TGS ASA

OSE:TGS

Earnings Call Transcript 2019-Q1

[Kristian Kuvaas Johansen, Chief Executive Officer]

Good morning, and welcome to TGS Q1 presentation for 2019. My name is Kristian Johansen. I'm the CEO of TGS. With me today I have Sven Borre Larsen, our CFO, who is going to go through the financial section of our presentation.I just want to draw your attention to our forward-looking statements before we go straight to the highlights of the presentation.So in Q1, we had net revenues of $110 million. That compares to $135 million in Q1 of 2018. As you remember, Q1 of last year was quite extraordinary in terms of some of these transfer fees that we had in the first quarter of the year related to some relatively large M&A transactions, especially in the U.S. Gulf of Mexico.Net late sales of $91 million, versus $115 million in the same quarter of last year, and $91 million is actually slightly ahead of our own estimates for the year. So we're well on track to reach our ambitions for 2019.In addition to that, we had net prefunding revenues of $14 million. That's down from $18 million in Q1 of 2018. And that's a prefunding rate of 37% of our total multi-client investments for the quarter.The investments were about $37 million. That compares to $31 million in the same quarter of last year.And we had an EBITDA of $88 million. That compares to $111 million for the same quarter of last year.And then an EBIT or operating profit of $17 million, compared to $25 million in Q1 of '18.Earnings per share was $0.17. That's up 34% from $0.13 in the same quarter of last year.And then we had an extraordinarily strong cash flow in Q1 this year. So we had $147 million. And that's up 108% from $71 million in the same quarter of last year.That means that by the end of the first quarter we had a cash balance of close to $400 million, and that comes in addition to a $100 million revolving credit facility. So that means that in total we liquidity of about $0.5 billion after Q1.That means that we are well positioned to continue to pay a healthy dividend. That dividend yield becomes better every day it seems like, with a weak market for oil and gas right now. But the quarterly dividend of $0.27, and that's up 35% from Q1 of last year.And then I guess the main highlights over the last week has been our agreement to acquire Spectrum, and that's to cement our position as a leading provider of multi-client seismic data on a global basis, and we will come back to that in the last section of this presentation.So let me quickly run through the operational highlights. We don't have a lot of new acquisitions this quarter compared to what we had in Q4. So you've seen most of these projects. But again I just want to repeat that we had 2 projects in the SCOOP/STACK play in Oklahoma. So 2 crews operating there for the quarter.And then we had, as we see, quite a hectic quarter in Brazil, where we actually have 3 operations. We have 1 3D in the [ outboard ] Santos, with the 720. That's a joint venture that we have with Spectrum, as you probably know. Then we have Amazon Warrior shooting seismic in Campos, and that Campos survey was started in Q1 and that's a project that we're going to continue also in Q2. And then we have also a SeaSeep project, or multi-beam project, that covers a big area in both Santos and Campos in Q1.If we move to the Eastern Hemisphere, as for is normal at this time of the year you don't see a lot of activity in the Northern Hemisphere, but we will come back to that obviously in Q2 and Q3.But in the southern Eastern Hemisphere you see that we have the BGP Prospector joint venture that we have with PGS, where we're shooting a big 3D in the MSGBC Basin in northwest Africa. In addition to that, we also have a SeaSeep program there, as well.Let me touch on that very quickly. So we have the SeaSeep program. It's about 113,500. multi-client regional SeaSeep project. This covers, you see, the whole dotted area here on the northwest coast of Africa.In the same area, we have the Jaan 3D. This is a 28,300. So it's a large 3D project that we're doing. We're doing this, as I said, with PGS and a smaller company called GeoPartners. Of the 28,300, 11,000 is new acquisition, and then there is some existing data that we reprocess and then we line it with a new acquisition such that we get a complete product of about 28,000 square kilometers.In terms of the northwest Africa market, this is one of the areas in the world where we actually see growth this year. We see a lot of the Supermajors are taking active steps in West Africa to buy more data and obviously drill more wells. So you will see quite a lot of activity from some of the big guys, such as Exxon, especially in the northwest Africa in 2019, and we expect that trend to continue in '20 and '21. We also see a positive trend in terms of more and more smaller companies entering the northwest African basin.Still some uncertainty of timing of license rounds. That's kind of the name of the game in Africa, is that license rounds may be announced but it may not be completed on the date when it is announced. But that's the nature of the game. And the good thing right now in Africa is that we have more visibility and more transparency in terms of license rounds, and that's obviously good triggers in terms of future activity for seismic.Moving on to Brazil. So as I said, we had 3 operations in Brazil in Q1. We have the SeaSeep program, which is a 200,000 square kilometer multi-beam program. So it's almost twice as big as what we're doing in northwest Africa.In addition to that, we have the Santos Basin 3D. This is a 15,000 square kilometer multi-client 3D. This is in the [ outboard ] Santos. So this is actually outside the license rounds area. So this is actually international waters, but waters where we expect Brazilian government to include in future license rounds. So although this may be slightly more long term than some of the stuff that we're doing for the 16th round, it's a project that we are very, very enthusiastic about at TGS. And so of course with Spectrum.Then we have the Campos Basin 3D. This is a new project that we announced, and this is an 11,200 square multi-client 3D in Campos. So it's further north, you see from the map on the right-hand side. And in addition to that, you will see that we are now in discussions with Spectrum whether we're going to move the vessel that is shooting [ outboard ] Santos, move that inside the border and shoot some of the 16 blocks in Santos. So that's a project that we're planning to do then together with Spectrum.In terms of the Brazilian markets license rounds transparency. We now have a calendar out to 2021. I think Brazil is a great example of a country where you offer more predictability to the oil companies and you see much more interest for the license rounds.As you know, Brazil was quite unpredictable. If you go back to the period of 2012 to 2016 or '17, there was unpredictability in terms of the license rounds and the interest for Brazilian, in general, actually dropped quite dramatically. And now you see a significant uptick again in terms of the activity based on the government's predictability in terms of future license rounds. So that's really, really good in terms of seismic interest, of course.The seismic permitting process has, as a result, become much more streamlined. The regulatory process also facilitates for collaboration and partnerships between the seismic players, and the reason for that is that they only award one permit at a time. So they don't award multiple permits over the same areas. They want to avoid some of that overshooting and undisciplined activity. So that's a good foundation for more partnerships.And as you see, TGS is doing a partnership with Spectrum here on the Santos 3D. We're now moving that vessel inboard, and we're doing that together with Spectrum. And there may actually be more partnerships to come. So when I look, like, 1, 2 years into the future, I think a lot of the stuff that we're going to do in Brazil will probably be in collaboration or partnership with other companies.It's an area where you see Supermajors are focusing. So it's very competitive bidding. In the last, in the 15th round, there was the highest bid I've ever seen in the world in terms of acreage. So Exxon and their partners bid $850 million just to get access to acreage. So you can imagine how interesting this area is, and also you can imagine what small part seismic cost is compared to the overall cost of doing a project in Brazil.So it's quite exciting what we're doing in Brazil now, and I think there will be more to come in Brazil. This was going to be one of the areas where you see growth from TGS in the future.And then North America land. In our onshore business, we had 2 active projects in Q1. We had Gloss Mountain and Canton 3Ds in the SCOOP/STACK in Oklahoma. They're about the same size, about 1,500 square kilometers. In addition to that, we have announced a few projects. Railgun 3D. It's a smaller project, 680 square kilometers, in the Powder River Basin. And then we have the South Hackberry, as you can see on the upper map, which is 350 square kilometers.The onshore market is still we see a higher level of onshore or seismic intensity, which is good. The basins are getting more geologically complex. The drills are more difficult and more advanced to drill, which means that you need a better G&G understanding. So the overall long-term trend really calls for more seismic, which is really good. And we've already seen that in the numbers. Q1 was really good for our onshore business. Q4 last year was extraordinarily good. So it's been a very healthy growth in our onshore business, on good margins. So that's good.The key drivers in the future, I think acreage turnover and farm-ins that's certainly going to continue to be drivers. If you look 5 years into the future, you look at all the companies who are operating in the Permian today, a lot of these companies won't make it or they won't be there in 5 years' time because now you see all the Supermajors are moving in.The best example of that would be Chevron and Exxon, who guided a few months ago that they will do together 1.9 million, 900,000 for Chevron and 1 million barrels per day for Exxon, in terms of production for the Permian within 5 years. So within 5 years 2 of the Supermajors will produce 2% of the global supply of oil and gas from one basin in North America. So if Texas was a country, it would be the third largest oil producer in the world.So it's quite amazing what we see now in the North America onshore, and it's obviously something that TGS wants to be exposed for in the future. And I think we're very, very confident with the market position we have now, both in the Permian and the SCOOP/STACK, and we're looking forward to further consolidation and further growth in that area.So with that I will hand it over to Sven Borre Larsen, who is going to go through the financials, and then I will come back and talk about the outlook. Thank you.

