TGS ASA

Robert Hobbs - CEO Sven Borre Larsen - CFO

Rahul Bhat - J.P. Morgan Christopher Mollerlokken - SpareBank 1 Markets AS

Thanks Jeremy. Hello and welcome to TGS' Q4 2015 Conference Call.

I am Robert Hobbs, I'm CEO of TGS, and joining me today on our call is CFO, Sven Borre Larsen. Earlier today, we posted our fourth quarter earnings release and full year 2015 results.

As a reminder, we released our 2016 guidance on January 7. I hope you had an opportunity to view this morning's release and we'll now just give a brief summary of the main points before opening the call to your questions.

In the fourth quarter 2015, TGS had total net revenues of $132 million, compared to $298 million in Q4 of 2014. Multi-client late sales of $90 million were down 60% from the $226 million that we had in Q4 of 2014.

Pre-funding revenues were $37 million, funding 42% of our investments in multi-client products. Our multi-client investment totaled $88 million for the quarter, down 30% from one year ago.

We recorded an operating loss for the quarter of $140 million after several nonrecurring items, compared to $47 million profit in the same period one year ago. The unusual items included $161 million of impairments to the multi-client data library in addition to $18 million of restructuring costs, bad debt and other provisions.

Earnings per share were a negative $1.19 versus $0.31 gain per share in Q4 of 2014. For the full year 2015, net revenues were $612 million compared to $915 million in 2014.

Net late sales for the year for the multi-client data library were $334 million, and that's down 47% from 2014. Full year pre-funding revenues were $257 million, up 4% from 2014, funding 51% of our multi-client data investments.

Multi-client investment totaled $502 million for the year. In [2014] [ph], we had an operating loss of $21 million, compared to a profit of $295 million in 2014.

Earnings per share in 2015 were a negative $0.28, compared to $2.09 in 2014. TGS' cash flow from operations remained strong at $567 million, down only 6% from $605 million in 2014.

And as of December 31, 2015, TGS' cash holdings were $163 million, and that's in addition to our undrawn $75 million revolving credit facility. TGS' Board of Directors has resolved to pay a dividend of $0.15 per share in the first quarter of 2016.

The dividend will be paid in the form of 1.3 Norwegian kroner per share on the 23rd of February 2016. The share will trade ex-dividend on the 9th of February 2016.

Moving onto operations, during the fourth quarter, TGS continued acquisition of this Gigante seismic and multibeam projects offshore Mexico. Five 2D seismic vessels were active during the quarter and we announced last week that we were halfway through acquisition of the 186,000 kilometer 2D regional survey.

More than 57,000 kilometers of fast track data is already available to our customers covering the proposed licensed rounds in the Campeche, Perdido and Mexican Ridges regions. In East Canada, the acquisition season came to an end with the completion of two 3D projects and three 2D projects, all acquired in partnership with PGS.

This region continues to see high interest from clients with over $1.2 billion of successful bids in Newfoundland-Labrador's November licensing round under the new scheduled land tenure system. During Q4, TGS also completed its FOgo Full Azimuth Node survey in the Gulf of Mexico in partnership with FairfieldNodal and continued its agreement of multi-year 2D seismic campaign.

In the U.S. onshore, TGS completed acquisition of the 1,100 square kilometer Blanchard survey in the South Central Oklahoma Oil Play, also known as the SCOOP Play.

In addition, to the north of this survey and adjacent to our existing Loyal survey, in what's known as the STACK play, TGS acquired the 500 square kilometer Kingfisher survey in a transaction with a group of oil companies. This is a great example of TGS' strategy to build a dominant position in the core area of upcoming and prolific onshore areas where we expect continued high activity, even in the current low oil price environment.

2015 proved to be a very challenging year for our industry with global E&P spending declining by 20% to 30%. Oil companies are continuing to cut E&P spending and the market for seismic data is likely to remain weak in 2016.

As I mentioned in the guidance conference call in January, there is higher uncertainty than usual with respect to late sales and we expect 2016 late sales to move in line with or slightly better than general E&P spending trends. TGS has implemented a number of measures to handle the downturn in the best possible manner.

In November 2015, a major restructuring of the Company was announced and through 2015 the global workforce was reduced by approximately 28%. Compared to the situation a year ago, the run rate for cash operating cost has been reduced by approximately US$25 million on an annualized basis.

Simultaneously, we are continuing to work hard on identifying interesting projects that can create long-term value for our shareholders and provide rapid growth when the market improves. For 2016, TGS management reiterates our guidance as follows.

TGS expects multi-client investments of approximately $220 million and multi-client investments are expected to be pre-funded 45% to 50%. Jeremy, at this time, we'll open the call for questions, if you could please do so.

Just a few questions from my side. On your conversations with the customers, are you looking at more innovative ways, if I can say that, to kind of get them interested in seismic data again in terms of changing payment terms or giving them more volume data or anything in those sorts, are you trying something different to spur demand from your customers?

We're always looking to – and Rahul, you'll probably remember in past discussions how we've disclosed or how we've described sort of discounting programs that we can sometimes offer our customers. That's usually related to volume deals that we can do with those customers.

We continue to offer those in a depressed market like we are in right now. Those things are actually pretty tough to do because it requires a higher dollar spend and the oil companies really have sort of globally reduced their seismic spending budgets.

And so unfortunately, we don't see a lot of deals like that. Obviously, our Q4 revenues were down for the first time below the previous three quarters, for the first time in the Company's history.

