MISC Bhd
(April 7, RM 8.98)
Reiterate add with target price of RM9.10: The P5+1 grouping (comprising the five permanent members of the United Nations Security Council, plus Germany) successfully entered into a historic framework deal last Thursday with Iran that promises to limit its ability to develop nuclear arms in exchange for a loosening of crippling economic sanctions. This has positive consequences for the crude oil shipping markets, although the exact timing of the positive impacts is difficult to pinpoint at this moment.

As Poten & Partners highlighted in its recent report, Iran’s oil exports have declined from a peak of 1.6 million to 1.8 million barrels per day (bpd) in 2010 to 2011, to just one million bpd in the past two years, as a result of sanctions imposed by the United States (US) and the European Union (EU), which have dissuaded oil importers from buying Iranian crude oil exports. This has had the effect of severely devaluing the Iranian rial, causing hyperinflation and hardship to the Iranian economy.

This was one of the factors causing tanker freight rates to remain in the doldrums from 2012 to 2013. Other factors included tanker fleet growth in excess of demand, and the rise in shale oil production in the US. If Iranian sanctions unwind, Iranian oil production will eventually come back into the market (estimated by year-end), generating more demand for tanker shipping.

The oil supplies will add to an already oversupplied market, potentially pushing down crude oil prices, and possibly triggering an oil storage play if the contango steepens. Our base case was for tanker rates to soften in 2016 as new building ship deliveries pick up pace, but if the Iranian factor comes into play, we may have to reassess our position. This positive volume effect from more Iranian exports is most likely going to outweigh the reduced tonne-mile effect as the Far East buyers may import less oil from Latin America or West Africa

We reiterate our “add” call on MISC because crude tanker shipping has the best fundamentals in the entire shipping space in 2015. — CIMB Research, April 6

This article first appeared in The Edge Financial Daily, on April 8, 2015.