TGS ASA

OSE:TGS

Earnings Call Transcript 2022-Q2

[Kristian Johansen, Chief Executive Officer]

Good morning, everyone and welcome to TGS Q2 2022 Earnings Release. My name is Kristian Johansen. I am the CEO of TGS. And with me today, I have our CFO, Sven Børre Larsen, and our EVP of Digital Energy Solutions, Jan Schoolmeesters.

Let’s have you read the forward-looking statements after the presentation is over. So I just jump straight to the highlights of Q2. So again, we announced our numbers as we always do on the sixth business day of the quarter. So obviously, the revenues won’t come as a big surprise to you, but I have to say we are extremely pleased about the quarter. It’s a third quarter in a row now where we not only beat your expectations, but we actually beat our own expectations as well, which is always great.

We had strong late sales of $97 million in Q2 of 2022, and that compares to about $30 million in the same quarter of last year. The total revenues, if you include the pre-funding revenues were $230 million, and that compares to $72 million in Q2 of 2021, so a significant year-on-year improvement on revenues this quarter. We had POC revenues of about $136 million, and that compares to $54 million in Q2 of 2021. Not only did we have strong revenues this quarter, but we also had a strong order inflow. So we had new orders signed of $156 million, and that compares to $49 million in Q2 of 2021.

The backlog remains at around $220 million. It’s slightly down despite the fact that we had a very strong order inflow. And the reason for that is that we completed a big project in Argentina in the quarter. The financial position remains really strong. We have a net cash balance of $255 million after Q2. That means that we can continue to pay a quarterly dividend of $0.14 per share, that’s U.S. dollars, which again is about $16 million paying out to shareholders after Q2.

We are really pleased about delivering on our strategy. And if you go back to our Capital Markets Day that we had in February 2021 and you look at the slides there and where we talk about our strategic priorities going forward, I can clearly look back on that and say we have delivered on that. It’s partly supported by M&A. And as you know, we actually did three M&A transactions. First one announced on the June 29. And during that week, starting the 28, we actually closed or we didn’t close, but we announced three M&A transactions that will be closed eventually during July and August and possibly September. So we are delivering on our strategy and we are extremely excited about the new acquisitions that will really be a game changer for TGS going forward. And the reason for doing that is that we believe the market recovery is continuing. We’ve seen that. As I said, the third quarter in a row now where we beat our own expectations and we beat the market expectation. And we think it’s going to continue to – we are going to continue to see a market recovery in our seismic business.

If we move on to the next slides and the next section of the presentation, I’m going to talk a little bit about the operational highlights for Q2 and the first slide talks about the multi-client operations that we had going on in Q2. Some of these have been discussed previously. So for example, the Engagement 2, I’m not going to talk too much about that because we completed the transaction in March or early April of 2022. So I’m not going to touch too much on that other than saying that this is another successful OBN transaction in the Gulf of Mexico.

And in fact, we look back on the performance of our three OBN surveys now or our two first OBN surveys in the U.S. Gulf of Mexico, and they are just as good as the WAZ surveys that we kicked off in the 2008 to 2010 period. So we are very optimistic now that we can continue to do OBN surveys in the U.S. GoM, covering the same area that we did a lot of WAZ from 2008 to 2012 and with the same type of profitability, which is, again, just shows that seismic is developing in terms of technology, and you can overshoot areas over and over and over again, which is just a great business model and a great business to be part of. Second one, if we move right, Cameron Canyon, that’s a new project that we announced in Canada. So this is a 10,000 square kilometers of 3D data. It’s actually an extension of the South Bank survey that we did back in 2020. Fast track for – fast-track data is going to be available in 2022 or for the 2022 licensing round, and that licensing round is going to be later this fall. Final data is supposed to be available in 2023 for that datasets.

Moving further to the right, NOAKA 2022 OBN, also a new project. This is an extension of a 2021 project that we did. And the final data here will be available in 2023. So two of these projects I’ve talked about right now is OBN projects, and again, goes back to our internal review of these projects where we see good profitability. And we see a very strong market going forward, where we cover a lot of these areas that are about to be mature and now we cover that with new technology, new embedded technology. And obviously, that’s part of the reason why we announced the acquisition of Magseis, of course. Magseis is, by the way, the supplier in both these two projects.

Sarawak 3D, I have already talked about that in our Q1 presentation. Its Phase 1 is about 8,500 square kilometers of 3D data acquisition completed in Q2. So it’s already done. Final data is scheduled for 2023. And there is a possibility there for next or further phases of that project. So we are working now with our clients to identify new areas where we can continue acquisition. Suriname is an interesting area. Suriname is one of the areas that we saw big discoveries in February this year, and Phase 1 is about 11,100 square kilometers of new 3D data. In addition to that, we also do reprocessing of about 3,000 square kilometers of existing data in Suriname. So again, this is another project where we see potential for additional phases, subject to client interest, which we believe is good in line with the exploration success that we see.

