Pareto World Wide Offshore AS

2nd quarter report 2015

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

Executive Summary

Market Development

The oil price has exhibited significant volatility

with a 40% rebound from the winter low,

followed by a near 20% decline in the past

month. Expectations of a gradual rebalancing of

the oil market during H2’15 have been quashed

by rising OPEC production and fears of additional

export volumes from Iran in the next years.

OPEC is definitely not abandoning its strategy of

maximizing market share at the expense of price

anytime soon.

Hence, it appears that the oil price will be capped

at the marginal cost of US tight oil producers for

the foreseeable future (USD 60-65/b), until

global inventories have been worked down to a

more normal level.

Thus, there is less reason to expect a recovery in

global E&P spending next year and the oil service

markets are likely to remain depressed. Long

term contracts at past rate levels provide some

cushion, but many are being terminated by their

clients. New contracts are often barely able to

cover operating expenses. Asset valuations are

continuing to decline, putting financial covenants

at risk and the banks are more restrictive. We

expect these conditions to persist through 2015

and 2016, making asset realizations difficult to

achieve at sensible prices. Rather, the main task

is to preserve underlying values and to position

the portfolio for a recovery in the next 3-4 years.

Portfolio

PWWO did not make any project realizations

during the second quarter. The portfolio has

relatively low contract coverage and is thus

exposed to the weak market conditions in the

offshore oil services markets. The portfolio is

heavily weighted towards two projects, which

make up 60% of the value and where it is

essential to be able to preserve the values while

waiting for improvements in the markets.

We are pleased to report that TOT Drilling’s

appeal to the High Courts regarding the slot fee

on the Songa Eclipse has been rejected. As a

result, the ruling from the Oslo Court of Appeals

(Lagmannsretten) stands and PWWO is finally

able to close the project after nearly four years of

legal battle in the courts. The ruling has a

positive impact on NAV in excess of NOK 2 per

share, as PWWO had previously made an

allocation for a potential negative outcome.

The way forward

The term of PWWO was extended to July 2019 at

the Annual General Meeting in June 2015. This

was in recognition that it is exceedingly difficult

to realize meaningful value in the current

markets, particularly with the portfolio so skewed

towards two large investments.

In connection with the extension, the Fund

manager has agreed to a change in the

management fees, which will imply a 50%-60%

reduction in the annual management fee. The

change will be the same for investors that are

exposed to PWWO through POK. Going forward,

the fees will be fixed at a declining profile, with

zero management fee payable from 2019. There

is a small incentive fee to encourage the Fund

manager to realize the portfolio as quickly as

possible.

PWWO will refrain from investing further for the

remainder of its lifetime, save for follow-up

investments in existing projects, if required.

The offshore oil services markets have weakened substantially so far this year, with the impact seen

through lower day rates, lower utilization and reduced asset valuations. We expect a difficult 2015 and

2016, in which investors should not expect meaningful dividend distributions and where it will be hard

to make good project realizations. As a result, the shareholders have approved an extension of the

Fund until July 2019, while the Fund manager has agreed to reduce the management fees during the

extension period. The Fund is set to report its next NAV at 31st December this year.

NAV PWWO NOK 93/share NAV POK NOK 43/share

(as of 30 June 2015)

Portfolio News

BassDrill Alpha Ltd

The contract with Total was terminated at the end of

May against a cancellation fee. The rig is now warm

stacked offshore Congo. New employment is being

sought for the rig and there is a reasonable chance that

it will be back working around the turn of the year. The

project is well capitalized and should be able to

weather a period of unemployment for the next 9-12

months.

Neptune Subsea IS

One of the vessels is still employed until October ’15 at

a reasonable rate, while the other has just mobilized

for a short term job in Angola. The owners injected at

total of USD 5m in April to boost working capital and

service debt. The process to enforce the company’s

rights versus the charterer continues and has priority,

although the bankruptcy estate has proven less

cooperative than one might have hoped. It is expected

that another capital call will come during H2’15 to fund

debt service in the project.

Vestland Seismic IS

The vessel M/V Vikland is still idle and there have been

no material developments regarding a new charter or a

sale. All debt has been repaid and the project is 100%

equity. The seismic market is very weak and it will take

time to secure employment for the vessel. Alternative

markets are also being explored.

Master & Commander IS

Charter hire is paid punctually, while the seismic

market is weak. Both counterparts are in reasonably

good shape. The vessel valuations have been lowered,

which has a negative impact on the residual value

expectations.