[Sven Børre Larsen, Chief Financial Officer]

Thank you for that, Kristian, and good morning, everyone.First, just let me remind you that we are looking at Segment Reporting, where revenue recognition of uncompleted projects are done on a percentage of completion basis, as opposed to IFRS where revenue recognition is postponed until completion of those projects. So you will find IFRS numbers in the quarterly report and also as an appendix to this presentation. But for now we focus on the Segment Reporting numbers.And I'll start with late sales, on the top left-hand chart. We had $91 million of late sales in the first quarter, and that's a decline of 21% compared to the $115 million we had in the same quarter of last year. But as Kristian said, we are quite satisfied with the number. It's actually a little bit ahead of our own expectations and our own budget. The decline year-on-year is largely related to the fact that we had some transfer-related revenues in the comparables of last year and also lack of licensing round or fewer licensing round triggers in this quarter compared to last year.Then looking at prefunding revenues, $14 million this quarter compared to $18 million in the corresponding quarter of last year. That's a decline of 23%, despite investments actually being a little bit up, as the prefunding rate was low at 37%. And this has mainly to do with the Santos project that we're shooting in Brazil without any prefunding.Proprietary revenues, $5.0 million in this quarter. That's 119% above what we had in the same quarter of last year. Going forward, we expect the quarterly run rate on proprietary revenues to be in the range of $3 million to $5 million. So in the very high end of that range in this quarter.So all in all, this gave us total revenues of $110 million, which is a decline of 18% year-on-year.Looking at the net revenue breakdown, North and South America accounted for 58% of our revenues in the quarter; Europe accounted for 22%; Africa, Middle East and Asia Pacific accounted for 7%; and other businesses came in with 13% of our total net revenues in the quarter.Looking at the breakdown by technology, 3D accounted for 78%; 2D, 13%; and geological products and services accounted for 9%.Looking at operating costs, on this slide on the top left-hand chart we had $21 million of operating costs in the quarter. That's a decline of 10% compared to the same quarter of last year. However, you should note that it has been reduced by approximately $3 million as a result of the implementation of IFRS 16 from 1st of January this year, which means that we see a corresponding increase mostly obviously on depreciation but a little bit on interest cost, as well.Amortization, $66 million in this quarter, compared to $84 million in the same quarter of last year. The decline is partially due to the fact that we had included approximately $10 million of impairments in the comparables from last year and also as we have lower revenues from unfinished projects this quarter. So the WIP part of our amortization is lower, whereas the straight line amortization is basically the same as last year.This gave us an operating profit or an EBIT of $17 million, corresponding to a margin of 15%.We had extremely strong cash flow in the quarter. Free cash flow of $147 million, which is actually the strongest quarterly free cash flow we have ever had. So this once again demonstrates the strong cash flow generating capabilities of TGS. So we are obviously extremely happy with that performance on the cash side.Then looking at investments, we have $37 million of multi-client investments in this quarter, compared to $31 million in the same quarter of last year. We had a prefunding rate of 37%, compared to 57% in the same quarter of last year.In Q2, we expect investments to be obviously still a bit uncertain, but as of now we expect it to be between $70 million and $80 million. And we are also looking at a rather low prefunding rate in Q2, probably around 30%. This of course means that the investments and the prefunding revenues in the first half of the year will be rather low, but we still remain very confident in our guidance of investments of more than $300 million this year and a consolidated prefunding rate of 40% to 45%.And this is supported by our pipeline. We have, as you have seen announced, a good number of projects lately and that we have currently committed around $240 million of investments. So we're not concerned about the guidance and the investment outlook. But it will be more back end loaded this year than what you normally would see.Looking at the net book value of our multi-client library, it continues to decline as we are amortizing more than we are investing, and that obviously has to do with the continued low unit cost of our investments. So at the end of this quarter we had a net book value of the library of $698 million.We continue to be very comfortable with this value, and as you can see from the bottom left-hand chart the net book value of the different vintages are low compared to the historical costs.On the bottom right-hand chart, you can see that we continue to perform, our vintage library continues to perform quite well. We had 13% of net revenues coming from service completed prior to 2014 in this quarter, 9% came from the 2014 vintage, and 13% came from the 2015 vintage. So we are really happy with how those historical vintage service are performing. And that's really important, obviously, for both cash flow and the margin of the numbers that we are delivering.I'll run fairly quickly through the income statement. $109.9 million of revenues. Cost of goods sold, $1.1 million, which is a bit up due to the higher proprietary revenues. Personnel cost, $15.1 million, which is basically in line with what we had last year. Other operations cost, $5.7 million, as I said, down due to IFRS 16. This gave us an EBITDA of $87.9 million.Amortization, $65.9 million. And depreciation, up due to IFRS 16, $5.1 million, which gave us an operating result of $16.9 million.Net financial items, a little bit higher than normal, $6 million. We have higher interest income. After all, we have almost $400 million of cash from our balance sheet and also we've had some gains on financial instruments in the quarter. This gave us a pretax profit of $22.9 million.Tax cost, fairly normal in the quarter, of $5.1 million, corresponding to a 22% tax rate. Gave us net income of $17.7 million, which corresponds to an EPS of $0.17, compared to $0.13 last year, an increase of 34% there.Cash flow, as I said, continues to be very strong. Net cash flow from operating activities of $208.6 million in this quarter. We invested cash of $65.5. million. And cash flow from or to financing activities, minus $28.1 million, and that's obviously largely related to the dividend payments. So including the impact of currency, the net change in our cash balance was $116.4 million in this quarter.And this of course means that we continue to have a very strong balance sheet, with $390 million of cash as of the end of the quarter, and also the solidity is very robust, with an 86% equity ratio.And finally, I will talk a little bit about the dividend. So the board has once again resolved to pay a dividend of $0.27 per share. So it's the same level as in Q1. And it's 35% above the level we paid during last year. The ex-date will be one week from now, so the 16th of May, whereas the payment date is set as 31st of May.And with that, I'll leave the word back to Kristian to cover the rest of the presentation.