A YEAR OF TRANSITION

After several years of losses, we launched Project Felix at the beginning of 2015. The mandate for Project Felix was simple–Odfjell had to figure out a way of making a reasonable returnon our capital within our shipping activities, also in the tough market environment that we had been facing for several years.

This meant that Project Felix became much more than a cost saving exercise. Apart from achieving significant cost savings, we have also during the year implemented a wide range of improvement measures, including optimisation of how we trade and operate our fleet, energy and fuel economising, right-sizing of our organisation and other initiatives. The list of initiatives counted around 400 items, all with the aim of strengthening our competitive position for our chemical tankers. As good examples of what we have achieved, I can mention that we have reduced the daily Opex for our chemical tankers by 19% in 2015 compared to 2014, and we have reduced the average fuel consumption for converted ships with above 20%.

Making so many changes has been a challenge and in many aspects also a painful process for the organisation, since we have had to say goodbye to many valuable colleagues, but the initiatives were necessary to ensure that Odfjell would have a sustainable future.

Project Felix has been implemented with great success for the Company. In February this year we announced that we had reached our target of savings in excess of USD 100 million on an annual basis, which significantly improves our competitive position... but we are not declaring victory just yet!

Our markets are difficult to predict, and the supply of ships continues to grow, although the ordering of new chemical tankers has been reduced substantially. The demand side is very dependent on what happens to the world economy, and also here the signals are mixed. The bottom line for Odfjell is that we cannot rely on the markets to help us, so we have to focus on how we best utilise our markets, no matter what they offer.

This means that the spirit of Project Felix lives on and the hunt for efficiencies, new improvements, and new ways of engaging our markets continue at full speed.

A key objective for us is that cost-cutting and focus on operational efficiency shall not jeopardise our QHSE performance. On the contrary, we see strong QHSE results as a prerequisite for proper and sustainable operations. I am happy to see that we seem to be on the right track also in this field, with a trend that shows fewer personnel injuries, spills, and damages to facilities and cargo. To get an even stronger focus on this, we have linked the QHSE responsibility closer to the line organisation. The business units now have an even more direct responsibility to ensure proper and safe operations, which will always be a main priority for us in Odfjell.

2015 also brought substantial improvements of our financial results, with an EBITDA for the company as a whole almost twice of what it was the year before. The bottom line net result was still negative, and that is never OK – but during 2015 we suffered significant accounting losses from bunker hedging contracts entered into in 2014 due to the steep fall in the oil prices. Had it not been for these hedging contracts, Odfjell had delivered a positive net result in 2015, so the results from our underlying operation is improving.

The results for our Chemical Tankers improved compared with the previous year, on the back of a basically flat chemicals freight market but benefitting from the combination of reduced costs and lower bunker prices. We were also helped by the strong product tanker market, which in addition to boosting our voyage results with clean petroleum products (CPP) cargoes also made this market more attractive for swing tonnage and thus,  ontributed to a tighter supply/demand balance in the chemical tanker segment. This effect waned towards the end of the year with the weakening of the CPP market. Going forward we do not expect that the chemicals freight market will improve substantially in the short-term horizon. With an orderbook of close to 25% of the deep-sea core fleet to be delivered over the next 2-3 years, the fleet expansion will most likely off-set the forecasted growth in demand in this period. However, we are well positioned to face the market challenges, with our varied and versatile fleet of sophisticated chemical carriers, our wide contract portfolio and our professional and dedicated organisation all over the globe. Hence, despite a somewhat uncertain market outlook, we expect our chemical tanker results to improve in 2016, based on a more competitive cost structure and the expiry of the loss-making bunker hedges.

Also our Tank Terminals division achieved improved results, with positive EBITDA for Odfjell Terminals as a whole. Most terminals have delivered stable, positive net results during the last years, and in September also our terminal in Rotterdam, OTR, reached a positive monthly EBITDA, for the first time since the temporary shut-down in 2012. OTR has in 2015 more than doubled the distillation capacity of its largest column, and has commitments for new contracts that will ramp up during the first half of 2016 that will utilise the majority of this capacity. The terminal is running at close to full occupancy of commercially available storage capacity. Developments at our other terminals are also satisfactory where we continue to be the terminals of choice for customers with focus on product stewardship. We expect Odfjell Terminals 2016 results to improve on strong distillation activity and better storage results at OTR, and slightly improving results for the other terminals as new capacity has and will continue to come on line.

Odfjell Gas continues to be a rather marginal business venture for Odfjell, currently with our two 9,000 cbm LPG/Ethylene carriers trading in an external pool. Further development of our gas carrier business will depend on the delivery of the eight vessels of 17,000 cbm and 22,000 cbm that we have on order in China together with our joint venture partners. This newbuilding programme is substantially delayed, and we are discussing with the yard how to reach a satisfactory solution to these delays.

Our key focus in 2016 will be to continue building strength, enabling us to secure continued development of Odfjell and to allow for asset renewal and expansion. This includes initiatives to further improve our cash situation and balance sheet while at the same time emphasising operational improvements and quality of service. Our aim is to become the most efficient integrated chemical transportation company in the world. We are also committed to our terminals business, as a great stand-alone infrastructure business but even more attractive for us with its potential for synergies with the chemical tankers and how it can stabilise the impact on our financial results in the face of the more fluctuating tanker markets.

All in all, I believe that we will continue the positive development and further improve the results also in 2016 and the years beyond... so the journey towards making Odfjell a stronger and more competitive company continues!