And then last but not least, Red Sea 3D, Phase 1 here is about 6,800 square kilometers. It’s a long offset 3D data with acquisition completed in early April. Phase 2 is another 5,000 square and an acquisition there is about to complete as we speak. Final data will be sometime around year-end 2022 or early 2023 for Phase 2. And in addition to that, you also see that we have a number of ongoing processing or reprocessing projects where we take existing data and reprocess that to improve the quality. And then as I said, being able to sell it or license that once again to our clients. So a busy quarter in terms of multi-client operations, busy quarter for our processing centers as well, and we think it’s going to stay busy and partly because our view now is that the market continues to improve and we see greater client interest pretty much all over the world. Also very excited about a new wind measurement campaign that we announced in Q2. This is revolutioning the way with the wind industry accesses offshore measurement data.

And you can see the picture of the LiDAR boy on the right hand side. And basically, we’re applying the existing multi-client business model and data lake capabilities to win this LiDAR data. So the first project that we announced is a new wind measurement project offshore, the U.S. East Coast. This is a New York Bight area. And for those of you who follow the wind industry, you saw it was a really successful licensing round announced in New York Bight just a few months ago. So this enables the most accurate forecasting of the wind energy production potential. And like with our multi-client projects for oil and gas or seismic, it’s supported by industry funding, and it’s exactly the same business model. We go out and we seek industry funding. We don’t own the equipment, but we charter their equipment for the job and then we hope to license this to multiple parties. So an extremely interesting and innovative idea from TGS where we take a very successful business model that has been proven now about for 40 years, and we apply that to another similar industry that sees great growth potential for the future. So very proud of what the team has done in this regard, just the creativity and the ability to use an existing success story in new markets is just what we want to see in terms of making that transition for TGS.

I’ll give you an update on our strategy and especially in light of the acquisitions we made and try to put them into a context in terms of how we think about the market going forward and how we see TGS develop for the next – not only the next years, but the next decades. So first of all, the road map for continued long-term value creation for TGS is basically can be summarized by 4 bullet points. It’s industry-leading cost structure, its scale, diversification, combined with a strong balance sheet.

And if you start on the left hand side, industry-leading cost structure is just extremely important. We have a very strong focus on cost in TGS. We want to have the lowest unit cost of any player in our industry. We try to improve efficiency through smart adoption of technology and continuous process improvements, whether that’s in processing operations or in multi-client operations. Number two is scale and scale is important in terms of explaining the acquisitions and talking and justifying the acquisitions we made. We not only see high margins on incremental sales, but we can provide customers with better quality at a lower cost.

So for example, the ION multi-client data library, which is close to 30% of TGS in terms of 3D, but we can continue to license that library just with adding a few number of people to do that. So, scale is obviously very important also in terms of keeping that industry-leading cost structure. And then diversification is important. So what we really want to do is to utilize our core competencies to build an offering across the energy value chain. And we talked about this in the Capital Markets Day back in February 2021 and I am extremely proud of what we’ve done since then in terms of building a business by organically and by M&A. And this is a business that is obviously going to – in the future our goal is basically to reflect the overall energy mix.

And if you look at the energy mix in 20 or 30 years from now, you will see that oil and gas will still be probably the majority of it, but you’re going to see the highest growth in areas such as solar, wind, geothermal, carbon capture and storage and you name it. And we want to be part of that, and we want to reflect the overall energy mix, whether it’s in 10 years, 20 years or 30 years. So that’s really a reason for the diversification. Not only that, but we also see that a lot of these businesses that are probably more insight-driven than data-driven. They also provide a different business model. So rather than being a project-based business like we do today, it’s a subscription-based non-cyclical revenue stream that goes well along with our slightly more cyclical revenue stream in seismic.

And then last but not least, and this is very important to us, a strong balance sheet, backs all these other strategic priorities. A low financial gearing to counter the high operational gearing we see. And that, again, allows for countercyclical investments, and it also allows TGS to do acquisitions and inorganic growth in times like we’re in right now. So that’s kind of the roadmap that we’re following in terms of how do we think about the next year, but not only the next year but the next 5 or the next 10, etcetera?

And the next one is basically showing a similar slide to what we showed in 2021 at the Capital Markets Day, but now we’ve added the acquisitions on the right hand side, and you can see how the acquisitions are really fitting in to the strategic priorities that we announced to the market. We start with the first one, new technologies in mature basins. We saw back in 2019 and ‘20 that some of the core areas of TGS were about to move from frontier to mature. So take North Sea, as an example, take U.S. Gulf of Mexico, even Brazil was making that kind of transition from frontier to mature.

