Pareto Offshoreinvest AS
3rd quarter report 2014
Link: www.paretoprojectfinance.no/avdelinger/forvaltning/offshorefond
Executive Summary
NAV NOK 83/share
(as of 30 June 2014, dividend adjusted)
POI paid NOK 17 per share to its shareholders in August 2014 following project realizations. Adjusted for this, the
NAV per share as of 30/6/14 is NOK 83 per share. The USD has strengthened significantly against the NOK, which
will have a meaningful impact on the next NAV, which will be reported as of 31/12/14. The oil price collapse poses
new challenges going forward, primarily on terms of project realizations, since a very high proportion of the
portfolio continues to be on long term contracts.
Market Development
Portfolio
Global commodity markets have sold off significantly
this year, with oil the stand-out weak performer.
Growing concerns about emerging market economic
growth have coincided with renewed uncertainty about
the Eurozone, the Ukraine crisis, the Ebola virus and a
seasonally weak point in the oil market.
The portfolio consist of shares in 11 projects with a
total of 18 vessels.
The 15% decline in the oil price seen in the past month
will put an additional damper on already trimmed E&P
budgets. As such, one should expect a negative
development in oil services in the near term. The
timing and scope of a potential rebound will depend on
how quickly supply and demand forces respond. At the
moment, an exposure to late cyclical segments is likely
to be rewarded. The Fund’s exposure is generally more
weighted to this theme and the portfolio is not
expected to be dramatically effected.
The contract coverage is 88% with a weighted contract
length of 3.1 years.
POI has distributed NOK 37 per share to its
shareholders so far this year, taking total distributions
since inception to NOK 55 per share (55% of par).
Further distributions will depend on running dividends
and project realizations.
Portfolio News
POI is invested in 11 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
Carlisle Subsea IS
Both vessels are on charter and the charter hire is paid
relatively punctually. The seismic market has generally
weakened during the past six months. While CGG
(charterer of Phoenix) is struggling to employ their
fleet, Fairfield Nodal (charterer of Commander) appears
to have found a profitable market for their niche
technology (ocean bottom seismic). Discussions to
restructure the Phoenix CP has been initiated, but this
will only be considered at profitable terms for M&C.
The charterer is being closed down by its owner,
Superior Energy. It is unclear what this will result in, as
charter hire is still paid punctually. However, a
termination of the current arrangements and a sale of
the vessel would represent a positive outcome for the
project.
Asian Offshore IS
The average day rate for the four vessels was $
7,200/d during Q3’14, down 8% on the preceding
quarter. The project valuation has been revised down
due to weak operational cash flow and final payments
of this year’s drydockings. The integration process
together with the partners AO III and ACS is still
ongoing, but the efforts to secure a financing package
have been hit by the financial market volatility. At the
time of writing, it is therefore unclear whether the refinancing and integration can be completed in the near
term.
Vestland Seismic IS
The vessel M/V Vikland is still idle and there have been
no material developments regarding a new charter or a
sale. The shareholders contributed USD 3.5m in
uncalled capital during Q3’14 to retire all outstanding
bank debt. The project is thus 100% equity. The
seismic market is very weak and it will take time to
secure a new employment for the vessel.
PSV Invest II IS
The vessel was on a 4-month contract with
ConocoPhillips at above market day rates during Q3’14.
It has just started on a 3+1+1 year contract with
Apache Petroleum in the UK at a rate that implies a
slightly lower contribution. However, it is hoped that
this may pave the way for a re-negotiation of the
financing terms for the project.
Azur Offshore IS, 3B Offshore IS, Norseman
Offshore IS, Far East 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.
Payments from projects
During Q3’14, POI received dividend payments of NOK
0.2m. In addition, realization proceeds totalling NOK
12.0m was paid to POI in Q3’14.
New investments
POI has not made any new investments during Q3’14
and will refrain from doing so for the remainder of its
lifetime, save for follow-up investments in existing
projects, if required. During Q3’14, POI contributed
NOK 1.2m of such investments.
