I.M. Skaugen SE 1H 2010 report

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 is developed. 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 the region. 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 prices.  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. China Activities 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. [HUG#1431695] 1H 2010 Report: http://hugin.info/179/R/1431695/378004.pdf 1H 2010 Presentation: http://hugin.info/179/R/1431695/378012.pdf This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients. The owner of this announcement warrants that: (i) the releases contained herein are protected by copyright and other applicable laws; and (ii) they are solely responsible for the content, accuracy and originality of the information contained therein. Source: I. M. Skaugen SE via Thomson Reuters ONE