Chem Tanker Sector 190511

Equity Research

Shipping

Sector Update

Nordic

19 May 2011

Chemical tanker market Analysts

Structurally and cyclically favoured

Ole G. Stenhagen (47) 2100 8527 [email protected]



Utilisation up 14% next 2.5 years We believe demand for chemical tanker services is largely GDP driven and we expect a 7% annual increase during 2011-13. We have analysed the relevant fleet and newbuilding order book and forecast fleet growth of 4% for 2011, 3% for 2012 and 0% for 2013. We expect the consequent 14% increase in utilisation to lift TCE earnings back to the last peak in 2007 and by more than 30% from today’s levels.



The next peak will be better than the previous The previous macro upturn in 2003-08 did not lift earnings by as much as we expect the next upturn to do. During 2005-08, the chemical tanker fleet grew by about 15% a year, but we forecast moderate fleet growth now. In that period bunker prices trebled: we believe such risks are better handled now. Furthermore, we believe that structural factors such as increased geographical price spreads on feedstock and the industrial development of the Middle East countries will lift tonnemile demand beyond the cyclical upturn.



Stock picks: all on Buy, leverage is the differentiator We initiated our coverage of Eitzen Chemical with a NOK 1.08 target price and Buy recommendation. The company is the most financially leveraged of the three companies in this sector note and is sufficiently well-financed to reach the upturn and benefit. We reiterate our Buy recommendations for Odfjell and Stolt-Nielsen and our respective NOK 84 and NOK 165 targets prices. We use similar valuation approaches: DCF and multiple pricing of the various segments’ historical average income per unit capacity. We believe Odfjell is more rewarding at only a marginally higher risk and it is our favoured pick.

Nicolay Dyvik (47) 2100 8649 [email protected]

Gross and realised chemical tanker earnings 80

1.60

70 1.40 60 1.20 50 40

1.00

30 0.80 20 0.60 10 0 Jan-94

0.40 Jan-97

Jan-00

Jan-03

Houston-Ro Houston-Rotterd tterdam am 3,000mt 3,000mt Easychems, Easychems, USD/tonne USD/tonne

Jan-06

Jan-09

Stolt-Niel Stolt-Nielsen sen TC index, index, RH Axis

Source: Clarksons, Stolt-Nielsen, SEB Enskilda

www.sebenskilda.se

Important. All disclosure information can be found on pages 44 – 46 of this document

Sector Update

Chemical tanker market

Contents Page Executive summary.............................................................................................................3 Rate outlook: different now................................................................................................4 Demand ......................................... .................... ........................................... ........................................... ........................................... .......................................... ......................6 ..6 Fleet development...............................................................................................................8 Young fleet – barely any need for scrapping...................................................................11 Manual experiment confirms high slippage.....................................................................14 Stainless steel fleet ............................................ ...................... ............................................ ............................................ ....................................... ................. 15 The situation is different every time................................................................................16 Company section...............................................................................................................20 Eitzen Chemical ASA .......................................... .................... ............................................ ........................................... ........................................ ................... 23 Valuation ........................................... ..................... ............................................ ............................................ ............................................. .................................. ...........23 23 Fleet ........................................... ...................... ........................................... ............................................ ........................................... ......................................... .................... 24 Odfjell SE............................................................................................................................27 Valuation approach: approach : ........................................... ..................... ............................................. ............................................. ...................................... ................ 27 Stolt-Nielsen Ltd................................................................................................................30 Valuation approach: approach : ........................................... ..................... ............................................. ............................................. ...................................... ................ 30 Appendix Appendi x 1: Market definition ...................................... .................. ......................................... ......................................... ............................... ...........32 32 Barriers to entry...............................................................................................................34 Interface management ............................................. ....................... ............................................ ............................................ ................................. ...........35 35 Appendix 2: Experience and stance........ stance ................ ................ ................. ................. ................. ................. ................ ................. ..............37 .....37 Appendix 3: Shipping glossary........................................................................................39 Target prices and risks .......................................... ..................... .......................................... .......................................... ...................................... ................. 45

SEB ENSKILDA

19 May 2011

2

Sector Update


Contents Page Executive summary.............................................................................................................3 Rate outlook: different now................................................................................................4 Demand ......................................... .................... ........................................... ........................................... ........................................... .......................................... ......................6 ..6 Fleet development...............................................................................................................8 Young fleet – barely any need for scrapping...................................................................11 Manual experiment confirms high slippage.....................................................................14 Stainless steel fleet ............................................ ...................... ............................................ ............................................ ....................................... ................. 15 The situation is different every time................................................................................16 Company section...............................................................................................................20 Eitzen Chemical ASA .......................................... .................... ............................................ ........................................... ........................................ ................... 23 Valuation ........................................... ..................... ............................................ ............................................ ............................................. .................................. ...........23 23 Fleet ........................................... ...................... ........................................... ............................................ ........................................... ......................................... .................... 24 Odfjell SE............................................................................................................................27 Valuation approach: approach : ........................................... ..................... ............................................. ............................................. ...................................... ................ 27 Stolt-Nielsen Ltd................................................................................................................30 Valuation approach: approach : ........................................... ..................... ............................................. ............................................. ...................................... ................ 30 Appendix Appendi x 1: Market definition ...................................... .................. ......................................... ......................................... ............................... ...........32 32 Barriers to entry...............................................................................................................34 Interface management ............................................. ....................... ............................................ ............................................ ................................. ...........35 35 Appendix 2: Experience and stance........ stance ................ ................ ................. ................. ................. ................. ................ ................. ..............37 .....37 Appendix 3: Shipping glossary........................................................................................39 Target prices and risks .......................................... ..................... .......................................... .......................................... ...................................... ................. 45

SEB ENSKILDA

19 May 2011

2

Sector Update


Executive summary We have updated our chemical tanker outlook, with particular reference to our coverage of Odfjell and Stolt-Nielsen, and to our initiation of coverage for Eitzen Chemicals. The following table summarises our forecast of the supply-demand development: development: Summary of supply-demand and earnings changes (%) (%)

2011

2012

2013

Supply growth Demand growth Net utilisation change Accumulated change in utilisation

4 7 3

3 7 4

0 7 7

Earnings change, TCE Accumulated change in TCE earnings

4

3

7 10

4

14 15

14

32

Source: SEB Enskilda

This results in the following earnings forecasts, valuations and targets for the relevant companies. Estimate summary, Eitzen Chemical, Odfjell and Stolt-Nielsen 2011

Eitzen Chemical ASA Odfjell Stolt-Nielsen

-1.41 34.25 14.47

PER - adjusted 2012

-2.24 6.52 8.79

2013

2011

PBV 2012

2013

-4.79 3.86 7.23

0.97 0.77 0.83

1.72 0.69 0.78

2.69 0.59 0.74

EV EBITDA multiple 2011 2012 2013

35.32 9.31 9.12

17.36 6.24 6.46

10.57 4.60 5.11

Free cash flow / Market cap (%) 2011 20 1 2 20 13

-11.44 11.01 -28.15

-2.45 22.68 9.20

22.70 27.25 31.52


Summary of recommendations and target prices, chemical tanker companies

Eitzen Chemical ASA Odfjell Stolt-Nielsen

Recomme Recommendat ndation ion

Target Target,, NOK/sh NOK/share are

Buy Buy Buy

1.08 84 165

Share Share price price (NOK) (NOK) Upside Upside to target target (%)

0.80 48 128

35 75 29


We initiated coverage of Eitzen Chemcial with a NOK 1.08 target price and Buy recommendation. The company is clearly the most financially leveraged of the three chemical tanker companies. We believe the company is sufficiently well-financed to reach the upturn and leveraged to benefit, hence our Buy recommendation. We reiterate our Buy recommendations for Odfjell and Stolt-Nielsen and our respective NOK 84 and NOK 165 target prices. We use similar valuation approaches: DCF and multiple pricing of the various segments’ historical average income per unit capacity. We believe Odfjell is more rewarding at only a marginally higher risk and it is our favoured pick.

SEB ENSKILDA

19 May 2011

3

Sector Update


Rate outlook: different now Even though we dislike all “it is different now” arguments, our basic premise is that there are several coincidental factors that favour chemical tanker operators and that this industry faces one of the largest upticks in its recent history. What are the potential drivers? A limited 2012-14 order book When the current order book is delivered in 2012, very few ships will be left on order: there have been virtually no orders since 2008; meanwhile, the fleet will age. Feedstock costs prompt shifts in production The chemicals transported are produced either from natural gas in the US and the Middle East or from naphtha in the rest of the world. For logistical reasons, the natural gas market is local and the local marginal cost of production sets the price; the alternative buyers are the utilities. The naphtha market on the other hand is global and the alternative buyers are the refineries that use it in the production of gasoline and other light distillates. Based on huge (Middle East) and increasing (US) natural gas resources, the oil and natural gas prices in these areas have disconnected. Chemicals producers in these regions have therefore improved their competitive positions significantly. Likely increase of chemical exports in the Middle East The advantageous feedstock price in the Middle East, with ample natural gas resources and very few local uses, is the premise for a broad-based industrialisation of the region. The goal is to add more value to the exported hydrocarbons and to provide local employment; employment; hence the exports of intermediate intermediate products throughout the petrochemical field are set to increase. Chemical plants are becoming more specialized New plants are more specialised, producing a smaller range of products. This is a function of the disconnect from feedstock production and a greater focus on logistics from customers. Both developments increase the transport content of the finished product. China China’s industrialisation and development includes the construction of chemical plants and huge increases in the consumption of chemical outputs – e.g. paint, insulation, kitchen tops, or furniture.

On the other hand, what happened in the previous upturn, from 2003 onwards? Difficult customer relationship Just before the beginning of the previous upturn, four of the leading chemical tanker companies were accused of anti-competitive behaviour, i.e. dividing long-term contracts between themselves. It cost both Odfjell and Stolt-Nielsen their CEOs and a lot of money. Their exact situations were different, but we must assume both had more difficult relationships with their customers immediately afterwards: difficult enough to weaken their position in rate negotiations.

SEB ENSKILDA

19 May 2011

4

Sector Update


Bunker costs were the largest single risk Since the chemical tanker operators had long-term contracts with payment in USD/tonne carried, they were responsible for all the voyage costs. The largest contributor to voyage costs is the bunker cost: typical chemical tankers can use as much as 20-40t/day and have further consumption during loading and discharge operations (powering the pumps). As the oil price rose from 2003 onwards, bunker prices rose in step, to the detriment of the operators. Although the companies’ bunker hedging is far from 100% coverage the experience focused attention on risks and risk management and we do not expect similar exogenous moves to hit the bottom line as hard in the future. Not such a cosy market The parcel tanker operators need to be close to the customers to provide the logistics operations. However, we believe the overall impact of the widening chemical tanker market (e.g. the large number of IMO 2 ships operated outside the parcel tanker systems and the growth in the number of 10,000-15,000dwt vessels owned by new operators) makes the market more competitive and less cosy. It had been our impression that chemical parcel tanker operators in hot markets may not have used their bargaining position fully. All else being equal, we would therefore expect increased commoditisation to improve the pricing power of chemical tanker operators in a hot market.

SEB ENSKILDA

19 May 2011

5

Sector Update


Demand Our basic assumption for chemical tanker demand is that it depends on chemical production volumes for its cargoes and thus that demand grows by about 1.5x global GDP. Since our global GDP development forecast is 4.5%, we forecast 7% annual demand growth for the transportation of chemicals. We also assume similar levels for 2013, although we have no explicit GDP forecast. Comparing GDP and production changes to chemicals spot rate changes 25.0

100.0

20.0

80.0

15.0 60.0 10.0 40.0

5.0 0.0

20.0

-5.0

0.0

-10.0 -20.0 -15.0 -40.0

-20.0 -25.0 Jan-86

-60.0 Jan-89

Jan-92

Jan-95

OECD Index YOY

Jan-98

Jan-01

World Prod index YoY

Jan-04

Jan-07

Jan-10

Houston Rotterdam YoY

Source: Clarksons, SEB Enskilda

The biggest difference in the past four years is the massive fleet growth, hence the feeble recovery even as growth rockets. Odfjell’s placement of the industry’s cargoes relates to the raw materials and the end products (see next table). Organic chemicals, from raw material to end product Raw materials

Coal Gas Crude oil

Basic products

Derivatives

End products

BTX Ethylene Propylene Methanol Butadiene

EDC Styrene Glycol MTBE Industrial alcohols Polyester

Paint Fibres Plastics Detergents Oil additives Rubber

Source: Odfjell

In addition to the organics, there are acids, edible oils, caustic soda and other smaller groups. Chemical tankers also carry petroleum products. The basis for exact demand forecasting is weak: Odfjell states that it carries about 600 cargoes every year but gives no proportions. Eitzen Chemical shows the following chart of its cargoes.

SEB ENSKILDA

19 May 2011

6

Sector Update


Eitzen Chemical’s 30 largest cargo types carried in 2010 12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

l l i l d i l l l i l P a e l s x i l B r s n C l a P i d e i e i e i i o e o s e t e d d o n n O D n t b o o h n o l o c u c o c s e n e m e S e C h D n l P t s a b B O o P e y g a r e l a a z e U m l a l a L h r C e s U l e D n H t e E u M l U a S y c y h h p y O s c C u c a a n t t L V t G i i G l x a S e c e r l r e e x P i , F e i o E a y t o i u b N B r C D s M n y M h h a d O t u e o p p e l P h l a s m x y S u i g o l i C h t S h a L M E P P

Source: SEB Enskilda, Eitzen Chemical

After communicating with Stolt-Nielsen, we have tried to group some key speciality chemicals by transportation-relevant parameters: Feedstock driven (Ethylene/Propylene/Aromatics) The necessary input is a hydrocarbon for cracking - and location of the feedstock is the key. Following the basic ethylene crack, single processes produce inter alia ethylene, MTBE, methanol. Parallel or subsequent processes produce propylene and the whole range of aromatics. End-market driven Smaller quantities or limited durability means production is geographically closer to the final user. Production follows industrial production to Asia. Site driven Depends on a large dedicated plant, in many cases considered a legacy plant from larger integrated complexes. Natural resource driven For example, phosphoric acid production depends on the supply of phosphates, while edible oils depend on farms/plantations. Ethanol for fuel depends on sugar supply.

In addition to these speciality chemicals, other cargoes carried by chemical tankers include caustic soda, molasses, naphtha, and refined petroleum products. Select chemicals assumed to be indicative of overall demand direction Speciality

2-Ethylhexanol (2EHA) Acetic Acid Acetone

Acids

Veg oils

Phosphoric Acid

Palm Oil

Com mod ities

Benzene Vegetable Oil

Cyclohexane Ethylene Dichloride

Acrylonitrile (ACN) Acrylates Epichlorohydrin (ECH) Ethanol Amines Ethyl Acetate i-Butanol Isopropyl Alcohol (IPA) Methylene Diphenyl Diisocyanate (MDI) Methyl Methacrylate (MMA) n-Butanol Phenol Propylene Oxide Toluene Diisocyanate (TDI) Vinyl Acetate Monomer (VAM)

Methanol MTBE Propylene* Propylene Glycol Styrene Toluene

Source: Stolt-Nielsen

SEB ENSKILDA

19 May 2011

7

Sector Update


Fleet development Using Clarkson’s base of ships, 76.8mdwt or 3,809 ships are classified as “Oil & Chemicals”. Eliminating ships without double hulls lowers the base to 72.2mdwt and 3,227 ships, while ignoring vessels of less than 13,000dwt brings the total to 62.7mdwt and 1,874 ships. Another way of looking at this is that if we are only interested in IMO 2 (and IMO 1) capable ships of more than 13,000dwt, the addressable fleet totals 34.1mdwt. Clarksons has a definition of a “handy chemical tanker”, a vessel of 10,000-60,000dwt with at least IMO 2. We use this definition for our initial fleet study. We expect the “handy” chemical tanker fleet growth to decrease from 7% in 2010 to 4% in 2011 before declining further to 3% in 2012 and 0.5% in 2013. The “handy” chemical tanker fleet is young, with 93% of the fleet less than 20 years old. SEB Enskilda’s “handy” chemical tanker yearly supply growth forecast 18% 16%

16%

16% 15% 14%

14% ) 12% % ( h t w o r 10% g y l p p u 8% s Y o Y 6%

10%

7%

4% 4%

3%

2% 0.5% 0% 2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

Source: SEB Enskilda, Clarkson

SEB Enskilda’s “handy” chemical tanker (annualised) quarterly supply growth forecast 18% 16% 14% ) 12% % ( h t w o r 10% g y l p p u 8% s Y o Y 6%

4% 2% 0% Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113 Source: SEB Enskilda, Clarkson

SEB ENSKILDA

19 May 2011

8

Sector Update


Like the order book in other shipping segments, there have been major delays and cancellations in the “handy” chemical tanker fleet. We calculate that 55% of the start-ofyear order book was delivered in 2009 and 2010, a decline from 92% in 2008. “Handy” chemical tankers: % of order book actually delivered 100% 92% 90%

