Evan S.

Templeton

etempleton@Jefferies.com

(203) 708-5807

HIGH YIELD RESEARCH

Oilfield Services August 3, 2005

Northern Offshore Limited

www.northern.bm
Issuer Northern Offshore, Ltd. Security Common Stock Outstanding Shares 144mm Current Price $2.10

RATING: BUY
Equity Market Cap. $302.4mm

Restructuring Complete, Initiating Coverage of Post Reorganization Equity With BUY Recommendation

HIGH YIELD RESEARCH

!" On May 30, 2005, the Company completed its balance sheet restructuring. !" All of the Companys existing debt was converted to equity. !" Bondholders received 98% of the equity of the Company. !" Existing equity holders retained a 2% stake. !" We are projecting EBITDA will increase 51% to $47mm in 2006 from $31mm in 2005. !" Our initial price target of $2.60 is based on an 8x 2006 EV/EBITDA multiple. !" Additional upside provided by strong offshore drilling environment or sale of company. SUMMARY AND RECOMMENDATION: We are initiating coverage of Northern Offshore Limited with a BUY recommendation. Key Points:

Company Description:
Northern Offshore Limited (NOL) operates three offshore oil and gas drilling and production service units. The Companys fleet currently consists of the Northern Producer, a semi-submersible floating production platform, the Energy Searcher, a drillship, and the Galaxy Driller, a semi-submersible drilling rig. Northern Offshore ASA, the Companys predecessor, was Company was formed in 1997 in Norway and had its shares listed on the Oslo stock exchange in 1998. In 2000, Northern Offshore Limited was formed, completing the Companys relocation to Bermuda from Norway. Northern Offshore Limiteds shares were also listed on the Oslo exchange. Having warned in 2003 that it would be unable to meet its financial obligations in 2004 and 2005, the Company failed to pay its 5/15/04 coupon payment within the grace period. Management presented bondholders with a restructuring proposal in June 2004 to reduce debt and in July 2004, Provisional Liquidators were appointed by Order of the Supreme Court of Bermuda to oversee the Companys balance sheet restructuring. The Scheme of Arrangement was declared effective on May 31, 2005.

!" !" !" !" !" !" !" !" !" !"

On May 30, 2005, Northern Offshore successfully completed a balance sheet restructuring that converted all of the Companys US$ and NOK denominated debt to common equity. As an operator of a drillship, a semi-submersible and a production platform, the Company is leveraged towards the improving utilization and dayrate trends for offshore equipment. According to recent data, supply and demand for offshore equipment continues to be extremely tight with effective utilization near 100%. We believe the Company is trading at a discount to its peers based on cash flow and NAV. Given the current contract status of the Companys rigs, the continued strength of the offshore markets, and the reactivation of the Galaxy Driller, we believe Northern Offshores EBITDA will increase 51% to $47mm in 2006 from $31mm in 2005. Based on our 2006 EBITDA estimate of $47mm, the Company is trading at an EV/EBITDA multiple of 6.3x, a steep discount to comparable oil service forward multiples in the 7-10x range. At an 8x EV/EBITDA multiple, we value Northern Offshores equity at $2.60 per share. The Company is also valued at 47% of its replacement value versus 101% for its peers. Should the Company re-list its equity, we believe the additional exposure and increased trading liquidity will help to narrow the valuation gap between Northern Offshore and its publicly traded peers. Due to the sizable costs to add new equipment to its fleet, we believe the current equity holders may look to sell the Company to a larger oil services company better situated to weather the industrys cyclicality and manage the fleets operational risk.

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Recent Events
The Restructuring In May 2005 Northern Offshore successfully restructured its US$340.0mm of senior notes due 2005 and NOK150.0mm of floating rate notes due 2004. Pursuant to the Scheme of Arrangement, all of the Companys outstanding debt was converted to common equity. Pro forma for the transaction, Northern Offshore has no outstanding debt and approximately 144mm shares of common stock outstanding. Exhibit 1 shows the original principal amounts of the two debt issues and the amount outstanding just prior to the restructuring. The difference between the original principal amount and the amount outstanding just prior to the restructuring is attributable to open market purchases of the bonds. Between 1998 and 2001, the Company repurchased $196.8mm face amount of the US$ notes at an average price of 58% of par. As a result of the balance sheet restructuring, total debt was reduced to zero from approximately $163.2mm. Exhibit 1: Debt Outstanding Pre- and Post-Restructuring
Debt Outstanding US notes '05 NOK notes due '04 Total Original ($US) 340.0 23.2 363.2 Pre-restructuring ($US) 143.2 20.0 163.2 Post-restructuring ($US) 0.0 0.0 0.0

Source: Company disclosures and Jefferies & Company estimates.

