Welcome to the Aker Companies Investor Day. We're very pleased to see so many of you here today. Before we get started, I'd like to point to the nearest emergency exits which are out through the doors behind you, as well as both to the left and the right of you. Do please note that we don't have any fire drills planned today. As you will see from today's agenda, each Aker company will hold a presentation, after which there will be time for some questions. We will take questions both from people in this room as well as our webcast audience, who can send their questions in using the webcast system. Our first speaker today is Øyvind Eriksen, the President and CEO of Aker ASA.
Good afternoon and welcome to this Aker Investor Day 2016. This film summed up 175 years of industrial development from a tiny mechanical workshop to an industrial investment company. Today, we generate approximately NOK 73 billion in revenue. We employ more than 30,000 people, we operate in more than 60 countries all around the world. Much for our legacy on this capital markets day. Let's spend the remaining time on our future. Starting off with how Aker exerts its active ownership. As an industrial investment company, Aker creates value by allocating capital where to maximize return within an acceptable risk profile and defining the strategic direction for each portfolio company. Our method of work is unchanged. We communicate clearly to the boards and the CEOs of each portfolio company.
Aker's ownership agenda as an input to the company's own strategic process. The output is alignment on key value drivers such as capital structure, operational improvements, organization, and transactions. Speaking of M&A, we announced last week the divestment of our shareholding in Havfisk and Norway Seafoods, adding 2 billion NOK to Aker's cash holding. Havfisk is a perfect example of how Aker operates. We patiently built the company. We weathered the storms. We improved operations, invested in more efficient trawlers, enhanced profit, introduced an attractive dividend policy, and we exit when we believe that the company has reached its full potential with Aker as main shareholder. At the same time, we expect both Havfisk and Norway Seafoods to continue to grow with Lerøy as new main shareholder, partly due to the synergies between red and whitefish to be pursued going forward.
As far as capital allocation is concerned, increasing our net asset value is our main criterion and objective. 12% annual return over the cycle remains our target despite the low interest rate environment. Last year, we received a 20% increase in NAV, and year to date, the increase amounts to 4%, whilst direct shareholder return amounts to 13%, dividend included. What can investors expect from Aker going forward? Well, Aker is an attractive investment opportunity, provided that you appreciate our strong financial position, investment capacity, and solid upstream cash flow. You share of a belief in the longer-term trend lines in our various industry sectors, oil and gas in particular. You trust that our portfolio companies will continue to improve operations and competitiveness.
You assume that Aker will continue to create additional value through M&A, you rely on an attractive dividend policy to distribute between 2% and 4% of net asset value annually to shareholders. Let me elaborate on each of these value drivers. First, our financial flexibility. Our investment capacity continues to increase, as partly reflected in Aker's own financials and partly in the robustness of other portfolio companies. Increased upstream cash flow to Aker has been a main objective in recent years. Last year, we received NOK 1.4 billion in dividend, and this year we expect to receive about the same. As a result, our cash position is growing to around NOK 5 billion post-divestment of Havfisk and the investment in Solstad Offshore, which was announced earlier today.
When you combine this with the fact that we neither have contingent liabilities of significance in Aker nor additional equity commitments, you see that our liquidity today can almost entirely be used to build our future. Given the adverse market conditions we've been facing, it's worthwhile reminding you of the solidity of our portfolio companies' balance sheets and their overall satisfactory financial performance. The market has faith in our companies, as can be seen on the left-hand side graph. The credit spreads for bonds issued by Aker and our main portfolio companies, Det Norske, Aker Solutions, and Ocean Yield, have done well over the last two years compared to the high-yield market in Norway. This is the result of work pursued by the companies themselves, inspired by us. Since 2014, the portfolio has undergone restructurings, divestments, debt reductions, refinancing, and self-help measures to adjust capacity and cost.
As a result, most portfolio companies have strong balance sheets with long-term funding in place. Some have dividend capacity in excess of the dividend they're actually distributing, most companies are still generating high revenues and decent profits. The longer-term trend lines and opportunities in our main industry sectors, oil and gas in particular, are another value driver. Our principal shareholder said in his letter earlier this year that if you don't believe that oil and gas will come back, you shouldn't invest in Aker. Today, 45% of our gross assets are investing in that sector, 28% in the Norske, and 16% in Aker Solutions, Akastor, and Kværner combined. Going forward, we expect this share to increase both as a result of oil market improvements and as a result of new investments.
As you know, our portfolio also consists of significant investments in other industry sectors, such as sale and lease back in the maritime sector, real estate, and marine biotechnology. We also believe in the longer-term trend lines in these sectors that our biggest exposure will still be in oil and gas. We remain positive about the longer-term outlook for oil and gas for two main reasons. First, we expect to see a tighter supply and demand balance. Second, we strive to see a world with a more stable geopolitical situation. As you all know, there are strong voices out there with a different view. Their main argument is the ongoing green shift, driven partly by consumer behaviors, partly by governmental policies, and partly by new technology. We also appreciate that the world is trading in that direction.
Realistically, it will take more time than some of the environmentalists may argue. Hence, fossil fuels will continue to play a dominant role in the energy balance for generations to come. It is, however, a fact that currently oil and gas industry is going through one of the most severe crisis in several decades. The downturn started with cash flow concerns in oil companies and continued with overproduction and oversupply as growth in U.S. shale production exceeded expectation and OPEC upheld production. Both factors led to a hard stop in both green and brown field developments. Brutal for suppliers, but probably also for the crude oil markets. Demand continues to grow at least 1% annually next 5 years. No new technology or governmental policy will stop that. What's inevitable is declining production from existing fields, accelerated by low investments.
Crude oil storage is a balancing factor, at least the next year or so, but should not change the fundamentals longer term. New supply is also a factor. There's no reason to doubt that OPEC is serious about increasing their production even further. How flexible U.S. shale production will be is more debatable. It involves both technical and commercials parameters. History tells that the Americans tend to find a way, even though they were about to learn the hard way that OPEC has left to others to stabilize the market going forward. Each of these and other factors can be discussed at length. The important point is, however, that we believe that the market will shift from one imbalance to another, not overnight, but most likely during the course of the next few years.
We see continued opportunities in oil and gas with a corresponding upside for Aker. A higher oil price will have an immediate positive impact on oil companies' cash flow. We do not expect a corresponding swift rebound in oil service activity. Self-help measures have reduced development costs significantly already. As illustrated on this slide, for some projects and some services, cost has already been cut in half. Still, most oil companies will need more time to strengthen their balance sheet before starting investing bigger money again. A 1-2 years delay is probably a realistic expectation for most oil service segments. A positive trend line for oil and gas longer term is what we believe in. What we're planning for is a different consideration. Neither you nor we know how the markets will actually perform.
The strategy and for planning purposes, the prudent assumption to make is continued turmoil. In clear language, all our operating entities must continue to enhance operational excellence, cut costs, adopt leaner processes, promote new technology, and improve efficiency in order to maintain competitiveness in a low oil price scenario. Even in an industry as complex as oil and gas, the winning formula is simple. The cheapest barrels will be produced first by the most efficient suppliers and producers. What are the key value drivers for our main holdings going forward? Let me start with Det Norske. Our most significant investment measured by value, and I would claim potential. Despite an oil price down 20% in 12 months, Det Norske's share price is up 50% in the same period. That's amazing.
Behind the success lies great operational performance, no unresolved issues with creditors, a high quality portfolio of assets, and accelerated growth through acquisitions. We would like to see more of the same. I can see a future in which Det Norske has become a benchmark for independent oil companies offshore. In order to become so, Det Norske must prove that it's the most efficient producer with the lowest cost per barrel. We continue to explore opportunities to acquire more high-quality assets on the Norwegian continental shelf, because we have reasons to believe that a growing number of established players are in the process of reconsidering their future in, and their presence in Norway. One of Aker's main objectives is to position Det Norske for payment of dividend. The current portfolio will enable dividend distribution to shareholders from 2020. Acquisition of more cash-generating assets could accelerate that plan.
Aker Solutions is a different story as far as share price performance is concerned. Down 36% in 12 months. That's probably the biggest disappointment for me personally. Aker Solutions performance is far better than the share price indicates. Projects are on track, customers are satisfied, capacity is being adjusted, the cost base is going down, the backlog is still healthy, and the financial performance is still decent. The market uncertainties are real, and the only way to respond is by becoming the most efficient supplier of equipment and services in the subsea and field design spaces. Much has already been done, there is more to do. Aker Solutions must also respond to ongoing consolidation in the oil service industry. One trend line is to offer bundled products and services. Another trend line is about technology innovation in order to reduce costs and boost production.
Aker Solutions are backing both horses by entering into alliances with leading companies such as Baker Hughes, ABB, Saipem, and SPM. Whether the alliances are permanent delivery models or interim steps is too early to say. What I can assure you is that Aker is following the ongoing consolidation carefully and will do whatever is right to realize the full value potential of Aker Solutions. Akastor has also been a disappointment as far as share price performance is concerned, down around 30% in 12 months. Divestments and other transactions are part of Akastor's mandate. Far, nothing has happened except divestment of real estate to Aker. The explanation is for this resides in the ongoing market uncertainties and outlook.
Meanwhile, shareholder value is preserved by focusing on operational excellence and cost reductions, which should make companies like MHWirth, KOP, and Fjords Processing better positioned to win contracts when the market turns. Kværner has been a more positive journey for us recently. The share price is up 42% in 12 months, and Kværner's balance sheet is impressively strong. The successful outcome of legacy cases has been a main driver. Stable pro-project execution and other, as have productivity improvements and cost reductions. Still, continued operational improvement and cost reduction will be required in order to win more work and deliver a decent profit. Aker remains open-minded to strategic alternatives, including changes that might impact our shareholding, if that could generate higher value and an even more prosperous future for Kværner. Ocean Yield is an easy one.
The message from Aker is basically to continue on the track Ocean Yield has already embarked on, growth by more transactions, if required, by raising more capital with or without subscription from Aker. At the same time, Aker appreciates how well management follows our partners as credit risks have increased due to market uncertainties. Aker BioMarine is also encouraged to continue on its current track. Increased sale of Superba Krill and even more attention to M&A are the two key value drivers. The position of global market leader has already been achieved, and that tends to create both optionality and value. Value creation through M&A is a part of Aker's mandate and our track record. Here you see some of the deals that we have announced over the past year and a half.
Some were completed by Aker itself, others by portfolio companies, albeit in close collaboration with us. Our two biggest investments today, Det Norske and Ocean Yield, are both products of series of transactions. When I joined Aker a few years ago, I could never have imagined that this, a small cap company like Aker Exploration one day should be one of the most prosperous independent oil companies in the world, I did never envisage the possibility of our fragmented maritime assets becoming our main source of upstream cash flow. In the recent years, transaction activity has been combined with a lot of hard work to improve our portfolio companies. Given the satisfactory financial and operational position of our operating entities today, Aker intends to allocate even more time and capital to deal-making at Aker level.
The last two days, or the last few days, we have announced two transactions. The divestment of a fishery business, Havfisk and then Norway Seafoods, I've already commented upon. Let me now expand briefly on the rationale behind our investment in Solstad Offshore, which was announced this morning. Over the last months, Aker has had successful dialogue with Solstad. We find the offshore service vessel segment interesting longer term, and we rate Solstad as the company with the biggest potential in collaboration with Aker. Our strong relations with banks, oil companies, and other stakeholders have been important facilitators of this transaction. With our support, Solstad has been able to reach an agreement in principle with its largest creditors regarding refinancing of the company's debt.
Subject to that refinancing, Aker will invest half a billion kroner in Solstad through a combination of new equity and a convertible bond. The 2 transactions will give Aker a 47% economic interest in the company. We acknowledge that this venture is not without risk. It's highly leveraged, Solstad has to manage the current down cycle. We see an opportunity for high returns based on 2 main factors. Firstly, we expect a positive repricing of assets when the markets rebound. Secondly, we see growth opportunities for Solstad through acquisitions and partnerships. The final value proposition that I will discuss today is an attractive dividend policy. Our track record speaks for itself. Over the last 5 years, we have delivered an annual direct cash yield of between 5.7% and 7.1%.
Our dividend policy is to pay 2% to 4% of net asset value per year. Aker has sustained its annual dividend payments every year since the dividend was stipulated in 20 06. We will continue to do so. Our future dividend payments will be supported both by our strong balance sheet and by increased upstream cash flow. Hence, confidence in dividend should not be an issue.
To sum up, our value proposition to shareholders is about strong balance sheets and investment capacity, exposure to industry sectors with high return potential, oil and gas in particular, portfolio companies well-positioned in their respective segments and with improved operational excellence as the number 1 priority, M&A as a main tool for additional value creation, and attractive annual yield to shareholders from dividend, supported by an upstream cash flow that we expect will increase and become even more predictable going forward. Finally, what has changed? Well, the divestment of our fishery business provides you with an implicit answer. It was a difficult but correct decision made by us and our main shareholder. We manage capital, not industrial traditions or emotions. With that mindset, Aker will yield even greater returns going forward.
Thank you very much for your attention this afternoon, and now we open up for Q&A.
Thank you, Øyvind. We are prepared to take some questions from the audience here today. If we have time to spare, also from our webcast audience. Any takers in here? If not, then I have a question for you, Øyvind, actually. Aker has a solid cash position of NOK 1.5 billion after the recent divestment and investment that we've seen. Could you give us some indications on what you're planning to do with this?
Well, I think I've given you a lot of indication already. In the bigger picture and our mandate is to grow both net asset value and upstream cash flow. We will allocate capital in order to deliver on those two commitments. As far as portfolio composition concerns, Aker experienced during the course of 2015, the importance of some diversification. I actually think it's quite amazing that we managed to increase net asset value by 20% in such an, a turbulent oil and gas market. Still, it's a fact that valuations in oil and gas seems to be more attractive for the time being than most than the valuations in most other segments. Shorter term, we see more investments opportunities in the oil and gas sector than in other sectors.
Indeed. To follow up on that, we're seeing quite a lot of consolidation in the industry. Do you expect more of that going forward? Is it on your agenda for any of the Aker companies to be taking part in that?
