Pareto Offshoreinvest AS
4th quarter report 2016
Link: http://paretosec.com/pai-reports.php
Executive Summary
Market Development
The OPEC accord has resulted in the oil price stabilizing
at around USD 55/b for Brent crude. This is a level that
allows for increased spending by the oil industry, and
has thus spurred a return of some optimism. Indeed,
global E&P spending plans are now expected to be up
by 7% y-o-y and several oil companies have reported
plans to raise spending by double digits this year. While
this looks first and foremost to benefit North American
land production, but is expected to trickle through to
the offshore markets during the year.
Anecdotal evidence that we are now about to emerge
from the bottom can also be found in solid share price
gains with oil service stocks up by around 33% in the
past three months, higher pricing of oil service bonds,
an increasing sale and purchase activity driven by more
speculative buyers willing to take the risk, a greater
tendency of oil companies wanting to lock in vessel
capacity on term contracts to lock in low prices and a
few positive profit warnings in the seismic industry to
indicate rising exploration spending – a typical leading
indicator. All in all, the tide seems to be turning,
although we are far from out of the woods yet.
Portfolio
The portfolio consist of shares in 8 projects with a total
of 15 vessels. The contract coverage is 100% with a
weighted contract length of 5.2 years. There has been
a charter restructuring for one of the projects, which
will be favourable to the Fund considering the
alternatives.
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.
NAV as of 31 December 2016 was NOK 22 per share.
Since inception, NAV is down by 8% including
dividends distributed. The Fund will next report NAV as
of 30 June and investors should be wary of further
declines based on the lower vessel valuations we are
currently witnessing, as well as charterer defaults and
debt restructurings. Worst case, the liquidity could
become very tight for the Fund.
The market conditions continue to be very challenging, but we may be close to the bottom now due to
the oil price recovery. That being said, the upturn is likely to be slow in materializing. The Fund is
keeping its powder dry and is preparing for a very difficult 2017, in which investors should not expect
any dividend distributions.
NAV NOK 22/share (as of 31 December 2016)
Portfolio News
Master and Commander IS
An agreement has been completed with CGG whereby
the company has settled all outstanding hire for 2016.
The remaining part of the bareboat contract will be
subject to a reduced day rate, with the reduction being
compensated by an issue of senior unsecured bonds to
M&C. An agreement with the Lenders has also been
secured whereby available funds, plus a call of about
1/3 of the uncalled capital facilitates a major upfront
repayment of debt, in exchange for reduced
amortizations going forward and covenant adjustments.
Going forward, M&C will have sufficient cash flow to
cover all debt obligations, with an additional buffer of
cash holdings and liquid bonds. As a result, one will be
maintaining a solid exposure to any market
improvement in seismic.
3B Offshore IS
Bareboat hire is paid punctually. The vessel valuations
are lower and there continues to be a potential MVC
breach to be handled, while a process to prepare for
the expiry of the BBCP has started. The value of the
vessels are likely so low that the uncalled capital is at
risk. That being said, with some market improvement
possible during the year, the odds may start to
improve.
Azur Offshore IS
The BBCP is in the process of being restructured with a
lower rate payment for the next couple of years, which
is partly compensated for by an extension of the lease
period. In connection with this, some of the uncalled
capital is set to be drawn to prepay debt. The
completion of the restructuring hangs in the balance,
however, as the guarantor is now subject to creditor
demands that may make it difficult to raise the level of
equity required to consummate the restructuring.
Norseman Offshore IS
The main shareholders in the project are taking legal
advice on whether to pursue legal claims against the
bank in the project or the charterer. The call for
uncalled capital is also being disputed. The valuation
reflects full payment of the uncalled capital.
Far East Offshore
The project has reached an in-principle agreement with
its secured Lender regarding a 2-year extension of the
current loan, but has so far failed to reach an
agreement with the charterer regarding an restructured
repayment of the sellers’ credit. In the absence of this
agreement being carried out, the ships are expected to
be sold, but are not expected to fetch proceeds that will
imply any equity recovery. All uncalled is set to be paid
in, and the recovery of such is uncertain.