And when you go from frontier to mature, you also need to apply new technologies in terms of being able to overshoot your existing data. And I think this is a great example where we – as I showed on the previous slide, we’ve been using OBN now for three different surveys, both in Norway and U.S. Gulf of Mexico over the past 2 years, and we’re going to continue to see a quite significant growth in that regard. So Magseis Fairfield fits perfectly in terms of applying these new technologies in mature basins. Magseis is very strong in areas such as Norway, Gulf of Mexico and Brazil, and those are really the key areas for TGS as well.

Then we want to strengthen our position in South Atlantic. So South Atlantic is probably the area where you’re going to see the highest seismic activity going forward, whether it’s going to be frontier or mature basins, but it’s a growth area. Both the acquisition of ION and Magseis Fairfield back that strategy as did Spectrum back in 2019. So there is a plan behind that, and it’s really increasing our footprint and our scalability in the South Atlantic, both these transactions, both Magseis and ION fit perfectly into that strategy. We don’t address the point on further growth onshore. So we will have to seek that growth from organic activities.

But if you move down and look at the technology strategies, one is to expand the value chain through data and analytics and Prediktor fits perfectly in there. So Prediktor has 40 experts within data analytics who is going to help us and basically fill the gap that we have in Europe, where we have about 40 people in Houston working data analytics. Now we’re also going to have 40 people working out of Europe. So it’s a perfect fit to our existing Houston-based team. Imaging quality and reputation, as you seek new technologies in mature basins, there’s also going to be a higher requirement for better processing. TGS has been a Tier 1, Tier 2 processing company for many years. We think that with the acquisition of ION, we can get it even stronger, and we can be a clear number one or two in our industry in processing as well, which has been our goal for quite some time. Magseis Fairfield, so ION is going to help us to get there because we can take the best of two companies, build the best software package, get synergies from hardware and more scale.

Magseis Fairfield is also going to help us there because Magseis Fairfield is going to increase the traffic and the workload for our processing centers. In that regard, this – both of these transaction actually support our strategy in a great way. And then last but not least, diversification. I touched on that on the previous slide, but having data offerings towards other energy-related industries and other industries that may have higher growth potential than oil and gas for the next two or three decades is obviously an important part of our strategy and that’s where Prediktor fits perfectly in.

A couple of minutes on these transactions that we did. So Magseis, I think most of you are quite familiar to Magseis, but it is the world’s leading OBN acquisition company. They get a strong position in TGS core markets such as Norway, Brazil and Gulf of Mexico. And we made an offer to acquire all the outstanding shares on the June 29 this year. The strategic rationale is quite obvious. Number one is strengthened our multi-client business towards ILX and converted contracts, and these are probably the – this is the part of the market that has shown the highest stability during the down cycle, and it’s a good way for TGS to secure an even stronger position in that market. It also positioned TGS for production seismic and 4D. Again, these are examples of relatively stable noncyclical markets that TGS would love to get into at the right moment, and we think this is the right moment to do that. Number three, it further enhances TGS position in OBN processing. So I touched on that already. And number four don’t forget the fact that it also improves the exposure towards energy transition-related industries. And that will be the offshore wind, that would be CCS or carbon capture and storage and also deep-sea minerals. So this transaction fits into TGS in so many different ways, and it really changes the way TGS can pursue our clients in the future.

The global OBN market, as I’ve mentioned previously, is looking really promising. It’s probably going to pass about $1 billion of total revenues this year. It’s going to continue to grow next year. And more interestingly, if you look at the market share of OBN versus streamer seismic or market share of the total, you see it continues to go up. And it’s almost – we expect it to be close to one-third of the overall seismic market already in 2023. So we think this is the right timing to do this and feel very positive about this transaction.

Another transaction was ION. It’s expanding our multi-client footprint and data processing offering. And description of ION is that it’s considered the number five multi-client company globally, very similar business model to TGS. It’s asset-light, strong position in Africa and Latin America, as you can see on the map. And we basically acquire all ION’s offshore multi-client data, both 3D and 2D and also the processing business, and we did this as part of a Chapter 11 process that ION went through in the U.S. It’s a relatively big database.

So if you look at the multi-clients library, it actually increases by 29% as a result of this transaction and the 2D library increases by 14%. So it’s quite a significant change and an increase in our total footprint. But not only that, we’re also buying a processing company, a processing company that has a great reputation in the market and a processing company that comes with IP, it comes with technology, it comes with people and you name it. So in many ways, we feel really good about this transaction as well. And I think it’s really going to help us to improve our imaging reputation, which, as I said, was one of the key priorities back in 2021 when we announced our new strategy.

