Pareto World Wide Offshore AS 3rd quarter report 2017 Link: http://paretosec.com/pai-reports.php
Executive Summary NAV PWWO NOK 5.1/share NAV POK NOK 2.3/share (as of 30 June 2017) The portfolio development during the third quarter has been mixed. There is a large uncalled capital call coming in the fourth quarter, which will drain some liquidity from the Fund. On the other hand, the development in the other two projects is positive, while the overall oil and oil service markets are continuing to strengthen. Market Development The oil price has strengthened during the quarter, currently trading above USD 60/b. The primary reasons have been a decline in global inventories, the US onshore rig count levelling out as well as political tension in the Middle Easst. This is creating more optimism in the oil service sector, but as we are approaching the typically slow winter season, any tangible effects are unlikely to materialize until next spring. It will still be tough going for the next two quarters. Portfolio The portfolio consists of three projects, of which two are within seismic and one within PSVs. The former two represent positive equity value for the Fund, with the markets looking to be developing in a positive direction. In the PSV bareboat project, all uncalled capital will have to be paid in during Q4 17. The Fund has adequate liquidity to handle this, but it will leave a smaller buffer going forward. NAV in PWWO was NOK 5.1 per share, flat during H1 17, and is down 65% since inception, adjusting for dividends. In POK, NAV was marginally down at NOK 2.3 per share (2.4 at Q4 16). So far this year, the development seems to be trending upwards, but the risks remain high. The next NAV will be reported in the Q4 17 report.
Portfolio News This section provides an update on the quarter s most important news flow related to the underlying investments. BassDrill Alpha Ltd PWWO indirectly owns 2.8% in the tender rig and values are still well below outstanding debt. The rig continues to be in lay-up in Congo. Any equity recovery is doubtful. Vestland Seismic IS A bid has been received for the vessel, albeit at a very low level, and will be addressed by the board. Vestland Seismic expects to receive an estimated NOK 18 million from RXT s bankruptcy estate at some point during Q4 2017. The current project valuation is reflective of the expected receipts from the RXT estate along with an estimated sales value of M/V Vikland. if the vessels are sold, there will be a 50/50 profit split with the charterer of any proceeds above bank debt. In connection with this, the sellers credit, which was due to the charterers, will be zeroed. PMSOF s share of the uncalled capital amounts to USD 1.2m, and it is hoped that one may recover around 30% of this upon a sale of the vessels. Project sales/payments to and from projects A capital call in 3B Offshore will materialize in Q4 17. The Fund retains sufficient liquidity to cover this. Master & Commander IS CGG is continuing its financial restructuring, which is expected to be completed around year end. The Ch 11 part of the process looks to be completed on track, while there is some opposition from certain creditors to the French Sauvegarde process, which is running in parallel. This will delay the finalization of the restructuring. According to the pre-packaged proposals, M&C s current holdings of unsecured bonds in CGG will be converted to equity and it is envisaged that completion of the financial restructuring and possibly improving seismic markets may result in a value appreciation of these holdings. The market value of these bonds recovered significantly during the quarter. Asian Offshore III IS The project has sold all its vessels during October. There will be no equity recovery in this project, in line with expectations. The company will be liquidated as soon as practically possible. 3B Offshore IS An agreement has been struck with the charterer and the lender whereby the vessels will continue to trade for up to a year in the hope of an improved sales price. All uncalled capital will have to be paid in to reduce the debt. When and
Portfolio The contract coverage is 44% and the weighted average contract length is 0.5 years. All cash flow goes to service debt, so the portfolio does not produce cash flow for the Fund at the time being. Investments and capital At the time of writing, PWWO s portfolio consists of 3 projects which owns stakes in 6 units. The average contract length is 0.5 years and the contract coverage is 44%. Charterparty Distribution based on NAV+commited Bareboat 44% The gross nominal value of the contract backlog is roughly NOK 3.7m. The backlog is primarily made up by two listed counterparts. PWWO had a cash holding of NOK 6.6m as of 30 June 2017. The life cycle of PWWO has been extended through 30 June 2019. Spot/Asset Play 56% Charter hire backlog by counterpart Segment Distribution based on NAV+commited Fairfield Nodal 41% Bourbon 5% Seismic 100% PSV/AHTS (Asia) 0% PSV/AHTS (Europe) 0% CGG 54% Project / company Segment Contract Charterparty Charterer Proportion of NAV Vestland Seismic IS Seismic Spot/Asset play 56.1 % Master and Commander IS Seismic Dec-18 Bareboat CGG/Fairfield Nodal 43.9 % 3B Offshore IS PSV/AHTS (Europe) Nov-17 Bareboat Bourbon 0.0 % Asian Offshore III IS SHL Spot/Asset play 0.0 % Asian Offshore III IS PSV/AHTS (Asia) Spot/Asset play 0.0 % Bassdrill Alpha Ltd Tender Rig Spot/Asset play 0.0 %
Second Hand Market and Share Liquidity As of 30 September 2017 PWWO had 4.37m shares outstanding. Pareto Securities AS ( PSec ) strives to facilitate an active second hand market for shares. The last trading price in PWWO was NOK 62 per share, but be aware that the last transaction is nearly three years old (29 October 2014). Investors who wish to buy or sell shares should contact their advisors or alternatively PSec directly. Given the challenging market and situation of PWWO and POK, shareholders and potential investors should exercise caution when trading in the shares. POK As of 30 September POK had 5.3m shares outstanding. The last trading price in POK was NOK 1 per share (3 May 2017) and the previous five trades are displayed in the table below. Second hand prices have been dropping in line with a weaker market outlook for oil services. Investors who wish to buy or sell shares should contact their advisors. Date Share price No. of shares Volume (NOK) 01/01/17-10,000-18/01/17-5,000-15/02/17-2,000-17/03/17-4,901-03/05/17 1.0 5,000 5,000 Number of trades since startup: 619 Volume traded since startup (NOK): 94,560,500 Average volume per trade (NOK): 152,763
