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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 Funds 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 Q416, 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 Q117, 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 Q416 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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    240PWWS - NAV development

    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 Q316 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 Q416, 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 Q316 at a price equal to NAV and

    looks set to complete another in Q117.

    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 Q416, 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 Capitals 25% ownership in

    PMSOF.

    Direct yield

    As of Q416, 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 H213, 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 Q416, 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.

    PMSOFs portfolio consists of 16 projects with stakes in

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

    USD 2.1m.

    During Q416, the Fund contributed USD 3.9m to

    underlying projects. The operating expenses paid

    during Q416 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 Q416 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 Q117, 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 quarters 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 OPECs 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

    Q416 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 Q416, 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 Q316, 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 Q416, 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 Oct13 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

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

  • 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 companys financial advisor and

    does not render and shall not be deemed to render

    any advice or recommendations as to a transaction.