Impairment losses in Norway Q2-2016 Shipping, Offshore, Oil&Gas

Rachell Lau Erik Nordskar Bjørn Einar Strandberg

www.pwc.no

2 Impairment losses in Norway Q2-2016

Table of content Impairment charges in the Shipping, Offshore and Oil and Gas sector

3

Limitations 5 Shipping 6 Offshore 8 Oil and Gas

12

Closing Statement

14

Impairment charges in the Shipping, Offshore and Oil and Gas sector Executive Summary Due to the dramatic fall in the oil price, the oil and gas and related industries are facing a tougher economic environement. It is therefore to be expected that some asset values can no longer be recovered at their book values. Impairment charges in the industry were present in the 2015 annuals. Typically first quarter is not the right timing for extensive impairment test updates. This study therefore focuses on the second quarter of 2016, and the prupsoe is to identify the recognised impairment losses of listed companies on Oslo Børs within the Shipping and Offshore as well as the Oil and Gas sector. Among the companies we investigated for the second quarter of 2016, 24 companies (out of 56 considered) recorded an impairment loss and three companies made an impairment reversal. Total impairment charges (excluding reversals) during the period were 1,238 MUSD. The oil and gas sector had impairment charges of 281 MUSD (representing 23% of total impairment losses), while shipping and offshore had 109 MUSD (9%) and 849 MUSD (69%), respectively. Among the three sectors, only companies within the oil and gas sector made reversals of prior impairment losses. Three companies had reversals for a total of 40 MUSD. Structure, data and limitations The population is represented by companies listed on the Oslo Børs or Oslo Axess, belonging to the oil and gas, shipping and offshore sector. The constraint (belonging in the three sectors) was used to target companies were impairment was deemed most likely to occur. We have investigated all subjects that belong in one of the categories. We have analyzed the Q2-2016 report of the companies. The study considers only impairment losses. Included in this is impairment value relative to its book value, method used for recoverable amount, considerations on the employment of external counsel (i.e., brokerage firms) and reversal of impairment charges.

The study is based on the publicly available financial statements and quarterly reports without any adjustments for possible differences in generally accepted accounting principles (GAAP) applied. These reports were found on company websites or from newsweb.no, and we consider the information as valid, though most interim reports are not audited. A significant number of the companies in our study have prepared their financial statements based on the International Financial Reporting Standards (IFRS). As shown in Figure 1, only 7% of the companies we have analyzed used US GAAP. These are Frontline Ltd, Golden Ocean Group Ltd and Seadrill Limited, and are primarily listed in New York, USA. Both Frontline Ltd and Seadrill Ltd are listed on the New York Stock Exchange while Golden Ocean Group Ltd is listed on Nasdaq, New York. Figure 1: Applied reporting framework

7%

IFRS

93%

US GAAP

4 Impairment losses in Norway Q2-2016

Impairment losses in Norway Q2-2016 5

Limitations

The most prominent limitation is the absence of extensive information regarding impairments in the quarterly reports. A large number of companies does not specify sufficiently; e.g., whether external counsel was considered; which discount rate was used and the other underlying assumptions included in the impairment tests. Many interim reports are brief in nature. Some figures in the study herein show relative impairment charges. This is calculated as the impairment charge divided by the sum of the closing book value (as of 30th of June, 2016) and the impairment charge itself. The book value in the calculation is not the total assets of the company, but the asset class that relate to the impairment charges. Some reports do not specify in detail which cash generating unit (CGU) was impaired. As a consequence, it will exist some uncertainty with regards to the ability to “match” an impairment to the corresponding asset class in the balance. Also impairments of financial assets are difficult to attribute to an asset class or CGU unless specified in the interim report. Below is a summary of the findings in the three different categories which were investigated.

6 Impairment losses in Norway Q2-2016

Shipping

The total impairment loss recorded during the second quarter of 2016 is 109 MUSD. 7 out of 20 or 35% of the shipping companies listed on the Oslo Stock Exchange have recorded an impairment loss. 71% of the companies which recorded an impairment loss applied Fair Value Less Cost of Disposal (FVLCD) as the recoverable amount, while the remaining 29% of the companies used Value In Use (VIU). Companies using VIU applied an average WACC of 8.1% (range: 7.5% - 9.1%). A larger share of the impairment is contributed by BW LPG and Frontline Ltd. BW LPG recorded 56 MUSD during the second quarter in 2016 and its impairment charge was measured using VIU.

