Interim report January - June 1999

INTERIM REPORT JANUARY - JUNE 1999 'Income before taxes reached SEK 69 M (January-June 1998: SEK 41 M). Net asset value on June 30, 1999 was SEK 10 M per share, unchanged from December 31, 1998. 'Freight rates weakened during the second quarter of 1999. 'The Suezmax vessels Nord Hope and Nord Horn were delivered from the Daewoo Shipyard. FINANCIAL POSITION Income before taxes During the first half of 1999, the income of the NTA Group before taxes was SEK 69 M. During the first half of 1998, the Group reported an income before taxes of SEK 41 M. Mainly due to a weakening of the tanker market, income before taxes during the second quarter of 1999 was SEK 16 M, down from SEK 53 M during the first quarter. The corresponding 1998 figures were SEK 15 M and SEK 26 M, respectively. Cash earnings Cash earnings from current operations totaled SEK 244 M (January-June 1998: SEK 276 M), equalling SEK 1.18 (SEK 1.41) per share. Cash earnings from current operations are defined as income after financial items adjusted for items not included in cash earnings and cash earnings from changes in working capital. Net asset value Based on vessel valuations by independent shipbroking firms, net asset value on June 30, 1999 was estimated at SEK 10 per share, unchanged from December 31, 1998. The valuation of the VLCC newbuilding was NTA's own estimate. These valuations indicate that vessel prices had fallen by an average of 5 percent since year-end 1998. However, this was offset by earnings for the report period, including booked depreciation, as well as by a rising U.S. dollar (USD) exchange rate against the Swedish krona (SEK). It is important to emphasize that only a few sales transactions involving modern tanker tonnage have taken place. A change of 10 percent in the market value of the fleet would affect net asset value by about SEK 2.60 per share. Liquidity and equity/assets ratio On June 30, 1999, the NTA Group's available liquidity amounted to SEK 798 M (Dec. 31, 1998: SEK 898 M), including unutilized overdraft facilities totaling SEK 10 M (Dec. 31, 1998: SEK 10 M) and after subtracting SEK 210 M (Dec. 31, 1998: SEK 115 M) in pledged funds. On June 30, 1999, the visible equity/assets ratio was 38 percent (Dec. 31, 1998: 38). The adjusted equity/assets ratio, which takes into account the market value of the fleet and commitments related to the current newbuilding program, amounted to 32 percent (Dec. 31, 1998: 30). Parent Company Income before taxes was SEK 337 M (SEK -3 M). Revenue for the report period totaled SEK 397 M (SEK 460 M). Available liquidity at the end of the period, including short-term investments, totaled SEK 63 M (Dec. 31, 1998: SEK 73 M). CAPITAL EXPENDITURES NTA Group capital expenditures during the first half of 1999 totaled SEK 543 M (SEK 2,396 M, including the acquisition of Nordström & Thulin AB). Net capital expenditures by the Parent Company amounted to SEK 1 M (SEK 1,788 M). Construction of the Very Large Crude Carrier (VLCC) contracted from the Daewoo Shipyard in South Korea is progressing as planned, and delivery is expected to occur early in 2000. Suezmax vessels delivered In April and June 1999, NTA took delivery of two Suezmax vessels from the Daewoo Shipyard. These vessels, which were named the Nord Hope and the Nord Horn, each have a deadweight of 158,000 tonnes and are equipped with a double hull. THE TANKER MARKET DURING 1999 Employment of the NTA fleet During the first half of 1999, the NTA fleet was mainly employed in the spot market. The VLCCs Argo Pallas and Argo Daphne are time-chartered out until November 1999 with an option for the charterer to extend the contract for six more months. The Suezmax vessel Nord Jahre Traveller is time-chartered out until October 1999. The Aframax vessels Nord Jahre Princess and North Pacific are time-chartered out until February 2000 and October 2001, respectively. Average net revenue, based on all calendar days during the period, including offhire and time-charter contracts Jan-Jun Jan-Jun Apr-Jun Jan-Dec USD/day 1999 1998 1999 1998 VLCC 27,600 32,800 23,600 29,800 ULCC 14,800 25,700 10,000 26,000 Suezmax 18,100 20,700 16,400 20,300 Aframax 15,500 16,700 15,200 15,800 The tanker market During the first half of 1999, the tanker market was weaker than during the same period of 1998. This deterioration was due to the oil production ceilings introduced by the Organization of the Petroleum Exporting Countries (OPEC). Since the production ceilings announced during 1998 proved insufficient to keep up oil prices, in March 1999 OPEC decided to cut production by an additional 6 percent or 1.7 million barrels per day. As a consequence of this action, the price of Brent oil doubled from USD 10 per