TGS ASA

OSE:TGS

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the TGS Conference Call. [Operator Instructions]. Just to remind you, this conference call is being recorded.Today, I'm pleased to present Kristian Johansen. Please go ahead with your meeting.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Good morning, good afternoon, and good evening depending on where in the world you're listening in from. My name is Kristian Johansen, I'm the CEO of TGS. And with me today, I have our CFO Fredrik Amundsen who is based in our office in Norway. As most employees in the U.S., I'm still working remotely, but I'm pleased to follow the developments in Europe where people are slowly returning back to work.As usual, we reported our preliminary revenues for the quarter on sixth business day after quarter close. The numbers are therefore well known for you. So this morning we reported our full financials for Q1. I hope you've had a chance to review the numbers and that you have watched our pre-recorded presentation available at our website, pgs.com. We're also happy to take your questions at the end of the call.Q1 2020 was impacted by the COVID-19 crisis and the sharp drop in oil price. Protecting the health and safety of our employees at the same time as ensuring minimal disruption to the business have taken top priority. And in that regard, I'm extremely pleased with how the organization had performed during the challenging times. With the announced measure to protect cash flow, the company is well proficient to use the difficult market conditions to form the basis, fulfill the long-term value creation and continue the industry leading results.TGS had net segment revenues of $152 million in Q1 of 2020. This is a 3% decline compared to last year. The quarter saw solid prefunding revenues driven by Latin America and North America onshore while late sales were hurt by the COVID-19 crisis and the large oil price drop towards the end of the quarter.At $125 million, EBITDA in Q1 came in 1% above last year as a result of favorable development in operating cost. We expect these operation costs to come down further as our cost cutting initiatives start to kick in.TGS continue to deliver industry-leading return on average capital employed with 17% annual returns as per the end of Q1 2020. Our balance sheet remains strong with a cash holding of close to $250 million at the end of the first quarter, allowing the company to pay dividend of $0.125 per share in Q2 2020 despite the challenging market conditions.On April 8, 2020, we announced several measures in response to the market turmoil. The highlights are; number one, a cost reduction from centralization of offices, a global salary freeze, temporary cut in employee bonuses, and right-sizing of organization leading to a 2020 cost base that is approximately 35% below the 2019 pro forma numbers. Number two, multi-client investments for 2020 reduced to approximately $325 million from $450 million by postponing projects and reducing scope. And finally, the Q2 2020 dividend reduced to $0.125 per share from previously at $0.375 per share.TGS has a history of maneuvering difficult times in such a manner that we come out in a stronger position at the end and this is our goal in the current situation as well. By the measures I just described, we're ensuring that the balance sheet remains robust, which will allow us to withstand a prolonged period with lower revenues as well as taking advantage of interesting opportunities that tend to appear in periods such as this.These were the key point I wanted to cover initially. Thank you for your attention so far. We will now open up for questions. Operator, please.

[Operator]

[Operator Instructions] And we have our first question from Christopher Mllerlkken from Carnegie.

[Christopher Møllerløkken, Research Analyst]

Two questions if I may. Regarding the multi-client library, do you have any book values remaining for your data offshore Gabon? And second question, in the Q1 release, you said normalized tax rate of 22% was expected in 2020 and you referred to tax rates in U.S. and Norway. But do you see any impact from your operations in Brazil and Argentina this year, which would impact this tax rate this year?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Thank you very much, Christopher. So I will cover the first part, the answer to whether we have book value less in offshore Gabon. It's yes, we have some book value in Gabon. It's part of the Spectrum transaction that we did last year and Spectrum had a library in Gabon as you well know. So I don't want to go in detail about what the book value is. But we still have some exposure to Gabon.Your second part of the question which is related to tax rates, I will refer to Fredrik who is going to cover that.

[Fredrik Amundsen, Chief Financial Officer]

This is Fredrik here. Tax rate will of course be influenced by the activity in a global organization. And we could see that that tax rate is coming up somewhat based on the high tax rate in Brazil based on the mix of the revenue going forward. So the short answer is, it is possible that we will see a slight increase in our tax rate for the current year.

[Operator]

[Operator Instructions] And we have our next question from Morten Nystrm from Arctic Securities.

