PGS ASA

OSE:PGS

Earnings Call Analysis

Company Forecasts Positive Growth in 2024

After a year of decent MultiClient sales and a strong order book totaling $366 million at year-end, the company is entering the next period with positive momentum. They are embarking on a significant 4D contract for Petrobras in Brazil with the Ramform Victory, anticipating stable costs in 2024 consistent with Q4 '23. Capital expenditures are projected at $125 million, including expansion of offshore wind activities. Liquidity reserves hold strong at $177.7 million while debt reduced significantly in 2023. The New Energy business line saw revenues of $35 million in 2023, growing from $30 million the previous year, with expectations for considerable growth in 2024 driven by high bidding activity and market expansion for offshore wind and carbon storage projects. A proposed merger with TGS is progressing, expecting to close in Q2 after competition authority reviews.

Highlights and Financial Performance in Q4 2023

The final quarter of 2023 saw robust MultiClient sales, with late sales roughly doubling compared to earlier quarters, reaching an impressive $82 million. Despite this, a subdued winter market for contract acquisitions was observed, although profitability of projects remained stable. A noticeable development was the establishment of a New Energy business, particularly marked by an entry into the offshore wind market. The revenues achieved totaled $227 million, with an EBITDA of $127 million and an EBIT of $33 million, indicating a 9% decline from the previous year. Cash flow remained strong with $115.8 million generated from operations within the quarter.

Order Book and Project Updates

The company's order book concluded the year at $366 million, a decrease from a peak in Q3 but still maintaining historically high levels, with expectations to stay vibrant throughout the year. Addressing permit issues that hindered certain projects, particularly in Brazil, resolutions are set leading to an early April commencement of the Ramform Victory on a 4D contract. Furthermore, with a 148% prefunding rate for MultiClient projects, the company has positioned itself well financially.

2024 Outlook and Operations

Looking ahead to 2024, higher vessel utilization of around 70% is anticipated in Q1. With an increase in operating costs attributed to higher-cost regions and outsourced vessel use, the cost level for 2024 is projected to remain similar to the Q4 2023 run rate. The company also cited an ambition to reach even higher vessel utilization than the 73% achieved in 2023.

Capital Expenditure and Debt Reduction

The company plans for a capex of approximately $125 million in 2024, which includes expansion into offshore wind activities. A substantial reduction in interest-bearing debt was achieved in 2023, with a decrease of $273 million in gross debt and net debt reduced by $75 million, leading to an end-of-year net interest-bearing debt of $542 million.

Business Development and Growth Strategies

The New Energy business line produced around $35 million in revenue in 2023 and is expected to see significant growth in 2024 due to high levels of bidding activities, particularly in the North Sea region. With the introduction of an innovative 3D solution for offshore site characterization, which complements existing geotechnical surveys, the company is making strides in efficiency and cost savings. An expansion of capability is foreseen with the delivery of an ultra high-density 3D set slated for mid-2024.

Merger with TGS and Regulatory Update

The merger with TGS is progressing, with requisite filings made to the Norwegian and U.K. competition authorities. Phase 2 of scrutiny by the Norwegian authority will conclude by the end of April, while the U.K.'s pre-acceptance phase and subsequent 40 working-day review will work in parallel. The companies aim to finalize the merger in Q2, pending regulatory clearance.

Earnings Call Transcript 2023-Q4

[Bard Stenberg, executive]

Good day, and welcome to this presentation of PGS Q4 2023 results. My name is Bard Stenberg, Vice President, Investor Relations and Corporate Communications in PGS.

Before we start, I would like to give you some practical information. For those of you on the webcast, you can ask questions by typing in on the webcast platform. We will address the questions after management's concluding remarks.

I would also like to draw your attention to the cautionary statement showing on the screen and available in the Q4 earnings release and presentation.

The agenda for the presentation is Rune Olav Pedersen, President and CEO, will give you the Q4 highlights, financial summary and the order book. Then Gottfred Langseth, EVP and CFO, will give you a financial review. And then Rune Olav Pedersen will come back to give you an operational update and market comments, be it on the merger process, a summary, and then we will do the Q&A.

