sector research report - amazon s3s3.amazonaws.com/zanran_storage/€¦ · ` asia also prospective,...

Pareto Securities AS www.pareto.no

Bloomberg: PASE (go) Reuters: PARETO

P.O. Box 1411 Vika N-0115 Oslo, Norway

Tel: +47 22 87 87 00 Fax: +47 22 87 87 10

Video Conf.: +47 22 87 88 45 Trading desk: +47 22 87 87 50

11 Jun 2010 Please refer to important disclosures at the end of this document 1(77)

Sector Research Report11 Jun 2010

Oil Offshore

4

FPSO Market Report The supply demand fundamentals in the FPSO sector are favourable, enabling attractive returns on selective projects. However, valuation does not discount growth, rather the sector continues to trade at a significant discount to current units NAV. Although the sector continues to be out of favour and liquidity has halved over the past couple of years, valuation is too attractive to ignore. Contract coverage and cash flows are solid. Down, but not beaten The FPSO sector continues to be out of favor with liquidity drying up. With valuation, risk profile and outlook in our view very attractive the question is if the sector will always be cheap. The large FPSO players are on average trading at 0.6x NAV. Free cash flow yield assuming no new projects, in the 12-20% range Average fixed contract length of 6 years, average option period of 5 years

Business environment for taking on new projects is attractive as the supply chain capacity is good

Very limited impact from the GoM spill at this stage Brazil push continues, North Sea becoming more active So far this year there has been 8 awards, compared to 7 in 2009. We expect 14 awards in 2010, and 15-20 annually going forward given the current market outlook and our long term oil price estimate of USD 80. Petrobras continues to be the main demand driver with its pre-salt FPSOs, as well as other projects in more mature areas

The North Sea is emerging as an active region going forward with a number of projects in the planning and tendering stage both on the UK side and on the Norwegian continental shelf

West Africa continues to be dominated by large scale projects that use Oil Company owned newbuild FPSOs, but several smaller scale projects with leased FPSOs are expected to come to market

Asia also prospective, but more competition from local players Contained supply side opens for attractive returns The number of idle units is down considerable from Q4 and poses a limited threat to returns on new contracts. Current idle count of competitive units is three. Several units have been scrapped, sold or contracted in 2010 On selected projects, competition is limited to 1-2 companies Long duration, high capex contracts in Brazil are more competitive Latest contracts at 14-15% IRR, long term contracts with Petrobras yields 10-12% IRR

Core recommendations PROD and BWO both offer attractive NAV and multiple valuation with solid contract backlogs. M&A could materialize in 2010.

SEVAN does in our view have the best ever market outlook, but short term operational and funding issues dominate. With the driller on stream and more contracts in 2010, sentiment should turn.

SBM offers size and liquidity, but valuation and risk profile is higher. On the high yield bond side our top picks are Bluewater and Sevan.

The recommendation was not presented to the issuer before dissemination.

Sector Oil & Offshore Relative Valuation Company

10e 11e 12e 10e 11e 12eSBM Offshore 6.6x 5.9x 6.0x 13.0x 9.2x 9.1xSevan Marine 16.6x 10.7x 7.0x N/A N/A 6.9xBW Offshore 7.3x 4.6x 3.7x 6.7x 6.2x 5.4xProsafe Production 5.3x 4.5x 3.7x 10.7x 8.4x 7.0xFred. Olsen Production 5.8x 5.1x 4.3x N/A N/A N/AFPSO Sector 8.3x 6.1x 4.9x 10.1x 7.9x 7.1x

Oil Service Sector 7.1x 5.6x 4.8x 14.6x 9.7x 7.9x

EV/EBITDA P/E

NAV of existing units

-43%

75%35%

74% 72%62%

103%123% 50% 30%

177%8%

13%31% 47%

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-50%

0%

50%

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150%

200%

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300%

Sevan FOP PROD BWO SBM

Firm Options Residual

Net Asset Value (% of Shareprice) - Existing Units Only

*PROD includes turret sale

Supply/Demand

0

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1990

1992

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2014e

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Demand Low Case Demand High Case

Demand Base Case

FPSO - Supply/Demand

AnalystsEquity Research Credit ResearchKristian Diesen Øyvind [email protected] [email protected]+47 2287 8736 +47 2413 2140Steffen Rødsjø Lars Erik [email protected] [email protected]+47 2287 8838 +47 2287 8825

Magne M. Ø[email protected]+65 6408 9820

Oil & Offshore Sector Research Report

11 Jun 2010 2(77)

EXECUTIVE SUMMARY ................................................................................................................................................. 3 INVESTMENT HIGHLIGHTS........................................................................................................................................... 4 SOFT PERFORMANCE & OUT OF FAVOUR, BUT ATTRACTIVE VALUATION WILL PAY OFF.............................. 5

FPSO SPACE TRADING AT 0.6X NAV OF EXISTING UNITS ONLY......................................................................................... 5 VALUE PROTECTION THROUGH SOLID BACKLOGS.............................................................................................................. 6 SHARE PRICE PERFORMANCE.......................................................................................................................................... 8 VALUATION METHODOLOGY............................................................................................................................................. 8

FPSO COMPANIES, OVERVIEW ................................................................................................................................... 9 ACTIVITY DOMINATED BY LARGER PLAYERS...................................................................................................................... 9 A CAPITAL INTENSIVE INDUSTRY, EXPANDING BALANCE SHEETS ...................................................................................... 11

CURRENT SUPPLY/DEMAND PICTURE .................................................................................................................... 12 UTILIZATION INCREASING WITH RE-EMPLOYMENTS AND SCRAPPING................................................................................. 13 NEWBUILDING ACTIVITY: VAST MAJORITY CONTRACTED .................................................................................................. 15 SUPPLY – FPSOS COMING OFF CONTRACT BEFORE 2014.............................................................................................. 17 20 UNITS SCRAPPED TO DATE ....................................................................................................................................... 18 FINANCING IS THE KEY TO NEW UNITS ............................................................................................................................ 20 TREND TOWARDS LARGER FPSOS AND DEEPER WATERS............................................................................................... 20 BRAZIL IS THE DOMINANT FPSO REGION ....................................................................................................................... 22 CONVERSIONS ARE THE PREFERRED CONSTRUCTION METHOD........................................................................................ 22 RE-DEPLOYMENT RISK.................................................................................................................................................. 23

COLLAPSE IN HULL VALUES ALSO IMPROVES PROJECT ECONOMICS ............................................................ 24 FUTURE IRRS EXPECTED IN THE 10-14% RANGE .................................................................................................. 25 DEMAND – PACE OF AWARDS PICKING UP............................................................................................................ 26

E&P SPENDING THE DRIVER FOR ACTIVITY..................................................................................................................... 26 DEEPWATER RIGS AS A LEADING INDICATOR, LIMITED GOM IMPACT ................................................................................ 27 VERY LIMITED DIRECT EFFECT OF GOM OIL SPILL ON THE SECTOR .................................................................................. 27 FIELD DEVELOPMENT SANCTIONS PICKING UP ................................................................................................................ 28 REGIONAL DEMAND ...................................................................................................................................................... 29

Brazil continues to be the dominant FPSO region, more local content................................................................. 29 An increasingly favourable development solution in the North Sea...................................................................... 30

COMPANIES.................................................................................................................................................................. 33 SEVAN MARINE (BUY, TP NOK 13).............................................................................................................................. 34 SEVAN – BOND CASE.................................................................................................................................................... 38 PROSAFE PRODUCTION (BUY, TP NOK 18) ................................................................................................................. 40 BW OFFSHORE – (BUY, TP NOK 13) .......................................................................................................................... 42 SBM OFFSHORE – (BUY, TP EUR 18)......................................................................................................................... 45 FRED. OLSEN PRODUCTION (BUY TP NOK 15) ............................................................................................................ 48 EOC – FOCUSED ON GROWTH...................................................................................................................................... 50 BLUEWATER – BOND CASE ........................................................................................................................................... 52 SEA PRODUCTION – BOND CASE................................................................................................................................... 56 RUBICON OFFSHORE INTERNATIONAL – BOND CASE....................................................................................................... 58 AKER FLOATING PRODUCTION – BALANCE SHEET WORRIES ........................................................................................... 60 SONGA FP – FILED FOR BANKRUPTCY MARCH 2010 ...................................................................................................... 60 FPSOCEAN – BANKRUPT FEBRUARY 2009 ................................................................................................................... 60 PETROPROD – BANKRUPT APRIL 2009.......................................................................................................................... 61 NEXUS – FIRESALE TO BRAZILIAN OSX......................................................................................................................... 62

PARETO RELATIVE VALUATION TABLE .................................................................................................................. 63 ESTIMATES................................................................................................................................................................... 64

GLOSSARY................................................................................................................................................................... 71 DEFINITIONS OF FLOATING PRODUCTION SYSTEMS......................................................................................................... 71 APPLICATION, ADVANTAGES AND DISADVANTAGES ........................................................................................................ 72


11 Jun 2010 3(77)

Executive Summary The FPSO sector continues to be out of favor with liquidity drying up, but valuation, risk profile and outlook is very attractive for the patient. Current valuations are seeing the large FPSO players on average trading at 0.6x NAV. Free cash flow yield, assuming no new projects, for these companies are at 12-20%. Solid contract coverage provides a low risk profile for these companies with the average fixed contract length being 6 years and the average option period being 5 years. Impact from the GoM spill is at this stage very limited. On the demand side we are seeing activity back to more normalized levels after a dismal 2009. So far this year there has been 8 awards, compared to 7 in 2009. We expect 14 awards this year, and 15-20 annually given the current market outlook. Petrobras continues to be the main demand driver with its pre-salt FPSOs, as well as other projects in more mature areas. The North Sea is emerging as an active region going forward with a number of projects in planning and tendering stage both on the UK side and the Norwegian continental shelf. Elsewhere, West Africa continues to be dominated by large scale projects that use Oil Company owned newbuild FPSOs, but several smaller scale projects with leased FPSOs are expected to market. The Asian region is also prospective, but more competition from local players is emerging. Hence the majority of incremental units will come from new conversions from the FPSO players. Capacity is filling up for certain players like Modec and SBM Offshore having taken on large scale projects in Brazil. The capex on these units are USD 1bn+, putting high requirements to the balance sheets. The number of idle units is down considerable from year end 2009 and poses a limited threat to returns on new contracts. The current idle count of competitive units stands at 3 units with several units having been scrapped, sold or contracted in 2010. On selected projects, competition is limited to 1-2 companies, while long term, high capex projects in Brazil are more competitive. Latest contracts at 14-15% IRR, long term contracts with Petrobras 10-12% IRR. In the companies section we cover the main listed FPSO companies and the most traded FPSO bonds. See next page for investment considerations.


11 Jun 2010 4(77)

Investment highlights Sevan Marine (SEVAN) – A very attractive market position and outlook is overshadowed by funding and legacy issues. Tightening the grip on current operations, creating confidence in the funding situation and capitalizing on market opportunities should unlock significant value for Sevan shareholders. The Huntington contract was solid and the project activity in the North Sea is likely to see Sevan getting contracts for FPSO # 4 & 5 in 2010. We expect the company to continue the shift towards a license model requiring limited new capital on new projects. BUY TP NOK 13. Fred. Olsen Production (FOP) – FOP has 3 FPSOs on long term contracts and the financial flexibility to add another unit. A mid-sized project is targeted, however the company has so far been left unsuccessful in the bidding phase. With strong share price performance (+34% YTD) and low liquidity we prefer other FPSO names on a relative basis, but keep our BUY rating on 40% discount to NAV. BUY TP NOK 15. Prosafe Production (PROD) – Prosafe Production has all its units on contract, with run-rate EBITDA proposing an 18% FCF yield. The main short term trigger is the closing of the Turret sale to National Oilwell, however we see this potentially slipping from the current guided timeline of a closing by end Q2. Management now expects to start active tendering in H2’10 enabled by the cash injection from the turret sale. A new project coupled with debt amortizations will absorb free cash flow going forward, hence a dividend is unlikely over the next few years. There is a NOK 4/share upside to our target on a concluded turret sale. BUY TP NOK 18. BW Offshore (BWO) – BW Offshore is delivering steady operations and EBITDA, have a solid contract backlog and in a good position to secure new attractive contracts. Short term uncertainty regarding start-up of the BW Pioneer, currently located in the GoM. Stand-by day-rate is expected from end July, with production start-up in late 2010. With a 50% upside to target and moderate risk, this is a clearcut buy. Patience will pay off. BUY TP NOK 13. SBM Offshore (SBMO) – SBM has won several contracts over the recent year, increasing the utilization of its large organization. The company has a strong balance sheet and is well positioned in the growing Brazilian market. The risk in the Turnkey business is phasing out with the drilling rigs and Yme nearing completion, however still more risky than main peers. SBM represents solid long term value and is by far the largest and most liquid FPSO stock in the sector, currently trading well below the historical multiples. BUY TP EUR 18. EOC Ltd. (EOC) – EOC is an Asia Pacific focused offshore service provider with three offshore support barges and two FPSOs. With the FPSO Lewek Arunothai now on-stream, EOC turns its attention to growth. BUY, TP NOK 13. BEST BOND IDEAS Sevan Bonds - Sevan bonds currently yield 10-15% and have traded up since year end 2009, following positive newsflow related to funding on the second driller, LOI award for FPSO Voyageur, several study contract awards and the first Driller being accepted by Petrobras. We prefer the solid 1. lien bonds and the Driller bond as secure investments while we see the 2. lien Voyageur bond as an interesting event-driven investment. Bluewater - The USDm 360 senior unsecured bond with maturity in July 2014 and a coupon of 3mL+3% is indicated in the high 50ies at an IRR to maturity around 20%. The financial situation of Bluewater has been significantly improved following the sales of Hanne Knudsen and Jotun and the contract awards for the two FPSOs Munin and Glas Dowr. Main focus going forward is start up of modification project on Glas Dowr and ongoing negotiations with banks to amend amortization schedule and to extend maturity on the revolving credit facility. Please refer to the companies section for more companies and further details.


11 Jun 2010 5(77)

Soft performance & out of favour, but attractive valuation will pay off It is no secret that the FPSO sector continues to be out of favour with liquidity in the largest names (SBM Offshore, BW Offshore and Prosafe Production) down 50% over the past couple of years, stocks trading at in our view continued unchartered territory compared to existing fleets and risk profiles. This is by no means unjustified given the poor project execution in 2008 and 2009, but represents an opportunity as the reasons for the underperformance should be behind us. Cost overruns and delays sunk the shares, but the risk of this is now significantly reduced. Whereas taking on new projects have been a negative thing over the past couple of years, this should now increasingly be a positive. The FPSO companies are currently in a position to take on new projects at attractive terms with competition on many projects being limited, overall capex risk reduced through improved contract terms with sub-suppliers and a supply chain that has significantly lower pressure than in the 2006 – 2008 period. Current valuation does however not put any value on future growth, instead the FPSO sector continues to trade at a discount to NAV. FPSO space trading at 0.6x NAV of existing units only The FPSO sector currently offers solid upside to NAV on contracted cash flows, with low operational risk and generally limited capex risk. After taking on a number of projects in the previous cycle with consequent cost overruns and delays, these units are now on contract generating cash flow with new or potential new projects likely to have a lower risk profile. The latter comes as a result of a significantly improved supply chain situation with a lot of spare capacity and lessons learned among the FPSO companies especially when it comes to contracting, mainly with the suppliers, but also to a certain extent the oil companies. The graph below measures the NPV from firm contracts, contract extension options, and the residual from the remaining lifespan of the FPSO. These estimates are presented in percent of the current share price (the line indicates the current share price). Please note that net debt and remaining capital expenditure on contracted units are subtracted from the value of NPV of the firm contract value. Valuation comparison

-43%

75%35%

74% 72%62%

103%123% 50% 30%

177%8%

13%31% 47%

-100%

-50%

0%

50%

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150%

200%

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300%

Sevan FOP PROD BWO SBM

Firm Options Residual

Net Asset Value (% of Shareprice) - Existing Units Only

*PROD includes turret sale

Source: Pareto Research As seen, the FPSO sector is trading at a significant discount to our NAV, with P/NAV of only 0.6x for our companies. Highest upside is found within Sevan Marine, but as also seen through the distribution of value (high share of residual value) the risk profile is higher. Also, short term funding issues overshadows underlying valuation potential. Prosafe Production completed its troublesome

Cost overruns and delays sunk the shares, but the risk of this is now significantly reduced.

FPSO players has now the upper hand in contract negotiations

Sector trading at a 40% discount to NAV of existing units


11 Jun 2010 6(77)

newbuild programme in January 2010, with the Ningaloo Vision commencing dayrates on the Van Gogh field off Australia. The company now has all its units on long term contracts, which will give a stable cash flow going forward. Also, with the sale of the turret and swivel business, expected to close in Q3, the company is in a position to take on a new project, however an attractive risk/reward profile is highly emphasized by management. BW Offshore is taking advantage of the current favourable supply/demand picture in the FPSO market, as evidenced by taking on two new contracts recently, both of which is expected to be firm within a couple of months at attractive terms. The likelihood of contract extensions for a unit in the FPSO market is far larger than for instance in the rig market, as the units are tailor made for each specific field. Hence, we view the risk on the optional period as low for most contracts, so long as the field continues to produce at economical levels. The alternative cost for the oil company in contracting another unit is generally high with a significant lead time. Also, the lifting cost is on average very low once the field is on stream and the majority of costs are sunk. The main risk to option periods is that the reservoir is not performing, i.e. production is too low to justify further commencement. We therefore believe that it is fair to include options in the assessment of potential downside in FPSO stocks. Value protection through solid backlogs FPSO companies generally have a long term contract portfolio with a fixed term and option periods usually at the operators discretion (in some instances it can be a mutually agreeable option). The options are in most instances called as long as the field that it produces from is still economical. Fred. Olsen Production has the best value protection on the enterprise value looking at the contracted EBITDA. Sevan scores lowest in the peer group on this measure, mainly due to the short term contracts on Hummingbird and the relatively short term contracts on the drilling units relative to common FPSO contracts. Additionally, Sevan has a going concern technology business, which is not included in the EBITDA backlog.

Prosafe Production and BW Offshore is favourably priced compared to their NAV. Prosafe Production is a long term value case, with all units on contract and a free cash flow yield of 18% on exiting units only. BW Offshore is also attractive, having a high potential equipment division (APL), and set for growth with new attractive FPSO contracts, namely Atena and TSB FPSOs. It has commercialised its technology through 3 working FPSOs, and has a high potential technology/licensing business which offers a significant upside to the investment case, although potential financing need is expected to continue to weigh on the stock in the short term picture.

Higher likelihood of contract extension and exercise of options in the FPSO segment vs. other offshore segments

FOPN and PROD have solid EBITDA Backlog relative to EV

Backlog analysis

123% 103%147%

106%

17%

172%

129% 43%57%

49%

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Fred. OlsenProduction

ProsafeProduction

SBMOffshore

BW Offshore SevanMarine

Firm Backlog Optional Backlog

Nominal EBITDA Backlog/Funded Enterprise Value

*SBM & BWO adj for Turnkey business

6.78.1

5.5 5.3 6.6

7.0 4.6

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0

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Fred. OlsenProduction

SBM Offshore ProsafeProduction

Sevan Marine BW Offshore

Firm Years Optional Years

Contract duration FPSOs

*Sevan includes drilling rigs

Source: Pareto research


11 Jun 2010 7(77)

Weak share price performance, limited exposure to oil spill The oil service stock performance chart depicts that the FPSO sector has underperformed all sectors the last 12 month period, and being among the worst performing sectors also the last 6 month period. An interesting observation is that most other segments, especially seismic and drilling, have seen share prices lower due to the USGoM oil spill, of which the FPSO players have very limited exposure. Relative Performance

19%

13%

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Subsea/Services

OSV

Seismic

Offshore Equipment

Offshore Drilling

FPSO

-12m -6m

Shareprice performance

Source: Pareto Research, DataStream The poor performance of the FPSO sector in 2008 and 2009 has been warranted with delays, cost overruns and financing experienced by the industry, however the troublesome projects taken on in the previous cycle have now been completed. Another issue for the sector has been that as a capital intensive industry, it creates higher dependence on a well functioning credit market. With a historical 70-80% leverage on the projects, equity values are sensitive to capex overruns. Our FPSO Ou The FPSO universe is currently trading at EV/EBITDA11e 6-7x, only lower than Offshore Equipment companies and OSV. As most of the capital expenditure is already taken for the existing fleets in the respective companies, D&A will be significantly higher than capex for many companies going forward. Taking this into account, we will argue that EBITDA multiples is the most applicable multiple.

The FPSO Sector has underperformed oil services in general

Sector Relative Valuation Segments

10e 11e 12e 10e 11e 12e 10e 11e 12eSubsea/Services 6.4x 5.6x 4.5x 9.1x 8.0x 6.1x 13.3x 11.8x 9.6xOffshore Equipment 8.5x 7.0x 5.5x 10.9x 8.5x 6.2x 16.4x 13.5x 10.9xOffshore Drilling 5.0x 3.9x 5.0x 5.0x 3.9x 5.0x 7.1x 5.9x 6.2xOSV 9.0x 6.8x 5.9x 15.8x 10.5x 9.3x 15.2x 7.8x 7.1xFPSO 8.3x 6.1x 4.9x 14.5x 13.1x 9.6x 10.1x 7.9x 7.1xSeismic 4.9x 4.1x 2.8x 12.9x 8.2x 4.6x 25.6x 11.5x 6.6xAverage 7.0x 5.6x 4.8x 11.4x 8.7x 6.8x 14.6x 9.7x 7.9x

EV/EBITDA EV/EBIT P/E

Source: Pareto Research, DataStream


11 Jun 2010 8(77)

FPSO Relative Valuation Company

10e 11e 12e 10e 11e 12eSBM Offshore 6.6x 5.9x 6.0x 13.0x 9.2x 9.1xSevan Marine 16.6x 10.7x 7.0x N/A N/A 6.9xBW Offshore 7.3x 4.6x 3.7x 6.7x 6.2x 5.4xProsafe Production 5.3x 4.5x 3.7x 10.7x 8.4x 7.0xFred. Olsen Production 5.8x 5.1x 4.3x N/A N/A N/AFPSO Sector 8.3x 6.1x 4.9x 10.1x 7.9x 7.1x

Oil Service Sector 7.1x 5.6x 4.8x 14.6x 9.7x 7.9x

EV/EBITDA P/E

Source: Pareto Research Share price performance Within the FPSO sector, Fred. Olsen Produciton has been the best performer over the past 12 months. BW Offshore, SBM Offshore and Prosafe Production have also been decent performers, with Sevan and Modec underperforming.

