Letter from the CEO. Letter from the CEO

Transcription

1 Annual Report 2014

2 Contents Letter from the CEO... 3 Key figures... 5 Selected financial information... 5 Business Overview History and organisation Organizational structure Share Capital Operations and contracts... 7 Directors Report Strategy and Operating review Summary of results and financial position Liquidity and capital resources Investments and planned surveys Going Concern Risk factors Risks relating to the industry in which the Group operates Risk factors relating to the Group and its business Risks relating to the Group s financial situation Environment and society Quality, Health, Safety and Environment Employees Corporate Governance Code of Practice Equal treatment of Shareholders Dividend policy and payment of dividends General Meetings Pre-emption rights Board of Directors Group Policies Independent auditors Senior Management Independent Auditor's report Consolidated Financial Statements Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows

3 Letter from the CEO Letter from the CEO For Songa Offshore there has been considerable change and improvements throughout Following the completion of the refinancing of the company early 2014, we have focused on strengthening the organization and the structure significantly over the last year. The drilling market in 2014 and into 2015 has been very challenging, driven by the fall in the oil price which has impacted many variables in the market environment, primarily access to people, market rates, access to capital, cost level etc. In this unstable environment Songa Offshore has continued to build on the new Vision that we implemented in 2013 Songa Offshore shall be the preferred International Midwater Drilling Contractor with a strong presence in the harsh environment North Atlantic basin. I am personally happy that we have had no serious incidents or injuries and that the strong focus on QHSE work is pushing our trends in the right direction. However, we still have room for improvements and we shall use 2015 to raise our safety awareness further throughout the entire organization to levels significantly better than the comparable industry. Our existing rig fleet have delivered solid operations in 2014 and I would like to give credit to our hard working offshore employees that have been a key contributor in achieving this. Songa Offshore is one of the companies that delivers the best operational and financial uptime on the Norwegian Continental Shelf. This is something that we work hard to achieve and improve, constantly. We have had challenges with the progress of the Cat D project and we experienced some significant delays during the first three quarters of However, we are encouraged to see the improved construction progress of the Cat D rigs in Korea, particularly in the fourth quarter 2014 and the further acceleration into We are now looking forward to take into operation in 2015 and 2016 our four new prime Cat D drilling units on long term contracts with our customer Statoil. Also Songa Dee Special Periodic Survey overran its planned budget and duration. The survey was completed and the rig back in operation late December Songa Offshore is today a stronger drilling company. The 2014 sale of the Songa Venus and Mercur that operated in the Far East has enabled renewed focus on the operations on the North Atlantic basin. The company has the longest contracts and highest average contract value per rig in the industry. Once we have the new Cat D rigs in operation, we will become the largest semi-submersible drilling contractor operating on the Norwegian Continental Shelf. However, more work is required to further strengthen the Songa Offshore organization. This will enable us to build on this unique position and ensure a higher and more efficient service quality for our clients. I believe we are well positioned in the years to come.

4 Letter from the CEO Main achivements in 2014 The Company finalized the refinancing at the beginning of the year adding the total capital raised of USD 425 million, where Perestroika AS, a company owned by Mr. Frederik Mohn, became the majority shareholder, owning 50.2 percent. The USD 1,014 million financing for Songa Equinox and Songa Endurance was signed in the first quarter The sale of Songa Mercur and Songa Venus, and the establishment of strategic Joint Venture for international operations with Opus Offshore Songa Offshore Opus Drilling were completed in July This was a consequence of a strategic focus on midwater harsh environment. The Songa Dee 5 year Special Periodic Survey (SPS) was completed in December The company is not satisfied with the execution of the SPS and the technical project team will be strengthened going forward. The Board of Directors of Songa Offshore SE have established a new Long-Term Incentive Program for management and certain key personnel and an Employee Discounted Share Purchase Plan for all employees. The execution of the IFS ERP system project was executed in 2014, to be implemented throughout The USD 1,100 million financing of Songa Encourage and Songa Enabler was signed in October Priorities for 2015 We will work hard to improve our safety results to ensure that by the end of the year we are achieving top quartile performance. With the delivery of the Cat D rigs throughout 2015 we have a significant challenge ahead of us. We will do this without detriment to safe and efficient operations throughout the year. We are now in the process of taking onboard approximately 700 new employees who will be assimilated into the organization over the next nine months. We will work hard to deliver world class uptime and efficiency for our customer both on our existing rigs and on our Cat D Rigs when they come into operations. We will work to reduce the risk of the 2016 of maturity on our fleet loan financing our existing fleet. Our new Rig Support Centre at Mongstad outside Bergen (our base facility) will start operations in second quarter. Our Operational Support and Engineering Department will be further strengthened to receive the Cat D rigs and prepare for the Songa Delta SPS. We will work hard to secure further work for our three existing rigs Songa Trym, Songa Delta and Songa Dee that come off contract in Finally, I would like to conclude this letter by taking the opportunity to thank all our important and valued stakeholders for the firm support they have shown Songa Offshore throughout the year. We are especially grateful for the contributions of our onshore and offshore employees, our main customer Statoil and the DSME yard. On behalf of everyone at Songa Offshore, I can assure you that we really look forward to working with you all in Limassol, Bjørnar Iversen Chief Executive Officer 4

5 Key figures Key figures Selected financial information Amounts in USD million 2012 Income statement data Operating revenue Operating expenses (217) (279) (331) Operating profit before depreciation (EBITDA) Operating profit (EBIT) 17 (19) (256) Net profit (loss) before tax (57) (102) (295) Tax charge - (57) (11) Net profit (loss) for the year (57) (159) (305) Earnings (loss) per share, basic and diluted (0.07) (0.74) (1.59) Number of shares at year end (000) 873, , ,913 Balance sheet data Cash and cash equivalents Drilling units 1,063 1,208 1,372 New-builds Current assets Current liabilities (391) (500) (715) Working capital (59) Total indebtedness (846) (1,067) (1,396) Total assets 2,307 2,439 2,739 Total equity 1,036 1, Cash flow from operations Cash flow from (used in) investing activities (126) 367 (735) Contract backlog (Bn USD) Number of Employees

6 Business overview Business Overview Songa Offshore s vision is to be the preferred International Midwater Drilling Contractor with a strong presence in the harsh environment North Atlantic basin. 1. History and organisation Songa Offshore SE ( the Company ) and its subsidiaries (together, the Group and/or Songa Offshore ) is an offshore drilling contractor, registered in Cyprus and listed on the Oslo Stock Exchange (Ticker: SONG). The principal business of the Group is to own and operate drilling rigs to be used in exploration and production drilling. Songa Offshore operates in the North Atlantic Basin and owns and operates a fleet of three semi-submersible rigs, Songa Dee, Songa Delta and Songa Trym, all operating in the midwater segment on the Norwegian Continental Shelf. In addition, Songa Offshore has four semisubmersible Cat D drilling rigs under construction that are scheduled for delivery in The drilling rigs are mobile and can be moved to new locations in response to client s demand. They are designed to operate away from port for extended periods and have living quarters for the crew and helicopter landing facilities. Drilling rigs, related equipment and crews are generally contracted on a day rate basis to exploration and production companies. During 2014 the Group sold the Songa Mercur and Songa Venus to Opus Offshore Group. The sale was completed on 23 July The Group is headquartered in Limassol, Cyprus. The rig operations are managed from the Group s office in Stavanger, Norway. In addition, a project organisation is established in South Korea to oversee technical project management of the Cat D new build process. The Group also has presence in Bermuda, Kuala Lumpur, Singapore and Aberdeen. Aberdeen UK Hamilton Bermuda Stavanger Norway Okpo Bay South Korea Singapore/ Kuala Lumpur Malaysia Limassol Cyprus 2. Organizational structure Songa Offshore SE is the Group parent company. As of 31 December 2014 there were 28 fully consolidated subsidiaries. A list of major subsidiaries directly held by the Company is given in Note 7 to the Consolidated Financial Statement 3. Share Capital On 26 February 2014 the Group announced the completion of the subsequent share offering of 61 million shares at NOK 2.50 per share, following a private placement in December The total number of issued shares in the Group as at 31 December 2014 was 873,912,544, each with a par value of EUR