So with that, I deliver to you Rune Olav.

[Rune Pedersen, executive]

Thank you, Bard, and good morning.

I will normal start with the Q4 2023 highlights and start with our MultiClient sales. We had decent MultiClient sales in the quarter. Our late sales more than doubled -- or approximately doubled versus the average of the first 3 quarters, which was good to see. And compared to our peers, it was a strong late sales number of $82 million in the quarter. We had strong prefunding level in Q4 and also for the full year of 2023.

On the contract side, we are experiencing a more mixed winter season market. Profitability is keeping up on the project we have sold, both in the fourth quarter, as you saw and also further through the winter season. But we are seeing lower acquisition activity in the winter season -- over the winter season than what we had expected some quarters back. And we anticipate that this will revert and that we will see a more robust summer season this year.

We have, during 2023, established a significant New Energy business, and the highlight for 2023 was obviously that we entered the offshore wind market. And we have now Sanco Swift operating with a 3D spread in the offshore wind market. And we are, with our solution, positioned for further growth in this segment in 2024, which I will come back to.

Obviously, combination with TGS is a highlight in Q4, and our shareholders and the shareholders of both TGS and PGS voted in favor with almost unanimously on the 1st of December. And the process is currently ongoing, planning for an integration process and also ongoing versus the competition authorities in Norway and U.K., which I will also come back to later.

I will be brief on the financial summaries. I'll only mentioned the highlights, as Gottfred will come back and review the numbers in more detail. In the fourth quarter last year, we had produced revenues of $227 million. We have produced EBITDA of $127 million and produced EBIT of $33 million, while net cash provided by operating activities sat at $116 million.

So over to the order book. The order book at year-end sat at $366 million, which is sequentially down for -- from the very strong order book we had in the third quarter 2023, which you will remember was the strongest order book we've had for -- I think it was, 8 years. So the order book year-end is still at high levels, more in line with the order book in Q1 and Q2 of last year. We -- and I expect the order book to remain at these high levels through the year.

The booked position. The booked position is, as of yesterday, so not at the same time as the order book, and we have booked 20 vessel months in the first quarter, and we have booked 17 vessel months in the second quarter and 15 vessel months in the third quarter.

Now it is important to note that we are now reporting our booked positions on 8 vessels. So the 7 vessels we have in 3D mode in the traditional oil and gas market and also Sanco Swift, which is operating in 3D mode in the wind market -- offshore wind market. So we are reporting the booked position for all these 3D vessels.

On Ramform Victory, there has been quite a bit of a discussion and worry of when Ramform Victory will be able to start the large 4D contract for Petrobras in Brazil. As you will remember, this should have started more or less midyear last year, but Petrobras have had issues with their permit.

We are informed that most of those permit issues are now resolved, and there are only formalities left. And we are, together with Petrobras, starting -- planning for a start of Ramform Victory on this 4D contract early April, which is immediately after Ramform Victory is finished with the current MultiClient work she is doing in Brazil. So good news there on the Ramform Victory.

And with that, I will leave the word to Gottfred to go through the financials. And then I will be back for more information later.

[Gottfred Langseth, executive]

Thank you. I will start with clearing my throat and then moving to the key financial numbers.

So the revenues of $227.3 million were in line with what we had preannounced. They are 9% down from Q4 last year. Produced EBITDA, $126.7 million, that is as well a reduction of 9% compared to Q4 '22. Produced EBIT, $33.3 million.

IFRS, or as reported revenues, were higher this quarter than the produced number. The primary reason for that is that we completed and delivered the finally processed data on our 2022 Norwegian Sea campaigns.

Operational highlights. We had contract revenues of $83.8 million. We used 45% of our active time for contract acquisition in the quarter. On a project level, the pricing profitability was maintained at level with the summer season. And we reported quite high revenues per active contracted day in the quarter.

