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Fairfax Financial Shareholders Dinner

Bob Robotti
President & CEO April 8, 2014

The Firm is not providing investment advice through this material. This presentation is provided for informational purpose only as an illustration of the firms investment philosophy and shall not be considered investment advice or a recommendation or solicitation to buy or sell any securities discussed herein. As of the date of this presentation the firm continues to own the securities discussed herein. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Robotti & Company Advisors, LLC or its affiliates may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities. The information and any opinions contained herein are as of the date of this material, and the firm does not undertake any obligation to update them. Information contained in this presentation has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. This material does not take into account individual client circumstances, objectives, or needs and is not intended as a recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. Robotti & Company Advisors, LLC does not provide tax advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, clients should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions.

About Robotti & Company Advisors

Manage over $700 million in separate accounts and partnerships on behalf of institutional and individual clients Focus on small-to-mid capitalization equities of misunderstood, neglected, or out-of-favor companies Established in 1983 by Robert Robotti, our primary focus was on North American investments until 2004 Expanded in 2005, when Isaac Schwartz launched Robotti & Companys international investing initiative to apply Robotti & Company Advisors investment philosophy to the global equity markets

Two Edges Too Many Behavioral Edge

We take a longer-term view and have the ability to tolerate losing money before we make it. Leads Us To

Analytical Edge
Within the context of a longer-term perspective and 30+ years of experience, we have the ability to develop a different conclusion than that of the market.

Informational Edge
Our network of industry relationships, focus on deep primary research, and experience serving on company boards, provides us with more pieces for building our information mosaic.

Our behavioral edge comes from our ability to tolerate losing money before we make it. As a result, our investment process concentrates on understanding the long-term normalized earning power of a business well before the herd, in this case the market, gains interest.

Value Investing: A Big Tent

Expensive Warren Buffett


Graham and Dodd Cheap Low




In theory there is no difference between theory and practice. In - Yogi Berra practice there is.

What Is A Good Business

A high quality or good business is one that can earn above average returns on capital over a sustained period of time.

Economics 101
In a competitive economy, firms that earn above-average returns will quickly attract competition.

Competitors emerge and attempt to compete even more efficiently and/or effectively. This places downward pressure on returns.

As new competitors continue to enter, demand becomes spread among more participants. Average costs will rise as fixed costs are spread over fewer units sold.

Prices fall until returns on capital are driven to a level at or below the cost of capital and economic profits disappear (setting the stage for industry restructuring).

Porters Five Forces: Four Too Many?

Porter Greenwald

Rivalry of Competitors

Rivalry of Competitors

Threat of New Entrants

Bargaining Power of Suppliers

Threat of Substitute Products

Threat of New Entrants

Bargaining Power of Suppliers

Threat of Substitute Products

Bargaining Power of Customers

Bargaining Power of Customers

Source: How Competitive Forces Shape Strategy, Harvard Business Review, Michael Porter

Source: Competition Demystified, Bruce Greenwald

Companies with Barriers to Entry?

According to Bruce Greenwald: Without the protection of barriers to entry, the only option a company has is to run itself as efficiently and effectively as possible. For companies with barriers to entry, it is most important to execute a strategy that will sustain those barriers.


Warren Buffett

Graham and Dodd Cheap Low

Ideal High


Primary Sources of Competitive Advantages?

Type Supply Advantages: Definition Cost advantages that allow a company to produce and deliver its products or services more cheaply than its competitors Access to customers that rivals cannot match customer captivity Source Lower input costs / privileged access to resources Proprietary technology Habit Switching Costs Search Costs

Demand Advantages:

Economies of Scale:

Advantage exists if average Size - but it is important to cost per unit declines as the remember that pure size firm produces more, leaving alone is not the same thing smaller competitors unable to as economies of scale. compete

Source: Competition Demystified, Bruce Greenwald


110.40 NOK / $18.42 USD
(as of 4/4/2013)


Subsea 7 SA (OB:SUBC)
Investment Summary
Subsea 7 is a global leader in subsea engineering & construction - a niche industry with a sustainable competitive advantage. It is the only pure-play among the 3 dominant competitors in an industry with the dynamics to create a runway for significant growth. Subsea 7 maintains a solid balance sheet and leadership interests are aligned with shareholders. The company has a record backlog indicating the potential for strong growth, yet still trades at a modest multiple of earnings.