7 4. Operations and contracts Songa Dee, Songa Delta and Songa Trym are operating on the Norwegian Continental Shelf. In addition to the three semisubmersible drilling rigs, Songa Offshore have four semisubmersible Cat D drilling rigs under construction that are scheduled for delivery in Songa Dee, Songa Delta and Songa Trym are contracted to 2016 with Statoil for work on the Norwegian Continental Shelf, while the four rigs under construction are each contracted with Statoil for eight years, also at the Norwegian Continental Shelf. Business overview The seven rigs have as per 31 December 2014 an aggregate firm contract backlog of approximately USD 6.1 billion, with options corresponding to approximately USD 8.3 billion. During 2014 the Group sold the Songa Mercur and Songa Venus to Opus Offshore Group. The Songa Mercur and the Songa Venus are, following the sale, operated through a 50% owned Joint Venture established with Opus Offshore Group. Songa Dee Songa Dee is a winterised semi-submersible drilling rig build in 1984 by Mitsubishi Heavy Industries Ltd and was last Upgraded in 2014 when it underwent its five-year Special Periodic Survey (SPS). Songa Dee was at year end employed on the Norwegian Continental Shelf with Statoil as customer on a five year contract ending in third quarter The current day rate is USD 356,652. The day rate is subject to annual cost escalation. Statoil has the right to extend the contract with up to one year at contract rate. Songa Delta Songa Delta is a winterised semi-submersible drilling rig build in 1981 by Rauma Repola Oy, Pori Finland and was last upgraded in Songa Delta was at year end employed on the Norwegian Continental Shelf with Statoil as customer on a four year contract ending in third quarter The current day rate is USD 364,105. The day rate is subject to annual cost escalation. Statoil has the right to extend the contract with one year at contract rate. The rig is scheduled for its next SPS in Songa Trym Songa Trym is a winterised semi-submersible drilling rig build in 1976 by Aker Verdal, Norway and was last upgraded in Songa Trym was at year end employed on the Norwegian Continental Shelf with Statoil as customer on a contract ending in first quarter The current day rate is USD 372,088. The day rate is subject to annual cost escalation. Statoil has the right to extend the contract with up to 24 months at contract rate. The rig is scheduled for its next SPS in Songa Equinox Songa Equinox is a harsh environment semi-submersible drilling rig, built by DSME and is expected to be delivered in June The rig will perform drilling services in Norway under an eight--year contract with Statoil. The current day rate is USD 483,932. The day rate is subject to annual cost escalation, as well as certain adjustments as per the drilling contract. Statoil has the right to extend the contract with up to 4x3 years at contract rate. Songa Endurance Songa Endurance is a harsh environment semi-submersible drilling rig, built by DSME and is expected to be delivered in August The rig will perform drilling services in Norway under an eight-year contract with Statoil. The current day rate is USD 483,932. The day rate is subject to annual cost escalation, as well as certain adjustments as per the drilling contract. Statoil has the right to extend the contract with up to 4x3 years at contract rate. Songa Encourage Songa Encourage is a harsh environment semi-submersible drilling rig, built by DSME and is expected to be delivered in September The rig will perform drilling services in Norway under an eight-year contract with Statoil. The current day rate is USD 455,349*. The day rate is subject to annual cost escalation, as well as certain adjustments as per the drilling contract. Statoil has the right to extend the contract with up to 4x3 years at contract rate Songa Enabler Songa Enabler is a harsh environment semi-submersible drilling rig, built by DSME and is expected to be delivered in November The rig will perform drilling services in Norway under an eight-year contract with Statoil. The current day rate is USD 459,437*. The day rate is subject to annual cost escalation, as well as certain adjustments as per the drilling contract. Statoil has the right to extend the contract with up to 4x3 years at contract rate * Based on USD/NOK exchange rate of 7.43 as per 31 December

8 Directors report Directors Report Strategy and Operating review Songa Offshore is now focused on operating in the mid-water segment of the harsh environment North Atlantic Basin. The sale of the Songa Mercur and Songa Venus in 2014 has decreased operational and geographical complexity and allows the Company to focus on operational improvements and operational synergies of the existing three-rig fleet operating on the Norwegian Continental Shelf, as well as to take delivery and mobilize the four Cat D new-builds under construction at the DSME yard in South Korea. With these four new builds complementing our current pool of rigs, Songa Offshore will be the largest operator of semi-submersible rigs on the Norwegian Continental Shelf and the potential for operating and administrative synergies will further increase. The existing fleet consisting of the Songa Dee, Songa Delta and Songa Trym continued to work under long term contracts with Statoil throughout The Songa Dee has been employed with well workovers and production drilling on the Gullfaks field during the year and it has had an operating efficiency of 100% and an earnings efficiency of 97% when at contract. The rig underwent its five year Special Periodic Survey in Invergordon, Scotland from 24 August and was back on day rate from 26 December. The Songa Delta has been employed with production drilling in relation to Statoil s fast-track field developments at an operating efficiency of 100% and an earnings efficiency of 99%. The Songa Trym has been engaged in exploration drilling, as well as a plugging and abandonment campaign at the Glitne field. The rig was suspended by the client from 20 November 2014 to 18 January 2015 at a 75% suspension rate. Prior to this period the rig achieved for 2014 an operating efficiency of 99% and an earnings efficiency of 97%. The Cat D new-build program has progressed but with significant delays and thus behind plan throughout Final Cat D delivery schedule has now been agreed between the DSME yard and Songa Offshore. The Songa Equinox is to be delivered mid June The Songa Endurance is to be delivered in August 2015, while the delivery date for the Songa Encourage and the Songa Enabler is end September and end November 2015 respectively. The Group is working closely with the client, Statoil, in overseeing all aspects of the project. Songa Offshore recorded six recordable incidents in 2014 as per IADC guidelines and definitions, resulting in a Total Recordable Frequency Rate (TRFR) of 3.54 and a Lost Time Incident Frequency Rate (LTI FR) of 0.59 per one million working-hours. Of the six incidents five were Medical Treatment Only (MTO), and one was a Lost Time Incident (LTI). 8

9 Directors report 2. Summary of results and financial position Key events On 26 February 2014 the Group announced the completion of the subsequent share offering of 61 million shares at NOK 2.50 per share, following a private placement in December The USD 1,014 million loan facilities for the two first Cat D drilling rigs were signed on 31 March The junior financing include a pre-delivery tranche of USD 104 million that was drawn on 9 May On 23 July 2014, Songa Offshore completed the sale of the Songa Mercur and the Songa Venus rigs to the Opus Offshore Group. The Songa Mercur and the Songa Venus, were from the same date operated through a 50% owned Joint Venture established with Opus Offshore Group. The Songa Dee was back on day rate on 26 December 2014, following the SPS performed in Invergordon Scotland that commenced on 24 August. The out of service period of 124 days exceeded the budget of 65 days due to additional scope of work, unexpected failure on one of the four main engines, and longer than planned acceptance-testing than anticipated after the SPS. The yard stay costs were USD 105 million, compared to a budget of USD 90 million, in addition to USD 29 million in operating costs in the period, of which USD 21 million were capitalized and USD 8 million were expensed. The USD 1,100 million senior secured credit facility for the financing of the last two Cat D rigs, Songa Encourage and Songa Enabler, was signed on 30 October Group results Operating profit before depreciation (EBITDA) Revenue for the Group was USD million in 2014 compared to USD million for 2013, a decrease of 12.0%. The main reason for the decrease, is the lower revenue contribution from the Songa Mercur and the Songa Venus, as well as the Songa Dee out of service period in relation to its SPS. Rig operating expenses of the Group decreased by 22.1% compared to last year, from USD million in 2013 to USD million in The decrease in operating expenses is to a large extent due to the divestment of the Songa Mercur and the Songa Venus and to lower Songa Dee operating costs, as operating expenses incurred during the 2014 yard stay were partly capitalized. General and Administrative (G&A) expenses for the year were USD 48.7 million as compared to USD 60.1 million in 2013, a decrease of 18.9%. The decrease is mainly explained by absence of refinancing related expenses of USD 4.4 million, absence of severance payments and other special compensation related elements incurred in 2013, as well as lower South East Asia G&A cost in Other gains and losses decreased from a gain of USD 0.9 million in 2013 to a gain of USD 0.8 million in EBITDA for 2014 was USD million compared to USD million in 2013, representing an EBITDA margin of 39.7% compared to 37.8% in Depreciation and impairment Depreciation expense was USD million in 2014, USD 25.3 million lower than the 2013 depreciation expense, primarily reflecting the Songa Mercur and the Songa Venus divestment. During the year the Group recognised an impairment loss of USD 64.9 million compared to USD 92.3 million in The 2014 impairment loss consist of USD 60.7 million related to the Songa Venus and the Songa Mercur, as well as USD 4.2 million Songa Dee and Songa Trym equipment that was written off. 9

