Pareto World Wide Offshore AS - Pareto Project Finance

Pareto World WideOffshore AS2nd quarter report 2012Link: www.paretoprojectfinance.no/avdelinger/forvaltning/offshorefond

Executive SummaryNAV NOK 118/shareThe offshore oil services markets have posted a strong performance so far this year with meaningfulincreases in dayrates and utilisation. However, turbulent financial markets and a volatile oil pricerepresent threats to the medium term outlook. Therefore, the composition of the portfolio with modernassets and high contract coverage should do well on a relative basis going forward.Market DevelopmentOffshore oil service activity levels have risensignificantly in the past year. As a result, utilizationlevels have surged, leading to an average rate increaseof around 50% across the various segments. Asevidenced by the mushrooming order backlogsamongst oil service companies, the volume of work inthe coming years seems to be very solid. This is alsoleading to more long term contract opportunities, whichis a bonus with regards to financing.The financial markets tell a different tale, though. Stockmarkets have been volatile this year, as psychology hasshifted back and forth from crisis mode to a sigh ofrelief and a focus on low valuations. The oil price hasbeen volatile and is down 2% since the start of theyear, and 17% from its YTD peak. Doubts aboutChina’s future demand growth, coupled with high OPECoutput are the main drivers behind this, although otherfactors also contribute. Financing conditions remainvery difficult, making it challenging to raise funding forasset purchases, as well as creating forced sellers ofassets. This has a negative impact on transactionvalues and we note that, despite the hefty increase indayrates, average asset values in oil services are downmore than 10% in the past year.There’s definitely a buyers market out there and cashrich players are well positioned to make reallyattractive deals right now. Earnings security throughlong term contracts against mainly solid counterparts isa definite bonus in an uncertain world.Overall market growth in oil services is likely to remainsteady at around 10% since the current oil price ishigher than the oil industry’s planning price for 2012. Itwill take an oil price below USD 80/b to have a materialimpact on spending. While that can not be ruled out,we believe it will be a temporary and self-correctingoccurrence, that should not represent a base casescenario. After all, OPEC with its stated ambition of anoil price of USD 100/b, is well placed to providedownside protection.«The board expects cash distributions toincrease in the coming years…»PortfolioFollowing a successful turnaround of its portfolio during2011, PWWO retains a high contract coverage, whichcurrently stands at 91% with an average contractlength of nearly 3.6 years. The bulk of the backlog isagainst solid and profitable counterparts.The portfolio is focused on modern assets and is wellspread across several market segments and geographicregions. The high contract coverage is expected toresult in a solid increase in incoming cash flow, whichin turn will take down asset exposure and pave the wayfor increasing pay-outs to shareholders.Despite the difficult financial markets, NAV hasincreased 3.2% so far in 2012 (adjusted forrepayments of capital). This is primarily a result of highcontract coverage and cash returns on the investments.The way forwardPWWO made an extraordinary repayment of capital ofNOK 10 per share to its shareholders in September2011. In June 2012 NOK 12 per share was distributedto the shareholders as repayment of paid in capital.The board expects cash distributions to increase in thecoming years as PWWO nears the end of its scheduledlife cycle in 2014.The board strives to maximize values for itsshareholders and believe that project realizationsshould be done later, rather than sooner. This is toreap rising asset values, as well as to exploit the rapiddeleveraging in the underlying projects. With referenceto our discussion about the market development on thispage, it is definitely not a seller’s market out there andasset owners will be well advised to have patience tomaximize exit values.The board is conscious that the current financialdistress seen in many markets will provide interestinginvestment opportunities, some of which we havealready looked at. A discounted investment in a goodmarket could provide extra return potential forshareholders.The strategy towards 2014 will therefore be to build onthe current, solid portfolio, with a view to make a fullexit at that time. This is considered a better alternativethan a forced run-off in an early market recoveryphase. However, the current state of the financialmarkets indicate that this may take longer than earlieranticipated.In the meantime, the cash flows from underlyingprojects will provide our shareholders with increasingcash distributions.

