Fred-olsen Energy

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Fred-Olsen Energy SELL Company update 21 May 2015 Results date 10 July 2015 Share data Sector: 21/05/2015 Offshore Reuters/Bloomberg FOE.OL/FOE Medium Risk Rating Outstanding shares 66 Market cap (USDm) 566 Net interest bearing debt (USDm) 1,277 Enterprise value (USDm) 1,843 48% Free float Average volume ('000) 354 High/low 52w 175 / 53 Weight OSEBX 0.22% Rel. Perf 3/6/12 Abs. Perf. 3/6/12 -12 / -27 / -63 -6 / -20 / -59 Estimate changes ESTIMATE CHANGES Revenues EBITDA Operating profit Pre-tax profit EPS, rep. EPS, adj. DPS 2015E 2016E Change % Curr. Prev. Curr. Prev. 2015 2016 1,103 1,188 1,100 1,255 -7 % -12 % 558 561 528 576 -1 % -8 % 184 186 141 189 -1 % -25 % 153 135 83 132 13 % -37 % 2.16 1.94 1.18 1.89 12 % -37 % 1.72 1.94 1.18 1.89 -11 % -37 % 0.00 0.00 0.00 0.00 n.a n.a. Share price (NOK) & Valuation Scenarios 180 160 140 120 Value destruction! Fred. Olsen Energy (FOE) has transitioned from creating good ROCE on its old asset base into a phase of value destruction. While the rig market is vastly oversupplied and scrapping is long overdue, FOE decided instead to spend USD 2.2bn (NOK 250/share) in capex during 2014 & 2015 by taking five of its old rigs through the 5-year SPS (Special Periodic Survey) and on the delivery of the two newbuilds. We believe several of the old rigs are at risk of being idle, which would have a huge negative impact on the equity value of the company. In addition, we believe the contract for the newbuild Bollsta Dolphin is at risk of being re-negotiated or cancelled altogether if the rig is further delayed from the yard. Combined, this could lead to the equity being wiped out altogether. We therefore reiterate our SELL rating and lower our target price to NOK 25 (30). With a wave of relatively new rigs rolling off contracts in the floater market, with most of them having little hope of finding new work in the near term, there is even less hope for the very old assets of FOE to find employment. Scrapping in our view may have been the best alternative, but FOE is rather spending USD 800m (NOK 90/share) in capex on five of its rigs in 2014 & 2015 with an average age of 35 years in order to make sure they can continue to operate in a market where additional employment is hard to find. In addition, FOE has/is taking delivery of two newbuilds during 2014 & 2015, with an additional capex of USD 1.4bn (NOK 160/share). The newbuild Bollsta Dolphin, scheduled for delivery in 3Q15, may be at risk of being further delayed on top of the six months delay already announced. The rig has a 5-year contract with Chevron for use at the Rosebank field, which has been delayed several times. The latest information suggests that a decision with regards to the project is now postponed from end-15 to end-16. If the rig is further delayed from yard, we believe Chevron may have a good case for cancelling the contract altogether, or at least re-negotiate to a lower day-rate. The combination of spending USD 800m on old rigs that may be idle and worthless soon, and the risk of a possible cancellation/re-negotiation of the Bollsta Dolphin contract, may potentially be lethal for FOE and wipe out the entire equity value. We therefore reiterate our SELL rating and lower our target price to NOK 25 (30). 100 80 60 40 Base; 32 20 Bollsta; 10 0 May-14 Share Price: NOK 64 Target Price: NOK 25 (30) Boll/Bred.; 0 Nov-14 May-15 Nov-15 May-16 Key figures (USDm) Revenues Håkon Johansen Fondsfinans AS TEL: +47 23 11 30 18 [email protected] 2015E 1,103 2016E 1,100 2017E 1,046 Q214 273 Q215E 305 EBITDA 585 516 558 528 397 107 150 343 187 184 141 37 19 58 PTP 330 191 153 83 -16 16 46 EPS, rep 4.52 1.77 2.16 1.18 -0.24 0.10 0.67 CFPS Knut Erik Løvstad Fondsfinans AS TEL: +47 23 11 30 40 [email protected] 2014 1,184 EBIT EPS, adj. Prepared by analyst: 2013 1,194 Dividend per share 4.71 2.41 1.72 1.18 -0.24 0.10 0.67 -0.41 -0.65 -1.30 0.58 3.87 -2.52 -0.06 0.00 0.00 3.30 0.00 0.00 0.00 0.00 8.9 % 0.0 % 0.0 % 0.0 % 0.0 % EV/EBITDA 73% 5.3 0% 4.0 0% 3.3 0% 3.5 0% 4.6 EV/EBIT P/E P/B ROE ROCE NIBD/EBITDA 9.1 7.9 1.7 22% 17% 1.0 11.0 4.9 0.6 12% 8% 2.4 10.0 3.9 0.4 8% 6% 3.4 13.0 7.2 0.4 5% 4% 2.9 50.2 -35.0 0.4 -1% 1% 3.2 Dividend yield (%) Payout ratio Source: Fondsfinans Research, Fred-Olsen Energy FONDSFINANS AS, HAAKON VII’S GATE 2, P.O. BOX 1782 VIKA, NO-0122 OSLO, TEL: +47 23 11 30 00, FAX: +47 23 11 30 03, [email protected] This report was prepared by an analyst engaged by Fondsfinans AS, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. See