FPSO Performance chart

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Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10PROD Sevan BWO FOP Modec SBMO

Total Return

Source: Pareto research, DataStream Valuation methodology We value FPSO companies using a Sum-Of-The-Parts (SOTP) approach, taking the sum of the DCF value per unit in the fleet. The DCF takes into account the estimated lifetime of the respective unit. This cash flow is based on the value of the fixed and optional contract period, as well as a residual value (including scrap value), when a unit is expected to be redeployed after its current contract. We estimate the expected useful life of a converted FPSO at 15 years, while a newbuild has an expected life of 25 years. For FPSO companies with subsidiaries or other elements of value apart from the FPSOs, a market value estimate is used. The second hand market for FPSOs is virtually non-existent, and there have been very few transactions over the past 10 years, with none worth mentioning as a particular benchmark. There are obvious reasons for this, as FPSOs are not generic units like e.g. drilling rigs, but field specific. Therefore, other metrics will be more applicable to value any particular unit. The age, quality, processing and storage capacity etc. are important factors to take into account, but usually a unit will get an IRR in the range of 10 to 15% on contracts (using the depreciated value at contract end as the residual value). This will vary on a number of factors such as the length of the contract, counterparty risk and reservoir risk.

FOP, BWO and SBM the best performers last 12 months

FPSO companies are valued based on a SOPT approach, with a DCF value per unit


11 Jun 2010 9(77)

FPSO companies, overview Activity dominated by larger players The FPSO industry remains fragmented, with SBM Offshore, Modec, Prosafe Production, BW Offshore and Bluewater constituting the major players. In addition, there are a number of medium to small sized players with 1-3 units. Companies with one or two units that were built on speculation are struggling with several having filed for bankruptcy over the past year. The speculative angle to the FPSO industry is proved unsuccessful with no new units to enter the market. Remaining units from these players is limited (see supply segment). The inability to obtain contracts proves to a certain extent that the barriers of entry are significant also in the FPSO business, and that they not only relate to the access to capital but also to the ability to manage construction risk and having an operational track record that the oil companies favour. FPSOs are either leased from the FPSO operator or owned by the oil company. The chart below includes both currently working FPSOs, units under construction, and idle units for lease companies. SBM Offshore and Modec have the largest fleets of all the FPSO players. FPSO lease companies

02468

1012141618

SB

MM

odecP

rosafeB

luewater

BW

Sevan

Maersk

TeekayB

umi

Saipem

Aker

EO

C Ltd.

Fred Olsen

MISC

PT M

itraR

ubiconS

eaTankerO

ther

Working Idle In yard Construction

Lease FPSOs by owner

Source: Pareto research, ODS 97 units are owned by the lease operators, while 79 belong to the E&P companies. The trend over the past five years has been towards leased units, as this approach enables the oil companies to finance a large part of their projects off balance sheet and reduces their funding requirement. Some companies, like Petrobras, prefer to own a significant share of the FPSOs, as this makes sense on certain types of projects and is a necessity to match its requirement with industry capacity. As the ability of the FPSO companies to take on new projects has become more limited due to a massive expansion in the past cycle and difficulties obtaining satisfactory funding for new projects, there will be a reversal of this trend in our opinion. This development will see the oil companies having to carry more of the projects on their own balance sheet, with more EPC/turnkey FPSO projects. For instance BW Offshore has recently been awarded contracts for the Papa Terra FPSO and OGX FPSO I on a turnkey basis (although BWO’s scope is somewhat limited). Please refer to the companies section for a detailed analysis of the individual FPSO companies.

Oil companies prefer experienced FPSO operators

New entrants with one or two vessels have experienced limited success

The trend has been towards more leased FPSOs


11 Jun 2010 10(77)

FPSO owning companies

02468

1012141618

Petrobras

CN

OO

CE

xxonmobil

TotalS

hellBP C

hevronW

oodsideB

rasoilC

onocophillipsH

essM

aersk Olie

Coogee

Statoil

AnadarkoBH

P Billiton

Prem

ierH

usky oilO

ther

Working Idle In yard Construction

Owned FPSOs by owner

Source: Pareto Research The graphs below illustrates that FPSOs are by far the preferred choice among the different floating production concepts. 143 FPSOs are currently working or in yard, preparing for re-deployment. (A definition of the other floating production concepts is presented in the appendix.)

FPSO - a preferred choice for floating production solutions

FPSO

Semi

TLP

Spar

FSO

Distribution producing FPUs

Source: Pareto Research, ODS Petrodata

FPSOs are by far the preferred FPU choice.


11 Jun 2010 11(77)

A capital intensive industry, expanding balance sheets A clear tendency emerging over the past ten years is that the capital investments of FPSO projects have increased significantly along with the number of barrels produced per day, water depths and complexity of the reservoir and hence the unit. FPSO projects increasing in size

300 400550

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Espoir (2000)

Marlim Sul (2004)

Kikeh (2005)

ChinookCascade

(2007)

Tupi (2009)

USDm Capex

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Source: Pareto Research As mentioned above, this development represents a challenge for FPSO companies, as their capacity to take on new projects becomes more limited. This is also true for the oil companies, which need to fund more of the FPSOs on their own books. Total assets and leverage ratio

4324 4707 49027075

896910189 10828 11242

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Total Assets Leverage Ratio

USDm

Source: Pareto Research, SBM Offshore, Modec, Prosafe Production, BW Offshore The asset side for the largest FPSO companies has expanded by ~2.5x from 2003 to 2010e. Even though the leverage ratio is in line with the historical average, the ability to take on new, large scale projects has decreased. Also contributing to the limited ability to take on new projects are delayed cash flows and cost overruns on these projects.


11 Jun 2010 12(77)

Current supply/demand picture The current fleet comprise 137 producing units (143 inclusive in yard for short term upgrade). We see 28 newbuilds, of which 24 have a contract in place. However, by 2016 we see ~50 of the working vessels coming off their firm contracts (32 if options are called). Some of these need further commitments on the current field (options called or extension to contract) or redeployment to another field. A number of vessels will also be scrapped or unsuitable for longer redeployments up until 2016. The expected useful life of a converted FPSO is 15 years, although this can be extended and 25 years for a newbuild. FPSO fleet by status

Construction, 28

Idle, 5

Production, 137

Other (Yard, Maintenance

etc), 6

FPSOs by status

Source: Pareto Research, ODS Petrodata The graph below summarizes the current supply and demand picture. The supply side consists of all producing and ordered units, while the demand side is calculated on the basis of outstanding projects, i.e. firm tenders, planned and possible. In the different scenarios, we have weighted the outstanding projects by our estimation of the probability that they materialize. Options are assumed called for current contracts. FPSO Supply and Demand, Based on existing projects only

0

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1990

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2012e

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0

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250Producing FPSOs Idle Units re-employed

Demand Low Case Demand High Case

Demand Base Case

FPSO - Supply/Demand


137 vessels currently working

Idle units coming off contracts could be absorbed by demand by end 2010 and beginning 2011


11 Jun 2010 13(77)

Since our last update in December 2009, we have increased our low case somewhat with higher confidence in the oil price and some projects maturing and hence increasing in probability. Based on these assumptions, we believe that the high fleet growth will continue the next five years, as higher drilling activity in the deepwater segment leads to new discoveries. As mentioned above, we do not foresee that the GoM situation will materially impact this thesis. The main risk factor to this is low oil prices (below USD 50-60 per barrel). Our base case estimates indicate demand for more than 190 FPSOs within 2014e (including already producing units). Utilization increasing with re-employments and scrapping The 80s and early 90s was a pioneering period for the FPSO industry. The technology was proven viable, and the path for exploring new and more remote offshore areas was laid. The figure below presents the historical fleet development and utilization level in the FPSO market. FPSO supply and utilization

0

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120

140

160

1990

1992

1994

1996

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2000

2002

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2008

Current

82%84%86%88%90%92%94%96%98%100%Idle Units

Producing fleetUtillization

FPSO - Utilization of fleet

Source: Pareto Research

The fleet utilization has improved from our December update, with several of the idle units being re-deployed (BW Carmen, Glas Dowr), sold (Nexus 1, PetroProd I) and scrapped (Ocean Producer). Number of idle vessels coming down from record highs

0

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9

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15

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FPSO - Idle Vessels



11 Jun 2010 14(77)

We see 5 units idle at present, down from 11 at year end. However, the competitiveness of many of these vessels is very limited, hence it is not a fair representation of actual supply.

Currently Idle Units Name Owner Status Prod. Capacity Hull ConvertedFPSO Falcon SBM Idle 165000 2200000 1975 2002FPSO Jamestown Trafigura Idle 20000 200000 1957 1995Front Puffin Sea Production Idle 40000 650000 1990 2007Seillean Frontier Drilling Idle 25000 300000 1989 1990Uisge Gorm FPSO Bluewater Idle 57000 594000 1983 1995

Add. Q4'09 Idle Vessels Conv. CommentBW Carmen 1999 Awarded LOI at the Athena fieldGlas Dowr 1997 Awarded LOA for the Kitan fieldOcean Producer 1991 Scrapped in Q4'09Nexus 1 2009/10 Bought by OSX, leased to OGX (EWT unit)Berge Okoloba LPG FPSO 1979 Sold, continuing at siteFPSO Rang Dong I 1998 SBM scrapped the unit in Q4'09


The Jamestown FPSO is highly likely to be scrapped as it should be close to retirement age and would need extensive upgrades to commence a new contract. Another vessel that is likely to be retired is the Uisge Gorm, which has been working for more than a decade in the harsh environment North Sea. If anything, the unit would need to be deployed in benign waters and have a significant upgrade. Given the current financial position of Bluewater, the competitiveness of this vessel is somewhat limited. The Seillean has been working successfully for Petrobras in Brazil for a long time, and we believe the unit is very likely to continue there in the not too distant future. This is a DP unit, built for extended well testing from a rigid riser system. The BW Carmen is a small FPSO that was awarded an LOI for the Athena field in Q1 2010. This contract is likely to become firm over the summer. See BWO under companies section for further details. Berge Okoloba LPG FPSO is continuing to operate in the Niger Delta with new owners and Ocean Producer was retired and sold for scrap by Oceaneering in Q4 2009. In sum, out of the 5 “idle” vessels, only three (FPSO Falcon, Seillean and Front Puffin) are likely to be competing for new projects, with two being scrapping candidates (Uisge Gorm, Jamestown).

However, several of the idle FPSOs are not competitive


11 Jun 2010 15(77)

Newbuilding activity: Vast majority contracted The list below outlines the units under construction or undergoing upgrading. 28 FPSOs to be delivered the next couple of years Unit Status Start Date End DateConstructionAquila Phase II FPSO Construction 25 Nov 2009 28 Oct 2011Aseng FPSO Construction 26 Aug 2009 1 Jun 2012BW Pioneer Construction 22 Aug 2007 1 Jun 2010Cendor Ph 2 Construction 7 Aug 2010 6 Aug 2013Cidade de Angra dos Reis MV22 Construction 26 Aug 2008 1 Dec 2010Dua/Chim Sao FPSO Construction 20 Oct 2009 10 Jun 2011Dynamic Producer Construction 27 Apr 2007 1 Aug 2010Goliat FPSO Construction 7 Feb 2010 27 Nov 2013Guara Pilot FPSO Construction 26 Jan 2010 29 Nov 2012Kwame Nkumrah MV21 Construction 11 Aug 2008 24 Nov 2010Montara Venture Construction 26 Dec 2006 30 Jun 2011Okha FPSO Construction 30 May 2008 9 Mar 2011P-57 Construction 8 Jan 2008 19 Jul 2011P-62 Construction 11 Mar 2010 17 Jun 2013P-63 FPSO Construction 8 Oct 2009 1 May 2013Pazflor FPSO Construction 4 Jan 2008 1 Jul 2011Peregrino FPSO Construction 27 Feb 2007 14 Jan 2011PSVM FPSO Construction 29 Jul 2008 15 Feb 2011PUO FPSO Brotojoyo Construction 11 May 2010 15 Dec 2011Ruby II Construction 24 Aug 2007 25 Jun 2010Skarv FPSO Construction 19 Feb 2007 15 Aug 2011TGT FPSO Construction 25 Nov 2009 29 Jul 2011Tupi Nordeste Pilot FPSO Construction 24 Mar 2010 1 Feb 2013Usan FPSO Construction 27 Feb 2008 5 Apr 2012Speculative unitsDeep Producer 1 Construction 15 Jan 2007 31 Dec 2013PetroProd 1 Construction 12 Jan 2007 31 Dec 2011Sevan 300 No. 04 Construction 2 Jun 2006 31 Dec 2013Sevan 300 No. 05 Construction 1 Jun 2010 17 Jun 2013Other, Installation & Redevelopments etc.Cidade de Santos MV20 Installation 18 Feb 2010 31 May 2010FPSO Capixaba Installation 30 Mar 2010 31 May 2010Nan Hai Fa Xian FPSO Maintenance/Repair, Yard 14 Sep 2009 29 Jul 2011Glas Dowr FPSO Major upgrade, Yard 26 Jan 2010 30 Aug 2011OSX-1 (Nexus 1) Major upgrade, Yard 27 Jan 2010 1 Apr 2011

Source: Pareto Research, ODS Petrodata The figure indicates that 28 converted/newbuild FPSOs are estimated to be delivered between now and 2014. 24 of these units have secured contracts, while there are 4 speculative units at current.

Available vessels – Speculative units

FPS Name Oil Processing Oil Storage bbl

Sevan 300 No 4 30,000 300,000Sevan 300 No 5 30,000 300,000Deep Producer 1 40,000 400,000Petroprod 1 80,000 700,000

Source: Pareto Research and ODS Petrodata

Sevan has two FPSO hulls under construction at the Hantong Shipyard in China. In total, Sevan has invested USD 140m in the two units and further progress is uncommitted in anticipation of a firm contract and financing. Delivery time of these units is approximately 18 months after definitive contracts. With the tight supply/demand balance in the North Sea we believe that Sevan will be successful in contracting these FPSOs, with Det norske’s Frøy development emerging as the most likely candidate for FPSO #5 and potentially the Western Isles development suitable for FPSO #4 (see North Sea market chapter for more details)

28 vessels are under construction (including recent contract awards).


11 Jun 2010 16(77)

Petroprod 1 has been acquired by Jurong Shipyard after the parent company has been under liquidation which has been managed by KPMG. The shipyard has decided to complete the unit, and has as we understand already found a buyer. The unit is 65% complete, and further work will be subject to specifications from the buyer. This buyer is Teekay that will use the unit on Petrobras’ Tiro Sidon field. Teekay recently placed the low bid in competition with SBM Offshore (bidding the FPSO Falcon) and Modec. Purchase price from Jurong is in the USD 150m range, with remaining capital expenditure estimate of some USD 250-300m. The bid from Teekay is likely to generate an IRR of only 10-11% on our calculations, depending on final capex figure. Deep Producer 1’s future is uncertain, with the owner FPSOcean in bankruptcy, leaving completion of the vessel uncertain. The unit remains at the yard in Dubai that is marketing the unit to potential buyers. Nexus Floating Production has sold their unit to the Brazilian player OSX, and the counterparty have chartered the unit to OGX as an early production unit. Nexus does have an option for a second unit that is due in September 2010. The option also gives Nexus right to terminate the agreement with an exposure limited to USD 67m, which is already paid on the unit. We doubt that Nexus will be in a position to take on this construction contract, and the going concern in the company is very dependent on reaching an agreement with bondholders to waive the residual claim of USD 67m.


11 Jun 2010 17(77)

Supply – FPSOs coming off contract before 2014 The below figure shows the units coming off contract in the short to medium term (until 2014). Many of these are likely to stay on their respective fields for an extended period of time, while others are likely to enter the market place over the next 5 year period.

Vessels coming off contract

Vessels coming off contract by YE'13

May-10 May-11 May-12 May-13

FPSO Jasmine VentureRuby Princess

Cossack PioneerHaewene Brim FPSO

Petrojarl 1East Fortune FPSO (Nortechs)

FPSO XikombaFPSO Kuito

MV8 Langsa Venture FPSOCrystal Ocean

ABO FPSOSendje Berge

Sevan HummingbirdModec Venture 11Bleo Holm FPSO

Munin FPSOCidade de Rio das Ostras

BrotojoyoEspoir Ivoirien FPSO

Lewek ArunothaiFPSO Marlim Sul

FPSO BrasilNorth Sea ProducerFPSO Cuulong MV9

Berge HeleneFour Rainbow

LPG FPSO SanhaArmada Perkasa FPSO

Petrojarl VargRubicon Vantage

Seagood 101FPSO Perintis

Song Doc Ocean Pride MV 19

Production Options



11 Jun 2010 18(77)

20 units scrapped to date At present, 20 units have been scrapped since the first FPSO was employed. In our estimate of future scrapping, we assume that demolition of converted hulls on average takes place after 15 years of operation, while newbuilds have an estimated lifetime of 25 years. A total of 37 units, including the current 15 scrapped units, are estimated to be scrapped by year end 2016. 15 units have been scrapped at present

0

3

6

9

12

15

1990

1992

1994

1996

1998

2000

2002

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Current

FPSO - Accumulated Scrapping



11 Jun 2010 19(77)

The FPSO industry is filling up capacity post slow-down With the number of FPSO awards seen since August 2009, the FPSO industry is once again filling up the spare capacity. Most of the newbuilds awarded during the previous cycle are delivered, and new projects are now entering the construction phase, although still at a significantly lower level. Given the cost overruns experienced, the industry seems much more aware of the risk/reward perspective on new contracts. The most conservative company seems to be Prosafe Production, which does not come as a surprise given the major cost overruns on the 3 latest newbuilds, although balance sheet constraints is the main reason for not taking on new projects. However, with a closing of the LOI to sell the turret business, the company is in a position to look for a new project.

Industry capacity for new projects increasing as projects awarded during the last cycle are delivered Company Rig Name

SBM Offshore Tupi Nordeste

SBM Offshore Baleia Azul (Prev. Espadarte)

SBM Offshore FPSO Aseng

SBM Offshore FPSO P-57

SBM Offshore MOPU Deep Panuke

SBM Offshore FPSO Woodside CWLH

SBM Offshore SEMI-SUB (Turnkey to Delba)

SBM Offshore SEMI-SUB (Turnkey to Odebrecht Drilling Services)

SBM Offshore SEMI-SUB Thunder Hawk

SBM Offshore FPSO Frade

SBM Offshore MOPUstor Yme

SBM Offshore FPSO Espirito Santo

SBM Offshore SEMI-SUB (Turnkey to QGP)

SBM Offshore FPSO Saxi

SBM Offshore FPSO Mondo

Modec Inc. FPSO Guara

Modec Inc. FPSO Cidade de Angra dos Reis MV22

Modec Inc. FPSO Tullow Jubilee

Modec Inc. FPSO BP Angola PSVM

Modec Inc. FPSO Cidade de Santos MV20

Modec Inc. BHP Pyrenees FPSO

Modec Inc. FPSO Cidade de Niteroi MV18

Modec Inc. FPSO Song Doc Pride MV19

Modec Inc. FSO Rang Dong MV17

Modec Inc. TLP Shenzi

Modec Inc. FPSO Stybarrow Venture MV16

Modec Inc. FSO Cidade de Macae MV15

Modec Inc. FPSO Cidade do Rio de Janeiro MV14

Prosafe Production FPSO Ningaloo Vision

Prosafe Production FPSO Cidade de Sao Mateus

Prosafe Production FPSO AzuriteProsafe Production FPSO Umuroa

Prosafe Production FPSO Polvo

BW Offshore FPSO TSB

BW Offshore FPSO BW Athena (Prev. Carmen)

BW Offshore FPSO Oil - BW Pioneer

BW Offshore FPSO Oil - BW Cidade De São Vicente

Q1 Q2 Q3 Q42007 2008 2009 2010

Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q42011

Q1 Q2 Q3 Q4


The fixed cost base varies significantly among the large FPSO companies, with SBM having the largest installed base of permanent staff, as can be seen in the diagram below.


11 Jun 2010 20(77)

Number of employees

3617

591

21001200

627

1534

0

1,000

2,000

3,000

4,000

5,000

6,000

SBM MODEC BWO PRODPermanent Temporary Total

# of employees

Source: Pareto research In our view, the need to fix contracts to maintain the internal activity level (but also to a certain degree for strategic reasons) and to keep key engineers busy, was well illustrated by the H2’09 Aseng award to SBM Offshore from Noble Energy, where IRR is expected to be in the low end of the normal return interval. With the major players now having filled the orderbooks, this effect is easing. Financing is the key to new units While the FPSO industry has had the luxury of willing banks and readily available financing for years, this changed from H2’08 as credit became scarcer and risk aversion has increased among banks. Projects have historically been financed on average with 70-80% debt, and even more for certain contracts. This has certainly changed and to a much larger degree is contingent upon a contract and the quality of it. Funding units without contracts is not feasible in the current market, however this is not an issue as speculative building is not going to happen any time soon. The leverage ratio on contracted units depends on factors such as contract length, counterparty risk, economics, residual risk and reservoir risk. Amortization profiles are more aggressive, with banks unwilling to take any material residual risk after the fixed contract term. Recent examples of debt financing have seen leverage ratios in the 60% to 75% range. Leading project financing banks have funded good quality projects for the leading operators at 200 – 300 basis points above Libor, which is down some 100bp over the past 6 months. Although financing is available for the right projects, the time to arrange the facility is still significantly longer than what has been the norm historically. Trend towards larger FPSOs and deeper waters The largest FPSO in terms of dead weight tons (dwt) is the Agbami FPSO (400,000 dwt) owned and operated by Chevron in Nigeria, West Africa. The FPSO has a storage capacity 2,300,000 barrels of oil and is equipped with 35 risers. Total oil production capacity is ~250,000 barrels per day. The average FPSO size for the current fleet is ~180,000 dwt. A 150,000 dwt unit has about 1,000,000 barrels of storage capacity, while a 200,000 dwt unit has about 1,300,000 barrels of storage. In tanker market terms, this approximate size is referred to as a Suezmax. As seen below, the water depth trend is clear, and we believe the future lies in deeper waters. The world record when it comes to water depth is held by the BW Cidade de Sâo Vincente FPSO, owned by BW Offshore, currently producing at a depth of 7,103 feet. However, the Pioneer FPSO (Chinook/ Cascade field), owned by BW offshore as well, will raise the bar in 2010, with planned production at 8,200 feet water

SBM has the largest number of permanent employees

Funding without contract is virtually impossible.

The trend is clear – average water depth is increasing


11 Jun 2010 21(77)

depth. Advances in technology are considered some of the most important drivers for this development, and in our view this also increases the barriers to entry.

When all the FPSOs in the current order book are delivered, the entire FPSO fleet will be able to process ~15 million barrels of oil per day. This is around 17% of the total oil production in the world. However, the actual production is well below the capacity level. The age distribution numbers in the figure above are estimated from the time of conversion into FPSO. Some of the FPSOs from the early 80s are close to retirement. However, the trend in expected newbuild activity will outpace scrapping by over the next couple of years.

