates also  went up to  close to USD40,000/day just before the Chinese  New Year in anticipation of a comeback in demand (see Figure 1 overleaf). Apart from higher demand, some of the positive drivers were the return of the Libyan barrels, which had a positive impact on the Aframax and Suezmax markets, and a build-up in tensions in Iran as oil was sourced elsewhere, thus lengthening voyages and adding cost savings to the tonne-mile balance. The higher refinery utilization rates as a result of stronger exports of refined products from the US’ Gulf Coast further boosted demand. As a result of the improving collective demand for oil shipments, the surplus in VLCCs hit a 17-month low (see Figure 2), which was positive for freight rates.

Tanker rates bottomed in 3Q2011. We opine that the tanker market bottomed in 3Q as forward freight agreement (FFA) rates have been inching up since end-Sept. As of yesterday, the FFAs on July contracts for VLCC shipments for the Arabian Gulf to Japan have appreciated by 41% (see Figure 3 overleaf) compared with a week ago.

Contango effect kicks in. Furthermore, the contango pricing effect (when current price is more than future contract price) is emerging on oil price’s movements due to  the tendency to store oil given the  risk of war and an oil shortage due to EU sanctions on exports from Iran effective 1 July. This had prompted  traders  to  store  cargo at sea, which  ultimately boosted demand for tanker shipping. But this could prove to be disastrous if the situation prolongs as it would stoke artificial demand, which could later lead to another oversupply in the market. 

Orderbook to existing fleet drops. The high level of scrapping and slower newbuilding orders have resulted in a decline in the orderbook to fleet ratio (see Figure 4 overleaf). The oil tanker segment’s ratio is now at its lowest of 13-16% of total fleet compared with other segments (container: 23%, ore carriers: 51%, bulk: 27% and chemical: 24%).

Source: OSK188