TGS ASA

Robert Hobbs - CEO Kristian Johansen - CFO

John Olaisen - ABG Sundal Collier Kristian Diesen - Pareto Securities Annie Wang - UBS Christopher Møllerløkken - SpareBank 1 Markets AS Rob Pulleyn - Morgan Stanley

Hello and welcome to TGS' third quarter 2014 conference call. I'm Robert Hobbs, I am CEO of TGS, and joining me on the call today is Kristian Johansen, our CFO.

Earlier today we posted our third quarter earnings release and recorded presentation of the results. I hope that all of you have had an opportunity to review the presentation.

We will now just give a brief summary of the main points of the presentation before opening the call to your questions. In the third quarter of 2014 TGS had total net revenues of US$109 million, compared to US$191 in the same period one year ago.

Q3 late sales were US$130 million, down 6% from Q3 2013 whereas net pre-funding revenues of $51 million were up 17% from Q3 of 2013. Pre-funding represented 55% of the company’s $93 million operational multi-client investments during the quarter.

Amortization of the multi-client library for Q3 amounted to $81 million which corresponds to 45% of net multi-client revenues. As you may have noted our sales from fully written off vintages was at a record high 28% of our multi-client revenues this quarter.

This would normally lead to a very low overall amortization rate. However, in light of the current market conditions characterized by lower oil prices and CapEx reductions from oil companies we have taken a cautious look at our library.

This has related in some adjustments and impairments totaling $25 million this quarter mainly from the 2013 vintage. Although this vintage still has a remaining amortization lifetime of more than three years we believe that this was a prudent approach given the market conditions.

Proprietary revenues of US$9 million were flat versus Q3 of 2013. Our resulting operating profit was $71 million, down from $80 million one year ago and represents 38% of net revenue.

Cash flow from operations was $184 million compared to $118 million in Q3 of 2013 and our closing cash position at the end of the quarter after share repurchases and dividend payments was $264 million. Earnings per share were $0.53 per share compared to $0.54 per share in Q3 of 2013.

TGS had three 3D vessels and two 2D vessels operating under its control during the quarter. TGS is also a participant in two 2D marine joint venture projects, one, control source electromagnetic joint venture projection.

One high resolution P-Cable marine joint venture and one Full Azimuthal Nodal joint venture in the Gulf of Mexico. In North America, TGS continued acquisition of the 30,000 kilometer 2D Survey off the coast of Newfoundland Labrador in partnership with PGS.

This program is a continuation of a multi-year effort to supply much needed seismic coverage in a very prospective region that has recently been open to the industry for licensing. During the quarter TGS commenced acquisition of the Snipe Phase 52 2D survey in the deep water, U.S.

Gulf of Mexico extending to the U.S. Mexico boundary.

Also in the U.S. Gulf of Mexico TGS was very pleased to announce its first commercial Full Azimuthal Node or FAN project in collaboration with FairfieldNodal.

This project called Nessie FAN is in the South Timbalier area of the U.S. Gulf of Mexico shelf and will cover 54 OCS blocks.

TGS also entered into an agreement with FairfieldNodal to partner in another FAN project in Eugene Island area of the U.S. Gulf of Mexico shelf.

This project which will cover 136 OCS blocks has already been partially acquired and operations are scheduled to restart in November of 2014 continuing through the full year 2015. TGS continued its high level of activity in the Barent Sea during Q3 completing its 2D, 3D, P-Cable and CSCN projects.

TGS expects to have this data available for the 23rd Norwegian licensing round. In Northeast Greenland the company commenced the acquisition of a multiyear 2D program.

During Q4 we have completed the 2014 acquisition season and acquired over 5,600 kilometers of this 13,000 kilometer multiyear program. In the West of Shetland area of the North Sea TGS completed two 3D surveys in the Brendan Basin and Erlend Basin.

And finally TGS commenced and completed a 3D survey offshore Sierra Leone. Our backlog continues to be strong and at the end of Q3 we had future customer commitments of $260 million which is 46% higher than one year ago and a 16% increase from last quarter.

