Pareto World Wide Shipping AS

Transcription

1 Pareto World Wide Shipping AS 4th quarter report 2016 Link:

2 Executive Summary NAV NOK 38/17 per share (as per 31 Dec 2016) The NAV share as of Q4 16 was NOK 38 per share for PWWS shareholders that are pro-rata holders of the PMSOF Preference Capital, and NOK 17 per share for PWWS shareholders that are non-holders. The decline in NAV from the previous quarter is due to a continued trend in lower vessel valuations and an increasing number of projects in PMSOF facing financial challenges. Market Development The OPEC accord has resulted in the oil price stabilizing at around USD 55/b for Brent crude. This is a level that allows for increased spending by the oil industry, and has thus spurred a return of some optimism. Indeed, global E&P spending plans are now expected to be up by 7% y-o-y and several oil companies have reported plans to raise spending by double digits this year. While this looks first and foremost to benefit North American land production, but is expected to trickle through to the offshore markets during the year. Anecdotal evidence that we are now about to emerge from the bottom can also be found in solid share price gains with oil service stocks up by around 33% in the past three months, higher pricing of oil service bonds, an increasing sale and purchase activity driven by more speculative buyers willing to take the risk, a greater tendency of oil companies wanting to lock in vessel capacity on term contracts to lock in low prices and a few positive profit warnings in the seismic industry to indicate rising exploration spending a typical leading indicator. All in all, the tide seems to be turning, although we are far from out of the woods yet. Portfolio PMSOF made up 81% of PWWS NAV as of Q4 16, and had an exposure weighted 52% to offshore oil services and 48% to shipping. The contract coverage is 92% with a weighted contract length of 0.7 years. In addition to PMSOF, PWWS owns direct stakes in Singapore Tankers and Parbulk II. In the former, there is a mediation in London during Q1 17, which hopefully may lead to a final conclusion of this project. PMSOF has drawn USD 19m of the USD 25m available from the Preference Capital (USD 15m was drawn at 31/12/16). It is expected that portfolio developments may lead to additional capital being required in the next 6-12 months, which in turn will have to be funded by additional draws on the Preference Capital. The NAV for holders of the Preference Capital was equal to NOK 37.9 per share, down 10% during the quarter, while the NAV for non-holders was NOK 16.9 per share, down 31%. In shipping, the Fund s exposure to the LPG markets also appears to be bottoming after a deep downturn during Sound trading conditions in chemicals transportation is also enabling the Fund to manage an project realization at an acceptable level.

3 Net Asset Value Development On a diluted basis, NAV was down 31% during Q4 16, reflecting a continued decline in the valuation of the offshore oil services assets in PMSOF. For shareholders who are PMSOF Preference Capital holders, NAV (collectively PMSOF and PWWS share) was down 10%. NAV development NAV as of was NOK 17 per share, down 31% from the previous NAV (30 Sept 2016) and down 43% from inception in 2006 (adjusted for repayments). Nevertheless, the Fund expects to make further draws on the Preference Capital during the year as additional capital requirements are expected to materialize, not least due to uncalled capital commitments in PMSOF. For PWWS shareholders that participated in the issue of Preference Capital in PMSOF, the corresponding figure is NOK 37.9 per share, down 10% from Q3 16 and down 38% from inception (adjusted for paid-in Preference Capital). During the quarter, the USD value of PMSOF fell by 19%, while the value of Singapore Tankers was down 6%. The USD gained by 7% vs the NOK during the quarter and this, together with a decent cash position, cushioned the total decline. During Q4 16, PWWS did not contribute any capital to PMSOF. The Fund Manager expects the PMSOF portfolio to require significant additional capital during the next 6-12 months to weather the current adverse market conditions. PMSOF completed one major project realization during Q3 16 at a price equal to NAV and looks set to complete another in Q1 17. As of Q4 16, PWWS had a cash balance of NOK 4.0m (USD 0.5m). Preference Capital The balance of the Preference Capital, including accumulated interest was USD 15.6m. For PWWS shareholders that are owners, this equates to a value of NOK 16.4 per PWWS share, plus the NOK 4.6 per share that reflects the Preference Capital s 25% ownership in PMSOF. Direct yield As of Q4 16, PWWS has paid out NOK 97 per share to its shareholders since inception, which equals 48.5% of par value. This does not include the NOK 490m that was paid out to exiting shareholders in connection with the restructuring of PWWS during H2 13, nor the amounts paid in to the Preference Capital in PMSOF by participating shareholders (NOK 15.8 per share so far). Last 3 mths Last 12 mths Last 24 mths Since inception PWWS (ex Pref Cap) -31.3% -78.8% -86.4% -43.0% Oslo Stock Exchange 9.8% 12.1% 18.2% 79.0% Shipping Index * 15.0% -16.9% -3.6% 20.4% Offshore Index ** 26.0% 22.8% -5.6% -18.1% * Based on OSLSHX Oslo Shipping Index ** Based on OSLESX Oslo Oil Service Equipment and Services Index PWWS - NAV development NAV per share NAV per share (dividend adjusted)

