PGS ASA

OSE:PGS

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Bard Stenberg, executive]

Good morning, and welcome to this presentation of PGS Q1 2024 results. My name is Bard Stenberg, Vice President, Investor Relations and Corporate Communications in PGS.

Before we start, I would like to give some practical information. For those of you on the webcast, you can type in your questions on the webcast platform during management presentation, and we will address those after management's concluding remarks. I would also like to draw your attention to the cautionary statement showing on the screen and available in today's earnings release material.

The agenda for the presentation is that CEO, Rune Pedersen, will give you the Q1 highlights and the order book. Then he will give some comments regarding the contract, the offshore wind and the multiclient markets, an operational review and a merger update. Gottfred Langseth will give you a financial review and summarize the presentation followed by a Q&A. So with that, I'll give it the word to you, Rune.

[Rune Pedersen, executive]

Thank you, Bard, and good morning, everyone. I will, as normal, start with Q1 highlights and the highlights for this quarter is obviously that we've had a good start to 2024. A particularly good start we've had in MultiClient, where we've had robust late sales and a strong basket of active opportunities leading also into Q2, which should bode well for late sales in the rest of the year. We had a prefunding level above 100% in the quarter.

On contract, we had strong contract revenues on our vessels in operation with similar profitability as we had during the summer of 2022 on the vessels in operations. However, there was lower activity during the winter season this year, and therefore, we have incurred some idle time also in Q1. On new energy, this business segment is progressing well and particularly well, I would say, in the offshore wind segment, where we have a significant basket of opportunities.

As you know, the Sanco Swift is currently doing a very large offshore wind job, offshore New York in the New York White, and she will be done in during the -- towards the end of this quarter. And they're also transferred to the North Sea and continue with work there. And I will get back to offshore wind a little bit later. On the merger, we now expect the merger to complete on or around the 1st of July after we received clearance from the Norwegian competition authorities on April 17. The U.K. competition authorities have initiated their Phase 1 assessment period, which will expire in -- on June 11th, and within that date, the U.K. authorities will have to inform us whether they clear the transaction or whether they move it into Phase 1. We expect them to clear the transaction during Phase 1.

The order book. The order books sat at $375 million at the end of the quarter, which is a slight increase from Q4 order book and more or less exactly the same as we had in Q1 2023 and at a decent level, I would say. Booked position, which is as of the 6th of May, we had moved to 21 vessel months in Q2, 20 vessel months in Q3 and 8 vessel months in Q4 and that is of the 24 available vessel months per quarter. So fairly strong booking during the summer season and with some availability towards the end of Q3 still for sale.

Now to the contract market, we normally show you the contract bids and leads curves. The dark blue line being the dollar value of all contract bids we have currently have in-house. And the light blue line being the dark blue line plus the risk-weighted dollar value, all the leads we have recorded. And what is clear when you look at this graph is that they are moving away from each other. Contract leads is -- have a healthy increase from the start of the period here in 2017 and basically all the way up to today. While when you look at the bids, it is more flattish.

I would say that this graph used to be a very good representation of what happened or a leading indicator of how we saw the contract market. That has changed somewhat. It is not so representative anymore. And the reason for that is we have seen over the last few years, a trend towards a lot more direct negotiation. Not everything goes to tender. There are 2 trends, I would say, that is particularly noteworthy. One is that we, from time to time, get what we call RFI or request for interest which is not a tender, but it's a request for availability and a budgetary price. And once you've given that the contractor or the client will move directly into contract negotiations. So these contracts never hit the dark blue line. They move directly from the light blue line and into the order book.

And the second trend we have seen is that we do see quite a few direct negotiations also where the client in question would like to avoid a lengthy permit process and where PGS has a MultiClient acquisition permit. So then the client can go direct negotiations with PGS and then close the contractual, but we use our multiclient permit to acquire the job. These will also go directly from the light blue line and into the order book. And therefore, this growth is less representative than what it used to be.

However, we do expect the gap to narrow over the next weeks. And I was just informed this morning that we have received a very large RFI tender document for several large jobs for one client, which would have lifted the blue lines quite significantly here. So we do expect to see this narrowing, but it is also so that it is less representative in the market today and what it was 3 to 5 years ago.

