FYI. I know this idea shows up with $, but the VIC's scroll down menu for companies upon submission does not have the option for a Norwegian stock. So the amounts are pretty much all to be read in Norwegian Krone (NOK), rather than $. Except naturally for the numbers that have a $ in front of them. Anyway, after a Belgian and Indonesian stock, this time we landed in Norway.

Ganger Rolf (GRO) trades on the Norwegian stock exchange. Actually, when looking at Ganger Rolf, it also makes sense to keep Bonheur (BON) in mind. Bonheur is also listed on the Norwegian stock exchange, is managed by the same people, owns pretty much the same assets and trades at a similar discount of about 50% to a conservative IV (80% of assessed IV). (See valuation table below.)

Ganger Rolf and Bonheur are both controlled by the Fred Olsen family. Ganger Rolf also owns 20.7% of Bonheur and Bonheur owns 62.1% of Ganger Rolf. Frederick Olsen is a fourth generation reclusive shipping magnate. The company was named after his grandfather. Frederick Olsen is still the chairman, but ownership and management of the family’s stake in the companies now lie with his daughter Annette Olsen. She seems to be a decent manager, the family surely eats its own cooking and regularly returns capital to shareholders.

Both companies pay out good dividends. In 2011, Ganger Rolf paid out a dividend of 20 NOK and for 2012 the dividend will be 8.40 NOK. Bonheur paid 20 NOK in 2011 and for 2012 the dividend was 7 NOK. The current stock price for Ganger Rolf is 132 NOK and for Bonheur it is 140 NOK.

Both Ganger Rolf and Bonheur are both active in the same businesses. Here is a layout of the ownership of each entity.

* For other investments, the investments are not identical, but pretty close.

Valuation of Ganger Rolf and Bonheur.

* Ganger Rolf owns 20.7% in Bonheur and Bonheur owns 62.1% in Ganger Rolf. I calculate the value of the cross ownership in the following way.

- Cross Ownership Ganger Rolf:

a. GRO = GRO.NAV + 0.207 * BON and BON = BON.NAV + 0.621 * GRO

b. GRO = GRO.NAV + 0.207 * (BON.NAV + 0.621 * GRO)

c. GRO – (0.207 * (BON.NAV + 0.621 * GRO)) = GRO.NAV

d. GRO – 0.207 * BON.NAV - (0.207 * 0.621 * GRO) = GRO.NAV

e. GRO – (0.207 * 0.621 * GRO) = GRO.NAV + 0.207 * BON.NAV

f. GRO = (GRO.NAV + 0.207 * BON.NAV)/ (1- 0.207 * 0.621)

- Cross Ownership Bonheur:

a. BON = BON.NAV + 0.621 * GRO and GRO = GRO.NAV + 0.207 * BON

b. BON = BON.NAV + 0.621 * (GRO.NAV + 0.207 * BON)

c. BON – (0.621 * (GRO.NAV + 0.207 * BON)) = BON.NAV

d. BON – 0.621 * GRO.NAV – 0.621 * 0.207 * BON = BON.NAV

e. BON – (0.621 * 0.207 * BON) = BON.NAV + 0.621 * GRO.NAV

f. BON = (BON.NAV + 0.621 * GRO.NAV) / (1 – 0.621 * 0.207)

The valuation I get is 349 NOK per share for Ganger Rolf and 343 NOK for Bonheur. In order to be conservative I then multiply that IV by 80% to get to a discount to IV of 53% for Ganger Rolf and 49% for Bonheur.

Fred Olsen Energy (FOE)

FOE is Ganger Rolf’s and Bonheur’s biggest assets. FOE currently owns one ultra-deep water drill ship, one deep water SS (Semi-Submersible) drilling rig, five midwater SS, one tender support rig and one accommodation unit. In addition one ultra-deep water drill ship is expected to be delivered in 2013 and one SS drilling rig is expected to be delivered in 2015.