The increase from last quarter is mainly due to the customer commitments for an Australian 3D survey that we have previously announced called Nerites Phase 2 that we announced on July 31st earlier this year. Near term uncertainty in exploration spending has been increased by negative oil price development with the price of BRENT dropping close to 25% during the last four months.

It is likely that energy companies will continue their efforts to reduce capital expenditures, become more selective when prioritizing investment such as seismic programs. Certain important events are expected to occur that will allow TGS to achieve its 2014 guidance.

And most importantly is the official announcement of the Norwegian 23rd round exploration blocks which we expect to occur mid-Q4. Despite this continued near-term uncertainty TGS believes the long-term future of its business and particularly the company’s focused asset light multi-client model is strong.

Energy companies continue to demand higher resolution sub-surface images in mature basins and new regional data frontier basins to guide their exploration efforts. TGS’ customers see the economic value of the multi-client business model and are increasingly comfortable accessing their geoscience data through this method.

TGS has secured the necessary onshore and offshore crude capacity for the remainder of 2014 under very favorable terms. This capacity will allow TGS to reach the top-end of the guided investment range or even slightly higher than the guided investment range.

And our full guidance for 2014 remains unchanged. Our investment range remains from $390 million to $460 million, our average pre-funding is in the range of 45% to 55% of investments.

And average annualized multi-client amortization rate between the range of 40% and 46% of net revenues. We kept our guidance of net revenues in the range of $870 million to $950 million of which approximately 5% of those revenues will be from proprietary contract projects.

At this time we will open the call for your questions. Ben we’ll let you give us the instructions for Q&A.

Good morning gentlemen, a couple of questions. First did I hear correct when you said you expect multi-client investment in 2014 to be at the high-end or even above the guidance of $390 million to $460 million?

Yes that’s true John, it will be at the highest end of that range or maybe even slightly above that.

All right. And could you give some indication of pre-funding for Q4…?

We still feel very comfortable with the annualized guidance that we have for pre-funding to between 45% and 55%. So we are not going to guide on a quarterly basis on that John but we still feel very comfortable with the range.

Okay. And then the declaration in particular, the wide azimuth over that [Geco] about the stock in the Gulf of Mexico has been some talk in the market that Western Geco is over shooting in that survey and is that something you can confirm?

We actually started our project, we actually started the acquisition either yesterday or day before, we started that project actually after Western Geco had started theirs quite some time ago. And it’s a very different product.

The technology is extremely different. We are overshooting one of our previous wide Azimuth surveys and overshooting it obliquely, are 90 degrees to the previous data.

We are using CGG’s, a variant of CGG’s tag size technology to get wide Azimuth long offset signal into the earth and we are going to process our two data sets together to get long offset full-Azimuth data in the area. This is very different from the technology that Western Geco is using in the area.

So surveys themselves are not replicative at all.

So you don’t think it will cannibalize, the two of you will cannibalize each other?

No, the surveys are really dealing with I guess two problem or two imaging issues. We believe our technology that we’re acquiring in the area is really capturing all the needs of our customers in the area.

I would also point out too that the data is not being -- we’re not shooting over all of Western Geco’s data there. In fact over 50% probably of our survey is not coincident with theirs.

So they don’t cover exactly the same area.

All right. Did you ever consider doing the project together as you had done in the area already?

We talk on a periodic basis but I can’t speak specifically to this project and the fact that we haven’t partnered with them should signal that it’s not one very important to us.

All right and then [inaudible] was very low pre-funding from your side is that correct?

No, we’re quite happy with our situation there. I would also say that we are -- the survey that we’re acquiring is in area that has very complex salt structures.

So full azimuth is extremely important. What’s also important is the long offset component which is designed to enrich at very deep depths in the subsurface where there is a play called the [Northwood play] in the area which Shell has made -- talked about several discoveries and we’re really happy with our ability to use the [inaudible] technology in the area to not only image around these complex salt features but also just deep Jurassic Northwood proper.

