TGS ASA

OSE:TGS

Earnings Call Transcript 2018-Q2

[Kristian Kuvaas Johansen, Chief Executive Officer]

Good day, everyone, and welcome to the presentation of Q2 2018 of TGS. My name is Kristian Johansen, I'm the Chief Executive Officer of the company, and I have our CFO, Sven Børre Larsen, here with me to present the numbers for Q2.As you know, we have already released our numbers. We usually do that on the sixth business day so you see the revenue numbers, and today we will go through the full P&L as well as the outlook of the rest of the year and into the future.And for those of you who have seen our numbers, Q2 was an excellent quarter for TGS, and I want to take the opportunity to say thank you to all our employees around the world for all your hard work and achievement in Q2. I know that most of you are watching this webcast because you care a lot about this great company. And again, thank you very much for all the hard work.First of all, I'll draw your attention to the forward-looking statements, and then going into the highlights of Q2 of 2018. So we had net revenues of $158 million, that's up 47% compared to the same quarter of last year. We had net late sales of $136 million, that's up 73% from the $79 million we had in the same quarter of 2017. Our prefunding revenues were $21 million. That's down from $27 million in the same quarter of last year, and that's funding 37% of our operational multi-client investments for the quarter. The operational multi-client investments were $56 million. And in addition to that, we had about $4 million from risk-sharing arrangements. Operating profit for the quarter was $54 million, that compares to $18 million in Q2 of 2017, and that strong operating profit margin shows the leverage of our business model now when amortization is more or less a fixed cost and when revenues hit a certain level, you will see that it drops pretty much straight down to the EBIT level.Our free cash flow was $55 million, that compares to $12 million in Q2 of last year, and that adds to a cash balance of $338 million at the end of June. And in addition to that, we have an undrawn credit facility of $75 million. So a liquidity in excess of $400 million now which is close to the strongest we've ever had in TGS. And a quarterly dividend is maintained at $0.20 per share, and that's up 33% from the same quarter of last year. So I think that summary shows that Q2 again was an excellent quarter for TGS. We're very pleased about the quarter. We had great visibility and we were quite optimistic when we were standing here at the end of Q1 and we certainly even exceeded our own expectations for the quarter. So very pleased about that.I'll take you through the operational highlights of the different areas where we have been acquiring seismic in -- or in Q2 of 2018, and I'll also touch on some of the outlook and the characteristics of the different markets where we're operating in.So if we start to look at the operations that we had in Q2 and we start on the left-hand side of the slide, which is the Western Hemisphere, you see that we have 3 crews operating onshore U.S. There were 2 crews in the SCOOP and STACK area of Oklahoma, and then we have 1 crew in the Permian as well.In addition to that, we had 2 3Ds this quarter in the Western Hemisphere: we had the Ramform Hyperion joint venture with PGS in Eastern Canada; and then we had Polarcus Asima, that was working for TGS in the U.S. Gulf of Mexico on a project called Alonso. Then we had 2 multibeam crews, they were both in Brazil. So it was 2 Fugro vessels operating for TGS in Brazil. And then on the Eastern Hemisphere, we have the Ramform-Atlas joint venture with TGS -- with PGS on a project called Nansen in the Barents Sea. It's a project that we started out up in late Q2. And then we have Polarcus Adira, who's finishing up the Atlantic Margin survey that was started out in 2017 and we're completing this year.If we look into different regions. U.S. Gulf of Mexico, as I said, we had the Alonso 3D that was operating in Q2. That's about a 6,172 square kilometers multi-client 3D. This is in the Atwater Valley of the U.S. Gulf of Mexico and as you see from the map, it's slightly south of the core area of Mississippi Canyon where TGS has been collecting data since the '80s. If you look at the GOM market, or the U.S. Gulf of Mexico market going forward, there's certainly a couple of drivers. We see a pickup in activity in the U.S. Gulf of Mexico which is very positive to our business, of course, because we have probably the strongest database in the U.S. GOM of all the seismic players. There are 2 license rounds starting out in 2017. We started out with an August round as well as the lease round that we always have in March. And that means that we will typically [ sell ] data related to the March round in Q4. And then Q2, every year, will benefit from the August round. And it was good to see this quarter that we actually saw some benefits from the August round in the U.S. Gulf of Mexico.Also another trend that we've seen in the U.S. Gulf of Mexico and actually elsewhere in the world is a record high acreage turnover activity and farm-in activity. So if you look at all the -- either M&A transaction or asset transfers and asset turnover, et cetera, in the U.S. Gulf of Mexico, it's been remarkably high for the last couple of quarters. I will come back to that. I have a separate slide that's going to cover that.We've seen quite a lot of recent discoveries in the U.S. Gulf of Mexico. I'll just mention 3 of them here. So operators such as Shell and Chevron have been quite successful finding new oil in the U.S. Gulf of Mexico. And the good news is that the new oil has a breakeven at 50 or lower. We have talked about that in the past, that the U.S. Gulf of Mexico is probably the most price-sensitive area of all the areas where we are operating. And it's probably the area where we saw the biggest drop in demand when we saw the oil price dropped down to 27 at the low end in early 2016. So the good news now is that as costs is coming down in the U.S. Gulf of Mexico, the oil price is coming up, we see a higher demand for data. We also see synergies with Mexico Gulf opportunities. And given that U.S. Gulf of Mexico is very mature in terms of there's been a lot of seismic [ shot ] in the U.S. Gulf of Mexico for many, many years, it also means that this is a technology play going forward. We know, for example, that this summer and also plans for next summer, we see a record high amount of node surveys being acquired in the U.S. Gulf of Mexico, companies like Fairfield is