TGS ASA

Robert Hobbs - CEO Sven Borre Larsen - CFO

Amy Wong - UBS John Olaisen - ABG Christopher Mollerlokken - SB1 Rahul Bhat - JPMorgan David Herman - Crispin Capital

Hello and welcome to TGS' third quarter 2015 conference call. I am Robert Hobbs, CEO of TGS, and joining me on the call today is our new CFO, Sven Borre Larsen.

Earlier today we posted our third quarter earnings release and recorded presentation of the results. I hope you had an opportunity to view the presentation and we'll just give a brief summary before we open the call to your questions.

In the third quarter of 2015, TGS had total net revenues of $169 million, a decrease of 11% compared to $190 million in the same period one year ago. Late sales for the quarter totaled $90 million down 31% from Q3 2014.

Net prefunding revenues was $74 million up 45% from Q3 2014, funding 55% of the Company's multi-client investments during Q3. Our operational multi- client investments totaled $135 million, that’s 45% higher than one year ago.

Proprietary revenues of $5 million were lower than the $9 million from one year ago. A resulting operating profit was $46 million, a 36% lower than one year ago and represents 27% of net revenues.

Earnings per share were $0.39 per share compared to $0.53 per share in Q3 of 2014.Cash flow from operations was $129 million compared to $187 million in Q3 2014 and our closing cash position for Q3 was $191 million which is in addition to the unused revolving credit facility of $50 million. Our backlog amounted to $182 million at the end of quarter, that's a decrease of 25% from last quarter following a very active month of investment and associated revenue recognition.

Moving to operations, TGS made good progress on its Mexico activities during Q3 with four vessels now active on the Gigante 2D seismic program. We now have exceeded the 25% progress mark with over 47,000 kilometers acquired on the survey.

TGS also commenced multi-beam operations on the U.S. side of the Gulf of Mexico during the quarter and will continue in Mexican waters in Q4.

During Q3, TGS commenced the acquisition for the second year of the multi-year 2D program offshore Northeast, Greenland. The icy conditions and the operational performance have been very good and the Company was able to acquire 7,300 kilometers of this program leaving only 1800 kilometers to be acquired in 2016 to fulfill our commitment to the prefunding customers.

TGS was also very active in a number of other offshore regions during Q3 including East Canada, the Barents Sea and the U.S. Gulf of Mexico.

In addition, TGS continued the expansion of its U.S. onshore library in the Utica and the SCOOP plays.

During Q3 2015, TGS completed the acquisition of Polarcus's Northeast Europe multi-client data library for a total of $21.4 million. The closing of the purchase of certain Polarcus multi-client projects in West Africa took place in October.

This morning we announced our latest product offering to our geologic products in services division. TGS has acquired Digital Petrodata, at Denver Colorado based energy focused GIS Company.

The addition of Digital Petrodata allows TGS to now offer a digital GIS referenced data base on producing oil and gas fields in the U.S. and it will be great addition to our current geologic library in the U.S.

The demand for seismic data has continued to weaken during the first nine months of the year and oil companies seem determined to continue their efforts to reduce investment and cut costs. Rest oil companies have signaled further cuts in 2016 and a couple have indicated reductions in 2017 as well.

In order to adapt to the changing market conditions, TGS implemented a cost reduction program in the first quarter of 2015 resulting in a significant reduction in operating expense. Due to continued weak market conditions, the Company is in the process of further reviewing the cost based with the aim of realizing additional cost reductions from the beginning of next year.

Although the seismic market has weakened substantially over the past year, TGS has positive view on the long term outlook of its asset like multi-client strategy has been reinforced. The Company has taken advantage of the slow market to secure adequate land in marine crew capacity for the plan projects at favorable arrangements.

The acquisition cost per unit has come considerably down and the multi-client investments in 2016 are likely to be lower than in 2015. Our 2015 revenue and investment guidance remains unchanged from last quarter at approximately $630 million of revenue and approximately $490 million in investment for 2015.

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

Hi there. It's Amy Wong from UBS.

