Pareto World Wide Shipping AS - Pareto Securities Q4 2016.pdf · Portfolio News Pareto Maritime...

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Pareto World Wide Shipping AS 4th quarter report 2016 Link: http://paretosec.com/pai-reports.php

Transcript of Pareto World Wide Shipping AS - Pareto Securities Q4 2016.pdf · Portfolio News Pareto Maritime...

Pareto World Wide Shipping AS

4th quarter report 2016

Link: http://paretosec.com/pai-reports.php

Executive Summary

Market Development

The OPEC accord has resulted in the oil price stabilizing

at around USD 55/b for Brent crude. This is a level that

allows for increased spending by the oil industry, and

has thus spurred a return of some optimism. Indeed,

global E&P spending plans are now expected to be up

by 7% y-o-y and several oil companies have reported

plans to raise spending by double digits this year. While

this looks first and foremost to benefit North American

land production, but is expected to trickle through to

the offshore markets during the year.

Anecdotal evidence that we are now about to emerge

from the bottom can also be found in solid share price

gains with oil service stocks up by around 33% in the

past three months, higher pricing of oil service bonds,

an increasing sale and purchase activity driven by more

speculative buyers willing to take the risk, a greater

tendency of oil companies wanting to lock in vessel

capacity on term contracts to lock in low prices and a

few positive profit warnings in the seismic industry to

indicate rising exploration spending – a typical leading

indicator. All in all, the tide seems to be turning,

although we are far from out of the woods yet.

In shipping, the Fund’s exposure to the LPG markets

also appears to be bottoming after a deep downturn

during 2016. Sound trading conditions in chemicals

transportation is also enabling the Fund to manage an

project realization at an acceptable level.

Portfolio

PMSOF made up 81% of PWWS’ NAV as of Q4’16, and

had an exposure weighted 52% to offshore oil services

and 48% to shipping. The contract coverage is 92%

with a weighted contract length of 0.7 years.

In addition to PMSOF, PWWS owns direct stakes in

Singapore Tankers and Parbulk II. In the former, there

is a mediation in London during Q1’17, which hopefully

may lead to a final conclusion of this project.

PMSOF has drawn USD 19m of the USD 25m available

from the Preference Capital (USD 15m was drawn at

31/12/16). It is expected that portfolio developments

may lead to additional capital being required in the

next 6-12 months, which in turn will have to be funded

by additional draws on the Preference Capital.

The NAV for holders of the Preference Capital was

equal to NOK 37.9 per share, down 10% during the

quarter, while the NAV for non-holders was NOK 16.9

per share, down 31%.

The NAV share as of Q4’16 was NOK 38 per share for PWWS shareholders that are pro-rata holders of

the PMSOF Preference Capital, and NOK 17 per share for PWWS shareholders that are non-holders. The

decline in NAV from the previous quarter is due to a continued trend in lower vessel valuations and an

increasing number of projects in PMSOF facing financial challenges.

NAV NOK 38/17 per share (as per 31 Dec 2016)

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NAV per share

NAV per share (dividend adjusted)

Net Asset Value Development

NAV development

NAV as of 31.12.2016 was NOK 17 per share, down

31% from the previous NAV (30 Sept 2016) and down

43% from inception in 2006 (adjusted for repayments).

For PWWS shareholders that participated in the issue of

Preference Capital in PMSOF, the corresponding figure

is NOK 37.9 per share, down 10% from Q3’16 and

down 38% from inception (adjusted for paid-in

Preference Capital).

During the quarter, the USD value of PMSOF fell by

19%, while the value of Singapore Tankers was down

6%. The USD gained by 7% vs the NOK during the

quarter and this, together with a decent cash position,

cushioned the total decline.

During Q4’16, PWWS did not contribute any capital to

PMSOF. The Fund Manager expects the PMSOF portfolio

to require significant additional capital during the next

6-12 months to weather the current adverse market

conditions. PMSOF completed one major project

realization during Q3’16 at a price equal to NAV and

looks set to complete another in Q1’17.