80%

70%

60% 55%

55%

2009

2010

50%

40% 2008 Source: SEB Enskilda, Clarkson

Since the financial crisis, we have assumed that the shipyards do not allow orders to be cancelled, but have proven flexible when it comes to delays to existing orders. Our view that the “handy” chemical tanker order book is being delayed rather than cancelled is based on our understanding of what happened to the order book from 2009 to 2010 and from 2010 to 2011. The next chart shows that 3.2mdwt was delayed from 2009 until 2010-13, while a marginal 0.3mdwt was cancelled, which is the gap between actual deliveries in 2009 and the startof-year order book. Under the assumption that the 2010 order book in January 2010 equals the 2010 order book in January 2009 and new orders placed in 2009 for 2010 delivery, we discover that 2.4mdwt was delayed from 2009 to 2010. Applying the same reasoning to the 2011-13 order book, we discover that 0.8mdwt has been delayed from 2009 to 2011-13. 2009 supply overview – how to explain what happened from 2009 to 2010 9

8

0.3 2.4

7

6

t w d

3.2

0.1

5

m

4

8.2

7.9

0.8 0.3

3

5.7 4.4

2

4.3 3.2

1

0 2009 o.book Jan-09

Deliveries 2009

Delays 2009 Cancellations 2010 o.book 2009 orders Delays from 2010 o.book 2011-13 2009 orders Delays from 2011-14 2009 Jan-09 for 2010 2009 Jan-10 o.book Janfor 20112009 o.book Jandelivery 09 2013 delivery 10

2009

2010

2011- 2013


SEB ENSKILDA

19 May 2011

9

Sector Update


In the next chart, we show the same reasoning applied to 2010, which indicates that the gap between the 2010 order book and actual deliveries postponed to 2011 is 3.1mdwt and to 2012-13 is 1.3mdwt. 2010 supply overview – how to explain what happened from 2010 to 2011-13 9

8

7

4.4

6

t w d m

3.1

5

8.2

4

0.0

6.7

3

2

3.8

3.6 1.3 2.0

1

0.0 0.7 0

2010 o.book Jan-10

Deliveries 2010

Delays 2010

2011 o.book Jan-10

2010 orders for 2011 delivery

2010

Delays from 2010

2011 o.book 2012-13 Jan-11 o.book Jan-10

2010 orders for 2012-13 delivery

2011

Delays from 2012-13 2010 o.book Jan-11

2012-2013


The next table shows our detailed “handy” chemical tanker supply growth forecast by year, including y-o-y supply growth, slippage estimates, deliveries, scrapping and expectations of new ordering activity. SEB Enskilda’s “handy” chemical tanker supply growth forecast

Fleet, start of year

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

18.2

21.0

24.0

27.5

31.9

35.2

37.8

39.4

40.7

5.7 2.4 0.1

3.6

0.7

0

1.2 0.0 1.9

0.1 0.0 0.1

Orig inal o rder bo ok o ne year earlier + Yard delays from 2009 to 2010 + New orders placed in 2009 for 2010 delivery + Yard delays from 2010 to 2011/12/13 + New orders placed in 2010 for 2011/12/13 delivery = Current order book start of each year, MDWT

5.4

7.9

8.2

3.1 0.0 6.7

5.0

4.4

3.8

2.8

1.3

0.2

92

55

55 3.1

55 2.0

55 0.4

55 0.0

Delivery of orders delayed in 2009/2010 % Delivery of orders delayed in 2009/2010MDWT

25 0.6

25 0.8

25 0.3

25 0.0

Delivery of vessels ordered in 2009/2010 (%) Delivery of vessels ordered in 2009/2010, MDWT

95 0.1

95 0.0

95 0.0

95 0.0

= Deliveries (HISTORY) and order book (FORECAST)

2.9

3.3

3.8

Delivery of: Deliveries relative to original order book 1 year earlier (%) Deliveries relative to original order book 1 year earlier, MDWT

Delivery of vessels delayed in 2011 (%) Delivery of vessels delayed in 2011, MDWT

40 0.6

Delivery of vessels delayed from 2012 (%) Delivery of vessels delayed from 2012, MDWT - Scrapping, MDWT + New contracting, M DWT +/- Miscellaneous changes, MDWT Fleet, end of year, MDWT Growth (y-o-y) (%)

40 0.13 -0.08

21.0 16

-0.37

24.0 14

-0.28

27.5 15

-0.46

-1.01

-0.10

-0.10

31.9 16

35.2 10

-1.27

-1.09 0.0

-0.19 0.10

-0.16 0.20

37.8 7

39.4 4

40.7 3

40.9 0

Source: SEB Ensklda, Clarkson

SEB ENSKILDA

19 May 2011

10

Sector Update


“Handy” chemical tanker order book by delivery year, size and coating, mdwt and % April-Dec 2011

2012

2013

Stainless 10-19,999 20-29,999 30-39,999 40-49,000 Sum % of segment total

Total % of fleet total

0.46 0.25 0.30 0.00 1.01 58

0.22 0.17 0.13 0.17 0.69 40

0.04 0.00 0.00 0.00 0.04 2

0.72 0.42 0.43 0.17 1.74 100

9 6 6 2 23

Epoxy 10-19,999 30-39,999 40-49,000 50-59,000 Sum % of segment total

0.62 0.31 1.07 0.61 2.61 73

0.23 0.00 0.15 0.50 0.88 25

0.00 0.00 0.00 0.10 0.10 3

0.85 0.31 1.22 1.21 3.59 100

11 4 16 16 47

Marineline 10-19,999 20-29,999 40-49,000 Sum % of segment total

0.15 0.03 0.18 0.35 52

0.01 0.00 0.27 0.28 42

0.00 0.00 0.05 0.05 7

0.16 0.03 0.50 0.68 100

2 0 6 9

Zinc 40-49,000 Sum % of segment total

0.32 0.32 44

0.41 0.41 56

0.00 0.00 0

0.73 0.73 100

10 10

Other 10-19,999 20-29,999 30-39,999 Sum % of segment total

0.22 0.25 0.12 0.59 66

0.13 0.13 0.00 0.26 30

0.01 0.02 0.00 0.03 4

0.37 0.40 0.12 0.88 100

5 5 2 12

Total

4.88

2.53

0.22

7.63

100


Young fleet – barely any need for scrapping Scrapping accelerated when the market turned down in 2008: 2.3mdwt, or 7% of the “handy” chemical tanker fleet was scrapped 2009-10. 77% of the vessels scrapped in the past three years were between 24 and 31 years old. We expect 1.1mdwt or 3% of fleet capacity to be scrapped in 2011, supported by 0.5mdwt in the first four months of the year. The “handy” chemical fleet is young, as 93% of the fleet under 20 years old and we forecast only marginal scrapping from 2012 to 2013 of 0.35mdwt, equivalent to 0.9% of the current fleet. “Handy” chemical tanker scrapping – yearly, mdwt

“Handy” chemical tanker scrapping – quarterly, mdwt

1.40

0.60 0.55

1.20

0.50 0.45

1.00

0.40 t w d

0.80

0.35

t w d 0.30 m

m

0.60

0.25 0.20

0.40

0.15 0.20

0.10 0.05

0.00

6 9 9 1

7 9 9 1

8 9 9 1

9 9 9 1

0 0 0 2

1 0 0 2

2 0 0 2

3 0 0 2

4 0 0 2

5 0 0 2

6 0 0 2

7 0 0 2

8 0 0 2

9 0 0 2

0 1 0 2

E 1 1 0 2

E 2 1 0 2


SEB ENSKILDA

E 3 1 0 2

0.00 Q196 Q197 Q198 Q199 Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q110 Q111


19 May 2011

11

Sector Update


“Handy” chemical scrapping by scrapping age, past three

77% of the “handy” chemical ships scrapped aged 24-31 years

0.6

18%

0.5

17% 17%

16%

0.5 14%

0.4

12%

12%

0.4 t 0.3 w d m

10%

10% %

0.3

8%

8% 0.2 6%

0.2 0.1

4%

0.1

5%

3%

2%

10-19,000

20-29,000

30-39,000

2%

2% 1%

0.0 1 4 1 7 1 8 1 9 2 1 2 2 23 2 4 2 5 2 6 2 7 2 8 2 9 3 0 31 32 33 34 3 5 3 6 3 8 4 0 4 1

5%

5% 4%

4%

0%

0%

2% 1%

0% 1%

1%

1% 0%

0%

1 4 1 7 1 8 1 9 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 3 0 3 1 3 2 3 3 3 4 35 3 6 3 8 4 0 4 1

40-49,000



“Handy” chemical tanker fleet by build year and coating

“Handy” chemical tanker age profile

3.2

5.5 5.0

2.8

4.5

) t w d 4.0 m ( t e e l 3.5 f l a c i m 3.0 e h c y 2.5 d n a h e l 2.0 i f o r p 1.5 e g A

2.4 2.0 t w d 1.6 m

1.2 0.8

1.0 0.4 0.0 1963-85

0.5 0.0 1988

1991 E p ox y

1994 M ar in e li ne

1997 O th e r

2000 P o ly

2003

S ta in le ss s te e l

2006

2009

1

2

3

4

5

6

Z in c


SEB ENSKILDA

0

7

8

Epoxy

9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 > 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 0 3

Marin eline

Other

Poly

Stainless steel

Zinc


19 May 2011

12

Sector Update


“Handy” chemical fleet by age and coating (mdwt and %) 0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

Total

10-19,999 20-29,999 30-39,999 40-49,000 50-59,000 Sum % of segment total

2.0 0.6 1.0 0.3 0.0 3.9 34

1.8 0.5 0.9 0.2 0.0 3.3 28

1.1 0.2 1.0 0.0 0.0 2.3 20

0.4 0.0 0.5 0.0 0.0 0.9 8

0.2 0.1 0.1 0.2 0.0 0.6 5

0.1 0.2 0.3 0.0 0.0 0.5 5

0.0 0.0 0.0 0.0 0.0 0.1 1

0.0 0.0 0.0 0.0 0.0 0.1 1

0.0 0.0 0.0 0.0 0.0 0.0 0

5.7 1.7 3.7 0.7 0.0 11.7 100

Epoxy 10-19,999 20-29,999 30-39,999 40-49,000 50-59,000 Sum % of segment total

3.7 0.3 1.0 1.5 3.0 9.6 50

1.1 0.7 1.3 3.0 0.6 6.7 34

0.6 0.1 0.1 0.6 0.0 1.3 7

0.3 0.1 0.1 0.2 0.0 0.8 4

0.2 0.1 0.0 0.2 0.0 0.5 3

0.0 0.1 0.0 0.1 0.0 0.3 1

0.0 0.0 0.0 0.0 0.1 0.2 1

0.0 0.0 0.0 0.0 0.0 0.0 0

0.0 0.0 0.0 0.0 0.0 0.0 0

6.0 1.4 2.7 5.6 3.7 19.4 100

Marineline 10-19,999 20-29,999 30-39,999 40-49,000 Sum % of segment total

1.9 0.1 0.3 0.1 2.4 77

0.2 0.0 0.0 0.2 0.4 14

0.1 0.0 0.0 0.1 0.2 7

0.0 0.0 0.0 0.0 0.0 1

0.0 0.0 0.0 0.0 0.0 0

0.0 0.0 0.0 0.0 0.0 0

0.0 0.0 0.0 0.0 0.0 0

0.0 0.0 0.0 0.0 0.0 0

0.0 0.0 0.0 0.0 0.0 0

2.2 0.1 0.3 0.5 3.1 100

Zinc 10-19,999 20-29,999 30-39,999 40-49,000 Sum % of segment total

0.0 0.0 0.3 1.2 1.6 44

0.0 0.0 0.0 0.3 0.3 9

0.0 0.1 0.1 0.5 0.7 20

0.0 0.0 0.1 0.1 0.3 9

0.0 0.0 0.2 0.0 0.2 6

0.1 0.0 0.1 0.0 0.2 6

0.0 0.0 0.2 0.0 0.2 6

0.0 0.0 0.0 0.0 0.0 0

0.0 0.0 0.0 0.0 0.0 0

0.3 0.2 1.0 2.2 3.6 100

Other 10-19,999 20-29,999 Sum % of segment total

0.3 0.1 0.3 100

0.0 0.0 0.0 0

0.0 0.0 0.0 0

0.0 0.0 0.0 0

0.0 0.0 0.0 0

0.0 0.0 0.0 0

0.0 0.0 0.0 0

0.0 0.0 0.0 0

0.0 0.0 0.0 0

0.3 0.1 0.3 100

Poly 50-59,000 Sum % of segment total

0 0.0 0

0.1 0.1 100

0 0.0 0

0 0.0 0

0 0.0 0

0 0.0 0

0 0.0 0

0 0.0 0

0 0.0 0

0.1 0.1 100

17.9 47

10.8 28

4.6 12

2.0 5

1.3 3

1.0 3

0.4 1

0.1 0

0.0 0

38.2 100

Stainless steel

Total % of total Source: SEB Enskilda, Clarkson

Assuming that the current rough market has chastened owners, we expect contracting to be moderate even as the market starts to pick up. For the 2011-13 period, we forecast 0.3mdwt of new orders, equal to 0.8% of current fleet capacity.

SEB ENSKILDA

19 May 2011

13

Sector Update


“Handy” chemical tanker contracting – yearly

“Handy” chemical tanker contracting - quarterly 3.3

10

3.0

9

2.8 8

2.5

7

2.3 2.0

6 t w d

m

5

t 1.8 w d

4

1.3

3

1.0

m 1.5

0.8

2

0.5 1

0.3 0.0

0 1996

1998

2000

2002

2004

2006

2008

2010

Q196 Q197 Q198 Q199 Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q110 Q111

2012E



Manual experiment confirms high slippage Starting from Clarksons’ order book listing of “Chem & Oil” tankers, we have made some manual adjustments to the order book to verify our “handy” chemical supply growth forecast. “Handy” chemical tanker order book by yard (number of vessels) 28 26 24 22 20 r e d r 18 o n o 16 s l e s s 14 e v f o r 12 e b m u 10 N

8 6 4 2 0

g n i d l i u b p i h S S L S

n e s o Z n o h i n a t i K

l a v a N l u r e i t n a S

. t n I . Y . S u o h z g n a u G

. B . S a k o u k u F

a m i h s u r u K n i h S

e d g n i M g n o t n a N

a m i a B n a i j u F

Y / S u o h z g n a i J

n a u g g n o H g n i n o a i L

o p i M i a d n u y H

d r a y / S g n u R a h P

g n i d l i u b p i h S g n a w k e S

. d l i u b p i h S X T S

u f n a S u o h z i a T

. o C . B . S c 1 2

g n e h s g n a i X g n a i j u i J

d r a y p i h S r a s m a R

n e s o Z e o n a t i h S

o h s n e s o Z i k u s U


A number of key shipyards for fleet development in the segment have had well-publicised problems and we have tried to adjust the delivery schedule accordingly. SLS: The SLS yard in Korea has been struggling. Stolt-Nielsen has cancelled a large programme and Odfjell has bought ships where the original contractor no longer had an obligation. We have deleted a number of contracts and delayed the remaining ones. Kitanihon: The Kitanihon yard in Japan is in the region hit by the tsunami. We have assumed all these vessels will be delayed by half a year. The yard itself has not announced any delays, however, pictures of the yard would seem to suggest that at least some of the order book may have been damaged. Sekwang: This smaller Korean yard is facing financial difficulties and we understand that the banks are considering abandoning the yard. We have eliminated most of these orders.

SEB ENSKILDA

19 May 2011

14

Sector Update


Vinashin: The owning group of the Vinashin yards has defaulted on a large US bond loan. That might not mean that the yard is defunct, but we do not believe a shipyard in loan default will be allowed to build for its own account. We have cancelled the ships built for the shipyard’s own account and delayed the ships being built for other owners. Samho: The Samho Shipyard had contracts with its owner Samho Shipping. This group entered bankruptcy at the end of 2010 and we assume the shipyard will find it difficult to complete the orders. We have eliminated these orders.

In addition to eliminating or correcting orders from certain yards, we have applied the following corrections to the remaining orders: ships that were contracted in 2006 and before but have not yet been delivered are unlikely to turn up and IMO 3 ships are not relevant to the fleet or the order book. This selection of ships is broadly comparable with the “handy chemical tanker” fleet in the Clarksons register. We have also made extensive spot checks of deliveries and found a number of cases where the delivery date and/or specification in the base did not match the information the shipyard or customer had on their own websites. We have amended the entries accordingly. The resulting delivery profile is shown in the next table. Delivery schedule after manual adjustment of order book

mdwt due

2011 remaining

2012

2013

3.2

1.9

0.7


Although the growth forecast is higher than our “policy based” forecasts of 2.8mdwt for 2011, 1.3mdwt for 2012 and 0.2mdwt for 2013, we consider it broadly supportive of that outcome.