In aggregate, the $163.2mm of outstanding US$ and NOK denominated notes were exchanged for 141.1mm shares of common stock, or approximately 864.4 shares per $1,000 principle amount of notes. As a result, bondholders received 98.0% of the Companys shares with the existing holders retaining 2.0%. Specifically, holders of the US$ denominated notes received 85% of the Companys equity with holders of the NOK denominated notes receiving 13% of the equity. The US$ note holders were also entitled to a cash payment of $14.0mm. Exhibit 2 highlights the exchange. Exhibit 2: Debt for Equity Exchange
The Debt for Equity Exchange US Notes (US$) NOK Notes (NOK) Total (US$) $mm 143.2 138.0 163.2 Shares/note 857.2 132.9 864.6 New shares (mm) 122.7 18.3 141.1

Source: Company disclosures and Jefferies & Company estimates.

The common shares represent US$0.25 par value in the share capital of the Company and will not be initially listed or traded on any public market and there may be no public market for the shares. The shares have not been registered under the Securities act of 1933, as amended (the Securities Act), or the securities laws of any state and may not be sold, offered for sale, pledged or hypothecated except pursuant to a registration statement in effect with respect to such securities under the Securities Act or any then available exemption from the registration requirements of the Securities Act and any applicable state securities laws.

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Scheme Projections According to projections included in the Scheme (excluding certain non-recurring restructuring costs), Northern Offshores revenues and EBITDA for 2005 are estimated at $75.0mm and $31.3mm, respectively. Including $6.7mm of restructuring costs, the $14.0mm cash distribution to bondholders, taxes and other income/expenses, the projections call for $10.9mm of net cash flow before capital items in 2005. The $5.5mm of capital items largely include capital outlays for the upgrade of the Galaxy Driller. The following table (Exhibit 3) highlights the projections that were prepared by the Northern Offshore Group Finance function, Singapore. Exhibit 3: Actual 2004 and Estimated 2005 EBITDA Per Scheme
2005 Projected Cash Flow - per Plan $mm Revenue Less: Geveran commission Net Operating costs Admin costs - Singapore Restructuring costs Taxes Operating cash flow Less: Loan and interest repayment Distribution to US notesholders Financing charges Interest income Net cash flow Less: Capital items Net capex FX Net cash movement Beginning cash Ending cash 75.0 1.1 73.8 38.6 2.9 6.7 1.0 24.6

14.0 0.1 -0.4 10.9

5.5 0.0 5.4 14.0 19.3

Source: Company disclosures and Jefferies & Company estimates.

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The Fleet
The Companys fleet consists of three units: the Northern Producer, the Energy Searcher, and the Galaxy Driller. Northern Producer

The Northern Producer was originally constructed as a semi-submersible drilling rig in 1977 (second generation) and then underwent substantial refurbishments in 1991 and 1997 to convert the rig to a floating production platform (FPF). The rig was converted to a floating production platform in 1991 to work on the Emerald Field and was later adapted to the Galley Field in the U.K. sector of the North Sea in 1996/1997. The unit is currently capable of producing 55mbd of oil and 60mmcfd of gas. Petrofac manages the Northern Producer. Petrofac is the former production services division of Petroleum Geo-Services and is currently a privately held company headquartered in the United Kingdom. Northern Offshore purchased the Northern Producer in December 1997 for $226mm. Originally discovered in 1974 and operated by Texaco, the Galley Field began producing in May 1998. Talisman purchased the Galley Field from Texaco in early 2004. Originally thought to have a lifespan of four years, the Field is still in production. Exhibit 4 highlights recent production trends at the Galley Field. After peaking in 2000, at the field declined, reaching 8,800bpd in 4Q04 before rebounding to 10,200bpd in 1Q05. Notably, since Talisman took over the Galley Field in 1Q04, production has averaged approximately 10,000bpd. According Talisman, the Field continues to perform above expectations, particularly against the backdrop of $60.00 oil. According to a press release dated May 4, 2005, Talisman completed a Galley Field well in 1Q05 that came on at 1,700bpd. The new well should help to arrest the Fields declining production and leads us to believe that the FPFs contract will be extended beyond the initial 2006 expiration date. Exhibit 4: Galley Field Oil Production (mbd)
25,000

20,000

Production (mbd)

15,000

10,000

5,000

0 1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

Source: Company disclosures and Jefferies & Company estimates.

