I. M. Skaugen SE : 1H Result 2014

The SPT group of companies US Gulf based crude oil lightering business, continues to contract as US domestic production continues to grow and imports are reduced. This is reflected in recently announced reports that US crude imports have fallen to approximately 7.3 million barrels per day. The crude oil imports to the US Gulf have declined with about 50% over the last years (see fig. 3).

Since June 2012 we have been working to resolve several outstanding issues with MAN, a German based marine diesel engine supplier. This included refund of prepayments on cancelled engines, warranty questions and compensation for malperformance of engines installed and finally a compensation for their deliberate manipulation of Factory Acceptance Tests (FAT) on engines manufactured by MAN and supplied by them to our companies. The manipulation of the FATs have apparently, and according to MAN representatives, been going on for more than a decade and the MAN entity in question has in 2013 agreed to be given a fine by the German authorities for this unethical and fraudulent conduct. We had reached an overall agreement in August 2013 to resolve all our outstanding issues, but MAN suddenly and unexpectedly decided to contest the validity of the agreements reached and agreed upon after more than a year of negotiations. We are now seeking redress for this. In order to process our civil claims, as described, we have found it to be required to file criminal charges against the MAN company for its fraudulent concealment of the FAT manipulations. In the civil claims we have filed we have found it necessary to put forward well founded claims for losses on our purchases from MAN inclusive of losses regarding extended warranty for performance deficiencies on marine engines already delivered by MAN and compensation for excess fuel consumption of ships to which MAN has delivered engines. This compensation claim is based on MAN admitting to having manipulated FAT tests at their factory in Augsburg and thereby stating lower fuel consumption than what was actually achieved at the tests and higher than the agreed design specifications.
The total global order book for additional  semi-refrigerated fleet (all sizes), now stands at 35% measured in cbm capacity of the sailing fleet, with the larger sized vessels (18-23,000 cbm) representing more than 70% of this order book for new ships. This order book of larger vessels reflects mostly the expectation of further growth in longer haul export of LPG and Ethane from the US and is well surpassed by the planned three-fold growth in US LPG exporting capacity. In the smaller vessel segment suitable for regional and short haul trade of petrochemical gases and LPG the growth is marginal at present (see fig. 4). We do expect a sizable part of this new LPG to also move short haul which bodes well for our vessels involved in the growing regional trade of LPG.

CORPORATE ACTIVITIES
We have continued to use excess liquidity to buy back bonds in the market and during 2Q14 we bought bonds with a nominal value of NOK 28.4 mill or about USD 4.8 mill. The book value of our outstanding bond debt has now been reduced with USD 16.8 mill since end of 2013 and was USD 82.4 mill by the end of the second quarter of which about USD 35 mill is due in 2015. Our consolidated mortgage debt by the end of 2Q14 was USD 66.6 mill and our liquidity was USD 21.8 mill.

We remain compliant with all covenants for our loan and bond portfolio and all these are continuously monitored to ensure that pro-active steps are taken.

AGREEMENTS IN AUGUST 2014.
We have in August 2014 agreed with our JV partners in Skaugen Gulf Petchem Carriers Pte Ltd (SGPC) in Bahrain (35% share) that they now will buy their second vessel; the Norgas Petaluma (8,556 cbm, built 2003). The agreed price of USD 24 mill reflects the vessel book value and it will be delivered in September 2014. The three shareholder partners in SGPC will be required to inject additional equity of USD 8 mill (100%) to allow for this purchase. SGPC will now have two ships that both will be financed by shariah compliant loan facilities from Bahraini based banks in the GCC region. The net proceeds, from the sale of Norgas Petaluma, of about USD 20 mill, will be used to reduce corporate debt associated with the vessel and other corporate purposes. The vessel will continue to be operated within the Norgas pool of ships.

As a next step in improving our efficiency further and to lower our operational costs, we have in August transformed our fleet management functions at Norgas Carriers into a newly established joint venture called Skaugen OSM Ship Management Pte Ltd in Singapore and (51% for IMS) in cooperation with the company OSM (www.osm.no). OSM is a global leader in the field of fleet management and by combining our forces we expect material efficiencies to be gained in the management of gas carriers The core of the team of professionals at Skaugen OSM Ship Management Pte Ltd come from the Norgas Carriers and all our seagoing team members will continue. The cost saving will thus not come from day to day operations of the ships, but come mainly from shared services and back up functions where we will benefit from the scale effects of OSM. We will also gain access to a wider range of expertise to handle the many operational challenges a company like our has to struggle with. OSM will gain access to the Norgas know how re gas tankers and this could allow the joint venture company to expand its business. The expected cost savings we are seeking are material and achievable and will gradually be realized and with full effect from late 2014.