We're taking part in some more consolidation through the transaction we announced this morning. It's not only an investment in Solstad, but it's with a clear ambition to grow Solstad by more acquisitions and more partnerships going forward. To turn the downside in that oil service segment into our advantage. At the same time, it's not crystal clear for the time being how the different trend lines will play out. We see companies joining forces in order to bundle more products and services. We also see companies joining forces in order to develop a new technology, in order to reduce costs and boost production. It's somewhat unclear to us and the entire industry what trend line customers will support.
I appreciate a lot the fact that Aker Solutions, in particular, has positioned itself for alternative developments through alliances with leading companies like Baker Hughes, ABB, Saipem, and SPM.
Thank you. I was just going to... See there's a gentleman here with a question. Yeah.
Okay.
Thank you.
Hello. I have a question, Øyvind, about your financing policy. You had a slide in your presentation showing how it de-developed through the year in relation to high-yield indexes. What's your comment, actually, even today when you had seen a squeeze in the margin, or narrowing in? You still have very high financing costs. What's your thoughts about that? I mean, your main objective is to create increase in net asset values, right?
Mm-hmm.
The financing cost is being deducted. How do you actually view financing cost and the way you are organized? Is that optimal? Is there anything you can do to reduce that financing cost?
What, the question about what's optional, optimal is not entirely about what you can read out of a spreadsheet. It's also about how you will prepare yourself for different scenarios and different investment opportunities going forward. In that context, and we have prioritized to have more cash available short term in order to enable ourself to make investments both in our existing portfolio companies and outside the current portfolio at short notice.
I'm thinking more that you over time have a very high financing cost. I understand that you'd like to have the money available for future transaction. On the other hand, the way you are organized as a holding company with a lot of subsidiaries, I would think maybe the whole shooting match would have had a lower financing cost than what you're actually experiencing through the separation of independent listed companies.
Sure. It's a fact that Aker could have reduced its gross debt if we paid more dividend, to pick that example, from portfolio companies and leverage some of the operating entities even more than what we have done recently. That's also a considered decision made by us. Because we have learned repeatedly how important it is in a turbulent market like this to have a strong balance sheet in the operating entities, and in particular in the oil service businesses like Transocean and Aker Solutions. Again, as a matter of financial theory, I don't disagree with you.
In order to develop a strong Aker as an industrial investment company, we have, first, during this downturn cycle, focused both on strengthening Aker's financial position and, but without compromising the financial strength of our portfolio companies.
Thank you. Are there any further questions in this room? On the webcast? Well, thank you very much, Øyvind. Our next speaker today is Karl Hersvik, the CEO of Det Norske.
Thank you. Okay. Give you 30 seconds to settle down. Ladies and gentlemen, it is a pleasure to be here this afternoon at the Capital Markets Day of Aker. I remember back to January when we had the Norske's Capital Market Day. The joke was that that morning was probably the low point in the oil price, I would say fortunately, we turned out to be right. Let's hope that today is not the high point in the oil price, that the macros continue in our favor. It's good to be here, if, even if you are still here, we didn't hear the price, we certainly heard the challenges. Talking about the Norske, it is a good starting point to have a look at the investment case.
I think the points have already been made, but just to let me put it to you even more clearly. Det norske is, as we see it today, as a result of a series of acquisitions, last 4 acquisitions, the last 12 months, is today a leading independent European oil and gas company. We actually believe that we're uniquely positioned to leverage the current environment. I think the share price shows you that the market tend to agree. We have a sizable production base. Roughly estimated production this year is in excess of 60,000 barrels, and we're well ahead of our current plan. It's all on the Norwegian continental shelf with extremely competitive lifting costs. We have a robust capital structure coupled with prudent and disciplined financial management to support our business strategy.
We have top-quartile operated assets, both in terms of performance, but also in terms of development. Even more importantly, in this turmoil world, our development projects are on track, and cost estimates are coming down. Lastly, we have a clear and visible path to organic growth from the current portfolio, which will deliver significant production growth and free cash flow from 2020 and onwards, and thus will put the company in a position to pay to have capacity for a significant dividend in the 2020 plus. All in all, we agree with the market. Maybe not that surprisingly. I'll try to get into a few of these points in turn and also provide some more depth into what the more operational and industrial architecture of the company.
In the Norske, we believe that understanding the market environment that you operate in is a necessity in order to have a high economic performance. In Norway, it is important to bear 3 things in mind. Low production cost, inclining production profile, and a capital structure where there's a balance between execution and growth. Our profile puts us in an extremely good position. We have an inclining production outlook over the next 10 years just based on the reserves we have in the portfolio today, where no incrementals are taken from projects we cannot name today. This gives, in effect, a visible organic path to 100,000 barrels a day from high-quality projects.
If market conditions improve, and as we stand here today, I can say they do not need to improve significantly, we have a good project inventory that can increase this hopper to 100,000-180,000 barrels a day. However, the sanction project in our portfolio will provide us with a tremendous cash flow after 2020 when the investment program for Aasen and Johan Sverdrup, for the most part, are completed. As of today, with the current forward curve, the company could deliver an after-tax cash flow from operations, excluding operations costs and interest costs, in excess of $5 billion in the six-year period from 2020-2025. To put this in perspective, this is more than the entire current enterprise value. Leaving the investment case and starting to talk about the more industrial architecture.
The Norske as a company is a great believer in simplicity, our strategy is a very simple one. We put this strategy in place in 2015 and have adhered to that strategy for the time being. It's basically divided into three building blocks, mirroring Øyvind statement about the economic performance. Strong execution for our operated assets is the first building blocks, a prerequisite in our mind to execute the other two. Second, we need to continuously improve the way we operate to be able to sustain long-term competitiveness in what we envisage to be a long-term, highly volatile price environment. Thirdly, we will continue to exploit the growth opportunities. If we succeed on execution and improvement, and maybe I should say when, we believe that this will create a unique opportunity going forward.
I would like to stress, however, that value over volume is still our number one priority. We do not necessarily have a very strong preference for where the barrels come in to our business model. We are equally evaluating organic and inorganic growth, and are only concerned about the economic performance of such barrels. You will see that over the last eight to nine months, we have acquired roughly 200 million barrels of reserves, of resources, and are executing a quite strong exploration program at the same point in time. On the last point, we actually think that this is the time to explore. We have stepped up the exploration program this year, and we were recently successful, being awarded three very promising licenses in the 23rd licensing round.
The strategy should be clear and the path forward should be very easy to identify. Let's take each of these points in turn, and let's start with Alvheim. On the execution side, the Alvheim operations are run in a very excellent manner. That is not to say that there are not significant improvement potentials in that operation. However, I would like to remind you that the production efficiency across the Alvheim FPSO averaged 99.3% in the first quarter of 2016. A large part of the rationale for acquiring Marathon back in 2014 was related to opportunities we saw in the Alvheim area that we believed Marathon did not put significant resources or investment into.
Now looking back, I can say we have actually identified more opportunities, far more opportunities than we, even in our most optimistic points in time, thought we would see from Alvheim. We will continue to work with this area to fill the FPSO with more infill drilling, to fight the underlying decline in the fields. Roughly, there are currently between 10 and 12 main project that we plan to carry out with the partners in the coming years, and there's a spare capacity on the Alvheim FPSO, which make these projects highly profitable even if the volumes are relatively modest by our project by project nature. We have secured assets in order to execute on this program.
First and foremost, a contract with Transocean at $179,000 a day. The rig will commence drilling in December this year. The rig will carry out the firm scope of four wells in the area. We have opportunities and options to continue drilling until the rig is due for new class in 2019. As previously communicated, we are planning to put three wells on stream in 2016. In the first quarter, we finished drilling a trilateral, the Boakom North well, 14,473 meters well, three pilots, and delivered well ahead of time and cost. We have completed the Viper well and are currently running completions on the Cobra well, all of them well ahead of plan and cost.
The Boakom North well will start producing, has started producing in May and has shown tremendous performance so far this year, well above our expectations. Viper and Cobra will be put on stream at the back end of this year. All in all, we're happy with the performance on Alvheim, but there's still a lot to be done. Moving on to Aasen. I think it's a pleasure to be able to stand here today and say that the heavy lift vessel sailed away last night, safely completed our program at the SMOE yard. That means that we're firmly on the path of delivering first oil in November, December this year. As in all our businesses, safety is our first concern.
It's a pleasure to be able to say that in this project up to this day, we have executed 15 million hours of work without a single serious incident. It is also a fact that I can name each and every one of the non-serious incidents, and there are five of them. To me, that speaks volume for an organization where efficiency and safety goes hand in hand. Yesterday, as I said, it sailed away on the heavy lift vessel, and I'm being carefully briefed not to try to say the name, but I can think you can find it yourself. We will start lifting in July of 2016, and in total, we will do five lifts following a hookup and commissioning period.
The drilling team and the well team have delivered excellent drilling performance in the pre-drilling campaign. We are well ahead of schedule. We have more than sufficient well capacity to meet the production target for the first year and beyond. We're also in an excellent position before the startup of the hookup and commissioning phase. A very well-defined scope, significantly limited hours of carryover work, and all the jobs are currently being set and tasked. We also have all the spares for the first 30 days currently residing in the modules they are to be installed in. That means we are in an excellent position for a world-class hookup. Together with our contractor, we are implementing a continuation of the one team approach.
Common incentive to minimize number of offshore working hours, reduce the size of the scope, and implement the most efficient hookup we can. I'm actually quite impressed by the proactive approach, the detailed planning, and the coordination activities that have been carried out up front, and I'm certain that will continue. Our aim, and here I'm fully relying on the team, is to make this the most efficient hookup, on the Norwegian Continental Shelf in the last year. I know Jan Arve made a challenge on Edvard Grieg. We'll do our best to beat you, Jan Arve. Moving on to Sverdrup. Sverdrup is our largest asset in reserves. Roughly 303 million barrels of 2P reserves on our hand. It is a large asset, we have a dedicated team to follow up the project.
In my mind, Statoil is doing an excellent job as operator of the project. I'm proud to say that also Aker Solutions, in our mind, is doing an excellent job as the EPMA contractor. The project is on track, more or less exactly on the S-curve that we plan to do. The engineering is more mature than you should have expected at this point in time. I think Aker Solutions has done an excellent job. We have focused as a partner on supporting Statoil where we believe they need support and challenging them where we think their cost estimate are a bit too high. We are, of course, pleased that the project is executed according to plan. A major milestone was passed when we started the pre-drilling campaign.
Statoil and the Norske has spent a bit of time, transferring learnings from the pre-drilling campaign on Ivar Aasen so that we can speed up operations on Johan Sverdrup as well. Construction of several platforms have also started up, and the partners have decided on debottlenecking measures with the aim to increase phase I production capacity in excess of 380,000 barrels a day. As we have announced previously, the CapEx estimates for phase I and the development costs continue to come down, and we're now approximately NOK 108 billion compared to NOK 123 billion from the PDU. We continue to believe that there is opportunity for further cost reduction as new contracts continue to come in lower than market and the project is executed on time and on schedule.
The project break-even is currently below $30 per barrel, the life cycle break-even, and making this easily the most robust standalone field development on the Norwegian Continental Shelf. All this is well and good. However, the trademark of an excellent company is to strive to become even better. That gives me the clue to move in to what I believe is the most important thing that we do as a management team, and that is our improvement program. The Norske have already decided to set the bar high by realizing an ambition to become the benchmark independent E&P company. That means, amongst other things, sanctioning projects, standalone projects at break-even prices well below $40 a barrel. Last year, I think we started out as pretty much everyone else in this industry, postponing activities, cutting costs, removing waste where we thought it was evident.
As the low oil price sustained, we realized that we would not realize our growth ambitions with such an unsustainable cost path. We therefore decided that we would have to change our culture, our way of working, our steering system, and the way we collaborate with the vendors, and that there was no time to lose. We have therefore initiated several projects, and in total, there are now 71 projects where improvement is the key theme running in the company of 528 people, making it easily our most prolific activity. One of the instances, and I'll talk about it in a minute, is developing a new project delivery model that will enable us to reduce cost and lead time on projects. This is not done in isolation, but it's done based on the learnings from Alvheim and the Aasen projects. We are now, as I said, implementing improvement projects all over the disciplines with the aim to reduce run rate going forward. We are working with our suppliers to find sustainable contract models and solutions that will increase the flow efficiency of our process, increase productivity, and hence reduce cost for us as an operator, but also make vendors and contractors more competitive and, if successful, more cost-efficient, increasing their own value in turn. We are, in fact, already starting to see the result of this important improvement work. The drilling performance on both Ivar Aasen and Alvheim have been excellent and improved step on step as we have progressed into our drilling program. I come back to that in a minute.
On Alvheim, on the FPSO, even with its high uptime and low cost, we continue to see improvements from the implementation of lean operations. We are witnessing the start, at least in my mind, of a cultural change by empowering our offshore personnel to solve challenges, improve processes, and in course, reduce both risk and cost over time in a sustainable manner. In order to, and make these changes sustainable, we're also training the entire organization, all the way from my executive management team to the operators offshore in lean methodologies and lean thinking. Moving on to a couple of the tasks. One of the key learnings we've had from other operators that have operated in low-margin industries over time is the importance of continuous learning, and I would say extreme honesty in dissecting historic performance.
I think this is an excellent point when it comes to Ivar Aasen. The drilling team has done a lot of improvements, and the consistency in the drilling has been world-class. The Maersk Interceptor is drilling wells well in excess of the average on the Norwegian Continental Shelf. It's a pleasure to remember back to the autumn of 2014 when we took the rig out of the Keppel yard. That's only two years down the road, one and a half year down the road. This is a year rig that's only one and a half year old. Bear that in mind when you look at the performance figures.
We set out an ambition with our vendors, in a meeting room not too far away from here, where we said our ambition is to be, in 2016, the most efficient drilling operation on the Norwegian Continental Shelf. I can tell you not a lot of our vendors believed that that was possible at that point in time. Now, halfway into 2016, and almost completed with the pre-drilling program on Ivar Aasen, I think they've actually done a pretty good job of achieving that. 216 meters a day is the average ROP of a pre-drilling program. That's comparing to a Rushmore average on the Norwegian Continental Shelf of a 109.7. What are the key ingredients in that story? There are four that comes to mind immediately. The first one is excellent teamwork.