Stainless steel fleet Odfjell and Stolt Nielsen use fairly similar descriptions for their competitive market: ships above 13,000dwt, either with stainless steel tanks and/or controlled by one of 17 or 19 competitors respectively. From the Q1 2011 presentations of both companies, this fleet would seem to be about 13mdwt. Even if we might think we know the identity of these competitors, we do not have access to the full list; we rely on the supply of ships with stainless steel tanks instead. Stainless steel tanks, delivery schedule after manual adjustment of order book

mdwt due for delivery % of current fleet

2011 remaining

2012

2013

0.97 7

0.43 3

0.08 1


In the Clarksons fleet list, the ships with at least some stainless steel tank capacity add up to 14.5mdwt: about 4mdwt below 13,000dwt and about 10.5mdwt above 13,000dwt.

SEB ENSKILDA

19 May 2011

15

Sector Update


The situation is different every time Our basic premise is that there are several coincidental factors that favour chemical tanker operators and that this industry faces one of the largest upticks in its recent history. How can we amplify the potential drivers? A limited 2012-14 order book When the current order book is delivered in 2012, very few ships will be left on order: there have been virtually no orders since 2008; meanwhile, the fleet will age. Amplification: our discussion of fleet development supports this argument. Feedstock costs prompt shifts in production The chemicals transported are mostly natural gas (in the US, ethane is classified as an LPG, but we refer to it as a natural gas) - typically supplied to utilities – and naphtha (used in the production of gasoline and other light distillates). While the oil price is global and has risen over the past 10 years, natural gas prices are highly regional and not as homogenous. The resulting variations in oil and natural gas prices mean that chemical feedstocks and primary products are often sourced in different regions, thus increasing the transportation element of production. Amplification: US chemicals production is 70% based on natural gas (ethane in particular). The US classification of gases is different: ethane is stripped out of the natural gas and classified as LPG. In the tanker market, LPG is propane and butane and not ethane. Chemicals production in Japan and Korea has largely been based on cracking naphtha or LPG. In Europe, the historical path is to crack coal to produce naphtha, but modern industry is based on natural gas.

Feedstock pricing is driven by two factors: natural gas is the fastest growing hydrocarbon for utility use and the oil price driven by transportation demand. The consequence is that geographical price spreads for natural gas are quite dramatic – but even the most expensive natural gas is cheap calories compared with crude oil-based products. Natural gas price, using oil price as proxy for marginal price in Asia, USD/MMBTu 30

25

20

15

10

5

0 Jan-00

Jan-03 Hhub, USD/MMBTu

Jan-06 Zeebrugge, USD/MMBtu

Jan-09 Far East contract price based on Brent

Source: Blooomberg, SEB Enskilda

SEB ENSKILDA

19 May 2011

16

Sector Update


Naphtha prices in Japan and Europe, USD/tonne 1400

1200

1000

800

600

400

200

0 Dec-95

Dec-98

Dec-01

Dec-04 Japan

Dec-07

Dec-10

Europe


The most extreme examples compare natural gas-based chemicals producers in the Middle East with naphtha based chemicals producers in Japan. Natural gas-based producers enjoy a near-zero marginal cost of gas or an alternative cost represented by LNG, while the political goal of the governments is to add more value to production. Naphtha-based producers compete with refiners – one of naphtha’s uses is in refineries to push the quality – and by extension, the transportation market for this feedstock. There is no reason to expect the absolute or relative positions of producers to change; obviously, the long distance bulk transportation of intermediate chemicals will grow rapidly. Likely increase of chemical exports in the Middle East The advantageous feedstock price in the Middle East, with ample natural gas resources and very few local uses, is the premise for a broad-based industrialisation of the region. The goal is to add more value to the exported hydrocarbons and to provide local employment; hence the exports of intermediate products throughout the petrochemical field are set to increase. Amplification: logically, this should be a sub-item to the feedstock cost factor above, but while relative feedstock prices are dynamic and have a direct short-term impact, several Middle Eastern states are making a more concerted effort to monetise their resources, create an industrial infrastructure to provide the population with employment, and add more value to raw material exports. Saudi Arabia’s Port Authority reported chemicals exports of 23.9m tonnes in 2008, 26.2mt in 2009 (up 10% y-o-y) and 30.7mt in 2010 (up 17% y-o-y). Chemical plants are becoming more specialised New plants are more specialised, producing a smaller range of products. This is a function of the disconnect from feedstock production and a greater focus on logistics from customers. Both developments increase the transport content of the finished product. Amplification: historically – and very “big picture” – the chemicals industries have tended to be integrated; the US chemicals industry was based on natural gas from the US Gulf and customers in the north. The customers included farmers on the Great Plains and the automobile industry around the Great Lakes.

SEB ENSKILDA

19 May 2011

17

Sector Update


World chemical shipments, USDbn 4000 3500 3000 2500 2000 1500 1000 500 0 1998

1999

North America

2000

Latin America

2001

2002

Western Europe

2003

2004

2005

Central/ Eastern Europe

2006

2008

Africa & Middle East

2009

Asia /Pacif ic

Source: American Chemistry

China China’s industrialisation and development includes the construction of chemical plants and huge increases in the consumption of chemical outputs – e.g. paint, insulation, kitchen tops, or furniture. Chinese imports of three basic chemicals, 000tonne/month 800 700 600 500 400 300 200 100 0 Jan-04

Jan-05

Jan-06

Jan-07 Prse

Jan-08 Xylene

Jan-09

Jan-10

Jan-11

Gly col


On the other hand, what happened in the previous upturn, from 2003 onwards? Difficult customer relationship Just before the beginning of the previous upturn, four of the leading chemical tanker companies had been accused of anti-competitive behaviour, i.e. dividing long-term contracts between themselves. It cost both Odfjell and Stolt-Nielsen their CEOs and while their exact situations were different, both had a difficult relationship with their customers immediately afterwards: difficult enough to weaken their position in rate negotiations.

SEB ENSKILDA

19 May 2011

18

Sector Update


Bunker costs were the largest single risk Since the chemical tanker operators had contracts based on USD/tonne carried, they were responsible for all the voyage costs. The largest contributor to voyage costs is the bunker cost: typical chemical tankers can use as much as 30-50t/day and have further consumption during loading and discharge operations (powering the pumps). As the oil price rose from 2003 onwards, bunker prices rose in step, to the detriment of the operators. Although the companies’ bunker hedging is far from 100% coverage the experience focused attention on risks and risk management and we do not expect similar exogenous moves to hit the bottom line as hard in the future. Bunker price vs crude oil price 900

160

800

140

700

120

600 100 500 80 400 60

300

40

200

20

100 0 Jun-02

0 Jun-03

Jun-04

Jun-05

Jun-06

Bunker, 180CST, Fujaira, USD/ton

Jun-07

Jun-08

Jun-09

Jun-10

Crude oil, dated Brent Blend USD/barrel, RH axis


Not such a cosy market Necessarily tight in order to secure the logistics operations, we believe the overall impact of the widening chemical tanker market (the large number of IMO 2 ships operated outside the parcel tanker systems) makes the market more competitive and less cosy. All else being equal, this improves the pricing power of chemical tanker operators in a hot market.

SEB ENSKILDA

19 May 2011

19

Sector Update


Company section While Odfjell and Stolt-Nielsen historically see each other as main competitors, and their TCE earnings track in a broad sense, the relative developments since 2009 differ markedly. Comparing Odfjell and Stolt-Nielsen earnings 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 Q1/01

Q4/01

Q3/02

Q2/03

Q1/04

Q4/04

Q3/05

Q2/06

Odfjell, rebased

Q1/07

Q4/07

Q3/08

Q2/09

Q1/10

Q4/10

Stolt SITC

Source: Companies, SEB Enskilda

Bringing in Eitzen Chemical suggests that Odfjell and Eitzen were exposed to market, and that Stolt-Nielsen’s contract coverage sustained that company’s earnings. Earnings comparison: Eitzen Chemical, Odfjell, Stolt-Nielsen 120%

110%

100%

90%

80%

70%

60%

50% Q4/06

Q2/07

Q4/07

Q2/08

Q4/08

Odfjell

Stolt-Nielsen

Q2/09

Q4/09

Q2/10

Q4/10

Eitzen Chemical

Source: SEB Enskilda, Companies

To apply a percentage change exactly the same way to the three companies would assume an equal exposure and positioning in the spot market at the same time. So we have let the tracking be fairly loose – and show the difference in the following tables instead.

SEB ENSKILDA

19 May 2011

20

Sector Update


Odfjell average TCE earnings for the pool, quarter by quarter, USD/day Q4/10

Rate estimate Calculated rate, based on aggregate forecast Contract coverage (%) Spot rates increasing in the quarter (%) Contract rates increasing in the quarter (%) Old rate estimate, y-o-y increase (%) Calculated rate estimate, y-o-y increase (%)

Q1/11

Q2/11

Q3/11

Q4/11

Q1/12

Q2/12

Q3/12

Q4/12

Q1/13

Q2/13

Q3/13

Q4/13

19,700 19,208 20,400 20,400 20,400 23,100 23,100 23,100 23,100 26,000 26,000 26,000 26,000 19,700 19,700 19,966 20,235 20,509 20,786 21,357 21,944 22,548 23,168 24,037 24,938 25,873 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 1.7 1.7 1.7 1.7 3.0 3.0 3.0 3.0 4.0 4.0 4.0 4.0 1.0 1.0 1.0 1.0 2.5 2.5 2.5 2.5 3.5 3.5 3.5 3.5 4 13 13 4 10 15


Stolt-Nielsen average TCE earnings for the pool, quarter by quarter, USD/day

Rate estimate Calculated rate, based on aggregate forecast Contract coverage (%) Spot rates increasing in the quarter (%) Contract rates increasing in the quarter (%) Old rate estimate, y-o-y increase (%) Calculated rate estimate, y-o-y increase (%)

Q4/10

Q1/11

Q2/11

Q3/11

Q4/11

Q1/12

Q2/12

Q3/12

Q4/12

Q1/13

Q2/13

Q3/13

Q4/13

1.17 1.17

1.17 1.09 70.0 5.0 1.0

1.17 1.13 70.0 1.7 1.0

1.20 1.15 70.0 1.7 1.0

1.20 1.17 70.0 1.7 1.0 3 0

1.28 1.18 60.0 3.0 2.5

1.28 1.22 60.0 3.0 2.5

1.30 1.25 60.0 3.0 2.5

1.30 1.28 60.0 3.0 2.5 8 10

1.35 1.32 50.0 4.0 3.5

1.35 1.37 50.0 4.0 3.5

1.35 1.42 50.0 4.0 3.5

1.37 1.48 50.0 4.0 3.5 5 15

Q4/11

Q1/12

Q2/12

Q3/12

Q4/12

Q1/13

Q2/13

Q3/13

Q4/13


Eitzen Chemical average TCE earnings, quarter by quarter, USD/day Q4/10

Average T CE rates Average quarterly rate increase (%) Calculated rate estimate, y-o-y increase (%)

Q1/11

8,263

Q2/11

8,915 7.9

Q3/11

9,138 2.5

9,367 2.5 19

9,843 5.1

10,247 4.1

10,667 4.1

11,104 11,559 4.1 4.1 17

12,033 4.1

12,527 4.1

12,911 13,441 3.1 4.1 16


Eitzen Chemical’s historical TCE earnings (USD per day) 13,000

12,736

12,728 12,389

12,500 12,000 ) y a d 11,500 r e p D S 11,000 U ( s g n 10,500 i n r a e r e 10,000 t r a h c e 9,500 m i T

10,894

9,354

9,000

9,316 8,747

8,500 8,000 2007

2008

2009

2010

2011E

2012E

2013E

Source: SEB Enskilda, Eitzen Chemical

SEB ENSKILDA

19 May 2011

21

Sector Update


Norway

Shipping

Eitzen Chemical ASA Analyst: Nicolay Dyvik Tel: (47) 2100 8649 Estimates (USD) (Y/end 31-Dec) Revenues (m) Operating profit (m) PTP (m) EPS (reported) EPS (adjusted) DPS

Revenue growth (%) PTP growth (%) EPS growth (%) Operating margin (%) ROE (%) ROCE (%) Valuation PER (adjusted) FCF yield (%) Div. yield (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Key data (2011E) Market cap (USDm) Market cap (NOKm) Net debt (USDm) Net gearing (%)

Buy NOK 0.77

e-mail: [email protected] 2010 202 (57) (117) (0.15) (0.15) 0.0

2011E 206 (50) (101) (0.1) (0.1) 0.0

2012E 235 (18) (72) (0.06) (0.06) 0.0

2013E 267 18 (33) (0.03) (0.03) 0.0

(16.0) n.m. n.m. (28.9) (43.4) (4.3)

2.6 n.m. n.m. (24.7) (53.7) (4.1)

14.7 n.m. n.m. (7.9) (55.6) (1.5)

13.7 n.m. n.m. 7.0 (43.8) 1.8

Target price: NOK 1.08 Reuters/Bloomberg: ECHEM.OL/ECHEM NO 30 25 20 15 10 5

(2.1) 5.8 0.0 1.15 6.0 43.8 (20.9)

(1.4) (15.7) 0.0 0.97 5.3 35.3 (21.5)

(2.2) n.a. 0.0 1.72 4.7 17.4 (59.3)

156 Shares outstand. (m) 867 Shares fully dil. (m) 915 Avg volume (000s) 571

(4.8) 21.8 0.0 2.69 4.0 10.6 56.9 1126.12 1126.12 4382.11

0 2006

2007

2008

ECHEM.OL Source: SIX

Performance data Absolute (%) Relative to local index (%) Relative to Europe, ex UK (%) Relative to sector (%)

2009

2010

2011

Rel Norway 12m High/Low -1M (10.5) (12.1) (12.0) (16.6)

2/1 -3M (38.9) (38.1) (38.8) (39.6)

-12M (63.3) (69.3) (71.0) (69.5)

Case

We expect chemical tanker utilisation to improve by 14% from 2011 to 2013, with demand growth of 7% annually and supply growth of 4% in 2011, declining to 3% in 2012 and 0% in 2013. Several coincidental factors favour chemical tanker operators at present: feedstock costs are shifting production, the Middle East is increasing chemical exports, chemical plants are becoming more specialised, China is industrialising, customer relationships are improving and bunker costs are falling.

Valuation

We initiate our coverage with a Buy recommendation and NOK 1.08 target price based on a 2013E P/CEPS multiple of 6.5x (about 40% upside). Eitzen Chemical is a geared play on a recovery in the chemical tanker market. A USD 1,000/day change in TCE will increase annual EBITDA by USD 21m and a 15% increase in asset values will increase the current NAV of NOK 0.35/share by 210% to NOK 1.08/share.

Risks to target price

Chemical tanker demand is highly correlated to global GDP and consequently, weaker-than-expected GDP growth could mean a downside risk to our freight rate assumption and ultimately our target price.

Description

Eitzen Chemical's objective is to be a leading company within the marine transportation of chemicals and related products, through the commercial management and ownership of a diversified chemical tanker fleet. The fleet consists of 59 coated and stainless steel vessels ranging from 3,500dwt to 48,000dwt, of which 41 are owned, 11 are on financial leases and seven on operational leases. The vessels are primarily designed for the transport of IMO 2 classified chemical cargoes. In addition, the company operates around 23 vessels for partners in two pools. The average age of the owned and leased vessels is less than seven years.

