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Executives

Jens Wilhelmsen - Chairman of the Board and Interim CEO

Geir Karlsen - Chief Financial Officer

Analysts

Songa Offshore Se (OTC:SGAZF) Q42012 Earnings Call February 25, 2013 9:00 AM ET

Operator

Welcome to the Songa Offshore conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to your host, CEO Mr. Jens Wilhelmsen. Sir, you may begin.

Jens Wilhelmsen

Thank you and good afternoon. I am here together with the CFO, Geir Karlsen and after my general introduction, Geir will continue with this fourth quarter figures. When we met or addressed you in November last year, then I remember saying that as interim CEO, this would be my one and only quarterly presentation in that call. I must admit that this may take long. I actually realized that I have to forget about the interim part of the title and then focus all my efforts on the CEO part.

I mention this for two reasons. One is to emphasize that Songa has been through a terrible required remanagement presence and focus and also to emphasize that my own commitment to the job. Although the search for a new permanent CEO is progressing according to plan, they are on the way to fill the role of a CEO, it is a long-term mindset.

You will hear today that Songa is reporting EBITDA results in line with consensus estimates. As you will also know, we have been through a challenging period, not least because of the delays and the cost overruns of the yard space of Songa Delta and Songa Trym. Yet, while working hard to manage these projects in order to get the rigs back in contract, I believe we have also managed to put in place measures which significantly improves options to achieve our long term objective of becoming a leading mid-water rig operator in the Nords and the Norwegian continental shelf.

The key points are that through the sale of Songa Eclipse, the company's liquidity is restored. With Songa Trym now back on rigs, all five rigs are operational and make good returns. We have strengthened the board and the management team and specifically we have a forward contract base worth approximately $6.6 billion with us.

However, before I make the key issues going forward, let me dwell a few minutes on last quarter's events. In my mind, the fourth quarter results (inaudible). We have not still a number of certain challenges behind us. We have learned important lessons as have dealt with the cost of overruns on some Songa Trym and Songa Delta and we are now in a position where we can focus on the key projects ahead which, of course, it will take over the CAT-D rigs.

We have decided to underscore the (inaudible) important adjustments in our books in order to approach the future improvements and we will clean our sheet as possible. We have made impairments to the book writers of Songa Trym and Songa Delta of approximately $210 million.

This will bring the book values in line with the market values. for these two rigs. After that the financial results we present are in line with the previous guidance and Geir will walk through all the numbers and give you more details in a few minutes.

Songa Ecplise was delivered on January 3, 2013 at the price of $590 million. The sale has restored company’s liquidity but the fact that the delivery took place in 2013 required the company to apply for waivers through our financial covenants from the bank syndicate and the loan holders.

The waiver requires or the financial problems requires us to have $50 million in cash or in the bank. These covenants are paced over two year. That loan holders and the bank approved the waivers without any extra condition on penalties and as you understand the covenant position was restored on January 3.

For those of you who read in the recent newspapers you could read about two weeks ago that Songa Trym's yard space was today was comedy. That was the statement. Unfortunately that statement is completely wrong, as most of you understand that. It could easily turn into a tragedy for everyone involved. I can only again apologize to the shareholders for the long drawn SPS and the huge overrunning cost. The Songa Trym is now completing with (inaudible), finally back on day rates and we now have a very good rig that is fit for operations in the North Sea for the next decade.

In this explanation, I would also like to say a big thank you to Songa Trym's crew and all the Songa employees, (inaudible) who worked tirelessly almost 24/7 for the last two months in order to get the necessary work completed and the new certificates issued.

So then the question, of course is, why did it take three months longer and $210 million to complete the SPS and (inaudible). Once again, we have completed a through base assessments. I cannot give you an exhaustive answer but you do already know some of the key reasons.

The work schedule for the yard stay for far too optimistic and then I did (inaudible) hire some project managers who truly understand the technical status of rigs, toward the risk of cost escalation from (inaudible) and equipment problems. Several of the larger time-consuming projects have to be undertaken ad-hoc and could therefore not be properly planned in on-site.

Finally, several refurbished end-projects has all caused OEMs and equipment suppliers turn out to be faulty and they have to be rectified during all our final testing. So most of the time, overrun after December 18 is due to be this fact.