benefiting from that. And this is also something that TGS is looking into to see how we can benefit from new technologies in our core markets.If we move to Brazil where we had a SeaSeep survey. So you remember those 2 multibeam vessels from Fugro, those 2 vessels are shooting a 200,000 square kilometer multi-client multibeam and seep study. That survey started in 2018 and will continue for the remainder of the year. A few comments to the market in Brazil. The good news is that there is more license round transparency in Brazil, so we have a calendar now that goes out to 2021. So while Brazil used to be a lot of uncertainty related to the timing of the license round, that risk is certainly lower going forward.Also following that, we see that the seismic permitting process is now becoming more streamline. Although there are still some environmental challenges in Brazil, it's getting more streamline and that's also good news for the seismic players. On the slight negative side is that Brazil is still a market for the big guys. So if you look at the competitive bidding in Brazil for the recent lease sales, you see that there are enormous amounts of money put up for the blocks, which means that this is very favorable for the big guys such as Exxon, Total, Shell, Equinor and a few others. But it's not yet a great playground for the smaller players. And in order to be very profitable in multi-client, you also need the small guys. So this is something we're obviously watching very carefully and waiting for Brazil to turn into an even better multi-client market. It's also a high degree of data saturation in some of the core areas and that drives the need for new technology also in Brazil. And that's also something that TGS is looking into and want to time perfectly. Norway/U.K. In terms of the activity that you saw in the quarter, we had the Atlantic Margin 3D with Polarcus as I mentioned on one of my first slides, and we had the Nansen joint venture with PGS that started in Q2. So this is a 6,100 square kilometer multi-client 3D that we do together with PGS.In terms of new projects, we announced this morning a project called Erlend Wild West. This is 1,000 square kilometer survey, a 3D survey in U.K., west of Shetland region which is a very prolific area, where there is some existing TGS data already. We have a survey called TGS Erlend West we shot back in 2012 and that's also a 3D adjacent to the new 3D that we're acquiring right now.The drivers for Norway and U.K., first of all, we have the 24th round where we had the awards announced in June -- in early June this year. And obviously, we benefited from that in the quarter and it was good to see that some of the uplifts were collected as planned. Then we had the annual APA rounds and that's becoming increasingly important for TGS because as the North Sea, Norwegian Sea and even the Barents Sea is becoming more mature, we see that the APA round is getting more important for sure.Acreage turnover on farm-ins, again I will come back to that, but we see a record high number of deals and we see asset swaps and we see portfolio changes, et cetera, and the good thing about that is that it drives the need for better geological understanding and drives the need for more seismic.So continue to East Canada. We had Tablelands 3D project, a relatively large 3D, 8,000 square kilometers that was going on in Q2 and this is also in partnership with PGS. And then we have 2 new projects in Canada that will start in early Q3, Lewis Hills 3D, that's a 3,400 square multi-client 3D also in partnership with PGS; and then we have -- we're about to finish 2 of the surveys that we started last year, so they're called Harbour Deep and Cape Broyle. We started out those surveys last year. We didn't finish that, so the vessel is back again now and it's going to complete these 2 surveys as well as shoot a new survey in Canada. So we're quite active in Canada with 2 vessels in Q3.In terms of drivers and future of the East Canada market, obviously, it's a scheduled land tenure system. So it's a great visibility and transparency in terms of license rounds going forward and there is a license round coming up in November in the Newfoundland area and we are quite optimistic with regards to that. It's a stability and attractive fiscal regime and that again promotes exploration, as we all know from -- for example, Norway. And it's high prospectivity and this is proven by a few large discoveries in Canada, especially back in 2012 and 2013. It's an E&P-focused area and actually Canada held up quite well even through the downcycle.And then finally on the North America onshore. We had a quite busy Q2. So you see we had 3 surveys going on in U.S. onshore. So we had 2 surveys in the SCOOP/STACK in Oklahoma and then we had 1 in Permian. We have just announced 2 new projects this morning, so expansions to the existing database in the SCOOP/STACK and then we have another smaller 3D in Canada called Dawson Phase 2. And these surveys are going to be completed or acquired in Q4 of this year or early next year. So this is not Q3 activity necessarily, but it's going to be recorded in -- later this year. In terms of the onshore market and the drivers going forward, this is a market where we have seen growth and we've been -- we've done really well financially in our onshore portfolio. But what we see is obviously an increased degree of geological complexity in some place and that's driving the need for seismic, and we see obviously, a great amount of turnover and farm-ins and asset activity, which again drives the need for seismic data.Then we also acquired a data set in -- from a supplier actually in Q2. So it's a Capreolus 3D that we purchased from Polarcus. We did this in -- we expect to close the transaction in August, we signed it in early June, I guess. And the good thing about this is that we had a -- just about 1 week or 1.5 weeks after signing the purchase agreement, there was actually a big discovery announced over that database. So it's obviously, discoveries drives the need for more data and we are very optimistic in terms of the future of the Capreolus 3D data set. So we plan to reprocess the data. We plan to get it up to the standard TGS quality and we hope that we will benefit from this major oil discovery in Australia. And Australia as you know, is very gassy and less oily, and this oil discovery is great for the outlook of the Australian market going forward. So with that, I will hand it over to Sven Børre who's going to go through the financials and I will come back and talk about the outlook later. Thank you.

