I. M. Skaugen SE : 1Q Result 2014

The I.M. Skaugen Group (IMSK) had a negative result for 1Q 2014 of USD6.7 mill, compared to a positive USD1.7 mill for 4Q 2013. The EBITDA generating capacity 1Q 2014 was negative USD3.6 mill, compared to negative USD1.5 mill for 4Q 2013.

PERFORMANCE 1Q14
We have, over the last year, initiated the sale of assets to facilitate an exit from our non-strategic businesses in general, but especially in China, arranged for the restructuring of the SPT business and have made divestments of older gas vessels, that had become less profitable due to age. The end result will be a re-alignment around our core business - Norgas and its liquefied gas transportation. In 1Q14 we sold Norgas Patricia at a profit. Norgas Carriers now operate a fleet of 15 gas carriers. This is one of the youngest and most modern fleets in the liquefied gas transportation market. We have further continued the "Centralise and Simplify" cost reduction program. The goal of this program is to improve our efficiency and reduce the cost of operations. We will continue this process going forward and plan to move additional functions to the Singapore hub in order to achieve further efficiencies.

The supply of petrochemical gasses, especially ethylene available for long haul transportation out of the GCC or Gulf region, continue to weaken compared to previous quarters. The underlying reasons for the decline of exports from the GCC region are a combination of un-announced shut-downs, feed-stock shortages and plant optimizations.

We started to reposition part of our fleet from the GCC region at the end of last year which increased our exposure to the prevailing spot markets. As a consequence of the repositioning we have experienced a much higher than normal commercial idle time with a negative impact on the TCE (Time Charter Equivalent) for our fleet.

The decline in the long haul business, where Norgas operates, has led to a prevailing overcapacity of tonnage within the liquefied gas transportation markets for petrochemical gasses. The lack of available products from the lower cost Middle East region is compensated by "short haul" volumes supplied by higher cost suppliers from other regions.

The somewhat poor trading performance of the Norgas vessels in 1Q14 is reflective of these factors.

The butadiene market, our second largest product category, developed a little more positively compared to the ethylene markets in 1Q14. We also see more positive signs going forward with a shortage of Butadiene developing in the US as a result of changes in feedstock for US crackers with more ethane being available.

Two out of the three of our "short-haul" combination carriers have been employed with time charter agreements. These are with clients that can make use of their capacity to both transport chemicals and petrochemical products. The contract employment follows from a prolonged period of weak performance trading these vessels in the spot markets.

CORE BUSINESS - NORGAS SUPPLY&DEMAND
By far, the biggest game changer for all energy related business, including our company, will be the US shale gas and oil boom that now is gaining further momentum.

We expect that this will have a positive impact on most markets for seaborne logistics and for all kinds of gasses. We have already seen the fast growing export of LPG or propane from the US leading to a more ton-miles for the global LPG fleet and with this a growing order book for LPG carriers. We do expect that the large supply increase of LPG will delink LPG from oil prices and this will again drive demand for LPG.

The export of the excess ethane will follow, since shale oil- and gas are rich on ethane. This ethane will be used as feed-stock in overseas crackers and mainly in Europe and Asia, where producers can change feedstock from naphtha to ethane. When the planned and new cracker expansions in the US (30-40% of existing capacity) will become operational in a few years' time, we expect the export volumes of ethylene to increase.

Further, we see potential imports into the US of butadiene and propylene as a result of the increased use of ethane as feedstock.

The availability of low cost gas in the US has also lead to an unprecedented number of LNG export facilities being planned. Even though not all of the planned 240+ million tons LNG capacity may be built, US export of LNG will have an impact on both the availability and the pricing of LNG. A majority of the LNG volume will be targeted for the over-seas markets. The regional markets in the Caribbean will also have access to a large LNG source nearby.

The unknown factor in the above analysis is how much of the available supply of liquefied gasses out of the USA will be absorbed by a developing domestic industry and thereby reduce the exports.

Norgas' current sailing fleet of six "small scale" LNG carriers is the largest operational fleet of its kind. Their development arose from our extensive experience in design and in operation of gas carriers. Our firm belief in the market for the emerging regional distribution of LNG leads us to believe that these can be deployed for new LNG trades; either as the long term solution or as an interim solution while we build a vessel of optimal size and configuration to meet the specific needs of new customers.

Our SPT group of companies (50% share) was the early pioneers in the realisation of ship to ship (STS) transfers of LNG and performed the world's first commercial transfer already in 2006. Since then, the SPT group has performed more than 150 transfers between LNG ships. The SPT group has also been instrumental in developing the requisite procedures and equipment for STS transfers as well as being forerunners in the training of staff for the operations. Today the SPT group also provides project development of LNG facilities as well as the operational management of the same.

The combined know-how of SPT and Norgas will enable us to provide customers with a single point of contact for terminal and shipping solutions; starting at the development stage and continuing all the way to FID and through-life operational support of the complete LNG supply chain.

During 1Q14 SPT completed the commissioning of China's first FSRU unit in their role as technical advisors and is currently supporting, in an advisory capacity, a major infrastructure project in the Americas. Additional long term opportunities within the LNG sector are under active discussions. If successful this will provide a solid foundation for future growth and diversification in the LNG segment and enable the SPT group of companies to work itself out of the reliance on US Gulf based lightering business of crude oil. The US Gulf crude oil lightering business will continue to be negatively affected by lower crude imports as US domestic production reach record levels owing to growth in US crude production from shale deposits. The SPT team is currently operating only one crude oil tanker within this segment against a contract with its clients and on a more permanent basis. Additional capacity needed is then secured from the market on a spot basis to cover spot needs. The SPT teams continue to work to reduce the relative importance of this segment by expanding into other regions and with other services.

The order book for long haul semi-ref and ethylene capable vessels of sizes 8,000 cbm and larger has changed during the first quarter of 2014. The current order book is now at 31% measured in cbm capacity of the fleet. The growth in the fleet is mainly driven by the expectation for growing export opportunities of LPG from the US as well as the new export of ethane and certain other petrochemical products. Much of the growth in cbm capacity comes from larger sized vessels destined for the LPG market and a size of vessels which are not normally used in the long-haul trade of ethylene. In the short-haul segment there is no growth in the fleet.

CORPORATE ACTIVITIES
In 1Q14 we continued last year's activity of using excess liquidity to reduce our debt and strengthen our balance sheet. During 1Q14 we bought back bonds in the market to a nominal value of NOK67.5 mill. reducing our bond debt with a further USD12 mill.  The book value of our bond debt now stands at USD87 mill. In April 2014 we bought back bonds with a nominal value of NOK15.5 mill. Our consolidated mortgage debt by the end of 1Q14 is USD93.2 mill. Our liquidity was USD61.9 mill. at the end of 1Q14.

We remain in compliance with all the covenants for all our loan and bond portfolios and all these are constantly monitored to ensure that pro-active measures are being made.

COMPANY OUTLOOK
The longer term and positive fundamentals for liquefied gas transportation are still in place and the outlook for the global economy is positive which will support the fundamental growth in our current core market. Our market position and asset base makes us well placed for capturing the expected recovery and thus an upturn in the long haul transportation market for petrochemicals as well as the emerging markets for regional distribution of LNG.