SEB ENSKILDA

19 May 2011

22

Sector Update


Eitzen Chemical ASA Interim financial statement (USDm)

Q1/11

Q2/11E

Q3/11E

Q4/11E

2007

2008

2009

2010

2011E

2012E

2013E

Freight income on T/C basis

49

49

51

52

323

298

234

196

201

231

263

Management fees and other income Gain/(loss) on sale of assets Gross profit

1 0 50

1 0 50

1 0 52

1 0 53

4 21 347

12 8 319

5 -3 236

5 -3 199

4 0 206

4 0 235

4 0 267

Ship operating expenses Charterhire expenses Other operating expenses General and administrative expenses

-30 -8 0 -6

-31 -7 0 -6

-31 -7 0 -6

-30 -7 0 -6

-141 -18 0 -31

-144 -20 0 -26

-150 -26 0 -25

-126 -26 0 -23

-122 -28 0 -25

-121 -27 0 -25

-119 -24 0 -25

6

7

8

10

157

128

36

24

30

62

98

Impairment Depreciation and amortization

0 -20

0 -20

0 -20

0 -20

0 -102

-313 -87

0 -89

0 -84

0 -80

0 -80

0 -80

EBIT

-14

-13

-12

-10

55

-273

-53

-59

-50

-18

18

Interest income Interest expense

0 -11

0 -12

0 -12

0 -12

5 -59

1 -49

1 -48

1 -44

1 -48

1 -54

1 -52

-2

0

0

0

3

-18

-3

-14

-2

0

0

-27

-26

-24

-22

5

-338

-102

-117

-99

-72

-33

0

1

1

1

4

-8

4

3

2

2

1

-27

-25

-24

-22

9

-346

-99

-114

-97

-70

-33

Nr of share EPS (basic/diluted)

754 -0.04

1,126 -0.02

1,126 -0.02

1,126 -0.02

172 0.05

171 -2.02

224 -0.44

753 -0.15

1033 -0.09

1126 -0.06

1126 -0.03

ECHEM fleet Average dwt No. of vessels EOP TCE - USD/day Change Q-o-Q (%)

59 8,915 8

17,000 59 9,138 3

16,952 59 9,367 3

16,952 58 9,843 5

16,952 71 12,736

EBITDA

Other financial items Profit/(loss) before tax

Income tax expense Net profit/(loss)

16,403 17,117 17,003 17,146 16,964 16,952 16,952 66 66 61 59 58 57 12,389 9,354 8,747 9,316 10,894 12,728 -3 -24 -6 7 17 17


Valuation Eitzen Chemical is a geared play on a recovery in the chemical tanker market. The market capitalisation is USD 160m and we forecast end-2011 net interest bearing debt of USD 915m. We forecast that Eitzen Chemical’s average TCE earnings will increase to 2007 levels by 2013, which will lift the annual EBITDA from USD 24m in 2010 to USD 98m. A USD 1,000/day change in time charter earnings (TCE) will increase annual EBITDA by USD 21m.

SEB ENSKILDA

19 May 2011

23

Sector Update


2012 EBITDA sensitivities (USDm) to USD 1,000 per day change in TCE rates 200 175

167 146

150 125

) 125 m D S U 100 ( A D T I B 75 E 2 1 0 2

104 83 62

50

41 20

25 0 -1 -25 7,894

8,894

9,894

10,894

11,894

12,894

13,894

14,894

15,894


Our target is based on a 2013E P/CEPS multiple of 6.5x (about 40% upside). Eitzen’s peer, Odfjell, traded at a P/CEPS of 5-8x from 2005 to 2008. Chemical tanker asset values are down about 50% since the peak in 2008. We now understand secondhand values have now stabilised. By our calculation a 15% increase in asset values will increase the company’s own current calculated NAV of NOK 0.35 per share by 210% to NOK 1.08 per share.

Fleet Eitzen Chemical’s fleet consists of 59 coated and stainless steel vessels ranging from 3,500dwt to 48,000dwt, of which 41 are owned, 11 are on financial leases and seven are on operational leases. The vessels are primarily designed for the transport of IMO 2 classified chemical cargoes. In addition, the company operates around 23 vessels for partners in two pools. The average age of the owned and leased vessels is less than seven years. The vessels below 13,000dwt are mainly involved in regional trades. The vessels above 13,000dwt operate in global trades. The vessels are employed in the spot market or chartered out through time-charter agreements or Contracts of Affreightment (COA). The contract cover, measured by number of days, is 36% for 2011, with the COA cover at 29% and time charter cover at 7%. TCE earnings divided spot, T/C & COA 100% 90%

22%

22%

21%

28%

28%

31%

33%

36%

37%

16%

16%

11%

11%

80% 70%

23%

20%

19% 16%

60% ) % (

16%

50% 40% 30%

55%

58%

60%

Q109

Q209

Q309

56%

56%

53%

51%

53%

52%

Q409

Q110

Q210

Q310

Q410

Q111

20% 10% 0% Spot

T/C

COA

Source: SEB Enskilda, ECHEM

SEB ENSKILDA

19 May 2011

24

Sector Update


Profit & loss statement (USDm) Total revenues Total expenses Profit before depreciation Depreciation Intangibles amortisation Operating profit

2006 77 (50) 27 (22) (0) 5

2007 327 (190) 136 (102) 0 35

2008 311 (191) 120 (401) 0 (281)

2009 239 (200) 39 (89) 0 (50)

2010 202 (175) 27 (84) 0 (57)

2011E 206 (175) 30 (80) 0 (50)

2012E 235 (173) 62 (80) 0 (18)

2013E 267 (168) 98 (80) 0 18

(11) 0 1 2 (2) 0 (0)

(53) 0 3 21 5 0 4

(48) 0 (18) 8 (338) 0 (8)

(47) 0 (3) (3) (102) 0 4

(44) 0 (14) (3) (117) 0 3

(49) 0 (2) 0 (101) 0 3

(53) 0 0 0 (72) 0 2

(52) 0 0 0 (33) 0 1

0 (2) 6.9 (14.8) (0.6) 0.8

(0) 9 10.7 (79.5) 1.4 2.5

0 (346) (94.1) (2.3) (72.3) (18.6)

0 (99) (21.3) 3.6 (31.6) (3.6)

0 (114) (28.9) 2.7 (43.4) (4.3)

0 (98) (24.7) 2.7 (53.7) (4.1)

0 (70) (7.9) 2.7 (55.6) (1.5)

(0) (33) 7.0 2.7 (43.8) 1.8

0.0 0.0 0.0

328.7 560.8 0.0

(7.6) 0.0 0.0

(21.6) 0.0 0.0

(16.0) 0.0 0.0

2.6 0.0 0.0

14.7 0.0 0.0

13.7 0.0 0.0

(USDm) Net profit Non-cash adjustments Changes in working capital Operating cash flow Net capital expenditures Free cash flow Net loan proceeds Dividend paid Share issue Net change in cash

2006 (2) 20 25 43 (558) (515) 299 0 290 58

2007 9 81 46 136 (175) (39) 177 0 0 67

2008 (346) 393 57 104 (195) (91) 89 0 0 (66)

2009 (99) 92 61 55 (1) 54 (50) 0 122 63

2010 (114) 86 50 23 (10) 13 (20) 0 0 (50)

2011E (98) 66 15 (18) 0 (18) 0 0 53 35

2012E (70) 65 1 (4) 0 (4) (12) 0 0 (16)

2013E (33) 67 1 35 0 35 (58) 0 0 (23)

Capex/sales (%)

773.6

107.4

128.9

36.7

7.9

0.0

0.0

0.0

(USDm) Cash and liquid assets Other current assets Fixed tangible assets Intangibles Total assets

2006 48 79 1,433 60 1,619

2007 105 77 1,505 21 1,708

2008 50 100 1,306 14 1,470

2009 122 77 1,221 9 1,429

2010 72 82 1,148 4 1,306

2011E 107 47 1,068 4 1,227

2012E 92 54 988 4 1,138

2013E 68 62 908 4 1,042

Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity

898 97 0 625 1,619

980 77 0 651 1,708

1,065 100 0 305 1,470

1,032 77 0 319 1,429

1,023 78 0 205 1,306

1,023 44 0 160 1,227

1,011 37 0 91 1,138

952 32 0 58 1,042

Net debt (m) Net debt/equity (%) Equity/total assets (%) Interest cover

850 136.0 38.6 0.6

875 134.6 38.1 0.7

1,015 332.4 20.8 (5.7)

910 285.1 22.3 (1.0)

951 462.8 15.7 (1.3)

915 571.3 13.1 (1.0)

919 1,015.1 8.0 (0.3)

884 1,523.9 5.6 0.4

(USDm) No of shares, fully dil. (y/e) Share price, y/e

2006 170.6 25.5

2007 171.8 22.9

2008 170.8 8.7

2009 171.8 1.8

2010 754.2 1.8

2011E 1,126.1 0.8

2012E 1,126.1 0.8

2013E 1,126.1 0.8

EPS (reported) EPS (adjusted) Cash earnings/share Dividend/share

(0.03) (0.05) 0.24 0.0

0.05 (0.07) 0.52 0.0

(2.02) (2.06) 0.27 0.0

(0.44) (0.43) (0.03) 0.0

(0.15) (0.15) (0.04) 0.0

(0.1) (0.1) (0.03) 0.0

(0.06) (0.06) 0.0 0.0

(0.03) (0.03) 0.03 0.0

PER (adjusted) CEM Dividend yield

(75.4) 17.3 0.0

(61.3) 8.1 0.0

(0.6) 4.5 0.0

(0.7) (10.6) 0.0

(2.1) (8.6) 0.0

(1.4) (4.2) 0.0

(2.2) (32.2) 0.0

(4.8) 4.6 0.0

57.4 295.7 20.5 1.11 1.11 (165.8)

11.8 46.4 5.0 1.12 1.12 (5.5)

10.2 (4.4) 4.1 0.69 0.69 (43.7)

24.8 (19.4) 4.1 0.17 0.17 75.2

43.8 (20.9) 6.0 1.15 1.15 5.8

35.3 (21.5) 5.3 0.97 0.97 (15.7)

17.4 (59.3) 4.7 1.72 1.72 n.a.

10.6 56.9 4.0 2.69 2.69 21.8

Net interest expenses Foreign exchange items Other financial items Value changes Reported pre-tax profit Minority interests Total taxes EO items/Discontinued oper. Net profit Operating margin (%) Tax rate (%) ROE (%) ROCE (%) Growth rates y-o-y (%) Total revenues Operating profit Pre-tax profit

Cash flow

Balance sheet

Valuation

EV/EBITDA EV/EBIT EV/Sales Price/Book value Price/adjusted equity Free cash flow/Market cap (%)

Main shareholders Name Camillo Eitzen & Co Odin Norden JP Morgan Clearing Corp

SEB ENSKILDA

Management (%) Votes 33.8 4.8 3.0

Capital 33.8 4.8 3.0

19 May 2011

Title COB CEO CFO

Company information Name Axel Eitzen Terje Askvig Per-Hermod Rasmussen

Contact Internet Phone number Fax number

www.eitzen-chemical.com 24006100 24006101

25

Sector Update


Norway

Shipping

Odfjell Analyst: Ole G. Stenhagen Tel: (47) 2100 8527 Estimates (USD) (Y/end 31-Dec) Revenues (m) Operating profit (m) PTP (m) EPS (reported) EPS (adjusted) DPS

Revenue growth (%) PTP growth (%) EPS growth (%) Operating margin (%) ROE (%) ROCE (%) Valuation PER (adjusted) FCF yield (%) Div. yield (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Key data (2011E) Market cap (USDm) Market cap (NOKm) Net debt (USDm) Net gearing (%)

Buy NOK 45.4 e-mail: [email protected] 2010 1,239 23 (18) (0.97) (0.94) 0.0 (2.0) n.m. n.m. 1.9 (9.4) 1.1

2011E 1,205 79 96 0.96 0.24 0.0

2012E 1,344 156 119 1.25 1.25 0.0

2013E 1,492 220 188 2.11 2.11 0.0

(2.7) n.m. n.m. 6.5 9.5 3.6

11.5 24.4 425.0 11.6 11.2 6.9

11.1 57.4 69.0 14.8 16.4 9.8

(9.8) 7.2 0.0 0.96 1.7 12.7 93.0

34.2 10.9 0.0 0.77 1.6 9.3 25.2

6.5 22.4 0.0 0.69 1.4 6.2 11.8

3.9 27.0 0.0 0.59 1.1 4.6 7.5

646 3,596 1,336 159

Shares outstand. (m) Shares fully dil. (m) Avg volume (000s) Free float (%)

79.38 79.38 25.74 50

Target price: NOK 84 Reuters/Bloomberg: ODF.OL/ODF NO 140 120 100 80 60 40 20 0 2006

2007

2008

ODF.OL Source: SIX


2009

2010

2011

Rel Norway 12m High/Low -1M 0.9 (0.9) (0.8) (6.0)

-3M (14.3) (13.3) (14.2) (15.4)

55/33 -12M 5.6 (11.7) (16.6) (12.1)

Case

We believe the economic cycle has passed the trough and that newbuilding deliveries are manageable. The earnings growth so far is slow, but during 2011 we expect the focus to shift from the question of whether chemicals rates are heading up, to the consequences for income, given Odfjell's high leverage.

Valuation

Our target is a mid-cycle valuation, based on historical average EBITDA/ship/day and similarly for the terminals. We believe the trending earnings and the poor liquidity make step-wise earnings and price target increases less than useful.


Demand for chemical tankers is a function of the global economy and particularly China. However, if there is a decoupling, with regions following individual paths, this might stimulate trade. The parcel trade may be under pressure from excessive supply of tramp chemicals.

Description

Odfjell's business is the global maritime transport of bulk chemicals. Such cargoes include organic chemicals, acids, alcohols, vegetable oils and petroleum products. The company uses deep-sea parcel tankers, distribution tankers and terminals at hub locations. The deep-sea market share is above 20% and about half the cargo is from long-term contracts with customers. The ships are operated on regular routes and the function of the terminals is to link deep sea and regional transport, or land-based and maritime transport. Odfjell is a fully integrated shipping company handling all related functions, such as ship management, operation and chartering.

SEB ENSKILDA

19 May 2011

26

Sector Update


Odfjell SE Odfjell, SOTP Deep sea and short sea tankers No of ships Lifetime Scrapping EBITDA/ship operating day Annual EBITDA RRR (%) Present value tanker fleet Terminals

Wholly owned terminals Terminal capacity (mCBM) Annual EBITDA/CBM capacity (USD/CBM) EBITDA current capacity EV/EBITDA (attractive locations) Value of wholly owned terminals

Low case

Base case

High case

75 30 0 1,554 43 7 528

75 30 0 5,606 153 8 1,728

75 30 0 8,975 246 10 2,316

2.8 13.0 36 13 473

2.8 25.4 71 12 850

50

50

50

Comment

Mean reverting market - rises and risk moves to down Book value of owned fleet and newbuildings: USD 1287m

2.8 Nett 100% capacity - including part owned 3.7CBM 45.2 126 2010: USD 110m 8 1,009 Book value of terminals USD 733m Sevmash award

Corporate

Corporate assets

Valuation

Enterprise value

1051

2,627

3,375

Net interest bearing debt

1371

1,371

1,371

Corrected for ships sold - removed from fleet

Value of equity (USDm) Value per share (USD) Currency exchange rate USD/NOK Value of equity (NOK/share)

-320 -4.1 5.55 -23

1,256 15.9 5.55 88

2,004 25.4 5.55 141

Book equity USD 790m


Valuation approach: Our sum-of-the-parts valuation is based on historically high, low and average earnings per unit capacity in the key segments. The resulting EBITDA is then used as a basis for a DCF in the shipping segment and a multiple pricing in the other segments.

