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    Hansson reflects on OSV market - benefits significantly from currency gain

    Company News // March 20, 2015

    As Nordic American Offshore approaches the first anniversary of its listing on the New York Stock Exchange (NYSE) in June 2014, Herbjørn Hansson, the company's Executive Chairman, has been reflecting on the seismic changes in the offshore oil and gas and offshore vessel market in a letter to shareholders.

    He noted that NAO entered the market for PSVs against a background of high, stable oil prices and record investment levels in the offshore segment.

    "I believe it is justified to keep an optimistic outlook for the future," he said. "Nine months existence for a start-up company is a short period in the life of a company that owns a young fleet.

    "A company owned and controlled by my son Alexander and I bought 50,000 NAO shares yesterday at about US$7.83 per share, in addition to the stock ownership we have direct and indirect in NAO.

    "Currently the market for our vessels is turbulent - the decline in oil price has led to reductions in exploration activity in the North Sea, in turn lowering the number of working oil rigs and the demand for PSVs.

    "Five vessels in our eight vessel fleet are currently employed on contracts, up from three last quarter. Three of our vessels are operating in the spot market. 

    "At the time of this letter to you, we enter a period of greater visibility on earnings and security in the current challenging environment. We have achieved in excess of 80 per cent utilization which is a sound performance in the current market conditions. Rates for the spot ships have been reduced this year as a consequence of the low oil prices.

    "For NAO as a start-up company, employing three vessels in the spot market serves an important purpose in terms of marketing our modern, fuel efficient and homogeneous vessels to the many customers operating in the North Sea and elsewhere.

    "Demonstrating the performance of our vessels and operations for shorter jobs is important as we seek to be the first choice provider of PSVs as our fleet grows. We recently contracted two vessels to Statoil to assist on the prestigious Polarled project, securing employment for those vessels for several months going forward.

    "When observing PSV rates, we must consider two important factors. First, utilization and rates in our market are always affected by the winter season when non-essential work tends to be postponed until weather conditions are more favorable.

    "Second, our vessels operate in local currency, Norwegian Kroner in the Norwegian sector and British Pounds in the British sector. This also applies to our expenses. The weaker reported rates are impacted by the appreciation of the US dollar.  

    "Conversely, our two vessels delivered from the Norwegian yard of Ulstein earlier this year were ordered from the yard in Norwegian Kroner. The realized currency gain on these two vessels was about US$8 million per vessels, actually reducing the US$ price from about US$44 million to about US$36 million. It is indeed comforting to see that an economic advantage of about US$32 million may be achieved - spread across four vessels delivered in 2015.

    "The two additional vessels will be delivered to us later this year. We expect to capture similar reductions in cost on those vessels, given the Norwegian Kroner/ US$ relationship to be at the same level as now. Our positioning by ordering the vessels in Norwegian Kroner and reaping the benefits of a stronger dollar, has indeed given our shareholders an extra economic benefit.

    "The low oil price continues to put pressure on our industry. The fundamentals in the oil market suggest an improved balance between supply and demand for crude oil in the second half of this year.

    "When Brent crude prices return to the US$60-80 range per barrel we expect to see renewed activity in our market, and improved demand for our vessels.

    "The geopolitical situation involving Russia has also affected our market. Vessels owned by other companies that were due to work in the Arctic regions had their charters cancelled. Those vessels were drawn from the North Sea and their return to this market has contributed to an oversupply of vessels. Should the political situation change and sanctions against Russia be removed, this should affect our market positively.

    "In our 2014 start-up year we declared total dividends of US$1.80 per share. Going forward we will review the dividend on a quarterly basis in the same way as Nordic American Tankers (NAT) has done in the past.

    "NAO basically employs the same strategy as NAT. A strong balance sheet and low cost breakeven are the key elements of our robust long-term performance.

    "We expect to continue to pay a dividend going forward - although, for the time being, at a lower level than for the previous quarters when the dividend was 0.45 US$ per share.
    "Our strategy is designed to remain robust in strong and weak markets. With that said we are positive about the oil price in coming years. We expect to reap the benefits of an improved oil price which will be a stimulus to the activities of the PSV market.

    "With a low cash break even and an improved market, we expect that a higher oil price should form the basis for improved commercial results for Nordic American Offshore."



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