Oil processing capacity & FPSO Age profile

0

500000

1000000

1500000

1982 1992 1997 2002 2007 2012

0

10

20

30

40

50

60

70

0-5 6-10 11-15 16-20 21-25 26-30Years

Source: Pareto research, ODS

The most common FPSO size is between 100’ and 200’ DWT & water depth is increasing

13 %

26 %

38 %

23 %

0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

40 %

45 %

>300' 200'-300' 100'-200' 0-100'

0

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4000

6000

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10000

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: Pareto research, ODS


11 Jun 2010 22(77)

Brazil is the dominant FPSO region The dominant regions in both terms of producing vessels and newbuilds are Brazil and West Africa, respectively. Brazil will take the largest share of FPSOs going forward with the pre-salt development, however for the short to medium term most lease contracts have been awarded over the past six months. The next step will be the award of 8 newbuild FPSOs, to be constructed in Brazil. Asia is in a position to increase their share of the market with a lot of FPSO demand on smaller developments seen. We are seeing local players and yards pursuing these opportunities quite aggressively. The USGoM is currently installing the first ever FPSO, with the BW Pioneer expected to start producing on Petrobras’ Cascade and Chinook field later this summer (although timing is somewhat uncertain given the oil spill). Irrespective of the oil spill, we do not expect this area to be a major demand driver going forward as the traditional TLP, SPAR and semi development solutions are likely to dominate. Geographical distribution of the FPSO fleet

West Africa

South America

Far East

Northwest Europe

Other

Australia/New Zealand

Geographical distribution of FPSOs

Source: Pareto research, ODS Petrodata Conversions are the preferred construction method The majority of FPSOs have historically been constructed as a conversion of old tankers, while the large scale West African FPSOs in particular has tended to be newbuilds. All units have historically been based on the ship shaped design with Sevan Marine the only player introducing a new concept, building circular shaped FPSOs. Of the FPSO fleet, 64% are conversions and the residual 36% are newbuilds. Conversion is the preferred construction method

Newbuild

Conversion

Construction method FPSOs

Source: Pareto research and ODS Petrodata


11 Jun 2010 23(77)

Re-deployment risk FPSOs are usually tailor made for a specific field, with a contract at hand before construction. A contract is on average around 5 – 7 years fixed with typically a similar period of options, however very dependent on the size of the field and capital expenditure on the unit (higher capex, higher residual risk, longer duration). FPSOs are generally viewed as having risk on the residual value, with the optional period also at risk pending good production from the reservoir of the specific field. We do however see that most options are called, as the capex on the field is sunk and hence the breakeven cost per barrel is generally low. The residual value theme is more difficult to assess, but units with the major FPSO companies that are still competitive after coming off contract have historically been redeployed. The Petrojarl 1 example (owned by Teekay Petrojarl) is the most extreme example of re-deployments. After having been on a number of fields post start-up in 1986, Petrojarl 1 is still working on the Glitne field in the North Sea. The official contract is running out this summer, but as Statoil (operator) has communicated that they will drill an additional production well on the field, the unit is expected to stay on the field for a longer period of time. Interestingly, the 24 year old unit is now linked to BG Group’s Bream development, and hence the unit may run for more than 30 years. Petrojarl 1 redevelopments Petrojarl 1 Re-employment track record

Field Country Operator Start EndOseberg Norway Hydro 31/08/86 6/6/1988Lyell UK Conoco 7/6/1988 28/08/88Fulmar1) UK Shell 15/02/89 9/11/1989Troll Norway Hydro 24/12/89 6/5/1991Balder Norway Esso 7/5/1991 7/10/1991Angus UK Hess 31/12/91 4/7/1993Hudson UK Hess 5/7/1993 26/01/95Blenheim UK Talisman 15/03/95 1/5/2000Kyle UK Ranger 24/05/00 6/11/2000Glitne Norway Statoil 6/15/2001 1/7/2010

1) Used as storage and loading unit Source: Pareto Research, ODS-Petrodata


11 Jun 2010 24(77)

Costs are now at attractive levels for new developments With the escalating oil price up until mid 2008, the upstream cost inflation was massive. From the 2003 levels, industry costs increased by some 130% to its peak in 2008. This represented huge challenges for the service industry, as well as the oil companies, with many projects being postponed on cost issues. The current costs are down approximately 15-20% from peak. We believe that costs have flatten out at this level, and with increasing commodity prices and the increase in activity, the direction of costs are likely upwards going forward.

The mismatch between what E&Ps and contractors are demanding in cost reductions has been wide, and this was one of the main reasons for the low frequency of contract awards in 2009. However, this is now less of an issue in our view. Collapse in hull values also improves project economics Steel is an integrated part in the FPSO cost structure, and on average constituting some 15-20% of the overall capex on a unit. Over the recent year, we have seen a strong run in the iron ore prices (used to make steel), with Steel prices lagging but still trending upwards. In our opinion, this coupled with higher activity and utilization in general, should limit further cost reduction in the industry. As previously mentioned, FPSOs are generally converted VLCC tankers. The values in the second hand market collapsed during late 08/early 09 with driven by the weak macro environment. This has led to cheaper access to hulls for the FPSO players, which in turn enables better economics.

At current prices are down approximately 15% according to data provided by CERA.

Upstream cost inflation

100

125

150

175

200

225

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Upstream costs (rebased to 2003)

27%

41%32%

0%

20%

40%

60%

<10% 10-20% 20-30%

Targeted Cost Deflation

Source: CERA/IHS, Pareto E&P Survey 2009

Steel/Iron Ore and second hand VLCC prices

0

25

50

75

100

125

150

175

2001-11

2002-11

2003-11

2004-11

2005-11

2006-11

2007-11

2008-11

2009-11

VLCC D/H 300K DWT 10 Year Old Secondhand Prices

VLCC S/H 265K DWT 15 Year Old Secondhand Prices

VLCC Second hand prices (USDm)

400

600

800

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1200

1400

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1800

2000

Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-1140

60

80

100

120

140

160

180

200

China steel rebar price China iron ore spot price

China steel rebar price (USD/ton) China iron ore price (USD/ton)

Source: Pareto Research, Clarkson, Bloomberg


11 Jun 2010 25(77)

Future IRRs expected in the 10-14% range The FPSO industry has on average generated an IRR of some 11.5% on historical projects. However, projects in the 06-09 period saw significant cost overruns, delayed start-ups and operational problems, which adversely impacted the returns. With the supply chain easing, operators addressing the issues experienced in the previous cycle, and no new speculative companies, in combination with an attractive demand side, new projects are expected to be more robust. We are still likely to see projects at the 10% IRR level (as seen with Guara and Tupi Nordeste in Brazil), however that is expected on large sized projects with long duration contracts (typically in line with the life of the FPSO or 15 – 20 years) and subject to very attractive gearing ratios and cheap financing backed by government export agencies enhancing the return on equity. Estimated IRRs on FPSO projects

Source: Pareto Research, BWO


11 Jun 2010 26(77)

Demand – pace of awards picking up E&P spending the driver for activity Oil and Gas companies represent the demand side for FPSOs, and their spending levels determine the activity level in the industry. After 9 years of consecutive growth in overall E&P spending, the level was reduced in 2009 with around 10 to 12%. This hence reduced the activity in the oil services industry, and chartering activity in the capital intensive FPSO industry in particular. With the oil price stabilizing in the USD 70 to 80/bbl band and oil companies generally challenging with production growth and reserve replacement, we are confident that the spending figures will increase over the coming years. We have increased our 2010e spending estimate steadily from August 2010, from flat development to our current estimate of 9% increase.

For 2010e, NOCs are continuing their upwards spending pattern and we expect that this segment will increase the spending level by 10% this year, driven by the Brazilian giant Petrobras. Majors are also increasing their spending, however the large deltas are seen within Independents and Onshore players. Independents are returning to the market with the higher oil price than seen in 2009 and perhaps more importantly the access to funding. E&P Spending by segment E&P Spending - Pareto Sample

2008 2009e 2010e Delta 09 Delta 10

NOCs USDbn 86 89 98 3% 10%

Majors ¨ 135 129 135 -4% 4%

Independents ¨ 43 34 41 -21% 21%

Onshore ¨ 51 35 40 -30% 12%

Total ¨ 315 288 313 -9% 8.8%* Sample comprising 50 E&Ps, size approximately 70% of total 2008 Source: Pareto research, Company reports With new field investment decisions being postponed in the challenging economic climate we saw in the beginning of last year, we are now seeing that oil companies have started to award contracts again. NOCs are an important driver in the less mature regions as in Brazil, West Africa and Asia, where a lot of the future FPSO incremental demand is expected to emerge (deeper waters makes FPSO solution very competitive). Smaller independents constitute the marginal demand for FPSOs. With the improving credit market, and better cash flow contribution from existing production (higher oil price), we think that they will be the marginal driver for FPSO demand, especially in the North Sea.

E&P Spending and Reserve-Replacement-Ratio (RRR)

-30%

-20%

-10%

0%

10%

20%

30%

40%

1997 1999 2001 2003 2005 2007 2009 2011e0

20

40

60

80

100

120USD/bbl

Nominal spending grow th (lhs) Average Brent (rhs)

Delta E&P

40%

60%

80%

100%

120%

140%

160%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Organic RRR (3 year rolling)

Source: Pareto Research, Company accounts


11 Jun 2010 27(77)

Deepwater Rigs as a leading indicator, limited GoM impact The majority of new large scale offshore oil fields lie in deeper waters. We believe that the development in the ultra deepwater rig fleet (UDW) should be an important explanatory variable in a demand equation for FPSOs going forward. The fleet has grown from 29 to 70 rigs during the last couple of years. By the end of 2012 some 60 more rigs are set to be delivered. Currently 2/3 out of these have already secured contracts, which bodes well for the future demand for FPSO units. Subsea tree awards and ultra deepwater drilling fleet

0

20

40

60

80

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120

140

2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e0

100

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400

500

600

700

800

UDW fleet

Subsea tree aw ards* (right axis) *Quest Offshore projections

# rigs # subsea tree awards

Source: Pareto Securities, Quest Number of subsea tree awards coincides very well with the activity in the FPSO space. The number of awards has been stable the recent years, with a decline seen in 2009 with the standstill in contract awards. With the increase in ultra deepwater drilling rigs, the number of subsea wells and hence subsea infrastructure spending is expected to increase significantly going into 2010 and onwards. This should also imply a strong demand for FPSOs. Very limited direct effect of GoM oil spill on the sector The US GoM spill has no material impact at this stage on the FPSO industry as a whole. The first FPSO that has been allowed for operations in the US is BW Offshore’s BW Pioneer that is due to come on stream this year (see BWO segment). Besides a small converted FPSO that will be working for Helix, no other FPSOs are planned for the region. Looking at the prospect list, the GoM is not an important growth region, as most new field developments are assumed developed with the traditional solution for this region, namely semi submersibles, SPARs and TLPs. The main threat is a long term impact on deepwater activity internationally as a spill over effect from the GoM. At this stage there are no such indications and we find it unlikely that this will materially impact the sector at this stage. It could however lead to a longer decision making process and hence slow the pace of new awards. Another factor is that increased regulation will lead to higher costs. For the operating costs, FPSO operators are in general compensated for inflation related to new regulation. On the capex side, the result will be higher unit cost, however this will be reflected in contract terms as “other” cost inflation, obviously assuming this is set prior to fixing the contract.

Offshore oil production is trending towards deeper waters where FPSOs have a competitive advantage

Number of subsea trees and hence subsea infrastructure spending is expected to increase significantly in 2010 an onwards boding well for FPSO demand

GoM production units by type:

16

15

8

2

SPAR

TLP

SEMI

FPSO

# of units

Source: Pareto, ODS Petrodata


11 Jun 2010 28(77)

Field development sanctions picking up Contract news flow was, as expected, slow in H1’09, with delayed investment decisions and projects being put on hold. However, very few projects have been cancelled entirely, leading to material growth in the prospect base through 2009. This emphasizes a very healthy underlying demand for FPSOs, as it remains a highly competitive solution for field developments. Contracts started to move again in the second half of 2009 and the momentum has continued through the first half of 2010.

FPSO awards recent 12 months Awards past 12 months Type Company Field Operator Country Type AwardFPSO SBM Aseng Total Eq. Guinea Leased 2009FPSO Petrobras Papa-Terra Petrobras Brazil Owned 2009FPSO Bumi Armada TGT Hoang Long JOVietnam Leased 2009FPSO EOC Chim Sao Premier Oil Vietnam Leased 2009FPSO Saipem Aquila ENI Italy Leased 2009FPSO Bluewater Nan Hai CNOOC China Leased 2009FPSO SBM Baleia Azul Petrobras Brazil Leased 2009FPSO Bluewater Kitan ENI Timor Leased 2010FPSO Modec Guara Petrobras Brazil Leased 2010FPSO BWO Athena Ithaca UK Leased 2010FPSO SBM Tupi NE Petrobras Brazil Leased 2010FPSO Hyundai Goliat ENI Norway Owned 2010FPSO Sevan Huntington E.ON UK Leased 2010FPSO BLT Pagerungan Kangean Ener Indonesia Leased 2010FPSO MMHE/MISC Cendor Ph.2 Petrofac Malaysia Owned 2010

Source: Pareto Research 15 contracts have been awarded or are to be signed over the next couple of months. With the current prospect list, we estimate that 6 additional FPSO contracts will be awarded through H2’10 and our base case sees annual award of 15-20 units per year going forward. Lease, sale & re-deployment contracts

18

26

1519

7

617

20

8

0

10

20

30

2005 2006 2007 2008 2009 2010e 2011e 2012e

Source: Pareto research and ODS Petrodata Our award estimate is partly linked to our oil price assumption of USD 75/bbl in 2010 and USD 90/bbl in 2011/12, and the re-emergence of smaller E&P companies. There are a number of marginal field developments operated by E&P companies with a limited portfolio and production. Cash flows from existing production will generally be fully invested and with easing credit markets, the

Healty underlying demand in the FPSO industry.


11 Jun 2010 29(77)

sources of funding for these types of developments should improve significantly in 2010e. Regional demand Brazil is the largest FPSO region both in terms of current FPSOs and future estimated demand. However the other regions are also seeing a lot of prospects, which to a greater extent is seeing Independent oil companies as operators (hence greater risk).

Brazil continues to be the dominant FPSO region, more local content The FPSO consept has proven to be a very competitive development solution in the Brazilian region, and with Petrobras eying FPSO solutions for the gigantic pre-salt build out, the demand in the region has escalated. The Tupi field is alone estimated to hold 5-8bn boe of oil equivalent, with the nearby Iara and Guara fields estimated to hold on agreegate a similar size. The Tupi field is expected to employ 8-10 FPSOs excluding early well tests. The first early well test (EWT) FPSO came on stream on the Tupi field in 2009 chartered from BW Offshore on a 10 year lease. Modec is supplying the FPSO pilot, with first production expected in December 2010. Furthermore, Modec and SBM Offshore have been awarded LOIs for the Pilot FPSOs on Guara and Tupi Nordeste, respectively.

Tupi Overview

Source: Pareto research, BG Group

The Tupi FPSOs will predominantly be EPC contracts with a high degree of local content and standardization, however there are several lease possibilities

Prospect list distribution by oil company type and phase

5 5 2 3 2

27

6 8 74

9

3021 18

11

0

10

20

30

40

50

SouthAmerica

Asia West Africa NorthwestEurope

Other

Tendering Planned Possible

FPSO demand by region

35

112 3

8

1

720

44

5

239

215

0

10

20

30

40

50

SouthAmerica

Asia West Africa NorthwestEurope

Other

NOC Major IOC

FPSO demand by operator segment

Source: Pareto research, ODS-Petrodata


11 Jun 2010 30(77)

as seen with the recent Tupi Nordeste LOI to SBM Offshore and Tiro-Sidon FPSO due for award shortly (Teekay with low bid). Petrobras and its partners are targeting as much as 39 FPSOs in the deepwater pre-salt area in the Sanotos basin by 2027. The FPSOs are standardised units, with an expected production capacity of some 120,000-150,000 boe/day. Total capex for the units are in the region of USD 1.1-1.2bn, and IRR on the leased contracts estimated to around 10%. Although a low figure in an historical perspective, one should bear in mind the low counterparty risk, high potential gearing and low financing cost, generating a solid return on equity. Petrobras has also signed an agreement with Engevix-GVA to commence the procurement services for the construction of 8 FPSO hulls targeted the Tupi development. A tender for the FEED for topside production modules for the 8 FPSOs was issued less than 2 months ago. The FPSOs are likely to go to both BM-S-09 (Guara) and BM-S-11 (Tupi), with the majority expected to go the latter. An increasingly favourable development solution in the North Sea FPSOs is becoming an increasingly favourable development solution in the North Sea, with many discoveries being too small for a stand-alone platform development and but suitable for an FPSO solution. Also, with a significant share of independents operating in the region, a lease structure (capex taken by FPSO company) is beneficial. Potential FPSO projects in the North Sea Potential projects in the North SeaField Country Operator Est. first oilBeechnut/Acorn UK Venture 2012Bream Norway BG Group 2013Draupne Norway Det norske 2013Fyne/Dandy UK Antrim Energy 2011Frøy Norway Det norske 2013Golden Eagle UK Nexen 2012Grevling Norway Talisman 2015Hood UK BP 2013Huntington UK E.ON 2012Jackdaw UK OMV 2013Jordbær Norway BG Group 2012Kelpie UK Nautical 2015Kerloch UK Dana 2011Kraken UK Nautical 2012Luno Norway Lundin 2013Luva Norway StatoilHydro 2015Grosbeak Norway Wintershall 2015Mariner UK Statoil Hydro 2014Nucula Norway StatoilHydro 2014Pilot UK Venture Production 2012Rinnes UK Dana Petroleum 2013Rosebank UK Chevron 2014Schiehallion UK BP 2014Selkirk UK Nexen 2012Torphins UK Lundin 2012Western Isles UK Dana 2012Alder UK Chevron 2014 Source: Pareto Research There are several projects with likely near term award, with the Frøy consortium expected to contract either SKDP (Production Jack-up) or Sevan (FPSO#5) in Q3’10. The recently awarded Huntington LOI (Sevan) illustrates the tight supply/demand balance in the North Sea, given the attractive economics.

Standardised FPSOs with capex in the region of USD 1.1-1.2bn

A lot of FPSO prospects in the North Sea


11 Jun 2010 31(77)

North Sea projects with potential near term award Frøy (redevelopment) - Sevan awarded FEEDPartners: Detnor (Op;50%), Premier Oil (50%)Location: NorwayFirst Oil: 2013eProd: 30,000Resources: 56mStatus:Concept screening and pre-FEED ongoing; Revised PDO in 2010; Sevan and SKPD competitors; Decision likely in Q3'10

Potential contract structure: License/Lease

Bream - Sevan Awarded Study ContractPartners: BG(Op;40%),Spring(20%),Skeie(20%),Premier(20%)Location: NorwayFirst Oil: 2013/14eProd: 30,000Resources: 38-63mbblStatus:Study contract awarded in October.BG has decided to move forward with a development; FPSO most likely, and capex is estimated to between NOK 4-6bn.Potential contract structure: License

Western Isles - Potential Lease OpportunityPartners: Dana(Op; 65%),Cieco(35%)Location: UKFirst Oil: 2012eProd: 45,000Resources: 65mboeStatus:Dana targeting an FPSO development due to the size of the field. Project sanction planned for Q3 2010 and first oil by Q4 2012.

Jordbaer - Potential Study AwardPartners: BG(Op;45%),Idemitsu(25%),Revus(20%),RWE(10%)Location: NorwayFirst Oil: 2012/13eProd: 40,000Resources: 60-110mboeStatus:BG is in planning mode with regards to a development of the Jordbaer field.;Regarded as a potential play opener, several nearby prospects.Potential contract structure: License/Lease

Source: Pareto Research, Company data


11 Jun 2010 32(77)

World wide FPSO Projects with potential award over the next 24 months Projects with potential award next 24 monthsType Field Country Operator First oil Comment on FPSO providerFPSO Baleias/Chachalote Phase 2 Brazil Petrobras 2012 TenderingFPSO Tiro-Sidon Brazil Petrobras 2012 Tender out, 9 year lease, Teekay with low bidFPSO Pipa 3 (Guanambi) Brazil Petrobras 2014 Two DP FPSOs, tender delayedFPSO Tupi (BMS-11) Brazil Petrobras 2010-2017 1x EWT & 2x pilot (awarded), 8 FPSO producersFPSO Carioca (BMS-9) Brazil Petrobras 2012-2020 1x EWT, 1x pilot, 8 FPSO producersFPSO Parati (BMS-10) Brazil Petrobras 2012-2020 1x EWT, 1x pilot, 4-8 FPSO producersFPSO Caramba (BMS-21) Brazil Petrobras 2012-2020 1x EWT, 1x pilot, 4-8 FPSO producersFPSO Bem-Te-Vi (BMS-8) Brazil Petrobras 2012-2020 1x EWT, 1x pilot, 4-8 FPSO producersFPSO Iara (BMS-11) Brazil Petrobras 2012-2020 1x pilot (awarded), 4-8 FPSO producersFPSO Guara (BMS-9) Brazil Petrobras 2012-2020 1x pilot (awarded), 4-8 FPSO producersFPSO P-62 Brazil Petrobras 2013 Jurong awarded hullFPSO Aruana Brazil Petrobras 2012 1xEWT + FPSOFPSO Waimea Brazil OGX 2011-2012 1x EWT , 1x FPSO+FPSO Vesuvio Brazil OGX 2011-2012 1x EWT , 1x FPSO+FPSO Western Isles North Sea Dana 2012 Currently tenderingFPSO Frøy North Sea Det Norske 2013 Sevan, SKDP competing; Selection mid 2010FPSO Rosebank North Sea Chevron 2015 Development studies underway, FEED in 2011FPSO Mariner North Sea Statoil 2014 Sevan awarded study contractFPSO Bream North Sea BG Group 2013 Tendering, Petrojarl I chasingFPSO Luno North Sea Lundin 2013 Sevan with study contractFPSO Jordbaer North Sea BG Group 2013 Bids submitted early JuneFPSO Grevling North Sea Talisman 2015 Development studies likely in 2011FPSO Draupne North Sea Det norske 2014 Successful appraisal, likely FPSOFPSO Huntington North Sea E.ON 2012 Sevan with LOIFPSO Fyne/Dandy North Sea Antrim 2012 TenderingFPSO Golden Eagle North Sea Nexen 2013 Nexen exploring development optionsFPSO Luva North Sea Statoil 2015 Gas development, FEED in 2011FPSO Hai Su Trang & Hai Su Den Vietnam Talisman 2011 All major names chasingFPSO Ketapang PSC Indonesia PC Ketapang 2013 Songa Floating, M3nergy,Tanker PacificFPSO Terang Sirasun Batur (TSB) Indonesia Kangean Energy 2012 BWO likely to be awarded firm contract soonFPSO Bukit Tua Indonesia Petronas 2013 Songa Floating, T.Pacific, BLT,M3nergyFPSO Gehem Indonesia Chevron 2014 Barge FPSOFPSO Gendalo Indonesia Chevron 2014 Barge FPSOFPSO KG-D6 phase II India Reliance 2012 Possible phase II of current developmentFPSO D-1 India ONGC 2013 Leased FPSO targetedFPSO Nang Nuan (B6/27) Thailand PTTEP 2013 Small FPSO requiredFPSO Lady Nora Australia Woodside 2013 At feasibility study levelFPSO CLOV Angola Total 2014 EPC, newbuild, award imminentFPSO PAJD (Southeast Block 31) Angola BP 2014 SBM with LOIFPSO Ceres & Hebe (Block 31 MID) Angola BP 2014 SBM/Modec with frameagreementFPSO Block 32 (GCG) Angola Total 2012 Modec awarded study contract in 2008FPSO Block 15/6 Angola ENI 2012 Possible SBM redeploymentFPSO Lucapa Angola Chevron 2014 At FEED stage, TLP/FPSO solution likelyFPSO Negage (Block 14) Angola Chevron 2013 Pending FID, project delayed for yearsFPSO Platina/Chumbo/Cesio Block 18 Angola BP 2012 Pending FIDFPSO Nsiko Nigeria Chevron 2013 Pending FID, gov't approvalFPSO Egina Nigeria Total 2014 Newbuild FPSO, tendering Source: Pareto Research


