TGS ASA (TGS) Earnings Call Transcript & Summary

Welcome to the TGS 2020 Q3 Earnings Release Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Kristian Johansen, the Chief Executive Officer. Please go ahead with your meeting.

Good morning, everyone, and welcome to TGS Q3 2020 Earnings Call. My name is Kristian Johansen, I'm the CEO of TGS. I'm calling in from Houston this morning. And with me from Oslo, I have our CFO, Fredrik Amundsen. This morning was, to me, personally a good illustration of the unprecedented times we're going through. I woke up at 5:00 a.m., checked the market reactions to our Q3 report and noticed that the share price was down 1.5% despite severe cost-cutting and positive cash flow. The oil price continued to slide to a level below $37 for Brent, and most oil service companies' share prices are quoted in cents rather than dollars. Getting out of bed, I get a text from my daughter's school saying that school is closed due to 2 new COVID cases. When I finally get to the office, there is a gift on my desk from the marketing department. The gift is a nice gray face mask with a TGS logo that our clients can look forward to receive for Christmas this year. COVID-19, global demand for oil and gas and the consistently low oil price are factors completely outside our control. What we can control, however, is the following: number one, cost, where we are reporting 64% lower cash operating cost than Q3 of last year; cash collections, where we collected $109 million in the quarter, which is only 16% less than last year. As a result, we had positive free cash flow in Q3, which, again, provides support to a dividend of $0.125 per share, corresponding to a dividend yield higher than 5%. Last but not least, our revenues are, to a certain degree, within the control of management, and I'm happy to notice that our late sales versus peers continue to be superior. In the presentation that we posted on our website this morning, we're focusing a lot on cost and cash flow. The market has developed as we expected, and our cost-cutting measures are exceeding our plan. We have a good strategy for how to continue being cash flow-positive, distribute cash to our shareholders, and at the same time, take advantage of the down cycle as you've seen TGS do many times before. Our 2021 investments will be lower in dollar value, but probably quite similar in terms of data volumes. The reason being, lower vessel rates, more use of risk-sharing and a more selective investment strategy centered around a few geographic areas where we continue to see healthy demand. We continue to be focused on supporting a sustainable future by providing quality data and insights in the most resource-efficient manner possible while contributing to minimizing the industry's environmental footprint. This year, we have introduced several initiatives for reducing emissions and further enhancing contribution to social development as well as improving the ESG reporting to stakeholders. The efforts have been recognized in The Governance Group's annual ESG ranking, which recently gave TGS an A- ranking. The energy transition offers interesting opportunities for TGS, and we see growing interest for alternative uses of TGS products. The world's largest library of subsurface data, combined with strong competencies in areas such as geoscience, data management, data processing and analytics, position TGS well to contribute with insights related to carbon capture, utilization and storage, and offshore mineral exploration as well as to the renewable energy industries. We've already had several projects directed towards CCS, renewables and DSM, and the fact is that some of these have already generated revenues for TGS in 2020. In the future, our ambition is to capture a greater part of this rapidly growing market that is very complementary to our asset-light data model. Once again, I would highlight that we have a plan, we're delivering on this plan, and we continue to believe that we will come out of this cycle with an even stronger position. With that, I would like to hand it over to the operator who will open up for questions. Thanks.

[Operator Instructions] Our first question comes from the line of John Olaisen of ABG. I stand corrected, we are actually going to a question from the line of Christopher Møllerløkken of Carnegie.

With regards to the -- I know it's early in fourth quarter, but could you give any level of comments regarding client interest for data purchases as we approach the year-end?

Yes. Thanks for your question, Christopher. We usually don't say a whole lot about that. I think all I'm prepared to say in that regard is that it has developed as we expected. And that means that we expect to see a normal kind of end of year spending. So we expect Q4 to be better than the previous 2 quarters in terms of late sales, but obviously weak compared to previous years where Q4 tends to be very strong. But we still expect to see more interest in late sales than we've seen in the previous 2 quarters as we normally see that kind of phasing toward Q4.

Do you get any impression that due to COVID-19, which was unprecedented for your clients, that they have cash left over as they hit the breaks immediately starting March, April? Or do you sense that your clients are still very cautious in terms of spending also when you talk about 2021?

