Pareto Offshoreinvest AS

Transcription

1 Pareto Offshoreinvest AS 3rd quarter report 2016 Link:

2 Executive Summary NAV NOK 41/share (as of 30 June 2016) The market conditions continue to be very challenging, but we may be close to the bottom now due to the oil price recovery. That being said, the upturn will is likely to be slow in materializing. The Fund is keeping its powder dry and is preparing for a very difficult 2017, in which investors should not expect any dividend distributions. Market Development The oil price appears to be stabilizing around USD 50/b for Brent crude, primarily due to evidence of inventory draws, as well as a soft-agreement in OPEC to stabilize prices through potential production cut backs. The E&P spending budgets are set against the current prices and is reasonable to expect a decline of around 10% next year. This does not mean that activity may not start to respond to a firmer oil price, as much (if not all) of the reduction will be due to lower pricing of products and services. However, there are significant levels of excess capacity in most segments with large portions of ships in lay-up and significant order books for new vessels. This will dampen the utilization and rate recovery in the next couple of years. Most oil service companies are also financially distressed, so counterparty risks are very real threats to the Fund s portfolio. Some projects are already in tough restructuring negotiations with charterers. The lenders are generally in a constructive mood, preferring to help out instead of enforcing their securities and taking upfront losses. Portfolio The portfolio consist of shares in 8 projects with a total of 16 vessels. The contract coverage is 91% with a weighted contract length of 3.6 years. There has been a charter restructuring for one of the projects, which will be favourable to the Fund considering the alternatives. POI has distributed NOK 70 per share (70% of par) to its investors since the inception. Further distributions will depend on running dividends and project realizations. NAV as of 30 June 2016 was NOK 41 per share. Since inception, NAV is up 12% including dividends distributed. The Fund will next report NAV as of 31 December 2016 and investors should be wary of further declines based on the lower vessel valuations we are currently witnessing and the charterer defaults and restructurings we are experiencing in the industry.

3 Portfolio News POI is invested in 8 offshore projects, which implies a good diversification across different market segments. This section provides an update on the quarter s most important newsflow related to the underlying investments. Master and Commander IS CGG has not paid charter for the past two months and have proposed to unwind the current arrangements at unacceptable terms for M&C. As a result, M&C have submitted a request for payment under the guarantees issued by CGG SA. Various legal steps are being considered. While the liquidity situation is good in the short to medium term (USD 7.5m in cash), there is a risk that the uncalled capital (USD 14.5m) could come into play, depending on the final solution with both CGG and M&C s lenders. On the positive side, the Commander is being re-activated by Fairfield and will be employed at full day rate from November and onwards. 3B Offshore IS Bareboat hire is paid punctually. The vessel valuations are lower and there continues to be a potential MVC breach to be handled, while a process to prepare for the expiry of the BBCP has started. The value of the vessels are likely so low that the uncalled capital is at risk. Azur Offshore IS The BBCP is under restructuring with the expectation of a rate deferment for a certain period. There will be need for some draw on the uncalled capital to facilitate this restructuring. Norseman Offshore IS Norseman has been declared bankrupt following a petition by DVB Bank. The decision is highly controversial and an appeal is being considered, as well as legal action both against DVB and the charterer. However, any such action will require additional funding from the owners, which will have to be evaluated in the context of the chances of success. PSV Invest II IS The vessel went off the Apache contract in September and is now fixed on a 2+1 month contract at a day rate that covers opex. The project is nearing an agreement with the Lenders regarding a restructuring, which will require some payment of uncalled capital in exchange for an amortization freeze and extension of the loan until This increases the chances of survival. Vestland Seismic IS The vessel is still idle. The project is 100% equity financed and the cash burn is insignificant. Asian Offshore IS The Sea8 pool s average day rate was USD 3,600 during Q2 16 adjusted for utilization, down 5% q-o-q. Vessel valuations have dropped to below bank debt. The cash flow situation is reasonable for the moment, but as operations are running slightly below cash flow break even, it will become problematic in the not too distant future. The board of AO I has some dialogue with the Lender regarding a restructured loan agreement, but has so far not seen any proposal to contemplate. In the meantime, and with the understanding of the Lender, no interest or amortization is being paid. If the need for additional working capital re-emerges, the board may have to consider placing AO I into liquidation, unless there is an acceptable restructuring on the table, which could enable new equity to be injected with adequate risk/reward. Payments from projects No payments were received during the quarter and no payments were made. Far East Offshore The project continues as planned with bareboat hire paid punctually. The project is hoarding cash, which will be utilized to prepay debt and handle potential requirements upon the expiry of the BBCP in Feb 17. The low vessel values put the uncalled capital at risk at expiry and also introduces an incentive for the stakeholders to keep the arrangements alive for some time to facilitate a better timing for an exit. New investments POI will only make follow-up investments in existing projects, if required.

