TGS ASA

Robert Hobbs - CEO Kristian Johansen - COO & CFO

Rahul Bhat - JPMorgan. Rob Pulleyn - Morgan Stanley Unidentified Analyst - Christian Mallick - Nomura Daniel Ravik - Handelsbanken

Hello and welcome to TGS' second quarter 2015 conference call. I am Robert Hobbs, CEO of TGS, and joining me today is Kristian Johansen, our COO and Interim CFO.

I am please to confirm today that our new CFO, Sven Borre Larsen will begin employment with the company on September 1, based in our Asker office in Norway. I look forward to having him join me on this call next quarter.

And also I'd like to thank Kristian for his role in holding two hats over the past several months as COO and CFO and I am looking forward to working with him in Houston and he move to Houston and gets into the COO job 100%. Earlier today we posted our second quarter earnings release and held the presentation of those results.

A replay of that presentation is available on our website. I hope that you had an opportunity to view this and we'll now just give a brief summary of the main points before opening the call to questions.

In the second quarter of 2015, TGS had total net revenues of $140 million, a decrease of 32% compared to $205 million in the same period one year ago. Late sales for the quarter totaled $82 million, down 40% from Q2, 2014 but up from 14% compared to the first quarter of this year.

Net pre-funding revenue was down $53 million, down 12% from Q2, 2014, funding 45% of the Company's operational multi-client investments during Q2. Multi- client investments totaled $116 million, 2% higher than one year ago.

Proprietary revenues were $5 million than $8 million from one year ago. A resulting operating profit was $36 million, 56% lower than one year ago and represents 26% in net revenues.

Earnings per share were $0.24 compared to $0.59 per share in Q2 of 2014.Cash flow from operations was $86 million, compared to $66 million in Q2, 2014. After payment of our dividend in May our closing cash position was $176 million which is in addition to our unused revolving credit facility which will soon be expanded from $50 million to $75 million.

Our backlog amounted to $242 million at the end of Q2, 2015, an increase of 26% from last quarter. As expected demand for seismic data continue to be depressed during the second quarter although we were pleased with the 14% growth in late sales versus Q1.

While TGS is not expecting the market to improve for the remainder of the year, we also recognize these market conditions provide an opportunity for counter- cyclical investments. This allows TGS to benefit from attractive pricing and beneficial commercial terms from our suppliers.

During Q2, TGS was very active acquiring new data with two 3D vessels, three 2D vessels, and one wide azimuth crew three land cruise offering operating under TGS control. TGS is also a participant in six joint venture projects for 2D, 3D, ocean bottom, P cable and EMdata.

TGS continue to expand its library in proven basin such as Gulf of Mexico and Barents Sea. TGS reached a number of initial milestones also during the quarter.

We commenced our first 3D survey offshore Eastern Canada in partnership with PGS, and TGS also started acquisition of the Gigante 2D regional survey in Mexico. This 181,500 kilometer 2D survey is our first seismic project in Mexican waters.

And we will continue well into 2016. On the 29th of June, TGS announced that it enter into a Letter of Intent to acquire Polarcus multi- client data library with the exception of Australia for a price of $27.5 million on a cash and debt free basis.

The data covers a prime location within the established hydrocarbon provinces of six countries along the Western Atlantic corridor and comprises 40,000 square kilometers of 3D data and approximately 5,000 kilometers of 2D data. We expect to close this transaction during Q3.

TGS will continue to take advantage of the asset-light business model combined with the strong balance sheet. And we've identified a number of attractive investment opportunities for the remainder of the year.

A prepayment of acquisition cost related to purchases of Polarcus data library and slight acceleration of our investment plan in Mexico, means that we now expect 2015 investments of approximately $490 million. Our revenue guidance remains unchanged at this point at approximately $630 million.

At this time we will open the call to your question. Please press star 1 to post your question.

Operator, I'll now turn the call over to you please.

Good afternoon, Rob. Good afternoon, Kristian.

Congratulation in the strong results today. I have few questions please.

One is on payment terms with customers. How are the negotiations going with customers?

