Sector Update

1 Jun 2010

Cruel summer ahead Sector

Index - last 6m performance
Oil & Offshore
130
With a 6 month drilling ban in the GoM and oil spewing into the sea
at a rate of more than 12,000bpd, both sentiment and fundamentals 120
for offshore drilling is challenged. The long term consequences are
uncertain as it is still unclear how long the ban will eventually last 110

and how many rigs will leave the region as a consequence. 100
However, as long as the ban does not significantly exceed the
current 6 months, we believe a large part of the US GoM fleet will 90

remain in the area. Nevertheless, this unprecedented disaster will 80

shape the future of the industry through a stricter regulatory
climate and an increased environmental focus 70
Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10
OSX OSEBX Brent
Uncertainty over length of moratorium
Although speculation has been made that the moratorium will last
significantly longer than the current 6 months, we believe it is Figures NOK/USD Cap. USDm Week YTD
premature to make any such predictions Key Share price Market USD chg USD chg
SCORE 40.3 547 11.9% 46.7%
` Although the current political climate makes an extension beyond 6 NOF 12.0 284 25.4% 12.7%
months likely, a lot can change during the course of the ban RDC 24.8 2,800 3.5% 9.4%
` Key factors will be how successful BP eventually is in stopping the VTG 1.6 611 13.7% -1.9%
leak and how the moratorium affects GoM production and oil prices ESV 37.4 5,240 -4.1% -6.3%
` It is worth noting that US GoM is the source of 30% of US domestic FOE 189.1 1,936 4.4% -20.1%
PDE 24.8 4,310 1.7% -22.4%
oil production and employs some 75,000 workers. The industry is
SDRL 124.8 7,938 -8.5% -24.1%
also a major source of US tax revenues NE 29.1 7,488 -6.3% -28.4%
RIG 56.8 18,280 -0.7% -31.4%
Extent of consequences still unknown DO 63.1 8,777 -8.9% -33.2%
SONG 22.3 578 5.9% -34.7%
The extent of the consequences from the disaster and ensuing drilling
ban are still unknown but will likely be significant in the long term Key P/E P/E EV/EBITDA EV/EBITDA
` Short term consequences will depend on the length of the ban Figures 11E 12E 11E 12E
` If it does not exceed the current 6m, a lot of rigs, especially those DO 5.8 5.7 3.5 3.2
that were performing development drilling, will likely remain in the ESV 9.6 6.7 5.1 3.7
FOE 3.3 2.8 3.2 2.6
area. However, the uncertainty and lack of information is a problem
NE 6.3 7.1 3.0 2.6
` We already know of one rig that will leave for work in the
NOF 7.4 14.8 2.0 1.9
Mediterranean and companies with a portfolio of deepwater assets PDE 7.2 6.1 5.1 3.6
will probably use at least part of their US GoM fleet elsewhere RDC 11.2 8.3 4.9 3.6
` Transocean mentioned this as the most likely outcome on their SDRL 4.3 3.7 3.0 2.1
conference call on Friday SONG 3.0 2.6 2.5 1.8
` Longer term, there will be increased regulation and stricter SCORE 9.3 11.0 6.4 6.4
requirements to operator history and capability RIG 5.6 6.4 3.9 3.2
` A recent proposal of unlimited liability would change the industry as VTG 12.7 5.1 6.4 4.8
the disincentives to exploration would likely outweigh the benefits for
all but the most promising prospects and largest operators Analysts:

Buy jackup and newbuild/premium asset exposure Frank Harestad

Direct: +47 5183 6315
With the uncertainty of the drilling ban placing a dark cloud on the
Mobile: +47 9300 5060
industry, we prefer jackups and newer assets
Email: frank.harestad@pareto.no
` The spread between new and old jackups continues to increase
` For floaters it is a different story, as capabilities vary greatly between Andreas Stubsrud
new and old floaters. Nevertheless, in a difficult market we believe Direct: +47 2413 2116
high spec newbuilds will at least get solid utilization, while the risk of Mobile: +47 9179 7565
reduced utilization for lower end floater equipment is greater Email: andreas.stubsrud@pareto.no
` We believe Rowan stands out as the only pure play jackup company
left (after SCORE is acquired) Erik S. Thomassen
` Vantage’s four newbuild jackups also gives excellent exposure Direct: +47 2413 2165
` For floater exposure we prefer Seadrill with downside protection Mobile: +47 9243 3186
from a strong backlog and a large fleet of premium newbuilds Email: erik.thomassen@pareto.no
The recommendation was not presented to the issuer before dissemination.

