chem tanker sector 190511

Equity Research

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

Structurally and cyclically favoured 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 tonne-mile 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.

Shipping

Nordic

Sector Update

19 May 2011

Chemical tanker market

Gross and realised chemical tanker earnings

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Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

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1.60

Houston-Rotterdam 3,000mt Easychems, USD/tonne Stolt-Nielsen TC index, RH Axis

Source: Clarksons, Stolt-Nielsen, SEB Enskilda

Analysts

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

Nicolay Dyvik (47) 2100 8649 [email protected]

SEB ENSKILDA

Sector Update Chemical tanker market

2 19 May 2011

Contents Page

Executive summary.............................................................................................................3 Rate outlook: different now................................................................................................4 Demand ................................................................................................................................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 Fleet ................................................................................................................................24

Odfjell SE............................................................................................................................27 Valuation approach: ........................................................................................................27

Stolt-Nielsen Ltd................................................................................................................30 Valuation approach: ........................................................................................................30

Appendix 1: Market definition ..........................................................................................32 Barriers to entry...............................................................................................................34 Interface management ....................................................................................................35

Appendix 2: Experience and stance................................................................................37 Appendix 3: Shipping glossary........................................................................................39 Target prices and risks .....................................................................................................45

SEB ENSKILDA


3 19 May 2011

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:

Summary of supply-demand and earnings changes (%)

(%) 2011 2012 2013 Supply growth 4 3 0Demand growth 7 7 7Net utilisation change 3 4 7Accumulated change in utilisation 3 7 14

Earnings change, TCE 4 10 15Accumulated change in TCE earnings 4 14 32Source: SEB Enskilda

This results in the following earnings forecasts, valuations and targets for the relevant companies.

Estimate summary, Eitzen Chemical, Odfjell and Stolt-Nielsen

PER - adjusted PBV EV EBITDA multiple Free cash flow / Market cap (%) 2011 2012 2013 2011 2012 2013 2011 2012 2013 2011 2012 2013

Eitzen Chemical ASA -1.41 -2.24 -4.79 0.97 1.72 2.69 35.32 17.36 10.57 -11.44 -2.45 22.70Odfjell 34.25 6.52 3.86 0.77 0.69 0.59 9.31 6.24 4.60 11.01 22.68 27.25Stolt-Nielsen 14.47 8.79 7.23 0.83 0.78 0.74 9.12 6.46 5.11 -28.15 9.20 31.52Source: SEB Enskilda

Summary of recommendations and target prices, chemical tanker companies

Recommendation Target, NOK/share Share price (NOK) Upside to target (%) Eitzen Chemical ASA Buy 1.08 0.80 35Odfjell Buy 84 48 75Stolt-Nielsen Buy 165 128 29Source: SEB Enskilda

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


4 19 May 2011

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; hence the exports of 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


5 19 May 2011

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


6 19 May 2011

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

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OECD Index YOY World Prod index YoY 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 Basic products Derivatives End products Coal BTX EDC PaintGas Ethylene Styrene FibresCrude oil Propylene Glycol Plastics

Methanol MTBE DetergentsButadiene Industrial alcohols Oil additives

Polyester RubberSource: 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


7 19 May 2011

Eitzen Chemical’s 30 largest cargo types carried in 2010

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Cau

stic

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a

CPP

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ic a

cid

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Oil,

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lene

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col

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il

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aci

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oil

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ean

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HC

B

Oth

er

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 Acids Veg oils Commodities 2-Ethylhexanol (2EHA) Phosphoric Acid Palm Oil BenzeneAcetic Acid Vegetable Oil CyclohexaneAcetone Ethylene Dichloride (EDC)Acrylonitrile (ACN) EthyleneAcrylates Ethylene GlycolsEpichlorohydrin (ECH) MethanolEthanol Amines MTBEEthyl Acetate Propylene*i-Butanol Propylene GlycolIsopropyl Alcohol (IPA) StyreneMethylene Diphenyl Diisocyanate (MDI) TolueneMethyl Methacrylate (MMA) n-Butanol Phenol Propylene Oxide Toluene Diisocyanate (TDI) Vinyl Acetate Monomer (VAM) Source: Stolt-Nielsen

SEB ENSKILDA


8 19 May 2011

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

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2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

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(%)

Source: SEB Enskilda, Clarkson

SEB Enskilda’s “handy” chemical tanker (annualised) quarterly supply growth forecast

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SEB ENSKILDA


9 19 May 2011

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-of-year order book was delivered in 2009 and 2010, a decline from 92% in 2008.

“Handy” chemical tankers: % of order book actually delivered

92%

55% 55%

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100%

2008 2009 2010


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 start-of-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

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SEB ENSKILDA


10 19 May 2011

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

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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

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E Fleet, start of year 18.2 21.0 24.0 27.5 31.9 35.2 37.8 39.4 40.7

Original order book one year earlier 5.7 3.6 0.7 0+ Yard delays from 2009 to 2010 2.4 + New orders placed in 2009 for 2010 delivery 0.1 + Yard delays from 2010 to 2011/12/13 3.1 1.2 0.1+ New orders placed in 2010 for 2011/12/13 delivery 0.0 0.0 0.0= Current order book start of each year, MDWT 5.4 7.9 8.2 6.7 1.9 0.1

= Deliveries (HISTORY) and order book (FORECAST) 2.9 3.3 3.8 5.0 4.4 3.8 2.8 1.3 0.2

Delivery of: Deliveries relative to original order book 1 year earlier (%) 92 55 55 55 55 55Deliveries relative to original order book 1 year earlier, MDWT 3.1 2.0 0.4 0.0

Delivery of orders delayed in 2009/2010 % 25 25 25 25Delivery of orders delayed in 2009/2010MDWT 0.6 0.8 0.3 0.0

Delivery of vessels ordered in 2009/2010 (%) 95 95 95 95Delivery of vessels ordered in 2009/2010, MDWT 0.1 0.0 0.0 0.0

Delivery of vessels delayed in 2011 (%) 40Delivery of vessels delayed in 2011, MDWT 0.6

Delivery of vessels delayed from 2012 (%) 40Delivery of vessels delayed from 2012, MDWT 0.13

- Scrapping, MDWT -0.08 -0.37 -0.28 -0.46 -1.01 -1.27 -1.09 -0.19 -0.16+ New contracting, MDWT 0.0 0.10 0.20+/- Miscellaneous changes, MDWT -0.10 -0.10

Fleet, end of year, MDWT 21.0 24.0 27.5 31.9 35.2 37.8 39.4 40.7 40.9Growth (y-o-y) (%) 16 14 15 16 10 7 4 3 0Source: SEB Ensklda, Clarkson

