The Norwegian oilfield services analysis 2015

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1 The Norwegian oilfield services analysis 215

2 Contents Summary 4 Introduction 6 Key findings Company performance relative to size 9 EBITDA analysis 1 The reservoir/seismic segment 12 The exploration and production drilling segment 14 The engineering, fabrication and installation segment 18 The operations segment 23 The decommissioning segment 26 Geographical distribution 27 Activity going forward 28 Comparison of NCS and UKCS 32 Methodology 34

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4 Summary Norway OFS revenues and employees Revenue No. of employees NCS investments and oil price development Oil price (USD per barrel) Investments, excluding exploration Oil price (Brent) USD/barrel Source: Norwegian Petroleum Directorate No. of employees (thousands) Investments (NOK b) The Norwegian oilfield service sector has become one of the primary industries in Norway The oilfield service (OFS) industry is one of Norway s largest industries, with more than 1,1 companies generating total revenues of NOK56b by around 131, employees. The industry has grown significantly in recent years: total Norwegian OFS revenues increased by 42.8% from 21 to 214, and the number of employees increased by 22.4%. Growth has been stimulated by three themes Firstly, part of the growth can be attributed to exports. There has been an increase in global spending on offshore exploration and production (E&P) equipment, where Norwegian OFS companies are key suppliers. Global spending was fueled by both increasing global demand for petroleum products and the oil price reaching over US$11 per barrel. E&P companies set their investment agenda to focus on and commit to offshore exploration, due to both the high oil price and the significant exploration successes in the last 2 years in the Gulf of Mexico, West Africa and Brazil, as well as in the North Sea, offshore Canada, Australia and Southeast Asia. Secondly, in recent years there has been high activity in both exploration and field development on the Norwegian continental shelf (NCS). These developments include Aasta Hansteen, Edvard Grieg and Goliat. In 214, estimated investments in field development and license related exploration in 56 exploration wells reached NOK76b and NOK31b, respectively. High exploration activity has driven growth in the reservoir/seismic and E&P drilling segments, with subsequent field development success driving growth in the engineering, fabrication and installation (EFI) segment. Norway OFS segments size and growth % Reservoir/seismic 1.9% Exploration & production drilling 9.1% Engineering, fabrication & installation 6.6% Operation 3.7% Decommissioning 12% 1% 8% 6% 4% 2% % Revenue growth Lastly, the growing number of offshore installations on on-stream fields, and the focus on increased recovery and lifetime extension for mature fields, has led to high demand for modifications and upgrades to producing fields. In 214, an estimated NOK95b capex was invested in producing fields, driving revenues in the E&P drilling, EFI and operation segments. All of the OFS segments have recorded growth In 214 the OFS industry overall recorded a 4.3% growth, with growth in all segments except decommissioning. The single largest segment comprised engineering, fabrication and installation, valued at NOK244b in revenues. However, the highest growing segments have been reservoir/seismic and exploration and production drilling. Revenue 5-year CAGR 4 The Norwegian oilfield services analysis 215

5 OFS growth was challenged in 213, augmented by the oil price collapse in 214 Toward the end of 213, a shift was observed in the E&P companies emphasis from volume growth to profitability. According to some E&P majors, cost inflation caused increasing pressure on the profitability of new field developments. Simultaneously, several oil companies struggled to maintain positive free cash flow, resulting in announcements of major cost reduction programs by E&P operators during the first half of 214. When the oil price abruptly dropped to around US$5 per barrel toward the end of 214, pressure to cut costs further increased. As the oil price continued to hover between US$4-5 per barrel during 215, E&P companies have had to take a second look at their asset portfolios. This has resulted in stricter project prioritization and comprehensive improvement programs to realize capex and operating cost savings. However, due to contract lag and active project portfolios, 214 still turned out to be a year of positive revenue growth for Norwegian OFS companies. The OFS industry now has overcapacity issues High activity and stable growth led the OFS industry to invest in building up resources in terms of employees and assets. In 214, as E&P industry indicators and sentiment turned negative, many asset light segments, such as EFI and maintenance and modifications (M&M), began to reduce staff to match capacity against declining demand. Within the asset heavy segments, such as seismic equipment, rig companies and offshore logistics, capacity is less flexible resulting in companies facing challenges in rightsizing their asset bases. This is demonstrated by the stacking of offshore vessels, the cancellation of new rig constructions and the drop in day rates for both drilling rigs and offshore vessels. From November 214 to October 215, the rig order book for floaters was reduced by 27%. During the same period, spot day rates for offshore supply vessels were reduced by more than 75% and utilization is now at very low levels. A rebound in demand is unlikely in the short term According to Wood Mackenzie, global E&P capex is estimated to decrease by 4% from 214 to 216, impacting both the domestic market and the export market for the Norwegian based OFS industry. Even if the oil price were to drastically increase and E&P sentiment were to shift back to growth and investment, there would be a significant lag in commissioning of new projects. In our forecast for the Norwegian OFS industry, we expect total OFS revenues to remain considerable but with a reduction from the 214 peak to the activity levels experienced by the Norwegianbased OFS industry during 211. NCS investment forecast in 214 vs. 213 Investments (NOK b) Forecast as per 214-Q1 Forecast as per 215-Q1 Source: Norwegian Petroleum Directorate OFS employees and NCS investments, operating costs and exploration costs Costs (NOK b) NCS investments and costs No. of employees Source: Norwegian Petroleum Directorate, EY analysis OFS revenue and profitability development Revenues (NOK b) Source: EY analysis Revenues EBITI-margin ROCE % 16% 14% 12% 1% 8% 6% 4% 2% % No. of employees (thousands) Profitability The Norwegian oilfield services analysis 215 5

6 Introduction Welcome to the 215 version of EY s annual review of the Norwegian oilfield service industry. In this report, we quantify the size and development of this diverse industry and analyze the dynamics across the oilfield service s value chain. EY has conducted the oilfield service (OFS) analysis every year since 26, and the report has been developed and expanded each year in line with the growth of the industry it seeks to cover. In addition, EY also issues annual reports covering the UK and the Dutch based OFS industries. In this 215 report, the database has been updated to reflect the addition of new legal entities to the empirical data set, bringing the total number of Norwegian registered OFS companies to over 1,1. A new section comparing the highlights from the UK and the Norwegian OFS sectors has also been added. We hope that you find the report useful and we welcome any feedback that you may have. NCS oilfield service revenue Revenue, NOK b Inclusion criteria A company is defined as a Norwegian OFS company if: At least 5% of its turnover is generated in the oil and gas sector and It is a Norwegian-registered legal entity Value chain segments Reservoir/seismic Exploration and production (E&P) drilling Engineering, fabrication and installation Operations Decommissioning Company size definition Large companies: revenues above NOK1b Medium-size companies: revenues between NOK1m and NOK1b Small companies: revenues below NOK1m Methodology In order to analyze economic activity by geographic location and across the OFS value chain, information from stand-alone financial statements of individual legal entities has been used. Where annual reports were not available by the time this report was prepared, 214 figures have been modeled based on companies previous year financial statements. Many of the companies will have activities in several geographic regions and offer products and services in more than one segment of the OFS value chain. However, each company has been linked to only one geographic region, based on its main business address, and to only a single segment of the OFS value chain, based on its main activity within the sector. For larger industrial conglomerates with multiple daughter companies, each of the group companies has been allocated to its respective best fit OFS segment. Please also note that our chosen methodology does not capture or eliminate intercompany transactions or revenues in holding companies registered abroad The Norwegian oilfield services analysis 215

7 214 was a record year in terms of Norwegian OFS revenue. The primary drivers of growth in 214 were the reservoir/seismic and exploration and production drilling segments. The Norwegian oilfield services analysis 215 7

8 OFS industry revenue remained strong in 214, but profitability under pressure OFS total revenues OFS total workforce Number of employees Operating expenses Expenses (NOK b) Profit margins 14% 12% 1% 8% 6% 4% 2% % 11.8% , , % 11.3% % Revenues up from 213 In 214, the combined turnover of the OFS industry was NOK56b, an increase of 4.3% compared with 213. However, this marks a decline in growth rate, as highlighted by a 5-year CAGR of 8.3%. The drivers of growth in 214 were the reservoir/seismic and exploration and production drilling segments. The engineering, fabrication and installation segment and the operation segment remained relatively flat. The decommissioning segment experienced a sharp decline in revenues in 214. Number of employees virtually unchanged The industry experienced moderate growth of.3% in the number of directly employed professionals in 214. This is a strong contrast to previous years where workforce growth was consistently in the 5%-1% range. The announced job cuts and layoffs during 214 were estimated to be 5,. The slight increase in 214 was entirely driven by the exploration and production drilling segment, which increased by approximately 1,8, offsetting workforce reductions in all the other segments. Small increase in operating cost items The industry s three main operating expenses increased in 214, leading to a.5% decrease in the EBITDA margin: Cost of goods (COGS) increased by 5.1% from 213 to 214, driven primarily by the reservoir/seismic segment. Labor cost increased by 3.9%, driven by the higher number of employees in the exploration and production drilling segment. Other operating cost increased by 5.9%. Large increase in impairment costs While the EBITDA margin declined by.5% to 11.3%, the EBIT margin declined by 2.3% to 5.4% in 214. The disproportionate reduction in EBIT margin is due to impairments in 214, which increased from NOK.5b in 213 to NOK8.6b in 214, primarily driven by the exploration and production drilling and the engineering, fabrication and installation segments. This increase in impairments may signal a lowered expectation of future profitability by the industry, for example write-downs on goodwill and recent acquisitions that may not yield future profits to the same extent as originally expected. EBITDA (%) EBIT (%) 8 The Norwegian oilfield services analysis 215

