TGS ASA (TGS) Earnings Call Transcript & Summary

Hello, and welcome to the TGS Q1 Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present Kristian Johansen. Please go ahead with your meeting.

Good morning, good afternoon and good evening, depending on where in the world you're listening in from. My name is Kristian Johansen. I'm the CEO of TGS. And like most employees in the company, I'm currently working remotely, and I'm doing this call from my home office in Houston. As we do every sixth business day after quarter close, we have today announced the preliminary net revenues for Q1. In addition, given the special circumstances caused by the COVID-19 virus, we have provided an extended announcement with additional information on how this situation is affecting us. Based on preliminary reporting from our business units, we expect Q1 net revenues of approximately $152 million, whereof about $85 million is made up by prefunding. The COVID-19 crisis accelerated during the last few weeks of the quarter, and with more than 60% of late sales historically being generated in the last month of the quarter, this hit our Q1 sales hard. With this, we came in well below our expectations we had earlier in the quarter and probably below the expectations you also had. Over the past weeks, I've had a lot of conversations with exploration management of several E&P companies ranging from super majors to small exploration companies. These conversations have had one thing in common, E&P spending is cut significantly. All companies are now turning every stone to find items to cut. As a substantial part of the 2020 budget are already committed, discretionary spending will suffer an over-proportional share of the cut. Unfortunately, most of seismic spending falls into this category, which means that data sales for the full year should be down considerably more than the average CapEx reduction of 25% to 40% announced by E&P companies. On this backdrop, we've seen the need for initiating several measures for reducing costs and protecting our cash flow. Firstly, we aim at reducing 2020 multiclient investments to a level of $325 million from the previous guidance of $450 million. Although this means that prefunding revenues will be lower, it will have a positive impact on our cash flow of between $50 million and $100 million. Secondly, we've taken actions to reduce operating costs through centralization of offices, global salary freeze, temporary suspension of employee bonuses and rightsizing of the organization. We expect a reduction in cash operating costs of approximately 35% compared to 2019 pro forma numbers. And thirdly, we're temporarily reducing dividend payment to $0.125 per quarter from $0.375 previously, which will reduce cash outflow for the remainder of the year by approximately $44 million. And I'm talking dollar figures on the dividend per quarter. TGS has a history of maneuvering difficult times in such a manner that we come out in a stronger position at the end. And this is our goal in the current situation as well. With the measures I just described, we're ensuring that the balance sheet remains robust, which will allow us to withstand a prolonged period with lower revenues as well as taking advantage of interesting opportunities that tend to appear in periods such as this. These were the key points I wanted to cover initially. Thank you for the attention so far. We will now open up for questions. Please, operator?

[Operator Instructions] And our first question is from Christopher Møllerløkken from Carnegie.

This is Christopher Møllerløkken from Carnegie. With regards to the interesting opportunities you mentioned that might appear, could you elaborate a bit more on that?

Yes. I don't think I want to go in details about that. But what I can do is to refer to previous down cycles that we've seen in 2014 and '15 when we saw -- I wouldn't say a similar situation. This one is far more dramatic. So we saw a situation where E&P spending dropped significantly from one year to another and TGS came out as a stronger company. We purchased a few data libraries from peers who were in financial difficulties. We were able to make countercyclical investments. We will do that this time, too, but I think it's still too early to make that call. But there are always opportunities that we could capitalize on in a situation like this, and that's why it's so important for us now to preserve our cash balance and make sure that we are in a good position to take advantage of opportunities when the market allows for it.

You mentioned that you expected this downturn to be more severe than the 2015, 2016 downturn. In what way are you experiencing that?