Market Capitalization

(USD mm as of 4/4/14)

Price Shares Market Cap Long-Term Debt Minority Interest Cash Enterprise Value
Valuation Summary
FY 12/31

$18.42 350.8 1 $6,462 1 636 47 650 $6,495

2013 6,297 1.0x 981 6.6x $0.93 19.7x 2014E 6,860 0.9x 1,404 4.6x $1.89 9.7x 2015E 7,159 0.9x 1,538 4.2x $2.03 9.2x

3 Year Price Chart

Revenue ev/revenue EBITDA ev/ebitda EPS p/e

Trading Summary
52 Week High / Low: Avg Daily Volume: Listing Exchange:

$22.61 / $16.70 1.4 million shares Oslo Bourse


Adjusted for convertibles see slide 30 Source: Capital IQ

Business Description
Seabed-to-surface engineering, construction and contractor to the global offshore energy industry services

Capable of executing projects of all sizes and complexity in all water depths


Investment Thesis / Variant Perception

Global leader in oligopolistic industry dominated by 3 competitors Near-term industry-wide concerns and company-specific issues have caused the market to view the business solely through disappointing past earnings and depressed margins Normalized growth / margins for the industry and the company are being ignored Long-term, there are dynamics in place to allow for a long runway of revenue growth in an industry protected by sustainable barriers to entry Backlog growth is just the tip of the iceberg, indicating the potential for significant revenue growth and increased returns on capital Low margin contracts signed during the 2009-2011 period are being replaced with higher margin contracts High insider ownership aligns the interest of management and shareholders capital investment and reinvestment opportunities are focused on returns We believe that shares trade at > 50% discount to the companys intrinsic value

Industry Map
Oil Service Majors Baker Hughes, Halliburton, Schlumberger Reservoir Data CGG Veritas, TGS Nopec, Polarcus

Logistical Support Bristow, Era, Tidewater

Major IOCs & NOCs

Anadarko BP Chevron CNOOC ENI ExxonMobil PEMEX Petrobras Repsol Shell Statoil Total

Contract Drilling Atwood, Diamond Offshore, Ocean Rig, Rowan, Seadrill, Transocean

Deepwater & UDW E&C Saipem, Subsea 7, Technip

Service Equipment Manufacturing Cameron, FMC, Aker

Shallow & Deepwater E&C Allseas, EMAS-AMC, Heerema, McDermott

Other Equipment & Services Cal Dive Intl, Hornbeck Offshore, Oceaneering

Industry Overview

EIPC: Engineering, Procurement, Installation and Commissioning Sapura Crest merged with Kencana in April 2012 and is now known as SapuraKencana Source: Subsea 7 September 2012 Company Presentation


Merger Between Acergy and Subsea 7

In July 2011, Acergy and Subsea 7 merged further consolidating the industry from four to three competitors Complementary service offerings, technology offerings and geographic strengths especially important for local content offerings in key markets Kristian Siem whose interests are aligned with shareholder through large ownership of shares is named Chairman of Subsea 7 S.A.

Source: Subsea 7 / Acergy Merger Presentation; Robotti & Company Research


Deepwater Lifecycle
Investment Period
2 10 years
Exploration & Appraisal

Harvest Period
10 30 years
Subsea 7 Work

1 5 years

1 2 years

Prospect Identification & Planning, Drilling & Evaluation Completion, Installation

Seismic Subsea Inspections Drill Wells Collect & Analyze Well Data ROV Support*

Reservoir Modeling Subsea Surveys TLP/Spar/FPSO Subsea Tie Back* Pipelines* Well Design Drill Developments FEED* Engineering* Fabricate Topsides Fabricate Pipelines* Heavy Lift Pipelay*

Subsea is wellpositioned at the fulcrum between investment and cashflow



Outsourced Labor Infrastructure Inspections & Maintenance Workovers Infill Drilling Platform Modification Life-of-Field*