9 Small and medium-sized companies challenged on profit The Norwegian OFS industry includes 1,113 companies, of which 5.1% are characterized as small (annual revenues less than NOK1m), 41.2% as medium (annual revenues between NOK1m and NOK1b), and 8.7% as large (annual revenues more than NOK1b). There is considerable diversity in companies with respect to revenues and the number of employees. Large companies in the industry generally provide a wide range of services across the value chain, and many of these are global players. Small companies tend to be more specialized and focus on a narrower part of the value chain and/or specific technologies. In 214, the OFS industry directly employed 131, people and had a combined turnover of NOK56b. The OFS industry is therefore of great significance to the Norwegian economy, directly employing 4.9% of the Norwegian workforce, with an aggregated value creation (EBITDA + labor cost) of NOK184b, representing 6.4% of the Norwegian mainland GDP for 214. Key financials per year and size segment (NOK b) Employees (thousands) P&L Revenues Cost of goods Labor cost Other operating cost EBITDA EBIT Ratios Avg. EBITDA% -Small 6.5% 6.3% 9.2% 7.7% 6.1% Avg. EBITDA% -Medium 16.3% 14.8% 14.3% 14.9% 12.7% Avg. EBITDA% -Large 13.2% 12.1% 11.9% 1.7% 11.% Avg. EBITDA% -All 13.8% 12.6% 12.6% 11.8% 11.3% Profit margins for the industry have remained relatively stable over the period However, the slight decrease in EBITDA in 214 has primarily impacted the small and medium sized companies, which have seen EBITDA rates decline by 1.6%- units and 2.2%-units respectively. Historically medium sized companies tended to be more profitable than its smaller and larger counterparts, but the EBITDA gap of medium companies as compared to large companies narrowed in 214. Revenues and number of employees by company size in , Revenue (NOK m) , 4, 2, No. of employees <1 NOK m 1-1, NOK m >1, NOK m Revenue No. of employee The Norwegian oilfield services analysis 215 9

10 Cost inflation on goods sold has negatively impacted EBITDA margins in the OFS industry OFS total EBITDA EBITDA (NOK b) % 14% 12% 1% 8% 6% 4% 2% % EBITDA Aggregated EBITDA increased by 16.6% from 21 to 213 before declining by.8% in 214. Aggregated EBITDA totaled NOK56.9b in 214, compared with NOK57.4b in 213. EBITDA margins have declined steadily from 13.8% in 21 to 11.3% in 214. EBITDA drivers 6% EBITDA EBITDA-margin EBITDA drivers Revenue and labor costs are positively correlated during the time period, with growths of 42.8% and 41.4% respectively. Index (21 = %) 4% 2% % Revenue index Cost of goods index Labor cost index Other cost (excl D&A) index Value creation in total and per employee COGS, which declined in the aftermath of the financial crisis in 29, has since outpaced revenue growth. COGS has increased by 57.3% since 21 and has negatively impacted the industry EBITDA for 213 and 214. COGS inflation was mainly driven by larger companies across the segments, and was a consequence of group structures and associated intercompany pricing arrangements. Value creation Value creation (EBITDA + labor costs) grew from 21-14, increasing by 32.7% over the period. The growth in value creation slowed in 214 (2.4% increase). Value creation (NOK b) Value creation Value creation / employee Number of employees and labor costs # employees (thousands) # employees Labor cost / employee Value creation per empl. (NOK m) Labour cost per empl. (NOK m) The growth in value creation per employee over the period was 8.4%, of which 1.8% occurred in 214. This growth was driven primarily by companies in the reservoir/seismic segment, which has seen a 12.1% increase in value creation per employee in the period. By comparison, the value creation per employee in the E&P drilling segment declined by 1.1% during the same period. Labor costs Total labor cost increased by 41.4% from 21 to 214, explained by an increase in both the labor force and in the cost of labor. During the same period, the labor force grew by 22.4%, reaching 131, in 214. Labor cost per employee grew at a slower pace of 15.5% over the period, an average of 3.1% per year, which corresponds with the overall wage inflation in Norway over the period. The increase in total labor cost should therefore be interpreted primarily as a result of increased activity in the sector and not as an increase in the relative cost of labor. 1 The Norwegian oilfield services analysis 215

11 The reduction in E&P spending will impact the Norwegian OFS industry and we project OFS revenues to decline by 25% from 214 to 216. The Norwegian oilfield services analysis

12 Reservoir/seismic activity growth plateaued in 214 Reservoir/ seismic Exploration and production drilling Engineering, fabrication and installation Operations Decommissioning About the segment The reservoir/seismic segment includes companies that operate seismic vessels for data gathering purposes, companies that analyze, interpret and display seismic data, and companies that supply equipment for gathering and analyzing seismic data. We have divided the segment into two sub-segments: 1. Seismic interpretation and consultants 2. Seismic equipment Key financials Segment composition (214) Number of companies Revenue EBITDA ROCE Revenue 2% 4% 35% 3% 25% 2% 15% 1% 5% % Segment highlights Companies in the reservoir/seismic segment are experiencing challenging market conditions relating to a significant mismatch between supply and demand. Oil companies are cutting E&P spending in preparation for a slow oil price recovery, while seismic vessel capacity has been increasing. The reservoir/seismic segment is at the front of the E&P value chain and is closely correlated with changes in oil price. It has therefore been considerably impacted by the capex and cost cuts being made by oil companies. There has been strong capacity growth in the segment, with investments in modern vessels and technology upgrades facilitating both significant increases in operational efficiency and higher quality data output for its customers. The effect of the market downturn on the companies operating in the segment includes decreasing utilization and increasing price pressure. Companies with limited vessel exposure are better positioned to quickly adjust to the new market conditions. The market conditions impacted revenue growth in 214, which was 4.5% compared to a CAGR of 1.3% from 21 to 214. The impact on existing contracts is likely to have been limited in 214, but as new contracts fail to appear in 215, the market conditions will be reflected more in the financial statements going forward % 79% Companies are focusing on reducing costs and capacity. The segment reduced its employees by a record 12.3% in 214 and several seismic companies announced fleet reductions and postponement and/or cancelations of new build contracts. Small < NOK 1m Large > NOK 1,m Medium NOK 1 1,m The sharp decline in ROCE from 212 to 214 can primarily be attributed to an increase in capital employed, indicating excess vessel capacity being used to invest in multi-client data libraries, which comprise the majority of the balance sheet growth. 12 The Norwegian oilfield services analysis 215

13 Seismic interpretation and consultants Seismic equipment Seismic interpretation and consultants The sub-segment includes companies that analyze and interpret seismic data and surveys, and provide related software and consulting services. Total revenues reduced by 2.9% in 214, declining by 4.% since the peak in 212. The drop in revenue can primarily be attributed to lower demand for seismic data interpretations, in addition to mergers with companies in other subsegments. The number of companies in the sub-segment has reduced from 18 in 212 to 11 in 214. There is a high degree of consolidation in the sub-segment, with the five largest companies accounting for 78.5% of revenues. A substantial increase in depreciation and amortization from NOK62.8m in 211 to NOK521.2m in 214, due to data library reclassification from inventory to intangible assets, substantially reduced the EBIT margin from 37.1% in 211 to 2.3% in 214. Subsequently the ROCE was reduced significantly from 64.1% in 211 to 3.6% in 214. The number of employees in the sub-segment was reduced by 36.9% from 62 in 212 to 38 in 214. Top five companies (214 revenues) 1. Fugro Multi Client Services AS 2. Landmark Graphics AS 3. Fugro Geotechnics AS 4. Geodata AS 5. Roxar Software Sol Key financials 3, 2,5 2, 1,5 1,,5, Revenue EBITDA ROCE 7% 6% 5% 4% 3% 2% 1% % Seismic interpretation and consultants Seismic equipment Seismic equipment The sub-segment includes Norwegian legal entities that operate seismic vessels, deliver equipment to the vessels and process and prepare the seismic data acquired for the E&P clients. Revenues in the sub-segment increased by a CAGR of 12.% from 21 to 214, with a growth of 6.4% in 214. The revenue growth was due to the increased multi-client library data sales in 214 combined with ongoing client project contracts. Sub-segment profitability improved significantly from 211 to 212, due to efficient implementation of new seismic data technology and increased productivity, resulting in an increase in revenue per employee. However, sub-segment profitability has since declined, with the EBITDA margin decreasing from 33.5% in 212 to 27.7% in 214, attributed to a substantial increase in COGS and other operational expenses. COGS has increased by 45.% since 212, likely as a result of excess vessel capacity used to invest in multi-client library data, also explaining the steeper year-on-year decline for ROCE. Top five companies (214 revenues) 1. PGS Geophysical AS 2. TGS Nopec Geophysical Company ASA 3. Dolphin Geophysical AS 4. Multiklient Invest AS 5. WesternGeco AS Key financials Revenue EBITDA ROCE 4% 35% 3% 25% 2% 15% 1% 5% % The number of employees in the sub-segment has decreased by 9.6% from 2,12 employees in 21 to 1,819 employees in 214. The Norwegian oilfield services analysis