Okay and quick on Q4 you write in your report that certain important events are expected during Q4 allowing you to reach your guidance and you highlight the announcement at the Norwegian 23rd round. If the Norwegian 23rd round announcement is delayed until 2015 does that mean that it’s highly unlikely that you will reach the guidance for the year or is it hanging on the Norwegian license and that will be announced?

As you know John, our late sales are often times triggered by license round events and things like that and so and the Norwegian round has been important for TGS because we have extensive three investments that are in the blocks that we think are going to be included. But we do know considerable sales that are going to be related to the round and so timing obviously is important to us when we’re looking to book those sales.

I would say that certainly if the block announcements are delayed into early 2015 you would expect a certain degree of sales that would be pushed into 2015. So whereas we might underperform a little bit in Q4 to our expectations right now because we definitely expect -- we actually expect -- are pretty confident that the blocks are going to be announced by mid-November but if for some reason they are not and it pushes in to 2015 then we may be very pleasantly surprised by upside in our 2015 plans then.

And in regards to your 2015 plans, I know you haven’t given any guidance yet, but it’s important you give some indication about the multi-client investments in volume versus dollars, you see that day rates are coming down for the vessel owners and we should try to send the 20% lower next year than now this year it seems a bit hard for you guys to grow your investment in solid terms, is it possible to give some indication of this what do you expect for next year…?

Yeah we are in budget together now John. I know you’ve followed this for long enough, you know that our business model is geared to be really good at taking advantage of markets like we are right now and the market that we’re in right now we can acquire a lot more data for the same dollar spend and we look to take advantage of that obviously, as I have said.

I can’t communicate or guide as to any dollar commitments next year. I would certainly -- I guess I would say a couple of things I would say that if I were you I wouldn’t expect that we would be acquiring less volumes certainly next year than we did this year.

We might even grow it, see an opportunity to grow it. I’ll also say that and you can see from our backlog of $260 million at the end of Q3, we have quite high visibility going in to next year when it comes to our investments.

And so we're quite pleased with that. We're quite comfortable with that.

We will be coming out the second week of January and communicating our guidance. Our plan is to hold a capital market day and we will be reviewing our guidance for 2015 at that point.

Okay. Thanks a lot gentlemen.

Thanks John.

Just a question on the vintage mix there. You see the old vintages being sold but also that sort of been the trend now for a few quarters and given the current market conditions how much are you sort of incentivizing say your newer data by discounting older data?

I don't know if I quite understand your question about incentivizing new data.

The question is basically if you are able to get [sales] into the books that you offer and obviously volumes discounts and price discounts in certain…?

Yeah.

But you are playing out on your [LIBOR] basically to and adding some more perhaps older data to get the sales in?

Yeah, we don't -- we typically don't take up our business that way really Kristian in terms of vintages. We do, I mean if we do ever discount data it’s usually based upon increased volumes and so sometimes yeah, also multiple better sets that might happen to fall in with certain vintages but we never really sort of cautiously discount one data set to trigger a sale on another data set.

That's not really part of our sales process but the -- where our sales occur in terms of the vintages it's probably one of the most difficult things for us to predict, and you are right 28% is the highest it’s ever been for fully written off surveys. I think that's probably a testament to just quality of our data library in the pre-2010 vintages that still remains very relevant to things like license rounds the world and in this quarter it just happened to be quite high and it's a hard thing to predict.

Got that. And so it's so, so from that I take it that [inaudible] or if you compare your previous results here with Q3 last year or year-to-date for that matter is that you are now in a more active in terms of discounting on volumes or incentivize sales activities around the globe?

No, no, I mean we're always trying to get oil companies to buy more data of course right but that and that I mean that hasn't really changed we've always been doing business that way.

And on the Gulf Mexico you now committed quite potential amounts both for Q4 and 2015, is that sort of taking advantage of the pricing [inaudible] a couple of years and everywhere let’s say client activity has been somewhat lower than previous years and moving in the opposite direction?