SEB ENSKILDA


11 19 May 2011

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

April-Dec 2011 2012 2013 Total % of fleet totalStainless 10-19,999 0.46 0.22 0.04 0.72 920-29,999 0.25 0.17 0.00 0.42 630-39,999 0.30 0.13 0.00 0.43 640-49,000 0.00 0.17 0.00 0.17 2Sum 1.01 0.69 0.04 1.74 23% of segment total 58 40 2 100

Epoxy 10-19,999 0.62 0.23 0.00 0.85 1130-39,999 0.31 0.00 0.00 0.31 440-49,000 1.07 0.15 0.00 1.22 1650-59,000 0.61 0.50 0.10 1.21 16Sum 2.61 0.88 0.10 3.59 47% of segment total 73 25 3 100

Marineline 10-19,999 0.15 0.01 0.00 0.16 220-29,999 0.03 0.00 0.00 0.03 040-49,000 0.18 0.27 0.05 0.50 6Sum 0.35 0.28 0.05 0.68 9% of segment total 52 42 7 100

Zinc 40-49,000 0.32 0.41 0.00 0.73 10Sum 0.32 0.41 0.00 0.73 10% of segment total 44 56 0 100

Other 10-19,999 0.22 0.13 0.01 0.37 520-29,999 0.25 0.13 0.02 0.40 530-39,999 0.12 0.00 0.00 0.12 2Sum 0.59 0.26 0.03 0.88 12% of segment total 66 30 4 100

Total 4.88 2.53 0.22 7.63 100Source: SEB Enskilda, Clarkson

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

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Source: SEB Enskilda, Clarkson Source: SEB Enskilda, Clarkson

SEB ENSKILDA


12 19 May 2011

“Handy” chemical scrapping by scrapping age, past three 77% of the “handy” chemical ships scrapped aged 24-31 years

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“Handy” chemical tanker fleet by build year and coating “Handy” chemical tanker age profile

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SEB ENSKILDA


13 19 May 2011

“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 TotalStainless steel 10-19,999 2.0 1.8 1.1 0.4 0.2 0.1 0.0 0.0 0.0 5.720-29,999 0.6 0.5 0.2 0.0 0.1 0.2 0.0 0.0 0.0 1.730-39,999 1.0 0.9 1.0 0.5 0.1 0.3 0.0 0.0 0.0 3.740-49,000 0.3 0.2 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.750-59,000 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Sum 3.9 3.3 2.3 0.9 0.6 0.5 0.1 0.1 0.0 11.7% of segment total 34 28 20 8 5 5 1 1 0 100

Epoxy 10-19,999 3.7 1.1 0.6 0.3 0.2 0.0 0.0 0.0 0.0 6.020-29,999 0.3 0.7 0.1 0.1 0.1 0.1 0.0 0.0 0.0 1.430-39,999 1.0 1.3 0.1 0.1 0.0 0.0 0.0 0.0 0.0 2.740-49,000 1.5 3.0 0.6 0.2 0.2 0.1 0.0 0.0 0.0 5.650-59,000 3.0 0.6 0.0 0.0 0.0 0.0 0.1 0.0 0.0 3.7Sum 9.6 6.7 1.3 0.8 0.5 0.3 0.2 0.0 0.0 19.4% of segment total 50 34 7 4 3 1 1 0 0 100

Marineline 10-19,999 1.9 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 2.220-29,999 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.130-39,999 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.340-49,000 0.1 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.5Sum 2.4 0.4 0.2 0.0 0.0 0.0 0.0 0.0 0.0 3.1% of segment total 77 14 7 1 0 0 0 0 0 100

Zinc 10-19,999 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.320-29,999 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.230-39,999 0.3 0.0 0.1 0.1 0.2 0.1 0.2 0.0 0.0 1.040-49,000 1.2 0.3 0.5 0.1 0.0 0.0 0.0 0.0 0.0 2.2Sum 1.6 0.3 0.7 0.3 0.2 0.2 0.2 0.0 0.0 3.6% of segment total 44 9 20 9 6 6 6 0 0 100

Other 10-19,999 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.320-29,999 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1Sum 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3% of segment total 100 0 0 0 0 0 0 0 0 100

Poly 50-59,000 0 0.1 0 0 0 0 0 0 0 0.1Sum 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1% of segment total 0 100 0 0 0 0 0 0 0 100

Total 17.9 10.8 4.6 2.0 1.3 1.0 0.4 0.1 0.0 38.2% of total 47 28 12 5 3 3 1 0 0 100Source: 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


14 19 May 2011

“Handy” chemical tanker contracting – yearly “Handy” chemical tanker contracting - quarterly

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5

6

7

8

9

10

1996 1998 2000 2002 2004 2006 2008 2010 2012E

m d

wt

0.0

0.3

0.5

0.8

1.0

1.3

1.5

1.8

2.0

2.3

2.5

2.8

3.0

3.3

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

m d

wt


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)

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

SLS

Ship

build

ing

Kita

niho

n Zo

sen

Sant

ieru

l Nav

al

Gua

ngzh

ou S

.Y. I

nt.

Fuku

oka

S.B.

Shin

Kur

ushi

ma

Nan

tong

Min

gde

Fujia

n Ba

ima

Jian

gzho

u S/

Y

Liao

ning

Hon

ggua

n

Hyu

ndai

Mip

o

Pha

Run

g S/

yard

Sekw

ang

Ship

build

ing

STX

Ship

build

.

Taiz

hou

Sanf

u

21c

S.B.

Co.

Jiuj

iang

Xia

ngsh

eng

Ram

sar S

hipy

ard

Shita

noe

Zose

n

Usu

ki Z

osen

sho

Num

ber o

f ves

sels

on

orde

r


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


15 19 May 2011

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

2011 remaining 2012 2013 mdwt due 3.2 1.9 0.7Source: SEB Enskilda

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

2011 remaining 2012 2013 mdwt due for delivery 0.97 0.43 0.08% of current fleet 7 3 1Source: SEB Enskilda

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


16 19 May 2011

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

0

5

10

15

20

25

30

Jan-00 Jan-03 Jan-06 Jan-09

Hhub, USD/MMBTu Zeebrugge, USD/MMBtu Far East contract price based on Brent

Source: Blooomberg, SEB Enskilda

SEB ENSKILDA


17 19 May 2011

Naphtha prices in Japan and Europe, USD/tonne

0

200

400

600

800

1000

1200

1400

Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10

Japan 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


18 19 May 2011

World chemical shipments, USDbn

0

500

1000

1500

2000

2500

3000

3500

4000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009

North America Latin America Western Europe Central/Eastern Europe Africa & Middle East Asia/Pacific