PSV Invest II IS
One of the Lenders backed out of a restructuring
agreement and negotiations are ongoing to see
whether an acceptable solution can be found. The
alternative is to put the company into liquidation. The
valuation reflects full payment of the uncalled and thus
represents the maximum downside.
Vestland Seismic IS
The vessel is still idle. The project is 100% equity
financed and the cash burn is insignificant.
Asian Offshore IS
The Sea8 pool’s average day rate was USD 3,900
during Q4’16 adjusted for utilization, up 9% q-o-q. The
cash flow situation is reasonable at the moment with
distributions from the pool covering operating
expenses. There is no development regarding a
restructuring agreement with the Lender, apart from an
understanding that AO I is not paying interest or
amortization. If the need for additional working capital
re-emerges, the board may have to consider placing AO
I into liquidation. Vessel values are clearly well below
the outstanding level of debt.
Payments from projects
No payments were received during the quarter, and no
payments were made.
New investments
POI will only make follow-up investments in existing
projects, if required.
POI is invested in 8 offshore projects, which implies a diversification across different offshore oil service
segments. This section provides an update on the quarter’s most important newsflow related to the
underlying investments.
Spot/Asset Play
9%
Timecharter
4%
Bareboat
87%
Charterparty Distribution based on NAV
PSV/AHTS (Asia)
45%
PSV/AHTS
(Europe)
13%
Seismic
42%
Segment Distribution based on NAV
Ezra Holdings
64%
CGG
8%Bourbon
18%
Fairfield Nodal
10%
Charter hire backlog by counterpart
Project / company Segment Contract Charterparty Charterer Proportion
of NAV
Master and Commander IS Seismic Dec-18 Bareboat CGG/Fairfield Nodal 66.2 %
Azur Offshore IS PSV/AHTS (Asia) Jun-23 Bareboat Ezra Holdings 63.1 %
Vestland Seismic IS Seismic Spot/Asset play Albatross Shipping 13.8 %
3B Offshore IS PSV/AHTS (Europe) Nov-17 Bareboat Bourbon Maritime 0.6 %
Far East Offshore IS PSV/AHTS (Asia) Feb-17 Bareboat Sanko Steamship Ltd 0.0 %
PSV Invest II IS PSV/AHTS (Europe) Timecharter Team Marine 0.0 %
Asian Offshore IS PSV/AHTS (Asia) Spot/Asset play 0.0 %
Asian Offshore I IS shareholder loan Spot/Asset play 0.0 %
Norseman Offshore IS PSV/AHTS (Europe) Other Viking Supply Ships AS -14.0 %
PSV Invest II IS shareholder loan PSV/AHTS (Europe) Timecharter Team Marine -29.8 %
Portfolio
Investments and capital
POI’s portfolio consists of 8 projects which owns stakes
in 15 units. The average contract length is 5.2 years
and the contract coverage is 100%.
The gross nominal value of the contract backlog is
roughly NOK 40m. The backlog is now weighted
towards Ezra, which is in danger of not being able to
perform its obligations, according to the restructuring
in Azur Offshore.
POI had a cash holding of NOK 10m as of 31
December. The Fund is preserving its cash holding in
the expectation of further capital calls in the portfolio.
Worst case, liquidity may become an issue.
The life cycle of POI has been extended to 30 June
2018. 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 be expected.
The portfolio continues to be characterised by a high contract coverage (100%), despite the market
volatility. The average charter length is 5.2 years, which is robust. We expect the portfolio to continue
to produce a decent cash flow for the Fund, but the situation continues to be that cash is trapped in the
projects for debt repayments, rather then becoming available to the Fund.
