Pareto Conference Summary

As usual, the conference was well attended, with about 1,500 investors and company representatives in
attendance including RIG, ESV, VTG, Shelf, BORR, and Songa among the drillers. Notably, Seadrill,
Noble, Rowan, Diamond, and Atwood did not attend. A number of the Chinese yards were
General Take-Aways

 Norway has called the bottom. The general mood at this week’s conference was realistic, but
optimistic. Compared to last year, when there was still bad news being delivered to the market,
the impression is that we’re more or less at the bottom. Utilization has started to improve, even
for deepwater assets, though it’s generally acknowledged that we’re not likely to see meaningful
dayrate increases in the near future. Still, more activity is better and investors are talking about
entry points.

 There’s money available. After several years of sitting on the sidelines, there’s money available
for investment, at least in Norway. Bankers and investors alike appeared to be looking for
opportunities. The BORR drilling and Shelf presentations were filled to capacity. My impression
is that investors are still going to be discerning, but that the offshore sector is gaining interest.

 Offshore isn’t dead. If oil demand continues to grow at 1% p.a., need approximately 12
MMBOD of development to reach the estimated need of 101 MMBOD by 2020 given a global
decline rate of ~3.5%. As one of the analysts put it, that’s about 20X the plateau production of
the Norwegian super-field Johan Sverdrup.

Costs have come down enough to make offshore (at least the shelf) competitive with U.S. shale,
which some analysts here had conflicting views on. One of the analysts at SpareBank1 who
analyzed 22 predominantly shale-only companies asserted that they consistently reported negative
FCF (Cashflow from ops-capex) and that the breakeven price for these companies is ~$61/bbl.
He argued that they’re focused on growth at any price rather than profitable growth.

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Clarksons had a slightly different view, estimating a break-even around $40/bbl and gave this
interesting comparison showing the efficiency and cost gains:
2014 Metric 2017
1030 A: # of rigs onshore US 600
operating
Vertical Focus Horizontal
135 B: Pay Ft drilled/rig per well 200
11.7 C: Production 14.5
bbl/day/1000ft
1.63 MMBOD AxBxC: Total Production 1.74 MMBOD
delivered
$80 Marginal breakeven price $40

Clarkson’s demand analysis was slightly different, but consistent with SB1’s, focusing on
demand in 2025 (vs. 2020). They still view a significant requirement for offshore development
and fortunately for us, more of what they call ‘short-cycle,’ or jackup work, at least in the near
term. However, they still estimate 2018 will be a ‘weak year’ for offshore capex with 2019 being
the pick up.

Pareto also had a view on the call for oil that is relatively consistent. They’re predicting a
marginal cost of $65-75/bbl for new marginal oil supply.

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 New assets over old. In general, the story still seems to be focused on a view that customers will
prefer new assets over older ones. Shelf told a very good story about older rigs in their
presentation, but that notwithstanding, RIG, ESV, BORR, and VTG talked mostly about the
need/desire for customers to have newer, more efficient rigs. Granted, RIG and ESV were
focused on the floater markets, but the sentiment remains the same that newer rigs will get more
focus.

 Harsh environment in focus. RIG talked about its rationale for doing the Songa deal and their
ongoing fleet rationalization. They’ve determined that for floaters, they need to differentiate
themselves by having the latest, greatest tech on the UDW floaters and that they should focus on
harsh environment as a specific market segment. Likewise, ESV talked about how the ATW
floaters would upgrade their fleet. There is starting to be chatter among the brokers about the
need for new mid-water HE floaters. There are a few HE CS-60’s in yards in Asia, but they’re
being talked about as ‘overkill’ for UK shelf work and even for Norway. Arctic Securities thinks
a mid-sized modern HE floater could be built at around $400 MM. Notably, they didn’t view that
there was a substantial premium for NORSOK compliance—only $5 MM or so for
documentation, which is notably different from the past cycle. HE jackups are also of interest, so
our story on PROS is getting some traction (more separately).

 Yards may be starting to deal. It’s still hard to say where the Chinese yards are based on the
conversations we had. In some instances, there’s a claim that the yards are starting to move and
are willing to get to a deal in $140 MM range. On the other hand, there’s a claim that there’s no
real movement yet, though SWS is working to get a deal done where it can get rigs off its balance
sheet in exchange for cash at full value from a Chinese bank. They’d have marketing
responsibility still and would ultimately have to pay the bank back though it seems likely that
they’re expecting that in a number of years, it would then be easier for the system to accept write-

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 downs and the yards might not be on the hook for the total amounts. SWS may come to Houston
in October and we’ll have a conversation with them.

Other yards may be interested in deals as well. For example, one broker talked about Keppel
being to work with someone to do a deal on up to 4 116E’s for little money down and financing
over up to 36 months (see separate deck) at a price around $120 MM/rig.

