Impairment losses in Norway Q2-2016 Shipping, Offshore, Oil&Gas Rachell Lau Erik Nordskar Bjørn Einar Strandberg www.pwc.no 2 Impairment losses in Norway Q2-2016 Table of content Impairment charges in the Shipping, Offshore and Oil and Gas sector 3 Limitations 5 Shipping 6 Offshore 8 Oil and Gas 12 Closing Statement 14 Table of content Impairment charges in the Shipping, Offshore and Oil and Gas sector Executive Summary The study is based on the publicly available financial statements Due to the dramatic fall in the oil price, the oil and gas and related and quarterly reports without any adjustments for possible industries are facing a tougher economic environement. It is differences in generally accepted accounting principles (GAAP) therefore to be expected that some asset values can no longer be applied. These reports were found on company websites or from recovered at their book values. Impairment charges in the newsweb.no, and we consider the information as valid, though industry were present in the 2015 annuals. Typically first quarter most interim reports are not audited. A significant number of the is not the right timing for extensive impairment test updates. This companies in our study have prepared their financial statements study therefore focuses on the second quarter of 2016, and the based on the International Financial Reporting Standards (IFRS). prupsoe is to identify the recognised impairment losses of listed As shown in Figure 1, only 7% of the companies we have analyzed companies on Oslo Børs within the Shipping and Offshore as well used US GAAP. These are Frontline Ltd, Golden Ocean Group Ltd as the Oil and Gas sector. and Seadrill Limited, and are primarily listed in New York, USA. Both Frontline Ltd and Seadrill Ltd are listed on the New York Among the companies we investigated for the second quarter of Stock Exchange while Golden Ocean Group Ltd is listed on 2016, 24 companies (out of 56 considered) recorded an Nasdaq, New York. impairment loss and three companies made an impairment reversal. Total impairment charges (excluding reversals) during Figure 1: Applied reporting framework the period were 1,238 MUSD. The oil and gas sector had impairment charges of 281 MUSD (representing 23% of total impairment losses), while shipping and offshore had 109 MUSD 7 (9%) and 849 MUSD (69%), respectively. Among the three IFRS sectors, only companies within the oil and gas sector made reversals of prior impairment losses. Three companies had 93 reversals for a total of 40 MUSD. US GAAP Structure, data and limitations The population is represented by companies listed on the Oslo Børs or Oslo Axess, belonging to the oil and gas, shipping and offshore sector. The constraint (belonging in the three sectors) was used to target companies were impairment was deemed most likely to occur. We have investigated all subjects that belong in one of the categories. We have analyzed the Q2-2016 report of the companies. The study considers only impairment losses. Included in this is impairment value relative to its book value, method used for recoverable amount, considerations on the employment of external counsel (i.e., brokerage firms) and reversal of impairment charges. 4 Impairment losses in Norway Q2-2016 Impairment losses in Norway Q2-2016 5 Limitations The most prominent limitation is the absence of extensive information regarding impairments in the quarterly reports. A large number of companies does not specify sufficiently; e.g., whether external counsel was considered; which discount rate was used and the other underlying assumptions included in the impairment tests. Many interim reports are brief in nature. Some figures in the study herein show relative impairment charges. This is calculated as the impairment charge divided by the sum of the closing book value (as of 30th of June, 2016) and the impairment charge itself. The book value in the calculation is not the total assets of the company, but the asset class that relate to the impairment charges. Some reports do not specify in detail which cash generating unit (CGU) was impaired. As a consequence, it will exist some uncertainty with regards to the ability to “match” an impairment to the corresponding asset class in the balance. Also impairments of financial assets are difficult to attribute to an asset class or CGU unless specified in the interim report. Below is a summary of the findings in the three different categories which were investigated. 