I. M. Skaugen SE : 3Q Result 2013

The underlying demands for the services we provide and the products we transport are closely linked to the production and consumption of all plastic products used and consumed in most parts of our daily life. A positive development of the global economy will therefore lead to a growth in ethylene consumption, which historically has been higher than GDP growth and with a factor of 1-1.5.

The signs are that the world economy is on an improving trend and we will see increase in growth going forward. We also note that the European industry is now showing signs of recovery and we have seen an increase in ethylene imports into Europe; mainly from the Gulf region. The Chemical tanker market, which historically has been ahead of the petrochemical market, has also shown signs of recovery during the year.

The GCC region remains the lowest cost producer of petrochemicals due to it cost base for feed-stock and will remain the key hub for long haul exports of petrochemicals.

On the back of the US shale-gas and shale-oil boom taking place, the US is set to become the second large export hub for low cost ethylene when the planned expansion of ethylene crackers becomes operational in 2015-2017. Shale-gas and oil production generates huge surpluses of ethane that now is available as a very low cost feed-stock for the US petrochemical industry.

A secondary effect of the increased use of ethane as feed-stock in the petrochemical industry will be that it creates even more of a structural shortage of butadiene and propylene. A conventional naphtha based ethylene cracker produces significant amounts of these products while an ethane based produces very little or none. It is therefore likely that the US can become an importer of these products from overseas sources.

Shale gas contains a high proportion of NGL (natural gas liquids; ethane, propane and butane). The ethane is currently used as feed-stock for the local petrochemical industry while much of huge quantities of LPG (propane and butane) will be exported overseas.

This growth in shale gas production will continue since it provides significant benefits to the US industry; providing a low cost source of energy and electricity as well as a feed stock for the chemical industry. If we compare the US gas prices with the European import prices between 2008 and 2012, the accumulated cost advantage amounts to more than USD600 bill for the US.

The growth in shale gas production will also help fuel a further growth in LPG exports from the US since the LPG is a by-product of shale gas production that needs to be extracted. It will also most likely lead to more overseas export of the other surplus NGL, ethane, as feed-stock for petrochemical plants.

During 3Q13 there have been significant additions to the order book for the fleet of long haul gas carriers for LPG and with capability to carry also ethylene (defined as vessels between 8,000 and 23,000 cbm that can transport ethylene fully refrigerated at minus 104C). The current order book of 28 vessels equates to 44% growth (measured in cbm) in the sailing long haul ethylene fleet's capacity. We interpret this more as investments in LPG tonnage, but with ethylene capability added as an option for increased cargo flexibility. We note that many of these larger vessel that are now being built, are of sizes that normally are not involved in the long haul ethylene trade and are more commonly used in regional LPG trade as well as transport of ammonia and VCM.

The LPG shipping market is currently experiencing a tremendous upswing and the high growth expectations in ton-miles seems well founded on the growing export of low cost LPG surplus generated in the US -as a direct result of on the on-going shale-gas boom. The ship borne exports are not limited to conventional LPG but also ethane and LPG with high ethane content, both which will require vessels with ethylene capabilities.

It is therefore more appropriate to look at the whole semi-ref fleet, including vessels that only can carry LPG, to get the fleet growth in perspective.

The conventional semi-ref fleet (8,000 to 23,000 cbm - without ethylene capability) has an order book of only 10 vessels versus a sailing fleet of 69 and with 8 vessels passing the age of 30 years before 2016. This equates to a growth of only 9% in terms of cbm capacity. Combining these two vessel types (ethylene and semi-ref), the growth in cbm will  be 25% over the coming three years and the compounded net annual growth rate in fleet capacity (cbm) for the combined fleet will be 7% per year going forward (2013-2016).

The underlying fundamentals for our small scale LNG concept remain sound and valid. Gas is, and will remain, one of the key fuels of the future - both for cost and environmental reasons. We have a unique business proposition with a sailing fleet of six LNG capable vessels (four 10,000cbm vessel and two 12,000cbm vessels) that are currently transporting petrochemicals. These vessels can be made available for LNG trade within short notice for either long- or short term employment (and can easily revert back in to petrochemical trade if needed).

