Pareto Offshoreinvest AS

2nd quarter report 2016 Link: http://paretosec.com/pai-reports.php

Executive Summary

NAV NOK 42/share

(as of 30 June 2016)

NAV was down 30% from Q4’15 due to a significant drop in vessel and project valuations, as well as a 4.5% decline in the NOK/USD exchange rate. The market conditions continue to be very challenging, but we may be close to the bottom now due to the oil price recovery. The Fund is keeping its powder dry and is preparing for a very difficult 2016 and 2017, in which investors should not expect any dividend distributions. Market Development

Portfolio

The oil price appears to be stabilizing around USD 4550/b for Brent crude. We are starting to see early signs of inventory draws, which most observers expect will accelerate during Q3’16 and pave the way for an oil price that is expected to move towards USD 55-60/b towards year end. If that happens, we would expect to see some demand improvement during 2017. On the other hand, there are significant levels of excess capacity in most segments with large portions of ships in lay-up and looming order books for new vessels, too. This will dampen the utilization and rate recovery in the next couple of years.

The portfolio consist of shares in 8 projects with a total of 16 vessels. The contract coverage is 96% with a weighted contract length of 2.9 years.

Many oil service companies are also financially distressed, so counterparty risks are very real threats to the Fund’s portfolio. Several projects are already in tough restructuring negotiations with charterers and more are likely to engage in such discussions in the near future. The lenders are generally in a constructive mood, preferring to help out instead of enforcing their securities and take upfront losses, but there are exceptions, which add to the challenges.

POI has distributed NOK 70 per share (70% of par) to its investors since the inception. Further distributions will depend on running dividends and project realizations. NAV as of 30 June 2016 was NOK 42 per share, down 30% from the last reported NAV as of 31 December 2015. Since inception, NAV is up 12% including dividends distributed. The Fund will next report NAV as of 31 December 2016 and investors should be wary of further declines, based on the lower vessel valuations we are currently witnessing and the charterer defaults and restructurings we are experiencing in the industry.

Portfolio News POI is invested in 8 offshore projects, which implies a good diversification across different market segments. This section provides an update on the quarter’s most important newsflow related to the underlying investments.

Master and Commander IS Charter hire is paid punctually by CGG while the charter hire from Fairfield is more irregular. Both counterparties are being closely monitored and we do not rule out some restructuring negotiations in time unless the markets pick up speed soon.

with both the charterer and the lender about facilitating an early exit, which will be evaluated against other solutions such as a sale of both vessels at BBCP expiry or alternative employment beyond this. PSV Invest II IS

Bareboat hire is paid punctually. The vessel valuations are lower and there continues to be a potential MVC breach to be handled.

The vessel is on a contract to Apache in the UK at an acceptable day rate through to September 2016. The market for high spec PSVs continues to be difficult, so the future of the project is uncertain once the current contract expires.

Azur Offshore IS

Vestland Seismic IS

The project made an extra ordinary debt instalment in March. There is a negotiation with the charterer concerning a temporarily lower bareboat rate, which may be acceptable if the BBCP is extended and the sellers’ credit is reduced. These negotiations are undertaken with the understanding of the lenders to the project. The end result may not necessarily imply large change to the value of the project, although the risk will increase due to potentially lower incoming cash flow and longer duration.

The vessel is still idle, although there have been some developments regarding a new charter. The project is 100% equity financed and the cash burn is insignificant.

3B Offshore IS

Norseman Offshore IS No solution has been found between Norseman and its charterer Viking Supply, with hire still unpaid since February. Norseman submitted a petition for bankruptcy for VSS in June, but were forced to withdraw this at the instruction of its lender, which also declared Norseman’s loan in default and has initiated bankruptcy proceedings against Norseman. Norseman’s lender is also a major lender to VSS and therefore has a clear conflict of interest, and the lender is apparently willing to sacrify Norseman and its shareholders’ interests to save its exposure directly to VSS, where it is facing potentially large losses. Naturally, Norseman is contesting the lender’s actions and are currently considering legal action. Far East Offshore The project continues as planned with bareboat hire paid punctually. The project is hoarding cash, which will be utilized to handle potential requirements upon the expiry of the BBCP in Feb ‘17. There is some dialogue