And then Prediktor. And Prediktor, Jan is going to talk more about that, but it’s going to be an important building block in our renewable strategy. And the company is a leading provider of asset management and real-time data management solutions. They do that both to renewable and energy asset owners. Company is based in Fredrikstad in Norway, has about 40 people and has a strong presence already in the solar industry, but they also deliver solutions to other types of industrial assets, whether that’s wind energy or even oil and gas for that sake.

If you look at the growth potential for solar power, we expect – our EIA expect a compounded annual growth rate of about 11.7% over the next 10 years or so, and that compares to about 8.9% for offshore wind, for example. So this is the fastest growing area in renewables. And for TGS to get a footprint into that, it’s obviously a game changer for our strategy as well. So we can help predict or accelerate the go-to-market strategy. We have offices all over the world. We have long experience of 40 years of experience to break into and get into new countries. And obviously, we can help predict our – with a go-to-market strategy to put their growth strategy on or accelerate that growth strategy.

So with that, I’m going to hand it over to Jan Schoolmeesters, who is going to talk more about the Digital Energy Solutions progress and the strategy going forward. Then he is going to hand it over to Sven Børre again, who is going to talk about our financials, and then I will come back and talk about the outlook and summarize the presentation. So thank you very much, and welcome to Jan.

[Jan Schoolmeesters]

Thank you, Kristian and it’s great to be able to explain a little bit more around the Digital Energy Solutions strategy and progress. So Digital Energy Solutions, that’s the group in TGS where we have put together all our digitalization efforts. And part of that is also New Energy Solutions. And why we put New Energy Solutions in this group is because we feel it’s essential to resolve the complex energy picture to make the right decisions based on the right data. If you look at the complexity of the energy sources as more and more sources more and more intermittency. So we feel that the digital solutions are going to help to master that type of intelligence.

So this is giving rise to the DES vision, the Digital Energy Solutions vision, where we really want to create a one-stop shop for data and insights for the energy industry. With that, more and more complex picture of the energy landscape is more and more mixing of energy sources. So you really need to have a multitude of different data sources to make your decisions, to make your optimization of power plants, when to produce more, when to produce less. So we have grouped this in energy producers and supply chain, energy distributors and energy consumers. Those are more like industrial consumers because they all play a part here. And they will influence the investment decisions that you’re going to make for new areas to invest in wind parks, solar parks, you name it.

So we have – we’re building up this database. And if you look at TGS, what we’ve done over the past 40 years, we’ve always worked with big data. We’ve always worked with digitalization. And we accelerated that in the last decade with a lot of data and analytics efforts and development of software as well. And all these elements are really key now. We have a strong base of our data lake that contains all the subsurface data that you can imagine, seismic, well data products and also closer to the surface. We have APIs that we provide to clients to get access to the switching data lake, but we also continue to develop more and more software. So to extract the right insights from that data.

And you can also see that a predictor that is doing this for live streaming data fits in perfectly here. They capture millions of data points. They put it together. They make sense of it. They provide it to clients, client software and they also have their own software. So it fits perfectly in this data vision. We don’t want to do this just on a – yes, part of the value chain. We want to do this for the full project life cycle. So when you screen an area, when you select an area, when you work up an area, we want to be able to provide the right type of data and software. And ultimately, when you operate the assets as well, which is something that predictors has the expertise for.

So in order to go about this building up from the subsurface onward to other data sources, we needed to ramp up our destine and we did some recruiting of subject matter experts in wind, in solar, coming from DNV GL, coming from Scatec, coming from industry in general and project financing. And with a handful of those subject matter experts, we started to developing organic products. And I’m giving you an example of the TGS wind ecosystem. So that’s not normally an area that TGS would be straight away, yes, finding the right types of solutions, but through the subject matter experts. And through some innovative thinking, we were able to come up with a real, yes, real slick type of software that has low latencies and that gets good reception in the industry.

It’s got several components, and the colored text means that we have that either in-house or it’s ongoing and the darker blue ones are where we are collaborating with others. Worth mentioning here 4C, the company that we acquired last year, it was key for us to get access to clients, to understand the clients. Their expertise helped us to develop the right type of product as well. And then we built what we call the Wind AXIOM. So that’s a GIS type platform where you can interrogate a lot of the areas around the world, find the most suitable areas in terms of energy output, in terms of wind profiles, in terms of the bathymetry. There is all sorts of different data streams that go into this to make the right decisions.

And then we now high grade that with the LiDAR measurements that Kristian mentioned before. So that’s an innovative new business model for the industry that we’re bringing to market. And that’s going to be proprietary data that we’re mixing in with a lot of the public data here to make sure that the picture becomes more and more precise. Worth mentioning is that we also have the ambition to put the multi-beam data in there, new measurements. We already have existing measurements in there, but also a ultra-high resolution shallow seismic is really interesting. And that’s where, for instance, Magseis has a proprietary type solution, which we are really interested in as well.

