I.M. Skaugen SE: 3rd Quarter 2010 (Norway)

The I.M. Skaugen group reports improved results for the third quarter of 2010 compared to 2Q10.

This is mainly driven by higher utilization and better profitability in the gas carrier segment (Norgas). The China activities posted slightly reduced results and the Marine transfer activities (SPT) suffered from a most challenging crude tanker markets and were not able to continue its positive trend seen earlier in the year.

When going into the final quarter of 2010 we see revenues and rates stabilizing at an improved level in the gas carrier segment. The market is more in balance, and our core clients in the Middle East are again exporting further products tying up tonnage and tightening trading conditions.

In our core areas of focus we continue to experience mounting signs of a decoupled world economy, with the emerging markets being in an “economic boom” and the developed world or G7 countries in more of a soft patch. We believe that our strategy of focusing our business on emerging markets and specially business in “East of Suez” will pay off as this is more than a cyclical trend.

Major emerging market economies are experiencing strong growth, as consumer spending and trade are booming.

Issues related to our CAPEX and debt financing

In the quarter I.M. Skaugen completed a new bond issue with maturity in September 2012, a total of NOK300 mill (equal to abt. USD50 mill).

This is an issue of a floating rate bond with a coupon margin of 8.00% over 3 months NIBOR, unsecured and with other relevant covenant terms similar to our previous bond issues. The repayment obligation in NOK is swapped to USD.

Average interest cost (incl. of margin) for all of our outstanding bonds financed now stand at 6.6 % given current USD interest rate levels. The issue of this new bond is part of the company`s proactive efforts to mitigate potential refinancing risks in the bond markets for our bond loan portfolio in 2011.

By offering existing investors in IMSK 08 the opportunity to extend their maturity to 2012, an equal NOK amount to the new note has been repurchased from this bond. The repurchase was done at par. Remaining debt maturity in 2011 is now equivalent of USD66 mill. IMSK 02 with an outstanding amount of USD2.9 mill will be fully paid down in 4Q10.

Our current shipbuilding concept managed by SMC requires considerable amounts of working capital, and the bond markets has been our way to finance this for the IMS group. From the proceeds of the 3 remaining vessels sold on S&L to Teekay LNG partners (the ships are all scheduled for delivery in the 1H of 2011), we are able to repay the majority of the remaining outstanding bond debt in 2011.

The delivery of these vessels will significantly reduce working capital provisions, and improve our key balance sheet ratios. Given the challenging financial markets we now envision that for future newbuildings we will contract vessels through a more traditional shipbuilding setup which is less working capital intensive.

We now see that the yard capacity in China for more technically sophisticated ships has grown substantially since the time when we decided to enter into the current newbuilding program. At that time it proved very difficult to contract our specialized orders at traditional yards, and the setup with internal shipbuilding through subcontractors was chosen as the better alternative in order to renew our fleet.

Gas Carrier Activities – Norgas Carriers

Norgas generated an EBITDA of USD8.1 mill. in 3Q10 (USD1.7 mill. in 2Q10 and USD5.5 mill. in 3Q09). We experienced better utilization and improved freight rates for the Gas Carrier Activities over the quarter. This was mainly driven by increased exports of petrochemicals out of the Middle East.

The volumes were captured both under our Contracts of Affreightment and from more spot cargoes. Asian olefin markets strengthened in the third quarter, with demand improving as activity in the manufacturing industry entered its peak season. Consumers and traders rebuild stocks as prices found a floor after falling sharply in the second quarter.

This improved trading conditions also affected our Wintergas vessels in north Asia. Waiting time for these vessels was reduced as they were fixed on more consecutive voyages. These vessels are specially designed for the growing intra Asian trade, with capacity for combination of both chemicals and petrochemical gas.

Ethylene markets in Europe were largely isolated from the sharp price falls seen in other markets early in the end of the second quarter, leaving European ethylene prices at a considerable premium to other regions. The higher prices in Europe spurred incentives for increased imports and we saw more products moving also to this area from the Middle East.

This tightened the overall market with more ships being employed due to longer voyage distances. In Europe many consumers continue to hold low inventories, fearing a downside to demand should the economic recovery stall toward the end of the year.