If we move to MultiClient. The total produced revenues were $137.6 million, $82 million net sales, $56 million prefunding. Prefunding level -- or prefunding rate of 148%, which is a high level and driven by strong prefunded on our ongoing acquisition projects as well as some additional sales on surveys in the processing phase.

56% utilization or active vessel time in the fourth quarter, impacted by a significant steaming and yard time. In addition, the Europe season ended earlier than planned due to weather. We do expect higher utilization in the first quarter in 2024 now and believe that we should get to around 70% area.

On the cost, we have a sequential increase of gross cash cost, $146 million in the fourth quarter. We have an overweight of operations in high-cost regions in the quarter. And we're also using more than normal outsourced vessels on -- in operation, so using in the fourth quarter source vessels on 2 projects.

Looking forward, we expect that the cost level in 2024 will be relatively consistent with the run rate that we report now for Q4 '23, and this is primarily due to increased production with our vessels, an increased utilization and related to that Ramform Victory will plan to operate for a full year in Brazil versus only second half of '23 and an increase of our onshore -- sorry, offshore wind activities. It is obviously also impacted by inflationary cost increases, but these are quite moderate.

Then the cash flow. We had cash flow from operations of $115.8 million in the quarter, $467.2 million for the full year. Both reflect strong cash collection. We managed to avoid almost, at least, an increase of working capital in the fourth quarter, so a very moderate increase. And for the full year, we achieved a quite significant reduction of working capital.

Looking at net cash flow after investing activities or before financing activities, $50.7 million in the fourth quarter and $182 million for the full year. That is after CapEx, as said, which ended lower than our plan for the year at $89 million.

For 2024, we expect CapEx of approximately $125 million, and that includes some carryover from last year as well as expansion of our offshore wind activities.

I will be very quick on the balance sheet in a way on just noting that our liquidity reserve or cash and cash equivalents amounted to $177.7 million end of year.

Then the last slide that I will comment on today. We have reduced our interest-bearing debt significantly in 2023. Gross -- that gross interest-bearing debt is down by $273 million, and net interest-bearing debt is down by $75 million, leaving a net interest-bearing debt at the end of the year over $542 million. And we are satisfied with that.

After the balance sheet, there are 3 things to mention. We have -- firstly, we have now in February repaid the remaining amount of the Term Loan B, which otherwise was due in 19th of March.

Secondly, relating to the Super Senior Loan, instead of using the extension option for that loan, which matures 18th of March, we decided to refinance it, and we received commitment from TGS for such refinancing. I should note that the commitment is at terms, which are consistent with terms otherwise available to PGS from other sources.

And then lastly, the amounts due to PGS from the arbitration award last fall regarding a transfer fee dispute has now been received in Q1.

With that, Rune, I give the podium back to you.

[Rune Pedersen, executive]

Thank you, Gottfred, and I will, as normal, again, start with the fleet activity in -- now in February and start in the Northwest, if I can call it that, the Sanco Swift operating the 3D spread for offshore wind outside in the New York Bight area, and we expect that she will be there through the second quarter before then moving over to the Europe season and continuing work there, which we have just announced.

Then further South, you see the Ramform Victory in Brazil currently doing MultiClient, as I said. And then she will move over to the very large 4D in Brazil, which will take her up to the end of the year, at least.

Then moving East, we have the Ramform Atlas in South Africa on a contract job. Further North, you will see Ramform Tethys and Ramform Vanguard in Las Palmas. Ramform Vanguard finished off her job in January and are waiting for a yard stay, which will start in a few weeks, and I think early March, and that is for classing. And so she will be then ready for working again when that is done.

Ramform Tethys, currently in Las Palmas waiting for the next assignment, and we are working with a few alternatives for her.

In the Mediterranean, you will see Ramform Titan and Ramform Hyperion, both operating in Egypt on the MultiClient work and the other on contract work.

Then for -- in the Far East, Ramform Sovereign is currently on a pit stop in Singapore following completion of jobs she had in Malaysia, and she will go back to Malaysia for a fairly large job thereafter is the plan.