[Sven Børre Larsen, Chief Financial Officer]

Thanks for that, Kristian, and good morning, everyone. I will just start by reminding you that we implemented IFRS 15 accounting standard for revenue recognition from 1st of January this year. And as we discussed in the previous quarter, this can have a -- this had a significant impact on the multi-client industry as we now have to postpone all the revenue recognition related to projects that are not yet completed until completion of those projects. Whereas before, we had a percentage of completion recognition of those projects and during the project phase. However, for internal management reporting purposes, we are still using the percentage of completion method. And since we think this is the most meaningful way of presenting our business, we will also focus on percent of completion or segment reporting in this presentation. So you'll find our official IFRS accounts in the appendix at the end. So I will only talk about the percentage of completion numbers or the segment reporting numbers here.I will start with net revenues. And with the strong revenues that we saw, it's, of course, a pleasure to present these figures. Late sales on the top left-hand corner, we had $136 million of late sales, which is 73% increase over the $79 million we had in the same quarter of last year. And this strong performance is obviously driven by increased cash flow for the oil companies as a result of the higher oil price but also as Kristian alluded to, a higher acreage turnover activity in terms of farm-ins, M&As and general repositioning -- portfolio repositioning among the international oil companies.Then to prefunding on the top right-hand chart. We had $21 million of prefunding in the quarter, which is a decline of 24% compared to the $27 million we had in the same quarter of last year. So although we have strong momentum on late sales, you can see that we -- it's still difficult to get longer-term commitments or prefunding commitments from customers at this point in the cycle.Then proprietary revenues on the bottom left-hand chart, $1.5 million of proprietary revenues in the quarter, which is 17% down compared to Q2 of 2017. So all in all, this gave us net revenues of $158 million in the quarter, which is a 47% increase over the $108 million we had in the same quarter of last year.Then looking at the breakdown of net revenues focusing first on the business units on the left-hand side here. NSA account, or that's North and South America, accounted for as much as 69% of our revenues in Q2, and that is, of course, largely driven by strong performance in the U.S. Gulf of Mexico; Europe accounted for 20%; Africa, Middle East, Asia-Pacific accounted for 5%; and other businesses contributed 5%. Then looking at the split by technology or data type, if you want, 3D accounted for 74% in the quarter; 2D, 21%; and geological products and services, GPS, 4%.Next slide. Operating expenses first on the top left-hand corner. We had $23 million of operating -- total operating expenses, when we exclude bad debt charge of $2.1 million that were -- that was recognized in the quarter. So this is obviously an increase, as we can see, over what we had last year, and this is entirely related to the result-linked bonuses that we have. So when the operating result goes up, bonuses to employees goes up. So if you exclude these bonuses and look at the day-to-day kind of OpEx run rate, we're actually below where we were last year at the same point in time.Looking at amortization. We had $74 million of amortization for the second quarter which is a 7% increase over last year despite a very high increase in net revenues. And this shows the leverage effect from the new amortization scheme that was put in place a couple of years ago where the amortization now is largely unrelated to sales. Previously, as you may remember, we had a sales-based amortization scheme.So for the full year, we maintain the guidance of $310 million on amortization. But with a higher proportion of land service, onshore service in the investment portfolio than we planned for in the beginning of the year, it's probably more risk on the upside than on the downside to this figure for the full year.Looking at operating profit, $56 million in the quarter corresponding to a margin of 36%, and this is actually the best quarterly operating profit we have had since Q4 -- no, sorry, Q3 of 2014. Again, highlighting the -- or showing the leverage impact from the changed amortization scheme.Then cash flow. We had strong cash flow in the quarter, particularly when you take into account that Q2 is normally weak -- seasonally weak on cash flow. We had $55 million of free cash flow this quarter compared to $12 million in Q2 of last year, and a negative cash flow, as we have seen, in many Q2s historically in Q2 of 2016.Then I will focus on the multi-client library. First, talk a little bit about the investments on -- as you can see there in the chart on the top left-hand side, we invested $56 million in our library in the quarter and this was prefunded 37% by our customers. So a fairly low prefunding rate in the quarter. This means that we have, year-to-date, invested almost $90 million, $87 million in the library, which means that