I have three questions please. The first one relates to this morning’s announcement that TGS will be leasing the two Sanco vessels instead of them staying with Polarcus - you have been big users of these two vessels in the past.

So could you perhaps give us a comment on how you feel that – down this vessels being [indiscernible] could may or may not effect kind of your availability to you and the cost to you. My second question relates to the R&D credit you recognized in the quarter whether that is repeatable and how we should think about that benefit.

And on the third question then is related to your impairment testing of your multi-client library. Can you give us some parameters that you used at the third quarter and how – may be your view on the oil pricing in 2016 and 2017 can competency changed that impairment test outcome.

Thanks.

Sure, thanks Amy. Regards to the announcement this morning that - growing our suppliers in the Sanco vessels.

Right now – in market that we're in the right now, there is no issues acquiring adequate capacity for us to continue on investments. We're in a market right now, it is dramatically oversupplied.

You always like to see a broad mix of healthy suppliers. We always like to see that.

But you have to lift the market sort of dictate what's happened and so - what we’re seeing this morning doesn’t really concern us at this point. Doesn't - is not really an issue for us, I’ll just point out that the wells are currently not being used by Polarcus, they have used by Dolphin or been leased by Dolphin.

But yes, we’ll just – it's not something that concerns us at this point. There is plenty of capacity both onshore as offshore for us to accomplish our investment plans.

The next two questions, I'm going to turn over to Sven Borre and he will handle the tax and the impairment testing questions.

Yes, with regards to the tax question, the refund that we achieved on the R&D spend is definitely a one-off, so you shouldn't expect that to be repeated going forward. We're going to have the project ongoing that we completed now in the third quarter and that has been successful but it is a one-off.

With regards to impairment testing, in general we feel fairly comfortable with our - with library regarding we feel that we have adequate buffer on a consolidated basis but of course we do the impairment testing on the survey by survey basis rather than on consolidated basis. So, of course we cannot rule out that there will be impairments going forward.

The main impairment that we are looking at of course is sales and sales expectations. And of course when the market weakens, sales expectations are basically coming down so it's fair to say that in the current market the risk of impairments is increasing.

Thank you very much. And good to hear from you and thanks Robert for your answer as well.

I’ll turn it over.

Good morning, Houston. Couple of questions, you mentioned that couple of your clients have indicated that they will get spending also in 2017, I presume that it’s a year-on-year relative to spending in 2016.

Could you elaborate a little bit about it, it’s a particular regions and how good – do you think these clients have on spending in 2017?

Yes, it's - I think certainly we're expecting further declines in 2016 what our comments on 2017 that we made today are based upon couple of notable comments that I think analyst have actually reported on a couple of larger oil companies - global oil companies. They are super majors.

So I think that’s pretty well published and a couple of those have come out and described potential further E&P spending reductions in 2017 over 2016. So we just have to watch it closely, the right thing John about our - about the way we run our business is we can react very, very quickly.

And I think as we look at our business going forward, we’re probably in a period right now that is more uncertain than we’ve seen it in many years. And we have to plan to be - to handle really any contingency going forward in a market like this so that's a challenge of our management and I think comments from very large super major customers like this where there talking about further reductions in 2017, we have to take those into account.

None of your clients have actually say that to you, it's more to pickup -

That's right. These are published comments, yes.

And then on the guidance for the year you think it's 630 for the year which [indiscernible] means a very weak to full. And I was thinking to the guidance just due to uncertainty or is there hope for some upside on that number or any reasons why you probably be this week and may be in particular don’t you expect to see normal seasonal uptick in sales Q4 this year?

Yes, I think going back to how I answered the last question, I think we’re in a market that is extremely uncertain and I think in any given quarter, the last month of the quarter carries a huge percentage of sales in any given quarter. And just given the uncertainty that we have in the market right now, in the place that we’re in, in terms of Q4 it's - I think we just need to be prudent.

I do think we're in - I mean, let's face it, we're in a very weak market for seismic data. I can't stress that more its tough and we see some customers obviously from our Q3 results we’ve seen some customers that are still consuming data and exploring in certain areas but we're having to be - we’re having the straight extra hard for the sales and I think just right now the outlook for Q4 is pretty marquee right now John.

