I.M. Skaugen Posts 3Q 2011 Results (Norway)
The I.M. Skaugen Group (IMSK) announced third quarter 2011 results.
The pre-tax result for 3Q11 was negative USD2 mill compared to zero result for 3Q10. The result of the 3Q11 on an EBITDA basis was USD8.4 mill compared to USD7.9 mill for the 3Q10.
The pre-tax result was negative USD6 mill YTD 3Q11 compared to negative USD8.6 mill for the YTD 3Q10. The result of the YTD 3Q11 on an EBITDA basis was USD22.5 mill compared to USD14.6 mill for the YTD3Q10.
Despite the mounting signs of a synchronized global slowdown due to financial stress imposed by the debt crisis in Europe, I.M. Skaugen core business segment (being the long haul petrochemical gas carrier trades of Norgas Carriers) have held up well with no signs of demand being affected. Norgas continued its positive trend seen from mid-2010, and the 3Q performance was more or less similar to 2Q with high volumes under our COA contracts. The China activities improved its result from higher sales compared to the second quarter. I.M. Skaugen SPT business was stung by lower support jobs combined with continued weakness in the tanker markets, and ended the quarter negatively compared to the second one.
The company experiences that the global economic environment has become more uncertain during the past quarter. The advanced economies are experiencing much slower growth compared to the beginning of this year mainly due to increased fiscal and financial uncertainties caused by lack of sufficient political support in the US and the Euro area. The company has seen a slowdown in Emerging Markets especially in the industrial production growth of the BRICs except from China and its neighboring emerging countries. Nevertheless, I.M. Skaugen believes that the Emerging Markets has the “tool box” to boost the economic growth as their monetary tightening on inflationary pressures will end soon. In the long run they will sustain a higher growth rate than the OECD countries. Hence the company should continue to benefit from its strategic focus on business in markets “East of Suez”.
In third quarter the company took delivery of the last of the three vessels in the Wintergas series-“Norgas Camilla” with the unique ability of carrying a combination of gas and chemicals.
The delivery of this vessel generated USD 33.5 mill in liquidity which has been utilized in improving company’s liquidity as well as the equity ratio from reduction of working capital and associated debt related to construction of the newbuilding vessels. The delay of this vessel has caused direct losses of about USD 10 million from May 2010 when the vessel was ready to sail. Going forward this should directly improve company’s profitability. Norgas Camilla loaded her first cargo shortly after delivery and she is now operating in intra-Asia trades. Although Norgas Camilla has been delivered, we are still proceeding with the arbitration process at HKIAC (Hongkong International Arbitration Centre) to recover for the economic loss we suffered from the delayed delivery.
The other two Multigas vessels Norgas Vision (12 000cbm) and Norgas Conception (10 000cbm) with the capability of carrying both LNG and petrochemical gases have completed their sea trials and both vessels are under final stage of construction and scheduled for delivery in October of 2011. Over the past 10 years the Company has built 18 gas carriers in China at a gross investment of USD570 mill. This newbuilding program makes the Norgas fleet the most efficient and modern fleet of all gas carrier operator in the world. At the end of 2011 the fleet will have an average age of 8 years and the fleet is much harmonized in its average size and design especially for long-haul trades which is made to focus on company’s core markets. The company wishes now to proceed to build the remaining four vessels based on a strategy of building up to 10 Multigas carriers before the completion of the current newbuilding program. This will require some further work on securing proper financing and construction facilities in China or elsewhere given the challenging financial markets for the time being.
The results in Norgas Carriers were better as the EBITDA during the third quarter of 2011 increased by USD 0.8 mill compared to the second quarter of 2011. I.M. Skaugen Group experienced good utilization and earnings due to high volumes in the Middle East, a positive trend seen since mid-2010. A large percentage of company volumes were dedicated to broad contract coverage which has created some limitations for Norgas to profit from a firm spot market. However, coverage at 70% of the fleet on COA and T/C basis for the remainder of 2011 mitigates market risks and thus contributes to more steady earnings.