6 Impairment losses in Norway Q2-2016 Shipping The total impairment loss recorded during the second quarter of Frontline Ltd recorded an aggregate amount of 25.5 MUSD in 2016 is 109 MUSD. 7 out of 20 or 35% of the shipping companies impairment losses in the second quarter, in which 18.2 MUSD was listed on the Oslo Stock Exchange have recorded an impairment due to a contracted sale of (agreed in June 2016) of its six MR loss. 71% of the companies which recorded an impairment loss tankers at lower than book value and 7.3 MUSD on termination of applied Fair Value Less Cost of Disposal (FVLCD) as the capital lease time-charter agreement (agreed in May) at an earlier recoverable amount, while the remaining 29% of the companies than expected date (July 2016). used Value In Use (VIU). Companies using VIU applied an average WACC of 8.1% (range: 7.5% - 9.1%). A larger share of the Figure 2 shows the varying contributions that the seven shipping impairment is contributed by BW LPG and Frontline Ltd. BW LPG companies made to the total amount impaired (109 MUSD). BW recorded 56 MUSD during the second quarter in 2016 and its LPG alone contributed approximately 50 % of the total impairment charge was measured using VIU. impairment charges. Figure 2: Impairment amounts (million USD) 120 109 2 100 13 25 1 80 56 60 40 20 7 6 0 Wilh. Avance Gas Awilco BW LPG Frontline Ltd. Golden Ocean Jinhui Shipping and Wilhelmsen Total Holding Ltd. LNG ASA Limited Transportation Limit ASA Impairment losses in Norway Q2-2016 7 Figure 3: Relative overview of the population Figure 3 shows that more than a third of the shipping companies had impairment losses during the second quarter. Five companies based their recoverable amount on FVLCD calculations, while two based it on VIU. 2 65 35 5 Number of impaired company FVLCD Not impaired VIU Figure 4 shows the relative impairments which range from 0.05 % - 2.81 %. It is possible that the relative impairments are more similar (or more different) over a longer period of time. A company might have impaired a relatively large part of its fleet in second quarter 2016, while another company, with other assumptions for the VIU and FVLCD calculations, might have recorded large impairments already in Q1. Figure 4: Overview of relative impairments 3,0% 2,81% 2,5% 2,19% 2,0% 1,71% 1,5% 1,14% 1,0% 0,65% 0,5% 0,05% 0,08% 0,0% Avance Gas Awilco BW LPG Frontline Ltd. Golden Ocean Jinhui Shipping and Wilh.Wilhelmsen Holding Ltd. LNG ASA Limited Transportation Limit ASA 8 Impairment losses in Norway Q2-2016 Offshore Significantly larger impairment losses have been recorded in the reasonable estimation. This includes future contract availabilities, offshore sector during the second quarter of 2016. 13 out of 21, or future performance of the cash generating units and day rates. 62%, of the offshore companies reported impairment losses Fred. Olsen Energy ASA assumed in its calculation that the during the quarter. As shown in Figure 5 (showing the negative market development will continue to reduce the day impairment loss for each respective company), the total rates and utilisation for the next couple of years. Fred Olsen impairment loss in the offshore sector in the second quarter of Energy ASA disclosed more specific information than most 2016 is 849 MUSD. Fred. Olsen Energy ASA reported the largest companies about the specifics of their impairment test and results. impairment loss. Its impairment loss represents 19% of the total In the table below we can see how they specify impairment impairment losses incurring in the sector. The estimated recognized during the period and the net book values, subsequent recoverable amount for its impairment test during the quarter was to the impairment as at 30th June 2016: based on VIU. Various assumptions were made to determine a (USD mill) Q2 2016 Net book value as at Discount rates 30.06.2016 31.12.2015 Post-tax Pre-tax Byford Dolphin 67 92 178 8,99% 8,99% Borgland Dolphin 72 126 221 8,50% 9,79% Bredford Dolphin 20 15 37 8,50% 9,96% Total implairment 159 Impairment losses in Norway Q2-2016 9 Bonheur ASA also reported a relatively large impairment loss Figure 5 shows the disaggregation of the impairment charges that with a total of 1,321 MNOK, or 158 MUSD, for its offshore drilling occured during the second quarter of 2016. units. The impairment charge was due to a continued weak offshore drilling market. Figure 5: Impairment amounts for companies in the offshore sector (MUSD) 180 160 158 159 140 120 118 103 107 100 90 80 60 40 40 28 18 20 12 5 10 0 1 Bonheur BW Deep DOF EMAS Farstad Fred. Siem Solstad Songa Subsea 7 GC Rieber Rem ASA Offshore Sea ASA Offshore Shipping Olsen Offshore Offshore Offshore SA Shipping Offshore Limited Supply Limited ASA Energy Inc. ASA SE ASA ASA Plc ASA 10 Impairment losses in Norway Q2-2016 Figure 6 displays the relative impairment as a percentage of its Offshore ASA, this could probably explain part of the higher pre-impairment book value.