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

0

100

200

300

400

500

600

700

800

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Prse Xylene Glycol


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 19 May 2011

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

0

100

200

300

400

500

600

700

800

900

Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

0

20

40

60

80

100

120

140

160

Bunker, 180CST, Fujaira, USD/ton 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


20 19 May 2011

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

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Q1/01 Q4/01 Q3/02 Q2/03 Q1/04 Q4/04 Q3/05 Q2/06 Q1/07 Q4/07 Q3/08 Q2/09 Q1/10 Q4/10

Odfjell, rebased 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

50%

60%

70%

80%

90%

100%

110%

120%

Q4/06 Q2/07 Q4/07 Q2/08 Q4/08 Q2/09 Q4/09 Q2/10 Q4/10

Odfjell Stolt-Nielsen 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


21 19 May 2011

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

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 Rate estimate 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 Calculated rate, based on aggregate forecast 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 Contract coverage (%) 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0Spot rates increasing in the quarter (%) 1.7 1.7 1.7 1.7 3.0 3.0 3.0 3.0 4.0 4.0 4.0 4.0Contract rates increasing in the quarter (%) 1.0 1.0 1.0 1.0 2.5 2.5 2.5 2.5 3.5 3.5 3.5 3.5Old rate estimate, y-o-y increase (%) 4 13 13Calculated rate estimate, y-o-y increase (%) 4 10 15Source: SEB Enskilda

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

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 Rate estimate 1.17 1.17 1.17 1.20 1.20 1.28 1.28 1.30 1.30 1.35 1.35 1.35 1.37Calculated rate, based on aggregate forecast 1.17 1.09 1.13 1.15 1.17 1.18 1.22 1.25 1.28 1.32 1.37 1.42 1.48Contract coverage (%) 70.0 70.0 70.0 70.0 60.0 60.0 60.0 60.0 50.0 50.0 50.0 50.0Spot rates increasing in the quarter (%) 5.0 1.7 1.7 1.7 3.0 3.0 3.0 3.0 4.0 4.0 4.0 4.0Contract rates increasing in the quarter (%) 1.0 1.0 1.0 1.0 2.5 2.5 2.5 2.5 3.5 3.5 3.5 3.5Old rate estimate, y-o-y increase (%) 3 8 5Calculated rate estimate, y-o-y increase (%) 0 10 15Source: SEB Enskilda

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

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 Average TCE rates 8,263 8,915 9,138 9,367 9,843 10,247 10,667 11,104 11,559 12,033 12,527 12,911 13,441Average quarterly rate increase (%) 7.9 2.5 2.5 5.1 4.1 4.1 4.1 4.1 4.1 4.1 3.1 4.1Calculated rate estimate, y-o-y increase (%) 19 17 16 Source: SEB Enskilda

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

12,736

12,389

9,354

8,747

9,316

10,894

12,728

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

13,000

2007 2008 2009 2010 2011E 2012E 2013E

Tim

echa

rter e

arni

ngs

(USD

per

day

)

Source: SEB Enskilda, Eitzen Chemical


SEB ENSKILDA 22 19 May 2011

Shipping Norway

Eitzen Chemical ASA Buy Analyst: Nicolay Dyvik NOK 0.77Tel: (47) 2100 8649 e-mail: [email protected] Target price: NOK 1.08

Estimates (USD)(Y/end 31-Dec) 2010 2011E 2012E 2013E Reuters/Bloomberg: ECHEM.OL/ECHEM NORevenues (m) 202 206 235 267Operating profit (m) (57) (50) (18) 18PTP (m) (117) (101) (72) (33)EPS (reported) (0.15) (0.1) (0.06) (0.03)EPS (adjusted) (0.15) (0.1) (0.06) (0.03)DPS 0.0 0.0 0.0 0.0Revenue growth (%) (16.0) 2.6 14.7 13.7PTP growth (%) n.m. n.m. n.m. n.m.EPS growth (%) n.m. n.m. n.m. n.m.

Operating margin (%) (28.9) (24.7) (7.9) 7.0ROE (%) (43.4) (53.7) (55.6) (43.8)ROCE (%) (4.3) (4.1) (1.5) 1.8

ValuationPER (adjusted) (2.1) (1.4) (2.2) (4.8)FCF yield (%) 5.8 (15.7) n.a. 21.8Div. yield (%) 0.0 0.0 0.0 0.0P/BV (x) 1.15 0.97 1.72 2.69EV/Sales (x) 6.0 5.3 4.7 4.0 ECHEM.OL Rel NorwayEV/EBITDA (x) 43.8 35.3 17.4 10.6EV/EBIT (x) (20.9) (21.5) (59.3) 56.9 Source: SIX 12m High/Low 2/1

Key data (2011E) Performance data -1M -3M -12MMarket cap (USDm) 156 Shares outstand. (m) 1126.12 Absolute (%) (10.5) (38.9) (63.3)Market cap (NOKm) 867 Shares fully dil. (m) 1126.12 Relative to local index (%) (12.1) (38.1) (69.3)Net debt (USDm) 915 Avg volume (000s) 4382.11 Relative to Europe, ex UK (%) (12.0) (38.8) (71.0)Net gearing (%) 571 Relative to sector (%) (16.6) (39.6) (69.5)

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011

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.



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 1 1 1 1 4 12 5 5 4 4 4Gain/(loss) on sale of assets 0 0 0 0 21 8 -3 -3 0 0 0Gross profit 50 50 52 53 347 319 236 199 206 235 267

Ship operating expenses -30 -31 -31 -30 -141 -144 -150 -126 -122 -121 -119Charterhire expenses -8 -7 -7 -7 -18 -20 -26 -26 -28 -27 -24Other operating expenses 0 0 0 0 0 0 0 0 0 0 0General and administrative expenses -6 -6 -6 -6 -31 -26 -25 -23 -25 -25 -25

EBITDA 6 7 8 10 157 128 36 24 30 62 98

Impairment 0 0 0 0 0 -313 0 0 0 0 0Depreciation and amortization -20 -20 -20 -20 -102 -87 -89 -84 -80 -80 -80

EBIT -14 -13 -12 -10 55 -273 -53 -59 -50 -18 18

Interest income 0 0 0 0 5 1 1 1 1 1 1Interest expense -11 -12 -12 -12 -59 -49 -48 -44 -48 -54 -52