Asian Offshore IS The pool’s average day rate was USD 3,800 during Q2’16 adjusted for utilization, up 4% q-o-q. The founders of the pool sold the operating platform (RK Offshore) to Navig8 during the quarter and will move all vessels into a similar pool as of Q3’16, which will be operated by Navig8. Vessel valuations have dropped to below bank debt. The cash flow situation is tight and the company is in need for fresh funds. The board of AO I is in dialogue with its lenders to restructure the credit facility so that it makes sense to inject additional equity. In the absence of such an agreement, the company may go into liquidation. Payments from projects During Q2’16, POI did not receive any dividend payments from the portfolio. New investments POI will only make follow-up investments in existing projects, if required.

Portfolio The portfolio continues to be characterised by a high contract coverage (96%), despite the market volatility. The average charter length 2.9 years, which is still robust. We expect the portfolio to continue to produce a decent cash flow for the Fund, but the situation now is that this cash is trapped in the projects due to restrictive banks, rather then becoming available to the Fund. Investments and capital POI’s portfolio consists of 8 projects which owns stakes in 16 units. The average contract length is 2.9 years and the contract coverage is 96%.

Charterparty Distribution based on NAV

The gross nominal value of the contract backlog is roughly NOK 50m. The backlog is evenly distributed among solid counterparts.

Bareboat 86%

POI had a cash holding of NOK 10.0m as of 30 June 2016. Capital calls for projects should not be ruled out. Until the situation is more clarified, the Fund plans to retain its cash position.

Timecharter 10%

The life cycle of POI has been extended to 30 June 2018. It goes without saying that it will be difficult to make project realizations at good prices with the current market conditions. Hence, if the markets do not improve within such a time frame, further extensions should be expected. Charter hire backlog by counterpart

Spot/Asset Play 4%

Segment Distribution based on NAV

Bourbon 21% CGG 30%

Seismic 41% PSV/AHTS (Europe) 27%

Apache 1% Viking Supply Ships AS 6%

PSV/AHTS (Asia) 32%

Ezra Holdings 42%

Project / company

Segment

Master and Commander IS Seismic Azur Offshore IS PSV/AHTS Norseman Offshore IS PSV/AHTS PSV Invest II IS shareholder loan PSV/AHTS Far East Offshore IS PSV/AHTS 3B Offshore IS PSV/AHTS Vestland Seismic IS Seismic PSV Invest II IS PSV/AHTS Asian Offshore IS PSV/AHTS Asian Offshore I IS shareholder loan

(Asia) (Europe) (Europe) (Asia) (Europe) (Europe) (Asia)

Contract Charterparty

Charterer

Aug-18 Jun-23 Dec-20 Sep-16 Feb-17 Nov-17

CGG/Fairfield Nodal Ezra Holdings Viking Supply Ships AS Apache UK Sanko Steamship Ltd Bourbon Maritime Albatross Shipping Apache UK

Sep-16

Bareboat Bareboat Bareboat Timecharter Bareboat Bareboat Spot/Asset play Timecharter Spot/Asset play Spot/Asset play

Proportion of NAV

41.7 23.2 6.4 8.0 9.3 6.5 5.0 0.0 0.0 0.0

% % % % % % % % % %

Net Asset Value Development Net asset value was down 30% during H1’16. A weaker USD vs the NOK has exacerbated the decline and measured in USD, NAV dropped by 25% during the period. Overall, the portfolio’s high contract coverage is providing some protection against the developments in the oil services markets, but one cannot escape the effect that lower vessel values have on the residual value estimates, as well as the counterparty risk in the current markets. NAV development

Direct yield

NAV as of 30 June 2016 was NOK 42 per share, down 30% from the previous NAV as of 31 December ’15 and down 46% for the past year. POI makes semi-annual NAV calculations. Accordingly, the next NAV will be published as of 31 December’16 and will be reported to investors in the report for the fourth quarter of 2016.

POI has an ambition to make annual payments to its shareholders. Such payments are made within the relevant laws, and may come in the form of ordinary dividends, as well as repayment of capital.