[Morten Nystrøm, Head of Research]

First question relates to the balance sheet and the current assets. Do you see any risk of clients -- and especially on the receivables, do you see any risk of clients not paying you either because of, I guess, the COVID-19 situation or due to potential default situation in some of your clients and I'm referring especially to the U.S. onshore clients?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Well, your question is related to the receivables and what I can say about that is, first of all, our clients typically tend to be quite large. And especially onshore, you've seen our client mix, you see that is a higher portion of larger companies and typically some of these mom and pop shops who are exposed to Permian and [indiscernible], they typically don't use a lot of seismic. So they're not really big on our client list.So I guess the answer to that is that we haven't seen any losses so far. We haven't had any negotiations with clients who are trying to push out payments yet. I would say onshore the risk is very manageable, very minor, and the same goes with offshore where obviously our -- the majority of our clients are rather big and even in today's market they have an ability to pay. So I guess to summarize, my answer is that we are not too concerned about that. It will always be high on our agenda to follow-up the payment. But we haven't really seen any issues so far onshore. I'm not particularly concerned about that.

[Morten Nystrøm, Head of Research]

And my second question again is to you, Kristian. I'm just trying to get our heads around how the next quarters will develop. I remember that when you hosted the COVID-19 conference, you were asked about potential late sales for Q2 and Q3. I guess your answer was somewhere in the range of hoping to do similar numbers in Q2 and Q3, as you did in Q1. Has this changed? And also are you able to say anything about how much of your late sales [indiscernible]?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I [indiscernible] answer that question. So I cannot give you the full details of course. But in terms of late sales, so we have $63 million of late sales in Q1. And as you note, Q1 was only impacted pretty much for the last month out of 3 months. Then you're absolutely right, I said that for the next couple of quarters I hope that we can keep up that level of late sales. I would still say I hope to do that. I think $63 million for Q2 will be a really good achievement. I would be extremely happy if we can get to $63 million. I saw some speculation today that the lowest it's ever been, it's $38 million in a quarter, which was Q1 of 2016. It's not the lowest ever, but it's the lowest over the past few years.And also referring to Q1 2016 actually being better, the market is more dramatically down now than it was in Q1 of '16. You should also be aware that we have a bigger data library now and we have a data library that is probably better positioned for this kind of market. So I think if we drop down to the level of $38 million, I would be very disappointed. If we get to $63 million, I would be very pleased. And with that, I kind of give you an indication of what we hope to do in Q2.And your second question is related to what we've seen so far or how much was related to March in Q1. Yes, I think Q1 was probably less back-end loaded than what you usually see because the crisis started in March. So typically we would have higher late sales in the quarter and we would have a really good March. Now we didn't have a good March and our quarter ended as it was at $63 million. So I think we certainly started to see the impact of COVID in March, no question about that. We've seen that in April as well of course. April is always a very challenging quarter in terms of late sales, and this time around, it was obviously even more challenging.

[Operator]

And our next question is from John Olaisen from ABG.

[John A. Schj. Olaisen, Joint Global Head of Research]

A question on multi-client investments for the rest of the year. How firm is the guidance for $325 million? Because when I look at your slide of the project schedule, it's very little committed beyond April really, especially beyond May? So if you could talk, maybe today first, how much of the $325 million is committed already? And elaborate a little bit on the rest.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, I guess, you're referring to Slide 23 in our earning release packet. And as you'll see from that slide, we had very high investment, a lot of activity in Q1. And we actually had quite a lot going into Q2 as well. So our investments will be quite high also in Q2, but then after that there's basically 2 projects. It's Engagement OBN survey in the Gulf of Mexico and it's Atlantic Margin survey in Norway. Both surveys are actually quite big. So they take up quite a big portion of the second half of the year in terms of investment.I think if we stopped here, if we do nothing else for the rest of the year, we're probably going to fall slightly short of that. So it means that we are still planning for a few investments probably in the latter part of the year. It will most likely be Q4. It should be 1 or 2 investments before that as well. But I think we need another couple of projects to fill up our $325 million, if that's our goal. But I would have to say that these investments are highly subject to good prefunding and good near-term returns. We're not obligated to do anything at all. We don't have any vessel commitments. And we would look very carefully at the market conditions and the prefunding.

[John A. Schj. Olaisen, Joint Global Head of Research]

Also I hear that you are not participating in TGS offshore campaign with Canada this year. It will be the first in many years that you did not. I just wonder if you could tell us why you're not participating in that piece.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Well, I think it's all about securing cash or preserving cash and securing our financial position. And when we look at our projects, we look at prefunding of course, we look at near-term revenue potential, and we looked at the overall return of the project. And these projects this year didn't satisfy our financial criteria for return. So we decided to opt out for this year. It doesn't mean that we're out of Canada. We will still probably participate whenever the market becomes better.