Other financial items -2 0 0 0 3 -18 -3 -14 -2 0 0

Profit/(loss) before tax -27 -26 -24 -22 5 -338 -102 -117 -99 -72 -33

Income tax expense 0 1 1 1 4 -8 4 3 2 2 1

Net profit/(loss) -27 -25 -24 -22 9 -346 -99 -114 -97 -70 -33

Nr of share 754 1,126 1,126 1,126 172 171 224 753 1033 1126 1126EPS (basic/diluted) -0.04 -0.02 -0.02 -0.02 0.05 -2.02 -0.44 -0.15 -0.09 -0.06 -0.03

ECHEM fleet Average dwt 17,000 16,952 16,952 16,952 16,403 17,117 17,003 17,146 16,964 16,952 16,952No. of vessels EOP 59 59 59 58 71 66 66 61 59 58 57TCE - USD/day 8,915 9,138 9,367 9,843 12,736 12,389 9,354 8,747 9,316 10,894 12,728Change Q-o-Q (%) 8 3 3 5 -3 -24 -6 7 17 17Source: SEB Enskilda

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.



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

-1

20

41

62

83

104

125

146

167

-25

0

25

50

75

100

125

150

175

200

7,894 8,894 9,894 10,894 11,894 12,894 13,894 14,894 15,894

2012

EBI

TDA

(USD

m)

Source: SEB Enskilda

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

55% 58% 60% 56% 56% 53% 51% 53% 52%

23% 20% 19%16% 16%

16% 16% 11% 11%

22% 22% 21%28% 28% 31% 33% 36% 37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111

(%)

Spot T/C COA

Source: SEB Enskilda, ECHEM



Profit & loss statement(USDm) 2006 2007 2008 2009 2010 2011E 2012E 2013ETotal revenues 77 327 311 239 202 206 235 267Total expenses (50) (190) (191) (200) (175) (175) (173) (168)Profit before depreciation 27 136 120 39 27 30 62 98Depreciation (22) (102) (401) (89) (84) (80) (80) (80)Intangibles amortisation (0) 0 0 0 0 0 0 0Operating profit 5 35 (281) (50) (57) (50) (18) 18

Net interest expenses (11) (53) (48) (47) (44) (49) (53) (52)Foreign exchange items 0 0 0 0 0 0 0 0Other financial items 1 3 (18) (3) (14) (2) 0 0Value changes 2 21 8 (3) (3) 0 0 0Reported pre-tax profit (2) 5 (338) (102) (117) (101) (72) (33)Minority interests 0 0 0 0 0 0 0 0Total taxes (0) 4 (8) 4 3 3 2 1

EO items/Discontinued oper. 0 (0) 0 0 0 0 0 (0)Net profit (2) 9 (346) (99) (114) (98) (70) (33)Operating margin (%) 6.9 10.7 (94.1) (21.3) (28.9) (24.7) (7.9) 7.0Tax rate (%) (14.8) (79.5) (2.3) 3.6 2.7 2.7 2.7 2.7ROE (%) (0.6) 1.4 (72.3) (31.6) (43.4) (53.7) (55.6) (43.8)ROCE (%) 0.8 2.5 (18.6) (3.6) (4.3) (4.1) (1.5) 1.8Growth rates y-o-y (%)Total revenues 0.0 328.7 (7.6) (21.6) (16.0) 2.6 14.7 13.7Operating profit 0.0 560.8 0.0 0.0 0.0 0.0 0.0 0.0Pre-tax profit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash flow(USDm) 2006 2007 2008 2009 2010 2011E 2012E 2013ENet profit (2) 9 (346) (99) (114) (98) (70) (33)Non-cash adjustments 20 81 393 92 86 66 65 67Changes in working capital 25 46 57 61 50 15 1 1Operating cash flow 43 136 104 55 23 (18) (4) 35Net capital expenditures (558) (175) (195) (1) (10) 0 0 0Free cash flow (515) (39) (91) 54 13 (18) (4) 35Net loan proceeds 299 177 89 (50) (20) 0 (12) (58)Dividend paid 0 0 0 0 0 0 0 0Share issue 290 0 0 122 0 53 0 0Net change in cash 58 67 (66) 63 (50) 35 (16) (23)

Capex/sales (%) 773.6 107.4 128.9 36.7 7.9 0.0 0.0 0.0

Balance sheet(USDm) 2006 2007 2008 2009 2010 2011E 2012E 2013ECash and liquid assets 48 105 50 122 72 107 92 68Other current assets 79 77 100 77 82 47 54 62Fixed tangible assets 1,433 1,505 1,306 1,221 1,148 1,068 988 908Intangibles 60 21 14 9 4 4 4 4Total assets 1,619 1,708 1,470 1,429 1,306 1,227 1,138 1,042

Interest bearing debt 898 980 1,065 1,032 1,023 1,023 1,011 952Other liabilities 97 77 100 77 78 44 37 32Minority interests 0 0 0 0 0 0 0 0Shareholders' equity 625 651 305 319 205 160 91 58Total liabilities and equity 1,619 1,708 1,470 1,429 1,306 1,227 1,138 1,042

Net debt (m) 850 875 1,015 910 951 915 919 884Net debt/equity (%) 136.0 134.6 332.4 285.1 462.8 571.3 1,015.1 1,523.9Equity/total assets (%) 38.6 38.1 20.8 22.3 15.7 13.1 8.0 5.6Interest cover 0.6 0.7 (5.7) (1.0) (1.3) (1.0) (0.3) 0.4

Valuation(USDm) 2006 2007 2008 2009 2010 2011E 2012E 2013ENo of shares, fully dil. (y/e) 170.6 171.8 170.8 171.8 754.2 1,126.1 1,126.1 1,126.1Share price, y/e 25.5 22.9 8.7 1.8 1.8 0.8 0.8 0.8

EPS (reported) (0.03) 0.05 (2.02) (0.44) (0.15) (0.1) (0.06) (0.03)EPS (adjusted) (0.05) (0.07) (2.06) (0.43) (0.15) (0.1) (0.06) (0.03)Cash earnings/share 0.24 0.52 0.27 (0.03) (0.04) (0.03) 0.0 0.03Dividend/share 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PER (adjusted) (75.4) (61.3) (0.6) (0.7) (2.1) (1.4) (2.2) (4.8)CEM 17.3 8.1 4.5 (10.6) (8.6) (4.2) (32.2) 4.6Dividend yield 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EV/EBITDA 57.4 11.8 10.2 24.8 43.8 35.3 17.4 10.6EV/EBIT 295.7 46.4 (4.4) (19.4) (20.9) (21.5) (59.3) 56.9EV/Sales 20.5 5.0 4.1 4.1 6.0 5.3 4.7 4.0Price/Book value 1.11 1.12 0.69 0.17 1.15 0.97 1.72 2.69Price/adjusted equity 1.11 1.12 0.69 0.17 1.15 0.97 1.72 2.69Free cash flow/Market cap (%) (165.8) (5.5) (43.7) 75.2 5.8 (15.7) n.a. 21.8