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Talismans contract for the Northern Producer currently runs through July 2006 and contains a six-month notice of termination that may be exercised any time after January 1, 2006. Specific terms of the Northern Producers current contract have not been disclosed. However, it contains both a dayrate and a tariff component. The tariff component is linked to the market price of oil and is levied on volume throughput. The dayrate and tariff structure have not been disclosed, but we believe the platform is generating a dayrate equivalent of approximately $100,000 per day. The production unit is well suited to harsh environments and small-to-medium sized fields. Given the units superior operating performance, management believes the unit is extremely marketable in the event that the Galley Field contract is not extended. It is important to note that in the event the Company is unable to secure employment for the unit as a floating production platform, management could also convert the FPF back into to a semi-submersible to seek employment in the supply constrained drilling markets. Energy Searcher

The Energy Searcher is a conventionally moored drillship. The vessel was built in 1982 and is capable of drilling in water depths up to 2,500 feet. Northern Offshore purchased the drillship in June 2001 for $37.0mm. Jet Drilling, a subsidiary of Northern Offshore Limited, manages the Energy Searcher. The following table (Exhibit 5) shows the Energy Searchers employment and dayrate history from January 2002 to July 2004, the last period for which the Company provided detailed information. Subsequent to the rigs employment with Rims, it left Singapore to commence a three-month contract with Medco Langsa Indonesia. Exhibit 5: Energy Searcher Dayrate and Employment History (1/02 6/04)
Energy Searcher Dayrate History Dayrate Location US$ Partner OMV Vietnam $50,000 Inpex Indonesia $72,000 Conoco Natuna Sea $43,000 Repsol Malaysia $60,500 Shell Brunei $45,500 Atlantis Oman $50,000 $57,000 Daewoo Myanmar Hardy Oil India $50,000 Rims Indonesia $50,000 Average $53,111 Min $43,000 Max $72,000
Source: Company disclosures and Jefferies & Company estimates.

Duration Months 2.5 7.0 1.0 2.7 1.8 1.2 2.0 2.8 1.5 2.5 1.0 7.0

Contract Begin Jan-02 Mar-02 Nov-02 Jan-03 May-03 Sep-03 Nov-03 Feb-04 May-04

Contract End Mar-02 Oct-02 Dec-02 Mar-03 Jul-03 Oct-03 Jan-04 May-04 Jul-04

The Energy Searcher has recently been employed under a drilling contract by a unit of Talisman in South East Asia. The contract is for two firm wells plus six option wells. The options are exercisable on a well-by-well basis. Petronas Carigali, a partner of Talisman has optioned the five remaining wells. Assuming it takes 80 days to drill two wells, the contract is expected to be completed in August 2005. According to information published by ODS-Petrodata, the current dayrate is $52,000. According to ODS-Petrodata, the drillship is scheduled to commence drilling in Indonesia with Star Energy in September 2005 at a dayrate of $61,000. The Star Energy contract extends through the beginning of December 2005. Then the Energy Searcher will head to Yemen for Please see Important Disclosure Information on the last pages of this Report
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a contract with Oil Search that ends March 21, 2006. Additional options could extend the contract through May 2006. The dayrate is undisclosed. Exhibit 6 contains the drillships current and future contract status per information provided by ODS-Petrodata. Exhibit 6: Energy Searcher Current and Future Contract Status
Energy Seacher: Current and Future Contracts Operator Oil Search Star Energy Petronas Carigali Petronas Carigali Region Middle East Southeast Asia Southeast Asia Southeast Asia Country Yemen Indonesia Malaysia Malaysia Start Date 12/21/2005 9/15/2005 7/31/2005 6/20/2005 End Date 3/21/2006 12/4/2005 8/30/2005 7/31/2005 Dayrate Undisclosed $61,000 $52,000 $52,000

Source: ODS-Petrodata and Jefferies & Company estimates.