Here is a list:

* At times, drilling rigs require maintenance and they also need to be overhauled and recertified which is called the Class Renewal Survey. At that time rigs are often upgraded with new and better equipment.

Dayrates are very much dependent on the depth one can drill as well as the complexity of the rig. Ultra-deep water rigs are very much in demand and midwater rigs are second in demand as a class. Complexity adjusted midwater rig pricing is still about $100K in dayrate pricing below the highs from 2008, while deep water rig pricing is back to the highs from 2006 to 2009. Deepwater is what creates the most demand for new rigs from offshore drillers. What we see is that pricing tends to be soft until we hit the 85% utilization mark at which point pricing takes off.

A fair amount of drilling rigs come on the market each year. The average deep water rig costs between $600 and $800 million to build. I am somewhat worried that we might see too many deepwater drilling vessels built. The fleet has doubled in size in the last five years. Now it is not because a vessel is classified as ultra-deep that all its drills will be in ultra-deep waters. That’s the benefit for the oil companies of booking these vessels as they have more flexibility.

Although some oil companies are putting projects on hold because of cost inflation, projections call for increased demand of 42% for deepwater and ultra-deep water rigs and drill ships while planned supply is only 30% by 2015. Fred Olsen Energy has good bookings, especially on those two new ultra-deep water vessels. Midwater demand in theUKandNorwayis steady too. Although the demand picture does not seem to be as positive, it is a steady generator of cash flow. A plus is that theUKandNorwaymarkets, where FOE is active, tend to be considered harsh environments requiring rigs that can handle that. FOE has 5 rigs and 2 support vessels in theNorwayandUKmarkets.

One thought is that Diamond Offshore Drilling, which is controlled by the Tisch’s, is ordering new vessels. They are the company that has achieved to the highest return on capital employed in the industry and must think there still is a good future in drilling, especially in ultra-deep water vessels. Actually they also have midwater vessels on order so they must believe that market is going to be healthy for some time too.

FOE has a good order book. The average rig is booked from 33 months. Especially the two new ultra deep vessels are well booked ahead of delivery. Although I listed the fleet status above, one can check on the fleet status for FOE here http://fredolsen-energy.com/fleet-status. At this time they did not yet update the current status for the Blackford Dolphin, but I guess that’s because of the recent contract negotiations.

I used the market value of FOE as the source for my valuation of Ganger Rolf and Bonheur. The valuation of Fred Olsen Energy is reasonable I believe at about 10 times EPS. Given the full order book and the delivery of the new vessel(s), the next few years should see up uptick in EPS. Still these companies do trade on forward earnings. If the oil price falls a lot for an extended period of time, demand for drilling rigs will fall and that will be reflected in EPS and likely the stock price. When you look at the other offshore drillers, their projected EBITDA numbers through 2015 all show big increases. If the current environment persists that seems to be a reasonable assumption.

Predicting demand for and dayrates of drilling rigs a number of years out is not easy. There are many variables, from the number of vessels available in each class to new discoveries, the oil price, etc. I will try to address a number of those below:

1. Number of drilling vessels:

The fleet of ultra-deep vessels has doubled since 2009. Since 2009 deliveries have been between 17 and 31 ultra-deep vessels annually. In 2013 there are 23 deliveries expected, in 2014 we got 28 and for 2015 the current delivery schedule is for 15 vessels. This is a lot and could drive down dayrates. Now it is not because an ultra-deep drilling vessel is classified that way, that it is required to drill only at those depths. They can just as well drill 1,000 feet. Yes, the cost is higher, but the flexibility is much better too. So what has been happening is that demand for new drilling vessels has moved from midwater to deep water and ultra-deep water.

In the midwater market, demand is not as great, but dayrates are attractive. Especially for midwater vessels that can handle harsher environments, like theNorth sea. Also the average age of midwater vessels is much higher than the deep or ultra-deep market so we are seeing the removal of midwater vessels on a regular basis.