Main shareholders Management Company informationName (%) Votes Capital Title Name ContactCamillo Eitzen & Co 33.8 33.8 COB Axel Eitzen Internet www.eitzen-chemical.comOdin Norden 4.8 4.8 CEO Terje Askvig Phone number 24006100JP Morgan Clearing Corp 3.0 3.0 CFO Per-Hermod Rasmussen Fax number 24006101



Shipping Norway

Odfjell Buy Analyst: Ole G. Stenhagen NOK 45.4Tel: (47) 2100 8527 e-mail: [email protected] Target price: NOK 84

Estimates (USD)(Y/end 31-Dec) 2010 2011E 2012E 2013E Reuters/Bloomberg: ODF.OL/ODF NORevenues (m) 1,239 1,205 1,344 1,492Operating profit (m) 23 79 156 220PTP (m) (18) 96 119 188EPS (reported) (0.97) 0.96 1.25 2.11EPS (adjusted) (0.94) 0.24 1.25 2.11DPS 0.0 0.0 0.0 0.0Revenue growth (%) (2.0) (2.7) 11.5 11.1PTP growth (%) n.m. n.m. 24.4 57.4EPS growth (%) n.m. n.m. 425.0 69.0

Operating margin (%) 1.9 6.5 11.6 14.8ROE (%) (9.4) 9.5 11.2 16.4ROCE (%) 1.1 3.6 6.9 9.8

ValuationPER (adjusted) (9.8) 34.2 6.5 3.9FCF yield (%) 7.2 10.9 22.4 27.0Div. yield (%) 0.0 0.0 0.0 0.0P/BV (x) 0.96 0.77 0.69 0.59EV/Sales (x) 1.7 1.6 1.4 1.1 ODF.OL Rel NorwayEV/EBITDA (x) 12.7 9.3 6.2 4.6EV/EBIT (x) 93.0 25.2 11.8 7.5 Source: SIX 12m High/Low 55/33

Key data (2011E) Performance data -1M -3M -12MMarket cap (USDm) 646 Shares outstand. (m) 79.38 Absolute (%) 0.9 (14.3) 5.6Market cap (NOKm) 3,596 Shares fully dil. (m) 79.38 Relative to local index (%) (0.9) (13.3) (11.7)Net debt (USDm) 1,336 Avg volume (000s) 25.74 Relative to Europe, ex UK (%) (0.8) (14.2) (16.6)Net gearing (%) 159 Free float (%) 50 Relative to sector (%) (6.0) (15.4) (12.1)

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011

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.

Risks to target price 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.



Odfjell SE Odfjell, SOTP

Low case Base case High case Comment Deep sea and short sea tankers

No of ships 75 75 75 Lifetime 30 30 30 Scrapping 0 0 0 EBITDA/ship operating day 1,554 5,606 8,975 Annual EBITDA 43 153 246 RRR (%) 7 8 10 Mean reverting market - rises and risk moves to down Present value tanker fleet 528 1,728 2,316 Book value of owned fleet and newbuildings: USD 1287m

Terminals Wholly owned terminals Terminal capacity (mCBM) 2.8 2.8 2.8 Nett 100% capacity - including part owned 3.7CBM Annual EBITDA/CBM capacity (USD/CBM) 13.0 25.4 45.2 EBITDA current capacity 36 71 126 2010: USD 110m EV/EBITDA (attractive locations) 13 12 8 Value of wholly owned terminals 473 850 1,009 Book value of terminals USD 733m

Corporate Corporate assets 50 50 50 Sevmash award

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) -320 1,256 2,004 Book equity USD 790m Value per share (USD) -4.1 15.9 25.4 Currency exchange rate USD/NOK 5.55 5.55 5.55 Value of equity (NOK/share) -23 88 141


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.



Profit & loss statement(USDm) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013ETotal revenues 846 846 907 943 1,045 1,088 1,239 1,476 1,264 1,239 1,205 1,344 1,492Total expenses (643) (687) (737) (736) (781) (829) (924) (1,190) (1,083) (1,070) (992) (1,049) (1,131)Profit before depreciation 203 159 170 207 264 259 315 286 182 169 213 294 361Depreciation (83) (87) (90) (100) (107) (119) (136) (142) (151) (146) (134) (138) (141)Intangibles amortisation 0 (0) (2) 0 0 0 0 (0) (0) 0 0 0 0Operating profit 120 72 78 107 157 140 179 144 31 23 79 156 220Associated companies 0 0 0 0 0 0 0 0 0 0 0 0 0Net interest expenses (40) (26) (23) (25) (28) (41) (61) (65) (45) (41) (40) (37) (32)Foreign exchange items (14) 15 30 17 2 0 2 21 0 3 0 0 0Other financial items (1) (1) (0) (1) (1) 2 (1) (7) 9 3 0 0 0Value changes 4 1 (0) 7 14 15 25 53 31 (6) 57 (0) 0Reported pre-tax profit 69 61 84 105 143 116 143 145 26 (18) 96 119 188Minority interests 0 (0) 0 0 0 0 0 0 0 0 0 0 0Total taxes (9) (15) (7) (11) (19) 0 (153) 17 95 (60) (20) (20) (20)

EO items/Discontinued oper. 0 0 (55) 0 4 0 (0) (0) 0 0 0 0 0Net profit 60 45 22 94 129 116 (10) 163 121 (78) 76 99 168Operating margin (%) 14.2 8.5 8.6 11.4 15.0 12.9 14.5 9.8 2.4 1.9 6.5 11.6 14.8Tax rate (%) 13.4 24.8 8.5 10.7 13.0 0.0 106.7 (11.9) (364.4) (333.3) 20.9 16.8 10.6ROE (%) 11.2 8.2 14.2 16.0 18.8 16.7 (1.4) 23.6 15.0 (9.4) 9.5 11.2 16.4ROCE (%) 8.9 5.3 5.3 6.9 9.7 8.2 9.5 7.1 1.5 1.1 3.6 6.9 9.8Growth rates y-o-y (%)Total revenues 21.5 (0.0) 7.2 4.0 10.7 4.1 13.9 19.1 (14.4) (2.0) (2.7) 11.5 11.1Operating profit 174.4 (40.2) 8.0 38.1 45.9 (10.6) 28.2 (19.6) (78.7) (25.0) 242.5 98.4 40.9Pre-tax profit 0.0 (12.5) 39.5 24.5 36.1 (18.8) 23.4 1.5 (82.1) 0.0 0.0 24.4 57.4

