TGS ASA (TGS) Earnings Call Transcript & Summary

Yes. Good afternoon, everybody. It's my great pleasure to welcome TGS and Kristian Johansen, the Chief Executive Officer. TGS last week held a Capital Markets Day following the merger with another company within this space. TGS creating the largest energy data company, I believe, is your new description. So very opportune time to hear from Kristian, and I'm looking forward to hearing your story.

Thank you, Mick, and thank you, everyone, who's either attending the presentation here or watching the presentation on our webcast. Again, my name is Kristian Johansen, CEO of TGS, been in that position since 2016. And I'm going to tell you about the journey that we have been through in terms of consolidating the seismic market, going from a relatively niche player in the asset-light multi-client space to by far to position by far, the biggest player in a fully integrated company, who covers the entire value chain of both new energies and oil and gas data. And I'll have you read the forward-looking statements after the presentation. And again, I want to start with a picture that you probably are quite familiar to, but I want to reiterate a few of the key points, and I'll start on the left-hand side and looking at oil and gas supply, both historically and estimates going forward. And the estimates here based on oil demand and where oil demand is going to move going forward is from OPEC, Exxon and what we call the IEA STEPS scenario. I want to make a few comments about Exxon because Exxon just released on Monday, a week ago, they came out with a new upgraded energy outlook, and this slide was made before that. But actually, what Exxon came back with on Monday is a revised estimate, which is far more positive and bullish on the outlook of oil and gas, where they expect that demand for oil and gas in 2050, which is in 25 years is going to be about 2% higher than what it is today. And for gas, the same number is going to be 21% higher in 2050 than what it is today. And that's quite contradictory to, for example, the numbers that you saw from IEA or a lot of other players, I think right that at the time in 2021, said we're going to have peak oil in 2024 or 2025. But it continues to grow. If you look at the supply of both oil and natural gas, you will see that we're already back to above pre-COVID levels. And you see that if you draw a straight kind of trend line through those different figures, you'll see that we follow pretty much the same goals for both oil and gas as we had before COVID. And I think that's really important that we are getting more fact-based in terms of where is this market going to go in the future. And again, there is no reason to believe that this is going to flatten out considerably over time given Exxon's outlook. And then, of course, what you see on the right-hand side of that particular chart is the decline curve, which is deep and it's particularly steep for the next 10 years. And as a result of that, you see that the reserve life of the major IOCs continue to come down and it's coming down quite significantly. And in the manner of oil, it's going down from 13 to about 9 years, and this is in the matter of only 8 years. Say, basically declined by about 20% per year, pretty much that's what we've seen for a period of time. Same goes with gas. So although we had a little bit of a recovery in 2023, saying picture is true for gas where reserves are getting smaller and smaller. We don't explore and as a result of that, and we produce even more. And as a result of that, the reserve lives are coming down year after year. So I touched on the most recent trends in terms of energy, and I've thought on the left-hand side with oil and gas, and then I'll touch on seismic and then last but not least, on the new energy industries. So in terms of the oil and gas industry, there is a tremendous focus on increasing recovery rates, near-field exploration and reduced cycle time. There is significant M&A activity. In fact, last year, we have $200 billion worth of E&P deals. It's the highest we've seen in a 10-year period. And we see a gradual increase in exploration spending, but not enough to offset the risk that I highlighted on the previous graph. And I want to go back to the significant M&A activity. This is obviously driven by the fact that we serve life is getting shorter. And what you do is that you buy other companies to sort your own problem, but you don't really sort the big problem, which is the world problem is that we're not going to have enough oil and gas in the future. But again, record high M&A activity and lots of focus on existing production. In the seismic industry, which is very much focused on the exploration side, you see the majority of activity in mature basins, of course. So if you go back 10 years, about 70% of seismic business was from tier and 30% was mature. Today, it flips is about 70% is now mature, while only 30% is from tier. So a significant change in that regard. We see multiclient opportunities to basically go in and shoot seismic and then license that to multiple parties. But of course, you cannot apply the model the same way over a mature field as you can in frontier area. And the reason is obviously that in mature fields, you already have companies who picked up the blocks and they're pretty much the only player there. And last but not least, you see a significant consolidation in the seismic market. So over the past 4 years, we have acquired 5 or 6 companies, another competitor