1. Demand for offshore drilling:

Every field is different in that it has different drilling requirements. For example in order to currently generate about 100Kbpd the Brazilian pre-salt requires only 7 wells, the post salt in Brazil requires about 25 wells, deepwater in the Gulf of Mexico about 40 wells and the North Sea requires about 150 wells. So it is difficult to get a full overview with exact requirements as to what drilling activity will be needed to produce X amount of barrels of oil.

Demand for midwater drilling is still steady and provides for attractive returns as many of the vessels are older and paid for. There still are plenty of areas of demand for midwater vessels. Complexity and ability to work in harsh environments are important factors. Not every rig is created the same. FOE currently has 5 rigs and 2 support vessels working theUKandNorway, both considered harsh environment markets. Both markets tend to need a lot of wells in order to produce oil compared to other offshore markets.

On the deepwater and the ultra-deep water side, we have seen significant new discoveries in East and West Africa, Eastern Mediterranean, Northeast Brazil,French Guiana,Mexico,India,MalaysiaandAustralia. Projections for the next few years call for increased demand of 42% for deepwater and ultra-deep water rigs and drill ships while planned supply is only 30%.

1. The price of oil – Demand

Over the last decade we have seen significant growth in oil consumption in all emerging markets, while demand for oil has leveled off in the developed world. Especially Europehas seen marked declines in the consumption of oil, very much related to the state of crisis in the GIIPS and to a lesser extend because of the use of more efficient vehicles. North Americatoo has seen a decent decline in demand, mostly driven by the warmer than average winters over the last few years, the recession and the use of more efficient vehicles. Now the picture looks very different in the emerging markets, where demand has increased significantly due to economic growth. The net result has still be steady growth in oil consumption. If you’d like to check out the actual numbers check out the following url http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=5&aid=2

If you believe that there will be no structural changes to the direction of the world’s economies, then I think these trends seem likely to continue in general. I know there is a lot of noise regarding future weaknesses in the global economy for reasons going fromChinato the Euro area, etc. I have my own personal thoughts around these issues, but so seems everyone else … so your analysis is probably as good as mine.

1. The price of oil – Supply

I find the supply argument a little easier to think about. We all know oil fields have decline rates and the cost of the marginal barrel seems to lie around the $90 level (Brent). $90 a barrel is a level that allows demand for drilling rigs to continue.

Regarding the decline rates, the general assumption is that the world’s oil fields decline at a 5% rate. I just read a study that states quite convincingly that the decline rates of oil fields on average is between 9% and 15%. In addition there is an enormous variance between different fields. At about 90 million barrels per day 10% decline rates require that one needs to find about 9 million barrels a day. That’s a lot of wells that need to be drilled each year, including offshore wells.

Regarding my $90 a barrel price as the cost of the marginal barrel seems to be reasonable. For one, OPEC states, especiallySaudi Arabia, require about $90 per barrel in order to pay the bills. The Canadian oil sands require about $100 per barrel in order to have adequate ROIC.USoil shale, while of great relevance to theUS, has a much smaller impact on the world market long-term than is believed in general. Currently the supply of oil from shale represents only 1.5% of global production. The most optimistic assumptions are that shale oil will be only 3.2% of global production by 2016. In addition the supply of shale oil is highly sensitive to the price of oil. When the oil and gas price fell during the financial crisis drilling activity fell by over 60%. Lastly, the cost of the marginal barrel continues to increase by about 2% to 5% a year it seems.

Conclusion: I seems likely to me that the current price of oil will maintain itself at a level where it makes sense to produce oil offshore.

Fred Olsen Production (FOP)

Yinson Production is buying Fred Olsen Production for a 9.40 NOK in cash per share. Given that the board is recommending the sale and that the Olsen family controls Fred Olsen Production it is highly likely that the sale will happen. FOP owns three production floating storage and offloading vessels that soon will turn into cash on the balance sheet. So no need to go into further detail.