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Thank you, Sven Borre. Let's start this section by looking at the outlook for the market. So first of all, let's just look at the oil price and the strong momentum we've seen in the oil price since the trough on Christmas Eve 2018. But we see the oil price has gone steadily from $50 to $70. Although there's been a slight negative trend in the past week, or so, we still feel quite confident that there is support to an oil price of today's level, which is actually really good for all of us. It's good for the service industry and it's really good for our clients.If you look at the cash flow that the Supermajors and the E&Ps are making right now, it's significantly higher than it's been for many, many years. And although some of these Supermajors disappointed slightly in Q1, they may have disappointed compared to consensus estimates that were really high, but if you look at that and if you compare it to 2 or 3 or 4 years ago, the cash flow is really, really strong for Supermajors and other E&Ps right now.So that really puts a good foundation for further growth for the service industry. We think that there will be further spending as a result of that. We just had a client event last weekend in Houston where we had a lot of the Supermajors and the smaller independents and America-based companies, and I have to say the signals we're getting, especially from the Supermajors, now are very, very positive in terms of increased spending. It's very good.What remains to be seen is the midsize companies. Some of these midsize companies is more a mixed bag right now. And then we hear from the smaller independents that they're getting more excited. And as an example, there was a discovery announced in the U.S. Gulf of Mexico yesterday. So Talos and Fieldwood had a discovery in the Green Canyon, where TGS has a lot of data.So we think we need more exploration success. We think that the Supermajors' increase in spending will mainly benefit West Africa and Brazil for the next 12 months. But we think overall, we see a positive trend, mainly driven by very strong momentum in the oil price. So that's good.So when we look long term or medium term we're very bullish to our business, which is obviously good.The reserve replacement ratios continue to be very low, and this is a discussion that we're obviously having with our clients and we see that there is a need to buy more seismic and really make sure that they are well prepared for further growth in terms of oil exploration.That partly reflects the backlog, as well. You've seen a significant increase in the backlog from Q4 to Q1. You see we have a backlog now of $112 million. It's significantly higher than what we had in the same quarter of last year. And that's why we feel very confident when we're standing here and we're talking about the investment level for the full year, where we have guided a growth from last year to a level of about $305 million, $310 million. We feel very confident that although we are behind in the first half of the year we're going to catch up that and perhaps even invest more than what we have guided for the year.This slide shows what we have committed so far. So we have committed about $240 million out of the $310 million that I referred to. And if you look at the slide and you see Q4, there is hardly any activity in Q4. And this is very normal for this part of the year. So if we start speculating on what may you see in Q4, then I would first refer you to onshore projects. We don't have any onshore projects here. Of course, there's hardly ever been the fact that we have a Q4 without any onshore activity. That's really the peak of the activity in Canada. And we also have projects in the U.S., mainly Permian and SCOOP/STACK, where you will see activity hopefully in Q4 2019. So that's a good part.In addition to that, there's obviously plans for additional 3Ds. We're looking at areas in Brazil. So additional service in Brazil. It's public information that we have a permit in Argentina to shoot 3D, and we're obviously looking at 3D activity in West Africa, as well, for Q4.So that's really, the seasonality of our business calls for more activity in the Southern Hemisphere in Q4, and I can assure you that we have good and promising plans. And then it remains to be seen what we can announce over the next few months. But I don't expect Q4 to be completely open, and that's why we feel very confident having $240 million out of $310 million already committed.If we look at the activity in Q2, and this is important for you when you're going to make your estimates on how much we're going to invest, you see that we continue our SeaSeep project in Brazil for about 1 month or 1.5 months for Q2. You see that we're going to have 1 month of coring activity.We're going to have a start of the East Canada JV together with PGS. As you see, we have 1 vessel that we have committed so far for the season. I think some of you have heard that PGS is talking about sending 2 vessels to Canada. Let me make it clear. We have a joint venture with PGS in Canada. We have no commitment to participate in every single project, but I don't think it's ever happened that PGS has had 2 vessels in Canada for a season and we only participate in one. So it's highly likely that we will reach an agreement with PGS and possibly do more than just one vessel in East Canada, as well.West Africa SeaSeep will continue throughout Q2. So no changes there.And then on the 3D side, we have MSGBC. So the vessel left the survey in early April, and then it's going to come back in mid-June. And the reason why it left is that we have an agreement with BGP where they have some kind of first right of refusal. If we agree to it, they can move the vessel elsewhere because we have really favorable terms on that vessel, and there's obviously some risk-sharing element into that, as well.Amazon is going to continue the Campos survey. It's a big survey. That's going to finish in early September. It's been really good productivity so far. So we're very pleased about that.The JV with Spectrum in the [ outboard ] Santos. Again, we're going to move that vessel to the [ inboard ] Santos and we're going to continue a survey there that is targeted to the 16th round. So rather than shooting a slightly more long-term focus survey in the [ outboard ] Santos, we're going to move that vessel to [ inboard ].East Canada, as I talked about, one 3D vessel, one 2D vessel. It may be more than one 3D vessel, but our 3D is going to start sometime in late May and it's going to have about 1.5 month acquisition for Q2.And then we have one survey in the Barents Sea that is going to start after Q2. So it's going to start in early Q3, and this is a topsize survey that we're doing together with CGG, a survey that we are very excited about because it's really applying the latest and greatest in terms of technology in the Barents Sea. And I just read the other day that CGG has gotten an exploration prize for this technology. So it's a very exciting technology that we use now for the first time in the Barents Sea called topsize.On the OBN, we're going to, well we started our big OBN survey with [ Maxxis ] in the Gulf of Mexico in early April. So that's going to continue through the end of July. And we're obviously looking at other follow-ups to that survey, as well. So again when we talk about Q4 activity, that's one of the surveys that we're looking at for Q4 is to continue our amendment program where we start now with Amendment 1. And there is a reason why we call it 1 because we're hopefully going to do 2, 3, and 4 and 5. But again, whether we're going to do it this year, we can't promise, but there are great plans for the future in terms of OBN activity in the U.S. Gulf of Mexico, as well. And in that regard, obviously seeing discovery success and exploration success is the greatest driver to see future investments. So for us reading about Fieldwood and Talos had a discovery yesterday is really good news for that region.Then you see that in the onshore business you see a lot of activity in Q1, and then there is hardly any or no activity in Q2, and then you will see that it picks up again in Q3. And again I'm hopeful that you're going see more activity also in Q4 in terms of onshore. And what you see typically when we don't have any onshore activity, the overall prefunding ratio would be lower because these onshore projects typically has a very positive impact on the prefunding percentage. So again, Q1 we