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