TGS ASA (TGS) Earnings Call Transcript & Summary

Hello, and welcome to TGS' Q1 2021 Earnings Release Call. [Operator Instructions] And just to remind you that this conference call is being recorded. I am now pleased to present Kristian Johansen, CEO. Please go ahead with your meeting.

Thank you very much, and good morning, everyone. Welcome to this investor call. This is Kristian Johansen, CEO of TGS, and I'm doing this call from our operational headquarter in Houston. With me from Oslo, I have our CFO, Fredrik Amundsen; and our EVP of Operations and New Energy Solutions, Jan Schoolmeesters. Before we start the Q&A session, let me just reemphasize a key message from our Q1 earnings release today. Net segment revenues amounted to $75 million in Q1 of 2021. This compared to about $152 million in Q1 of last year. Segment EBITDA was $51 million versus $126 million in the same quarter of 2020. Free cash flow was $84 million in Q1, up from $1 million in Q1 of last year. Including shareholder distribution of $19 million, the cash holding increased by $58 million to $254 million on the 31st of March 2021. The solid financial position allows TGS to maintain the quarterly dividend at $0.14 per share. And continued share repurchase program with a remaining value of up to $17 million. In my opinion, there are 3 key takeaways from our Q1 earnings release. Number one, despite the substantial increase in the oil price over the past 6 months, exploration spending remains muted. Please have a look at Slide 16 in your package, and you will see that the correlations between oil price and seismic spending, which has historically been very strong, seems to be broken for now. Our clients are indicating that their strong cash flow will mainly be directed at dividends, share buybacks and deleveraging balance sheets. While we remain cautiously optimistic for a pickup in activity towards the end of the year, we expect our near-term organic multi-client investments to be lower, partly due to use of supplier risk-sharing and JVs in this challenging market. As a result, we continue to add high volumes of data to our library and generate strong cash flow with lower dollar investments. The second point I would like you to walk away with is our truly unique ability to generate cash in challenging markets. This quarter, we had a free cash flow of $84 million, and even after dividend and share buybacks, our cash balance grew to $254 million. This is an extremely satisfactory situation to be in, and it allows us to combine allocation of capital to our shareholders as well as looking at countercyclical M&A opportunities as well as M&A for diversification, which we announced this morning. And last but not least, I would like to spend a few minutes on our diversification strategy and our acquisition of 4C Offshore. The acquisition fits perfectly with our ambition to become the leading global provider of energy data and insights to support decision-making processes across the energy value chain. Growing our business from data to insight and information has been a goal for TGS within our core business for many years. We've been looking at companies within oil and gas information and research, such as IHS, Wood Mack, et cetera, and been fascinated by their high proportion of recurring revenues and the trading multiples that are significantly higher than traditional service companies. Now we're making that move, but we do it in new markets, offshore wind. Not only can we use this acquisition as a building block for both organic and inorganic growth initiatives, but we can also transfer knowledge about business models, subscription models, et cetera, to our core businesses within oil and gas. I'm extremely excited about this, and it goes way longer than just adding a profitable company with single-digit dollar revenues to our portfolio. This is actually a critical part of our strategy for the future. As a final remark, I have to repeat that we're finding a very challenging market right now. However, we're delivering on our strategy, which means that we continue to make progress on applying new technologies to the market, both in acquisition and in processing. We're in the forefront of the digitization of our industry and excited about the opportunities coming out of this. Finally, we see great progress in the diversification strategy, and the acquisition of 4C is just one of many initiatives that you have either seen presented today or will be announced over the next few months. We cannot really do much about the market short term. Long term, however, we remain convinced that oil and gas will remain about half of the energy mix even in 20 years from now. You will still need to find more oil to satisfy this demand and seismic is the only way to help you find it. I will now open up for questions and refer back to the operator who is facilitating. Thanks.

[Operator Instructions] Our first question comes from the line of Christopher Møllerløkken from Carnegie.

This is Christopher from Carnegie. In the pre-recorded call -- there are 2 questions from me. You mentioned that you would contribute cash to PXGEO, this new seismic vessel company being set up. Could you elaborate about how much cash you would contribute and also the timing has this cash been paid already in the Q1 accounts? And the second question relates to carbon storage. On the prerecorded call, you mentioned that you had made sales in Q1 related to carbon storage. I assume it's a relatively small multiclient sales, but could you elaborate a bit on the magnitude here? And what you see in this market going forward?

Yes. So the contribution to PXGEO, which is a combination of cash and a better commitment, and obviously, they go hand-in-hand. But I think -- I definitely don't want to say how much we're talking about. But we're -- it's definitely less than $10 million. But I mean, the main cash is going through a commitment over 12 months over the next 24 months. And obviously, then you can calculate yourself approximately how much that's going to be. There has been no cash payment to PXGEO, yes. Second question is related to carbon storage and a sale that was mentioned that we already had a sale in Q1. We actually had sales last year too, related to that. The sale that we made in Q1 is relatively insignificant, meaning it's somewhere between $1 million and $2 million.

And what do you see for this market going forward? There's been probably a lot of attention, especially in the North Sea Basin regarding potential carbon storage opportunities.