had 2 projects, we're going to have 3 projects in Q3, and then Q4 we hope to have a couple of projects, as well.So that's how we see the year. Again some uncertainty related to Q4, but we feel very good about that.Let me move on and talk a little bit about the Spectrum transaction that was announced. So most of you have seen the press release. Most of you have seen the investor presentation that we did at the Day. But I'm just going to touch on a few of the highlights.So again, the board of directors of TGS and Spectrum have agreed to principal terms of the acquisition. The transaction is to be structured as a statutory merger between the companies. We will be the surviving entity. And we have precommitments from shareholders representing 34.1% of Spectrum. That's basically Altor, who is the largest shareholder, Gross Management and management of Spectrum. So pretty much all the primary insiders of Spectrum have already approved or precommitted to the transaction.The transaction is obviously subject to definitive merger documentation, shareholder approval at EGM and other regulatory processes. So the way that we see the timeline right now is that we're probably going to have the merger plan executed by the end of May. We're going to have EGMs of the 2 companies sometime in mid-June. And then after that it's just going to be the regulatory approvals, which we don't foresee is going to be very challenging because the beauty of this transaction is that we don't really have a lot of overlapping data. So when we go and we file to competition authorities in countries such as Brazil or if we do it in the U.S. Gulf of Mexico or in the U.S. or in Norway, we don't see a lot of overlap. So the company is not going to change all that much in the different regions. But as a whole, in a global basis, it's going to change significantly, which is obviously the key trigger to this transaction.And that leads me to then, takes me to the strategic drivers. So again, what is the reason why we do it? Well, this slide could have been much longer than this, because we see a lot of strategic drivers for why we do this. And I think you will all agree that this transaction makes perfect sense.Number one, we're going to be the leading multi-client geophysical data company in all major mature and frontier basins globally. You will see from a map that I have later in the presentation that that great overlap or complementary databases will be really, really good.Spectrum owns the world's largest 2D data library which combined with our financial capacity and robustness facilitate for a quicker and more accelerated investment program in terms of 3D.Number three, we get an increasing multi-client footprint in South America, with Brazil and Argentina being key areas for growth. This is something we've been talking about for a long time. Our organic growth in Brazil has been tremendous over the past 6 months, but we're also looking at countries such as Argentina where we just got a permit. And we go head-to-head in these areas, and for us obviously it makes a lot of sense and also for clients that we go together.Scale is key to accelerate our data and analytics strategy. We see significant cost synergies, which I will come back to. And the transaction is accretive on TGS earnings even before the synergy takeouts.Transaction highlights. While it's an exchange ratio of 0.28, in addition to that is the cash component, which means that we're talking about a share price of Spectrum of about NOK 62.4. That's based on the current share price of the 8th of May. That's a premium currently of about 11%, but obviously that's going to change over time and it will change pretty much every day or every hour.It's an issuance of about 16.6 million TGS shares. That represents 13.9% ownership post-transaction. So the current Spectrum shareholders will own 13.9% of TGS.And there is a cash consideration for the dividend, for the Q2 dividend that is going to be paid in Q3. So Spectrum will get a compensation for that if the transaction hasn't been closed by the time we're going to pay our dividend.Again in terms of timing I've already talked about that. So we're targeting EGMs in mid-June. And before that, obviously, we're going to have the merger agreement signed, and that's going to happen late this month. So the lawyers are busy doing that right now.In terms of how it fits with our strategy, it really ticks off 2 very important boxes in our strategy that we have communicated to the market at the Capital Markets Day just a few months ago. So let me just repeat that strategy, and then I will touch on these 2 boxes.So number one, our intention is to apply new technologies in mature basins. So we're basically going to replace and overshoot our existing library in Norway and U.S. Gulf of Mexico with new technologies. We've started that with the OBN survey, with Axxis in Norway and with [ Maxxis ] in the U.S. Gulf of Mexico. And this is a long-term plan. So over the next 3 years, you're going to see a significant part of our existing data library being overshot with new technologies.Number two is strengthening our position in South Atlantic. We've already seen great results of that. So as you saw from the previous map, we have 3 active projects in Brazil ongoing right now. In addition to that, we have a permit for shooting 3D in Argentina. And we have very, very good communication with clients right now on these 2 areas.Number three, further growth onshore. So you won't see any impact from Spectrum in that regard because they don't have an onshore business. But on technology, it's quite important because part of our strategy is to expand the value chain through data and analytics. So if we talk about machine learning, you all know that the more data you plug into a machine, the more accurate the output is going to be. You've seen that in a lot of business-to-consumer applications, and we're going to see the same in oil and gas.So with the transaction now we're going to have more data than obviously any other seismic company in the world, but we're also going to have more data than any oil and gas company in the world. Meaning that when they develop their own algorithms for machine learning interpretation of data, which they all spend a lot of money on and investment funds on right now, you will see that we are actually in a better position to do that than any oil company. So this is something that is going to be very important for us in the future.And then number five, last but not least, imaging quality and reputation. We think as all our peers are basically moving into the multi-client space and there will be more competition in multi-clients, which for us I think that's actually good because it also means that it's going to be more disciplined. It's not going to be all these multi-client acquisitions that are purely based on vessel utilization. You will see that our peers will do their multi-client investments only when and if they see the right returns for the project. So in many ways this is actually positive for us.But where there is some kind of a challenge and some kind of a threat is that we also need to compete on imaging quality, because our clients will fund the program who has the best imaging quality. And for us, it's going to be very important to be the #1 and #2 imaging company in terms of quality and reputation within clients. So that's something that we put a lot of R&D money into that right now and really making sure that we can be the top-tier imaging company within multi-client because that's really going to be important.If we could come back here in a couple of years and tick off all these five boxes, I can guarantee you that this is a very, very successful company. What I feel very good about right now is that we've already ticked off partly 2 of those boxes with the acquisition of Spectrum. First of all, we accelerate our strong position in South Atlantic. Secondly, we put ourselves in a really, really exciting position in terms of developing the future machine