Pareto World Wide Shipping AS

1st quarter report 2016

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

Executive Summary

Market Development

The oil price has jumped by ~60% from the bottom in

January and is now trading at around USD 47/b for

Brent. The reason is that we have finally started to see

production levels coming down outside of OPEC,

particularly onshore US, while oil demand continues to

be firm. As a result, most observers now see the re-

balancing of the oil market strengthening during H2’16

and there is an increasing confidence that the oil price

will head towards USD 60/b. During the next 9-12

months, we are therefore expecting to see some

improvement, but probably not material until 2017.

That being said, earnings and cash flows remain at

depressed levels and most industry players are having

a hard time servicing debt. We are seeing an increasing

number of bankruptcies in the industry and many more

debt restructuring efforts that appear to have an

uncertain outcome. Some default-induced forced asset

sales have also taken place, some at extreme discounts

to a more normalized newbuilding parity. The Fund has

had its share of default events during the quarter.

Shipping continues to be affected by a weak sentiment

in most segments. Newbuilding prices are falling and

the second hand value discounts to newbuilding parity

continues to widen. The Fund’s exposure to the

chemicals and LPG markets remain robust, although it

seems somewhat difficult to make good realizations in

markets characterized by so much negativity.

Portfolio

PMSOF made up 97% of PWWS’ NAV as of Q1’16, and

had an exposure weighted 68% to offshore oil services

and 32% to shipping. The contract coverage is 68%

with a weighted contract length of 0.8 years.

In addition to PMSOF, PWWS owns direct stakes in

Singapore Tankers and Parbulk II. The first position has

been marked down 11%, while the latter is still marked

at zero value.

PMSOF raised USD 25m of Preference Capital in Q1’16

to boost its liquidity reserves. It implies a dilution of

PWWS’ stake in PMSOF of 20%-37.5%, depending on

how much of the capital is actually deployed into the

Fund (22% based on the draw at the time of writingt).

The Preference Capital carries a PIK-interest of 7.5%

p.a., and ranks ahead of the ordinary equity in the

Fund in terms of distributions.

All PWWS shareholders were invited to subscribe to

avoid dilution. Of the total number of shares in PWWS,

21.6% subscribed in the Preference Capital, while the

remaining shareholders are thus being diluted in line

with the above.

The NAV for holders of the Preference Capital was

equal to NOK 60 per share, down 25% during the

quarter, while the NAV for non-holders was NOK 46 per

share, down 42%.

The NAV share as of Q1’16 was NOK 60 per share for PWWS shareholders that are pro-rata holders of

the PMSOF Preference Capital, and NOK 46 per share for PWWS shareholders that are non-holders. The

decline in NAV from the previous quarter is due to several large portfolio investments in PMSOF being

marked down due to lower asset valuations, as well as increased assumed tax liabilities for PWWS.

NAV NOK 60/46 per share (as per 31 Mar 2016)

0

20

40

60

80

100

120

140

160

180

200

220

240PWWS - NAV development

NAV per share

NAV per share (dividend adjusted)

Net Asset Value Development

NAV development

NAV as of 31.03.2015 was NOK 46 per share, down

42% from the previous NAV (31 Dec 2015) and down

28% from inception in 2006 (adjusted for repayments).

The reason for the large drop is partly the 20% dilution

of PWWS’ stake in PMSOF due to the Preference

Capital.

For PWWS shareholders that participated in the issue of

Preference Capital in PMSOF, the corresponding figure

is NOK 60 per share, down 25% from Q4’15 and down

23% from inception (adjusted for paid-in Preference

Capital).

During the quarter, the USD value of PMSOF fell by

29%, while the value of Singapore Tankers was down

11%. The USD fell by 7% vs the NOK during the

quarter, which exacerbated the decline in NOK.

During Q1’16, PWWS contributed USD 0.1m of uncalled

capital to PMSOF. PWWS did not participate in the call

of USD 3m of Preference Capital in PMSOF in February,

but 21.6% of its shareholders did so directly.

The Fund Manager expects the PMSOF portfolio to

require significant additional capital during 2016 and

2017 to weather the current adverse market

conditions.

The majority of these capital requirements have

already materialized and by May this year, PMSOF will

have paid in in excess of USD 10m to portfolio

investments, with a total draw on the Preference

Capital of USD 12m. This will result in a further dilution

of PWWS’ stake in PMSOF by 2%-points.