Yeah, one of the things we look at is acreage turnover and if you look ahead to the years 2017 to 2019 there are about three years there where there is substantial acreage turnover that will be made, that will be really available or turned over again and made available to exploration companies in the Gulf and we had identified potential within the [inaudible] region which is our core area and we're particularly suited to identify this potential because we have so much data in the area. Our geologist has identified that the opportunity to acquire this full azimuth data set utilizing this technology to be able to not only image features around the complex salt in the area but also there is this Jurassic play and the long offsets that we’re acquiring there are particularly suited to both companies explore from the north in this deeper play.

So it's our strategy and our timing of acquiring the project in the Gulf is driven by customer interest and that customer interest is being driven by new play and people are starting to look and starting to think about late 2016, 2017 to prepare for these rounds. So which we're going to see a lot of acreage turnover.

So those are really the kind of the drivers. Now I will say that we are seeing good positions from our suppliers.

I think I think we've communicated that we're seeing favorable turns from suppliers and that's always a benefit to TGS. But it's not the timing of any individual project is not really govern by that.

And just a last question. If you could just talk a little bit around what your [inaudible] are telling you with regards to the current [inaudible] that will take next going forward.

Looking at your latest downturn 5% this year it's seems as if this downturn is not affecting at all. Is your client's [inaudible] resilience is that I'm sorry and not specific issues that's enable due to find pockets on cash and that going forward how do you view that?

I think certainly we believe that quality of our data library has allowed us to sustain what has been a tough time for some. I think we have done a very good job of making sure that we have placed our library in some of the more attractive areas for all companies to continue to explore.

And we're continuing to explore for even in slower periods. It's too early right now.

These all companies aren’t really coming and communicating at what their plans are for 2015. So it's too early for us to comment on that and understand what's going to happen then.

We do know however that oil companies are continuing to explore and it's not something that they're turning off. They have to replace reserves.

But they're being selective about where they do that. And I think as long as we continue to put our investments in the right place at the right time which I think our results this year have demonstrated that we have done that correctly in the past years I think we'll continue to be successful.

[inaudible] is focusing our efforts and making sure we put our investments in the right place.

Thank you.

Hi good afternoon. Two questions from me please.

Can you in terms of the tucking in your various region, talk about if you have seen a change in the mix of the client in terms of IOCs, independent or perhaps non-Oil and Gas companies looking at your data. And then secondly my question is just to, on your point about the accelerated write down of your 2013 vintage.

Is there anything specific with that, and I just want to make sure how the logic correct? Was that because of sales about certain data was pending below your forecast calls you to write down the data.

I'll answer the first part of the question I'll turn over the second question over to Christian but I think in terms of our customer mix we haven't seen a real big change, Annie in that at least near term we haven't. I think over the past couple of years we have at least in the Gulf of Mexico certainly and to maybe a slightly less extent and also in Norway, but in the rest of the regions we've had seen a rise in sales to smaller exploration focused private equity backs aggressive oil companies.

And that's been actually a great thing for us. It's been, I think if you -- while certainly we didn't predict this back in 2010 during post Macondo 2010-2011 we felt like the Gulf of Mexico for example was going to be a big [bully], right and we wouldn't see the new small exploration start-ups thrive and we've fortunately we're proven wrong.

And at least our focus area in the Gulf of Mexico has been demonstrated to be an area in which small exploration-focused companies can thrive. So they have been a great customer for us recently.

We don't do a lot of business with national oil companies unless they love to sort of spread their wings outside of their home turf because they normally within their areas of business they usually dominate and so therefore those territories can sometimes not be very good multi-client markets and so we will -- I will just use, just for an example an area that is changing and this is Mexico. We haven’t had a business in Mexico until hopefully now and so I would hope to assume we have [inaudible] as a customer as we start building a data library in Mexico which we certainly expect to do here in the next years, so in that particular case hopefully we will see a new NOC join our customer list as we move forward.

I will turn it over to Kristian for the question about the impairment…

Thanks Robert. Well I think you saw that we have 28% of our sales from fully written off data and obviously in a quarter like that when you have such a high percent of your sales from old data you would expect to see an extraordinary low amortization rate.