The Norske, the service company, the rig owner Maersk, our predominant service company, Schlumberger, Petroleum Technology and Exploration have all worked as one team with one common objective, that's to make the operations as efficiently as possible. We have been able to take out synergies from combined knowledge within that group without considering the contract models and the discussions about transaction cost by a one team approach. In addition, by implementing domain expertise, best in their kind domain in expertise, we will also been able to increase the amount of sand in the reservoir sections far beyond what we assumed in the PDO. Second, good planning. In fact, excellent planning.
The team have utilized the time they've had available from the PDO and up to the commencement of drilling operation, to gather data, to perform study, to assess risks, to implement risk mitigation factors, to collect learnings from other operators, to be able to develop a design and to drill as efficiently as possible. It's a fact that not only has the operations been efficient, but they've also been extremely robust to changes in the subsurface. Simultaneous operations. The top modern rig, Maersk Interceptor, have capacity to do a lot of simultaneous operations, such as racking pipe and making up casing while drilling. However, it takes good planning to utilize that capacity. The team at Ivar Aasen have been actively looking at the operations and optimizing both the offline and the online activity in order to maximize performance.
That means that we have increased ROP or rate of penetration and reduced out of hole time. Last, and in my mind, most important, is continuous learning. The team has been really serious about continuous learning. Even after they drilled the first well, that's second well on this slide, you can see it almost to the right of 246 meters. The first activity carried out was a post-drill assessment to be able to clearly define the actions to drill even faster the next time. The next one is finally the last well at 303 meters a day, easily the fastest well on the Norwegian Continental Shelf. There are 1,700 learning points that have been executed and action taken in a system that we run. I think the proof is in the pudding.
The figures are on the wall. It's easy to just be able to stay here and say, we're happy about it. In fact, we're not. We still believe that there's significant improvement potential to be had in these operations as well. Project is another manner where this industry seem to have a problem to deliver. One of our key improvement initiatives has been to develop a new project delivery model for the Norske. This is work that we have carried out with the help of Aker Solutions and Kværner. The goal is very simple, to reduce the amount of engineering hours by 50% and execution time by 25%. Again, quite ambitious targets. To be able to do this, we need to look closer at the way we are collaborating with our vendors in the development projects.
We need to ensure that all participants in this project have the same goal. For that reason, we have established an alliance model as the basis for our project execution going forward. In this model, the Norske and the contractors would work together as one integrated two-team with the alliance contract as a tool, common KPIs, common incentives. The alliance partners will develop a budget or a most likely target for the entire project, and the cost will be measured against this target. Overruns or gains, hopefully, will be shared among the partners. This is to ensure that all alliance partners will be working towards achieving the overall target for this project. The new project delivery model, including the alliance model, is being piloted on a new subsea tie-ins to the Alvheim field. Remember, this is a model we haven't changed since 2008.
Lot of people are talking about standardization. We have flatly refused to change the infrastructures since 2008. Standardization is the name of the game. However, it is a pleasure to be able to stand here today and say that the ITT that we put out has now been concluded, and we are going to award a new contract where the Christmas trees will be supplied by Aker Solutions and the services will be supplied by Subsea 7. This is a contract where the value is in excess of NOK 2.7 billion and will cover a firm scope of the already decided subsea tie-ins on Alvheim, as well as a frame contract for the next four years. Now, does it work?
It's easy to say it, the values of the contract indicate that we are well on our way to achieving the target. I'm even more enthusiastic after seeing the tremendous energy put into the alliance model and the collaboration model by the two contractors we are going to work with. I feel confident that this will be an excellent benchmark for subsequent contracts on the Norwegian Continental Shelf. Now, taking it one step further. Utilizing the fact that we are a part of the Aker family, the Norske and Aker Solutions have joined forces to create a new standard for digital engineering.
The PUSH is a project where we will work together to deliver seamless workflow in projects, starting from the concept and all the way up to the evaluation, to the completion of design, the complete design. The vision for this project is for Aker Solutions and the Norske to be recognized as a reference for digital project execution. PUSH will be built upon the delivery model I just talked about and corresponding adjustments in the Aker Solutions project execution model. With the digitization of the project delivery, we will aim to achieve a field, a developer tool that will allow quickly to evaluate and estimate concepts at an early stage with a higher confidence due to the links to existing experience data.
We are going to develop a search and reuse tool, which we built on the field developer tool I just talked about, and facilitate the reuse of adaptive building blocks going forward. Lastly, we are going to create an optimized data flow model based on the 3D model. The 3D model will be built on the concept established from the field developer and will continue to be updated as the design develops by implementing as-built designs from the Akslo database, for example, from the search and reuse tool. The 3D model will also incorporate design from suppliers, and communication during design will be implemented in the 3D model directly. The goal is to further enhance project execution and reduce the number of engineering hours in addition to the target I've already talked about.
This is basically about utilizing the fact that we are a part of an industrial group, as best we can. Then on to grow. We are stepping up our exploration activity this year. We will drill more wells in 2016 than we've done in 2014 and 2015. The ambition is to be the leading explorer on the Norwegian Continental Shelf by 2020, and target approximately 150 million barrels of resources up to 2020. The drilling campaign on Askja in the North Sea commenced in March, and the drilling campaign consists of four firm wells with sidetracks. As a reminder, this is an area where discovered resources are already in the range of 140 million-220 million barrels.
Discoveries were made at Madam Felle and Askja Southeast, but a bit smaller than we hoped for. Despite these disappointments, we still believe in the area, and the upcoming wells will have the potential to prove additional resources. Currently, Statoil, as the operator, is drilling the Beerenberg well, and we expect a result from this well shortly. Over summer, we will utilize Maersk Interceptor to drill the Røverkula well in the North Sea. This is designed in the case of a discovery to be a tie-in to Ivar Aasen. I'd like to comment a little bit on the 23rd round as well. This was one of the rounds that probably been most pushed forward on the Norwegian Continental Shelf. We're extremely happy to be able to say that we were awarded the licenses that we applied for.
We've gained access to two licenses on the Russian border, one as an operator and one as a partner further to the west in the Barents Sea. The new licenses will offer very exciting opportunities for us to be drilling one of these licenses, my guess is early 2018. Øyvind talked a lot about M&A, so maybe I don't have to. Over the last 8-9 months, the Norske has been easily the most active player in the M&A market on the Norwegian Continental Shelf. During this time, we have demonstrated the ability to acquire assets at a fairly attractive price.
In fact, if you add the transactions on the wall now, you will see that we have added about 200 million barrels to our resource hopper at a price lower than even the best exploration players have been able to consolidate as their finding cost. In total, we have paid less than $0.30 per barrel for those acquisitions. Again, consolidating my statement that we don't necessarily care where the resources come from, but we deeply care about their economic potential. Building on this, we are working very hard now to develop a new core area. Three of the four acquisitions that we've done recently has increased our exposure to and our influence in the area that we refer to as North of Alvheim. That is the area between Askja and Alvheim.
The North of Alvheim resources are roughly about 170 million barrels of continued resources. We see this area as a potential new core area for our existing operations. Our position now enables us to take a leading role in the progress of the development solution in this area. We have dedicated a team working on possible development concepts. We hope to mature the development solution over the next year. Finally, it's good to have a strategy. You need to be able to execute it. I'll take a short stop into our liquidity position and long debt maturities. Our strategy on the funding side has been similarly easy to understand as our strategy on the business side. We are aiming to diversify our capital structure to attract both banks and debt investors.
At the same time, aim for a low cost as capital as possible, but also to have a structure which allows the company flexibility to grow further as more M&A opportunities become available. The debt is currently a mix of bank debt, both first and second lien, and bonds both of them in the Nordic high-yield market, both unsecured and subordinated. We do not have any short-term maturities, and our current funding is sufficient to lift the work program I've just talked about up until the commencement of production on Johan Sverdrup. As of first quarter, we had about $1.2 billion in cash and undrawn credit facilities. We have a strong, and I must say extremely supportive bank consortium consisting of 18 banks, most of which are both in the RBL and the RCF.
The $3 billion RBL is the cornerstone of our debt funding. The RBL is very robust and has proven itself to be very insensitive to oil price changes, much more insensitive than you might expect. As we've highlight previously, about a quarter of the borrowing base is, only about a quarter of the borrowing base is sensitive to oil price changes. From the end of June, the borrowing base has been set to $2.9 billion. Remember that when this RBL was put in place in the of 2014 at 3 billion barrels, the oil price at that point in time was $104.
In May, the bondholders in the DETNOR02 bond voted for the amendments of the loan agreement to ease covenants levels to be identical to the threshold that we agreed with the banks earlier through 2019. To sum up, we believe that we're well-positioned to take benefit of the current market conditions. We believe that we have a bottom line, a capital structure, and an operational efficiency that provides a solid framework for the strategy to be executed going forward. We are not happy. We believe that there are significant opportunities to still improve processes, increase efficiency, and drive operational excellence even higher. With that, I'll conclude. Thank you.
Thank you, Karl. We'd like to open up for some questions from the audience. While you guys warm up, I just have a quick question for you first, Karl.
Good.
I mean, you've talked about acquisitions that you've made recently and a bit on the NCS. Is there enough room for growth on the NCS, and would you consider acquisitions outside?
I get this question a lot. I tend to answer it in the following manner. The only reason I see for going outside the Norwegian Continental Shelf for the Norske is for the lack of opportunities on the Norwegian Continental Shelf. Currently, I don't see that as a restriction.
Okay.
There are significant opportunities, as we've already proven in the last few months, both on the organic but also on the inorganic side. I can't really envisage the Norske to run out of business opportunities on the Norwegian Continental Shelf, at least in the short time frame, going forward.
Okay. you've talked about opportunities, but what are the biggest risks you see right now for the Norske going forward?
Well, several actually. On the more cultural side, I think there's a real risk of complacency. When you have this kind of success, there's a real risk of complacency. I spend a lot of time with the organization driving the sense of urgency. We're not nearly where we need to be to have the operational efficiency that we should have had as a company. I think secondly, oil prices are always.
Yeah
a discussion. I think we're actually very well-positioned on that. We don't spend a lot of time wondering about what the oil price will be. We do spend a lot of time trying to agree in the company how our performance standard are to be. I believe that once I get my drilling manager to be a bit excited when the drilling crew breaks down the Bottom Hole Assembly in six pieces rather than two, than four pieces, because that's an additional 20 minutes on the iron roughneck. We are starting to get to a culture that I'm looking for.
Okay. Can I just quickly add, I was pleased to hear that your management team are learning all about Lean. At Aker Solutions we're going to train everybody.
Sounds good.
All getting white belts in Lean. I would like to take some questions from the audience in here if anybody is care to ask them.
Crystal clear.
No? From the webcast audience? Nothing from them. There's a question from the gentleman at the back there.
Hi. Thank you for a nice presentation. On your first graph where you say you have 60 million barrels a day at $7 breakeven. Can you just elaborate on the $7?
The breakeven cost is a mix between lifting costs and transportation costs. The $8-$9, as we have in our guidance, is inclusive of $1.2 on average as transportation costs, as we changed our sales mechanism from FOB to at the quay. If, to be able to consolidate the lifting cost and the OpEx per barrel to the guiding, you have to subtract this $1.2. That means that you should see the same OpEx per barrel for your operations in 2016 as you saw in 2015. There's a bit of a caveat to it, because at the point in time when we declare Ivar Aasen ready for commencement of operation, we will have to book costs as OpEx rather than CapEx.
There might be a period of time from commencement of operation to production that will increase cost but not have a production volume assisted to it. Roughly, yeah.
Thank you. Well, thank you very much, Karl.
Thank you.
Our next speaker today is the CEO of Aker Solutions, Luis Araujo. Before Luis goes up to speak, we would like to share a short film with you.
Are you sure? I've been told the slide will come automatically, but I don't think so. Needs a push. Yeah, needs a push. Well, hello, thank you for being here. Good afternoon. It's always a pleasure to speak after, you know, a client, a very demanding client, that share our goals and also announce some orders for us that has to be announced before. It's... There you go. See, they are more excited than we are sometimes. This is good. I think you have enjoyed the video, which we actually rolled out this video November last year, where we introduced our new vision for Aker Solutions. We are proud of this vision, and we are also keenly aware of its necessity for us and for the entire industry during these challenging times.
Simply put, our vision is to be a leader in forging a sustainable future. It does not only benefit ourselves and our bottom line, but also our customers, our industry, and the world we serve. We will find the best solutions to bring down costs, boost efficiency, and create value, always putting safety first. We will develop technology to minimize the environmental footprint while helping to meet global energy needs, and we will continue to have positive development in communities that we operate. Now more than ever, it's important that we take the necessary steps. Let me look back a bit to explain why we think we, perhaps more than most, are prepared to come through the current environment and make this vision a reality. We are very far-looking in September 2014, where we split and simplified the company.
We did this to better position our business in an increasingly competitive industry, even though the oil price was still at $114 a barrel. We reduced the company's complexity, going from nine business areas to two main reporting segments, subsea and field design. These business are a good fit. Since they share the same customers and regional markets, they have clear operational synergies. They operate in markets driven by long-term field developments, and they are all linked technologically through the development of advanced subsea production and processing systems, where we are at the forefront of global innovation. Our simpler structure has helped us become more cost-efficient as we realize greater synergies. Just to give an example, we have centralized support functions and leveraged expertise across the company in areas such as project management, construction management, sourcing, and fabrication.
This enable us to avoid duplication, strengthen processes, and reap scale benefits. We also have standardized our manufacturing facilities across the world, so they make up one global versatile delivery model. Two years on from the split, we are playing to our strengths, and we are seeing the benefits even as we face market headwinds. We are showing consistently strong execution on major projects globally as we focus on operational excellence. We are reporting stable margins quarter by quarter while bringing down costs. We are bolstering our position in key markets through targeted technology developments, strategic partnerships, and a strengthening of facilities and operations in countries including Angola, Malaysia, and Brazil.