The offshore site characterization market for offshore wind is improving quite dramatically. And I will just repeat that we are offering a 3D solution to this market, which has traditionally only been 2D. And we have received several tenders, and we have responded to several tenders for work during the summer season of 2024, and we're also seeing a strong outlook for 2025. So we expect both to be awarded and for wind to be awarded either to us or others over the next 2 months.

For this reason, we have decided to convert the Ramform Vanguard to a dual-purpose vessel. That means that we are doing work on her so that she can carry both the new ultra-high resolution 3D streamer kit for offshore wind and our traditional GeoStreamer. And she will be ready for operation after this conversion early Q3, and we expect her to go straight into work on offshore wind, and therefore, running 2 vessels on offshore wind during the summer.

This conversion, as I said, will make our flexible vessel. That means that we can move from offshore wind into traditional acquisition or the other way with approximately 1 week of time in port to just prepare for the different streamer set. So therefore, we can flex her between these 2 operational modes, which we think will be useful going forward. So we're quite excited with what we've been able to create in this market, bringing 3D to offshore wind, and we think we're just scratching the surface or in the very beginning of what we can see in this.

Now we talked about the contract market a little bit. We talked about the offshore wind market. What about the MultiClient market? We are seeing an increasing exploration activity. And let me explain what I mean by that. We are hearing from our clients that they want to do more exploration. They're telling us they want to do more exploration around their existing fields and also do more frontier exploration. We are seeing them moving and expanding their acreage portfolios, farming in 2 areas around the world. I mean there is an active, there's a farming market, I could almost say now, we've seen that, for example, in Namibia, where a lot of the large oil companies have farmed into acreage. We are seeing the larger oil companies of the world being active in tendering rounds around the world. To mention Brazil, like I mentioned, Uruguay, just to mention a few.

And we're also seeing companies being active approaching governments where there is an open door licensing policy where you can basically go and say, "I want acreage now" and then there is a process for award, which we're seeing in other places. So we expect the multiclient market to be quite healthy going forward. We expect to have -- continue to have high prefunding because areas such as Norway, parts of Brazil, Angola, Malaysia are areas which are rather mature, but where there is still a lot of exploration going around fields in mature areas. These are typically done with high prefunded multiclient projects.

We also expect that late sales will continue to be on a gradual increase going forward because we do see frontier exploration coming back in areas such as Guyana, Surinam and the Atlantic margin of Brazil, Uruguay, Namibia, Egypt, Indonesia, I could also mention India, [indiscernible]. So there is some movement. So the question is more when do we see this move towards integration, which is quite clear, reflect properly into the revenues of the seismic companies. I expect that we will see this gradual increase towards the end of this year into 2025. So the market outlook should look fairly healthy when it comes to the MultiClient. Obviously, this will also pull contract jobs and these kind of things. But right now, also addressing MultiClient.

Now changing here a little bit, where is our fleet currently. We can start with the Sanco Swift in outside of the New York in New York White, she is doing the offshore wind job. We expect her to complete according to schedule towards the end of this quarter and then move to a fairly large offshore wind job in the North Sea. Further down, we have the Ramform Victory. She is currently in port in Rio, undergoing inspections from Petrobras, which we have to do before we go out and start acquiring a very large 4D, which has been on the block for some time. We expect her to leave Rio within a few days.

Ramform Atlas leaving South Africa moving north to the next large MultiClient job. Ramform Vanguard currently in Las Palmas, as I said, she will soon go into yard for this conversion to a dual offshore wind and regular operation vessel. Ramform Hyperion and RamformTethys, both in the North Sea, Ramform Hyperion doing prefunded MultiClient work in Norway, while Ramform Tethys doing a 4D job in U.K. before moving also into Norway for MultiClient for the rest of the season. Ramform Titan currently in Egypt, and we expect her to stay there for some time. Ramform Sovereign just started a large MultiClient job together with our partners, which will last more or less through the summer before we'll see what she will do thereafter.