Nevertheless, the Fund expects to make further draws

on the Preference Capital during the year as additional

capital requirements are expected to materialize, not

least due to uncalled capital commitments in PMSOF.

As of Q4’16, PWWS had a cash balance of NOK 4.0m

(USD 0.5m).

Preference Capital

The balance of the Preference Capital, including

accumulated interest was USD 15.6m. For PWWS

shareholders that are owners, this equates to a value of

NOK 16.4 per PWWS share, plus the NOK 4.6 per share

that reflects the Preference Capital’s 25% ownership in

PMSOF.

Direct yield

As of Q4’16, PWWS has paid out NOK 97 per share to

its shareholders since inception, which equals 48.5% of

par value.

This does not include the NOK 490m that was paid out

to exiting shareholders in connection with the

restructuring of PWWS during H2’13, nor the amounts

paid in to the Preference Capital in PMSOF by

participating shareholders (NOK 15.8 per share so far).

On a diluted basis, NAV was down 31% during Q4’16, reflecting a continued decline in the valuation of

the offshore oil services assets in PMSOF. For shareholders who are PMSOF Preference Capital holders,

NAV (collectively PMSOF and PWWS share) was down 10%.

Last 3 mths Last 12 mths Last 24 mths Since inception

PWWS (ex Pref Cap) -31.3% -78.8% -86.4% -43.0%

Oslo Stock Exchange 9.8% 12.1% 18.2% 79.0%

Shipping Index * 15.0% -16.9% -3.6% 20.4%

Offshore Index ** 26.0% 22.8% -5.6% -18.1%

* Based on OSLSHX Oslo Shipping Index

** Based on OSLESX Oslo Oil Service Equipment and Services Index

Portfolio News

Pareto Maritime Secondary Opportunity Fund

Following the dilution resulting from the Preference

Capital, PWWS now has a 36.3% (48.4%) stake in the

Fund. The USD value of PMSOF declined by 49% for

PWWS, including the dilution effect and by 19%,

excluding this effect.

PMSOF’s portfolio consists of 16 projects with stakes in

43 units. Its cash position as of 31 December 2016 was

USD 2.1m.

During Q4’16, the Fund contributed USD 3.9m to

underlying projects. The operating expenses paid

during Q4’16 amounted to USD 0.9m.

At present, the contract coverage is 92% and has a

gross nominal revenue value of USD 11m for the Fund.

The weighted average contract length is 0.7 years.

The largest counterpart is Fairfield Nodal (30%), CGG

(23%) followed by Viking Gold (21%) and Apache

Petroleum (12%). The overall exposure to different

segments in the maritime industries is weighted

towards LPG, seismic and subsea vessels. The shipping

exposure is 48% and the offshore oil services exposure

is 52%, which is a reduction of the latter due to a

significant mark-down of offshore asset values.

The largest contributor to the decline in the portfolio

value during Q4’16 was Neptune Subsea (16%) due to

lower vessel valuations and weak cash flow, followed

by PSV Invest II (15%) due to an unsuccessful

conclusion of restructuring negotiations with the

Lenders and Norseman Offshore (15%) due to the

project being declared bankrupt.

In Master & Commander, a comprehensive

restructuring was agreed with both CGG (the main

charterer) and the Lenders. This has resulted in about

one third of the uncalled capital being drawn and to be

used for an upfront debt repayment together with

available cash. M&C will continue the charter of the

Phoenix with CGG at a reduced day rate, but will be

compensated for this through the issue of unsecured

bonds by CGG, which can be sold in the open market.

This preserves the value in this project well.

B-Gas has been recapitalized through a share issue that

took out all debt in the company and a short term

shareholder loan to shore up liquidity. The company is

now pursuing an M&A strategy to gain in size and to

become a leader in the small-gas segment.