All shareholders in PWWS were offered to participate in

the Preference Capital on the same terms as the

majority owner in PMSOF. As a result, 21.6% of the

shares in PWWS participated, thereby avoiding any

dilution, while the remaining 78.4% will be diluted by

at least 20%.

As of Q1’17, PWWS had a cash balance of NOK 6.6m

(USD 0.8m).

Direct yield

As of Q1’16, 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 3 per share so far).

On a diluted basis, NAV was down 42% during Q1’16, reflecting a substantial decline in the valuation of

the offshore oil services assets in PMSOF, as well as the dilution from the issue of Preference Capital in

PMSOF. For shareholders who are PMSOF Preference Capital holders, NAV was down 25%.

Last 3 mths Last 12 mths Last 24 mths Since inception

PWWS (ex Pref Cap) -42,1% -61,8% -35,4% -28,4%

Oslo Stock Exchange -5,4% -6,8% 2,7% 51,0%

Shipping Index * -22,3% -14,5% -3,6% 12,5%

Offshore Index ** -17,0% -30,6% -56,1% -44,6%

* 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 38.7% (48.4%) stake in the

Fund. The USD value of PMSOF declined by 40% for

PWWS, including the dilution effect and by 25%,

excluding this effect.

PMSOF’s portfolio consists of 18 projects with stakes in

46 units. Its cash position as of 31 March 2016 was

USD 3.7m.

During Q1’16, the Fund contributed USD 0.5m to

underlying projects and received USD 0.7m of

realization proceeds and dividends. The operating

expenses paid during Q1’16 amounted to USD 1.0m.

The Fund called USD 0.2m of uncalled capital in

January and USD 3m of Preference Capital in February.

At present, the contract coverage is 68% and has a

gross nominal revenue value of USD 31m for the Fund.

The weighted average contract length is 0.8 years.

The largest counterpart is CGG (45%), which is listed

on the Euronext, followed by Swiber Offshore (17%)

and Fairfield Nodal (14%). The overall exposure to

different segments in the maritime industries is

strongly weighted towards offshore support vessels.

The shipping exposure is 32% and the offshore oil

services exposure is 68%.

The largest contributors to the decline in the portfolio

value during Q1’16 were Asian Offshore I and Asian

Offshore III, where both projects are exposed to small

AHTS in West Africa and South East Asia and are

subject to a significant drop in vessel values. These two

projects contributed to 44% of the decline in the

portfolio value.

The third largest contributor was Neptune Subsea,

which was responsible for 32% of the decline. Both

vessels are still in warm lay-up and significant capital is

required to preserve values. However, a

comprehensive debt restructuring agreement has been

struck with the Lenders to the project, which means

significantly reduced debt service requirements, as well

as a 3-year extension of the debt maturity. As a result,

the vessels will be significantly more competitive in

bidding for work and it will now be much easier to

safeguard the exposure to a market recovery in this

project. Under the agreement, all uncalled capital had

to be paid in and the shareholders also had to provide

additional working capital. Moreover, PMSOF has

doubled its stake in the project through taking over

from a defaulting partner. All in all, PMSOF will use

about USD 10m to support Neptune Subsea, all of

which will be drawn from the Preference Capital and

reflected in the Q2’16 NAV. At the time of writing, the

total draw on the Preference Capital is USD 12m.

There have also been a charterer default in Norseman

Offshore, where Viking Supply Ships has not paid

bareboat hire since February. The situation is being

handled in close cooperation with the Lender to

Norseman, but the outcome is still unclear.

Finally, the largest investor in NorthSea PSV has gone

into liquidation, which poses some challenges vs the

Lenders to the project due to guarantees.

Operationally, the vessel in the project is doing well.

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.

Singapore Tankers

The project consists of a claim against the former

charterer of the vessels. Legal steps to secure STAS’

position are in the process of being taken. The outcome

of these proceedings are highly uncertain.

Payments from projects

PWWS contributed USD 0.2m in uncalled capital to

PMSOF during Q1’16.

