Pareto World Wide Shipping AS

Transcription

1 Pareto World Wide Shipping AS 2nd quarter report 2016 Link:

2 Executive Summary NAV NOK 50/30 per share (as per 30 June 2016) The NAV share as of Q2 16 was NOK 50 per share for PWWS shareholders that are pro-rata holders of the PMSOF Preference Capital, and NOK 30 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. So far, USD 12m of the USD 25m Preference Capital has been drawn to cover capital requirements in PMSOF s portfolio. Market Development The oil price appears to be stabilizing around USD 45-50/b for Brent crude. We are starting to see early signs of inventory draws, which most observers expect will accelerate during Q3 16 and pave the way for an oil price that is expected to move towards USD 55-60/b towards year end. If that happens, we would expect to see some demand improvement during On the other hand, there are significant levels of excess capacity in most segments with large portions of ships in lay-up and looming order books for new vessels, too. This will dampen the utilization and rate recovery in the next couple of years. Many oil service companies are also financially distressed, so counterparty risks are very real threats to the Fund s portfolio. Several projects are already in tough restructuring negotiations with charterers and more are likely to engage in such discussions in the near future. The lenders are generally in a constructive mood, preferring to help out instead of enforcing their securities, but there are exceptions, which add to the challenges. Shipping continues to be affected by a weak sentiment, but there are some bright spots. The Fund s exposure to the chemicals and LPG markets remain robust, and the largest chemicals tanker exposure was sold during the quarter at a price equal to NAV, providing much needed liquidity to the Fund. Portfolio PMSOF made up 92% of PWWS NAV as of Q2 16, and had an exposure weighted 70% to offshore oil services and 30% to shipping. The contract coverage is 70% with a weighted contract length of 0.6 years. In addition to PMSOF, PWWS owns direct stakes in Singapore Tankers and Parbulk II. There have been no developments regarding Singapore Tankers and the project is still pursuing the original charterer through various legal avenues to secure agreed payments. PMSOF has drawn USD 12m of the USD 25m available from the Preference Capital. This implies that PWWS stake in PMSOF has now been diluted by 22%, so that it currently owns 37.8% of PMSOF. PMSOF has completed a significant project realization during Q2 16, which means that further draws on the Preference Capital will probably be less than anticipated near term. The NAV for holders of the Preference Capital was equal to NOK 50 per share, down 17% during the quarter, while the NAV for non-holders was NOK 30 per share, down 35%.

3 Net Asset Value Development On a diluted basis, NAV was down 35% during Q2 16, reflecting a continued decline in the valuation of the offshore oil services assets in PMSOF, as well as the dilution from the issue of Preference Capital in PMSOF. For shareholders who are PMSOF Preference Capital holders, NAV was down 17%. NAV development NAV as of was NOK 30 per share, down 35% from the previous NAV (31 March 2016) and down 37% from inception in 2006 (adjusted for repayments). For PWWS shareholders that participated in the issue of Preference Capital in PMSOF, the corresponding figure is NOK 50 per share, down 17% from Q1 16 and down 31% from inception (adjusted for paid-in Preference Capital) to weather the current adverse market conditions. PMSOF completed one major project realization during Q2 16 at a price equal to NAV. The proceeds from this means that the Fund is well covered for 2016 and that further draws on the Preference Capital will probably be less than anticipated near term. As of Q2 16, PWWS had a cash balance of NOK 4.4m (USD 0.5m). During the quarter, the USD value of PMSOF fell by 36%, while the value of Singapore Tankers was flat. The USD fell by 4.5% vs the NOK during the quarter, which exacerbated the decline in NOK. On the other hand, PWWS has a decent cash position, which cushioned the total decline. During Q2 16, PWWS did not contribute any capital to PMSOF. On the other hand, PMSOF drew USD 9m of Preference Capital during Q2 16. As a consequence, USD 12m of Preference Capital has now been drawn, implying that the dilution for PWWS ownership in PMSOF has increased to 22% from 20%. The Fund Manager expects the PMSOF portfolio to require significant additional capital during 2016 and Preference Capital The balance of the Preference Capital, including accumulated interest was USD m. For PWWS shareholders that are owners, this equates to a value of NOK per PWWS share. Direct yield As of Q2 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 12 per share so far). Last 3 mths Last 12 mths Last 24 mths Since inception PWWS (ex Pref Cap) -35.2% -72.2% -65.2% -36.5% Oslo Stock Exchange 4.5% -4.1% -2.7% 57.8% Shipping Index * -7.8% -25.6% -13.1% 3.8% Offshore Index ** 9.6% -26.3% -54.5% -39.2% * 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 92% 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 37.8% (48.4%) stake in the Fund. The USD value of PMSOF declined by 53% for PWWS, including the dilution effect and by 36%, excluding this effect. PMSOF s portfolio consists of 17 projects with stakes in 46 units. Its cash position as of 30 June 2016 was USD 5.7m. During Q2 16, the Fund contributed USD 11.9m to underlying projects and received USD 5.2m in dividends and realization proceeds. The operating expenses paid during Q2 16 amounted to USD 0.3m. The Fund called USD 12m of Preference Capital in February in connection with the purchase of 32% in Neptune Subsea at a price of zero, but where the Fund at the same time took over the responsibility to pay in a total of USD 6m of uncalled capital and shareholder loans compared to its original exposure. At present, the contract coverage is 70% and has a gross nominal revenue value of USD 30m for the Fund. The weighted average contract length is 0.6 years. The largest counterpart is CGG (43%), which is listed on the Euronext, followed by Swiber Offshore (16%) and Fairfield Nodal (12%). The overall exposure to different segments in the maritime industries is weighted towards offshore support vessels. The shipping exposure is 30% and the offshore oil services exposure is 70%. The largest contributor to the decline in the portfolio value during Q2 16 was Neptune Subsea (38%), due to lower vessel valuations and lack of vessel utilization, followed by Asian Offshore I and Asian Offshore III (37%), where both projects are exposed to small AHTS in West Africa and South East Asia and are subject to a significant drop in vessel values and Bukit Timah Offshore (12%), where the charterer has entered into administration and where any equity recovery looks doubtful. exposure directly to Viking. The outcome here is subject to significant risk and may well end up in the courts. PMSOF has sold its 50% stake in Brøvig Stainless II at a price marginally above NAV. This provides the fund with a good exit, as well as significant funds to support the rest of the portfolio. Finally, UBT has managed to secure a 5-year bareboat contract at a good rate, although there are a few subjects remaining before this is 100% firm. This adds to the order back log for the fund. 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. Singapore Tankers The project consists of a claim against the former charterer of the vessels. Legal steps to secure STAS position have been taken, but the outcome of these proceedings are highly uncertain. 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. There continues to be a stand-off in Norseman Offshore, where Viking Supply Ships has not paid bareboat hire since February. Norseman is trying to enforce its rights under the BBCP, but is being restricted by its Lender, which also has a large