I think it's a mixed picture. I think overall, everyone is cautious in this market because there is so low visibility on what's going to happen. I think you're right. I mean there are certainly companies who have a lot of their budgets left because they haven't spent them. But I think there is a great chance that we compete with corporate, and corporate would very much like to have this budget back again, of course. But I think that's kind of the discussions we're going through right now. And as I said, we -- October turned out to be pretty much as we planned for, so a decent start of the quarter. We expect to see a good December, as we always do. So we probably have 3 or 4 global deals that we are in negotiations with some of our largest clients. And obviously, the outcome of that is highly uncertain, but we think we have a really good database in the areas where companies are still spending. So that's obviously a great advantage that we have in TGS.

And lately, we have seen several of your clients merging, especially in U.S. onshore. Do you expect to realize any transfer fees from these transactions? Or is it not so relevant for these ones?

No, there will be transfer fees in Q4. We actually had transfer fees in Q3 as well. They were rather small, though. But I think there will be at least 2 or possibly 3 in Q4. And then obviously, we've seen a lot of M&As announced quite recently, which will close in early 2021, which is going to help us a little bit in terms of building some backlog for late sales for 2021. So I mean these transfer fees are not as big as the one we had in Q3 last year. Obviously, Q3 was a tough comparison because we had a big transfer fee in Q3 2019. But they're still reasonably sized, and they still help, obviously, with some visibility on revenues, which is good.

And as you now go into your budgeting season for 2021, you have already highlighted that dollar investments is likely to come down, but volume, more flattish. Any geographical areas which you would highlight, which you would look at for next year?

I would probably be a bit careful by doing that because, obviously, this is a very competitive market, too. So -- but I think where you still see relatively healthy demand is probably U.S. Gulf of Mexico, Latin America and to a certain degree, Norway, U.K. So there will be investments in all these 3 basins, for sure. And then in addition to that, I mean, we're looking at some interesting opportunities in Africa, Asia Pacific and even onshore, where we see some opportunities of projects with really high pre-funding, of course. So I think certainly, our dollar investments will come down, which we highlighted today in the presentation. There's no question about that. But the data amounts are probably going to be quite similar to this year.

And final question from me, maybe more to Fredrik. So is it possible to give any indication for multiclient amortization going forward?

Fredrik, please go ahead.

As you saw from -- or as you heard from your -- from the presentation, I gave some flavor to the straight-line amortization coming down to $53 million for the quarter, which is down from the mid-60s that we reported early in the year, and that is an effect of the impairment taken that that's coming down. Then the remaining portion of amortization will be a direct link to the revenue recognized on ongoing projects, and that's harder to predict that mix. But at least you know then that it's about $50 million in straight line that is taking underneath there.

And just to clarify that, in the amortization you reported for Q3, which was quite significantly down versus Q2, it also included that $8 million impairment.

That is correct. So it was about $78 million in normal amortization, of which $53 million was straight line. And then on top of that, it was $8 million in impairment related to the onshore library.

Our next question comes from the line of John Olaisen of ABG.

As a follow-up on Christopher's discussion about amortization or impairments, I just wonder in Q4, could you elaborate a little bit on the potential risk of more impairments on the library, like year-end? I see that 6% of the book value as of Q3 from the 2016 vintage. I presume, that has to be 0 at the end of Q4, 15% is on '17. I just wonder if you could elaborate a little bit on any risk of the significant impairments in Q4 this year, please.

So for...

Fredrik, go ahead.

Yes. So for every quarter, we go through the sales prognosis forward. When we get to Q4, we do an elaborate process in conjunction with the budget process, and we go through that. We have a good headroom in the library as such in all regions. But of course, when you go through this and you go through it on a project-by-project basis, there could be areas that we need to look at. So we can't guide anything on that, of course, but we are going through that. But we have -- on the portfolio, as a whole, we have a good and healthy headroom.

Okay. But I just...

Yes. I just want to -- it's a good point Fredrik is bringing up. If you look at the portfolio as a whole, we have late sales this year that is probably going to be not too far off from $300 million, and we have a data library of $763 million. I mean that's a yield of 39%. So I mean we're still yielding it pretty good. If you just look at our late sales versus the size of the data library, it is yielding a good return. So -- but as Fredrik said, I mean, we have to go through every single project, and there will always be a project that sometimes fail the impairment test. So that's the way it is.

