Board of Directors Report

The Board of Directors of Siem Offshore Inc. (the “Board”) presents its report for the fiscal year ended 31 December 2016 together with the audited consolidated financial statements and the audited financial statements for the parent company. The financial statements and related notes were authorised for issue by the Board on 19 April 2017 and will be presented to the shareholders for approval at the Annual General Meeting to be held 5 May 2017.

The company

All references to “Siem Offshore” and the “Company” shall mean Siem Offshore Inc. and its subsidiaries and associates unless the context indicates otherwise. All references to “Parent” shall mean Siem Offshore Inc. as the Parent Company only.

Siem Offshore is registered in the Cayman Islands and is listed on the Oslo Stock Exchange (OSE Symbol: SIOFF). The Company’s headquarters are located in Kristiansand, Norway and additional subsidiary offices are located in Brazil, Germany, the Netherlands, Poland, Ghana, United States, Canada, Cayman Islands and Australia. The Company is tax resident in Norway.

The Company operated a fleet of 46 vessels at year-end, including partly-owned vessels and ten vessels in lay-up. During 2016, the total fleet of OSVs conducted operations in the North Sea, West Africa, Argentina, Australia, the U.S. Gulf, Canada and Brazil.

Secunda Holding Limited (“Secunda”) is now a wholly-owned subsidiary following the Company’s acquisition of the remaining 50% ownership during the year. Secunda owns and operates a harsh-weather fleet of five offshore support vessels and is a leader in support services for platform supply, anchor-handling, rescue standby and towage in its primary area of operation offshore Eastern Canada.

Siem WIS AS, a 60%-owned subsidiary of the Company, develops applications for managed-pressure drilling (“MPD”) based on a patented seal technology.

Overseas Drilling Limited (“ODL”) is a wholly-owned subsidiary and the owner of the drillship, the JOIDES Resolution. The JOIDES Resolution is used in scientific research to drill core samples in the ocean floor during expeditions for an international research program.

Siem Offshore do Brasil S.A. is the Company’s wholly-owned Brazilian subsidiary which owns and operates a fleet of six OSVs in Brazil and provides specialized engineering applications to develop and implement combat management systems for vessels in the Brazilian navy.

Financial Results, Position And Risks

IFRS
The financial statements for the Company and the Parent are prepared in accordance with the International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

Going-Concern
The financial statements have been prepared under the assumption that the Company and the Parent are going-concerns. This assumption is based on the Company’s level of cash and cash equivalents at year-end, forecasted cash-flows, available credit facilities, agreements with finance creditors and bondholders and the market value of its assets.

The Company began to implement comprehensive cost reduction measures at the end of 2014 with the onset of a slowdown in the industry to reduce the Company’s cost base and to preserve liquidity for ongoing operations.

The current market situation creates uncertainty related to the expected level of future revenues and places pressure on the Company’s cash position used in operations and the servicing of debt.

Following months of negotiations, the Company announced last summer that its proposed Finance Plan had received approval from all of its bank lenders; however, the approval of the Finance Plan remains subject to the Company’s reaching agreement with the holders of its two public bonds to extend the maturity dates of the bonds on terms that are acceptable to the banks. The Finance Plan gives support to the Company’s contention that it is a viable, going-concern and provides a solid financial platform to meet the challenges presented by the oil and gas services market during the next several years. The approvals include up to three-year extension of the final bullet payments of all mortgage debt due before 31 December 2019, deferral of instalments for the fleet of AHTS vessels for 2.5 years with a cash sweep mechanism, and the easing of certain debt covenant requirements from the Company’s banks for the next three years. An agreement with the bondholders was reached in April 2017 for the two public bonds for certain amendments to the terms of the bond issues including the extension of maturity by 2.75 years from original maturity date, easing of financial covenants, lower interest coupon and option to payment-in- kind at a higher interest rate. The Company has been granted a call option at par and has agreed to certain restrictions on new debt and new encumbrances outside the ordinary course of business, as well as a restriction on dividend payments. In connection with and subject to certain conditions in relation to the proposed amendments, the Company intends to carry-out a share rights issue to generate gross proceeds of NOK190 million for working capital. The Company’s largest shareholder, Siem Europe S.a r.l., has indicated its willingness to fully underwrite the share issue.