So a fairly active picture, and we look forward to also getting Ramform Vanguard into operation in wind work. Now on the merger, as I said, Norway has cleared the transaction, and we are waiting for clearance by the CMA in U.K., which have initiated their Phase 1 assessment, which will end on June 11th. The way we see it in PGS is that the more challenging area to get clearance was Norway, why? Because that's where both TGS and PGS has their primary activities when it comes to Norway and in U.K., activity levels in U.K. has been much lower over the last few years. So we expect clearance from the CMA during the Phase 1. And we expect that clearance to come towards the end of the period because that is normally what happens if you look at the history of CMA. And therefore, with a clearance in the beginning of June, we expect them to close the transaction on or around the 1st of July.

And with that, I will give the word to Gottfred to give us some news on the financials. Thank you.

[Gottfred Langseth, executive]

First quarter was a good start of the year, total revenues of $223 million, is a 29% increase over Q1 last year. We had a significant improvement of the MultiClient late sales. You can see from the graph that they are more than double what we had last year. Our contract revenues improved as well, and this is driven by improved pricing and production on our vessels and not capacity utilization. .

This is the summary over a bit longer period, it's the 5 quarters where revenues are on a good trend. You can see that is a rising trend and that the Q1 revenues were almost at par with what we had in Q4, which generally due to seasonality is the better quarter for our business.

EBITDA, $113 million, and that's a 57% increase over Q1 last year. EBIT for the quarter, positive $26 million, which corresponds to 12% EBIT margin for the group -- sorry, quick on that one. The cash conversion of our business is strong in the quarter, $128 million of cash from operations, which is better than the reported EBITDA, which speaks to a healthy working capital performance in the quarter.

Then to the operational highlights. Contract revenues first, $116 million. In total, we used 63% of our active time for contract acquisition. Converting that to a number of acquisition days, and that would mean that we spent approximately the same number of days for contract in Q1 this year as in Q1 last year, if adjusting for the difference in nature between wind and conventional 3D seismic acquisition. Therefore, the revenue increase that is illustrated in the graph is driven by price and margin increase and not applying more capacity in the market. The profitability on the project level was maintained now in Q1 at the level we managed to get to during the summer season 2023.

Then moving to MultiClient. Total revenues of $102.3 million, prefunding 106%, and that is okay prefunding level. You'll see from the graph and the orange line in the graph that it is somewhat lower than what we have seen in recent quarters. We do expect prefunding to increase in the coming quarters. We spent $43.6 million in MultiClient investments in the quarter.

Then vessel utilization, 70% active time in the quarter -- for the current quarter. Second quarter, we expect less standby, but we expect more steaming as a result of moving vessels for summer season work. And lastly on this one as mentioned by Rune already, Ramform Vanguard will have yard time in the second quarter related to 25-year classing, and also conversion to dual purpose use.

Gross cash cost in the quarter, $152 million. This is somewhat higher than the trend line or, call it, the run rate for some specific reasons, operations in high-cost regions, that's typical for the time of the year, but more importantly, in the first quarter, it is impacted by our share of the costs related to participation in the third party 2D MultiClient projects as well as using external source vessels on acquisition projects. Our expectation for cost for the full year is unchanged compared to what we said after the fourth quarter and entering into the year, we expect to be below $600 million, and that is taking into account higher vessel utilization than what we had last year, the impact of operating Ramform Victory for the full year, the impact of more planned offshore wind activity now in '24 compared with '23. Comparing the cost to last year, the impact of inflationary cost increases are quite modest.

Cash flow, the $127.8 million operating cash flow reflects a robust cash collection. We had a cash flow before financing activities of approximately $60 million. A little bit of movement within -- in the financing part of the cash flow statement and on the debt side of our balance sheet as we repaid the final stub, final part of our long friend, the term loan -- long time friend the Term Loan B, the last $70 million approximately was repaid in Q1 in February from available cash. And then we refinanced our $50 million super senior loan with a new $60 million loan funded by TGS.

Cash and cash equivalents, $147 million, approximately same as we had 12 months ago. Net interest-bearing debt, $500.4 million, which is a relatively significant reduction since Q1 last year, 15% down.