5 Portfolio PMSOF Project / company Contract Charterparty Charterer Proportion of NAV B-Gas Ltd Apr-16 Timecharter Total / Vitol / Statoil 24.1 % Master and Commander IS Aug-18 Bareboat CGG/Fairfield Nodal 21.7 % Neptune Subsea Shareholder Loan III Spot/Asset play 7.5 % Neptune Subsea Shareholder Loan II Spot/Asset play 7.4 % Far East Offshore IS Feb-17 Bareboat Sanko Steamship Ltd 5.7 % Neptune Subsea Shareholder Loan Spot/Asset play 5.6 % Iceman IS Spot/Asset play 4.5 % NorthSea PSV Shareholder Loan Sep-16 Timecharter Wintershall 4.4 % Asian Offshore III IS Shareholder Loan Spot/Asset play 3.8 % Atlantic Gas II IS Nov-16 Timecharter Geogas Maritime SAS 3.2 % Norseman Offshore IS Dec-20 Bareboat Viking Supply Ships AS 2.7 % NorthSea PSV IS Sep-16 Timecharter Wintershall 2.5 % UBT AS Aug-21 Bareboat 2.5 % PSV Invest II Shareholder Loan Sep-16 Timecharter Apache Petroleum 2.2 % Vestland Seismic IS Spot/Asset play 1.4 % 3B Offshore IS Nov-17 Bareboat Bourbon 0.5 % Atlantica Tender Drilling Aug-17 Timecharter Petrobras 0.4 % Lion AHTS Spot/Asset play 0.0 % Asian Offshore III IS Spot/Asset play 0.0 % Neptune Subsea IS Spot/Asset play 0.0 % Asian Offshore IS Spot/Asset play 0.0 % Bukit Timah Offshore DIS Jul-20 Bareboat Swiber Offshore Marine Pte. 0.0 % Asian Offshore I IS Shareholder Loan Spot/Asset play 0.0 % Key portfolio charts for PMSOF (based on NAV) Segment Distribution Charterparty Distribution Seismic 23% LPG 27% Timecharter 37% Subsea 20% PSV (Europe) 10% Chemical 3% Spot/Asset Play 30% Bareboat 33% AHTS AHTS (Asia) (Europe) 10% 7%

6 Second Hand Market and Liquidity As of 30 June 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 (13 April 16), implying a 52% discount to NAV. Investors who wish to buy or sell shares should contact their advisors or alternatively PSec directly. 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