Kristian already in the morning said that a large part of the revenue decline is volume based not pricing base. But are you exploring new payment terms with customer?

Are they asking for delayed payment terms or they want to pay for the seismic library over a couple of years or how are those negotiations timing out?

Yes. It is pretty rare that we agree to payment terms over that sort of time period that you referenced.

But most of our transactions are traditional from the standpoint of any late sales or payable in reasonable 30 day period. However, there are cases when period of time in -- and this is actually probably an advantage that TGS has with our strong balance sheet.

There are occasionally deals that we might do with players where we agree to longer payment terms that might for example go into the next budget year. But this really that they go longer than into the first part of the next budget year.

And then of course when we have pre-funding on new projects, those payment terms are related to percent of completions. So based upon milestones during the project as we complete acquisition and processing, we invoice the customers and those invoices are typically paid on the 30 day period.

So I guess I would say that we've been seeing a mix of regular payment terms and occasional extended payment terms over the past several years. And I guess that really hasn't changed right now I suppose.

We still see a similar mix and but it is very rare when it goes -- it is rare when one deal goes fast really the -- into the next budget year.

Understood. And I think last time when we spoke you mentioned that it is being quite tough to get pre-funding on new projects.

And with the increase in investment that you propose without changing the revenue guidance. Does that reflect that it is got tougher to get pre-funding now and therefore you are expecting even lower -- are you lowering its pre-funding threshold in new projects?

No. We are not lowering our threshold for new projects at all.

I think it would -- I think it is probably more of a reflection on our view of the market and really sort of the late sales aspect of our revenue stream. And our feeling that we need to be cautious there.

And we believe that we are going to be in a very difficult market certainly through the end of this year. And most definitely on into 2016.

So I think it is more of a reflection of our caution on sort of the late sales aspect. We in fact with our most recent investments I would say we've become a bit more vigorous and looking for higher pre-funding hurdles before we have actually approving newer investments given the market conditions that we are in right now.

Understood. And last question for me please.

I was looking at the results and it seems that our Africa and Middle East segment is again produced loss and that is -- and your adversaries also stated that you have not embed any library which was probably the reason why it was in loss in prior quarters. Why -- what could be the problem in that segment or what is the data library result.

Well, I can answer that question, Rahul. I think in general you will see that we had a high percentage of our sales coming from very old institute that are probably not advantage but at the same time we had a very high amortization rate.

I think you can take from that the -- we amortize on new survey that are still in progress very high because we want to be confirmatory on that given the market. And we did some adjustment on the amortization rate of all the survey especially in this region which fails to sell like according phase to phase over the last several quarters.

We try to take a very prudent view and make sure that we keep the library under control and make sure that we still ahead of its amortization schedule as you see one of our side.

And this is about these adjustments and also you are not calling them payment, it is your rewriting its book value.

Yes. Basically that we are putting.

Hi, good afternoon, gentlemen. A few questions for myself if I could, and apologies it might have been covered some of the topic.

So the first one is you highlight that you are going to spend more multi client given the counter-cyclical opportunities which makes it great deal of sense. But what really has changed since the first quarter.

Is it the day rate fallen incrementally since then or you just have more confidence in doing this counter-cyclical investment? And the second question I had was that when I look at one of your regions, it's loss making in EBIT line again, is that because you are particularly aggressive for the monetizing those surveys versus other regions and I am just wondering.

And then finally if I may, in terms of the older surveys which obviously have very little if any book value, a large contribution from them again this quarter and to what degree is that sustainable and where did they come from again. Than you very much.

Yes. So Rob I'll take shot at those.

In terms of what had might have changed since the first of the year in terms of our investments? The first obvious one is the Polarcus deal.

That has added to our reported investments that's added $20 million because we had reached a deal Polarcus where they actually acquired data and we could invoice this $20 million until -- because those amounts were contingent upon sales. As far as the Polarcus deal we agree to go ahead and prepay that $20 million which was the biggest addition to our guided investment earlier in the year.

