Pareto World Wide Offshore AS - Pareto Project Finance

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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
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