4 Portfolio News PWWS has 81% of its NAV invested in PMSOF and the remainder in two directly owned projects in addition to cash. This section provides an update on the quarter s most important news flow related to the underlying investments and the portfolio. Pareto Maritime Secondary Opportunity Fund Following the dilution resulting from the Preference Capital, PWWS now has a 36.3% (48.4%) stake in the Fund. The USD value of PMSOF declined by 49% for PWWS, including the dilution effect and by 19%, excluding this effect. PMSOF s portfolio consists of 16 projects with stakes in 43 units. Its cash position as of 31 December 2016 was USD 2.1m. During Q4 16, the Fund contributed USD 3.9m to underlying projects. The operating expenses paid during Q4 16 amounted to USD 0.9m. At present, the contract coverage is 92% and has a gross nominal revenue value of USD 11m for the Fund. The weighted average contract length is 0.7 years. The largest counterpart is Fairfield Nodal (30%), CGG (23%) followed by Viking Gold (21%) and Apache Petroleum (12%). The overall exposure to different segments in the maritime industries is weighted towards LPG, seismic and subsea vessels. The shipping exposure is 48% and the offshore oil services exposure is 52%, which is a reduction of the latter due to a significant mark-down of offshore asset values. The largest contributor to the decline in the portfolio value during Q4 16 was Neptune Subsea (16%) due to lower vessel valuations and weak cash flow, followed by PSV Invest II (15%) due to an unsuccessful conclusion of restructuring negotiations with the Lenders and Norseman Offshore (15%) due to the project being declared bankrupt. In Master & Commander, a comprehensive restructuring was agreed with both CGG (the main charterer) and the Lenders. This has resulted in about one third of the uncalled capital being drawn and to be used for an upfront debt repayment together with available cash. M&C will continue the charter of the Phoenix with CGG at a reduced day rate, but will be compensated for this through the issue of unsecured bonds by CGG, which can be sold in the open market. This preserves the value in this project well. B-Gas has been recapitalized through a share issue that took out all debt in the company and a short term shareholder loan to shore up liquidity. The company is now pursuing an M&A strategy to gain in size and to become a leader in the small-gas segment. In Norseman, the main shareholders in the project are taking legal advice on whether to pursue legal claims against the bank in the project or the charterer. The call for uncalled capital is also being disputed. One of the PSV projects in PMSOF is facing liquidation after one of the lenders backed away from an agreed restructuring. As a result, all equity will be lost. Another PSV project is potentially facing a lay-up of the vessel, unless a long term contract can be secured. The third PSV project is continuing as planned, although low vessel values at the expiry of the current BBcontract may result in uncalled capital having to be paid in with limited view of any recovery. Among the small AHTS projects, several vessels are in the process of being sold at price levels below bank debt, resulting in a loss of equity. Directly owned projects Parbulk II This project is still marked at zero value and consist only of a claim against the previous charterer of the vessel in this project. The claim is still being vigorously pursued and one is now awaiting a high court ruling in Indonesia that may lead to a positive outcome. Singapore Tankers The project consists of a claim against the former charterer of the vessels. A mediation will take place during Q1 17, which may lead to a conclusion of this project. Payments from projects PWWS did not contribute any capital to PMSOF or its projects during the quarter and did not receive any distributions. New investments PWWS is purely focused on realisation of its portfolio and will not make additional investments during its remaining life cycle. The same goes for PMSOF, other than required follow-up investments in existing projects.