share where they basically picked up all the companies that used to own seismic vessels, meaning that in the seismic vessel industry, there's only 2 players pretty much, and that's TGS and Shearwater. And then in the new energy industry, it's definitely where we see the highest growth potential, but it's coming off a relatively small base. And the reason for that is that energy evolution or energy addition, as I like to call it, drive new data needs, of course. We as an industry can benefit from that, because we control and already own a lot of the subsurface data that is out there. And you actually need a lot of subsurface data to succeed, whether it's offshore wind, whether it's deep-sea minerals, geothermal, CCS, et cetera. So about providing secure, affordable and sustainable energy. And last but not least, again, significant growth opportunities. We have a business in the new energy space. We started out in 2021 with $7 million worth of revenues. This year, we're probably going to be at $75 million is, a significant growth and that's going to continue to grow in line with the need for more clean energy in the future. Going to go through the journey we've been on for the past 3.5 years. And again, it goes back to this market trends that we see. It starts with a macro trend, which I'm highly convinced based on the macro data we read that a company like TGS is going to be around in many, many decades. But secondly, I'm convinced that you're going to see a different market going forward. It's got to be a market driven by some kind of transition or addition with new energies, but you're still going to have a lot of need for exploration in oil and gas, and it's going to be higher than today according to Exxon. And you're also going to have a market driven by only a few players who are -- who were able to get through these challenging times that the industry has been through. But again, our journey started in 2020. At the time, we were a market leader in multi-client, which was just a segment in the seismic industry. And we also had an imaging business with about 200 people is doing data processing and making sure that we prepare and interpret the data before we license it to clients. Then in 2021, we acquired a company called 4C Offshore. We acquired 4C Offshore, because we saw the trend of the new energy business starting to grow, and we wanted to get a foothold into that because it fits our core competencies quite well given that we were basically the biggest subsurface data company out there. But in order to get into the offshore wind space, rather than buying a company that was an operator or a company that was more heavy assets play in the offshore wind space. We actually bought a company that is more like Wood Mac for offshore wind. So 4C is providing data and insights to multiple clients have about 2,000 subscribers. For us, it was a great way to open doors into the offshore wind industry. It's been a great success since 2021. So we acquired a company called Prediktor. This is a company out of Norway that is doing asset management software for mainly the solar business, but also for oil and gas and offshore wind. And this company -- or this company's software is installed at 2 out of the 3 largest solar parks in the world, but that gives us another foothold into the fast-growing new energy business. And quite a public company or a company that used to be public on the New York Stock Exchange, ION Geophysical in 2022. ION gave us more multi-client data. And on top of that, imaging or data processing and software. We just signed a relatively large software deal with 1 of the super majors last week, and that was based on the software that we actually acquired from ION in 2022. So we did Magseis Fairfield in 2023, and we did that because we see the ocean bottom node market being the fastest growing segment of seismic and Magseis Fairfield was public company at the time and we bought them at a really attractive multiple, and it gave us a really strong foothold in a market where we had no presence from before. And then last but not least, the public takeover of PGS that was closed on July 1 in 2024, I announced back in September last year and gave us a very strong foothold in the 3D streamer market in addition to further multi-client data and, of course, imaging, which means that TGS today compared to where we were in 2020 is a completely different company, which pretty much has a market-leading position in every single segment and again, transferred from a highly successful niche player in the multi-client segment to a fully integrated player that can pretty much provide any data service or products that an oil and gas or energy company need for their exploration needs. So again, this one is just kind of summarizing the previous slide in terms of our market positions. But in multi-client, just to give you the perspective, from all the data acquired as multi-clients since 2018, so over the past -- or 2016, so over the past 8 years, TGS has invested $4 billion in new seismic data or subsurface data, and that's about 62% of the overall industry. If you assume that all the relevant data is data that is shot over the past 8 to 10 years, you can probably argue that TGS controls and holds access to more than 60% of all the data. And of course, a significant upside if you're able to develop AI technologies and algorithms that could extract more value out of that data, but a fantastic starting point in that regard. Streamer acquisition. We have 8 of the most