10 Directors report Net financial cost Finance income in 2014 was USD 3.4 million compared to USD 0.6 million. The increase is mainly due to additional income earned on the financial assets derived from the sale of the Songa Mercur and the Songa Venus and the investment in the Joint Venture established with Opus Offshore Group. Finance costs in 2014 were USD 33.5 million compared to USD 83.3 million in 2013, a decrease of 59.8%. The decrease is mainly explained by the absence of the refinancing accounting effects of USD 48.2 million incurred in The finance costs are net of capitalized interest of USD 51.7 million. Capitalized interests in 2013 were USD 41.3 million. Other financial items of USD 43.8 million were recognized in USD 8.7 million is attributable to the Songa Mercur sale, where estimates for two earn-out arrangements that are now classified as financial assets have been reassessed in light of the weaker drilling market. USD 5.4 million represents realized foreign exchange losses in relation to foreign exchange forward transactions. The balance of USD 29.7 million is primarily related to unrealized mark to market valuation changes of foreign exchange forward transactions, reflecting the sharp appreciation of the US Dollar vs. the Norwegian Kroner during the fourth quarter of the year Loss before tax Loss before tax for the year was USD 56.6 million compared to a loss of USD million in 2013, reflecting the above fluctuations Income tax Income tax charge in 2014 was USD 0.1 million compared to a charge of USD 56.8 million in 2013, a difference of USD 56.7 million. Income tax charge for 2014 included a partial reversal of a USD 12.4 million non-cash tax provision related to the international operations. Also included is a non-cash realization effect of USD 4.5 million related to the Norwegian exit tax case. This was more than offset by a non-cash income tax expense for ongoing operations in Norway of USD 12.2 million, primarily reflecting effects from revaluation of the NOK denominated loss carry forward and the related deferred tax asset at a stronger USD/NOK exchange rate Net Loss Net Loss for the year was USD 56.7 million compared to a net loss of USD million in Earnings per share Basic and diluted loss per share (EPS) for the year ended 31 December 2014 was USD 0.07 compared to a loss of USD 0.74 in Dividends and allocation of this year s loss The Board of Directors does not recommend the payment of any dividend and the net loss for the year is allocated against other equity. Financial position Total assets The Group s total assets as at year end were USD 2,306.6 million compared to USD 2,438.8 million in The carrying value of the Group s drilling rigs and new-builds accounted for USD 1,781.7 million compared to USD 1,606.8 million in Cash and cash equivalents Total cash and cash equivalents as at the end of the year were USD million, compared to USD million at year end Total equity Total equity has decreased from USD 1,080.6 million in 2013 to USD 1,035.8 million in The decrease is due to the loss for the year of USD 56.7 million and to other comprehensive income movements of USD 13.8 million, partly offset by USD 25.4 million related to the subsequent offering of 61 million shares. As of 31 December 2014 the book equity ratio of the Group (defined as total equity divided by total assets) is 44.9% compared to 44.3% in

11 Directors report 3. Liquidity and capital resources Financing Cat D financing On 31 March 2014 Songa Offshore announced that the loan agreements for the previously announced USD 1,014 million loan facilities for the financing of the first two Cat D drilling rigs, Songa Equinox and Songa Endurance, were signed by all parties. The new facilities are split into senior loans of USD 774 million and junior loans of USD 240 million and have an average amortization profile of 10.5 years. The junior loans include a pre-delivery tranche of USD 104 million that was drawn in May The senior loans are priced at LIBOR plus 3.00%, while the junior loans are priced at a fixed rate of 7.50%. On 30 October 2014 Songa Offshore announced that the loan agreements for the USD 1,100 million senior secured credit facility for the financing of the Cat D rigs Songa Encourage and Songa Enabler had been signed. The financing consists of a revolving pre-delivery financing of USD 90 million per rig and a post-delivery financing of USD 550 million per rig. The pre-delivery loan is priced at LIBOR plus 3.00%, while the post-delivery loan is priced at LIBOR plus 2.50% Availability of funding The Group anticipates that its aggregate funding requirement over the next 12 months in respect of ongoing operations, commitments with regards to the four Cat D new-builds, as well as to service debt, is covered through cash flow from operating activities, cash at hand and committed debt facilities. The funding situation beyond this period is challenging and dependent on the Company s ability to take delivery of the Cat D new-builds at cost and schedule, the Songa Delta SPS expenditures, the ability to refinance the existing fleet loan before or at maturity in October 2016, as well operational performance and foreign exchange developments. Cash flow Net cash generated from operating activities for the year was USD 42.4 million compared to USD 45.8 million in The main reasons for the decrease are reduced working capital and higher fee expenditures related to financing of the Cat Ds. Net cash used in investing activities for the year was USD million, compared to net cash received from investing activities of USD million in This is mainly driven by the capital expenditures of USD million related to the Cat D new-builds and the Songa Dee SPS, partly offset by the cash portion of the sale of the Songa Mercur and the Songa Venus of USD million. Furthermore, the Group received USD 590 million for the sale of Songa Eclipse in Net cash used in financing activities for the year was USD million compared to USD 19.1 million in This is a result of USD million used for loan repayments, partly offset by the net proceeds from the subsequent offering of share completed in March 2014 of USD 25.4 million and proceeds from the Cat D 1 and 2 junior loan pre-delivery tranche of USD million. Net decrease in cash and cash equivalents for the year was USD million compared to a net increase of USD million in This is as a result of the above mentioned changes. The Group as at 31 December 2014 had USD million of unutilised financing facilities in relation to the pre-delivery financing of Cat D 3 and 4 that is available upon repayment of the current pre-delivery financing from Statoil of USD million. 11

12 Directors report 4. Investments and planned surveys Capital expenditures for the Group s operating rigs mainly relate to Special Periodical Surveys (SPS). These surveys are required in order to maintain classification certificates, which are renewed every five years. SPSs normally involve yard stays and are often combined with rig upgrades. The duration and cost of SPSs depend on many factors including the rig s general condition, regular maintenance, extent, and planning of the survey, area of operation, and local requirements. Normally no charter hire is received during surveys. The Songa Dee SPS in Invergordon Scotland commenced upon rig arrival on 24 August The rig stayed at yard until 16 November, when it moved to perform inclination tests and acceptance testing in waters close to the yard. On 5 December, the rig moved to the Norwegian coast to complete the acceptance tests. The rig was back in operation on the Gullfaks field 26 December 2014 and continued to work under the Statoil contract. The out of service period, initially planned to be 65 days, was completed in 124 days. This delay was mainly caused by an unexpected failure on one of the four main engines and an acceptance-testing period that extended longer than planned. The actual yard stay costs were USD 105 million, compared to the budget of USD 90 million, reflecting increased scope, as well as higher project organization costs from a longer out of service period. Operating costs in the period were USD 289 million, of which USD 21 million were capitalized and USD 8 million were expensed. Songa Delta is scheduled for its next SPS in 2016, and Songa Trym in In addition to the SPS capital expenditures, there will also be other capital expenditures for the rigs. The normal level of such capital expenditure is USD 5-8 million per year per rig. It is expected that the Cat D rigs will have lower levels of capital expenditure during their first years of operation. 5. Going Concern The Board of Directors confirms their assumption of the Group as a going concern. This assumption is based on the budgets for 2015 and the Group s long-term forecasts for the following years. Please also refer to Availability of Funding section under Risks relating to the Group s financial situation on page 25. The Board believes that the annual report provides a correct outline of the Group s assets and debt, financial position and financial performance. Limassol, 29 April 2015 Frederik W. Mohn (Chairman of the Board) Michael Mannering (Board Member) Arnaud Bobillier (Board Member) Christina Ioannidou (Board Member) Johan Mikkelsen (Board Member) 12

13 Risk factors Risk factors 1. Risks relating to the industry in which the Group operates 1.1. Oil and gas prices The profitability and cash flow of the Group s operations depends upon the reaction of the Group s clients to the market price of oil and gas, which in turn is affected by numerous factors beyond the Group s control, including, but not limited to, worldwide economic and political conditions, levels of supply and demand, the policies of OPEC (Organization of Petroleum Exporting Countries), advances in exploration and development technology, and the availability and exploitation of alternate fuel sources. A substantial or prolonged decrease in oil prices could cause a delay or depress exploration, development and production activity, which could lead to a lower utilisation of rigs affecting the financial position of the Group Oversupply of drilling units in the industry The supply of drilling units in the industry is affected by, inter alia, assessments of the demand for these units by oil gas clients and drilling contracting companies. Any overestimation of demand for drilling units may result in an excess supply of new drilling units. During prior periods of high utilization and day rates, industry participants have increased the supply of rigs by ordering the construction of new units on speculation, ie without contracts. This has, from time to time, created an oversupply of rigs and has caused a decline in utilization and day rates when the rigs enter the market, sometimes for extended periods of time as rigs have been absorbed into the active fleet. The offshore drilling industry is highly competitive with numerous industry participants. Drilling contracts are traditionally awarded on a competitive bid basis, where intense price competition is one of the primary factors, together with the quality and technical capability of service and equipment. The entry into service of newly constructed, upgraded or reactivated units will increase marketed supply and could reduce, or curtail a strengthening of, day rates in the affected markets. In addition, the new construction of high specification rigs, as well as changes in the drilling rig fleets of the Group s competitors, could require the Group to make material additional capital investments to keep its rig fleet competitive. Excess supply could result, when existing contracts expire or are otherwise terminated, in lower contract rates, which could have a material adverse effect on the business and results of operations of the Group Market volatility The world s principal financial markets have experienced extreme volatility and disruption for more than three years, due in large part to the turmoil affecting the liquidity of the banking system and the market reaction thereto. These adverse market conditions have led to, and could lead to further, significant trading losses and write-downs by banks and other financial institutions. It is unclear whether the severity of the downturn in the global financial markets and/or economic conditions will continue to worsen, or when conditions might improve. It is difficult for the Group to predict what the impact of continued market turbulence will be on the Group from a general business perspective or from a capital or liquidity perspective. 13