Net Asset Value Development (PWWO)NAV in PWWO increased 3.2 % during H1’12, due to a combination of cash returns from underlyingcontracts and a slight rise in underlying asset values. This was partly offset by a downgrade of thevalue of Asian Offshore III. Overall, PWWO is likely to continue to benefit from underlying cash flows,while improving market conditions in oil services indicate upside in asset values in the coming years.NAV developmentThe manager is pleased with 2012 so far. NAV as of30.06.2012 was NOK 118, up 3.2 % on the previousNAV as of 31.12.2011 and up 13.8 % for past twelvemonths, both adjusted for the dividends paid out toshareholders (NOK 10 per share in Q3’11 and NOK 12per share in Q2’12).PWWO makes semi-annual NAV calculations.Accordingly, the next NAV will be published as of31.12.12 and will be reported to investors in the reportfor the fourth quarter 2012.NAV is down 30% since inception in 2007. This poorreturn reflects the cyclical timing of PWWO’s inception,which started investing at the peak of the previouscycle, just as we headed straight into the 2008 financialcrisis. This is reflected in the fact that oil service stockson the Oslo Stock Exchange are down 15% in the sameperiod. That being said, the performance since thebottom has been reasonably good with NAV rising 45%since the end of 2009. This reflects the intense work toturn around troublesome projects with exit and contractopportunities having improved along with bettermarkets.As can be seen in the graph below, the estimatedvalues of the charters, charter free values and cash inthe projects constitute NOK 194 per share in PWWO.The debt in the projects make up NOK 103 per share,leaving a net position in the projects of NOK 91 pershare. Cash, tax positions and cost provisions at theholding company net a positive NOK 26 andconsequently a NAV per share of NOK 118.Direct yieldPWWO strives to make cash distributions toshareholders as we move towards the end of thecompany’s life cycle in 2014. As a result, NOK 12 pershare was paid out in June 2012. The ambition is forincreased distributions in the coming years.Last 6 mths Last 12 mths Last 24 mths Since inceptionPWWO 3.2% 13.8% 25.0% -30.0 %Oslo Stock Exchange 5.8% -3.4% 24.1% -18.8%Offshore Index * 10.7% -2.4% 41.3% -15.1%* Based on OSE101010 Energy Equipment & Service260240220200PWWO - NAV developmentNAV per shareNAV per share (dividend adjusted)250200PWWO - NAV Composition per share (NOK)Value ofchartersCash inSPVs15Debt inSPVs180160140120100150100Charterfreevalues8699Sellers'credit4Cash inPWWO27TaxOthercosts0 1NAVPWWO8060Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-1250931180

Net Asset Value Development (POK)NAV in the feeder company Pareto Offshorekapital ASA («POK») increased by 2.2% during H1’12 and isup 11% in the past 12 months. POK currently has more than 1,600 shareholders and the company actsas the main marketplace for second hand transactions for small, non-institutional investors.NAV developmentNAV as of 30.06.2012 was NOK 54, up 2.2% on theprevious NAV as of 31.12.2011 and up 11.1 % for thepast year (IRR), both adjusted for the repayments ofcapital made to shareholders (NOK 8.60 per share inQ3’11 and NOK 6.30 per share in Q2’12).Direct yieldPWWO strives to make cash distributions toshareholders as we move towards the end of thecompany’s life cycle in 2014. As a result, NOK 12 pershare was paid out in June 2012. The ambition is fordistributions to increase in the coming years. POK willpay out a corresponding amount to its shareholders.The proportion of the NOK 6.30 per share repaymentthat related to the underlying payment from PWWOwas NOK 5.30 per share, hence POK financedapproximately NOK 1.00 per share of the repayment toits shareholders from its own cash balance.Last 6 mths Last 12 mths Last 24 mths Since inceptionPOK 2.2% 11.1% 20.9% -31.1 %Oslo Stock Exchange 5.8% -3.4% 24.1% -18.8%Offshore Index * 10.7% -2.4% 41.3% -15.1%* Based on OSE101010 Energy Equipment & Service140POK - NAV developmentNAV per shareNAV per share (dividend adjusted)12010080604020Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