I guess biggest single addition. The rest of the change I guess from what was guided the 430 I guess that was guided earlier in the year, so where we are now are a few projects that where we reached very good supplier terms.

And these are -- these projects are largely in the western hemisphere, you will see that we've announced four vessels in Mexico and we have two new 3Ds in Eastern Canada. Certainly the Mexican investments we have actually accelerated our investment there by bringing in a fourth vessel earlier than what we had planned originally.

And then we've -- we are quite excited about customer feedback on our Eastern Canada investments. And we along with PGS have decided to move forward in 3D investments in Eastern Canada in that particular play.

Regards to your second question and it was very similar question what Rahul asked previously in terms of Africa and Middle East and our amortization that we've taken there. Kristian answered we are very careful particular in that region given the pull back from our customer base from that region given hydrocarbon price.

We are very careful to make sure we are setting appropriate amortization rate from that data library. So you were looking at that on a constant basis and that the numbers that you see is associated with our Africa, Middle East seismic specific region n in terms of our profitability is certainly impacted by our view on amortization on the projects that we have in that area.

And then I can't remember your third question. Yes, that's right.

Kristian reminds that over advantage, yes, we have a larger percent I think it is 24% of our sales came from fully written down surveys this quarter. That as you have seen if you review our numbers over the past few years, that varies widely on a quarter-by-quarter basis.

And actually it is pretty hard to project and is a function of sales mix so which projects customers choose to buy in any given quarter. It was particularly high this quarter but again as we -- as I just answered we look pretty hard at the newer vintage datasets to make sure that we are amortizing those appropriately and we admittedly are in market that we are in right now we want to be specially cautious and make sure that we carry appropriate amortization rate almost newer advantages.

Thank you very much. Sorry may be just one quick follow up on Mexico which you mentioned and obviously we saw the backlog improvement which looks encouraging.

But I think it is fair to say that the uptick on blocks on offer in Mexico thus far has been relatively muted, and presumably you expect that to turnaround and sort of what timeframe do you think the data sales from Mexico could become significant for results?

Well, I mean first of all our program in Mexico carries very good pre-funding. We are happy with the pre-funding levels we have on our budget.

So we have good customers' interest on the project, on the data that we acquiring down there. The Mexican authorities are holding this license round in several stages.

This first stage that occurred a couple of weeks ago was for exclusively shallow water blocks and we suspected that most of the interest in this initial round of tenders was probably going to be skewed more towards the deep water versus the shallow water. And I think that's what -- and I think we saw evidence in this first phase of the Mexican round.

We are optimistic that and this is based upon direct customer feedback that we have from the participants in our survey. We are optimistic of due of international oil companies on investing in Mexico.

And right now we are not -- that doesn't give us too much concern what happened the couple of weeks ago in the shallow water tender round. I'll note that the Mexican authorities came out; I believe it was yesterday and announced the slight delay in the next round which will be deep water blocks.

And in addition to that they announced that they are reviewing the commercial terms that will be adhered to. And are actually relaxing some of those commercial terms.

So I think that they have taken feedback from the first phase of the round. And are adjusting terms in the next phase of this first round as we move into the deep water side.

I think that's very positive.

Good morning, gentlemen. Two questions.

One is what faction of your CapEx or these multi- client investment are you doing on onshore asset, I mean that way ENP company CapEx is shifting towards your may the acquisition year or two ago, how that -- can give some color on your outlook on that aspect of your business.

Sure. We don't disclosing the split between offshore and onshore.

I would say that all of our onshore investment recorded in our North and South America figures that you see in on earnings release. So that's where all of our onshore multi client activity is.

And that's where we foresee at being in the future, that just where the opportunities on international place in North America. Yes, we acquired actually got into this business, we first started investing in the onshore in 2012, and so we only had been investing for in the play for about three years no.

And as part of our investment was to expand our ability to process onshore data but also move into the Canadian unconventional market. So we acquired a company called Arcus as you rightly pointed out in 2012.

We've been very happy that investment. It's performed -- performed quite well for us.