Everyone also seems to acknowledge that it will take $20-30MM to get these rigs out of the yards
and that there aren’t jobs today to support yard prices, but no one really was firm about who will
pay for the preparation capex or how/when these deals would get done.

 Speculators generally not in a good position. Spoke with a representative from Fecon, a
private company that had 3 FELS B class under construction and was trying to work out how a
bareboat charter would work. Really had no understanding of the economics of the system and
was pretty dejected when I explained market rates-op costs left very little for any kind of
substantial BBC payment to let them get the rigs. Tom Kellock (IHS) was part of the
conversation as well and agreed with the analysis.

 Utilization up, but not dayrates; scrapping/consolidation needed. Most participants

(company and investor) agree that it’s a positive sign to see utilization increasing, but no one is
getting excited about dayrates. 2018 is not yet being viewed as a turn-around year, at least for
floaters. Both stand-alone scrapping and M&A-drive scrapping were viewed as being needed to
bring the overall industry back into more of a balance.
Company-specific (presentations attached)

 Transocean-Mark Mey
o Highlighted Fleet composition, Backlog, Liquidity, and Experience
o Songa deal improves HE position
 $3.4 BN cost of transaction
 PV of backlog of $2.1 BN
 Implies steel cost of $1.3 BN—valuing the Cat-Ds at ~$312 MM/rig
o Post Songa
 55 floaters
 $14.3 BN backlog
 $5.2 BN liquidity
o Discussion of how they have segmented the market
o In conversations, Songa deal generally viewed positively for RIG’s position in Norway,
but no thinks there’s any upside given the long terms of the Cat-D contracts and the
potential options

 Vantage-Ihab Toma
o $201 MM cash
o Debt Structure
 $143 MM 1st lien at LIBOR + 6.5%
 $76 MM 2nd lien @ 10%

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  Convertible 3rd lien
 Net debt of ~$14 MM
o All but one rig (floater) contracted, $342 MM backlog
o Focused on
 Stellar safety and operational excellence
 Putting all rigs to work
 Conserving cash and cutting costs
o Costs
 2017 shorebase costs are 50% of 2014 with same # of rigs operating

 Fit for purpose org-size/location

 Nationalization of positions
 Recalibrating wages—all special benefits incl risk premiums are gone
 Lowered stacking costs, but DID keep people which reduced their reactivation
costs
 Supply chain benefits
o Spoke on continuing jackup bifurcation
o Note—not sure where they go from here. Almost fully contracted. They’re open to
M&A/acquisitions and suspect they’ll be a target.

 Shelf Drilling – David Mullen/Kurt Hoffman

o Dubai HQ
 Very good move for them in cutting costs
 110 people at the HQ, mostly Indian, Pakistani
 Still doing US GAAP Acctg
 4 Mktg people in total; all former rig mgrs. Report to Kurt
 Have essentially nationalized all country positions incl. leadership. Feel ‘better’
about using locals than expats from an FCPA standpoint
o Strong growth in ME—from 4 to 10 units
o Estimate total fleet utilization ~85% in 2018
o New contracts (no dayrates)

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  Announced 3 short-term jobs in WA incl Nigeria. Thinks Nigeria needs 5-6 rigs
in 2018.
 Announced 2 new HS jobs in Dubai.
 Accepting performance elements in the contracts
o Good safety: 0.22 TRIR
o Uptime of 98.7%
o Field-level opex incl field overhead of $33k/day
o $195 MM liquidity
o $778 MM gross debt
 $533 MM Sr. sec. notes
 $245 MM sale/leaseback with ICBC Leasing
 ESV-Jon Baksht
o Jon read a script for his presentation; room was lightly attended compared to other
presentations
o Pretty generic presentation with focus on ATW at end
o 25 patent filings since 2015
o $4.1 BN Liquidity
o $3.3 BN Backlog
o ATW
 Think they’re paying $222 MM per ATW floater
 $70 MM of expected annual synergies beginning in 2019 ($50 MM in 2018)
based on ATW’s costs:
 $35 MM of Ops Support
 $50 MM G&A
o In conversations, didn’t seem that people found this deal compelling. Some thoughts that
it may signify ESV’s concern about their own fleet and a general view that they were
hungry to a deal.

 BORR-Simon Johnson
o Packed room. Simon looked like a rock star with at least 2 photographers following him
around. Clearly it’s the “Troim magic” that people are interested in.
o General strategy deck
 Their avg. acquisition cost is about $107 MM/rig
 Good cost position since no requirements to cover debt
 Only need to secure $122 MM to finance remaining newbuilds through 2020
 Admittedly low contract coverage, but working to change that
 Couple of contracts in WA
 New rigs better than old (old rigs can’t compete)
o Interesting reactivation chart in Appendix

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o Opex chart