0
20
40
60
80
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160 POI - NAV development
NAV per share NAV per share (dividend adjusted)
Net Asset Value Development
NAV development
NAV as of 31 December 2016 was NOK 22 per share,
down 48% from the previous NAV as of 30 June and
down 63% for the past year. POI makes semi-annual
NAV calculations. Accordingly, the next NAV will be
published as of 30 June ‘17 and will be reported to
investors in the report for the second quarter of 2017.
NAV is down 8% since inception in 2009 (adjusted for
repayments of capital). This is an acceptable return
when compared to how other investments within oil
service investments have fared in the same period.
The Fund’s reliance on long term bareboat contracts
has benefited the performance and enabled substantial
dividend pay-outs. Nevertheless, liquidity is tight in
view of the wide range of capital calls the Fund is
becoming subject to and may, worst case, force
through asset disposals or additional capital having to
be raised in order to preserve the portfolio’s exposure
to a potential market recovery.
Direct yield
POI has an ambition to make annual payments to its
shareholders. Such payments are made within the
relevant laws, and may come in the form of ordinary
dividends, as well as repayment of capital.
POI has distributed NOK 70 per share to is investors,
which is 70% of par value.
Future distributions are mainly expected to follow
realisations of projects, which could take more time
considering the current weak markets.
Net asset value was down 48% during H2’16 and is now down 8% since inception, adjusting for
dividends. The reason is a continued decline in asset values, which is resulting in capital calls to reduce
debt, and in some instances a forced sale of assets below debt levels. Charter parties are also being
renegotiated, leading to lower future cash flows and in turn lower project valuations. The risk continues
to be high, particularly when it comes to liquidity.
Last 6 mths Last 12 mths Last 24 mths Since inception Since first investment
POI -48,1% -63,4% -77,5% -8,4 % -8,4 %
Oslo Stock Exchange 13,4% 12,1% 18,2% 187,3% 75,8%
Offshore Index* 31,3% 22,8% -5,6% 76,9% -5,4%
* Based on OSLO Energy Equipment & Service
Second Hand Market and Liquidity
As of 31 December 2016, 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 30 per share in
March 2016, which implies a 36% premium Q4’16 NAV (of NOK 22 per share). Investors who wish to
buy or sell shares should contact their advisors or alternatively PSec directly. Given the challenging
market and situation of POI, shareholders and potential investors should exercise caution when trading
in the shares.
Date Share price No. of shares Volume (NOK)
06/08/14 82 4,129 338,578
25/08/14 65 1,000 65,000
23/01/15 35 5,000 175,000
27/04/15 45 2,000 90,000
04/03/16 30 2,065 61,950
Number of trades since establishment 43
Volume traded since establishment (NOK) 8,173,723
Average volume per trade (NOK) 190,087
Last 5 trades in second hand market
The oil market
Inventory correction seen to continue
The OPEC production cut-back agreed in November
2016 is targeting a reduction of OPEC crude production
by 1.5 mb/d. This has spurred an oil price increase of
about USD 5/b and restored a bullish sentiment in the
oil market.
As can be seen in the chart to the left, it will
essentially now be OPEC’s turn to shoulder the burden,
after 2016 was characterized by large production
declines in US tight oil. Nevertheless, the inventory
draw downs look to accelerate, which is positive.
On the other hand, OECD inventory levels are still very
high and it will take a major reduction to really push
oil prices back to previous levels. The key danger here
is the recovery of US tight oil production. Oil prices are
now at levels that make many wells profitable again
and the US horizontal land rig count has started to
increase steadily. The higher the oil price goes, the
more will come back on line and it will only be a
matter of time before there is a meaningful response
in actual production.
In the next 12-18 months, we therefore expect rising
US tight oil production to put a damper on the oil price
recovery. We may see USD 60/b in the not too distant
future, but we have a hard time seeing material upside
from that level until we see the impact on global
production from conventional reserves of the past
three years’ underspend on reserve replenishment.