Galaxy Driller

The Galaxy Driller is a second-generation semi-submersible drilling rig that had a rated water depth of 600 feet and a drilling depth of 20,000 feet prior to its recent upgrade. The rigs current specifications have not been disclosed. The rig was originally built in 1977 and has undergone two major refurbishments prior to its most recent shipyard stay. Northern Offshore acquired the Galaxy Driller in 1996 for $50mm. Jet Drilling manages the rig. The rig was scheduled to begin a contract with Asia Petroleum Development, an affiliate of Serica Energy Corporation (TSX:SQZ), offshore North Sumatra on or about July 24, 2005. According to ODS-Petrodata, the contract extends through August 18, 2005 at a dayrate of $50,000. According to a Serica press release, the rig will be used to drill two rigs, an 8,200 foot appraisal well and a 6,300 foot exploration well. The rig will then mobilize to Myanmar to begin a six-month contract with Daewoo that begins September 15, 2005 and ends March 14, 2006 at a dayrate of $60,000. An option could extend the contract through June 12, 2006. We believe the Galaxy Driller could likely command a higher dayrate after an initial seasoning period in which the market becomes re-acquainted with the semi-submersibles capabilities. Exhibit 7: Galaxy Driller Current and Future Contract Status
Galaxy Driller: Current and Future Contracts Operator Daewoo Asia Petroleum Dev. Region Indian Ocean Southeast Asia Country Myanmar Indonesia Start Date 10/15/2005 7/24/2005 End Date 3/14/2006 8/18/2005 Dayrate $60,000 $50,000

Source: ODS-Petrodata and Jefferies & Company estimates.

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Outlook
Our 2005 and 2006 earnings estimates incorporate the re-activation of the Galaxy Driller, the Companys contracted dayrates and stable dayrates when contracts expire in the latter part of 2006. Based on our assumptions, we are projecting that EBITDA will increase 50.9% to $46.8mm in 2006 from $31.0mm in 2005. Exhibit 8: Historical and Projected Earnings
Historical and Projected Earnings Summary ($mm) 2000a 58.5 36.6 62.6% 21.6 2.4 12.6 5.2x 5.1x 1.7x 1.6x 4.4 191.6 187.2 2001a 54.1 25.4 47.0% 20 41.4 -36 7.7x 7.4x 1.3x -0.8x 7.5 196.4 188.9 2002a 69.3 33.1 47.8% 18.8 0.0 14.3 5.7x 5.6x 1.8x 1.8x 3.3 187.6 184.3 2003a 57.5 26.6 46.3% 18.2 0.1 8.3 6.6x 6.3x 1.5x 1.5x 6.4 174.4 168.0 2004a 56.9 20.9 36.8% 16.4 0.0 (1) 4.5 8.0x 7.3x 1.3x 1.3x 14.0 166.7 152.7 2005e 66.2 31.0 46.9% 0.0 7.5 23.5 0.0x -0.6x NM NM 17.7 0.0 -17.7 2006e 89.2 46.8 52.5% 0.0 7.5 39.3 0.0x -1.2x NM NM 55.9 0.0 -55.9

Total revenue EBITDA EBITDA margin Net Interest Capital expenditures Cash Flow Debt/EBITDA Net debt/EBITDA EBITDA/Net interest EBITDA-Capex/Net interest Cash and cash equivalents Total debt Net Debt

Source: ODS-Petrodata and Jefferies & Company estimates. (1) Unavailable.

The primary driver of the improvement is the contractual improvement in dayrate for the Energy Searcher and the re-activation of the Galaxy Driller in 2Q05. Our projections have the EBITDA contribution from the Energy Searcher growing to $12.1mm in 2006 from $5.1mm in 2005 and the contribution from the Galaxy Driller growing to $12.9mm in 2006 from $4.1mm in 2005. Assuming that Talisman maintains production at the Galley Field steady in the 10,000bpd range, our projections hold the EBITDA contribution for the production platform flat at $24.8mm in 2006 and 2005. After deducting corporate overhead costs of $3.0mm, we project 2006 EBITDA of $46.8mm. After deducting estimated capital expenditures of $5.0mm to $10.0mm, we believe that Northern Offshore could generate between $36.8mm and $41.8mm of free cash flow in 2006. A key component of the Northern Offshore story is the substantial operating leverage due to the high component of fixed costs. Assuming the offshore drilling markets remain tight into 2007, we believe there could be considerable upside beyond the $46.8mm of EBITDA we are projecting for 2006. According to our calculations, if: 1) the dayrate on the Energy Searcher return to the $72,000 that the vessel earned in 2002 when it was employed on a seven-month contract with Inpex in Indonesia; 2) the dayrate on the Galaxy Driller climbs to $100,000 per day, which compares favorably to other semi-submersible dayrates and is near the historical peak reached in 1998; and, 3) the Northern Producer continues at its current rate, we believe the Company could generate $61.4mm of EBITDA. After $5.0mm to $10.0mm of estimated capital expenditures, we project free cash flow of $51.4mm to $54.4mm. Should rates on both the Energy Searcher and Galaxy Driller reach $100,000 per day, we believe EBITDA could reach $82.1mm. Net of $5.0mm to $10.0mm of capital expenditures, we believe estimate Northern Offshore could generate $72.1mm to $75.1mm of free cash flow in this upside scenario. Exhibit 9 highlights recent dayrate trends for second and third generation semi-submersible rigs and drillships in Southeast Asia, the region where Northern Offshores rigs have primarily operated. Exhibit 10 shows utilization rates for semi-submersible rigs and drillships in Southeast Asia and the world. Utilization rates exclude equipment that is stacked or in the shipyard without an upcoming contract.