14 Risk factors 2. Risk factors relating to the Group and its business 2.1. Project risk It is customary in the drilling industry where the Group operates that all contracts are charter related, e.g. structured as time charters or bareboat charters. The rationale for this is that oil service companies provide a service where the schedule and scope of work is controlled and ultimately directed by its customers. In some instances market participants may accept fixed prices for certain components of the overall contract work scope. Such instances include mobilisation and demobilisation of a unit to/from a worksite, and the conversion/upgrade of units to meet specific requirements as may be required for a specific project. The Group s corporate policy is to seek to mitigate project risk at all times by having a strict policy on termination risk, breakdown risk, off-hire situations, force majeure risk etc. However, there can be made no assurance that the Group will be able to sufficiently mitigate these project risks, and any such risk could negatively affect the financial position and results of operations of the Group Insurance and uninsured risk Operational risks can inter alia cause personal injury, the loss of a unit, operational disruption, off hire and termination of contract. In order to mitigate these risks, the Group has instigated an insurance program in line with market practice, and additional insurance is always considered when a specific project is considered to be of a high risk nature. In 2014, the Group has decided to extend its insurance program with loss off hire insurance, as part of a reduction of the overall risk profile of the Company. Such insurance is in place for the existing fleet from May 2014 and will also be implemented for the Cat D rigs when delivered form yard. Insurance policies and contractual rights to indemnity may not adequately cover losses, and the Group does not have insurance coverage or rights to indemnity for all risks that could result from drilling operations. The Group coverage includes [annual aggregate] policy limits. If a significant accident or other event occurs that is not fully covered by the insurance or an enforceable or recoverable indemnity from a client, the occurrence could adversely affect the Group s financial position, results of operations or cash flows Rig operation The Group s fleet is exposed to operational risks associated with offshore operations such as breakdown, bad weather, technical problems, force majeure situations (e.g. nationwide strikes), collisions, grounding and similar events, which may have a material adverse effect on the earnings and value of the Group Charter risks The Group provides its services on the basis of drilling contracts that are awarded through competitive bidding or to a lesser extent through direct negotiations with oil companies. For Songa Offshore, the three existing rigs are on contract with Statoil with remaining terms up to one and a half years, all with options for extensions. The four new builds are backed by eight years firm contracts plus options of another 12 years (4x3 years) per rig. The Group s financial condition, operating results and cash flows could be adversely affected by early termination of contracts, contract renegotiations or cessation of day rates under any of the foregoing circumstances. 14

15 Risk factors 2.5. Risk of accidents Offshore drilling units may work in harsh environments. The Group s operations are subject to the usual hazards inherent in drilling for oil offshore, such as breakdowns of vessels, blowouts, reservoir damage, loss of production, loss of well control, punch-through, cratering s, groundings, collisions, fires, adverse weather conditions and natural disasters such as cyclones, storms and hurricanes. The Group s operations are also subject to accidents, which could be caused by various factors, including human error, adverse weather conditions or faulty construction. The occurrence of any of the above events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury or death to rig personnel, damage to producing or potentially productive oil formations and environmental damage. Operations also may be suspended because of machinery breakdowns, abnormal drilling conditions, failure of subcontractors to perform or supply goods or services or personnel shortages. In addition, offshore drilling operators are subject to perils peculiar to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Damage to the environment could also result from its operations, particularly through oil spillage, extensive uncontrolled fires or a spill, leak or accident involving other hazardous substances that are stored on a rig. The Group may also be subject to damage claims by oil and gas companies or other parties. An accident can have a material adverse effect on the Group s financial condition, and there can be no assurance that the Group will have sufficient insurance against such losses and/or expenses Service life and technical risk The service life of a rig and/or vessel is generally assumed to be more than 25 years, but will ultimately depend on its efficiency. There can be no assurance that the Group s drilling units will be successfully deployed for such period of time. Although the Group has four high specification mid-water semi-submersible rigs under construction, the remaining three rigs were all built in the 1970s and 1980s. The capital associated with the repair and maintenance of each rig increases with age. In addition, there may be technical and environmental risks associated with ageing rigs, including operational problems and regulatory requirements leading to unexpectedly high operating/maintenance costs and/or lost earnings, and which may have a material adverse effect on the financial position of the Group Unexpected repair cost The timing and costs of repairs on the Group s drilling units are difficult to predict with certainty and may be substantial. Many of these expenses, such as dry-docking and certain repairs for normal wear and tear, are typically not covered by insurance. Large repair expenses could decrease the Group s profits. In addition, repair time may imply a loss of revenue for the Group. 15

16 Risk factors 3. Risks relating to the Group s financial situation 3.1. Financial risk The Group monitors and manages the financial risks related to the operations of the Group through internal reports and analysis. The Group is exposed to various risks such as currency risk, interest rate risk, price risk, credit risk, liquidity risk and cash flow risk. The Group seeks to manage these risks by using derivative financial instruments where appropriate. The use of financial derivatives is monitored and approved by the Board of Directors. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The Group is facing a challenging financial position due to, inter alia, the level of capital needed to finance its rigs under construction. The Group monitors and manages the financial risks related to the operations of the Group through periodic internal reports and analysis The Group has a significant amount of third party indebtedness The Group has a significant amount of third party indebtedness. A breach of the terms of the Group s loan agreements may cause the lenders to require repayment of the financing immediately and to enforce the security granted over substantially all of the Group s assets, including its rigs. If the Group s cash at hand, operating cash flows and financing arrangements are not sufficient to meet its operating expenses, its capital expenditure commitments and the debt payment obligations of the Group, the Group may be forced to do one or more of the following: (i) delay or reduce capital expenditures; (ii) sell certain of its assets; and/or (iii) forego business opportunities including acquisitions and joint ventures The Group has exposure for financial covenants The Group s credit and borrowing facilities contain financial and other covenants. There can be no assurance that the Group will be able to meet all such covenants relating to current or future indebtedness contained in its funding agreements or that its lenders will extend waivers or amend terms to avoid any actual or anticipated breaches of such covenants. Failure to comply with its financial and other covenants may have an adverse effect on the Group s financial condition, and also potential increased financial costs, requirements for additional security or cancellation of loans Market risk management and foreign currency risk management USD is the functional currency of the Company and all its subsidiaries. The Group is exposed to foreign currency risks related to its operations. The Group s expenses are primarily in USD and NOK. As such, the Group s earnings are exposed to fluctuations in the foreign currency market for NOK in relation to USD. In addition, the Group is to a lesser extent exposed to the currencies of the United Kingdom (GBP) and the European currency (EUR).The Company will attempt to minimise these risks by implementing hedging arrangements as appropriate, and uses the foreign currency spot and forward market to buy foreign currencies. Contracts are entered into when the Group finds it in line with the overall currency risk strategy. The Group enters into derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including but not limited to forward exchange contracts to hedge the exchange rate risk arising on debt in foreign currency Interest rate risk management The Group is exposed to fluctuations in interest rates for USD. The Group s interest costs on its bank loan and credit facility are subject to floating interest rate (LIBOR) plus a margin. Consequently, the Group is exposed to fluctuation in interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts. 16

17 Risk factors 3.6. Credit risk management Due to the nature of the Group s operations, revenues and related receivables are typically concentrated amongst a relatively small customer base of international oil and gas companies. The majority of the revenues are generated by contracts with Statoil, which has a credit rating of AA-. The Company continually evaluates the credit risk associated with customers and, when considered necessary, requires certain guarantees, either in the form of parent company guarantees, bank guarantees or escrow accounts. The maximum credit risk is equal to the capitalised value of trade receivables and incurred revenue not billed Borrowing and leverage To the extent income derived from assets obtained with borrowed funds exceeds the interest and other expenses that the Group will have to pay, the Group s net income will be greater than if borrowings were not made. Conversely, if the income from the assets obtained with borrowed funds is insufficient to cover the cost of such borrowings, the net income of the Group will be less than if borrowings were not made. The Group will borrow only when it is believed that such borrowings will benefit the Group and the Group after taking into account considerations such as the costs of the borrowing and the likely returns on the assets purchased with the borrowed monies, but no assurances can be given that the Group will be successful in this respect Value of the drilling units and market rates The value of the drilling units owned by the Group may fluctuate with market conditions. A downturn in the market could have a material adverse effect on the Group s liquidity and may result in breaches of the financial covenants in its loan agreements. In such a case, sales of the Group s drilling units could be forced at prices that represent a potential loss of value Re-domiciliation to Cyprus in 2009 Exit tax The Group received the final Norwegian tax assessment for 2009 when the Company re-domiciled from Norway to Cyprus. The taxable profit for 2009 was increased by NOK 1.8 billion and is based on the tax authorities view that all assets and liabilities at the time of the exit should be considered realized in 2009 for Norwegian tax purposes. The Company disagrees and argues that such taxation should be imposed when the assets and liabilities are realized, and within five year from the exit. Any realization after 2014 should therefore not be subject to Norwegian tax. Songa Offshore has decided to challenge this matter. It should be noted that the received tax assessment will not have any cash effect for the company if the case is lost, as the tax losses carried forward can be used to offset the taxable gain. Please also refer to note 4 to the financial statements for further details Australian tax The Australian Tax Office (ATO) claim that Songa Offshore owe AUD 31 million for the tax year 2009 plus interest and penalties in tax resulting from the global company restructure implemented in May The ATO have confirmed that they will purse Songa Offshore on an alternative determination as opposed to the above described Withholding Tax Case that is currently being defended. The alternative position is based on the absence of the Australian restructure and for Songa Offshore to have continued to run the Songa Venus and Mercur on an owner/operator basis. The court proceedings in relation to the tax case has been scheduled at 30 November, Please also refer to note 4 to the financial statements for further details. 17