And my final question is related to dividends. You have - that's shows strong cash generate and deliver shareholder value, how important is it for you guys to hold the dividend rate and how - would expect cuts investment significantly next year which you’re indicating that you will do, that should improve cash flows.

How important is it for you to keep - not to cut dividend and keep dividend at current level?

Yes I think we’ve said and our Board's communicated that certainly our ambition to maintain the dividend and that's important to us. I think in saying that, we’re going to continue to look at our cash flow prospects going forward in the health of the market.

As we have communicated in the earnings release today and as we’ve communicated before, we’re going to quarterly dividend payments in 2016 and we've – and obviously after our Q4 earnings release in Q1, we will communicate a level that will be paying out in the first quarter and we’ve communicated that is our aim to keep that steady through the years. We're in our budget period right now and obviously an outcome from that budget is going to be a view our cash flow and that will impact the level of dividend in 2016 but certainly it’s the ambition that we’re going to maintain it.

That's all from me. Thanks a lot.

Yes, good morning. In terms of the third quarter results, could you – where they stronger than you had internally expected?

No, they were pretty much in line with our expectations.

And going back to John's question. So of course year-to-date only down 22% topline guidance basically implies roughly 30% decline.

So you would say that the guidance is just a reflection of the low risk stability you have for Q4?

That's a reflection of the market. We have given our – given what visibility we have in late sales right now, we have very - I mean obviously at this point of the year and toward the quarter we have very high visibility on our investments in our prefunding at this point.

I think we feel comfortable with the guidance that we have right now and I think it reflects the health of the market that we’re in.

And of course we will have much lower activity with regards to acquisition of Seismic Data in Q4, so investment levels will be substantially down from Q3.

You have also previously guided that investment level in 2016 will come down versus 2015 also just used the good price effect here on charted capacity. But would you care to give any interval or quantification of how much it will be reduced?

Not at this point, we’ll come out in January with our guidance for 2016 and disclose that at that point.

The comment in the quarterly report you mentioned that you will remain optimistic in terms of inorganic communities. You previously acquired the Polarcus library, would it be mainly library companies or libraries you would look for or are there other types of assets like the acquisition you announced today?

Well obviously since we announced one today, we’re looking for a breadth of data companies that span the seismic and geologic product space. The company that we acquired today is really in its core data company and they use GIS technology in order to deliver the data to our customers.

And so I would – you should probably assume that any kind of M&A that we do going forward would be obviously oriented to the EMP space and be oriented to sort of a data business.

Even up I understand that you not want to give guidance for 2016 yet but would you quantify how much capacity we have locked in for 2016 so far. I’m mainly assuming it's Mexico program of course, continuation of Greenland and Newfoundland.

Well, certainly we're wrapping our Eastern Canada operations shortly, our 3D operations and 2D operations. We'll have our Mexico projects going through into 2016 and that will be five 2D vessels and of course our Multibeam operation which is a goodwill vessel.

And so, those will go into 2016 and then we do have our final season in Greenland of that multi-year program. That’s all we have communicated so far in terms of intentions - investment intentions for 2016.

And again strong revenues from North, South America again but would you care to split it a bit on in terms of Mexico, U.S. side of Gulf, South America.

It seems based on the numbers you reported but pre -funding in Mexico. Could that be in a bit higher than we had assumed originally?

We are pleased with our prefunding in Mexico. We don’t guide specific revenue splits and that sort of granularity to your question but we’ve been happy with our prefunding levels in Mexico.

We were happy with where we've stood in Eastern Canada and we’ve communicated before that in Greenland, Northeast Greenland that’s a very heavily prefunded 2D project on the multi-year programs. So all of those contributed to good prefunding results in Q3.

As well as and I’ll point out we wrapped up our onshore activity on the Blanchard and Freeport surveys as well in Q3 and then early Q4. We’ll be wrapping up the Oklahoma operation in mid-Q4.