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Exhibit 9: Semi-Submersible and Drillship Dayrate Trends

$140 $120 $100 Dayrates ($000) $80 $30 $60 $20 $40 $20 2nd Gen $0 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 $0 $10 3rd Gen $60

$120

$60

Price of oil
$50

Southeast Asia drillship dayrate

$100 $50

Dayrate ($000)

$60

$30

$40

$20

$20

Price of oil

$10

$0 $0 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05

Source: ODS-Petrodata and Jefferies & Company estimates.

Exhibit 10: Semi-Submersible and Drillship Utilization Trends

2nd Generation Semi-Submersible Utilization 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
7/04 8/04 9/04 10/04 11/04 12/04 1/05 2/05 3/05 4/05 5/05 6/05 7/05

3rd Generation Semi-Submersible Utilization 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
7/04 8/04 9/04 10/04 11/04 12/04 1/05 2/05 3/05 4/05 5/05 6/05 7/05

Drillship Utilization
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
7/04 8/04 9/04 10/04 11/04 12/04 1/05 2/05 3/05 4/05 5/05 6/05 7/05

South East Asia World

Source: ODS-Petrodata and Jefferies & Company estimates.

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Price of Oil ($)

Southeast Asia World

$40 Price of oil ($)

$80

$40

J E F F E R I E S H I G H Y I E L D R E S E AR C H

VALUATION
Enterprise Value to EBITDA Valuation On average, the Offshore Drilling segment tracked by Jefferies & Company is trading 13.7x 2005 EBITDA and 8.1x 2006 EBITDA. Notably, EBITDA for the eight companies in the Offshore Drilling sub-sector is projected to grow 67% between 2005 and 2006. With our projected 51% EBITDA growth, we believe a similar EV/EBITDA multiple is warranted for Northern Offshore. Exhibit 11 highlights current EV/EBITDA multiples for 2005 and 2006 EBITDA and projected EBITDA growth rates. Exhibit 11: Oil Service Comparables
Oil Service Comparables Offshore Drilling ATW DO ESV GSF NE PDE RDC RIG Min Max Average Offshore Construction Min Max Average Other Oil Service Min Max Average '05EV/EBITDA 16.3x 14.8x 11.3x 14.6x 14.6x 9.1x 10.9x 18.3x 9.1x 18.3x 13.7x '05EV/EBITDA 6.7x 11.4x 8.4x '05EV/EBITDA 7.3x 13.9x 10.1x '06EV/EBITDA 8.1x 7.9x 7.2x 8.4x 8.7x 6.9x 7.5x 9.9x 6.9x 9.9x 8.1x '06EV/EBITDA 0.9x 8.4x 5.5x '06EV/EBITDA 6.4x 11.2x 8.7x '05 EBITDA 68 523 542 748 629 564 343 1,157 68 1,157 572 '05 EBITDA 30 274 149 '05 EBITDA 44 199 120 31 '06 EBITDA 137 976 849 1,301 982 743 500 2,145 137 2,145 954 '06 EBITDA 33 286 186 '06 EBITDA 54 215 136 47 % chg. 101% 87% 57% 74% 56% 32% 46% 85% 32% 101% 67% % chg. 4% 96% 33% % chg. 8% 23% 16% 51%

ATW DO ESV GSF NE PDE RDC RIG Min Max Average

Min Max Average

Min Max Average NOF

Source: Company disclosures and Jefferies & Company estimates.