18 Risk factors Construction project risk The Group has been awarded four marine drilling contracts with Statoil for the Cat-D rigs. The rigs are currently under construction by Daewoo Shipbuilding & Marine Engineering Co., Ltd. (DSME) in Korea. The construction contracts are entered into on a turnkey basis where DSME has accepted full design responsibility, and on a back-to-back basis with respect to the specifications outlined by Statoil. The Group has, however, taken on some interface and project management risks. Penalties to Statoil in the event of delays are covered by corresponding penalty agreements with DSME. As previously disclosed by the Group, there have been certain delays and cost-overruns related to the delivery of the four rigs. Although the Group has worked together with DSME in setting new delivery dates for the four rigs, there are no assurances that further delays and cost-overruns, which are inherent in any construction project, will not occur. If occurring, such events could have a material adverse impact on the financial position and/or results of operations of the Group and could also lead to the termination of the marine drilling contracts with Statoil. In addition, construction projects of this nature often involve disputes with the yard, primarily at the time of delivery of the rigs. There can be no assurance as to the ultimate outcome of any litigation, but given the contractual provisions with DSME, the Group is of the view that any such potential dispute would be groundless and of no merit, and any such attempt will be vigorously defended. However, the Group cannot predict with certainty the content of any such potential dispute and its outcome or effect, which if adversely determined - could have a material adverse impact on the financial position and/or results of operations of the Group. 18

19 Environment and society Environment and society 1. Quality, Health, Safety and Environment The Quality & Safety Management System (QSMS) is the main and key element in achieving Songa Offshore s vision Through our dedication and hardwork, we shall create premium value to our customers. Maintaining a robust QSMS which provides clear direction on how to manage the quality, health, safety and environmental issues offers a competitive advantage over other organisations in terms of protecting our people, the environment, our assets and business in general. Therefore, continuous improvement, training, enforcement and evaluation of the QSMS are important management responsibilities. Compliance with the Songa Offshore QSMS is mandatory for all personnel employed within the organisation both at offshore and shore-based facilities. The foundation of Songa Offshore s integrated QSMS is a set of seven policies which apply to all company activities worldwide. The seven policies detail the focus on people, environment, and assets. A brief abstract is shown below; Quality Policy - Songa Offshore will set standards and continuously improve. Health, Safety and Environment (HSE) Policy - Songa Offshore will always put people and the environment first. Ethics Policy - Songa Offshore will be recognized as an organization with high ethical values. Operational Policy - Songa Offshore will be recognized as the driller of choice. Security Policy - Songa Offshore will ensure the safety and security of company personnel, company assets, and installations by preventing or mitigating unlawful acts. Human Resource policy Songa Offshore will be looked upon as the preferred employer in our industry and be known as a great place to work Risk Policy Songa Offshore will manage risk in its business effectively and proactively 1.1. Quality Policy In achieving efficient and safe operation, Songa Offshore requires to continuously improve its QSMS. Such development is based on various changes in the organisational structure, lessons learned from operations, industry best practices, client feedback or simply proposals and suggestions from personnel. Our QSMS system is undergoing adjustments and updates constantly, all to ensure lessons learned and fine-tuning of operational processes and procedures. All updates to the QSMS are closely tracked and followed though an established document controlled process. In this highly competitive industry to succeed one requires a high degree of expertise, experience and reliability to be able to perform safely and efficiently at top level. Consistently providing high standards of drilling services, it is required to develop a management system that conforms to or exceeds contractual, industry and regulatory standards and requirements. To achieve this, the Songa Offshore QSMS is developed based on the following: ISM Code. The company and its rigs are certified against the International Safety Management (ISM) Code and maintains official certificates issued by the American Bureau of Shipping (ABS), on behalf of the Marshall Islands Administration and the Norwegian Maritime Authority. This essentially means the QSMS suffices the international requirements of all facets of safety and the environment. OHSAS This is an international occupational health and safety management system which is recommended by the International Association of Drilling Contractors (IADC). ISO 9001:2008. Relevant parts of the International Standardisation Organisation (ISO) 9001:2008 quality management system. National Regulations. In areas where Songa Offshore operates adopts the national regulation, such as the Petroleum Safety Authorities (PSA) Norway, Framework regulation - Section 17. Industry Best Practice. The company always seeks to incorporate guidance from industry best practise from organisation such as the International Marine Contractors Association (IMCA), International Association of Drilling Contractors (IADC), Dropped Objects Prevention Scheme (DROPS), Working together for Safety (SfS) and others. During the year, numerous audits were performed at Songa Offshore shore-based and offshore facilities in order to confirm compliance with international and regional requirements, and company process and procedures. Such audits included ISM Code audits, QSMS compliance audits, class society audits, local regulator audits, flag administration audits and client audits. Songa Offshore continually aims to improve further its QSMS as well as other company systems, by identifying the expectations and needs of its customers and by processes including data collection and experience feedback from QSMS users, both at offshore and shore-based facilities. 19

20 Environment and society 1.2. Health, Safety and Environment (HSE) Policy It is Songa Offshore s top priority to place people and the environment first. All activities performed are subject to a risk management process resulting to efficient operations and a safe and healthy working environment for personnel. Further, Songa Offshore continues to maintain its standards that all rigs shall have valid HSE Cases, regardless of where a rig is operating and whether or not it is a requirement in the respective market, such as it is in Norway and the United Kingdom. Songa Offshore has adapted the IADC guidelines for the preparation of an HSE Case. QHSE Performance Songa Offshore has established a QHSE annual plan which includes a set of corporate objectives together with the supporting rig specific objectives and key performance indicators (KPI) as set by Songa Offshore management All Songa Offshore personnel are expected to work as a team in order to successfully achieve all objectives and KPIs. The KPIs consists of detailed performance criteria within the following areas; quality & HSE, client satisfaction, operational uptime, rig maintenance and rig budget adherence. Incident Statistics Songa Offshore recorded six recordable incidents in 2014 as per IADC guidelines and definitions, resulting in a Total Recordable Frequency Rate (TRFR) of 3.54 and a Lost Time Incident Frequency Rate (LTI FR) of 0.59 per one million working-hours. Of the six incidents five were Medical Treatment Only (MTO), and one Lost Time Incident (LTI). Despite the fact that Songa Offshore HSE performance has improved we will still challenge the optimal target of zero incident philosophy and continue to strive towards excellence by achieving an injury free environment Environment The protection of the environment is considered of primary importance for Songa Offshore and great emphasis has been placed so that the offshore facilities meet all statutory requirements for emissions, pollution and environmental impact. The company strives to comply with all class society, flag state, national and international regulations, but more importantly the International Maritime Organization (IMO) requirements with regards to environmental issues. All offshore installations maintain valid certificates for the following: IOPP (International Oil Pollution Prevention), Waste Management Songa Offshore ensures that all waste and waste products generated as a result from rig operations are disposed of in a safe and efficient manner, without harm to personnel, the environment or third parties, and in compliance with relevant statutory environmental legislation. Considerations are given to the following in terms of waste management: IAPP (International Air Pollution Prevention) and ISPP (International Sewage Pollution Prevention). Respect of the environment is continuously promoted within Songa Offshore and emphasis is provided to all personnel responsibilities and duties in terms of environmental performance. It is a requirement within Songa Offshore that all uncontrolled environmental spills both on board and overboard are reported, investigated and corrective action is implemented to prevent reoccurrence o o o o the nature and quantities of waste products the environmental impact of relevant waste disposal methods at the particular location the waste products that will be generated (and their subsequent disposal) when purchasing raw materials (including the containers and packaging containing the raw material) the exposure of personnel to accumulations of waste and strategies for personnel protection 20

