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  • 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.

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    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