Frontline Ltd recorded an aggregate amount of 25.5 MUSD in impairment losses in the second quarter, in which 18.2 MUSD was due to a contracted sale of (agreed in June 2016) of its six MR tankers at lower than book value and 7.3 MUSD on termination of capital lease time-charter agreement (agreed in May) at an earlier than expected date (July 2016). Figure 2 shows the varying contributions that the seven shipping companies made to the total amount impaired (109 MUSD). BW LPG alone contributed approximately 50 % of the total impairment charges.

Figure 2: Impairment amounts (million USD) 120

109 13

100 80

25

1

Frontline Ltd.

Golden Ocean

2

56 60 40 20

6

7

0 Avance Gas Holding Ltd.

Awilco LNG ASA

BW LPG Limited

Jinhui Shipping and Transportation Limit

Wilh. Wilhelmsen ASA

Total

Impairment losses in Norway Q2-2016 7

Figure 3 shows that more than a third of the shipping companies had impairment losses during the second quarter. Five companies based their recoverable amount on FVLCD calculations, while two based it on VIU.

Figure 3: Relative overview of the population

2 65%

35% 5

Number of impaired company

FVLCD

Not impaired

VIU

Figure 4 shows the relative impairments which range from 0.05 % - 2.81 %. It is possible that the relative impairments are more similar (or more different) over a longer period of time. A company might have impaired a relatively large part of its fleet in second quarter 2016, while another company, with other assumptions for the VIU and FVLCD calculations, might have recorded large impairments already in Q1.

Figure 4: Overview of relative impairments

3,0%

2,81%

2,5% 2,19%

2,0%

1,71%

1,5% 1,14%

1,0% 0,65% 0,5%

0,08%

0,05%

0,0% Avance Gas Holding Ltd.

Awilco LNG ASA

BW LPG Limited

Frontline Ltd.

Golden Ocean

Jinhui Shipping and Transportation Limit

Wilh.Wilhelmsen ASA

8 Impairment losses in Norway Q2-2016

Offshore

Significantly larger impairment losses have been recorded in the offshore sector during the second quarter of 2016. 13 out of 21, or 62%, of the offshore companies reported impairment losses during the quarter. As shown in Figure 5 (showing the impairment loss for each respective company), the total impairment loss in the offshore sector in the second quarter of 2016 is 849 MUSD. Fred. Olsen Energy ASA reported the largest impairment loss. Its impairment loss represents 19% of the total impairment losses incurring in the sector. The estimated recoverable amount for its impairment test during the quarter was based on VIU. Various assumptions were made to determine a

(USD mill)

Q2 2016

reasonable estimation. This includes future contract availabilities, future performance of the cash generating units and day rates. Fred. Olsen Energy ASA assumed in its calculation that the negative market development will continue to reduce the day rates and utilisation for the next couple of years. Fred Olsen Energy ASA disclosed more specific information than most companies about the specifics of their impairment test and results. In the table below we can see how they specify impairment recognized during the period and the net book values, subsequent to the impairment as at 30th June 2016:

Net book value as at

Discount rates

30.06.2016

31.12.2015

Post-tax

Pre-tax

Byford Dolphin

67

92

178

8,99%

8,99%

Borgland Dolphin

72

126

221

8,50%

9,79%

Bredford Dolphin

20

15

37

8,50%

9,96%

Total implairment

159

Impairment losses in Norway Q2-2016 9

Bonheur ASA also reported a relatively large impairment loss with a total of 1,321 MNOK, or 158 MUSD, for its offshore drilling units. The impairment charge was due to a continued weak offshore drilling market.

Figure 5 shows the disaggregation of the impairment charges that occured during the second quarter of 2016.