21 Environment and society Type and Quantity of Energy and Raw Materials Consumed The type of raw materials consumed on board rigs are as follows: Drilling with non-aqueous drilling fluids: High-speed shale shakers will be used to provide an average of less than 20% wet weight mud on cuttings over the sections of the well where non-aqueous drilling fluids are used. Upon completion of drilling with non-aqueous drilling fluids, the drilling fluid is returned to the supplier for reconditioning and re-use. Drill cuttings: Discharged to sea through a shunt pipe placed below the sea surface. The discharge depth is set and selected to achieve maximum dilution effects and to minimise impacts upon the surface waters. Deck Drainage: Spillage of diesel, cleaning solvents or mud chemicals will be cleaned up completely using absorbent pads and low toxicity biodegradable detergents. Deck drainage, wash down water and machinery space drainage will be processed through an oil-water separator as required and in accordance with rules and regulations. Sewage: The drilling units are equipped with sewage treatment units; all sewage is properly treated prior to disposal at sea. Galley wastes: Food waste will be macerated to less than 25 mm and discharged to the sea at a distance of more than 12 nautical miles (22 km) from shore. The table below shows the quantity of fuel consumed, and waste oil and air emissions produced due to rig activity during the year 2014: Atmospheric Emissions Rig Fuel consumed Waste Oil (m 3 ) SO 2 (T) NO 3 (T) CO (T) (m 3 ) Songa Dee 5, , ,778 78,151 Songa Delta 7, , , ,371 Songa Trym 3, , ,719 65,755 Songa Mercur* 3, , ,375 55,885 Songa Venus * 2, ,027 66,642 20,995 * Figures for Songa Venus and Songa Mercur include only the period from 1 January July 2014 Pollution prevention Pollution prevention is integral part of Songa Offshore procedures and processes. The focus areas of environmental protection spans from assessing, handling and controlling chemicals in order to reduce environmental impact by having proper controls and measures in place to prevent a spill. All Songa Offshore rigs have a classification society approved Ship Oil Pollution Emergency Plan (SOPEP). The purpose of these plans is to provide guidance to the personnel on board with respect to the steps to be taken when pollution incidents have occurred or are likely to occur. Planning is considered vital in ensuring that the necessary actions are taken in a structured, logical, and timely manner. The SOPEP contains all information and operational instructions required by the Guidelines set forth by the flag state. These plans have been approved by the Flag Administration and no alteration or revision shall be made to any part of the plan without prior approval of the Administration. The SOPEP is designed to link into the Corporate Crisis Management Plan for dealing with oil pollution emergencies. The Offshore Installation Manager (OIM) will be backed up on-scene by management-appointed personnel as the circumstances and the position of the rig at the time of the incident require. Regular exercises and drills are performed by the crew on board with the involvement of shore-based support personnel to ensure that the SOPEP functions as expected and that the contacts and communications specified are accurate. Such exercises and drills may be held in conjunction with other shipboard exercises and are appropriately logged. 21

22 Environment and society 2. Employees 2.1. Equal Employment Opportunities ( EEO ) Songa Offshore is fully committed to providing a workplace with equal opportunities in all aspects of the employment relationship, and the promotion of equal opportunities and diversity within the Group. Any discrimination based on colour, gender, sexual orientation, nationality, ethnicity, religious or political beliefs, physical disabilities or similar factors violate our obligations of equality. The gender profile of the Group for the year 2014 was 22.8% female and 77.2% male compared to 15.4% and 84.6% respectively in The high percentage of male employees is explained by the proportion of Group employees working in offshore positions the majority of candidates for which are male. For these positions there is little scope for new entrants to the oil industry to join the Group. These are traditionally male dominated disciplines within the Drilling Industry, and the pool of labour for female entrants is limited. In cases where the Group has agreements with third party vendors to supply the junior offshore positions (where the pool of female labour may be greater), the Group requests that these vendors comply with the Group s commitment to Equal Employment Opportunities. Equal Employment Opportunities improvement initiatives The Group is cognisant of EEO, and the following initiatives will continue throughout 2014: o o o Ensure a fair and consistent recruitment and selection process, including advertisements to avoid discrimination and stereotyping through language and images. Indicate if any genuine occupational requirements apply Operate transparent and consistent appraisal and performance management processes. Have clear career paths including promotion and training opportunities for all employees Revise policies and procedures, to ensure fairness and consistency e.g. flexible working practices o Treat personal information sensitively and confidentially, and reassure how this information will be used o o Continuously monitor and evaluate policies and practices to ensure that they are effective and bias free using cross-sections of the organisation. Complacency can undermine effectiveness Encourage all third party vendors to follow the Group s commitment to Equal Employment Opportunities and Diversity 2.2. Sick leave Recorded leave of absence due to illness was 2.9% for 2014, compared to 3.1% in Throughout 2015 the Group will continue to focus on reducing absence through a coordinated and consistent approach. Key focus areas are: o o o o Proactive absence management and reporting The involvement of occupational health services where appropriate to limit long term sickness absence The involvement of private medical insurance providers to assist with timely rehabilitation The use and analysis of return to work interviews 22

23 Corporate governance Corporate Governance The development of the Group s corporate governance is a continuous and important process to which the Board of Directors devotes a strong focus. The Group has adopted the corporate governance requirements set out in the Norwegian Securities Trading Act and the Norwegian Stock Exchange Regulations and has established and maintains a separate Corporate Governance Policy that is published on the Group s website ( as well as a Business Code of ethics documents. 1. Code of Practice The Group s corporate governance principles are in accordance to the Norwegian Code of Practice of Corporate Governance (the Code of Practice ). The Code of Practice is a comply or explain guideline. The Company considers that it is, in all material respects, in compliance with the Code of Practice 2. Equal treatment of Shareholders All issued shares in the Company are vested with equal rights in all respects. There is only one class of shares issued and all shares are freely transferable. The Company s Articles of Association do not contain any provisions imposing any limitations on the ownership or the tradability of the shares. Pursuant to Regulation 4 of the Articles of Association of the Company, unissued shares may be issued as shares with such preferred, deferred or other special rights or such restrictions as the General Meeting of shareholders may by ordinary resolution determine and, subject to the provisions 3. Dividend policy and payment of dividends All shares in the Company have equal rights to dividends. Pursuant to Regulation 112 of the Articles of Association and provided that the Company has sufficient distributable profits, the Group may, at a General Meeting of its shareholders, declare by ordinary resolution (simple majority) dividends to be paid out of profits and to be distributed to the shareholders pro rata to their holdings in the Company but no dividend will exceed the amount recommended by the Board. The Board may declare interim dividends as appear to the Board to be justified by the profits of the Company (Regulation 113 of the Articles of Association). of the Company Law, unissued shares may be issued as preference shares, redeemable on such terms and in such manner as the General Meeting may by special resolution (adopted by a majority in favour of at least 75% of the votes cast) determine. Shares ranking pari passu in all respects with existing issued shares may be issued as the Board determines in accordance with Regulation 5 of the Articles, subject to pre-emption rights. The Company s current ability to pay dividends is restricted by its significant capital requirements by the Cat D new build program, as well as by contractual arrangements including restrictions under its different loan agreements. Over time, when and as the Company has adequate financial resources, dividends will be considered by the Board of Directors. The Company has not paid any dividends for any of the years 2013, 2012, 2011, or 2010 and the Board of Directors are not proposing a dividend for