Fred Olsen Renewables (FOR)

FOR is an owner and developer of wind farms in Europe, mainly in theUK,Ireland,NorwayandSweden. Currently FOR operates 387 MW in theUKandNorwaywith another 99 MW under construction in theUK. All current operating and under construction wind farms are onshore. In addition FOR has another 917 MW consented, waiting to start construction. Given that it can be quite an effort to get all approvals, there is value in projects that have been approved. Now some of the consented projects still have opposition and court cases fighting the approval. I do not take into account any value related to the consented projects.

Revenues can be quite volatile over time. After all, no wind, no electricity, no revenue.

I value FOR in the following manner:

(a)   In Q1, 2013, FOR sold Akka Wind AB, which owned 7.4 MW for a total of 86.5 M OK or 11.69 M NOK per MW. So I am using that valuation per MW and use that value to value all the current MW that are operational.

(b)  This is a conservative value I believe for the following reasons:

• Akka Wind Ab was a project that is dependent on spot pricing.CrystalRig (62.5 MW), Rothes (50.6 MW) and Paul’s Hill (64.4 MW) are all pre-2010 projects and have long-term stable contracts. Crystal Rig II and Lista I believe to be dependent on the spot market.
• In order to be conservative, despite significant sums already spent, I did not assign any value to Rothes II (41.4 MW), which started first production in Q1 2013, and to Mid Hill (57.5 MW), which is expected to commence operations in Q2 2014. Nor did I assign any value to consented projects.

Fred Olsen Wind Carriers (FOW)

FOW owns two recently delivered vessels, the Brave Tern and the Bold Tern, specifically built for the installation of offshore wind turbines. The total investment for both ships was about $336 M (2,009 M NOK) or $168 M per ship. FOW is expected to cash flow between $25 M and $35 M a year per ship, so a value of 168M or 2,009 NOK equal to the new build cost seems reasonable to me. Demand for offshore wind turbines is strong and growing. By 2020 demand for offshore turbine installation is expected to grow fourfold. Until now most of the global wind turbine investment has been onshore, but that is starting to change as the easy pickings onshore are used up and the potential for wind is higher offshore.

In addition FOW also owns 5 new and modern crew service ships delivered in 2011 and 2012 and one older ship that was refurbished in 2010. These ships are mainly used to ferry crews to and from oil rigs. The new cost of one of the ships is 25 M NOK. The refurbished vessel I value at 15 M NOK. This gives us a total valuation for these crew carrier vessels of 140 M NOK.

FOW also owns 51% of Global Wind Service, an international supplier of personal to the global wind turbine industry. FOW also owns Fred Olsen United which offers turnkey solutions to the offshore wind industry. I could not find numbers on these companies, so I did not include them in my valuation.

Knock Clune (KC)

The Knock Clune is a Suezmax oil tanker with a dwt of 163,000. It was delivered in 2010. The oil tanker market is severely depressed. Both the VLCC and Suezmax market have seen a boom in net deliveries that are expected to continue through this year.

As one can see, capacity has expanded rapidly in the last few years, significantly faster than the increase in demand for crude shipping services. This has resulted in a huge decrease in dayrates at all levels, from the spot market to the charter market. A VLCC 3 year charter had a high of $70K a day early 2008, where that rate is now about $23K. For Suezmax we had a high of $43K in the summer of 2008 and the current 3 year charter price is about $17K. Both are close to the daily cash cost of the vessels. On the spot market we have seen more volatility with low prices in Q3 2012 of $12.3K for VLCC and $10.5K for Suezmax.

This also resulted in new build prices coming down significantly. VLCC ships were selling for a high of $160 million in 2008 where the price has come down to about $90 million today. For Suezmax we had a high of $100 million in 2008 where the current new build price is about $60 million. Many shipyards are building ships at a cash loss just to keep busy.

So … since the Knock Clune was built new in 2010 I am assuming its value is about $45 million. I don’t have access to second hand shipping prices, but a price cut of 25% from severely depressed new build price levels for a 3 year old modern ship that should last at least 20 years seems reasonably conservative to me. $45 million is 266 million NOK.

