Pareto Offshoreinvest AS

Transcription

1 Pareto Offshoreinvest AS 3rd quarter report 2015 Link:

2 Executive Summary NAV NOK 77/share (as of 30 June 2015) The offshore oil services markets remain very challenging and we expect 2016 to be weaker than this year, on average. In this context, investors should not expect meaningful dividend distributions and it will be hard to make good project realizations. The Fund is set to report its next NAV as of Q4 15 in early next year. Market Development The oil price appears to be bottoming out, but the inventory correction cycle is disappointingly slow and we are therefore not expecting it to firm up meaningfully in the near term. Thus, next year is likely to be another difficult year for oil services and on average, probably worse than the current year has been in terms of activity. There are some glimpses here and there, but overall it is pretty depressing. With vessel valuations falling sharply and cash flows shrinking, debt service will be an issue all around and we expect to see a wave of debt restructuring, as well as defaults and forced asset sales. In this scenario, cash is king, as it enables both survival and investment opportunities for those with a medium to long term perspective. Once this process is over, we can expect to start looking at a recovery, which most observers now seem to expect may take place from 2017 and onwards. In the meantime, the task for the Fund Manager is to survive 2016 with the Fund s exposure intact so that a recovery can add back the lost value. Portfolio The portfolio consist of shares in 9 projects with a total of 16 vessels. The contract coverage is 87% with a weighted contract length of 2.7 years. The Fund Manager would also like to highlight that there has been a generally negative trend in asset valuations since the last NAV was published as of June Moreover, the valuations that are obtained are subject to significant uncertainty, as there are few (if any) actual transactions to benchmark against. POI has distributed NOK 70 per share (70% of par) to its investors since the inception. Further distributions will depend on running dividends and project realizations. The remaining term of the Fund was extended to July 2017 at the AGM in June. The Fund manager believes further extensions will be necessary if the markets do not improve within the next two years.

3 Portfolio News Following the sale of Carlisle Subsea in January 2015, POI is invested in 9 offshore projects, which implies a good diversification across different market segments. This section provides an update on the quarter s most important newsflow related to the underlying investments. Master and Commander IS Charter hire is paid punctually, while the seismic market is weak. Both counterparts are in reasonably good shape. The vessel valuations have been lowered, which has a negative impact on the residual value expectations. The lenders are very reluctant in approving dividends (requires significant e.o. repayments on the debt) so the future dividend schedule has been downwards revised. Asian Offshore IS The average day rate for the four vessels was USD 4,900/d during Q2 15, down 37% on the preceding quarter. Receivables collection is a main headache and has resulted in liquidity constraints and two capital calls from the investors during the quarter, totalling USD 2m. The project has managed to get an amortization holiday with the bank for the Q4 15 instalment, and is actively pursuing a re-financing to secure debt service obligations that are more in line with the current operating cash flow. Far East Offshore The project continues as planned with bareboat hire paid punctually. The bank has not approved any dividend distribution in the project during During Q3, the accumulated cash flow compensated for the lower vessel valuations. Songa Offshore SE Bond POI sold off NOK 1.1m worth of bonds at 71.5% in October to boost its liquidity position. So far, the investment in the bonds have yielded a 10% IRR, so it has been a robust investment, all things considered. Azur Offshore IS and 3B Offshore IS These projects are all developing according to schedule with charterers performing (hire paid punctually), debt serviced according to plan and free cash distributed to owners, although vessel and project valuations are trending lower. Vestland Seismic IS The vessel is still idle, although there have been some developments regarding a new charter. The project is 100% equity financed and the cash burn is insignificant. Payments from projects During Q3 15, POI did no receive distributions from projects. The Fund contributed NOK 0.8m of capital to its portfolio. PSV Invest II IS The vessel is on a contract to Apache in the UK at an acceptable day rate through to October 2016, however, with a 3-month stint in the spot market in Q4 15. The market for high spec PSVs is extremely difficult at the moment. New investments POI will only make follow-up investments in existing projects, if required. During Q3 15, POI had to invest roughly NOK 0.4m in Asian Offshore to boost net working capital and service debt. Norseman Offshore IS The LTV covenant is yet to be satisfied and the shareholders paid in USD 0.8m from uncalled capital as security against a potential breach at YE 15. The charter hire is paid punctually, but the charterer is facing an exceedingly difficult market and has put the ship into temporary lay-up for the winter season.