FIVE YEARS OF TRANSFORMATION - 2009 to 2014.
The "2008 financial crisis" and the subsequent "Great Recession" made us re-think and re-focus our business towards what it is starting to look like today. We have gone from having global ambitions for three different business segments to having one core business segment focused on the markets for the handling and transportation of liquefied gases.

We have transformed from mainly being a long haul ethylene transporter with a focus on the Gulf region and "East of Suez" to a regional transporter of liquefied gases. We currently carry a balanced portfolio of all petrochemical gases, LPG and LNG and we operate both East and West of Suez. Our modern fleet of gas carriers with more flexibility and superior capabilities for cooling and changing between products transported has become an effective tool to capture opportunities from arbitrage trade. It has also helped improve efficiency by increasing the cargo carrying time for our vessels. The transformation is by no means finished, but we are getting where we want to be.

When the "2008 financial crisis" hit we were in the middle of a fleet expansion by newbuild of ships in China. The newbuildings were delayed during construction and the process of making their delivery was more complicated than anticipated and much delayed.  We managed to acquire all the ships combined at competitive cost, but not as competitive as expected. The expected lower cost we planned for were to compensate for the risks we took in the process. Due to the financial crisis as well as the delays the financing became more expensive and more complicated.

The challenge to secure debt financing was not the only challenge companies like ours were confronted with after the 2008 crisis. We took the necessary actions to secure long term finance solutions, but we and much of the rest of the industry also faced an "output gap". The widening gap created by the increased supply capacity in the value chain, not only in the marine transportation segment, was based on pre-crisis analysis of future growth in demand. In many regions and in many industries and certainly within ours, this "output gap" is yet to be closed.

During our journey on this sea of change, the headwinds have sometimes been strong. The Iran sanctions by EU/US have made it more challenging, but the decline from GCC region itself has also been material and the trade now stands at less than half of what it used to be. The long-haul trade of petrochemicals, and especially that of ethylene out of the Gulf region that was our core business area, has thus been greatly reduced and has also to a great extent been substituted by more of a short-haul trade This has led to a reduction in the ton-miles demand for the core petrochemical gas products we carry and chief amongst these are ethylene. Most analysis and plans were for this trade to expand.

Another major change has been the stark decline in the import of crude oil to the US due to increased domestic oil production. This deteriorated the fundamental basis for the core business of SPT- the crude oil lightering business in the US Gulf based on long haul imports of crude oil. This market has been reduced to about 50% of its former size.

We have also encountered challenges by LNG not being available in the quantities expected. The shortage of LNG has made LNG costly and delayed the expected conversion from diesel for power generation and transportation that would allow our ships to serve these markets.  We see LNG production expanding again in the years ahead and the price for LNG has become more affordable. This should make LNG more available for the redistribution purposes we are cultivating.

New opportunities have however emerged on the horizon during this journey and a prime example are the positive effects of the shale oil- and gas boom in the US, with growth in both export and import of most liquefied gases.

After having completed our fleet renewal program in 2010/11, we have successively divested all of our ship building activities in China as well as exited all other non-core business activities in China. The composition of our assets has thus changed as well. During this five year period we have gone from managing a diverse fleet of 41 vessels in all our segments to a fleet of 15 that is now aligned with our liquefied gas strategy. We have sold 7 of our older and less efficient gas carriers, net proceeds from such sales are USD 34.5 mill and all with a gain compared to book value. Other non-core assets have realized USD 52.6 mill in net proceeds. We have continued to use excess liquidity to reduce our debts and to improve our balance sheet capacity. We have during this period reduced our bond debt with USD 107 mill (see fig 5).

Our shore based teams and organization has step by step been both centralized and simplified during this period and aligned with the reduction of business areas. The management of our core business is now based at our hub in Singapore with a small corporate office in Oslo to cover the functions needed. Our shore based staff has been reduced with more than 100 people or 60% and as a result of the strategic and operational changes made.

FIVE YEARS FROM NOW?

