TGS ASA

Robert Hobbs - CEO Kristian Johansen - COO & CFO

Rob Pulleyn - Morgan Stanley Christopher Mollerlokken - SB1

Thanks, Roman. Hello and welcome to TGS' fourth quarter 2014 conference call.

My name is Robert Hobbs and I'm CEO of TGS, and joining me today on the call is Kristian Johansen, our COO and CFO currently. Earlier today we posted our fourth quarter earnings release and full year 2014 results.

I hope that you had an opportunity to view the release and will now just give a brief summary of the main points before opening the call to your questions. Just as a reminder we released our 2015 guidance at our Capital Markets Day in January.

As part of this release we preannounced our revenue expectations for the fourth quarter and we’re happy to confirm those expectations with you today. In the fourth quarter 2014 TGS had total net revenues of $298 million up 10% from $271 million in the fourth quarter of 2013.

This represents a record quarter for TGS. Multi-client late sales of $226 million were up 4% from $218 million in Q4 of 2013 another record for TGS in terms of late sales.

Prefunding revenues were 62 million funding 49% of our investments in multi-client products. Our multi-client investment totaled $126 million for the quarter up 37% from one year ago.

Our resulting operating profit for the quarter was $47 million, 16% of net revenues compared to $120 million in the same period one year ago. Operating profit was impacted by impairments relating to the closure of the Reservoir Solutions Business Unit and fair value assessment of non-current assets.

In our Capital Markets Day presentation in January, we announced that we were seeking strategic alternatives for our Reservoir Solutions Business. We have been unable to complete the successful sale of this business and are now announcing today that we will terminate all activity associated with this business.

We continue to own the technology and we will look to leverage the value of this technology in the future. Adjusted for the impairment cost, operating profit was $111 million for Q4 or 37% of net revenues.

Earnings per share were $0.31 per share compared to $0.81 per share in Q4 of 2013. For the full year 2014 we achieved guidance with net revenues as $915 million up 4% from 883 million in 2013.

Net late sales from the multi-client library were $631 million down 1% from 638 million in 2013 and we’re very pleased with the performance that we saw through the full year of 2014 given the commodity price environment that we found ourselves in the second half of the year. Full year prefunding revenues were $247 million up 33% from 2013 funding 53% of our multi-client investments, multi-client investments totaled 462 million for the full year.

In 2014 operating profit was $295 million or 32% of net revenues compared to $387 million or 44% of net revenues in 2013. Adjusting for the non-recurring impairment items that we have previously discussed that occurred in Q4, operating profit for 2014 was $358 million or 39% of net revenues.

Earnings per share in 2014 were $2.09 per share compared to $2.59 per share in 2013. As of December 31, 2014, TGS's cash holdings were $256 million down from $281 million at the end of 2013.

TGS had two 3D vessels and three 2D vessels and one wide azimuth 3D crew operating under it's control during the quarter. TGS is also a participant in two 2D marine joint venture projects and one ocean bottom seismic joint venture project.

In addition four lane cruise operated under TGS control in Q4 of 2014. Our marine projects during the quarter included our Newfoundland and Labrador partnership with PGS, 2D, 3D multi-wide azimuth and ocean bottom seismic projects in the Gulf of Mexico.

2D programs in Greenland and New Zealand, and the Nerites Season 2 3D project in the Great Australian Bight of Australia. We have four land projects being acquired in Q4, those were Waterford and Freeport and the Utica Shale Play of Eastern Ohio, Loyal in the STACK play fairway of Central Oklahoma and the Kaybob-Bigstone 3D survey in the Canadian Duvernay play.

Our backlog continues to be very strong, at the end of Q4 we had record high future customer commitments of $293 million which is 4% higher than one year ago and 13% increase from last quarter. The increase from last quarter is mainly due to customer commitments for several onshore seismic projects in North America.

