IMSK- 1H result 2011

The pre-tax result for 2Q was positive USD 0.4 mill compared to negative USD
4.5 mill for 2Q2010. The pre-tax result was a negative USD 4.1 mill for the
first half of 2011 (1H11) compared to a negative USD 8.6 mill for the 1H10. The
result of the 1H11 on an EBITDA basis was USD 14.1 mill compared to USD 6.6 mill
for 1H2010. The EBITDA result in 2H2010 was USD 12.6 mill.
 
Our views of the performance of the company in first half of 2011
 
In  second quarter we took delivery of  the first 12'000 cbm Multigas LNG vessel
"Norgas  Unikum" and the ship is set for  its first ethylene cargo in July.  Two
more vessels are under final stage of construction and scheduled for delivery in
September  and October of  2011. The completion and  delivery of these will mark
the end of the current gas carrier newbuilding program.
 
The  uncertainty re the timing of the  expected export license and thus delivery
of  Norgas Camilla  or WG#3  - the  last of  the three  vessels in the Wintergas
series  - remains throughout the 2Q11. In May  we received an interim award from
the  Hong Kong International Arbitration Centre with a positive decision for our
legal  demands of an immediate release of the ship by the Chinese counterparties
involved.  The next  step is  now to  make the  relevant Chinese authorities and
courts  enforce this verdict in mainland China.  The ship yard is cooperating to
deliver  the ship, but the trading house  involved is not. Through this process,
we  have received continuous support and  assistance from the Chinese Government
and  based  on  the  legal  position  from  the award we believe that the export
license may soon been issued, and thus enable us to finally take delivery of the
last  3 Wintergas vessels in 3Q 2011. Delivery of  this vessel will generate USD
33.5 mill in improved liquidity and this will directly improve our profitability
as  well as improve the equity ratio from potential reduction of working capital
and associated debt related to the construction of the vessels.
 
We expect the global economy to continue to expand with the associated growth in
trade  and  as  per  the  forecasts  and  one  that remain mainly unchanged. The
Emerging  Markets remains  the growth  engine of  the global economy. However, a
temporary  slowdown of the  Global expansion has  been observed due  to the slow
economic recovery and perhaps the debt crisis in some of the advanced economies.
The  short-term  turbulence  caused  by  inflation  and policy tightening in the
Emerging markets is considered temporary.
 
We maintain our strategic focus on business that can be generated in the markets
"East  of  Suez"  and  believe  that  the global economy especially the Emerging
countries  will  achieve  sustainable  growth  going forward. The most important
drivers  we  see  is  the  expansion  of  low  cost production in Middle East of
relevant  petrochemical products and the increased demand of same from countries
like China and the Indian subcontinent as well as most parts of South East Asia.
The  unrest in  certain parts  of the  Middle East  has so  far had little or no
effects  neither on the expansion nor on  investments. For us the Gulf region or
the  GCC countries are the key markets  for export of the petrochemical products
and  these countries  have so  far been  mostly unaffected  by the unrest within
other countries bordering the Mediterranean region.
 
Norgas Carriers
 
In the first half of 2011 we experienced improvement of the utilization level of
our gas tankers as the supply / demand balance in the spot market tightened. The
results  in Norgas Carriers  were significantly better  as the EBITDA during the
first  half of  2011 increased by  USD 9.2 mill  compared to  the first  half of
2010. This  despite  the  fact  that  Norgas  experienced  higher  off-hire  and
increased dry dock costs due to unexpected damages in 2Q11.
 
Most  of the growth in Norgas revenues  in 2011 is derived from increased export
of  Gulf region cargo volumes,  and the market is  continuing the positive trend
seen  from mid-2010. Norgas has about 70% of the  fleet on COA and T/C basis for
2011 which  has contributed to steady earnings. On the other hand, large volumes
under  the Gulf region COAs have also  limited our flexibility to take advantage
of a relative tight spot market seen in the first two quarter of the year.
 