Combined with growing capacity for risk capital as the world economy recovers and being one of the shipping segments with the more favorable order books, 16 new ethylene vessel orders were placed in the third quarter. We count 8 of these as part of the fleet renewal for a competitor and their take over by a new participant.

The new carriers will at delivery replace their current fleet and thus not negatively impact the overall market. The remaining 8 ethylene carriers ordered is currently without an established operator and will be added on to the overall market.

These are the first newbuildings designed for the long haul ethylene trade contracted since the financial crisis of 2008. The growth in the supply or the fleet will be somewhat mitigated by ship recycling in the period with 18 % of capacity that are now above 25 years and thus eligible for recycling or alternative uses in the coming years.

The normal age for scrapping of such vessels has been in the period 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.

In 3Q10 2 vessels were scrapped and these had an average age of 29 years. Further 41 semi-ref newbuildings of 6 000 cbm and above (both short and long haul vessels) are due for delivery in the remainder of this year, with 34 of these having ethylene capacity.

The existing world fleet of 321 semi refrigerated vessels has now an order book of 41 vessels (414 184cbm capacity) or about 16 % of capacity and to be delivered before end of 2012. Norgas has now 5 new ships or 53 600 cbm capacity to be delivered in this period and that is about 13 % of the ethylene capacity to come in this period.

China Activities

Our China activities posted a reduced EBITDA in 3Q10 compared to 2Q10. This came mostly as Shenghui Gas Chemicals Systems Co. Ltd (50%) reported disappointing quarterly results for the first time since 2006 when we acquired our shareholding. We experienced slower growth in revenues and higher cost than expected and the combined effect reduced the margins.

The slower growth in revenues was partly due to delays in deliveries. Shenghui is manufacturer of non-standard pressures tanks, spherical tanks, cryogenic steel structures and gas cargo plant system for the refinery and petrochemical industry.

TNGC, our domestic transporter of LPG in China posted improved results in 3Q10. We also experienced that we achieved to get a new JV partner that is willing to grow the company in gas transportation with us. This brings to an end a longer period waiting for such development since the bankruptcy of our former JV partner.

In the interim period an entity owned by the Chinese Government has been holding the shares. SMCs production of ships continues delivery of its ships and with some marginal delays, but an increasingly better track record to show for itself. Norgas Creation – the second Multigas ship of four 10 000 cbm LPG/Ethylene/LNG carriers was successfully delivered to the Norgas Carriers Pool on 1st August.

The third MG ship is berthed alongside Skaugen bay for further outfitting in this quarter with expected delivery in late 2010 or early 2011. The third Wintergas vessel is technically complete, but there is an ongoing case awaiting the export license for the vessel which has resulted in a delay in final delivery to the new owners.

We do expect this problem to be solved within early fourth quarter.

Marine Transfer Activities

SPT generated an EBITDA of USD0.2 mill in 3Q10 (USD0.6 mill in 2Q10 and negative USD0.4 mill in 3Q09). The Marine Transfer Activities continue to suffer from difficult trading conditions in the crude oil tanker markets as a continued stream of newbuildings is delivered.

The current growth in the demand for crude oil transport is not able to absorb the amounts of new tonnage available. What looked like a more promising and volatile market earlier this year has turned down again in the third quarter to depressed levels only covering the operational costs for most of these types of vessels.

The SPT tankers are now trading for the most in the global spot markets as some of these have come off long term charters. In these spot markets these SPT ships made USD14 000 per day on average in 3Q10. In the third quarter we signed a new and for us profitable 2 year full service lightering and support contract commencing in mid October this year.

The contract reflects a required risk premium for the lightering operations compared to the pure crude aframax market, and we are very satisfied with this as it is some times since this was possible to achieve. The global support services of SPT continue to generate a positive result, offsetting the negative performance of the tankers.

One of the support vessels began operations in West Africa in September and SPT also hope to conclude its first business in South Asia during the last quarter of the year.

The IMSK share

During the third quarter of 2010 the IMSK share performed below the OSEBX and the majority of its peers. IMSK has agreed with Argo Securities to terminate the current market maker agreement.

Argo Securities will until 23rd of November perform its obligations under this agreement. Over the last 12 months the share has performed below both the OSEBX and the transport index comprised mostly of shipping companies.


Source: I.M. Skaugen SE, October 18, 2010

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