Asian Offshore III IS

The average day rate for the six vessels was $ 7,100/d

during Q2’15, down 6% from the preceding quarter.

The receivables collection issue is shared with its pool

partners (including AO I), with an additional liquidity

drag from the ongoing drydocking program. Further

capital calls have been avoided in Q2, but it will be a

close call for the rest of the year. The difficult markets

is putting the integration process involving AO III and

its pool partners AO I and ACS at risk, despite some

progress.

Iceman IS

The vessel has enjoyed good utilization during Q2’15,

resulting in vessel revenue almost double that of the

preceding quarter. The outlook for the remainder of the

year is highly uncertain and further capital calls to

boost working capital should not be excluded.

Songa Eclipse

TOT Drilling’s appeal to the High Courts regarding the

slot fee on the Songa Eclipse has been rejected. As a

result, the ruling from the Oslo Court of Appeals

(Lagmannsretten) stands and PWWO is finally able to

close the project after nearly four years of legal battle

in the courts fighting a claim of roughly USD 5m. The

ruling has a positive impact on NAV in excess of NOK 2

per share, as PWWO had previously made an allocation

for a potential negative outcome.

Project sales

PWWO has not made any divestments during Q2’15.

Payments to and from projects

During Q2’15, PWWO received NOK 0.5m in payments

from projects. During the quarter PWWO had to inject a

total of NOK 13m of equity into two more projects

(Iceman and Neptune Subsea) to support the projects

due to the adverse market conditions.

PWWO is invested in a broad range of offshore projects, which implies a diversification

across different asset types and market segments. This section provides an update on the

quarter’s most important news flow related to the underlying investments.

Spot/Asset Play

84%

Timecharter

0%

Bareboat

16%

Charterparty Distribution based on NAV+commited

PSV/AHTS (Asia)

19%

PSV/AHTS

(Europe)

7%

Subsea

33%

Seismic

15%

Tender Rig

26%

Segment Distribution based on NAV+commited

Swiber

68%

CGG

17%

Bourbon

8%

Fairfield Nodal

6%

Hallin

1%

Charter hire backlog by counterpart

Project / company Segment Contract Charterparty ChartererProportion

of NAV

Neptune Subsea IS Subsea Spot/Asset play 31.1 %

Bassdrill Alpha Ltd Tender Rig Spot/Asset play Total / CNR 31.7 %

Vestland Seismic IS Seismic Spot/Asset play Albatross Shipping Ltd. 10.2 %

Bukhit Timah Offshore DIS PSV/AHTS (Asia) Jul-20 Bareboat Swiber Offshore Marine Pte 9.0 %

Asian Offshore III IS PSV/AHTS (Asia) Spot/Asset play 8.7 %

Iceman IS PSV/AHTS (Europe) Spot/Asset play 3.8 %

Master and Commander IS Seismic Aug-18 Bareboat CGG/Fairfield Nodal 3.5 %

3B Offshore IS PSV/AHTS (Europe) Nov-17 Bareboat Bourbon 2.1 %

Portfolio

Investments and capital

PWWO’s portfolio consists of 8 projects which owns

stakes in 19 units. The average contract length is 0.6

years and the contract coverage is 16%.

The gross nominal value of the contract backlog is

roughly NOK 86m. The backlog is primarily made up

by two solid counterparts.

PWWO had a cash holding of NOK 33m as of 30 June

2015. There may be additional capital calls in in the

coming quarters, so cash is being preserved to be in a

position to follow up such calls.

The life cycle of PWWO has been extended through 30

June 2019.

The characteristics of the portfolio has changed drastically in the past year months due to the charterer

default in Neptune Subsea and the termination of BassDrill Alpha’s contract. Contract coverage has

dropped to 15% and the weighted average charter length is only 0.6 years. Hence, the portfolio risk

has increased meaningfully and there will be less visibility on incoming cash flows than before.

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NAV per share

NAV per share (dividend adjusted)

Net Asset Value Development (PWWO)

NAV development

In USD, the value of PWWO declined 4% during

H1’15. Adjusted for the positive impact of the Songa

Eclipse claim the value was down 6% in USD. A

stronger USD vs NOK resulted in NAV ending up at

NOK 93 per share at the end of Q2’15, basically flat

for the year.

PWWO makes semi-annual NAV calculations.

Accordingly, the next NAV will be published as of

31.12.2015 and will be reported to investors in the

report for the fourth quarter 2015.