SEB ENSKILDA

19 May 2011

27

Sector Update


Profit & loss statement (USDm) Total revenues Total expenses Profit before depreciation Depreciation Intangibles amortisation Operating profit Associated companies Net interest expenses Foreign exchange items Other financial items Value changes Reported pre-tax profit Minority interests Total taxes

2001 846 (643) 203 (83) 0 120 0 (40) (14) (1) 4 69 0 (9)

2002 846 (687) 159 (87) (0) 72 0 (26) 15 (1) 1 61 (0) (15)

2003 907 (737) 170 (90) (2) 78 0 (23) 30 (0) (0) 84 0 (7)

2004 943 (736) 207 (100) 0 107 0 (25) 17 (1) 7 105 0 (11)

2005 1,045 (781) 264 (107) 0 157 0 (28) 2 (1) 14 143 0 (19)

2006 1,088 (829) 259 (119) 0 140 0 (41) 0 2 15 116 0 0

2007 1,239 (924) 315 (136) 0 179 0 (61) 2 (1) 25 143 0 (153)

2008 1,476 (1,190) 286 (142) (0) 144 0 (65) 21 (7) 53 145 0 17

2009 1,264 (1,083) 182 (151) (0) 31 0 (45) 0 9 31 26 0 95

2010 1,239 (1,070) 169 (146) 0 23 0 (41) 3 3 (6) (18) 0 (60)

2011E 1,205 (992) 213 (134) 0 79 0 (40) 0 0 57 96 0 (20)

2012E 1,344 (1,049) 294 (138) 0 156 0 (37) 0 0 (0) 119 0 (20)

2013E 1,492 (1,131) 361 (141) 0 220 0 (32) 0 0 0 188 0 (20)

0 60 14.2 13.4 11.2 8.9

0 45 8.5 24.8 8.2 5.3

(55) 22 8.6 8.5 14.2 5.3

0 94 11.4 10.7 16.0 6.9

4 129 15.0 13.0 18.8 9.7

0 116 12.9 0.0 16.7 8.2

(0) (10) 14.5 106.7 (1.4) 9.5

(0) 163 9.8 (11.9) 23.6 7.1

0 121 2.4 (364.4) 15.0 1.5

0 (78) 1.9 (333.3) (9.4) 1.1

0 76 6.5 20.9 9.5 3.6

0 99 11.6 16.8 11.2 6.9

0 168 14.8 10.6 16.4 9.8

21.5 174.4 0.0

(0.0) (40.2) (12.5)

7.2 8.0 39.5

4.0 38.1 24.5

10.7 45.9 36.1

4.1 (10.6) (18.8)

13.9 28.2 23.4

19.1 (19.6) 1.5

(14.4) (78.7) (82.1)

(2.0) (25.0) 0.0

(2.7) 242.5 0.0

11.5 98.4 24.4

11.1 40.9 57.4

2001 60 84 (0) 144 (111) 33 5 (11) (41) (14)

2002 45 101 9 156 (107) 49 (9) (22) (18) 17

2003 22 99 58 179 (165) 15 (21) (24) 0 (27)

2004 94 91 84 269 (228) 40 70 (25) 0 85

2005 129 92 21 242 (305) (63) 73 (60) 0 (50)

2006 116 105 (36) 185 (220) (35) 160 (84) 0 42

2007 (10) 306 6 303 (340) (37) 38 (77) 0 (75)

2008 163 56 58 277 (330) (53) 232 (39) (32) 109

2009 121 121 (169) 74 (120) (46) (2) (12) 0 (60)

2010 (78) 148 29 99 (45) 54 (51) 0 (24) (21)

2011E 76 77 2 156 (85) 71 (114) 0 0 (43)

2012E 99 138 34 272 (126) 146 (24) 0 0 122

2013E 168 141 (45) 264 (89) 175 (300) 0 0 (125)

13.1

12.6

19.6

24.2

23.9

20.2

27.4

22.4

9.5

8.1

17.0

9.4

6.0


2001 213 87 1,284 17 1,601

2002 230 85 1,299 15 1,630

2003 203 94 1,370 10 1,677

2004 170 95 1,558 10 1,833

2005 190 109 1,647 9 1,955

2006 244 130 1,803 12 2,189

2007 166 165 2,037 11 2,379

2008 193 165 2,216 10 2,585

2009 198 245 2,246 11 2,699

2010 141 243 2,184 11 2,579

2011E 98 236 2,192 11 2,536

2012E 219 213 2,180 11 2,622

2013E 94 246 2,128 11 2,478


960 91 4 546 1,601

957 109 4 560 1,630

1,045 97 4 530 1,677

1,000 194 0 639 1,833

1,037 226 0 692 1,956

1,293 188 6 702 2,189

1,347 359 6 666 2,379

1,500 364 6 715 2,585

1,576 216 5 901 2,699

1,526 287 5 761 2,579

1,412 283 5 837 2,537

1,388 293 5 936 2,622

1,088 282 5 1,104 2,479


752 136.8 34.4 2.5

732 129.7 34.6 2.3

847 158.6 31.9 3.0

842 131.9 34.9 3.8

860 124.3 35.4 4.5

1,067 150.7 32.3 2.8

1,197 178.0 28.3 2.6

1,323 183.5 27.9 2.1

1,401 154.6 33.6 0.7

1,407 183.7 29.7 0.6

1,336 158.7 33.2 1.9

1,191 126.5 35.9 3.9

1,016 91.6 44.7 6.2

(USDm) No of shares, fully dil. (y/e) Share price, y/e

2001 22.9 33.8

2002 22.9 27.5

2003 21.7 37.0

2004 21.7 106.0

2005 43.4 137.0

2006 86.8 115.0

2007 86.8 89.0

2008 82.8 43.5

2009 82.8 52.0

2010 79.4 54.0

2011E 79.4 45.4

2012E 79.4 45.4

2013E 79.4 45.4


0.64 0.6 1.54 0.2

0.5 0.5 1.6 0.29

0.71 0.45 1.62 0.43

1.08 0.77 2.13 0.25

1.44 1.26 2.54 0.48

1.34 1.17 2.55 0.89

(0.11) 0.17 3.42 0.44

1.92 1.04 2.58 0.14

1.46 (0.04) 2.93 0.0

(0.97) (0.94) 0.87 0.0

0.96 0.24 1.93 0.0

1.25 1.25 2.99 0.0

2.11 2.11 3.89 0.0

6.2 2.4 5.2

7.9 2.5 7.3

12.4 3.4 7.7

22.8 8.3 1.4

16.1 8.0 2.4

15.8 7.2 4.8

94.8 4.8 2.7

6.0 2.4 2.3

(213.9) 3.1 0.0

(9.8) 10.6 0.0

34.2 4.2 0.0

6.5 2.7 0.0

3.9 2.1 0.0

5.4 9.1 1.3 0.63 0.63 9.6

6.9 15.2 1.3 0.64 0.64 13.7

7.8 17.0 1.5 0.91 0.91 2.3

11.4 21.9 2.5 2.38 2.38 2.6

9.7 16.3 2.4 2.54 2.54 (3.6)

10.0 18.5 2.4 2.27 2.27 (2.2)

8.1 14.2 2.1 2.14 2.14 (2.6)

6.4 12.8 1.2 0.72 0.72 (10.0)

11.8 69.5 1.7 0.83 0.83 (6.2)

12.7 93.0 1.7 0.96 0.96 7.2

9.3 25.2 1.6 0.77 0.77 10.9

6.2 11.8 1.4 0.69 0.69 22.4

4.6 7.5 1.1 0.59 0.59 27.0

(%) Votes 45.8

Capital 36.0

EO items/Discontinued oper. Net profit Operating margin (%) Tax rate (%) ROE (%) ROCE (%) Growth rates y-o-y (%) Total revenues Operating p rofit Pre-tax profit

Cash flow (USDm) Net profit Non-cash adjustments Changes in working capital Operating cash flow Net capital expenditures Free cash flow Net loan proceeds Dividend paid Share issue Net change in cash

Capex/sales (%)

Balance sheet

Valuation

PER (adjusted) CEM Dividend yield EV/EBITDA EV/EBIT EV/Sales Price/Book value Price/adjusted equity Free cash flow/Market cap (%)

Main shareholders Name B.D.Odfjell jr. and family

SEB ENSKILDA

Management

19 May 2011

Title COB CEO CFO

Company information Name Laurence Odfjell Jan Hammer Haakon Ringdal


www.odfjell.no (47) 5527 0000 (47) 5528 4741

28

Sector Update


Norway

Shipping

Stolt-Nielsen Analyst: Ole G. Stenhagen Tel: (47) 2100 8527 Estimates (USD) (Y/end 30-Nov) Revenues (m) Operating profit (m) PTP (m) EPS (reported) EPS (adjusted) DPS

Revenue growth (%) PTP growth (%) EPS growth (%) Operating margin (%) ROE (%) ROCE (%) Valuation PER (adjusted) FCF yield (%) Div. yield (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Key data (10/11E) Market cap (USDm) Market cap (NOKm) Net debt (USDm) Net gearing (%)

Buy NOK 126.5

e-mail: [email protected] 09/10 1,794 129 132 1.83 1.45 1.5 9.0 26.0 13.8 7.2 7.1 7.3

10/11E 1,875 127 122 1.64 1.57 1.0

11/12E 2,050 229 198 2.59 2.59 1.5

12/13E 2,131 269 239 3.15 3.15 0.0

4.6 (7.2) 8.1 6.8 6.1 5.0

9.3 61.8 64.7 11.2 9.3 7.9

3.9 21.0 21.6 12.6 10.7 8.9

16.7 25.3 6.2 0.90 1.3 7.9 15.5

14.5 (27.9) 4.4 0.83 1.5 9.1 19.2

8.8 9.1 6.6 0.78 1.3 6.5 10.7

7.2 31.3 0.0 0.74 1.1 5.1 8.0

1,391 7,736 1,379 84

Shares outstand. (m) Shares fully dil. (m) Avg volume (000s) Free float (%)

59.80 61.16 53.19 48

Target price: NOK 165 Reuters/Bloomberg: SNI.OL/SNI NO 250 200 150 100 50 0 2006

2007

2008

SNI.OL Source: SIX


2009

2010

2011

Rel Norway 12m High/Low -1M (1.6) (3.3) (3.2) (8.3)

-3M (14.8) (13.8) (14.7) (15.9)

155/73 -12M 40.6 17.5 11.0 17.0

Case

Demand for parcel tankers is a function of general economic activity and regional imbalances. We believe deliveries of new chemicals tankers are slowing and consider 2011 the low year of the current cycle.

Valuation

Our target price is based on historical average EBITDA/ship/day or similar for the various businesses. For the shipping segment, we use an average; for the tank containers and terminals we have a multiple-based approach. We consider the current valuation a fair mid-cycle valuation.


The demand side is vulnerable to new macro mishaps. Some of the tonnage overhang is from tramp chemical ships entering the parcel trade.

Description

Stolt-Nielsen, together with its alliance partners, provides one of the world's leading networks for transport and storage services for bulk liquid chemicals, acids, edible oils and other speciality liquids. Through its logistics management systems and parcel tankers, tank containers, and terminal, rail and barge services, the company provides cost-effective solutions to meet the needs of its customers for single mode, multi-modal and full supply chain management services.

SEB ENSKILDA

19 May 2011

29

Sector Update


Stolt-Nielsen Ltd Stolt-Nielsen SOTP Low case Stolt-Nielsen Transportation Group Stolt Tankers Present value tanker fleet Assumptions No of ships Lifetime Scrapping EBITDA/ship operating day Annual EBITDA RRR (%) Present value tanker fleet Valuation of investments Stolt Tankers Annual contribution PER Value of equity investees - Tankers Stolt Tank Containers Number of tank containers Annual EBITDA/tank container (US D) Annual EBITDA current capacity EV/EBITDA Value of Tank Container division Stolt Terminals Terminal capacity (mbbls) Q4/2012 Annual EBITDA/bbl capacity (USD/bbl) EBITDA based on Q4/2012 capacity EV/EBITDA (attractive locations) Value of Tank Terminals division Investment requirement Contribution equity investees (USDm) PER assumed Value of equity investees - Terminals

Base case

123 30 0 2,634

High case

9 1,215

123 30 0 4,161 118 11 1,624

123 30 0 5,872 187 13 1,976

4 14 61

12 10 120

23 6 135

24,359

24,359 1,753 43

11 470

7.63 7.6

3,394 83 6 A significant part of assets are chartered in containers 307 Book 496 7.6

9.7

11.5

58 9 525 235 5.9 11 65

74 8 590 235 6.7 9 60

88 7 615 235 9.8 8 78

2101

2737

3066

Stolt Sea Farm Assumed value

20

50

100

Stolt-Nielsen Gas Book value

54

54

54

0

0

0

Total Enterprise value

2,175

2,841

3,220

Net interest bearing debt

1,050

1,050

1,050

Value of equity (USDm) Value per share (USD) Currency exchange rate USD/NOK Value of equity (NOK/share)

1,125 18.8 5.97 112

1,792 30.0 5.97 179

2,170 36.3 5.97 217

Total Stolt Nielsen Transportation Group

SNTG Corporate Book assets: USD 109m, Annual loss: USD 10m

264 When assuming a strong market one should apply risk 2052 Book

24,359 2,633 64

9 577

7.6

Comment

498 Book

2856 Book

Reports a loss of approx. USD 10m annually

Book equity is 1513


Valuation approach: Our sum-of-the-parts valuation is based on historically high, low and average earnings per unit capacity in the key segments. The resulting EBITDA is then used as a basis for a DCF in the shipping segment and a multiple pricing in the other segments.

SEB ENSKILDA

19 May 2011

30

Sector Update


Profit & loss statement (USDm) Total revenues Total expenses Profit before depreciation Depreciation Intangibles amortisation Operating profit Associated companies Net interest expenses Foreign exchange items Other financial items Value changes Reported pre-tax profit Minority interests Total taxes

00/01 2,678 (2,325) 354 (219) 0 134 13 (114) (2) 1 14 47 4 (28)

01/02 2,853 (2,599) 254 (209) (118) (73) 14 (93) 1 0 10 (141) 56 (18)

02/03 3,026 (3,009) 17 (372) (2) (357) (11) (93) 13 0 (1) (449) 149 (15)

03/04 1,956 (1,739) 216 (119) (0) 97 36 (81) 6 (2) 25 81 8 (14)

04/05 1,636 (1,385) 251 (97) 0 154 27 (41) (2) (15) 7 130 (0) (7)

05/06 1,577 (1,333) 244 (97) 0 147 25 (28) 3 0 58 206 (0) (5)

06/07 1,759 (1,493) 266 (98) 0 168 22 (23) (10) (1) 25 180 (0) (6)

07/08 1,998 (1,720) 278 (123) 0 154 21 (24) 4 0 28 183 0 (6)

08/09 1,645 (1,405) 240 (138) 0 102 20 (25) 8 (1) 1 104 (0) (9)

09/10 1,794 (1,515) 279 (150) (0) 129 25 (26) 3 (5) 7 132 0 (20)

10/11E 1,875 (1,589) 286 (160) 0 127 17 (41) 1 15 3 122 0 (22)

11/12E 2,050 (1,656) 395 (166) 0 229 24 (55) 0 0 0 198 0 (39)

12/13E 2,131 (1,694) 436 (167) 0 269 25 (56) 0 0 0 239 0 (47)

0 24 5.0 58.6 2.2 5.0

0 (103) (2.6) (12.7) (9.8) (2.0)

0 (316) (11.8) (3.4) (37.4) (13.6)

0 75 5.0 17.0 9.5 6.1

361 485 9.4 5.4 11.7 9.7

0 201 9.3 2.4 16.8 9.8

42 216 9.5 3.2 13.7 9.9

0 177 7.7 3.1 13.2 7.6

0 95 6.2 9.1 6.7 4.6

(7) 105 7.2 15.0 7.1 7.3

15 115 6.8 18.0 6.1 5.0

(0) 158 11.2 19.9 9.3 7.9

0 192 12.6 19.5 10.7 8.9

18.1 42.3 145.1

6.5 0.0 0.0

6.1 0.0 0.0

(35.4) 0.0 0.0

(16.3) 58.3 59.9

(3.7) (4.3) 58.1

11.6 13.9 (12.5)

13.5 (8.0) 1.6

(17.6) (33.8) (42.9)

9.0 26.2 26.0

4.6 (1.6) (7.2)

9.3 80.2 61.8

3.9 17.8 21.0

00/01 24 178 (99) 103 (234) (131) 130 (14) 1 (14)

01/02 (103) 237 2 136 (123) 13 116 (14) 0 116

02/03 (316) 237 218 139 (89) 50 (68) (14) 0 (32)

03/04 75 11 (290) (204) 752 548 (723) 0 104 (71)

04/05 485 (303) (50) 132 403 535 (419) (125) (36) (45)

05/06 201 2 4 206 91 298 (39) (126) (130) 3

06/07 216 (1) (66) 150 (206) (56) 103 (60) (7) (17)

07/08 177 85 43 306 (779) (473) 535 (60) 0 3

08/09 95 118 (16) 197 (207) (10) 5 (30) 3 (33)

09/10 105 113 (63) 155 222 377 (288) 0 0 89

10/11E 115 139 14 268 (657) (389) 430 (90) 0 (49)

11/12E 158 142 (17) 283 (156) 127 36 (60) 0 103

12/13E 192 142 201 535 (100) 435 (6) (90) 0 339

7.9

4.3

2.9

1.8

8.0

-5.8

13.3

31.1

12.6

21.1

35.0


00/01 25 930 2,842 175 3,972

01/02 23 1,007 2,672 86 3,787

02/03 147 973 2,381 76 3,578

03/04 76 464 1,833 61 2,434

04/05 30 212 1,953 24 2,218

05/06 45 221 2,224 24 2,514

06/07 32 289 2,151 16 2,487

07/08 34 346 2,663 39 3,082

08/09 38 280 2,843 50 3,211

09/10 127 363 2,522 39 3,052

10/11E 79 317 3,040 39 3,475

11/12E 182 334 3,055 39 3,610

12/13E 521 133 3,013 39 3,707


1,693 857 322 1,101 3,972

1,652 940 204 991 3,787

1,700 1,129 51 697 3,578

1,113 432 3 885 2,434

667 339 0 1,213 2,218

631 710 0 1,173 2,514

737 381 3 1,366 2,487

1,276 490 3 1,313 3,082

1,280 415 3 1,513 3,211

993 436 3 1,620 3,052

1,422 405 3 1,645 3,475

1,458 405 3 1,744 3,610

1,452 405 3 1,847 3,706


1,668 117.3 35.8 1.2

1,629 136.3 31.6 (0.8)

1,553 207.5 20.9 (3.5)