Pareto Securities AS Bloomberg: PASE (go) P.O. Box 1411 Vika Tel: +47 22 87 87 00 Video Conf.: +47 22 87 88 45
www.pareto.no Reuters: PARETO N-0115 Oslo, Norway Fax: +47 22 87 87 10 Trading desk: +47 22 87 87 50
1 Jun 2010 Please refer to important disclosures at the end of this document 1(9)
Oil & Offshore
Some drilling may occur under
the moratorium: Less than
expected rigs will leave the
region we believe
1 Jun 2010
Sector Update
Latest on the drilling ban
There has been a lot of speculation surrounding the possible extent
and length of the drilling ban. We believe such speculation is
premature and that the final outcome of this moratorium will depend on
the successfulness of BP’s containment efforts and the impact the
moratorium has on US GoM production and oil prices – this was and
will be a highly political decision.
Regardless, details have recently been released by the MMS, which
outline the nature of the drilling ban. In short, all drilling in water depths
of more than 500 feet, both exploratory and development, will be
banned for 6 months and all ongoing drilling must be suspended as
soon as safely possible. However, several exceptions apply, including:
“drilling necessary to sustain reservoir pressure from production wells”
and “workover operations”, “waterflood, gas injections or disposal
wells” as well as “drilling operations or other activities that are
necessary to safely close or abandon a well, or to accomplish well
completion operations…”
As such, although normal exploratory and development drilling will be
off limits, a number of other operations can still be carried out in an
effort from regulators to limit the effects on GoM oil production.
GoM floater fleet facts
There are currently 35 floaters in the US GoM (with another 7
newbuilds scheduled for drilling in the area), please see owner
distribution below. 21 have dynamic positioning (DP), while 14 are
moored rigs. We believe around 40% of these units were drilling
development wells.
GoM floater ownership distribution
Aban Offshore,
1
Diamond
Offshore, 6
Transocean, 14
Ensco, 3
Frontier Drilling,
1
Maersk Drilling,
1
Stena, 1
Noble, 6
Seadrill, 1 Pride, 1
Source: ODS-Petrodata, Pareto Research
If the drilling ban only lasts 6 months, we do not believe the majority of
the rigs will relocate to other regions (such as West Africa and Brazil)
because:
1. Several units will likely remain in the region to perform
operations exempted from the drilling ban, such as workover
drilling and drilling needed to “sustain reservoir pressure from
production”
2. The travelling distance to the closest markets (Brazil/W. Africa)
even for a drillship or DP rig is significant
Pareto Securities AS 2(9)
Oil & Offshore
UDW rates may bottom out 50-
75’$/day below current market
rates, however, we see no
collapse of UDW rates over time
The jackup market still looks
good – however, look for
premium assets
1 Jun 2010
Sector Update
3. Other regions have available rigs with a growing number of
floaters stacked worldwide (currently 12). A rig company would
most likely be satisfied with a reduced dayrate for a period
instead of relocating their rig to another market where they
already have idle units. The companies with the highest GoM
exposure already have stacked rigs in other regions
However, of the 35 units the majority (28 units) are contracted by oil
companies with deep water assets also outside the GoM (see
operators of GoM floaters below). As such, several of the units will
relocate to other regions because the oil company will use their rig time
efficiently and economically. We already know that one drillship will
head for the Mediterranean.
Such mobilisation for other regions will put pressure on floater
dayrates, but the impact should be short term and the oil price will most
likely move up and increase demand other places in the world. Hence,
we do not believe in a collapse of dayrates, but that UDW rates could
easily see 350’$/day before we see the bottom of the market.
GoM floater operators
Walter Oil &
Taylor Energy,Gas,
1 1 Anadarko, 3
Statoil, 2
ATP Oil & Gas, 1
BHP Billiton, 2
Shell, 4
BP, 4
Noble Energy, 2
Nexen, 1
Newfield Chevron, 3
Exploration, 1
Marathon, 2
Devon Energy, 1
LLOG, 1 Eni, 3
Hess, 1
ExxonMobil, 1
Source: ODS
Jackup and newbuild exposure preferred
We believe there is a trend towards significantly higher utilization for
new assets versus older units, which was evident even before the
Deepwater Horizon accident. However, even if the Horizon rig was only
9 years old, we believe the disaster has made oil companies more
concerned about older equipment.
Jackups
We have been optimistic to the jackup market for some time now, and
are still positive. However, there is a huge difference between new and
old units, both in terms of second hand values and dayrates.
The spread in dayrates is currently 40-50’$/day and new jackups
currently operate with 94% utilization, while older jackups are below
85% (high end older jackups – other low spec units are on much lower
utilization).
Ensco recently sold three older jackups for USD 50m each, while the
latest transactions in the jackup market, including implied values of
Scorpion last Friday are around USD 180m.
We believe the spread in dayrates and values is based on:
Pareto Securities AS 3(9)
Oil & Offshore
Currently there are 12 stacked
floaters world wide, and several
are coming of contracts shortly.
In West Africa there are 3 units
stacked, 2 are stacked in the
North Sea and 7 are stacked in
Asia.
Buy Rowan, Vantage and
Seadrill
1 Jun 2010
Sector Update
1. More efficient conventional drilling
2. Some older jackups are not able to drill high pressure wells
3. Deck capacity larger on new units – positive for deep wells
and wells far from shore (reduced supply costs)
4. Security for employees
Utilization for new units stands at 94% and the large supply expected
from an inflated orderbook is likely exaggerated as many units will
never enter the open market. As can be observed in the graph below,
the majority of the current jackup fleet was built in the 80s and the
newbuild fleet only comprises some 150 units
Jackup fleet age
# of units
90
80
70
60
50
40
30
20
10
0
<19701972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Delivered On order/ Under Construction
Source: ODS
Floaters
The floater market has YTD been impacted by the UDW newbuilds
entering the market. Rates have been pushed down from 500’$/day
last year to 450’$/day for several contracts YTD, before we observed a
Maersk UDW newbuild starting its life with 385’$/day for 3 months in
West Africa. As such, the moored floater market has been under
pressure, but rates have been quiet stable.
Other than in Brazil we see few regions with significant incremental
short term demand for floaters, and hence, if floaters are leaving GoM
dayrates will be under pressure.
At the same time, we do not believe dayrates will collapse, but
utilization for older units may fall dramatically. We believe dayrates for
newbuild UDW units will fall, but that they will find a new home, hence
solid utilization. New assets will get work, older units may be stacked
(or scrapped) like the trend shows us in the jackup market.
Investment ideas
Rowan is trading at 5x EV/EBITDA (2010/11), has 90% premium/high
spec jackups, fleet age is 14 years (excluding 3 conventional JUs) and
the company has 10% gearing Q1’10 in percent of EV.
Vantage has secured a long term UDW contract above market for its
drillship, and operates four newbuild premium jackups. The implied
values are far below second hand values, even when the drillship
equity value is set to zero.
Seadrill has 5 years average fleet age, solid contract backlog, cheap
financing and a management/board with solid track record. The stock is
trading at 5.5x EV/EBITDA (2011).
Pareto Securities AS 4(9)
Oil & Offshore Sector Update