The oil market The oil market has showed better underlying fundamentals during the summer than most expected. As a result, the price has recovered sharply from a trough of almost USD 45/b in June to a above USD 60/b in early Q4. Key factors include stronger than expected global demand growth, some improvement in OPEC production discipline, slower production growth from US tight oil producers and political tension. The resulting inventory draws appear to continue into 2018, which is clearly positive. Inventory correction cycle slower than expected Source: Pareto Securities, IEA, Opec The tables have turned in the oil market during Q3. Firstly, it has become evident that the YTD oil demand growth is meaningfully stronger than expected, averaging about 1.6mb/d. Secondly, the OPEC production discipline has improved, resulting in OPEC production being some 0.2mb/d lower YTD compared to last year. Moreover, the strong growth in North American tight oil production has tapered off, with total non-opec production up around 0.7mb/d this year. As a result, global oil inventories have declined by about 1mb/d this year, and with this being evidenced by regular inventory reports, the oil price as far better support than before the summer. Forecasts indicate that the inventory decline should continue through 2018, which should result in an upward trend in the oil price, provided that OPEC sticks to the current levels of production. Finally, political tension in the Middle East, and Saudi Arabia in particular, has added an extra risk premium on oil recently. Source: Nordea Markets Many are now speculating that US tight oil production will start to disappoint as new wells may be less productive than previous wells. However, we think it is too early to call this and continue to regard US tight oil production as a key risk to the market balance, together with lower OPEC production discipline. OECD inventory levels have been slow to come down. The North American inventories are falling very slowly, while there was a build-up in Europe during Q1 17 that has now been reversed. Inventories in Asia have been volatile, but generally down, although this has not been sufficient enough to drive through a meaningful overall inventory drawdown. Source: Nordea Markets Consensus forecasts ahead of reality The consensus oil price forecast for 2017 has stayed at USD 53/b since the previous quarter, which implies an expectation of USD 54/b for H2 17, somewhat below the current trading price. The consensus expectations for 2018 have risen by USD 2/b to USD 58/b, with a corresponding rise in the 2019 consensus. However, we are currently seeing more forecasters raising their forecasts, so we would expect the overall consensus expectations to continue to rise. Source: EIA, Nordea Markets
The oil services market E&P spending seen to rebound in 2017 Recently updated E&P spending surveys continue to point to a 7% increase for 2017, provided the oil price stays around the YTD average. We continue to see anecdotal evidence suggesting that drilling, maintenance and development plans are being reactivated. Preliminary forecasts point to an increase of 5%-10% for 2018. Rising cash margin for the oil industry Source: Barclays Capital,, EIA,Pareto Securities The integrated oil companies are estimated to have a cash break even price of USD 51/b to cover production costs, debt service and dividends. Hence, any oil price above this level will allow for increased spending, the opposite of what has been the case for the past three years. The average oil price assumption that forms the basis for 2018 spending plans USD 52/b, in line with the average expected oil price for 2017. Moving into 2018, there appears to be a growing upside to this level, which may well result in more E&P growth than what is currently expected. Anecdotal evidence of a recovery Source: Pareto Securities Equity Research We are continuing to see opportunistic M&A transactions and asset purchases, both by industry players and financial players. Several large rig transactions have been concluded and funded, most recently with Borr Drilling committing USD 1.3bn to acquire a pipeline of jack-up newbuilds from SembCorp at a discount of some 30% to original ordering prices. Source: Nordea Markets We are also seeing an uptick in global drilling activity, which bottomed out in Q1 17.. This is important, as drilling is the most important leading indicator for offshore oil services. The number of new rigs being delivered to the market is also tapering off. On the other hand, there is a significant supply side overhang and we continue to see rigs being taken out of lay-up. That being said, the laid up fleet consist of the oldest and least competitive rigs, so it is a clear potential that many (if not most) of the laid-up rigs will never return to the market. Source: Bloomberg, Oslo Stock Exchange The global OSV utilization has also recovered. This market generally follows the rig activity and so looks to have significant potential to improve going forward, albeit with a significant capacity overhang, which will restrict the pace at which day rates improve. A simlar pattern is also seen in seismic, where demand has started to build and where the supply side is much more consolidated and controlled by a select few players.
Fund Management Team Richard Jansen Head of Maritime Investments Phone: + 47 22 01 58 96 E-email: richard.jansen@pareto.no Håkon Jacobsen Fund Manager Phone: + 47 22 01 58 77 E-mail: jacobsen@pareto.no Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, www.paretosec.com/pai.php
Disclaimer This Quarterly Report has been prepared in order to provide information about Pareto World Wide Offshore AS ( PWWO 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 2017. 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.