Figure 5: Impairment amounts for companies in the offshore sector (MUSD) 180 160

158

159

140 118

120

107

103

100

90

80 60

40

40 18

20 0

28

5 Bonheur ASA

BW Offshore Limited

1 Deep Sea Supply Plc

DOF ASA

EMAS Offshore Limited

Farstad Shipping ASA

Fred. Olsen Energy ASA

Siem Offshore Inc.

12 Solstad Offshore ASA

10 Songa Offshore SE

Subsea 7 GC Rieber Rem SA Shipping Offshore ASA ASA

10 Impairment losses in Norway Q2-2016

Figure 6 displays the relative impairment as a percentage of its pre-impairment book value. The relative impairment ranges from 0.07%- 14.92%. The company with the largest relative impairment charge, Rem Offshore ASA, was acquired around the same time as the Q2 figures were released. On 27 June 2016, Rem Offshore ASA released its restructuring plan, laying out financial solution for the company through to the end of 2019, with assumptions in a low-case scenario with limited or zero utilization of the vessels and no new long-term contracts. With no certainty on the utilization of the company’s fleet, combined with cancelled newbuilds, Rem Offshore ASA recorded an impairment loss of 107.3 MUSD during the second quarter of 2016. In July 2016, Rem Offshore ASA entered into an agreement to merge with Solstad

Offshore ASA, this could probably explain part of the higher relative impairment taken by Rem Offshore ASA during the second quarter, whereby a more aggressive impairment assessment has been required. As previously mentioned in our study introduction, one of the limitations of the analysis is absence of information. Many of the listed companies did not specify the measurement method applied for recoverable amount. Among the 13 companies that recorded an impairment loss in the second quarter of 2016 in the offshore segment, only eight companies specified the measurement method.

Figure 6: Overview of relative impairments (impairments / [closing book value + impairments]) 16%

14,92%

14% 12% 10%

9,44%

9,19%

7,56%

8% 6%

5,75%

5,67%

4%

4,55%

2,77%

2%

0,94%

0,19%

0% Bonheur ASA

BW Offshore Limited

Deep Sea Supply Plc

DOF ASA

0,07% EMAS Offshore Limited

Farstad Shipping ASA

Fred. Olsen Energy ASA

Siem Offshore Inc.

0,76% Solstad Offshore ASA

0,23% Songa Offshore SE

Subsea 7 GC Rieber Rem SA Shipping Offshore ASA ASA

Impairment losses in Norway Q2-2016 11

12 Impairment losses in Norway Q2-2016

Oil and Gas

In the second quarter of 2016, four out of the 15 companies in the oil and gas sector recorded impairment losses, whereas three out of 15 companies recorded reversals of prior impairments. Only Atlantic Petroleum P/F recorded both impairments and reversals in the second quarter of 2016.

Figure 7 shows the reversals and impairments. Statoil ASA contributed to the majority of the impairment amounts with 275 MUSD. The oil and gas sector had a total reversals of 40 MUSD and a total impairments of 281 MUSD, for a total net impairment charge of 241 MUSD.

Figure 7: Impairment (reversal) amounts for companies in oil&gas sector (million USD)

241

141,3

Net Total

275,0

STL AKA

4,2

ATLA NOK_E&E

1,4

APCL

0,3 -9,1

DNO

-10,8

ATLA_NOK_Prod.license

-19,6

DETNOR

-150

-100

-50

0

50

100

150

200

250

300

Impairment losses in Norway Q2-2016 13

Figure 8 shows relative impairments (reversals) as a percentage of the closing a book value, after addition (subtraction) of the impairments (reversals) applied in second quarter 2016. In addition to the companies in the Figure 8 there are two outliers not included. The outliers are the impairments and reversals of Atlantic Petroleum P/F. The relative effects would be calculated to 45 % and 900 %, respectively. Due to extremely large changes in the balance sheet of the company (from earlier charges, sale of assets, etc) we do not find it meaningful to consider the relative charges. Consider the closing book value of its exploration and evaluation asset, listed as 1.7 MUSD, which is approximately 4 % of the value as of 30th of June 2015. For the asset class related to the reversals, we find that the closing book value of 9.6 MUSD is 14% of the value as of 30th of June 2016.