14 Exploration activity was high in 214, resulting in a good year for E&P drilling Reservoir/ seismic Exploration and production drilling Engineering, fabrication and installation Operations Decommissioning About the segment The exploration and production drilling segment includes companies that own and/or operate drilling rigs, as well as companies that deliver systems, products and services to these rigs and the wells being drilled. We have divided the segment into three sub-segments: 1. Rig companies 2. Rig equipment 3. Well services Key financials Segment composition (214) Number of companies 87 Revenue EBITDA ROCE Revenue 19% 79% Small < NOK 1m Large > NOK 1,m Medium NOK 1 1,m 2% 25% 2% 15% 1% 5% % Segment highlights Companies in the exploration and production drilling segment have experienced sustained growth in the period 21 to 214. However, with the market shifting to significantly weaker demand (both globally and for the NCS), and with several rigs coming off longer-term contracts, and with an inflow of new builds, the segment is currently under considerable pressure. Compared to the reservoir/seismic segment, E&P drilling activity is cushioned against market cycles by longer term contracts. However, although segment revenues grew by 9.1% in 214, this is a considerable reduction from the 21.1% growth seen in 213. The EBITDA margin was stable year-on-year (13.7% in 213 to 13.9% in 214). This is attributed to a lower growth in personnel expenses (6.5%) and COGS (.9%) as compared to revenues (9.1%). The rig equipment sub-segment contributed the most to segment growth, with a growth of 18.%. Due to the long construction time (order-to-delivery) for new build rig equipment, changes in demand are expected to impact the financials after an months delay. The segment includes a total of 198 companies, of which the 28 large companies generate 79.2% of the segment revenues. NCS drilling activity Number of wells Development wells drilled from permanently placed drilling facilities Exploration wells Development wells drilled from mobile drilling facilities 14 The Norwegian oilfield services analysis 215

15 Rig companies Rig equipment Well services Rig companies The sub-segment includes companies that own and/or operate offshore drilling rigs. Few of the rig companies have their rig assets on Norwegian registered entities balance sheets, which somewhat limits the relevance of ROCE analysis. The sub-segment experienced a revenue growth of 6.7%, due to maintained high rig utilization of 93% at the end of 214. This is, however, a significant reduction from the revenue growth of 21.6% in 213. The sub-segment EBITDA margin remained stable at 16.2% in 214 compared to 15.8% in 213. Meanwhile, warm and cold stacking and market consolidation initiatives may be an opportunity to limit the oversupply effects in the short to medium term. The sub-segment includes 56 companies, of which 17 are large companies generating 76.% of the revenues. Top five companies (214 revenues) 1. North Atlantic Norway Ltd 2. Seadrill Offshore AS 3. Cosl Offshore Management AS 4. Transocean Offshore 5. Dolphin Drilling AS The number of employees increased by 2.% in 214. Revenue per employees increased by 4.5% year-on-year, while cost per employee increased by 3.3%. Due to existing contracts and high rig utilization, the announced initiatives to reduce the number of employees is expected to be observed in the 215 financial statements rather than those for 214. With rig companies being prepared for growth, the oil price reduction has significantly impacted the sub-segment. The current overcapacity, lower utilization and day rates is leading to rig stacking and extensive focus on operational cost reduction both on the NCS and globally. Key financials Revenue EBITDA ROCE 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % While rig utilization for the North Sea was at 93% in December 214, one year later it was at 66%. With several rigs on the NCS coming off-contract in the coming years, there is a risk of a further downward trend in utilization resulting in day rates at or below cash flow break-even levels in both the floater and the jack-up markets. A reduction in the number of active rigs on the NCS is occurring as a result of the low demand seen in 215 and expected in 216. The 37 active rigs on the NCS in 214 (average year) were reduced to 34 in 215. A significant number of rigs coming offcontract in 215 and 216 are older than 25 years and will need extensive upgrades to re-enter operations on the NCS. Despite the lackluster order flow toward the yards for rig new builds over the last 18 months, the current global order book still exceeds 2 units (25% of current available fleet) with planned deliveries in the period Moreover, the current oversupply trend in the operational fleet, as indicated by the utilization rates of 5%-6%, suggests a requirement to take a significant amount of aged tonnage out of the market permanently. NCS committed rigs Average number of rigs Firm contracts Contracts ending Contracts starting Despite the lackluster order flow toward the yards for rig new builds over the last 18 months, the current global order book still exceeds 2 units with planned deliveries in the period The Norwegian oilfield services analysis

16 Rig companies Rig equipment Well services Rig equipment The sub-segment includes companies that offer systems and equipment for drilling on rigs and topsides. Revenues in the sub-segment increased by 18.% in 214, with activity strongly dominated by export markets. The five largest companies accounted for 94.% of revenues in 214. The rig equipment sub-segment saw a 14.8% year-on-year increase in employees and contributed to a significant share of the employee inflow to oilfield services in 214. The sub-segment EBITDA margin increased from 11.9% in 213 to 12.4% in 214. However, profitability was reduced from the 16%-2% margin level in the period, mainly due to a significant COGS inflation. A substantial increase in capital employed through acquisitions and build-up of receivables and unbilled revenue caused the ROCE to decrease considerably from the peak in 211. The rig equipment companies have maintained their growth rate and profitability due to a relatively stable rig order book throughout 214. Going into 215, the global rig order book gradually reduced as units were delivered and new orders failed to appear. Currently companies see practically no new orders and are adapting with cost cuts and employee reductions to align capacity with expected future demand. The global rig order book in 214 started with 236 units and ended with 239 units, remaining relatively stable. However, due to a limited number of new orders since the second half of 214, the total global rig order book has declining continuously from 239 units in November 214 to 23 units in October 215. The highest impact is on floaters, where the number of units in the order book has decreased by 27%. Furthermore, only 69% of the floaters in the order book are firm orders. The jack-up order book has decreased by 4% compared to year-end 214. With limited new order volumes and a declining global order book, companies are initiating cost reductions and layoffs. Although minor initiatives were seen in 214, they have accelerated throughout 215 with significant employee reductions and internal production infrastructure consolidation, by means of shutting down satellite offices and factories. Further capacity optimization is likely as the order book continues to decline. There are limited signs of improvement in general offshore oil and gas activity in the short term, and if demand increases, the idle and available rigs are likely to be re-deployed prior to building new tonnage. This will result in an extended improvement lag for the sub-segment post a potential market recovery. Top five companies (214 revenues) 1. National Oilwell Varco Norway AS 2. Mhwirth AS 3. Cameron Sense AS 4. Odfjell Drilling Technology AS 5. Step Offshore AS Key financials Revenue EBITDA ROCE Global rig order book development Number of units Number of units October 215: 23 units Not firm Jack-ups Floaters Source: Morgan Stanley Jack-ups November 214: 239 units Floaters 7% 6% 5% 4% 3% 2% 1% % 16 The Norwegian oilfield services analysis 215