1,037 116.7 36.5 1.2

551 45.5 54.7 3.4

439 37.4 46.7 4.4

753 55.0 55.1 5.9

1,289 97.9 42.7 5.1

1,287 84.9 47.2 3.5

900 55.5 53.2 2.4

1,379 83.6 47.4 3.1

1,312 75.1 48.4 4.1

966 52.2 49.9 4.8

00/01 55.4 141.0

01/02 54.9 44.9

02/03 54.9 64.0

03/04 62.6 174.0

04/05 65.5 223.5

05/06 60.6 191.0

06/07 60.9 162.0

07/08 60.9 70.5

08/09 61.2 80.3

09/10 61.2 142.5

10/11E 61.2 126.5

11/12E 61.2 126.5

12/13E 61.2 126.5


0.43 0.21 3.67 0.25

(1.87) 1.7 2.44 0.25

(5.75) (5.96) (1.44) 0.0

1.2 0.71 1.38 2.0

1.86 (3.68) 2.75 2.0

3.12 2.17 3.15 1.0

2.87 1.9 3.56 1.0

2.91 2.57 4.31 0.5

1.56 1.28 3.49 0.5

1.83 1.45 3.56 1.5

1.64 1.57 4.15 1.0

2.59 2.59 4.91 1.5

3.15 3.15 5.46 0.0

PER (adjusted) CEM Dividend yield

74.9 4.3 1.6

3.8 2.6 3.9

(1.6) (6.7) 0.0

40.9 21.0 6.9

(9.0) 12.0 6.1

14.1 9.7 3.3

15.8 8.4 3.3

3.9 2.3 5.0

10.9 4.0 3.6

16.7 6.8 6.2

14.5 5.5 4.4

8.8 4.6 6.6

7.2 4.2 0.0

8.9 7.9 18.6 (1,948.5) 1.5 0.8 0.79 0.36 0.47 0.28 (15.3) 3.7

17.2 (8.6) 0.8 0.76 0.28 9.4

11.3 21.4 1.5 2.04 0.81 30.3

9.8 15.0 1.7 1.75 0.79 24.5

8.5 13.3 1.5 1.54 0.82 15.2

8.9 13.6 1.5 1.30 1.30 (3.1)

6.4 10.8 1.0 0.46 0.46 (77.0)

8.2 17.5 1.3 0.55 0.55 (1.2)

7.9 15.5 1.3 0.90 0.90 25.3

9.1 19.2 1.5 0.83 0.83 (27.9)

6.5 10.7 1.3 0.78 0.78 9.1

5.1 8.0 1.1 0.74 0.74 31.3

(%) Votes 58.0 3.0

Capital 50.0 6.0 5.0

EO items/Discontinued oper. Net profit Operating margin (%) Tax rate (%) ROE (%) ROCE (%) Growth rates y-o-y (%) Total revenues Operating profit Pre-tax profit

Cash flow (USDm) Net profit Non-cash adjustments Changes in working capital Operating cash flow Net capital expenditures Free cash flow Net loan proceeds Dividend paid Share issue Net change in cash

Capex/sales (%)

7.6

4.7

Balance sheet

Valuation (USDm) No of shares, fully dil. (y/e) Share price, y/e

EV/EBITDA EV/EBIT EV/Sales Price/Book value Price/adjusted equity Free cash flow/Market cap (%)

Main shareholders Name Stolt-Nielsen with Family Odin NYK

SEB ENSKILDA

Management

19 May 2011

Title COB CEO CFO

Company information Name Christer Olsson Niels G. Stolt-Nielsen Jan Christian Engelhardtsen


www.stoltnielsen.com (44) 20 7611 8960 0

31

Sector Update


Appendix 1: Market definition Bulk chemicals are unit cargoes. The vessel will pick up one cargo, take it to its destination and discharge it there. However, the parcel tanker’s purpose is to provide economical long distance transportation of small “parcels” of liquids. To do this economically, the ships carry several parcels of different cargoes for different owners on the same voyage. Consequently, large parts of the chemical tanker fleet are involved in a hub and spoke system. The complexity of this meant that the large operators became involved in terminals, in order to make the shift between hub and spoke more efficient. However, the borders of the chemical tanker market are not very sharp: just as the larger operators will take clean petroleum products as part of their repositioning or for their own sake if it pays well, vessels normally trading in the clean petroleum products market will take unit cargoes of chemicals when the rate differential is right. In terms of specifications, the chemical tanker fleet represents a continuum, stretching from the most advanced and specialised to vessels that are essentially product tankers. The typical parameters by which the ships are described are:

SEB ENSKILDA



Size. A tanker can be described by the deadweight (dwt), the weight of the possible cargo, or the cubic capacity, the volume available for cargo. The optimal ratio between these depends on the cargoes intended: with cargos’ specific densities ranging from naphtha at 0.67 to caustic soda and sulphuric acid well above 1.5, there is a wide range.



IMO grade. The International Maritime Organisation groups the various cargoes by potential environmental impact. Type of chemical then dictates what kind of tank it can be carried in: e.g. a tank suitable for cargoes classified as “IMO 2” must be less than 3,000cu m and behind double hulls. There are also certain requirements to the design of the ships, such as the superstructure not hanging over the deck. However, once double hulls became mandatory for oil tankers, the most demanding aspect of the IMO 2 rules was the limited tank size and adding IMO 2 capability to a quality product tanker added only minimally to the cost.



Cargo tanks. Crude oil is carried directly in tanks of mild steel. However, corrosion or previous cargoes may pollute the present cargo, or the cargo may destroy the tank surface, so the tanks for chemicals are either made in stainless steel or the mild steel tanks have their inner surfaces “coated”. The coating is typically epoxy, zinc or various polymers. Various coatings are resistant to various cargoes.



Tank configuration. In a modern parcel tanker every cargo is in a separate tank with its own deep-well pump (centrifugal pump fitted to the tank floor), line and manifold. Thus the cargo need not come into contact with other cargoes at any time, from loading to discharging. The number of cargoes that can be carried in this manner is called the number of “segregations” and is an important design parameter.



Other equipment. Some chemicals need to be heated, some need to be cooled. After the carriage of any chemical, thorough cleaning before the next cargo is essential. So tanks are fitted with various types of heating or cooling apparatus and cleaning machinery. In addition the use of tank-cleaning machines puts demands on the vessel’s generator capacity (availability of electricity on board) and other equipment.

19 May 2011

32

Sector Update


The first four parameters are quite straightforward, ships are typically described as “coated IMO 2 45,000dwt with 20 segregations”. The question of other equipment generally requires a closer study, but is significant enough in a real parcel tanker operation. In order to visualise some typical ships in the current fleet we include the following non-exhaustive list of typical chemical tankers:

SEB ENSKILDA



A 45,000dwt parcel tanker with 50 stainless steel tanks with separate pipes and pumps for every tank. The vessel would probably have a cubic capacity of about 50,000cu m. This ship would probably be controlled by one of the top operators in the market, such as Stolt-Nielsen or Odfjell. She would in all likelihood be traded in a semi-liner fashion (i.e. a more or less fixed route), between the main chemicals centres US Gulf, Rotterdam, Middle East and the Singapore-Korea range. She would most certainly trade with “parcels”, i.e. several part cargoes taking up the total capacity.



A 45,000dwt tanker with 18 tanks coated with epoxy, with separate pipes and pumps for every tank. The vessel would probably have a cubic capacity just above 55,000cu m. The ship could be controlled by anything from a chemicals operator to a speculative owner, and would probably be traded in the tramp market with unit cargoes, i.e. taking one cargo at a time, and going where the cargo is going, and then looking for something else. If the product tanker market was better when she entered service, she may be traded as a product tanker. If on the other hand she is traded by one of the major chemical parcel operators, she too is likely to be semi-liner and with parcels.



A 19,000dwt tanker with 12 stainless steel tanks. This type of vessel might either be traded in a regional market, e.g. South America, or she might be involved in the large trade from the Middle East to Asia. In the former trade, she would be acting as a feeder for the larger ships; in the latter, her size would be competitive against bigger ships (with economies of scale) by matching lot sizes for the cargo or because the smaller size allows the ship to enter more convenient ports for the receiver.



A 15,000dwt tanker with 12 epoxy coated tanks. This ship might be doing regional work, e.g. edible oils inter-Asia, or she might be part of the Middle East – Asia trade above.



A 28,000dwt tanker with 25 stainless steel tanks, all with separate pipes and pumps for every tank and a cubic capacity of about 35,000cu m. This is a smaller parcel tanker serving less busy trade lanes.

19 May 2011

33

Sector Update


Barriers to entry The chemical tanker market is dominated by known operators: Chem owners: Broader definition

Chem owners: Core fleet

Odfjell 8%

Stolt Nielsen 7%

Odfjell 15%

Other 24%

Eitzen 4% Tokyo Marine 4%

Stolt Nielsen 15%

Fairfield lino 4% Other 57% Other majors 10%

MISC 3% BLT/ Chembulk 3%

Other majors 12% BLT/Chembulk 5%

Source: Odfjell

MISC 6%

Eitzen 8%

Tokyo Marine 8%

Fairfieldlino 7%

Source: Odfjell

The question is whether the barriers to this market are strong enough to give the operators some pricing power and the competition is oligopolistic. For the long-term contracts with the major chemicals companies we believe answer is “yes”, there are entry barriers. There are only so many possible suppliers of this kind of transportation. However, we believe the spot market is far more open. And we believe that the connection between the spot and contract markets is quite strong: contracts may be multi-year logistics arrangements, but are increasingly one-year commercial arrangements. And given the customers’ flexibility under the contracts, their use of the contracts will vary with the spot market, again linking the spot and contract markets. Technical barriers to entry such as stainless steel tanks and IMO 2 capacity are not sustainable. The only barriers to entry that seem to work are operational, specifically parcel trades and semi-liner operations. However, more important than the existence of barriers to entry is why one would want barriers to entry when earnings so clearly have proven unsatisfactory relative to the cost of the assets. Newbuilding prices, product tanker and top of the line chemical tanker, USDm 160 140 120 100 80 60 40 20 0 1975

1980

1985

1990 Chem

1995

2000

2005

2010

Product tanker

Source: Clarksons, SEB Enskilda

We support our view that chemical tanker returns are unsatisfactory with the following calculations.

SEB ENSKILDA

19 May 2011

34

Sector Update


We take product tanker earnings and product tanker newbuilding prices and computed an annual EV/EBITDA (newbuilding price divided by daily earnings less daily opex * 360/1000000). We have said that chemical tankers should, at the same time, have the same EV/EBITDA return. Since there are a number of reference points for a newbuilding price curve, we can compute implied rates. At face value the strong uptick in newbuilding prices is reflected in earnings. However, when we see the development in the immediately preceding period (the 1993-95 rate uptick) it seems clear earnings have not matched the increase in newbuilding prices. Chemicals earnings and product earnings compared 80,000

1.4

70,000

1.3

60,000 1.2

50,000 40,000

1.1

30,000

1

20,000 0.9

10,000 0

0.8 1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Product tanker actual income, USD/day Chemical tanker implied rate to trade on the same EV/EBITDA, USD/day Stolt Index, annual average, RH Axis Source: Clarksons, SEB Enskilda

Again, we consider the reason to be historical: specialisation picked up sharply in the 1970s, but at the same time inflation picked up and real interest rates, particularly if you could access tax-breaks, turned negative. The result was that in nominal terms (as opposed to replacement terms) profitability in the period was excellent. This has meant that shipowners in the chemical tanker segment might have been willing to contract even when current returns were insufficient, trusting future earnings to catch up.

Interface management The chemical parcel tanker shows uncontested economies of scale at sea, carrying many parcels on one keel very economically. However, assembling those parcels onto that keel is challenging. In 1996, writing in another context, we reflected the operators’ reports that the large parcel tankers were approaching 30% of their time in port and that there would be some upside to rates if that could be reversed. However, the trend did not reverse, on the contrary, the large parcel tankers now spend more than 35% of their time in port. Admittedly, about half of this time is paid for by customers, but it still represents time the operator cannot use the ship flexibly to optimise returns. Why does this happen? Imagine a large parcel tanker with 50 grades coming into Rotterdam. On board there are cargoes owned by perhaps 20 different owners, three of whom require the cargo discharged at their own terminals. So the ship’s call at that port comes to depend on scheduling at all those berths and in those different terminals. And even when the berth is ready, the discharge might take time. Every cargo has to be tested before discharge and all the interfaces between ship and shoreside installation have to be right (and getting it right can take valuable time).

SEB ENSKILDA

19 May 2011

35

Sector Update


The simplest approach for the shipowner is to use his own dedicated terminal as much as possible, but that may not satisfy all the customers. Alternatively, the shipowner may analyse the port calls with the relevant customers and try to isolate the problems and address them procedurally. This is fine with contract customers, where there is a lasting relationship, and it should tie the customer to the shipowner. However, it can also constitute part of the close and cosy mood between charterer and shipowner, which makes it difficult to increase payments. Our basic assumption is that the economic cost of the risks (caused by cargo pollution or production delays) that customers incur at the load/discharge interface is very large.

SEB ENSKILDA

19 May 2011

36

Sector Update


Appendix 2: Experience and stance In our view some of the characteristics of the chemical parcel tanker market can only be understood in light of the segment’s recent history: History: 1958 and before When the liners ruled the waves, liquid cargoes too small to justify their own ship but too large for barrels carried in the liner ships’ deep-tanks. Since tankers in general were smaller, that threshold was lower than we are used to now.

In the post-war era, there were a number of specialised tankers, carrying specialised cargoes such as molasses, wine, whale oil, and lubricating oils. One high-profile player in these trades was the Anco Group, a consortium of Norwegian shipowners including Ole Schrøder, Iver Bugge and Halder Virik (the name Anco merged manager AO Andersen and the London commercial manager, Collingwood). Traditionally, the moment of change is held to be in 1958 when Jacob Stolt-Nielsen, then a shipbroker in the US, bought an old tanker, renamed her “Stolt Avance” and converted her to carry many different cargoes at the same time. We also note that the UK’s Athel Lines, later to join with the Anco partners, got a parcel type contract for their ships in 1958, with Socony Vacuum (http://www.theshipslist.com/ships/lines/athel.htm). Thus in the late 1950s, there were several ships that could carry many different liquid cargoes in separate tanks simultaneously. These ships got combined cargoes or managed to combine several individual cargoes to cover some the capacity beforehand. Operationally, the challenge was the time taken for cleaning between cargoes, and the safe handling of some cargoes. These ships traded within the Atlantic basin, between the chemical production centres in the US Gulf and from Rotterdam to the Ruhr and their raw materials sources throughout the Atlantic. History: 1958 to 1970 Consolidation and larger ships. Over this period,the ships’ size increased, and number of operators decreased. About 20 years, ago we saw a fascinating chart showing how the Anco fleet came about through mergers, consolidating the market gradually. However, this chart was never published, nor were we able to secure a copy. History II: erly 1970s In the early 1970s both Odfjell and Stolt Nielsen ordered vessels with double bottoms and significant cargo capacity in stainless steel tanks. For Odfjell, this was the era of the “Poland ships”, 32,000DWT with 42 tanks and active for almost 30 years.

Both Odfjell and Stolt-Nielsen bought terminals in Houston. The purpose of the terminals was to consolidate cargoes and to facilitate a more optimal use of the fleet. History: 1993 The change had long been coming, but the deadline for ordering single hull tankers was in June 1993. Until product tankers became double hulled, there was a world of difference between a product tanker and a chemical tanker: chemical tankers had a double bottom. After double hulls became mandatory for product tankers, getting chemical class or certificates was a small modification or option. From this changeover emerges a large fleet of advanced double-hulled product tankers with IMO 2 class. These ships will try to swing into the chemical market if other markets are unsatisfactory.

SEB ENSKILDA

19 May 2011

37

Sector Update


History: 1998 The Asian Crisis in 1998 made the changes in the chemical tanker business very obvious. It had already been a long time since it had been about balancing US and European chemicals prices and volumes, because Japan had become an important player. The Asian Crisis made it clear that Singapore, Korea and several other countries in Asia were becoming large and important participants in the chemicals market.

The comparison between traditional chemicals producers and the new producers in Asia is often characterised as follows: the traditional producers will be part of an integrated chain from raw materials to a large range of final products, while the more recently constructed plants will be based on imported feedstock and producing a narrower range of products in larger quantities. History: 2003 The main players in the chemical tanker business were indicted by European and US competition authorities. The process, including the resulting class action suits from customers drags on for several years, History: 2004 The world economy grew at a good pace, normally the ideal situation for chemical parcel tanker. However, oil prices also rose dramatically, kicking the bunker price upwards. The chemical parcel tanker companies are bound by COAs, where the payment is calculated in USD/tonne for a given voyage, hence realised returns drop dramatically when the largest exogenous cost rises. History: 2005 The Middle East governments’ biggest challenge is to facilitate the “monetisation” of their vast hydrocarbon resources. The typical solutions, given the complexity of the various transportation methods, are to export the oil as it is, export the LPG if the price is right and use the lighter gases in the domestic economy. However, given the scale of these latter reserves, they too are being refined or processed for exports.

