The I.M. Skaugen Share – its performance, evaluation and key market drivers

THE IMS SHARE AND ITS PERFORMANCE DURING 2004
The IMSK share price on the Oslo Stock Exchange increased by 8.8 per cent during 2004, from NOK142 to NOK154.50, with a low of NOK132 in August and a high of NOK167 in March and April. The average share price during the year was NOK149.42 with a yield of 13.73 per cent, including the dividend of NOK7 per share paid in March. During the same period the Oslo Stock Exchange Benchmark Index (OSEBX) increased by 38.45 per cent and the OSE 2030 Transportation Index (OSE2030GI) by 73.37 per cent.

Source: EconWin

Source: EconWin

HOW TO VALUE THE COMPANY
The valuation of companies like I.M. Skaugen can be a complex issue and should be based on the ability of the company to generate future cash earnings. The strategy, the business model, our customers, the I.M. Skaugen organisation - and in our case also our alliances - are integral links in the chain that enable us to generate future cash flow. Many analysts focus on the EBITDA generating capability of the company to gauge this and thus derive a value of the shares. One method of predicting future cash generating capability is to review historic performance, but a company like I.M. Skaugen is going through changes that make such historical analysis irrelevant. Substantial investment was made in 2003 to change the composition of both the fleet and the Group structure, enabling us to improve the future earnings and this needs to be accounted for.

                

Due to the Company's focus on cost and efficiency improvements we have seen a steady reduction in our “EBIT break-even level” . These efforts have improved our EBITDA generating capacity. The earnings on t/c basis for the Norgas segment was in 4Q04 approximately 20 per cent lower than the peak 10 years ago. At these t/c earnings levels the EBITDA generating capacity of Norgas was approximately 12 percent higher than corresponding figures at that period.

If we were, however, to focus on a model based on the last 12 months EBITDA earnings of the Company and applying the current net debt and exchange rates we would get following:

The last 12 months EBITDA earning levels currently stand at US$27.1 million and the current net debt is US$83.7 million. The number of shares is 5,977,310. The NOK/US$ exchange rate is 6.04 as at year-end 2004.

Most companies of our type are valued by using a multiple of between six and ten times the future EBITDA earnings. The share price of the Company closed at NOK154.50 for year 2004, reflecting a multiple of 8.7 when applying this valuation model of the historic EBITDA earnings. This valuation model also does not take into account the increase in the number of shares due to the future conversion of bonds to shares. Furthermore, through the purchase by Teekay of 50 per cent of SPT we will see a change in the future EBITDA earnings as we now only account for 50 per cent and one has to also account for the effect of the agreed ‘earn-out element’ in order to reflect future EBITDA and net debt to this evaluation model.

EBITDA multiple matrix:

An alternative means is to compare valuations by different methods of our fleet of vessels against the book value of these assets and thus the equity per share. The valuations can be based on discounted cash flow (net present value) or on valuations from external brokers. Three independent brokers evaluated all the Norgas vessels as at December 2004. The value of the vessels has significantly increased over the year, however there have been very few sale and purchase transactions to support the estimates put forward by the brokers.

Net Present Value is another commonly used method. This is a valuation of the fleet based on assumed earnings, factoring in historical earnings and operating expenses. This method gives a higher value than the book value of the fleet and has been adopted as the new preliminary Norwegian Accounting Standard related to Impairment of Fixed Assets.

Another method of valuation is to look at the book value of the equity of the company in total and on a per share basis. As of year-end 2004, this value was US$71 million in total or US$12 / NOK72 per share.

WHAT ARE SOME OF THE UNDERLYING MARKET DRIVERS?
The trends in GDP and industrial production growth are the key drivers for sea-borne transportation, particularly for petro-chemical gases as carried by the Norgas business. To a certain extent these same drivers impact upon SPT’s business.

A positive GDP growth rate shows that the overall economy is indeed growing. In 2005 the growth is estimated to be 3.8 per cent - an increase of 1.9 per cent over 2001.