17 Rig companies Rig equipment Well services Well services The companies in the well services sub-segment offer products, services and integrated project management for drilling and well construction, as well as intervention and other operations over the life cycle of the well. The well services segment revenue grew year-on-year by 2.8% in 214, compared to 13.7% in 213. CAGR for the full period 21 to 214 was 8.8%. The number of employees increased by 6.2% in 214, compared to an increase of 4.3% the previous year. EBITDA decreased from 12.7% to 12.3% and ROCE decreased from 14.5% to 12.2% in 214 compared to 213. The decrease in EBITDA is due to a higher growth in both COGS and personnel expenses compared to revenues. The decline in the ROCE is a consequence of an increase in capital employed of 17.3%, while EBITDA decreased by.4%. The well services sub-segment includes 1 companies, with the five largest companies accounting for 61.1% of revenues in 214. The market share of the top 5 companies has remained relatively stable since 211. The lower right figure shows that, post their 211 increase in market share, the five largest companies have seen a substantially more negative EBITDA development compared to the other companies in the sub segment. This is likely to be a consequence of the contracting structures the larger suppliers have with the major operators, as the general activity level for the segment increased after the 29-1 downturn. medium-sized companies will see efficiency improvements by consolidation, and that structural shifts will follow suit so as to align the overall supply offering with the larger multi-national companies. Top five companies (214 revenues) 1. Schlumberger Norge AS 2. Halliburton AS 3. Baker Hughes Norge AS 4. Archer AS 5. Weatherford Norge AS Key financials Revenue EBITDA ROCE Revenue and EBITDA development, large vs rest % 2% 15% 1% 5% % 25% 2% With clients focusing on cost cuts and efficiency improvements, the well services sub-segment is experiencing decreasing market activity and the frame agreement contracts are being re-negotiated % 1% 5% EBITDA% As a consequence, the well services domain has responded with structural M&A initiatives, which challenge both the vertical oil and gas production value chain, as well as the traditional distinction between services companies and original equipment manufacturers (OEM). Moreover, these initiatives have also been extended to engineering and construction/installation companies in the form of joint ventures and alliances. The outcome will be larger contract scopes and less supply chain interfaces, and more efficient planning, engineering and installation project phases estimated to yield up to 4% project cost reduction for operators. What then remains are industry standards for cross vendor interoperability, as well as system lifetime operation and maintenance agreements avoiding single source arrangements Revenues, other EBITDA margin, other Revenues, five largest % EBITDA margin, five largest The well services domain has responded with structural M&A initiatives, which challenge both the vertical oil and gas production value chain, as well as the traditional distinction between services companies and original equipment manufacturers (OEM). It is also expected that the dominant number of small and The Norwegian oilfield services analysis

18 Demand for engineering, fabrication and installation remained strong in 214 Reservoir/ seismic Exploration and production drilling Engineering, fabrication and installation Operations Decommissioning About the segment The engineering, fabrication and installation segment includes Norwegian legal entities involved in equipment supply, manufacturing, construction and installation of offshore oil and gas production units, both surface (topside) and subsea. We have divided the segment into five sub-segments: 1. Subsea 2. Larger EPCI/yards 3. Shipyards 4. Consultants and engineering houses 5. Workshops and product suppliers Key financials Segment composition (214) 29 Number of companies Revenue EBITDA ROCE % Revenue 67% Small < NOK 1m Large > NOK 1,m Medium NOK 1 1,m 5% 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Segment highlights The engineering, fabrication and installation segment is the single largest OFS segment, comprising 5% of the Norwegian registered OFS companies, and generating 48% of the overall 214 OFS revenues. Market drivers include capex spending on the NCS, modification projects on existing producing infrastructure and the products, equipment and systems export to rigs (marine and utilities), offshore vessels and international topside projects. Despite the challenging backdrop in 214, the segment posted a modest uptick of 3% in aggregated revenues. During the period 21-14, revenues grew by 55.4% and the number of employees grew by 22.%. Profitability has been under pressure throughout the period, with the EBITDA margin decreasing from 8.9% in 21 to 5.9% in 214. Meanwhile the ROCE decreased from 18.% in 21 to 9.9% in 214. The negative profitability trend suggests that the overall segment did not capture any bottom line effects of the strong market period The reduction in oil price has significantly altered the E&P spending outlook. A low oil price combined with relatively high cost levels on the Norwegian continental shelf poses a challenge for the oil companies and the supply industry going forward. To regain competitiveness Norwegian EPCI companies are currently cutting costs through streamlining, downsizing and increasing collaboration. NCS capex Capex (NOK b) Fieds in production Under development Discoveries Source: Norwegian Petroleum Directorate 18 The Norwegian oilfield services analysis 215

19 Subsea Larger EPCI/yards Shipyards Engineering consultants Workshops and product suppliers Subsea The subsea sub-segment includes companies that engineer and fabricate subsea equipment and companies within subsea umbilicals, risers and flowlines (SURF) and inspection, maintenance and repair (IMR). Subsea has developed into an important sector on the NCS. The majority of the fields developed on the NCS over the last ten years have been developed partly or fully with subsea technologies. The substantial growth in subsea developments is mainly driven by a number of smaller discoveries, discovered by means of the awards in predefined areas scheme (APA), where the regulator re-issues licenses in mature areas. This development is evident by the strong growth in subsea revenues of 66.6% since 21 (CAGR of 13.6%). High subsea capex growth, both on the NCS and for deepwater export markets such as Brazil, West Africa and the Gulf of Mexico (GOM), has been the main growth driver. Substantial exposure to the deepwater developments cycle is a major challenge for the international subsea market going forward. With the oil price remaining below US$5 per barrel, it will be a challenge to maintain capital allocations in deepwater as oil companies are set to favor less capital intensive alternatives, that have lower complexity and project risk. EBITDA has been relatively stable since 21, indicating that the oil price drop is yet to impact profitability within the subsea segment. Volatility in the ROCE is predominantly related to build up of receivables and unbilled revenue in the asset-heavy SURF niche. Top five companies (214 revenues) 1. FMC Kongsberg Subsea AS 2. Aker Subsea AS 3. Subsea 7 Norway AS 4. Technip Norge AS 5. Vetco Gray Scandinavia AS Key financials NCS subsea capex Capex (NOK b) Revenue EBITDA ROCE 18% 16% 14% 12% 1% 8% 6% 4% 2% % Subsea developments have increased in capital intensity over this period. Subsea costs have increased significantly, partly as a consequence of more challenging operating conditions and increasing field remoteness, complexity and bespoke engineering, and partly due to increased traceability requirements of components and testing, documentation and quality assessment of equipment. The cost inflation challenges the competitiveness of subsea solutions. In response to the subsea cost inflation, and the cost of intervention campaigns for subsea wells, operators are assessing alternatives such as unmanned wellhead platforms for field developments with applicable water depths. Onstream Under Development Technical reserves Probable Development Ceased Production To regain competiveness, the subsea contractors are reducing planning, engineering and installation costs by increasing collaboration and forming alliances. To regain competiveness, subsea contractors are reducing planning, engineering and installation costs by increasing collaboration and by forming alliances. Subsea installation companies and equipment providers are aiming to simplify system interfaces and reduce overall complexity. In addition several of the major subsea companies have downsized in 215. These and other efficiency measures have contributed to lowering subsea costs by 2%-3% on several new developments. The Norwegian oilfield services analysis

20 Subsea Engineering consultants Larger EPCI/yards Shipyards Workshops and product suppliers Larger EPCI/yards The sub-segment includes companies that offer engineering, procurement, construction and installation (EPCI) of production and processing modules and facilities. Companies in the sub-segment are also major maintenance and modification contractors for offshore topside facilities and onshore processing and receiving terminals. The larger EPCI/yard sub-segment experienced strong revenue growth of 97.7% from 21 to 213, before declining by 13.5% in 214. The negative market trend in 214 was initially driven by E&P s cost cutting regimes and saving programs. Intensified price competition resulted in lower EBITDA margins (2.7% in 214 compared to 4.7% in 213) and lower ROCE. COGS, as a percentage of revenues, increased from 46% in 212 to 55% in 214. The increased price competition was due to elevated presence from Asian yards. During the period, Asian yards and the increased in COGS was due to increased use of contracted personnel in the boom period Asian yards won the majority of significant construction and installation projects in the period, including Gina Krog, Valemon, Ivar Aasen, Dagny, Martin Linge and Aasta Hansteen. However, Norwegian based OFS companies still delivered equipment, modules, jackets and hook-ups services to these projects, in some cases estimated to be 5%-6% of the total project value. Labor costs per employee and revenues per employee both showed volatility in the period. In 213 the labor cost per employee decreased by 22.4%, while the revenue per employee increased by 15.4%. The trend reversed in 214, when the labor cost per employee increased by 2.2%, while the revenue per employee declined by 9.3%. Overall the increase in the unit labor cost in Norway outpaced the corresponding increase in peer countries, as shown in the right graph, and poses a challenge for labor intensive sub-segments going forward. In 214 the number of employees in the sub-segment decreased year-on-year by 4.7% to 9,854 employees. The labor reduction programs intensified in 215. The oil price reduction, starting in 214, further affected the EPCI/yard segment as the focus on cost translated into lower margins. Project cancellations, postponements and significant reductions in maintenance scope further added to the short and medium term market challenges for the sub-segment. companies, partly due to cost overruns and delays affecting several of the Asian construction projects. Among the projects being awarded to Norwegian players is the 4 platforms Johan Sverdrup phase 1 development project, where 2 out of 4 topsides and 3 out of 4 jackets went to Norwegian based EPCI companies. Top five companies (214 revenues) 1. Kværner Stord AS 2. Aibel AS 3. Westcon Yards AS 4. Rosenberg Worleyparsons AS 5. Coast Center Base AS Key financials Unit labor cost (indexed) Index (year 21=1) Norway Korea Revenue EBITDA ROCE 25% 2% 15% 1% 5% % Germany United Kingdom Project cancellations, postponements and significantly reduced maintenance scope further add to the short and medium term market challenges for the EPCI/yards sub-segment The extensive use of Asian yards reduced in 215 as the majority of construction projects were awarded to Norwegian EPCI 2 The Norwegian oilfield services analysis 215

