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I. M. Skaugen SE : Preliminary Result 2015


The I.M. Skaugen Group (IMSK) had a negative result for 2015 of USD4.9 mill,
compared to a negative USD27.1 mill for 2014.

The year was another challenging year to achieve what we have set out as goals
and thus tried to accomplish. We are pleased about progress made in many
areas and the hard work to accomplish this, but the negative results and cash
flow due to the market conditions and trading of the ships is a

Utilization of the Norgas fleet improved in 2H15 and as a result the
underlying earnings per vessel increased with 40% in 3Q15 compared to 2Q15,
and in 4Q15 the earnings increased by another 23% compared to 3Q15. From a
low point in April the earnings at year doubled (fig 1). The average earnings
of the fleet is right now back at or above the 10-year historical average. We
have further managed to improve the forward contract coverage for our fleet
in 2H15.

This improved performance in 2H15 is supported by an overall improvement in
the market conditions. We experience growth in the Atlantic market for
seaborne transportation of LPG and petrochemicals and we see that Far East
Asia is increasingly short on products that more often needs to be covered by
long haul transport. At the same time excess supply is brought on stream in
the US (LPG, petrochemical gas and ethane) and also from Iran following the
lifting of sanctions in January 2016. This drives a fundamental increase in
ton-miles and a gradual improvement in the overall utilization of the
semi-ref/ethylene capable fleet (fig 2.).

The lower oil price should further support our LPG and petrochemical gas
business. Lower product prices stimulate end user demand, as plastic prices
are reduced consumption increases. LPG is being more and more used as
feedstock in the petrochemical industry and for transportation and power
generation. The lower oil price and the high growth in ethane and LPG supply
from the shale revolution in the US will further boost the demand for
shipping of petrochemicals as well as for LPG and ethane. There are also
other pockets of excess petrochemical gas emerging from a revival of naphtha
based crackers in Europe who has seen remarkable margin improvements along
with the drop in the oil price. The naphtha based production creates many
by-products such as butadiene which in turn generate additional trading

In 2015 we successfully performed several LNG voyages in Asia and this
continued into 2016. We loaded LNG from a large export terminal in Asia and
delivered the LNG to a smaller re-distribution hub. This LNG hub services the
regional small scale LNG client base. The main use for the LNG is the fast
growing transport market either in the form of LNG or converted into CNG
(compressed natural gas). This contract confirms the versatility and
flexibility our Multigas carriers have in terms of loading LNG from any
source of LNG. It also re-confirms the USD premium our vessels can achieve
when performing LNG trade compared to the petrochemical market. These
premiums are achievable in the Small Scale LNG niche as we are able to make
use our unique know-how built up over many years, Multigas technology and
innovative maritime solutions.

We believe that we are seeing the time for Small Scale LNG (SSLNG) developing
as we have envisioned for many years; bringing LNG to power generation and
replace diesel or naphtha. Lower oil and derivative prices are positive for
demand - leading to converging energy prices supporting regional and short
haul trade. Lower oil prices have also enabled many countries to reduce and
remove subsidies on diesel, supporting the competitive position of gas.
Supply of LNG is further set to exceed demand, increasing the need to develop
new markets for LNG (?stranded customers? without access to pipeline gas)
through fast-track and flexible supply solutions. Finally, we should also see
increased push for more environmental friendly solutions (LNG vs Diesel/HFO)
supporting development of Small Scale LNG solutions.

Since mid-2010 our shore based teams and organization have been centralized,
simplified and aligned with the reduction business activities from three into
the one operation of a Norgas fleet of 15 vessels. This resulted in some
one-off costs in the 1H of the year, but with reduction in headcount and
subsequent reduced overhead cost going forward. Since this initiative was
taken we have seen a continued sharp downwards trend in administration costs
and the trend is expected to continue in 2016. Similarly, we are working
harder to reduce vessel operating costs, and have experienced a positive
trend throughout the year and into 2016. This trend has been supported by a
lower USD/EUR exchange rate as well as positive impacts of lower oil prices
on consumables.

A successful sale of the SPT related activities in July 2015 enhanced the
Group's balance sheet and working capital position - an initiative taken to
enable the Company to better execute on its LNG strategy. As an integral part
of the SPT transaction, IMSK was granted two purchase options for two of its
leased Multigas vessels in 2015; one for the vessel Bahrain Vision, and one
for the vessel Norgas Unikum. In February 2015 we completed a refinancing,
where maturity of IMSK12 and a cross currency swap was deferred to June 2016.
The intention with the transaction was to "buy time" for the company to be
able to execute its LNG strategy.