On the contract bids and leads, and you've seen this before, but I will still explain. The dark blue line is the dollar value of the tenders we currently have in-house. And the light blue line on top is the dark blue line plus the risk-weighted average of the leads we have recorded in PGS in the contract market only.

And as you can see, which is predominant here, is that the difference between the active leads and the active tenders are increasing and continue to increase. This is an, I would call it, abnormal situation and will adjust over time. We believe it will adjust with tendering activity going up as well as backlog increasing, obviously, because when it moves out of this, it goes into the backlog.

So we expect that during 2024 into 2025, this thing will normalize itself by lifting the tendering activity graph and the backlog in PGS, which is consistent with what we're hearing from our clients.

On the supply side, we expect that the supply side in 2024 will remain more or less intact with what we have observed in 2023, as illustrated by this graph. And of course, it is still a very consolidated vessel market, where Shearwater and PGS controls most of the 3D vessel capabilities worldwide.

Now over to New Energy. And as I said, we have established a significant New Energy business during 2023. The revenues from this business line in 2023 was approximately $35 million, which builds on the approximately $30 million we had of revenues in 2022. So we have now established a fairly sizable level for this business.

In 2022, this was only carbon storage-related revenues, both acquisition and data sales. In 2023, there is a combination. We have acquisition for carbon storage. We have data sales from our library related to carbon storage. And then, very important, we have entered the wind market, more or less, in the middle of the year and have had continuous operation with Sanco Swift for the offshore site characterization market. So the $35 million contains all these elements.

Our solution, we have brought to the offshore site characterization market is a 3D solution. The norm in this market worldwide is several 2Ds and several geotechnical surveys, which then, in combination, gives developers of offshore wind parks what they need to know of the subsurface before starting to develop the wind park.

Our solution is that you can do 1 3D and together with geotechnical, you can then accelerate the start date for building or developing your offshore wind park. And this has attracted and continued to attract considerable client interest. So we have had a very successful entry to the market here.

And as you know, we are expanding our capabilities. We have ordered a second 3D set, or ultra high-density 3D set, as we call it, for delivery midyear 2024, which position us to take a further chunk of this growing market.

So the outlook for 2024 is that we are currently seeing very high bidding activity for the North Sea season or maybe, more correctly, the Europe season because it's not only the North Sea, it's other places in Europe as well. And we believe we are well positioned to be awarded some of these jobs and, therefore, grow this business through 2024.

We are also, which is interesting, maturing now MultiClient prospects for carbon storage -- or projects for carbon storage projects. These are both combination surveys, where you do get prefunding, both from a carbon storage player and from an oil and gas player, and also standalone and MultiClient projects where we're trying to attract prefunding from carbon storage players alone. And this is happening several places in the world. This is not only the North Sea.

So all in all, the outlook for 2024, we expect a fairly large increase in total revenues in this segment versus 2023. So we are very excited about the growth we are seeing in our business in this market.

Now over to the merger with TGS. I thought I would explain a little bit about the competition process as I understand there are several people that are -- want to understand this further. We have to file in with the Norwegian competition authorities because we meet the threshold for filing.

In the U.K., we do not meet the thresholds for filing, but the CMA, the U.K. Competition and Market Authority, has requested a filing, so we also have to file in the U.K.

So these are the 2 places we have to file this merger for clearance. The process in the 2 countries are somewhat different. In Norway, we sent a draft notification in December, had a premeeting explaining our business to the competition authorities. And then we made the final -- the formal filing early in January.

When the formal filing is made, like we did early in January, there is a first phase of 25 working days where the competition authority gathers more information about the merger and the market. They talk to our clients and talk to competitors, talk more to us. And then they decide whether they want to take a deeper look at the transaction or not.

And they did yesterday decide that they wanted to take another -- or a deeper look at this transaction after this introductory or first phase of gathering information. So we are moving into a Phase 2, which lasts for 45 working days and ends then towards the end of April.