New investments

PWWS is now 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 97% of its NAV invested in PMSOF and the remainder in two directly own 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)

Chemical

11%

PSV

(Europe)8%

AHTS (Asia)

26%

AHTS (Europe)

9%

Subsea

7%

Seismic

17%

LPG

22%

Segment Distribution

Spot/Asset

Play31 %

Timecharter

27 %

Bareboat

42 %

Charterparty Distribution

Portfolio PMSOF

Project / company Contract Charterparty ChartererProportion

of NAV

B-Gas Ltd Spot/Asset play 19.2%

Master and Commander IS Aug-18 Spot/Asset play 15.9%

Asian Offshore III IS, incl SHL Spot/Asset play 14.4%

Neptune Subsea IS, incl SHL Spot/Asset play 7.4%

Brøvig Stainless II DIS Nov-16 Bareboat Stolt Tankers B.V 9.3%

NorthSea PSV, incl SHL Aug-16 Timecharter Wintershall 5.4%

Far East Offshore IS Feb-17 Bareboat Sanko Steamship Ltd 4.9%

Iceman IS Spot/Asset play 4.7%

Bukit Timah Offshore DIS Jul-20 Bareboat Swiber Offshore Marine Pte. 4.2%

Norseman Offshore IS Dec-20 Bareboat Viking Supply Ships AS 4.0%

Atlantic Gas II IS Nov-16 Bareboat Geogas Maritime SAS 2.5%

PSV Invest II IS, incl SHL Timecharter Apache Petroleum 2.0%

Asian Offshore I IS, incl SHL Spot/Asset play 1.7%

UBT AS Spot/Asset play 1.6%

Vestland Seismic IS Spot/Asset play 1.2%

3B Offshore IS Nov-17 Bareboat Bourbon 0.7%

Lion AHTS Spot/Asset play 0.3%

River Cruise KS Mar-16 Bareboat Viking River Cruises S.A. 0.2%

Atlantica Tender Drilling Timecharter 0.1%

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

13.04.16 14,5 932 13 514

Number of trades since startup: 1 716

Volume traded since startup (NOK): 360 042 779

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 March ‘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 (13 April ‘16), implying a 69% discount to NAV. Investors who wish to buy or sell

shares should contact their advisors or alternatively PSec directly.

The offshore oil services market

Non-OPEC oil production has started its decline

US onshore oil production has finally caved in and

started on a downward trajectory. The 80% drop in

the US onshore rig count suggests an additional

decline of about 0.5 mb/d by Q3’16, implying a total

decline of nearly 1.2 mb/d from the peak in March

2015. The lower production levels are also starting to

show up in the weekly inventory numbers, adding

further evidence that the inventory correction cycle is

indeed underway.

At the same time, OPEC is maintaining its high

production levels. Iran has raised its production faster

than expected, following the removal of sanctions, up

0.7 mb/d from October ‘15. This has been balanced

out by Saudi Arabia and other OPEC producers, leaving

OPEC-12 production within the same 32-32.5 mb/d

range we’ve seen in the past year.

Worries over China appear to have abated somewhat,

with crude imports at strong levels and the leading

indicators, such as the PMI, now levelling out and even

showing some improvement.

Finally, the USD has weakened due to reduced

expectations of interest rate hikes in the US. This is

typically good for all commodities, oil and gas

included.

Oil price bounces back strongly

The oil price is up by more roughly 60% from its

trough in January this year, in response to the factors

above. While this may appear to be an outsized move,

it only reflects a move back to the levels seen as late

as November ‘15.

Such a sharp move necessarily leaves the oil price

vulnerable. The move is based on forward

expectations, as the market fundamentals so far do

not warrant such a large recation. Hence, we need to

see a continued strengthening of the inventory

correction cycle, and disappointments in this regard

may lead to a downward correction.

That being said, it is hard to see why the oil price

should not continue its upward trajectory during the

remainder of the year as the inventory correction cycle

is bound to strengthen. In the medium term, it will be

interesting to watch the production levels from

conventional oil plays, which is bound to have been

negatively impacted by the cut-backs in E&P spending.

That could provide an upside surprise.

The oil price reached new lows early this year and continues to exhibit strong volatility. The inventory

build is continuing, while worries about the health of the Chinese economy is adding gloom to demand

side projections. We expect this pattern to continue to the next 6-9 months and do not expect any

upwards traction for the oil price until after the summer. All in all, this means that the likelihood of any

meaningful recovery in 2017 is slim.

Source: EIA, Nordea Markets

Source: IEA

Source: EIA, Nordea Markets

Source: Nordea Markets

Oil services, continued

E&P spending expected down another 20% in 2016

Global E&P spending was down around 25% last year,

the biggest decline in three decades. For 2016, the

forecast is for another down-tick of 20%, meaning that

2016 will be even more difficult than 2015 on a global

basis and that we are down to levels not seen since

before the financial crisis. Any recovery in the oil price

is unlikely to have material impact until next year, as

the budgets for 2016 are more or less fixed.