barrel to USD 20 per barrel. Because of the production ceilings, freight rates also deteriorated sharply, especially during the second quarter of 1999. The average freight rate for VLCCs fell by more than 35 percent, compared to the first half of 1998. For Suez- and Aframax vessels, the decline was 24 and 12 percent, respectively. The VLCC market was hardest hit because about 80 percent of the latest production ceiling was imposed on oil producers in the Middle East, which is the main loading region for VLCCs. The decline in Middle Eastern oil output during the second quarter of 1999 was estimated to be equivalent to the shipping capacity of about 40 VLCCs, or about 10 percent of the active global VLCC fleet. If OPEC is to increase production again, lower oil inventories, higher oil consumption and continued higher oil prices are regarded as necessary. The buildup in oil inventories, which was one reason behind the strong tanker market in 1998, has now been replaced by drawdowns, since demand for oil is larger than oil output. Oil inventories are now rapidly shrinking. Oil consumption is expected to increase by 1.5 percent this year, because the countries of Asia have begun to recover following the economic crisis that began in 1997. Oil prices have gradually climbed throughout the summer. OPEC's criteria may therefore very well be met as early as during the autumn. This would also lead to a recovery in the tanker market. If current oil production ceilings should continue into next year, there is a major risk that certain oil producers cannot resist the temptation to boost their income by means of higher production at the expense of others, especially since Middle East oil production capacity exceeds current output by more than 30 percent, or 6 million barrels per day. This scenario, too, would mean a recovery in the tanker market, although with a time lag. Vessel prices Because both the tanker and dry bulk markets have been weak, order bookings to shipyards have declined. Newbuilding prices have consequently fallen, adversely affecting second-hand prices. Low newbuilding prices, excess shipyard capacity and strained finances due to the Asian crisis are factors that have led to discussions of a consolidation of the Japanese and South Korean shipyards. Scrapping of older tonnage has increased. In the VLCC and Suezmax segments, almost as many vessels have been scrapped as have been delivered from shipyards. In the Aframax size category, however, the number of scrapped vessels is considerably smaller than newbuilding deliveries, because there are fewer older vessels in this segment. EVENTS AFTER THE CLOSE OF THE REPORT PERIOD Discontinuation of dry bulk operations In light of continued weak dry bulk market prospects, during 1998 NTA decided to discontinue its dry bulk operations. A provision for the estimated discontinuation cost was made against 1998 net income. As part of the discontinuation process, NTA has reached an agreement on termination of its time charter on the vessel United Respect. This transaction is expected to be completed by late August. The remaining dry bulk vessel, the World Nord, which NTA hires on a time charter, will be redelivered to its owner late in 1999. The provision made in the 1998 financial statements for the entire cost of discontinuing NTA's dry bulk operations is believed to be sufficient. OTHER EVENTS The millennium shift All essential equipment on NTA's vessels has been inventoried with respect to their function on critical dates around the transition to the year 2000. This study has not revealed any critical technical problems. Older systems and components have undergone fine-tuning and upgrading. Functional tests were conducted on board, and safety procedures for alternative operation of systems in case of any disruptions in their function have been devised and incorporated into the vessels' safety plans and drill procedures. INFORMATION SCHEDULE FOR 1999 -The Interim Report for the first nine months will be published on October 28, 1999. -The Year-End Report of 1999 results will be published on February 23, 2000. NTA's web site contains publicly available information about the Company and freight rates. Current press releases, Interim Reports etc. are also published there. The address is: www.ntargonaut.com Stockholm, August 19, 1999 N&T ARGONAUT AB (publ) Anders Berg President and CEO Any questions about this Interim Report for January-June 1999 can be answered by Anders Berg, President and CEO, or Björn Hansson, CFO, tel. +46 8 613 19 00. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/08/19/19990819BIT00430/bit0001.doc The full report including figure http://www.bit.se/bitonline/1999/08/19/19990819BIT00430/bit0002.pdf The full report