page 11 of this report for Important Disclosure Information. Investment case: Value destruction Several rigs at risk of being idle... Fred. Olsen Energy (FOE) has for some time created good ROCE on its old asset base. Those days are gone. The backlog is rapidly coming to an end, and new contracts are hard to secure in a fast deteriorating rig market. We would therefore expect that several of the rigs would become idle as the current contracts expire. Based on today’s backlog, FOE will have four rigs without contracts by end-15, with another four expiring during 2016. This means that eight out of eleven rigs are at risk of being without employment by year-end 2016. And even if some work can be secured, it will be at very different levels than current backlog. ..which will have a huge negative impact... ..leading to risk of equity being wiped out We have therefore looked more closely at our sum-of-the-parts (SOTP) valuation, which is based on discounted free cash flow for each of the rigs during their expected lifetime. We have provided two additional scenarios to our base case, which is illustrated in the graph below, and clearly shows the value destruction that is taking place in FOE, caused by the deteriorating rig market combined with the huge capex investments made by the company at the wrong time in the cycle. While our base case scenario assumes a NAV value of NOK 32/share, we fear that there is a real chance that the equity value of FOE could be wiped out altogether. Share Price & Valuation Scenarios Capex 180 Rig Built 2014 Blackford Bideford 1974 1975 210 110 1,575 825 24 13 2015 Borgland Byford Belford 1976 1973 2000 160 190 130 1,200 1,425 975 18 22 15 800 6,000 91 650 750 4,875 5,625 74 85 Sub-total 1,400 10,500 159 TOTAL 2,200 16,500 250 160 140 120 100 80 60 Sub-total 40 Base; 32 20 Bollsta; 10 0 May-14 Boll/Bred.; 0 Nov-14 May-15 Nov-15 May-16 Newbuilds Bolette Bollsta 2014 2015 SPS & Newbuild Capex USDm NOKm NOK/share Source: Fondsfinans Research, Bloomberg, Company Data Scrapping is long overdue and the rig mkt is vastly oversupplied... ..but FOE decides to spend NOK 250/share in capex instead SELL Target NOK 25 (30) Page 2 We expect a wave of relatively new rigs rolling off contracts to experience serious challenges in obtaining work short-to-medium term, and therefore at risk of becoming idle. FOE, with its fleet of very old assets, of which many were originally built in the mid-1970s, there comes a time when scrapping is long overdue, and that time is approaching relentlessly. The company is resisting though, and has recently invested large amounts of fresh capital into these old assets by taking them through 5-year Special Periodic Surveys (SPS), as seen above, with total capex of USD 800m (NOK 90/share). In addition, the company has/is investing USD 1.4bn (NOK 160/share) in two newbuilds. This means that FOE has/will have capex of USD 2.2bn (NOK 250/share) during 2014 & 2015, while the value and future earnings potential of these assets are highly uncertain. Those investment decisions should perhaps have been avoided, given the rapid deterioration of the market we have seen during the past 12 - 15 months. We therefore reiterate our SELL rating and lower our target price to NOK 25 (30), but we see a risk that the equity value could be wiped out completely. 21 May 2015 Fondsfinans Research Fred-Olsen Energy - Company update Valuation Scenarios & Assumptions Quickly deteriorating position With dividends suspended, a rising debt burden, day-rates in free-fall, many rigs at risk of becoming idle due to severe difficulties of finding additional employment, the situation for FOE is deteriorating quickly. Net int. bearing debt approaching USD 2bn All the capex related to the SPS and the newbuilds, has transformed the balance sheet from having a conservative capital structure to becoming much more leveraged. We expect the interest bearing debt to approach ~USD 2bn by yearend 2015. Implied value too high The implied value given today’s share price in FOE is ~USD 300m per rig (assuming the cold stacked rig Borgny Dolphin and the accommodation rig Borgholm Dolphin are valued at zero). If we further assume that the newbuilds are worth USD 600m each (which probably is too high), the remaining old rigs of FOE are still valued at more than USD 200m each. We therefore believe the market’s implied value of FOE today is too high, and we have therefore in the following highlighted a few scenarios. Base case at NOK 32/share Base case suggest half today’s share price Our base case