Reaching an agreement with the bondholders and raising new equity through the rights issue will provide the Company with a stronger financial footing during the current downturn and will position the Company to comply with its loan covenants over the next couple of years.

Income Statement
The Company had 46 offshore vessels in operation at year-end. The Company finished its comprehensive newbuilding program with the last six vessels delivered in 2016. All vessels commenced long-term charters after delivery.

In 2016, the Company recorded operating revenue of USD469.1 million and a net loss attributable to shareholders of USD(82.1) million, or USD(0.10) per share, compared to operating revenue of USD422.4 million and a net loss attributable to shareholders of USD(186.7) million, or USD(0.36) per share, in 2015.

The Company’s operating margin for 2016 was USD128.3 million compared to USD118.5 million in 2015. Net operating margin as a percentage of operating revenue was 27% in 2016 compared to 28% in 2015.

The Company’s operating profit for 2016 was USD(49.6) million compared to USD(168.7) million in 2015 and includes depreciation and amortisation of USD111.8 million (2015: USD107 million). During 2016, the Company conducted periodic reviews of vessel valuations and recorded impairments of USD76.6 million on certain vessels, receivables and intangibles compared to impairment charges of USD166.2 million in 2015. Net currency exchange (losses) of USD(7.8) million (2015: USD(30.8) million) was recorded on forward contracts, of which USD0.9 million (2015: USD2.1 million) was unrealised. The net gain/(loss) on sale of assets was USD(0.4) million (2015: USD16.3 million).

The Company’s net financial items included net expenses of USD(46.7) million (2015: USD(21.4) million) and a revaluation gain of non-USD currency items of USD(3.8) million (2015: USD22.1 million) due to stronger USD during the period. Non-USD currency items are held to match short- and long-term liabilities, including off-balance sheet liabilities, in similar currency.

The Parent company is primarily a holding company owning shares in operating subsidiaries.

The Board proposes that the Parent’s net loss of USD(14.2) million for 2016 be allocated to retained earnings and that no dividend be paid for 2016.

Financial Position and Cash-Flows
Total equity for the Company was USD648 million at year-end 2016 (2015: USD666 million), and the equity ratio was 27% (2015: 33%). Shareholders’ equity was USD549 million (2015: USD632 million), equivalent to USD0.65 per share (2015: USD0.75 per share).

The cash position at year-end was USD101 million (2015: USD149 million).

The Company recorded USD492 million as gross capital expenditures in fixed assets during 2016, of which USD334 million related to new vessels delivered from yards or vessels under construction, and USD158 million related to project-specific investments in vessels and capitalised dry-dockings.

The net interest-bearing debt at year-end were equivalent to USD1.4 billion (USD1.0 billion in 2015). The Company made total drawings equivalent to USD456 million under credit facilities during the year. The weighted average cost of debt for the Company was approximately 3.9% p.a. at year-end (2015: 4.3% p.a.).The Company paid debt instalments of the equivalent of USD188 million during the year.

The Company’s cash-flows are primarily denominated in USD, NOK, EUR and BRL. During 2016, the USD weakened by 2.15% to the NOK, 16.54% to the BRL and strengthened by 3.59% to EUR. The average recorded exchange rates were NOK/USD 0.1186, EUR/USD1.1022 and BRL/USD 0.287 (2015: NOK/USD 0.1236, EUR/USD 1.1134 and BRL/USD 0.3002).

Financial Risks
-INTEREST RISK
The Company is exposed to changes in interest rates as approximately 69% of the interest-bearing debt is based on floating interest rates and primarily denominated in USD and NOK. The average 3-month USD LIBOR was 0.7444% p.a. during 2016 (0.31583% p.a. in 2015) and the average 3-month NIBOR was 1.0674% p.a. during 2016 (1.29% p.a. in 2015). The Company held USD70 million in interest rate swap agreements at year-end.

-CURRENCY RISK
The Company is exposed to currency risk as revenue and costs are denominated in various currencies. The Company is also exposed to currency risk due to future yard instalments in relation to shipbuilding contracts and long-term debt in various currencies. Forward exchange contracts are entered into in order to reduce the currency risk related to future cash flows.