Portfolio
Project / company
Segment
3B Offshore IS
PSV/AHTS (Europe)
Master and Commander IS
Seismic
Carlisle Subsea IS
Subsea
PSV Invest II IS
PSV/AHTS (Europe)
Songa Offshore SE 2011/2016 FRN Semi Submersible Rig
Azur Offshore IS
PSV/AHTS (Asia)
Asian Offshore IS
PSV/AHTS (Asia)
Vestland Seismic IS
Seismic
Norseman Offshore IS
PSV/AHTS (Europe)
Far East Offshore IS
PSV/AHTS (Asia)
PSV Invest II IS shareholder loan
PSV/AHTS (Europe)
Charterparty Distribution based on NAV
Bareboat
68%
Charterer
Nov-17
Aug-18
Oct-15
Oct-17
May-18
Jun-23
Bourbon
CGG/Fairfield Nodal
Hallin Marine Subsea
Conoco
Songa Offshore SE
Ezra Holdings
Dec-20
Feb-17
Nov-17
Bareboat
Bareboat
Bareboat
Timecharter
High yield bond
Bareboat
Spot/Asset play
Spot/Asset play
Bareboat
Bareboat
Timecharter
Albatross Shipping
Viking Supply Ships AS
Sanko Steamship Ltd
Maersk Oil
27.4
22.9
14.8
11.9
8.8
8.7
8.4
7.0
6.8
6.4
4.3
Subsea
12%
Seismic
23%
Semi
Submersible Rig
7%
PSV/AHTS (Asia)
19%
Spot/Asset Play
12%
High yield bond
7%
%
%
%
%
%
%
%
%
%
%
%
Segment Distribution based on NAV
PSV/AHTS
(Europe)
39%
Timecharter
13%
Proportion
of NAV
Contract Charterparty
Second Hand Market and Liquidity
As of 30.09.2014 POI had 851,877 shares outstanding. Pareto Project Finance AS (”PPF”) aims to
facilitate an active second hand market for shares. The last trading price was NOK 65 per share. This
transaction was concluded following the latest distribution of NOK 17 per share in August, which means
that the trading price was flat from the previous transaction adjusted for the distribution.. Investors
who wish to buy or sell shares should contact their advisors or alternatively PPF directly.
Last 5 trades in second hand market
Date
Share price
No. of shares
Volume (NOK)
18/02/14
75
894
67,050
25/06/14
78
4,389
342,342
06/08/14
82
5,000
410,000
06/08/14
82
4,129
338,578
18/08/14
65
1,000
65,000
Number of trades since establishment
41
Volume traded since establishment (NOK)
7,846,773
Average volume per trade (NOK)
125
2,000
Pareto Offshoreinvest AS - Second Hand Trades
Volume (Thousand NOK)
NAV per share
NAV per share (dividend adjusted)
Second hand price per share
1,800
1,600
1,400
100
1,200
Price per share
83
75
1,000
65
50
800
600
400
25
200
0
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
Date
0
Volume (Thousand NOK)
150
191,385
The offshore oil services market
The dust has settled after panic hit the financial markets last month, resulting in a broad commodity
sell-off. Global economic growth expectations have been lowered, both for emerging markets and the
Euro zone. This has coincided with a sharp rise in the USD, an abundance of crude in the market in a
seasonally weak period of the year and thus a rather dramatic plunge in the oil price. What is next?
Global Commodity Prices, YTD performance
Doom and gloom in oil
The rather sluggish seaborne trading volumes in shipping
during the past year have lead us to question the real growth
in the global economy. It seems as if the global financial
markets have finally caught up, hung over from a multi-year
QE-intoxication. The sentiment has been worsened by the
Ukraine crisis, Ebola and tensions in Syria and Iraq.
The oil price has taken a severe beating, but appears part of a
general commodities sell-off. As such, one may explain the
weakness as being driven by growth concerns in emerging
economies, particularly China.
Source: Bloomberg, Nasdaq, LME
Brent Crude, $/bbl
The reasons why oil has fared worse than other commodities
include a strengthening USD, a sharp growth in US tight oil
production, seasonally weak markets and growing oil
inventories.
Where do we go from here? If global growth indeed turns out
on the low side, the oil industry must adapt to lower demand
growth. With the growth in non-OPEC production, driven by US
tight oil, set to continue, this implies a new reality for OPEC,
which will have to cut back production for the first time since
2011.
The fact that Saudi Arabia so far has cut prices instead of
volumes has attracted significant attention. One key reason
may be that the strengthening USD results in a limited margin
Source: Nordea
impact as its costs are primarily non-USD denominated.