All of this give us a solid foundation for tackling the challenges currently faced by the industry and to build on our strengths so that we're well prepared for when the markets recover. Actually, this all ties in with our five strategic objectives that we presented to the market when we split. Number one, we will continue to push for the highest levels of safety and performance in all we do as we seek to be an industry leader in forging a sustainable path. Two, we will build on our strong position in deepwater, subsea, and complex environmental markets through our technology, engineering, project management skills, customer relationships, and global delivery model. Number three, we will bolster our presence in key markets internationally. We now generate 65% of our revenue from contracts delivered outside Norway. That's up from 40% in 2013.
That's impressive considering we have maintained our strong position in the Norwegian Sea and UK North Sea. We will continue to build local competence at our bases around the world, and use this to form efficient global delivery models. Number four, we will further strengthen our project portfolio by diversifying our customer base, contract mix across key locations. Five, last but not least, we will continue to push hard to realize the full benefits of our linear business model. This means achieving even deeper synergies across the company, reducing costs more, and strengthening our operational and financial performance. These are our main strategic objectives, just simply put. We also realize that, of course, we cannot achieve these priorities alone. A great part will be attained through collaboration with customers, peers, and other industry participants.
For customers, we see major potential to create value when we become involved at the earliest phase of a field development during the appraisal and feasibility studies. We use our technical experience and the full spectrum of field development and our life cycle knowledge to evaluate the total development rather than the mere parts. This increases the potential for us to develop solutions to significantly improve the overall economics of a, and value of a development. As an example, our front-end team was involved in early concept studies at Johan Castberg, Johan Sverdrup, Njord, and Zidane developments, just to mention a few. If I can pronounce the names correctly, that's a big step. Our efforts in close cooperation with our customers were instrumental in finding cost-effective solutions for these fields.
Our main collaboration also extends to peers, particularly in subsea area, where we have in the last 2 years formed alliances with, among others, Baker Hughes, ABB, MAN Diesel, and Saipem. This spans the entire value chain from down to reservoir, also along the seabed, and up to the topside. The partnerships are with companies that are leaders in their fields of expertise and whose competence and technology complement Aker Solutions capabilities. Key goals are to lower costs, boost recovery, enable viable development of more fields, improve safety, and minimize the environmental footprint while securing the energy needs across the globe. Just going through those alliances. We formed the first of these collaborations in April 2014 through the Subsea Production Alliance with Baker Hughes. This cooperation actually combines Baker Hughes' well expertise and our subsea know-how.
It addressed the challenges and opportunities in the interfaces between the reservoir and the subsea production equipment. Typically, the technology from these two areas have not been developed to work well together. Very well separated between the drilling department and the production department, as you know, across the history of deepwater exploration. We are now solving this to find effective combinations of in-well and subsea technologies that, and that will reduce costs and importantly, boost production and recovery rates at subsea oil and gas fields. One of the alliance's first products is PowerJump. This is a fast-track and cost-effective boosting system, which is tailored to increase production from single wells and from smaller fields. That includes, of course, greenfield and brownfield developments. PowerJump actually combines proven technology from both companies and can reduce CapEx by more than 50% compared to existing solutions.
We are currently in dialogue with 10 customers about using this product, and we hope to see the first installation in the 2018-2019 period. Moving along from the reservoir, to the other end of the chain, we are collaborating with Saipem on selected subsea projects worldwide. The scope of this cooperation is design, installation, and services through the life of the field, of subsea field. Briefly put, we will simplify the field architecture and management for all the interfaces between the subsea production system and the subsea umbilical riser and flow line systems, the so-called SURF. This will reduce development time, the operating costs, and risks for the field developments.
The partnership is currently in talks with clients on a number of potential projects. Just filling another gap, we joined force with ABB in April to collaborate on subsea power and automation technologies. Together, we will work to enhance how production units on the sea floor are powered and controlled by application onshore and from platforms. The cooperation actually builds on many years of joint work. Most recently, last year's landmark delivery of the world's first subsea compression system for Statoil Åsgard field. We see several important interface between our technologies. Let me show you just a few. We can optimize the connection between Aker Solutions subsea production systems and ABB's topside automation. This reduce the need for extra integration work. We can increase the power and data capabilities of the subsea system to provide more effective data of the performance and condition at any given time.
This will enable maintenance to be planned proactively, increasing reliability and minimizing costs. We also see the potential to enable our electric subsea production systems that remove the need for hydraulic power. This will reduce environmental risk and increase reliability. Lastly, but not least, as I say, we can develop power and automation solutions for advanced subsea processing, including pumping and compression systems. Indeed, an initial focus of the corporation will be to develop better subsea compression systems at lower cost and less time. This actually ties with our collaboration with MAN Diesel, which also worked with us on the Åsgard compression system. We are together building on the technology development for Åsgard using our subsea expertise and MAN's tool machining capabilities. We will provide subsea compression systems based on current solutions. Of course, why change something that's working?
We also are developing the next generation in compression systems. Smaller, lighter, and cheaper systems that can be used at even the smallest subsea fields. Our calculations shows that we can reduce the size and weight of the systems by as much as 50% without changing their core functionality. This actually will enable us to place one compressor train into a standard North Sea template instead of a much larger template used at Åsgard. You actually can see that difference in the illustration in the right-hand side of the slide, the Åsgard footprint versus the standard template. Using that standard template means that we can actually use smaller installation vessels, what actually will significantly reduce CapEx installation costs for the subsea compression systems.
Actually, the systems at Åsgard is showing strong performance, with an uptime of 97% since going on stream last September. That's impressive. Those alliances are seeing positive interest, both the alliances that we're talking about here are seeing interest from customers. Indeed, the collaboration with MAN has secured its first study for subsea gas field development just a couple weeks ago. I think, as mentioned earlier, by our chairman, Øyvind Eriksen, we have recently seen increasing consolidation in the oil and gas service segments. We think what works best for us is selected collaborations that provide flexibility for us, our partners, and perhaps more importantly, for our customers. That's why we have chosen to collaborate with a few partners who are leaders in their fields and whose cultures and technologies complement ours.
These collaborations close technology gaps in our portfolio and target adjacent segments, strengthening our overall offering. We now have access to the full range of capabilities we need to develop fully functioning subsea production and processing systems. This is actually key to our subsea strategy. The alliances also bolster our platform for international growth, which is very important. Those all international companies. They entail low capital expenditure and limit risks related to R&D with emerging technologies. Always easier to collaborate than do it alone. They provide flexibility for our part, for all the parties involved. Each company is free to develop and market its own products and technologies outside of the partnership. Our customers are free to select the exact products and service they need from us.
Instead of just being offered, you know, a nothing or nothing package deal. For what you can see, this is what most of our clients prefer. We also see for the alliance to work together in some areas. We can see them collaborate in some several areas, such as increased recovery, for example, for fields and subsea compression, where we can see MAN Diesel, ABB, and Baker Hughes all having, you know, valuable expertise to offer. Actually, as Øyvind mentioned, you know, still very early days for some of those alliances, but we are getting positive feedback from our customers. We are off to a good start with several study awards and technology develops on the way. I'm also firmly convinced that this type of collaboration innovation is crucial for our industry to make the changes needed to move forward with strength.
Of course, we're very proud of these collaborations, and we are putting a lot of resources and efforts to make them successful, and we hope you see the importance for us. Let me now take you inside Aker Solutions a little bit to see how we walk to the talk on so-called operational excellence. I'm not sure how much I need to talk about The Journey since my one of my key clients just spent a good part of presentation talking about the operational excellence and how much we have done to improve our company and of course, his company at the same time. Of course, I won't resist. Let me give a few details and a few more views into that particular journey.
Actually, let's see who introduced the this company-wide program that's called The Journey. That actually, as I mentioned earlier on to some of the analysts, actually the baby had one year without a name. That's one of the employees who call it Journey, and that's how it is. As Kali said, you can never stop. This has to be a journey, or you won't succeed, or somebody else gonna catch up with you. Actually, what we decide is that we're gonna target, you know, a cost efficiency of at least 30% across our business. It won't stop there, the 30% on and on for now on. That's the name of the game.
Based on our 2015 cost base and work volumes, of course, this equates to potentially annualized cost savings of minimum NOK 9 billion by the end of 2017. We're actually targeting a quarter of this improvement by the end of this year. Next year, we're gonna see even more momentum helped by longer term improvement processes. The Journey is more than a cost-saving target, of course, as explained very well by Kali. It's about changing how we work to be more competitive. We're actually simplifying our methods, our organization set up, as announced previously, simplification, our geographical footprint. We are also standardizing our products and services. This is giving us a leaner, more efficient processes, enabling us to reduce the overall cost of our projects and products while improving quality.
Let me, let me be clear. This is not a top-down endeavor. It's about building a culture of continuous improvement and engaging all our employees worldwide in this, in this change. I'm very pleased to see how much they have engaged so far. These efforts are progressing well, and they are supporting overall margins, and they are reflected in the work we do with customers in projects. In fact, our improvement agenda has triggered considerable interest among our key clients, as you saw from Kali, and several have invited us to participate in their own internal improvement processes. Simply put, we are building our two companies' extensive project management.
Me and Kali, as Kali mentioned, are gonna build in our companies' extensive project management experience and use Aker Solutions' leading engineering IT tools to facilitate a seamless workflow in projects, starting from concept evaluation to complete design. These will considerably reduce engineering hours in projects, eliminate complexity. Actually, the logo mark of the project, I hope that Kali is gonna show that. There's actually a button that say, "Push." Idea is to push, and then the project gets to the other end. That's the dream, but of course, we have a long way to go, but there's quite a lot that can be done to reduce costs. Actually, since we split two years ago, we have worked hard to achieve stable margins and no surprises on projects.
I would like to say that we have succeeded in these efforts so far, where being boring is actually a good thing. Obviously, like everyone else, we are seeing the effects of the industry slowdown. We are not alone, so we see a slowdown. As reported in April, our top line declined 24% in the 1st quarter year-on-year basis as activity levels fell in the global oil and gas markets. We maintain steady margins thanks to our improvement efforts and our continuous focus on operational excellence. We have since the split shown consistently strong execution on major projects from Brazil to Norway and Africa. That includes our work on one of the world's largest, if not the largest, subsea development in Angola.
We also had a solid financial position at the end of the first quarter, with a low net debt of NOK 406 million and a liquidity buffer of NOK 8.5 billion. This give us very good flexibility ahead. Now, to my favorite slide, because we are also winning key contracts, helping to diversify our customer base and contract mix. As mentioned by our lead of operational improvement, Tore Sjursen, he says that it's very hard to improve. There's nowhere to improve. We need the projects to improve and also to win projects is part of the exercise.
Actually, yesterday we announced an order to deliver our longest ever umbilical system at the Zohr offshore gas field in the Egyptian part of the Mediterranean Sea, and the agreement with Petrobel in Egypt, and is valued more than NOK 1 billion. Other orders so far this year has included Subsea services contracts with Petrobras in Brazil, MBP globally. We have strategic important concept study awards as well for Johan Sverdrup and Johan Castberg in Norway. A framework agreement with Lundin to provide engineering services for the development of offshore Norway. We also secure several important orders for our maintenance, modification, and operations business, some of those includes contracts with Statoil for the Åsgard A production vessel in the Norwegian Sea, and for preliminary work on a tie-in of the North Sea Utsira Field.
In order also to work as a subcontractor to Kværner on upgraded semi-submersible platform on Njord A field for Statoil. A major framework agreement in Norway with ConocoPhillips. Our first ever MMO contract with Det Norske for maintenance and modification work on the Alvheim FPSO. Actually combined, these contracts ensure we at least maintain our MMO market share in Norway at a challenging time for this segment. I'm also pleased to announce that our MMO business just secure a three-year extension on a contract to provide maintenance and operation services to Total's Elgin and Franklin fields in the U.K. .North Sea. We actually have worked together since 2000, the extension is valued at more than NOK 400 million.
I would also like to emphasize the continuous strong interest we see in our early phase capabilities. We have won about 40 awards so far this year, including four projects in Norway, Australia, the U.K., and West Africa. Repeat again, 40 studies in this part of the year. I think that's quite impressive, especially when some of our competitors announced that they have won two or three studies. A long way to go. Our order backlog was healthy at 38.5 billion NOK at the end of the first quarter. This is equivalent to about 1.5x our expected annual revenue and give us good flexibility for this year and very reasonable visibility for the medium term.
All in all, a very positive development as our customers show confidence in our ability to deliver what they need going forward. Very briefly, to conclude, because I'm very conscious that I'm between you and a cup of coffee at this time of the day. For the outlook here, from Aker Solutions, the steep and sustained decline in oil prices and oil companies' capital constraints are having a significant impact, no doubt. Projects are being postponed and there is persistent pressure on pricing. There is a steady tendering in our main markets, we are currently bidding for contracts totaling more than 40 billion NOK, with about three-quarters in subsea.
We actually see indications, as shown early on, by Øyvind Eriksen in his presentation, that the measures are having impact, and we see that the break-even costs are coming down. Actually, Johan Castberg in the Barents Sea is a good example, as voiced by our client, Statoil. This actually includes the likelihood of some projects being sanctioned in the next 12-18 months. Activity offshore Norway, our largest regional market still, is expected to remain subdued this year. The main exception, and we're very pleased to be involved, is Johan Sverdrup development, where we have an engineering framework agreement that stand as far as 2023. Very pleased to see how excited Det Norske is about that particular field and our performance.
We see the biggest potential for growth outside Norway, where we have expanded in recent years. Going forward, we will continue to be vigilant about our workforce capacity to ensure it fits current market conditions after reducing our permanent staff by as much as 20% since the second half of 2014. Our medium-term financial guidance remains unchanged. We aim to at least uphold our market share in our main Field Design and Subsea markets. In Field Design, which consists of engineering and MMO businesses, margin is expected to gradually improve the most in MMO. In Subsea, we target a move over time towards the peer group across the time margins and a return on average capital employed of 20%-25% in the medium term. Longer term, we remain optimistic.
Field develops are becoming more complex. We have the capabilities needed to manage these challenges. Forecast global energy demand also supports a positive long-term outlook for offshore and deepwater oil and gas developments. We are well-positioned to take advantage of this through our technology, projects, and strong customer relations. Our continuous improvement efforts, our consistently strong execution, our healthy order backlog, and our solid finances stand as well as we face continued market uncertainty. We are building on all of this with key collaborations and a relentless drive to boost our competitiveness. This will help us and our customers to come out even stronger when the market recovers, and they will. Well, thank you for listening. I'm happy to take a few questions.