And then the energy forecasting to complete the picture there. So you can see that we have a whole range of products here that are relevant for investment decisions. We are ramping up on the subscription side of things. We – and of course, the first multi-client LiDAR is a new type of thinking, a new business model that shortens time lines that reduces cost, and that makes it more practical for wind developers to get to the development of their wind parks quicker.

And that type of thinking leads into our second focus, and that’s really the disruptive solutions that we’re aiming to yet to explore. We believe that with the limited margins that there are for wind developers, for solar plants, etcetera, that we need to have the smartest approach. And we put some venture capital into a startup. It’s led by the former Chief Digital Officer of Siemens Gamesa. They have a passionate team of a handful of people that are now building up the company.

And the whole concept is based on the fact that if you have a lot of the development is around even higher wind turbines that capture more wind in high wind periods, but they are all producing at the same time. So you get a lot of electricity in flux. And with the post-subsidy market, when the pricing is not fixed, but it’s market driven, you see that electricity prices can reach zero because there is just too much electricity being produced in times when it’s not really that needed.

So what they have done is they work with an AI model, taking all these different inputs and variables that you cannot do by just a human brain. And they combine this to find the optimal wind park designs, but also the operation of wind parks. How can you optimize it such that you can capture wind in the low wind periods, that you can optimize energy output for those periods? And that’s gaining good interest. They still have a long way to go, but we have 10% of the equity. We are working together with them, and they are very focused on the onshore market, which is interesting for us as we’ve been focusing on the offshore market to date. So it gives us an entry into a new market with a collaborative effort of product development here as well. So that’s the second track that we’ve taken to further grow our vision and the platform type solutions that we see.

And the third one is through M&As. We need certain areas – we need to strengthen our subject matter expertise, get access to clients and have a track record that gives confidence to clients that we can deliver the full value chain of solutions here. And if you can be in operations and management – operations and maintenance phase of these wind parks, of the solar parks, that’s really one of the highest aims that we have because you’re in the project for 20, 30 years, making sure that you provide the right type of software and run it and optimize the assets. So it’s a real attractive part of the segment to be in.

And with Prediktor, that gives us a ticket to be in there. They are already providing a lot of the solutions, and they do this also to sizable ventures. And they have the biggest customers in the industry as their clients. They have Johan Sverdrup. They provide the data streams there to Equinor and others. They have the Doggerbank wind park that’s being built, the Benban Solar Park. And these are extremely well, large projects. Well, they are entrusted with the mission-critical data from these companies.

So it’s really a strong feed from a relatively small company in Fredrikstad to have been getting the confidence of the clients. But when we called around and talked to clients, they were all singing the praises of Prediktor, but they also were extremely happy that a company like TGS would take over because they recognize that it is much more robust in terms of the future, in terms of driving innovation, in terms of global reach and new geographical regions that we can support more operations. So we get a very strong support from the Prediktor clients, which was really important to us too. And we see that they had a year ago, a one utility type client, now they have nine in the portfolio. So, it’s really strong growth that we already see, but we believe that we can also open up new areas, new regions. And we can definitely help them improve the scalability because we really have built up a lot of expertise in cloud-based solutions that are well accepted by industry.

So that’s a quick run through. Digital Energy Solutions, where we are at this stage. So the next focus is going to be a lot on making sure that we get more value out of the companies that we acquire, like Prediktor, like 4C that we combine the efforts here and make sure that one and one is more than 2 here. But also, we continue to build up on the full value chain offerings that we see and explore disruptive ideas.

So with that summary of Digital Energy Solutions, I hand it over to our CFO, Sven Børre Larsen, who will go through the numbers. Thank you.

[Sven Børre Larsen, Chief Financial Officer]

Thank you for that, Jan. We certainly have exciting things going on in the DES segment. We – and as we speak, we actually have roughly $16 million of annual – or a run rate of annual subscription revenues in the DES segment, and we expect that to grow quickly going forward.

As Jan said, I will go through the financials today. I’ll start by talking about the operating revenues. First, early sales. You can see the chart on the top left-hand side, we had early sales of $127 million in the quarter. Early sales is all the sales that we have committed for the service that we completed in the quarter. So it’s not a PoC recognition as we used to have with respect to the prefunding revenues that we reported before. So this is a point-in-time revenue recognition of all the revenues that we – that has been committed to date on projects that have been completed during the quarter.

So this quarter, the $127 million is, as you can see, in a historical perspective, quite high. And the main reason for that is that we completed the Malvinas 3D project in Argentina. That was a project with very high prefunding. But we also had – saw some contributions from the Voyager 3D survey onshore U.S. in the Powder River Basin in Wyoming and also from the AM20 or Atlantic Margin 20 survey in the Norwegian Sea in Norway and obviously also a few other smaller surveys.