No. As I said in my introduction, I've had these meetings with pretty much all our clients over the past 10 days. And I think what made this down cycle quite unique is that it happened so quickly. It was a matter of a couple of weeks. And we started out the quarter being very optimistic, things look really good. Our clients were increasing their budgets. They had plans of buying a lot of seismic in 2020. And then within the matter of 8 or 10 days, things were completely turned around and looking quite negative at turns. What we hear from our clients is that discretionary spending is pretty much put on hold for now, maybe put on hold for the remainder of the year, which means that seismic that really fits into that category of discretionary spending will be hurt quite significantly. So unless you already have signed commitments, it's going to be very hard to get the extra dollars out of all company projects. And I think that's kind of different to what we saw back in 2014 and '15. I mean it was a quite dramatic drop in spending at that time, too. But I think at least we got some kind of a prewarning. And it didn't really happen overnight or over the course of 10 days, as you've seen right now. So right now, we see that our clients are in a bit of a shock. They're really focusing now on, as I said, turning every stone, trying to cut their CapEx significantly overnight. We've seen some of the programs that have been announced. And as I referred to, E&P spending cuts of 25% to 40% seems to be the consensus right now. Keep in mind that when you cut E&P spending 25% to 40%, the key part of that -- or the production part of that is quite sticky. I mean it's mainly long-term commitments that all companies have already entered into. So you cannot really cut too much on that short term. On the exploration side, unfortunately, data is probably the less sticky part. So that's where we're going to see the greatest negative impact short term. Then obviously, when we take a slightly longer-term view, we all know that all companies need data, and they need seismic to explore and they need drilling rigs to drill wells. So this will obviously be more of a temporary hold back rather than a permanent change in their spending. But right now, it looks quite dramatic, I would have to say.

And one area that's been hit perhaps the most by E&P companies' spending reduction is the U.S. onshore. When you reduce multiclient investments for 2020, is it fair to assume that you have reduced your plan to invest in U.S. onshore for this year?

Yes. We're going to invest less in onshore, and we're going to -- we had really high investments in Q1, and that was our plan. We had a front-end loaded investment plan for the year. So a lot of the investments that we did in Q1 or actually quite a significant part was onshore. And fortunately, it was heavily prefunded. So we didn't have a big net investment in onshore in Q1. But you will see that if we do onshore investments for the remainder of the year, it will probably be fully funded. I wouldn't expect us to make any big cash investments in our onshore business in 2020.

And as you said, the plan was to have high investments in Q1, but given the vessel schedule provided in Q4, it also seems that it's relatively high in the second quarter. Or have you changed plans? Or is it fair to assume that second half will be very low for investments?

Yes. I can probably give you a bit more clarity on that. So I -- we have reduced our plans for Q2 as well. But there are some programs that we started in Q1 that will continue into Q2. So Argentina is one of them where we have 2 vessels where the current plan is to acquire seismic until May. So that will continue. And I think in general, you will probably see investments in Q2 of about half of what we did in Q1. That's a rough estimate as of now and it assumes that we're not going to have any big operational hiccups related to crew changes or travel restrictions and that kind of stuff. But it can easily be cut to about half. And then for the rest of the year, you can probably do the math yourself. We obviously have imaging investments because we are continuing to do imaging and processing of the project that we invested in, in Q1. So there will be a few tens of millions of dollars in imaging. And we have announced the program in the Atlantic Margin in Norway. That program will hopefully go according to plan, depending on the outlook for COVID-19, of course. We have -- we may come back to Argentina in the latter part of the year, but that will be probably late Q4, so it won't have a significant impact on 2020. And we are planning some surveys in Brazil. That still is a bit uncertain because we've seen a delay of the 17th round. So that could be pushed into next year. And then finally, we have this OBN survey in the Gulf of Mexico that we have been planning for quite some time. It was originally going to start sometime in April or May this year. That may also get pushed to the latter part of the year. So you could probably count the number of projects that we're going to carry out after mid-Q2 until the rest of -- or until the end of the year. It's probably no more than 4 or 5 projects.

And our next question is from Lillian Starke from Morgan Stanley.

I just had a quick question regarding the -- in the dividend. I was just wondering if this is a little bit sort of you being more conservative in terms of what you're seeing in the market or that is more or less the magnitude that you expect sort of revenues to come down and cash flow to be impacted.

Well, I guess the dividend policy allows us for some flexibility. So what we do for Q1 or what we're announcing today doesn't necessarily have to be the same dividend level as you will see for the next 2 or 3 or even 4 quarters. But I think it gives you some kind of a guideline for where we feel comfortable to be in 2020. And the reason for that is, first of all, as I said, we've had significant investments in Q1. We actually planned for a negative cash flow in Q1. And obviously, with much lower late sales, we will have a lower free cash flow than we expected for the quarter. Then we obviously had a significant dividend payment during the quarter. So we paid a dividend or dividend and share buybacks of about $50 million in the quarter. So our cash balance as of today is about $250 million. And then in addition to that, we have another $100 million of an RCF that obviously we haven't drawn on. So I think given the outlook that we see today and if you assume that the late sales run rate that we saw at the end of Q1 will continue at least for another couple of quarters, then we feel that we really want to be cautious with the dividend. We want to have some gunpowder to take advantage of opportunities that will come up, which I think will be better for shareholders, too, in terms of that's really where we have yielded high returns in the past. So it's a decision we've made in collaboration with the Board, of course, and discussing what we see now in terms of both cash flow outlook for the rest of the year, but probably more importantly, opportunities that may arise from this.