Cash flow(USDm) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013ENet profit 60 45 22 94 129 116 (10) 163 121 (78) 76 99 168Non-cash adjustments 84 101 99 91 92 105 306 56 121 148 77 138 141Changes in working capital (0) 9 58 84 21 (36) 6 58 (169) 29 2 34 (45)Operating cash flow 144 156 179 269 242 185 303 277 74 99 156 272 264Net capital expenditures (111) (107) (165) (228) (305) (220) (340) (330) (120) (45) (85) (126) (89)Free cash flow 33 49 15 40 (63) (35) (37) (53) (46) 54 71 146 175Net loan proceeds 5 (9) (21) 70 73 160 38 232 (2) (51) (114) (24) (300)Dividend paid (11) (22) (24) (25) (60) (84) (77) (39) (12) 0 0 0 0Share issue (41) (18) 0 0 0 0 0 (32) 0 (24) 0 0 0Net change in cash (14) 17 (27) 85 (50) 42 (75) 109 (60) (21) (43) 122 (125)

Capex/sales (%) 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

Balance sheet(USDm) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013ECash and liquid assets 213 230 203 170 190 244 166 193 198 141 98 219 94Other current assets 87 85 94 95 109 130 165 165 245 243 236 213 246Fixed tangible assets 1,284 1,299 1,370 1,558 1,647 1,803 2,037 2,216 2,246 2,184 2,192 2,180 2,128Intangibles 17 15 10 10 9 12 11 10 11 11 11 11 11Total assets 1,601 1,630 1,677 1,833 1,955 2,189 2,379 2,585 2,699 2,579 2,536 2,622 2,478

Interest bearing debt 960 957 1,045 1,000 1,037 1,293 1,347 1,500 1,576 1,526 1,412 1,388 1,088Other liabilities 91 109 97 194 226 188 359 364 216 287 283 293 282Minority interests 4 4 4 0 0 6 6 6 5 5 5 5 5Shareholders' equity 546 560 530 639 692 702 666 715 901 761 837 936 1,104Total liabilities and equity 1,601 1,630 1,677 1,833 1,956 2,189 2,379 2,585 2,699 2,579 2,537 2,622 2,479

Net debt (m) 752 732 847 842 860 1,067 1,197 1,323 1,401 1,407 1,336 1,191 1,016Net debt/equity (%) 136.8 129.7 158.6 131.9 124.3 150.7 178.0 183.5 154.6 183.7 158.7 126.5 91.6Equity/total assets (%) 34.4 34.6 31.9 34.9 35.4 32.3 28.3 27.9 33.6 29.7 33.2 35.9 44.7Interest cover 2.5 2.3 3.0 3.8 4.5 2.8 2.6 2.1 0.7 0.6 1.9 3.9 6.2

Valuation(USDm) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013ENo of shares, fully dil. (y/e) 22.9 22.9 21.7 21.7 43.4 86.8 86.8 82.8 82.8 79.4 79.4 79.4 79.4Share price, y/e 33.8 27.5 37.0 106.0 137.0 115.0 89.0 43.5 52.0 54.0 45.4 45.4 45.4

EPS (reported) 0.64 0.5 0.71 1.08 1.44 1.34 (0.11) 1.92 1.46 (0.97) 0.96 1.25 2.11EPS (adjusted) 0.6 0.5 0.45 0.77 1.26 1.17 0.17 1.04 (0.04) (0.94) 0.24 1.25 2.11Cash earnings/share 1.54 1.6 1.62 2.13 2.54 2.55 3.42 2.58 2.93 0.87 1.93 2.99 3.89Dividend/share 0.2 0.29 0.43 0.25 0.48 0.89 0.44 0.14 0.0 0.0 0.0 0.0 0.0

PER (adjusted) 6.2 7.9 12.4 22.8 16.1 15.8 94.8 6.0 (213.9) (9.8) 34.2 6.5 3.9CEM 2.4 2.5 3.4 8.3 8.0 7.2 4.8 2.4 3.1 10.6 4.2 2.7 2.1Dividend yield 5.2 7.3 7.7 1.4 2.4 4.8 2.7 2.3 0.0 0.0 0.0 0.0 0.0

EV/EBITDA 5.4 6.9 7.8 11.4 9.7 10.0 8.1 6.4 11.8 12.7 9.3 6.2 4.6EV/EBIT 9.1 15.2 17.0 21.9 16.3 18.5 14.2 12.8 69.5 93.0 25.2 11.8 7.5EV/Sales 1.3 1.3 1.5 2.5 2.4 2.4 2.1 1.2 1.7 1.7 1.6 1.4 1.1Price/Book value 0.63 0.64 0.91 2.38 2.54 2.27 2.14 0.72 0.83 0.96 0.77 0.69 0.59Price/adjusted equity 0.63 0.64 0.91 2.38 2.54 2.27 2.14 0.72 0.83 0.96 0.77 0.69 0.59Free cash flow/Market cap (%) 9.6 13.7 2.3 2.6 (3.6) (2.2) (2.6) (10.0) (6.2) 7.2 10.9 22.4 27.0

Main shareholders Management Company informationName (%) Votes Capital Title Name ContactB.D.Odfjell jr. and family 45.8 36.0 COB Laurence Odfjell Internet www.odfjell.no CEO Jan Hammer Phone number (47) 5527 0000 CFO Haakon Ringdal Fax number (47) 5528 4741



Shipping Norway

Stolt-Nielsen Buy Analyst: Ole G. Stenhagen NOK 126.5Tel: (47) 2100 8527 e-mail: [email protected] Target price: NOK 165

Estimates (USD)(Y/end 30-Nov) 09/10 10/11E 11/12E 12/13E Reuters/Bloomberg: SNI.OL/SNI NORevenues (m) 1,794 1,875 2,050 2,131Operating profit (m) 129 127 229 269PTP (m) 132 122 198 239EPS (reported) 1.83 1.64 2.59 3.15EPS (adjusted) 1.45 1.57 2.59 3.15DPS 1.5 1.0 1.5 0.0Revenue growth (%) 9.0 4.6 9.3 3.9PTP growth (%) 26.0 (7.2) 61.8 21.0EPS growth (%) 13.8 8.1 64.7 21.6