Yes. There's been opportunities in Norway and also great opportunities in the U.S. You've probably seen Exxon's press release or what they're doing in terms of new investments in carbon capture and storage. So we think this market will grow significantly going forward. It's probably going to be single-digit dollars for this year. But in the future, you will see that this could be quite a sizable business for us. And seismic, as you know, it is a key product to identify some of the storage opportunities. And then they will grow into a 4D market for this as well. And TGS obviously has an ambition to be a part of this, whether it's on the acquisition or processing side, it's definitely a market that we are looking very closely at, partly due to its great growth potential going forward.

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

A couple of questions from me, please. Firstly, on the capital allocation, you continue to have to invest in multi-clients. And then now you're also -- I mean, of course, you want to jump-start your New Energy Solutions business as well, and you have shareholder returns as well. How is management thinking about the trade-off between multiclient investments versus more acquisition opportunities in the New Energy business. So just talk a little bit about that. And then the second question is a bit more boring. Just a technical question. You're flagging that it looks like you will be eventually phasing out the segment reporting. So can you talk a little bit about what some of the concerns were from some of the regulators in terms of looking at 2 sets of accounts and kind of the time frame you're going to, to phase out the segment reporting.

Yes. I'll touch on both those questions, Amy. So number one is in terms of capital allocation. And I think as you see in terms of our guidance for new investments, we see that the market is challenging. It's hard to get prefunding for new projects. And if we can, and we try to use risk sharing as much as we can, and we also partner with some of our peers in terms of reducing the overall exposure. So that obviously takes down the cash need for new investments, which is good in the market like this. M&A is always on the agenda. And I think M&A and organic growth opportunities will probably be prioritized rather than allocating funds to shareholders. We see some interesting M&A opportunities. We announced one today. There's a few others within the New Energy space. And we're also -- and we've been very clear that part of our strategy is to consolidate the core market. So there are still opportunities within the core market that we are reviewing very closely and looking at. So I think you will see a combination of all of them. I think our dividend hopefully stays where it is, and there is even growth potentially in the dividend. We have announced a share buyback program, where we've only spent sales than $3 million, so there's still another $17 million to spend. Our investments are going to be lower this year, which means that cash flow, hopefully, is going to get better, and that allows us to actually spend money on both M&A and share buybacks and dividends. So I'm not sure if that answered your question, but I mean the good situation right now is that we can actually do all and -- but we definitely will prioritize to grow our business. That is really important to us. If we had good investment opportunities in multi-clients, we would do that. But right now, it seems like those opportunities are still a few months or quarters ahead of us. And on your second question, segment revenues versus IFRS. Yes, I think everyone on the call will understand why we're making this progression towards IFRS only. We're basically reporting 2 sets of accounts today. It puts a big, big burden on our financial team and accounting teams because they basically need to produce 2 sets of accounts. And I think over the next few quarters, you will see that we'll gradually move away from the segment reporting. We will -- our target is that we're only going to have IFRS for next year, but we are going to provide you with key figures that are still relevant to how we look at the segment today. So I mean, you're probably going to guess what you need, but it's going to be slightly different to what it is today. And I hope you all understand that. I mean this has been controlled by regulators. This is something that we cannot decide this ourselves. We just need to follow the guidelines of IFRS and still seen in Norway, the financial authorities in Norway. So that's how it is.

Got you. Maybe a quick follow-up on the 4C Offshore. Clearly, there's no financial disclosures in this morning's release. But you mentioned single-digit millions in terms of kind of the revenue at the moment. In terms of the acquisition price, how -- can you give some guidance on that where it came out?

We haven't disclosed that. And I think eventually, you will see that as part of our cash flow, but it is a model where there is some sharing of risk as part of it. And I think, obviously, it's higher multiples than you traditionally see in seismic because it's such a high proportion of subscription revenues, but we're very pleased. We're -- I mean, it's a profitable company, very profitable company. And we think we can grow it significantly, and we can probably grow the profitability, too. So we're extremely excited about that. And I think it's a win-win. It's a good deal for both parties. And we're very, very pleased about that.

[Operator Instructions] We have a question from the line of John Olaisen from ABG.

A couple of questions. First, on the seismic market. Now most of the seismic companies have reported Q1, and it's not very optimistic reading, the numbers or the outlook comments. And Kristian, at the Q4 presentation, you said that the market was likely to be new to the first half, but potentially increasing -- improving somewhat in the second half. Now you say towards the end of the year. And also that slide you showed with the seismic spending versus the oil price and that correlation seemed to be broken. I just wonder how much of -- how much of this -- of course, oil prices come up sharply, but it came basically only since mid-November. What do your clients tell you because I know that the guys in the seismic, the exploration guys, they always want more seismic, but they're constrained with the allocation of capital that they're getting from top management in the oil companies. I just wonder what do the exploration guys in oil companies tell you? Do they tell you that they want more seismic, but they haven't got the funds, but they hope to get them next year. Could you shed any light on what the clients are telling you anything?