And then to the last slide and summing up, good MultiClient start to 2024, reasonable start on the contract side as well, particularly with maintaining pricing profitability on the project level for our surveys at the levels we got to last summer despite slightly lower activity level over the winter. When it comes to offshore wind, significant opportunity basket, I would say, exciting outlook, and we are positioning for that with the conversion of Vanguard to be in position to operate, to wind cruise from early third quarter. And then the merger where we are working, preparing for merger integration and eagerly awaiting clearance from the authorities in the U.K.

With that, I will stop, Bard. Word back to you for the Q&A.

[Bard Stenberg, executive]

Thank you, Gorrfred. We have some questions from the people on the web, and we also have some people in the audience in Oslo. So you can probably start with the audience in Oslo with the questions. So John, go ahead.

[Unknown Analyst]

I want to know on the Vanguard, is there any CapEx related to the conversion of it?

[Gottfred Langseth, executive]

That is fairly some -- that's very moderate, I would say, $1 million or so.

[Rune Pedersen, executive]

Something like that.

[Unknown Analyst]

For the rest of the year, do you expect Vanguard to be operating in the wind segment or in the traditional total size big streaming market?

[Rune Pedersen, executive]

We expect to be operating in wind at least through the summer. And then we'll see what happens thereafter. A little bit depends on activity levels, we don't have those basically come middle of the third quarter, fourth quarter whether we'll convert or back or not, depends, yes.

[Unknown Analyst]

And is the economic similar in the wind market versus total market for her?

[Rune Pedersen, executive]

It's -- the margins are similar, but the costs are lower. I mean the kit is much, much cheaper in particular, is what, $5 million plus versus $50 million streamer kit. So...

[Unknown Analyst]

That's also lower revenues.

[Rune Pedersen, executive]

Yes.

[Unknown Analyst]

So it's lower contribution, so to speak.

[Bard Stenberg, executive]

Lower contribution, yes.

[Unknown Analyst]

You prefer to have her in this total streaming market?

[Rune Pedersen, executive]

Yes.

[Unknown Analyst]

And then Rune or Gorrfred. Do you have any plans for what to do after the 1st of July? And maybe on that and more specifically, you have noncompete, and also, do you have lockups on your shares? So what's your plans? And...

[Rune Pedersen, executive]

Yes, I have no particular plans currently. And yes, I have a noncompete.

[Unknown Analyst]

How long?

[Rune Pedersen, executive]

So I have noncompete for 2 years.

[Unknown Analyst]

2 years, well. And Gottfred?

[Gottfred Langseth, executive]

No particular plans. I need to check my agreement on the noncompete. I probably have one as well. And I don't have a lockup on my shares. That's fair to say. I should add that I have no plans of selling them. That is decided of today.

[Unknown Analyst]

Does that go the same for you, Rune? And then, Gottfred, you've been in PGS for about 20 years, and Rune close to 10, I say. So I wonder if we could take the time to reflect a little bit on the industry and PGS over the last 20 years, maybe start with you Gottfred since you've been here for 20 years. What should -- the return has been pretty bad, fair to say over those 20 years. What do you think PGS should have done differently to avoid -- to have yielded better return over the last 20 years?

[Gottfred Langseth, executive]

I will be a bit cautious on that. Much can be said, but what I want to say about PGS, it has been fantastic, fantastic culture, good structure, strong drive, combined with entrepreneurial spirit and best places I have ever worked. And then we made some decisions over this, which, in retrospect, we would have been different. And I won't dive into which. But -- and we've had a period where the market has been tougher than you would normally expect since 2014 on average. That's fair to say, probably the deepest downturn. We've come through that without having to enter into restructuring and these kind of things. So it's been -- it's a tough market to operate in. Fantastic company in an extremely interesting business, which I think probably won't be working in again at any later stage. So as we were ruffling probably, then Rune can say what we would have done differently.