value for FOE shows a value of NOK 32/share, which is only half today’s share price. We therefore see significant downside risk in today’s share price. The details for the valuation are as follows: Valuation (base case) VALUATION Built/ upgraded Water Depth NPV SOTP NPV Contract Impl. Val. 2000 1975/99 1976/99 1977 1976 1973/98 1975/00 1974/08 1975/02 2014 2015 10,000ft 1,500ft 1,500ft 2,300ft 1,500ft 1,500ft Ten.sup. 7,000ft Flotel 12,000ft 10,000ft 82 176 278 0 126 153 119 172 2 587 636 2,331 14 112 204 0 29 75 31 145 12 198 372 1,191 131 209 314 0 131 183 183 209 52 601 601 2,613 -510 -260 -1,277 -510 -260 -1,277 -510 -260 -1,277 Net Asset Value No shares 284 66 -856 66 566 66 NAV per share (USD) NAV per share (NOK) Current share price (NOK) 4.3 32 -12.9 -97 8.5 Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Blackford Dolphin Borgholm Dolphin Bolette Dolphin Bollsta Dolphin Total Value of Fixed Assets Newbuild CAPEX SPS yard-stay CAPEX Net interest bearing debt 64.0 Source: Fred. Olsen Energy, Fondsfinans Research Fondsfinans Research 21 May 2015 Page 3 Base case assumptions are not overly cautious The assumptions behind the above SOTP valuation based on discounting the NPV for each rig are as follows: - All current contracts are honored - 2 – 3 quarters of idle time for rigs coming off contracts in 2015/2016, and with full utilisation from 1Q17. - Day rates of USD 225 – 250,000 for rigs operating in Norway and ~USD 175,000/day for rigs outside of Norway without contracts from 2015 – 2017. - Day-rates are raised by ~25% from 2018 to come back to a more normalised return for the remaining life-time of the units. - Discount rate of 9.5%. - All the old rigs have another 10 – year lifespan. - The idle unit Borgny and the accommodation unit Borgholm (which is likely to be stacked) are assumed to have zero value. Despite the base case suggesting a fair value at only half today’s share price, we are concerned that our assumptions behind the base case might even be too optimistic. We have therefore in the following highlighted the assumptions behind the two scenarios illustrated in the graph above, yielding much lower valuations. Bollsta Dolphin contract at risk which could wipe out most of equity value? Further delay in delivery of Bollsta... We believe there is a risk that the newbuild rig Bollsta Dolphin, which is to be delivered in 3Q15 might be further delayed. The delivery of the rig from Hyundai Heavy Industries has already been delayed 6 months, and the management of FOE did not seem overly confident at the 1Q15 presentation that the rig would be delivered according to the current schedule in 3Q15. The rig has a 5 – year contract with Chevron at a day-rate of USD 560,000/day. Chevron is supposed to use the rig at the Rosebank field development northwest of the Shetland Island, where they are the operator. However, the fate of the project is not yet decided due to uncertainty with regards to the return on the project. One of the license partners, OMV, recently stated that a decision with regards to this project has now been further delayed from end-2015 to end-2016. ..might put Chevron contract at risk.. It is therefore possible that Chevron would like to get out of this contract, especially given the very high day-rate. If the rig is delivered in 3Q15, Chevron might not have a very good case, but if the rig is further delayed by 3 – 6 months, they may have an opening in their contract to cancel or at least re-negotiate the day-rate. Although FOE would have built in penalties related to delays from the yard in the contract, we do not believe those penalties would compensate for the potential loss/re-negotiation of the contract. In order to account for this uncertainty, we have assumed that the day-rate is renegotiated to USD 400,000/day, which is still quite a generous day-rate given that the latest fixtures in the market have been below USD 300,000/day. ...which would wipe out much of the equity value Page 4 That assumption alone would wipe out another NOK 22/share, and the remaining equity value of FOE would fall to NOK 10/share. 