And I would say our investment as a whole in North America in the onshore has performed to our expectations. I will say that when we look at new investments in the onshore place and particularly now with the market being weighted as we have very high hurdle rates when it comes to pre-funding being required before we sanction investment.

So we want to make sure that really our cost are pretty much covered up front before we commit to an investment in onshore just to reduce our risk in that play because that recent US side of the play, they are certainly driven license around. So it is not the predictability or timing that you might have like to do in the offshore in terms of acres turnover.

I think I mean that's obviously problem for multi clients offering because most companies tend to dominate or try dominate acreage and then diminish the value proposition or might multi client approach like yours so effectively that it would be onshore North American is more like a traditional contract basis work. Is that correct or how do you --

Not necessarily. I think if you were to look at 3D activity in North America right now it is -- you find somewhat high percentage in multi client data being acquired by TGS as well as some of our competitors there.

The financial structure you rightly point out is different. Again I go back to saying the level of pre-funding that we demand for a project is on average quite a bit higher than what we do on your average offshore project multi client project.

And because the survey is smaller and as you rightly point out that it is often time the percentage of acreage, dominants of one company underneath a single survey maybe typically higher than what you find in an average offshore project like in the offshore Gulf of Mexico. But we've still been able to adapt our business model to get similar returns on our investment onshore to what we see offshore.

Where do you see is stretching from this low price environment? I mean I know you are on the early stage of the investment thought process but are you seeing people cut back either on onshore or offshore because of this long term commodity their marker that the future curve is predicting.

We see pull back everywhere. I think across the board really around the world and offshore versus onshore, frontier basin versus producing basins, material basin, we've seen the pull back and it has been pretty even pull back.

It is hard to point to one particular basin or one particular area that's suffered more than another.

Right. And in terms of deep offshore, this is my last question.

Deep offshore or really this high CapEx projects that might people make these investments not on today's oil price environment but on long term environment, what kind of price range do your customers think would make think or going with working in Brazil, Columbia, West Africa. Are there regions that get cut off because of the low price environment or they think in terms of their customers' ability to choose bring in capital.

Yes. That's impossible question to answer really because it depends upon the view of attractiveness and the timing of the development.

I could tell you that we are -- we've recent sales of projects in extremely frontier areas in which you are not going to see production probably for 15-20 years. And oil companies are buying seismic data there.

There are areas in more proven areas, less frontier areas but they might be high cost, high political risk areas that companies are clearly fully back on. So it is -- that's a question that's you can't really generalize on the answer that question, it is very different, depended upon the basin and depended upon the region.

Hi, good afternoon, gentlemen. Just a two questions.

First of all, I want to understand just I know you gone through topic of amortization quite in detail but just if you can shed light on the metrics or framework you use around how you go about order, assumptions you are using in evaluating your multi client book and then to press amortization. And I say that in the context of -- you talked about uncertain outlook, well there is oil says this level so the 6-12 months could we then see on the basis of that framework of reassessment of what you think is worth.

So I really this is sums around the value. And then the second question regards to healthy competition in pricing.

Are you seeing pricing pressures drive margins potentially for future late sales lower or what is this actually - stabilize these levels just like to have an idea, going forward where you see those margins moving to.

Okay. Let me give the first question a shot so what we do in terms of evaluation of the lot of rate, we have an individual sales forecast for every single project in our portfolio.

And our portfolio contain probably a few 100 projects that been sort over money and we have sales forecast for every single project and we offset every quarter and oversee in light of the recent development of the industry we have taken a very, very careful look and specially in typical particular region where we have increase our profession rate quite significantly. We take into account the importance in the market.

And I think the best way for you to check whether we are prudent or not is to have a look at slide 19 in our earnings release that we show every single quarter. And what you will see if you look at and that's bar chart is where we are almost on average we are about one year ahead of the amortization schedule that we have to follow on in terms of coping with requirement from auditors.

So we have been very prudent in that past and we will continue to be so. We would like to be ahead of the schedule and we feel we would take into account the uncertainty in the market.