For the natural gas (methane and ethane) the processing is either to cool the gas and compress it for transportation (i.e. LNG), or to use it – particularly the ethane – as a feedstock in the petrochemical industry. This development has actually been going on for longer than the date we attribute, given the huge petrochemical complexes in Saudi Arabia. History: 2007 In 2007, a number of previously unclassified liquid cargoes became chemicals. The largest group was edible oils of various kinds: fairly benign, but harmful to the environment in full ship loads. In the financial market, this changeover was called “The vegoil case” and the thought was that it would bring a large quantity of new cargoes to the chemical tanker operators.

The actual result was that more cargo was added, but the ships that hitherto had carried these cargoes, the easy or swing chemicals ships, tried to find more permanent employment in the chemical tanker market and a number of ships with double bottoms but single sides were converted to continue as chemical tankers. History: 2010 Two very noteworthy deals between the top operators in the market: JO Tankers and StoltNielsen swapped ships and Odfjell sold ships to Stolt-Nielsen. Industry watchers were amazed. We were overjoyed: clearly the chemical tanker operators’ most difficult challenge is their capital base, and today the most dangerous competition is not the other established operators, but the large number of new entrants. So for the established operators to buy/sell/charter tonnage among themselves and thereby optimize their fleets without adding capacity made a lot of sense. And the main reason for our joy: the chemical tanker industry has rarely produced any free cash flow, instead cash has been poured into capacity additions and replacement. The deals of 2010 suggest a different future is possible.

SEB ENSKILDA

19 May 2011

38

Sector Update


Appendix 3: Shipping glossary Glossary of shipping terms Term

Explanation

Aframax

Originally, vessels of 79,999dwt, the largest vessel under the American Freight Rate Assessment, a key to US rates. Today, a vessel wider than panamax (107ft, or 32.3m) and smaller than 1m barrel capacity, typically 110,000dwt. Most aframaxes are built with coated tanks, so the distinction between a modern aframax and an LR2 is in the eye of the beholder.

Ageing

A ship gets older and as it ages the value diminished, just like any other asset. Also, as a ship gets older the specification is less attractive: newer vessels are larger, burn less fuel, are easier to maintain, have more safety equipment etc. All these factors are baked into the valuation - except for that increasingly rare ship built ahead of its time.

Ballast

When a ship is empty, certain compartments are filled with water to maintain stability. This water is called ballast. For the ship to be "in ballast" means that it is empty, e.g. moving from one discharge port to the next load port. Vessels may also have permanent ballast, cement or steel placed in the structure to aid stability. This is not as usual with freight ships as with cruise ships or ferries.

Baltic

The Baltic Exchange was the physical space where the market for freight to the Baltic was constituted. Today it is an independent body that publishes indices in shipping, collecting, joining and publishing assessments of freight rates. BDI (Baltic dry) and its sub-indices are the best known, but there are Baltic sponsored indices for LPG and product tankers too.

Bareboat charter

Leasing a ship with no crew or operations.

Barrel

Volume measure for crude oil, about 159litre. Typical grades of crude oil are about 7-7.1barrel/ton

Bulk

A cargo carried in bulk is a cargo poured straight into the ship's holds or tanks. I.e. strictly speaking a tanker is also a bulk carrier - hence the use of dry bulk. If used alone, "bulker", it would be taken to mean a dry bulk ship. Cf. "General cargo"

Bunker

The fuel the ship uses for propulsion

CAP

Condition assessment programme. With the increasing pressure on older tonnage, class societies provide these programmes to allow owners of well maintained older ships to document their excellence.

Capesize

A dry bulk vessel so large it had to go via the capes, i.e. too large for the Panama and Suez canals. Today typically a vessel of 170,000dwt. The main cargo is iron ore and the other important cargo is coal. Originally a contract based industrial market, but increasingly spot based.

Cargo segregations

In a modern product or chemicals tanker every tank has its own deepwell pump, its own cargo line and its own manifold, allowing the completely separate carriage of a whole range of different cargoes at the same time without mutual contamination. Cf. parcel tanker.

CGT

Compensated Gross Tonnes. A unit of size which tries to capture how much construction work for a given ship. Intended to allow the comparison of newbuilding order books at shipyards with different composition of backlog. E.g. how a large cruise ship construction compares with two LNG ships.

Charter, charterparty Employment, contract of employment, for ship. Charters can be agreed on three bases: 1. Spot charter: all costs covered by the shipowner, typically quoted in USD/tonne. 2 Timecharter: payment per day for the ship, shipowner pays crewing and maintenance, but the charterer pays all voyage related costs, typically quoted in USD/day. 3. Bareboat: payment per day for the ship, but the charterer pays all costs, typically quoted in USD/day. COA

Contract of affreightment. A contract between a shipper and a shipowner that stipulates that e.g. x tons of cargo will be carried from a to b at USD n/ton every n days. I.e. there are no constraints on which ship will carry the cargo, the shipowner's own or a hired ship.

Congestion

Due to the vagaries of the sea, a ship never arrives on time. Due to the vagaries of the customers, things are rarely ready exactly when a ship is to load or discharge. Taken together, this means that there is always a certain fraction of the fleet waiting for something. In addition, when the markets are poor many shipowners prefer to trade the ship more slowly to save bunkers. Thus, the normal slack in the fleet is never known. However, special conditions regularly contribute to huge pile-ups in ports: insufficient load/discharge capacity, accidents, strikes, etc. Thus, while the phenomenon is real and worth watching for, we are very sceptical of measuring this number.

Constant

Items such as fresh water and supplies which take up part of the ship's dwt capacity so that the dwt is not the exact cargo capacity. For a VLCC the constant can be as much as 10,000tonnes.

Cubic

A ship’s cargo carrying capacity is governed by its dwt, how much mass it can lift, and the cubic capacity of its tanks/holds, typically measured in cubic metres. At opposite ends of the scale, iron ore with density above 2 tends to exhaust the bulker's dwt long before cubic capacity becomes a problem - for the older chemical tanker the problem with a light cargo such as naphtha is tank space (cubic capacity) not lifting capacity (dwt). The storage is rarely long enough to allow the shipowner to adjust crewing or other operating expenses and even during static storage there will be some fuel consumption to keep the cargo heated and liquid.

Daily operating costs Crew, insurance, maintenance (paint and materials) etc Deepwell pump

Cargo pump for tanker. Individual pump, the pump itself is in the bottom of the tank, the machinery is at the top.

Demurrage

Payment for time spent in port beyond the agreed allocation for loading, discharge.

Double hull/skin

A double-hull ship has an outer hull comprising structural elements, a void space and then on the inside the cargo tanks. The idea is that in the event the outer hull is breached, the cargo will not escape. From 2010 international rules essentially require double hull for tankers - the ships are phased out in their anniversary month.

Double sides, double bottom

Before double hulls became mandatory, quite a few tankers were built with either double sides or double bottom. These spaces allowed the ships to meet e.g. IMO requirements, or provided space for separate or dedicated ballast tanks (prior to this ballast had been carried in the empty cargo tanks). Facing a 2010 phase-out it may be economic to fit either a double bottom or double sides to such vessels, if the other "half" is already there, although we doubt it will be profitable.

SEB ENSKILDA

19 May 2011

39

Sector Update


Draft

How deep a vessel goes. A given carrying capacity is at a given draft. So if a vessel is not fully laden she will not be as deep. Cf. the Plimsoll markings on a ship's bows, which show how fully it is laden. A number of ports, canals and areas have draft restrictions, i.e. a vessel cannot enter if the draft is larger than a set figure. If this is the only restriction it may be economical to fix a larger vessel but to not load it fully. Often larger ships are lightered, i.e. some of the cargo is removed prior to calling at ports that otherwise they would not be able to use.

dwt

Deadweight tonnes, loading capacity. Theoretically cargo capacity, but both bunkers and miscellaneous supplies ("constant") have to be deducted.

Employment

See time charter, Spot charter, bareboat charter and COA

Exxon Valdez

211,469dwt single hull tanker built 1986. After grounding on March 24, 1989 in Prince William Sound, Alaska USA, about 40,000CBM crude oil escaped the tanks. The spill is commercially important in so far as it directly triggered the US "Oil Pollution Acty of 1990" (OPA) which in - our view - triggered the the global phase-out of single hulled tankers. The vessel has been converted to an ore carrier and now carries the name "Dong Fang Ocean".

Fix, Fixtures

A ship is fixed for a voyage.

Flag state

The country in which the ship is registered - the flag it flies. Historically the flag state plays the most important role in controlling the condition of the world fleet: the flag state’s rules, the flag state’s requirement regarding classification etc. Increasingly, frustrated port states and customers are taking on more of this task.

Floating storage

A tanker can be used to store as well as transport oil. We regularly have reports that large oil companies, such as Saudi Aramco or Iran NOC are chartering tankers to store oil. This group of charterers will often have a storage option under a spot charter: the option to use the vessel for storage a number of days after arrival in the discharge port.

Gear, Cargo gear

A handy bulker has cranes, which typically rotate and are capable of lifting at least 25 tons and can be fitted with grabs. The handys do a lot of work among the several hundred "minor bulks" in less developed ports and the ability to do its own loading or discharging is a real advantage. However for the panamax and capesize vessels that spend more time working developed ports with shoreside cranes, shipboard cranes would just be too small and in the way.

General cargo

Goods carried not in bulk - packaged or unpackaged. General cargo ships, with many different decks, tanks and gear to handle this was until the 1950s the mainstay of the dry cargo fleet. Since then outcompeted on finished goods by the container ships and on raw materials by the bulkers. The general cargo ships' greatest weakness was portt-time: time to load and or discharge.

Grades

A chemical parcel tanker will carry many simulateous cargoes. The typical question is how many "grades" the ship can carry with full segregation: i.e. separate tank, pump, line and manifold.

Handy, bulk

A handy size ship used to be a ship of some 25,000-45,000dwt. Increasingly the group is breaking apart: 20,000-35,000dwt handysize, 35,000-45,000dwt handymax and 50,000dwt or larger supramax. For the largest of these vessels the size is the same as a panamax; the distinctive features is gear (a handy has four cranes, a panamax is mostly without gear), the number of holds and hatches (a panamax typically has seven and a handy five) and the length (even these large handies are typically less than 200m long while a panamax is often 228m.

Handy, tank

Not a very clear term - sometimes used interchangeably with MR, sometimes referring to SR and MR, sometimes referring to the 35,000dwt between those…

Hebei Spirit

269,605dwt single hulled tanker built 1993. After being hit by a drifting crane barge on 7th December 2007 in the port of Daesan, Korea, 10,800 tonnes of crude oil escaped the tanks. The spill is commercially important in so far as it changed many Asian countries' attitude to single hulled ships.

IMO

International Maritime Organisation: the UN body tasked with regulating the maritime industries. It is to the industry's and the customers' great advantage that rules are global. It would certainly be comfortable for certain (particularly) port states' politicians to pass special rules for their country.

Industrial shipping

The harder you try to define it, the more elusive it becomes: the understanding that in some shipping segments free competition is not perfect, but shipowners may in fact enjoy some market power… Clearly the container shipping market is industrial, and clearly there are industrial aspects of the chemical and car carrier markets. However, whether use of contracts allows parts of the product tanker market or dry bulk markets to become industrial is not clear.

Intermodal

For a shipowner, lorry company or general logistics company to take an overall responsibility for the cargo over several modes (car vs. ship vs. rail). The large container operators are often intermodal - as are the chemical tanker companies with their inland terminals and involvement in rail transport and occasionally distribution in tank containers.

Kamsarmax

Large panamax bulker, typically well above 80,000dwt. Achieved by making the vessel both long and deep.

Knots, nautical mile

1knot = 1nautical mile/hour = 1,852m/hour

Laycan

The agreed dates when the ship is supposed to turn up to load or discharge a cargo.

Lay-up, idle

A ship can be laid up, i.e. be anchored without crew. This happens because the rates make it unprofitable to trade - as there are costs involved in being laid up and later in breaking lay up, the shipowner needs to believe the lousy conditions will last for some time to lay up the ship. We would contrast this with "idling", which we would take to mean that the ship has its crew and is ready to trade, but that it is at anchor or alongside and not actively traded. We would expect to see idling of tonnage when shipowners do not expect the poor market to last very long, but where current trading does not create a profit.

lightweight, ldt

When a ship is sold for demolition, the measure is payment per tonne light, i.e. empty. Essentially the steel weight. Handysizes below 10,000 - VLCCs 35,000-45,000 ldt.

Liner

Originally a multi deck multipurpose ship trading on a fixed line, e.g. Norway-Holland-UK-Spain round voyages. Today most likely to be used about a container ship.

LNG

Liquid natural gas. Methane and ethane (=natural gas) cooled to -160deg C in order for the volume to be reduced by a factor of 600 in order to allow the gas to be carried economically.

LNGRV

LNG vessel with regasification capacity, i.e. facilities for taking its own cargo of LNG and bringing it back to ambient pressure and temperature. Historically both the production of and regasification of LNG have required huge and expensive plants, necessitating long-term contracts for the majority of a given project's output. The emergence of LNGRVs and at sea transfer of LNG is contributing to making the market far more flexible. Sometimes called FSRU.

SEB ENSKILDA

19 May 2011

40

Sector Update


Logistics

As a given shipping company becomes "industrial" it becomes more and more tempting to arrange more and more of the transportation: no longer port to port, but reaching toward the total door to door logistics. We believe the main risks in transportation relate to the transfer between modes - but that shipping companies may not be the best at understanding the risks in the next mode. So, while taking overall logistics responsibility and becoming intermodal may have benefits for the ocean transportation, the overall risk level for the shipping co may rise.

LPG

Liquid petroleum gas. Mostly propane and butane. Carried cooled to -45deg C.

LR1

Large panamax product tankers, typically 84,000DWT. However, as these ships were used for carrying naphtha from the Gulf of Arabia to Japan/Korea the main constraint was not DWT but cubic capacity: typically the ships would carry two trading lots of 25,000tonnes, and only with the entry of the LR2 ships was there enough cubic capacity to take three lots.

LR2

"Long Range 2". As the hunt for a larger LR1 made the vessel longer, deeper and less optimal as a ship, the obvious solution was to break with the constraint of panamax beam. And when the vessel was wider than 100ft it was not a panamax but an aframax… But since a coated aframax at the time was almost unheard of (apart from the Maersk V-class), "LR2" was coined.

Marpol

International Convention for the Prevention of Pollution from ships (London). The convention is agreed under the auspices of IMO and the most relevant Marpol document in the present market is Annex 13G which addresses the phasing out of single hulls from mid-2010. Admittedly the convention is not universally agreed, but it is already sufficiently widely agreed that there will not be many possible legal voyages for single hulled tonnage.

Metric Tonne

A tonne of 2,204 pounds or 1,000 kilograms, equivalent to 0.9842 long tons.

MR

Medium range product tankers, typically around 45,000dwt.

NRT/GRT

Gross and Net Register Tonne. Formulaic approaches to the size of ships, making very different types of ships comparable. Practical purpose: the calculation of port fees, canal tolls etc.

OBO, O/O, Combo

Ship that can carry ore, bulk, oil or some subset thereof. In theory these ships should be able to combine several voyages with different cargoes and create better paying round-voyages. In reality the ships have been swapped in and out of either the bulk or tank markets in reaction to expectations. Quite a popular concept in the 1970s and 1980s but hardly built today; higher operating costs and scepticism from charterers must take the blame.

OPA 90

Oil Pollution Act 1990. The US act passed seemingly in response to the Exxon Valdez accident, and the first law to make double hulls mandatory.

Operating costs

Because so much of a ship's operation can be contracted to third parties, the operating costs tend to be fairly standard. Includes crew, insurance, basic maintenance.

Operator

The shipping company that takes the cargo contract and obtains the tonnage to serve it. Typical of the situation in car carriers, containers, chemical tankers to the extent there is an industrial element in the business it makes sense to be operators. But even in the panamax bulk market, in our view one of the most efficient shipping segments, there are a fair few operators.

Panamax, bulk

Vessel capable of going through the Panama Canal where the most immediate restriction is maximum beam of 106ft, or 32.30metres. Originally, when the voyage from the US Gulf to Japan with grain was one of the mainstays of the panamax trades, the beam was important. However, gradually other voyages matter more and the deep and narrow ship profile is becoming a liability rather than an asset. The Japanese already operate a number of 80,000-90,000dwt ships with 40m beam, i.e. shallower and more economical than the classic panamax, and we may see this type of ship spreading. Cf. the emergence of the post-panamax.

Panamax, tank

Vessel capable of going through the Panama Canal where the most immediate restriction is maximum beam of 107ft, or 32.20metres. The LR1 product tanker was a panamax tanker that grew, typically 84,000dwt, by becoming very long and by increased laden draft.

Parcel tanker

A chemical tanker with a large number of smaller tanks and cargo segregations, capable of simultaneously carrying a large number of different cargoes for different customers. To simplify the operation these vessels are generally operated in a semi-liner operation, i.e. the operator will know that he has a ship going from Houston to the Far East every week, allowing him to build a base of cargo contracts on that route. Then, once the contracts are accounted for the challenge is to maximise profitability on the rest of the ship.