The  reported spot markets rates for  seaborne transportation of ethylene by gas
carriers  were at highest USD 720k per  month during 1Q, however, in 2Q the spot
rates  decreased  to  USD  620k per  month  with  one year T/C being reported as
unchanged and at USD 550k.
 
Possibly  due to tightening monetary  policy in China, the  demand seems to have
weakened  somewhat during  the recent  months. Nevertheless,  the current market
condition  is  expected  to  improve  as  the Chinese credit tightening could be
approaching its end.
 
Norgas  Innovation - our  first of a  series of 6 "Multigas  vessels" loaded and
unloaded  its first LNG cargo  in early July. A  crucial step for IMS serving as
proof of the concept and it enables us to move forward in the establishment of a
market for Small-scale LNG vessels.
 
Piracy
 
Piracy  at  sea  has  become  a  well  organized crime. However, it is above all
performed more as a "business" which has been "booming" during the recent years.
By  mid-June 2011, numbers  of total  attacks worldwide  has been reported to be
243, of  which  154 incidents  were  reported  for  off  Somalia. Of 26 hijacked
vessels,  21 of these were reported for Somalia. 362 hostages are currently kept
for ransom by the Somali pirates.
 
Piracy and the effects that in combination leads to lack of safety for our teams
of  professional crews  has become  a great  concern for  us and for many of the
shipping  companies which are operating  ships within the area  of Gulf of Aden.
The  piracy infested  areas have  recently been  expanding to  the entire Indian
Ocean,  increasing the risk and probability of being attacked and the crew being
hijacked  by the  pirates. One  reason for  piracy beyond  the initial  area off
Somalia is that while the risks- for the pirates on the high seas are high it is
still  very profitable  and made  easy for  new startups.  Most of  the shipping
companies  affected are willing to pay ransom  in exchange of safety of the crew
and  property.  There  is  further  very  little  efforts  by  the International
community  to assist  to safeguard  international shipping  and our crew against
this type of organized crime. Only a few nations are currently arranging escorts
for ships by naval forces. Norway is not one of these.
 
Norgas  is focused on prevention of piracy incidents through early detection and
evasive  tactics.   We  have  so  far  not  yet had an incident with our vessels
incurring violence or risk of capture of crew and property. The vessels are as a
matter  of  policy  sailing  in  convoys  and  avoidance  of piracy hot spots is
arranged  through rerouting and route  monitoring during transit. New electronic
detection  aids and active anti-boarding systems have been tested and installed.
We  are also testing  new devices all  the time which  are in addition to use of
high  performance radars and binoculars for  our lookouts. The Norgas vessels do
not  currently have armed guards onboard, but  this policy is being evaluated as
rules  and  regulations  change  and  there  are more professional such services
available.  Citadels  on  the  Norgas  ships  are  strengthened  through further
developments  and equipped  with independent  satellite communications and being
upgraded  with CCTV.  The Crew  training program  is also  in good  progress and
masters  receive specialized training at  advanced training centers. Costs spent
on  equipment, crew training, risk insurance and  the cost of extra waiting time
for  convoys in terms of lost turn-over have amounted USD 3.5 mill over the last
2 1/2 years.  We do carry  proper insurances to  help mitigate the economic loss
for  the company of such events, but this cannot compensate for the suffering of
the crew involved in such cases.
 
The order book for gas carriers and the recycling of ships
 
The current Semi-Ref (SR) fleet consists of 243 vessels (2,428,151 cmb). The
order book for semi refrigerated vessels with cargo capacity above 4,000 cbm is
currently at 37 vessels (total 387,300 cmb) and equal to 16 % of current
capacity. A total of 15 newbuilds (157,900 cbm) is to be delivered during 2011;
this equals 37 % of the total order book. 8 of the Semi-Ref vessels (69,800 cbm)
have the capacity of carrying ethylene, of which 5 vessels (49,800 cbm) or about
one third of these total deliveries in 2011 are for the Norgas Carriers
operations.
 