21 Subsea Larger EPCI/yards Shipyards Engineering consultants Workshops and product suppliers Shipyards The sub-segment includes shipyards that construct offshore vessels such as platform supply vessels (PSV), anchor handling tug supply vessels (AHTS) and offshore subsea construction vessels (OSCV). The newbuild offshore vessel market is of significant importance for Norwegian-based shipyards. Since 212, offshore vessels have accounted for more than 8% of the entire order backlog for Norwegian shipyards. As the demand for offshore vessels declined in 214, as shown in the lower right graph, the total order backlog fell from NOK36.6b in 213 to NOK24.1b in 214. Ship yard revenues decreased in the period as demand for new vessels declined after the financial crisis. Revenues have since rebounded with increased demand for more efficient vessels and fit for purpose design, resulting in a 24.3% revenue growth in the period Year-on-year revenue growth in 214 amounted to 3.3% while the number of employees decreased by 3.%. In contradiction to revenues, EBITDA margins and the ROCE both peaked in 211. Actual EBITDA also peaked in 211, which indicates that profitability is sensitive to activity levels and order intake rates. Lower activity levels allowed the shipyards to focus on project management and efficient execution. COGS, as a percentage of revenues, increased from 74% in 211 to 85% in 214. The reduction in the ROCE since 211 can be explained by both reduced profitability and by a 117.% increase in capital employed in the period, primarily due to balance sheet build-up of receivables and unbilled production. The short- to mid term outlook for Norwegian shipyards looks challenging with ship orders in 215 projected at the lowest level since 25. The oil price decline has led to a reduction in demand for offshore supply vessels, followed by an oversupply of vessels and reduced charter rates. As a result, the total number of stacked operational vessels on the NCS grew close to 1 during 215 the majority being PSV and AHTS vessels resulting in a poor climate for investing in new vessels. The combination of a reduction in global demand in offshore support vessels, with the current level of vessels under construction, has created an oversupply situation that will take time to bring back into balance. Similar to the offshore drilling rig situation, there will be a considerable time lag between a potential oil price recovery and the time when market balance is restored. Thereafter yards will start to receive orders again for offshore support vessels. shipyards are increasing their focus on efficiency improvements, cost reduction and monitoring counterparty risk and cash conservation in order to handle the current and short term market outlook. Top five companies (214 revenues) 1. Vard Group AS 2. Kleven Verft AS 3. Myklebust Verft AS 4. Ulstein Verft AS 5. Simek AS Key financials Revenue EBITDA ROCE Order backlog Norwegian shipyards Order value (NOK b) Order backlog year-end 3% 25% 2% 15% 1% 5% % 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Share of offshore vessels Source: Norwegian Shipbuilders Sales and Marketing organization Similar to the offshore drilling rig situation, there will be a considerable time lag between a potential oil price recovery and the time when market balance is restored. Thereafter yards will start to receive orders again for offshore support vessels. Meanwhile, and in the wake of the challenging market situation, The Norwegian oilfield services analysis

22 Subsea Larger EPCI/yards Shipyards Engineering consultants Workshops and product suppliers Consultants and engineering houses The engineering consultants sub-segment includes companies that supply skilled personnel and consultants to the E&P operators and OFS companies. Revenues grew by 47.9% from 21 to 214 (CAGR 1.3%), compared to a corresponding growth in the number of employees of 21.9%. This indicates that engineering consultancy companies increased their capacity by offering third-party stand-alone consultants to their clients. In 214 revenues grew year-on-year by 3.9% while the number of employees decreased by 1.9%. The sub-segment experienced increases in labor costs at a CAGR of 3.% for labor cost per employee in the period 21 14, as compared to revenues per employee, which had a CAGR of 5.%. This resulted in a stable profitability over the period and, with improved capital discipline, a corresponding positive ROCE trend. The focus on cost since the beginning of 214 impacted the consultant houses negatively in terms of activity level. Consequently, staff reduction intensified in 215, which may indicate a reduction in revenues for this segment going forward. Top five companies (214 revenues) 1. DNV GL AS 2. Aker Engineering & Technology AS 3. Frontica Business Solutions AS 4. Wood Group 5. Omega AS Key financials Revenue EBITDA ROCE 3% 25% 2% 15% 1% 5% % Subsea Larger EPCI/yards Shipyards Engineering consultants Workshops and product suppliers Workshops and product suppliers Companies in the workshops and product suppliers sub-segment design, develop, fabricate and sell products and systems to offshore installations, rigs and vessels. The revenues increased by 25.% in the period (CAGR 5.7%), while the year-on-year revenue in 214 increased by 5.1% up to NOK89.2b. Profitability has declined steadily since 21, with EBITDA reduced from 1.9% in 21 to 6.% in 214. The reduction in profitability is primarily due to increasing price pressures and cost inflation (primarily in COGS). COGS, as a percentage of revenues, increased from 53.4% in 21 to 56.9% in 214. Meanwhile labor costs have increased by 26.4% in the period 21 to 214, driven by both an increased number of employees and increased labor cost per employee. The number of employees increased by 11.5% in the period, while labor cost per employee increased by 13.3%. Top five companies (214 revenues) 1. Rolls-Royce Marine AS 2. Kongsberg Maritime AS 3. Wartsila Norway AS 4. Wärtsilä Oil & Gas Systems AS 5. Bergen Engines AS Key financials The ROCE has declined steadily from 23.8% 21 to 11.6% in 214, heavily impacted by the decline in profitability in addition to a 28% increase in capital employed. The increase in capital employed mainly related to build-up of inventory and work in progress balance items % 2% 15% 1% 5% % Revenue EBITDA ROCE 22 The Norwegian oilfield services analysis 215

23 Offshore logistics and M&M started seeing the effects of the reduced oil price in 214 Reservoir/ seismic Exploration and production drilling Engineering, fabrication and installation Operations Decommissioning About the segment The operations segment includes entities that support oil companies in the production phase, providing services such as offshore logistics, modification and maintenance services and production equipment and services. Segment highlights Revenues in the operations segment was stable with a modest growth of.3% from 213 to NOK75.b in 214. Profitability remained stable with an EBITDA margin of 16.2% and a ROCE of 6.8% in 214. We have divided the segment into 3 sub-segments: 1. Offshore logistics 2. Maintenance and modification 3. Production Key financials Segment composition (214) Revenue EBITDA ROCE 25% 2% 15% 1% 5% % The offshore logistics sub-segment experienced only a minor decrease in revenues. It was only toward the end of 214 that the supply vessel sector started to experience the effects of declining demand, manifested by declining utilization and a sharp drop in spot market rates. In 214, the maintenance and modification (M&M) segment experienced reductions in revenues as a result of the cost reduction programs of E&P companies. Despite work force reduction initiatives, the M&M segment was not able to keep up with the decline in demand, and its year-on-year EBITDA margin declined from 5.9% to 3.3% in 214. The declines in offshore logistics and M&M were offset by an increase in the production segment, which continued to grow with stable EBITDA margins into 214 and appeared to be relatively unaffected by cost reductions. With the NCS greenfield project portfolio now starting to come on-stream, market demand remains robust, however it is expected that the focus on cost will add pressure on margins going forward. Number of companies Small < NOK1m Medium NOK1 1,m Revenue 9% 42% 49% Large > NOK1,m Production on the NCS Annual production (mmboe) Oil Gas NGL Condensate Source: Norwegian Petroleum Directorate The Norwegian oilfield services analysis