modern seismic vessels in the world. They're all built in the period of 2010 to 2016. So basic an average age of about 10 years, and these vessels last for at least 35 years, and there's not going to be any new builds as we can see over the next decade or so. OBN acquisition from the acquisition of the company, Magseis Fairfield, we control about 40% of the global market for ocean bottom nodes deep and mid-water with around 30,000 nodes in inventory. And again, this is the fastest-growing segment of seismic as we speak. Advanced imaging. These companies have been doing -- this industry has been doing big data for many, many years. So I remember back in 2017, I think TGS ranked on top 15 of the largest supercomputer users in the world. So we're talking big, big data here. today, both TGS and then PGS that we acquired on July 1, they are big, big clients of Google. And obviously, we see great potential of merging together, take out cost synergies, but also on what we can do together with someone like Google in terms of developing technologies for the future in terms of getting more efficient. And then new energy, I touched on that. Merger cost and synergy run rate. So when we announced the transaction last year, we said that we were going to have $50 million to $70 million worth of synergies of -- and the equity value of PGS was around $650 million and if you include the debt, it was like $1.3 billion, $1.4 billion. So synergy is quite significant if you calculate synergies as a percentage of the overall transaction cost. But since then, we've actually updated or upped our synergy estimate twice. So we -- of course, we came out 4 months ago, and we said it was going to be between $90 million and $110 million. And then at the Capital Markets Day last week, we came back to the market telling them that we're going to -- you can expect to see between $110 million and $130 million of annual synergy from this transaction. So again, a very strong cost synergy case. And just to give you some examples of that. So PGS had debt of gross debt of about $800 million when we acquired them. And for the bond, the $450 million bond, they're paying an interest rate of 14%, and we're going to go out and refinance that debt in early 2024 or '25 and obviously, see great synergies. One of our competitors who have far more debt than TGS came in below 10%. And obviously, with a strong balance sheet of TGS, we expect to see significant synergies on the refinancing side. So let me touch on each one of the businesses and just give you a little bit of flavor. So in terms of the multi-cloud library, you see the bars on the upper left-hand corner there, and you see the size of this library and you see what PGS does to the overall library in terms of adding another about 30% to the library size of TGS, meaning that we have close to $1.2 billion in book value of the combined data library. That's far more than you've seen in quite some time. You've got to go back to Q4 of '19 and at that point, the library was of a similar size. And then you see that the dark line there, which is basically the enterprise value of the trading multiple, enterprise value to MC library, and you see that with how they ever been lower in that regard. And then you see the bar charts at the bottom of the slide, and you see we trade at the box 1.8x Multi-Client library. Historically, it's been somewhere between 2.2 and 3.3 depending on the time period you look at. Again, this library has a strong historical performance. Typically, we average of sales to investment of 2x, meaning that we invest $10 million in library, we expect to see $20 million in terms of sales. If you look at the seismic 3D vessel fleet that we acquired from PGS, the imply PGS acquisition value as per our purchase price allocation is below $100 million per vessel and new build costs at the time was about $270 million. Average adjusted newbuild cost would be around $200 million today, and that's also the replacement cost or call it the broker value of these vessels. So very attractive entry point, obviously, because of some tough times over the past few years in terms of the vessel market. And then in OBN or ocean bottom node that I just talked about briefly on one of the previous slides, you see that we have revenues in that business of about $400 million, so slightly north of expected in 2024 and EBITDA of about $150 million plus/minus, which means that we acquired that company, Magseis Fairfield at an enterprise value of $238 million. In terms of EV/EBITDA multiple 2023, it's about 1.8x. And if you do an EBIT multiple on that, it's just north of 4, which tells you how good this acquisition was and the fact that we may be able to basically return that within 4 years after the acquisition was closed. Last but not least, the new energy exposure. Yes, we're coming from a small base, but we have tremendous growth in that business. And you see a business that started out in 2021 with only $7 million worth of revenues, have now passed about $70 million, $75 million is where we expect to be in 2024. And again, we're not doing this because of greenwashing. We're doing this because it's a great contribution to cash flow. You see a pretty strong EBITDA margin for the past 2 years and a business that is growing fast. That should be a stand-alone significant value creator to TGS overall. And then in terms of clear capital allocation priorities going forward. So if you look on the right-hand side and you look at the bar chart, you see the net debt to EBITDA of