11 Jun 2010 33(77)

Companies


11 Jun 2010 34(77)

Sevan Marine (BUY, TP NOK 13)

A very attractive market position and outlook is overshadowed by funding and legacy issues. Tightening the grip on current operations, creating confidence in the funding situation and capitalizing on market opportunities should unlock significant value for Sevan shareholders. The Huntington contract was solid and the project activity in the North Sea is likely to see Sevan getting contracts for FPSO #4&5 in 2010. We expect the company to continue the shift towards a license model requiring limited new capital on new projects. Current status The Sevan Driller #1 acceptance testing has taken longer than expected, but management announced on Friday 11th of June that is has been accepted by Petrobras. The unit will now be on standby rate (90% of full dayrate) before commencing full operations shortly. According to the Petrobras contract, Sevan is entitled to a mobilization fee that is payable once the unit is on the field totalling some USD 20m, hence freeing up some cash in the short term picture (payable in 30 days post start-up). Sevan has drawn the residual USD 43m of the Driller#1 bank debt during Q2, which can be used for general corporate purposes with all instalments paid. Sevan has reached an agreement with banks regarding financing of Driller #2 (Sevan Brasil, contracted to Petrobras, delivery in Q1’12). The facility totals USD 525m at libor + 3.4/3.1% pre/post delivery, which in our opinion is very attractive. In addition, the unit has vendor financing of some USD 80m that can be drawn upon (all debt is earmarked payments on this unit). At Q1, some USD 170m was invested in the unit (USD ~105m at Q4), meaning that the residual capital expenditure is fully funded. Furthermore, Sevan was this week awarded a term sheet by ING Bank for a replacement of the current 1st priority facility on the Voyageur FPSO. The new facility to be increased by USD 80m to USD 230m and covers the upgrade of the Voyageur FPSO, given approval from bondholders. Positive development that should be attractive for both shareholders and bondholders in our view Contract situation – Voyageur with strong contract in the North Sea The main concern on the contract side has over the last year been the Sevan Voyageur currently employed on the Shelley field in the North Sea. The field is expected to be decommissioned in July 2010 leaving the unit without employment. However, the FPSO was recently awarded an LOI for the EO.N operated Huntington field also in the North Sea. The LOI is for a 5 year contract with perpetual options commencing in Q3’11. The contract economics are very attractive supporting an annual EBITDA of some USD 80m (above the USD 60-75m expectation), and covers costs on the unit from it leaves the Shelley field. Contract Overview

UnitPiranema - Petrobras, Brasil Contract to 2018 + 11 years optionalHummingbird - Venture, N. Sea (UK) Contract to 2011 + 2 years optionalVoyageur - Premier Oil, N. Sea (UK) LOI contract to 2016 + perpetual optionsFPSO # 4/5 Uncontracted hullsSevan Driller I - Petrobras, Brazil Contract to 2015Sevan Brazil - Petrobras, Brazil Contract to 2018Sevan Driller II - ONGC, India Pending renegotiation or terminationGoliat - ENI, Barents Sea, Norway Technology license agreement

Construction Idle

Contract Option

2012 2013Q1 Q2 Q3

2010 2011Q1 Q2 Q3 Q4 Q1 Q3 Q4Q2 Q3 Q4 Q1 Q2 Q4

Source: Pareto Research In our opinion, there is low risk of the Voyageur LOI not materalising. Hence, the company has firmed up a decent backlog, and although the Hummingbird is coming off its fixed contract in Q2’11, we believe that options will be called by the client Centrica, which also owns 20% of the unit. The Chestnut field, where the Hummingbird is operating, is producing well (~8,000 boe/day) and Centrica

Driller 1 start-up imminently

Driller#2 fully funded at attractive terms, Sevan Voyageur awarded term sheet for upgrade capex

USD 80m in annual Voyageur EBITDA vs. USD 60-75m expected – Contract covers costs from the unit leaves Shelley

Hummingbird to be extended and potentially refinanced


11 Jun 2010 35(77)

has communicated that they are also likely to use the FPSO on another field post Chestnut close down. The ONGC contract on the third driller is very likely to be cancelled, and maximum liability is set to USD 25m in such a scenario. Debt restructuring targeted to enhance financial flexibility Despite firming up the Voyageur facility, the financial position of Sevan is tight, with the cash position taking a hit in Q1’10. In order to address the situation, the company expects to refinance parts of the bond debt. In our opinion, the Hummingbird is the most obvious candidate, given the unit’s low loan-to-value and improved residual value based on the solid Voyager contract. A new convertible is also a potential source for funding. At the 2010 AGM, the proposal of allowance of issuing 10% in new equity and a convertible bond was approved. Debt Overview (before Voyageur refinancing) Debt Amortization Overview

Undrawn 2010 2011 2012 2013 >2013Piranema Bond 270 20 23 25 202 0Hummingbird Bond 132 8 125Voyager Bank 1 45 1 1 1 42Voyager Bank 2 105 3 2 2 2 96Voyager Bond 133.8 20 20 93.8Driller #1 Bank(3) 206 44 7 28 30 32 109Driller #1 Bond 154 154Driller #2 Bank(1) 0 525 31 62 432Vendor financing 80 80 26 53Convertible (2) 48Total 1174 649 84 252 336 298 679

(1) Mandate for financing, expected to be finalised in Q1'10(2) Convertible bonds towards Luxor Capital Group, Strike USD 1.05/share, due 13(3) Predelivery Facility of USD 250m, increasing to USD 400m (not firm) post deliveryNOK/USD 6.5 Source: Pareto Research Given the successful start-up of Driller #1 and improved Piranema economics, the company should be able to manage without an equity issue through increasing the debt side in a scenario with existing units only. Focused on asset light growth Sevan’s technology has been proven commercially, with all three FPSOs showing high utilization figures and Driller #1 commencing its contract with Petrobras. Over the past year, the company has been awarded several study contracts in order test the viability of the Sevan design on different fields in the North Sea. This, coupled with the recent Voyageur contract, proves Sevan’s strong standing in the region. Study contracts

PotentialProject Operator Size First oil FEED Award Contract typeStudyRosebank Chevron UK Large 2017 2011 2012/13 LicenseLuva Statoil Norway Large 2015 2011 2011 LicenseMariner Statoil UK Medium 2014 2010 2011 LicenseBream BG Group Norway Small 2013 2010 2010 LicenseAlder Chevron UK Small 2013 2010 2010 Lease/LicenseLuno Lundin Norway Medium 2013 2010 2010 License

FEEDFrøy Det norske Norway Small 2013 2010 2010 License/lease

PotentialJordbaer BG Group Norway Medium 2013 2010 2010 License/leaseGrevling Talisman Norway Small 2014 2010 2011 License/leaseDraupne Det norske Norway Small 2014 2010 2011 License/leaseWestern Isles Dana UK Medium 2012 2010 2010 LeaseGolden Eagle Nexen UK Large 2014 2010 2011 LicenseHuntington E.ON Medium 2012 2010 Voyager reemployment Source: Pareto Research

Extensive list of study contracts/FEED and prospects in the North Sea is likely to see FPSO#4/#5 contracted


11 Jun 2010 36(77)

Sevan is turning from a lease provider into being more license focused, as seen with the Goliat award last year. We believe that this is the future for the company, reducing capital expenditure and financing risk on new projects. Given the extensive prospect list and the number of study contracts awarded to the company over the recent year, we expect that FPSO #4 and #5 will be contracted this year. In our opinion, a likely development scenario would be a pure license contract (with Sevan taking limited capex risk) or alternatively a mix, where the licensees take joint ownership in the unit. The latter scenario could see Sevan using the invested equity in the units (USD 85m on FPSO#4 and USD 50m on FPSO#5), with the clients investing a similar amount and utilizing joint project financing of the residual capital expenditure requirement. An issue that needs to be resolved in connection with the contracting of these units is the first priority security that the USD 48m convertible issued in April last year has. In addition, this CB has a pledge on the license fee payments from ENI related to Goliat that goes into escrow, which is a challenge for Sevan given the current situation. Calling the bond will have a cost to Sevan of approximately USD 19m. The Frøy development, operated by Det norske (50%) together with licensee Premier Oil (50%), is in our opinion likely to end up with Sevan, and a contract structure as outlined above could very well materialize. The licensees are currently in the process of getting bids for the steel jacket with AKSO and Chinese yards as the main competitors. Frøy is however not the only option, with also BG Group’s Bream and Jordbaer developments likely to move this year. Given the current market position, we find it unlikely that Sevan will trigger an equity need on a new contract at this point in time. Of other study contracts, we would highlight the Statoil contract for the Luva field awarded last year. This could potentially become a large scale contract, with the Luva field expected to become a new hub in the Norwegian Sea, with several satellite deposits already discovered. Statoil has also been working with Aker Solutions and Technip regarding development solutions. If Sevan is to be awarded this contract, the contract terms will likely be similar to the Goliat award, implying limited capex risk and no funding requirement for Sevan. Concept selection is likely to take place in late 2010 or 2011, with first production targeted around 2016. In Brazil, Sevan is also positioned to secure license contracts for its driller design. Having teamed up with its Brazilian partner, the company is positioned for the newbuild UDW drilling rig program that Petrobras has ongoing for a planned 28 rigs. The tender is changing structure rapidly, however at current it looks like Sevan is participating in a bid for two units to be owned by Petrobras. Petrobras has now received bids for the first two parts of the tender. Bidding for Part 1 were KeppelFELS, Jurong, Andrade Gutierrez, Engevix, EISA, Atlantico Sul, Odebrecht Construction, STX and Alusa Galvao. For part 2, Petrobras received 7 proposals. Bids were submitted by Keppel FELS, Jurong, Andrade Gutierrez, Engevix, EISA, Atlantico Sul, and Odebrecht Construction. Andrade Gutierrez is bidding the Sevan design. Valuation The funding position is likely to continue to weigh on the stock going forward, with several issues that needs to be addressed by the company in order to give a comforting situation. This primarily relates to start up on Driller #1, which has now been achieved, refinancing and securing new debt and an improved contribution from Piranema. In the longer run, the underlying fundamentals for Sevan are very attractive. Their study contracts and tight supply/demand picture in the North Sea bodes well for future growth, and given a more license focused model (low capex/financing risk), the long term value potential is in our opinion attractive.

Sevan front-runner for the Frøy development

Competing in the Petrobras 28 rig tender, license contract i.e. no capex risk

Funding position is likely to continue to weigh on the stock going forward


11 Jun 2010 37(77)

Sum of the parts (SOTP) SOTP SEVAN USDmDCF committed units*Piranema 217Hummingbird (80%) 293Voyageur 454Sevan Driller (Q2'10) 852Sevan Brazil (Q2'12) 409Goliat 75

Additional potential contractsFPSO #4 (Invested USDm 85 to date) 149FPSO #5 (Invested USDm 50 to date) 149Additional license contracts (x2) 200

Value all units (committed & new) 2,798

Value Kanfa 100Value of Technology 100Net debt YE'10e (1,231)SG&A and tax (200)Equity value 1,568 1,231

USD NOKNPV per share committed & new 3.0 19.4NPV per share committed fleet 2.0 13.3WACC 10.5%, USDNOK 6.5 © Pareto Securities AS* Includes post-contract residual value



11 Jun 2010 38(77)

Sevan – Bond case

Sevan bonds currently yield 10-15% and have traded up since year end 2009, following positive newsflow related to funding on the second driller, LOI award for FPSO Voyageur, several study contract awards and the first Driller being accepted by Petrobras. We prefer the solid 1. lien bonds and the Driller bond as secure investments while we see the 2. lien Voyageur bond as an interesting event-driven investment. 1. pri. USD 250m Piranema bond Price 81, yield 13.7% - maturity 14.05.2013 The bond has a strong security package through the 1 pri. security in Sevan Marine’s first FPSO (Piranema), which is currently on an 11 years firm contract with Petrobras until 2018 + 11 years options. The FPSO has had a good uptime since contract start-up in October 2007. The FPSO Piranema is currently the only FPSO in Sevan Marine with firm contract duration longer than the pledged debt against the unit – upon bond maturity in 2013 the remaining firm contract length is 5.5 years. Outstanding bond amount upon maturity is USD 202.5 – NPV of remaining firm contract is then USD ~110m. The current contract on FPSO Piranema does not fully reflect the potential of the FPSO as this was the first circular shaped FPSO ever built. This is highlighted by the recent LOI award for sister FPSO Voyageur, with an estimated annual EBITDA of ~USD 80m. High opex and low revenue utilization has caused the EBITDA contribution from the FPSO Piranema to be lower than expected, with estimated EBITDA of USD 14m in 2010E (USD 28m expected in 2011E). We think refinancing of the bond in 2013E should be achievable; 5.5 years of remaining firm contract upon maturity of the bond + 11 years option and Petrobras has indicated that they are interested in keeping the FPSO for the rest of its life. Further, leverage in the Group is expected to come down significantly towards 2013, driven by lower capex and higher earnings. 1. pri. USD 135m Hummingbird bond Price 98.5, yield 10.5% - maturity 20.12.2011 The bond has 1. pri. security in the FPSO Hummingbird which is on a 2.5 years firm contract with Centrica until March-11 plus 7 years options. The FPSO Hummingbird is the unit with the lowest leverage in Sevan Marine. With only USD 120m of debt outstanding on the unit upon maturity in 2011, the asset coverage on this bond is considered to be solid – construction cost was USD 360m. The main challenge will be to secure a new contract for the unit in 2011 if Centrica decides not to exercise any of its options. Centrica has 7 years options in total after the firm contract period expires and the counterparty’s 20% stake in the unit increases the possibility of options being exercised. However, should the contract not be extended the FPSO should be well positioned to get a new contract with a significant higher dayrate (ref. strong LOI on sister FPSO Voyageur awarded recently). 2. pri. NOK 870m Voyageur bond Price 91.5, yield 14.6% - maturity 24.10.2012 1. lien debt on the unit is currently USD 150m, made up by a USD 105m bank loan and a USD 45m bond from Deutsche bank. When including the NOK 870m 2. lien bond, total leverage on the FPSO is currently USD ~285m. The FPSO originally had a 5 year firm contract with Oilexco, but following the bankruptcy of Oilexco in early 2009 the new owner of the field, Premier Oil, decided to decommission the FPSO in 3Q10. However, in May-10, the FPSO was awarded a 5+10 year LOI with E.ON for the Huntington development. Estimated upgrade capex in relation to the contract is USD 80 – 90m. Sevan has received a term sheet for a new 1. lien bank facility of up to USD 230m which will cover the upgrade capex in relation to the contract and take out the existing 1. lien debt. Hence, the company has proposed to increase the 1. lien carve-out from USD 150m to USD 230m. Sevan is currently in discussions with 2. lien bondholders regarding this amendment and potential compensation. The new 1. lien facility will amortize with USD 12.1m quarterly, starting 6 months after first oil on Huntington, expected in 4Q11. Estimated annual EBITDA from the new contract is ~USD 80m. If the current proposal is completed and the contract materializes,


11 Jun 2010 39(77)

total leverage on the unit will be USD 365m. With a fully funded unit and a very strong 5 year contract, the protection on the downside for the 2. lien bond should be good. Further, we see the refinancing risk upon maturity of the 2. lien bond (Oct-12) as limited, if the contract materializes. 2. pri. NOK 1,000m Driller bond Price 98, YTM 9.8%, YTC June ’11 @ 104 14.5% - 07.12.2012 The bond has 2. pri. security in the first Driller, behind USD 250m of bank debt. The unit has a firm 6 year contract with Petrobras and was accepted by Petrobras on 11 June 2010. The company has secured a post-delivery bank facility of USD 400m, originally to be used for refinancing of the pre-delivery bank facility and the bond. Terms on the post delivery facility is Libor + 4.5%, maturity is 6 years and the facility is available 6 – 12 months after acceptance date. Total leverage on the unit is currently USD ~404m (second Drilling unit has secured USD 525m in financing). We think the company will refinance the bond in order to increase leverage on the unit and / or align the debt repayment schedule with cash flow. Call price on the bond is 104% 6 to 12 months post acceptance date and NPV of the firm contract is estimated to ~USD 450m.


11 Jun 2010 40(77)

Prosafe Production (BUY, TP NOK 18)

Prosafe Production has all its units on contract, with run-rate EBITDA proposing an 19% FCF yield. The main short term trigger is the closing of the Turret sale to National Oilwell, however we see this potentially slipping from the current guided timeline of a closing by end Q2. Management now expects to start active tendering in H2’10 enabled by the cash injection from the turret sale. A new project coupled with debt amortizations will absorb free cash flow going forward, hence a dividend is unlikely over the next few years. There is a NOK 4/share upside to our target on a concluded turret sale. Current status – Steady cash flow, new project expected in 2010e Prosafe Production has completed its troublesome newbuild program with the delivery of the Ningaloo Vision in early January. Hence all 8 FPSOs are on contract, with a long term backlog and great visibility on cash flow. Q1 figures showed an EBITDA of some USD 56m, and with somewhat delayed start-up of the Ningaloo Vision in the quarter, we expect the EBITDA to approach USD 60m on a quarterly basis going forward. Earlier this year, PROD signed an LOI with National Oilwell Varco for sale of the Turret and Swivel business for a total cash consideration of USD 165m. In addition, PROD is entitled to a royalty of 10% on NOVs sale from the business unit for 7 years. Assuming NOV is successful in selling one such system per year, the value of the total transaction could reach USD 200m. The transaction is subject to due diligence and board approval in both companies and is according to management expected to close in Q2’10. The business unit has historically only conducted internal projects with a relatively small cost base, and no value has been attributed in our valuation of the company. A closure of the transaction would enhance our valuation of the company by NOK ~4/share, from the current level of NOK 16.5/share. Importantly, this transaction will improve the balance-sheet significantly and enable the company to take on a new mid-sized project in late 2010/2011. The pipeline of projects is significant, and PROD has communicated that it will start to bid on tenders this year, although an attractive risk/reward profile is required (typically 12-14% IRR and reasonable risk profile especially from a construction point of view). Solid backlog coverage and contract length Prosafe Production has a solid backlog with on average 5.5 years of fixed contracts and further 6.5 years of optional contracts. The only FPSO that is seeing its fixed period ending in the short term is FPSO Abo, however with the operator on the field, Agip, drilling further production wells, the unit is expected to stay on the field even post the optional period. The upside in valuation of a potential extension is limited, however, with the counterparty having a purchase option on the unit.

Contract overview Unit

FPSO Umuroa - AWE, Australia Contract to 2015 + 7 years optionalFPSO Polvo - Devon Energy, Brazil Contract to 2014 + 8 years optionalFPSO Abo - Nigerian Agip, W.Africa Contract to 2011 + 2 years optionalFPSO Espoir Ivoirien - CNR, W. Africa Contract to 2011 + 10 years optionalFPSO Petróleo Nautipa - Vaalco Enrgy, W.A. Contract to 2015 + 2 years optionalFPSO Cidade de São Mateus - Petrobras, Brazil Contract to 2018 + 6 years optionalFPSO Ningaloo Vision - Apache, Australia Contract to 2016 + 8 years optionalFDPSO Azurite - Murphy, W. Africa Contract to 2016 + 8 years optionalFSO Endeavour - Aban Offshore, India Contract to end 2010eFSO Madura Jaya - Kodeco Energy, Indonesia Contract to Nov 2010

Option Construction Idle

2010 20132011 2012Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4


Troublesome newbuild program completed, all units on long term contracts

Expects to start active tendering this year

Solid contract backlog with 5.5 years fixed and further 6.5 years of optional years


11 Jun 2010 41(77)

Fixed value case, solid cash flow generation With closure of the sale of the turret business and consequent reduction of the enterprise value, the company trades on a free cash flow yield to the enterprise value of some 14% in 2010e escalating to 29% by 2013e. The risk to our estimates are considered to be low, with Q1 generating an EBITDA of some USD 56m vs. USD 240m expected for the full year. Also with the long duration of contracts, the cash flow also post 2010 is very much fixed. Dividends however are not expected in the short term, with the current debt situation requiring instalments of USD 150m on an annual basis, which compares to the operating cash flow of around USD 200m. The targeted net debt to EBITDA ratio is communicated to be 3-3.5x, and hence the company should be in a position to be paying dividends in 2011 on an existing units only scenario, but we expect that the company is more interested in growing their fleet rather than paying dividends at this point in time.

