MISC Annual Report 2019

61 60 OUR VALUE CREATION STORY MISC BERHAD PEOPLE. PASSION. POSSIBILITIES ANNUAL REPORT 2019 Risks and Opportunities To create value for our stakeholders over the long term, it is essential that we are able to identify and manage the risks that are inherent in our business as well as to exploit and maximise opportunities in the market. Risk considerations are paramount to our business strategy as well as our investment decisions. MISC has an established Risk Management Framework that includes Enterprise Risk Management process to guide the identification, assessment, treatment, monitoring and review of risks. Further details of the Group’s risk management processes can be found in the Statement on Risk Management and Internal Control on pages 220 to 229. The following are the key risks and opportunities that the Group is facing at present: Business cyclicality Crude oil dynamics - supply, demand and price Evolving LNG market • Project and financial performance • Project and financial performance • Customer satisfaction • Project and financial performance • Customer satisfaction • Growing the proportion of assets that generate stable long-term income while maintaining some flexibility to capture the upside when the cycles turn in our favour. In the meantime, the Group’s operating cash flow and earnings continue to be underpinned by our portfolio of long-term charters and contracts • Developing and growing new recurring income businesses to diversify our revenue, such as DPSTs and non- conventional LNG solutions Geopolitics • Project and financial performance • Carrying out robust risk assessments on countries, customers and projects • Diligently monitoring global developments • Regularly reviewing commercial strategy and being nimble to adapt to changing conditions • Maintaining a diversified portfolio of core businesses which are not all subject to identical cycles and drivers • Growing the proportion of assets that generate stable long-term income as compared to short-term income • Developing new recurring businesses to diversify our revenue, such as DPSTs, non-conventional LNG solutions and fabrication of offshore wind farm structures • Expanding our presence and strengthening our capability to capitalise on the ample opportunities in the Atlantic Basin for FPSOs, DPSTs and oil and LNG shipping services • Being prudent and selective in bidding for new projects, and where feasible, to take advantage of the short-term/ spot shipping market opportunities that present themselves • Venturing into new LNG asset-based solutions to address changing market needs • Emphasizing on proven commercial and operational experience with impeccable safety record and high vessel availability • Leveraging on the Group’s credit standing to secure competitive financing terms Asset availability and utilisation • Project and financial performance • Customer satisfaction • With well-trained crew and by applying stringent operations and maintenance policies and procedures, we have a good track record of achieving commendable levels of vessel availability and floating asset uptime rates • We also improve utilisation rates by virtue of having more of our assets on long-term charters MATERIAL MATTERS DESCRIPTION/IMPACT TREND RESPONSE Risk: The highly cyclical nature of the shipping markets makes it a challenge to generate predictable cash flows and earnings to sustain our borrowings on capital expenditures. Tonnage oversupply in the petroleum and LNG shipping sectors could place downward pressure on charter rates Risk: A low and volatile oil price environment would reduce the likelihood for new upstream oil and gas projects to be sanctioned, resulting in fewer opportunities for our Offshore Business and Heavy Engineering segments. However, if oil prices are too high, it may limit oil demand and reduce the demand for tankers Opportunity: Countries such as the US and Brazil have been rapidly growing their energy exports. This would boost oil tanker and LNG carrier tonne-mile demand, as the main importers are situated in Asia Risk/opportunity: The LNG market has been evolving, characterised by shorter duration LNG contracts, the increasing participation of commodity traders and a growing spot/short-term market. As a result, the LNG shipping market is also changing, with shorter charter periods, new counterparties, and a more liquid spot market Risk: Competition is increasing from newer entrants Risk/opportunity: Geopolitical developments may lead to trade tensions or risk of military conflict, affecting supply or demand for oil and gas. Economic sanctions on key oil producing countries or shipping companies could alter energy trade patterns and supply of vessels, which may be favourable or unfavourable to us Risk: Not achieving the optimum use of our vessels, floating assets or facilities would affect our earnings DRIVERS Upward Neutral Upward Upward Upward Upward Neutral