Source: EconWin

Source: MSI

Source: Goldman Sachs Financial Workbench

Market Risks

OIL PRICES / BUNKER PRICES

Source: EcoWin

COMMODITY PRICES

Source: EcoWin

Source: Clarkson Research

OIL PRICE
The development in the oil price has considerable impact on the Company. Oil price variation will, inter alia, lead to fluctuations in bunker prices. Fluctuations in bunker prices tend over time to be reflected in the freight rates, but with certain time lags and dependant upon competitive pressures. A few of our freight contracts have "bunker clauses" that compensate for this fluctuation. Increased oil prices also tend to affect the margins for the petro-chemical producers and thus as a general rule less product is being produced. The real effect of fluctuations in oil prices on the demand of our transportation services is uncertain, but it is believed that high oil prices are negative for the overall demand for most of the products we transport. From time to time the Company enters into hedging contracts for bunkers. As at 31 December 2004 the Company had no hedging contracts for bunkers.

COST OF CRUDE OIL TONNAGE FOR SPT
A key issue for SPT has been the challenge to match its supply of resources, such as vessels and its experienced personnel, to the demand for our ship-to-ship-transfer services from our customers. Matching customer needs and vessel contracts to mutual advantage is an essential part of our business model. The changing patterns in the sourcing of US crude oil imports, the fluctuating demand from the customers and most importantly the volatility of charter rates in the Aframax tanker markets have made it necessary for SPT to secure a more steady supply of the most modern “double / double” tonnage. In December 2003 and January 2004 SPT entered into a 10 year bareboat charter for six new Aframax tankers. These agreements will be effective from delivery of the newbuildings from the shipyard, with expected commencement dates ranging through 2007.

CURRENCY RISK
The Company is using US$ as its currency for reporting purposes. This is also the principal currency for most if not all freight rates. Most services for its operations and financing are agreed in US$. Vessel values are stipulated in US$ and vessel financing are agreed and paid in US$. The Company usually maintain all available cash in US$, NOK or EURO positions. A NOK bond was placed in the Norwegian market in May 2004 and a forward contract has been entered into in order to cover the US$/NOK exposure for the principal amount and for the five-year duration of the bond. Fair market value at year-end was US$ 4.6 million. A convertible bond, issued for general corporate purposes in 2001, has been denominated in NOK and is exposed for currency risk. The convertible loan will most probably be converted to equity NOK and the appreciation of NOK has made this loan more expensive. The Company is sensitive to currency fluctuations only to a limited extent as only a small part of the administration and operating expenses are in currencies other than US$ or US$ linked currencies - and then mostly in NOK as other currencies such as RMB are pegged to US$. From time to time the Company enters into forward contracts and into US$/NOK or US$/EURO positions when we believed this to be correct to match US$ fluctuations. The sensitivity of a NOK1 incremental change in the NOK/US$ exchange rate is estimated to be a US$1 million effect on the net result. This exposure is normally covered by short-term currency swaps and these are maturing within 12 months. As at 31st December 2004 the Company had no forward contracts or currency swaps to cover this exposure.

Source: EcoWin

INTEREST RATE RISKS
The Company is exposed to interest rate risk. Depending on the development of the interest rate market, the Company regularly considers entering into fixed interest rate agreements. In November 2003 the Company entered into such an agreement for total debt of US$35 million, at a fixed interest rate of 3.765 percent and the interest rate period is fixed for this amount and for five years. The sensitivity of a one per cent incremental change in the LIBOR will have an effect on the net result of about US$0.5 million calculated on outstanding loans at year-end. As of 31st December 2004 the market value of the interest swaps is positive US$18,000. The joint venture company Somargas Limited (49.5 percent owned) has a long-term loan in US$ on a fixed rate basis from China Eximbank and GATX Capital Corporation. The China Eximbank loan can be repaid by the borrower without penalty if so desired and the interest rate is fixed at 4.89 percent. The loan from GATX is fixed at 9.025 percent.

Source: EcoWin

CREDIT RISK
The credit risk and liquidity risks are considered to be quite low.

RISK OF ACCIDENTS
The Company has maximum available P and I insurance for all its vessels and for all its operations, which covers against all third-party damages and any personnel injuries, together with the cost of cleaning up any oil or bunker spills. The Company does not have any 'loss of hire insurance' with third-party insurance companies, but maintains an internal self-insurance 'loss of hire pool' for all of the Norgas vessels. The Company has full cover for its hull and machinery damages and for all vessels, excluding only some of its smaller vessels. The agreed values for such vessels in case of total loss covers its estimated market values at the beginning of the year. There is a deductible that makes the Company pay a certain amount of its damage claim. The Company also carries War Risk insurance for its international fleet.