Valuation – significant upside on turret sale and new project In our opinion, Prosafe Production is an attractive company with significant cash flow yield and support from long term contracts. With the favourable supply/demand picture seen in the FPSO industry going forward, combined with PROD’s more prudent approach to new projects, they are well position to enhance the value of the company with some USD 100-150m by taking on a new mid sized project (USD ~500m) in the short term. We reiterate our BUY recommendation, but increase target price to NOK 18/share (17) on stronger dollar, with NOK 4/share upside on finalization of the turret transaction. Further NOK 3/share upside with new unit. Sum of the parts (SOTP) SOTP PROD including Turret Sale USDmDCF committed units*FPSO Espoir Ivoirien 151FPSO Abo 79FPSO Petrolia Nautipa (50%) 32FSO Madura Jaya (50%) 4FPSO Polvo 209FPSO Umuroa 113FPDSO Azurite 343FPSO Cidade de São Mateus 510FPSO Ningaloo Vision 300VLCC hull, variation orders 40FSO Endeavor 7

Additional unitsValue of one additional FPSO 125LOI Sale of Turret Business to NOV 200

Value all units (committed, idle & new) 2,112Net debt end YE'10e (ex. Turret sale) (877)SG&A and tax (185)Equity Value 1,050

USD NOKNPV per share committed, idle & new 4.1 26.7NPV per share committed & idle fleet 3.6 23.6WACC 9%, USD/NOK 6.5 © Pareto Securities AS*Includes post-contract residual value Source: Pareto Research

Solid free cash flow yield

We expect PROD to grow the fleet rather than paying dividends in the short term picture

Free cash flow yield & leverage ratio

6.9x5.4x

4.2x3.4x

29%

24%

15%

19%

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

2010E 2011E 2012E 2013E0%

5%

10%

15%

20%

25%

30%

EV/FCF FCF Yield to EV

EV/FCF and FCF Yield

2.2x

3.0x

1.5x

0.7x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

2010E 2011E 2012E 2013ENet Debt/EBITDA

Leverage ratio


BUY TP NOK 17, NOK 4/share upside with concluded turret sale


11 Jun 2010 42(77)

BW Offshore – (BUY, TP NOK 13)

BW Offshore is delivering steady operations and EBITDA, have a solid contract backlog and in a good position to secure new attractive contracts. Short term uncertainty regarding start-up of the BW Pioneer, currently located in the GoM. Stand-by day-rate is expected from end July, with production start-up in late 2010. With a 50% upside to target and moderate risk, this is a clearcut buy. Patience will pay off. Current status BW Offshore is well positioned in the FPSO segment, with an organization and balance sheet to take on new projects. Two new FPSO projects have joined the fleet this year, with the BW Carmen set for the Athena field on the UK side of the North Sea and a new unit highly likely to be signed at the TSB field in Indonesia. We believe that the company is in shape for a third newbuild, with the North Sea as the likely destination in our view. Key focus at curreThe current focus is however on the BW Pioneer, which is located in the US GoM ready for hook-up to commence production at Petrobras’ Chinook and Cascade field. The FPSO has still not received the technical approval from Petrobras, and is according to management now expected on standby day-rate from end July (95%). Production at the field is now expected to start in late 2010, but due to the current situation in the USGoM a prolonged delay should not be ruled out at this stage in time. BW Offshore’s equipment division APL has had a challenging 2009, with revenues and backlog declining steeply. However, the outlook is increasingly attractive with the number of new projects in the FPSO segment gaining pace. The company recently received an authorization to proceed with the completion of the FPSO OSX-1 (previously awarded to BW from Nexus). The scope includes among other delivery of a submerged turret production system (STP) and topside modifications with a total value of USD 150m. We estimate that USD ~50m of this is attributed to the APL backlog (a significant contribution), with the residual being booked on the FPSO segment (USD 100m). Contract situation BWO has 5 FPSOs working on long term contracts. In April 2009, FPSO Cidade de Sâo Vicente commenced on a 10 year contract with Petrobras on the high profile Tupi field. Sendje Berge is contracted with Addax until 2011 in Nigeria, with two optional years. Berge Helene is contracted with Petronas in Mauritania until 2013, with options for 8 more years. In Mexico, the company has an FPSO working for Pemex until 2022, with options for 3 more years. As mentioned above, the company has entered into an LOI with Itacha Energy for employment of the BW Carmen on the Athena field. A firm agreement is expected to be signed in due course, enabling the company to commence on an upgrade for first production in Q3’11. The company is also the only bidder on

Two new projects joining the fleet, 3rd newbuild likely

Overview of Athena and TSB

Source: BW Offshore

0

50

100

150

200

250

300

350

400

450

1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10

APL backlog development

APL Backlog Development (USDm)

Source: BW Offshore


11 Jun 2010 43(77)

the TSB project, and a contract is very likely to be signed shortly at attractive terms (IRR likely 14-15%, and 10 years fixed and further 4 years in options). BWO owns 25% in Prosafe Production and 49% in Nexus Floating Production. Nexus’ only asset (1 new FPSO completed at Samsung), was last year sold to OSX. The total consideration of USD ~400m included remaining yard instalments (sales price of USD 350m and USD ~50m in remaining capex). Equity value of Nexus is close to zero.

Contract overview

UnitSendje Berge - Addax, Nigeria Contract to 2011 + 2 years optionalBerge Helene - Petronas, W. Africa Contract to 2013 + 8 years optionalBelokamenka - Rosneft, Russia Contract to 2019YÙUM K’AK’NÁAB - Pemex, GoM Contract to 2022 + 3 years optionalBW Pioneer - Petrobras, GoM Contract to 2015 + 3 years optionalBW Cidade de São Vicente - PBR, Brazil Contract to 2019 + 5 years optionalBW Carmen - LOI Construction, Contract to 2014 + life of field optionsTSB - Likely contract Construction, Contract to 2022 + 4 years optionalBW Nisa, Papa Terra JV Construction, EPC (turnkey) contractBW Ara (VLCC) Idle

Contract Option Construction Idle

Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q42010 2011 2012 2013

Q1 Q2 Q3 Q4

Source: Pareto research, BW Offshore

Merger with PROD makes sense strategically BW Offshore has good financial flexibility with the credit facility established with BW Group. However, in order to compete with the two major players, SBM and Modec, a stronger balance sheet would be favourable. As previously mentioned, the Company owns a large stake in Prosafe Production, and a merger between the entities makes sense strategically. It is also worth noting that BWO wanted to appoint directors to the board in Prosafe Production at the AGM in May, but this proposal was not supported by the shareholder base. We do not believe that this is a situation that BWO is comfortable with, and hence expect it to lead to M&A or divestment. (With M&A most likely in our view). Valuation – BUY NOK 13/share BW Offshore is in growth mode, with two projects expected to be signed shortly and potential of taking on another conversion. Their APL segment is expected to see a more favourable market, with the activity in the general FPSO market gathering pace (value also supported by PROD’s LOI). The company is guiding on a run-rate EBITDA of USD 250-300m, going into 2011 and 2012 (Excluding BW Carmen and TSB). Our NAV of existing units (including BW Carmen) is NOK 13.2/share, with further NOK 1.5/share upside on TSB. We reiterate our BUY recommendation and NOK 13/share target price.

Proposal of BWO board members not supported by PROD shareholder base

BUY TP NOK 13/share


11 Jun 2010 44(77)

SOTP SOTP BWO USDmCurrent FleetSendje Berge (Addax to 2011, opt. to 2013) 82Berge Helene (Petronas to 2013) 178Belokamenka (Rosneft to 2019) 40YÙUM K’AK’NÁAB (Pemex to 2022) 225BW Pioneer (Petrobras to 2015) 481BW Cidade de São Vicente (Petrobras to 2019 220BW Carmen 165BW Nisa, Papa Terra EPC 25OSX - FPSO Segment 8BW Ara (scrap value) 12PROD ownership (23.9%) 129

Sum exsisting fleet 1,564APL - Technology 350New unit (TSB) 100Net debt YE'10e (778)SG&A and tax (210)

Equity value existing fleet 926

USD NOKPer share existing fleet 2.0 13.2Per share including new FPSO 2.2 14.6WACC 9%, USD/NOK 6.5 © Pareto Securities AS Source: Pareto Research


11 Jun 2010 45(77)

SBM Offshore – (BUY, TP EUR 18) SBM has won several contracts over the recent year, increasing the utilization of its large organization. The company has a strong balance sheet and is well positioned in the growing Brazilian market. The risk in the Turnkey business is phasing out with the drilling rigs and Yme nearing completion, however still more risky than main peers. SBM represents solid long term value and is by far the largest and most liquid FPSO stock in the sector, currently trading well below the historical multiples. FPSO segment, growing in deepwater Brazil The company is growing in the Brazilian deepwater play, with the recently awarded Baleia Azul and Tupi Nordeste LOIs. The Baleia Azul LOI was awarded in December 2009, and will see re-development of the FPSO Espardarte. The FPSO will be disconnected from its current location at the Espadarte field offshore Brazil for upgrade and modification. The planned disconnection of the FPSO is expected to commence in April 2011, with first oil from the Baleia Azul field expected in July 2012. The upgrade requires a significant capital expenditure figure, estimated to around USD 500m. IRR on the 18 year lease is estimated to a relatively attractive 13%. After announcing a letter of pre-commitment in April, SBM announced an LOI for the Tupi Nordeste development in early June. The lease is for a 20 year period with expected start-up in early 2013. SBM will not solely own the unit, with a consortium of other companies expected to take 50-55% ownership (local content requirements). We estimate that the capital expenditure requirement on the unit totals USD 1.1-1.2bn, and the IRR is projected to 10%. However, as SBM will have a large scope (installation etc.) the net IRR is estimated to 11.5%-12%. The 10% IRR on the unit is low in an historical perspective, however with favourable gearing and financing costs, together with low counterparty risk, the return on equity is seen as attractive. In August ’09 a contract was signed with Noble Energy for the provision of an FPSO for the development of the Aseng field located in ~1,000 meters offshore Equatorial Guinea. The FPSO, which will be based on the conversion of a VLCC hull from SBM Offshore’s inventory, will serve not only the Aseng field, but will also establish a liquids hub for Noble Energy’s future developments in the area. The processing capacity is for 120,000 bbls of liquids per day, including 80,000 bbls of oil. The unit will have storage capacity for 1.6 million barrels of oil, including up to 500,000 barrels of condensate. The Aseng FPSO will be SBM’s second unit in Equatorial Guinea and its ninth in West Africa. The initial contract is for 15 years, commencing in 2012, with options for 5 years. The total contract value to SBM is ~USDbn 1.2. IRR on the contract is calculated to 10-11%. Late October the company received a termination from Exxon for the lease contract of the FPSO Falcon from 3rd of December. The unit was completed and commenced operations in 2002 for an initial 6 year lease, which was subsequently extended twice. The Company will actively market the FPSO Falcon for redeployment globally (most recently on the Tiro Sidon tender, Teekay with low bid). Until a new contract has been obtained the unit will remain in lay up conditions in the Far East. FPSO Rang Dong 1, which has been idle post termination of charter in 2008, was sold for scrap in Q4’09, giving a gain on sale of some USD 2m. The order backlog was USD 10bn in February, split 80/20 between the FPSO and turnkey business. The company has also signed a framework arrangement with Shell for the supply of turrets for Shell’s FLNG projects for a period of up to 15 years. So far the workscope is limited to a FEED contract, but the potential is significant related to future deliveries. Furthermore, the company was in late 2009 awarded a FEED by Petrobras, studying the FLNG concept as one means to handle the associated gas that will be produced by the series of FPSOs planned for the pre-salt development.

Baleia Azul contract with estimated capex of USD ~500m and IRR of 13%

Enters the Tupi field, 20 year lease. IRR in line with SBM’s target of 12% on their share 10% IRR on the total unit

Aseng USD 1.2bn FPSO lease contract with IRR of 10-11%

Falcon idle, Rang Dong 1 scrapped

Order back-log USD 10 bn


11 Jun 2010 46(77)

Contract overview

UnitFPSO Kuito - Chevron, AngolaFPSO Espadarte - Petrobras, Brazil Contract to 2030 Belaya Azul field, 18 yearsFPSO FalconFPSO Roncador - Petrobras Brazil Contract to 2012FPSO Xikomba, ExxonMobil, Angola Contract to 2011 + 6 years optional (likely to be re-allocated)FPSO Marlim Sul - Petrobras, Brazil Contract to 2012 + 2 years optionalFPSO Sanha -Chevron, Angola Contract to 2013FPSO Capixaba (Golphinio/Cachalotte) Contract to 2022FPSO Kikeh - Murphy Oil, Malaysia Contract to 2016 + 15 years optionalFPSO Mondo - ExxonMobil, Angola Contract to 2022FPSO Saxi-Batuque - ExxonMobil, Angola Contract to 2023FPSO BC-10 - Shell, Brazil Contract to 2024 + 5 years optionalFPSO Aseng Contract to 2027 + 5 years optional

Thunder Hawk Semi - Murphy, USA Contract to 2014 + undisclosed optional periodYME - Talisman, Norway Contract to 2015 + 10 year optional periodDeep Panuke - EnCana, Canada Contract to 2018 + 12 year optional periodFSO Nkossa - Total, Congo Contract to 2011FSO Yetagun - Petronas, Myanmar Contract to 2015

13 Contract Option Construction Idle

Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q42009 2010 2011 2012 2013

Source: Pareto research and SBM Offshore

Turnkey risk phasing out, although new major projects need to be booked The turnkey business has seen some troublesome projects, with the 3 drilling rigs currently being constructed in Abu Dhabi seeing delays and cost overruns. The construction of the rigs is now moving in line with expectations according to management, with the three units due for delivery in Q2/Q3/Q4’10. The order-backlog also includes other large projects, namely the P-57 (offshore installation in Q4’10) and FPSO Okha (completion in Q4’10), however SBM needs to start booking new larger items in the short term to keep the utilization of the turnkey business at a high level when entering 2011. Valuation and Sum-Of-The-Parts (SOTP) The valuation of SBM has become increasingly attractive with the slide of the overall market. The company should be relatively immune to the oil spill in the GoM and hence the FPSO player is in our opinion attractive especially compared to stocks within drilling and seismic, where uncertainty is likely to persist for quite some time still. The stock currently trades below 10x P/E’11e, significantly below the historical average of some 15x. Trades significantly below historical averages

0x

5x

10x

15x

20x

25x

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

EV/EBITDA P/E Avg. EV/EBITDA Avg. P/E

One year forward trading multiples

Source: Pareto Research, DataStream

3,220 4,4075,651 6,278

7,834839

2,5852,304

2,9692,198

0

2000

4000

6000

8000

10000

12000

2005 2006 2007 2008 2009

FPSO Turnkey

Orderbacklog (USDm)

SBM currently trades below 10x P/E’11e, compared to the historical average of 15x


11 Jun 2010 47(77)

Our SOTP of existing units only, excluding Tupi Nordeste, is EUR 18.5/share, up form 17 in our December FPSO report, mainly due to stronger dollar vs. Euro. We reiterate BUY, but increase the target price to EUR 18/share (17). Target is inline with the historical P/E of 15x. Our SOTP value of SBM currently stands at EUR ~19/share (17)

Total FirmSOTP SBMO USDm USDmCurrent FleetFPSO Kuito - Chevron, Angola 192 -FPSO Espadarte - Petrobras, Brazil 606 606FPSO Roncador - Petrobras Brazil 95 22FPSO Xikomba, ExxonMobil, Angola 148 21FPSO Marlim Sul - Petrobras, Brazil 281 58FPSO Sanha -Chevron, Angola 186 63FPSO Capixaba (Golphinio/Cachalotte) 399 352FPSO Kikeh - Murphy Oil, Malaysia 310 156FPSO Mondo - ExxonMobil, Angola 129 115FPSO Saxi-Batuque - ExxonMobil, Angola 132 117FPSO BC-10 - Shell, Brazil 465 412FPSO Aseng 355 309FPSO Tupi Nordeste 582 551Thunder Hawk Semi - Murphy, USA 669 286YME - Talisman, Norway 485 239Deep Panuke - EnCana, Canada 628 378FSO Nkossa - Total, Congo 10 2FSO Yetagun - Petronas, Myanmar 39 22Value Lease assets* 5,709 3,711

FPSO Falcon 150 -Turn Key 1,000 1,000Total value 6,859 4,711Net debt YE 10E (1,726) (1,726)Remaining capex (1,100) (1,100)SG&A + tax (257) (257)Value equity 3777 1628

NAV per share USD 23.0 9.9NAV per share EUR 19.2 8.3

WACC 9.0%, EUR/USD 1.20 © Pareto Securities AS* Contract value lease assets right hand column Source: Pareto Research

Guidance for 2010 The company guides 2010 sales in the same range as 2009. Turnkey systems’ EBIT margin is expected in the 5-10% range and the Turnkey services are expected at 15-20%. The EBIT contribution of the FPSO segment is expected to be below 2009 due to end of certain lease contracts and lower expected bonuses. Company description SBM was founded in 1965, and pioneered the offering of Floating Production, Storage and Offloading (FPSO) systems in 1979. Present activities include the engineering, supply and installation of all types of Floating Production and/or Storage and Offloading systems as well as FPUs of all types including semi-submersibles, TLPs and self elevating MOPUs. Construction and installation of all hardware components and services are outsourced, while SBM provides all the engineering and project management expertise. The group owns and operates FPSO/FSO systems (lease division), in addition to supplying systems on a turnkey basis to third parties.

The leased units are contracted on long-term charters, including their operations, to oil companies world-wide. SBM has 18 units in their portfolio (fully and partly owned), of which 13 FPSOs. The group is the largest player in this market, followed by Modec and Prosafe Production. Historically, the lease division has had 80% of earnings vs. turnkey at 20%. Turnkey supply contracts include large production systems, mooring systems and terminals, deepwater export systems, supply of drilling units etc. SBM has been struggling with three drilling rigs being built in the Middle East. In terms of technology, SBM has a broad portfolio of innovative solutions within FLNG, regasification, drilling, production, renewables and more.

Pioneered the FPSO industry in 1979

18 units in operations


11 Jun 2010 48(77)

Fred. Olsen Production (BUY TP NOK 15) FOP has 3 FPSOs on long term contracts and the financial flexibility to add another unit. A mid-sized project is targeted, however the company has so far been left unsuccessful in the bidding phase. With strong share price performance (+34% YTD) and low liquidity we prefer other FPSO names on a relative basis, but keep our BUY rating on 40% discount to NAV. Current status Fred. Olsen Production (FOP) has 3 FPSOs on long term contracts, with great visibility on cash flows. The company has good financial flexibility, and further growth of the FPSO portfolio is targeted with a medium sized project (USD 300-450m). The company has been actively bidding on projects, with the latest likely to be signed by BW Offshore (TSB). In addition to the FPSO contracts, the company has a management agreement on MOPU Marc Lorenceau, which is currently on a 30 days termination period. The company has also invested in a tanker conversion candidate, currently operating in the short term tanker market. The company had a cash balance of some USD 62m at the end of Q1’10, with an undrawn credit facility of some USD 300m.

New growth opportunities vs. dividends FOP is perusing a new project predominantly in Asia or Brazil. However, the company has so far been left unsuccessful in the bidding phase, likely due to both more aggressive bidding from competitors and local content issues. In April, Geveran Trading Ltd., controlled by the major owner in Seadrill and Frontline, John Fredriksen, acquired 5.69% of FOP. The dividend focused investor proposed at the annual general meeting in May that FOP should vote on a NOK 3/share in dividends, as new growth opportunities in their view was limited. The proposal was declined by the shareholder base at the AGM. Valuation – BUY TP NOK 15/share FOP has very attractive backlog coverage and valuation is undemanding at EV/EBITDA 11e of 5.3x and EV/FCF 11e of 6x. However, due to strong share price performance YTD (+34%) and low liquidity in the stock, we prefer PROD/BWO and SBM Offshore on a relative basis. With still significant discount to our NOK 16/share NAV, we reiterate our BUY TP NOK 15/share recommendation.

Good financial flexibility

Contract overview

Unit Client Country FieldFPSO Knock Adoon Sinopec Nigeria Antan Contract to 2014 + 8 year optionalFPSO Knock Allan CNR Gabon Olowi Contract to 2019 + 10 year optionalFPSO Petóleo Nautipa Vaalco Gabon Etame Contract to 2015 + 2 year optionalFSO Knock Dee* Laid up Fujairah Pinauna Provisional Contract to 2021 (El Paso, Brazil) + 5 year optionalMOPU Marc Lorenceau (mngt) Sinopec Nigeria Contract with 30 days termination periodKnock Muir Short term tanker T/C / Spot market

Contract Option Construction Idle

*Option may be declared un until 30 June '10

2009 2010 2011 2012 2013Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Source: Pareto research, Fred. Olsen Production

Persuing new projects, so far unsuccessful


11 Jun 2010 49(77)

Sum-Of-The-Parts (SOTP) SOTP FOP USDmDCF committed units*FPSO Petrolia Nautipa 32FPSO Knock Adoon 159Knock Allan 213Marc Lorenceau 9Aframax tanker 10

Idle unitsKnock Dee (assumed scrapped) 5

Additional contractsNew FPSO 50Value all units (committed, idle & new) 478Value EOC shares (4.9% @ NOK 7.5) 6Net debt YE'10e (1) (124)SG&A and tax (50)Equity value 310

USD NOKNPV per share committed, idle & new 2.9 19.0NPV per share committed & idle fleet 2.5 16.0WACC 9.5%, USD/NOK 6.5 © Pareto Securities AS*Includes post-contract residual value(1) Adjusted for potential Dee Scrapping Source: Pareto Research


11 Jun 2010 50(77)

EOC – Focused on growth

EOC is an Asia Pacific focused offshore service provider with three offshore support barges and two FPSOs. With the FPSO Lewek Arunothai now on-stream, EOC turns its attention to growth through the new FPSO contract for Chim Sao in Vietnam. BUY, TP NOK 13. TP equals EV/EBITDA 4.3x ‘11e. Background EOC is a 48.5% owned subsidiary of Ezra, a leading offshore services provider in the Asia Pacific region, based in Singapore. The Company owns two accommodation barges, one heavy lift and pipe lay barge, and one FPSO. In addition, the Company also owns an equity stake (26.6-43.3%) in a new FPSO (Chim Sao FPSO) that is expected to see first oil in mid 2011. Current fleet update Following a full quarter contribution in Q2’10, FPSO Lewek Arunothai had to undergo maintenance for the upkeep and modification of equipment onboard in Q3’10. This lowers utilisation by ~40 days, and impacted full year estimates, but was necessary to maintain long term operating efficiency. According to a corporate announcement in April ’10, EOC has been allocated 43.33% share in the Chim Sao FPSO joint venture. To our understanding, this includes PetroVietnam’s potential share of 16.7%, which is subjected to regulatory approval by the end of the calendar year. Currently, EOC has paid ~USD 30-33m in equity into the joint venture. Separately, asset loan details are expected to be finalised soon. The Lewek Conqueror is on a long-term contract with Brunei Shell, and is expected to continue contributing positively to the Company. Contract negotiations are currently still ongoing for Lewek Champion and Lewek Chancellor, and although this will affect utilisation in Q3’10, we expect contract wins to come soon, which should see higher fleet utilisation. We expect both vessels to work in South East Asia. Contract Overview

FPSO Lew ek Arunothai - PTTEP, Thailand Contract to 2012 + 2 years optional

Lew ek Champion Contract to March 2010

Lew ek Conqueror Contract to Mar 2014 + 5 years optional

Lew ek Chancellor Contract to June 2010

FPSO Chim Sao - Premier, Vietnam Contract to 2017 + 6 years optional

Option Construction Idle

Q1 Q4Q1 Q2Q3Q4 Q3Q1 Q2 Q32010 2011 2012

Q2 Q4

Source: Pareto Research, EOC Focused on fleet expansion and upgrades EOC is currently looking at FPSO opportunities in the Mediterranean and Indonesia that could see an award in 2010. Although these are comparatively smaller FPSO projects (USD 100-150m total capex), the assets are likely to be taken off balance sheet should the opportunities materialise. On the Construction front, EOC has previously communicated their interest in upgrading the existing fleet, including upgrading the crane size, in an effort to push the current assets into a more sophisticated front.