21 May 2015 Fondsfinans Research Fred-Olsen Energy - Company update Bredford Dolphin idle as well? With Bredford being stacked as well... In addition to the re-negotiation of the Bollsta Dolphin contract, we further believe that the rig Bredford Dolphin will be stacked when the current contract expires at the end of 3Q15 (which management confirmed if it does not obtain work). If that happens it may never return to the market, meaning the value is less than the current NPV of the backlog as FOE also will use part of that value in stacking costs in the hope that it will find employment in the future. ..the equity value is vaporised completely If we add that assumption as well, the equity value of FOE would be wiped out completely. We certainly believe there is a high risk that these occurrences could happen. Norway - Demand for 2015 & 2016 Norway - Supply for 2015 & 2016 2 1 Tender; 2 Probable; 1 Firm Potential Rig name West Navigator Transocean Barents Transocean Spitsbergen West Venture Transocean Searcher Deepsea Atlantic Borgland Dolphin Bredford Dolphin Transocean Barents Island Innovator Transocean Arctic Songa Trym Leiv Eiriksson Transocean Winner COSLPioneer Songa Delta Songa Dee Dayrates (USDk) 562 509 441 368 561 525 442 562 387 355 545 425 420 374 340 Rig 2015 2016 type 2Q 3Q 4Q 1Q 2Q 3Q 4Q Drillship 0 0 0 0 0 0 0 Semi-sub 1 10 0 0 0 0 0 Semi-sub 1 10 0 0 0 0 0 Semi-sub 1 1 0 0 0 0 0 Semi-sub 1 1 0 0 0 0 0 Semi-sub 1 1 0 0 0 0 0 Semi-sub 1 1 10 10 10 10 10 Semi-sub 1 1 0 0 0 0 0 Semi-sub 1 1 0 0 0 0 0 Semi-sub 1 1 1 10 10 10 10 Semi-sub 1 1 1 1 0 0 0 Semi-sub 1 1 1 1 10 10 10 Semi-sub 1 1 1 1 10 10 10 Semi-sub 1 1 1 1 1 1 0 Semi-sub 1 1 1 1 1 1 0 Semi-sub 1 1 1 1 1 1 10 Semi-sub 1 1 1 1 1 1 1 Source: Fondsfinans Research, IHS Petrodata UK - Demand for 2015 & 2016 UK - Supply for 2015 & 2016 8 Possible; 2 4 Pretender; 4 Firm Probable; 6 Potential Rig name Ocean Princess Ocean Guardian Transocean Prospect West Phoenix Sedco 714 Ocean Valiant WilHunter Stena Spey Paragon MSS1 Byford Dolphin Sedco 711 Transocean John Shaw Ocean Valiant Sedco 714 Sedco 704 WilHunter Byford Dolphin Stena Spey Sedco 712 Dayrates (USDk) 350 464 430 385 275 346 361 414 Private 430 362 385 346 397 2015 Rig type 2Q 3Q 4Q Semi-sub 0 0 0 Semi-sub 1 1 0 Semi-sub 1 1 0 Semi-sub 1 1 0 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 Semi-sub 1 1 1 2016 1Q 2Q 3Q 4Q 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10 0 0 0 10 0 0 0 0 0 0 0 10 10 10 10 0 0 0 0 10 10 10 10 1 0 0 0 1 0 0 0 1 0 0 0 1 0 0 0 1 0 0 0 1 1 0 0 1 1 1 10 1 1 1 10 1 1 1 1 Source: Fondsfinans Research, IHS Petrodata Fondsfinans Research 21 May 2015 Page 5 Backlog Drilling RIG 2015 2016 2017 2018 2019 2020 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Norway Bideford Dolphin Statoil @ USD 441k per day Borgland Dolphin Consortium @ USD 488k per day Bredford Dolphin Consortium @ USD 411k per day UK Byford Dolphin BP @ USD 345.5k per day Borgsten Dolphin (tender support) Total @ USD 202k per day Borgholm Dolphin (flotel) BG @ USD 240k per day Bollsta Dolphin Chevron @ USD 560k per day Borgny Dolphin Idle @ USD 0k per day Blackford Dolphin Nexen @ USD 428k per day Africa Belford Dolphin Anadarko @ USD 495k per day Bolette Dolphin Anadarko @ USD 488k per day On contract Option Free SPS / Yard stay Construction NAV- and NPV based valuation VALUATION We find limited support from earnings to back up asset values Built/ upgraded Water Depth NPV SOTP NPV Contract Impl. Val. 2000 1975/99 1976/99 1977 1976 1973/98 1975/00 1974/08 1975/02 2014 2015 10,000ft 1,500ft 1,500ft 2,300ft 1,500ft 1,500ft Ten.sup. 7,000ft Flotel 12,000ft 10,000ft 82 176 278 0 126 153 119 172 2 587 636 2,331 14 112 204 0 29 75 31 145 12 198 372 1,191 131 209 314 0 131 183 183 209 52 601 601 2,613 -510 -260 -1,277 -510 -260 -1,277 -510 -260 -1,277 Net Asset Value No shares 284 66 -856 66 566 66 NAV per share (USD) NAV per share (NOK) Current share price (NOK) 4.3 32 -12.9 -97 8.5 Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Blackford Dolphin Borgholm Dolphin Bolette Dolphin Bollsta Dolphin Total Value of Fixed Assets Newbuild CAPEX SPS yard-stay CAPEX Net interest bearing debt 64.0 Source: Fondsfinans Research, Fred-Olsen Energy Page 6 21 May 2015 Fondsfinans Research Fred-Olsen Energy - Company update Credit Information Credit Metrics Credit Metrics (x) Gross debt / EBITDA 12m Net debt / EBITDA 12m EBITDA / Net Interest expense EBIT / Net Interest expense Debt / Equity Equity / Total Assets Net debt / Market Cap. Market Cap. / EV Current ratio Quick Ratio 2012 1.48 1.06 17.75 10.85 1.09 0.48 0.26 0.79 0.87 0.74 2013 1.36 0.98 15.59 9.13 1.13 0.47 0.23 0.81 0.65 0.53 2014 2.82 2.43 10.28 3.72 1.65 0.38 1.60 0.38 0.79 0.62 2015E 3.62 3.41 10.74 3.54 1.73 0.37 3.36 0.23 0.69 0.55 2016E 3.20 2.91 8.90 2.38 1.44 0.41 2.72 0.27 0.79 0.65 Q214 3.00 2.54 11.08 4.99 1.74 0.37 0.11 0.90 0.74 0.59 Q314 3.16 2.80 10.14 2.78 1.73 0.37 0.14 0.88 0.89 0.70 Q414 2.82 2.43 10.28 2.87 1.65 0.38 0.23 0.81 0.79 0.62 Q115 2.50 2.23 