The reported spot markets rates for seaborne transportation of ethylene by gas carriers on average reached USD 652k per vessel/month for the 8 000 cbm segment during 2Q. In 3Q the spot rates increased to USD 690k per month on average with one year T/C being reported at USD 563k compared to USD 550k in 2Q. Business conditions remain challenging for olefins (ethylene, propylene, etc.) producers in Asia, mainly due to a slowdown in demand for polyolefins (raw material of plastic production) in China. While the volatility in crude oil prices directly affected buying sentiment for polyolefins, the value of olefins themselves was more stable. The supply side shortened due to a busy period of maintenance at derivative units coupled with extensive unplanned outages at several large complexes. The Middle Eastern exporter on the other hand experienced an increase in competitive advantage on short olefin supply and high crude oil prices.
The short-haul chemical tanker markets continue to be quite depressed, and this has slowed the implementation of the Wintergas concept. Nevertheless, Norgas Cathinka managed to improve the utilization rate on average for the quarter.
The order book for gas carriers and the recycling of ships
The current Semi-Refrigerated (SR) fleet consists of 254 vessels (2 572 128 cbm). The order book for semi refrigerated vessels with cargo capacity above 4 000 cbm is currently at 22 vessels (total 215 100 cbm) and equal to about 8 % of current capacity. 16 of the SR vessels (168 600 cbm) have the capacity of carrying ethylene. These are for both long haul and short haul transportation. For long-haul transportation (above 8 000 cbm) the fleet for ethylene carriers stands at 72 vessels or 801 673 cbm capacity by the end of 2011, while the order book for the long-haul ethylene carriers is at 8 vessels (90 000 cbm).
Concerning the age of the world SR ethylene fleet, the normal age for recycling of such vessels has been between 27 and 30 years of age. However at about 25 years of age it is quite normal for such ships to cease carrying ethylene and concentrate on other less demanding products to trade. There will be total of 39 SR carriers (328 288 cbm) equals to 13% of the total SR fleet and 12 ethylene carriers (80 177 cbm) equals to 7% of the total Ethylene fleet over 25 years by the end of 2011.
The result from Skaugen China Activities contributed with a positive EBITDA of USD 2 mill in 3Q2011. The Shenghui Gas Chemical System Company (50% owned by IMS) has now improved its profitability and approaching its target of net profit after tax (NPAT) for and delivering a NPAT rate of 8.3% on average for the third quarter. Shenghui has gradually changed its focus from significant IMS related orders to other new business as the newbuilding projects are approaching completion. IMS continues to consider the opportunities within the Chinese (IPO or PE) market in order to visualize the values created in Shenghui since we became the largest shareholder in 2006.
SPT – Marine Transfer Activities
SPT delivered a negative result of USD 0.7 mill on EBITDA basis (IMS share of the result with a 50% ownership) for the third quarter of 2011. SPT continue to be affected by the supply demand balance in the crude oil tanker markets and the pressure from additional newbuildings is still keeping a lid on rates. During the third quarter, SPT experienced weaker ship-to-ship transfer activities, and this part of the business was not able to offset the negative result from the crude tanker market.
In July, the remaining NOK39M of the bond named IMSK08 was repaid upon maturity.
In September I.M. Skaugen Group repurchased NOK 150 mill of the IMSK09 bond on par in an exchange offer where NOK75 mill of was swapped over into a new bond with maturity in March 2013 on the same covenants as the other IMSK bond issues. The new note carries a coupon rate of 3MNibor plus 8% margin. The remaining NOK75 mill was repurchased with a cash settlement. In addition a total NOK 20.5 mill was repurchased from IMSK04. The debt reduction has contributed to improve the Group’s equity ratio towards our goal of 30% at all time.
Source: I.M. Skaugen Group, October 17, 2011