learning algorithms.I think this map is great in terms of if I was going to pick one map or one slide to describe why we do this transaction, this is the best one to explain it. What it basically shows is that we have 4 hubs globally. We have 4 hubs that has about equal representation in terms of size of investments and size of revenues. And this has been our goal for many, many years.So if you go back to TGS pre-2010, you basically saw 2 of these pies. It was U.S. Gulf of Mexico and it was Norway. TGS was very strong in those 2 areas. Then we had the Macondo in 2010, 2011 that really put kind of a solid brake on the activity in the U.S. Gulf of Mexico area. We continued to build the business in West Africa due to the Macondo and the slightly lower activity level in the U.S. Gulf. So we built 3 hubs, so we had 3 hubs.And then we have built the North America onshore business that we started in 2012 with the acquisition of Arcis. So we had, like, maybe -- we saw the start of having 4 hubs. And at that time we decided the ultimate goal should be to have 4 equal hubs, because this is where you see seismic expanding, both historically and in the future. And if you can build equal representation in these 4 hubs, that's the optimal seismic portfolio and the optimal seismic company. And this is what we have achieved with the acquisition of Spectrum and that's what makes this really, really exciting.And why is that important for you? Well, it's important for you because you see, you tend to follow every quarter and every quarter's revenues and triggers and drivers, et cetera. Sometimes too much, in my opinion, but okay, that's just the nature of the game.But what is important for us is that we need to be exposed to these triggers every quarter. So in Q1 this year we didn't really have a lot of triggers. I think the key triggers in Q1 was probably Argentina, for sure, some areas in West Africa. If you look at Q4 last year, it was certainly Brazil, and we didn't have the exposure to Brazil at the time. In the future, we're going to have equal distribution within the 4 hubs where you see most of the activity globally, and that's going to be a great position to be in.I've talked about the data analytics initiatives, and I just want to refer you to the quote from Google here, and this is really the reason why Google has an interest in oil and gas now. So what they say is that one of the things we see at Google is that it's not the company with the best algorithms that is going to win. That's going to be a commodity. By the way, it's the company with the most data. The more data you can train your machine on, the more accurate the output is going to be.Substantial synergies. So in terms of cost synergies, we expect annual cash cost synergies of approximately $20 million. That's going to be OpEx and CapEx. We will come back to the market when we have more clarity on the split between OpEx and CapEx. Right now we still don't have the opportunity to go in and really do a proper analysis of Spectrum's numbers. So that's why we will have to come back when we get closer to the closing of the transaction.You will see that the main part of the synergies will be in processing software and hardware consolidation. This is an area where we both spend a lot of money right now. You will see a consolidation of offices in key hubs. You will see overlapping functions mainly in imaging and admin support staff.And you will see great synergies coming from insourcing of Spectrum's existing third-party processing. So Spectrum doesn't have capacity right now to do all their processing in-house. They don't do it with TGS. They do it with outside vendors. And obviously one of the low-hanging fruits in terms of taking out synergies is going to be to insource some of that processing so that we can make sure that we run at 100% or close to 100% utilization in our processing departments.In addition to that there's a lot of scale advantages. So number one, strengthening our South Atlantic hub, as I have talked about today.Number two, we're going to be a true exploration for global E&Ps. I've talked to a lot of clients about this transaction. They're all super excited. And why are they excited? Well, they're excited because they want to have a supplier who can supply them with data all over the world. They don't want to deal with 5 or 6 different ones. If they can deal with one who can basically be a one-stop shop to provide them with data all over the world, that's fantastic. So they like it.It's going to be the world's largest 2D library. It gives us a broader exposure to a more diversified client base in all regions. This is something that both companies are going to benefit from. Spectrum has clients where we are not particularly strong; we have probably a higher number of clients where they are not particularly strong. That's just the name of the game. And it's going to be a great scale advantage.And then, as I said, scale to capitalize on data analytic trends.The combined company is going to have a fantastic cash balance and a great balance sheet. Obviously, we didn't spend cash on this transaction; we're printing shares. It means that we're still going to have a very strong balance sheet, which is good because we see opportunities to invest more. So this is not going to be -- our ambition is that it's not going to be 1 plus 1 is 2. Our ambition is that we're going to get access to people who has a proven track record coming up with new project ideas and developing these ideas, and now we have the cash balance to carry out some of these projects. So we think that we need a strong balance sheet because our plan is to accelerate our investments. We have a very strong balance sheet, and we're very, very pleased about that.You may ask, is it too strong? Or do you have too much? And the answer is, as it's always been, yes, you may be right. And that's why we are looking into obviously dividends. We feel like the dividend is a healthy yield right now. We're looking into accelerating our investments, which I have talked about. And we will also be looking into share buybacks. That's something that's always on our list. And depending on where the share price trades, that could be more interesting now than it was about a year ago.It's a combination of 2 of the most profitable and best-run companies in the seismic sector. But not only the seismic sector, also in the overall oil service sector. So this is showing the return on capital employed for 2018 for the 15 companies on the Philadelphia All Service Index, and then we've added TGS and Spectrum to that list. And you see we rank #2 and #3 on that list. So it's certainly 2 companies with a proven track record of very strong financial results and profitability and returns. And when you merge these 2 companies and you take out the synergies, the goal and ambition is obviously that the new company is going to have an even stronger return on capital.So in summary, we are continuing to deliver a strong cash flow. Our free cash flow of $147 million in Q1 of 2019 is, as far as I understand, the best cash flow ever for TGS, which we are very proud of. That means that our cash position is $390 million, so close to $400 million. Adding $100 of the RCF, and you're very close to $0.5 billion of cash.Solid order inflow in Q1. Our order backlog increased quite substantially from Q4, but it's also significantly higher than in Q1 of last year.So we are well on track for meeting our 2019 guidance. You will see a growth of approximately 20% in multi-client investments, prefunding ratio of 40% to 45%, and amortization pretty much the same level as last year.Market outlook is improving, with an increasing oil price.And then the acquisition of Spectrum, which I have talked about. And although I'm extremely excited about the transaction, I'm not going to repeat all the bullet points.So with that I want to thank you for your attention and I want to open it up for Q&A. I'm going to have Sven Borre come up here and help me with that. Thank you very much.

