New international energy transition rule to have negative impact on MISC

Analyst believes that MISC’s petroleum tanker fleet is likely to outperform its competitors once the EEXI/CII rules come into effect

by NUR HANANI AZMAN / Pic Source:

MISC Bhd has to take measures to progressively improve its shipping fleet’s energy efficiency in the short term as the International Maritime Organisation (IMO) has set in motion the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Index (CII).

These regulations will take effect from Jan 1, 2023F.

The EEXI is a technical standard of carbon intensity that all existing ships above 400 gross tonnage must comply with from Jan 1, 2023F.

While all ships above 5,000 gross tonnage will also need to comply with the CII measure, which are operational standards of carbon intensity, from 2023F onwards.

CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) analyst Raymond Yap believed that MISC’s petroleum tanker fleet is likely to outperform its competitors once the EEXI/ CII rules come into effect, and may be forced to accept discounts on the time charter rates of its ageing fuel-inefficient steam turbine liquified natural gas (LNG) tanker fleet.

“Potential carbon taxes and a longer-term decline in fossil fuel demand may require MISC to revamp its business model in the transportation of fossil fuels and ownership of floating production assets.

“With a strong balance sheet and Petroliam Nasional Bhd’s (Petronas) target for net-zero carbon emissions by 2050F, MISC is well-positioned to tap into these opportunities,” he said in a note.

The EEXI and the CII rules that the IMO proposes to implement from Jan 1, 2023F may not have an adverse impact on the company.

However, he said, MISC may face challenges to fulfil its cargo delivery obligations. “MISC’s LNG ships are time-chartered out, mainly to Petronas, and time charter contracts typically specify speeds at which ships must be capable of sailing, failing which the shipowner is in breach of contract and penalties apply.

“This is because slower sailing speeds impinge on the charterers’ ability to meet their LNG cargo delivery obligations during any specific period of time, and charterers may have to in-charter additional vessels to meet delivery volumes.

“Hence, if as a result of the EECI/CII rules, MISC is forced to slow down the sailing speeds of its LNG ships to below the required speed after Jan 1, 2023F, we fear that MISC may have to compensate Petronas for the breach of contract,” he said in a note.

In response to CGS-CIMB Research’s concern, MISC CEO Datuk Yee Yang Chien did not think that it would be likely for Petronas or other LNG ship charterers to impose penalties for enforced slow steaming post-Jan 1, 2023F.

Yee’s view is that MISC may be protected by “change of law” clauses, which state that changes in laws or regulations after a charter contract comes into effect and that are beyond MISC’s control, will not adversely affect the terms of the charter.

“Furthermore, as the EEXI/CII rules affect the entire shipping industry, and steam turbine LNG ships make up a material 30% of global LNG ships, charterers may be amenable to negotiation and compromise rather than strict enforcement of contractual terms,” he said in a sell-side engagement session last week.

Yap said if MISC’s guidance is correct, there may be no adverse impact on MISC’s LNG charter contracts in the best-case scenario; in the worst-case scenario, MISC may have to share the charterers’ incremental cost burden of meeting cargo delivery obligations.

“Our standard operating procedure-based target price of RM7.81 is largely based on the discounted cashflow-value of MISC’s LNG and offshore businesses, but we have incorporated the value of MISC’s petroleum tanker business based on the expected liquidation value of its tanker fleet at the end of 2022F (we have pencilled in a 10% rise from current values).

“Potential rerating catalysts include floating production storage and offloading contractors are currently very busy — MISC expects a suppliers’ market and better pricing power — MISC is also planning to participate in bids for various LNG and ethane carrier time charter contracts,” he added.