[John A. Schj. Olaisen, Joint Global Head of Research]

If that was your discretion with the deed with TGS, could you like decide to join in 50-50 or is it at your discretion or how does it work?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, I obviously cannot go into details about that. But as you understand, it is a discretion that we have to opt out and the agreement is a long-term agreement where if you look at every project and you evaluate every project and it's your choice whether you want to participate or not. So far we both have participated in all projects for the past 8 years. Before that, it was only TGS. But for the future, as I said, we still believe Canada would come back. But at the current oil price, it's very, very challenging of course because as you know, it's a lack of infrastructure and the breakeven is quite high, especially in the northern part of Canada.

[John A. Schj. Olaisen, Joint Global Head of Research]

And my last question on the multi-client investment side is regarding non-organic investments. In Q1, you spent $50 million in buying an onshore library in Canada. I just wanted to -- how -- are there more opportunities that are onshore in the U.S. at the moment because, I guess, everything has come to a complete standstill? Would it be -- and if we just imagine, it's a great time to do some acquisitions onshore, of acreage onshore in the U.S.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, it's a great point. In fact, I got exactly the same question in our board meeting yesterday and -- from one of the board members. So, yes, that's absolutely something where we're looking very closely at because we know that this is obviously a boom and bust market, and right now obviously onshore is suffering from a very high -- very low and extremely volatile oil price. But we think over time that will probably normalize and we will see bigger players. We will see significant consolidation. We will see transfer fees as a result of the consolidation. So our belief is that the onshore market will still stay quite robust. It's just that it's very volatile right now, which means that there will come up opportunities and then we would certainly look at that for sure.

[John A. Schj. Olaisen, Joint Global Head of Research]

And just for the record, did you book any transfer fees in Q1?

[Kristian Kuvaas Johansen, Chief Executive Officer]

No, we did not.

[Operator]

[Operator Instructions] And we have our next question is from Sahar Islam from Goldman Sachs.

[Sahar Islam, Analyst]

I have 2, if that's okay, please. First, just on the cost savings. Can you give us some more color as to where the cost savings are coming from and how much is from vessel deflation? And then secondly, related to the vessel side. Could you talk a bit about the vessel owners, your relationships with them, given obviously some of them have quite high leverage in this downturn and whether you're worried about that side of your supply chain?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, I think your first question which is related to cost, I mean when we talked about reducing our operating cost by 35%, that's excluding any vessel related cost. So this is purely our salaries and other operational cost, cash cost. So the way we will reduce that cost is obviously, as we have announced, we have centralized some offices, so we're closing down offices. We're obviously accelerating the take up of synergies from the Spectrum transaction. We are unfortunately having to right-size the organization. So that process has already been going on for about a month or so. So there's -- and then obviously there is a much higher focus on cost in general.So we feel confident that we're going to be 35% lower than last year, meaning that last year we had about $150 million of operating cost. And this year it's going to be $100 million and hopefully even lower than that. And if you look at the run rate for the first quarter, you will understand that for the second half of the year, it will be significantly lower than what you saw last year. So we feel quite confident that we're able to deliver on that and we have a lot of -- actually it's already being implemented.So on the second part of the question on vessels, I mean we haven't seen any drop in vessels, vessel rates, yes. And typically that takes a bit of time before you see that that cost is starting to come down. So that's part of the reason why we're a bit careful by entering into new contracts right now, is that we still see that rates are relatively high. The relationships with vendors are very good. I mean, we are dependent on each other. We are probably their largest client and they are by far our largest supplier. So we have a very professional, healthy, and good relationship with our vendors. Yes, you're right, some of them are in some -- had some financial constraints. And obviously that's the situation we're following very closely. That's all I want to say about that.

[Operator]

Our next question is from Jon Masdal from DNB.