That effect is bound to emerge at some point and will
have a profound impact on prices. However, we
believe this is likely to happen in 2018-19 rather than
this year.
Consensus forecasts on the rise
The average 2016 price for Brent Crude was USD
44.8b and has averaged USD 54.4 YTD. The consensus
forecasts for 2017 are USD 55/b, which we think may
be on the conservative side. For 2018 and 2019
consensus is flat at USD 62/b. As explained above, we
think there might be meaningful upside to the 2019
forecasts.
The OPEC decision in November to cut production by 1.5 mb/d will strengthen and continue the
inventory correction cycle. As a result, consensus oil price forecasts have increased, although
moderately so. Most are wary of a rapid come-back of US tight oil production. We believe this will put a
damper on the price acceleration and that a more profound oil price increase will be delayed until we
see the actual impact of the past three years’ lack of spending on reserve replenishment globally.
Source: Pareto Securities, IEA, Opec
Source: EIA, Nordea Markets
The oil services market
E&P spending seen to rebound in 2017
Global E&P spending was down 22% in 2016, less than
expected. The leading E&P spending survey from
Barclays Capital was updated in January 2017 -
predicting a 7% increase for 2017. Observations of
updated spending plans from oil companies seem to
confirm this with several companies now expecting to
grow their investments by 20%-30% this year.
Looking at the graph to the left, this should be no
surprise, as oil price gains historically have always
coincided with rising E&P spending.
Rising cash margin for the oil industry
The integrated oil companies are estimated to have a
cash break even price of USD 51/b to cover production
costs, debt service and dividends. Hence, any oil price
above this level will allow for increased spending, the
opposite of what has been the case for the past three
years. The average oil price assumption that lies
behind the 7% projected E&P spending increase for
2017 is USD 52/b, so the current price level leaves to
margin for further expansion. Indeed, the oil industry
has historically raised spending above budgets if actual
prices have outperformed budget prices. Moving into
2018, this margin looks set to increase further,
although any price increases for services and
equipment will mitigate some of this effect.
US onshore to benefit first, then spread offshore
The Barclays E&P survey predicts North American
spending to increase by 27%, in line with the
expectation that tight oil production can (and will) be
ramped up quickly along with the rising oil prices.
International spending is only forecast to rise by 2%
and offshore, which is typically capex heavy and
driven by major field development decisions, is not
expected to start improving until late this year. This
sentiment was echoed by Schlumberger in its recent
Q4’16 report. For our portfolio, it appears to be no
longer a question of if, but when a recovery will
happen. However, patience is needed.
Anecdotal evidence of a recovery
The financial markets have become more optimistic
with US and Norwegian oil service stocks up by 19% in
the past three months. Drilling stocks, a typical
leading indicator, have fared even better. There have
been a selection of positive profit warnings from
seismic companies for Q4’16, owing to better-than-
expected multi-client sales. This hints at recovering
exploration spending, a typical leading indicator. We
are also seeing a rising wave of term fixtures in the
OSV space, as it appears that the oil industry is
sensing that we are at the bottom and is eager to lock
in capacity at low rates for the coming years. We are
also starting to see contract extensions within the
offshore rig industry, instead of contracts just being
allowed to lapse upon expiry. Finally, we have seen a
few speculative buyers of assets start to bite, both in
the rig industry and the OSV space. At least some
pieces in the recovery puzzle are there…
Source: Barclays Capital, , EIA,Pareto Securities
Source: Barclays, Nordea Markets
Source: Nordea Markets, Barclays Capital, EIA
Source: Bloomberg, Oslo Stock Exchange
Fund Management Team Richard Jansen Head of Maritime Investments Phone: + 47 22 01 58 96 E-email: [email protected] Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, www.paretosec.com/pai.php
Patrick Kartevoll Fund Manager Phone: + 47 22 01 58 79 E-mail: [email protected]
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 2016. 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.