selected energy service companies. So basically, this would be the Philadelphia Index, and then we've added 2 seismic companies or competitors. One is Viridien, the French company that used to be CTG and the other one is Shearwater. So they have a net debt to EBITDA of about 2.2 to 2.7, so relatively high leverage. And then you see TGS at 0.5 after the acquisition of PGS. So was quite heavily leveraged company at the time. But of course, because of our strong cash flow and our strong balance sheet, when you combine the 2, you're already down to healthy levels of debt, which means that we should be in an excellent position to distribute cash to shareholders going forward. Our goal going forward is that we're going to aim at reducing the net interest-bearing debt from a level of $417 million today to somewhere between $250 million and $350 million. And on top of that, whenever we're in that comfort zone, we will make sure that shareholders get a return in terms of dividends. And we paid a dividend every single quarter since 2014 when we started or introduced quarterly dividends, but we paid a dividend every year since 2010. There has not been a single quarter where we held back the dividend, because TGS has been a highly cash-generated business. Our goal for the future is that, yes, we're going to reduce the debt slightly. But as you see on the right-hand side, it's already really low compared to any other player within our space. But on top of that, we're going to keep our dividend going forward. But on top of that, we're going to mix it with share buybacks. That is also part of our toolkit, and you will see that starting to increase in '25 and '26. So as soon as we get into that kind of comfort zone in terms of net debt of being between $250 million and $350 million. So this is just showing an illustration of the cash flow potential of the combined company. And in order to do this, we didn't want to give you a guidance the way we want to be in 2024 in terms of revenues. So we just used an average of 2022 and '23 for the first 2 bars on the left-hand side. So this company, if you combine our revenues back in 2022 and '23 and you do have a simple average of that. We're somewhere around $1.8 billion, so close to $2 billion. And then you see how it builds down in terms of adding CapEx and cost components on top of that. So we have multiclient investment. It's the first box. Again, we used the average of '22 and '23. And then when you move to the third box, you look at where we are today or what the current run rate is today for these 2 companies. So again, you see we build it down with our current cost base. We build it further down with the maintenance CapEx, the net interest as of today. So basically, based on PGS, it's very high interest. And you get to a low point and then you start building up from there and you get the synergies that we have promised the market somewhere between $110 million and $130 million, which takes you to a cash flow potential pretax stand-alone after synergies of around $350-ish million or $300 million. And then you see how the upside, whether we apply 2019 to the first box there on revenues where the market was better, then you will see significant upside on the free cash flow, so growing from a level of around $350 million up to $500-ish million. Again, it's not a guidance of where we will be, and it doesn't give any timing of that, but it uses some historical data in terms of the revenue factors and then it uses the current cost data, and then it shows you what the potential of this business should be going forward. Okay. So we strongly believe that this is a compelling energy investment case. Number one, it's a unique play on increasing exploration activity. It's probably the play in terms of if you want to get exposure, if you believe that exploration will have to come back based on my first slide, which shows the decline rate and the fact that Exxon believes that oil demand is going to be higher in 2050 versus today, and TGS is a unique play on that. We're still relatively early in the exploration cycle and seismic, there is no substitute for seismic. So basically no risk that within the next 10 years, someone is going to come up with technologies that allows you not to buy seismic. We are a preferred partner through the entire value chain. We're the only company in our space that can basically provide data from A to Z. We have great exposure to the rapidly growing energy evolution based industries, attractive and industry-leading assets, as you saw in my previous slide, where we basically paid less than $100 million per vessel versus a new build cost of $250 million and a strong balance sheet and cash generation capacity. So in summary, we've executed an ambitious consolidation plan to address changes in the marketplace, very opportunistic, driven by a very strong balance sheet at a time when we were the only one who had a very strong balance sheet. Leading positions in all segments and a strong track record of integration. We've done quite a few of these in the past. Clear near-term priorities for realizing synergies, reducing debt and becoming the preferred partner and increasing shareholder returns over time. Again, last but not least, ambitious growth targets for the New Energy business and well positioned to capitalize in further growth in exploration spending. So that summarizes my presentation. I'm still 5 minutes -- I still have 5 minutes. So I'll hand it over to you Mick and I assume you're going to facilitate the Q&A.