PCC, PCTC

Pure Car Carrier: large RoRo vessel where strength of decks and height between decks dictates private cars as main cargo. Typically eight decks, and a hull which above the waterline shows its genetic relationship with a parking garage. Pure Car and Truck Carrier: similar ship, but some stronger decks and some spaces with greater height between decks means higher vehicles such as minivans and smaller trucks can be carried.

Pools

Shipowners regularly join together in pools: the pool fixes all the ships and distributes the income by a key. If these pools were to reach huge size they might have market power; as it is, they are more about marketing efficiency, operating efficiency and being part of a portfolio large enough to eliminate the silliest outcomes (storm blocks port where two out of four ships were due)

Port state

The country in which the relevant (next or previous) port is. Increasingly important for the actual regulatory regime of shipping: vetting and approvals by charterers and ports to a large extent set standards for operation and maintenance.

Post panamax

Bulker of typically 110,000-120,000dwt, intended for the coal trade.

Previous cargo

Many cargoes place requirements on what the previous three cargoes can be: typically leaded gasoline makes it impossible for the ship to carry edibles for at least three subsequent voyages.

Product tanker

A ship that carries refined petroleum products. The vessel has coated (e.g. epoxy painted) cargo tanks to protect the cargo from pollution and to ease cleaning between cargoes.

RoRo

Roll-on, Roll-off. A ship on which cargo is rolled on and rolled off. Technically includes the whole range from ferries to deep-sea car-carriers, but the name is used more narrowly about ships that RoRo and and is not dedicated for a specific cargo such as cars...

Sale, SNP, S&P

Ships are bought and sold all the time: the more standardised the ship type, the more liquid are the secondhand markets. The market is formed in continuous dialogue (chat, telephone, mail) between sale-and-purchase (SNP, S&P) shipbrokers. A ship sale is concluded when a Memorandum of Agreement is signed and a deposit is placed, typically three days after the negotiations are complete. The actual delivery and payment of the remaining monies will only happen later, typically the next time the vessel calls a suitable port where crews can be exchanged, flags changed.

SEB ENSKILDA

19 May 2011

41

Sector Update


SBT, CBT

Segregated or Clean Ballast Tanks. Historically one would take water in some of the cargo tanks when in ballast. Clearly this contributed to pollution and was changed.

Scrapping

Ships that are no longer profitable to operate are scrapped. The euphemism is that they are recycled, but the most commonly used scrapping zones in the Indian sub-continent offer abysmal safety and environmental standards and it makes euphemisms all the more misplaced. For whole fleet segments rules of thumb like "ships are scrapped at age X" (generally 22-30 years) work quite well, but for the individual ship the process is: as long as a ship requires no investment and provides a positive contribution to capital every day it is unlikely to be scrapped. However, the moment an old ship needs some investment, this will be considered like any other investment decision: if the outlook is good and the investment limited it makes sense to carry on, if not it is better to scrap.

Segregation

See "grade" above.

Semi-liner

A shipping line has regular departures, like an airline. A tramp operator does voyage by voyage. A semi-liner operator will have certain rules, such as "every week we will have a ship leaving Houston for Rotterdam", but it may be different ships and different days each week. Typically, this is how the major parcel tanker operators work.

Shipper

The customer; the party who ships the goods (not, as it is sometimes assumed by financial folk, the shipowner).

Short-sea

All kinds of regional shipping. Smaller ships, shorter voyages… The opposite of deep sea.

Single hull/skin

Traditionally there was outer plating and the structural elements on the inside in direct contact with the cargo: one layer of plating between the sea and the cargo. The structure is simple and easy to maintain and monitor.

Slow steaming

A ship's consumption of bunker is given by tons/day burnt at a certain speed. This relationship varies with speed, and generally the relationship is hockey stick shaped: past a certain point one knots speed increase demands a far larger increase in consumption than the previous knot. In consequence shipowners, within the requirements of the charter, try to optimise speed for a given earnings level and a given bunker price.

Special survey

In order to keep insurance as a competitive market, the task of checking that the ships are of insurable standard is left to class societies, not to the insurance companies themselves. The class societies require ships to be checked on a regular basis, engines, then navigation equipment then, and every so often (typically four to five year periods) the ship is required to be docked and go given a thorough check, a special survey.

Speed/consumption

How much bunkers does a ship use travelling at a given speed? Expressed as tons/day. Not a linear relationship: historically consumption increased quite slowly until a certain point where further speed could only be obtained at significant cost. We have found it difficult to obtain updated speed/consumption curves, but the material we have suggests that modern ships have more linear curves - i.e. that in aggregate consumers can buy more tanker capacity cf. also “slow steaming”

Spot charter

The basic mode of employment: the ship will take such and such a cargo from a to b at such and such a price. The ship deals with bunker, ports etc

SR

Short range product tankers. The classic 29,999dwt ships and their replacements, the 35,000dwt ship.

Suezmax

Originally vessels of about 120,000dwt, the largest vessels capable of going through the Suez canal laden. Today a vessel of 1m barrel capacity, Typically 150,000dwt

TCE

"Timecharter equivalent earnings" – taking USD/ton basis spot fixtures and translating them to USD/day. Purpose: it allows for comparison of returns between ships sizes and types and between various voyages. Deducting operating costs per day from TCE rates gives EBITDA/day/ship.

Time charter

The charterer rents the ship for a period and pays a fixed amount per day. Whether the charterer chooses to have the ship in lay up or trades it is of no consequence to the shipowner, hence all costs relating to the voyage are for the charterer’s account.

Tonnage supplier

A shipowner who does not have market access but who rents his ship to an operator: For example, in the car carrier market five large groups have had direct access to the major Japanese exporters and others have rented their ships to them. What the tonnage supplier gives up in market risk, he gains in stability. Typical of industrial shipping segments.

Trading lot

The size of cargo typical of the voyage. 25,000tonnes gasoline in the Atlantic, 50,000tonnes grain from US Gulf to Japan, 1m barrels oil from West Africa. Always the custom of the trade, sometimes heavily influenced by politics or rules.

Tramp

A vessel that does not follow a line (fixed route) is a tramp ship. Typically, tramp ships carry unit cargo (i.e. one cargo in all holds).

ULCC

An Ultra Large Crude Carrier. Originally a tanker of more than 300,000dwt, but today a vessel that carries significantly more than 2m barrel cargo. Only four have been built since the very early 1980s. The size has not fallen prey to declining economies of scale - that parameter develops linearly - but to increased trading within in the oil trade: 2m barrel trading lots is the standard and are large enough.

Unit cargo

The ship carries only one cargo - the ship's whole capacity is taken up by one cargo. Tramp ships typically carry unit cargoes, liners typically don't.

Utilisation

How will a given change in supply or demand impact freight rates? Because the correct unit to measure both fleet capacity and demand in would-be tonmiles, the question of productivity enters the utilisation ratio. I.e. some judgement of how fast the ships can travel is needed to estimate the supply side. And because speed is a function of freight rates the circularity is inherent to the number.

Value, valuation

On the one hand the shipbrokers' task is to find the next market clearing price and sale, on the other hand shipbrokers will only give valuation opinions based on last done, i.e. the previous representative sale. This creates interesting situations when the market moves rapidly and there are no representative deals (yet). However, the alternative, that shipbrokers give some calculated guess of "next done" or "true underlying long term price" are obviously too open for manipulation.

Vetting

Customers, terminals, port states and others who are in touch with tankers want to ascertain their condition. For the large oil companies which every day fix a number of ships, this has become an industrial process - for port states it may be slightly more haphazard checks. But vetting is the phrase used.

VLCC

A Very Large Crude Carrier. Originally a tanker between 200,000dwt and 300,000dwt, today a vessel of 2m barrel capacity, or typically 290,000-315,000dwt.

SEB ENSKILDA

19 May 2011

42

Sector Update


VLOC

Very Large Ore Carrier. Typically a vessel above 200,000dwt which is optimised for carriage of the very dense cargo ore. I.e. the vessel needs only have limited cubic capacity relative to weight carried. There are quite a few newbuildings under construction in this market, likewise a number of shipowners are converting VLCC tankers to this use. Commercially, these vessels are very difficult to trade in the spot market but instead rely on long term charters, COA or TC.

Voyage calculation, voyage accounting

The return from the individual voyages is returned: gross freight received, less voyage costs, divided by days spent. Because the decision about the next voyage is made as the end of the present voyage nears, the convention is for the calculation to be from discharge to discharge. This continues into accounting: part completed voyages are accounted from discharge to discharge.

Voyage costs

The costs relating to the voyage: bunkers, port costs, canal passages

Worldscale, WS

Index system for fixing ships providing the gross payment scale: USD/ton carried. With the assumed bunker costs, for the reference ship in the system, two different fixtures at the same WS level should give the shipowner the same return. In practice the reference ship is not as common as one would like and changing bunker price and e.g. port costs through the year means that it rarely works out quite "as advertised". Published on the web and in large books. The timecharter equivalent rate is found by ((WS*tonne cargo*base number)-(bunkers, port cost, lubricating oil, canal fees))/days spent.


SEB ENSKILDA

19 May 2011

43

Sector Update


SEB ENSKILDA

19 May 2011

44

Sector Update


Target prices and risks Target price definition and associated risks Our target price is the analyst's assessment of what total return an investor should expect over the coming six to 12 months. The target is based on fundamental equity research and other factors at the analyst's discretion. Please refer to published reports on the individual companies for a detailed description of the target price methodology. Risk levels The risk level is the analyst’s view of the uncertainty in the earnings forecasts based on an assessment of the company’s business model, operating risk as well as financial risk. We use two risk levels with the following explanations:

SEB ENSKILDA



Normal risk: All forecasts involve uncertainty and we view companies in this risk level to have normal forecast risks



High risk: The earnings forecasts are more uncertain than for an average listed company due to business model, operating risk, financial risk or any other reason at the analyst’s discretion. All companies with shorter track record than 12 months as a listed company are by definition classified as high risk according to SEB Enskilda.

19 May 2011

45

Sector Update


Authors' statement of independence (Analyst Certification) We, the authors of this report, hereby confirm that notwithstanding the existence of any such potential conflicts of interest referred to herein, the views expressed in this report accurately reflect our personal views about the companies and securities covered. We further confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in the report. The preparer of this research report is not registered or qualified as a research analyst, representative or associated person under the rules of the FINRA, the New York Stock Exchange any other US regulatory organization or the laws, rules or regulations of any State in the USA. This statement affects your rights This report is confidential and may not be reproduced, redistributed or republished by any recipient for any purpose or to any person. Recipients SEB Enskilda Research is prepared, approved, and issued by Skandinaviska Enskilda Banken AB (publ) (“SEB”), a bank organized under the laws of the Kingdom of Sweden, on behalf of itself and its affiliates for institutional investors. SEB is not a registered Broker-Dealer under the US Securities and Exchange Act of 1934. This report must not be distributed to retail clients except for to retail clients of SEB Enskilda AS ('ESO') located in Norway and, in case of research distributed via Gyllenberg Private Bank in Finland, to its retail clients located in Finland. Use This research report is produced for the private information of recipients and SEB is not soliciting any action based upon it. If you are not a client of ours, you are not entitled to this research report, and should destroy it. The document is not, and should not be construed as, an offer to sell or solicitation of an offer to buy any securities. Opinions contained in the report represent the author's present opinion only and may be subject to change. In the event that the author's opinion should change or a new analyst with a different opinion becomes responsible for our coverage of the company, we shall endeavour (but do not undertake) to disseminate any such change, within the constraints of any regulations, applicable laws, internal procedures within SEB, or other circumstances. If you are in doubt as to the meaning of the recommendation system used by SEB in its research, please refer to the "Disclaimer" section of SEB Enskilda Research Online, to which our clients are granted access. Good faith and limitations All information, including statements of fact, contained in this research report have been obtained and compiled in good faith from sources believed to be reliable. However, no representation or warranty, express or implied, is made by SEB with respect to the completeness or accuracy of its contents, and it is not to be relied upon as authoritative and should not be taken in substitution for the exercise of reasoned, independent judgement by you. Recipients are urged to base their investment decisions upon such investigations as they deem necessary. To the extent permitted by applicable law, no liability whatsoever is accepted by SEB for any direct or consequential loss arising from the use of this document or its contents. Distribution This research report has been prepared by SEB or its affiliates and is being distributed by SEB Enskilda offices in Stockholm, Copenhagen, Oslo, London, Helsinki and Frankfurt. It is being distributed in the United States by SEB Enskilda Inc. ('SEBEI'), a wholly owned subsidiary of SEB organized under the laws of the State of Delaware, USA. Any United States institutional investor receiving the report, who wishes to obtain further information or to effect a transaction in any security discussed in the report, should do so only through SEBEI and not its affiliates. Addresses and Phone numbers for each office can be found at the end of the report. The SEB Enskilda Group: members, memberships and regulators SEB Enskilda is a trading name used by SEB Merchant Banking Division, SEBEI, and ESO at its offices in Copenhagen, Frankfurt, Helsinki, London, New York, Oslo and Stockholm. Through these SEB Enskilda offices, SEB is a member of inter alia Nasdaq OMX Nordic, the London Stock Exchange, NYSE Euronext , SIX Swiss Exchange, Frankfurt Stock Exchange as well as certain European MTF’s such as ChiX, Turquoise, BATS Europe and Burgundy. SEB Enskilda uses both the trading identity ENS and SEB. SEB is regulated by Finansinspektionen in Sweden and, for the conduct of investment services business, in (i) Denmark by Finanstilsynet, (ii) Finland by Finansinvalvonta, (iii) Germany by Bundesanstalt für Finanzdienstleistungsaufsicht and (iv) the UK by the Financial Services Authority. ESO is a member of the Oslo Stock Exchange and is regulated by Finanstilsynet. SEBEI is a U.S. broker-dealer, registered with the Financial Industry Regulatory Authority (FINRA). SEBEI and ESO are direct subsidiaries of SEB. SEBEI is not authorized to engage in the underwriting of securities and does not make markets or otherwise engage in any proprietary trading in any securities. Prevention and avoidance of conflicts of interest All research reports are produced by SEB Enskilda’s Research department, which is separated from the rest of its activities by an Information Barrier; as such, research reports are independent and based solely on publicly available information. Following standard practice, recommendations and target share prices are removed from research on companies which are the subject of public offers on which SEB is advising. The remuneration of staff within the Research department is determined exclusively by research management and senior management (not including investment banking) and may include discretionary awards based on the firm’s total earnings, including investment banking income; however, no such staff receive remuneration based upon specific investment banking transactions. SEB Enskilda’s Compliance department monitors the production of research and the observance of the group's procedures designed to prevent any potential conflicts of interest from affecting the content of research; the latter are described in greater detail in the "Statement of Policies for dealing with potential conflicts of interest surrounding our Research activities" which is available on our Research Online website.

SEB ENSKILDA

19 May 2011

46

Sector Update


Your attention is also drawn to the fact that: The current market price of the securities shown in this report is the price prevailing at the close of the business day preceding the date of publication, save where such price was more than 5% different from the price prevailing as at the time of publication, in which case it is the latter.

Unless explicitly stated otherwise in this report, SEB Enskilda expects (but does not undertake) to issue updates to this report following the publication of new figures or forecasts by the company covered, or upon the occurrence of other events which could potentially have a material effect on it. Specific disclosures for US institutional investors The securities discussed in this research report may not be eligible for sale in all States or countries, and such securities may not be suitable for all types of investors. Offers and sales of securities discussed in this research report, and the distribution of this report, may be made only in States and countries where such securities are exempt from registration or qualification or have been so registered or qualified for offer and sale, and in accordance with applicable broker-dealer and agent/salesman registration or licensing requirements.

The analysis contained in this research report is based on numerous assumptions; different assumptions could result in materially different results. Any valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. The inclusion of any such valuations, projections and forecasts in this report should not be regarded as a representation or warranty by or on behalf of the Group or any person or entity within the Group that such valuations, projections and forecasts or their underlying assumptions and estimates will be met or realized. Past performance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities, such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Company specific disclosures and potential conflicts of interest A member of, or an entity associated with, SEB or its affiliates, officers, directors, employees or shareholders of such members (a) has never been represented on the board of or similar supervisory entity of the companies mentioned in the report, (b) has from time to time bought or sold the securities issued by the companies referred to in this report or options relating to these companies, and (c) SEB or its affiliates beneficially own less than 1 % of a class of common equity securities of the remaining companies mentioned in the report, as of 18 May 2011.

The analysts responsible for this report (jointly with their closely related persons) may hold shares or other instruments related to the companies mentioned in this report. Please refer to published reports on the individual companies for details. The information can also be found on our website, at the following address: www.sebenskilda.se.

SEB ENSKILDA

19 May 2011

47

Chem Tanker Sector 190511

Recommend Documents