MISC Integrated Annual Report 2020

// Key Messages / Highlights / Strategic Review / Sustainability / Financial Review ////// MISC Berhad / Integrated Annual Report 2020 4 84 MISC Berhad / Integrated Annual Report 2020 4 85 ////// Financial Review / Sustainability / Strategic Review / Highlights / Key Messages // Section Section Capitals Affected: Financial | Physical | Human Capitals Affected: Financial | Physical | Human Capitals Affected: Financial | Physical Capitals Affected: Financial | Physical | Human | Social and Relationship Capitals Affected: Financial | Physical | Intellectual | Social and Relationship | Human OUR RISKS AND MITIGATION STRATEGIES We are cognisant of the presence of risks in our decisions and activities, and thus we recognise the importance of carefully managing our risk exposure whilst pursuing our strategic and business objectives, with the ultimate aim of ensuring sustainable value creation over the long term for our stakeholders. To this end, MISC maintains a structured risk management framework that is integrated into the value creation process across all our businesses. Details of the Group’s risk management framework and processes can be found in the Statement on Risk Management and Internal Control on pages 294 to 307. The following are the key risks that the Group is currently facing and our responses to those risks: Trend: Neutral Trend: Upward Trend: Upward Trend: Upward Trend: Neutral Description: 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. Description: 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. Competition in the segment is also expected to rise from new entrants. Description: Reduced opportunities in the Offshore Business, Petroleum & Product Shipping, and Marine & Heavy Engineering segments from continued low and volatile oil price environment due to oil and gas players stepping back from venturing into new upstream oil and gas projects. Description: The risk of disruption to business and operations arose during the year as industries across the globe were faced with challenges on the impact of COVID-19 pandemic. Description: Under-utilisation or unavailability of vessels, floating assets and facilities would affect the Group’s earnings. Ineffective management of asset maintenance and operations efficiency would lead to asset breakdowns ultimately resulting in prolonged off-hire periods. Mitigation / Response: • Continue growing the proportion of assets that generate stable long-term income, while maintaining flexibility to take advantage during positive cycles which benefit the Group • Introducing floor and ceiling rates for some of our spot vessels to reduce the volatility of revenue during low summer seasons and peak winter seasons • Developing and growing new recurring income segments and businesses to diversify our revenue, such as shuttle tankers and ethane carriers Mitigation / Response: • 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 promising LNG asset-based solutions such as LNG bunkering or adjacent markets with growth potential such as ethane transportation Mitigation / Response: • Maintaining a diversified portfolio of core businesses • Strengthening business model and strategic direction focusing on long-term contracts, which are not affected by short-term oil price movements • Developing and venturing into new recurring businesses and broadening our asset portfolio into new asset classes such as ethane carriers and LNG bunker vessels • Pursuing an optimal tanker fleet such as through the sale of assets during low market environment to help protect against headwinds in the cyclical market while ensuring continued operational excellence • Exploring opportunities in fabricating wind farm structure, taking advantage of energy transition initiatives by energy players Mitigation / Response: • Ensuring effective implementation of our Business Continuity Management (BCM) and Crisis Management Plan (CMP) so that all critical business functions can be resumed promptly in various business disruptive scenarios, including in a pandemic situation • Reviewing contractual obligations which covers all areas including force majeure to protect the company’s interest in the event of unforeseen business disruption Mitigation / Response: • Implementing and continuously reviewing standard operating procedures on asset operations and maintenance to maintain high asset availability and uptime rates • Maintaining highly-skilled and trained personnel to operate assets at an optimal level • Leveraging on technology and Internet of Things in developing effective maintenance schedule BUSINESS CYCLICALITY EVOLVING LNG MARKET CRUDE OIL DYNAMICS, SUPPLY, DEMAND AND PRICE BUSINESS DISRUPTION ASSET AVAILABILITY AND UTILISATION Material Matters: Project and Financial Performance Material Matters: Project and Financial Performance | Customer Satisfaction Material Matters: Project and Financial Performance | Customer Satisfaction Material Matters: Project and Financial Performance | Risk Management Material Matters: Project and Financial Performance | Customer Satisfaction