Norway: I.M. Skaugen Releases 1H Results

The I.M. Skaugen Group (IMSK) achieved a pre-tax result for 1H13 of USD20.7 mill, compared to a negative USD5.1 mill in 1H12. The EBITDA for the Norgas segment for 1H13 was USD7.2 mill, compared to USD14.6 in 1H12.

2Q13 result was negative USD4.5 mill, compared to USD25.1 mill in 1Q13. The EBITDA for the Norgas segment was USD3.0 mill for 2Q13 compared to USD4.2 mill in 1Q13.

PERFORMANCE 2Q13

The performance of core business, liquefied gas transportation, in 2Q13 was in many ways similar to 1Q13. GCC Region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates) crackers that were shut down in 1Q13, gradually came back on-stream, and lead to the GCC Region export volumes increasing with more than 30% compared to 1Q13. Despite these additional export volumes I.M. Skaugen is still not back on previous levels and are seeing 35% less volumes from this region in 1H13 than in same period last year. The result of this shortfall in long-haul volumes has been growing short-haul trades and this has contributed to less ton-miles for the global fleet of such gas carriers. The other significant contributor to the globally reduced ton-miles has been the negative development of the global butadiene trades.

Over time contracted customers have shown to keep about 60% of fleet capacity occupied. In 1H13 these customers required less shipping capacity and I.M. Skaugen was thus more dependent upon the prevailing soft spot markets. In 2Q13 I.M. Skaugen also had four dry-dockings versus only one in 2Q12.

Market rates, both time charter and spot, as reported by various ship broker sources have shown a declining trend this year.

With oil prices staying on its current levels, the cost advantage for the GCC Region based producers of petrochemicals, who use low cost ethane as feedstock, will remain and thus support the region as the key hub for long-haul trade of petrochemicals. The same cost advantage will probably be valid for the expanding US petrochemical industry that now has access to more low cost feedstock ethane coming from the boom in shale- oil and gas production. A number of large ethylene cracker additions are scheduled for start-up in the US in the coming 5 years, potentially adding more than 30-40% to the current capacity of about 27 mill tons per year. This capacity should lead to increased long-haul exports from the US to the rest of the world. In addition, the change in feedstock to ethane will also lead to structural shortages of propylene and butadiene (an ethane based cracker produces no butadiene and little propylene), which could lead to further need for imports into US of these products.

The demand for the key products company transports, ethylene, butadiene, propylene and VCM, is mainly driven by industrial production. These are the intermediate products that in the end will become the plastic and rubber products we use in our everyday life, which are also integral parts of most industrial products.

Global industrial production is starting to pick up and is forecasted to continue increasing in 2H13. Normally there is a good correlation between global GDP growth and growth in demand for the products company carries. The latest research shows that the demand grows equally to or more than GDP (range between 1 and 1.5 times GDP growth) and the company expects the GDP growth to be between 3 – 4% going forward as of now.

The global fleet of long-haul gas carriers (8-22.000 cbm) for the transport of petrochemical gas products is expected to grow with an average of about 5% per year over the coming years. The growth could be lower should many of the largest semi-refrigerated vessels being built (capable of cooling and thus carrying ethylene) be pre-dominantly used in the expected new LPG or ethane exports from the US.

There is currently a fleet of 9 gas carriers of abt. 89,000 cbm in total capacity that has been engaged in the Iran trade that is sanctioned by the US and EU. Most of these ships will probably never be seen again in the competitive trades outside of Iran. So far these ships have not carried much Iran products for export and have been employed more for storage. The effect is a reduction of the competitive fleet of carriers to the benefit of the global supply/ demand balance.

I.M. Skaugen continues to re-focus business around core business of Norgas, liquefied gas transportation. In 2Q13 the company expanded on joint venture in the GCC Region, and the vessel, Norgas Sonoma, was sold to strategic partner and associated company Skaugen Gulf Petchem Carriers B.S.C. (SGPC) of which IMS owns 35%. The other two local partners are nogaholding with 35% and Elaf bank with 30%. The GCC Region is central to IMS’ core business of gas transportation and thus adding ownership of a fleet for the SGPC will help to further strengthen presence in the region and the base for further expansion.

In 2Q13, I.M. Skaugen also sold oldest vessel Norgas Chief (built 1983).

I.M. Skaugen has made effective use of excess liquidity during 2Q13 and the company has been able to buy back bonds with a nominal value of NOK107.5 mill from the market. The bonds were bought below par value and generated a gain of USD2.6 mill.

Since the beginning of 2013, outstanding bond debt has been reduced with USD31.1 mill, which would translate to a reduction of  financial costs with about USD3 mill on an annualized basis.

Consolidated mortgage debt now stands at USD76.7 mill.

The company has no refinancing needs until 2015, no material capital commitments and remain fully financed.