Heavy Lift Subsea Pipelines, Platform/Topsides, Pipelines FPSO Demobilization

* Subsea 7 Service Capability


Segments by Service Capability

ROV Support SURF Conventional / Hook-Up Heavy Lifting Life-of-Field
Revenue by Service Capability:
Life-OfField (12.3%) Remote intervention and drilling support technologies with global fleet of ROVs from observation-class to purpose-built drill support vehicles Engineering, procurement, installation and commissioning of subsea umbilicals, risers, flowlines and structures Fabrication / installation of fixed platforms & pipelines Addition of modules on new platforms and the refurbishment of topsides of existing fixed and floating platforms Heavy lifting in both the development and decommissioning stages.

Inspection, maintenance, repair and integrity management of subsea infrastructure i-Tech (3.6%)

Conv / Hook-up (11.7%)

SURF (72.4%)

Source: Subsea 7 Annual Report


Segments by Geography
Africa, Gulf of Mexico & Mediterranean Asia Pacific & Middle East North Sea & Canada
Revenue by Geography: 850 people SURF 2,850 people SURF, LOF, Conventional/Hook-Up 270 people SURF and LOF 2,300 people SURF and LOF
APME (8.0%) Brazil (13.0%)

AFGOM (39.0%) NSC (40.0%)

Source: Subsea 7 Annual Report


Leadership / Capital Allocation

Key Leaders
Kristian Siem Chairman Chairman of Subsea 7 since January 2002 Assumed Chairman role upon the merger of Subsea 7 with Acergy Active in the oil & gas industry since 1972 Currently Chairman of Siem Industries and Siem Industrikaptial Past director of Aker Kvaener and Transocean

Capital Allocation In 2012, Subsea 7 exited two non-core businesses: Sold stake in NKT Flexibles Spun-off VERIPOS as a dividend inkind to shareholders. In 2013 Subsea 7 authorized a $200 million share repurchase, of which $109 million was remaining at year end and paid a special dividend of $199 million. In 2012 the company repurchased $200 million of shares and paid $199 million of dividends. Interests are aligned - Siem Industries, which is controlled by Mr. Siem and other family members, owned 69.7 million shares of Subsea 7 or 19.8% of issued shares.

Jean Cahuzac CEO

CEO of Subsea 7 since April 2008 Active in the offshore oil & gas industry Prior experience as COO and then President of Transocean Spent 21 years in various positions at Schlumberger

Source: Subsea Annual Report


Mr. Market Reacts to Brazil

On June 27, 2013 Subsea 7 surprised the market by announcing the Guara-Lula project in Brazil would lose $250 - $300 million more than expected.
Issues cited were: (1) continued supply chain issues, (2) pipeline fabrication delayed on customs clearance issues, and (3) adverse weather issues.

In 2010, just 3 months after the merger between Subsea 7 and Acergy, Petrobras awarded the company a $1 billion contract for work in the Guara-Lula pre-salt region. In late 2011 it became apparent that Subsea 7 would not be able to gain the necessary permits to use the yard it had originally planned upon. This led to the announcement of a $50 million cost overrun. An additional $52 million write-down on the project occurred in Q4 2012. At the end of FY 2013 Subsea 7 announced an additional $49 million write-down, bringing the total full-life provision to $355 million.

While these issues are not insignificant, our discussions with management and primary research leads us to believe this is a contract specific event and not indicative of how other contracts that represent current and future revenue will progress.
Source: Subsea 7 conference call, Robotti & Company research 22

Key Investment Factors

Subsea 7 is a global leader in oligopolistic industry dominated by 3 competitors. Barriers to entry will allow for above average returns on capital over the long-term. Near-term industry-wide concerns and specific company issues have caused the market to view the business solely through disappointing past earnings, and depressed margins creating a misperception. Long-term, there are dynamics in place to allow for a long runway of revenue growth in an industry protected by sustainable barriers to entry. Backlog growth is just the tip of the iceberg, indicating the potential for significant revenue growth and increased returns on capital. Normalized growth rates and margins for both the industry and the company are being ignored.