Thank you, Luis. I'd like to open for some questions from our audience.
That was very clear.
Very clear.
to lack of motivation for a couple of questions.
Well, then I have a question for you.
Oh, good.
... Luis, because you did talk about contributing, how Aker Solutions contributed to lowering break-even costs. We're seeing costs coming down in the industry. Are we moving any closer to getting projects sanctioned increasingly now going forward?
I think you are, but I think the whole industry, I said, I think we are better prepared than most. I think the whole industry is working very hard to make us competitive towards, you know, other place. we all the discussions about shale and so forth. I think Øyvind showed on the first slides, the break-even cost coming down. I think right now it's not only a matter of break-even cost, it's just a matter of cash flow.
Mm-hmm.
Also the clients are awaiting some stability to be able to invest. We see that 'cause we are talk to them all the time. As Carry said, you cannot be satisfied with the performance, and I think the clients are looking for these solutions. I think the biggest reflects of this eagerness to improve the break-even cost and to look for new solutions is the amount of studies we are receiving, how busy our front-end group is right now. 'Cause people want to know what else can we improve. Actually, it's amazing to see how excited engineers are. You think they are, some of them might be scared right now. I mean, a lot of people lost their jobs. We don't do that very easily.
Mm-hmm.
As we know, by our Norwegian, you know, you know, DNA, we are safeguarding capacity. Actually the study is a good way to do so, and look for new solutions and so forth. I think that's a big reflex. Certainly, I think the break-even costs are coming down, and they'll continue coming down. Not only from, 'cause I think people confuse a lot improvements and also cost efficiency with procurement and deflation. Those are different things. We need to make sure that when the market recovers.
Mm-hmm
we don't go back to the old ways of doing things and reapply, what we are, developing now together with the clients and peers.
Yeah. Another question on an important market. I mean, you are Brazilian and you used to lead-
I wasn't, yes.
You used to lead Aker Solutions' Brazilian unit before you became CEO of the whole company. The company also just recently opened up a new subsea facility in Brazil. Could you say something about the outlook in this market, which has faced more than its share of challenges recently?
Okay. Yeah. Oh, Brazil is usually a question that comes-.
Mm-hmm
very, very common these days, especially to me. As I said, I have worked half of my life in Brazil, half abroad, but I am Brazilian and very connected to that market. I was there actually opening the plant about two months ago, together with our CFO and some of the management, some of my management team, and also all our bankers. I'm sure some of the faces you were there for that fantastic opening. It's a fantastic plant. Of course, Brazil is in turmoil. There's no question. If you read the papers, there's only, it seems there's only bad news, even though it's still the seventh largest economy in the world, and we have the largest reserves. My personal view is that in the future, those reserves will be produced.
The Pre-Salt is a major success. Of course, all the noise, and of course, Brazil is in a, as I call, a perfect storm. As you know, from my home country as well, after the largest storms, you have the sunniest days.
Mm-hmm.
Things will change. I think Brazil went through a major change, both in the political sense, and there are opportunities to change the framework. Without changing the framework, we won't have the diversity of clients that we need to develop all those resources that we found. The reserves are there, proven and unproven and unexplored. Petrobras had the largest success rate in the last decade. We are very well positioned. You know, we are delivering, even though Petrobras has slowed down to an extent because of several reasons. We have delivered records to that plant last year. 34 trees equivalent to Petrobras while we're moving to the new plant. Fantastic achievements. We have very capable workforce.
That, as I mentioned, we developed those plants to be part of the global delivery. There's no reason why you cannot deliver from that plant from Brazil to other clients. In fact, we had a massive interest from clients on the plant opening. I was surprised to see one of the majors, actually, who does not buy from us subsea so far, they will. They had five people attend the opening. That's an indication. It's an amazing plant. I mean, I cannot describe. You have to go there and see it for yourself, how great it is. I think Brazil can be competitive. Brazil is competitive with the planes. We fly every day with the Embraer planes. I don't know why you cannot deliver from there for nano locations.
I should stop now because I'm very excited about that particular operation for all those reasons.
Yeah. I also think we have a question from the webcast audience.
We do. We have one from Mr. Jan Petter Anderson, who asks, "Can you give some color on which subsea projects you are tendering for, and which subsea projects you think will move forward first?
Okay. We have, as I said, we're tendering a lot of projects in the list of pretty, I think it's disclosed these days. Again, we see a lot of tendering. The question is, are they gonna be placed? I think there's a lot of retendering in some of those projects with people looking for new solutions, as said, part of the studies and also part of procurement strategy. We have projects in several locations. We have projects in Africa. We see some projects start to move without being tendered, but moving towards tendering. I think it's the usual suspects. We are tendering Coral, Mamba. We are tendering the engine projects. There's ONGC start to move. There's Reliance in the North Sea.
We are just being awarded a contract today. I'm very, very pleased. It opened, like, half an hour ago. We have some projects moving towards tendering. We have, of course, Zidane. There's a lot of projects out there, and I'll just name you a few. We just won the Zohr Umbilicals. That's the phase I. We are ready, preparing to tender phase II for that particular project. Since phase I in terms of subsea was actually stock equipment that's been used. There's quite a few that I think I mentioned a few of those projects. When are they gonna be sanctioned? Who's gonna come first? It's actually quite hard to predict. When you talk to the clients, I actually noticed the last two months far more excitement.
We see, for example, Exxon moving strongly on the, on the Guyana projects, the first phase being Liza, huge play. We see new findings in Africa, in places as, Senegal with Cairn. We see findings in Mauritania. Siccos is a lot smaller. Independence finding oil and so forth. I think it's, I think the opportunities are there. We just need to continue working and, of course, we need the balance that we see now between supply and demand.
Okay. Thank you, Luis. Well, on that positive note, I think we will take a coffee break, and people should come back here for the next session, which starts at 2:30. The first speaker then will be Kristian Røkke, CEO of Akastor.
Thank you very much.
Thank you.
Day's Investor Day for the Aker companies. Our next presenter today is Kristian Røkke, who is the CEO of Akastor.
Okay. It's a pleasure to see you all here today. I'm gonna keep things simple, one page, three topics, the challenges, the opportunities, and some of the achievements as I see it in Akastor today. I'm not gonna focus so much on the portfolio company level as I am on Akastor and the development and the way forward as I see it. To start with the punchline, and maybe this picture provides a little bit of insight to this, the challenges continue, but we're making progress at Akastor. If I had to use an analogy, I would say that we're waging forward, but it feels like we have mud to our waist. The good news is it's a lot less mud than it was six months ago, and we in fact see some firm ground ahead of us that actually looks attractive.
I'm just not how sure how far and how deep it is between where we are and where we're going. What I am sure is that we have a strong team, and we have the tools to weather a heck of a storm. That might be a little bit of a depressing analogy to start off with, but one of my roles coming into Akastor and our team's role is to see the brutal reality as it is, not as we'd like it to be or hope it to be, but at the same time, not sell short the opportunities that we see across the group. That's a skill in of itself to work with both of those simultaneously. What I'm going to do is provide some context and some specifics.
Looking at the 3 stages as I see it in Akastor, starting in 2014 with the startup, moving on to what I'm calling strengthening the platform, which I would argue where we are today. Thirdly, value creation, which is our ambition over time. As many of you surely know, in 2014, Aker Solutions and Akastor split. Aker Solutions being a new co focusing on subsea, MMO, and engineering, as you heard earlier today. Akastor being the old legal entity with the portfolio companies that you see at the bottom, the largest being MHWirth, Frontica, Akastor, KOP Fjords, First Geo, STEP Oiltools, and a number of other smaller financial positions. The first phase was characterized by the setup of the companies, setting up systems and processes to match Akastor, establishing new management teams and new boards of directors.
The model was simple. Create standalone companies, have a small corporate center, be a supportive and demanding proactive owner, I think that model continues today. The big change being from phase one to phase two is the dramatic change in the market conditions and dealing with that. I think that's been characterized by us dealing with the challenges, as I mentioned, trying to harvest some of the opportunities over time. An important thing for us talking about some of the things that we have done is strengthening our balance sheet last year going into this year, there's 3 main things that we did. We sold our real estate portfolio for NOK 1.2 billion. That helped.
We've worked hard to reduce our working capital, turning accounts receivable into cash from the peak to where we were in Q1 was just shy of NOK 1 billion. That helped our financial position. In addition, we proactively refinanced our entire bank facility. Those three things helped dealing with the challenging conditions. In addition, we restructured a number of our portfolio companies, most notably MHWirth, where we reduced cost by approximately 60%. We've changed the organizational structure, delayering it. We've rationalized locations and product lines. Big picture, we're shifting from a projects-oriented company to a service-oriented company, where now services account for well over 50% and are growing. Another example is Frontica, where also we've implemented a number of cost reduction. We've outsourced a number of our commodity services.
We've established and strengthened a number of the functional areas, sales, business development, contracting to support it going from an in-house shared service organization to a standalone commercial entity. Now we're in the process of separating the manpower business that we refer to as Advantage and the IT side of the business. These are 2 examples of restructuring that we've done in face of changing market conditions. In addition, we've had some specific challenges related to Brazil, and we have 2 main engagements there. The first one with Akastor and Petrobras. To remind you, we have 3 vessels, Akastor. We have the Seafarer, which is designed to be a light well intervention vessel. That vessel is now stacked, bringing costs low. In addition, we have 2 more vessels, the Santos, and the Wayfarer.
The Santos being on contract in operations, and the Aker Wayfarer just completing its upgrade, which by the way has gone very well. We have a long-term perspective on Brazil and our relationship to Petrobras. We've elected to engage in constructive conversations to help them with their goal of reducing their costs. That's all I can say at this time. We'll report back when we have something more specific to say. The other engagement that we have, Brazil, that's been a challenge, is related to Sete Brasil. We have seven drilling packages with Jurong that were ultimately destined to go to Sete Brasil. I'm not going to speculate on the whole Sete Brasil, situation, but what I can say is that we're working on the first drilling package and commissioning phase.
The rest have been put on hold, and we're currently in constructive dialogue with Jurong. That's another situation that's been a big uncertainty that we continue to work on in Akastor. In addition, we have a number of legacy issues that we spend time on. Perhaps the biggest in terms of financial terms is the owner's leases related to the real estate, where we've taken a write down of half a billion NOK already reported to the market. Second is a number of smaller legacy claims. Each one even themselves, I wouldn't say, moves the needle financially. In terms of my time, our time, management time continues to take. What I see is we continue to work systematically to close these. Those are some of the challenges that we have.
In terms of the next points, the changing market conditions, I could speak a lot more about cost reductions, but what I think is more interesting is the shift talking about cost reductions, bringing down capacity, rather the opportunities in the medium and long term. I can see across the portfolio that more and more of our time, I mean, a number of our companies, we've brought down costs 50%, 60%. We can do more, we can do better, but I think the brunt of that is done now. It's a lot about focusing on the opportunities. A couple of example, KOP. Now looking in the rear-view mirror, 50% of its revenue has been attached to one client in Southeast Asia.
If you look at the top three clients, that's accounted for around 80% of revenue. Those clients and the activity there has come down dramatically. Manufacturing facility in Batam, in Indonesia is very close to idle. Is expanding its markets, looking at new customers. Today, we're looking at 30 countries. We're talking to close to 50 customers. Time will tell how well good we are at converting those leads, those opportunities into concrete business and revenue. What I see is a lot of good work going on in expanding the markets for an upturn. Another example is Fjords, where we have reported a record strong order backlog, and record earnings in 2015 with good momentum into 2016.
Interesting there is, one is the strengthening of the execution model, which I think has shown results financially. In addition, if you look at the order backlog now, a significant portion is related to activity in the Middle East. That's good concrete work done to expand the markets in addition to service revenue has continued to increase. I think Gøran Fankopf and the team there have done a great job. A third example would be in Frontica when I think about opportunities in an upturn. If you look at the Aker Advantage business, manpower, obviously that's come down in terms of the hired-ins. One thing that we know from previous experience is when activity does come back, it's provides a lot of flexibilities to our clients to be able to hire, use these hired-ins.
I think I'm not gonna say it's flattened out, but we see some interesting signs there that I think a rebound when activity does come. That market is positioned well in Norway and growingly so in the U.K. That's what I would provide some flavor on the opportunities. In addition, in terms of transaction leads, we spent a lot of time over the last six months developing longer term leads. We have more transaction activity ongoing in the portfolio than I'd say we'd ever had. I think the hit rate going forward in the coming quarters is probably going to be low, but we have a long-term perspective on this, and I'm very pleased to see the amount of transaction activity that we have across the portfolio.
That's my summary of the strength in the portfolio, the second phase. I think the interesting phase, which is our clear ambition to get to, is what I'm calling here value creation. Our ambition is to stand in front of you in the future and be able to tick those question marks, concluding the key risks, saying that we've concluded several attractive divestments, that we can demonstrate that a number of our portfolio companies have in fact rebounded, have in fact extended their business in an upturn. Also that we can demonstrate systemic value in Akastor as an owner, investor with edge. We're a team. Total, we're just under 6,000 people. Here at Fornebu, Fornebuporten, we're 23 people. We have 8 people investment team. We sit around 1 table, Leif and myself and the rest of the team.
We speak openly, we speak candidly. We try to understand the negatives. We try to be creative. We try to dream big, ultimately getting things done. I'm very pleased with the team that we have. When I sum this up, and you'll see in the top in the blue here, is that we're working systematically to maximize the shareholder return through the cycle. There's two key things. We need to be a forceful value-creating owner, and we need to be able to demonstrate value-creating transactions. Going back where I started, I'm not quite sure how deep and how far it is, but I'm pleased with the work that we're doing.
I think the outcome window for Akastor is rather large, but in a scenario with a recovery over however many years, if we're able to tick some of these challenges and uncertainties that we're working with, and if we can pull off some of the longer term things we're working on, I continue to believe there's a meaningful potential in this company. That's my one-page overview of Akastor, and I'm happy to take some questions.
Thank you, Kristian. I'd like to open up for some questions from the audience in here today.
There's gotta be one.
No takers? They're all shy. I have a question.