In Norseman, the main shareholders in the project are

taking legal advice on whether to pursue legal claims

against the bank in the project or the charterer. The

call for uncalled capital is also being disputed.

One of the PSV projects in PMSOF is facing liquidation

after one of the lenders backed away from an agreed

restructuring. As a result, all equity will be lost.

Another PSV project is potentially facing a lay-up of the

vessel, unless a long term contract can be secured. The

third PSV project is continuing as planned, although

low vessel values at the expiry of the current BB-

contract may result in uncalled capital having to be

paid in with limited view of any recovery.

Among the small AHTS projects, several vessels are in

the process of being sold at price levels below bank

debt, resulting in a loss of equity.

Directly owned projects

Parbulk II

This project is still marked at zero value and consist

only of a claim against the previous charterer of the

vessel in this project. The claim is still being vigorously

pursued and one is now awaiting a high court ruling in

Indonesia that may lead to a positive outcome.

Singapore Tankers

The project consists of a claim against the former

charterer of the vessels. A mediation will take place

during Q1’17, which may lead to a conclusion of this

project.

Payments from projects

PWWS did not contribute any capital to PMSOF or its

projects during the quarter and did not receive any

distributions.

New investments

PWWS is purely focused on realisation of its portfolio

and will not make additional investments during its

remaining life cycle. The same goes for PMSOF , other

than required follow-up investments in existing

projects.

PWWS has 81% of its NAV invested in PMSOF and the remainder in two directly owned projects in

addition to cash. This section provides an update on the quarter’s most important news flow related to

the underlying investments and the portfolio.

Key portfolio charts for PMSOF (based on NAV)

Timecharter

73%

Bareboat

19%

Spot/Asset Play

8%

Charterparty Distribution

Portfolio PMSOF

Project / company Contract Charterparty ChartererProportion

of NAV

B-Gas Ltd Timecharter Total / Vitol / Statoil 39.8%

Neptune Subsea IS, incl SHL Timecharter 32.0%

Master and Commander IS Dec-18 Bareboat CGG/Fairfield Nodal 14.8%

NorthSea PSV, incl SHL Spot/Asset play 7.9%

UBT AS Aug-21 Bareboat Viking Gold 4.5%

Atlantic Gas II IS Timecharter Geogas 4.1%

Iceman IS Spot/Asset play ENI 3.0%

Vestland Seismic IS Spot/Asset play 1.7%

Atlantica Tender Drilling Timecharter Petrobras 0.8%

3B Offshore IS Nov-17 Bareboat Bourbon 0.0%

Far East Offshore Feb-17 Bareboat Sanko Steamship Ltd 0.0%

Asian Offshore I Spot/Asset play 0.0%

Asian Offshore III Spot/Asset play 0.0%

Bukit Timah Offshore DIS Spot/Asset play 0.0%

Norseman Offshore n.m. -2.1%

Lion AHTS Spot/Asset play -2.9%

PSV Invest II IS, incl SHL Timecharter Team Marine -3.6%

The oil market

Inventory correction seen to continue

The OPEC production cut-back agreed in November

2016 is targeting a reduction of OPEC crude production

by 1.5 mb/d. This has spurred an oil price increase of

about USD 5/b and restored a bullish sentiment in the

oil market.

As can be seen in the chart to the left, it will

essentially now be OPEC’s turn to shoulder the burden,

after 2016 was characterized by large production

declines in US tight oil. Nevertheless, the inventory

draw downs look to accelerate, which is positive.

On the other hand, OECD inventory levels are still very

high and it will take a major reduction to really push

oil prices back to previous levels. The key danger here

is the recovery of US tight oil production. Oil prices are

now at levels that make many wells profitable again

and the US horizontal land rig count has started to

incraese steadily. The higher the oil price goes, the

more will come back on line and it will only be a

matter of time before there is a meaningful response

in actual production.