Going over to late sales. We had a really strong late sales development in the quarter with $97 million, and that’s obviously a huge year-on-year improvement. The strong late sales is obviously driven by the recovery we have seen in frontier markets, but we also had some help from transfer fees during this quarter. And we are also optimistic that we’re going to continue to see quite decent momentum in late sales in the second half of the year. Proprietary revenues came in at $6 million. So a couple of millions more than we saw in the previous quarter and also in the same quarter of last year. This gave us total revenues of $230 million, which is, of course, a massive improvement of what we have seen in the – both in the previous quarters and also compared to Q2 of last year.

Then I will talk a little bit about the operating result and cash flow. Starting with the operating expenses on the top left-hand side, we have $31 million of operating expenses in the quarter. As you can see, it is fairly high compared to what we have shown over the past few quarters. And this is entirely down to the profit-based bonuses that we pay to the employees. So this quarter, the bonuses contributed $8 million or almost $9 million. So adjusting for that, the cost development is pretty much in line with what you should expect.

On the amortization side, we had fairly high amortization in the quarter, $161 million. This consisted of $120 million of accelerated amortization, which was largely driven by the completion of the Malvinas project. As I said, the Malvinas project was – had really high pre-funding rate, actually more than 100% pre-funding rate. And when we recognize revenues from such projects, there will also be a quite high associated accelerated amortization. In addition to that, sometimes when we have high late sales, we will have to accelerate amortization on some of the vintage surveys where we recognize these high late sales. And therefore, in quarters and years with highlights, we will sometimes see that not only early sales, is contributing to high accelerated amortization, but also late sales. So in this quarter, we actually had a bit of a few million dollars of accelerated amortization related to late sales.

Straight-line amortization increased slightly in the quarter to $39 million from $36 million in Q1. We expect – due to the completion of projects in Q2, we expect a further slight increase in the – sorry, in the straight-line amortization in Q3 and into Q4. So it will be probably slightly above $40 million, the way it looks right now. Also in the quarter, we recognized some smaller impairments on various service totaling approximately $1.4 million. And all in all, as I said, this led to total amortization of $161 million in the quarter. We had an operating result of $31 million corresponding to a profit margin or an operating margin of 14%. We showed strong cash flow in the quarter. Strong cash collections combined obviously with a strong late sales. So $59 million of free cash flow in the quarter, which as you can see, compares very well in a historical perspective as well.

Then I’m going to talk a little bit about the multi-client library. First, operational investments was – were $43 million in the quarter. So this is the multi-client investments into the multi-client library. We are starting to see a very good pipeline building for multi-client investments for 2023. And customers are already quite interested in discussing ideas for 2023. So that’s a very promising outlook or a promising signal for what may happen going forward. For this year, we stick to our guidance of approximately $200 million for now.

Then looking at the net book value of the multi-client library, you see that it continues to slide in this quarter as well with a high amortization as we touched upon. So this means that we are in a very good position for showing strong margins and also strong return on capital in a market that is expected to continue to recover going forward. On the bottom left-hand chart on this slide, you can see our historical investments or historical cost of the different vintages. And you can also see where the net book value of these vintages sits now represented by the white diamonds. So the white diamonds show the percentage of – or the percentage of net book value or the net book value as a percentage of the historical cost.

As you can see, which is quite illustrative is the 2022 vintage, where the net book value is already as low as 33% of the historical cost. So it just shows that we have a very aggressive amortization of our library. Then on the bottom left hand – sorry, bottom right-hand side, you can see how the revenues in the quarter were distributed from – on the different vintages. And the most interesting thing on this chart is that we continue to see strong sales on older vintages. So the pre-2018 vintages contributed with 23% of the sales. And these are vintages with pretty much zero book value at this stage. I mean we see – we clearly see this as a quality stamp of a well-executed multi-client strategy.

Then looking at the income statement, as I already touched upon, we have $230.1 million of revenues. Subtracting the various cost categories, $1.5 million of cost of goods sold, $21.1 million of personnel costs and other operational costs of $10.3 million, we ended up with an EBITDA of close to $200 million, $197.3 million, which is obviously a massive improvement compared to the $50.5 million that we showed in Q2 of last year. Subtracting the different categories of amortization and the $1.4 million of impairments and also the depreciation, we had an operating result of $31.4 million compared to a loss of $15.1 million in the same quarter of last year. The result before taxes after subtracting financial items ended up at $33.5 million compared to a loss of $22.5 million in the same quarter of last year. The tax cost was fairly normal in the quarter, 24% tax rate, which gave us a net income of $25.4 million, corresponding to an EPS of $0.22. This compares to 15 – a loss of almost $16 million, sorry, in last year and which was minus $0.14 per share.