NAV is up 12% since inception in 2009 (adjusted for repayments of capital). This is a solid return considering the fact that the first investment was made as late as Q2’10 due to a lack of deal flow during the financial crisis. The Fund’s reliance on long term bareboat contracts with solid underlying dividend yields has shown its benefit during the past two years, when the overall oil service markets have weakened substantially. Moreover, the fund has made some very strong realizations during this period, which has added further to the performance.

POI has distributed NOK 70 per share to is investors, which is 70% of par value. Thus, the entire return has been returned to shareholders, as well as excess capital. Future distributions are mainly expected to follow realisations of projects, which could take some more time considering the current detrimental market outlook.

Last 6 mths Last 12 mths Last 24 mths Since inception Since first investment POI

-29.5%

-46.0%

-43.4%

11.6 %

11.6 %

Oslo Stock Exchange

-1.6%

-4.9%

-2.8%

152.1%

54.2%

Offshore Index*

-8.6%

-26.3%

-54.3%

31.7%

-29.6%

* Based on OSLO Energy Equipment & Service

160

POI - NAV development

140

120 100 80 60 40

20 0

NAV per share

NAV per share (dividend adjusted)

Second Hand Market and Liquidity As of 30 June 2016, POI had 851,877 shares outstanding. Pareto Securities AS (”PSec”) aims to facilitate an active second hand market for shares. The last trading price was NOK 30 per share in March 2016, which implies a 29% discount to the Q2’16 NAV (of NOK 42 per share). Investors who wish to buy or sell shares should contact their advisors or alternatively PSec directly.

Last 5 trades in second hand market

Date

Share price

No. of shares

Volume (NOK)

06/08/14

82

4,129

25/08/14

65

1,000

65,000

23/01/15

35

5,000

175,000

27/04/15

45

2,000

90,000

04/03/16

30

2,065

61,950

Number of trades since establishment Volume traded since establishment (NOK) Average volume per trade (NOK)

338,578

43 8,173,723 190,087

The oil market The signs are strengthening that the inventory correction cycle has started and that it will become more forceful during H2’16. This, plus a rise in unplanned production outages, has driven the oil price to levels of around $45-50/b. Forecasters are now becoming more optimistic, but so far only for 2016, with consensus expectations for 2017 flat so far. We think it is safe to say that we have turned the corner, but exactly how quickly the recovery takes place is still subject to uncertainty. Non-Opec production declining

Source: EIA, IEA, Opec

Non-OPEC production is falling. The primary driver is US onshore production where the collapse in drilling activity is now finally impacting tight oil production. The overall decline in global E&P spending is also likely to have an accelerating impact on non-OPEC production elsewhere as both drilling and field development spend is down sharply. At the same time, global oil demand growth is healthy, leaving a gap to be filled by either inventory draws, which is what will drive oil prices upwards, or increased OPEC production, which will be negative for the oil price. OPEC spare capacity is becoming more limited The return of Iranian oil exports has been the main driver behind the increased OPEC production in the past three quarters. Going forward, however, it is estimated that available OPEC spare capacity will not be able to keep pace with the call on OPEC, so it seems an almost certainty that we will see inventory draws accelerating during H2’16.

Source: EIA, Nordea Markets

Source: EIA, IEA, Opec

How much is already priced in? The sentiment has improved much this year, not least due to the early signs that the inventory correction cycle is actually happening and from a growing confidence that it will strengthen going forward. On the other hand, the oil price has also had help from unplanned production outages in OPEC (chiefly Nigeria) and lately also in Canada. These are temporary factors that will gradually evaporate, although the market will continue to be sensitive to these factors as long as the market balance is tight. The sharp correction following the Brexit is also a reminder that we are not out of the woods yet. Consensus forecats on the rise

Source: EIA

Source: IEA

The consensus forecast for Brent crude for 2016 has risen to roughly $45/b from a low point of $40/b earlier this year. Consensus is now expecting $55/b for 2017, but it is interesting to note that this has not moved at all so far this year. It would appear that the market is still a bit cautious, which in turn leaves some possibility for a upside.