Activity levels are more robust

A reasonable measure for offshore activity levels is

represented by the demand for floating drilling rigs. As

seen by the graph to the left, activity levels have

dropped back to 2009 levels, and as such similar to

what we saw post the financial crisis – a drop of 28%

from the 2014 peak. This is less than the 43% drop in

E&P spending from peak and reflects that an important

part of the reduction in the oil industry’s capex spend

is coming from pricing declines.

Reduced pricing lowers break-even costs

The lower pricing on all oil services and equipment is

resetting the break-even prices for new field

developments and could, once the dust has settled,

result in some recovery, even if oil prices were to stay

low. The lower profitability experienced by the oil

companies has also forced the oil industry into

improving overall efficiency. As such, there could even

be some room for pricing improvement, while retaining

a permanently lower break-even price. Therefore, it

should be expected that the required oil price recovery

to facilitate a more material recovery in oil services is

more limited now and that things could start moving

upwards once (and if) the oil price climbs above USD

50/b.

Asset valuations are at cyclical lows

Both day rates and asset values are down in excess of

50% during the past two years. Inflation adjusted,

asset pricing is basically back to the 1980s level.

While some may view this as a buying opportunity, it

is creating significant headwinds for current owners.

The cash flows from the assets are barely sufficient to

cover operating expenses, little (if anything) is left

over for debt service. This is leading to a high activity

in terms of debt restructuring, which in turn also

requires fresh equity to prop up the balance sheets.

The lower valuations are also leading to LTV-covenant

breaches. We are witnessing an increasing number of

bankruptcies in oil services. The result of this will likely

be a string of forced asset sales, which will set new

benchmarks for asset pricing. The latest one being set

by the 2011-built UDW drillship Cerrado, which

fetched USD 65m in an auction, about 10% of its

original construction cost.

Source: Barclays Capital

Source: IHS, Pareto Securities,

Source: Pareto Securities, PGS

Source: Pareto Securities, Clarksons Platou, Westshore

The shipping market

Gloom is returning

Global shipping markets are continuing a slow but

volatile improvement. Average day rates during Q1’16

were down by 25% both q-o-q and y-o-y. The markets

continue to be driven by crude and product tankers,

with other segments either flat or declining.

The Q1’16 ordering of new tonnage was down 45% q-

o-q and 58% y-o-y. Drybulk contracting accounted for

86% of the orders placed in the first quarter, having

almost been non-existent for the preceding four

quarters. Conversely, orders for tankers and other

vessels all but dried up during the first quarter.

It is still fascinating to see how small gains in charter

rates (dry bulk rates have just started to edge above

opex levels) can boost optimism and herd optimistic

owners and bargain hunters back to the shipyards like

a flock of sheep. Maybe investors will shoot

themselves in the foot once again in this segment.

The development in tankers is the opposite. Earnings

are still strong, but nobody are ordering new ships

anymore and worries are now creeping in that there

will (once again) be an oversupply of tankers going

forward. Sentiment wise, tankers are an inverse play

on the oil price, so the recent rebound in oil may also

explain some of the missing spark in this segment.

Newbuild prices are trending steadily lower, obviously

a result of the low contracting activity as shipyards

have to entice owners back for orders through offering

more competitive prices. Lower newbuild prices are, as

is the norm, also having a negative impact on

secondhand transaction values. Moreover, we are

continuing to see a widening discount between

newbuilds and secondhand vessels. Many argue that

there is an investment opportunity in buying second

hand vessels with the view that the discount should

revert back to normal historical levels (about 20%). So

far, this has not materialized.

The Fund`s exposure to shipping is within chemical

and LPG shipping. Within chemicals, the trading

volumes are improving, and freight rates have started

to climb. On the other hand, a mushrooming order

book for new vessels, particularly mid-sized stainless

steel tankers may have an adverse impact on earnings

in the medium term.

Within LPG, the rates for large vessels (VLGCs) have

collapsed from a historical peak and are now at more

normal levels. Rates for medium sized vessels (MGCs)

have also come down, but remain healthy. However,

rates for smaller vessels have come up nicely lately,

but for 3,200 cbm semi-ref vessels and 5,000 cbm

pressurised vessels, to which the Fund has exposure to

through B-Gas.

Source: Clarksons

Source: Clarksons

Source: Clarksons

Source: Clarksons

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: richard.jansen@pareto.no E-mail: patrick.kartevoll@pareto.no 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

May 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.