Portfolio NewsPWWO is invested in a broad range of offshore projects, which implies a significant diversificationacross different asset types and market segments. This section provides an update on the quarter’smost important news flow related to the underlying investments.BassDrill AlphaThe tender rig is currently employed by Total in Congoon a contract that will run towards the end of 2013.Discussions with the client are underway for anextension through 2015. Given the rising rate levels inthe rig market, such an extension should provide anupside in earnings. In the meantime, the rig is fullyfinanced with a rapid deleveraging that will leave theowners with an attractive position when it comes to anexit or re-financing in the coming years.Carlisle Subsea ISThe project has bought a small subsea constructionvessel from Sanko and stepped into an underlyingbarebaot charterparty with Hallin Marine, a subsidiaryof NYSE-listed Superior Energy Services. The vesselwas bought at very attractive terms and the projectoffers a significant return potential at low risk. Theproject is not included in the following portfoliodiagrams as it is under establishment.Neptune Subsea ISBoth ships are on 5-year bareboat charters with ReefSubsea. The charterer has fixed both ships out toTalisman in the North Sea through Q3 2012 for surveyand accommodation duties.Parbarge ISFollowing an extraordinary debt repayment this year, asubstantial dividend was paid out to shareholders inQ2’12. The two barges are still employed on long termcontracts with underlying contracts to major oilcompanies.Project salesThere have been no project sales during Q2’12.Payments from projectsDuring Q2’12, PWWO received NOK 6m in paymentsfrom projects, including Bukit Timah and Parbarge.Asian Offshore III ISThe project owns six small AHTS, which were leased onbareboat charters to RK Shipholdings with SankoSteamship as the ultimate charterer. Sanko filed forJapanese creditor protection in early July and RK hassubsequently cancelled the charters due to nonpaymentof charter hire. The ships are now tradeddirectly in the spot market by RK. A group of ownerswith similar exposure have pooled together with RK toset up a partnership and pool to operate the vesselsefficiently in the markets. Due to working capitalneeds, AO III will need some additional funding, but itis considered a good solution to maintain the vessels’operation before making an exit at a later stage inhopefully improved markets. As a result of theincreased risk, the value of this project has beenlowered, and it has been reclassified as a spot marketinvestment.New investmentsThe Board and the manager are actively seeking toexploit investment opportunities arising from financiallydistressed owners. PWWO therefore invested NOK 5min Carlisle Subsea IS during Q2’12.

This Quarter’s Investment Review:Bukit Timah DISBukit Timah owns three 10,800 BHP AHTS, which were built in China in 2009/10. Since delivery, thevessels have been on bareboat charters to Swiber Offshore Marine, which is a Singapore listed oilservice company. The charters have 10 years duration, with purchase options from 2015.The project was started as a sale-lease-back projectbased on a newbuild project initiated by Swiber. Thevessels were delivered during 2009 and 2010 fromFujian shipyard in China and went straight on charterto Swiber upon delivery.Swiber Offshore is a Singapore listed oil servicecompany specializing in offshore construction, subseaservices, offshore support services and offshoredevelopment services. The company has a fleet of 55offshore vessels, a majority of which is leased. Thecompany was founded in 1996 and has grownsignificantly since then. In 2011, the company hadrevenues of USD 654m (+40%) with a pretax profit ofUSD 69m (+50%). The Q1’12 results followed up onthis with a 29% y-o-y revenue growth. The orderbacklog for Swiber is currently USD 1.2bn, indicatingcontinued growth. The current market cap of Swiber isSGD 367m (USD 290m).The ships were purchased for USD 120m, which wasfinanced by USD 84m of bank debt, USD 12m of loansfrom Swiber and a sellers credit of USD 6m. Paid inequity was USD 29m. The charters have 10 yearduration and Swiber has purchase options per vesselfrom 2015 and onwards.Bukit Timah is a good example of a solid bareboatproject against a good counterpart, where an attractiveleverage provides good IRR for equity holders. So farthe project has yielded an IRR for PWWO of roughly16% (in NOK), in line with the estimated return for theproject.The value of the vessels is holding up well and they areconsidered attractive units. Current market dayrateshave recovered well and support the valuation of theproject.Project start: June 2008Segment: AHTSContract: Bareboat charter to 2020Charterer: Swiber Offshore MarinePaid in equity: NOK 19.2mPaid out equity: NOK 9.7mLast valuation: NOK 20.5m