[Christopher Møllerløkken, Research Analyst]

Christopher from Carnegie. If you look at the committed investments for 2018 and the guidance you implied for second quarter prefunding and investments, it would also imply that the prefunding that you have secured for second half is up to close to 70%. What is driving that increase versus the first half?

[Sven Børre Larsen, Chief Financial Officer]

The drivers. Yes, we have some progress with where we naturally have higher prefunding than on certain other projects that we do. We are doing the OBN projects, both in the second quarter but particularly in the third quarter. And that's a type of project which is covering a lot of held acreage. So it's pretty natural to expect that to require a higher prefunding rate on such service. And also of course on the onshore side we normally have higher prefunding rates.

[Kristian Kuvaas Johansen, Chief Executive Officer]

We see 3 projects onshore in Q3 and no projects in Q2, and that obviously explains part of that.

[Sven Børre Larsen, Chief Financial Officer]

And also we expect to have decent prefunding in our investments in Canada.

[Christopher Møllerløkken, Research Analyst]

What's now the status with the ongoing Spectrum transaction? Have you received any further precommitments? What would the next step be?

[Kristian Kuvaas Johansen, Chief Executive Officer]

We haven't tried to get any further commitments. So I think we feel very confident about the commitment level that we have. We have all the primary insiders who have committed to the deal. And for us, it's not a big point trying to get additional precommitments. I think we feel very confident. We feel like the market has received the transaction extremely well. The share price of TGS went up close to 10% on the day of the announcement and Spectrum close to 20%. And that's really the definition of a very successful deal for both parties. So we think that all the people we have talked to have been extremely pleased about the transaction and very excited, as we are, about the transaction. So we don't see any need to go out and try to get precommitments. The deal is announced as is.