Okay.
Yeah. Aker Offshore has two vessels that are either in operation or preparing for operation in Brazil.
Mm-hmm.
Is there any pressure now from the client to reduce the rates or to cancel the contracts?
Yeah. We do have 2 vessels. We have the Santos, which is in operation. We have the Wayfarer, as I mentioned, which is completing, and that has gone well. I think it's well known that Petrobras is looking to reduce its costs, so we are in dialogue with them right now. We have firm contracts in place, but as I mentioned and alluded to, we have a long-term perspective on both Petrobras and Brazil. Other parts of the business, in MHWirth, we've invested significantly in Brazil. They're parts of the Aker group. Although the activity, if you look at CapEx and a number of subsea wells and so forth is coming down, they continue to be a big player and I think in the future will be a big player. That's our perspective.
Ultimately, we'll, I don't know, see where we find fallout financially, but those are dialogues that we're in currently.
Mm-hmm. Okay. A little bit on the market. I mean, you didn't go into too many details there, but could you say something on, I guess, the outlook for oil services in general and maybe a bit more on drilling in particular?
Sure. I think it's still weak, to be very frank with you. I think sentiment over the last couple of months has probably picked up, both one can see in contract award and M&A activity and oil price up and so forth. I continue to see activity declining. I would say from Akastor, our portfolio is pretty varied. I mentioned Fjords, which is able to win market share and improve its execution model in a tough market and has benefited from that. I think drilling is suffering from both cyclical and structurally weak market. I think that'll take some time. As we see it now. This is something we've been preparing for quite some time.
You also talked about in the future you hope to be able to stand here on the stage or meet a group of people and say that you've had some successful divestments. How is the M&A scene looking like right now, and are you any close to any transactions?
Yeah, I mean, speaking for what we see in Akastor, I mean, as I alluded to, I think activity has picked up pretty significantly. I think the hit rate's still going to be low, but if you look over the last weeks and months, it's actually picked up somewhat and we'll see what happens. I mean, I think we need to work long-term for some of these leads and that we're doing, and I expect it to pick up over the coming quarters and probably years.
Okay. No specifics on that front.
Not gonna-
No?
Well.
No?
No.
I guess the final question, I mean you have cut costs a lot in a lot of the companies and MHWirth in particular. You said you can go deeper, further on the cost cuts. Should we be expecting say more capacity adjustments in MHWirth?
Yeah. We've had significant cuts already. I would say 50%-60% is probably the benchmark in a couple of our companies, and unfortunately, that's led to a number of workforce reductions. I think the brunt of it is probably done, but I think this will depend on both the market and how the companies perform in terms of if we see further reductions from here.
Okay. Are there any questions from our webcast? No? Okay. One question in the audience. Yeah.
Thank you for a great presentation, very briefly on one slide. I just wonder when you're trying to restructure these companies.
Mm-hmm
...with the perspective that you're gonna sell them, how do you, what kind of challenges do you see doing that?
I wouldn't say so it's just the perspective of selling. We've owned MHWirth for over 20 years and built that. I'm talking Aker broader. I think the one thing that makes us different is that we don't have a fixed timeline, we can be flexible. I think the moves that we're doing in terms of bringing down cost, in terms of looking for opportunities, in terms of improving our service business, I think we do that regardless of ownership horizon. Fundamentally, we are an investment company. If there's a better owner, we're very happy to engage in those conversations. We're a very proud owner of the company it is. I actually don't think it makes that much of a difference in terms of the ownership perspective. We're building this company for the long term.
Another question.
Obviously, you can't say a lot about what you're looking at, when you see a deal flow coming to you, but could you shed some light on the composition of your portfolio going forward? What interests you the most? What's your main interest as of now, and how would you look at the composition risk-wise?
I didn't quite catch the essence. In terms of what interests me the most?
The deal flow. The future, composition of these, of your portfolio companies.
Yeah. I think I'm hesitant to provide specifics on that. I think we have value, or I know we have value creation plans for each company in place, and we see a lot of potential really in each of the companies, and we'll see how well each company performs. I would say for Akastor overall, I think it's important that we over time focus the companies. As I alluded to today, we have a lot of smaller engagements that take a lot of time, so I would be surprised if we're not here next year and we haven't focused the company. If you look at the markets that are in MHWirth, if you look at Aker, if you looked at KOP, I mean, we see a lot of potential.
Right now it's a low point, we believe in the market. At least we think there's more upside than downside here, we're focused on developing those. I'm not gonna provide specifics, I do see it as strategically important to focus the portfolio over the coming years. Oh, sorry for not answering your question more specifically.
All right. Are there any further questions in here? Okay. Well, thank you very much.
Okay. Thank you.
Thank you. Our next speaker today is Jan Arve Haugan, who is the CEO and president of Kværner.
Okay. Thanks for the introduction, good afternoon, everyone. Have to admit that I can't manage to put it on one slide, you have to bear with me for some units, I was impressed as well. Let me start by saying that Kværner as a company can be summarized into two products. Number one, we do EPC business in building platforms and onshore plants, we do the final commissioning and completion of those. I will also share with you today that we are going to expand further on some of our other adjacent opportunities, and in particular, looking a little bit at, for instance, the high-end modifications and the decommissioning. On the screen behind us, or behind me, in front of you see the picture of the Johan Sverdrup field development. In short, a giant puzzle.
Statoil, the operator for this field development, has chosen a number of contractors with the track record and the trust that they safely can deliver these complete jackets and topsides on time to the specified quality, and in particular, at a competitive price. That is why I have to say that I need to highlight that Kværner has been successful in winning a number of these projects, and we are in the process of completing these parts according to the schedule. In order to, in a way, continue to keep up the message that our delivery model is predictable, and this is the advantage that we harvest on in the global competition. Kværner is one of the few EPC contractors with a pretty solid, strong financial platform, and I will come back to that. Larger projects that run for several years needs solid contractors.
We utilize our financial strength to win new contracts and to strategically develop our business. It is important to remember that any improvement, any cost cut, any betterment that we do, it's no value if you don't have any competition to compete for. It's also important for us to participate in the cost-cutting in the industry in order to be able to have something to compete for in the future. The 2 message that the messages that I have now is that we strongly believe that we are well-positioned for new contracts, and we participate actively in cutting costs in order to, together with the industry, to mature more projects in our markets.
We have reason to believe, we have touched from the market that there are a number of clients that are looking at the opportunity to go into the market now and initiate new projects when the price has gone down. Before I go into the more detail of the, or some of the details of the operations, I need to mention for you that safety performance, that's a prerequisite. That's our license to operate. For many years, our clients have looked at the top performance on safety in order to put us and our competitors on the bidders list. If you are not acceptable from a safety standard, you're not gonna be on the bidders list. For us, that is absolutely crucial.
I also repeat again and again that those that have a predictable, stable performance on safety also have a tendency to be pretty stable and predictable on financial results. When we look at our market and the industry, and we just have a few projects, but we have very dedicated projects. We do see that based on our track record of more than 50 years of operations to complete pretty complex projects, we continue to work within the target regions. As you see from this picture, we do have a pretty solid market position in those regions. It's also important for us that when we put together a project and bid for a project, that we assured ourselves and to the client that we are going to be delivering a product that improves the business for our clients.
We try to say to ourselves that the execution of the existing projects, that's the most important part of the tender going forward. I have chosen the opportunity to pick up one of the slides from Lundin's market presentations, and I also add highlighted the final state or the statement from the last quarterly presentation that they had. This shows that Lundin, being the operator of the Edvard Grieg platform, highlight the fact that our product actually outperforms their own expectations, in particular when it comes to uptime. If I go into the next message from our side is that when we were established back in 2011, we got a very clear mandate: Avoid negative surprises. Kværner since, has since then been able to, yes, fluctuating results, but no negative surprises.
Some of the spikes that we see is as a, actually a result of some of our big projects, crossing the hurdle of 20% before we recognize profit. However, on the contrary, we have had some, I would say, positive surprises. I would like to address the comment from Kristian Røkke that, the management time that you spend on legacy project is of course, an expensive one. I think we have been quite successful in cleaning out some of the most important legacies that were established in project before Kværner, came back into the market in 2011. We continue actually to deliver also predictable results, in when the industry now have probably been through one of the toughest market changes over the last couple of years.
This has built some very strong foundation for growing the company forward as well. I try to put our financial platform into one key message. The backlog that we had at the end of the first quarter was slightly above NOK 12 billion. This provides us a foundation to reach to the expected revenue over this year of approximately NOK 10 billion. Both the Nyhamna project and the Hebron project will have full speed through the end of this year and into 2017. The three Johan Sverdrup jackets that we are going to deliver to Statoil will have good activity in 2017 and 2018. Three of the Johan Sverdrup project will reach 20% at the end of this year, and when we then will start recognizing margin.
However, we also are exposed to the situation that has been covered by several speakers here today, that operators both in 2015 and in particular in 2016, reducing CapEx will give us uncertainty going forward in 2017 and onwards. The EPC business that we are in is capital light. It's in a way it's a people business, even though we have yards and facilities, but it's the people that produce the products. It's capital light because it's customer finance, because we are delivering tailor-made products to the different clients. This is of course always reflected that we have a negative working capital when we present our quarterly results. When we last summer, refinanced the company, we established a loan facility of NOK 2 billion.
That is there in order to be used if we by any situation should come into a critical financial position. But I have to say that we are on the positive side of that still, and we look forward to continue there. The facility can also be used to handle opportunities to secure the financial guarantees for increasing requirements from the clients or guarantees, and of course, finance future expansion when that on, if that can occur. In addition to that, we have also an investment of approximately NOK 200 million this year, and some of that is related to the three new cranes that we are buying at Verdal for the jackets. But in short, for 2016, it's in a way, a short message, NOK 10 billion in top line, NOK 2 billion in net cash and NOK 200 million in investments.
It's important to understand that the composition of the activities that we have may vary over time. Since we started, our operations were new build of new topsides. The share of our own value creation when we build these topsides is of course limited to our assembly part, because we do subcontract both engineering, a lot of procurement and prefabrication. Over the next few years, however, we see that activities related to, for instance, hookup, commissioning and completion, modification projects will contribute to a larger part of that contract done by ourself.
We have tried to make a figure out or show that graph here that the graphs illustrates now that it's an increasing from typically an EPC contract where we could be down to one-third of the value creation of the contract being done by ourself and into like a typical job like the one we have for Statoil, for Aasta Hansteen. In such a project, our own value creation will be approximately 50%. The implication is that our own capacity utilization depends on the share of our own value creation. That's why, here I think I would like to repeat this one, we in a way convey this message throughout all our quarterly presentations, and we repeat it here today.
Back in 2012 or late 2012 into 2013, we had a situation where we realized that we need to do something with our own cost level. I think that was a very clear message to ourselves after the bidding round in 2012 and 2013. We established a clear program, first of all to ourselves, but also starting to approach our partners and clients. This shows how far we have come in our execution. As we try to say, I am pleased, but I'm not satisfied, and that's the situation for me as well. We have reduced our cost base so considerably. Not to the degree that some of our competitors and other players in the industry when it comes to manning reductions.
The results that we have is that we actually were able to contract jackets in 2015 to the same price tag as we did 10 and 15 years ago. Some of you know that I was the buyer at that time, so I know the figure. We also believe that there is a opportunity for a same approach to the topsides. Our ambition is now to continue to work on our own cost improvements and with our partners and clients to meet the hurdle rate of $50 per barrel. We understand that a number of clients use this as a threshold for new investments. Even though I saw Karl having 40, but that's a message to me as well.
We see that we can do step changes together, and in particular in the interface, because we do believe that each individual player has done a substantial improvement when it comes to the cost, but we need to continue in the interfaces. Since 2013, we have promoted the need for a common effort that we see in the, in the market. We see also that actually this message that we need to jointly engage ourselves is gaining traction in the industry. Kværner has together with Aker-related companies now, and together with a number of key clients, revitalized the successful North Sea and contract collaboration. That was actually a story, No, sorry, back in 1992 into 1994. We have repeatedly said that it's the final price tag that is important.
We do see an industry and a market that now increasingly respect the final price tag to be the important message. Updated experience illustrate that we are well positioned for winning such tenders in the future. We do see a number of EPC deliveries from Asia, not to mention any particular, into the North Sea, the typical duration from signing the EPC contract until delivery is approximately 48 months with some variations, and Ivar Aasen is one of them. However, not even the fastest deliveries can compete with our standard delivery. When we look at our delivery model, we commit to deliver in 36 months. The typical Norwegian supplier industry is up to 38 months, but we are down at 36 months, and Edvard Grieg is probably the best example on that.
Lundin said when they awarded the contract to us that if they should have awarded such a contract to Asia, they would have started oil production one year later. If you do a very simple math on the sizes that we are talking about now in project development, a delay of one month is approximately NOK 250 million extra for the license owner and for the society. We have also indicated that, yes, it might be an opening price when you look at the bid, but it's the final price that is important. According to statistics that we have gotten through Norwegian news media and from the authorities, the average cost increase for a Asian delivery is 42%, and the average in Europe or from Norway is 16%. That's a difference of NOK 2 billion.
The global drop in the oil and gas investments has influenced the different segments and the individual suppliers quite differently. We are not safeguarded from that either. Over the last 24 months, we estimate that investments in our target markets have dropped by approximately 30%. Based on input from our customers and external analysts, we believe that our parts of the market are about to stabilize. As Karl said, we hope really that we see an upturn and that this, these messages are stable around the world. We are in dialogue with several oil companies who consider new projects. Based on this, we do see a careful growth during the next couple of years. Again, as I have said initially, 2017 and 2018 might be challenging, we do see a number of opportunities coming up.
We are actually invited by some clients to bid for bids that we, in a way, hadn't planned to bid for in regions where we do see considerable investment plans ahead. We are currently probably more specific than any other in the portfolio, looking at specific project targets. In the long-term market, we see an opportunity also to grow our business. The core of our business, as I said when I started, EPC with new builds and completion of offshore platforms and onshore plants. We are also in the position where we can develop and grow our business into adjacent segments and try to say that we are not trying to do something that we haven't done before. We're trying to do more of what we do, but in different products.