Yes, Kristian, can I just start off with one of the pushbacks I guess is there's been integrated seismic companies before, and they went down the disintegration route. They're booking the trend. So why are you different?

Yes. I mean it's a great question. I mean when we -- both SLB and CGG decided to follow the TGS well to say, hey, we want to go asset light, because it's clear that that's where you get the good returns and they bought it. And they did that in, I guess, 2018 and 2019. And then in 2022, we decided that we're going to go the other way around. And yes, I mean, it's an interesting question. I'm convinced that we did the right thing. And for one reason, when they were fully integrated players, there were 8 different seismic companies who held 65 different vessels. Well, today, there's 2 seismic companies holding 15 vessels. Basically a duopoly in the seismic space. So the acquisition phase of seismic has a duopoly and you -- when you have such a high market share that we had, we didn't have any choice. I think it was a great opportunity to kind of lock in that market. And I think they will probably regret their actions, but time will tell.

On the multi-client you talked about we're in the early innings of green shoots. Can you explain where you're seeing activity? And also secondly, how do you compete against your peer in that group? Because that group multi-client seems to be the one that has the most leverage given the fixed cost nature of the business.

Yes. Yes. I think the hot basins right now, I think if I go really broad, I would say South Atlantic. So anything that goes Brazil, Guyana, Uruguay, Suriname that basin is very hot. And then on the other side of that basin, you'll find Namibia, you find South Africa, Nigeria, Angola, et cetera. I mean that's where a lot of activity finds place. Can't be more specific than that, because that's probably the most important thing that we do, and it's a secret. But again, a lot of activity is finding place there. Second hot spot right now is Asia, around Indonesia, India, Malaysia, quite a lot of activity there is driven by the fact that these countries are extremely population rich. They see population growth, and they have no energy. So India, for example, imports about 85% of their energy needs. There is an enormous pressure to find a petroleum basin, of course. So that probably summarizes where we see most of the activity right now. In terms of how do we differentiate and how do we make sure that we stay competitive. I think part of it is that we have secured all the assets now. I mean we can do anything. We can go to an Exxon or a Shell and say, whatever exploration challenge you have, we can sort it all because we have a whole toolkit. There's no other company who has the whole toolkit. Secondly, it's about having access to the underlying data. That's an enormous advantage. When there was a discovery in Namibia, then we already had a lot of that basin covered by data and having that kind of first mover advantage is super important. Does that come up with pricing power? I think where you may have pricing power, and this is an industry that doesn't unfortunately, have a lot of pricing power. But I think where you may eventually have a little bit of pricing power from the asset side, because there are fewer and fewer assets, and the assets are held by fewer and few other companies. And all you need is a little bit of an uptick in exploration spending, and it will get tight for sure. So that's kind of going back to why do we go [indiscernible] when everybody else went up at like 4 or 5 years ago, when the world is completely different. Or we need now is a slight pickup in overall demand, and you will see things are getting tight. That's kind of... Yes. Should we expect more exploration with the question? And again, absolutely. I mean we've had some exploration success in countries like Suriname, Guyana, and Namibia, even Mozambique. But if you look at the slide, I presented, the decline curve continues to go down, right? And because we produce so much right now, everybody is so focused on maximizing production and forget the fact that you need to renew those barrels. And again, my guess and my big bet is that companies will realize that, world trade will realize that and world trade will stop questioning, this company has an average reserve life of 7 years. And then you have a model that shows production for the next 30 years, I mean, it doesn't add up. So you're going to challenge them and you're going to say, hey, what do you plan to do after 2030 because that's the point where you run out of oil and gas. And then there's going to be a shift back to exploration spending. And again, no other company is better positioned for that shift than TGS. I'm out of time. Thank you very much for the attention. Thanks Mick.