We have continued our strategy to target and develop niche markets where we see potential for growth and higher margins and where we can use technology and innovation to position us as the cost and service leader. The small scale LNG markets is one such niche market where we believe we can leverage our fleet of innovative LNG carriers with our knowledge of safely transferring liquefied gases as well as LNG terminal management.

Another growing market is the short haul market for handling and transportation of liquefied gases such as LPG and the wider range of petrochemical gases. These gases are petrochemical gases like ethylene, butadiene, propylene and VCM, all key intermediate products in the value chain for plastics and rubber products. LPG (liquefied petroleum gas, i.e. propane and butane) is an easily distributed fuel product but also a key feed-stock for the petrochemical industry. LPG is a by-product from oil- and gas processing and its markets are supply driven. LNG is natural gas that has been cooled down to its liquid form in order to transport it efficiently. At the point of use it will be heated up and turned into natural gas again and used mostly for power generation.

One thing that has not changed throughout this transformation is our firm belief that small scale LNG will become a key market for us. It has taken longer to achieve, but we do believe we will get there. During this period we have made substantial investments to develop our small scale LNG concept. The cargo system we developed for the MultiGas vessels is unique and contains many novel technologies. It can handle a wide range of gases including LNG and keep them cool during transport without any losses. We have also invested close to USD 15 mill in R&D as well as market- and concept developments. The latter includes equipment and systems for transferring (ship-to-ship), storing and re-gassing of LNG. The return on these investments has been slower than anticipated but we now see regional markets where tangible projects are under development.
In many countries state fiscal reasons do also require that fuel subsidies now need to be removed. This will ensure that gas is cheaper than diesel fuel and the economics for gas distributed as LNG will be there for two key market segments.  Firstly, remote power plants where more expensive diesel is the alternative fuel due to lack of gas supply through pipelines. Secondly, the transportation market as fuel for trucks, buses and cars as well as ships. Diesel and petrol are far too valuable products while abundant and lower cost gas should become the transport fuel of the future. Due to its composition, natural gas is the fossil fuel with the lowest emissions. Compared to conventional fuels it will generate no SO_x emissions, reduce NO_x emissions with 80-90% and reduce CO₂ emissions with 20-30%. For both these market segments, one of the key enablers will be the availability of small scale LNG supply chains where the gas is delivered in its liquid form and in smaller quantities to  multiple locations. Our fleet of six LNG capable vessels could easily be deployed in LNG service as and when needed.

The SPT group of companies has been transformed from its total dependency on US oil imports with heavy commitments on leased crude tankers and into an "asset light" global service business for "ship to ship transfer" of liquefied gases, crude oil and petroleum products. The SPT teams has also during this period managed to develop a portfolio of LNG related clients - both for managing ship-to-ship transfer of LNG but also to provide LNG terminal management and advice for LNG terminal design. For many new entrants to the LNG trade there is a demand for the SPT experience and know-how for design and operations of LNG receiving terminals, Floating Storage Units with or without regasification as well as growing ship to ship transfers of LNG.

Responsibility statement

We confirm, to the best of our knowledge, that the condensed set of financial statements for the period 1^st January to 30^th June 2014 has been prepared in accordance with IAS 34 - Interim Financial Reporting, and gives a true and fair view of the Group's assets, liabilities, financial position and profit or loss as a whole.

We also confirm, to the best of our knowledge, that the interim report includes a fair review of important events that have occurred during the first six months or the financial year and their impact on the condensed set of financial statements, a description of principal risks and uncertainties for the remaining six months of the financial year, and majority related parties transactions

Oslo, 20^th August 2014

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 business activity is to provide logistics solutions for seaborne regional distribution of liquefied gasses such as LNG and petrochemical gases as well as LPG.

The Skaugen Group of companies currently operates a fleet of 22 vessels worldwide. In our core fleet of 15 advanced gas carriers, we have 6 vessels with the capacity to transport LNG in addition to petrochemical gases. Our global teams can provide on- and off-shore LNG terminal management as well as ship to ship transfer services of LNG/LPG. We have in-house capabilities for the development and design of specialized high quality LNG- and gas carriers for our niche markets. We recruit, train and employ our own team of seafarers.

IMS employs approximately 700 people globally and with nearly 30 nationalities represented. We manage and operate our activities and service our clients from our offices in Singapore, Oslo, Houston and Sunderland.