Out of the four companies that impaired losses, only one is explicitly stating the accounting principle behind the impairment: Statoil ASA impaired 275 MUSD, based on a VIU calculation. The underlying assumptions (i.e. discounting rate) are not disclosed. African Petroleum Corporation, Akastor ASA and Atlantic Petroleum P/F did not disclose whether they impaired as a consequence of a VIU calculation, or an FVLCD assessment.

Figure 8: Relative impairments (reversals) in the oil&gas sector

1,0

0,8%

0,5

0,4%

0,4%

STL

AKA

0,0 -0,5 -1,0

- 1,1%

-1,5 -2,0 -2,5

- 2,2% DNO

DETNOR

Impairment Reversals Det Norske Oljeselskap ASA made a reversal for 19.6 MUSD of prior impairments of the oil field “Gina Krog”. The justification of the reversal is “mainly due to increased forward prices compared to the end of Q1”. The asset Gina Krog was impaired with 9.2 MUSD in result of a VIU calculation. A discount rate of 8.5 % after tax was its assumption for the calculation. DNO ASA made a reversal of 9.1 MUSD, of which 3.1 MUSD was an updated valuation of its “available-for-sale” financial assets, which the company records at fair value at the end of each period. The remaining 6 MUSD was spare material which was formerly written down (in 2014) when it was used in Dohuk PSC (oil field). The company discovered that the material could be utilized at its Tawke field, and was therefore transferred to Tawke at cost in Q2-2016.

APCL

Atlantic Petrolum P/F made a reversal of 10.8 MUSD of its “producing licenses” during the second quarter of 2016. The company already impaired 0,3 MUSD of the same asset class in the first quarter 2016. The company did not disclose any details, or rationale, regarding the reversal.

14 Impairment losses in Norway Q2-2016

Closing Statement The low oil price continued to affect the oil and gas as well as the offshore sector negatively (Risk Outlook 2016, Finanstilsynet). The latter one had the majority of impairment losses (of 849 MUSD), which represents 69% of the total impairment losses in the second quarter. The activity levels in the oil and gas sector have fallen sharply throughout 2016, and there is substantial overcapacity in oil and gas related industries. Large parts of the offshore fleet are laid up, and many companies are taking workforce reductions. The day rates and utilization remain under pressure in both OSV and drilling sector whereby supply side is facing difficulty to adjust to a deteriorating demand side, causing significant overcapacity in the market. This is reflected through impairment charges across the offshore sector whereby companies such as Fred. Olsen Energy ASA and Bonheur ASA recorded a significant large portion during the second quarter of the 2016. Throughout the study, most of the companies that recorded impairment losses did not provide sufficient information in the interim reports to enable readers to comprehend completely on the method used (for recoverable amount) and/or the most significant assumptions (i.e., discounting rate) applied in the calculations

Impairment losses in Norway Q2-2016 15

Tabell 1: Companies that recorded an impairment charge in Q2-2016 Companies

Impairment charge in MUSD (excl reversals)

African Petroleum Corporation Limited

0

Akastor ASA

4

Atlantic Petroleum P/F

1

Avance Gas Holding Ltd.

6

Awilco LNG ASA

7

Bonheur ASA

158

BW LPG Limited

56

BW Offshore Limited

5

Deep Sea Supply Plc

18

DOF ASA

28

EMAS Offshore Limited

90

Farstad Shipping ASA

103

Fred. Olsen Energy ASA

159

Frontline Ltd.

25

GC Rieber Shipping ASA

40

Golden Ocean

1

Jinhui Shipping and Transportation Limited

13

Rem Offshore ASA

107

Siem Offshore Inc.

1

Solstad Offshore ASA

12

Songa Offshore SE

118

Statoil ASA

275

Subsea 7 SA

10

Wilh. Wilhelmsen ASA

2

Total

1 238

Tabell 2: Companies that recorded a reversal of impairment in Q2-2016 Companies

Impairment reversal in MUSD

Det norske oljeselskap ASA

20

Atlantic Petroleum P/F

11

DNO ASA

9

Total

40

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