And as I told you [not the case] this quarter we reported and amortization rate of 45% and although we are very pleased with our revenue, so overall this quarter we are certainly not immune to market situations. We see that the market is getting tougher we see that the oil price is under pressure and we see some macro factors out there that obviously there is some uncertainty in the market.

So what we have done this quarter is we have taken a very careful look at every single project in our portfolio which had disappointed somewhat in early stages in terms of sales. And then we had applied a higher amortization rates or some kind of net adjustments or impairments with some of those projects.

This projects happen to be mostly in the 2013 vintage we see that vintages be heavily amortized this quarter and we are not going to talk about specific regions but that vintages is where you see the most of the impairments and I think that has been a very prudent approach given the market conditions and I think positions TGS very well for the future.

Just to follow-up on both parts of the answers, thank you very much for them. On the first one given that your customer base has somewhat shifted to a little bit more of the smaller independents, does that make -- would you -- is that giving you bit more worry about your revenue stream given the volatility where if were exposed to bigger companies with bigger balance sheets then maybe they would tend to recycle more?

No, in fact, I think…

Probably other way around?

Yeah comps are the other way around and we look at some of the announcements now and maybe because a lot of these big super majors and such, the public oil companies and so they are being a little bit more open about their plans but I mean you are seeing more of the announcements of cost reductions and that kind of thing from the majors right and super majors but I think we continue to see our that new component of customers that we have is proving to be quite resilient and we haven’t seen much of a change.

Great, and a question on your response, just looking at your regional operating profits there Africa and Middle East seems -- actually in a quite significant negative contribution. Can we just take this cue that’s where most of the accelerated write-off occurred?

[inaudible].

Okay, great. Thank you, I will turn it over.

Yes, good afternoon gentlemen. In terms of the feed schedule we see the investment level in the third quarter was significantly higher than the fleet schedule insight.

Was there any in particular which cause investments to be relatively high in terms of days of feed capacity in Q3?

Yes, Christopher a part of the region for that is that one of the service that we started or announced in Q3 and that you will see on the vessel schedule was supported that was already started at the time and there was a one off payment in order take over that survey from the existing owner and that explained part of deviation in your numbers.

Was that the onshore survey?

That was an offshore survey, a marine survey.

Okay, is that also fair then to say that because looking on the fleet schedule for fourth quarter I end up significantly above the guided range of 2014 although you highlighted you’ll probably be at top of the range. Could there be any some timing that occurs from different parts of the investments in Q4 were already booked in Q3?

We wouldn’t expect it to be significant but maybe slightly above so you may need to a look at your assumptions in terms of what vessel rates were obtained.

In terms of the Norwegian 23rd round so you’re confident about the announcement mid-November but unfortunately the Norwegian authorities have said that application should be in the second half of 2015 which normally means that the announcement will come in June ’15 what makes you confident that will come in November?

I think the whole schedule Chris for as you know has been stretched out. We do know and talking our customers too that they have exploration teams that are kind of sitting by waiting to start working for the round.

Normally in a normal Norwegian round here the upper round will be wrapped up and many of those same geoscientists and teams and technicians would start working immediately after the upper round awards and start working or after the upper round business to say will start working the -- lots will be already announced for the exploration and they’ll start working for that. So this can be turned in December but we do know that there is a gap this year and so I think there is the recognition that there needs to be a period of things to start moving.

We know the data that has been acquired in the Southeast [inaudible], the 3D data it has been acquired, it’s being processed now and some preliminary versions of that data are now being published and put out to interested oil companies. So we think with all that included that this is going to be more, there’s going to be a longer period of time between the former block announcements and the date on bids are going to be turned in.

So a lot more data for oil companies to evaluate so the government is going to allow a lot more time for that to happen.

Thank you. In terms of the strong sales from the pre-2010 vintages, is this fair to assume that, that is partly coming from old azimuth data shot in North America given very strong sales of 2D data and fairly good contribution as always probably from NSA?

I think you should assume that quite a bit of that was 3D as well. It’s was a mix.

Thank you.

Hi gentlemen, amazingly enough I too still have some questions. Just a couple and we’ll keep it to that.

