The I.M. Skaugen Group (IMSK) achieved a result for 2013 of USD18.4 mill, compared to a negative USD15.9 mill for 2012. The EBITDA for the Norgas segment for 2013 was USD8.4 mill, compared to USD24.1 mill for 2012.
PERFORMANCE 2013
2013 proved to be yet another year of external challenges and this brings the "Financial Crisis" of 2008 to have had rippling effects for 5 years. The world economy delivered growth numbers below what was originally expected, at the beginning of the year, and this shortfall in economic activity has weighted heavily on world trade which has registered only a slight increase from 2012. As our core business of liquefied gas transportation is directly linked to growth in the world economy in general and to the growth industrial production and demand for plastic products in particular, the year has proved to be more challenging than first envisaged. We still suffer from the overcapacity within these markets for liquefied gas transportation and much so within our core market segments. We have also seen a year-on-year decline in the ton-miles demanded for our type of services which has made the prevailing overcapacity even more visible.
The action plans initiated to improve our profitability and balance sheet capacity have delivered tangible results in 2013;
In 2012/2013 we have been working to resolve several outstanding issues with MAN, a key German based marine diesel engine supplier. This included refund of prepayments on cancelled engines, warranty questions for malperformance and compensation for deliberate manipulation of Factory Acceptance Tests (FAT) on engines manufactured by MAN and supplied by them to us. 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 addition we have found it necessary to put forward well founded claims for extended warranty for performance deficiencies on marine engines already delivered by MAN. We are also seeking 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 and thereby stating lower fuel consumption than what was actually achieved at the tests and higher than the agreed design specifications. The manipulation of the FATs have 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.
The restructuring measures implemented in the SPT group of companies (50% ownership) during 2013 have had much of the intended effect and the SPT group has delivered more positive results on a EBIT level throughout the year. The much needed restructuring sprung from the continuing decline in SPT Ltd's core market - crude oil lightering in the US Gulf and due to the much declining imports of crude oil to the US. This is the result of the rapidly changing energy balances in USA brought by shale oil developments. As a consequence of the losses SPT Ltd did re-deliver four out of six Aframax tankers on a bareboat charter to its owners in December and the two remaining ones in the early part of 2014. The owners of these six vessels have now been able to employ these on their own and by this they can enjoy a much more promising market for crude tankers than being tied to the SPT Ltd business in the US Gulf. The SPT group of companies has now a sounder platform for the further growth of its global service business for both conventional products and LNG. With the joint venture departure from the sole dependence on the crude oil business in US Gulf we will be able to embark on a process of enabling the companies to participate more in the field of LNG handling - a business much closer to the core business of IMS.
Throughout 2013 we have used excess liquidity to reduce our debts. The book value of the outstanding long term bond debt has been reduced with USD44.5 mill from USD143.5 mill to USD99 mill by repayments as well as buying back bonds in the market at prices below par. In January 2014 we bought back bonds with a nominal value of NOK37 mill. Our consolidated mortgage debt by the end of 2013 was USD77.6 mill.
We have maintained an equity ratio of above 25% through the year, and our target of 30% remains.
CORE BUSINESS - NORGAS PERFORMANCE 2013
The result on EBITDA basis in Norgas Carriers segment for 4Q13 was a negative USD1.5 mill and USD8.4 mill for the year 2013 - compared to USD3.6 mill and USD24.1 mill respectively, for the same periods in 2012.
The main factor affecting our performance this year has been the lack of recovery in the export of petrochemicals and especially ethylene from the Gulf region (GCC region) and the loss of volumes from Iran following the international embargoes implemented mid-2012. Compared to 2012, the export volumes from the region were down with more than 30% in 2013.
The shortfall in ethylene export volumes from the GCC region was for the most replaced by intra-Asia trade which is mainly short haul trade and thus less ton-miles. The results we have seen is an overall reduction in ton-miles demand for the global ethylene fleet and thus an increase in commercial idle time which resulted in a weaker spot market.