[Jon Masdal, Senior Analyst]

I have one question on the backlog, $160 million, and given sort of what you said on committed investments. That's -- it's pretty much the same amount remaining investment under that. Could you give some indication on scheduling or pacing of that backlog? And also how this -- or how big are the late sales contribution on the [indiscernible] completion step backlog?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I mean, it's a mix. So first of all, you need to account for the fact that between 20% and 25% of that backlog is related to our well data product business or GPS business. So that obviously adds to the backlog or is part of the $160 million. So I would estimate that to be somewhere between 20% and 25% of that really. And then if you look at the remaining backlog, then yes, most of it will be taken out this year in terms of prefunding of new projects. You've seen what we announced in terms of both engagement and the Atlantic Margin survey, so that's part of it.And then we also have prefunding for projects that are not part of the vessel schedule yet because we haven't decided whether this is going to take place in 2020 or 2021. So take Argentina as an example. We haven't completed our Argentina projects, haven't decided whether we want to come back in 2020 or whether we're going to push out into 2021. So most of the backlog is 2020 and most of its seismic and certainly the majority is prefunding on new projects.

[Operator]

[Operator Instructions] And we have a follow-up question from Christopher Mllerlkken from Carnegie.

[Christopher Møllerløkken, Research Analyst]

With regards to your operations in Brazil and Argentina, have you seen any impact from the COVID-19 situation, down especially in Brazil? And also the significant travel restrictions that have been put in place, which have made crew changes on seismic vessels difficult to perform.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, I mean it's taken a lot of focus and dedication and work from our operations department to manage that, and obviously a very close collaboration with our suppliers. If you look at our project schedule, we see that most of it, and sometime in early or late April. So I think the majority of its contracts were completed on time. And we had no issues other than keeping the crew longer on the particular vessel to avoid the crew change. So we haven't had any big issues related to that. But obviously it's taking a lot of focus on the organization.So you're asking specifically about Argentina and Brazil. I think Argentina, you'll see it from the vessel schedule that we're, one vessel has completed and another one is due to complete this week. And then in Brazil, we also had no significant interference in our operations in the quarter. But as you see, from early May we hardly had any operations outside Gulf of Mexico and Norway.

[Christopher Møllerløkken, Research Analyst]

As now as we are in mid-May, could you describe how you have experienced the first half of second quarter in terms of late sales?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, obviously I cannot be specific on that, I'm sorry. As I've said in the previous question today, April is always a very tough month in terms of late sales, no real drivers. And it's the first month of a typically a quite challenging quarter in any market. So April was certainly not good. It was pretty much as we expected. That's all I can say. We had late sales, so it was not zero. We had probably a handful, but they're not big, but we had sales. And then for the remainder of the quarter, we have -- we still have some relatively big deals that we are trying to get close and we have good interaction with our clients. And when you ask me, what is the big deal today? I think in today's market, a big deal will be anything above $3 million to $5 million. So we have some of those deals that we are looking at and hopefully able to close.And I have to say, our customer engagement and our interaction with clients has been extremely good. I think we go through the list of meetings every Monday in the executive team and the activities pretty much just as good as it was before the crisis. So we have multiple meetings with clients. I think the decision making process is a bit slower for the clients, which you can expect in a market like this. But there is activity out there. It's just it's harder to get it off the -- over the finish line, of course.

[Operator]

We have another follow-up question from Morten Nystrm from Arctic Securities.

[Morten Nystrøm, Head of Research]

Kristian, you answered partly my question. Now my question was, so your team and also I guess your clients are still at home office, at least in U.S., and there's social distancing theme is still the case. I was just wondering if this is expected to have any, let's say, negative impact on deals you're trying to secure over the next months, especially in May even.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, as you said, I answered partly that question. I think, as I said, the activity level just measured by number of meetings and number of contact points with clients, is probably as good as it was prior to the down cycle. And that's certainly something we've been pushing very hard from executive management too in making sure that activities is kept up. I would probably lie to you if I say that it's business as usual. I mean, obviously it's harder to interact over Teams or Skype than it is to have physical meetings. And sometimes you have this data source where you're showing data to clients and it's a bit more cumbersome to do that electronically than doing it in a physical meeting room with all the technology and equipment in place.So I guess we're all looking forward to get back to the office. I think that's going to make it easier. But I'm positively surprised about how we've been able to manage this crisis in that regard.

[Operator]

[Operator instructions] There are no further questions at this time. I'll pass the floor back to Kristian.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, with no further questions, I would just like to thank you for your attention. We remain committed to deliver industry leading returns for our shareholders. And your constructive input and questions are highly regarded in that sense. So I hope you stay safe and healthy and looking forward to see you in Q2 and hopefully see you in person as well. So thank you very much and stay safe.