[Tommy Johannessen, Research Analyst]

Tommy Johannessan, Sparebank 1 Markets. Spectrum also has committed a very high share of their current 2019 guidance. Do you see any changes to the investment level from Spectrum when you take over? Or do you see any changes in your priorities where to invest in 2019, on the Spectrum side?

[Kristian Kuvaas Johansen, Chief Executive Officer]

So first of all, until this transaction is closed, and that's going to happen sometime late summer, it's business as usual. And Spectrum will have to announce whatever they want to announce and invest where they want to invest, and we're going to do the same thing. Post-transaction, you can only speculate, but I think there's a lot of synergies on the investment side of course. Rather than running after the same projects, we're going to coordinate ourselves and really go after the best projects.Again, I really hope there's going to be some synergy in terms of deal flow, too. We get access to a lot of people with a proven track record of coming up with good investment opportunities. So what I'd really like to see from the transaction is to see more deal flow and hopefully some deals that we can say “no” to because we really want to pick the best. And the bigger the pie is, the better it is.So we're quite excited that you're going to see hopefully a growth in investments. So rather than 1 plus 1, you're going to see rather than being 2, it should be, like, 2.5.

[Tommy Johannessen, Research Analyst]

And Spectrum has also used a higher share of risk sharing than TGS has historically. Do you see any changes there? Or will it be the same?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I think we're going to continue to utilize risk sharing where we need it. We obviously don't need it from a financial perspective because we have a lot of cash in TGS. But when we see that risk sharing could be go for operational reasons, that would probably be a good idea to continue that. So I think you will see -- TGS has used quite a lot of risk sharing in the past, too. We do that in northwest Africa as we speak. So I don't think it's going to change all that much.

[Sven Børre Larsen, Chief Financial Officer]

A couple of questions from, a few questions from the internet. First, from Glen Lodden, in Nordea, I guess. A quick housekeeping question. How do you see the run rate for financial income, going forward?We had $6 million in this quarter. It's not going to be that high, going forward. I would say between $1 million and $3 million is probably a more normal run rate. And then of course it will depend a little bit on exchange rate developments and things like that, that could have an impact. But on flat exchange rates, it should be, say, between $1 million and $3 million.Another question, from John Delos Santos, of UBS. Can you talk about how you expect working capital to move for the rest of the year? Also, have the Norway services been delayed versus the previous schedule? If so, why?Working capital is obviously going to be -- on the receivables side it's obviously a build-up when we have strong quarters and a lot of sales. And then if we see a quarterly decline in revenues, there is normally a decline in the receivables. And also bear in mind, as we mentioned in the Q4 presentation, that we have prepaid some of the investments for this year already in 2018.And the other part of the question is that the Norway services have been delayed a little bit, and that's a correct observation, obviously. It has to do with scheduling of vessels. So not being very dramatic or unusual in that it has a purely kind of scheduling question with the vendor of that particular vessel.Then there is a question from [indiscernible], [ Sparebank End Markets ]. A couple of questions. One, could you quantify prefunding ratio levels offshore versus onshore and what less onshore activity means on the overall number? And the second part is on transfer fees and uplifts, how much of Q1 '19 late sales was driven by this?First, about the prefunding ratio onshore versus offshore, it varies quite a bit, obviously. But as a general expectation you can say that onshore service would typically be between 60% and basically up to 100%, whereas a typical onshore (sic) [ offshore ] survey would most of the time be in the 40%, 50% range, but sometimes lower, sometimes 0, as for the Santos survey in Brazil, and sometimes in the 20% to 30% range, where we see most of streamer-based U.S. Gulf of Mexico service hitting. But on a consolidated basis, yes, 40%, 50%.And then it was about the transfer fees. We basically didn't have any transfer fees in Q1 of this year.And let me see. And then, Kristian, there is a question. It's a long question, but it basically ends with, and this is from Ramsey Crane. How likely is it that the Spectrum shareholders demand a higher exchange ratio?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Well if they demand it, they're not going to get it. I think the deal is done. The deal is a result of a long-term negotiation between the 2 parties. We've been looking at Spectrum for many, many years and we know exactly what they would like to demand in terms of exchange rate and they know what we have been expecting. And after months of negotiations we have reached a final agreement, and that's where we are.

[Sven Børre Larsen, Chief Financial Officer]

Then there is questions from Sahar Islam, of Goldman Sachs. “Can you give us an update on how your customers are thinking about exploration and their appetite for seismic? One of the concerns we hear is that majors have already bought a lot of data through the downturn, so have more limited appetite from here. On newer technologies like OBN, can you give us an update on your experience operationally with these technologies so far?”

[Kristian Kuvaas Johansen, Chief Executive Officer]

I think in terms of the first question, Supermajors have acquired a lot of data during the down cycle, that's a fair statement. It's been probably a bigger decrease in spending in terms of price, rather than volume. That's just the way it is.But again, as I said in my opening statement, we just had a client event where I got the chance to talk to a lot of the Supermajors in terms of their plans for the future. We feel very confident that you're going to see quite significant growth in their seismic spending, for sure.I think the last, what was the last part of the question, please?

[Sven Børre Larsen, Chief Financial Officer]

That was about how our experience with OBN, the operational performance of the OBN service are, so far.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Operational performance of the OBN is pretty much as expected. It is very complicated. It is, if you're looking at streamer seismic survey, it may look complicated. But if you look at ROVs and if you look at OBNs it's very, very complicated in terms of the operations. But the people we work with and the companies we work with, they are quite experienced in this and they deliver pretty much according to plan and we're very excited to start to see the first data now. And that's obviously going to be the main trigger here, is that you need to see a significant data uplift in terms of really being successful to sell this to multiple clients. So we're getting closer to that point. And again, so far we've had very good experiences.