Aronothai undergoes maintenance

In search for growth opportunities


11 Jun 2010 51(77)

Valuation and financials EOC is expected to generate EBITDA (adj.) of ~USD 62m and ~USD 90m in ‘10e and ‘11e, respectively, as the assets secure higher utilisation. At current price, valuation multiples are attractive with P/E 2.7x ‘11e and EV/EBITDA 4.2x ‘11e. BUY, TP NOK 13. Sum-of-the-parts valuation SOTP EOC USDmDCF committed fleet*FPSO Lewek Arunothai 313Lewek Conqueror 40Lewek Chancellor 35Lewek Champion 180FPSO Chim Sao (30% owned JV) 63

New offshore support unit 30

Value all units (committed & new) 661Net debt end 10 (323)SG&A tax (70)Equity value 268

USD NOKNPV per share commited & new 2.4 15.7NPV per share committed fleet 2.1 13.9WACC 9.5%, USD/NOK 6.5 © Pareto Securities AS*Includes post-contract residual value



11 Jun 2010 52(77)

Bluewater – Bond case The USDm 360 senior unsecured bond with maturity in July 2014 and a coupon of 3mL+3% is indicated in the high 50ies at an IRR to maturity around 20%. The financial situation of Bluewater has been significantly improved following the sales of Hanne Knudsen and Jotun and the contract awards for the two FPSOs Munin and Glas Dowr. Main focus going forward is start up of modification project on Glas Dowr and ongoing negotiations with banks to amend amortization schedule and to extend maturity on the revolving credit facility. The Bluewater bond has come down some points the last weeks from the mid 60ies due to recent market turmoil. This is natural given the relative long duration and the bonds position in the capital structure being subordinated to USD 630m of bank debt. However, financial situation and outlook has been significantly improved after the contract award from ENI for the FPSO Glas Dowr, a 5-10 year contract for work at the Kitan Field in the Timor Sea, start up on the 12-18 month contract with CNOOC for the FPSO Munin and the asset sales of Hanne Knudsen and Jotun reducing debt levels. The two new contracts for Munin and Glas Dowr combined with the long term contracts for most of the remaining FPSO fleet including Aoka Mizu (firm until August 2015, expected beyond that), Haewene Brim (expected on current contract until 2018 or beyond) and Bleo Holm (expected on current contract until 2018 or beyond) has improved the cash flow outlook for many years going forward. Main uncertainty is commercial terms of the Glas Dowr contract which hasn’t been disclosed to market yet. We expect the contract to contribute with USD 60m in annual EBITDA. Before start up on the contract, expected in 2H2011, the unit needs to undergo a modification and upgrade project to meet specific requirements at the Kitan field. The project is expected to start in 2010 and will most likely be at a Singapore yard; either Sembawang, Keppel Shipyard or Jurong. Budgeted CAPEX for the project has not been disclosed but is expected to be around USDm 130. Bluewater has secured project financing for the modification project covering expected cost plus a significant contingency. This financing indicates that the Glas Dowr contract is strong and that the lead syndicate banks continue to support the Company. 2009 was a very challenging year for Bluewater, due to significant delays and cost overruns on the conversion project on Aoka Mizu, and three FPSO contracts expiring in a muted FPSO market. During the summer of 2009 Bluewater restructured its USD 850m revolving credit facility and reached an agreement with banks for a USD 50m super senior tranche maturing in December 10 and a temporary deferral of amortizations due in 2009. In November 09, Bluewater sold the shuttle tanker Hanne Knudsen for USD 55m and in January they sold their 55% stake in the FPSO Jotun. This was done to repay debt and most likely according to requirements set by the banks in the restructuring in 2009. Amortizations on the bank facility are aggressive from 2010 and onwards, and the facility amortizes from its YE09 level of USD 630m (after sale of Jotun) down to USD 375m at maturity in December 2011. Bluewater will not generate cash flow from operations to meet the scheduled amortizations from late 2010 and for 2011 before Glas Dowr has started on its new contract and has therefore initiated discussions with the bank syndicate to amend the amortization schedule and maturity to match conservative cash flow estimates going forward. Given the positive development since restructuring of the RCF concluded in a very difficult environment in 2009 we think the outlook for finding a viable long term solution with the banks is good. Furthermore, we believe some of the banks under the RCF also are involved in the project financing for Glas Dowr which we see as an indication that banks will be constructive in the negotiations. However, the process is time consuming due to the large number of banks in the syndicate, all of them with veto rights in negotiations. Conclusion on the discussions is expected within the next few months, but is not expected before after the summer.

The Bluewater bond has come down a few points the last weeks due to market turmoil

The Glas Dowr and Munin contracts coupled with asset sales have improved the financial situation of the Company significantly and cash flow visibility is good for many years going forward.

2009 was a challenging year due to cost overruns and delays on Aoka Mizu and contracts expiring and bank debt was successfully restructured.

We think the outlook for finding a viable long term solution with the banks is good.


11 Jun 2010 53(77)

Bluewater has initiated a company wide restructuring plan to significantly reduce costs and to improve profitability, as a first step it has been decided that engineering activities in Kuala Lumpur will be ceased. This expected to reduce overhead costs significantly going forward. Currently, 4 out of 6 FPSOs are contracted, while Glas Dowr will start on the modification for the ENI contract in 2010 and Usige Gorm is cold stacked. Uisge Gorm is expected either to be contracted in benign waters or to be sold. Bleo Holm and Haewene Brim is expected to stay on its current contracts until 2018 or beyond according to third party field life studies and indications from clients. Munin is currently on a 12 - 18 months contract with CNOOC starting 1 March 2010, but we expect the vessel will continue with CNOOC due to earlier interest from CNOOC to buy a 50% stake in the vessel.

Fleet overview

UnitHaewene Brim - Shell, UK Expected until 2018 or beyondBleo Holm - Talisman, UK Expected until 2018 or beyondAoka Mizu - Nexen, UK Contract to 2014 + 2 years optionalMunin - CNOOC 12-18 months contractGlas Dowr - ENI Modification 5-10 year contractUisge Dorm Idle

Minimum duration Expected duration Idle

2010 2011 2012 2013Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Source: Pareto Research, Bluewater

EBITDA per FPSO

EBITDA 2008 2009 2010E 2011E 2012E 2013E 2014EUisge Gorm USDm 19 (4) -5.5 - - - - Glas Dowr " 35 (3) -4.6 16 61 61 61Bleo Holm " 42 43 42.5 43 43 43 43Haewene Brim " 21 17 24.7 22 23 25 22Munin " 14 5 19.9 25 25 25 25Aoka Mizu " - 25 72.4 64 61 56 52Jotun A (55%) " 34 33 1.7 - - - - Hanne Knutsen " 10 6 0.0 - - - - Gandria " - (0) -0.9 - - - - Other " - - 0.0 - - - - FPSO EBITDA " 169 121 150 168 212 210 202SPM EBITDA " (8) 7 - - - - - SG&A " (27) (64) (34) (28) (25) (26) (28)Other operating income " - - - - - - - EBITDA " 135 64 116 140 187 183 175 Source: Pareto Research, Bluewater

EBITDA increases from 2009 to 2010E due to full year contribution from Aoka Mizu and Munin which started on the new contract with CNOOC in Q1’10. Glas Dowr is expected to start on the ENI contract in 2H’11 contributing to EBITDA from 11E and onwards.


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Cash flow projections

Cash flow projections 2007 2008 2009 2010E 2011E 2012E 2013E 2014EFPSO EBITDA USDm 172 169 121 150 168 212 210 202SPM EBITDA " (1) (8) 7 - - - - -SG&A " (24) (27) (64) (34) (28) (25) (26) (28)=Total EBITDA " 147 135 64 116 140 187 183 175

Net interest cost " (108) (48) (74) (63) (67) (66) (60) (57)Asset sales " - - 55 130 30 - - -Other non cash items and working capita " (2) (28) 105 (17) (13) (11) (10) (9)CAPEX " (198) (206) (125) (90) (64) (10) (10) (10)=Free Cash Flow " (161) (147) 25 77 26 101 104 99

Net change current RCF USDm 12 (159) (534) - - -Net change current Jotun " (28) (48) - - - -Net change debt Glas Dowr (51%) " - 80 50 (30) (25) (75)Refinancing RCF and Jotun debt " - - 450 (100) (50) (50)Net change on bond debt " - - - - - (360)Assumed refinancing of bond debt " - - - - - 350PIK on Marenco Loan " 12 14 14 15 16 18Other / adjustments " (23) - - - - -Sum change in indebtedness " 173 (28) (113) (20) (115) (59) (117)

Net change in cash " (3) (36) 6 (14) 46 (18)

=Cash at Year End " 40 66 63 27 33 20 65 47 Pareto Research, Bluewater Debt Overview

DEBT OVERVIEW 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014ESecured DebtRevolving Credit facility 5.0 % 364 492 681 693 534 - - - -Super Senior Tranche 6.0 % - - - - - - - - -Glas Dowr Financing 7.0 % - - - - 80 130 100 75 -Refinancing USDm 850 RCF 6.5 % - - - - - 450 350 300 250Jotun debt 4.0 % 131 104 76 48 - - - - -Long term loan 5.0 % 11 11 11 11 11 11 11

Unsecured Debt10,25% Sen. Uns. Notes 10.3 % 310 - - - - - - - -Senior Unsecured Bond 4.5 % - 360 360 360 360 360 360 360 -Refinancing Senior Unsecured Bond 6.5 % - - - - - - - - 350Subordinated debt from affiliate (Marenc 7.2 % 154 162 173 186 199 214 229 245 263Other (Adjustments including derivatives - 3 (15) 46 27 27 27 27 27 27

Total 962 1 103 1 348 1 324 1 211 1 165 1 077 1 018 901 Pareto Research, Bluewater

The capital structure consists of a 1. lien revolving credit facility (RCF) with security over all vessels, the senior unsecured bond and a subordinated PIK note from the affiliate company Marenco. It has been agreed that Glas Dowr can be removed from the security package under the RCF to be pledged in favour of the new project facility which will be issued by the vessel owning entity. The subordinated debt, provided by the shareholder of Bluewater Hugo Heerema, is contractually subordinated to the senior unsecured bonds and carries a PIK coupon of 7.2%.

Credit Metrics

CREDIT METRICS 2006 2007 2008 2 009 2010E 2011E 2012E 2013E 2014EEBITDA USDm 151 146 134 64 116 140 187 183 175FFO " 31 37 64 -19 54 73 122 124 118IBD/EBITDA x 5.3x 6.4x 8.8x 17.8x 8.7x 7.0x 4.5x 4.2x 3.7xNIBD/EBITDA x 5.0x 6.2x 8.3x 16.8x 8.5x 6.7x 4.4x 3.9x 3.4xNIBD bonds @ 60% / EBITDA x 5.0x 5.2x 7.2x 14.6x 7.2x 5.7x 3.7x 3.1x 2.6xEBITDA/Net interest x 2.1x 1.4x 2.8x 0.9x 1.9x 2.1x 2.9x 3.1x 3.1xEquity/Assets % 32 % 27 % 26 % 11 % 13 % 14 % 20 % 25 % 31 %

Trade levels on bonds: 60 % © Pareto Securities ASA Pareto Research, Bluewater

Net debt to EBITDA at 8.5x for 2010E is high, but levels are expected to come down as the Company is expected to de-lever through 2010E and 2011E and particularly in 2012E, first year Glas Dowr will have full year contribution to cash flow. Net debt to EBITDA expected below 3.4x in 2014 should support refinancing, but is dependent on contract backlog at maturity in 2014. We expect that both bank debt and senior unsecured bonds have to be refinanced in 2014.


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Bond Cash Flow

USDm 360 Frn bond @ 60% 13.06.2010 2010 2011 2012 2013 2014Cash flow: Interest rate payments 1.5 4.6 4.6 3.4 3.4Amortization 100Cash flow: -60.0 1.5 4.6 4.6 3.4 103.4% of investment paid back @ 60% 2 % 10 % 18 % 23 % 196 %IRR: 19.7 % Pareto Research, Bluewater

Bond cash flow above is based on a Libor assumption for remaining life of the bond at 1.5%. 4 year dollar swap is currently at 1.97%.


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Sea Production – Bond case Sea Production main challenge in the short to medium term will be to redeploy FPSO front Puffin on a new contract and to finish the arbitration with AED. The USD 130m senior secured bond is currently quoted in the mid 50’s, yielding some 44%. Sea Production acquired the FPSO Front Puffin, FPSO Crystal Ocean and two Aframaxes for USD 336m in 2007 and listed on the OTC in Norway the same year. Rubicon Offshore International Holding is currently the largest owner in SEAP with a 76% ownership. FPSO front Puffin – Available for new contract FPSO Front Puffin started work on the Puffin field of the North West coast of Australia after conversion at Keppel in 2007. AED is a 40% Joint venture partner in the oilfield while the remaining 60% is owned by Sinopec. Sea Production’s charter contract was supposed to terminate on 15 June ’10. However, in June ’09 the operator of the Puffin field filed a notice of termination for default to Puffin FPSO ltd on behalf of the contracting client, AED, claiming that SEAP was in breach of certain material obligations. SEAP is now pursuing legal action, claiming that AED terminated the contract without proper ground. The value of the foregone dayrate is estimated to USD 60m and cost and losses of approximately USD 25m. We believe the contract was terminated by AED because the Puffin field was performing below expectations, and recent drilling results have been mixed. However, the cash situation in SEAP is relatively tight, providing AED with incentives to delay the arbitration process. Crystal Ocean – Performs satisfactory Crystal Ocean is on a bareboat charter with Anzon Australia at USD 20’/day + profit split until mid-Jan 2012. Crystal Ocean has so far received the minimum bareboat dayrate of USD 20’/day (Annual EBITDA of USDm 7) plus a tariff payment of USDm 1.1. The unit has experienced some problems with the disconnectable turret and mooring system in May this year, but this is not expected to impact revenues to SEAP (because the unit is on a bareboat out contract). The unit is currently producing as normal. Sea Cat and Jaguar – In lay up The Aframax vessels Sea Cat and Sea Jaguar are laid up in Malaysia. Both of the Aframaxes are suitable for FPSO conversions, but the company does not intend to initiate a conversion before the arbitration with AED is solved, and the FPSO Front Puffin has secured further employment. Estimates Cash Flow 2 009 2010E 2011E 2012EEBITDA - Front Puff in USDm 61 3 36 33EBITDA - Crystal Ocean " 7 7 7 7EBITDA - Sea Cat " 1 (1) (1) (1)EBITDA - Sea Jaguar " (1) (1) (1) (1)SG&A " (7) (10) (8) (5)EBITDA " 61 (2) 33 33Interest cost " (8.4) (10) (11) (8)Tax: " (11) - - -Changes in w orking capital " (25) (0) 4 0CAPEX " (5.1) (52) (2) (2)Free cash flow " 12 (65) 24 23Debt amortization " (35) 50 (15) (39)Dividend Payments " (5) - - -Net change in cash holdings " (28) (15) 9 (16)Cash Balance " 23 8 17 1 Source: Pareto Credit Research The bond – Trading at a significant discount SEAP issued a USD 130m bond in Feb 2007 with maturity in Feb 2012. The bond has a 2. pri mortage in the vessels and the agreement allows for a USD 65m carve out of 1. priority debt (to be reduced to USD 35m in Feb-11). Currently there is no 1. pri. debt in the company. The bond coupon is 3mL+4.25%. Despite the original investment cost for the assets in the company of USD 336m, asset coverage on the bond is currently uncertain as only one of the units is on contract. In addition, this contract only generates USD 7m of EBITDA per year. We think the upside potential in the bond is interesting and


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dependent on the outcome of the arbitration process with AED and the company’s ability to secure a new contract for the FPSO Front Puffin. Financial status – Relatively tight The cash balance was USD 18.2m as of end Q1’10. This should be sufficient to follow up on the dispute with AED. However, the redeployment will most likely involve some further capex outlay (we assume USD 50m). Overview of assets

Front Puffin Crystal Ocean Sea Cat Sea Jaguar

Built: 1990Converted: 2007Length: 246m Storage:743,868 bbl

Built: 1999Converted:n.a.Length: 101mStorage:45,145 bbl



Source: Pareto Credit Research


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Rubicon Offshore International – bond case At current bond prices we consider the asset backing to be solid for the USD 180m 1. lien bond. The main challenges for the company in the short to medium term are to secure higher utilization for the MSV Maverick and more stable operation from FPSO Rubicon Intrepid. Bond is currently quoted at price 62.5, yielding 41% to maturity. Rubicon was founded in 2005, and operates three assets in Asia today. The two FPSOs are operating satisfactory, while the multi functional support vessels (MFSV) has been idle large parts of Q1’10e. The company is private held with Ashmore Investment as the largest shareholder. Rubicon Intrepid – Currently performing satisfactory Rubicon Intrepid started on a 10-year contract with Vitol Marine on the Gallock field in the Philippines in Sept 2008. The rate is USD 78’/day + USD 2/bbl tariff. However, the unit has experienced long period of operational downtime since startup (three times in 2009), reducing revenue. However, only two weeks of downtime has been reported so far in Q1’10. Uptime has improved to 78% in 4Q09 and 83% in 1Q10. The current production is ~9 - 11,000 barrels per day and the expected lifespan of the oilfield is 5 - 10 years. Rubicon Vantage – Steady performance Rubicon Vantage is working for Salamander Energy on a 5-yr contract in Gulf of Thailand at USD 50,000/day + 5% of net oil proceeds. The unit has been operating as planned and current production is around 6,000 bopd, and expected to increase significantly following phase II drilling in 2010. The FPSO is expected to continue on the current contract for 6 - 7 years according to Salamander Energy. MSV Maverick – Varying degree of utilization in the spot market The MSV Maverick performs repair works and dive support operations. The vessels was idle for the first part of Q1’10. The contracts have so far been in the spot market, with a varying degree of utilization. Contract overview

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Rubicon Intreprid Vitol Marine (10 yr contract w ith 6 month termination clause)

Rubicon Vantage Salamander Energy until August 2013

MSV Maverick spot

2010 2011 2012 2013

Source: Pareto Credit Research The Bond – Solid asset backing at current levels The USD 180m bond has first lien security in the three assets and has maturity in April 2012. The coupon is 3mL+5% and the bond has a USD 30m amortization in 2011 while the remaining is paid at maturity. At bond price 62.5, exposure towards the underlying asset values is USD 113m. We see good protection on the downside from FPSO Vantage and the MSV, with potential upside related to FPSO Intrepid and MSV valuation. Estimated value of FPSO Vantage (USD 75m) and MSV (USD 40m) is USD 115m and this does not include any value to FPSO Intrepid. We think there is substantial refinancing risk in the bond, but we believe long term contracts and 1. lien structure is supportive to bond.


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Asset backing

11080

123110

60

60

180113

0

50

100

150

200

250

300

350

Appraisal from 2007

Construction cost Bond debt at Face Value

Bond @ 0.625

Rubicon Intrepid Rubicon Vantage Rubicon Maverick* 1. Lien Bond

USD million

Source: Pareto Credit Research


11 Jun 2010 60(77)

Aker Floating Production – Balance sheet worries Aker Floating Production currently has one FPSO in operation and a further one conversion candidate is laid up in Indonesia in anticipation of a new contract award and financing. The company’s first FPSO, the Dhirubhai 1, was awarded a ten year contract with Reliance Industries in Q2’07 and Aker Borgestad Operations, a subsidiary, was awarded a contract for operations and maintenance. The conversion of the FPSO was completed in 16 months, although the company experienced major cost overruns. The Dhirubhai 1 initially showed excellent performance following first gas in September ’08, however, on December 8th the same year, the unit was shut down, due to an incident onboard. The necessary repairs were time consuming and the FPSO was down for a total of three months. Since activity resumed, there have been no new problems and Final Acceptance Certification, and thus full dayrate, was achieved in Q2’09. The unit has shown strong utilization the recent quarters. The company is assessing the possibility of another conversion, and currently owns one additional hull. Their third hull was sold for USD 7.5m in December 2009 in an effort to free up some cash. The company delivered Q1’10 EBITDA of some USD 24m, on good operations by Dhirubhai-1. The Q1 cash position of the company was USD 23m, with USD 58m in short term interest bearing liabilities, of which the Secured hull loan of USD 12m falls due in July ’10. The residual short term liabilities is due to a syndicate of banks. The equity ratio was at a very low 4%, although they were not in breach with covenant as the loan from Aker ASA is calculated as part of the equity. With around USD 750m in debt, the outlook for the company looks challenging and limited margin for error. The value of the assets is most likely lower than the outstanding liabilities. AKFP is not rated by Pareto Research. Songa FP – Filed for bankruptcy March 2010 Songa Floating production’s FPSO East Fortune was last year awarded a 270 day contract with an Indonesian company, Pulau Kencana (working as FSO). The newly converted FPSO is working at the Kakap Field, while the FPSO currently working at the field, FPSO Kakap Natuna is in drydock. The current contract runs to September 2010. Songa Floating Production negotiated a contract with Peak Petroleum in Nigeria in 2008, but Peak was unable to provide the necessary financing for the project. A new contract has been perused since, but the unit has remained without long term employment. During March 2010, the company filed for bankruptcy, as their current contract was insufficient to pay contractual obligations on the convertible bond and bank loan. To our knowledge, the company is now perusing PC Ketapang’s Bukit Tua project in the Java Sea. An FPSO award for the project is likely in late 2010 or early 2011, however the Songa’s involvement is uncertain after the bankruptcy. The spread moored FPSO, which is a 1983 converted tanker, has a storage capacity of 360,000 barrels and a production capacity of 30,000 barrels per day.

FPSOcean – Bankrupt February 2009 The restructuring process for FPSOcean failed in February 2009, and the company filed for bankruptcy the same month. FPSOcean faced cost overruns when they failed to secure employment contracts for the DP 1 FPSO they had under construction at Drydocks World Dubai. Remaining funding to finish the vessel is likely USD 150-200m depending on where the unit will be deployed. Overall cost for the Deep Producer 1 (DP 1) FPSO was USD ~335m. USD ~199m in pre-instalments was paid in to the yard as of Jan 2009. The company

Their concept, based on the design of the Aker SMART FPSO, is to minimise the amount of time needed from project-award until delivery and first oil


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was seeking to raise USD ~136m in funding, through debt and equity, to finance the remaining instalments. When the contemplated USD 70m equity issue failed in February 2009, the company was forced to liquidate. The FPSO was purpose built for ultra deep water extended well testing, early production and marginal field development. The vessel was a converted 1981 built tanker (68,000 dwt) with storage capacity of 400,000 barrels of oil. The vessel was supposed to stay on site using a dynamic positioning system (DP 2), and planned “sail away” from the yard was in July 2009. Deep Producer 1’s future is uncertain, with the owner FPSOcean in bankruptcy, leaving completion of the vessel uncertain. Petroprod – Bankrupt April 2009 Petroprod filed for bankruptcy in April 2009 due to the magnitude of the remaining investments required to complete the conversion. The FPSO was scheduled to be delivered in Q4’09, and the CJ 70 jack-up was scheduled to be delivered in Sept 2010. The budget for the Aframax size FPSO was USD ~290m as of March 2009. The company reached an agreement with an undisclosed client to sell the vessel for USD ~216m, of which USD 181m was to cover remaining instalments and USD 35 was retained by the borrower. However, the transaction with the buyer failed at a later stage. The jack-up rig (CJ 70) was acquired by Seadrill, and subsequently charted to Statoil on long term charter in 2010. Petroprod 1 has been acquired by Jurong Shipyard after the parent company has been under liquidation which has been managed by KPMG. The shipyard has decided to complete the unit, and has as we understand already found a buyer. The unit is 65% complete, and further work will be subject to specifications from the buyer. The buyer is most likely Teekay, which is currently the low bidder on the Tiro-Sidon field off Brazil.


11 Jun 2010 62(77)

Nexus – Firesale to Brazilian OSX The company was set up as a pure-play FPSO company. However, being plagued by the low activity in the FPSO market, the company found itself in economical difficulties. Nexus Floating Production has sold their first unit to the Brazilian player OSX, and the counterparty have chartered the unit to OGX as an early well test unit. The sale realised proceeds of USD 350m, which gave a full recovery to 1st priority lenders, 50% to second lien and 10% to the convertible bond holders. In addition USD 38.1m was used to pay outstanding balance to Samsung Heavy Industries Ltd. Nexus does have an option for a second unit that is due in September 2010. The option also gives Nexus right to terminate the agreement with an exposure limited to USD 67m, which is already paid on the unit. We doubt that Nexus will be in a position to take on this construction contract, and the going concern in the company is very dependent on reaching an agreement with bondholders to waive the residual claim of USD 67m.