We have now commissioned Ernst & Young to audit and hire SPS in refurbishing program, both for Songa Delta and for Songa Trym and then of course it will be presented to the board and of course there will problem planning and project management, both for Songa and third parties, as there likely will be an audit on the invoices for CCB and (inaudible). Ernst & Young has already concluded their preliminary report for Songa Delta, which we are now studying and they haven’t started on the report for Songa Trym.

(inaudible) have confirmed that we have already started the planning for Songa Dee's SPS and yard stay will take place in 2014. Without being complacent, we believe that this should be a smoother process. Songa has operated this rig for several years and know it well. The yard stay will be managed by the company, not by a third-parry. It will also be operated more conservatively and it is board's inflection that Songa management will ensure that the time and cost for Songa Dee's yard stay will be realistically calculated taking into account the difficult lessons we have learnt from Delta and Trym.

Turning over to the management and board issues. I took over as Chairman in 2011 and I soon realized that there was a need to strengthen the board in relevant international management industry and financial experience. Last AGM, there was a nomination committee elected and their first task was then to assess the competence and the member of directors on the board and possibly then suggest improvements.

Through the subsequent appointment of two board members who both joined the company in January, I feel that we now have a board which possesses the necessary competences and experience to bring the company through the challenges ahead of us.

Mr. Steven McTiernan brings to the board his long experience in the oil and mining industry and an extensive track record in international product finance and corporate governance. Mr. Arnaud Bobillier brings with him from his many years as senior executive in Transocean, have also experience in international oil rig operations as well as corporate management.

Regarding the executive management, we have also working hard and looking hard to strengthen that. As each evolve we have serious turnout that Mr. Bjornar Iversen will join the Songa Group as President of Songa Rig AS based in Stavanger. Mr. Iversen brings his vast experience in commercial and rig project management from his more than 15 years in executive positions at Odfjell Drilling.

Once he joins, he will take charge of the Category D new building program and be responsible for strengthening Songa's commercial relationship with Statoil and other operators in the North Sea basin. Mr. Iversen is laving Odfjell Galvão (inaudible) and will join Songa as soon as he can be released from his present engagement.

He will be located in Stavanger in addition to the management already in place there. The operations, technical management and drilling of the three rigs now are working in the North Sea as well as the oncoming Cat D rigs will continue to be performed by Songa Management AS led by the Managing Director, Vidar Skjelbred.

Following the resignation of our COO, Mr. Trond Christensen, both Mr. Iversen and Mt. Skjelbred will be reporting directly to the CEO in Cyprus. In addition, we have decided to strengthen our office in Kuala Lumpur currently managing and operating our two international rigs, Songa Venus and Songa Mercur. The plan is to operate the two rigs independently from the North Sea operation and become a clear partner of the financial and industrial investors in the Asian market.

Moving over to the Category D, we gave you a thorough presentation of this during the 3Q presentation. Songa's top management, that is Geir Karlsen, (inaudible) and myself, we spent a week in (inaudible) in Korea together with the project organization at the yard and discussed with them our outstanding- DSME. I am pleased to report that Songa is now very comfortable that the project director (inaudible) and his team of almost 70 are handling the relationship with the yard and Statoil very confidently.

This finding has later been confirmed and audit is carried out by an independent party. The last of these reports (inaudible) minor changes to the project organization that will further improve our (inaudible). There are presently no indications that the DSME will be further delayed in its building program and the first rig is then scheduled to be delivered in June 2014.

The much heralded VDL, that means variable deck load, issue has been resolved. The rig is (inaudible) in cooperation with the client, Statoil has confirmed that the rigs have to be constructed as per contractual design without sponsons and blisters. (inaudible) at the inclination tests not reached the contractual level (inaudible). DSME need to rectify the issue and will enter over the penalties. I may also have that recent technical studies show that DSME should be able to deliver as per contract which is more financial and technical question of this (inaudible). Statoil and Songa are totally aligned on this issue and Songa will not incur higher penalties than what we DSME will have to pay us in that unlikely event that such type of factors.

Songa is keenly aware that there will be many challenges going forward to get the Cat D rigs ready with the plan and as per budget. This we confidence that our technical organization is very prepared to handle these for the best to Statoil and Songa's satisfaction.

