I. M. Skaugen SE : 1Q result 2012

The pre-tax result for 1Q12 was small profit of USD0.1 mill compared to losses of USD4.4 mill for 1Q11 and USD4.2 mill in 4Q11. The result of the 1Q12 on an EBITDA basis was USD5.3 mill compared to USD6.0 mill for the 1Q11 and USD3.8 mill in 4Q11.

Earnings affected by Middle East situation

Despite the positive outlook on petrochemical trade and global economy; the financial markets and shipping markets are not yet fully recovered after the financial crisis of 2008. This causes volatility and uncertainty that affects the business and reduces profitability. Due to international sanctions on Iran and potential conflicts with Iran many vessel owners needs to consider to reposition their fleets presence in Arabian Gulf. Our decision to be cautious and reduce our presence in Arabian Gulf in advance, due to the potential tensions in the Iran conflict, affected the performance with repositioning costs, and reduced earnings. However, March performance improved and we see April as returning closer to our expected levels.

There are great uncertainties regarding trade patterns to substitute for the export of Iranian products and the effectiveness of the sanctions. This will affect shipping of such products going forward and affect ton miles demand for our type of ships.

With Iran trading sanctions affecting trade in Asia, products will have to come from other sources to satisfy the large demand in Asia. Our long term clients have capacity to provide the volumes and we see improved 2012 earnings looking forward despite of the potential conflicts with Iran.

International sanction will be effective from May 1^st and most if not all vessels owned or financed or insured by western companies will be refrained from trading to and from Iranian ports with petrochemical gases.

Norgas Activities - Core segment

The EBITDA result in Norgas Carriers 1Q12 was USD6.1 mill compared to USD8.6 mill in 1Q11 and USD6.2 mill in 4Q11.

Two core clients experienced unplanned cracker shutdowns in January and February which led to much lower volumes under our COA contracts compared to the past 5 years average. The impacted vessels were re-employed in the spot market, which yielded lower earnings due to idle time and repositioning cost compared to what the vessels could have earned under the COA contracts.

High oil prices also leads to increased bunker cost not compensated by spot markets due to time lag.

"Norgas Energy" (6,100 cbm), built in 1979, was sold in 1Q12 with a profit over book value of USD2.2 million.

Macro update - Petrochemicals
  
In the medium to long term we see that there is ample room for higher plastic consumption as a natural consequence of higher standards of living in emerging markets, new ways of incorporating plastic in construction and manufacturing, and a general higher per capita income in emerging markets. We see that the link between GDP growth and ethylene demand in China underbuilds our forecast that the Chinese demand for polyethylene will increase steadily over the next decade. This is also supported by the worldwide urbanization trend - particularly for emerging market countries. The same pattern as is observable for consumption of other commodities and consumables looking forward.

The higher oil prices leads to regional diverged cost of ethylene production as production of ethylene through ethane has a lower cost. The key advantage of the Middle East is thus the low cost of feedstock with ethane offered at a low cost giving a considerable advantage relative to producers using naphtha as feedstock.

The cost advantage of the producers based in the Middle East has grown as crude oil prices have increased over the last decade.

The US petrochemical market recovered as the many ethane based crackers (more than 80 percent of ethylene produced in the United States is sourced from ethane and propane) profited from plunging natural gas prices and improving their competitive advantage. We also see the US providing for further seaborne trade with their lower cost of ethylene production.

We hence still see a positive impact on seaborne transportation of ethylene when demand for petrochemicals is steady and regional cost differences continue to provide added incentives for trade.

Global Ethylene fleet - limited growth

China has, at a competitive cost, provided us a complete renewed fleet with efficient and advanced operational capabilities. Today we have a fleet consisting of 19 vessels at an average age of less than 9 years with average size of 9,000 cbm. 75% of the fleet is engaged in long-haul Ethylene trade and all the ships have the "best in class" cooling capability to maintain our strategy as cost and service leaders in the petrochemical seaborne transportation business.