Recent oil price development is likely to result in decreased exploration spending from customers. However, TGS believes a long term future of it's asset light focus multi-client business remain strong.

For 2015 the company secured adequate land and marine crew capacity, a very favorable rates. This is encouraged TGS to continue investments in prolific areas with proven returns.

This counter cyclical approach has historically proven successful on TGS and will continue to take advantage of the asset like business model combined with the strong balance sheet. For 2015, TGS management reiterates our guidance as follows.

We expect multi-client investments of approximately $421 million an additional CapEx of $15 million. We’re targeting revenues of approximately $750 million, we’re targeting an EBIT, our earnings before income tax of approximately $260 million and the Board has decided to propose to the annual general meeting in May, a dividend of NOK8.5 per share.

At this time we will open the call for your questions. Roman, I will turn the call over to you now.

Couple of questions from my side please. One is if you could please provide any kind of color on the impairment you took in -- multi-client impairment you took in Q4, what's the -- so in Q3 you had said that you had taken the 25 million impairment, so what is amount of impairment that you took in Q4 and if you think the market will remain as bad in 2015 should we expect you to take more multi-client impairments?

While we haven't really quantified impairments but I guess you can assume that they are in the ballpark, the same figure or close to what we did in Q3 and the reason for that is obviously that we have seen a significant oil price drop during Q4 which obviously makes us a little bit more concerned about some of the newer projects that we need to make sure that we have sales forecast going forward that support the book value in our multi-client library. So we did an impairment of few projects this quarter and I don’t think we foresee to do any impairments in 2015 because if we did we would have done it right now.

And could you provide an approximately percentages how much percent of your book value is on the Asia-Africa region?

We don’t split that, but what I can say is that it indeed has been significantly reduced during the last two quarters.

And just some, so I was listening to your earlier call also and I heard Rob say that things are not as bad as it was in 2009 and so customers were not picking up the phone back in 2009 and now they are picking up. They are ready to talk but on the other hand I think implied year guiding to a late sales fall of close to 20% and while in 2009 late sales fell only by 5%.

So I can't add both of these up so is there something that I'm missing?

No I think if I can add some color to my comments that I made this morning Rahul, I think you shouldn’t interpret too much in those comments this morning. We often times sales that we complete in the quarter we go through a long discussion with customers and negotiations with customers on deals.

My reference this morning was that really sort of contrasting the period we’re in now versus Q1 of 2009. At least right now customer is talking to us versus in 2009.

Now whether we can ultimately close those deals this quarter is another thing right and obviously we’re striving to do a lot of that and we have -- at this point we’re very comfortable with our guidance which is an annual guidance, we don’t guide on a quarterly basis but remain based upon the activity that we see and even though it's early in the year, just our outlook and our communication with our customers we still feel comfortable with that annual guidance but obviously it's still too early to call Q1 yet.

And one last one for Kristian, please if I may. This is just on the working capital.

I see a huge jump in both accounts receivable and accrued revenues, so those are huge working capital outflow. So is this in any way -- is it anyway related to the Nerites 2 survey or is it the multi-client sales that happened in Q4, is it expected to normalize in the first half of next year?

Could you provide any color over there?

Yes, I think what happened this quarter except we had surprisingly strong sales in December. So a significant portion of our sales came in the last months of the quarter and it obviously add stuff to the accounts receivable at the end of the quarter and will be collected in Q1.

So I think that is a temporary thing.

And on accrued revenues, accrued revenues also jumped a lot. Even if you look at Q3 versus Q4?

So on accrued revenues it's basically the same. The same goes for accrued revenues is that we had very high sales at the end of the quarter and that makes our revenue recognition compared to cash collection quite skewed in a way.

Just one question from me and that is you mentioned earlier about the next set of lease rounds in the U.S. including the as yet relatively unexplored East Coast, something -- there has been a bit of an excitement about -- could you give us a rough stir as to when you think you may start actually looking at doing surveys in that area or is this sort of too far beyond the immediate horizon?