In the next 12-18 months, we therefore expect rising

US tight oil production to put a damper on the oil price

recovery. We may see USD 60/b in the not too distant

future, but we have a hard time seeing material upside

from that level until we see the impact on global

production from conventional reserves of the past

three years’ underspend on reserve replenishment.

That effect is bound to emerge at some point and will

have a profound impact on prices. However, we

believe this is likely to happen in 2018-19 rather than

this year.

Consensus forecasts on the rise

The average 2016 price for Brent Crude was USD

44.8b and has averaged USD 54.4 YTD. The consensus

forecasts for 2017 are USD 55/b, which we think may

be on the conservative side. For 2018 and 2019

consensus is flat at USD 62/b. As explained above, we

think there might be meaningful upside to the 2019

forecasts.

The OPEC decision in November to cut production by 1.5 mb/d will strengthen and continue the

inventory correction cycle. As a result, consensus oil price forecasts have increased, although

moderately so. Most are wary of a rapid come-back of US tight oil production. We believe this will put a

damper on the price acceleration and that a more profound oil price increase will be delayed until we

see the actual impact of the past three years’ lack of spending on reserve replenishment globally.

Source: Pareto Securities, IEA, Opec

Source: EIA, Nordea Markets

The oil services market

E&P spending seen to rebound in 2017

Global E&P spending was down 22% in 2016, less than

expected. The leading E&P spending survey from

Barclays Capital was updated in January 2017 -

predicting a 7% increase for 2017. Observations of

updated spending plans from oil companies seem to

confirm this with several companies now expecting to

grow their investments by 20%-30% this year.

Looking at the graph to the left, this should be no

surprise, as oil price gains historically have always

coincided with rising E&P spending.

Rising cash margin for the oil industry

The integrated oil companies are estimated to have a

cash break even price of USD 51/b to cover production

costs, debt service and dividends. Hence, any oil price

above this level will allow for increased spending, the

opposite of what has been the case for the past three

years. The average oil price assumption that lies

behind the 7% projected E&P spending increase for

2017 is USD 52/b, so the current price level leaves to

margin for further expansion. Indeed, the oil industry

has historically raised spending above budgets if actual

prices have outperformed budget prices. Moving into

2018, this margin looks set to increase further,

although any price increases for services and

equipment will mitigate some of this effect.

US onshore to benefit first, then spread offshore

The Barclays E&P survey predicts North American

spending to increase by 27%, in line with the

expectation that tight oil production can (and will) be

ramped up quickly along with the rising oil prices.

International spending is only forecast to rise by 2%

and offshore, which is typically capex heavy and

driven by major field development decisions, is not

expected to start improving until late this year. This

sentiment was echoed by Schlumberger in its recent

Q4’16 report. For our portfolio, it appears to be no

longer a question of if, but when a recovery will

happen. However, patience is needed.

Anecdotal evidence of a recovery

The financial markets have become more optimistic

with US and Norwegian oil service stocks up by 19% in

the past three months. Drilling stocks, a typical

leading indicator, have fared even better. There have

been a selection of positive profit warnings from

seismic companies for Q4’16, owing to better-than-

expected multi-client sales. This hints at recovering

exploration spending, a typical leading indicator. We

are also seeing a rising wave of term fixtures in the

OSV space, as it appears that the oil industry is

sensing that we are at the bottom and is eager to lock

in capacity at low rates for the coming years. We are

also starting to see contract extensions within the

offshore rig industry, instead of contracts just being

allowed to lapse upon expiry. Finally, we have seen a

few speculative buyers of assets start to bite, both in

the rig industry and the OSV space. At least some

pieces in the recovery puzzle are there…

Source: Barclays Capital, , EIA,Pareto Securities

Source: Barclays, Nordea Markets

Source: Nordea Markets, Barclays Capital, EIA

Source: Bloomberg, Oslo Stock Exchange

The shipping market

Yet another rebound

Average day rates have rebounded 53% after touching

yet another low in Q3’16, touching a new, post-1990

low in August. All segments are up, with the exception

of average containership earnings.