-LIQUIDITY RISK
The Company is financed by a combination of debt and equity. If the Company fails to repay or refinance its credit facilities, additional equity financing may be required. There can be no assurance that the Company will be able to repay its debts or extend the debt repayment schedule through re-financing of credit facilities. There is no assurance that the Company will not experience cash flow shortfalls exceeding the Company’s available funding sources or to remain in compliance with minimum cash requirements or other covenants. Further, there is no assurance that the Company will be able to raise new equity or arrange new credit facilities on favourable terms and in amounts necessary to conduct its ongoing and future operations should this be required.

Operations

Fleet, Performance and Employment
The fleet in operation at end of year 2016 totalled 46 vessels (2015: 45 vessels), including partly owned vessels and vessels in lay-up.

The Company had 13 PSVs in operation at end of the year. The PSV fleet earned operating revenues of USD62.1 million and had 77% utilisation (2015: USD76.5 million and 75%). The operating margin before administrative expenses was USD28.1 million (2015: USD38.7 million) and the operating margin as a percentage of revenue was 45% (2015: 51%). The contract backlog at 31 December 2016 is 51% for 2017, 36% for 2018 and 23% for 2019 (2015: 60% for 2016, 31% for 2017 and 24% for 2018).

The Company had five OSCVs in operation at end of the year and two WIVs in operation at end of the year (2015: five).The OSCV and WIV fleet earned operating revenues of USD97.2 million and had 92% utilisation (2015: USD111.3 million and 94%). The operating margin before administrative expenses was USD44.5 million (2015: USD69.6 million) and the operating margin as a percentage of revenue was 46% (2015: 63%). The contract backlog was 55% for 2017, 43% for 2018 and 29% for 2019 (2015: 88% for 2016, 83% for 2017 and 77% for 2018).

The Company had ten AHTS vessels in operation at end of the year (2015: ten). The AHTS fleet earned operating revenues of USD48.3 million and had 39% utilisation (2015: USD54.7 million and 55% utilization). The operating margin before administrative expenses was USD10.8 million (2015: USD(1.4) million) and the operating margin as a percentage of revenue was 22% (2015: (3)%). The contract backlog is 8% for 2017, and 0% for 2018 (2015: 11% for 2016, 0% for 2017 and 0% for 2018).

The Company had a fleet of five Canadian-flagged offshore support vessels at the end of the year. The Canadian fleet earned operating revenue of USD24.5 million and had 73% utilization. The operating margin before administrative expenses was USD12.5 million and the operating margin as a percentage of revenue was 51%. The results for Secunda were recorded in accordance with the equity method for the first five months and were fully consolidated commencing with effect from 1 June 2016, post-acquisition of 100% ownership in Secunda. The contract backlog was 48% for 2017, 45% for 2018 and 26% for 2019.

The Company had a fleet of six smaller Brazilian-flagged vessels at end of the year (2015: seven).This fleet earned operating revenue of USD20.1 million and had 73% utilisation (2015: USD21.3 million and 86%). The operating margin before administrative expenses was USD8.6 million (2015: USD7.1 million) and the operating margin as a percentage of revenue was 43% (2015: 33%). The contract backlog was 69% for 2017, 41% for 2018 and 33% for 2019 (2015: 57% for 2016, 57% for 2017 and 49% for 2018).

The research vessel “Joides Resolution” recorded operating revenues of USD26.4 million (2015: USD26.2 million) with an operating margin before administrative expenses of USD15.1 million (2015: USD14.5 million) and the operating margin as a percentage of revenue was 57% (2015: 55%). The contract backlog was 100% for 2017, 100% for 2018 and 75% for 2019. (2015: 73 % for 2016, 0% for 2017 and 0% for 2018).

Siem Offshore Contractors (SOC) recorded operating revenues of USD193.8 million (2015: USD132.3 million). The projects within SOC are accounted for using the percentage-of-completion method and profit margins are not recorded until the respective project’s offshore operation has reached a minimum of 25% technical completion. This has an impact on the overall percentage of operating margin for Siem Offshore on a consolidated basis. Total project margin before administrative expense of USD30.0 million (2015: USD17.5million) was recognized on projects.

