TGS ASA

Thank you very much, and good morning and afternoon, everyone, and welcome to TGS Q2 earnings release. My name is Kristian Johansen.

I'm the CEO of TGS. And with me today, I have Fredrik Amundsen, our CFO; and Sven Bar Larsen, our Head of Strategy.

Q2 was another challenging quarter for TGS. Although oil prices are strong, exploration spending remains limited outside of commitments made prior to the downturn.

E&P companies continue to prioritize deleveraging the balance sheet, and we expect this to continue until strategies are revisited and new budgets are set. Here are the financial highlights of the quarter, with a focus on segment numbers rather than IFRS that you can find in the earnings release document posted at tgs.com.

Net segment revenues amounted to USD 54 million in Q2 of 2021, and that compares to USD 96 million in Q2 of last year. Be aware that it was a quarter where we invested more than twice the amount that we did this quarter.

Segment EBITDA was $32 million versus $56 million in the same quarter of 2020, while the segment operating result amounted to negative $25 million compared to negative $85 million in Q2 of last year. Free cash flow amounted to $18 million in Q2 of 2021, and this is up from negative $10 million in Q2 of last year.

After the shareholder distribution of about $20 million and spending $24 million in relation to mergers and acquisitions this quarter, the cash balance totaled $223 million at the 30th of June. The solid financial position allowed TGS to maintain the quarterly dividend at $0.14 per share and continued share repurchasing program with a remaining value of up to $14 million.

On a separate note, we executed on our fourth M&A transaction within offshore wind with our acquisition of a U.K. company, 4C Offshore, that was closed during Q2.

The plan is that this acquisition will be a building block for both organic and inorganic initiatives, both within wind but also other parts of energy transition-related businesses as presented at our Capital Markets Day in early February this year. Going forward, the market for subsurface data and insight is expected to remain challenging in the near term, and this will influence the company's appetite for risk related to multi-client investments.

However, I believe we put the trough behind us. Our investments for the second half of 2021 are expected to increase from the historically low levels of the first half of 2021.

We already have announced projects in Canada, which take full effects alongside ongoing acquisition in Latin America and a project in Malaysia announced this morning, as you may have seen. These projects have healthy prefunding and satisfy our strict requirement for client funding before taking on risk.

Despite near-term challenges, we remain confident that demand for multi-client data will remain solid for decades. This belief is supported by positive indications of new lease sales in U.S.

Gulf of Mexico, although it is uncertain as to the potential terms of such lease sales and when they will actually take place. In the current market, the pickup in demand and timing of late sales remains uncertain.

TGS is therefore pleased to have no interest-bearing debt and a net cash position of about $223 million in addition to another $100 million of an undrawn credit facility. This facilitates the flexibility needed in the prevailing market.

Our strategy in the current market remains firm and can be summarized as follows: number one, cash is king, targeting industry-leading shareholder distribution for the future; number two, risk mitigation from both clients interaction and also risk sharing with suppliers; number three, extensive use of partnerships, as you saw from the announcement this morning of a project together with PGS and WesternGeco and continuing to pursue consolidation of issuance as well; and last but not least, capitalize on new growth opportunities related today in the fight for renewables. I will now turn it back to the operator, who will facilitate the Q&A session.

Thank you.

Yes, John may be muted. I cannot hear anything.

Can you hear me now?

Yes.

Yes. Sorry about that.

I was actually muted, yes. The projects in Asia that you're doing with WesternGeco and PGS, could you just remind me, please, is this the third year, I just was wondering.

And if I remember correctly, you didn't participate to the first phases. Is this full effect, correct?

And I just wonder, what has made you participate now if you didn't participate in the first phases, please?

Yes. You're right.

We announced -- probably 2.5 years ago, we announced a collaboration with WesternGeco and PGS to the area. And since then, I think at least 1 of the companies have done at least 1 survey.

And you're right, we didn't participate in the first two programs. And the reason for that is that we look at these programs independently, and they need to satisfy our requirements for a decent prefunding and obviously, late sales.

And the first 2 didn't, and this one does. And hence, we're part of this one.

So it's solely an independent assessment of the business cases.

And may I ask what sort of prefunding that you have now on this project?

Yes. We can't disclose that, and that's in agreement with our partners, but it's definitely higher than what the average from what you will see from TGS this year.

And it's typically in line with what you see when we do our onshore programs or seismic over -- like converted contracts.

And also let me ask then going forward, where should we expect big new projects from TGS? Which regions are we likely to see the -- not necessary in Q3 or Q4 for that matter, but for the next 24 months, which regions are you considering doing bigger surveys, taking on new surveys with bigger surveys going forward?

Yes. I think that -- I cannot give you a precise answer to that.

But what I can say is that we're doing screening of all our markets. And I think where you will see activity from TGS in the future is very much in line with our long-term strategy would be Latin America, with probably the main focus of Brazil.

You will see that TGS will continue to be active in the U.S. Gulf of Mexico, mainly in OBN rather than stream department.

And then you will see continued to our investments, which you will see in Q3 as well, and then Northwest Europe. So to answer your question, I think we're probably somewhere along the Latin American margin or U.S.

Gulf of Mexico.

All right. But PGS seems to be a whole -- PGS later seems to be holding effective than the other seismic companies, and they argue that it's because they have a multi-client likely located in more mature regions with 4D and 4C.

So I just wonder, do you see the same thing that the mature regions are holding effect, too? And also, going forward, I would more likely to see TGS OPEC investing in more regions -- in more mature regions with full CROs and seismic for that matter?

Or are you holding on to some CRO exploration as the main focus?

Well, I think, first of all, when you look at results and you compare different companies, you probably need to look at more than 1 or 2 corners. And you know them better than anyone, John, I think.

But secondly, to that question, I think there is definitely a shift towards more what we call ILX or infrastructure-led exploration right now. And a lot of these programs that are being carried out at resets have been committed probably 2 or 3 years ago, so before the COVID and the downturn.

Discretionary spending is probably at a record low level, as you can see from our results. So I think when some of these jobs that were committed back in 2018 and '19, when some of these jobs are done, you will see some of the budgets shift back to more discretionary spending, which is, I think, a lot of us would benefit from.

So it's not like the majors have kept their overall seismic budget by 80%, 90%. It's more that the shift in their budgets have been towards infrastructure-led exploration that they pretty much have to do because it's a lot of historical commitments made.

So I think that's really important to understand. So for TGS, I don't see a significant shift.

I think there is more mature areas today than it was 2 or 3 years ago, for sure. And obviously, with the acquisition of Spectrum, we inherited a lot of frontier data.

I still think we -- Gulf of Mexico is a rather mature area, and you will see quite a lot of activity from TGS in Gulf of Mexico. Brazil is also -- parts of Brazil is considered quite mature.

And that's another important market to look at.

Just a final question on your last comment. Do you experience that oil companies are eager to get back to Gulf of Mexico to go back exploring once the Biden moratoria, so to speak, is lifted?

Yes. Absolutely.

I think there's a lot of oil companies who are just waiting to get more clarity on the administration strategy, and we are ready to start investing whenever that happens because, I mean, obviously, with the current oil price and the attractiveness of the U.S. Gulf of Mexico deal, there's hopefully a lot of money to waiting to be good into play there.

Thank you for your attention today. And as mentioned, our strategy remains firm and take a dialogue with our largest customers.

We remain confident that we will ultimately see a recovery of the market. Meanwhile, our asset-light business model, robust balance sheet and strong cash flow enable us to take advantage of strategic opportunities, both in asset surface sale of business and in our New Energy Solutions segment.

Thanks, and hope to see you again at the Q3 earnings release later this year. Bye.