Pareto World Wide Offshore AS

2nd quarter report 2014

Link: www.paretoprojectfinance.no/avdelinger/forvaltning/offshorefond

Executive Summary

Market Development

Offshore oil services demand has been mixed this

year, with cost saving initiatives among the oil

companies affecting activity levels in many areas.

It remains to be seen whether this is a one-time

event or represents the early phase of a long

term trend. In the North Sea, the absence of

large development projects has resulted in this

impact being felt more sharply than in other

areas, where development spending is still

growing.

The rig markets generally appear to have peaked

for now, although the Fund has no exposure

here. The offshore support vessel market in the

North Sea has disappointed this year and while

demand may appear to be flat for the next year

or so, it is positive that newbuilding ordering is at

a low ebb.

Portfolio

The contract coverage is 83% with a weighted

average contract length of 3.1 years. The

portfolio is focused on modern assets and is well

spread across several market segments and

geographic regions. The high contract coverage

is expected to preserve a good dividend capacity

until exits are made.

The way forward

Following a distribution of NOK 4.50 per share in

June 2014, PWWO has paid NOK 52.50 per share

to its shareholders during the past two years.

The two project realizations that are in process

will contribute with proceeds to PWWO of around

NOK 15 per share, and it is aimed to distribute

an equivalent amount to PWWO shareholders

during Q3’14, barring any unforeseen

circumstances.

The term of PWWO was extended to July 2016 at

the Annual General Meeting in June 2014. The

extended lifetime does not mean that realisations

are pushed out in time, but will be executed as

soon as deemed reasonable to preserve

shareholders’ values. A clear signal of this is the

concluded sale of the two projects which

amounted to approximately 12% of the NAV as

per year end 2013. There is no guarantee that

the entire portfolio will be realised within the

extended lifetime (market conditions may

increase the difficulty of realising at satisfactory

values), but the Manager and the Board are very

much focused on realisations.

PWWO will refrain from investing further for the

remainder of its lifetime, save for follow-up

investments in existing projects, if required.

NAV was up by 2.4% during H1’14, reflecting two meaningful project realizations have been agreed to

during the quarter (with completion during Q3’14) as well as a strengthening USD vs NOK. Otherwise,

the projects continue as planned and the contract coverage continues to be above 80% based on NAV.

The markets are stable, and the oil price is flattish with no immediate signs of significant change.

NAV PWWO NOK 102/share NAV POK NOK 48/share

(as of 30 June 2014)

Portfolio News

BassDrill Alpha Ltd

The uptime of the rig has improved during 2014 from

an unsatisfactory level during H2’13. The rig is on a

two-year contract extension on a higher day rate which

expires in December 2015. The tender rig market

overall appears to have levelled out and it will be of

interest to follow the trend in jack-up rig rates in the

coming year, as these normally act as the benchmark

for tender rigs.

Neptune Subsea IS

The charterer has both vessels employed on short term

contracts, one in West Africa and one in the North Sea.

The hire payments are on track. The project made its

first distribution to shareholders during July 2014,

totalling USD 7m (PWWO’s share is USD 1.7m).

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 1m in uncalled

capital during Q2’14 to pay bank installments.

Master & Commander IS

Both vessels are now on long term charters and the

project made a USD 1.5m dividend payment during

Q2’14.

Asian Offshore III IS

The average day rate for the six vessels was USD

8,200/d during Q2’14, up 14% from the preceding

quarter. The integration process together with AO I and

partner ACS has been formalized and a term sheet has

been signed with an international shipping bank to

finance the new, integrated company. It is expected

that the integration process will be finalized in early

Q4’14.

Iceman IS

The ultra large AHTS has been affected by a very weak

North Sea spot market during the spring and summer,

with results well below budget. The value has been

marked down due to negative free cash flow. The

vessel has secured a 3-month contract starting in early

Q3’14 at an acceptable day rate.

Songa Eclipse

While the project was sold in Q3’11, PWWO has been

subject to a USD 5.6m claim from the initial rig

manager, LOG, relating to a dispute regarding a so-

called “slot fee”. In a ruling in November 2013, the

Oslo Municipal Court (Oslo Tingrett) rejected the claim.