4 Portfolio The portfolio continues to be characterised by a high contract coverage (87%), despite the market volatility. The average charter length is 2.7 years, which is still robust. Barring any unforeseen circumstances, we expect the portfolio to continue to produce a good cash flow for the Fund. Investments and capital POI s portfolio consists of 9 projects which owns stakes in 16 units. The average contract length is 2.7 years and the contract coverage is 87%. The gross nominal value of the contract backlog is roughly NOK 64m. The backlog is evenly distributed among solid counterparts. Charterparty Distribution based on NAV Bareboat 76% POI had a cash holding of NOK 7.8m as of 30 September Capital calls for projects should not be ruled out and the Fund is therefore preserving its cash position. During Q4, POI also sold some of its holdings in the Songa Offshore bond to improve its cash position further. Timecharter 9% Spot/Asset Play 13% High yield bond 2% The life cycle of POI has been extended to 30 June It goes without saying that it will be difficult to make project realizations at good prices with the current market conditions. Hence, if the markets do not improve within such a time frame, further extensions should not be ruled out. Segment Distribution based on NAV Seismic 31% PSV/AHTS (Europe) 40% Semi Submersible Rig 3% PSV/AHTS (Asia) 26% Charter hire backlog by counterpart CGG 37% Bourbon 25% Apache 0% Viking Supply Ships AS 7% Ezra Holdings 31%

5 Portfolio Project / company Segment Contract Charterparty Charterer Proportion of NAV Master and Commander IS Seismic Aug-18 Bareboat CGG/Fairfield Nodal 25.0 % 3B Offshore IS PSV/AHTS (Europe) Nov-17 Bareboat Bourbon Maritime 23.7 % Azur Offshore IS PSV/AHTS (Asia) Jun-23 Bareboat Ezra Holdings 11.9 % Norseman Offshore IS PSV/AHTS (Europe) Dec-20 Bareboat Viking Supply Ships AS 7.7 % Far East Offshore IS PSV/AHTS (Asia) Feb-17 Bareboat Sanko Steamship Ltd 7.5 % Vestland Seismic IS Seismic Spot/Asset play Albatross Shipping 6.4 % Asian Offshore IS PSV/AHTS (Asia) Spot/Asset play 5.9 % PSV Invest II IS PSV/AHTS (Europe) Sep-16 Timecharter Apache UK 4.6 % PSV Invest II IS shareholder loan PSV/AHTS (Europe) Sep-16 Timecharter Apache UK 4.0 % Songa Offshore SE 2011/2016 FRN Semi Submersible Rig May-18 High yield bond Songa Offshore SE 2.5 % Asian Offshore I IS shareholder loan Spot/Asset play 0.9 % Charterparty Distribution based on NAV Segment Distribution based on NAV Bareboat 76 % PSV/AHTS (Europe) 40% Seismic 31% Timecharter 9 % Semi Submersible Rig 3% PSV/AHTS (Asia) 26% Spot/Asset Play 13 % High yield bond 2 %

6 Price per share Volume (Thousand NOK) Second Hand Market and Liquidity As of 30 September 2015 POI had 851,877 shares outstanding. Pareto Securities AS ( PSec ) aims to facilitate an active second hand market for shares. The last trading price was NOK 45 per share, which implies a 42% discount to NAV as per Q2 15 (of NOK 77 per share). Investors who wish to buy or sell shares should contact their advisors or alternatively PSec directly. Last 5 trades in second hand market Date Share price No. of shares Volume (NOK) 06/08/ , ,000 06/08/ , ,578 25/08/ ,000 65,000 23/01/ , ,000 27/04/ ,000 90,000 Number of trades since establishment 42 Volume traded since establishment (NOK) 8,111,773 Average volume per trade (NOK) 193, Pareto Offshoreinvest AS - Second Hand Trades Volume (Thousand NOK) NAV per share NAV per share (dividend adjusted) Second hand price per share 2,000 1,800 1,600 1, ,200 1,