we have approximately $170 million to go in order to reach our guidance of $260 million.So investments will obviously be significantly higher in the second half of the year. And in Q3, we will ramp-up the investments and we will probably, if everything goes as planned, be close to $90 million on multi-client investments. But with prefunding still at a low level, probably in line with what we saw in Q2.And in Q4, we will also see fairly high investments. But as we will have more onshore projects in the portfolio in Q4, you'll see that the prefunding rate will be significantly higher than we saw in Q2 and expect to see in Q3. So overall, we remain comfortable with our guidance on full year investments of $260 million and the guided prefunding rate -- range of 45% to 50%. The net book value of the multi-client library continues to decline, as you can see on the top right-hand chart, $736 million as of the 30th of June. Looking at the chart on the bottom left-hand side, we see investments and net book value by year of completion of the different service or vintage, if you want. The bars represent the historical cost and the diamonds tells you where the net book value is currently. And as you can see, the library remains healthy with net book values generally at a low level compared to the historical cost of the service.Then we look at the net revenues by vintage. As you can see there, we had as much as 33% of revenues this quarter coming from older service completed prior to 2014, and we see this as a strong sign of library health. It shows that the commercial life of these multi-client service are quite long if you are positioned in the right areas. And I think if you compare us to other multi-client companies, you will see that we, generally speaking, probably have a higher level of -- higher degree of revenues or proportion of revenues coming from older service than most of our competitors would do. And as I said, I think this is a clear sign of quality in our investment decisions historically.Then looking at the income statement. We had, as I said, $157.8 million of revenues in the quarter, which is a 47% increase over last year. Subtracting good cost of goods sold and amortization, we had a gross profit of $84 million which is to be compared to $38 million in the second quarter of 2017. Then subtracting the personnel costs, other operational costs and depreciation, we ended up with this reported operating result of $54.2 million which is almost 3x as high as we had in the same quarter of last year.Net financial items positive this quarter by $1.6 million gave us a result before taxes of $55.9 million. The tax cost was $9.6 million, which means that we had a fairly low effective tax rate in the quarter. So the tax rate, as we've discussed in previous quarters, seem to move along with the dollar-NOK rate as we have some intercompany balances from our -- between our parent company here in Norway and some of our dollar-based subsidiaries. So then when the dollar rate moves, the -- you'll get a profit or a loss in the Norwegian tax accounts of the parent company, which will be eliminated on a group level, of course. And that's why the tax rate is affected. But if you look at the tax rate -- as you may remember, we had opposite effect in the first quarter. And for the first half as a whole, we are pretty close to a normal tax rate. I think we had 26% year-to-date, whereas we normally would guide for an underlying tax rate of around 23%. So this gave us a net profit of $46.3 million compared to $9.6 million in the same quarter of last year, USD 0.45 per share in EPS.Then looking at cash flow. As I said, strong cash flow this quarter, $127.9 million from -- in cash flow from operations. So we obviously collected a bit of the revenues that were generated in the first quarter. As you remember, we had a strong first quarter as well. Then investments related to investing activities is negative by $73.1 million and same with cash flow related to financing activities, negative by $19 million, which means that we had a net increase in our cash balance, so $35.8 million during the quarter compared to a decline of $8.4 million in the same quarter of last year. This, of course, means that the balance sheet remains strong. We had cash of $337.5 million at the end of the quarter. And on top of this, we have this credit facility that gives us a very, very comfortable liquidity position. The equity ratio also remains strong, 85%, and we barely have no interest-bearing debt, only $2.5 million related to the sellers credit that we took on in connection with the purchase of the Dolphin library that was closed in early 2017.Then to dividends. The board has resolved to continue to pay USD 0.20 per share in dividend in Q3. This corresponds to NOK 1.62 per share this quarter. The share will go ex dividend in 1 week, 9th of August, and the payment date is 23rd of August, so in 3 weeks. So in the longer term, we aim at paying our dividend that is in line with the underlying cash flow. And the way we have implemented this is that the board do an assessment of the dividend in the beginning of each year, then we set a new dividend level for the first quarter and then we aim at having a flat dividend for the 3 remaining quarters of the year. So with a strong -- or with the improved outlook that we have seen and the strong cash flow, it's natural to assume that the board, of course, will discuss further increases of the dividend when we get to that process in the beginning of next year.And by that, I give the word back to you, Kristian.