Much of the reductions and volatility in volumes were from contracted customers in the GCC region. This is also probably a likely trend in the near future. We have had a large part of our fleet tied into contracts for exports out of the GCC region and with less volumes from these contracts we have experienced the effects of the softer spot markets. However, we do believe that we did continue to outperform our peers in these markets. At the end of the year we declined to renew certain freight contracts for exports from the GCC region due to the low rates offered and the substantial amount of ships needed to cover the contract to be permanently placed in the region. With our view of an improvement in the markets we decided it was financially better to try other regions for the majority of our fleet.
As a consequence we therefore started to reposition part of our fleet to other regions in 4Q13 and thereby increasing our overall spot market exposure. The repositioning of the fleet did affect the 4Q13 results negatively.
For butadiene, which is our second largest product transported, volumes declined in 2013 due to a complex set of reasons and this contributed to the further decline in demand for long-haul transportation of petrochemicals. A significant build-up of naphtha based cracker capacity in Korea created an oversupply of butadiene (as a bi-product of ethylene) in Asia and at the same time Europe's large crackers had un-planned shutdowns, which resulted in less available butadiene supply. In addition the US has steadily increased its imports of finished car tires from China thereby replacing locally made tires, leading to reduced demand for butadiene in the US. Korean exports to US thus disappeared due to lower demand. We expect that some of these butadiene volumes should be recovered as Europe's cracker maintenance schedule is lighter in 2014 which should lead to increased supply of butadiene. We do see a gradual recovery of the prices for Butadiene and we do see more volumes being shipped and expect that this market will make a gradual recovery.
Our three short haul combination carriers (about 6,000 cbm size and capacity to carry a combination of petrochemicals and chemicals) continued to show an unsatisfactory performance in their spot trade. With a low order book for smaller sized vessels for short haul and with the chemical markets improving the performance of these ships is expected to improve in 2014.
CORE BUSINESS - NORGAS SUPPLY&DEMAND
The by far biggest game changer for all energy related business as well as ours will be the US shale gas and oil boom that now is gaining momentum. We expect this will have a positive impact on the market for seaborne logistics of all kinds of gases. We have already seen the fast growing export of LPG from the US leading to a more ton-miles for the global LPG fleet and with this a healthy order book for LPG carriers. We do expect the large amounts of LPG will increase the discount of LPG to oil and this again will drive demand for LPG. Soon to follow will be the export of the excess ethane (shale oil- and gas is rich on ethane) to provide feed-stock to overseas crackers and many of these in Europe that today use naphtha as feedstock. When all the planned and new cracker expansions and additions in the US (currently 30-40% of existing capacity) will become operational in a few years' time, we expect an increase in exports of ethylene.
We will also see potential imports of butadiene and propylene due to structural deficiencies because of choice of feedstock. The availability of the lower cost gas in the US has also lead to an unprecedented number of LNG export facilities being planned. Even though far from all of the 240+ million tons of planned LNG capacity will be built, US export of LNG will have an impact on both availability and the pricing of LNG. Much of this LNG will be destined for the over-seas markets but also the regional markets in the Caribbean will now have a large LNG source nearby.
The current order book for semi-ref and ethylene capable vessels of sizes 8,000 cbm and larger sizes is mainly driven by the enthusiasm for growing export opportunities of LPG from the US as well as export of ethane and certain other petrochemical products. In percentage terms the order book, measured in cbm, stands at 30% or an annualized growth of 7% the coming 3-4 years, but in 2014 the fleet will probably grow by 12 %. 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.
With the now imminent suspension of the Iran sanctions; Iran is set to re-enter the market in the near to medium term. Iran was prior to the sanctions a major exporter with about 30% of the ethylene global long haul trade market. This should create a long awaited boost for the demand for our type of ships.