24 Corporate governance 4. General Meetings The shareholders collective membership rights and powers are exercisable in General Meetings of the Company. In accordance with the Cyprus Company Law, every annual General Meeting shall take place not more than 15 months from the previous annual General Meeting. The Board proposes that the annual General Meeting is held on or prior to 30 June each year. In addition to the annual General Meeting, extraordinary General Meetings of shareholders may be held if deemed necessary by the Board of Directors. An extraordinary General Meeting must also be convened by the Board at a written request of the Company s shareholders representing a total of at least 5% of the issued and paid up share capital carrying a right to vote and if the Board does not proceed to convene it, it may be convened by such shareholders themselves, as per the Articles of Association of the Company. A written notice shall be sent to all shareholders at least 21 days prior to an annual General Meeting and any other General Meeting at which a special resolution is proposed to be passed. All other extraordinary General Meetings shall be called by at least 14 days notice, if the shareholders are able to cast votes electronically. The shareholders may participate at a General Meeting in person or by proxy. The instrument appointing a proxy shall be in writing in usual form or in any form approved by the Company and is ordinarily enclosed in the notice calling the General Meeting. No business shall be transacted at any General Meeting unless a quorum is present. According to the Company s Articles of Association (the Articles ), at least three shareholders present in person or by proxy and together representing at least 5% of all the issued shares, shall be a quorum. The Cyprus Companies Law (the Law ) (Amendment) (No. 2) of 2010, Law No. 60(I) of 2010, has established certain provisions concerning members of Cypriot companies listed on regulated market, as follows: o o o Irrespective of any provisions contained in the articles of association of a Cyprus company listed on a regulated market, members who hold not less than 5% of the paid-up share capital and who have voting rights in General Meetings can call an extraordinary General Meeting; Cyprus companies listed on regulated markets shall provide their members through their websites with a notice of the meeting, the agenda and the documents that must be used for appointing proxies and for voting (if applicable) by mail or by electronic means; Members holding not less than 5% of the issued share capital (representing at least 5% of the total voting rights of those who have the right to vote in the meeting) of a Cyprus company listed on a regulated market can propose a subject to be added to the agenda through electronic means or by post; o o o o o A person must be registered as a member in the relevant register of members (including the register kept abroad) on the record date in order to be able to attend and vote in a General Meeting. Any amendment to the relevant register after the record date will not be taken into account when determining the rights of any person to attend and vote in the meeting. The right of a member to attend a General Meeting and vote in respect of his or her shares is not subject to a condition that the shares be deposited with, or transferred to another person or registered in the name of another person, prior to the General Meeting. Furthermore, a member is free to sell or otherwise transfer his or her shares in a Cyprus company listed on a regulated market at any time between the record date and the General Meeting, provided that such right to sell would not otherwise be subject to any restrictions; Cyprus companies listed on regulated markets may make voting by electronic means available to their members and without the need for the member or their proxies to be present and may also provide real time communication; Members of Cyprus companies listed on regulated markets may appoint more than one proxy if their shares are held in different security accounts; Members entitled to more than one vote (either in person or through a proxy) in a meeting of members of a Cyprus company listed on a regulated market are not obliged to use all of votes or to cast all of votes in the same manner; and When members of Cyprus companies listed on regulated markets apply for a full report of the voting results of a General Meeting, the company shall announce, for every resolution proposed (i) the number of shares on which votes were validly placed; (ii) the proportion of issued share capital at the end of the day before the meeting which is represented by such votes; (iii) the total number of valid votes; and (iv) the number of votes which were cast in favor and against every proposed resolution and, if counted, the number of abstentions. If no members apply for such a full report, it will be sufficient for Cyprus companies listed on regulated markets to announce the results on their websites within 14 days of the meeting and only to the extent necessary in order to ensure that the required majority was reached for every resolution. At the date of this Annual Report, all the issued shares rank pari passu and each issued share in the Company confers one vote on a show of hands and on poll. 24

25 Corporate governance As a general rule (and except where otherwise required), all matters raised at the General Meeting require decision by simple majority (more than 50% of the votes cast). Under the Company Law and the Articles of Association, a special resolution adopted by a majority in favor of at least 75% of the votes cast is required, inter alia, in respect of the following matters: o o o Variation of the rights attached to the Shares (Regulation 13 of the Articles of Association) Amendments to the Articles of Association of the company; Change of name of the company; o o Reduction of the issued share capital, the premium account or the redemption reserve, any of which also requires court sanction (Regulation 14 of the Articles of Association); and Merger and de-merger. In order to be entitled to vote at a General Meeting, a shareholder must, as a general rule, be registered as owner of the shares in the Company s shareholder register kept by the VPS. 5. Pre-emption rights Where the share capital is proposed to be increased by consideration in cash, the existing shareholders have a right of pre-emption to subscribe for new shares to be issued in proportion to the aggregate number of such shares of the shareholder. Rights of pre-emption are also applicable to the issuance of securities which are convertible to shares but there are no pre-emption rights with respect to shares issued for non-cash consideration or shares issued on the conversion of convertible instruments or the exercise of options. Pre-emption rights may be restricted or dis-applied in accordance to the provisions of the Law. Specifically, a disapplication of pre-emption rights requires a resolution of the general meeting which is passed by a specified majority. Pursuant to a board resolution of the extraordinary general meeting of the Company held on 18 December 2013, the board has agreed to increase the authorised share capital of the Company and the pre-emption rights of the authorised but unissued share capital of the Company have been dis-applied. 6. Board of Directors 6.1. Overview The administration and overall management of the Company pertains to the Board, which shall oversee the proper organisation of the business. The Board of Directors schedules quarterly meetings annually in advance with a tentative agenda and holds other meetings and teleconferences on an ad hoc basis to the extent necessary to discuss issues arising and strategic planning for commercial and financial matters. The auditors attend the Board meeting at least once a year. The members of the Board are elected by the General Meeting. The General Meeting also resolves the annual remuneration of the Board members based on the proposal made by the nomination committee. The Articles of Association provide that the Company s Board of Directors shall not be subject to a maximum number of members, but the minimum number of members is two. Pursuant to the Corporate Governance Policy, the Company endeavours to have between 3 to 5 Board members. 25

26 Corporate governance 6.2. Composition of the Board of Directors The Group s current Board of Directors is composed of five members, of which four have been elected by the shareholders and one member has been elected by the Board of Directors (on 18 February 2015). The Director appointed by the Board (in accordance with the Articles) will be eligible for reappointment by the shareholders on the 2015 Annual General Meeting. The names, positions and term of the members of the current Board of Directors are set out below. Frederik W. Mohn Chairman Mr. Mohn is the sole owner of Perestroika AS, which is the largest shareholder of Songa Offshore SE. He holds extensive industrial experience from his family s world-wide business, Frank Mohn AS, where he also held the position of Managing Director. The Frank Mohn Group was sold in Mr. Mohn is a Norwegian citizen and resides in Bergen, Norway. Christina Ioannidou Board member Mrs. Ioannidou is a lawyer at the Cypriot law firm Ioannides Demetriou LLC. Mrs. Ioannidou is an accomplished corporate lawyer and her areas of practice include corporate and commercial law, banking, finance, structuring loan and security documentation and M&A. Mrs. Ioannidou holds a first class BSc (Hons) from Imperial College, London in Mathematics, an AM from Harvard University in Statistics, and a first class BA (Hons) from the University of Oxford in Jurisprudence. Mrs. Ioannidou is a Cypriot citizen and resides in Nicosia, Cyprus. Michael Mannering Board member Mr. Mannering has over 40 years of experience in the energy industry. From 2008, Mr. Mannering has been President of Rig Management at Schlumberger and responsible for rigs contracted by IPM and for the Schlumberger equity participation in Schlumberger rig joint ventures. He was also Chairman of Saxon Energy Services, a Canadian based international drilling contractor with 95 land rigs, and member of the board of Schlumberger Oilfield UK. Mr. Mannering joined Schlumberger's drilling contracting organization, Sedco Forex, in 1985 where he went on to take various managerial responsibilities including the overall responsibility for the land and offshore fleet in the Middle East and S.E. Asia. In 1999 he became Managing Director for Schlumberger Oilfield Services UK with responsibility for all of Schlumberger's N. Sea Operations. Mr. Mannering retired from Schlumberger in March Mr. Mannering is a mechanical engineer with first class Honors from Southampton University UK. Mr. Mannering is a UK citizen and resides in London, UK. Arnaud Bobillier Board member Mr. Bobillier has held a number of senior line management positions within the industry in countries around the world, including the United States, Saudi Arabia, Indonesia, Brazil, South Africa and China. Between 1980 and year 2000, he held various management positions within Schlumberger and was the Operations Manager for Sedco-Forex Schlumberger during the preparations for the upcoming merger with Transocean. As Vice President of Transocean's European and African business units between 2004 and 2008, he was very much involved in the company's Norwegian operations. More recently, he served as the Executive Vice President of Transocean where he was responsible for the execution of integration of Aker Drilling into Transocean. Between 2011 and 2012 he served as a Special Advisor to the CEO of Transocean. He has also been a Member of the Board of Directors at Texas Institute of Science. Mr. Bobillier holds an Engineering Degree in Fluid Mechanics and Thermodynamics from the Ecole Superieure des Techniques de l'ingenieur de Nancy, France, with a Major in thermodynamics. Mr. Bobillier is a French citizen and resides in Paris, France. 26