Fred Olsen Cruise Lines (FOCL)

FOCL owns four cruise ships, the MV Black Watch, MV Braemar, MV Boudica and the MV Balmoral. The total passenger capacity is about 4,000. Following is the EBITDA for the last few year for the FOCL. As you can see results have gotten progressively worse over the last 3 years. The European travel and entertainment market is going through a severe recession, for example the average French person has cut back his travel during vacation from 15 to 10 days over the last two years. In addition during those days they are also spending less. You can also see thatEuropeis challenging for other cruise operators.

I value the business using EV/Revenue. I took Carnival’s EV/Revenue and then divided that by 2, just to be conservative. In addition I used FOCL’s first half depressed revenues and annualized those, rather than using the higher revenues from the past few years.

Other Investments – NHST Media Group

The NHST Media Group aims to be the best and leading provider of business news inNorwayand a world leader in the following three market segments: shipping, seafood, and oil & gas.

Ganger Rolf owns 227,135 shares and Bonheur owns 231,263 shares. The current price per share is 450 NOK.

Now NHST has produced after tax net income of

The market cap is 580.5 M NOK. At 24 M in net income that makes of 24.2 which seems a little high to me. So I decided to take 25% off the multiple for my valuation which gives me a value for Ganger Rolf of 77 M NOK and a value of 78 M NOK.

Other Investments – Properties

Under properties Ganger Rolf and Bonheur each own 6.3% of IT Fornebu Properties and 50% of two buildings inNorway, one named Fred Olsens Gate 2 and the other one called Stavnes Byggeselskap AS. I did look for information on all three assets, but did not get very far on the directly owned buildings. Actually I did find the information, but it was written in Norwegian, a language I do not speak. So I am ignoring the buildings with direct ownership and am just including IT Fornebu Properties here. Both companies keep IT Fornebu Properties on their books at a cost of 68.6 M NOK. Since they purchased the stake recently, I am assuming the valuation at cost is reasonable.

Other Investments – Callon Petroleum

Callon is an oil and gas company that used to be focused on offshore development, but has changed its focus to thePermianBasinand Haynesville Shale. Ganger Rolf owns 589,693 shares. The current stock price is $4.10 per share which makes for a value in M NOK of 14.4. Bonheur owns 826,693 shares. With the current stock price of $4.10 per share this makes for a value in M NOK of 20.2.

Other Investments – Opera Software ASA

Opera Software is the owner of the Opera browser. Ganger Rolf owns 608,333 shares and Bonheur owns 608,333 shares. The current stock price is 46.80 NOK per share for a value of 28.5 M NOK for Ganger Rolf and 28.5 M NOK for Bonheur. Opera has about 350 million users worldwide and is active on all platforms, from PC to tablet and cell phone. Of the 350 million users about 250 million use it on mobile devices.

Other Investments

There are a number of smaller other investments too. I will value those at cost and then cut that value in half to be conservative. Ganger Rolf Other Investments has a value of 36.3 M NOK and Bonheur Other Investments has a value of 37.1 M NOK.

The main risks are:

• Management abusing the rights of minority shareholders.
• New family based management. As they say, the 1^st generation starts the business, the 2^nd generation grows the business and the 3^rd generation runs it into the ground. Since we are already on the 5^th generation with the Olsen family, I worry less about this issue. The family has been a decent steward of capital over the years. Capital is returned to shareholders on a regular basis and for example Fred Olsen Production was just sold in order to maximize shareholder value. Lastly, the family eats its own cooking.
• The businesses taking a dive. A number of businesses owned are already having some economic issue. Cruise and the Knock Clune are struggling. Wind has had a weak year because of the lack of wind. So things can get better for this business. The main risk lies with Fred Olsen Energy. My general feeling is that in the long term the business will do fine. We are a long way away from getting off our use of oil and demand for offshore drilling continues to be strong. There might be bumps in the road caused by global economic events that impact the global economy in an adverse manner, but over the next two decades it is highly likely that oil consumption and the long-term average oil price will stay at a level that will support offshore drilling.