On the other side of the library equation is the inputs or new investments. And looking at the project schedule, it looks like Q4 will be pretty low in terms of multiclient investments. Not surprised as such, I guess. But I just wonder, should we expect more surveys to be -- to start now in Q4? Or is it -- the next surveys will be for next year?

I think -- go ahead. Yes.

Yes. And I think I commented on that this morning that we're looking at 1 or 2 other surveys that may start late this year. So that's probably going to be December or it may be early 2021. And these projects are pretty much committed already. It's like more of a timing discussion, whether we do it this year or next year. So obviously, based on that, there's a little bit uncertainty on whether we're going to invest $320 million or whether it's going to end up at $310 million. But we're still going to be pretty close to our guided figure with a little bit risk on the downside, which, again, means that there is risk on the upside in terms of cash flow. So I mean for us, that's also a positive thing. But I think going into 2021, these projects will certainly happen. So you will see that Malvinas, the big 3D in Argentina, that will continue into next year. And then we got a couple of other projects of which 2 of them are highly pre-funded as well that will probably be Q1 investment for 2021.

And I know it's early, but is it possible to elaborate a little bit on investment opportunities for 2021? If everything stays like it's now, is it likely that your investments will come down sharply? Basically my 3 questions.

I think if the market stays as it is today, you will see a combination of 3 or 4 converted contracts that are heavily pre-funded, one onshore and probably a couple in Latin America. And in addition to that, you will see a few -- or quite a few risk share investments, but we have discussions with our partners on that. And obviously, sharing the risk, we -- increases our appetite. So you will probably see quite -- yes, quite a few surveys where we share the risk with one of our suppliers. So I think in general, if the market stays as it is today, you will see that the total dollar value go down. You will see the pre-funding be quite healthy, and you will see the total data amounts that we acquire will probably be in line with this year.

Our next question comes from the line of Amy Wong of UBS.

I have a couple. The first one is -- actually, you were starting to answer it a bit on the risk-sharing. To what extent can you talk about how much we're sharing? Your suppliers are engaging that -- with -- what happened in the last cycle would be a good indication of how the risk-sharing is going to go this time around.

Yes. I mean typically, the risk share, it's around 50% or sometimes slightly higher. It all depends on how much you give away on the other side. So I think in general, we're happy to do collaboration projects where we share the risk pretty much 50-50. So that's been a good model for both TGS and Spectrum in the past, and it's also been a very good model for our suppliers. And in this case, we're mainly talking to 2 Chinese suppliers. So I think you're going to see that we're probably going to do that more next year than we did this year. And the reason for that is that this year, it started out with a very strong backlog where we already had a significant pre-funding committed. But for next year, I think that's probably going to be a bit more challenging, and you will see that we -- we're probably quite happy to share that risk, and both parties will benefit from that.

Okay. Yes, makes a lot of sense. In terms of like next year's projects that you guys have in the pipeline, can you talk a bit about the mix of the technologies you're going to use in there?

Yes. I think there is no secret that we have an ambition to continue to do OBN surveys, particularly in the U.S. Gulf of Mexico and possibly Norway as well. So that is still certainly high on the agenda for 2021. Then on the 3D side, there will be -- we already have announced the 3D in Argentina, of course. Our ambition would be to keep that vessel in Latin America for the winter and spring season and possibly do some risk-sharing on that. Norway, U.K. is probably going to be lower activity for next year. Hopefully, we can do some OBN surveys, but it will probably not be a whole lot of new 2D or 3Ds. That's the way it looks right now. Same with onshore, you will see onshore investment come down. And then Africa is still a bit uncertain because there are some big new projects in Africa that we are pursuing and that should happen, but it's still very early days. So I think OBN is certainly going to be a quite significant part of the total investments, and then the main 3D activity is going to be Latin America.

Our next question comes from the line of Sahar Islam of Goldman Sachs. [Technical Difficulty] Bear a moment, we have a slight technical issue. Okay. We'll now go to the question from the line of Sahar Islam from Goldman Sachs.

Two questions from my side, please. Firstly, on M&A. Could you talk a bit about your appetite for further industry consolidation and whether you'd look for something on the multiclient side or perhaps something in -- something like carbon capture or non-oil and gas? And then secondly, on cost savings, can you talk about how much of what you've done in structural versus cyclical as we think about when that market recovery fully happens? Will some of those costs start to come back?