Applying Offshore Drilling EV/EBITDA multiples ranging from 6.9x to 18.3x to our 2005 and 2006 EBITDA estimates of $31.0mm and $46.8mm, we derived a wide per share valuation range between $1.96 and $3.94 per share. However, based on average multiples of 13.7x for 2005 and 8.1x for 2006, we derived a base-case valuation of $2.63 to $2.96 per share. Exhibit 12 summarizes the results of our EV/Enterprise analysis.

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Exhibit 12: Summary Valuation

Per Share Valuation 2005 31.0 2006 46.8

EBITDA estimate ($mm) Multiple: Min Max Average Implied EV ($mm): Min Max Average Shares outsanding (mm) Implied share price ($/share) Min Max Average

9.1x 18.3x 13.7x

6.9x 9.9x 8.1x

282.4 567.9 426.3 144.0

323.0 463.4 378.0 144.0

$1.96 $3.94 $2.96

$2.24 $3.22 $2.63

Source: Company disclosures and Jefferies & Company estimates.

Given the rapid rise in dayrates and the potential for the Companys 2006 earnings to exceed our estimates, we have provided a sensitivity analysis that illustrates Northern Offshores implied Enterprise Value based in various EV/EBITDA multiples and EBITDA assumptions. In the following table, we have highlighted 2005 projected EBITDA according to the Scheme, our 2006 EBITDA estimate of $46.8mm and our two upside scenarios one scenario (roughly $60mm of EBITDA) in which the Northern Producer, the Energy Searcher and Galaxy Driller earn $100,000 per day, $72,000 per day and $100,000 per day, respectively and a second scenario (roughly $80mm of EBITDA) in which each of the three units earn $100,000 per day. Exhibit 13: Summary Valuation
Sensitivity Analysis 6.0x $1.25 $1.30 $1.46 $1.67 $1.88 $1.95 $2.08 $2.29 $2.50 $2.71 $2.92 $3.13 $3.33 EBITDA multiple 7.0x 8.0x $1.46 $1.67 $1.52 $1.74 $1.70 $1.94 $1.94 $2.22 $2.19 $2.50 $2.28 $2.60 $2.43 $2.78 $2.67 $3.06 $2.92 $3.33 $3.16 $3.61 $3.40 $3.89 $3.65 $4.17 $3.89 $4.44 9.0x $1.88 $1.96 $2.19 $2.50 $2.81 $2.93 $3.13 $3.44 $3.75 $4.06 $4.38 $4.69 $5.00 10.0x $2.08 $2.17 $2.43 $2.78 $3.13 $3.25 $3.47 $3.82 $4.17 $4.51 $4.86 $5.21 $5.56 Notes: FY05 Scheme plan

30.0 31.3 35.0 40.0 45.0 46.8 50.0 55.0 60.0 65.0 70.0 75.0 80.0

EBITDA ($mm)

JEF FY06 estimate

JEF $100k/$72k/$100k upside case

JEF $100k/$100k/$100k upside case

Source: Company disclosures and Jefferies & Company estimates.

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Net Asset Value

Based on our analysis, we believe Northern Offshore is trading at a discount to its peers based on liquidation and replacement values. The Offshore Drillers as a group are trading at 178% of liquidation value and 101% of fleet replacement value; and, according to our valuation, Northern Offshore is trading roughly 145% of its liquidation value and only 47% of its replacement value. Based on our analysis of comparable equipment, we believe the replacement value of the Company s three drilling units is approximately $600.0mm, or north of $4.00 per share. For the purpose of our analysis, we assigned the Northern Producer a value of $200.0mm, that of a semi-submersible, due to its uniqueness and ability to be reconfigured as a drilling unit. For the remaining two units, we used the lowest of the semi-submersible and drillship values to be conservative. Exhibit 14: Fleet Replacement and Liquidation Values for Comparable Equipment
Fleet Liquidation and Replacement Value for Comparable Equipment Delivered/ Liquidation Replacement Estimated Upgraded Max depth Location Operator Value ($mm) Value ($mm) Dayrate 1976/97 2,000 SE Asia Daewoo 45.0 180.0 $40,000 1979/86 1,500 North Sea Kerr McGee 55.0 180.0 $85,000 1975/95 1,000 Med ENI 47.0 180.0 $68,000 1982/97 1,500 Brazil Chevron 63.0 200.0 $65,000 1983 1,500 Med ENI 98.0 275.0 $75,000 1976 1,000 USGOM W&T 25.0 170.0 $60,000 1983 1,500 India Reliance 67.0 200.0 $54,000 1983 1,500 SE Asia Santos 50.0 180.0 $56,000 1973/01 1,500 W Africa Chevron 70.0 180.0 $90,000 1974 1,000 North Sea Venture 57.0 180.0 $50,000 1976 1,000 North Sea Total 57.0 180.0 $78,000 Average: 57.6 191.4 $65,545 Delivered/ Upgraded Max depth 1976/97 4,000 1976/97 7,500 1981 5,900 1977/97/04 7,200 1982/97/04 4,000 Liquidation Replacement Estimated Value ($mm) Value ($mm) Dayrate 45.0 300.0 NA 85.0 250.0 $102,000 85.0 300.0 $94,000 85.0 300.0 $96,000 70.6 249.0 $81,500 74.1 279.8 $93,375