Then many of you have been questioning (inaudible) mobilization cost of the rigs to be delivered from DSME. This we have indicated the cost at $290 million. Those figures remind of the following facts. Songa's indication of cost is an average of the total cost for the whole rigs. The first rigs will probably be more expensive than the last one. DSME has a contractual obligation to deliver a rig at the yard in compliance with ALC or Norwegian (inaudible) regulation before the week's VBR, an obligation which is significant and important in this sale of (inaudible) when the rigs construction is over, faults or rectification before the rigs are to be delivered to the fleet.

DSME have a strong inclination that they will deliver the performance and complying with the contractual obligations considering the many contracts, they have now added South Korean and the Norwegian yard customers.

Well, that was on the technical side of our Cat D rigs and let me move on to the financing issue of Cat D rigs. We are not yet in a position nor have we set out to be where we can provide complete chance to the financing of the Cat D rigs. (inaudible) we are currently working towards the plan based on the following elements. We are quite certain that we can finance the first two rigs based on loans and cash flow from operations. We realized that we needs additional capital in order to take deliver when we import and we have focused on the financing issue without establishing a fourth level attending committee that will work together. We will manage to resolve all these questions.

We are not in a position to reveal any current contract project finance nor I am willing to commit to a specific timeline when that finance will be in place. But what I can say is that our ongoing mobilizations with international financial institutions have reached a stage where we have received term sheets for that financing which probably are in a region that we have currently found acceptable.

Again, I must stress that the term sheet has not been committed to. Our (inaudible) will supply and welcome our (inaudible). I know you will find this information is limited but we have to balance the uncertainty the market is projecting to the company. We did (inaudible) confidentiality in our negotiations.

We believe that availability of that financing on the new rigs will limit the need for additional capital to manageable levels and several options will then be available to us. we can go to the market of course when we need to raise capital. We currently have capital from parts and sale of assets or we can actually take in partners in certain projects.

The (inaudible) contract we have with Statoil are our valuable assets for us and we believe this (inaudible) to be successful if we need additional capital. By the end of this presentation, let me just confirm our strategy going forward. The operational strategy is to become a leading operator of mid-water rigs on the Norwegian continental shelf. Financially we are entering new (inaudible) through our efforts and to create the long term post recurrence from the contract backlog, as I said, now worth about $6.6 billion and the new contracts here on those.

Potentially what we need to do is (inaudible). We have to take possession of the new Cat D rigs on (inaudible). We need to maximize cash flow from ongoing operations that means the focusing operation efficiency and new hard margin contracts and its by our present contracts. The international rigs are chief (inaudible) to ensure funding of the new deals. We will optimistically seek maximum value for these (inaudible) from a cash flow from operation or proceeds from the sale.

This I will leave to Geir Karlsen who will present the 4Q results and I will remind you that the AGM will take place on May 14 in Limassol and you are most welcome. Thank you.

Geir Karlsen

Thank you, Jens. Then I will briefly go through the Q4 figures. We talked of the P&L, I think the P&L exceptional impairment loss is more and more less in line with the consensus. Revenues at $140 million, OpEx at $89.7 million. I will come back to the details on that. G&A is slightly above what we have been reporting in the previous quarters. We have a couple of extraordinary (inaudible) this quarter and we believe that going forward we should come back to the level that we have seen earlier in 2012.

We have closed down the office in Angola, due to the sale Songa Eclipse. Angola has brought Songa nearly $7 million for 2012. That will not be part of the GA& in 2013. However we are expecting a slight increase from Songa Eclipse. So that was all-in-all issued with the levels that we have seen earlier in 2012. Again, a loss of $7 million is also related currently related in currency gains between the Norwegian Krone and the U.S. Dollar

EBITDA of $41.8 million and then we have based on an exercise we decided to take and impairment loss on the two rigs, Songa Trym and Songa Delta. We are using in accordance with (inaudible) support where we have actually done, looking at the cash flow going forward for the remaining life of the rig and then comparing that to what we will be (inaudible) for all the rigs. We have taken a slightly conservative view on the market going forward and we have then ended up to take an impairment loss on those two rigs. The book value today are in the area of $400 million each after the impairments.

When we have now taken the impairment, it will also give us an obviously lower depreciation rates going forward. It takes us then minus $218.9 million for the quarter, if you take out Songa on this regard and then only (inaudible) the result it is minus $5.7 million.