However, the claimant has appealed the ruling to

Borgarting Court of Appeals (Lagmansretten). As a

result, PWWO will have to continue to make a provision

for a potential negative outcome until the next round in

the Courts has been concluded. A court date has been

set for March 2015, but this may be deferred towards

the end of the year.

Project sales

PWWO has agreed to sell the five barges owned by the

sister-projects Offshore Accommodation and Parbarge.

The transaction is set to complete during July 2014 and

will result in total proceeds to investors some 24%

above NAV. The proceeds will amount to roughly NOK

15 per share in PWWO.

Payments from projects

During Q2’14, PWWO received NOK 2.9m in payments

from projects.

PWWO is invested in a broad range of offshore projects, which implies a significant

diversification across different asset types and market segments. This section provides an

update on the quarter’s most important news flow related to the underlying investments.

0

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240PWWO - NAV development NAV per share

NAV per share (dividend adjusted)

151

102

50

14

112

3 7

143

0

50

100

150

200

PWWO - NAV Composition per share (NOK)

Charter

free values

Value of

charters

Cash in

SPVsDebt in

SPVs

Sellers'

credit

Cash in

PWWO

Other

costsNAV

PWWO

Tax

Net Asset Value Development (PWWO)

NAV development

An increase in the value of the portfolio contributed

to a net 1.4% increase in NAV during H1’14, with

the remaining being down to a strengthening of the

USD. As a result, NAV ended up at NOK 102 per

share at the end of Q2’14, which equals a net

appreciation of 2.4% adjusted for the NOK 4.50 per

share distribution paid out in June 2014.

PWWO makes semi-annual NAV calculations.

Accordingly, the next NAV will be published as of

31.12.2014 and will be reported to investors in the

report for the fourth quarter 2014.

NAV is down 23% since inception in 2007. This poor

return reflects the cyclical timing of PWWO’s

inception, which started investing at the peak of the

previous cycle, just as we headed straight into the

2008 financial crisis. This is reflected in the fact that

oil service stocks on the Oslo Stock Exchange are

flat in the same period. That being said, the

performance since the bottom has been reasonably

good with NAV rising 61% since the end of 2009.

This reflects the intense work to turn around

troublesome projects with exit and contract

opportunities having improved along with better

markets.

As seen in the graph below, the estimated values of

the charters, charter free values, cash and debt in

the projects constitute NOK 100 per share in PWWO.

Cash, tax positions and cost provisions at the

holding company net a positive NOK 2 per share.

Direct yield

PWWO strives to make cash distributions to

shareholders as we move towards the end of the

company’s life cycle in 2015. A total of NOK 52.50

per share (26% of par value) has been paid out

during the past two and a half years. All

distributions have been repayments of paid in

capital. A further distribution of capital can be

expected in Q3’14, following the completion of the

ongoing two project realizations.

Net asset value was up 2.4% during H1’14. Of this, 1.4%-points come from an appreciation of the value

of the portfolio, primarily due to completed or agreed project realizations, while 1%-points came from a

strengthened USD. Overall, PWWO is likely to continue to benefit from underlying cash flows, while

improving market conditions in oil services indicate an upside in asset values in the coming years.

Last 6 mths Last 12 mths Last 24 mths Since inception

PWWO 2.4% 4.7% 12.3% -22.8 %

Oslo Stock Exchange 12.6% 31.8% 51.8% 23.2%

Offshore Index * 2.9% 9.6% 17.9% 0.1%

* Based on OSE101010 Energy Equipment & Service

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120 POK - NAV developmentNAV per share

NAV per share (dividend adjusted)

Net Asset Value Development (POK)

NAV development

NAV as of 30.06.2014 was NOK 48, up 2.7% on the

previous NAV as of 31.12.2013 and up 4.3% for the

past year, both adjusted for the repayments of capital

made to shareholders.

Direct yield

PWWO strives to make cash distributions to

shareholders as we move towards the end of the

company’s life cycle in 2015. As a result, NOK 27.20

per share has been paid out to POK shareholders

during the past two and a half years. All distributions

have been repayments of paid in capital. A further

distribution of capital can be expected in Q3’14,

following the completion of the ongoing two project

realizations.