[Rune Pedersen, executive]

Yes. I obviously echo everything you said about the company. I mean it's a great company to work for. It's a privilege to work for PGS, I must say. And with respect to -- it's always what should we have done different looking back, we should have had less capacity, less vessels, come 14th, that's clear. The market went into a significant downturn. The market went from 60 vessels down to 15 at the lowest and we're a little bit up. So obviously, had we known that with a different view of the Titan class and particularly the last 2, that would have impacted the debt level. But it's something else to stand here now and say it and to be in 2012 and kind of looking forward. So I'm not going to say it was a mistake, but that should have been done differently in hindsight, which is kind of 2 different things, I would say. So no, it's been -- in my time has been a lot of a struggle, I would say, in PGS, but it's still been a real privilege. It's overcoming Large hurdles is also satisfying.

[Unknown Analyst]

And then finally for me, what would your advice be now to Christian when you leave the company?

[Rune Pedersen, executive]

I don't think I'm going to give too many advice. I believe this company will be a really, really strong company with all the right tools, the positioning it has in the market. And the way the market has developed, I believe this move in a way, both the Magseis move and then now the PGS move has created a company, which is ideally positioned in this market. And I believe this market will be stronger over the next years. And then there's question of how strong? That is very, very difficult. You kow, this is obviously a gradual slow increase or is it going to be more rapid? I don't know. But I think if you can get the pieces to put together or get them all to work in the right direction. I mean, it is a very strong position in the company.

[Unknown Analyst]

And Gottfred from the financial side, what would you recommend, Stenberg, and what kind of balance sheet should TGS have for the next 5 years -- to be prepared for the next 5 years?

[Gottfred Langseth, executive]

Less debt.

[Unknown Analyst]

Less debt that it has now or?

[Gottfred Langseth, executive]

I don't think it should -- anyway, it's not a high debt level for the combined company. But reasonably industry will mature over time. It is expensive to finance assets in the segment that the company operates. So it's usually in a way, it is to do a -- make a cautious view of whether leverage is a good way of -- or an efficient way of increasing shareholder returns or whether it's equally good to have even less leverage

[Bard Stenberg, executive]

Okay. Very good. Let's also answer some of the questions on the web, we have 1 question which is not answered, and that's from Christopher Mollerlokken, Sparebank 1 Markets. That's to you, Rune. You mentioned you had received a request for tender for several large jobs for a client. I assume this is not included in your order book. But could you indicate how large contract this potentially could be?

[Rune Pedersen, executive]

I know it's obviously not included in the order book since the order book has not been won -- we haven't won this and it received yesterday last night. It's a request for interest. So it's one of the examples where things would -- if we get it would move from the yellow line and into your book order without ever touching the blue line. It is way north of $100 million I think is what I am going to say. And it's a [indiscernible] jobs, but I'm not going to be more specific on that. I mean, this is a ongoing job, which there will be competition for. So where we're going to put ourselves is not something I want to say, but just to indicate scale at least.

[Unknown Analyst]

Yes. Just in terms about how important the U.K. competition approval is?

[Rune Pedersen, executive]

Is your question whether we can go forward with the merger without it? I would say I haven't contemplated whether we can or would do that. I think if I were to -- so I haven't checked it out whether we're allowed to. The U.K. market is not an important market for this combined company. And I don't think it will be a very important market for this combined company. The U.K. market is generally turned into a 4D contract market, very little MultiClient, there's little new MultiClients and limited exploration, I would say. So not an important market for the combined company. How it will work? We both have libraries there and companies there, employees there, I'm not sure. But that's why we don't expect it to be a big problem as the U.K. market as used to be important, but over the last 3 to 4 years, it has not become so important.

[Bard Stenberg, executive]

Okay. We don't have any further questions from the web. So unless there's any last questions from the audience in Oslo that concludes our presentation.

[Rune Pedersen, executive]

We'll just say thank you. This is most likely our last quarter for unless the U.K. do something very strange. This is going to be our last quarter reporting. It's been ups and downs, but it's been a privilege both to run this company and to be able to discuss the market, the company, the ups and downs with investors and analysts, not always pleasant, but always interesting. So thank you all.

[Gottfred Langseth, executive]

Thank you.