7 The oil market The signs are strengthening that the inventory correction cycle has started and that it will become more forceful during H2 16. This, plus a rise in unplanned production outages, has driven the oil price to levels of around $45-50/b. Forecasters are now becoming more optimistic, but so far only for 2016, with consensus expectations for 2017 flat so far. We think it is safe to say that we have turned the corner, but exactly how quickly the recovery takes place is still subject to uncertainty. Non-Opec production declining Source: EIA, IEA, Opec Non-OPEC production is falling. The primary driver is US onshore production where the collapse in drilling activity is now finally impacting tight oil production. The overall decline in global E&P spending is also likely to have an accelerating impact on non-opec production elsewhere as both drilling and field development spend is down sharply. 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, or increased OPEC production, which will be negative for the oil price. 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 H2 16. Source: EIA, Nordea Markets Source: EIA, IEA, Opec How much is already priced in? The sentiment has improved much this year, not least due to the early signs that the inventory correction cycle is actually happening and from a growing confidence that it will strengthen going forward. On the other hand, the oil price has also had help from unplanned production outages in OPEC (chiefly Nigeria) and lately also in Canada. These are temporary factors that will gradually evaporate, although the market will continue to be sensitive to these factors as long as the market balance is tight. The sharp correction following the Brexit is also a reminder that we are not out of the woods yet. Consensus forecats on the rise Source: EIA The consensus forecast for Brent crude for 2016 has risen to roughly $45/b from a low point of $40/b earlier this year. Consensus is now expecting $55/b for 2017, but it is interesting to note that this has not moved at all so far this year. It would appear that the market is still a bit cautious, which in turn leaves some possibility for a upside. Source: IEA

8 The oil services market E&P spending expected down another 20% in 2016 Global E&P spending was down around 25% last year, the biggest decline in three decades. For 2016, the forecast is for another down-tick of 20%, meaning that 2016 will be even more difficult than 2015 on a global basis and that we are down to levels not seen since before the financial crisis. Any recovery in the oil price is unlikely to have material impact until next year, as the budgets for 2016 are more or less fixed. What does it take to provide an uptick for 2017? Source: Barclays Capital Source: Barclays, IEA 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, like in 2009 and 2015, with the exception of 1999 when the impact was delayed by one year. Conversely, since 1992, positive oil price changes have always had a positive impact on E&P spending. Based on consensus forecasts for H2 16, the oil price would average $45/b for 2016, down 20% on 2015 and corresponding well with the expected reduction in E&P spending. For 2017, however, consensus forecasts are for $55/b, a 23% increase from this year, which should provide a boost to E&P spending. We are not totally convinced that the impact will be 1:1 with the oil price increase, as some delay should be expected, but there nevertheless seems good reason to expect an improvement next year. A lot of excess capacity out there While the demand side of the equation might get a boost next year, the vast excess supply in key segments will delay the uptick in utilization and hence day rates. Including the newbuilding order book and units in lay-up, the segments have between 39% and 57% excess capacity relative to current levels of demand. Source: Pareto Securities, Nordea Markets, Westshore On the other hand, much of the excess capacity rests in units that are in cold lay, which will be costly to reactivate (both in seismic and rigs) and which may also be technically obsolete (seismic). Therefore, it may take more time before this capacity comes back, than for example for OSVs, where reactivation costs are low and the majority of the units are in semi-warm lay-up mode. One may also question whether the newbuilding order book will be delivered as few (if any) owners have the funds available to make the final delivery payments and debt financing is scarce. Nevertheless, we caution against expecting too much of day rate improvements in the coming years, as the excess capacity will have a negative impact one way or the other. Certainly, it will shave a fair bit off the peak recovery potential.

9 The shipping market Gloomy still Average day rates have come down again during Q2 16. The only bright spots are crude and product tankers, with other segments either flat or declining. The ordering of new tonnage continues to trend lower, despite a generally lower trend in newbuilding prices. Drybulk contracting continues to represent the bulk of new orders. Source: Clarksons Orders for tankers and other vessels all but dried up this year, which may seem at odds with the actual market conditions out there. Perhaps ship owners have finally learnt a lesson? Tankers are an inverse play on the oil price, so the recent rebound in oil may also explain some of the missing spark in this segment. Source: Clarksons Newbuild prices are trending steadily lower, obviously a result of the low contracting activity as shipyards entice owners back for orders through offering more competitive prices. The shipyard industry, particularly in South Korea, are in a sad state and currently rely on hefty financial support from their governments. The culprit lies in owners walking away from orders in a host of segments, which leaves the yards with half finished and finished vessels that have no buyers and a lot of sunk cost. It will be interesting to see whether there is a permanent reduction in global shipyard capacity as a result of this, which would be a clear positive. In any case, we would expect shipyard prices to continue to slide, driving second hand prices further down, as well. Source: Clarksons The Fund`s exposure to shipping is within chemical and LPG shipping. Within chemicals, the trading volumes are improving, and freight rates are reasonable. A mushrooming order book for new vessels, particularly mid-sized stainless steel tankers continues to pose a medium term risk to these markets. Within LPG, the rates for large vessels (VLGCs) have collapsed from a historical peak and are now at more normal levels. Rates for medium sized vessels (MGCs) have also come down, but remain healthy. However, rates for smaller vessels have come up nicely lately, but for 3,200 cbm semi-ref vessels and 5,000 cbm pressurised vessels, to which the Fund has exposure to through B-Gas. Source: Clarksons

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 May 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.