Former Nexus 1, now OSX 1

Source: OSX


11 Jun 2010 63(77)

Pareto Relative Valuation Table

Relative valuation oil services Relative Valuation Table - Oil Services

Local Mcap EV10e/ EV11e/ EV12e/ EV10e/ EV11e/ EV12e/ P/E10e P/E11e P/E12e -12m -6mCompany Market Price (USDm) % %

Subsea/ServicesAker Solutions NO 89.1 3756 7.1x 6.8x 5.5x 9.4x 9.2x 7.4x 12.1x 11.4x 9.7x 55% 23%Acergy NO 94.6 2838 4.6x 5.1x 3.7x 6.3x 7.5x 5.0x 11.7x 13.0x 9.0x 35% 7%Subsea 7 NO 94.8 2147 4.8x 4.1x 2.9x 7.0x 6.0x 4.0x 13.8x 11.8x 8.9x 29% 1%Prosafe SE NO 29.2 1034 5.5x 4.9x 4.4x 6.9x 6.0x 5.4x 5.0x 4.7x 4.5x -16% -16%Schlumberger* US 59.2 70578 10.3x 7.7x 6.4x 16.1x 11.8x 8.9x 20.5x 15.4x 12.1x 0% -4%Saipem* IT 25.2 13479 8.5x 7.2x 6.1x 12.3x 10.9x 9.2x 15.3x 13.7x 11.9x 32% 14%Technip* FR 48.7 6442 5.0x 4.3x 3.4x 6.6x 5.6x 4.4x 13.8x 12.4x 10.5x 33% 4%Oceaneering* US 45.7 2518 5.7x 4.8x 3.4x 8.1x 6.7x 4.7x 14.4x 11.8x 10.0x -14% -15%Average Subsea/Services Sector 6.4x 5.6x 4.5x 9.1x 8.0x 6.1x 13.3x 11.8x 9.6x 19% 2%

Offshore EquipmentNational Oil Well* US 37.4 15680 4.7x 4.7x 4.0x 5.7x 5.8x 4.2x 10.1x 11.6x 10.2x -1% -15%Cameron* US 36.4 8886 8.2x 6.8x 5.4x 10.2x 8.1x 6.4x 16.0x 13.0x 10.6x 16% -3%FMC Technologies* US 52.1 6330 9.7x 8.7x 7.1x 12.1x 10.6x 8.1x 18.0x 16.3x 13.4x 26% -4%Wellstream* UK 511.0 752 11.6x 7.7x 5.4x 15.3x 9.4x 6.3x 21.4x 13.1x 9.5x -3% 2%Average Equipment Sector 8.5x 7.0x 5.5x 10.9x 8.5x 6.2x 16.4x 13.5x 10.9x 10% -5%

Offshore DrillingTransocean US 44.3 14163 3.6x 3.1x 3.6x 5.1x 4.4x 3.5x 4.8x 4.1x 4.8x -0.5x -45%Diamond Offshore US 61.4 8529 3.9x 3.3x 3.9x 5.0x 4.2x 3.9x 5.2x 5.3x 5.1x -0.3x -36%Noble Drilling US 29.5 7534 3.2x 2.9x 3.2x 4.2x 4.1x 3.8x 5.5x 6.2x 7.1x -0.2x -27%Seadrill NO 133.5 8198 7.2x 5.5x 7.2x 9.2x 7.0x 6.2x 6.3x 4.3x 3.7x 0.4x -6%Pride International US 24.1 4236 8.3x 4.6x 8.3x 11.7x 5.9x 4.0x 12.7x 6.5x 5.4x 0.0x -25%Ensco International US 38.2 5440 5.5x 5.1x 5.5x 7.8x 7.4x 5.0x 10.7x 9.6x 6.8x -0.1x -9%Fred. Olsen Energy NO 184.5 1893 4.4x 3.0x 4.4x 5.9x 3.9x 3.1x 4.5x 3.1x 2.6x -0.2x -12%Songa Offshore NO 18.4 387 3.6x 3.6x 3.6x 5.2x 5.6x 3.7x 3.4x 4.3x 3.0x -0.2x -37%Scorpion Offshore NO 40.2 555 7.7x 6.0x 7.7x 10.9x 8.2x 8.5x 13.3x 8.5x 10.0x 0.6x 61%Northern Offshore NO 12.0 283 2.1x 1.9x 2.1x 3.8x 4.5x 6.9x 4.4x 6.9x 13.9x 0.6x 36%Average Drilling Sector 5.0x 3.9x 5.0x 5.0x 3.9x 5.0x 7.1x 5.9x 6.2x 2% -10%

Offshore Supply VesselsEzra holding Sing. 1.8 837 11.9x 8.2x 5.9x 20.4x 14.2x 11.0x 13.2x 8.6x 6.8x 34% -19%Tidewater US 41.7 2162 5.4x 4.6x 4.3x 8.3x 6.6x 6.2x 9.4x 7.7x 7.6x -17% -6%Bourbon Offshore FR 33.3 2470 11.0x 8.3x 6.7x 18.6x 12.2x 9.3x 25.1x 12.8x 8.9x 15% 32%Farstad Shipping NO 154.0 924 7.2x 6.9x 6.8x 10.9x 11.3x 11.5x 8.7x 10.0x 10.7x 27% 24%Solstad Offshore NO 124.0 721 7.0x 5.8x 5.1x 11.7x 8.9x 8.1x 7.5x 5.1x 5.4x 28% 19%Gulfmark Offshore US 26.0 679 6.5x 5.1x 4.2x 11.1x 8.6x 7.2x 11.6x 8.9x 8.3x -17% 0%DOF NO 42.4 594 10.8x 8.5x 7.6x 19.2x 12.3x 10.7x 15.8x 6.3x 5.4x 13% 13%Siem Offshore NO 11.1 614 10.9x 6.9x 5.7x 21.5x 10.9x 8.9x 16.9x 7.2x 6.0x 21% 26%Deep Sea Supply NO 11.6 232 9.4x 5.8x 6.0x 19.3x 9.0x 9.4x N/A 6.2x 6.4x 1% 37%Havila Shipping NO 63.0 155 10.0x 7.4x 7.1x 17.3x 11.0x 10.8x 29.1x 5.0x 5.5x 25% 13%Average Supply Sector 9.0x 6.8x 5.9x 15.8x 10.5x 9.3x 15.2x 7.8x 7.1x 13% 14%

FPSO SBM Offshore NL 13.0 2647 6.6x 5.9x 6.0x 15.1x 12.1x 12.7x 13.0x 9.2x 9.1x 6% 1%Sevan Marine NO 6.9 558 16.6x 10.7x 7.0x N/A 21.2x 10.8x N/A N/A 6.9x -42% -24%BW Offshore NO 8.6 604 7.3x 4.6x 3.7x 16.4x 9.5x 7.6x 6.7x 6.2x 5.4x 4% -3%Prosafe Production NO 14.0 550 5.3x 4.5x 3.7x 12.1x 9.5x 7.5x 10.7x 8.4x 7.0x 2% 16%Fred. Olsen Production NO 9.0 144 5.8x 5.1x 4.3x 40.6x 40.9x 34.6x N/A N/A N/AAverage FPSO Sector 8.3x 6.1x 4.9x 14.5x 13.1x 9.6x 10.1x 7.9x 7.1x -8% -3%

SeismicCGG Veritas FR 16.0 2933 5.8x 4.4x 2.9x 22.6x 12.4x 6.4x 64.9x 21.4x 10.2x 19% 10%PGS NO 61.8 1883 5.1x 3.7x 2.3x 13.8x 7.7x 3.9x 16.0x 9.5x 5.3x 49% -7%TGS-Nopec NO 79.1 1270 2.1x 1.6x 1.1x 4.4x 3.1x 2.0x 8.4x 6.6x 5.2x 11% -19%Fugro* NL 40.6 3946 6.8x 5.8x 5.3x 10.6x 8.7x 7.5x 12.9x 11.1x 9.9x 33% 6%Polarcus* NO 4.7 190 N/A 5.0x 2.4x N/A 9.0x 3.4x N/A 9.1x 2.4x #NA 42%Average Seismic Sector 4.9x 4.1x 2.8x 12.9x 8.2x 4.6x 25.6x 11.5x 6.6x 28% 6%

Average Oil Services 7.0x 5.6x 4.8x 11.4x 8.7x 6.8x 14.6x 9.7x 7.9x 11% 1%Source: Pareto Securities, Datastream, *Consensus estimates

Share price

EBITDA EBIT



11 Jun 2010 64(77)

Estimates


11 Jun 2010 65(77)

Sevan estimates Sevan Marine (SEVAN) 2008 2009 2010E 2011E 2012E 2013EOperating revenues USDm 121 195 335 425 577 597Operating costs " (219) (212) (225) (238) (277) (273)EBITDA* " (99) (18) 110 187 300 324Depreciation & amortisation " (32) (65) (93) (93) (104) (115)Operating profit " (130) (83) 17 94 196 209Associated companies " 1 0 1 1 1 1Net interest " (39) (62) (86) (100) (101) (99)Other f inancial items " 55 (36) - - - -Profit be fore taxe s " (113) (180) (68) (5) 96 110Minority interest " 13 - (6) (6) (1) (2)Taxes " 5 37 6 0 (9) (10)Net profit " (95) (143) (68) (11) 86 98

EPS USD (0.75) (0.28) (0.12) (0.02) 0.15 0.17*)Including associated companies

CAPITALIZATIONShare price USD 1.0 1.8 1.0 1.0 1.0 1.0Market cap. USDm 201 1,004 593 593 593 593Net interest bearing debt " 900 1,026 1,231 1,408 1,518 1,280Enterprise value " 1,101 2,030 1,824 2,001 2,111 1,873

VALUATIONP/E - - - - 6.9 6.0EV/EBITDA - - 16.6 10.7 7.0 5.8

CASH FLOWOperating cash f low USDm (164) (110) (25) 68 190 215Net cash used in investing activities " (538) (345) (180) (245) (300) (25)Net cash f rom f inancing activities " 522 568 93 179 136 (201)Net cash flow " (179) 113 (111) 2 26 (12)

Unit EBITDA 2008 2009 2010E 2011E 2012E 2013EPiranema USDm 13 16 14 28 27 31Hummingbird (80%) " (2) 21 24 25 25 29Voyageur " - (6) 4 - 79 78Sevan Driller " - - - - 57 107Sevan Brazil " - (10) 47 108 108 108Goliat " - 4 50 54 32 -SG&A, start up costs etc. " (44) (51) (29) (28) (28) (28)Total EBITDA " (32) (26) 110 187 300 324

BALANCE SHEET 2008 2009 2010E 2011E 2012E 2013ETangible f ixed assets USDm 1,732 1,953 2,041 2,193 2,389 2,299Other non-current assets & goodw ill " 99 157 158 159 160 160Interest bearing long-term receivables " - - - - - - Other current assets " 48 76 98 98 103 108Cash and liquid assets " 50 163 52 54 80 68Total as se ts " 1,930 2,349 2,348 2,503 2,731 2,635

Shareholders' equity USDm 703 974 906 895 981 1,127Minority interests " 38 38 44 50 52 53Other long-term debt " 18 4 4 4 4 4Interest bearing long-term debt " 951 1,101 1,167 1,361 1,497 1,248Other current liabilities " 220 143 111 92 97 102Interest bearing current liabilities " - 88 115 100 100 100Total liabilites & equity " 1,930 2,349 2,348 2,503 2,731 2,635 Source: Pareto Research


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Prosafe Production estimates P&L Prosafe Production (PROD) 2007 2008 2009 2010E 2011E 2012E 2013EOperating revenues USDm 150 265 315 423 414 411 408Operating costs " (58) (122) (130) (184) (169) (164) (164)EBITDA* " 94 148 185 238 244 246 244Depreciation & amortisation " (34) (254) (130) (135) (130) (125) (120)Operating profit " 59 (112) 55 103 114 121 124Net interest " 3 (25) (44) (41) (38) (32) (25)Other financial items " - (56) (1) 100 - - -Profit before taxes " 62 (193) 10 162 76 89 99Taxes " (9) (10) (20) (12) (12) (12) (12)Net profit " 53 (204) (10) 150 64 77 87EPS USD 0.2 0.2 0.1 0.2 0.3 0.3 0.3*)Including associated companies

CAPITALIZATIONShare price USD 10.7 1.5 2.1 2.1 2.1 2.1 2.1Market cap. USDm 2,719 395 548 539 539 539 539Net interest bearing debt " 67 822 1,018 712 548 366 179Enterprise value " 2,786 1,216 1,566 1,251 1,087 905 718

VALUATIONP/E 47.1 7.3 14.8 10.7 8.4 7.0 6.2EV/EBITA 46.0 13.5 15.5 12.1 9.5 7.5 5.8EV/EBITDA 29.6 8.2 8.5 5.3 4.5 3.7 2.9

CASH FLOWOperating cash flow USDm 46 131 152 266 184 202 207Net cash used in investing activities " (424) (955) (317) 40 (20) (20) (20)Net cash from financing activities " 380 983 88 (150) (150) (150) (150)

INTEREST COVERAGE AND LEVERAGEInterest bearing debt / EBITDA 1.3 7.2 6.2 4.2 3.5 2.8 2.3EBITDA / Net interest (34.4) 5.6 4.2 5.8 6.4 7.7 9.7Market Cap / EV 1.0 0.3 0.3 0.4 0.5 0.6 0.8EBITDAFPSO Espoir Ivoirien USDm 26 26 26 25 25 25 25FPSO Abo " 18 18 18 18 15 12 9FPSO Polvo " 16 31 31 30 30 30 30FPSO Umuroa " 22 58 31 23 17 17 17FPSO Petrolia Nautipa (50%) " 6 6 6 6 6 6 6FSO Endeavor " 7 7 5 5 5 5 5FSO Madura Jaya (50%) " 1 1 1 1 1 1 1FPSO Azurite " - - 45 48 48 48 48FPSO Cidade de São Mateus " - - 28 66 66 66 66FPSO Ningaloo Vision " - - - 37 37 37 37Other items (incl. aem.) " (4) (12) (5) (22) (7) (2) (2)Total EBITDA " 93 136 186 238 244 246 244

BALANCE SHEET 2007 2008 2009 2010E 2011E 2012E 2013ETangible fixed assets USDm 933 1,567 1,756 1,641 1,531 1,426 1,326Other non-current assets & goodwill " 128 144 135 75 75 75 75Interest bearing long-term receivables " - - - - - - -Other current assets " 59 59 71 95 93 93 92Cash and liquid assets " 53 211 134 290 304 336 373Total assets " 1,173 1,981 2,096 2,101 2,003 1,930 1,866

Shareholders' equity " 990 806 814 964 1,028 1,105 1,192Minority interests " - - - - - - -Other long-term debt " 1 2 38 48 48 48 48Interest bearing long-term debt " 66 1,014 1,001 851 701 551 401Other current liabilities " 62 141 93 88 76 75 75Interest bearing current liabilities " 54 19 151 151 151 151 151Total liabilites & equity " 1,173 1,981 2,096 2,101 2,003 1,930 1,866

Debt ratio 0.7 5.8 5.5 3.0 2.2 1.5 0.7Equity ratio 0.8 0.4 0.4 0.5 0.5 0.6 0.6 Source: Pareto Research


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SBM Offshore estimates SBM Offshore (SBMO) 2007 2008 2009 2010E 2011E 2012E 2013EOperating revenues USDm 2,871 3,060 2,957 2,783 2,861 2,962 3,051Operating costs " (2,323) (2,530) (2,343) (2,143) (2,109) (2,165) (2,184)Depreciation & amortisation " (246) (255) (320) (360) (381) (421) (461)Operating profit " 302 275 293 279 371 376 406Net interest " (22) (40) (60) (75) (85) (85) (85)Other financial items " - - - - - - -Profit before taxes " 280 237 234 204 286 291 321Taxes " (15) (9) (4) (12) (16) (16) (18)Net profit " 267 228 230 192 270 275 304EPS USD 1.9 1.6 1.6 1.2 1.6 1.7 1.8*)Including associated companies

CAPITALIZATIONShare price USD 30.9 13.1 20.2 15.2 15.2 15.2 15.2Market cap. USDm 4,427 1,872 3,313 2,494 2,494 2,494 2,494Net interest bearing debt " 875 1,464 1,464 1,726 1,977 2,295 1,888Enterprise value " 5,301 3,336 4,777 4,219 4,471 4,789 4,382

VALUATIONP/E 16.6 8.2 12.9 13.0 9.2 9.1 8.2EV/EBITA 17.6 12.1 16.3 15.1 12.1 12.7 10.8EV/EBITDA 9.7 6.3 7.8 6.6 5.9 6.0 5.1

CASH FLOWOperating cash flow USDm 331 577 459 555 650 694 763Net cash used in investing activities " (570) (1,029) (708) (706) (819) (930) (274)Net cash from financing activities " 169 409 156 190 268 218 (482)

BALANCE SHEET 2007 2008 2009 2010E 2011E 2012E 2013ETangible fixed assets USDm 1,962 2,565 2,830 3,176 3,615 4,124 3,937Other non-current assets & goodwill " 137 480 452 452 452 452 452Interest bearing long-term receivables " - - - - - - -Other current assets " 1,255 1,069 1,230 1,157 1,190 1,232 1,269Cash and liquid assets " 281 230 147 185 284 266 273Total assets " 3,635 4,345 4,658 4,971 5,540 6,073 5,930

Shareholders' equity " 1,333 1,235 1,803 1,912 2,100 2,293 2,514Minority interests " 4 6 14 14 14 14 14Other long-term debt " 45 36 45 17 17 17 17Interest bearing long-term debt " 922 1,430 1,282 1,582 1,932 2,232 1,832Other current liabilities " 1,097 1,374 1,186 1,116 1,148 1,188 1,224Interest bearing current liabilities " 234 264 328 328 328 328 328Total liabilites & equity " 3,635 4,345 4,658 4,971 5,540 6,073 5,930 Source: Pareto Research


11 Jun 2010 68(77)

BW Offshore estimates P&L BW Offshore (BWO) 2007 2008 2009 2010E 2011E 2012EOperating revenues USDm 663 474 409 658 873 676Operating costs " (562) (307) (276) (470) (607) (402)EBITDA* " 123 (171) 89 224 282 292Depreciation & amortisation " (41) (385) (64) (104) (139) (139)Operating profit " 59 (218) 69 84 127 135Net interest " (33) (34) (15) (21) (36) (33)Other financial items " 22 (54) (6) - - -Profit before taxes " 70 (517) 3 98 107 121Taxes " (14) (15) (11) (10) (11) (12)Net profit " 53 (533) (9) 89 96 109EPS USD 0.1 (0.2) (0.0) 0.2 0.2 0.2*)Including associated companies

CAPITALIZATIONShare price USD 4.2 0.6 1.5 1.3 1.3 1.3Market cap. USDm 1,922 282 669 592 592 592Net interest bearing debt " 901 585 849 778 620 428Enterprise value " 2,824 867 1,518 1,371 1,213 1,020

VALUATIONP/E 47.8 - - 6.7 6.2 5.4EV/EBITA 44.3 - 21.6 16.4 9.5 7.6EV/EBITDA 26.9 21.4 11.3 7.3 4.6 3.7

CASH FLOWOperating cash flow USDm 179 65 187 186 223 207Net cash used in investing activities " (1,125) 288 (368) (115) (65) (15)Net cash from financing activities " 945 (322) 181 50 - -

INTEREST COVERAGE AND LEVERAGEInterest bearing debt / EBITDA nmf 322.8 10.8 6.5 4.5 4.4EBITDA / Net interest nmf 0.1 6.7 8.1 7.0 7.8Market Cap / EV 0.7 0.3 0.4 0.4 0.5 0.6EBITDASendje Berge (Addax to 2011, opt. to 2013) USDm (5,000) (5,000) (5,000) (5,000) (5,000) (5,000)Berge Helene (Petronas to 2013) " - - - - - -Belokamenka (Rosneft to 2019) " - - - - - -Berge Okoloba Toru (Global to 2009) " - 1 1 1 1 1YÙUM K’AK’NÁAB (Pemex to 2022) " - 1 1 1 1 1BW Pioneer (Petrobras to 2015) " - 1 1 1 1 1BW Cidade de São Vicente (Petrobras to 2019) " - 0 - - - -BW Carmen " - 1 1 1 1 1BW Nisa, Papa Terra EPC " - 0 - - 0 1

BALANCE SHEET 2007 2008 2009 2010E 2011E 2012ETangible fixed assets USDm 629 870 1,228 1,246 1,182 1,068Other non-current assets & goodwill " 1,773 809 744 780 795 813Interest bearing long-term receivables " 320 284 163 163 163 163Other current assets " 252 271 191 207 275 213Cash and liquid assets " 37 68 68 189 347 539Total assets " 3,010 2,301 2,394 2,585 2,762 2,797

Shareholders' equity " 1,508 923 921 1,009 1,106 1,214Minority interests " - - - - - -Other long-term debt " 47 43 157 197 197 197Interest bearing long-term debt " 845 936 1,080 1,130 1,130 1,130Other current liabilities " 196 399 235 248 329 255Interest bearing current liabilities " 413 0.4 0.3 0.3 0.3 0.3Total liabilites & equity " 3,010 2,301 2,394 2,585 2,762 2,797 Source: Pareto Research


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Fred. Olsen Production estimates P&L Fred. Olsen Production (FOP) 2008 2009 2010E 2011E 2012E 2013EOperating revenues USDm 80 115 109 109 109 109Operating costs " (50) (64) (63) (63) (63) (63)EBITDA* " 30 51 45 45 45 45Depreciation & amortisation " (39) (40) (39) (40) (40) (40)Operating profit " (9) 11 6 6 6 6Net interest " (6) (6) (7) (6) (4) (2)Other financial items " (24) (1) - - - -Profit before taxes " (39) 4 (1) (0) 2 4Taxes " (0) (6) (5) (5) (5) (5)Net profit " (39) (2) (6) (5) (3) (1)EPS USD (0.1) (0.0) (0.1) (0.1) (0.0) (0.0)*)Including associated companies

CAPITALIZATIONShare price USD 0.6 1.2 1.4 1.4 1.4 1.4Market cap. USDm 65 130 144 144 144 144Net interest bearing debt " 126 127 119 86 50 13Enterprise value " 192 257 263 230 194 157

VALUATIONP/E - - - - - -EV/EBITA 14.5 23.5 40.6 40.9 34.6 27.9EV/EBITDA 6.5 5.1 5.8 5.1 4.3 3.5

CASH FLOWOperating cash flow USDm 1 51 16 34 36 38Net cash used in investing activities " (116) (51) (8) (1) (1) (1)Net cash from financing activities " 7 9 (41) - (50) (50)