Assuming a stable, strong USD, some oil market analysts have
therefore pointed to USD 90/b as being the new USD 100/b for
the Saudis. Others believe that Saudi Arabia is out to test the
real break-even levels for US tight oil to see where the pain
level lies, i.e. where drilling is cut back and production growth
abates. No one really knows, the answer to this, but probably
we will have to see WTI prices well below $80/b for an impact.
Nevertheless, market dynamics generally work. We expect to
see the supply side react to the sell-off in oil. At some point in
the next three months, we would expect to see OPEC reduce
quotas (the next OPEC meeting is 27 November). We would
also expect to see some of the higher cost US tight oil
impacted. The sharp contango in oil prices would also
encourage inventory build, taking volumes off the physical
market.
Demand is also heading into seasonally stronger territory and
should reduce the overhang. We see the overall situation as
markedly different to the 2009
bottomed
at
USD
35/b.
set-up when oil
Underlying
fundamentals
prices
could
therefore stage a recovery in oil prices near term. However, it
may be some time before we visit triple digit territory again.
And for those worrying about global economic growth, let us
not forget that lower energy prices provide a very meaningful
stimulus in its own right.
Source: Nordea
Oil services, continued
Expect further pressure on E&P spending
The oil majors`cut backs in E&P spending budgets have been
well publicised, but is likely be higher with a weaker oil price.
Hence, overall market growth will be weaker than assumed
only a few months ago. Lower oil prices will also spread across
to independents and NJOCs. The former are generally more
exploration oriented and may experience lower access to
funding. The NOCs should in principle represent more stability.
The most recent forecasts indicate roughly
5% decline in
global E&P spending in 2015, predicated on a modest oil price
recovery. Indeed, we’ve seen the first major oil companies
announce budget reductions in line with this.
Source: Pareto Securities
A weak sentiment and will inspire all players to reduce risk
through securing backlogs by sacrificing pricing. Hence, most
segments should experience negative pricing development.
We have already seen this in the rig market, where available
rigs are being re-contracted at significant discounts to previous
rate levels. In this part of oil services, there is the added
problem of a large newbuild order book, which will have an
unfavourable impact on the market balance.
The seismic market has followed exploration spending down
this year. Volumes are lower, but pricing is holding up
reasonably well. One benefit of this market is that it is well
consolidated and the large players have already initiated both
permanent and temporary capacity retirement. This will
cushion the downturn and means that it may not become quite
as bad as many appear to fear.
Source: Pareto Securities
In the offshore support vessel space, the situation is mixed.
The North Sea markets have been very volatile this year. The
main headline has been lower demand from Statoil, but some
of the slack appears to have been picked up by others as the
Q3 activity has been quite buyoant, particularly for AHTS.
Nonetheless, nobody seems to believe in better markets next
year.
Elsewhere, Brazil is improving and several long term contracts
have been renewed, with additional vessel requirements
coming to the market. The West African market is also
reasonably strong. It continues to be driven by production
development work, which was sanctioned by the oil companies
years ago and currently subject to large field development
Source: Seabrokers
contracts coming to the execution phase. The Asian market
remains choppy and appears the one most directly linked to
the movements in the oil price.
The subsea markets are generally late cyclical and the main
SURF players have record high order books to execute in the
coming years. Hence, the baseload of work should be healthy.
On the other hand, shorter term and more maintenance driven
work is likely to be impacted and will reduce overall fleet
utilization and rates. If the oil price stays low, the main impact
will be felt in a 3-5 year perspective through fewer field
developments.
Fund Management Team
Richard Jansen
Head of Fund Management
Shipping/Offshore
Phone: + 47 22 01 58 96
E-email: richard.jansen@pareto.no
Patrick Kartevoll
Fund Manager
Shipping/Offshore
Phone: + 47 22 01 58 79
E-mail: patrick@pareto.no
Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, www.pareto.no
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.
development.
All investors
must verify
these
assumptions themselves. The company cannot give any
assurance as to the correctness of such information and
statements.
Information contained in this Quarterly Report is
obtained by Pareto Project Finance AS (“Pareto Project
Finance”, “Pareto”, or “PPF”). Information is presented
to the best of our efforts and knowledge, but Pareto
Project Finance AS cannot guarantee that the
information is correct or all inclusive. Pareto Project
Finance AS 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.
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 PPF’s market report as per November
2014. Risks and costs are further described in the
prospectus (information memorandum) produced in
relation to share issues 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 Project Finance AS. Such forwardlooking 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
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 Project
Finance AS 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.