24 Offshore logistics Maintenance and modification Production Offshore logistics The sub-segment includes companies that own offshore vessels, such as PSVs, AHTSs and OCSV, as well as helicopter logistics and supply bases. Revenues in the offshore logistics segment reached NOK37.8b in 214, a decrease of 1.1% from 213. Activity levels were maintained for offshore supply vessels while activity increased in helicopter transportation. The stable performance of the segment in 214 is of little surprise, as OSV activity in the North Sea remained strong through the majority of 214, with utilization and rates at similar levels to that of 213. The global OSV fleet increased by circa 2 vessels in 214. However, toward the end of 214 and accelerating in 215, the OSV market experienced a slump in demand as E&P companies reduced activity primarily related to exploration and development, leading to an oversupply of vessels and a drop in day dates in the spot market. This was especially evident for smaller vessels. From a capital perspective, vessel acquisitions have been financed with an increasing amount of equity in recent years. Consequently, the overall sub-segment equity ratio has increased from 26.5% in 212 to 31.9% in 214. However, debt levels are historically high and equity ratios are expected to be negatively impacted as ship owners re-value vessels and other assets going forward. Currently, the OSV segment is facing three major challenges. Firstly, oversupply leads to low prices and poor utilization, forcing ship owners to cancel new ships, scrap or cold stack current fleet to better match supply with demand and to repurpose vessels to serve other sectors. Secondly, the price pressure from buyers may lead to consolidation efforts to improve supplier power. Thirdly, with high leverage and increasingly inaccessible bank and bond financing, ship owners will struggle to finance operations. Restructuring efforts are therefore likely to take place with alternative means of financing, such as institutional investors, private equity and buy/lease-back structures. An additional response from the industry will be to focus on working capital reduction, as average DSO rates are 4-5 months. The relatively smaller helicopter segment is less dependent on exploration and development activity than its marine counterpart, and could therefore be expected to manage the downturn better. However, the helicopter segment has seen low profitability during the last five years and 214 marked the sixth consecutive year of negative operating profit. Top five companies (214 revenues) 1. Farstad Supply AS 2. Chc Helikopter Service AS 3. Heli-One (Norway) AS 4. Solstad Rederi AS 5. Siem Offshore Rederi AS Key financials Revenue EBITDA ROCE Average spot day rates and utilization Day rate, NOK thousands Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Average day rates - PSV Average utilization - PSV Source: Seabrokers, DNB Markets, EY analysis Global PSV and AHTS fleet development Number of vessels % 25% 2% 15% 1% 5% % 1% 8% 6% 4% 2% % Average day rates - AHTS Average utilization - AHTS AHTS fleet (#) PSV fleet (#) Utilization % 24 The Norwegian oilfield services analysis 215

25 Offshore logistics Maintenance and modification Production Maintenance and modification The sub-segment includes companies offering maintenance and modification (M&M) of offshore installations, including surface treatment, fire protection and inspection services. M&M revenues declined by 5.4% in 214. Profitability was significantly impacted with several companies recording negative operating margins. The decrease in the ROCE from 3.6% in 212 to 6.9% in 214 is due to reduced profitability together with persistent levels of capital employed within the sub-segment. E&P companies have announced ambitions to reduce maintenance and modification costs for several years. The effects of these initiatives have been observed in 214, and appear to have impacted primarily modifications, in contrast to maintenance/iso. Top five companies (214 revenues) 1. Aker Solutions Mmo AS 2. Beerenberg Corp. AS 3. Bilfinger Industrier Norge AS 4. Kaefer Energy AS 5. Ikm Testing AS Key financials % 3% 25% 2% 15% 1% 5% Despite defensive moves to reduce work force, several companies have not been able to find work for their employees, resulting in a 2.4% decline in employee productivity, which is a primary driver behind the reduced operating margins Revenue EBITDA ROCE % Going forward, key challenges for M&M companies will be to deliver on the industry demand for reduced cost levels. We anticipate new contract and collaboration models arising between M&M and E&P companies. Offshore logistics Maintenance & Modification Production Production The production segment includes companies active in production supporting equipment and services, such as floating accommodation and production, facility management, waste management, communication and production operations. In 214 revenues increased by 13.3% to NOK15.7b with maintained profit margins. Profit margins have stabilized around 13% EBITDA after having declined from record high levels in 29 and 21. The unusually strong segment growth in 214 was primarily driven by a surge in production operation equipment. Apart from this, the segment in general experienced a more moderate growth of 6.6%. The production segment works primarily to support fields in production, and is therefore less exposed to the capex situation. Going forward, the segment is expected to be relatively sheltered from the effects of the low oil price and reduced NCS exploration activity. Top five companies (214 revenues) 1. Apl Norway AS 2. ESS Support Service AS 3. Franzefoss Gjenvinning AS 4. Sar AS 5. Aker Contracting Fp ASA Key financials Revenue EBITDA ROCE 25% 2% 15% 1% 5% % The Norwegian oilfield services analysis

26 Decommissioning segment activity expected to rebound after slump in 214 Reservoir/ seismic Exploration and production drilling Engineering, fabrication and installation Operations Decommissioning About the segment The decommissioning segment includes companies that offer services related to the removal of offshore installations. Decommissioning and plugging & abandonment (P&A) form an integral part of the strategic and operational focus of many Norwegian-based OFS companies, which have operational focus primarily in other segments. These OFS companies are therefore not included in this decommissioning section of the report. Key financials 2, 1,8 1,6 1,4 1,2 1,,8,6,4,2, Segment composition (214) Number of companies 4 Small < NOK1m Revenue EBITDA ROCE 3 Medium NOK1 1,m Revenue 8% 92% Large > NOK1,m 25% 2% 15% 1% 5% % Segment highlights In 214, a total of seven companies had decommissioning as their core business. Following two years of fast-paced growth, the decommissioning segment was characterized by low activity and diminishing revenues in 214. Revenues decreased by 27.% to NOK1.3b from 213 to 214. Profitability was negatively impacted by the revenue decrease. Decommissioning is exclusively a project-based business and is highly dependent on a few, large projects. It is likely that the decline in revenue is a result of timing of decommissioning projects and not an indication of segment contraction. On the contrary, the Norwegian Petroleum Directorate forecasts increasing decommissioning activity from 214 onward. There has been a general expectation for several years that the P&A and decommissioning surge is just around the corner, and the oil price collapse in 214 has further strengthened this belief. However, the expected impact that an extended period of oil price in the US$5 per barrel range would have on the segment can be debated. On the one hand, a low oil price results in the cash flow of mature fields turning negative earlier and would serve to advance the case for decommissioning. On the other hand, oil companies may experience capex constraints and may prefer to delay significant investments. In addition, there is the risk of missing out on potential future opportunities with the permanent removal of existing infrastructure it would be in the interests of both oil companies and regulators to preserve the fields. It is not obvious which of the above drivers will be of most significance and the response from oil companies and regulators has not yet shown strong indications in any one direction. NCS disposal/cessation forecast Investments (NOK b) Source: Norwegian Petroleum Directorate 26 The Norwegian oilfield services analysis 215

27 Rogaland remains the primary OFS cluster, but growth is stagnating Regions/clusters The Norwegian OFS industry is present in every region in Norway, with the southern part of Norway accounting for the most activity and the largest share of companies and employees. However, as the geographic analysis is based on HQ location only, the activity in northern Norway, via subsidiaries and branches, is likely to be underestimated. Methodology and description Size of circle indicates share of total revenues Distribution by official registered company head quarter location The Barents Sea #Potential future dev. 2 OFS revenues in Northern Norway have increased at a higher pace than the overall OFS industry, with an annual growth rate of 14.4% CAGR since 21. Growth in the OFS activity level in Trøndelag and Møre has slowed down in recent years. Rogaland remains the primary hub of OFS activity in Norway, but growth in the region has started to stagnate amounting to only 1.1% in 214, primarily due to lower activity within M&M and yards. #Fields under dev. 1 #Fields in production 1 The Norwegian Sea #Potential future dev. 14 #Fields under dev. 2 Northern Norway The North Sea and the Norwegian Sea remain the major oil and gas producing sectors, contributing 72.8% and 26.1% respectively of total liquid production in 214. The Barents Sea, located around the Arctic circle, contains the LNG producing Snøhvit development and soon the on-stream Goliat oil field. However, limited exploration success has resulted in declining drilling activity in the Barents Sea in 215. #Fields in production 17 Trøndelag Møre Reservoir/seismic Exploration & production drilling Engineering, fabrication & installation Operation Decommissioning All regions are facing challenges with reduction in market activity and uncertain short- to medium term outlooks. Regions with high concentrations of export-oriented OEMs, like Agder and Møre, are particularly exposed to the current heavy asset over-supply, and are at risk relative to the timing of a market recovery. Regions with a more diversified profile of OFS segment activity and a higher share of activity related to operational support, such as Rogaland and Hordaland, are positioned for an earlier recovery, but the significant size of the OFS sector relative to the overall economy in these regions means that they will nevertheless continue to be impacted by the downturn. Hordaland Rogaland Agder BTV Eastern Norway Regions Number of legal entities Employees (No. 1,) Revenue (NOK b) CAGR Agder % BTV* % Eastern Norway % Hordaland % Møre % Northern Norway % The North Sea North #Potential future dev. 7 #Fields under dev. 1 The NorthSea Central #Potential future dev. 9 #Fields under dev. 4 The NorthSea South #Potential future dev. 2 #Fields under dev. 1 Rogaland % #Fields in production 3 #Fields in production 22 #Fields in production 14 Trøndelag % Total % * Buskerud, Telemark and Vestfold The Norwegian oilfield services analysis