Type Semi Semi Semi Semi Semi Semi Semi Semi Semi Semi Semi

Owner Atwood Noble Pride Pride Pride Rowan Transocean Transcocean Transcocean Transcocean Transcocean

Name Southern Cross Ton Van Langveld North Sea South Atlantic Venezuela Midland Actinia Sedco 601 Sedneth-701 Sedco 704 Sedco 706

Type Drillship Drillship Drillship Drillship Drillship

Owner Transocean Diamond Noble Noble Noble

Name Peregrine III Ocean Clipper Leo Segerius Roger Eason Noble Muravlenko

Location USGOM Brazil Brazil Brazil Brazil

Operator Stacked Petrobras Petrobras Petrobras Petrobras Average:

Source: Company disclosures and Jefferies & Company estimates.

Exhibit 15: Summary Valuation

Summary Net Asset Value Liquidation Replacement Value ($mm) Value ($mm) 75.0 200.0 55.0 180.0 75.0 250.0 205.0 630.0 296.3 145% 178% 364.9 $2.53 296.3 47% 101% 636.3 $4.42

Northern Producer Galaxy Driller Energy Searcher Total ($mm)

Production Plaform Semi Drillship

Current Northern Offshore enterprise vaue ($mm) EV as % of Liquidation/Replacement value Comparable Offshore Drilling Co's Implied EV based on comparables ($mm) Implied share price

Source: Company disclosures and Jefferies & Company estimates.

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Exhibit 16: Financial Projections

Northern Offshore Cash Flow Summary 1Q05e Total revenues 14.3 Vessel operating expenses 7.0 Vessel gross margin 7.2 Administrative costs EBITDA EBITDA margin Restructuring charges Interest income Taxation Operating cash flow Distributions Capex Other Change in cash Beginning cash Ending cash 0.8 6.5 45.5% 6.7 0.0 0.3 -0.5 -14.0 -1.4 1.9 -14.0 14.0 0.0 2Q05e 14.4 7.1 7.3 0.8 6.5 45.4% 0.0 0.0 0.3 6.2 0.0 -1.4 -1.9 3.0 0.0 3.0 3Q05e 16.8 8.1 8.7 0.8 8.0 47.4% 0.0 0.0 0.3 7.7 0.0 -1.4 0.0 6.3 3.0 9.3 4Q05e 20.8 9.9 10.8 0.8 10.1 48.5% 0.0 0.0 0.3 9.8 0.0 -1.4 0.0 8.4 9.3 17.7 FY2005e 66.2 32.1 34.0 3.0 31.0 46.9% 6.7 0.1 1.0 23.2 -14.0 -5.5 0.0 3.7 14.0 17.7 1Q06e 21.5 9.7 11.7 0.8 11.0 51.2% 0.0 0.0 0.3 10.7 0.0 -1.9 0.0 8.8 17.7 26.6 2Q06e 22.1 9.8 12.3 0.8 11.6 52.2% 0.0 0.0 0.3 11.3 0.0 -1.9 0.0 9.4 26.6 36.0 3Q06e 22.8 9.9 12.9 0.8 12.1 53.2% 0.0 0.0 0.3 11.9 0.0 -1.9 0.0 10.0 36.0 45.9 4Q06e 22.8 9.9 12.9 0.8 12.1 53.2% 0.0 0.0 0.3 11.9 0.0 -1.9 0.0 10.0 45.9 55.9 FY2006e 89.2 39.4 49.8 3.0 46.8 52.5% 0.0 0.1 1.0 45.7 0.0 -7.5 0.0 38.2 17.7 55.9