GoM spill background

The US GoM oil spill, which began after an explosion aboard the
Deepwater Horizon drillship 20 April, has now been ongoing for more
than one month. Despite continuous efforts from operator BP, all
attempts to stop the flow have so far failed. Estimates of how much oil
has spilled vary, but the latest flow rate estimates of between 12,000
and 19,000bpd would put the spill thus far at between 480,000bbls and
760,000bbls, making it the largest oil spill in US history (Exxon Valdez
disaster was some 250,000bbls).

Investigation into the cause of the accident has indicated failure at a

systemic level, with problems with the cementing and BOP as key
issues. BP has identified 7 issues, which the company is focusing on
as the investigation proceeds:

BP investigation focus areas

1 The cement that seals the reservoir from the well
2 The casing system, which seals the well bore
3 The pressure tests to confirm the well is sealed
4 The execution of procedures to detect and control hydrocarbons in the well,
including the use of the BOP
5 The BOP emergency disconnect system, which can be activated by pushing
a button at multiple locations on the rig
6 The automatic closure of the BOP after its connection is lost with the rig
7 Features in the BOP to allow remotely operated vehicles to close the BOP
and thereby seal the well at the seabed after a blow out

The accident occurred as BP was preparing to plug the well and

temporarily abandon it. Halliburton had performed the cementing of the
well, while Transocean had finished the actual drilling of the well a few
days earlier. Before proceeding with the placing of a third and final
cement plug, BP decided to replace the drilling mud in the well with
seawater, which is 50% lighter. This was apparently done in an effort to
speed up operations, as the normal procedure is to first place the final
cement plug before then proceeding with the displacement of the
drilling mud. It is still unclear what happened next, but we know that
gas entered the well at some point and began rising to the surface. As
the gas escaped past the cement plug and rose towards the surface, it
increased in pressure before finally arriving at the surface of the rig
where it eventually ignited and exploded.

Containment efforts
Since the disaster, BP has been working continuously in order to stop
the flow of oil spewing into the GoM. These efforts have so far been
unsuccessful and it is clear that BP has little control of the situation. An
initial attempt to lower a containment dome over the leak was aborted
after gas hydrates clogged the opening.

BP has several possible options for containing or stopping the flow

going forward, all of which are associated with a high level of
uncertainty. The current plan involves removing the damaged riser and
attaching a cap to the BOP, which is intended to capture most of the
oil. However, if this does not work an alternative being considered is to
attach a second BOP on top of the old one.

If BP’s containment efforts fail, the worst case scenario would see the
well spewing out oil for as long as August, when a relief well is
expected to reach its target.

1 Jun 2010 Pareto Securities AS 5(9)

Oil & Offshore Sector Update

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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.

1 Jun 2010 Pareto Securities AS 6(9)

Oil & Offshore Sector Update

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.

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distribution of this research report which are disclosed on the following Appendix A and Appendix B.

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Disclaimer
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related to investments caused by or motivated by Recommendations from Pareto. Any person receiving a
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1 Jun 2010 Pareto Securities AS 7(9)

Oil & Offshore Sector Update

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.

Analyst Total Analyst Total

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

This overview is updated monthly (last updated 30.04.2010).

1 Jun 2010 Pareto Securities AS 8(9)

Oil & Offshore Sector Update

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).

1 Jun 2010 Pareto Securities AS 9(9)