Norgas has the largest fleet, and below average age, in the market for long haul ethylene trade (8-22,000 cbm). The outlook on newbuilding activity is limited and net increase in fleet is limited. A substantial number of vessels will pass 25 years of age in the years to come and these ships will have limited capability of participating in the ethylene trade. The expected net increase in fleet looking forward to 2016 is only 6 vessels. This is less than 7% of world ethylene trading fleet.

Lifting LNG cargo - IM Skaugen currently has 6 Multigas carriers capable of carrying LNG

We have seen more attention and activities in the small scale LNG market, with increased and wider acceptance of these concepts as a necessary solution to the limited energy sourcing in more remote areas.

Our small scale LNG solution will provide cheaper and cleaner fuel, a future necessity for a growing population in the emerging countries and markets.

"Bahrain LNG", our pioneer project on small scale LNG infrastructure and transportation in Bahrain, is proceeding according to plan. There are two contenders in the final round and decision is expected from the Government by end of 2012.

SPT - Marine Transfer Activities

SPT delivered a negative result of USD1.0 million on an EBIT basis during the first quarter of 2012 compared to negative USD2.0 mill in 1Q11 and USD0.3 mill in 4Q11 (based on IMS's 50% ownership).

SPT continues to be negatively impacted by the crude oil tanker market, with excess tonnage in the market. We do not expect a significant upturn in the crude tanker market in 2012 as market fundamentals remain unchanged.

We therefore continue to focus on our core business of ship-to-ship (STS) transfers to offset the weak tanker returns and yield positive results for SPT. Our STS business saw slightly lower volumes due to the seasonality of the first quarter, which is quite typical. We have secured several new customers during the first quarter throughout our various bases worldwide, further diversifying our customer base.
With respect to SPT's LNG business, we have made considerable progress in securing both fixed and opportunistic revenue, with a number of longer term projects under active discussion.

China Activities

The industry manufacturing company Shenghui Gas and Chemical Systems (Shenghui) had EBIT results of RMB9.6 mill in 1Q12 compared to RMB3.8mil in 1Q11, an increase of 141%. Revenue growth for the first quarter was 5.0% compared to the same period last year. This growth materialized in EBIT margins of 6.0% compared to 2.6% in 1Q11.

In order to visualize the values that have been created in Shenghui, we are continuing to explore the opportunities within the Chinese capital markets.

Financial Issues - Currently no refinancing risk after new bond issues in 1Q

During 1Q, I.M. Skaugen SE refinanced its four bonds (IMSK04, IMSK09, IMSK10 and IMSK11) due for repayment within one year.

IMSK12 is a NOK400 million bond with spread of 825bps over NIBOR maturing in 3 years. IMSK13 is a callable NOK 350m bond with spread of 900bps over NIBOR maturing in 5 years.

The two bonds totaling NOK750m will refinance existing bonds totaling NOK848m at the end of 4Q11. IMSK is continuing to reduce its bond debt, supported by continuous buy back efforts.

The graph below represents the company's net bond exposure in NOK million after 1Q12 market activities. Settlement of some of the transactions was in early April.
  
We are satisfied to have eliminated all refinancing risk until 2015 - which relieves us to focus on core business going forward.

The bonds have however increased our financing cost and the weighted average cost of debt has increased to 7.4% from 6.0%. The total cost on our bond debt itself has increased to 9.0% from 6.5% in 4Q11.

 

Sale of Non-Core Assets
Our shares in CSAM Health AS were sold in March with a profit of USD2.8 million.

The IMSK share

At the end of first quarter 2012 the shares were trading at NOK27.3 (USD4.80), down 8.4% compared to NOK29.8 (USD4.97) yearend 2010. By way of comparison, the Oslo Stock Exchange benchmark index increased by 10.8%, the MSCI world index increased by 10.9% and the transportation index increased by 16.7% during the first quarter. The market capitalization of I.M. Skaugen SE was NOK739.8 million (USD129.9 million) as per 31 March 2012. The Annual General Meeting was held 26 March 2012 at the Company's headquarters in Oslo, Norway.

Oslo, 17^th April 2012