Northern Producer - Floating Production Platform Dayrate Days employeed Utilization Dayrate revenues ($mm) Tarriff revenues Total revenues ($mm) Operating costs ($mm) OpCost/day Vessel gross profit ($mm) GP/day Energy Searcher Dayrate Days employeed Utilization Revenues ($mm) Operating costs ($mm) OpCost/day Vessel gross profit ($mm) GP/day $52,000 75 83% 3.9 2.8 $31,000 1.1 $21,000 $52,000 75 82% 3.9 2.8 $31,000 1.1 $21,000 $54,000 75 82% 4.1 2.9 $31,000 1.2 $23,000 $61,000 75 82% 4.6 2.9 $31,000 1.7 $30,000 $54,750 300 82% 16.4 11.3 5.1 $65,000 86 95% 5.6 2.8 $31,000 2.8 $34,000 $65,000 86 95% 5.6 2.8 $31,000 2.8 $34,000 $70,000 87 95% 6.1 2.9 $31,000 3.3 $39,000 $70,000 87 95% 6.1 2.9 $31,000 3.3 $39,000 $67,500 347 95% 23.4 11.3 12.1 $100,000 86 95% 8.6 1.8 10.4 4.2 $47,000 6.1 $53,000 $100,000 86 95% 8.6 1.8 10.5 4.3 $47,000 6.2 $53,000 $100,000 87 95% 8.7 1.8 10.6 4.3 $47,000 6.3 $53,000 $100,000 87 95% 8.7 1.8 10.6 4.3 $47,000 6.3 $53,000 $100,000 347 95% 34.7 7.3 42.0 17.2 24.8 $100,000 86 95% 8.6 1.8 10.4 4.2 $47,000 6.1 $53,000 $100,000 86 95% 8.6 1.8 10.5 4.3 $47,000 6.2 $53,000 $100,000 87 95% 8.7 1.8 10.6 4.3 $47,000 6.3 $53,000 $100,000 87 95% 8.7 1.8 10.6 4.3 $47,000 6.3 $53,000 $100,000 347 95% 34.7 7.3 42.0 17.2 24.8

Galaxy Driller Dayrate Days employeed Utilization Revenues ($mm) Operating costs ($mm) OpCost/day Vessel gross profit ($mm) GP/day $0 0 0% 0.0 0.0 $0 0.0 $0 $0 0 0% 0.0 0.0 $0 0.0 $0 $54,000 40 43% 2.2 0.9 $30,000 1.2 $24,000 $61,000 92 100% 5.6 2.8 $30,000 2.9 $31,000 $28,750 132 36% 7.8 3.7 4.1 $65,000 86 95% 5.6 2.7 $30,000 2.9 $35,000 $70,000 86 95% 6.1 2.7 $30,000 3.3 $40,000 $70,000 87 95% 6.1 2.8 $30,000 3.4 $40,000 $70,000 87 95% 6.1 2.8 $30,000 3.4 $40,000 $68,750 347 95% 23.8 11.0 12.9

Source: Company disclosures and Jefferies & Company estimates.

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J E F F E R I E S H I G H Y I E L D R E S E AR C H

I, Evan S. Templeton, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
2005 Jefferies & Company, Inc. All rights reserved. This material has been prepared by Jefferies & Company, Inc. ("Jefferies") a U.S.-registered broker-dealer, employing appropriate expertise, and in the belief that it is fair and not misleading. It is approved for distribution in the United Kingdom by Jefferies International Limited ("JIL") regulated by the Financial Services Authority ("FSA"). The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore except for any obligations under the rules of the FSA, we do not guarantee its accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date, and are subject to change without notice. Jefferies and JIL and their affiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or principal for their own account. This material is intended for use only by professional or institutional investors falling within articles 19 or 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001and not the general investing public. None of the investments or investment services mentioned or described herein are available to other persons in the U.K. and in particular are not available to "private customers" as defined by the rules of the FSA or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In October 2004, Jefferies acted as a co-manager of a follow on offering for Atwood Oceanics.

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HIGH YIELD RESEARCH August 3, 2005

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