Thanks. Yes. I think in terms of consolidation, I mean, we've been quite open, and everybody obviously have noticed that we submitted a public offer for the data library of TGS, which didn't go through. I think in general, I think everyone who's in this market should be in favor of further consolidation. I mean if you look at exploration spending, in general, it's probably down somewhere around 80% since the peak, and we pretty much have the same number of companies out there, except our Spectrum, which was acquired by TGS. So there are still too many players. There's no question about that. We need more consolidation in seismic, we need more consolidation in drilling, and we probably need more consolidation in subsea as well. So I think we can be quite open about that, that we are very open to have discussions. And we would entertain any initiative for further consolidation, whether it's in multiclient seismic or whether it's in the processing business, which is quite human capital- and capital-intensive as well. We would certainly entertain those ideas, and we've spent quite a bit of time internally looking at how we can make this industry more profitable for the future. So I think that answers your first question without being too specific, which I obviously cannot be. In terms of outside oil and gas, we have some really interesting initiatives now in terms of -- we've already seen interest from clients in some of the products that we already have that we've mainly licensed these products to oil and gas. But you see a lot of them can actually be used outside oil and gas and for renewables. Carbon capture and storage is one example, minerals is another one, and we even see opportunities within, yes, probably more wind than solar, but certainly within wind. So I think we continue to pursue some of these alternatives and see how we can build some kind of a data business around that. And that may involve some smaller acquisitions. But I don't think you would see big consolidation thoughts or initiatives from TGS partly because some of these companies are trading at very high multiples now, and we will probably do a smaller acquisitions and organic growth rather than doing big, big steps into this market. In terms of cost cuts, yes, a lot of these cost cuts are actually permanent because we certainly see a lot of potential after the acquisition of Spectrum. We've seen a lot of synergies that are way higher than we expected at the time, and we also see that we can operate our business more efficiently, given the current market. And I think some of that will be sustainable for the future. Even when the market picks up again, you will see that our costs will certainly not come back to what it was pro forma 2019. So will it come up 10%? Possibly. But it would certainly not come up like 30% or 40%. That's the way we look at it right now.

Our next question comes from the line of Mike Pickup of Barclays.

It's Mickey. Basically a follow-up on that. Obviously, on the geophysical side, the broader geophysical side, are there any ambitions of scale for your non-oil- and gas-related businesses as yet? Or are we too early?

Can you please repeat that, Mick?

Yes. I'm just wondering on the non-oil and gas side, the broader geophysical offering, have you got any ambitions of the scale you can get that building -- that business up to as you build it out?

Yes. I think we certainly do, and we're running quite a few scenarios internally. I think if you just look at what we've done in 2020, without any initiatives in that regard -- I mean we haven't really tried. It's almost like client-driven rather than driven by our salespeople. We probably had sales of NOK 50 million, NOK 60 million, so like $6 million, $7 million of products to renewables -- or renewable sectors. And then we're looking at how can we grow that and how can we also add other products that fits to our data business. I think in the big scheme, it's still relatively small because, I mean oil and gas is big. I mean oil and gas is a big industry where the willingness to pay have been quite significant over time. So I mean we're not talking about 50% exposure to renewables. But if we could do -- if we could build a renewable business that is similar to our well data business, which is between 6% and 10%, up to 12% of total revenues, I mean that would be a nice kind of first step.

Our next question comes from the line of Christopher Møllerløkken of Carnegie.

Yes. Just a follow-up question regarding the Malvinas project you have announced. Is that a converted contract survey like the other projects you've done in Argentina earlier this year? Or is this more a standard multiclient?

No, it's the same as the previous ones. So you would see high pre-funding on that project. That's not a secret.

[Operator Instructions] And we have no further questions. Please go ahead, speakers.

All right. Thank you, everyone. So as mentioned in my introduction, the market has developed as we expected in early April, and our cost-cutting measures are actually according to plan -- or just actually ahead of our plan. So we have a good strategy for how to continue to be cash flow-positive, continue to distribute cash to our shareholders and at the same time, take advantage of the down cycle, as you've seen TGS do many times before. With that, I would like to thank you for the attention. Hope that you all stay healthy and continue to look forward to see you in person as soon as our regulations allow us to. Thank you very much.