Pareto World Wide Shipping AS

3rd quarter report 2016

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

Executive Summary

Market Development

The oil price appears to be stabilizing around USD 50/b

for Brent crude, primarily due to evidence of inventory

draws, as well as a soft-agreement in OPEC to stabilize

prices through potential production cut backs. The E&P

spending budgets are set against the current prices and

is reasonable to expect a decline of around 10% next

year. This does not mean that activity may not start to

respond to a firmer oil price, as much (if not all) of the

reduction will be due to lower pricing of products and

services. However, there are significant levels of excess

capacity in most segments with large portions of ships

in lay-up and significant order books for new vessels.

This will dampen the utilization and rate recovery in the

next couple of years.

Most oil service companies are also financially

distressed, so counterparty risks are very real threats

to the Fund’s portfolio. Several projects are already in

tough restructuring negotiations with charterers and

more are likely to engage in such discussions in the

near future. The lenders are generally in a constructive

mood, preferring to help out instead of enforcing their

securities and taking upfront losses, but there are

exceptions, which add to the challenges. In several

cases, capital will be required to reduce debt levels.

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

have taken a turn for the worst, as all segments have

seen rates drop dramatically during the year. NAV is

holding up well for the investments, but the cash flows

are becoming more restricted, and will have an impact

on values unless there is a recovery soon.

Portfolio

PMSOF made up 90% of PWWS’ NAV as of Q3’16, and

had an exposure weighted 66% to offshore oil services

and 34% to shipping. The contract coverage is 85%

with a weighted contract length of 0.7 years.

In addition to PMSOF, PWWS owns direct stakes in

Singapore Tankers and Parbulk II. There have been no

developments regarding Singapore Tankers and the

project is still pursuing the original charterer through

various legal avenues to secure agreed payments.

PMSOF has drawn USD 12m of the USD 25m available

from the Preference Capital. The Fund has adequate

liquidity resources in the short term following a

significant project realization in Q2’16. However, 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 42 per share, down 15% during the

quarter, while the NAV for non-holders was NOK 25 per

share, down 18%.

The NAV share as of Q3’16 was NOK 42 per share for PWWS shareholders that are pro-rata holders of

the PMSOF Preference Capital, and NOK 25 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 42/25 per share (as per 30 Sept 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 30.09.2015 was NOK 25 per share, down

18% from the previous NAV (30 June 2016) and down

39% 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 42 per share, down 15% from Q2’16 and down

35% 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 flat.

The USD fell by 2% vs the NOK during the quarter,

which exacerbated the decline in NOK. On the other

hand, PWWS has a decent cash position, which

cushioned the total decline.

During Q2’16, 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. The

proceeds from this means that the Fund has an

adequate liquidity position short term, but further

draws on the Preference Capital should be expected as

additional capital requirements are expected to

materialize, not least due to uncalled capital

commitments in PMSOF.

As of Q3’16, 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 12.4m. For PWWS

shareholders that are owners, this equates to a value of

NOK 12.2 per PWWS share.

Direct yield

As of Q3’16, 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 12 per share so far).

On a diluted basis, NAV was down 18% during Q2’16, reflecting a continued decline in the valuation of

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

NAV was down 15%.

Last 3 mths Last 12 mths Last 24 mths Since inception

PWWS (ex Pref Cap) -18.0% -75.7% -65.8% -39.2%

Oslo Stock Exchange 3.2% 6.5% 2.3% 63.0%

Shipping Index * 1.0% -23.6% -13.1% 4.8%

Offshore Index ** 7.0% -5.1% -33.1% -35.0%

* 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 37.8% (48.4%) stake in the

Fund. The USD value of PMSOF declined by 19% for

PWWS, including the dilution effect and by 15%,

excluding this effect.

PMSOF’s portfolio consists of 17 projects with stakes in

46 units. Its cash position as of 30 June 2016 was USD

3.8m.

During Q3’16, the Fund contributed USD 1.4m to

underlying projects. The operating expenses paid

during Q3’16 amounted to USD 0.4m..

At present, the contract coverage is 85% and has a

gross nominal revenue value of USD 27m for the Fund.

The weighted average contract length is 0.7 years.

The largest counterpart is CGG (40%), which is listed

on the Euronext, followed by Shell Nigeria (28%) and

Fairfield Nodal (16%). The counterparty risk is

significant, particularly for the two seismic companies.

The overall exposure to different segments in the

maritime industries is weighted towards offshore

support vessels. The shipping exposure is 33% and the

offshore oil services exposure is 67%.