The total firm contract backlog for all OSV vessels at 31 December 2016 was USD0.9 billion (2015: USD1.2 billion), including the 41%-ownership in the “Big Orange XVIII”. The total vessel contract backlog is allocated  with USD194 million in 2017, USD164 million in 2018 and USD565 million in 2019 and thereafter.

The total firm contract backlog for SOC and the firm contract for the “JOIDES Resolution” at 31 December 2016 was USD293 million (2015: USD198 million). The contract backlog is allocated with USD137 million in 2017, USD113 million in 2018 and USD43 million in 2017 and thereafter.

HSEQ

The Company’s target includes zero personal injuries, no harm to the environment and no damage to or loss of equipment and property.

The HSEQ performance improved during 2016 with no Lost Time Injuries throughout the fleet.  Considerable efforts are made on various levels to ensure this positive trend continues in 2017.

The number of safety reports is steady, and it is believed that the ongoing training in Root Cause Analysis will ensure improved understanding of incidents in the fleet, which in turn will prevent future incidents.  On board and ashore, we believe that the transfer of experience is an important factor to create and maintain a professional HSEQ culture and continuously improve our HSEQ performance.

By nature, anchor-handling is one of the most demanding operations in the OSV sector. Siem Offshore puts great emphasis on a safe work environment and appropriate time for preparations of every job operation.

Siem Offshore Contractors

General
SOC is a well-established prime contractor for the installation, post-lay trenching, termination and testing of submarine composite cables for the inner array grid of offshore wind farms (“OWF”) and for export to shore. SOC has been successful in executing the work offshore by utilising primarily the Company’s specialized new-built vessels, Siem Aimery (Cable Layer) and Siem Moxie (Installation Support), both supported by our experienced offshore and onshore organisation.

Safety & Environment
High safety and environmental standards have been a first priority within SOC. Risk and opportunity management processes and personnel training ensures that internal personnel and subcontractors have a common safety first mentality, which has delivered zero loss time injuries for another year. Environmental impact is a key area of importance in a market focused on renewable energy. SOC has developed standards to minimize impact of cable installation activities on the environment. SOC has established itself as a leading contractor for quality and safety demonstrated by recent contract execution.

Projects
The Baltic 2 OWF project for EnBW Baltic 2 GmbH involved the installation, post-lay trenching, termination and testing of 86 inner array grid submarine composite cables within the German sector of the Baltic Sea. A positive margin was recorded on the project.

The Nordsee One OWF project for Nordsee One GmbH is an EPIC-contract for the supply, installation, post-lay trenching, and testing of 59 submarine composite cables forming the inner array grid and located in the German sector of the North Sea. The project was completed offshore in the fourth quarter 2016.The project recorded a positive margin.

The Nordsee One OWF export cable project for TenneT Offshore GmbH is a contract for the supply, installation, post-lay trenching, and testing of two export cables in the German sector of the North Sea in partnership with J-Power Systems. The cables installation work was completed offshore in the fourth quarter 2016 and final testing is expected in the second quarter 2017. The project recorded a positive margin.

The Veja Mate OWF project for Veja Mate Offshore Project GmbH is an EPIC-contract for the supply, installation, post-lay trenching and testing of 73 submarine composite cables forming the inner array grid, in the German sector of the North Sea. The offshore installation commenced in the fourth quarter 2016 and is progressing ahead of plan. The project recorded a positive margin in 2016 and is planned to complete with a positive margin in 2017.

The Beatrice Offshore OWF was awarded by SHL Offshore Contractors BV in June 2016 and is an EPIC-contract for the supply, installation, post-lay trenching and testing of 91 submarine composite cables forming the inner array grid located off the northeast coast of Scotland. The project started engineering and preparation for the cables fabrication.

The Trianel Windpark Borkum II OWF project was awarded in November 2016 and is an EPIC-contract for the supply, installation, post-lay trenching and testing of 32 submarine composite cables forming the inner array grid within the German sector of the North Sea. The project started the engineering and preparation for the cables fabrication.