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Thank you, Sven Børre. So for the outlook, I plan to cover 4 topics that make us quite optimistic about the future for our business. Number one, [ unsustainable ] reserve replacement rates; number two, offshore is not bad and the fact that many recent discoveries offshore had been over TGS data; number three, record high activity related to acreage turnover and farm-in activity; and number four, upcoming license round activity.If we start with the first one, the reserve replacement challenge. I think you've all seen this. You've seen 4 years of a negative year-on-year growth in E&P spending. And although we don't have the numbers for 2018, I don't think that the numbers will be significantly positive for '18. Because keep in mind that when all companies set their budgets for 2018, the oil price was still around $50 -- or $50 to $52. So I think the sanity check to whether budgets will really improve will be on the set of next year's budget which is going to happen in October or November this year. And given where the oil price is today, it's about 40% higher than what it was last time they made their budgets. So hopefully, you will see the real impact of higher E&P spending in next year's budgets.But again, if you go by -- or go over to the right-hand side of the slide, you look at the reserve replacement ratio. This is the 3-year average for deepwater liquids and you see that it's a negative trend that you've seen for quite some time. And obviously, this is not sustainable for the future. So it will eventually be an uptick in E&P spending and especially in terms of exploration, and that will benefit seismic for the future.Number two is that there is a strong alignment between TGS data and exploration activity. So offshore is certainly not bad. There is a lot of offshore activity going on. This slide shows a lot of the discoveries that have been made in recent months and it also shows some of the ongoing and upcoming drilling activity. And the great news, if you look at this and you look at the match between the TGS database which is the blue marks on the map, you see that most of the activity actually happens where we already have data. So they're using TGS data and multi-client data for a lot of the drilling activity that is going on and some of the recent discoveries that have been made. And a great example is obviously the big Dorado discovery in Australia where TGS now has a significant amount of 3D data.Another very important driver to our business right now, as I said, I don't think that E&P spending is significantly up but if you look at exploration spending, if you talk to our clients, they will say that they're still very cautious about their spending. And we hardly meet any clients who say that they have seismic budgets that have increased significantly in 2018. So why do we still show a year-on-year growth of 50% to 70% in TGS? And why do we see that quarter-after-quarter? Well, I think the main reason is that you see a record high activity related to acreage turnover and farm-ins. And this slide is a great illustration of what's going on in the E&P market right now.If you look at M&A activity on the left-hand side, we're just mentioning 6 or 7 of the M&A transactions that have been announced quite recently. If you look on the right-hand side, and this is probably just as important or even more important in terms of demand for seismic data, this is what we call asset sales or asset swaps. And this comes as a result of changes in the portfolio strategy of the E&Ps.And just some examples, Fieldwood acquired the deepwater assets on Noble in the U.S. Gulf of Mexico. Noble will now focus more on onshore and on Canada. You see BP buying the onshore assets of BHP, which again allows BHP to put more money into offshore and especially U.S. Gulf of Mexico. You see Encino just announcing that they're buying all the Chesapeake assets in the Utica shale in the U.S. onshore. You see BP, ConocoPhillips; Aker BP, Total, et cetera, et cetera. There are so many activities going on as we speak and all this is driving demand for seismic data. So although I would argue that exploration spending is not significantly up, this is really driving the demand for seismic. It's really driving demand for our products, and it makes us quite optimistic about the future because this is not a one-off. This is not something that just happened in Q1 or in Q2 this year. This is something that we expect's going to continue for the future. And again, all this dynamic, all these transfers is very positive to our business.And then thirdly or last but not least, you have the license round activity. We go through this every quarter and I just want to touch on some of the highlights here. So obviously, I just covered the fact that we have a central and a western GOM lease sale, partly explains the strong Q2 in the U.S. Gulf of Mexico part of our