In the U.K., this is slightly different. In the U.K., there is also a pre-notification filing, where we -- you file your document. But then before the U.K. authorities accept that filing has been made, they will ask a lot of questions. And they will talk to clients, they will talk to competitors, ask more questions, ask for more documents. So similar, I would say, in process to the Phase 1 in Norway is what's going on in the pre-process in the U.K.

We expect that the U.K. will accept our filing sometimes towards the end of February. This is an estimation. And then their first phase will start [ and it will last ] 40 working days, which will run in parallel then with the Norwegian competition authorities Phase 2.

So although the 2 process are somewhat different, what you can hear is that when you peel it down, differences aren't that many. The Phase 1 looks very much like -- Phase 1 in Norway looks very much like the pre-phase in the U.K. and then they have a deeper look in the 40 and 45 working days. And then they should conclude at approximately the same time.

We expect -- both TGS and ourselves expect that we will be able to close the merger sometime during Q2, obviously, then after we have received clarifications from both the Norwegian and the U.K. authority.

So this is a little bit to try to explain how these processes work, so everyone can have a better understanding of what to expect going forward.

So in summary, we had decent MultiClient late sales in the fourth quarter and actually quite strong relative to peers. We are experiencing a mixed winter market for contract work, and you saw that in the fourth quarter. And we are experiencing similar trends in the first quarter, if I can say that.

And then as I have explained, we have established a significant New Energy business. We expect that business to grow quite significantly in 2024. And obviously, the combination between TGS and PGS to create the premier energy company is on track, both in terms of the planning of the merger and with respect to the process versus the 2 competition authorities.

So with that, Bard, I will give the word to you so that we can take some questions.

[Bard Stenberg, executive]

Thank you, Rune. We have some questions from the people on the web. So the first question is from Christopher Mollerlokken in Sparebank 1 Markets. Vessel utilization in 2023 ended at 73%, up from 71% in '22. What's your ambition for '24?

[Rune Pedersen, executive]

Well, the ambition is obviously always to have as high utilization as possible. I think we expect to increase vessel utilization somewhat into 2024. We have not given a number, and I will not guide on the number. As we would have seen, we have not -- do not have full utilization in the first quarter, but we expect that to be much stronger and much more robust into the summer season and also when we get into the back end of 2024.

Obviously, we also expect to merge in the middle of the year. And what then may happen to our vessel utilization, how much vessel capacity TGS will require, it's difficult for us to predict as we are currently operating as competitors.

[Bard Stenberg, executive]

Another question from Christopher. I understand why you don't guide on MultiClient investments for '24. But could you provide any comments regarding what you would expect of a fair fleet mix in '24 in terms of contract versus MultiClient?

[Rune Pedersen, executive]

Yes. And the reason we don't guide obviously on the MultiClient investments is that we are in the major merger process. But I think if you assume, let's say, a similar MultiClient investment level on a standalone basis for us this year as last year and maybe a slight overweight of the contract work through the -- through 2024, I think you're pretty close to what we are looking at on a standalone basis. And then this may change, obviously, as the merger is completed. .

[Bard Stenberg, executive]

Yes. And we have 2 questions from Mick Pickup in Barclays. If I look at 4Q versus 4Q a year ago, you had 45 months of capacity booked for $460 million of order book. Now it's 52 months booked for an order book of $366 million.

Can you talk about the dynamics of pricing given that on the first glance, it appears to be down? Is this wind related?

[Rune Pedersen, executive]

Well, I think some of it is obviously wind related, but I don't think that's the main effect. The main effect is that in the book position, we have several both fairly large MultiClient program and contract work that has yet to be announced to the market, and that is not sitting in the order book as of year-end.

So there is a larger, call it, difference between the book position, which is as of yesterday and the order book, which was as of year-end. And the reason for this, obviously, is that, as we have communicated many times, it's -- we cannot announce these jobs before they are signed, and we're allowed to announce them by the client. And therefore, there will be this little time lag that we are experiencing.