Both newbuilding prices and the ordering of new

tonnage continues the downward spiral. Drybulk

orders started to recover in Q4’16, however, spurred

by rate levels rebounding off rock-bottom levels and in

line with our prediction. A general improvement across

most segments (save for tankers and containership)

should also be expected to materialize in somewhat

higher ordering activity going forward.

While the sentiment is seen to be improving, there is

little consolidation to be found in second hand vessel

prices. Few appear to be willing to snap up tonnage at

historically large discounts to newbuild prices,

although we have seen some speculative activity in

the dry bulk market recently. This may be a result of

an expectation that newbuild prices will continue down

as yards are running out of orders and are forced to

drop prices lower, but it could also be a more

cautionary approach taken due to the past few years

of disappointing and volatile vessel earnings.

Nevertheless, this may provide for a more bullish

cyclical set-up in the medium term as the risk of

uncontrolled capacity growth should be less than

normal.

The Fund`s exposure to shipping is within LPG

shipping. This market has followed the oil market

down both due to slowing oil production (LPG is a by-

product of oil) and due to lower LPG spreads globally,

making seaborne trade in the product less appealing.

The weaker earnings for the larger vessels have

forced such ships to trade lower, squeezing out lower

capacity ships for business. This trickles down all the

way to the smaller vessels, to which the Fund is

exposed.

Recently, there has been some uptick in rates, but on

a rather inconsistent basis. Smaller vessels have

started to perform better. Many observers are bullish

on LPG shipping this year, pointing towards rising

prices for LPG and associated products, as well as

rising US LPG exports, where there is significant extra

capacity to allow for increased volumes.

Source: Clarksons

Source: Clarksons

Source: Navigator Gas

Source: Clarksons

Global Seaborne LPG Transportation

Date Share price No. of shares Volume (NOK)

27/01/16 25.0 2,155 53,875

27/01/16 25.0 3,565 89,125

13/04/16 14.5 457 6,627

13/04/16 15.0 5,000 75,000

14/04/16 14.5 932 13,514

Number of trades since startup: 1,716

Volume traded since startup (NOK): 360,042,779

Average volume per trade (NOK): 209,815

Last 5 trades in second hand market

Second Hand Market and Liquidity

Second hand market

All shareholders in 2013 were given the opportunity

to sell their shares at a price of NOK 116.3 (+9.16

estimated value of Singapore Tankers at the time of

the transaction). The trading price following the

restructuring has dropped off significantly. The

traded volumes have however not been substantial.

Many of the traded share prices displayed in the

graph below (red dots) have been calculated on the

basis of implicit feeder trades, adjusted for the

merger exchange ratio. The transactions related to

the restructuring in Oct’13 have not been included in

the graph below.

As of 31 Dec ‘16 PWWS had 3,967,541 shares outstanding. Pareto Securities AS (”PSec”) strives to

facilitate an active second hand market for shares. The last trading price at time of writing was NOK

14.5 per share (14 April ‘16), implying a 12% discount to NAV. Investors who wish to buy or sell

shares should contact their advisors or alternatively PSec directly. Given the challenging market and

situation of PMSOF and PWWS, shareholders and potential investors should exercise caution when

trading in the shares.

Fund Management Team Richard Jansen Patrick Kartevoll Head of Maritime Investments Fund Manager Phone: + 47 22 01 58 96 Phone: +47 22 01 58 79 E-email: [email protected] E-mail: [email protected] Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, http://paretosec.com/pai.php

Disclaimer

This Quarterly Report has been prepared in order to

provide information about Pareto World Wide Shipping

AS (“PWWS” 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 Alternative Investments AS (“Pareto

Alternative Investments”, “Pareto”, or “PAI”).

Information is presented to the best of our efforts and

knowledge, but Pareto cannot guarantee that the

information is correct or all inclusive. Pareto 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. 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 Pareto Securities’ market report as per

November 2016. 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 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.