business. So the upcoming license round in August, then there is another one coming in March and we hope to see some impact of that in Q4 this year. Then we have a license round coming up in Newfoundland-Labrador in November of 2018. It's another round that we are quite optimistic with regards to because we -- together with PGS, we have a lot of data in the region. Brazil, as I said, there is much more transparency in terms of the future license rounds in Brazil which is good for the overall industry. There's been some delays in Mexico but Mexico continues to have regular license rounds, both onshore and conventional and also deepwater. And then if you go to Europe and Africa, Middle East, you see that Norway obviously had the APA round. and as I just said, it's becoming more and more important for TGS. As Norway in general gets more mature and TGS has a more mature database, APA is getting more important for us. 24th round was good for our business in Q2. We have a 31st round in U.K. coming up in November. And in Africa, Middle East the license round that's going to impact us the most is probably Madagascar but there is a few other license rounds coming up. So in general, there is quite a significant activity related to license rounds for the remainder of [ 2008 ] (sic) [ 2018 ] and also going into 2019.We should be a bit cautious in terms -- we shouldn't expect that exploration budgets will triple for 2019 and the reason for that is that there is still a lot of uncertainty related to the oil price going forward. I just heard BP say that their planning price for next year will be somewhere between 50 and 65. We will probably expect that most companies would say 70 to 80, but BP said that it's going to be 50 to 65 and I think this is part of the reason for that. The market in terms of EIA, they expect there to be some oversupply of oil going into 2019. And again, that could potentially put some kind of a ceiling to how far the oil price could go. But again, there are some arguments for why the oil price will go even higher which would be obviously great for our business and some arguments for why it would go much lower, and we just need to be very cautious in terms of our investments and plan for both scenarios. And that's something I think TGS has been very good at in the past. We have taken advantage of this downcycle and I think this slide really illustrates how TGS have been thinking through the downcycle. If you look at the blue color here on the graph, it shows the 3D volumes that we have acquired. And you see what we have done in 2017 and we expect to do in 2018 is pretty much all-time high in terms of data acquisitions, in terms of volumes rather than dollar terms. And if you add on the light yellow color here on the -- or orange color on the slide, it's the onshore activity which we have stepped up quite significantly in 2018. So in general, you see that we are pretty close to all-time high in terms of adding volume to our database which is really what we should be able to benefit from in the future when the market picks up and we're able to reprice some of the existing seismic that we have in the data library.In terms of our backlog, it increased in Q2. It went from $74 million to $86 million, partly related to some onshore projects that were signed up -- or prefunding on onshore projects that were announced in quarter and also the Canada campaign that we started in late Q2 and early Q3. I think when you look at this backlog in a historical perspective, it doesn't look that impressive, but keep in mind that the cost of this backlog is somewhere between 1/3 and 1/2 of what it used to be historically. So the cost of securing capacity for the backlog is very, very low and obviously that justifies the fact that $86 million is actually quite a decent backlog that we're quite pleased with going into 2019.And then on the projects schedule. You remember from Q4 of last year when we showed the plans for 2018, we didn't have much secured and we had a Q1 with very low acquisition activity. But you see that it filled up through the year and you see that period of July, August and September is going to be very busy for TGS with a lot of 3D going on in both Norway and Canada. You see a couple of onshore projects starting up in late Q3 but you see that Q4 will be a very disciplined quarter in terms of onshore projects. So in general, we're quite pleased about how this plays out. It's very much according to plan. Sven Børre mentioned that we have secured a lot of this -- of our guided investments already and we feel good about the project plan for the remainder of the year.So that leads me to the summary for -- of Q2 of 2018. So another excellent quarter for TGS. Net revenues of $158 million. EBIT of $54 million showing the leverage in our database right now with an EBIT margin of 34%. Free cash flow of $55 million and a cash balance of $338 million, liquidity of more than $400 million. Guidance is unchanged. And then finally, I'd just want to mention that at the current stage of the cyclical upturn, growth is driven by cash flow and acreage turnover. The next phase to be driven by budget increases and new projects. So with that, I will open up for questions, and thank you for your attention.