NAV is down 21% since inception in 2007. This poor

return reflects the cyclical timing of PWWO’s

inception, which started investing at the peak of the

previous cycle, just as we headed straight into the

2008 financial crisis. This is reflected in the fact that

oil service stocks on the Oslo Stock Exchange are

down 43% in the same period. That being said, the

performance since the bottom has been reasonably

good with NAV rising 65% since the end of 2009.

This reflects the intense work to turn around

troublesome projects with exit and contract

opportunities having improved along with better

markets, as well as a series of good project exits in

the past year. The performance of the past two

years is significantly better than relevant sector

comparisons.

Direct yield

A total of NOK 66 per share (33% of par value) has

been paid out during the past two and a half years,

of which NOK 17.50 came during 2014. All

distributions have been repayments of paid in

capital. Further distributions of capital cannot be

expected until further project realizations.

Net asset value was flat during H1’15. The stronger USD vs NOK has had positive impact of 4%, while

the conclusion of the Songa Eclipse claim has added another 2%. Adjusted for this, the NAV was down

roughly 6% during H1’15 as all projects have experienced a mark-down in value in line with the

deteriorating market conditions and lower contract coverage.

Last 6 mths Last 12 mths Last 24 mths Since inception

PWWO 0.3% 3.9% 8.1% -20.8 %

Oslo Stock Exchange 9.2% 1.8% 34.2% 30.4%

Offshore Index * -4.0% -45.4% -40.1% -42.6%

* Based on OSE101010 Energy Equipment & Service

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120 POK - NAV developmentNAV per share NAV per share (dividend adjusted)

Net Asset Value Development (POK)

NAV development

NAV as of 30.06.2015 was NOK 42.6, down 0.8% on

the previous NAV as of 31.12.2014 and up 1.2% for

the past year, both adjusted for the repayments of

capital made to shareholders.

Direct yield

NOK 33.20 per share has been paid out to POK

shareholders during the past two and a half years. All

distributions have been repayments of paid in capital.

Further distributions of capital cannot be expected until

further project realizations.

NAV in the feeder company Pareto Offshorekapital ASA («POK») declined by 0.8% during H1’15, but is

up by 1.2% in the past 12 months. POK currently has more than 1,600 shareholders and the company

acts as the main marketplace for second hand transactions for small, non-institutional investors.

Last 6 mths Last 12 mths Last 24 mths Since inception

POK -0.8% 1.2% 5.4% -24.2 %

Oslo Stock Exchange 9.2% 1.8% 34.2% 30.4%

Offshore Index * -4.0% -45.4% -40.1% -42.6%

* Based on OSE101010 Energy Equipment & Service

Second Hand Market and Share Liquidity

POK

As of 30 June 2015 POK had 5.3m shares outstanding.

The last trading price in POK was NOK 175 per share

(11 August 2015) and the previous five trades are

displayed in the table below. Second hand prices have

been dropping in line with a weaker market outlook for

oil services, with the discount to NAV widening to 58%,

as illustrated below (red dots). Investors who wish to

buy or sell shares should contact their advisors.

As of 30 June 2015 PWWO had 4.37m shares outstanding. Pareto Securities AS (”PSec”) strives to

facilitate an active second hand market for shares. The last trading price in PWWO was NOK 62 per

share (29 October 2014). Investors who wish to buy or sell shares should contact their advisors or

alternatively PSec directly.

Date Share price No. of shares Volume (NOK)

19/06/15 15.0 2,941 44,115

19/06/15 15.0 2,000 30,000

01/07/15 15.0 1,000 15,000

11/08/15 17.5 980 17,150

11/08/15 17.5 6,862 120,085

Number of trades since startup: 599

Volume traded since startup (NOK): 93,648,643

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OK)

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Pareto Offshorekapital AS - Second Hand Trades

Volume traded

Nav per share

NAV per share (dividend adjusted)

Second hand price per share

The offshore oil services market

The US re-balancing act

The sharp drop in the oil price has driven through an

unprecedented decline in US onshore drilling activity

and it seems to continue at a level roughly half of the

levels seen prior to the oil price collapse. We have

finally starting to see US onshore production starting

to fall, with decline rates slowly increasing.

At the same time, US oil demand is booming in

response to the lower prices. The latest reports from

the IEA indicating that US oil demand is up by 0.6-

0.7mb/d from a year ago. This means that the US

markets are heading into an inventory correction

phase that will continue to strengthen and provide a

positive driver for oil prices.