4 Portfolio The portfolio continues to be characterised by a high contract coverage (91%), despite the market volatility. The average charter length is 3.6 years, which is robust. We expect the portfolio to continue to produce a decent cash flow for the Fund, but the situation continues to be that cash is trapped in the projects due to restrictive banks, rather then becoming available to the Fund. Investments and capital POI s portfolio consists of 8 projects which owns stakes in 16 units. The average contract length is 3.6 years and the contract coverage is 91%. Charterparty Distribution based on NAV The gross nominal value of the contract backlog is roughly NOK 39m. The backlog is evenly distributed among primarily listed counterparts, but that nevertheless implies meaningful counterparty risk. Bareboat 87% POI had a cash holding of NOK 10.0m as of 30 June. Capital calls for projects will happen. Until the extent of this is more clarified, the Fund plans to retain its cash position. Timecharter 4% The life cycle of POI has been extended to 30 June It goes without saying that it will be difficult to make project realizations at good prices with the current market conditions. Hence, if the markets do not improve within such a time frame, further extensions should be expected. Charter hire backlog by counterpart Spot/Asset Play 9% Segment Distribution based on NAV Bourbon 23% Seismic 42% Fairfield Nodal 14% PSV/AHTS (Europe) 13% CGG 36% Ezra Holdings 27% PSV/AHTS (Asia) 45% Project / company Segment Contract Charterparty Charterer Proportion of NAV Azur Offshore IS PSV/AHTS (Asia) Aug-23 Bareboat Ezra Holdings 38.1 % Master and Commander IS Seismic Aug-18 Bareboat CGG/Fairfield Nodal 33.0 % Vestland Seismic IS Seismic Spot/Asset play Albatross Shipping 9.0 % Norseman Offshore IS PSV/AHTS (Europe) Dec-20 Bareboat Viking Supply Ships AS 7.8 % Far East Offshore IS PSV/AHTS (Asia) Feb-17 Bareboat Sanko Steamship Ltd 6.6 % PSV Invest II IS shareholder loan PSV/AHTS (Europe) Sep-16 Timecharter Apache UK 3.9 % 3B Offshore IS PSV/AHTS (Europe) Nov-17 Bareboat Bourbon Maritime 1.6 % PSV Invest II IS PSV/AHTS (Europe) Sep-16 Timecharter Apache UK 0.0 % Asian Offshore IS PSV/AHTS (Asia) Spot/Asset play 0.0 % Asian Offshore I IS shareholder loan Spot/Asset play 0.0 %

5 Second Hand Market and Liquidity As of 30 June 2016, POI had 851,877 shares outstanding. Pareto Securities AS ( PSec ) aims to facilitate an active second hand market for shares. The last trading price was NOK 30 per share in March 2016, which implies a 27% discount to the Q2 16 NAV (of NOK 41 per share). Investors who wish to buy or sell shares should contact their advisors or alternatively PSec directly. Last 5 trades in second hand market Date Share price No. of shares Volume (NOK) 06/08/ , ,578 25/08/ ,000 65,000 23/01/ , ,000 27/04/ ,000 90,000 04/03/ ,065 61,950 Number of trades since establishment 43 Volume traded since establishment (NOK) 8,173,723 Average volume per trade (NOK) 190,087

6 The oil market The inventory correction cycle is underway and is strengthening. At the same time, with Iran now reaching pre-sanction export levels, OPEC started discussing a production ceiling and potentially also production cut-backs. Only the former will be able to provide a long term boost to prices, and may be under threat if US tight oil production starts growing again or if OPEC discipline is weak. We may have turned the corner, but we are far from out of the woods. Non-Opec production declining Non-OPEC production is falling, primarily due to declining US onshore production. We are also seeing early signs of declines in more mature areas, where the overall decline in global E&P spending is likely to have an accelerating impact. At the same time, global oil demand growth is healthy, leaving a gap to be filled by either inventory draws, which is what will drive oil prices upwards, particularly if OPEC can keep production flat. Source: Pareto Securities, IEA, Opec OPEC spare capacity is becoming more limited The return of Iranian oil exports has been the main driver behind the increased OPEC production in the past three quarters. Going forward, however, it is estimated that available OPEC spare capacity will not be able to keep pace with the call on OPEC, so it seems an almost certainty that we will see inventory draws accelerating during How long for a tight market to emerge? Source: EIA, IEA, Opec As can be seen from the graph on the left, OECD oil inventories have posted three consecutive monthly declines, but are significantly higher than normal. About 400mb of oil would need to be removed in order to re-establish a tight market. If the global undersupply equals 1mb/d, it would therefore take a bit more than a year to properly re-balance the markets. This is what lies in most forecasts, assuming flat OPEC production from now and onwards, but as history has taught us, that is far from being a certainty. One would therefore seem be best advised to expect a proper tightening towards the end of 2017, but the risk being on the downside. Consensus forecasts on the rise Source: Nordea Markets The actual Q3 16 price for Brent Crude was USD 46/b, USD 2/b higher than consensus. We note that consensus forecasts through Q2 17 have risen by USD 2/b and for H2 17 by USD 1/b. Still, the markets appear to be rather cautious. There is a lot of talk about USD 60/b oil, but few appear to be willing to put their heads on the block. Source: IEA, Bloomberg