The balance sheet, not very much to comment here, others than noting that it continues to be very, very strong. We had a cash balance of $255 million at the end of the quarter. And on top of that, we have undrawn credit facilities of $100 million. So, we have plenty of liquidity reserve to comfortably cover the M&A transactions that will happen – that will be executed in Q3. So, obviously, you would expect to see the cash balance going a bit down going forward due to these M&A transactions, but we will still be in a very solid financial position. As I already touched upon, the cash flow was very strong in the quarter, $86.6 million of cash coming from our operations. The investment activities or investments of $31.1 million and dividend payments and other financial cash flow items of $19.6 million meant that we had an increase in our cash balance of $35.9 million in the quarter and that we ended up with a cash balance of $255 million at the end of the quarter. And based on the strong cash flow and the strong balance sheet and despite these M&A transactions, the Board continues to resolve dividends to the – dividend payments to the shareholders. So, we continue to pay $0.14 per share. Also for Q3, the ex-date will be on the 28th of July and the payment date of the 11th of August.

And by that, I will hand the word back to Kristian, who will go through the market outlook.

[Kristian Johansen, Chief Executive Officer]

Thank you, Sven, and thank you, Jan. So, I am going to wrap it up with a brief market outlook and then open up for questions from the audience. So, let’s start with the five pillars that position TGS for the next energy up cycle. Number one is energy demand continues to rise and energy security is becoming critical. I think the Russia-Ukraine situation has really gotten energy security back on the agenda for both nations, governments, but also for companies all over the world. And energy demand continues to go up. So, despite the fear of a recession, I think all you need to do is to go to any European airport these days, and you see that demand for energy is certainly quite strong.

Second one is significant under-investments in oil and gas. In fact, the exploration spending is down 76% from 2014 to 2022. So, that forces and now I think our clients are forced to higher spending. And that goes with all energy sources, obviously, not only oil and gas, but including oil and gas, but also for other energy sources that we discussed today. So, great growth expectations for wind energy, which is close to 9% CAGR for the next 10 years. We talked about almost 12% growth potential for solar energy. And you see that pretty much along the entire value chain of energy.

The third one is recent exploration success. That drives frontier investments and licensing activity. So, if you look at the month of February, just in isolation that month, we had three major discoveries in relatively frontier basins, such as Suriname and Namibia. Since then, we have – our clients have announced new discoveries in Guyana and in Australia and pretty much all over the world. And what we know is that exploration success obviously drives frontier investments and licensing activity. And we have already started to see that. And you can – if you look at TGS and our market insight is that typically you start to see that in terms of your late sales. You start to see greater interest for your own data library. And then after that, you will see that companies are also getting committed to invest more in future projects. So, we think that in that regard, 2023 will also be really good in terms of new investments and potential for new contracts.

The fourth one is quite important too. Price volatility triggers demand for data and insight across the energy industries and sources. What we know that if you provide data and insights, the more volatility, the better it is, because volatility is good for a provider because they need more data and they need more insights in terms of making an investment decision, whether that’s wind, solar or oil and gas. So, in that regard, we think price volatility is going to continue, and we think price volatility is good for a data company like TGS.

And then last but not least, client cash flow support higher spending. If you look at the cash flow of our clients now and you compare that to the budget that they set back in October, it’s probably twice or 3x as good. And some of these companies are still very disciplined in terms of paying back to shareholders, reducing their debt levels. But when you get to the point of late 2022 or early 2023, they are pretty much done. They pay their shareholders. Their shareholders are really happy in terms of the dividend yield that they are getting. And the banks are also happy in terms of the debt levels are back to a level that they can easily justify for the future. So, we think that, again, is going to be a significant trigger to increase activity going forward.

Our contract backlog and inflow, like I touched on, and Sven also mentioned that, but you see that the backlog is coming down slightly, and this is due to a big project in Argentina that we completed in Q2. But the good thing here is to look at the contract inflow, because the contract inflow is almost as good as it was in Q4 of 2021. And if you look at that in a historical scenario, you see that it’s the second best in a long period of times. In that regard, it just fuels the optimism for management in terms of we see a better market, and we see that the market continues to improve even from the level that we saw back in Q4 of 2021. The timing of the expected recognition of contract backlog, you can see on the right-hand side and that kind of helps you a little bit when you make your estimates and for the next quarters. And you see that we have about 25% of our backlog is now related purely to Q3 of 2022.