So, and typically our onshore, as you know Chris, for onshore activity typically carries higher prefunding than sort of average marine project.

That's it for me. Thank you.

Good morning, Rob, [indiscernible]. I just had some few questions on the conversations with your customers in 2016, has that started, do you have any feel on, if pricing reduces a bit people will be more interested in buying seismic data or is it just that they have no money to spend at the moment?

Very few of our customers have communicated what their budgets are going to be for 2016. I think we have to wait and see what that’s going to be.

The level of customers we deal with right now aren't typically or at least the level of the organization that we deal with in selling our product there. They are certainly not in position to communicate what their intentions are likely to be in 2016.

I think it's our expectation that we are going to continue to see a slow market through 2016. We believe that it will - we’re going to have to obviously see an uptick in commodity prices and you know, our customers right now are focused on cash flow and our products are largely in exploration products.

So, I think this is a cycle that’s going to take a little while to come out of and obviously nobody can really call the timing of that but it's - or they would not be wise to call the timing of that but certainly it’s our belief that 2016 we’re going to continue to see a slow market.

Okay, I understood. And on the sales that you’ve seen so far, are you seeing any kind of trend in the sense that companies are preferring to explore existing infrastructure location, existing fields rather than in frontier region or something.

Are you seeing more sales in such region or is there no such trend?

Probably say, the trend has not changed all that much for us. I mean, I think that could be - I think it’s evidenced by our recent activities in Greenland and out the east coast of Canada and frontier areas like Mexico deepwater, I think there is evidence that there is still interest in frontier exploration and so yes.

Okay, perfect. Thank you.

Good morning guys, thanks for the update. Quick question kind of coming back to this from the floor, with the lower commodity price environment and the availability of onshore shift to jurisdiction I see activity levels move towards on shore U.S.

North America and therefore are you increasing your investment in those shale base, I see a slide there talking about your activities but could you talk a bit about that - is that a structural shift that you’re seeing in the industry that you are getting ready to face or is that - is just a temporary being a an offshore you will come back.

I think our - the percentage on Slide 25 in our earnings release this morning we show our activity both marine and onshore and its actually been pretty steady over the past couple of years. We've continue to have one or two onshore projects being acquired in any one time.

I don't necessarily - there is no reason for me to believe that the percentage of our onshore investments are necessarily going to increase or decrease versus a percentage of our offshore investments and our customer interest is pretty for us for our product has been pretty static in both areas.

Maybe insight anything you could see there, share buyback with the cash flow that you generated, and you're expecting lower investments next year will be expect that to increase I mean assuming the current environment process or would you rather pay that out as dividends rather than share buybacks. So how do you think about that?

We haven’t done a share buyback since - I guess we wrapped up in first quarter of 2015 was the last bit of shares we bought back and that was from a authorization that we had a buyback shares in 2014. So the board has traditionally viewed share buyback as probably second priority to return value back to our shareholders versus dividend and you should probably view that as away for the company to return excess cash in a given point back to the shareholders.

So I think right now the focus is clearly – as it has been over the past year been on the dividend.

Right, thank you very much guys.

Good afternoon. Going back to earlier comment about the year-to-date revenues being down 22% your guidance being down 30%, and telling that with the comment that the last month the quarter has been a big impact on the quarter.

Are you anticipating a budget flush in the fourth quarter or you somewhat concern they may not be therefore you’re maintaining your conservative 2015 revenue guidance?

Yes, I think you’re right David we traditionally do see some budget flush money in the last quarter of the year and that’s traditionally been one reason why TGS's revenues tend to be higher in the last quarter of the year, you have some seasonality. There could be a little bit of that this year I mean we have, we are in discussions with customers now that are looking at sort of volume deals that they might pull the trigger on Q4 but it's, I think we have to just be cautious of the market that we’re in right now that money is tight for seismic data.

There is not as - oil companies are not exploring as they were in previous years and so again I would say that our - the degree of uncertainty is quite high near term. So I think we’re being realistic with our guidance and we may not expect a big buff that we have seen in past years in Q4 just given the current appetite for exploration data right now.