I think on your second question regarding pricing pressures in the market where we are in right now in challenging environment we had. We are typically successful at holding the price on projects and that has to do with the fact that if you are the only multi client company with data on a particular region which in all companies has to have an information, they has to have data, you are able to hold that pricing.

Where we do I guess discounts is we often times sit down with the customer and negotiate a volume deals. So they are able to reduce their unit price by more data which is of course better for us too because we are able to increase the revenue on a single deal.

So we typically enter into the things like that. Now we'll tell you obviously in a market like we are in right now, we have our customers come to us all the time morning to see if they could do deals.

And a lot of that they are smart they know that we are a pubic company and we do a substantial amount of our sales in any given quarter in the last few weeks of the quarter. So they are always out there looking for deals.

But historically we've been able to keep our pricing pretty stable. And so therefore the margin expectation change.

We obviously as Kristian describe we were careful about with the value of our data library and control that through the amortization rates that we set. Obviously, if we have not been making adjustments through amortization rates in some of our more recent projects, you would have seen a higher margin this quarter because we had a high -- relatively high percentage of sales coming from fully written down survey in this quarter.

But we don't think it is necessarily prudent to do that. I think it is more prudent for us to be careful, make sure we reflect the difficult market conditions that we see right now and set appropriate amortization rates on some of our more recent data which amortization is biggest -- the biggest factor in terms of determining our margins in any given quarter.

So just a follow up in terms of sort of future demand for multi client. Given where oil is -- is there you know sensing of reduce sense of urgency from clients who want to sign or pushing things out which could all do that-- there are less fields or vice versa are you sensing them they are taking advantage of it and wanting to -- you see as the current pricing environment, where we are in that spectrum.

Well, first of all demand for seismic data in general is down. I mean its depressed market.

So, yes, I mean we are not seeing the volumes that we would like to see here, that we used to see. And but that's true both for contract and multi client right.

I would -- in fact I think in general if oil companies are wanting new seismic data in new projects they haven't been acquired yet, I think what we are seeing now is we are seeing higher probably higher percentage of oil companies willing to do it at multi client versus contract because they understand that they could save money by doing it multi-client, which is sharing the cost with its benefits. So I would say in a market like we are in right now, our customer base is looking for more opportunities to acquire the data through the multi client model versus the contract model.

But overall the volume of seismic data that's being acquired and is being purchased by the oil industry is dramatically lower than it was.

Good afternoon. Question related to the backlog which I think we touched upon this morning as well.

The backlog increase to$242 million and I was just wondering is this purely pre-funding?

Should have the Kristian?

Yes, it is a combination of pre-funding and late sales where the data haven't been fully acquired yet. It is the combination of the two.

For example if we sell based up for new survey that let say we sell data Mexico now after the close up point, now they recognize that late sales and it would be possible backlog because so that only been partially completing.

Okay. Can you say how many you start late sale components or to say is that significant or is it just minor part of it?

No. It is quite a significant part.

I mean we don't provide any breakdown of that sort of, of course we told the market this morning is that more than $50 million of the backlog is $242 million related to 2016 revenue. But we don't want to be more precise on that.

Okay. So not more affect -- more than $50 million.

Yes.

Okay. And then just on sort of I understood that's correctly, the increase in the investment guidance which was up from $420 million to $419 million that included only the $20 million related to the deferred cost out to say to Polarcus is $25 million, $27.5 million in the acquisition cost.

That's correct.

Thank you and thanks for participating in the call today. TGS remains confident that the combination of our quality investments and our asset wide approach to the business as well as the unparallel expertise and enthusiasm of the employee base that we have positions us well in the market that we are fighting ourselves and which is quite challenging.

TGS remains focused on assuring that our cost structure is in line with our outlook on the future market. And we remain flexible and continue to implement cost savings measures to secure our profitability and allow us to maintain our leading position in the geo science data industry.

The company finds itself in a unique position to capitalize on interesting investment opportunities as you have seen this through this quarter. And while also continuing to deliver leading shareholder return.

And so we are looking forward to reporting the rest of the year to you. And look forward to talking to you again next quarter.