NAV in the feeder company Pareto Offshorekapital ASA («POK») increased by 2.7% during H1’14 and is

up 4.3% in the past 12 months. POK currently has more than 1,600 shareholders and the company

acts as the main marketplace for second hand transactions for small, non-institutional investors.

Last 6 mths Last 12 mths Last 24 mths Since inception

POK 2.7% 4.3% 11.7% -24.8 %

Oslo Stock Exchange 12.6% 31.8% 51.8% 23.2%

Offshore Index * 2.9% 9.6% 17.9% 0.1%

* Based on OSE101010 Energy Equipment & Service

Spot/Asset Play

17 %

Timecharter

24 %

Bareboat

59 %

Charterparty Distribution based on NAV+commited

PSV/AHTS (Asia)

13%

PSV/AHTS

(Europe)

5%

Accommodation

16%

Subsea

34%

Seismic

10%

Tender Rig

24%

Segment Distribution based on NAV+commited

Total / CNR

34%African Offshore

Services

25%

Reef Subsea

16%

Swiber

16%

CGG

4%

Bourbon

2%

Fairfield Nodal

2%

Hallin

1%

Charter hire backlog by counterpart

Portfolio

Investments and capital

PWWO’s portfolio consists of 11 projects which owns

stakes in 25 units. The average contract length is 3.1

years and the contract coverage is 83%.

The gross nominal value of the contract backlog is

roughly NOK 460m Total debt in the projects amounts

to around NOK 490m. The backlog is primarily made

up by solid counterparts.

PWWO had a cash holding of NOK 30m as of 30.06.14.

There are no known capital requirements in the

underlying projects. However, the company has made

a provision for the dispute with Larsen Oil & Gas in

connection with the Songa Eclipse.

The life cycle of PWWO expires 30 June 2016. The

underlying projects are expected to yield good cash

flow until then. Asset and/or portfolio sales will be

considered at the opportune time to provide

shareholders with the best possible exit values.

Current market conditions indicate that a better

environment for making exits compared to previous

years.

The contracted cash flow is evenly spread across five

main segments; rigs, supply, accommodation, seismic

and subsea.

The portfolio is highly robust, with most assets on long term contracts. Assets on long term contracts

make up 83% of the total exposure, and are well distributed across the different offshore oil services

segments.

Rigs

16 %

Supply

22 %

Oil Service

62 %

PWWO - EBITDA composition

1-2 years

44 %Later

56 %

PWWO - Duration of contract backlog

489457

362

13

13

13

0

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400

500

600

2014 2015 2016 - 2029

PWWO - Debt in projects, NOKm

Sellers credit

Bank debt

-200

0

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2014 2015 2016 - 2029

PWWO - Cash flow composition vs debt service, NOKm

Capex (-) / Sale of assets (+)

Spot EBITDA

Contracted EBITDA

Debt service

Project / company Segment Contract Charterparty ChartererProportion

of NAV

Neptune Subsea IS Subsea Feb-17 Bareboat Reef Subsea 31.8 %

Bassdrill Alpha Ltd Tender Rig Dec-15 Timecharter Total / CNR 23.9 %

ParBarge IS Accommodation Jul-23 Bareboat African Offshore Services 11.6 %

Asian Offshore III IS PSV/AHTS (Asia) Spot/Asset play 7.1 %

Vestland Seismic IS Seismic Spot/Asset play Albatross Shipping Ltd. 6.8 %

Bukhit Timah Offshore DIS PSV/AHTS (Asia) Jul-20 Bareboat Swiber Offshore Marine Pte 5.6 %

Offshore Accommodation IS Accommodation Dec-21 Bareboat African Offshore Services 4.1 %

Iceman IS PSV/AHTS (Europe) Spot/Asset play 3.1 %

Master and Commander IS Seismic Aug-18 Bareboat CGG/Fairfield Nodal 2.7 %

Carlisle Subsea IS Subsea Oct-15 Bareboat Hallin Marine Subsea 1.7 %

3B Offshore IS PSV/AHTS (Europe) Nov-17 Bareboat Bourbon 1.6 %

Portfolio (continued)

Second Hand Market and Share Liquidity

POK

As of 30 Jun’14 POK had 5.3m shares outstanding, net

of 160,000 own shares that were purchased by POK

during Q3’13. The last trading price in POK was NOK 33

per share (25 Jun’14) and the previous five trades are

displayed in the table below (only the last transaction

was concluded ex. Repayment in Jun’14). Second hand

prices have been rather stable, and the discount to NAV

has been around 30%, as can be seen from the graph

below (red dots). Investors who wish to buy or sell

shares should contact their advisors.