We go through next slide and then just to have a look at the revenue side. A few comments. Venus, working well, has been working well for so many months now. Mercur, solid on two day rates, $280,000 a day, November 15 and it is moving to Cuba in Zarubezhneft (inaudible) early December. It is paid around June this year at the current rate. Delta, finally turning to operation again, November 14, 2012 and has been operating very well since then.

Dee is working well. Trym, we have received two-third day rates and for 21 days in quarter before the rig went on (inaudible) day rates at the end of the quarter. Again, as you all know, it came in and started to on day rate again February 18.

OpEx, on Venus and Mercur, we have advised that the market that we expect to run these rigs at $100,000 a day. If you look at the year-to-date, you can see that’s approximately where we are at. We will expect to where we have run through operation in the area of $100,000 to $110,000 a day on average. Other than that, you can say that this quarter was a little bit (inaudible) and to have capitalized quite a lot of OpEx, especially related to Trym and it was performing when doing the SPS. But I think that Dee is at $1.87 billion for the year which is probably the area that we have been expecting this to be there.

Then over to the balance sheets. We have this Delta $1.9 billion on book values. That excludes the Eclipse. Eclipse is listed as current assets of $590 million. Eclipse was delivered, as you all know to the new owner, (inaudible) and we have done that for Q1 2013, taken out of the balance sheets.

The $1.878 billion, the book values, the Cat D rigs consist of $505 million. Out of that, $37 million is capitalized interest. As you know, we have Statoil loan facility on the two last rigs. The interest cost there are capitalized on those two rigs. Then on two first rigs we have bank debts and probably with regards to the whole debt, we are then capitalizing part of the loan value as part of the capitalized on the first (inaudible).

As for today, it is $100 million on the bond debt expense but as we add on capitalized items on the two Cat D rigs, we will also use part of that bond debt to capitalize even more interest of course.

As we have on delivery, where we are on solid base as normal. At the end, we have the $47.6 million in cash for year-end. By then we will reach on the covenants but we will book the day rates as earlier mentioned prior to December 31. The other side of the balance sheet is not really much to comment. You can see that the book equity has gone down and that is obviously due to that impairment cost we have taken. Then you have liability assets held for sale, $304 million.

That was the debt for those related to Songa Eclipse which was really paid on January 2. Then you have an item called the (inaudible) revenue of $106 million. That is the Statoil, or the majority of that is Statoil contribution on the two dry bookings and those $106 million will be taken over the P&L during the next two and half years. That will also benefit on the calculations on the reporting covenants.

Cash flow statement on the next slide, not really much to comment on value. This is for the whole year. Then that $809 million in CapEx is, I will come back to that on the next slide. Then we have the cash generated from financing activities. $396 million. That is all related as the bond we did last summer, the loan from Statoil of $222 million and the $50 million loan on the (inaudible) at the rates very early in 2012.

Then to the next slide. It is the CapEx. This slide, the CapEx slide might be a little bit confusing because it is the gross figures on CapEx meaning it also includes the contribution from Statoil. As you can see, the majority of these items are related to Cat D and then the dry bookings on Songa Delta and Songa Trym.I will come back to those two rigs and give a status on the CapEx situation as well as the cash situation and with the cost to the shipyard.

Go to the next slide. We will go through those (inaudible). If you look at Songa Delta, the total cost estimate now for the growth of have been performed during the last six, seven months is $180 million in total. That is (inaudible) as we added on earlier this year. So $140 million less taxes, total cost on Songa portion.

As for Q4, $118 million was paid to the yard and then remains $22 million that will be paid during first or second quarter. Again, the rigs came into operation again in November. I guess this, (inaudible) give to the market when it comes to the dry booking loss there.

Then on next slide to Songa Trym. The total cost for Songa portion is still estimated to be $205 million. The total yard cost will be $250 million. With that is also the payments we reported on early or mid January. They are still at the same level for the total cost. Of the total cost, we have approximately $118 million left to pay to the yard, which will then be paid during the first and will most likely then also go into the second quarter of 2013. The rigs, as we all know is back on day rates.