The largest contributor to the decline in the portfolio

value during Q3’16 was Master & Commander (60%),

due to lower vessel valuations and a higher perceived

counterparty risk, followed by Asian Offshore III

(20%) due to lower vessel valuations and Far East

Offshore (17%) due to lower residual value

expectations at the end of the BBCP in February 2017.

Norseman Offshore has been declared bankrupt by DVB

Bank in a highly controversial decision. The

shareholders are contemplating an appeal, as well as a

legal claim against DVB for fraudulent behavior and

against VSS for differential treatment of creditors.

Both PSV projects in PMSOF came off their long term

contracts during Q3’16 and are now employed in the

very weak North Sea spot markets. At least one of the

ships is likely to be laid up. Negotiations with the banks

regarding restructured loan agreements are ongoing,

but some payment of uncalled capital seems

unavoidable.

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 have been taken, but the outcome of these

proceedings are highly uncertain.

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 92% 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)

Chemical

4%PSV (Europe)

9%

AHTS (Asia)

5%AHTS (Europe)

7%

Subsea

28%

Seismic

16%LPG

30%

Segment Distribution

Spot/Asset

Play15%

Timecharter

60% Bareboat

25%

Charterparty Distribution

Portfolio PMSOF

Project / company Contract Charterparty ChartererProportion

of NAV

Neptune Subsea IS, incl SHL Timecharter 28.8%

B-Gas Ltd Timecharter Total / Vitol / Statoil 26.7%

Master and Commander IS Aug-18 Bareboat CGG/Fairfield Nodal 14.4%

NorthSea PSV, incl SHL Spot/Asset play 8.1%

Iceman IS Spot/Asset play 4.3%

UBT AS Aug-21 Bareboat Viking Gold 4.2%

Far East Offshore Feb-17 Bareboat Sanko Steamship Ltd 3.6%

Atlantic Gas II IS Timecharter 3.4%

Norseman Offshore Dec-20 Bareboat Viking Supply Ships AS 2.4%

Vestland Seismic IS Spot/Asset play 1.6%

PSV Invest II IS, incl SHL Timecharter 1.1%

Asian Offshore III, incl SHL Spot/Asset play 1.0%

Atlantica Tender Drilling Timecharter Petrobras 0.5%

3B Offshore IS Nov-17 Bareboat 0.2%

Lion AHTS Spot/Asset play 0.0%

Asian Offshore I, incl SHL Spot/Asset play 0.0%

Bukit Timah Offshore DIS Spot/Asset play 0.0%

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 30 Sept ‘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 41% discount to NAV. Investors who wish to buy or sell

shares should contact their advisors or alternatively PSec directly.

The oil market

Non-Opec production declining

Non-OPEC production is falling, primarily due to

declining US onshore production. We are also seeing

early signs of declines in more mature areas, where

the overall decline in global E&P spending is likely to

have an accelerating impact. At the same time, global

oil demand growth is healthy, leaving a gap to be filled

by either inventory draws, which is what will drive oil

prices upwards, particularly if OPEC can keep

production flat.

OPEC spare capacity is becoming more limited

The return of Iranian oil exports has been the main

driver behind the increased OPEC production in the

past three quarters. Going forward, however, it is

estimated that available OPEC spare capacity will not

be able to keep pace with the call on OPEC, so it

seems an almost certainty that we will see inventory

draws accelerating during 2017.

How long for a tight market to emerge?

As can be seen from the graph on the left, OECD oil

inventories have posted three consecutive monthly

declines, but are significantly higher than normal.

About 400mb of oil would need to be removed in order

to re-establish a tight market. If the global

undersupply equals 1mb/d, it would therefore take a

bit more than a year to properly re-balance the

markets. This is what lies in most forecasts, assuming

flat OPEC production from now and onwards, but as

history has taught us, that is far from being a

certainty. One would therefore seem be best advised

to expect a proper tightening towards the end of 2017,

but the risk being on the downside.

Consensus forecasts on the rise

The actual Q3’16 price for Brent Crude was USD 46/b,

USD 2/b higher than consensus. We note that

consensus forecasts through Q2’17 have risen by USD

2/b and for H2’17 by USD 1/b. Still, the markets

appear to be rather cautious. There is a lot of talk

about USD 60/b oil, but few appear to be willing to put

their heads on the block.

The inventory correction cycle is underway and is strengthening. At the same time, with Iran now

reaching pre-sanction export levels, OPEC started discussing a production ceiling and potentially also

production cut-backs. Only the former will be able to provide a long term boost to prices, and may be

under threat if US tight oil production starts growing again or if OPEC discipline is weak. We may have

turned the corner, but we are far from out of the woods.