Operating margin (%) 7.2 6.8 11.2 12.6ROE (%) 7.1 6.1 9.3 10.7ROCE (%) 7.3 5.0 7.9 8.9

ValuationPER (adjusted) 16.7 14.5 8.8 7.2FCF yield (%) 25.3 (27.9) 9.1 31.3Div. yield (%) 6.2 4.4 6.6 0.0P/BV (x) 0.90 0.83 0.78 0.74EV/Sales (x) 1.3 1.5 1.3 1.1 SNI.OL Rel NorwayEV/EBITDA (x) 7.9 9.1 6.5 5.1EV/EBIT (x) 15.5 19.2 10.7 8.0 Source: SIX 12m High/Low 155/73

Key data (10/11E) Performance data -1M -3M -12MMarket cap (USDm) 1,391 Shares outstand. (m) 59.80 Absolute (%) (1.6) (14.8) 40.6Market cap (NOKm) 7,736 Shares fully dil. (m) 61.16 Relative to local index (%) (3.3) (13.8) 17.5Net debt (USDm) 1,379 Avg volume (000s) 53.19 Relative to Europe, ex UK (%) (3.2) (14.7) 11.0Net gearing (%) 84 Free float (%) 48 Relative to sector (%) (8.3) (15.9) 17.0

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011

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.

Risks to target price 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.



Stolt-Nielsen Ltd Stolt-Nielsen SOTP

Low case Base case High case Comment Stolt-Nielsen Transportation Group Stolt Tankers Present value tanker fleet Assumptions No of ships 123 123 123 Lifetime 30 30 30 Scrapping 0 0 0 EBITDA/ship operating day 2,634 4,161 5,872 Annual EBITDA 118 187 264 RRR (%) 9 11 13 When assuming a strong market one should apply risk Present value tanker fleet 1,215 1,624 1,976 2052 Book Valuation of investments Stolt Tankers Annual contribution 4 12 23 PER 14 10 6 Value of equity investees - Tankers 61 120 135

Stolt Tank Containers Number of tank containers 24,359 24,359 24,359 Annual EBITDA/tank container (USD) 1,753 2,633 3,394 Annual EBITDA current capacity 43 64 83 EV/EBITDA 11 9 6 A significant part of assets are chartered in containers Value of Tank Container division 470 577 496 307 Book

Stolt Terminals Terminal capacity (mbbls) Q4/2012 7.6 7.63 7.6 Annual EBITDA/bbl capacity (USD/bbl) 7.6 9.7 11.5 EBITDA based on Q4/2012 capacity 58 74 88 EV/EBITDA (attractive locations) 9 8 7 Value of Tank Terminals division 525 590 615 498 Book Investment requirement 235 235 235 Contribution equity investees (USDm) 5.9 6.7 9.8 PER assumed 11 9 8 Value of equity investees - Terminals 65 60 78

Total Stolt Nielsen Transportation Group 2101 2737 3066 2856 Book

Stolt Sea Farm Assumed value 20 50 100

Stolt-Nielsen Gas Book value 54 54 54

SNTG Corporate Book assets: USD 109m, Annual loss: USD 10m 0 0 0 Reports a loss of approx. USD 10m annually

Total Enterprise value 2,175 2,841 3,220

Net interest bearing debt 1,050 1,050 1,050

Value of equity (USDm) 1,125 1,792 2,170 Book equity is 1513 Value per share (USD) 18.8 30.0 36.3 Currency exchange rate USD/NOK 5.97 5.97 5.97 Value of equity (NOK/share) 112 179 217 Source: SEB Enskilda

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.



Profit & loss statement(USDm) 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11E 11/12E 12/13ETotal revenues 2,678 2,853 3,026 1,956 1,636 1,577 1,759 1,998 1,645 1,794 1,875 2,050 2,131Total expenses (2,325) (2,599) (3,009) (1,739) (1,385) (1,333) (1,493) (1,720) (1,405) (1,515) (1,589) (1,656) (1,694)Profit before depreciation 354 254 17 216 251 244 266 278 240 279 286 395 436Depreciation (219) (209) (372) (119) (97) (97) (98) (123) (138) (150) (160) (166) (167)Intangibles amortisation 0 (118) (2) (0) 0 0 0 0 0 (0) 0 0 0Operating profit 134 (73) (357) 97 154 147 168 154 102 129 127 229 269Associated companies 13 14 (11) 36 27 25 22 21 20 25 17 24 25Net interest expenses (114) (93) (93) (81) (41) (28) (23) (24) (25) (26) (41) (55) (56)Foreign exchange items (2) 1 13 6 (2) 3 (10) 4 8 3 1 0 0Other financial items 1 0 0 (2) (15) 0 (1) 0 (1) (5) 15 0 0Value changes 14 10 (1) 25 7 58 25 28 1 7 3 0 0Reported pre-tax profit 47 (141) (449) 81 130 206 180 183 104 132 122 198 239Minority interests 4 56 149 8 (0) (0) (0) 0 (0) 0 0 0 0Total taxes (28) (18) (15) (14) (7) (5) (6) (6) (9) (20) (22) (39) (47)

EO items/Discontinued oper. 0 0 0 0 361 0 42 0 0 (7) 15 (0) 0Net profit 24 (103) (316) 75 485 201 216 177 95 105 115 158 192Operating margin (%) 5.0 (2.6) (11.8) 5.0 9.4 9.3 9.5 7.7 6.2 7.2 6.8 11.2 12.6Tax rate (%) 58.6 (12.7) (3.4) 17.0 5.4 2.4 3.2 3.1 9.1 15.0 18.0 19.9 19.5ROE (%) 2.2 (9.8) (37.4) 9.5 11.7 16.8 13.7 13.2 6.7 7.1 6.1 9.3 10.7ROCE (%) 5.0 (2.0) (13.6) 6.1 9.7 9.8 9.9 7.6 4.6 7.3 5.0 7.9 8.9Growth rates y-o-y (%)Total revenues 18.1 6.5 6.1 (35.4) (16.3) (3.7) 11.6 13.5 (17.6) 9.0 4.6 9.3 3.9Operating profit 42.3 0.0 0.0 0.0 58.3 (4.3) 13.9 (8.0) (33.8) 26.2 (1.6) 80.2 17.8Pre-tax profit 145.1 0.0 0.0 0.0 59.9 58.1 (12.5) 1.6 (42.9) 26.0 (7.2) 61.8 21.0