INTEREST COVERAGE AND LEVERAGEInterest bearing debt / EBITDA 7.8 4.7 4.4 4.4 3.3 2.2EBITDA / Net interest 5.1 8.4 6.1 7.6 11.3 22.7Market Cap / EV 0.3 0.5 0.5 0.6 0.7 0.9EBITDAFPSO Petrolia Nautipa (50%) USDm 4.7 6.2 6.2 6.2 6.2 6.2FPSO Knock Adoon " 18.1 21.9 21.9 21.9 21.9 21.9Marc Lorenceau (Ex. Borgen Dolphin) " 2.8 2.9 2.9 2.9 2.9 2.9Knock Dee " (1.8) (1.8) - - - -Knock Nevis " 3.8 (2.7) - - - -Knock Allan " (3.1) 17.3 24.0 24.0 24.0 24.0Total EBITDA " 24.5 50.6 45.3 45.3 45.3 45.3

BALANCE SHEETTangible fixed assets USDm 395 414 383 344 306 267Other non-current assets & goodwill " 9 11 11 11 11 11Interest bearing long-term receivables " - - - - - -Other current assets " 15 18 20 25 25 25Cash and liquid assets " 103 112 79 112 98 85Total assets " 522 555 493 492 439 388

Shareholders' equity " 263 265 260 254 251 249Minority interests " - - - - - -Other long-term debt " 15 15 15 15 15 15Interest bearing long-term debt " 230 237 196 196 146 96Other current liabilities " 14 35 20 25 25 25Interest bearing current liabilities " - 2 2 2 2 2Total liabilites & equity " 522 555 493 492 439 388 Source: Pareto Research


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EOC estimates P&L EOC (EOC) 2007 2008 2009 2010E 2011E 2012EOperating revenues USDm 32 110 72 115 147 152Operating costs " (14) (67) (37) (54) (61) (63)EBITDA* " 18 43 35 62 90 95Depreciation & amortisation " (2) (7) (8) (25) (27) (27)Operating profit " 16 36 27 37 59 63Net interest " (3) (7) (5) (16) (15) (11)Other financial items " - - - (0) - -Profit before taxes " 13 28 21 21 48 57Taxes " (2) (3) (0) (2) (2) (2)Net profit " 11 25 21 19 46 55EPS USD 0.1 0.2 0.2 0.2 0.4 0.5*) Including associated companies

CAPITALIZATIONShare price USD 3.3 2.6 1.2 1.1 1.1 1.1Market cap. USDm 369 287 129 121 121 121Net interest bearing debt " 158 266 336 323 255 182Enterprise value " 526 553 464 444 376 303

VALUATIONP/E 32.5 11.3 6.1 6.4 2.6 2.2EV/EBITA 32.9 15.4 17.2 11.9 6.0 4.4EV/EBITDA 29.3 12.8 13.3 7.2 4.2 3.2

CASH FLOWOperating cash flow USDm 48 29 112 54 72 77Net cash used in investing activities " (71) (147) (126) (71) (4) (4)Net cash from financing activities " 32 123 69 (6) (45) (45)

INTEREST COVERAGE AND LEVERAGEInterest bearing debt / EBITDA 9.6 6.7 11.8 6.2 3.9 3.3EBITDA / Net interest 6.2 5.9 6.5 3.8 5.7 8.1Market Cap / EV 0.7 0.5 0.3 0.3 0.3 0.4EBITDALewek Conqueror (Support barge) USDm - - - - - -FPSO Lewek Arunothai " - - - - - -Lewek Champion (Heavy lift/pipelay) " 6 6 7 8 7 7Lewek Chancellor (Support barge) " - - (2) 43 59 59Chim Sao FPSO " 6 10 9 4 5 5

BALANCE SHEETTangible fixed assets USDm 230 369 450 432 409 387Other non-current assets & goodwill " - - 19 49 53 58Interest bearing long-term receivables " - - - - - -Other current assets " 43 47 54 74 95 98Cash and liquid assets " 15 24 76 60 83 112Total assets " 288 440 599 616 640 654

Shareholders' equity " 88 110 131 150 195 251Minority interests " - - - - - -Other long-term debt " 1 0 0 - - -Interest bearing long-term debt " 149 274 363 312 267 222Other current liabilities " 27 39 56 83 106 110Interest bearing current liabilities " 24 17 48 71 71 71Total liabilites & equity " 288 440 599 616 640 654 Source: Pareto Research


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Glossary Definitions of Floating production systems FPSO A Floating Production, Storage and Offloading (FPSO) system is contained on large, tanker-type vessels that are moored to the sea floor. A FPSO is designed to process and stow production from nearby subsea wells and to periodically offload the stored oil to smaller shuttle tankers, which transports the oil to onshore facilities for further processing. While the system may be relocated, it generally resides on the same location for a prolonged period of time. Floating production unit designs FPSO Semi-submersible TLP Spar Sevan design

Semi-submersible A semi-submersible is a mobile offshore drilling, or production, unit floating on the water surface above the subsea wellhead, and is kept in position by either anchors or dynamic positioning. The semi-submersible name steams from the base pontoons that are empty when the unit is towed to a location and partially filled with water to stabilize the unit above the well. TLP A Tension Leg Platform (TLP) is an offshore drilling platform, vertically moored to the sea floor by means of tethers, or tendons, grouped at each of the structure’s corners. A group of tethers are called a tension leg. The TLP is particularly suited for water depths greater than 300 meters. The buoyancy of the platform applies tension to the tubes. TLP exhibit good motion due to the low elasticity offered with the use of tethers. SPAR There are four different versions of a spar platform: Classic, Truss, Cell, and Wet Tree. A Classic Spar platform is used as buoys in shipping and is moored in place vertically. The Classic Spar consists of a large-diameter, single vertical cylinder supporting a deck. A Truss Spar platform is a modified version of the Classic Spar and features an open truss in the lower hull, which significantly reduces the weight and lowers overall cost. The Cell Spar platform features a deck supported by a long, buoyant and cylindrical tank hull section moored to the seabed. The Wet Tree Spar platform has located the Christmas tree1 at the sea bed and the Spar is connected to the well through a low pressure riser. A Dry Tree Spar platform, on the other hand, uses a high pressure riser and the Christmas tree is located dry on the topside. SEVAN Design Sevan offers a cylindrical FPSO design. The turret system and the circular design provide cost advantages compared to other FPSO solutions working in harsh environments and the motion characteristics of the FPSO has proved to be very favourable. The oil is stored in tanks in the hull, and the topside provides the processing facilities, living quarter etc.

1 Christmas Tree – an assembly of control valves, gauges and chokes that control oil and gas flow in a completed well. Christmas trees installed on the ocean floor are referred to as subsea, or “wet”, trees. Christmas trees installed on land or platforms are referred to as “dry” trees (FMC Technology)


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Application, Advantages and Disadvantages The following chapter focuses on the applicability of the FPSOs, and also the advantages and disadvantages of such technology. The increased development of oil reserves in shallow water and the increased demand for oil and energy, world-wide, calls for the need of production in marginally profitable fields and in deep water. Production in deeper water gives rise to challenges less relevant for production systems in shallow water, such as heavy mooring systems and an increased need for thermally insulated pipelines. Furthermore, the cost and complexity of installing fixed structure, such as fixed platforms and sub-sea pipelines, also rise as a consequence of increasing depths.

Floating production units holds the potential of being less expensive and more environmentally sound due to the fairly short time frame in which the unit can be located and the possibility of relocating the unit to other fields in situations where wells are dry or contracts have expired. However, when fields are large and close to existing infrastructure, the total cost of connecting these fields to the pipelines may lie at levels that outweigh the advantages of floating production units. Advantages The FPSO is the most commonly installed floating production system and offers several advantages, some in which are presented next. Field storage FPSOs being self-contained and offering offshore segregated storage make these systems independent of existing infrastructure. The FPSOs can therefore be situated in fields that are distant from existing pipelines, while shuttle tankers regularly transport the oil/gas to onshore facilities. The segregated storage allows the FPSOs to store oil from different wells in different tanks, as quality and price may differ among wells. Furthermore, fields holding oil with high viscosity and low API makes it costly to pump the oil through pipelines. Short time to disconnect Depending on the specifications, the time frame necessary to disconnect the FPSO may be very short. A planned disconnection can be executed within 24 hours and an unplanned safe disconnection in only 10 hours. Movable FPSOs are often built with a ship-shaped hull, and are therefore movable. In general, they are also self-propelled, and hence independent of tugboats. As a result, FPSOs can easily be relocated in the event of an upcoming severe storm, expiration of a contract or when the FPSO are required on another field. The latter event might involve some modifications to the FPSO and a dry-dock overhaul. The flexibility of the FPSO has increased the profitability of smaller fields. Adaptability for water depths An FPSO can be used on several water depths. FPSOs operate on depths ranging from 20 to 2000 meters. The increase in cost for mooring an FPSO system in ultra deep water is less than that of conventional fixed structures or tension leg platforms (TLPs).


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Early deployment A FPSO can be deployed while the field is being developed. The allows the wells start to producing immediately after being drilled. This contributes to a shorter time to cash flow. Variable combinations with other facilities The possibility of using the FPSO in combination with other offshore facilities, allows the FPSO to be used for various field developments. The extensive deck area furthermore offers flexibility with respect to the process plant layout. Leased up front The FPSO can be leased up front, which may lead to lower up-front costs. Extended well testing FPSOs allow well testing to span across longer than normal time periods and thereby enhance reservoir information. In effect, the economical soundness of the field and decisions concerning pipelines and fixed infrastructure can be founded on a more extensive knowledge base. Less weight sensitive FPSOs being less weight sensitive allow FPSOs to be used on different fields with different production capacities. FPSOs have been used on different plants with an interval of the production volume from 20,000 to 250,000 Barrels of oil per day. Expanded market FPSO provides oil companies with the possibility of transporting oil to different locations. The price per barrel of crude oil may become lower as the use of pipelines implies that locations are predetermined. Possibility to exploit ageing tank and bulk vessels The price of a converted FPSO will decrease, compared to a newbuilding, as the FPSO can be converted from aging tankers and bulk vessels. This may lead to a better utilization of ecologically and economically resources. Disadvantages FPSOs also bring about several disadvantages compared to other floating production units and fixed structures. High cost of risers The price of the riser system usually connected to the FPSO is generally higher than the Steel Catenary risers used in conjunction with SPARs and TLPs. Limited number of risers As all risers on a turret-moored FPSO must pass through the inside of the turret bearing, the bearing opening is considered to be the governing factor on the number of risers that can fit within the turret. This limiting factor therefore controls the production rate that can be obtained at fields. No well access The FPSO lacks both access to wells and drilling equipment. With such a device, the unit would be classified as a floating drilling production storage and offloading unit (FDPSO). High well maintenance costs The subsea tiebacks associated with FPSOs generally bring about higher well maintenance costs.


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Disclaimers and disclosures This document provides additional disclosures and disclaimers relevant to research reports and other investment recommendations (“Recommendations”) issued by Pareto Securities AS (“Pareto”), cf. the Securities Trading Act Section 3-10 with further regulations. Basis and methods for assessment Recommendation for shares and share related instruments are based on price targets fixed with different valuation methods that may include analysis of earnings multiples (absolute and relative), valuation of a company using DCF calculations (discounted cash flow) and by carrying out net asset value (NAV) assessments. Price targets are changed when earnings and cash flow forecasts are changed. They may also be changed when the underlying value of the issuer’s assets changes or when factors impacting the required rate of return change. Pareto credit analysts provide credit ratings which is a framework for comparing the credit quality of rated debt securities. The ratings are based on the same rating scale as international rating agencies and represent the opinion of Pareto as to the relative creditworthiness of securities. A credit rating on a stand alone basis should not be used as a basis for investment operations. Pareto Securities may also provide credit research with more specific price targets. These price targets are based on different valuation methods. These methods may include analysis of key credit ratios and other factors describing the securities creditworthiness, peer group analysis of securities with similar creditworthiness and different DCF-valuations. Definitions of key terms Buy: Pareto expect this financial instruments’ total return to exceed 10% over the next six months. Hold: Pareto expect this financial instruments’ total return to be 0-10% over the next six months. Sell: Pareto expect this financial instruments’ total return to be negative over the next six months. Trading Buy: Pareto expect this financial instruments’ total return to exceed 10% over the next month. Trading Sell: Pareto expect this financial instruments’ total return to be negative over the next month. Risks related to investments and Recommendations There is risk attached to all investments in financial instruments. The analyst’s assessment of the risk is identified by the terms High, Medium or Low Risk in the relevant Recommendation. There may be uncertainties with respect to the accurateness and reliability of any information, interpretation and assessment. There are uncertainties and risks attached to the correctness of any Recommendation by Pareto and with respect to forward looking statements and expectations. Standards and supervision Pareto complies with the standards for recommendations issued by the Norwegian Securities Dealers Association and the Norwegian Society of Financial Analysts. Pareto is under the supervision of the Financial Supervisory Authority of Norway. No agreement with the issuer concerning Recommendations Pareto has no agreements with issuers with respect to dissemination of Recommendations. Generally Pareto will however present the Recommendation for the issuer prior to dissemination to assure a correct factual basis. Organisation and duty of confidentiality All employees of Pareto are subject to duty of confidentiality towards clients and with respect to handling inside information. Pareto has established “Chinese walls” and other organisational procedures for the purpose of minimizing conflicts of interest within Pareto and in the Pareto group and between clients. Compensation schemes for analysts No part of analysts’ salaries or compensations relates directly to investment banking services or other services provided by Pareto or related companies to issuers. Analysts are however part of the general bonus scheme. Updating of Recommendations Pareto has no fixed schedule for updating. Disclosure of positions in financial instruments Please see Appendix A for an overview of positions in financial instruments held by Pareto and related companies and persons. Disclosure of assignments and mandates Please see Appendix B for an overview of (a) all financial instruments in which Pareto or related companies are market makers or liquidity providers, (b) all financial instruments where Pareto or related companies have been lead managers or co-lead managers over the previous 12 months and (c) all issuers of financial instruments to whom Pareto or related companies have rendered investment banking services over the previous 12 months. Please be aware that agreements and services that are still subject to confidentiality are excluded.


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Previous Recommendations For an overview of Pareto’s Recommendations in the financial instruments of the issuing company the last 12 months, including data on changes in Recommendations. Log on to www.pareto.no, type in company name or symbol in the search field and click search. Under Reports you will find previous Recommendations. Please be aware that certain informal Recommendations may be excluded. Statistics on Recommendations Please see Appendix C for quarterly statistics on the overall ratio of “Strong Buy”, “Buy”, “Hold” and “Reduce” in Pareto’s Recommendations in financial instruments, including a split with respect to issuers where Pareto have provided investment banking services the previous 12 months. Additional provisions on Recommendations distributed in the United States This research reports is prepared by Pareto Securities AS and distributed in the United States by Pareto Securities Inc. The research report is intended for distribution in the United States to institutional investors only. Pareto Securities Inc. is a broker-dealer registered with the U.S. Securities and Exchange Commission and is a member of FINRA & SIPC. U.S. persons seeking more information about any of the securities discussed in this report, or wishing to execute a transaction in these securities, should contact Pareto Securities Inc. at 150 East 52nd Street, NY 10022, Tel. 212 829 4200. To the extent required by applicable U.S. laws and regulations, Pareto Securities Inc. accepts responsibility for the contents of this publication. Investment products provided by or through Pareto Securities Inc. or Pareto Securities AS are not FDIC insured, may lose value and are not guaranteed by Pareto Securities Inc. or Pareto Securities AS. Investing in non-U.S. securities may entail certain risks. This document does not constitute or form part of any offer for sale or subscription, nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. The securities of non-U.S. issuers may not be registered with or subject to SEC reporting and other requirements. The information available about non-U.S. companies may be limited, and non-U.S. companies are generally not subject to the same uniform auditing and reporting standards as U.S. companies. Market rules, conventions and practices may differ from U.S. markets, adding to transaction costs or causing delays in the purchase or sale of securities. Securities of some non-U.S. companies may not be as liquid as securities of comparable U.S. companies. Pareto Securities Inc. and/or Pareto Securities AS may have material conflicts of interest related to the production or distribution of this research report which are disclosed on the following Appendix A and Appendix B. Additional information for recipients in Singapore This research reports is prepared by Pareto Securities AS and distributed in Singapore by Pareto Securities Asia Pte Ltd (“Pareto Securities Asia”). Pareto Securities AS is a company established under the laws of Norway being licensed and supervised by Norwegian regulators. Pareto Securities Asia is an exempt financial advisor under the Singapore Financial Advisers Act and a subsidiary of Pareto Securities AS. This report is directed only to "accredited investors", "expert investors" and "institutional investors" as defined in the Singapore Securities and Futures Act. This report is intended for general circulation amongst such investors and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of any product referred to in this report, taking into account your specific financial objectives, financial situation or particular needs before making a commitment to purchase any such product. Please contact Pareto Securities Asia, 16 Collyer Quay, # 27-02 Hitachi Tower, Singapore 049318, at +65 6408 9800 in respect of any matters arising from or in connection with this report. This report does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. The securities or other financial instruments discussed in this report may not be suitable for all investors. This report has been prepared and issued for distribution to professional investors only and all recipients should seek independent investment advice prior to making any investment decision based on any information contained in this report. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. Disclaimer Pareto and the analyst accept no responsibility and expressively disclaim any and all liabilities for any and all losses related to investments caused by or motivated by Recommendations from Pareto. Any person receiving a Recommendation from Pareto is deemed to have accepted this disclaimer. The disclaimer shall apply even if an Investment Recommendation is shown to be erroneous or incomplete or based upon incorrect or incomplete facts, interpretations or assessments or assumptions by Pareto, and irrespective of whether Pareto or any person related to Pareto can be blamed for the incident.


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Appendix A Disclosure requirements pursuant to the Securities Trading ST Regulations § 3-10 (2) and § 3-11, letter a-b Pareto Securities AS does not alone or together with related companies or persons – own a portion of the shares exceeding 5 % of the total share capital – in any companies where a recommendation has been produced or distributed by Pareto Securities AS. Pareto Securities AS may hold financial instruments in companies where a recommendation has been produced or distributed by Pareto Securities AS in connection with rendering investment services, including Market Making. Please find below an overview of material interests in financial instruments held by employees in Pareto Securities AS, in companies where a recommendation has been produced or distributed by Pareto Securities AS. By material interest is meant holdings exceeding a value of NOK 50,000.

Company name: Analyst holding

Total holding Company name:

Analyst holding

Total holding

ACERGY S.A. 0 75 101 NORWEGIAN AIR SHUTTLE 0 1 300AKER ASA A-AKSJER 0 1 504 NORWEGIAN ENERGY COMPANY 0 81 680ATEA 0 2 070 OLAV THON 0 681BONHEUR ASA 0 2 804 ORKLA ASA A-AKSJER 0 17 546CAMILLO EITZEN 0 6 500 PROSAFE PRODUCTION 0 150 815CERMAQ ASA 0 3 000 PROSAFE SE 0 815CREW GOLD NYE 0 6 894 672 PROTECTOR FORSIKRING 0 499 100DNB NOR ASA 0 44 197 QUESTERRE ENERGY CORP 0 20 777DNO INTERNATIONAL ASA 0 60 000 RENEWABLE ENERGY CORP 0 30 580DOCKWISE 0 400 SANDNES SPAREBANK GR.FOND 0 9 877EMGS 0 13 385 SCORPION OFFSHORE 0 20 000EOC Ltd 0 25 000 SEADRILL LTD 0 7 700FARSTAD SHIPPING ASA 0 2 401 SEAWELL 0 10 000FRED OLSEN ENERGY 0 300 SEVAN 0 16 876FRONTLINE LTD 0 4 895 SHIP FINANCE 0 2 923GANGER ROLF ASA 0 12 724 SKEIE DRILLING & PRODUCTION 0 4 024 000GLOBAL RIG COMPANY 0 714 100 SONGA OFFSHORE SE 0 6 500GOLAR LNG ENERGY LIM 0 27 000 SPAREB. NORD-NORGE GR.FOND 0 5 733HAVILA SHIPPING ASA ORD. 0 16 050 SPAREBANK 1 SR-BANK 0 57 648IMAREX 0 1 150 SPAREBANKEN ØST GR.F 0 157 290INTEROIL 0 13 600 STATOILHYDRO ASA 0 6 954KONGSBERG AUTOMOTIVE 0 16 000 STOREBRAND ASA 0 4 161ERØY SEAFOOD GROUP 0 13 000 TELENOR ASA 2 000 12 604NORSE ENERGY CORP. A 0 83 021 TGS NOPEC GEOPHYSIC. 0 7 204NORSK HYDRO ASA 0 22 015 WILH. WILHELMSEN ASA 0 20 008NORSKE SKOGINDUSTRIER ASA 0 46 002 YARA INTERNATIONAL 0 9 796NORTHLAND RESOURCES 0 688 500 This overview is updated monthly (last updated 30.04.2010).


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Appendix B Disclosure requirements pursuant to the Securities Trading ST Regulation § 3-11, letter d-f, ref the Securities Trading Act Section 3-10 Overview over issuers of financial instruments where Pareto Securities AS have prepared or distributed investment recommendation, where Pareto Securities AS or related companies have been lead manager/co-lead manager or have rendered publicly known not immaterial investment banking services over the previous 12 months: - Aker Drilling - Hansa Property - Prosafe - Austevoll Seafood - Havila Shipping - Questerre - Bergen Group - InterOil - Rocksource - Bjørge - Kongsberg Automotive - RXT - Blom - Lighthouse Caledonia - Saga Tankers - BN Bank - Marine Accurate Well - Seadrill - Cecon - Marine Subsea - Sevan Marine - Color Group - Mosvold Supply - Skeie Drilling & Production - Crew - Nexus Floating Production - Solstad Offshore - Davie Yards - Noreco - Songa Offshore - DOF - Norse Energy - Sparebank 1 SMN - DOF Installer - Norske Skog - Sparebanken Sogn & Fjord. - DOF Subsea - North Energy - Sparebanken Vest - Eltek - Norwegian Air Shuttle - Sparebanken Øst - Equinox Offshore - Norwegian Property - Spectrum - Faktor Eiendom - Nutripharma - STX Europe - Flex LNG - Oceanteam - Vantage Drilling - Golar LNG Energy - PA Resources - Wega Mining - Green Reefers - Petroleum Geo-Services - Wilh. Wilhelmsen - Grenland Group - Petromena This overview is updated monthly (this overview is for the period 01.05.2009 – 30.04.2010). Appendix C Disclosure requirements pursuant to the Securities Trading ST Regulation § 3-11 (4) Column I shows the overall ratio of “Strong Buy”, “Buy”, “Hold” and “Reduce” in Pareto’s Recommendations in financial instruments. Column II shows the ratio of “Strong Buy”, “Buy”, “Hold” and “Reduce” in Pareto’s Recommendations in financial instruments, where Pareto have provided investment banking services to the issuer the previous 12 months. Column I Column II Strong Buy 0,6% 2,9% Buy 63,8% 70,6% Hold 24,4% 26,5% Reduce 11,3% 0,0% This overview is updated quarterly (last updated 24.03.2010).

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