The I.M. Skaugen Group (IMSK) today announces a negative net result for 1H 2010
The first half of 2010 (1H10) pre-tax result for was negative USD8.6 mill
compared to USD1.5 mill for the 1H09. The result for the 1H10, on an EBITDA
basis, was USD6.6 mill compared to USD14.2 mill for the 1H09. The pre-tax result
was negative USD4.5 mill for the 2Q10 compared to USD1.2 mill for the 2Q09. The
result of the 2Q10, on an EBITDA basis, was USD2.3 mill compared to USD6.9 mill
for the 2Q09 and USD4.4 mill in 1Q10.
Our views on the performance of the company in the first half of 2010
We experienced somewhat more difficult trading conditions for the Norgas Gas
Carriers in 2Q10, with higher idle time on our ships than in the prior quarters.
This impacted the performance of the Company, which generated lower results than
in 1Q10 from these gas carriers. For our other business units the operating
performance was better in 2Q than in the prior quarter.
When going into the second half of the year we see some positive signs in our
underlying freight markets. Spot rates and activity seems to have bottomed out
in the relevant crude and gas carrier segment. There is now again also better
activity in the gas carrier segment. Crude tanker rates appear to be reviving
from very depressed levels and with much greater volatility. Our two main China
activities are continuing the encouraging trend also seen in previous quarters.
At the same time the recent turmoil in the financial markets has highlighted
what we have addressed in our strategic positioning. The stress is this time
stemming from sovereign debt problems in Europe and the stock markets are also
affected by perhaps slower than the anticipated growth in the US with a very
slow job recovery, which illustrate a more dismal outlook for the economics of
developed markets. In light of this we would like to emphasize that IM Skaugen
SE (IMS) has little or no exposure to the Euro area. We have also reduced our
exposure to the US and are mostly focusing on business that benefit from growth
in Asia and the Middle East or the GCC region.
Issues related to our capex and debt financing
In 1H10, we repurchased the majority of the outstanding debt maturing in 2010.
With increased volatility and generally falling investor sentiment in the second
quarter due to the European sovereign debt crisis our bonds has been trading at
higher spreads and we have further repurchased some of the debt in 2011 and
2012 at attractive rates, totally lowering our bond debt balance by
approximately USD 20 mill. over the two quarters.
The average interest cost (incl. of margin) for all of our outstanding bonds
financed now stand at 5.9 % given current USD interest rates. The company has
only USD 2.9 mill. of bonds falling due for repayment within next 12 months. The
bonds with the longest duration mature in June 2012.
At the end of 1H 2010 total outstanding capex commitments on our newbuilding
program stood at a total of USD 51.7 mill. USD 35.7 mill of these remaining
capex commitments are for vessels financed trough sale and leaseback solutions
and USD 16.0 mill (adjusted for 50% ownership in JV's) for vessels financed via
traditional debt ship finance facilities against vessel mortgages. The lease
and debt facilities for these vessels, when completed, are available. About USD
40 mill over and above the above mentioned USD 35.7 will in total be paid out on
delivery of the 3 remaining sale and leaseback ships. About USD 32 mill of
short term loan facilities for vessel construction will be covered by this
payout. In addition the Company has cash balances of about USD 58 mill. to
shoulder our commitments.
Small scale LNG - exit from Nordic JV
The two main owners in Nordic LNG (www.nordiclng.com), LyseNeo and I.M. Skaugen,
have agreed to wind up their joint venture in an amicable way and thus their
cooperation re the development of Nordic LNG AS. Each partner will now pursue
their own strategies regarding LNG independently of each other and for us this
means being a transportation provider and arrange for logistics. The decision
has no material balance sheet effects on IMS and we have booked a recovery of
"R&D" expenses re this specific project due to this decision. We have been
together with Lyse ASA in developing this unique concept of energy distribution
based on small scale LNG since 2006. This concept of small scale or "MiniLNG"
distribution is clearly a key component in I.M. Skaugen's strategy going
forward, and we will continue our development efforts. This decision to exit
from Nordic LNG will enable us to focus even more of our resources "East of
Suez" and this is aligned with our overall strategy. We see good potential in
many markets "East of Suez" and these will be pursued. We now have LNG dedicated
teams at each of our offices in Oslo, Bahrain, Singapore, Shanghai and Houston,
who are well prepared and ready to meet the needs of our new type of clients.
