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

20

40

60

80

100

120

140

160

180

200

220

240 PWWO - NAV development NAV per share

NAV per share (dividend adjusted)

151

102

50

14

112

3 7

14 3

0

50

100

150

200

PWWO - NAV Composition per share (NOK)

Charter

free values

Value of

charters

Cash in

SPVs Debt in

SPVs

Sellers'

credit

Cash in

PWWO

Other

costs NAV

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 th