11.27 3.37 1.55 0.39 0.29 0.77 0.63 0.48 Q215E 2.61 2.37 12.98 4.43 1.54 0.39 0.34 0.74 0.73 0.58 Debt overview Type Crncy Princ. Outst. amount amount Maturity Covenants Group debt FOE04 NOK1,400m SR Unsecured Bond USD 181 181 May-16 Yes FOE05 NOK 1,100m SR Unsecured Bond USD 142 142 Feb-19 Yes "New" credit facility USD 2Bn USD 2,000 1,133 ~Jul-20 Total Debt USD 2,323 1,455 Covenants Covenants* Free cash Interest coverage ratio Leverage Requirement ≥ USD 30m > 2.5 < 4.5 Description USD 65m for bank loans and USD 30m for bonds EBIT / Interest expense (12m rolling) NIBD / EBITDA (12m rolling) Free cash ≥ USD 30m Interest coverage ratio ˃2.5 500 10.0 400 8.0 300 6.0 200 4.0 100 2.0 0.0 0 Q213 Q114 Q414 Q315E Q213 Q216E Leverage < 4.5 Q114 Q414 Q315E Q216E Equity Ratio 5.0 60% 4.0 50% 40% 3.0 30% 2.0 20% 1.0 10% 0.0 Q213 Q114 Fondsfinans Research Q414 Q315E Q216E 0% Q213 21 May 2015 Q114 Q414 Q315E Q216E Page 7 Financials Income Statement 2013 2014 2015E 2016E 2017E Q413 Q114 Q214 Q314 Q414 Q115 Q215E Q315E Q415E Q116E Q216E Figures in USDm 1,149 1,112 1,042 1,034 984 288 259 257 310 286 272 287 256 227 257 260 Reimbursables Operating revenues 46 72 61 66 62 10 19 17 25 11 12 18 16 15 16 16 Other revenues 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total revenues 1,194 1,184 1,103 1,100 1,046 298 278 273 335 298 284 305 272 242 273 276 -566 -597 -485 -507 -588 -172 -158 -151 -160 -130 -115 -138 -125 -108 -115 -123 -44 -71 -60 -65 -61 -9 -18 -16 -25 -11 -12 -18 -16 -14 -16 -16 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -609 -668 -545 -571 -650 -181 -176 -167 -185 -141 -127 -155 -141 -122 -131 -139 Opex Reimbursables Other opex Total OPEX (ex. DA) EBITDA Depreciations and amortization Impairment Operating profit Interest income 585 516 558 528 397 117 102 107 151 157 157 150 131 120 142 137 -242 -329 -374 -387 -360 -60 -63 -88 -92 -87 -91 -92 -92 -99 -99 -99 0 0 0 0 0 0 0 0 -43 0 0 0 0 0 0 0 343 187 184 141 37 57 39 19 15 71 66 58 39 21 43 38 2 3 1 1 2 1 1 1 1 0 0 0 0 0 0 0 -38 -50 -52 -59 -54 -9 -11 -15 -12 -12 -12 -11 -13 -16 -16 -15 22 52 20 0 0 4 -5 11 0 46 20 0 0 0 0 0 Net finance -13 5 -31 -59 -53 -5 -15 -3 -12 34 9 -11 -13 -16 -16 -15 Pre-tax profit 330 191 153 83 -16 52 25 16 4 104 75 46 26 5 27 23 Taxes -6 -1 -9 -11 -9 -5 -2 -1 0 -1 -1 Interest expenses Other -18 -30 -8 -3 1 Minorities 1 -1 -1 -1 -1 1 0 0 0 0 0 0 0 0 0 0 Discontinued operations 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 312 160 143 79 -16 46 23 7 -8 96 70 44 25 4 25 22 2013 2014 2015E 2016E 2017E Q413 Q114 Q214 Q314 Q414 Q115 Q215E Q315E Q415E Q116E Q216E 103 190 32 222 546 115 177 27 203 522 73 154 29 117 373 79 179 29 155 443 79 178 29 412 699 103 190 32 222 546 109 179 38 399 724 110 164 36 226 535 113 211 37 175 535 115 177 27 203 522 120 182 29 152 484 92 194 29 149 464 82 173 29 52 336 73 154 29 117 373 82 174 29 110 396 83 188 29 113 413 Rigs, machinery and equipment Goodwill Other LT assets Total non-current assets 2,476 16 27 2,519 2,902 13 31 2,946 3,543 12 31 3,586 3,244 12 31 3,287 2,972 12 31 3,015 2,476 16 27 2,519 2,596 17 27 2,640 2,823 16 27 2,866 2,796 15 28 2,839 2,902 13 31 2,946 2,990 12 31 3,033 3,100 12 31 3,143 3,620 12 31 3,663 3,543 12 31 3,586 3,466 12 31 3,509 3,389 12 31 3,432 Total assets 3,066 3,469 3,959 3,729 3,714 3,066 3,364 3,401 3,374 3,469 3,516 3,607 3,999 3,959 3,905 3,845 Equity and debt: Shareholders' equity Non-controlling interests (Minorities) Total equity 1,437 0 1,437 1,308 0 1,308 1,450 1 1,451 1,529 2 1,530 1,513 2 1,515 1,437 0 1,437 1,460 0 1,460 1,242 0 1,243 1,234 1 1,234 1,308 0 1,308 1,377 0 1,377 1,421 0 1,421 1,446 1 1,446 1,450 1 1,451 1,476 1 1,477 1,497 1 1,498 Short term interest bearing libilities Other current liabilities Total current liabilities 131 711 842 96 566 662 191 354 544 191 371 562 191 371 562 131 711 842 176 406 582 176 548 725 96 504 599 96 566 662 191 575 766 191 446 637 191 398 589 191 354 544 191 393 584 191 398 589 Long-term interest bearing debt Other non-current liabilities Total non-current liabilities 662 125 787 1,360 139 1,499 1,829 135 1,964 1,502 135 1,637 1,502 135 1,637 662 125 787 1,191 131 1,322 1,300 134 1,434 1,410 131 1,541 1,360 139 1,499 1,239 135 1,374 1,414 135 1,549 1,829 135 1,964 1,829 135 1,964 1,709 135 1,844 1,622 135 1,757 3,066 3,469 3,959 3,729 3,714 3,066 3,364 3,401 3,374 3,469 3,516 3,607 3,999 3,959 3,905 3,845 2013 2014 2015E 2016E 2017E Q413 Q114 Q214 Q314 Q414 Q115 Q215E Q315E Q415E Q116E Q216E 299 242 -60 16 497 118 372 85 -205 370 144 374 -247 48 319 79 387 -14 0 453 -15 360 