In the second quarter, you have attributed the revenue decline to more being more volume based than price based. Is that a similar comment that would apply to the third quarter revenue decline as well?

Yes, no I think it is probably more volume, we haven't seen much of a price impact in our revenue on our revenue stream. In the multi-client business, you’re pretty much able to hold pricing once you have a project acquired in employees.

So that hasn’t been a big drivers, it maybe been volume.

And the last question is just you have mentioned the uncertain market out there as well as your customers have provide a commentary and given the headcount reductions that in the department lot of your large customers I assume there is lot of uncertainty. But does that impact your confidence level or your outlook for to maintaining kind of cyclical investments that you’ve historically done during these periods with your very attractive day rates or could there be a temporary pause and so you get more visibility on what the outlook for the market is when budgets come out and be it more to active dialog with your customers.

Thank you.

Sure. Yes I mean when our customers are cutting cost like they have been over the past several months through the summer, it obviously is a signal that they are not going to consume as much data and that they are pulling back from exploration and we have seen a lot of headcount reductions in exploration departments in our – in the E&P sector.

And that's the function of the fact that their exploration plans have geared down and they are pulling back which obviously impacts the need for exploration data. I think we clearly are have been this year and we clearly intend to going forward to be a countercyclical investor.

We’re going to continue to invest and as we do that, I can't communicate what levels that will be for 2016 or really past Q4 but I think that we’re going to be able as we invest - we will be able to take advantage of what right now is probably more favorable conditions in the marine and onshore acquisition market in terms of contracting services than we have seen in many years. In fact if you think about in 2016, this will be the first full year that we will have been able to take advantage of rates that towards the bottom of the market presuming we’re at the bottom right now.

So, 2015 we still have lot of acquisition in investment that was based upon rates that were negotiated in previous periods. So I think we’re looking at that as we put together our 2016 plan.

I think that affect us has gone into comments that we’ve made and what little guidance we have provided to 2016 that our intentions are that we'll invest less cash next year and our data library. It doesn’t necessarily we will be acquiring substantially less data though.

And that is sort of the magic of our business model. Elaine, do we have any more questions?

Yes just a follow-up regarding the change from annual to quarterly dividends. Is it correct so that when you release fourth quarter results in February that you will announce first quarterly dividend payment but that you will have to wait until you have done the ordinary AGM and got the necessary approvals until that first dividend could be paid.

So you're announcing a quarterly dividend in Q1 and is little paid in Q2 and when you report Q1 results in May, you could speed up the process a bit so you will get basically two quarterly dividend payments in second quarter, is that correct.

It’s not correct. In the AGM in May we got the authorization of the Board – the Board got the authorization to pay quarterly dividends and that authorization lost until the next or lost throughout Q1 basically.

So it means that we are able to pay the Q1 dividend after we have been releasing the Q4 results. And then dividend in Q2, we will announce that in relation through the Q1 results but for technical reasons that cannot be paid out until of the AGM.

So that particular dividend will be part of the new authorization that we will see got AGM on the comfortable May. But then when we come to the third quarter, we will be back to a sort of the normal schedule again, so the third quarter dividend will be paid in connection with the release of the Q2 results and paid immediately afterwards as described in the quarterly report.

Okay, thanks for the clarification. Thank you.

Thanks Elaine. Thanks for calling in today everybody.

I think it's clear customers have pulled back dramatically from exploration and demand for seismic data overall has deteriorated as we stated. Our near term outlook for seismic demand remains uncertain.

However we remain very confident that we - TGS has the perfect business model to manage through the cycle. It’s the foundation of that is our strong balance sheet, our asset-light posture and allows us - both of those allow us to access interesting opportunities both organic and inorganic investment opportunities.

In addition our product really provides an ideal tool for energy companies to access seismic data to conduct their technical work in a cost efficient manner. So there is really not a subsurface imaging product out there, that's a better avenue for all companies to do, what exploration that they continue to do during the difficult period like this.

So we think we’re in a very, very strong position. So we look forward to reporting to you in January on our guidance for 2016.

And thank you very much for your calls.