The bearish news are found outside of the US

OPEC production has increased by nearly 1.0mb/d in

the past 18 months, due to higher Iraqi volumes and

maximum output from Saudi Arabia. It seems the

Saudis continue to be focused on market share instead

of higher prices, as indicated by the significant ramp

up in production during Q2’15. As a result, it now

seems that we will not see any meaningful global

inventory correction until the turn of the year.

The prospects for a nuclear deal with Iran has hit the

optimism that existed for 2016 oil prices. If the deal is

approved by the US congress, the sanctions on Iranian

exports are to be lifted. This may add significant crude

export volumes to the global markets. Estimates vary

from 0.5-1.0 mb/d of increased supply during the next

12-24 months, on top of what is already added by

Saudi/Iraq/Libya.

Hence, what a few months ago looked like a 2016 with

marginal production growth, significant demand

growth and a sharp downward inventory correction,

now looks more like a slow and gradual inventory

correction cycle.

All in all, this bodes for a more gradual recovery in

prices with the marginal cost of the US tight oil

producers (USD 60-65/b) probably representing a cap

until global inventories have come down significantly.

The longer term outlook for prices in the range of USD

75-90/b is the same, but looks certain to be pushed

out. This, plus the significant volatility, is obvously not

good news for oil services.

The oil price has exhibited significant volatility from the bottom in February this year. The sharp decline in US

onshore drilling activity and rising demand drove the prices upwards. Rising OPEC production, the imminent

introduction of potentially large Iranian export volumes and worries about Chinese demand have re-introduced a

bearish sentiment. Until global inventories have been meaningfully reduced, the marginal cost of US tight oil

production (USD 60-65/b) may represent a cap on the oil price.

Source: EIA, Pareto Securities

Source: EIA, Pareto Securities, Nordea Markets

Source: Pareto Securities

Source: IEA, Bloomberg, Pareto Securities

Source: EIA, Pareto Securities

Oil services, continued

The investment parameters are being reset

Global E&P spending is expected to be down around

25% this year, the biggest decline in three decades.

This masks some important regional differences,

namely that with North American spending expected

down 40-45%, it means that the RoW spending is

down around 18%. Still a big number, but not quite as

dramatic as the headline numbers would indicate.

An interesting exercise is to look at how low activity

levels have actually dropped. One may get the

impression that with a 25% decline in E&P spending,

the oil industry’s demand for assets and services are

dropping by the same magnitude. That is not the case,

most of the decline is driven by decline in pricing.

As shown in the chart to the left, the day rates for

various types of offshore oil service assets is down an

average of around 30% from the start of 2014. In

comparison, the decline in demand (i.e. activity levels)

is only down roughly 5% during the period. This

means that the oil industry is actually maintaining

their business levels at quite healthy levels.

Lower pricing means lower costs for the oil industry. In

an offshore development, the cost of seismic, drilling,

support and construction units make up about half of

the totalcost. While somewhat more sticky, the rest of

the cost base will also shrink in a low oil price

environment.

All this implies that more projects will gradually meet

the economic hurdles even with a low oil price. As a

result, activity levels will slowly start to ramp up

again. The graphs on the left illustrate a few concrete

examples of this. Of course, the reduced costs are not

solely due to pricing, but also through optimizing the

development solutions. Nevertheless, a roughly 35%

decline in costs means a lot to the profitability of a

project with an oil price in the 50s to 60s.

All in all, we expect a re-setting of the oil industry’s

cost base, coupled with a gradually increasing oil price

to start turning the markets around in the next 1-2

years. The process will be slow, but there will

definitely be light at the end of the tunell.

Source: Barclays Capital. Pareto Securities, EIA

Source: PPIM, Pareto Securities, Clarksons Platou

Source: Pareto Securities

E&P spending 1991-16e

Development costs USDm, Maria field - Norway

Development costs USDm, Kaombo field - Angola

Fund Management Team Richard Jansen Head of Maritime Investments Phone: + 47 22 01 58 96 E-email: richard.jansen@pareto.no Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, www.paretosec.com/ppim.php

Patrick Kartevoll Fund Manager Phone: + 47 22 01 58 79 E-mail: patrick@pareto.no

Disclaimer

This Quarterly Report has been prepared in order to

provide information about Pareto World Wide Offshore

AS (“PWWO” 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 Project Investment Management AS

(“Pareto Project Investment Management”, “Pareto”, or

“PPIM”). 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 2015. 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.