7 The oil services market E&P spending expected down another 20% in 2016 Global E&P spending looks set to drop by 30% this year and expectations are for a drop of up to 10% in We are seeing activity levels drop all around, but when looking towards next year, we believe that activity levels may actually start to rise slowly as much of the decline in spending will be down to lower average pricing of goods and services. What does it take to provide an uptick for 2017? Source: Barclays Capital, Pareto Securities Source: Barclays, IEA Source: Pareto Securities, Nordea Markets, Westshore Source: Pareto Securities, Nordea Markets, Westshore Historically, E&P spending has been closely correlated with the oil price. When the oil price falls, there tends to be an immediate reaction in E&P spending. Conversely, positive oil price changes have always had a positive impact on E&P spending. The oil price looks to average $45/b for 2016, down 19% y-o-y. For 2017, consensus forecasts are for $54/b, a 19% increase from this year. Under normal circumstances, one would expect this to provide a boost to E&P spending, but as the current downturn appears more systemic than anything seen for the past 25 years, there may well be a lag. Oil company break even levels, including dividend, appear to be a tad above USD 50/b, so we should not expect to see material movement until the oil price approaches USD 60/b. A lot of excess capacity out there While the demand side of the equation might get a boost next year, it will take a long time to restore market utilization. The excess supply across typical offshore oil services segments is 50%-60%, when including newbuilds to be delivered. Lack of take-out financing may reduce actual deliveries meaningfully (run-rate is approximately 25% of scheduled deliveries at the moment), but nevertheless, we would be looking at 40%-45% excess capacity in the markets. Scrapping is limited, as the value of steel in an offshore vessel is too little to fetch a scrap value that covers scrapping costs with any margin. The rule of thumb is that rates start to move north when utilization moves into the 80%-90% range, with the upper end signalling a tight market with high rates. Current utilization levels are 55%-60%, so demand for vessels would need to rise 40% on average in order to reach 80% utilization and a further 18% to reach 90% utilization. This is based on the actual fleet, including vessels in lay-up. A significant portion of the laid-up fleet may never return, but on the other hand, we have a newbuild order book of almost the same magnitude as the laid-up fleet. There are no two ways about it it will take long time before the markets recover. Demand will recover, but over time, and the only thing that could speed things up would be massive scrapping and cancellations of newbuild orders. That is likely to be wishful thinking.

8 Fund Management Team Richard Jansen Head of Maritime Investments Phone: E- richard.jansen@pareto.no Patrick Kartevoll Fund Manager Phone: patrick.kartevoll@pareto.no Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: ,

9 Disclaimer This Quarterly Report has been prepared in order to provide information about Pareto Offshoreinvest AS ( POI or the Company ) and must not be considered an offer to trade in the shares of the Company. Information contained in this Quarterly Report is obtained by Pareto Alternative Investments AS ( Pareto Alternative Investments, Pareto, or PAI ). Information is presented to the best of our efforts and knowledge, but Pareto cannot guarantee that the information is correct or all inclusive. Pareto takes no responsibility for any loss caused by information given being misleading, wrongful or incomplete nor for any other loss suffered as a consequence of investments made in the Company. This Quarterly Report includes and is based on, among other things, forward-looking information and statements. Such forward-looking information and statements are based on the current expectations, estimates and projection of the company or assumptions based on information available to the company and Pareto. Such forward-looking information and statements reflect current views with respect to future events and are subject to risks, uncertainties and assumptions that may cause actual events to differ materially from any anticipated development. All investors must verify these assumptions themselves. The company cannot give any assurance as to the correctness of such information and statements. Historic returns and return forecasts do not constitute any guarantee for future returns. Returns may vary as a consequence of fluctuations in currency exchange rates. Investors should be aware that there is significant uncertainty related to valuations in the current volatile market. The valuation process is described in Pareto Securities market report as per November Risks and costs are further described in the prospectus (information memorandum) produced in relation to share issues in the Company. The contents of this presentation are not to be construed as legal, business, investment or tax advice. Each recipient should consult with its legal-, business-, investment-, and tax advisors as to legal, business, investment and tax advice. Specifically, Pareto has been engaged as the company s financial advisor and does not render and shall not be deemed to render any advice or recommendations as to a transaction.