SMALL SCALE LNG - regional redistribution of LNG and mainly for the power

IMSK vision is to become the leading, go-to specialist for Small Scale LNG
(SSLNG) logistics solutions within 5 years and to employ all of the groups 6
Multigas carriers on LNG contracts within 2018. The value of LNG contracts
based on comparable rates achieved for Small Scale LNG vessels indicate that
there is much to gain commercially vs trading the 6 vessels in the
traditional LPG/petrochemical market with regards to both the level of
earnings and the duration of the contracts. With our fleet of six smaller LNG
carriers, we can provide a LNG logistics solution with a very short lead
time. In addition to transporting the LNG, our vessels can be used to provide
a stop-gap solution for LNG storage and re-gas while a more permanent
infrastructure is developed. Our small scale concept can provide cost savings
within 3-12 months' lead time as compared to the customer waiting at least
another 3-4 years in order to build a vessel and a permanent land based
re-gas facility.

From the historical position where LNG was not readily available and priced
based on oil indexation, we currently have an abundance of LNG supply
(fig3.). Pricing is increasingly based on the supply and demand of LNG. The
LNG infrastructure is expanding, not only with more production units coming
on stream but also new import terminals. We also note the trend that existing
conventional LNG import terminals are commissioned for re-export of LNG.
However, no matter which source of LNG, our Multigas vessels are designed for
maximum flexibility and will be able to load at most types of LNG sources.

Looking at the potential markets for our small-scale LNG concept, islands in
South East Asia, the Caribbean and the Mediterranean are all within
economical distance from a LNG source for our Multigas vessels. The same is
true for most coastal locations in the developing economies in Asia, Africa
and The Americas. We see the strongest interest for our concept from the
growing economies in Asia where energy is needed "yesterday" to support
growth of the local economies. We also note an increasing interest from the
regional markets which in the future will benefit from low cost US based LNG.
Smaller power plants will provide the base load for these supply chains and
thereafter will the local transport and industrial markets be developed from
the existing LNG infrastructure long term.

The lower oil price has also allowed many Governments to remove fuel subsidies
and make the local energy markets more transparent and more competitive. This
will open up for many smaller users, like island based power plants, to
switch their energy source from diesel to gas, supplied in the form of LNG -
and make significant savings in the process, as well as the environmental
benefits (fig 4).


Norgas Carriers is directly involved in the 8-17k cbm part or segment of the
semi-ref / ethylene market. These are the vessels that primarily cover
long-haul transportation of petrochemicals and short/medium haul
transportation of LPG.

In the period 2011 to 2013 we witnessed a decline in ton-miles for long haul
petrochemical gases and an increase in ton miles for Liquefied petroleum gas
(LPG). The additional LPG volumes have not been enough to cover for the
shortfall or decline in the long haul petrochemical gas trade (since these
LPG cargoes were mostly carried on the larger Handy size vessels). We
therefore experienced a sharp reduction in the overall fleet utilization in
this period. The decline is driven by lack of supply of petrochemical gases,
especially ethylene and mainly out of the Gulf region or Gulf Co-operation
Council (GCC) and Iran (decline from 1,5 to 0,5 mill tons per annum of
exports - fig 4). The lower supply of products from GCC/Iran region was often
replaced by short haul seaborne volumes from Japan and Korea up to 2013 and
into Far East Asia incl of China.

From 2013/14 there has been a gradual, but slow recovery in long haul seaborne
petrochemical trade driven by increased propylene volumes. This combined with
strong growth in LPG trade. In the same period the volumes available from
Japan and Korea for short haul transportation has been reduced and we have
seen a general lack of petrochemical product available for seaborne
transportation. This recovery has however not been enough to lead to an
increase in freight rates for our sized vessels before 2H15.

Going into 2016 we now see additional surplus of lower cost supply of
petrochemical gas, and this is primarily expected to come from both Iran and
the US (ethane based production). Iran accounted for approximately 30% of
long haul ethylene exports pre - sanctions introduced in 2012. In January
2016, sanctions against Iran was finally lifted. Iran is not yet an active
participant in the export of ethylene, but we do expect the country to resume
its position as the largest exporter country in the world.

At the same time as supply is set to grow in the US and Iran, we see a
continued further reduction in supply and exports from both South Korea and
Japan, as well as development of costal non-integrated downstream facilities
in China. Far East Asia and South East Asia is thus expected to be
increasingly short of ethylene. The lack of supply will need to travel longer
haul to fill the demand deficit in Far East Asia. Some of the volumes from
Iran and US will probably also find its way to Europe. The additional supply
of LPG and Ethane from US will also play a significant role in the recovery
for our markets. These products are supply driven and not demand driven and
lower prices will stimulate demand.


There have been no major changes to the current order book for semi-ref
vessels during 4Q15. The order book for vessels in the 8-17K cbm set to grow
by 12% (fig 6). At the same time about 13% of this part of the fleet are more
than 25 years and will thus be exiting the competitive fleet in the same
period which means there is virtually no growth in this part of the fleet.
The larger than 17k cbm vessels on order (26 vessels) are all expected to be
absorbed into the growing LPG (and possibly also ethane) trade on the back of
increased US and Iranian exports and specially when new US based export
terminal capacity will come on-line in 2016.

Where traditionally ethylene vessels were trading ethylene, today, more
ethylene vessels have been trading in other gases. The key product that is...

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