Indicators of Barriers to Entry

Historical returns on equity do not indicate the presence of barriers to entry.
Subsea 7 Return on Equity 2008- Present
50% 40% 30% 20% 10% 0%

The ultra-deepwater engineering & construction industry does, however, have a limited number of incumbent competitors with a history of dominating the industry.
Source: Company Financials, Capital IQ, Robotti & Company Calculations 24

Evidence of a Competitive Advantage

Source Proprietary Technology Type Supply Advantage Evidence History of increasingly complex engineering needs in deeper water requires a demonstrated track record of successful and safe execution.

Privileged Access to Resources Customer Captivity

Supply Advantage

In this case, the resource is skilled labor.

Demand Advantage

The tangible and intangible costs of searching for someone who can complete a major ultradeepwater project at or above the standard of the big three are very high.


Deepwater Production
Declining production of international oil companies drive demand for oil services Deepwater represents the greatest opportunity to replenish major oil & gas reserves Also presents greater technical challenges and increased overall complexity
Average Deepwater Well Depth (ft)
12000 10000 8000 6000 4000 2000 0

Source: BSEE, Hornbeck 2013 Investor Presentation

Source: FMC Technologies 2013 Investor Presentation


Revenue Driver: Industry Backlog

Industry Backlog The Big 3
$40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0

Saipem - Subsea
Source: Company Filings

Technip - Offshore

Subsea 7

Revenue Driver: Subsea 7 Backlog

Backlog Progression 2011 - Present
$12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Backlog above $10 bn for the first time

Current Backlog by Region

$5,000 $4,000 $3,000 $2,000 $1,000 $0 AFGOM APME Brazil NSC $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0

Current Backlog by Year of Execution




2017 - 2022

Source: Subsea 7 Financial Statements


Revenue Driver Backlog Progression

Revenue Driver: Variant View of Potential Backlog
Well known by the market

Reported Backlog over $12 billion

(updated for recent announcements)

Potential for >420 Tree Awards over the next 15 months1

Underappreciated by the market because of horizon to realization

Over $10 billion of contract awards expected over the next 18 months 2 Worldwide offshore rig count is expected to increase over 50% between 2012 - 2015 3

1 2

FMC Technologies Presentation, Quest Offshore Resources, May 2013 Robotti & Company Research 3 IHS-Petrodata, Barclays Research


Comparable Analysis The Big Three

Comparable Fundamental Analysis
Ticker Name Price Dil Shrs Mkt Cap EV Gross EBITDA Margin Margin EBIT Margin Debt / Debt / ROE EBITDA Equity


Subsea 7 SA Saipem SpA Technip SA

$18.42 $24.31 $100.27

351 1 439 112

6,462 10,682 11,198

6,495 17,367 10,791 Mean: Median:

12.4 24.5 17.3 18.1 17.3

13.1 5.2 11.1 9.8 11.1

7.7 (0.8) 8.8 5.2 7.7

5.4 (7.4) 14.0 4.0 5.4

1.1 7.5 2.5 3.7 2.5

13.8 99.2 61.8 58.3 61.8

Comparable Valuation Analysis

Ticker Name FY 2013 EBITDA EV/ EBITDA FY 2014E

EV/ EBITDA FY 2013 Price / Earnings FY 2014E Price / Earnings


Subsea 7 SA Saipem SpA Technip SA

981 862 1,431 Mean: Median:

6.6 20.1 7.5 11.4 7.5

1,404 1,977 1,502

4.6 8.8 7.2 6.9 7.2

0.99 6.44

18.5 na 15.6x 17.0 17.0

1.89 1.07 6.47

9.7 22.7 15.5 16.0 15.5

Company reports diluted shares assuming conversion of all convertible bonds regardless of current share price. Diluted shares adjusted for 2017 convertible bonds with a conversion price of $29.31 as of 12/31/2013. LT Debt adjusted for convertible bonds with a conversion price of $15.82 as of 12/31/2013.