One example is, of course, that we were able in Verdal, because Verdal is pretty much known for jackets. Last summer they delivered three compressor modules to the Nyhamna project with a very, very high standard. That documents for us that we in Verdal can improve our operations into other opportunities as well. The fact that we got the frame agreement on Njord was a very important message for us, back to us that we are heading now into the, what we call the upstream part or the, sorry, the upend part of the MMO segment, the more complicated one. Of course, we are extremely eager to convert that into an EPC contract. We also see that there are some turbulence in the industry.
Some of the more interesting features of today is that both competitors and partners that we have had are more interested to discuss new ideas with us now when we talk about the future. We believe that there is an opportunity for the most, could you say, the strongest one and the best one to continue into the future. Our solid markets position and the financial platform will of course, be a very important feature in the future as well. Should I try to sum up, in today's market our existing order book and solid financial platform is obviously an incredible asset which allows us to work on the continued improvement going forward. Our first priority is, as I always remind myself and my management team about, is to execute existing projects, first of all safely and predictably. Again, repeating this is the most important marketing that we do day out and day in. We will continue to reduce our own cost and strengthen our competitive power. We do see that clients are looking even more at robust financial execution and players going forward when they establish long-term contracts. I can assure you that working with a contractor that is on the brink of going bankrupt, that's almost destroying all the focus that you have on the project execution. We strongly believe that Kværner's financial platform today is a very important key asset, and we will, of course, use that capacity to secure new contracts and strategically develop our business. As I said when I started my introduction, we are starting to see a market with more opportunities for new contracts going forward.
I strongly believe that Kværner is well-positioned to meet those scenarios that we see ahead of us. By that, thanks for your attention and opening up for questions.
Thank you, Jan Arve. Actually thought it was you made an interesting point about your EPC model being key to bringing down costs on projects. I wondered if you could say a little bit more on that.
Well, I think that, first of all, it starts with the predictable delivery of, like, say, we try to say 36 months, as we said to Lundin, "Come 15th of April at 12:00 P.M. because then the platform will be finished. You come and pick it up." That starts actually with the transition from the feed and into the detail engineering. I strongly believe that the EPC model will confirm that we are actually guaranteeing a delivery in 38, 36 months.
Mm-hmm.
I think that some of the experience from some of the competitors is that they have been struggling to keep strict engineering management and procurement management. That's why I say that the EPC model where you have the total responsibility.
Mm-hmm
that keeps us in control of that. Probably in particular, that we can guide the engineering and procurement to the construction method and the completion method. This is in short our project execution model, which is the strong part of this.
Yes. You're looking at the entire development.
Entire thing.
Yeah. Yeah. You also talked a bit about the market, your market having dropped since 2014, and now you're seeing signs that this is leveling off and perhaps even potential for an improvement over the next couple of years. Although you did say they would be tough years. In that scenario, how are you positioned market share-wise?
We are in different markets, so it's a little bit. If you try to combine that, I think easily we could say that in our regions.
Mm-hmm
... we're at probably 25-ish%. Due to the fact that we lost some of these projects, however, some of the contracts that we had grew, so the total volume of course increased a little bit. We lost certainly. On the contrary, I think that we have regained our position now. I.
To be very around-.
Yeah
say, a quarter of the market is our market.
Okay.
I think that we can continue to say that that's our position.
Yeah. Good. I'd like to see if anybody in the audience has any questions for Jan Arve. Webcast? No. No webcast. Thank you very much.
Okay. Thanks a lot.
Our next speaker now is the CEO of Ocean Yield, Lars Solbakken.
Okay. Welcome, everyone, to a presentation of Ocean Yield. Ocean Yield is a dividend yield company, listed on the Oslo Stock Exchange. Currently have a market cap of about $900 million. All our vessels are on long-term charters, average tenure about 10.2 years. We have now a contract backlog of $2.6 billion. We're taking delivery of 13 newbuildings this year and first quarter next year. We already taken delivery of 6 vessels so far, and we have 7 newbuildings coming during the rest of the year. We intend to try to build a much bigger company out of Ocean Yield. Our growth target is $350 million annually in new investments.
Size is important for a company like ours, in order to drive down both the funding costs for debt and for equity. Currently, we have a dividend yield of 10%, we have an earnings yield of 12.7%. Payout first quarter was 79%. If you look at the key risk factors, it is counterparty risk and residual value risk. Partly the residual value risk is mitigated by very long-term contracts, typically in excess of 10 years. In a market where both the equity market and the bond market are partly closed for shipping oil service companies, leasing is a very attractive alternative financing source for many companies.
We can offer up to 100% leverage, although most of our deals have been about 90% leverage, up to 15 years tenors. It's very long-term money we're offering. Our typical tenor has been 12 years. We're doing both floating and fixed-rate leases. We have had a strong focus recently on floating rate leases where we eliminate the interest rate risk. If we do fixed rate leasing, then we hedge a part of that risk. We may offer purchase options if it's very long-term contracts in excess of 10 years, we may offer purchase option. We try to reduce the outstanding under the lease below the expected value at the end of the lease, and then the counterparty can recover that value through the option.
We do both on or off-balance sheet leases, also both operating leases and finance leases. I think that what we in total are offering is a very flexible leasing product at a very competitive cost of capital. Looking at our fleet today, we started off with 3 vessels in 2012. One of them are sold, so it's only 2 of our vessels today that are part of the initial fleet. We will, when all the newbuildings are delivered, have 27 vessels. As I mentioned, 6 vessels have been taken. We have taken delivery of 6 vessels so far this year, and there are 7 remaining. This will, of course, drive the earnings in the coming quarters. Looking at new investments, our focus is on modern fuel efficient assets.
Average age is 2 years. That is very important, and we don't like to buy vessels older than 3-4 years old. Very long-term charters, typically in excess of 10 years. We have a multi-segment strategy to diversify our portfolio that reduces the risk, will drive down as we grow the funding costs for debt and equity. We're focusing on counterparties with reasonably strong financials in order then to have an acceptable risk level. Annual growth $350 million. We have so far on average done $450 million annually, and we expect to continue the growth to do in excess of $350 million per year in new investments.
Looking at the focus area for new investments, we have recently focused particularly on chemical and product tankers, where we have had a reasonably stable market with good earnings. On gas carriers, but excluding VLGCs, we have not been interested as that is too volatile market for us. We also see now some interesting projects within container vessels. There we have looked at a number of vessels over the last few years, but never been happy with the return. Now we see some interesting opportunities. Looking at funding sources for future growth, there's a number of different funding sources for a company like Ocean Yield. Bank loans is of course key, as for any new project we typically do is about 70% bank financing.
We can do that at about LIBOR plus 2% margin. Although banks become a little bit more conservative generally towards shipping companies, I think that we have not seen any change in the terms we can obtain. That is that banks are focusing on the larger and more stable clients. We also see opportunities to basically refinance old loans and raise additional funds which can be used then as equity in new projects. Respect to bonds, we have 2 bond loans outstanding, each of NOK 1 billion, one with maturity in 2019 and one in 2020.
Margins there are 3.90% and 4%, trading at higher levels today, but we see now that margin levels are coming down, and that is, of course, an interesting funding source for us over the next few years. Yeah. With respect to equity markets have been more or less close to the last year. We see, as we intend to build a much bigger company over the next few years, of course, we will at some time have to raise more equity. But that will happen when markets are attractive, and we can raise at attractive levels. For short-term funding needs, we're looking at other sources of, for funding. We have $200 million in American Shipping Company bonds. They have maturity in February 2018.
Of course, these $200 million will be an important funding source for equity in new projects over the next few years for Ocean Yield. Our new building program is, we have had at the end of Q1 $423 million in remaining payments, but we have attached bank finance to that of $462 million. We have actually excess funding of $39 million to our new building program. We also have some additional prepayments, or we expect one of our counterparties coming in later this year of about $16 million. At end of first quarter, we had about $100 million in cash. Actually quite comfortable liquidity position.
If we look at our fleet of 27 vessels, we have four product tankers, one, three on the water and one new building, all on charter to Navig8 Product Tankers. Navig8 have about $420 billion in book equity, and they have quite good earnings on these vessels currently. Been a quite good market the last year. We have eight chemical tankers, all on charter to Navig8 Chemical Tanker, which is a separate company and a separate ownership structure from Navig8 Product Tankers. Navig8 Chemical is controlled by Oaktree by 50%-70%, but its commercial management is by Navig8. We have eight vessels, five under water, and three in new buildings. Also quite good earnings on these vessel the last 12 months.
We have 3 no, 6 car carriers, all to Höegh Autoliners. Höegh Autoliners is owned by Höegh family and AP Møller. Large operation, about 58 vessels, book equity about $900 million, and a reasonable stable operation there. We have three gas carriers on charter to Hartmann and SABIC. SABIC is a large Saudi Arabian petrochemical company. They are under construction. One will be expected to be delivered late this autumn and two early next year. Then we did just announce the financing of that on very attractive terms.
SPM is doing quite well in a difficult oil service market with most of their FPSOs on charter. They have about $2.5 billion in market cap and a quite strong position. Ezra has done some transaction recently where they got into order controlled by Mitsubishi as a partner, 50% partner on their subsea side, which clearly strengthens the company. They also have done a refinancing of the bond, that is good news with respect to Ezra. Akastor. We have the Wayfarer, which is under modification at Kleven, expected to be re-delivered end of June, which has then a charter to Petrobras. We have two supply vessels to Farstad.
One of them got a new contract of 17 months, starting now in June, that vessel was moved to Australia, and we were, of course, pleased that we were able to secure employment for one of them. We have the FPSO in India. It has a charter to Reliance, BP is partner there, until September 2018. Of course, we expect the FPSO to stay on the current field until the field is depleted, which we expect takes some longer than the firm contract. The good news that we have had recently with respect to that project is that there's a new price regime for new gas projects in India, with substantial higher gas price for new projects.
That has triggered a lot of activity from both Reliance and ONGC to develop new projects. That increases the probability for securing also long-term employment for thereby after the current field is depleted. Reliance has started basically preparing for development of the, what is called the MJ field, which is close by the current MA field. ONGC is also starting planning for development of 98/2 field, which is also quite close. Our expectation is that unit will stay in India quite long term. Looking at our EBITDA backlog, it's now NOK 2.6 billion, average tenor at 10.2 years. Largest counterparty is Navig8 Chemical with 16%. It's quite well-diversified.
Our intention is to build a much bigger backlog and to continue to diversify it. We've come a quite long way since we started, but we think we can even do more with respect to diversification. Looking at the development in the EBITDA and adjusted net profit, it's been quite stable. The EBITDA slow increase. It will increase much more over the next few quarters as we get the effect of the new building program. In first quarter, we had, we did not have much effect of the, as it was only one of the 13 vessel that was delivered, and that was in the middle of the quarter. We have some effect now in second quarter and then substantial effect in third quarter.
On the adjusted net profit, we see quite stable development with $29 million in Q1 net profit, or adjusted net profit. If you look at adjusted earnings and dividend, also positive development in earnings per share and a quite strong increase in dividend per share. We have last year increased dividend by half a cent every quarter. That is about 14% increase annually in dividends. We now have 10% dividend yield, 12.6% in the earnings yield, and a 79% payout ratio first quarter. Okay, to sum up a little bit. I think we expect to continue to increase the portfolio. First by delivery of the new buildings, also by doing new transaction.
We see from a very slow start of the year, I think that all the volatility in the market first quarter, we saw that there was not that many attractive new projects. This has changed quite a lot now in second quarter. We see much more projects, and a much better quality of the projects. We are quite optimistic now to that we will continue to or will hope to be able to close some new projects. We also feel we are well positioned to continue to pay attractive dividends. We have a strong financial position. With the also the new building program fully financed, all vessels on long-term charters.
$2.6 billion in contract backlog and net debt, if we deduct from the debt, the cash and the $200 million in bonds that we own, we only have about $1 billion in net debt. We have contract backlog of $2.6 billion. It's a quite good relationship between our contract backlog and net debt. We will have, over the next quarter, the quite positive effect on the earnings from delivery of our new buildings. Thank you. I think we can open up for questions.
Indeed, we can. Thank you, Lars. I'd like to see if we have any questions from anyone in the audience. Gentleman there.
Hi. Thank you for a informative presentation, Lars. Quick question. One, you put containers up on your wish list. I think 1 year ago, they were clearly not on your list. What has changed there? 2nd, could you elaborate maybe a little bit on how you target the various shipping markets and put them on your wish list?
I think with respect to container, we have over the last few years looked at a number of container projects. We have found that the yield on those projects was too low. Competition was too strong, the risk/reward was not attractive compared to some other sectors. What we have seen now in second quarter is that some of the projects, and this is we only look at towards the largest players, and new tonnage, that the risk/reward is better than what we have seen before. Now meeting our return requirements. Earlier we saw below 10% equity return on some of these projects. Whereas now we can see projects meeting our return requirement, which is in excess of 13%. That is a big difference.
Of course, a lot has happened in the market. MLPs are not there. It's more difficult for anyone to raise equity.
Why, why is tankers not on your list?
We Within the tanker space, we have chosen to focus on the product segment. We did, of course, last year, the LR2s, which is trading also into crude. We have not excluded crude tankers, but it's not been on the top of our list. We have looked at some crude tanker projects in the Aframax and Suezmax space. We will not exclude that we can do that. We, but it's not been on the top of the list as. The reason for that is that the product market is normally more stable than the crude market. We look for stability.
You find more stability in the containers than in tankers then?
There is of course, no doubt a challenging container market. Therefore, if you should do anything, you have to have the right counterparties that really have a strong market position.
Ask another thing different. Target growth, $350 million per year. Do you think you might have to raise equity? Maybe not now, but down the road.
What more?
You have a target of investing $350 million per year.
Yeah. Yeah.
Do you think you might have to raise equity in the company?
As I tried to say in the presentation that long term, we will need to raise equity, but short term, for near term growth, we are targeting other funding sources than equity. Of course, we have to think about we're getting in quite a lot of money from the bonds. We have this $200 million in American Shipping bonds, which should also be phased into equity into different projects.
Thank you. Are there any further questions from our audience? From the webcast audience? No. I guess I have one question for you then to follow up. You're targeting equity returns of 13%-14% on new projects. You did mention some new projects which are showing more attractive returns now. These are also tougher markets, is that kind of a target still achievable?