[Sven Børre Larsen, Chief Financial Officer]

And then finally there is a question from Miles Hamilton. The large E&P companies have been committing towards greater efficiency, cash flow generation and returns on capital. Does this have implications for the potential recovery in E&P CapEx? And has TGS noticed a change in E&P behavior in this respect?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Absolutely. And I think that's more of a story of the past than in the future because that's the main reason -- it's taken much longer than most people expected for this recovery of the overall oil service sector, and the reason for that is that oil companies, first of all, they've been very, very financially disciplined. So they've really held back. And I think this dramatic down cycle is still very fresh in mind for them. So even if they make a lot of cash right now, they really hold back and they try to be very disciplined. So fiscal discipline has been the key word.Secondly, we've seen that at the early stage of the up cycle we've seen that oil companies have been more focused on buying assets and trading assets between each other to buy into existing discoveries rather than spending money on exploration to find new discoveries. But again, you can only do that for a period of time, and we think that we are very close to the transition point now where you will see that exploration spending will grow as a result of that.Do we get another question from Christopher?

[Christopher Møllerløkken, Research Analyst]

A final question. It's Christopher, from Carnegie. Q1 '19 has been a great quarter for your customers. There has been major discoveries in South Africa, U.S. Gulf of Mexico, Cyprus, offshore Guyana continued success. And one comment I read was that it was partly driven by that Cloud computing, and increased processing power among your clients means that they can handle much more data now than in the past. And some say that has improved their exploration success. Have you seen any change from your customers in terms of that they're actually demanding more data volume than in the past?

[Kristian Kuvaas Johansen, Chief Executive Officer]

We do. I think one shot point of seismic, if you go back to the mid-'80s, that was 1 megabyte of data. That same shot point today is, like, 260,000 megabytes. So it's a tremendous exponential growth in terms of data in our business. So that's part of it.What the greatest concern has been now with oil companies is that you need to reduce the cycle time. You cannot shoot a seismic survey and it takes a year to shoot the survey, then it takes another year to process the survey, and then sometimes they even have to reprocess it and then start to drill. So they're really forcing us now to reduce that and cut the cycle time significantly. And that's where computer capacity really comes into play.So you need to have a lot of computer capacity in order to process all that data, and TGS has a plan in that regard, obviously. If you go back to 2015, we had one of the top 15 computer centers in the world in terms of data capacity, measured by petaflops. So 2015, we were top 15. Now we're not even close to being top 20.So we need to continue to invest in that. And the good thing is that the price of computer capacity has come down quite significantly. So you won't see, like, a significant increase in CapEx, but this is certainly going to be on top of our agendas. When I talk about imaging quality and imaging reputation, that's part of it. Cutting the cycle time is going to be really, really important. And we set an ambition internally that we should reduce that cycle time by at least 50% over the next couple of years.

[Unknown Analyst]

[indiscernible]. Regarding M&A and transfer fees, which we saw a lot in the first half of 2018, the last few weeks we have also seen a lot of announcement of big transactions in the industry. Do some of them give potential for you for M&A and transfer fee in the second half of 2019?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes.

[Unknown Analyst]

Can you quantify it more?

[Kristian Kuvaas Johansen, Chief Executive Officer]

No.

[Unknown Analyst]

Because it was a huge effect in the first half 2018.

[Kristian Kuvaas Johansen, Chief Executive Officer]

We don't comment on the size of the transfer fees, because obviously this is a very tough negotiation we have with the companies who merge. And we don't have a lot of transparency into it. It could be a big number. It could be a reasonable number. We never know. So we don't comment on our historical transfer fees, other than you know that it's quite unusual, as we said in Q1 last year.What I can say is that there have been transactions over the past few weeks announced where we will have transfer fees if everything goes according to plan in terms of the negotiations. The parties always have the option to just give us back the data, return the data and say we don't need it. That rarely ever happens, but it's happened a few times. But that's why we don't want to start to set too high expectations in that regard. But we go into some of these negotiations and we hope to get to a good result. And again, there has been some transactions, you're absolutely right, but I cannot comment more on that.

[Unknown Analyst]

But is that the main reason for your extremely bullishness now for the remainder of the year? Or is it due to the underlying organic exploration spending growth you are seeing?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I think it's a combination of many factors. It's a combination of good organic growth. It's a combination of, as you said, slightly better visibility on some of these transfer fees. And number three, last but not least, we are very excited about the transaction that we just did, because we think 1 plus 1 is more than 2.

[Unknown Analyst]

My last question is related to late sales, because it was down 21% year-over-year in the first quarter, and you have previously stated that you expect exploration spending to at least grow 5% this year and maybe exploration spending at around 10% or slightly higher. Do you think that late sales for TGS-NOPEC, multi-client late sales, will follow exploration spending in 2019, in total? So after 21% drop in the first quarter, will you still be able to grow late sales in 2019 in the pace of global exploration spending in 2019 versus what you delivered in 2018?

[Kristian Kuvaas Johansen, Chief Executive Officer]

That's still our ambition. And I think if you see the gap or the reduction in late sales compared to the same quarter of last year it's purely related to a couple of transfer fees that we had in Q1 last year. So I think we still see a healthy growth if you compare apples and apples. And I think for the full year, obviously we need some transfer fees this year, too, but if we can get what we think we're going to get we still think we can grow our late sales in line with exploration spending growth.

[Sven Børre Larsen, Chief Financial Officer]

You have to bear in mind that last year, 2018, was quite unusual in terms of how late sales was distributed over the year. I think the normal distribution would be, if you looked at long-term averages, it would be below 20% of annual late sales are generated in Q1, and then you have 23% to 25% in Q2, Q3, and then the rest in Q4. So that's the normal picture, whereas last year it was much more front end loaded than that. So we expect -- it's too early to say, obviously, but the expectation should be that we return to a more normal pattern again this year.

[Kristian Kuvaas Johansen, Chief Executive Officer]

All right. I think that's all we had. So I want to thank you very much for your attention and welcome you back to the Q2 presentation later this year. And then we will, obviously, when we have more news on the Spectrum transaction we will update the market accordingly. So thank you very much.