Within  the SR  segment, there  are 125 vessels  (1,117,215 cbm) above 4,000 cbm
that have ethylene carrying capacity as of 1H2011, this amounts to approximately
46 % of the total SR fleet.
 
The  current order  book for  ethylene carriers  is 25 vessels (226,200 cbm); it
equals 20 % of the existing fleet and these will be delivered between 2H2011 and
2015. These  are  for  long  haul  and  short haul transportation. For long-haul
transportation  the  orderbook  for  ethylene  carriers  stands at 12 vessels or
142,600 cbm  capacity, while the order book  for short-haul ethylene carriers is
at 13 vessels (83,600 cbm)
 
Concerning  the age of the world SR ethylene fleet, the normal age for recycling
of  such vessels has been  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. There will be total 28
ethylene  carriers (199,820 cmb) over 25 years  which equals to 15% of the total
fleet by 2015, and thus mitigates the growth of the fleet in the period.
 
In 2Q, the ethylene carrier Norgas Trader built in 1981 was sold with a realized
book value gain of USD 0.7 mill.
 
Skaugen China Activities
 
The  result from Skaugen China Activities  contributed with a positive EBITDA of
USD  0.3 mill in 1H2011. The Shenghui Gas  Chemical System Company (50% owned by
IMS)  has increased revenues by 39% compared  to the 1H2010 as Shenghui has been
growing  its business  with a  substantial amount  of new  orders. With  the IMS
orders  completing Shenghui has been working on increasing third party business.
IMS  orders will account for only approx. 6.5 % of 2011 revenues of Shenghui vrs
26% in 2010.
 
The revenue growth of Shenghui has improved; nevertheless the gross margin is
still under pressure as the company has suffered from inflationary pressures in
China. The two factors combined have caused low YTD result compared to last year
and the budget.  We continue to look for and consider the opportunities within
the Chinese (IPO or PE) market in order to visualize the values created in
Shenghui since we became the largest shareholder in 2006.
 
SPT - Marine Transfer Activities
 
SPT  delivered a positive result of USD  2.08 mill on EBITDA basis (IMS share of
the  result with a 50% ownership) for the  second quarter of 2011. For the first
half  of the year it ended at negative USD 0.8 mill in EBITDA due to losses from
operation  of the  crude oil  tankers during  the first  quarter. The  crude oil
tanker  business  of  SPT  is  still  largely  affected by a poor tanker market.
However,  during the second  quarter, SPT showed  an improved performance within
ship-to-ship  transfer which helped to offset  part of the negative outcome from
the crude tanker market.
 
SPT  received the prestigious Devlin Award issued  by the Chamber of Shipping of
America  for 4 of its LSVs for operating more than 2 years without a crew member
losing a full turn at watch from an occupational injury.
Financial issues
 
The  Group has NOK 39 mill outstanding  in IMSK08 matures 15(th) July which will
be  repay at maturity. Further, the sales proceeds of USD 33.5m from WG3 will be
utilized on bond repayment which will have positive impact on the equity ratio.
 
As  the company's proactive  efforts to mitigate  potential refinancing risks in
the  bond markets  for our  bond portfolio,  the Group will consider refinancing
opportunities  for IMSK04 which  matures in September  2012.  Within the current
bond portfolio, the bond with the longest duration matures in March 2013.
 
The IMSK share
 
During  the first  half of  2011, IMS adopted  SEB as  its new  Market Maker for
improve the stock trading liquidity and tighten the trading spreads for the IMSK
shares.  The trading spreads have had  more stable development with an increased
volume since May compared to the period without Market Maker.
 
The share price has had a steady development in general compared to the
benchmarks and peer groups over the last 12 months.
 
IMSK-1H result 2011: 
http://hugin.info/179/R/1531208/465984.pdf
 
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Source: I. M. Skaugen SE via Thomson Reuters ONE
 
[HUG#1531208]