You recognize in the past that Q4 – there is some seasonality in our revenues and Q4 tends to be a higher revenue quarter than the previous three quarters in most years. This is the first time when it's actually been down and we just didn't see the volume of sort of year-end deal opportunities that we normally see, and I think it's a reflection of the challenging market we're in right now.

I agree. Okay, I understand what you're saying.

But looking back, if you take a step back and look at the seismic market, 2014 I think second half was when it started weakening and 2015 was weak, 2016 we expect it to be weak, and if you exclude the oil prices, if you assume it's going to even recover [to 60] [ph], do you see seismic spending ever reaching a level where we can see a reasonable you reaching back to 2012-2013 kind of level of revenues?

Yes, I think so. I mean what we're doing now, Rahul, is we're making sure that we continue to invest in our data, whether it is adding to our data library by counter-cyclically investing both organically and inorganically, but also renewing our existing data library by reprocessing it, and all this activity that we are doing right now is geared towards hitting the other end of this cycle and inevitably oil companies are going to have to go back to exploration to replace the reserves that they are producing right now.

The question is, when is that point going to be, and that's very difficult to determine right now, but we have every confidence that oil companies are going to return to exploration and seismic data and well log data are going to be some of the first things that oil companies need in order to return to exploring [indiscernible].

Okay, fair enough. And probably just the last one or two questions for me.

On cost-cutting, if we assume that 2016 remains probably weak, then is there scope for more cost cuts? And probably I'll just ask another one and I'll leave it to you.

On multi-client libraries on the M&A, are you still being offered multi-client libraries, are there still opportunities to acquire some new data? Thank you.

Sure. So, on the cost-cutting, we went through a pretty significant reorganization in November and we pretty much had a good handle on what we thought, at least near-term, 2016 was going to look like by the time that we implemented that reorganization and the cost-cutting measures.

So from a personnel standpoint, I think we're positioned quite well for 2016. Of course, if the market deteriorates significantly from where it is right now, you can't rule out additional measures that we might have to take, but given our current expectations for 2016, I think we're in a pretty good situation.

We're continuing to look at ways we can reduce operating costs, operational costs, and we're going to continue to push cost reductions forward into 2016 that are sort of non-personnel related, and I think we see some opportunities to do that by being more efficient in certain areas and we'll continue to do that. In terms of investment, our average day rates that we're going to be paying for seismic vessels and seismic land crews on average will be lower in 2016, we expect, than they were in 2015, and so that will help as well.

In terms of your second question on available multi-client data libraries, we think this cycle could provide more opportunities for us to potentially pick up additional assets. There has to be – we're not going to do so though unless we feel like we're getting those assets at a price that will allow us to get the returns that our investors have grown to expect, which is a way to say that we're looking at a number of opportunities and where if we can get them for the right price then we're going to move on this.

You saw us do one last June where we bought the majority of Polarcus' data library and there could be other opportunities moving forward.

Understood. Perfect.

Thank you.

This is Christopher in SpareBank 1 Markets here. There have been some comments from E&P companies and other [indiscernible] providers that they have seen onshore costs coming more down than the offshore costs.

As you're chartering both onshore and offshore capacity, have you seen similar trends for seismic capacity?

Yes, I think we have. I think we've seen similar trends in cost reduction in both onshore as well as offshore.

I don't know if we could say that cost reductions are higher in one particular play side than others. I will say that the onshore market has – the barriers to entry to acquire data in the onshore market are much lower than for a marine data acquirer.

And so the financial health of the onshore business has been worse for a longer period than for the marine acquisition business. So we've seen an ability to get good cheap acquisition for quite some time in the onshore market, but I think I would say both markets are similarly strained right now when it comes to our ability to get good deals in the market.

Regarding the ongoing Mexico 2D multi-client survey, will you book that as a single vintage or would you split the survey in different vintages depending on how much of the data has been processed at a certain point in time?

That's a good question. It will be regarded as a single survey.

So we'll finish up acquisition in 2016 and be processing the data on into 2017, so the project will likely be a 2017 [indiscernible].

Yes, and note that with new amortization scheme that is coming into play from 2016, we will no longer – in accordance with the old system, we started amortization on 1st of January the year after the survey was completed. So in the Mexico case, let's say it was completed in – it will be completed in 2017, we will have taken into vintage in 2017 and then started amortization in 2018, whereas now we will start amortization from the date when the survey is completed.

Straight-line amortization.

Straight-line amortization, yes.

Okay. And the final question, could you please give any guidance regarding the costs of the coring and multibeam operations offshore Mexico, would it be similar to like 2D vessels or would it be more comparable with a 3D vessel?

No, the cost of those operations are below what we would normally pay for 2D vessels. So it's nowhere approaching 3D costs.

And that's true both for multibeam but it's especially true for coring. Coring is a very – it basically can be a fishing vessel that has a coring equipment off the back.

There's nothing particularly special about it. So costs are, particularly for coring is quite a bit lower than for 2D.

Okay, thank you.

Okay. While these are very challenging times for the seismic sector, we believe we're uniquely positioned to manage through this cycle.

Our strong balance sheet and our asset-light business model allow us to continue investing in high-quality projects. We have some of the best people in our industry who continue to work with passion and pride and I remain confident that together our organization will be able to continue to generate long-term value for our shareholders.

So I appreciate your attendance in our call today and look forward to talking to you in the coming months.