We see small scale LNG as a global solution to meet the demands for gas by
industrial users and for power generation as well as transportation - for trucks
and buses and also as maritime fuel for the shipping industry. Natural gas in
the form of LNG will substitute for diesel and heavy fuel oil (HFO) as it is
currently used. This will require different distribution concept than today and
our new LNG capable ships will be able to perform this service. We already have
our first LNG capable vessel trading - "Norgas Innovation" - at sea since the
beginning of this year and the second ship will deliver in 3Q10. Before the end
of 2011 we will have a fleet of six ships ready to transport LNG. We also have
options for four more such vessels to be built. With such a fleet of ten LNG
vessels Norgas Carriers will be well equipped to meet the needs of the future
market no matter where in the world the demand will be. For Norgas the risk
mitigating factor is that these ships are well built for the petrochemical long
haul markets as well and will serve our regular client base until LNG business
With an increasing focus on the environment and more stringent requirements for
lower emission of CO2, SOx and NOx the market potential for natural gas in the
form of LNG will increase. This together with higher oil prices and decoupling
of the gas prices from oil and with lower gas prices - and a global surplus of
LNG; means that we now see more opportunities for small scale LNG than when we
started our development work eight years ago. At this point in time we were
lonely pioneers, but we are now seeing an increased growth of players also in
Asia and in the Americas for small scale LNG solution. This is why we look to
the future with confidence and hope we can maintain and develop the
relationships we have built up over the years.
Gas Activities - Norgas
Norgas generated an EBITDA of USD6.6 mill. in 1H10 (USD13.4 mill. in 1H09 and
USD1.7 mill. in 2Q10).
We are experiencing a few negatives impacting our financials in the first half
of 2010 and especially in 2Q10; a shortfall of nominations under our COA
contracts in the Middle East during second quarter of 2010 and the inadequate
performance of two of our three new "Wintergas class" vessels.
The second quarter opened with high inventories across the supply chain in Asia.
As commodity prices collapsed through the quarter along with reductions in most
raw materials and commodity prices incl oil, many players rushed to liquidate
inventories. These traders and importers were all probably fearing a repeat of
the slump in their inventory values seen towards the end of 2008. There were
growing fears over economic turmoil in European countries, which could affect
Asian export business later in the year. The demand in China slowed
particularly, although only down from the very high growth levels. Meanwhile,
the supply side lengthened, with increased availability from new domestic
cracker capacity. All this combined with lower production volumes in the Middle
East, the Asian long-haul imports of petrochemical products declined
significantly compared to prior quarters and from the first quarter of 2009,
affecting Norgas utilization of the fleet and thus revenues negatively.
Compared to the 1H09, our specially designed "Wintergas" type vessels have
contributed negatively, as they have entered the spot markets at a challenging
time. These are vessels specially designed for a growing intra Asian trade, with
an innovative ship design combining both petrochemical and chemical capacity.
The concept is unique and thus new, and we experience that implementation in
current markets is a slower process than first anticipated. As both of these
freight markets (gas and chemicals) in this region have suffered from over
capacity and/or lack of products to be shipped. Our third ship of this type will
be delivered in 3Q10, and we are now allocating additional commercial resources
on implementation of this project. It will take some time to develop sufficient
contractual basis for the ships and in the mean time we will work our way in the
spot markets. We view the Wintergas ships as promising based on growing
increased inter Asian trade (short haul) stemming from strong economic growth in
Asian ethylene price increased in April due to firming crude oil values plus a
relatively tight supply side with extensive maintenance at Japanese crackers. It
fell in May as markets lengthened with extensive liquidation of inventories.
Propylene prices followed a similar trend.