Thanks very much.

Yes sure, Rob. I would like to talk about that, it's an interesting new play, new opportunity for us.

Yes, so what's happened is the U.S. regulators, the Bureau of Ocean Energy Management had published a draft proposal on how they will hold leasing in the next planning period.

These planning periods are five year windows and the next five year window starts in 2017. So what the government is proposed now is to hold a license around off the east coast of the U.S.

and these will be waters that include the states of Virginia, North Carolina and South Carolina and Georgia and the proposal was to hold a lease round in 2021 as part of this next five year plan. We have been quite interested in the east coast because the government last year came out and announced that they would allow G&G activity or geophysical activity in the Atlantic for the first time in decade.

So last seismic data that’s been acquired there has been in the early 80s, late 70s, early 80s. So the area is data poor, what data is there is very old technology.

There is very little known about it just because of this lack of application and technology -- it's been an area that’s been under moratorium drilling moratorium for decades. So we were initially excited when the government announced that they would allow seismic surveys but the missing ingredient there was that how can we customers to be interested in those surveys if the customers don’t have any assurance that they could participate in lease rounds, in another words acquire acreage and so now this new announcement that we saw last week is quite good because it provides our customer some assurance that they will have an opportunity to pick-up acreage in the area in which we’re shooting seismic data.

We have an application in to acquire a very large 2D survey off the east coast that more or less covers that entire area. There are several other seismic companies that have applied for permits as well, I think we’re pretty close to the top of the list and we’re in the middle of the permitting process.

I would say that the permitting process really started about mid-last year and is a pretty complex process that involves a number of U.S. government agencies and so we’re sort of waiting for approvals from those agencies.

My best guess is that a seismic acquisition off the Atlantic coast is probably going to need more of a 2016 event versus a 2017 event. Of course we would like to start earlier but we’re just happy to finally be able to get out there and in a scenario that has quite a bit of potential and it's quite data poor right now.

So it gives us an opportunity.

And sorry just as a follow-up to clarify something you said on this morning's call and just to make sure I understand this correctly but the reason you haven't contracted yet 3D vessels beyond April I think it was from your slide is because the market is weak enough, you can get any vessel you need pretty much any price whenever you want, is that fair?

Well not any price but yes I mean it's pretty, we give seismic vessel this year. I think we’re looking at a market that continues to be oversupplied.

We don’t and this has been true probably for the last 12 months or so. It's -- we don’t really have to lock in about to -shoot a survey until pretty quickly before you’re ready to do the survey, you know it's that kind of availability of the marketplace.

So we’re working on a number of projects and we’re confident that if they materialize we should have no problem in getting adequate capacity to invest in those projects.

At the Capital Markets Day earlier in January, you said you had secured capacity for multi-client projects which represented MC investments of roughly $300 million. Can we assume that all those projects are part of the fleet schedule that you provided at the Capital Markets Day and also now on the Q1 presentation?

Yes I think you can assume that. That capacity chart that we show is pretty much reflects that commitment that we announced in January [Technical Difficulty] that land project [inaudible].

That’s true. Onshore projects as well but those are also shown on the charts.

Yes. And when I look on that slide and try to make my calculations it seems like the investments in first quarter will be very high, could you give any more flavor, you have said that it will be front end loaded this year but in terms of what you’re planning for first quarter investments?

Yes, I think if you look at our activity chart that we published this morning and also on the Capital Markets Day, I think clearly we’re looking at a year that’s likely to be front loaded, given the investment guidance that we have delivered to the market. It's not to say that things can't develop later in the year but based upon our current budget right now I think it's going to be a pretty frontend loaded year.

Thanks, Roman and thanks everybody for dialing in today. We appreciate our shareholders and we appreciate the analyst who follow us and we look forward to talking to you again in our Q1, 2015 earnings release in April.

Thank you very much.