Description

Security Overview

·         $270mm Bond; Maturity – May 14, 2013; Call – First call at 103.5% May 2010

·         Coupon - 6m LIBOR + 300 bps

·         Bond Issued by Parent – Sevan Marine ASA

·         Security – First priority pledge on FPSO Sevan Piranema

·         Trading at 50% of par; Yield to Maturity of 26%

FPSO Sevan Piranema

The Sevan04 bonds are directly tied to the Sevan Piranema asset. Sevan Piranema is an FPSO that has been producing oil for over a year for the Piranema oil field owned by Petrobras. Sevan Piranema’s contract is with Petrobras and the contract has an 11 year duration with fixed dayrates, plus one six-year option and five one-year options. The Piranema field is expected to be larger than initial estimates and it is likely the Sevan Piranema will be working on this specific field for over 30 years. With revenues on a fixed escalating schedule, cashflow variability comes from 1) fluctuation in operating costs (which are relatively stable and at 30% of revenue have limiting cashflow impact) and 2) utilization (up-time of the platform). It is quite rare that these platforms need to come off-line beyond scheduled maintenance. (The company is paid its day-rate for scheduled maintenance). In Q3 2008, the Sevan Piranema had a 99.9% uptime. In Appendix, Chart I outlines a cashflow sensitivity to Piranema having 95% utilization and still having decent cashflow coverage under this extremely unlikely scenario.

Petrobras breaking the contract – while unlikely, worth exploring impact of this tail event

·         Petrobras is an investment grade company, little debt and one of the largest oil companies in the world. 

·         Beyond a legal obligation to honor the contract, Petrobras has little incentive to renegotiate the contract such that it bankrupts the bondholders and Sevan Marine is better off removing the FPSO from the Piranema field. Much of an oil company’s cost is in exploration and renting drilling rigs. Oil prices would need to be below $10-15 before most oil companies would be better off shutting in production.

·         Sevan Piranema was Sevan Marine’s first FPSO and as a result of being a first user, Petrobras was able to negotiate an attractive dayrate that is ~30-50% below current dayrates. Unlikely Petrobras can find a cheaper solution.

·         Petrobras (and in turn the Brazilian government) have a multi-year gameplan to develop their massive offshore discoveries and need access to multiple deepwater rigs and production platforms. Breaking a contract on a low-cost FPSO would likely freeze their access to additional fleet equipment.

·         The topside equipment on an FPSO are designed to specific fields. It is not possible to replace one FPSO with another without significant retrofitting. Topside equipment represents half of the total $500-600mm cost to build an FPSO.

·         Sevan Marine would not only have legal recourse, but it also has the ability to re-contract the platform to another oil company (after a retrofit of the top-side equipment).

Poor Utilization - Piranema has insurance to protect against catastrophic malfunction.

Ability of Sevan Marine ASA (parent) to pay interest and principal – cashflows are predictable due to day-rate contracts

·         2009 ebitda - $100mm; Total Company interest - $75mm

·         2010 ebitda - $275mm; Total Company interest - $115mm

·         If Sevan Marine couldn’t/didn’t make payment to Piranema, bondholders are able to take-over Sevan Production (which holds assets and staff) and has cashflows to cover debt payments. See Appendix, Chart II

$425mm Equity Funding for 2 committed Driller FPSO projects – This is big overhang on stock, but doesn’t effect bonds

·         $1b of debt has been secured (in October 2008); risk to equity is of massive dilutive offering for $230mm market cap

Asset Value Protection

·         A new FPSO 6 months ago cost ~$800mm. Assuming deflation, new FPSO today might cost ~$500mm.

·         With the $270mm bonds trading at $0.50 on the dollar, bondholders are purchasing Sevan Piranema for $135mm. Retrofitting topside to another field might cost ~$75mm, resulting in total cost of $210mm. Virtually all existing FPSO’s in construction are not built on speculation and are already tied to a specific field.  It would be tough for Petrobras or any other company needing an FPSO to find a better solution for <$210mm.

·         Mitigating Asset Devaluation Risk from falling Oil Prices – In the unlikely event Sevan Piranema needed to find a new customer, there is risk of demand for Sevan Piranema’s assets in an auction sale to a new buyer if oil prices stay below $35 (although Petrobras would still want to keep operating the Piranema at $35 oil). One way to counter this risk is to purchase insurance - purchase December 2010 oil future puts at $35 strike price for $1.00/put option. December 2010 Oil Futures are trading at $66. If Dec 2010 prices were to fall 47% to $35 within the next year, the options would likely be worth ~$10/put option – 10x return. Foregoing 2.5-5.0% of annual yield over next two years could protect 50-100% of the investment.

Catalyst