PortfolioThe portfolio is currently highly robust, with most assets on long term contracts. It is well distributedacross the different offshore oil services segments.Investments and capitalThe committed capital in PWWO was originally NOK880m. The current portfolio consists of 11 projectswhich owns stakes in 23 units. The average contractlength is 3.6 years and the contract coverage is 91%.The nominal value of the contract backlog is roughlyNOK 724m and is more than sufficient to cover all debtservice costs and projected operating costs. Total debtin the projects amounts to around NOK 420m. Thebacklog is primarily made up by solid counterparts.PWWO had a cash holding of NOK 118m as of30.06.12. Apart from Asian Offshore III, there are nospecific capital requirements in the other underlyingprojects. However, the company has made anallocation for a dispute with Larsen Oil & Gas inconnection with Songa Eclipse. Overall, there isadequate capital available to make cash distributionsto shareholders and to consider value addinginvestments, should they arise.Charterparty Distribution based on NAVBareboat45%Timecharter46%Spot/Asset Play9%Segment Distribution based on NAVThe life cycle of PWWO expires 30 June 2014. Theunderlying projects are expected to yield significantcash flow until then. Asset and/or portfolio sales willbe considered at the opportune time to provideshareholders with the best possible exit values.Current market conditions indicate that exits should bemade as late as possible to maximize values.The contracted cash flow is evenly spread across fivemain segments; rigs, supply, accommodation, seismicand subsea.Contracted cash flows will be more than sufficient tocover scheduled debt service through to 2015. Theprojects in PWWO’s portfolio also have a relativelysteep debt repayment profile, which gives theopportunity to refinance when financing conditionshave improved.SemiSubmersible Rig10%Seismic7%IMR21%Tender Rig36%Accommodation12%PSV/AHTS (Asia)10%PSV/AHTS(Europe)4%Charter hire backlog by counterpartAsset sales from the underlying investments areplanned upon the exit of existing contracts, which willprimarily take place from 2015 and onwards.Therefore, PWWO does not need to expose itself to thecurrent market conditions, where asset values are yetto reach their full potential.Reef Subsea12%AfricanOffshoreServices8%Swiber13% RXT10%Total / CNR43%CGGV6%

Portfolio (continued)Project / company Contract Charterparty ChartererProportionof NAVBassdrill Alpha Ltd Mar-15 Timecharter Total / CNR 37.4 %Neptune Offshore AS May-15 Bareboat Reef / CGG Veritas 12.1 %Songa Eclipse Ltd Aug-13 Timecharter Total 10.5 %ParBarge IS Jul-18 Bareboat African Offshore Services 9.6 %Neptune Subsea IS Feb-17 Bareboat Reef Subsea 9.6 %Asian Offshore III IS Spot/Asset play 5.0 %Vestland Seismic IS Sep-18 Bareboat Albatross Shipping Ltd. 7.1 %Bukhit Timah Offshore DIS Jul-20 Bareboat Swiber Offshore Marine Pte 5.1 %Offshore Accommodation IS Dec-21 Bareboat African Offshore Services 3.0 %Iceman IS Spot/Asset play 0.7 %Equinox Offshore Accomodation Ltd Apr-13 Timecharter N/A 0.0 %600500400300PWWO - Cash flow composition vs debt service, NOKmCapex (-) / Sale of assets (+)Spot EBITDAContracted EBITDADebt servicePWWO - EBITDA compositionRigs21%2001000Oil Service50%Supply29%-1002012 YTD 2013 2014 2015 2016 - 2021500PWWO - Debt in projects, NOKmPWWO - Duration of contract backlog45040035030025020015016431104021037410318Sellers creditBank debt10Later28%1-2 years31%100206500-5002012 YTD 2012 2013 2014 2015 2016 -0 - 20213-4 years41%

