Pareto World Wide Offshore AS - Pareto Project Finance

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.