27 Corporate governance Johan Kr. Mikkelsen Board member Johan Kr Mikkelsen has 40 years of experience from Norsk Hydro and Statoil. He entered the oil and gas industry at the Mongstad refinery in 1974 as process engineer and a couple of years later as Production Manager at the refinery. In 1983 he moved on as Production Director for Oseberg field and in 1992 as SVP for Norsk Hydro drilling. In 2000 he continued as SVP for Oseberg asset and in 2003 as SVP for the Troll asset. In 2005 he became Country manager for Norsk Hydro Canada before he moved on as Peregrino Project Director and later Production Director for the Peregrino field in Brasil. In 2012 he returned to Norway as VP for the Statoil Subsea Improvement Project until early 2014 when he retired from Statoil. At present he is the Chief Technology Officer with Perestroika AS. He holds a Master degree from NTH from 1973 in Industrial Chemistry and a Master degree in Chemical Engineering from University of Wisconsin, USA in Mr. Mikkelsen is a Norwegian citizen and resides in Bergen, Norway 6.3. Changes in the composition The names, positions and term of the members of the current Board of Directors are set out in the table below. Name Position Served since Business address Frederik W. Mohn Chairman 2013 Statsminister Michelsens vei 38, 5230 Paradis, Norway Christina Ioannidou Board member Diagorou Street, ERA House, floors 7-12, 1097 Nicosia, P.O.Box Nicosia, Cyprus Michael Mannering Board member 2013 c/o Songa Offshore SE, Porto Bello Building, No. 1 Siafi Street (2nd floor, office 201),3042, Limassol, Cyprus, Cyprus Arnaud Bobillier Board member , Rue Montfleury, Versailles (France) Johan Kr. Mikkelsen Board member 2015 Kvernabekkveien 47e, 5243 Fana, Norway Under the Code of Practice it is recommended in order to ensure independence in the decisions of the Company, that the majority of the members of the Board be independent of the executive personnel of the Company and that they do not enter into material business contracts with the Company. In addition to that, at least two of the members of the Board be independent of the main shareholders. None of the directors of the Company are, or are affiliated with, executive personnel or has entered into material business contracts with the Company. Three of the Board of director members of 2014, Mr Mohn, Mr Mikkelsen and Mr Bobillier, are affiliated with Perestroika AS, the Company s largest shareholder. Mr Mohn is the sole owner of Perestroika AS. Moreover, Mr Mikkelsen is an employee of Perestroika AS, and Mr. Bobillier is engaged by Perestroika AS pursuant to a consultancy agreement. Liability of directors The duties of Directors of Cyprus companies are not comprehensively codified and are set out, amongst others, in the Law, common law principles (the Common Law ), duties provided for in a Articles and respective EU directives transposed in Cyprus. There are four main common law fiduciary duties that the directors owe to the Company and must take into account when they are acting for the Company, these are to (i) act in good faith for the benefit of the Company and for proper purpose; (ii) avoid conflicts of interests; (iii) exercise independent judgment; and (iv) act with due care and skill. Their principal task is to safeguard the interests of the Company. Members of the Board of Directors may each be held liable for any damage they cause the Company through gross negligence or wilful misconduct. Subject to the Law, each of the current or former officers of the Company may be indemnified out of the Company assets against any losses or liabilities which he or she may sustain or incur in or about the execution of his/her duties. This includes liability incurred by him/her in defending any proceedings, whether civil or criminal, in which judgment is given in his or her favour or in which he/she is acquitted, or in connection with any application under Section 383 of the Law in which relief is granted to him/her by the court from liability for negligence, default, breach of duty or breach of trust in respect of the affairs of the Company. 27

28 Corporate governance 6.4. Audit committee The Company has established an audit committee. The audit committee is tasked with, but not limited to, the following: (i) preparing the follow-up of the financial reporting process for the Board of Directors, (ii) monitoring the systems for internal control and risk management, including the internal audit of the Company, (iii) having continuous contact with the appointed auditor of the Company regarding the auditing of the annual accounts, and (iv) reviewing and monitoring the independence of the auditor, including in particular to which extent other services than audit services which have been rendered by the auditor or the audit firm represents an undermining of the independence of the auditor. The audit committee meets in connection with the preparation of quarterly reports and annual statutory accounts, and may have additional meetings whenever deemed necessary by the committee. The audit committee consists of the following persons: Name Position Served since Frederik W. Mohn Member 2014 Christina Ioannidou Member 2014 Note: Mr Jon E. Bjørstad as of 18 February 2015 has resigned from his position as a Board Director and member of the Audit Committee of the Company Remuneration committee The Company has established a remuneration committee. The remuneration committee, amongst other tasks, prepares guidelines and policies for the remuneration of executive personnel and generally advises the Board of Directors on matters relating to the compensation paid to executive personnel. Meetings of the remuneration committee are held not less than once a year. The remuneration committee consists of the following persons: Name Position Served since Frederik W. Mohn Chairman 2014 Michael Mannering Member 2013 Arnaud Bobillier Member Nomination committee The nomination committee was constituted at the annual general meeting held in June The role of the nomination committee is to propose candidates for election to the Board of Directors of the Company and make recommendations to the General Meeting on the composition of the Board of Directors and level of remuneration. The Chairman of the nomination committee, Mr Torkildsen which was affiliated with Perestroika AS, the Company s largest shareholder, has resigned from his position with Perestroika AS, effective as of November The composition of the nomination committee as of 31 December 2014 was as follows: Name Position Served since Tom A. Torkildsen Chairman 2012 Geir Sandvik Member 2013 Johan Mikkelsen Member

29 Corporate governance Loans and guarantees The Company does not have a policy for granting loans and guarantees and has not granted any loans or guarantees to any of its Board members, members of the executive management or other related parties of these groups. Conflicts of interests and other disclosures The Company believes that it has taken reasonable steps to avoid, and to mitigate effects of, potential conflicts of interests arising from the Board members and management s private interests and other duties. The Company is not aware of conflicts of interests between the duties of Board members or the senior management toward the Company and their private interests and/or other duties. 7. Group Policies 7.1. Insider Trading The Group has in place an insider trading policy, which is followed up and monitored by the Insider Trading Officer, which for Songa Offshore is the Group s Chief Financial Officer Gifts and Entertainment The Group has in place a Gifts and Entertainment policy, which strictly prohibits the Group s employees from (either directly or indirectly) promising, offering, giving, requesting, agreeing to receive or accepting excessive, disproportionate or inappropriate invitations, gifts, gratuities, meals or any form of entertainment. The policy was approved at the end of 2014, effective as of 1 January Whistle Blowing The Group s Whistle Blowing policy offers a confidential and integrity channel of communication to the Group s employees and consultants in order to prevent, detect and report any violations to Group s policies and procedures or other improper activities. The policy was approved at the end of 2014, effective as of 1 January Anti-Fraud The Anti-Fraud Policy of the Group aims to detect and prevent the possibility of fraud against the Group. The Group s proposed guidelines intends to promote the awareness on fraud, risk and organisational behaviour. The policy was approved at the end of 2014, effective as of 1 January Independent auditors The independent auditors, PricewaterhouseCoopers Limited Cyprus, have expressed their willingness to continue in office. A resolution authorising the Board of Directors to fix their remuneration will be submitted at the forthcoming Annual General Meeting. 29

30 Management Senior Management Bjornar Iversen Chief Executive Officer Mark Bessel Chief Operating Jan Rune Steinsland Chief Financial Officer Bjornar Iversen Chief Executive Officer Mr Iversen was appointed as CEO in May Before joining Songa Offshore, Mr Iversen was a member of the executive leadership team at Odfjell Drilling AS. During his 17 year's tenure at Odfjell Drilling, he has been executive vice president for Corporate Business Development, Odfjell Drilling Technology and Odfjell Well Services. His latest position was President and CEO of Odfjell Galvao Ltda in Brazil. Mr Iversen holds a Master of Science in Business from the Norwegian School of Business and Economics (NHH), and various management courses from Harvard Business School and NHH. Mr Iversen is a Norwegian citizen and resides in Cyprus. Jan Rune Steinsland Chief Financial Officer Mr Steinsland joined Songa Offshore in May He previously held the position of CFO at Ocean Rig from 2006 to 2013, a period of great expansion and development, including an IPO and listing on NASDAQ. Prior to that, he was CFO at the Oslo Stock Exchange listed Acta Holding ASA, a position he held for six years from 2000 to From 1988 to 2000, he held several management positions at ExxonMobil. Mr Steinsland holds a Master of Business Administration from University of St. Gallen and is Certified European Financial Analyst (AFA). Mr Steinsland is a Norwegian citizen and resides in Norway. Mark Bessell Chief Operating Officer Before joining Songa Offshore in October 2013, Mr Bessell previously held the position of Senior Vice President with Ocean Rig. Mr Bessell commenced in the industry with Sedco, he then remained with Transocean for over 20 years, where he held a number of senior positions within operations, projects, technical and HR having gained extensive industry and business experience. Mr Bessell holds a BSc in Petroleum Engineering, he is a British Citizen and resides in Cyprus. 30

31 Statement of the members of the Board of Directors and other responsible persons of the Group for the Financial Statements In accordance with Article 9, sections (3) (c) and (7) of the Transparency Requirements (Securities for Trading on Regulated Market) Law of 2007 ( Law ), we the members of the Board of Directors and the other responsible persons for the financial statements of the Songa Offshore SE, and the businesses that are included in the consolidated accounts as a total, for the year ended 31 December 2014 confirm that, to the best of our knowledge: (a) the annual consolidated financial statements that are presented in this report: (i) were prepared in accordance with the International Financial Reporting Standards as adopted by the European Union, and in accordance with the provisions of Article 9, section (4) of the Law, and (ii) give a true and fair view of the assets and liabilities, the financial position and the profit or losses of Songa Offshore SE, and the businesses that are included in the consolidated accounts as a total, and (b) the Directors Report gives a fair review of the developments and the performance of the business as well as the financial position of Songa Offshore SE, and the businesses that are included in the consolidated accounts as a total, together with a description of the principal risks and uncertainties that they are facing. Limassol, 29 April 2015 Frederik W. Mohn (Chairman of the Board) Michael Mannering (Board Member) Arnaud Bobillier (Board Member) Christina Ioannidou (Board Member) Johan Mikkelsen (Board Member) 31

32 Independent Auditor's report 32

33 33