Price per shareVolume (Thousand NOK)Second Hand Market and Share LiquidityAs of 30.06.2012 PWWO had 4.37m shares outstanding. Pareto Project Finance AS (”PPF”) strives tofacilitate an active second hand market for shares. The last implicit trading price in PWWO was NOK125 per share (based on the last transaction price in POK of NOK 57 per share and before therepayment of NOK 12 per share on 29 th June 2012). Investors who wish to buy or sell shares shouldcontact their advisors.POKAs of 30.06.2012 POK had 5.46m shares outstanding.The last trading price in POK was NOK 57 per share andthe previous five trades are displayed in the tablebelow. Second hand prices have increased steadily overthe last few months, as can be seen from the graphbelow (red dots). No trades have been made sincePOK/PWWO made capital repayments to theirshareholders. Investors who wish to buy or sell sharesshould contact their advisors.DateShare price No. of shares Volume (NOK)19/06/12 57 2,716 154,81219/06/12 57 980 55,86012/06/12 56 3,921 219,57607/06/12 55 1,103 60,66507/06/12 55 897 49,335Number of trades since startup: 418Volume traded since startup (NOK): 73,501,292Average volume per trade (NOK): 175,840200175150125Pareto Offshorekapital ASA - Second Hand TradesVolume tradedNav per shareNAV per share (dividend adjusted)Second hand price per share10,0009,0008,0007,0006,0001005,0007550254,0003,0002,0001,000-Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12Date-

The offshore oil services marketThe psychology in the oil market has shifted to downside risks as weaker growth in China has added tothe negative effects from high OPEC production and European debt crisis. However, activity growth anddayrates in oil services is steadily building, so the long term investment cycle in oil & gas appears tocontinue unabated. However, a more risk averse approach seems warranted in the current climate.The oil and gas marketsSource: EIA, ICEThere are several factors behind the recent volatility inthe oil market, but the most prominent one is thereduced belief in China’s ability to sustain its higheconomic growth rates, which has been the primedriver behind oil prices in the past 10 years. OPEC’svery high production levels have added pressure, butalso holds the key to a reversal in the oil price as thecartel has an aim of maintaining prices at USD 100/b.Such a level is sufficient for the oil services markets tomaintain growth. Whether the oil price will resume itsupwards trend again depends on overall economicgrowth rates. The visibility on this remains low at themoment and the oil price may remain volatile within atrading band of USD 80-120/b in the meantime.Source: Barclays, PGSGlobally, the oil industry expects to invest 10% morein oil and gas exploration and production in 2012 thanit did in 2011, based on an average oil priceassumption of USD 96/b. As can be seen in the graphto the left, the oil price needs to drop to USD 80/bbefore there is any negative change in investmentplans. Right now, with the oil price trading at aroundUSD 105/b, there seems to be steady going.We have seen strong dayrate increases across theboard within oil services. On average, they are upnearly 50% in the past year. On the other hand,difficult financial markets have seen values foroffshore oil service assets tumble more than 10% inthe same period. Significantly increased earningspower can thus be bought cheaper than a year ago,which means that there is definitely a buyers marketout there.The market for floating drilling rigsSource: ODS-Petrodata, PGSThe ultra deepwater market continues to lead withfixtures now in the USD 500-600k/d range up 40-50%from the low seen in 2009. The ordering spree iscontinuing with 50 units now on order. The midwatermarket has been active recently, with fixture levelsnotching up in several areas, including UK. Activitygrowth in the Barents Sea will be particularly excitingfollowing the large discoveries in the area last year.The last licensing round offers 72 new licenses in theBarents Sea and a significant step up in drilling activitywill follow once exploration seismic on these blockshas been sampled.Source: ODS-Petrodata, Pareto Securities