As of 30 Jun’14 PWWO had 4.37m shares outstanding. Pareto Project Finance AS (”PPF”) strives to

facilitate an active second hand market for shares. The last trading price in PWWO was NOK 89.5 per

share (8 Apr’14). Investors who wish to buy or sell shares should contact their advisors.

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3 000

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4 000

4 500

5 000

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25

50

75

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125

150

Volu

me (

Thousand N

OK)

Price p

er

share

Pareto Offshorekapital ASA - Second Hand Trades

Volume traded Nav per share

NAV per share (dividend adjusted) Second hand price per share

Date Share price No. of shares Volume (NOK)

07.05.14 34.0 1 980 67 320

12.05.14 34.0 1 100 37 400

14.05.14 34.0 19 607 666 638

16.05.14 33.0 1 000 33 000

25.06.14 33.0 980 32 340

Number of trades since startup: 552

Volume traded since startup (NOK): 90 519 274

Average volume per trade (NOK): 163 984

The offshore oil services market

The large oil companies are trimming capex…

As highlighted towards the end of 2013, the large,

integrated oil companies are trimming their capex

levels. This is primarily due to the sticky oil prices

combined with rising costs, which in turn hurts

profitability on both new projects as well as from

existing fields. This combination resulted in weak

share price performances among oil companies and

needed to be adressed.

…to make way for dividend payments

As evidenced by the graph to the left, there is not

enough profit margin with current oil prices to support

both sustained capex levels and the dividends required

to secure good share price performance. Something

has had to give, and this time around, it has been

capex. So far, it has had a positive impact on share

prices, with the most aggressive “cost-cutters”

achieving the best performance.

The offset of this is a continued decline in production

levels. Oil production from the 10 largest integrated oil

companies has declined for 16 quarters in a row, and

has accelerated in the last three. While the portfolios

may be high-graded through a focus on the more

profitable projects, it will nevertheless end up having

an impact on the supply of oil, which at some point

should have a positive impact on oil prices and restore

a sense of normality. Therefore, our main thesis is still

that we are experiencing a temporary lull in oil service

markets.

North Sea AHTS market disappoints big time

Most observers were extremely bullish on the North

Sea AHTS spot market this year, citing rising demand

from an influx of drilling rigs, coupled with a reduction

in the number of available vessels due to high,

project-related requirements in Arctic Russia. They

have all been wrong. The market has been very weak

during the spring and summer.

The main reason appears to be reduced demand from

Statoil, one of the more vocal «cost-cutters» in the oil

industry, and by far the biggest client in the North Sea

AHTS market. In addition, the weather has been

benign, which normally improves vessel efficiency. The

remainder of the year looks bleak, but if there’s one

thing we know about this market, then it is to expect

the unexpected!

The activity growth in the oil services markets continued last year, albeit with some slowness emerging

in the seismic markets towards the end of the year. In the absence of a rising oil price, the oil industry

is trimming its upstream investment plans to be able to preserve shareholder dividends, which is

resulting in a slower growth outlook near term. The longer term, however, looks promising.

Capex budgets 10 largest integrated, USDm

Source: Bloomberg, SP1 Markets

Break even oil prices, 10 largest integrated (Brent $/b)

Source: Bloomberg, SP1 Markets

Fund Management Team Richard Jansen Head of Fund Management Shipping/Offshore Phone: + 47 22 01 58 96 E-email: richard.jansen@pareto.no Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, www.pareto.no

Patrick Kartevoll Fund Manager Shipping/Offshore Phone: + 47 22 01 58 79 E-mail: patrick@pareto.no

Disclaimer

This Quarterly Report has been prepared in order to

provide information about Pareto World Wide Offshore

AS (“PWWO” 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 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.

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 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 PPF’s market report as per April 2014.

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 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.