[Christopher Møllerløkken, Research Analyst]

This is Christopher from Carnegie. You mentioned that you didn't expect the M&A activity to be a one-off. And, of course, M&A for E&P companies is a continuing business. But would you agree that there could be some catch-up effect this year as there were some years in the past where the potential buyer had a much lower oil price assumption that the seller was willing to accept?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I think we shouldn't only focus on the M&A activity because I think what you saw on the right-hand side of the slide is just as important in terms of seismic demand, it's all the asset transfers that are taking place. And I think while M&A is very, very difficult to -- you have low transparency, of course, on M&A. What we have quite good transparency on is the asset swaps. And what we see right now is that there are so many changes in the portfolio strategy of some of the E&Ps so we think that that's going to continue. And in fact, if we look into Q3 and Q4, I think for the end of the year, we actually had quite good visibility on some of this asset transfer taking place. And obviously, it doesn't necessarily drive demand for seismic data but it gives us a good opportunity to go and visit clients, make changes to their portfolio and try to sell data such as they can get a -- in an even better position when they value their assets that they are about to transfer. So I think the answer is that, yes, I mean, you may focus on M&A but I think for our business, it's just as important to see those asset transfers.

[Christopher Møllerløkken, Research Analyst]

How would you describe the current market for securing prefunding on new projects? Do you see an improvement or is this still as challenging as it was before?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I would say it's quite challenging and I think the reason for that is that, as I've said in my presentation, the budgets were set back in October last year and most of the companies that we meet and we talk to, they still struggle with budgets that were set last year and they say that there is very tight budgets and they cannot really commit to long-term projects. I think there is a great chance that the next year's budget will be higher or significantly higher than what they are today. And I think that again will be the key trigger to get prefunding for long-term commitments rather than just seeing a significant increase in late sales. So, so far in this cycle, we have seen late sales has picked up great and I mentioned some of the reasons for that and some of them were related to asset transfers and all the activity related to farm-ins and farm-outs. But we haven't seen that in prefunding yet, but I think we will see that going into 2019.

[Christopher Møllerløkken, Research Analyst]

And the final question, I know that clients typically do not tell you why they buy seismic but I'll try anyway. Given that this quarter was the first quarter where all the acreage in U.S. Gulf of Mexico was included in the August round, is it fair to assume that second quarter going forward will be more important for you than it has been in the past?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I think over time, you will probably see that second quarter will be more important and Q4 will be slightly less important so you will have a -- kind of a balance between the 2 that is -- or more balance than in the past. But I still think you're not going to see a phenomenal lease sale in the U.S. GOM in August, that's kind of the indication that we have. I think you will still -- it will still take another 6 or 12 months with a continued high oil price in terms of seeing really activity pickup in terms of the numbers of players and the smaller players really being active again.

[Unknown Analyst]

My name is [ Salil ]. You have shown us the net revenue breakdown by segment. You say also that the Americas is some 70% of your business in the second quarter and it's Gulf of Mexico-tilted or related. How big do you expect the lower 48 to become -- or what kind of potential do you see in the lower 48 and particularly on the Oklahoma, which I guess is a more profitable business area than in another areas in the United States?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Well, I think in general, what you see from the geographical split there is that North America includes onshore. So it includes lower 48. I would have to say, although we don't split it up that way, that U.S. Gulf of Mexico was very good in Q2. Lower 48 is -- in terms of the overall business of TGS, our ambition is that onshore seismic in general should be 10% to 25% of our business and that's probably it is, but it varies from quarter-to-quarter.

[Fredrik Stene, Research Analyst]

Fredrik from Pareto. Just touching on your multi-client library. You say that you have this record low unit cost and that's -- at least your current backlog is priced and the cost of that is much lower than before. But, just to get a feel of that potential here and not just the dollar amount, let's say that you index your unit costs year-end 2013 at 100, what would the unit cost today be?

