I.M.Skaugen SE -3rd Quarter 2010

Friday, 15. October 2010 17:00
Improved results for the I.M. Skaugen group in 3Q 2010

The pre-tax result was zero for the 3Q10 compared to a negative USD2.8 mill for
the 3Q09. The result of the 3Q10, on an EBITDA basis, was USD7.9 mill compared
to USD4.6 mill for the 3Q09. The pre-tax profit was negative USD8.6 mill YTD
3Q10 compared to negative USD1.3 mill for the YTD 3Q09. The result of the YTD
3Q10 on an EBITDA basis was USD14.6 mill compared to USD18.8 mill for the YTD
3Q09.


Our views on the performance of the company in 3Q 10

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 1(st) 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.



[HUG#1452381]





IMS 3Q10 Presentation:
http://hugin.info/179/R/1452381/393228.pdf

IMS 3Q10 Report:
http://hugin.info/179/R/1452381/393226.pdf




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Source: I. M. Skaugen SE via Thomson Reuters ONE
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