7 The offshore oil services market The oil price appears to be bottoming out, but exhibits continued strong volatility. Market forces appear to be working, but the process is too slow to warrant any near term uptrend in oil. With 2016 capex budgets now in the process of being set in a low-price environment, there is limited scope for any meaningful improvement next year in oil services. One may hope that things will be shaping up for some recovery in 2017, which means that it will be tough going in the meantime. Market forces are working in the US, but slowly The rig count continues to drop in line with lower oil prices, and it is dragging production growth down. The EIA is now forecasting negative y-y growth in October, which is expected to accelerate going forward. The key drivers are a) reduced ability among the producers to fund mushrooming negative cash flow, and b) expiry of profitable oil price hedges, which mean that more of the current low prices will filter through. At the moment, debt service costs among US producers amount to 80% of operating cash flow. Source: EIA, Pareto Securities At the same time, US oil demand is responding favourably to lower prices. It is up by around 0.5mb/d YTD and by 0.7mbd in the past month (y-y). Still, the sentiment is being held back by a renewed crude oil inventory build. We believe this is largely seasonal. We are just exiting the normal maintenance season among refineries, where refinery production, and hence crude intake is at a low point. This means that crude oil inventories build somewhat, despite production coming down. Source: EIA, Nordea Markets Secondly, we are in the shoulder season of both gasoline and heating oil demand, so the reduction in oil product inventories is not sufficient to compensate for the increased crude oil inventories. This is something that should improve going forward, implying that the sentiment may strengthen a bit. Iran and China are the main worries outside of the US There is a strong focus on abating Chinese economic growth at the moment. While apparent demand and actual imports have been stronger than expected recently, the feeling is that it will abate going forward and maintain a sense of bearishness surrounding the long term demand outlook in China, which has been by far the most important driver for oil in the past decade. Source: EIA, Nordea Markets Iran is another negative factor. With the sanctions now in the process of being lifted, signals out of Teheran is that production and exports will increase by mb/d in the short term. There is thus a worry that what is gained from the US, will not help the global oil market, meaning that the global inventory correction phase may take longer than expected. All in all, it still looks rather gloomy, but we take some comfort in that the oil price appears to be bottoming out and while the inventory correction process is taking longer, it is in motion and should strengthen going forward. Source: IEA, Pareto Securities,

8 Oil services, continued E&P spending expected down another 10% in 2016 Global E&P spending is expected to be down around 25% this year, the biggest decline in three decades. For next year, the forecast is for another down-tick of 10%, meaning that 2016 will be even more difficult than 2015 on a global basis. Rig utilization the lowest since the 1980s Source: Pareto Securities The demand for floating drilling rigs has come down to the 2011 level, meaning that drilling activity is still quite high in a historical context. The reason for the demise in utilization and day rates is the sharply increasing rig fleet in recent years. As can be seen in the chart on the left, scrapping is needed to re-balance the market. In fact, the market would be in balance if all rigs more than 30 years old are scrapped. We are indeed seeing increased scrapping activity at the moment (42 rigs have been scrapped recently, while 84 rigs are either warm or cold stacked). It is also positive that an increasing number of newbuilds are being cancelled. In the jack-up space, the situation is similar, but slightly better balanced. OSV utilization falls off a cliff Source: IHS, Pareto Securities, The North Sea market is among the worst hit of all. As can be seen to the left, demand has shrunk meaningfully compared to a year ago, primarily as a result of reduced spot market activity. The long term work is still continuing more or less unchanged. The spot market is typically made up by rig moves (for AHTS), cargo runs (PSVs) and general production or construction support (PSVs). At the same time, there has been an influx of vessels, coming both from shipyards (newbuilds) and from other markets that have shed capacity (mainly Brazil). The result is a toxic mix, and it is difficult to see the way out of the misery. The scrapping potential is non-existent, as the fleet is of a young age. Expect a very tough 2016! Source: Pareto Securities, Clarksons Platou, Westshore Seismic demand at historically low levels Exploration spending is naturally on a back burner in times like these. The tendering activity for marine contract seismic is roughly at levels seen at the bottom of the cycle in the past ten years. This may respond quickly to an oil price recovery, but is unlikely to materialize into meaningful demand additions next year. The seismic market is, however, relatively consolidated and the players are retiring significant capacity (both permanently and temporarily). Nevertheless, there is a time lag here, so further capacity reduction is needed to balance the market. Source: Pareto Securities, PGS

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

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