We have not seen substantial changes in return that we can obtain. I think that we are in the fortunate situation that we have not seen any big changes in the funding cost for our bank debt. The latest we did was actually on very attractive levels we did for the gas vessels, which was higher leverage, much substantially higher leverage than we had planned when we did the project. Also annuity, and it was 10-year term at LIBOR plus 2%. If we had taken a more seven-year term, we could have actually got an even better margin. A lot of our or a lot of other shipping companies are experiencing higher margins on their bank loans, and that should make us more competitive.
Okay. Thank you. Thank you very much, Lars. There are no further questions in here, then we will move on to our next presentation.
Okay. Thank you very much.
Thank you. Which is the president and CEO of American Shipping Company, Pål Lothe Magnussen.
Thank you, Bernie. Let's see if I can get this to work. I'd like to bring your attention to 3 key points regarding American Shipping Company. There is downside risk protection. Wait, I need to get the presentation here. Okay. Here we go. There's downside risk protection, there's upside potential, and there's currently a 15% dividend yield if you buy the stock at the current valuation. There's a very interesting dynamic in the Jones Act tanker market today. We're coming off a 3-year very strong market. It's currently softer due to lower production in the U.S. of shale oil. If you believe in oil price recovery, you'll see shale oil production also grow, driving stronger demand for Jones Act tankers. American Shipping Company's business model is insulated towards short-term changes in the market.
You can buy American Shipping Company stock, you can collect 15% dividend yield while you're waiting for the oil market recovery. American Shipping Company owns 10 MR product tankers in the U.S. that are trading in the Jones Act market, carrying both crude, but also clean products as gasoline and diesel. Sorry. The ships are 7 years of average age. They're all built at Philly Shipyard. They're on bareboat contracts that are fixed until the end of 2019. We have 1 ship that has a 10-year contract that started last year. We expect these contracts to go on for a long time, which I will come back to a bit later. OSG is our counterparty on the bareboat contracts.
OSG is today in a financially sound situation coming out of bankruptcy 2 years back. There are significant cash flows being used to de-lever the balance sheet. The new investors in the company have put significant amounts of equity into the company. They're commercially managing our fleet and technically operating the ships. OSG puts these ships out on time charter contracts to oil majors. The market is typically 3-5 years. If you think about counterparty risk, we find that quite manageable with OSG in a good situation, and the end users of these ships being investment-grade oil majors. This structure provides American Shipping Company with a very stable cash flow. We get a bareboat, a fixed bareboat payment. We also get a deferred charter payment.
On top of that, we have a profit share. 90% of our cash flow comes from fixed revenue, while only 10% today represents the profit share. Why do we find these or think that these contracts are long-term, much longer than December 2019? Well, our ships are only seven years old on average. They're still modern. They're very competitive compared to brand-new ships in terms of what they offer technologically. There's very small differences in a brand-new ship compared to our ships. New ships that are being delivered today and next year have a delivered cost around $134 million. Our ships were built at a average cost of $107 million.
There's been M&A transactions over the past 3 years as well that kind of justifies these new building costs, meaning that all other modern tonnage in the Jones Act tanking market is acquired at a much higher cost than our ships. What does that mean? OSG's paying us $24,000 a day in bareboat rate, while the bareboat equivalent on a brand-new ship is at least $35,000 a day, depending on what kind of cost of capital you're applying to your calculation. That means at least 40% higher cost of capital on brand-new ships compared to our ships. We think OSG will continue to use our ships for a long time as they provide a cost-efficient asset base, while also providing a exposure to increasing profits as market improves.
If we take a look at the, call it, financial highlights on American Shipping Company, we are reporting a normalized EBITDA of $100 million. That consists of $88 million of bareboat revenue. There's a deferred charter payment around $4 million a year, and the trailing twelve months profit share is about $11 million. We are paying a quarterly dividend. We have guided on 15% growth in dividend for 2016 compared to 2015, which leaves us with a highly attractive dividend yield going forward. Let's talk about the market that our ships are trading in. Remember, our ships are only trading in the Jones Act tanking market.
The Jones Act is a law that was passed almost 100 years ago, which regulates transportation between U.S. ports. Meaning a ship needs to be built in the U.S., needs to be operated by a U.S. company, by U.S. crew. American Shipping Company is in the Jones Act through a financial lease exempt, meaning that foreign capital can own these assets as long as they are chartered in to a, on bareboat basis, to a U.S. operator. That's the setup that we have with OSG. There's 2 strong lobby groups in the U.S. protecting this law. One is national security, and the other is business protectionism. There's a lot of jobs in the Jones Act. There's many billions of dollars invested in the Jones Act. It's not just tankers. It's container ships. It's dry bulk ships. It's passenger ships.
It's a big industry, and it's not gonna go away. If you look at the markets that our ships are trading in, we can focus on three areas. One is the West Coast, the other is the U.S. Gulf, and third is on the East Coast. On the West Coast, ships are carrying crude from Alaska, from Canada, and there's also crude coming from Bakken to the West Coast. The crude is shipped down the coast to different refineries, which again ship them out as refined products to different distribution hubs along the coastline. The U.S. Gulf is by far the biggest market.
There's a surplus of crude, and there's a surplus of refineries in the Gulf, leading to intra-Gulf movement of both crude and clean products, but also movements of crude and clean from the Gulf over to Florida and over to the East Coast. There's also a shuttle tanker activity in the Gulf, taking crude oil from offshore oil fields to the shore. Now, if you look at the distribution or the logistical puzzle in the U.S., transporting both crude and clean products, it happens on pipelines, on vessels, on trains, and trucks. Some parts of the country, there's only one mode of transportation available, while in other parts, there's competition.
A pipeline is only marginally more cost efficient than a modern tanker, which again is more cost efficient than a barge, which again is more cost efficient than train and trucks. Shipping is a stable and flexible part of the solution and is there for the long run. If you look at Eagle Ford, it's closely located to a port called Corpus Christi in Texas, which is especially important for the Jones Act tanker trade. I'll come back to that point. If you look at the fleet deployment over time, it is very stable for the clean products trade, the chemicals trade, and the West Coast trade, and that comprise about 70% of the trade today. About 30% of the fleet is now in crude transportation.
That's down from 36% only a few months ago. There's been a very firm market. The fleet's been 100% utilized over the past years. There's been even hidden demand in the clean trade as some of the ships have moved from the clean trade over to crude. That's now shifting back into clean as lower oil price leads to increasing demand for gasoline. Some of the softness that we see in the quote crude transportation today is being absorbed by the stronger clean trade. In the past few years, the transportation of crude has been very important to the strength of the Jones Act tanker market. If you look at the left-side graph, it shows shipments out of Corpus Christi, which have increased in tandem with the shale oil production.
That's being reduced now the past year due to lower crude shale oil production in the U.S., especially Eagle Ford is important because of its close proximity to the Gulf. As oil price recovers, you'll see shale oil production grow, which will drive a stronger demand for Jones Act product tankers going forward. A closer look at Eagle Ford tells us that the cost curve at Eagle Ford is one of the most cost sensitive. Sorry, the production curve in Eagle Ford is the most cost sensitive, the current production level has a break-even below $50 per barrel.
As we look forward, look at a quote price range above 50, you'll see that there's potential for substantial growth out of Eagle Ford as we move forward, which we think will drive product tanker demand. If you take a look at the fleet age, you could divide the fleet into two or three parts. There's a really young part, there's a middle-aged part, and there's a one really old part. There's a lot of tankers and ATBs older than 30 years. We think that scrapping will start regardless of how strong the Jones Act tanker market continues. If the market persists softer, there's definitely a large number of ships that are candidates for scrapping.
If you look at the order book on the left-hand side, there's only 2 yards that can build these ships, and they're busy throughout 2017 and into 2018. You'll also see that there's container ships now coming into the order book, which we think will take more space in the container in the order book going forward. The container ship fleet is more than 30 years on average and needs to be renewed. More importantly, only 3 of these new buildings don't have a time charter contracts today. Almost all of the new buildings have time charter contracts when they enter the market. Overall, the supply side of things looks pretty controlled.
Now, if you look at the fleet balance, right now, it's moving into a call it oversupplied situation. We think that will take care of itself over the next couple of years for reasons I just mentioned. This graph on the right-hand side does not take into account a recovery in oil price. It does not take into account any scrapping. We think there's definitely potential for the demand and supply balance to narrow over the next couple of years. If you look at the left-hand side, there is a chart of the time charter rates in the Jones Act market over the past five, six years. These are medium to long-term contracts, there's very limited spot market activity in the Jones Act.
You see that the time charter rates have increased over the past 4 years in line with the growing crude production in the U.S. Right now, the market is softer. We haven't seen any longer or medium-term time charters since September last year when Texas City, which is one of our ships, was secured on a 3-year contract at $70,000, which is a strong rate. Now we see shorter term contracts, 6-12 months, and they're call it back at levels seen 4 years ago. We expect this to change as oil price recovers going forward. Now, this is the Jones Act fleet of tankers and large ocean-going ATBs by owner, basically. There's 3 leading owners in Crowley, OSG, and Kinder Morgan. Our fleet is a meaningful portion of the total fleet.
It's a very important part of the modern part of the fleet, an important part of OSG's fleet as well. Kinder Morgan, three years ago, didn't own a single Jones Act tanker, will become the largest owner as its new buildings start to deliver this year and next. Oh, in summary, I'll leave you with this slide, basically highlighting the fact that our fleet has a strong position in the market, most cost-efficient fleet. We have stable cash flows from long-term bareboat contracts. The Jones Act tanker market is stable. It leans on crew transportation, clean transportations, and chemical trade. Currently, we have a very attractive dividend, yielding as much as 15%. I'll leave you with that.
Thank you, Pål. This is our last presentation of the day, and I'd like to see if anyone has questions for P ål.
Thank you, Pål. Could you maybe talk a little bit about the profit split that you have? You say that you have your boats out on time charter to OSG at $24,000. New buildings are coming in at $35,000. I assume the market must have strengthened somehow, but then you said the TC levels are down. I'd like to hear... I mean, the upside must be here in the, in the...
Profit share.
Profit split, which only represents 10% of your revenue today, right?
Yeah.
What can it be?
I'll just clarify on the bareboat equivalent slide. OSG is paying us $24,000 a day, right? While competing assets would have to require $35,000 to kind of get the similar return on the asset. That's, call it, beside the point, but $24,000 a day goes to us from OSG. I have a slide on the profit share. OSG is charting out their ships and time charters they pay bareboat hire to us. They pay OpEx. They have dry docks provisions on top. When they have call it covered all our costs, we share 50/50 in the profits. Today, the cash flow break even for profit share is around $51,000-$52,000. Any rate above that level is shared 50/50.
The average time charter rate on OSG, I mean, OSG is reporting in their quarterly reporting is showing the average rate on this segment in the reporting, and that's around $63,000 today. Today, there's this profit share in the amount of $11 million for us over the past 12 months. Now, through a restructuring back in time, we owe OSG still $10 million in the profit share overhang, meaning the first $10 million that we make in profit share, which should take less than 12 months, goes to OSG before we earn cash profit share. The earnings power of our contract base today is around $100 million.
How likely do you see this number going up? Today, it's what did you say, $51,000? Do you see the market coming back up to $70,000 a day?
Yeah. The time charter portfolio that we have, or that OSG has on our ships has different durations. Some ships, 2 ships are coming off this year. We have another 3 ships coming off next year. One ship has a 10-year contract, right? They come off at different points. We have ships on, call it new market rates that we've seen in the past 3 years that are high, and we still have ships on older time charter rates, which is down in the $50s. It's a mix. The average rate that OSG is reporting on these ships today is about $63,000.
We expect that the short-term market is lower, but with a high oil price and growing shale production stimulating the demand for tankers, we expect that that time charter rate to increase again.
Is there a big difference between clean and dirty?
No.
Okay.
These ships, I mean, they're MR product tankers, but they are also used for crude trading, not, you know, they don't switch from you know, clean to crude on every single second voyage, but they can be used, you can shift the ship from clean to crude. There isn't really any price discrepancy between the two markets.
Just a follow-up question on what you said earlier. When these ships goes off contract with OSG, you can I mean, OSG does not have options on the ships, so you can start renegotiating the bareboat, the profit split. You start from scratch again, right?
OSG has evergreen renewal options basically on these ships at the same rate, meaning OSG can continue to charter our ships at $24,000 a day plus profit share for the remaining life of the ship. I think it's fair to add, though, that December nineteen is when nine of these ships come off bareboat with OSG. OSG needs to renew a year in advance. We have a year, basically, if for some reason they wanted to not continue with the ship. We have a year to either find another company to bareboat, you know, another operator to bareboat the company from us, or we can also bareboat the ship directly to an oil major, which is, you know, happening today, not on our ships, but on other ships. We could sell a ship.
I mean, we're, you know, pragmatic in terms of how we.
Continue.
Today your ships are $10,000 in the money with OSG, right?
Definitely. Right.
There was another question, gentleman behind.
Yeah. Is it correct that you assume that the two vessels coming up this year will be re-renewed at rates of around $55,000, in that area?
Yeah, I think that's what's being reported these days is that we're back at the level we've seen 4 years ago, which is in the middle, you know, it's the mid-50s. There's a few spot transactions or spot trades happening. In the 1st quarter, that was averaging about 62,000 a day. Those are really short contracts. Basically ships that are already on time charter contracts being relet to the market for a few days. I think it's fair to assume that, you know, that's, you know, that's where the market is right now.
Any further questions in here? No. You did mention, some alternatives if OSG decides not to renew the contracts that expire in 2 years. Are these the only alternatives you have?
Well, first of all, I think it's highly unlikely that we will get the ships back. In the case, in the event that that would happen, we would have to find somebody else to charter the ships. That would be number 1. We can either go with other existing operators in the Jones Act or directly to the end users, which would be the two main course strategies. As I said, we have 12 months to-
Yeah.
to work it out.
All right. If there are no further questions, then I'd like to thank you very much, Pål, for your presentation. Thank you to everybody in here for taking part in today's Investor Day. We now have an invitation for all the investors.