Okay. Perfect. And if I can ask a second question, just with regards to the investments that you might be looking out for or sort of monitoring in terms of if opportunities come up, would that be on this sort of traditional 3D type of surveys? Or are you looking as well at broadening the business at this point in time?

No. I don't think I can be specific about what we're planning to do and where we see opportunities. But as I indicated on Christopher's question initially, we -- from -- a situation like this will certainly trigger some opportunities. I mean there may be data libraries that we can have a closer look at and maybe surveys that -- where we have less competition. So there are certainly plenty of opportunities that we plan to take advantage of arising from a market like this. And you've probably seen that we've been very active in Latin America, Brazil, Argentina. We were continuing to be quite active in the U.S., Gulf of Mexico. So that's probably where you'll see most of our investments going forward.

[Operator Instructions] Our next question is from John Olaisen from ABG.

It's a little bit more on the pace of late sales because, of course, the corona issue was mainly for the second half of Q1. And you said that late sales was dramatically impacted. I don't know if it's the term that you -- I don't think you used the word dramatically, but that's sharply impacted towards the end of the quarter. So what I wonder a little bit about is how much of the late sales that you booked now for Q1 to be paid -- to be part of the first part of the quarter versus the last part of the quarter. And it seems like your late sales in the quarter was down almost 50% year-on-year. Just wondering a little bit, is it 50%? Is that like a good guess for how much we should expect late sales down for the coming quarters? Or it's going to be even worse since you had January and most of February where the market was pretty normal? Hope you understand my question, sorry.

Yes. No, I understand your question, and I wish I could give you a good answer to this, but obviously, there's not a whole lot of visibility right now. So obviously, the floor to this would be kind of some of the statements that I hear from super majors saying that there is no budget for discretionary spending. I mean that's certainly the floor. But we saw even in the -- even in the last week of Q1, we probably had somewhere between $10 million and $15 million of late sales. Usually, that would be probably $50 million, right? So it's not 0, and it's not going to be 0. I mean we're still going to have -- I hope that we're going to see a level of late sales. I think Q2 will be very challenging. I think Q2 is the first quarter where you will have a full impact of COVID. And so Q2 will be challenging, and then obviously, we can hope that things are getting better in terms of the spread of the virus and the economic situation and the oil price, of course, towards the latter part of the year, which means that Q4, you would still expect anything else equal, that it will be the best quarter of the year in terms of late sales.

Okay. And hopefully, [ if you can provide ] a little bit of guidance.

So I know that's not a very -- yes, I know and I know it's not a very precise answer to your question. But right now, there is obviously a lot of uncertainty. So all I can say is that we had sales in the last week of the quarter, $10 million to $15 million. It's not a complete stop, but it's obviously very, very challenging. And again, I think Q2 is probably going to be the most challenging quarter for seismic overall. And then after that, obviously, less visibility, but you can always hope that there is some upside in the oil price, et cetera.

Yes. And my second question is related to the vessel capacity. There's always somebody concerned about the vessel capacity and TGS' OpEx exposure. And when you reported Q4, we -- I asked you are you very worried about rising contract prices. So now I ask you, are you worried that the vessel owners, which are all heavily leveraged, that some of them could go under, and that will be negative for you at some point? Is it something you're concerned about at the moment?

Yes. I mean to answer the first part of your question, we're certainly not concerned about vessel capacity or availability. That's not really going to be a problem now. But yes, to your latter part of the question, of course, that is a concern, and that's something we're obviously looking into. And I think you would see that TGS would probably be prepared to try to help out in situations like that. We want a well-functioning supply market. And you've probably seen examples in past downturns. So we've taken some actions in that regard. So we're prepared to do that. And that kind of goes back to some of these opportunities that we see from a market like this.

And as there are no further questions, I will hand back to the speaker for any final comments.

Thank you, and thank you for listening in on the call. We will provide more details about the quarter and market developments in our Q1 earnings release on May 13. In the meantime, we encourage you to stay safe and healthy and have a great week. Thank you very much.