0 0 345 46 60 -13 45 137 24 63 5 11 102 7 88 41 -17 118 -8 135 14 -126 15 96 87 26 -73 135 70 91 -100 48 108 45 92 -113 0 23 25 92 -17 0 100 5 99 -16 0 88 26 99 11 0 135 22 99 -10 0 111 Rig capex Rigs sold Other investments CF from investments -212 1 0 -211 -941 0 0 -941 -995 2 0 -993 -88 0 0 -88 -88 0 0 -88 -63 1 0 -62 -495 0 0 -495 -181 0 0 -181 -134 0 0 -134 -131 0 0 -131 -159 2 0 -157 -202 0 0 -202 -612 0 0 -612 -22 0 0 -22 -22 0 0 -22 -22 0 0 -22 Debt raised Debt repayed Issuance of equity Dividend paid Other CF from financing 115 -191 0 -226 0 -302 1,934 -1,183 0 -223 0 528 685 -95 0 0 0 590 100 -427 0 0 0 -327 0 0 0 0 0 0 0 -50 0 0 0 -50 632 -63 0 0 0 569 152 -32 0 -223 0 -102 1,150 -1,089 0 0 0 61 0 0 0 0 0 0 0 0 0 0 0 0 175 0 0 0 0 175 510 -95 0 0 0 415 0 0 0 0 0 0 0 -120 0 0 0 -120 100 -187 0 0 0 -87 Net profit Balance Sheet Assets: Inventories Account receivables Other current assets Cash and short-term deposits Total current assets Equity and liabilities Cash Flow Cash earnings Depreciation & amortization ∆ Working capital Other items CF from operations Currency effects on cash -11 -1 -2 0 0 -7 0 -1 0 0 -2 0 0 0 0 0 Net cash flow -27 -43 -86 38 257 17 177 -167 -58 5 -51 -4 -97 66 -7 2 Source: Fondsfinans Research, Fred-Olsen Energy Page 8 21 May 2015 Fondsfinans Research Fred-Olsen Energy - Company update Segments REVENUES PER SEGMENT Offshore Drilling Engineering & Fabrication Eliminations Total revenues 2013 1,153 51 -9 1,194 2014 1,158 92 -66 1,184 2015E 1,082 55 -34 1,103 2016E 1,077 23 0 1,100 2017E 1,022 24 0 1,046 Q413 281 25 -8 298 Q114 267 48 -38 278 Q214 266 24 -16 273 Q314 331 14 -9 335 Q414 295 6 -3 298 Q115 280 38 -34 284 Q215E 296 9 0 305 Q315E 267 5 0 272 Q415E 238 3 0 242 Q116E 269 4 0 273 Q216E 266 9 0 276 OPEX PER SEGMENT* Offshore Drilling Engineering & Fabrication Eliminations Total opex 2013 -560 -58 9 -609 2014 -638 -77 47 -668 2015E -527 -51 32 -545 2016E -550 -21 0 -571 2017E -627 -22 0 -650 Q413 -158 -31 8 -181 Q114 -163 -44 32 -176 Q214 -157 -19 9 -167 Q314 -178 -10 3 -185 Q414 -139 -4 3 -141 Q115 -124 -35 32 -127 Q215E -148 -8 0 -155 Q315E -137 -4 0 -141 Q415E -119 -3 0 -122 Q116E -127 -4 0 -131 Q216E -130 -9 0 -139 *Operating expenses excluding depreciation and amortization EBITDA PER SEGMENT Offshore Drilling Engineering & Fabrication Eliminations Total EBITDA 2013 592 -7 0 585 2014 521 15 -19 516 2015E 556 4 -1 558 2016E 527 2 0 528 2017E 395 2 0 397 Q413 123 -6 0 117 Q114 104 4 -6 102 Q214 108 5 -7 107 Q314 153 4 -6 151 Q414 156 2 0 157 Q115 156 2 -1 157 Q215E 149 1 0 150 Q315E 131 0 0 131 Q415E 120 0 0 120 Q116E 141 0 0 142 Q216E 136 1 0 137 EBITDA PER RIG Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Bolette Dolphin Blackford Dolphin Borgholm Dolphin Bollsta Dolphin EBITDA rigs Net reimbursables EBITDA (Offshore Drilling) 2013 110 70 119 43 66 86 33 -31 16 35 0 548 2 550 2014 89 52 69 -4 77 63 40 59 31 36 -3 509 1 511 2015E 44 81 79 -5 51 33 40 89 103 28 -18 525 1 526 2016E -3 82 99 -6 3 56 8 87 102 -2 98 526 1 527 2017E 10 10 93 -6 18 19 29 85 13 -2 125 394 1 395 Q413 27 17 30 11 21 22 10 -13 -24 16 0 117 1 118 Q114 22 22 27 11 19 0 10 -14 -10 10 0 96 1 97 Q214 22 1 27 -3 20 21 10 24 -11 2 0 114 0 114 Q314 22 7 26 -11 20 21 10 26 26 9 0 158 0 158 Q414 22 21 -11 -1 18 21 10 22 26 15 -3 141 0 141 Q115 22 19 4 -1 18 -4 10 22 25 14 -3 127 0 127 Q215E 22 20 24 -1 18 -4 10 22 26 15 -3 149 0 149 Q315E -7 20 25 -1 18 21 10 22 26 0 -3 130 0 131 Q415E 6 22 25 -1 -3 21 10 22 26 0 -9 119 0 120 Q116E 18 20 25 -1 -3 21 10 22 25 0 5 141 0 141 Q216E -7 20 24 -1 -3 21 4 22 25 0 31 136 0 136 AVG DAYRATES ($'000) Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Bolette Dolphin Blackford Dolphin Borgholm Dolphin Bollsta Dolphin Average dayrates 2013 480 387 533 244 385 340 202 0 270 229 0 341 2014 489 459 509 123 427 346 202 366 436 242 0 360 2015E 441 440 490 0 308 346 202 488 428 120 140 340 2016E 242 446 498 0 124 300 183 488 428 0 560 363 2017E 237 246 505 0 259 172 172 488 172 0 560 312 Q413 480 383 528 247 434 346 202 0 0 242 0 358 Q114 489 463 522 247 433 346 202 0 419 242 0 374 Q214 489 466 518 247 436 346 202 488 467 242 0 390 Q314 489 459 506 0 429 346 202 488 428 242 0 399 Q414 489 448 488 0 411 346 202 488 428 240 0 393 Q115 489 432 488 0 411 346 202 488 428 240 0 391 Q215E 489 436 488 0 411 346 202 488 428 240 0 392 Q315E 496 436 488 0 411 346 202 488 428 0 0 412 Q415E 288 455 496 0 0 346 202 488 428 0 560 408 Q116E 288 438 496 0 0 346 202 488 428 0 560 406 Q216E 227 443 496 0 0 346 202 488 428 0 560 399 AVG OPEX PER DAY ($'000) Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Bolette Dolphin Blackford Dolphin Borgholm Dolphin Bollsta Dolphin Total 2013 154 175 180 114 184 87 80 84 185 51 0 129 2014 220 195 195 90 195 97 81 189 119 55 8 131 2015E 166 195 195 15 154 100 81 220 120 30 49 120 2016E 75 200 200 15 108 102 82 226 123 5 191 121 2017E 195 197 206 16 195 103 83 231 126 5 194 141 Q413 158 175 180 118 188 91 80 140 260 55 0 145 Q114 220 195 195 115 195 86 81 160 115 55 0 142 Q214 220 195 195 115 195 100 81 195 120 55 0 147 Q314 220 195 195 115 195 100 81 180 120 55 0 146 Q414 220 195 195 15 195 100 81 220 120 55 30 130 Q115 220 195 195 15 195 100 81 220 120 55 30 130 Q215E 220 195 195 15 195 100 81 220 120 55 30 130 Q315E 150 195 195 15 195 100 81 220 120 5 35 119 Q415E 75 195 195 15 30 100 81 220 120 5 100 103 Q116E 75 200 200 15 30 102 82 226 123 5 165 111 Q216E 75 200 200 15 30 102 82 226 123 5 200 114 AVERAGE UTILIZATION (%) Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Bolette Dolphin Blackford Dolphin Borgholm Dolphin Bollsta Dolphin Total 2013 95% 95% 95% 95% 95% 95% 84% 0% 64% 62% 0% 87% 2014 95% 74% 75% 32% 95% 78% 95% 71% 47% 64% 0% 73% 2015E 64% 95% 84% 0% 71% 55% 95% 95% 94% 45% 0% 78% 2016E 24% 95% 94% 0% 47% 78% 55% 95% 94% 0% 82% 74% 2017E 94% 91% 91% 0% 94% 90% 94% 95% 94% 0% 96% 93% Q413 95% 95% 95% 95% 95% 95% 95% 0% 0% 95% 0% 95% Q114 95% 95% 95% 95% 95% 25% 95% 0% 0% 67% 0% 83% Q214 95% 45% 95% 33% 95% 95% 95% 95% 0% 33% 0% 76% Q314 95% 60% 95% 0% 95% 95% 95% 95% 94% 65% 0% 88% Q414 95% 95% 15% 0% 95% 95% 95% 95% 95% 90% 0% 86% Q115 95% 95% 50% 0% 95% 15% 95% 95% 94% 90% 0% 80% Q215E 95% 95% 95% 0% 95% 15% 95% 95% 94% 90% 0% 85% Q315E 15% 95% 95% 0% 95% 95% 95% 95% 94% 0% 0% 85% Q415E 50% 95% 95% 0% 0% 95% 95% 95% 94% 0% 0% 88% Q116E 95% 95% 95% 0% 0% 95% 95% 95% 94% 0% 40% 88% Q216E 0% 95% 94% 0% 0% 95% 65% 95% 94% 0% 96% 91% Source: Fondsfinans Research, Fred-Olsen Energy Fondsfinans Research 21 May 2015 Page 9 Analyst: Knut Erik Løvstad, Tel. + 47 23 11 30 40 Håkon Johansen, Tel. + 47 23 11 30 18 Fred.Olsen Energy Date: Next result: Recommendation: Target (NOK): Target (USD) Price (NOK): Price (USD): Book equity per share: Equity ratio: 12 month high/low: 21 May 2015 SELL 25 3.3 64.00 8.53 21 39% 175 / 53 Sector: Shares outstanding: Market cap (USDm): Net int.-bearing debt (USDm): Enterprise value (USDm): Offshore 66.3 566 1,277 1,843 Income statement (USDm) 2012 2013 2014 2015E 2016E 2017E Q214 Q314 Q414 Q115 Q215E Contract revenues Other revenues Total revenues 1,140 41 1,181 1,149 46 1,194 1,112 72 1,184 1,042 61 1,103 1,034 66 1,100 984 62 1,046 257 17 273 310 25 335 286 11 298 272 12 284 287 18 305 Operating expenses EBITDA -583 598 -609 585 -668 516 -545 558 -571 528 -650 397 -167 107 -185 151 -141 157 -127 157 -155 150 Depreciation & Amortization Operating profit -233 366 -242 343 -329 187 -374 184 -387 141 -360 37 -88 19 -92 15 -87 71 -91 66 -92 58 Net financial items Pre-tax profit -48 318 -13 330 5 191 -31 153 -59 83 -53 -16 -3 16 -12 4 34 104 9 75 -11 46 Taxes Minorities Discontinued operations Net profit (reported) -14 0 0 303 -18 1 0 312 -30 -1 0 160 -8 -1 0 143 -3 -1 0 79 1 -1 0 -16 -9 0 0 7 -11 0 0 -8 -9 0 0 96 -5 0 0 70 -2 0 0 44 2012 2013 2014 2015E 2016E 2017E Q214 Q314 Q414 Q115 Q215E 480 396 531 242 361 326 222 489 459 509 123 427 346 202 366 436 242 365 441 440 490 0 308 346 202 488 428 120 371 242 446 498 0 124 300 183 488 428 0 299 237 246 505 489 466 518 247 436 346 202 488 467 242 386 489 459 506 489 448 488 489 432 488 489 436 488 353 204 365 480 387 533 244 385 340 202 0 361 229 367 429 346 202 488 428 242 405 411 346 202 488 428 240 397 411 346 202 488 428 240 395 411 346 202 488 428 240 395 96% 94% 96% 95% 88% 96% 62% 95% 95% 95% 95% 95% 95% 84% 64% 95% 84% 24% 95% 94% 94% 91% 91% 95% 60% 95% 95% 95% 15% 95% 95% 50% 95% 95% 95% 64% 62% 93% 71% 55% 95% 95% 94% 45% 77% 47% 78% 55% 95% 94% 94% 90% 94% 95% 94% 95% 45% 95% 33% 95% 95% 95% 95% 94% 90% 89% 95% 74% 75% 32% 95% 78% 95% 71% 47% 64% 78% 65% 92% 33% 79% 95% 95% 95% 95% 94% 65% 89% 95% 95% 95% 95% 95% 90% 82% 95% 15% 95% 95% 94% 90% 74% 95% 15% 95% 95% 94% 90% 82% 2012 66.3 211.3 2013 66.3 225.4 2014 66.3 81.2 2015E 66.3 64.0 2016E 66.3 64.0 2017E 66.3 64.0 Q214 66.3 170.4 Q314 66.3 143.6 Q414 66.3 81.2 Q115 66.3 65.4 Q215E 66.3 64.0 EPS reported EPS adjusted Op. CF - net capex per share CFPS 4.70 4.58 0.00 0.00 4.52 4.71 4.30 -0.41 1.77 2.41 -8.61 -0.65 2.16 1.72 -10.19 -1.30 1.18 1.18 5.50 0.58 -0.24 -0.24 3.87 3.87 0.10 0.10 -0.96 -2.52 -0.12 -0.12 -1.80 -0.87 1.44 1.44 0.07 0.07 1.05 0.61 -0.76 -0.77 0.67 