[Sven Børre Larsen, Chief Financial Officer]

It will be probably less than half.

[Christopher Møllerløkken, Research Analyst]

If there's no further questions, I'll do a follow-up. Christopher from Carnegie. In terms of the vessels you have booked, do you see any signs of cost inflation? Or are you still able to book them at unchanged prices and terms?

[Kristian Kuvaas Johansen, Chief Executive Officer]

We don't want to be too transparent about what we're paying for vessels. But I think it's fair to say that the vessel market is still challenging. I mean, we're going into a fall and winter season, which is always quite tough because there's lower activity in, especially the Eastern Hemisphere and Canada, as you know. I think the key to vessel prices and vessel supply going forward is what's going to happen to the WesternGeco vessels. And we expect the vessels to be back in the market sometime in 2019 and again, that's probably going to make it quite easy to get still access to capacity also in '19 although we expect the market to be better.

[Christopher Møllerløkken, Research Analyst]

And you also briefly mentioned a new technology both in U.S. Gulf of Mexico and Brazil. And historically, you have done some ocean bottom seismic but it has been limited in terms of costs being significantly higher than towed streamer. But do you see a development now where the costs of OBN could come down to a level where it's competitive enough for you also to [ digitize ] a multi-client investment?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I mean, the cost of OBN is coming significantly down over the past 3 years but at the same time, cost of seismic or streamer acquisition has also come down so the gap hasn't really narrowed all that much. But I think with a higher oil price, we're getting more optimistic that the time is -- timing is pretty good to start planning for multi-client projects in areas where you need newer technologies. So I wouldn't be surprised. I mean, we're planning this from -- in several areas of the world, to test the demand for OBN as a multi-client project. And I wouldn't be surprised if we could come up with something in 2019 or certainly, 2020. Again, prices are coming down but prices are also quite low for streamer seismic. So the gap is still quite significant. We're looking into that, of course.

[Sven Børre Larsen, Chief Financial Officer]

So we have some questions on the web. So this is John Olaisen. As you mentioned, your net cash position is close to all-time high. What are your plans to do with that? Are there any M&A opportunities for you in the market, e.g. libraries or companies?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I mean, it's fair to say that our liquidity's record high where we're above $400 million, of which $338 million is pure cash. So our plan is obviously not to sit on that cash for the -- forever, but we're looking at M&A opportunities. We're obviously looking into what to do about the dividends. And we're also looking into whether we could be more aggressive in shooting new seismic. Because again, we are quite optimistic about the future of the market. And again, it's quite challenging to get prefunding for new projects. So that much is actually quite good when you have a strong balance sheet. So we're looking into all 3. I think in terms of M&A, we have been quite active during the downcycle. We picked up Polarcus data library, we picked up a Dolphin before they turned into Shearwater, we picked up multi-client Geophysical and we purchased a large survey from Polarcus. So we are constantly looking at these opportunities. We haven't really seen those big opportunities play out yet. It's been challenging in terms of our loyalty to our existing business model, of course, but we're constantly looking at that. And you could assume that if we don't come up with good M&A opportunities, then we have to look more carefully at the dividend or we have to look more carefully at being more aggressive on organic growth. So I think we're looking at all 3 in that sense. And certainly, our plan is not to go forward with $400 million of cash.

[Sven Børre Larsen, Chief Financial Officer]

John as always has a second question. You're right. Funds may be available for exploration spending by our customers at the end of the year. Does that mean that you are expecting a higher than normal year in effect on sales this year?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I wouldn't say higher than normal but we always expect Q4 to be good. We always expect Q4 to be the best quarter of the year. As you saw from the project schedule, we have quite a lot of onshore activity also in Q4. It's always hard to say. I mean, the visibility for a Q4 end of year spending is always very, very low and sometimes we get very surprised. Most of the time, historically, it's been a positively a surprise. But I don't want to start speculating about how good Q4 could be but I think in general, I mean, the timing is good in terms of new budgets being approved sometime in October or November. Cash flow has been very strong for the E&Ps in the first 3 quarters or in the first 2 quarters of the year. But again, budgets for 2018 are not that significantly up. So we'll see.

[Sven Børre Larsen, Chief Financial Officer]

And that's it.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Any further questions from the room? If not, I want to thank you for the attention, and welcome you back when we do our Q3 presentation. Thank you very much. Bye.