And right now, since we are reporting quite late, the time lag between year-end and now is larger than normal and larger -- certainly larger than last year.

But there is also the point -- you point to there, Mick, that the day rate, because the cost of the wind jobs are, of course, lower, the margins are not lower, but the day rates are lower on average for the wind work we have booked for the first 9 months than what you would see on an average for a contract job in our normal operations for gas.

[Bard Stenberg, executive]

Then Michail has a question regarding the competition process. Can you confirm that no other countries need to look at the deal, except for Norway and the U.K.?

[Rune Pedersen, executive]

Yes. That is correct. No other companies in our countries need to look at the transaction.

[Bard Stenberg, executive]

Very good. Then we have another question that's related to debt repayment, Gottfred. Are you planning to pay the term loan of $75 million in Q2? This is the one due in 2026.

[Gottfred Langseth, executive]

There are no current plans with respect to that in a way, and I can refer to what we -- the disclosures we have in the financial statements and the Note 11. So the outstanding debt will be impacted by the merger.

And with respect to the term loan, the $75 million that in a way, the $70 million term loan B has been repaid already. The term loan of $75 million has -- depending on timing of the merger completion, a good option on the loans. It may well be put on us, and they would have to be dealt with as part of completing the merger.

There are no plans, let's call it, on a standalone basis. We have no plans to repay it in Q2.

[Bard Stenberg, executive]

And we have another question from Baptiste Lebacq on ODDO BHF related to New Energy. In medium term, let's say, next 3 to 5 years, how many vessels could be dedicated to New Energy business? Could you transform existing assets or build new one?

[Rune Pedersen, executive]

Yes. In terms of the vessel, our current plan will clearly be to utilize our existing vessels. In the near term, we may, call it, quit one of our current 3D vessels also with the wind kit, so that is -- it's a hybrid and can work both these markets, again, in the very near term.

And what you're asking in the 3- to 5-year time frame, I think we will utilize -- likely utilize our -- some of our existing vessels, in particular, on carbon storage, which is identical to what we do for oil and gas. It's identifying reservoirs several thousand meters below the seabed.

For offshore wind, it's probably a combination of utilizing existing vessels, maybe 1 or 2, and chartering in, I would say, smaller vessels more adapt to that kind of activity.

But it's a little bit different. We have no plans to build vessels for this activity, but that obviously depends on how large it will be. I can easily foresee us having 3 to 5 vessels full year, full time on these activities in 3 to 5 years. That is not difficult to see. So a significant part of what we do.

[Bard Stenberg, executive]

Very good. Then we have another question related to the competition filing process. It seems you don't expect Phase 2 in the U.K. Is that correct? And also can you please let us know if you expect to offer certain divestitures in order to obtain the Norwegian merger control approval?

[Rune Pedersen, executive]

I'll take the U.K. first. I think it's fair to say, and as we'll follow from the slide, that we don't expect Phase 2 in the U.K. I mean, this is our expectations.

The main reason for that is that the activity we have had in the U.K. over the last, call it, 3 to 5 years has been fairly low, and for TGS very low. So we don't expect the effect of the U.K. market to be significant. And therefore, we believe that it would be sufficient with the Phase 1. But we will see.

I think it's too early to say to what extent we will offer any remedies or mitigating factors to get approval in Norway or in the U.K. I think, currently, we believe that we will be approved without having to offer mitigating measures. But once again, that can be ruled out, but it is too early to speculate what they may be.

[Bard Stenberg, executive]

Very good. We don't have any further questions from the people on the web. We can pause for a short moment to allow people to type in any last questions they may have.

Well, it doesn't seem to be any further questions from the people on the web, but if you have any follow-up questions, I will be available later today. So feel free to send an e-mail with the questions you may have.

So with that, I thank you all for participating and logging on to the webcast and for coming to Oslo to watch the presentation. So have a nice day.

[Rune Pedersen, executive]

Thank you.

[Gottfred Langseth, executive]

Thank you.