Yes. I guess, the initial response to that question is that there is hardly anyone left, and that's that describe how challenging the situation is. I mean there's [ restructuring ] and reorganization and mainly among the super majors and the international oil companies, where exploration finds a new home. It merged with subsurface departments or it's pushed down further in the organization. So that's obviously a big concern right now, is that some of the people that we used to deal with, they don't know where they're going to fit in the new organization. And this goes with a lot of companies, still going through restructuring right now. I think that's part of the reason why you see that IOCs and super majors are particularly low in terms of spending, it's at a very late cyclical. I spoke to one IOC here in Houston just a few days ago, and they're doing a restructuring and getting new jobs in August. And by August, the old price should be $85, right? So it's very late. And those processes take a very long time. So I mean, the people we talk to, they -- I mean, on the exploration side, they definitely feel the pressure. They definitely feel the competition from some of the renewable activities because they go, they kind of follow the same time line, right. If you do exploration today, you do it because you're going to be in production in 10 or 15 years, and then you compete with the same time line as some of the renewable investments. So that's partly the answer. So I mean, yes, they want more data because more data is going to keep them busy and it's going to keep their jobs, right? So they definitely want more data. But right now, I think for 2021, I think it's going to be very challenging to get those extra dollars out of this category of clients. But then I'm getting probably slightly more optimistic on the smaller independents. We have one quote in our presentation today, which says our Board has mandated it has to get ready for another super cycle. That's a statement that was actually made in a meeting with TGS. And some of those statements, you tend to hear them more frequently now than you did 3 or 4 months ago. So that's good. In terms of what I said at Q4 and what we're saying today, yes, I would agree that we're slightly more muted in terms of our expectation and the timing of the recovery because we have a Q1 behind us, that is for the industry, extremely challenging. I can give you one example. If you take the 3 key asset-light players other than TGS and you combine the revenues for Q1, they're pretty much at the same level as we had. And we had record low revenue. So it's really dramatic to look at the Q1 numbers for the asset-light player. And I don't think Q1 and Q2 is going to get much better. I think Q2 is still going to be -- we're going to fight the same issues in Q2 that all companies still haven't made plans that correspond to the higher oil price. And then towards the end of the year, I will stick to that. I think the budget for next year will be higher, if not significantly higher. And hopefully, some of these companies can start spending from that in Q4. Did that answer your question, John?

It sure did. Just a follow-up on that. Since the oil companies are reorganizing and focusing on all the other things. And a few are trying to get positioned for the next super cycle, as you mentioned, at the Capital Markets Day, you guys also mentioned that you could potentially take more direct ownership in exploration licenses. Do you like exploit the situation now that other companies don't want to do that? Is there any progress on that? Or not?

It definitely is. So we've had meetings with somewhere between 5 and 10 players who operate in certain countries in Africa, where we see there is no demand right now, and we wouldn't really compete with our key clients because that's a key concern, of course. And we're definitely making progress in that regard. And we will obviously come back and talk more about that when we have -- when we can quantify some of that progress.

Okay. My other question is on the new initiatives. You announced the 4C acquisition. But as you also said, it's a fairly small exposure for you. But you also mentioned you have -- looking at a few more potential acquisitions. I just wonder in that portfolio companies that you are looking at the moment, are there any that could be more material with more impact on TGS at the is the near-term impact of the 4C acquisition?

I think the 4C acquisition is probably that should be the benchmark of what you could expect. I think it's a perfect size. It's about 30 people. It has, as I said, revenues in the single digit, but it's growing very fast. It's subscription based. And I think that size is definitely doable for us in terms of we want to do this, like, I'd say, a buy-and-build rather than just making one big acquisition that is going to completely change TGS. And that also has to do with the multiples that you tend to pay for some of these companies. You probably saw one company that was sold in Norway this week and look at those multiples, and it's something that TGS couldn't do based on our pricing in the stock market. And I think you should expect to see the same type of size, but don't forget we're still very convinced that we need to consolidate the seismic market as well. And there are still opportunities out there, and we will actively pursue them, and that's probably going to be bigger in terms of dollar figures.

We have a follow-up question from the line of Christopher Møllerløkken from Carnegie.

You mentioned that the projects done in first quarter were both risk share investments. Could you just remind us on the accounting here? Because previously, I remember that TGS had a separate line where risk share investment was split out on the multiclient investments. Can we assume now that this is part of the organic multiclient investments you're reporting of $37 million in Q1?

Yes. So it's part of us. But the way we capitalize that is that we only capitalize the part where we take risk. So if you work together with a vessel company, who takes, let's say, 75% of the risk on their own costs, then obviously, we would only capitalize the remaining 25%, plus the cost of processing.

And just to be precise, the guidance you do have for 2021 includes risk share investments. So that would be part of the $150 million to $180 million or the TGS part that drives the project.

That's right. That's correct.

There are no further questions registered, so I hand back to the speakers.

All right. With no further questions, I would like to thank you for the attention. I would hope that we can see each other in person later this summer or early this fall. And looking forward to meet you again on either road shows or quarterly presentations or conferences this summer or fall. So with that, thank you very much for the attention, and have a great day. Thanks.