5 Portfolio PMSOF Project / company Contract Charterparty Charterer Proportion of NAV B-Gas Ltd Timecharter Total / Vitol / Statoil 39.8% Neptune Subsea IS, incl SHL Timecharter 32.0% Master and Commander IS Dec-18 Bareboat CGG/Fairfield Nodal 14.8% NorthSea PSV, incl SHL Spot/Asset play 7.9% UBT AS Aug-21 Bareboat Viking Gold 4.5% Atlantic Gas II IS Timecharter Geogas 4.1% Iceman IS Spot/Asset play ENI 3.0% Vestland Seismic IS Spot/Asset play 1.7% Atlantica Tender Drilling Timecharter Petrobras 0.8% 3B Offshore IS Nov-17 Bareboat Bourbon 0.0% Far East Offshore Feb-17 Bareboat Sanko Steamship Ltd 0.0% Asian Offshore I Spot/Asset play 0.0% Asian Offshore III Spot/Asset play 0.0% Bukit Timah Offshore DIS Spot/Asset play 0.0% Norseman Offshore n.m. -2.1% Lion AHTS Spot/Asset play -2.9% PSV Invest II IS, incl SHL Timecharter Team Marine -3.6% Key portfolio charts for PMSOF (based on NAV) Charterparty Distribution Bareboat 19% Spot/Asset Play 8% Timecharter 73%

6 The oil market The OPEC decision in November to cut production by 1.5 mb/d will strengthen and continue the inventory correction cycle. As a result, consensus oil price forecasts have increased, although moderately so. Most are wary of a rapid come-back of US tight oil production. We believe this will put a damper on the price acceleration and that a more profound oil price increase will be delayed until we see the actual impact of the past three years lack of spending on reserve replenishment globally. Inventory correction seen to continue The OPEC production cut-back agreed in November 2016 is targeting a reduction of OPEC crude production by 1.5 mb/d. This has spurred an oil price increase of about USD 5/b and restored a bullish sentiment in the oil market. Source: Pareto Securities, IEA, Opec As can be seen in the chart to the left, it will essentially now be OPEC s turn to shoulder the burden, after 2016 was characterized by large production declines in US tight oil. Nevertheless, the inventory draw downs look to accelerate, which is positive. On the other hand, OECD inventory levels are still very high and it will take a major reduction to really push oil prices back to previous levels. The key danger here is the recovery of US tight oil production. Oil prices are now at levels that make many wells profitable again and the US horizontal land rig count has started to incraese steadily. The higher the oil price goes, the more will come back on line and it will only be a matter of time before there is a meaningful response in actual production. In the next months, we therefore expect rising US tight oil production to put a damper on the oil price recovery. We may see USD 60/b in the not too distant future, but we have a hard time seeing material upside from that level until we see the impact on global production from conventional reserves of the past three years underspend on reserve replenishment. That effect is bound to emerge at some point and will have a profound impact on prices. However, we believe this is likely to happen in rather than this year. Consensus forecasts on the rise The average 2016 price for Brent Crude was USD 44.8b and has averaged USD 54.4 YTD. The consensus forecasts for 2017 are USD 55/b, which we think may be on the conservative side. For 2018 and 2019 consensus is flat at USD 62/b. As explained above, we think there might be meaningful upside to the 2019 forecasts. Source: EIA, Nordea Markets

7 The oil services market E&P spending seen to rebound in 2017 Global E&P spending was down 22% in 2016, less than expected. The leading E&P spending survey from Barclays Capital was updated in January predicting a 7% increase for Observations of updated spending plans from oil companies seem to confirm this with several companies now expecting to grow their investments by 20%-30% this year. Looking at the graph to the left, this should be no surprise, as oil price gains historically have always coincided with rising E&P spending. Source: Barclays Capital,, EIA,Pareto Securities Source: Barclays, Nordea Markets Rising cash margin for the oil industry The integrated oil companies are estimated to have a cash break even price of USD 51/b to cover production costs, debt service and dividends. Hence, any oil price above this level will allow for increased spending, the opposite of what has been the case for the past three years. The average oil price assumption that lies behind the 7% projected E&P spending increase for 2017 is USD 52/b, so the current price level leaves to margin for further expansion. Indeed, the oil industry has historically raised spending above budgets if actual prices have outperformed budget prices. Moving into 2018, this margin looks set to increase further, although any price increases for services and equipment will mitigate some of this effect. US onshore to benefit first, then spread offshore The Barclays E&P survey predicts North American spending to increase by 27%, in line with the expectation that tight oil production can (and will) be ramped up quickly along with the rising oil prices. International spending is only forecast to rise by 2% and offshore, which is typically capex heavy and driven by major field development decisions, is not expected to start improving until late this year. This sentiment was echoed by Schlumberger in its recent Q4 16 report. For our portfolio, it appears to be no longer a question of if, but when a recovery will happen. However, patience is needed. Source: Nordea Markets, Barclays Capital, EIA Source: Bloomberg, Oslo Stock Exchange Anecdotal evidence of a recovery The financial markets have become more optimistic with US and Norwegian oil service stocks up by 19% in the past three months. Drilling stocks, a typical leading indicator, have fared even better. There have been a selection of positive profit warnings from seismic companies for Q4 16, owing to better-thanexpected multi-client sales. This hints at recovering exploration spending, a typical leading indicator. We are also seeing a rising wave of term fixtures in the OSV space, as it appears that the oil industry is sensing that we are at the bottom and is eager to lock in capacity at low rates for the coming years. We are also starting to see contract extensions within the offshore rig industry, instead of contracts just being allowed to lapse upon expiry. Finally, we have seen a few speculative buyers of assets start to bite, both in the rig industry and the OSV space. At least some pieces in the recovery puzzle are there