The oil services market E&P spending expected down another 20% in 2016 Global E&P spending was down around 25% last year, the biggest decline in three decades. For 2016, the forecast is for another down-tick of 20%, meaning that 2016 will be even more difficult than 2015 on a global basis and that we are down to levels not seen since before the financial crisis. Any recovery in the oil price is unlikely to have material impact until next year, as the budgets for 2016 are more or less fixed. What does it take to provide an uptick for 2017? Source: Barclays Capital

Source: Barclays, IEA

Historically, E&P spending has been closely correlated with the oil price. When the oil price falls, there tends to be an immediate reaction in E&P spending, like in 2009 and 2015, with the exception of 1999 when the impact was delayed by one year. Conversely, since 1992, positive oil price changes have always had a positive impact on E&P spending. Based on consensus forecasts for H2’16, the oil price would average $45/b for 2016, down 20% on 2015 and corresponding well with the expected reduction in E&P spending. For 2017, however, consensus forecasts are for $55/b, a 23% increase from this year, which should provide a boost to E&P spending. We are not totally convinced that the impact will be 1:1 with the oil price increase, as some delay should be expected, but there nevertheless seems good reason to expect an improvement next year. A lot of excess capacity out there While the demand side of the equation might get a boost next year, the vast excess supply in key segments will delay the uptick in utilization and hence day rates. Including the newbuilding order book and units in lay-up, the segments have between 39% and 57% excess capacity relative to current levels of demand.

Source: Pareto Securities, Nordea Markets, Westshore

On the other hand, much of the excess capacity rests in units that are in cold lay, which will be costly to reactivate (both in seismic and rigs) and which may also be technically obsolete (seismic). Therefore, it may take more time before this capacity comes back, than for example for OSVs, where reactivation costs are low and the majority of the units are in semi-warm lay-up mode. One may also question whether the newbuilding order book will be delivered as few (if any) owners have the funds available to make the final delivery payments and debt financing is scarce. Nevertheless, we caution against expecting too much of day rate improvements in the coming years, as the excess capacity will have a negative impact one way or the other. Certainly, it will shave a fair bit off the peak recovery potential.

Fund Management Team Richard Jansen Head of Maritime Investments Phone: + 47 22 01 58 96 E-email: [email protected]

Patrick Kartevoll Fund Manager Phone: + 47 22 01 58 79 E-mail: [email protected]

Dronning Mauds Gate 3, P.O. Box 1396 Vika, NO-0114 Oslo, Norway, Tlf: 22 87 87 00, www.paretosec.com/pai.php

Disclaimer This Quarterly Report has been prepared in order to provide information about Pareto Offshoreinvest AS (“POI” or the “Company”) and must not be considered an offer to trade in the shares of the Company. Information contained in this Quarterly Report is obtained by Pareto Alternative Investments AS (“Pareto Alternative Investments”, “Pareto”, or “PAI”). Information is presented to the best of our efforts and knowledge, but Pareto cannot guarantee that the information is correct or all inclusive. Pareto takes no responsibility for any loss caused by information given being misleading, wrongful or incomplete nor for any other loss suffered as a consequence of investments made in the Company. This Quarterly Report includes and is based on, among other things, forward-looking information and statements. Such forward-looking information and statements are based on the current expectations, estimates and projection of the company or assumptions based on information available to the company and Pareto. Such forward-looking information and statements reflect current views with respect to future events and are subject to risks, uncertainties and assumptions that may cause actual events to differ materially from any anticipated development. All

investors must verify these assumptions themselves. The company cannot give any assurance as to the correctness of such information and statements. Historic returns and return forecasts do not constitute any guarantee for future returns. Returns may vary as a consequence of fluctuations in currency exchange rates. Investors should be aware that there is significant uncertainty related to valuations in the current volatile market. The valuation process is described in Pareto Securities’ market report as per November 2015. Risks and costs are further described in the prospectus (information memorandum) produced in relation to share issues in the Company. The contents of this presentation are not to be construed as legal, business, investment or tax advice. Each recipient should consult with its legal-, business-, investment-, and tax advisors as to legal, business, investment and tax advice. Specifically, Pareto has been engaged as the company’s financial advisor and does not render – and shall not be deemed to render – any advice or recommendations as to a transaction.