Source: Company Financials, Capital IQ, Robotti & Company Advisor Calculations, All in USD

Earnings Summary
(USD mm)

Revenue growth Gross Profit gross margin Adjusted EBITDA ebitda margin Operating Income operating margin Gain on Disposal of Subsidiary Net Income Adjusted EPS Diluted EPS Diluted Shares

2011 5,476.5

2012 6,296.6 15.0% 1,095.0 17.4% 1,139.0 18.1% 808.2 12.8% (243.6) 847.2 $1.59 $2.23 380.2

2013 6,297.1 (0.0%) 742.2 22.0% 981.0 15.6% 573.4 9.1% 349.9 $0.99 $0.99 350.8 1

946.4 17.3% 1,003.0 18.3% 640.5 11.7% 450.7 $1.23 $1.23 366.3

Company reports diluted shares assuming conversion of all convertible bonds regardless of current share price. Diluted shares adjusted for 2017 convertible bonds with a conversion price of $29.31 as of 12/31/2013. LT Debt adjusted for convertible bonds with a conversion price of $15.82 as of 12/31/2013. Source: Company Financials / Capital IQ

Valuation / Margin of Safety

Implied EBITDA 8,500 9,000 15% 900 975 17% 1,020 1,105 19% 1,140 1,235 21% 1,260 1,365 23% 1,380 1,495 25% 1,500 1,625 Implied Stock Price (7x EBITDA) EBITDA Margin
Revenue (USD) 6,200 6,400 6,600 6,800 7,000 7,200 6,200 15% (3.0%) 17% 10.0% 19% 23.0% 21% 36.0% 23% 49.0% 25% 62.0% 6,400 5.1% 19.2% 33.3% 47.3% 61.4% 75.5%

Revenue (USD) 9,500 10,000 10,500 11,000 1,050 1,125 1,200 1,275 1,190 1,275 1,360 1,445 1,330 1,425 1,520 1,615 1,470 1,575 1,680 1,785 1,610 1,725 1,840 1,955 1,750 1,875 2,000 2,125 Implied Margin of Safety
Revenue (USD) 6,600 13.2% 28.4% 43.6% 58.7% 73.9% 6,800 21.4% 37.6% 53.8% 70.1% 86.3% 7,000 29.5% 46.8% 64.1% 81.5% 7,200 37.6% 56.0% 74.4% 92.8%

15% $17.86 $19.36 $20.86 $22.35 $23.85 $25.35 17% $20.26 $21.95 $23.65 $25.35 $27.04 $28.74 19% $22.65 $24.55 $26.44 $28.34 $30.23 $32.13 21% $25.05 $27.14 $29.24 $31.33 $33.43 $35.52 23% $27.44 $29.74 $32.03 $34.32 $36.62 $38.91 25% $29.84 $32.33 $34.82 $37.32 $39.81 $42.31

98.8% 111.3%

89.1% 102.6% 116.1% 129.7%


Source: Robotti & Company Research

Risks to Our Thesis

The safe and successful execution of large, complex EPIC projects is a primary risk. Supply chain delays can reverberate throughout a project. While management believes the current provision for the GuaraLula Project in Brazil is sufficient, additional problems could require additional write-downs. Operations in deepwater are subject to unpredictable events such as severe weather or harsh ocean environments. Increasing competition in shallower water could result in decreased profitability should well depth not continue to increase. Commodity Risk: A good forecaster is not smarter than everyone else, he merely has his ignorance better organized. -Anonymous

Disclosure: Ownership Information

Disclosures Subsea 7 (OB:SUBC)

Robert Robotti and/or members of his household has a financial interest in the following securities Robotti & Company or its affiliates beneficially own common equity of the following securities Robotti & Company or its affiliates beneficially own 1% or more of any class of common equity of the following securities Robert Robotti serves as a Director or Officer or Advisory Board Member of the following securities





As of the date of this presentation, Robotti & Company Advisors, LLC and/or its affiliates owns shares of Subsea 7 and does not have any current intention to exit this position. Companies have been chosen solely as a case study to illustrate the investment process and approach of Robotti & Company Advisors, LLC. This information should not be interpreted as a performance record or as an indication of future performance results.

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