Source: Pareto Securities, IEA, Opec

Source: IEA, Bloomberg

Source: Nordea Markets

Source: EIA, IEA, Opec

The oil services market

E&P spending expected down another 20% in 2016

Global E&P spending looks set to drop by 30% this

year and expectations are for a drop of up to 10% in

2017. We are seeing activity levels drop all around,

but when looking towards next year, we believe that

activity levels may actually start to rise slowly as much

of the decline in spending will be down to lower

average pricing of goods and services.

What does it take to provide an uptick for 2017?

Historically, E&P spending has been closely correlated

with the oil price. When the oil price falls, there tends

to be an immediate reaction in E&P spending.

Conversely, positive oil price changes have always had

a positive impact on E&P spending. The oil price looks

to average $45/b for 2016, down 19% y-o-y. For

2017, consensus forecasts are for $54/b, a 19%

increase from this year. Under normal circumstances,

one would expect this to provide a boost to E&P

spending, but as the current downturn appears more

“systemic” than anything seen for the past 25 years,

there may well be a lag. Oil company break even

levels, including dividend, appear to be a tad above

USD 50/b, so we should not expect to see material

movement until the oil price approaches USD 60/b.

A lot of excess capacity out there

While the demand side of the equation might get a

boost next year, it will take a long time to restore

market utilization. The excess supply across typical

offshore oil services segments is 50%-60%, when

including newbuilds to be delivered. Lack of take-out

financing may reduce actual deliveries meaningfully

(run-rate is approximately 25% of scheduled deliveries

at the moment), but nevertheless, we would be

looking at 40%-45% excess capacity in the markets.

Scrapping is limited, as the value of steel in an

offshore vessel is too little to fetch a scrap value that

covers scrapping costs with any margin.

The rule of thumb is that rates start to move north

when utilization moves into the 80%-90% range, with

the upper end signalling a tight market with high

rates. Current utilization levels are 55%-60%, so

demand for vessels would need to rise 40% on

average in order to reach 80% utilization and a further

18% to reach 90% utilization. This is based on the

actual fleet, including vessels in lay-up. A significant

portion of the laid-up fleet may never return, but on

the other hand, we have a newbuild order book of

almost the same magnitude as the laid-up fleet. There

are no two ways about it – it will take long time before

the markets recover. Demand will recover, but over

time, and the only thing that could speed things up

would be massive scrapping and cancellations of

newbuild orders. That is likely to be wishful thinking.

Source: Barclays Capital, Pareto Securities

Source: Barclays, IEA

Source: Pareto Securities, Nordea Markets, Westshore

Source: Pareto Securities, Nordea Markets, Westshore

The shipping market

Gloomy still

Average day rates have come down again during

Q3’16 and touched a new, post-1990 low in August.

All segments have dropped during the quarter, with

the exception of dry bulk, which has bounced off the

bottom.

The ordering of new tonnage continues to trend lower,

and the lower newbuilding prices do not seem to help.

Rather, owners appear to be focusing on vessel

earnings. Drybulk orders dropped back to almost zero

during the quarter, with orders for tankers picking up

some of the slack. Based on news flow so far in Q4’16,

we would expect the drybulk orders to pick up again

as it appears some are positioning themselves for a

recovery in this market following several years of

horrid trading conditions.

The fact that cash flow and vessel earnings are taking

centre stage for owners looking to add tonnage can be

further illustrated by the growing gap between second

hand prices and newbuild prices. Owning ships is

simply a liability these days, and it would clearly seem

as if one would be better advised buying second hand

tonnage on the cheap if the markets improve than

going to shipyards for new vessels.

The Fund`s exposure to shipping is within chemical

and LPG shipping, with the latter being by far the most

important. This market has almost universally

collapsed with no places to hide.

The weaker earnings for the larger vessels are forcing

such ships to trade lower, attempting to squeeze out

lower capacity ships for business. This trickles down all

the way to the smaller vessels, to which the Fund is

exposed.

The picture seems very complex, consisting of many

factors. Since LPG is a by-product of oil refining, lower

non-OPEC refinery output may be one factor

explaining the reduction in demand, exacerbated by

the normal refinery maintenance season in early

autumn. A slow down of demand growth in key

importing nations such as Korea and Japan has also

been negative. Finally, reduced trading spreads are

probably also responsible. All these factors have

coincided with a high fleet growth.

Lately, we have seen markets recover somewhat and

trading prices for LPG-stocks have rebounded

significantly. Hopefully this signals some positivitiy in

the coming 6-9 months.

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

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.