First of all, could you give us an idea about the demand on the U.S. land side or North American land side and given in terms of share repurchase et cetera which talks a lot about offshore, it would be interesting to hear that perspective there.

And secondly, I think we’ve heard the answers to this many times in the past but your vessel life business if there was an opportunity for some very cheap but potentially very new vessels coming to the market would you consider buying three or four of those which you need going forward or you’re philosophically wedded to the vessel light business as you have been in the past? That’s it, thank you very much.

Yeah so the first part of your question to answer your question I think the fact that we’re starting five onshore projects in Q4 is a good indication that we’re seeing good demand in onshore 3D data for the shale plays. We see a lot of opportunity to grow, in line with our overall business but continue to grow our onshore business.

We’re seeing more and more evidence that onshore players are starting to recognize the value of seismic data for the shale plays and as we grow our library I think we’re going to grow our late sales in the play along with the -- much as we do for the marine business. So we don't see much of the difference there and continuously healthy demand in the onshore.

I think if we -- you should recognize that before we commit to an onshore investment we typically look for prefunding that's higher than average level for our overall portfolio and the fact that we're starting five projects in Q4 should be an indication that we've been able to go out and attract some pretty good prefunding for our onshore plays. The second part of your question is really easy to answer.

I think where we recognize that business model that we're -- that we're expert at and that we're -- that we are able to take advantage of now. We've been able to take advantage of over the history of the company is the one [inaudible], and particularly in the markets that we're in right now.

And we also recognize that our business is cyclic. You never say never on things like that but it's certainly is not what TGS has planned to buy and own vessels.

I think we've proven that the even in tight periods we find ways to access the capacity that we need to be able to continue our investments. So I don't see any change in that going forward Rob.

Okay, that makes a lot of sense. And I'm sorry just one very small follow-up and I promise just one.

And that is regarding the investment guidance. Having said it's gone be the top end of the range or above, why aren’t you changing the range of guided investment.

I think I mean I guess we could have changed the lower end of it but I think that we're confident in that we're going to be certainly within the range but not at the top end. It's already pretty we're in Q4.

We've already secured a significant amount, while really pretty much the capacity we're gone be utilizing in Q4. There could be the odd additional capacity we would take.

Also there is a -- there are potentially some timing concerns on projects. We have a very large project, actually two large projects we're gone be kicking off in the latter part of the fourth quarter in the Asia-Pacific region, and so there is certain degree of uncertainty about when vessels show up on your project and start and of course we recognize investment as a percentage of completion.

So we just want to just make sure we are building in that sort of level of uncertainty and that’s why we haven't really guided.

Thank you very much.

Yes, good afternoon gentlemen. And just a very brief follow up question to the pricing I think you were kind enough to just state in the Q2 presentation that we expect the contract pricing down some 10% to 15% this year.

That was however of course before prices started to fall. Any chance that you could give sort of an updated view of where you think contracted prices will end up this year?

Yeah, I mean I think we're certainly seeing a softer Q4. We're seeing not only favorable day rates, but we're seeing good contractual terms.

We're able to push off a bit more risk onto our suppliers when we contract crews, land crews and marine vessels. I think I'm not going to state right now a percentage and revise what we said previously, but I would just say that we're certainly in a soft period in terms of day rates and we're seeing very good day rates.

And I would say kind of going back to Rob’s question previously in terms of the investment, I think we've been encouraged to continue growing our investment because we are seeing pretty good terms out there. And so therefore when you see day rates that we're seeing plus contractual terms that we're seeing we're able to -- that the project -- out quite well, when we're building a financial model for these investments.

So that's allowed us to continue to grow our investments in 2014.

All right. Thank you.

Yeah, thanks Ben. Appreciate everybody taking time to listen on the call today.

Look forward to talking with you again in early 2015. We will be delivering our guidance in the second week of January and we will be coming out with the formal announcement of the dates that those -- that guidance will be in association with Capital Market Day they we will be holding at that time.

And then we look forward to talking to you again in early February when we release our Q4 results for 2014. So thank you very much.