0.67 -2.70 -0.06 EV/EBITDA EV/EBIT P/E, rep. P/E, adj. P/B ROE ROCE 5.2 8.5 8.1 8.1 1.8 44% 37% 5.3 9.1 7.9 7.9 1.7 22% 17% 4.0 11.0 4.9 4.9 0.6 12% 8% 3.3 10.0 3.9 5.0 0.4 8% 6% 3.5 13.0 7.2 7.2 0.4 5% 4% 4.6 50.2 -35.0 -35.0 0.4 -1% 1% Sensitivity EPS, adj. 2016E 2017E BASE ESTIMATE + 5% Revenue growth + 1% EBITDA margin 1.18 0.29 0.11 -0.24 0.22 0.11 2012 2,325 534 2,859 1,366 878 614 2013 2,519 546 3,066 1,437 787 842 2014 2,946 522 3,469 1,308 1,499 662 2015E 3,586 373 3,959 1,450 1,964 544 2016E 3,287 443 3,729 1,529 1,637 562 2017E 3,015 699 3,714 1,513 1,637 562 Book equity / share Equity ratio Net interest bearing debt Net int. bear. debt / EBITDA 20.6 47.8 % 636 1.1 21.7 46.9 % 571 1.0 19.7 37.7 % 1,252 2.4 21.9 36.7 % 1,902 3.4 23.1 41.0 % 1,537 2.9 22.8 40.8 % 1,281 3.2 Cash flow statement Cash flow from operations Cash flow from investments Cash flow from financing Free cash flow 2012 0 0 0 0 2013 497 -211 -302 -27 2014 370 -941 528 -43 2015E 319 -993 590 -86 2016E 453 -88 -327 38 2017E 345 -88 0 257 Segment information Contracted Day Rates Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Bolette Dolphin Blackford Dolphin Borgholm Dolphin Average dayrates Utilization rates (%) Belford Dolphin Bideford Dolphin Borgland Dolphin Borgny Dolphin Bredford Dolphin Byford Dolphin Borgsten Dolphin Bolette Dolphin Blackford Dolphin Borgholm Dolphin Average utilization Key figures and valuation No. of shares, avg m Price (NOK) Balance Sheet Data Non-current assets Current assets Total assets Equity Non-current liabilities Current liabilities Page 10 21 May 2015 259 172 172 488 172 0 265 2015-05-18 10 largest shareholders Name No. shares % 17.314 26.1 % Bonheur Asa Ganger Rolf Asa 17.314 26.1 % 2.170 3.3 % Clearstream Banking S.A. Folketrygdfondet 2.447 3.7 % Euroclear Bank S.A./N.V. ('Ba') 1.474 2.2 % Schroder International Selec Tion 1.159 1.7 % J.P. Morgan Chase Bank N.A. Londo 1.060 1.6 % Bnp Paribas Sec. Services S.C.A 0.929 1.4 % Nordnet Bank Ab 0.913 1.4 % J.P. Morgan Chase Bank N.A. Londo 0.857 1.3 % 45.637 68.8 % Total 10 largest 20.663 31.2 % Others Total 66.300 100.0 % Fondsfinans Research Definitions of ratings Buy Neutral Low risk: with a potential of min 5%. Medium risk: with a potential of min 10%. High risk: with a potential of min 20%. Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -20% to + 20%. Sell Low risk: min -5%. Medium risk: min -10%. High risk: min -20%. Risk ratings are based on price volatility, fundamental criteria and perceived risk. Ratings are: Low (L), Medium (M) and High (H). Target: Our valuation as of today. Time frame of target: Target is what we value the share as of today. Recommendation distribution as of 20.05.15: Companies in each recommendation category that have been investment banking clients over the past 12 months: Recommendation Buy Neutral Sell Total Recommendation Buy Neutral Sell Total No 40 10 13 63 Percent 63 % 16 % 21 % 100 % No 1 1 0 2 Percent 3% 10 % 0% Our intention is to issue preview and update research on a quarterly basis. Our investment recommendation is elaborated in accordance with “The Norwegian Securities Dealers Associations” standards. This report has not been sent to the companies for correction of any factual errors. Fondsfinans is organized with Chinese walls between the Corporate Department and the Research/Broking Department. In addition, Fondsfinans has internal instructions and guidelines for handling sensitive information. The analyst receives compensation that is impacted by overall firm profitability, including investment banking activities. Fondsfinans is under supervision of The Financial Supervisory Authority of Norway. The recommendation has not been changed from SELL. The previous recommendation was issued 06.05.15 Ownership per 05.05.15 in Fred-Olsen Energy ASA: Analyst (including his/her closely related persons or companies): 0, corresponding to 0% of the company share capital Employees (including their respective closely related persons or companies): 0, corresponding to 0% of the company share capital Group Fondsfinans (including the holdings of its Chairman, his spouse and their closely related companies, Erik Must AS and its 100% controlled subsidiaries): 0, corresponding to 0% of the company share capital. Fondsfinans may hold shares in Fred-Olsen Energy ASA as a result of daily trading/market making. Information on such holdings is not given when of non-significant value. Fondsfinans does not act as market maker in Fred-Olsen Energy ASA. 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