Despite the above mentioned shortfall in Asian longhaul import volumes in 2Q10,
we now perhaps see the first "greenshots" signs of a positive development in
both spot rates and estimated newbuilding prices which ticked upwards for the
first time since 2008 on new ship orders (not in this segment) and higher steel
For our gas carriers, the deliveries of newbuildings in the Semi - Refrigerated
gas carrier segment, has the available supply has outpaced the demand of tonnage
for our type of ships and for some time. This leads to lower utilization levels
in general and a softer spot market for ships. This "output gap" is likely to be
evident in 2010. But we may have seen the peak with few new orders for ships and
the yet to be delivered orderbook is trailing off. We see recycling or scrapping
of ships and more to come as many ships are reaching the age where recycling is
considered an attractive option.
The growth in the supply or the fleet will be mitigated by ship recycling in the
period with 20 % 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 2Q 2010 2 vessels were scrapped and these had an average age of 27 years.
Further 18 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 10 of
these having ethylene capacity. The existing world fleet of 321 semi
refrigerated vessels has now an order book of 37 vessels (332 884 cbm capacity)
or about 13 % of capacity and to be delivered before end of 2012. Norgas has now
6 new ships or 63 600 cbm capacity to be delivered in this period and that is
about 40 % of the ethylene capacity to come in this period.
Skaugen China Holding Co Ltd and its investments generated an EBITDA of USD1.2
mill. in 1H10 (USD0.8 mill. in 1H09 and USD1.1 mill. in 2Q10).
Our China activities posted an improved result compared to the 1H09, as Shenghui
achieved higher revenues than in 1H09. The company is continuing the trend with
substantial growth in revenues from the year before and expects a revenue growth
in the range of about 35% - 45% in 2010 and net profit after tax at 10% as in
the year before. The Shenghui company management is exploring an IPO process for
the company in China and this will also visualize better the values that have
been created since we became the largest shareholder (with 50% ownership) in
2006. Shenghui is a strategic supplier to our newbuilding program and
constructing the sophisticated tank and cargo systems. Our orders accounted for
about 30% of revenues in 2009 and about 25% in 1H10, and this is expected to
decline in the years to come as our present newbuilding program is completed and
the company enjoys growth in the markets for cryogenic products in China.
SMC's production of ships continues with marginal delays but on expected cost.
The second Multigas vessel (Norgas Creation) and the third Wintergas vessel
(Norgas Camilla) are scheduled for delivery in mid July. SMC and its
subcontractors are now more adept so operations are progressing more smoothly
than in earlier completions of our series of ships.
Marine Transfer Activities - SPT
SPT generated an EBITDA of USD1.2 mill. in 1H10 (USD2.8 mill. in 1H09 and USD0.6
mill. in 2Q10).
The marine transfer division is benefiting from increased activities and net
profit contribution from our growing Support Service sector, offsetting the
weaker earnings from the aframax sized crude tankers compared to last year.
Global Support Services 1H10 volume was up 15%, compared to 1H09. This segment
alone accounted for the positive 1H10 EBITDA. We continue to generate
insufficient returns on our fleet of our 6 long term leased aframax crude
tankers. There has been improvement in the trading conditions and we expect this
to continue. The tankers are now trading for the most in the spot markets as
some of them come off charters and this offers a good opportunity for us when
these markets again recover; to again give a reasonable return on risk capital
employed in the long term bare boat charters.
The growing demand for oil in the emerging countries is now the key to the
potential positive development of the tanker markets.
Tanker markets have revived in the first half year with higher volatility,
compared to a depressed 2009.
The IMSK share
During 2Q10 the IMSK share has performed slightly above the OSEBX and some of
its peers on relatively low volumes as the slump in prices were more evident on
other transportation companies in June.
Over the last 12 months the shared has performed on par with both the OSEBX
index and the transport index comprised of mainly shipping companies.
1H 2010 Report: http://hugin.info/179/R/1431695/378004.pdf
1H 2010 Presentation: http://hugin.info/179/R/1431695/378012.pdf
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Source: I. M. Skaugen SE via Thomson Reuters ONE