Cash flow(USDm) 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11E 11/12E 12/13ENet profit 24 (103) (316) 75 485 201 216 177 95 105 115 158 192Non-cash adjustments 178 237 237 11 (303) 2 (1) 85 118 113 139 142 142Changes in working capital (99) 2 218 (290) (50) 4 (66) 43 (16) (63) 14 (17) 201Operating cash flow 103 136 139 (204) 132 206 150 306 197 155 268 283 535Net capital expenditures (234) (123) (89) 752 403 91 (206) (779) (207) 222 (657) (156) (100)Free cash flow (131) 13 50 548 535 298 (56) (473) (10) 377 (389) 127 435Net loan proceeds 130 116 (68) (723) (419) (39) 103 535 5 (288) 430 36 (6)Dividend paid (14) (14) (14) 0 (125) (126) (60) (60) (30) 0 (90) (60) (90)Share issue 1 0 0 104 (36) (130) (7) 0 3 0 0 0 0Net change in cash (14) 116 (32) (71) (45) 3 (17) 3 (33) 89 (49) 103 339

Capex/sales (%) 7.9 4.3 2.9 1.8 8.0 -5.8 13.3 31.1 12.6 21.1 35.0 7.6 4.7

Balance sheet(USDm) 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11E 11/12E 12/13ECash and liquid assets 25 23 147 76 30 45 32 34 38 127 79 182 521Other current assets 930 1,007 973 464 212 221 289 346 280 363 317 334 133Fixed tangible assets 2,842 2,672 2,381 1,833 1,953 2,224 2,151 2,663 2,843 2,522 3,040 3,055 3,013Intangibles 175 86 76 61 24 24 16 39 50 39 39 39 39Total assets 3,972 3,787 3,578 2,434 2,218 2,514 2,487 3,082 3,211 3,052 3,475 3,610 3,707

Interest bearing debt 1,693 1,652 1,700 1,113 667 631 737 1,276 1,280 993 1,422 1,458 1,452Other liabilities 857 940 1,129 432 339 710 381 490 415 436 405 405 405Minority interests 322 204 51 3 0 0 3 3 3 3 3 3 3Shareholders' equity 1,101 991 697 885 1,213 1,173 1,366 1,313 1,513 1,620 1,645 1,744 1,847Total liabilities and equity 3,972 3,787 3,578 2,434 2,218 2,514 2,487 3,082 3,211 3,052 3,475 3,610 3,706

Net debt (m) 1,668 1,629 1,553 1,037 551 439 753 1,289 1,287 900 1,379 1,312 966Net debt/equity (%) 117.3 136.3 207.5 116.7 45.5 37.4 55.0 97.9 84.9 55.5 83.6 75.1 52.2Equity/total assets (%) 35.8 31.6 20.9 36.5 54.7 46.7 55.1 42.7 47.2 53.2 47.4 48.4 49.9Interest cover 1.2 (0.8) (3.5) 1.2 3.4 4.4 5.9 5.1 3.5 2.4 3.1 4.1 4.8

Valuation(USDm) 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11E 11/12E 12/13ENo of shares, fully dil. (y/e) 55.4 54.9 54.9 62.6 65.5 60.6 60.9 60.9 61.2 61.2 61.2 61.2 61.2Share price, y/e 141.0 44.9 64.0 174.0 223.5 191.0 162.0 70.5 80.3 142.5 126.5 126.5 126.5

EPS (reported) 0.43 (1.87) (5.75) 1.2 1.86 3.12 2.87 2.91 1.56 1.83 1.64 2.59 3.15EPS (adjusted) 0.21 1.7 (5.96) 0.71 (3.68) 2.17 1.9 2.57 1.28 1.45 1.57 2.59 3.15Cash earnings/share 3.67 2.44 (1.44) 1.38 2.75 3.15 3.56 4.31 3.49 3.56 4.15 4.91 5.46Dividend/share 0.25 0.25 0.0 2.0 2.0 1.0 1.0 0.5 0.5 1.5 1.0 1.5 0.0

PER (adjusted) 74.9 3.8 (1.6) 40.9 (9.0) 14.1 15.8 3.9 10.9 16.7 14.5 8.8 7.2CEM 4.3 2.6 (6.7) 21.0 12.0 9.7 8.4 2.3 4.0 6.8 5.5 4.6 4.2Dividend yield 1.6 3.9 0.0 6.9 6.1 3.3 3.3 5.0 3.6 6.2 4.4 6.6 0.0

EV/EBITDA 8.9 7.9 17.2 11.3 9.8 8.5 8.9 6.4 8.2 7.9 9.1 6.5 5.1EV/EBIT 18.6 (1,948.5) (8.6) 21.4 15.0 13.3 13.6 10.8 17.5 15.5 19.2 10.7 8.0EV/Sales 1.5 0.8 0.8 1.5 1.7 1.5 1.5 1.0 1.3 1.3 1.5 1.3 1.1Price/Book value 0.79 0.36 0.76 2.04 1.75 1.54 1.30 0.46 0.55 0.90 0.83 0.78 0.74Price/adjusted equity 0.47 0.28 0.28 0.81 0.79 0.82 1.30 0.46 0.55 0.90 0.83 0.78 0.74Free cash flow/Market cap (%) (15.3) 3.7 9.4 30.3 24.5 15.2 (3.1) (77.0) (1.2) 25.3 (27.9) 9.1 31.3

Main shareholders Management Company informationName (%) Votes Capital Title Name ContactStolt-Nielsen with Family 58.0 50.0 COB Christer Olsson Internet www.stoltnielsen.comOdin 3.0 6.0 CEO Niels G. Stolt-Nielsen Phone number (44) 20 7611 8960NYK 5.0 CFO Jan Christian Engelhardtsen Fax number 0



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:

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.



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:

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.



Barriers to entry The chemical tanker market is dominated by known operators:

Chem owners: Broader definition Chem owners: Core fleet

Odfjell8%

Other 57%

Tokyo Marine4%

BLT/Chembulk

3%

MISC3%

Fairfield lino4%

Eitzen4%

Stolt Nielsen7%

Other majors10%

Odfjell15%

Stolt Nielsen15%

Fairfield lino7%

Other24%

Other majors12%

BLT/Chembulk5%

MISC6%

Eitzen8%Tokyo Marine

8%

Source: Odfjell 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

0

20

40

60

80

100

120

140

160

1975 1980 1985 1990 1995 2000 2005 2010

Chem Product tanker


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



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

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20100.8

0.9

1

1.1

1.2

1.3

1.4

Product tanker actual income, USD/dayChemical tanker implied rate to trade on the same EV/EBITDA, USD/dayStolt Index, annual average, RH Axis


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).



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.



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.



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 Stolt-Nielsen 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.



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.



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.



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.



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 ton-

miles, 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.



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.




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