The upcoming ECA (Emission Control Area) zone in North West Europe has gained a lot of attention since it provides a large potential market for LNG as a marine fuel. The building of infrastructure, like bunkering terminals for LNG, has so far been lagging behind. As we get closer to 2015 when the new emission regulations will come into force, we expect many of the current projects for infrastructure to materialize in order to serve this potentially large LNG market. We also note more activities taking place in Asia and in particular in China where there is already LNG bunkering stations operating, serving more than a hundred domestic vessels running on LNG.

Our strategy remains fully focussed on our core business, gas transportation, and our organisation is aligned accordingly. We are also continuing our focus on cost reduction programs. Objectives set out in 2010; reducing shore-based staff with about 50% and centralising the operational and commercial activities of our core business to Singapore, will be nearing completion in 2013.

To visualize the values in our business and to improve our balance sheet remain the key focal areas for the company. We have made continuous improvements during the year; restructured joint ventures, sold some of the older and smaller vessels and used excess liquidity to reduce our debts further. In addition our SPT businesses continue to deliver more positive results outside of the US Gulf ship to ship transfer business.

In 3Q13, we sold one of our oldest and smallest ships, Norgas Carine, built in 1989. The transaction generated a small gain and improved our liquidity further. 

We continued to use excess liquidity to reduce our debt and during 3Q13 we have bought back bonds in the market with a nominal value of NOK31 mill.

Our consolidated mortgage debt was USD73 mill by the end of 3Q13.

We will have no refinancing needs until 2015, we have no material capital commitments and we remain fully financed.

NON-STRATEGIC JOINT VENTURES AND ASSOCIATES
These businesses which include SPT and our China activities delivered a positive EBIT of USD4.1 mill for YTD 3Q13 which is an improvement compared to a negative EBIT of USD2.5 mill for the same period last year.

The manufacturing company Shenghui Gas and Chemical Systems (SGCS), of which we own 50%, continues to develop well. The YTD 3Q13 EBIT and NPAT are 14% and 32% higher respectively than the same period last year, while gross revenues were 4% lower. With SGCS' continued performance ahead of last year, we remain confident that the process of visualizing the value of this investment will be successful and we will be able sell our shares in the company at a gain compared to book value.

COMPANY OUTLOOK
Many of the indicators, in terms of the development of the world economy and industrial output, points towards an underlying growth in demand for the logistics services we provide. We expect the growth in export of petrochemicals from the GCC region to continue to improve. This together with the current surge of LPG exports from the US followed by growth in petrochemicals exports from the US will be needed to absorb the excess capacity of vessels within the gas transportation business.

Oslo, 24^th  October 2013

I.M. Skaugen SE
Board of Directors

I.M. Skaugen SE

If you have any questions, please contact:

Bente Flø, Chief Financial Officer, on telephone +47 23 12 03 30/+47 91 64 56 08 or by e-mail: bente.flo@skaugen.com. This press release is also available on the Internet at our website: www.skaugen.com.

I.M. Skaugen SE is a Marine Transportation Service Company, with a focus on Innovative Maritime Solutions.  Our core activity is the seaborne transport and logistics of liquefied gases, such as petrochemical gases, LPG and now also LNG.

The I.M. Skaugen Group of companies (IMS) currently operates a fleet of 30 vessels worldwide of which 17 are gas carriers within the core business area. We are also capable to provide on- and off-shore LNG terminal management as well as ship to ship transfer services of LNG/LPG and on a global basis. We have in-house capabilities for the development and design of specialized high quality gas carriers for our niche markets and we recruit, train and employ our own team of seafarers.

IMS employs approximately 2,000 people globally out of which 700 are within our core gas activity, and with 23 nationalities represented. We manage and operate our activities and service our clients from our offices in Singapore, Oslo, Shanghai, St. Petersburg, Houston, Sunderland and Bahrain.