28 Activity going forward 214 marked the end of a strong growth period in the Norwegian oilfield service industry. Already at the start of the year, major oil companies announced cuts to their opex and capex forecasts for the coming years, and the effect was reinforced by the significant oil price decline from US$115 per barrel in June 214 to below US$4 per barrel in December 215. Recent estimates from Wood Mackenzie forecast global E&P capex to decrease by 4% from 214 to 216. We anticipate the reduction in E&P spending to impact both the domestic market and the export markets for the Norwegian based OFS industry, by means of a projected revenues decline by 25% from 214 to 216. Exports, which accounts for approximately 35% of revenues in the analysis, are expected to be severely impacted, reducing by 31% from 214 to 216. The most important export segments are rig equipment, subsea, product suppliers and reservoir/seismic. Overcapacity within the reservoir/seismic, rig and OSV segments means a sharp reduction in new builds, and lower activity and challenging margins from existing fleet operations. The expected activity among product suppliers and subsea is more uncertain. Facilitated by a favorable currency exchange rate, Norwegian suppliers have obtained a competitive advantage internationally however, there is still a considerable downside to the activity levels, due to uncertainties around the oil price. The domestic market, which remains the largest source of activity, will also decline. NCS investments and costs are expected to decline by 22% from 214 to 216. This is mainly due to lower investments and exploration spending, the latter which is projected to drop by 27%, from 214 to 216, whilst operating costs are expected to remain stable. Several of the ongoing field developments that have fueled the investment growth in recent years, such as Edvard Grieg, Ivar Aasen and Goliat, are approaching the end of construction and are coming onstream. The field development investments going forward are mainly related to Johan Sverdrup and smaller projects. NCS Investments and costs The lower oil price has forced oil companies to evaluate their portfolios and several potential projects, most notably Johan Castberg, have been postponed. Effects on the industry Several OFS companies announced job cuts and cost saving initiatives toward the end of 214 and throughout 215, especially within EFI, rig equipment and rig companies. It remains to be seen if further cuts will follow, or if the majority of reductions already made are sufficient to establish sustainable operational cost levels. With further declining oil price trend into 216, it is likely that additional Norwegian based OFS capacity evaluations will occur. Frame agreements and medium- to long term service contracts are being re-negotiated, in many cases with extended durations and longer option periods. Due to the capacity oversupply, it is expected that companies participating in these negotiations will offer terms and conditions that are as cost effective as possible for their customers. These new terms and conditions will put pressure on future margins, which is what was observed following the financial crisis and the oil price collapse in 28. The equity ratio in the industry was higher in 214 than in 28. Even with notably large differences at the company level, higher equity ratios suggest that the industry as a whole is better prepared for this current downturn compared to the previous one. This also indicates that it could take time before the full effects of the downturn become visible. We expect several companies to recognize impairment of fixed assets and goodwill in relation to the closing of their 215 annual accounts, which will reduce the equity ratio. For some companies, asset write-downs could even result in breach of their loan covenants. Restructuring and industry consolidation initiatives are likely to follow, leading to an increase in OFS transaction activity in 216, compared to the low base transaction level experienced in 215. Revenues export vs domestic Investments and costs (NOK b) % 35% 34% 33% 32% 31% 3% 29% Share export Investments Operating costs Exploration costs Disposal and cessation Other costs Export Domestic Share export Source: Norwegian Petroleum Directorate 28 The Norwegian oilfield services analysis 215

29 Deteriorating outlook into 216 Based on available sources, such as quarterly reporting from listed OFS firms, and expected relationships between macro variables and individual segments, we have made projections for the activity levels in the OFS industry in 215 and 216. These forecasts are uncertain. Overall, we project a decline in total revenues of 9% in 215 and a further decline of 17% in 216. This constitutes a decline in revenues from NOK 56b in 214 to NOK 46b in 215 and NOK 382b in 216. Operating profit before interest, tax and impairment ( EBITI ) is projected to decline as well, both in absolute terms and as a share of revenues. However, the decline in the EBITI-margin will be limited by the industry s continued efforts to adjust the cost base to a lower activity level. Overall, our projections show a reduction of the EBITImargin from 7% in 214 to 6% in 215 and 5% in 216. OFS forecast Revenues (NOK b) Revenues EBITI-margin ROCE Reservoir/seismic Revenues in this segment have historically been correlated with the following year s exploration expenses. Exploration spending on the NCS is forecast to decline by 32% in 216, which indicates substantial weakening of revenues in 215. This is also in line with quarterly reporting by listed seismic companies. The current oil price environment does not point toward an imminent upswing in oil and gas exploration which, in combination with oversupply of seismic vessels, suggest some challenging years ahead for this segment. We estimate a YoY revenues reduction of 28% to 215 and a further 25% reduction in 216 for the Reservoir/seismic OFS segment. 18% 16% 14% 12% 1% 8% 6% 4% 2% % Profitability E&P drilling The rig market is currently oversupplied, with the number of rigs exceeding the demand. This has led to lower utilization and rig day rates, and a number of rigs being stacked or scrapped. We expect rig companies revenues to decline in 215 and 216, despite the support from the depreciation of the Norwegian krone. The overcapacity in the rig market has more or less cut new orders for rigs to zero. This will severely affect the rig equipment segment, which is expected to be one of the sub-segments with the most substantial revenue reduction in 216. Many companies within this sub-segment are cutting costs through layoffs, a trend that unfortunately is likely to continue into 216. The sub-segment s revenues in 216 are anticipated to fall back toward the levels obtained in The number of E&P wells drilled on the NCS increased from 219 in 214 to 245 in 215, which was surprising. For 216, Statistics Norway projects a sharp reduction in exploration spending on the NCS, whereas production drilling is currently forecast to decrease by 7% from 215 to 216. Overall, revenues in the well services sub-segment in 215 and 216 are expected to show a reduction in line with the general decline in drilling costs on the NCS. Overall, we expect revenues in the Exploration & Production Drilling segment to fall by 8% in 215 and 26% in 216, while EBITImargins will fall below the 1%-level achieved in 214. Engineering, fabrication and installation The revenue and profitability drivers of this segment vary between its different sub-segments. Consultants and yards are primarily suppliers to E&P operations and developments on the NCS, and are thus naturally affected by the general decline in NCS activity. The contracts awarded for the Johan Sverdrup field will to some degree support activity going forward, and we estimate that revenues for these two sub-segments will drop in line with the general fall in capex spending on the NCS for 215 and 216. In addition to the development on the NCS, the subsea sub-segment is also driven by exports. These are expected to fall due to lower global E&P spending, although the depreciation of the Norwegian krone will limit the decline in these firms revenues as measured in NOK. Medium term, upcoming subsea tie-backs on the NCS could set the stage for a partial recovery. In recent years, Norwegian shipyards have relied on the construction of new offshore vessels for the majority of their revenues. Due to the current overcapacity in the offshore vessel market, this revenue source will fall significantly in the coming years. We estimate year-on-year revenue reductions in the range of 1%-15% in both 215 and 216. The Norwegian oilfield services analysis

30 Workshops and product suppliers also have a large exposure to the offshore vessel new build market, and is therefore expected to experience sharp revenue reductions in both 215 and 216. As with subsea firms, the drop is somewhat alleviated by a weakened Norwegian krone. For the EFI segment as a whole, we forecast a decline in revenues of 9% in 215 and a further drop of 13% in 216. Historically, the segment s profit margins have not been strongly correlated with the activity levels, and we anticipate EBITI-margins to remain around the subdued 4%-level realized in 214. Operations The E&P operators on the NCS started announcing cuts in maintenance and modifications-spending in early 214, and this will continue to have an impact on revenues and margins in this sub-segment in 215 and 216. Renegotiated M&M contracts were recently awarded, and operators will continue to re-negotiate their contract portfolios in 216. We expect the pressure to lower prices in the new contracts will lead to continued revenue declines, while profit margins will stabilize at a low level as M&M firms reduce capacity in line with lower activity levels. The offshore logistics segment is experiencing severe overcapacity within the PSV and AHTS vessel markets after many years of adding new builds into the market. This has led to declining spot day rates and vessels being sent to stacking. Demand for AHTS is related to rig moves, which is expected to decrease with lower rig activity both globally and on the NCS. On this backdrop, the Production sub-segment stands out as relatively robust. Still, total revenues for all Operations subsegments are expected to fall by 4% in 215 and 9% in The Norwegian oilfield services analysis 215