The community dimension is on par and get out of his many, many of you have interesting example significantly from DSME and is in," he is mine: Songa vindication of his management for the first rigs. We have contracted negation to believe that the ethanol plant maintenance reportedly your information in this segment of the link to. Dictation. If any of the population that is the kind of analysis of removal. The plan is you cannot get the position.

We can provide complete plan Affidavit because the compute a sampling in Arctic and that we can find to prove to be the additional capital. It was and the Focus on the issue of the clinical need for a position to review it on Wednesday, the justice of the undocumented what I can say that there will have rigs space. The 64 bit are anything but suffice it will always find the information is limited, but in Stavanger.

The marketing project is to be you believe that an exhibit financing is that this festival is not. Fredia F: Taking part in a cave complex in the past several different view and his commitment for the successful.

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We need to maximize cash flow from operations efficiently and often conflicts is asked about the optical path of the 70s. In order to get caught up to 180 and 48 in Limassol. Thank you I am 54 years before you begin to example if more and more likely to use it for them that the 89.7 million compact unit, and you hate it.

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Need the diversity of his book for Songa executive committee of safety and beauty coupon office. The data.. The binding. And the corporate environment the work environment. We need to the plaintiff is Mondesi was responsible. If you again the will and on again affects life, Nina Simone and the defined market.

Do you think that sample. At the. It is convenient for him enough. Before the problem is that it will probably be the year. They have built in one of the almost good event to one of the the second of the funds to 1.800 feet.

I am, I think also that we have at the: no, indeed, because there are do you think you understand the difference is that it will enable you all today. It is convenient for Songa at the Id. on. Also, we all want the delivery. Following content that you have the unit tests monastic retreat. I think.

The phenomenon as you have nothing to do with 4 million of that naked from the delivery date on January the my template for revenue hundred and million that it was for the majority of that is the reason I think Mohammed in the community over the unit. The vehicle.

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anyhow, the and I am as is the loan commitment. No regard to the. very early. I am mindful of the fact that the and in my view is. many people it will infuse classic. The majority but to make in the icon below.

And it is difficult to in articles 2000. the report work at digital among republicans in on will be Songa Q4 and in case you are. as for you. as the minor league is going to be two. Songa. the people who will take we have responded in video.

Question-and-Answer Session

Operator

(Operator Instructions) Your next question is from (inaudible).

Unidentified Analyst

What is he is a the yard of the operating, loan, the is the second part UK for the yard the high level of not by the conflict.

Geir Karlsen

The decline in the from the of 90 people, if you use the phone number. it is not included in few easy to not incorporate optical and if the patient and medical opportunities and share their unborn interest found the spiritual to the trustee yard #3 leaving the account any apparent at first.

Before I can transplant from a printout online the question is how an attack on the part where you offer and country meant only if all of the Hague or if somewhat numbers you use it would be 18.

2013 included in those numbers indicate that will not be a arena over and what did you will be all under the old. although the whole will now only the be-all and Buckingham, the law. It will be the and lifelong Songa. you do and that some people in the board of the legal fidelity to rebuild his life.

The very best that this is the community portal. the most of it will number) you would expect, and pay close rigs the I will expect for writing about information of all want. this is the question is that you will see the finally means of may the young unsteady and will even be delivered to you.

Unidentified Analyst

Is that correct that I have to forget about also the beginning of the our cost basis. presentation $578 million in the mobilization center?

Geir Karlsen

He was $578 million that is a delight meeting you. some on top of that it would also be "i believe that the open protocols would be if the something extra that would be included in the over making the Wharton is that you will need to know about the end of the one that you like.

He replied already in the north, but none of the development and all you will now when the going market opened awarded more than he is but then he will hundred and that the book will be done as a monument in a.

You know the question I found it. Songa, and so on here, you just have to much involved the moment the moment for revenue from its understanding our with respect to the color contract is in the middle of the unit is now in the of and will on all on Delta and Trym.

As I said, should on it is old.. With all you were there anything old is notable that elected him all want in and the way it is going operatively, should expect that all you with but the release and the board capital is meant as a leading to what you.

Operator

We have no further questions at this time. I will now turn the call back over to your host.

Jens Wilhelmsen

Thank you very much. Thank you for your question. I thank you for attending this webcast. And looking forward to address you at next quarterly presentation. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating You may now disconnect.

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