The Hornsea OWF One project was awarded in November 2016 and is a contract for the installation and post-lay trenching of 81 submarine composite cables forming the inner array grid in the UK sector of the North Sea. The project started the engineering work.

The Ocean Breeze Energy walk-to- work charter for the Bard Offshore 1 wind farm in the German sector of the North Sea was awarded in March 2016.

Market Outlook
The tendering activity has been high throughout the year and continues into 2017. SOC has established itself as a reliable turnkey contractor within the offshore renewable energy industry and is well positioned in its segment for the future. Overall, the financial year 2016 was a successful year for SOC and this trend is expected to continue in 2017 and beyond.

Siem WIS

Siem WIS has designed and developed a pressure control device (“PCD”) which can improve managed-pressure drilling (“MPD”) operations. MPD has the capability to mitigate drilling hazards by improving drilling performance and increasing the performance rate. In offshore application, they solve various complex challenges such as reducing lost circulation, extensive mud cost, stuck pipe and well pressure surges. The global managed pressure drilling (MPD) market was valued at USD3.7 billion in 2015 and is expected to reach USD5 billion by 2024.

Siem WIS delivered five successful PCD operations in 2016. Four operations were for Statoil on the Gullfaks field and one operation on the ultra-high pressure/high temperature (“HP/HT”) well “Solaris” was for Total. The operations have been delivered without any non-productive time.

In December 2016, Siem WIS entered into a frame agreement with Statoil. Two contracts have been received to date for completion in 2017.

Shareholders And Corporate Governance

Shareholder Information
The Company’s authorised share capital is USD10,000,000- divided into 1,000,000,000 ordinary shares of a nominal value of USD0.01 each. The issued share capital at 6 April 2017, based on the 842,021,380 Company shares issued and outstanding, is USD8,420,213.80 The Company’s shares are listed on the Oslo Stock Exchange with the ticker symbol SIOFF. The Company’s largest shareholder is Siem Europe S.a r.l., a wholly-owned subsidiary of Siem Industries Inc., with an 83% interest at 6 April 2017. During 2016, the closing share price reached a high of NOK 2.60, a low of NOK 1.35, and closed at NOK 1.85 at year-end..

Corporate Governance
The Company has implemented guidelines for corporate governance based on the recommendations and guidelines given by the Oslo Stock Exchange. The purpose of these guidelines is to clarify the division of roles between shareholders, the General Meeting, Board of Directors and day-to- day Management beyond what follows from the legislation. A detailed summary of our corporate governance principles may be found in a separate section of the annual report.

The Working Environment And The Employees

The Company provides a workplace with equal opportunities. We treat current and prospective employees fairly with respect to salaries, promotions and recruitment. The Company offers its employees a sound working environment. We also give possibilities for professional development where men and women are treated equally and where there is no discrimination.

The sick leave for the onshore and offshore employees was 1.9 and 3.46% respectively.

The development of the onshore and offshore organizations continues in order to prepare for increased future activities. The knowledge of the crew is vital for a safe and secure operation of any vessel. Such knowledge includes good seamanship and understanding of the demanding assignments to be executed.

Outlook

The low activity within the oil-service industry has led to reduced charter rates and an increased number of vessels in lay-up. A recovery of the worldwide oil and gas drilling activities will absorb some, but not all, of the current excess capacity. The build-up of the existing fleets by owners and speculative newbuildings based on overly optimistic projections of future requirements is expected to take years to absorb. Fleet owners and their stakeholders must be willing to make the difficult decisions to minimise the current excess capacity by the scrapping of older, less efficient vessels in favour of modern tonnage that has been built to meet today’s increasingly demanding specifications. Such actions are necessary to provide long-term financial stability for the industry.

The financial pressure on the industry has led to consolidations among owners, which is positive for an industry that is very fragmented.

19 April 2017

 

Eystein Eriksrud
Chairman

John C. Wallace
Director

Idar Hillersøy
Chief Executive Officer

Kristian Siem
Director

Alexander Monnas
Director

Michael Delouche
Director

Board Of Directors

Financial Statements

Notes