8 The shipping market Yet another rebound Average day rates have rebounded 53% after touching yet another low in Q3 16, touching a new, post-1990 low in August. All segments are up, with the exception of average containership earnings. Source: Clarksons Both newbuilding prices and the ordering of new tonnage continues the downward spiral. Drybulk orders started to recover in Q4 16, however, spurred by rate levels rebounding off rock-bottom levels and in line with our prediction. A general improvement across most segments (save for tankers and containership) should also be expected to materialize in somewhat higher ordering activity going forward. Source: Clarksons While the sentiment is seen to be improving, there is little consolidation to be found in second hand vessel prices. Few appear to be willing to snap up tonnage at historically large discounts to newbuild prices, although we have seen some speculative activity in the dry bulk market recently. This may be a result of an expectation that newbuild prices will continue down as yards are running out of orders and are forced to drop prices lower, but it could also be a more cautionary approach taken due to the past few years of disappointing and volatile vessel earnings. Nevertheless, this may provide for a more bullish cyclical set-up in the medium term as the risk of uncontrolled capacity growth should be less than normal. The Fund`s exposure to shipping is within LPG shipping. This market has followed the oil market down both due to slowing oil production (LPG is a byproduct of oil) and due to lower LPG spreads globally, making seaborne trade in the product less appealing. Source: Clarksons Global Seaborne LPG Transportation The weaker earnings for the larger vessels have forced such ships to trade lower, squeezing out lower capacity ships for business. This trickles down all the way to the smaller vessels, to which the Fund is exposed. Recently, there has been some uptick in rates, but on a rather inconsistent basis. Smaller vessels have started to perform better. Many observers are bullish on LPG shipping this year, pointing towards rising prices for LPG and associated products, as well as rising US LPG exports, where there is significant extra capacity to allow for increased volumes. Source: Navigator Gas

9 Second Hand Market and Liquidity As of 31 Dec 16 PWWS had 3,967,541 shares outstanding. Pareto Securities AS ( PSec ) strives to facilitate an active second hand market for shares. The last trading price at time of writing was NOK 14.5 per share (14 April 16), implying a 12% discount to NAV. Investors who wish to buy or sell shares should contact their advisors or alternatively PSec directly. Given the challenging market and situation of PMSOF and PWWS, shareholders and potential investors should exercise caution when trading in the shares. Second hand market All shareholders in 2013 were given the opportunity to sell their shares at a price of NOK (+9.16 estimated value of Singapore Tankers at the time of the transaction). The trading price following the restructuring has dropped off significantly. The traded volumes have however not been substantial. Many of the traded share prices displayed in the graph below (red dots) have been calculated on the basis of implicit feeder trades, adjusted for the merger exchange ratio. The transactions related to the restructuring in Oct 13 have not been included in the graph below. Last 5 trades in second hand market Date Share price No. of shares Volume (NOK) 27/01/ ,155 53,875 27/01/ ,565 89,125 13/04/ ,627 13/04/ ,000 75,000 14/04/ ,514 Number of trades since startup: 1,716 Volume traded since startup (NOK): 360,042,779 Average volume per trade (NOK): 209,815

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

11 Disclaimer This Quarterly Report has been prepared in order to provide information about Pareto World Wide Shipping AS ( PWWS 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.