IMS currently controls and operates the largest small scale LNG fleet in the world. So far the lack of successful projects requiring short haul distribution mainly stems from the absence of infrastructure (smaller LNG receiving terminal) as well as low growth in supply of available LNG outside of major long term contracts. There seems to be a shortage of LNG that will take some more time to overcome. We continue to believe that the small scale LNG market will develop as expected and planned for and we are now seeing more and more changes to the conventional LNG business models. These changes are driven by three main factors; market, infrastructure and the entrance of new players. We have seen growing synergies between SPT and Norgas for LNG operations and we find ourselves often in the situation of proposing joint solutions to prospective clients.
By offering our combined skills and competencies of both Norgas and SPT we as a company can provide customers with a more complete solution for regional distribution of LNG. We have a fleet of six LNG capable vessels that with short notice can be deployed in LNG trade; be it as a long term solution or as a stop-gap solution until a tailor made ship can be built if the client's needs should change. We can also provide solutions for the effective loading of LNG, irrespective of size of terminals, as well as discharge at the receiving end.
With low gas prices both in the US and Europe, and with an increasing decoupling from the oil price, the LNG sellers are looking to access new markets with a better margin. At the same time the users are looking to switch from oil to gas to benefit from the widening price gap as well as to meet new and more stringent emission legislation. Many new users of LNG in emerging nations are willing to replace diesel with gas and enjoy the lower cost of power generation. New LNG supply coming to the market is therefore seeking out these high-value non-established markets. These markets like that of the transportation market for both ships and vehicles, do not want to receive LNG in huge cargo lots from a large conventional LNG vessels of 170,000 cbm- but quantities more in line with what our Multigas ships can supply.
Pipeline costs, geography and politics are preventing the movement of gas by pipeline; therefore LNG is becoming economic, despite relatively short distances due to new technologies and creative thinking, as for example our LNG capable Multigas ships
The high level of capital required in the LNG chain has previously acted as an entry barrier for many companies. It has tended therefore to only be the province of large companies. Small scale LNG technologies have reduced the size of financial exposure and meant that new players can enter the business as we have seen in Europe, the US and in China. These companies, often operating in a different market segment, also bring different skills and innovative approaches. We like to think that we are one of these companies.
NON-STRATEGIC JOINT VENTURES AND ASSOCIATES
These businesses, which consist of our SPT business and our remaining activities in China, delivered an EBIT of USD2 mill in 2013. This is an improvement compared to last year's result of a negative EBIT of USD3.9 mill for the two businesses.
COMPANY OUTLOOK
We enter the year 2014 as a leaner and more focussed organisation with a core strategy within gas transportation; long-haul trade of petrochemical products and regional distribution of LNG.
We have within Norgas Carriers the most modern fleet consisting of 15 unique and technically advanced gas carriers that can both transport petrochemicals and LNG. We have a young fleet with an average age of 6 years, compared to the world average of 12 years. Our ships have superior cargo cooling plants that also ensure a fast change of grade in order to be ready to load the next cargo as soon as possible and thus reduce idle time and un-necessary ballast voyages.
By combining the Group's LNG expertise from both the SPT and the Norgas organisations and with our fleet of six LNG capable gas carriers - we can offer a complete solution for the growing market for regional distribution of LNG.
The world economy is forecasted to have a more positive development in 2014 than was in 2013, which will benefit the long-haul trade of petrochemicals. We expect more demand for long-haul transportation and driven by Iran entering these markets again. A gradual impact of the effects of the US exports of liquefied gasses will be noticed. However, the business environment will remain volatile and it will be important that we continue to improve our ability to quickly adapt to changes and respond to market opportunities as they arise.
One of the major risks to our outlook is oil price volatility, as both the petrochemical trades and the growing small scale LNG market is benefitting from the arbitrage between gas and oil prices. The available supply of energy in all forms, with the exception of LNG, seems to be ample right now and this could give way to a downward pressure on oil prices in the near term.
Oslo, 17th February 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, Shanghai, Houston, St. Petersburg and Sunderland.