The offshore oil services marketJack-up marketThe jack-up markets are also continuing to improve.Perhaps the most interesting feature is that demandand dayrates for older units have staged a remarkablerecovery. In some areas the markets are sold out, andwe’ve seen some of the large US rig contractorsreactivate stacked units against some veryencouraging contracts.SubseaSource: ODS-Petrodata, Pareto SecuritiesDemand in this market is the most visible of all, as it isprimarily driven by the oil industry’s field developmentand infrastructure plans, both which are subject tolong planning horizons. The overall trend is that ofmore remote and more complex developments, whichmeans increasing oil service intensity and an overproportional demand growth. Based on the substantialhike in the order intake for the big subsea constructioncompanies (see graph to the left), activity levelspromise to be brisk in the coming years. We’ve alsoseen a wave of newbuild orders for large constructionvessels recently from Norwegian owners. Some ofthese have already been awarded long term contracts,while others are speculative.Source: Rystad Energy, ABG Sundal CollierSupply vesselsDemand is healthy, particularly for large and moderntonnage with rates at acceptable levels. There is aparticular preference for large tonnage in Norway, ascan be seen in the graph to the left. Overall, theoutlook is better for large AHTS vessels due to a verylimited order book. In the long term, the Norwegianmarket looks particularly encouraging on the back ofthe significant discoveries made last year. Potentialtightness in the market will be exacerbated by risingdeepwater rig activity, which will demand much thesame capacity as that being used in Norway.Source: Johan G. OlsenSeismicIncreasing demand has absorbed the excess capacitynow and rates have been ticking upwards, with the oilcompanies becoming more eager to book capacityearly to avoid vessel shortage. This is particularly thecase for large, state-of-the-art vessels. Demand formulti-client seismic in connection with exploration andlicensing bid rounds has shown particular strength andtypically illustrates that demand has strongermomentum.Source: PGS

Fund Management TeamPer-Christian NicolaisenRichard JansenHead of Fund ManagementHead of Fund ManagementReal EstateShipping/OffshorePhone: + 47 22 01 58 08 Phone: + 47 22 01 58 96E-mail: nico@pareto.noE-email: richard.jansen@pareto.noJohan Anker-Rasch Patrick Kartevoll Jonathan Andreas BarfodFund Manager Fund Manager Fund ManagerReal Estate Shipping/Offshore Shipping/Offshore/Real EstatePhone: + 47 22 01 58 73 Phone: + 47 22 01 58 79 Phone: + 47 22 01 58 46E-mail: jar@pareto.no E-mail: patrick@pareto.no E-mail: jab@pareto.noDronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, www.pareto.no

DisclaimerThis Quarterly Report has been prepared in order toprovide information about Pareto World Wide OffshoreAS (“PWWO” or the “Company”) and must not beconsidered an offer to trade in the shares of theCompany.actual events to differ materially from any anticipateddevelopment. All investors must verify theseassumptions themselves. The company cannot give anyassurance as to the correctness of such information andstatements.Information contained in this Quarterly Report isobtained by Pareto Project Finance AS (“Pareto ProjectFinance”, “Pareto”, or “PPF”). Information is presentedto the best of our efforts and knowledge, but ParetoProject Finance AS cannot guarantee that theinformation is correct or all inclusive. Pareto ProjectFinance AS takes no responsibility for any loss causedby information given being misleading, wrongful orincomplete nor for any other loss suffered as aconsequence of investments made in the Company.Historic returns and return forecasts do not constituteany guarantee for future returns. Returns may vary asa consequence of fluctuations in currency exchangerates. Investors should be aware that there issignificant uncertainty related to valuations in thecurrent volatile market. The valuation process isdescribed in PPF’s market report as per March 2012.Risks and costs are further described in the prospectus(information memorandum) produced in relation toshare issues in the Company.This Quarterly Report includes and is based on, amongother things, forward-looking information andstatements. Such forward-looking information andstatements are based on the current expectations,estimates and projection of the company orassumptions based on information available to thecompany and Pareto Project Finance AS. Such forwardlookinginformation and statements reflect currentviews with respect to future events and are subject torisks, uncertainties and assumptions that may causeThe contents of this presentation are not to beconstrued 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 ProjectFinance AS has been engaged as the company’sfinancial advisor and does not render – and shall not bedeemed to render – any advice or recommendations asto a transaction.