31 In the New Policies Scenario (central scenario), oil production grows by 12% from 214, to over 1 million barrels per day in 24. Source: IEA WEO, Oct 215 The Norwegian oilfield services analysis

32 Comparison of NCS and UKCS To allow a comparison across the UKCS and the NCS, the companies from the UK oilfield service report have been re-classified to match the segmentation used in this report, and only companies with revenues greater than GBP1m in any year from 28 to 214 are included. The UK report does not include a decommissioning segment and this has therefore been excluded in the comparison. The exchange rate used to convert GBP to NOK is 1.3 fixed rate. Norway OFS segments size and growth ,6 % 1,4 % Reservoir/seismic Exploration & production drilling 3,9 % Engineering, fabrication & installation Revenue 214 Revenue CAGR UK OFS segments size and growth ,9 % 5,9 % Reservoir/seismic Exploration & production drilling 9,3 % Engineering, fabrication & installation 6, % Operation 1,1 % Operation Revenue 214 Revenue CAGR Activity in oilfield services in the UK and Norway is increasing across all segments of the value chain. The UK has experienced revenue growth of 9.% CAGR between 28 and 214, while Norway has grown by 6.1% CAGR during the same period. The different levels of maturity in the UKCS and the NCS are reflected in the revenue generated by the different value chain segments. UK revenue growth has mainly been in the engineering, fabrication and installation and operations segments, reflecting the more mature status of the UKCS. There has been increased investment (214 capital spend was the highest for more than three decades) and the combination of ageing infrastructure and the need to extend the productive life of fields has resulted in substantial modifications and upgrades of installations. 12% 1% 8% 6% 4% 2% % 12% 1% 8% 6% 4% 2% % Revenue CAGR Revenue CAGR Norway revenue has experienced stable growth in all segments, driven primarily by increased capital expenditure in relation to exploration and development activities. In 214, revenue growth was primarily driven by the exploration and production drilling and engineering, fabrication and installation segments, due to the continued high exploration activity on the NCS. Norway OFS revenues and EBITDA Revenue UK OFS revenues and EBITDA EBITDA Revenue EBITDA Margins in the UKCS declined from 29 to 211 as a result of pricing pressures and salary increases due to a shortage of skilled personnel. There was an EBITDA margin improvement in 212, which was maintained in 213 and 214, but given the current low oil price, the focus on cost reduction and pressures on rates in the UKCS, maintaining margins in 215 and 216 will be challenging. On the NCS, margins have been relatively stable, albeit with a slow decline from the peak of 14.1% in 21. There was a further decline to 11.4% in 214 due to cost pressures reducing the underlying profitability of operations. Export turnover from the UKCS increased between 28 and 214 from NOK17.1b to NOK157.6b (38% of total turnover), reflecting the internationalization of the UK oilfield services sector. Exports from the NCS have steadily increased from 211 to 214, and are currently estimated to NOK175b (35% of total turnover). Norwegian exports are related to rig equipment, product suppliers, offshore and seismic vessels and subsea equipment and services, which are segments where the industry has gained a global competitive edge. 15% 1% 5% % 15% 1% 5% % EBITDA EBITDA 32 The Norwegian oilfield services analysis 215

33 Historical and forecast production 2 Production (mmboe) As the UKCS is a mature basin, production had been declining annually between 23 to 213, with an average annual decline of 1%. This trend was reversed in 214 and growth is forecast in each of the years 215 to 217, before plateauing in 218 and declining from 219 onward. The growth in 214, and forecast from 215 onward, is a result of new fields coming onstream (e.g., Golden Eagle, Kinnoull, Laggan, Cygnus and Mariner), a forecast ramp-up in activity in Elgin Franklin following the shut-down in 212 and Schiehallion production being expected to recommence in 217 after the new FPSO is commissioned. While oil production on the NCS has almost halved since its peak in 21, the decrease in oil volumes has gradually been replaced with gas production, offsetting some of the decline in overall production. Although the large mature fields such as Troll, Ekofisk and Åsgard have passed their peak production, they still have many years of production left. In addition, several small- and medium sized discoveries have come onstream during the recent years, such as Skarv, Gjoa and Vega, to compensate for reduction in production from some of the more mature fields. From 215 onward, there are several new developments coming onstream, including Aasta Hansteen, Edward Grieg and Goliat. In addition, the Johan Sverdrup field is forecast to commence production in 219 and this is expected to contribute an additional 6 boe/day during peak production. As a result, the combined impact of all these developments is expected to ensure stable production levels in the NCS for the next 1 years. Investment in the UKCS has more than doubled since 21 due to a number of large projects being sanctioned and new field allowances encouraging investment in projects that would otherwise have been unattractive. 214 was the highest year of investment in over 3 years at US$21b (comprising fields under development, e.g., Kraken, Greater Laggan Area, Mariner and Golden Eagle and upgrades to existing fields). However, capital expenditure is forecast to decline from 215 onward due to the current low oil price, which has resulted in operators significantly reducing their capital expenditure budgets. Although the large development projects which are underway will continue, the reduction in capital expenditure budgets has resulted in a number of projects which were due to commence in 215 onward being delayed or cancelled. Investment in the NCS reached a record high in 213 at US$29.8b and remained high in 214. This was driven by major development projects and upgrades in current fields, primarily Troll and Åsgard. During the next few years, the most significant project on the NCS will be the development of Johan Sverdrup, with the total value of the first stage of construction estimated to be around NOK117b. Historical and forecast capital expenditure 35 Investment (USD b) NCS UKCS The Norwegian oilfield services analysis

34 Methodology Data collection Accounting information is publicly available from the Brønnøysund Register Centre. The companies business addresses as registered by the same register have been used to reflect the entities geographic location. The number of companies included in the analysis will vary somewhat depending on the availability of financial information. In order to analyze economic activity by geographic location and across the OFS value chain, we have used the standalone financial statements of individual legal entities. As a result, large corporations have been analyzed through their constituent individual companies and not as a consolidated group. Intercompany transactions are not eliminated when financial figures are aggregated. In addition, the revenues of subsidiaries owned by a Norwegian holding company, but registered abroad, are not captured. 215 figures have been modeled based on previous years where annual reports were not available by the time this report was prepared. Inclusion criteria A company is defined as a Norwegian OFS company if: At least 5% of its turnover is generated in the oil and gas sector and It is a Norwegian-registered company Value chain segments Each company in the OFS portfolio has been reviewed individually, and an assessment has been made with regard to the company position in the value and supply chain. The value chain has the following categories: Reservoir/seismic E&P drilling Engineering, fabrication and installation Operations Decommissioning Company size definition Large companies: revenues above NOK1b Medium-size companies: revenues between NOK1m and NOK1b Small companies: revenues below NOK1m Location The regions used in the analysis have been chosen to reflect and illustrate the main clusters of OFS companies in Norway. The regions are: Rogaland Hordaland Agder Møre (Møre & Romsdal and Sogn & Fjordane) BTV (Buskerud, Telemark and Vestfold) Trøndelag (Sør- and Nord Trøndelag) Northern Norway (Nordland, Troms and Finnmark) Eastern Norway (Oslo, Akershus, Oppland, Østfold and Hedmark) Calculations EBIT = Earnings Before Interest and Tax (driftsresultat) EBITI =...EBIT + Impairment EBITDA = EBITI + Depreciation and amortization Capital employed = Total assets (Financial long-term and shortterm investments + Cash) (Trade creditors + Tax payable + Public duties payable) ROCE (Return on Capital Employed) = EBITI / Capital employed Days Sales Outstanding (DSO) = Trade receivables / (Revenue x [1+25%]) Days Payable Outstanding (DPO) = Trade payables / (COGS x [1+25%]) Days Inventory Outstanding (DIO) = Inventory / COGS Cash-conversion-cycle (CCC) = DIO + DSO DPO Each of these categories are further broken down into subsegments to capture the huge diversity within the industry. Companies have been categorized according to the value chain segment in which they generate the majority of their revenues. 34 The Norwegian oilfield services analysis 215

35 Contacts Transaction Advisory Services Espen Norheim Partner Mobile: espen.norheim@no.ey.com Transaction Advisory Services Kjell Stenersen Partner Mobile: kjell.stenersen@no.ey.com Advisory John Avaldsnes Partner Mobile: john.avaldsnes@no.ey.com Assurance Tor Inge Skjellevik Partner Mobile: tor.inge.skjellevik@no.ey.com Tax Hans Georg Wille Partner Mobile: hans.georg.wille@no.ey.com The Norwegian oilfield services analysis