So, to summarize the presentation, we are very pleased about the strong late sales, which is about 3x as much as it was back in the same quarter of 2021. It was driven by higher frontier activity and transfer fee. Even if you adjust for transfer fees, the quarter was great in terms of late sales. Number two, the total revenues are really good because we had high revenues from prefunding projects that we completed in the quarter as well. We had a strong order inflow. As I said, it’s the second highest we have had in the time series I have just referred to. The backlog remains strong. We are in a solid financial position with a net cash balance of $255 million, and we just closed three M&A transactions in the last week of June and the first week of July. So, I had to say what we have been through over the past month is just truly extraordinary. And I feel extremely good standing here as the CEO of the company and reporting really good sales, a really good backlog, a great prospects for the future and then three transactions that really going to change TGS both in terms of scale and in terms of diversification that are two of the really strategic pillars that we focus on now for the future.

So with that, I want to thank you very much for the attention today. I want to open up for questions. I want to ask Sven to come up with me and facilitate the Q&A. And hand it over to you, please.

[Sven Børre Larsen, Chief Financial Officer]

Yes. Thank you, Kristian, and you can all post questions during – or on the web player. So, we got some questions here already from, first, a few questions from Christopher Mollerlokken. Could you indicate how much you have invested in NASH Renewables? And could you give a bit more flavor regarding how you decide whether you make venture investments in a new start-up becoming a minority shareholder or if you make an acquisition of a company?

[Kristian Johansen, Chief Executive Officer]

Yes. I think in terms of the investment that we made in NASH, I mean we are talking very low dollar values. So, you can probably see in the cash flow for Q3 that it hardly makes any difference. We are talking a couple of million dollars. I think the reason why we do it is that we want to be positioned for new technologies and we want to be positioned for potential disruptions in our industry. And we think it fits really well in with the rest of what we are doing in terms of wind energies. I think Jan gave a good presentation in terms of how it fits in. And to just repeat the answer to your question, we are talking very low values in terms of dollars here, but it could be good. It could be much bigger than what it is today, and that’s really what we are hoping for.

[Sven Børre Larsen, Chief Financial Officer]

Then another question from Christopher, with Q2 late sales being positively impacted by transfer fees, would you agree it would be fair to assume a fairly significant drop in Q3 late sales?

[Kristian Johansen, Chief Executive Officer]

Yes. I think it’s fair to say that the whole industry benefited greatly from transfer fees in Q2. And I think some companies probably more than others. We also had a quite significant impact from transfer fees, but we continue to see an uptick in activity in frontier as well. So, in that regard, yes, I would be extremely pleased if we could get the late sales to the level that we had in Q2. That may be a bit too ambitious. So, it may come down, but it still has a very positive trend. And if you look at the year-on-year growth, it’s fantastic in that regard. So, I think that’s all I can say about Q3 late sales because it’s still very early days.

[Sven Børre Larsen, Chief Financial Officer]

And then Christopher also has a question about the Beirut case that has been written about a little bit in the media. So, he is basically asking whether we have received any updates from the U.S. court regarding when a hearing may be scheduled.

[Kristian Johansen, Chief Executive Officer]

Yes. I think you all understand that we cannot really go into details about that, but we are aware of the lawsuit filed in the Texas court. We strongly deny these allegations. So, let me be very clear on that. The allegations actually, they attempt to draw a connection between the incident that happened in 2020 in Beirut and a survey conducted by a subcontractor of Spectrum back in 2013. So, it’s 7 years between the two and quite a few layers between the company who chartered this vessel and TGS today, of course. Media actually picked up on this already back in 2020. So, as a result of that, we did an investigation or a quite comprehensive investigation of Spectrum’s activity in Beirut at the time back in 2013. And all I can say is that it really confirmed both by internal and external lawyers that Spectrum acted diligently at the time. And in that regard, that’s really all we want to talk about in that regard today.

[Sven Børre Larsen, Chief Financial Officer]

Question from Erik Fosså. You chose not to increase your guidance for multi-client investments for now. But I guess you have some upside here. How much would your internal estimate need to change in order for you to change your official guidance?

[Kristian Johansen, Chief Executive Officer]

Yes. I think if you look at our late sales performance, you would probably be a bit disappointed that we are not able to invest more given that the market is clearly improving based on our late sales. But it goes back to my previous point that typically, we see a market uptick first in the late sales. And then it’s a bit of a time lag, and then you see that in terms of future commitments for new surveys as well. I think the next trigger point is probably going to be the next year’s budgets that are probably going to be announced sometime in October, November from our clients. And I am hopeful that you are going to see a significant increase in new acquisition activity as well as late sales. And so in that regard, we already start to see quite a significant backlog buildup now for 2023, and I think that trend is going to continue. So, there may not be a great upside for 2022, but we think 2023 when we get new budgets, but that really reflect the new market we are in, we think that’s going to reflect our investment activity as well.

[Sven Børre Larsen, Chief Financial Officer]

Let me add that I think it’s not carved in stone, but if we are approaching kind of a change of plus/minus 10% to the guidance, we would obviously need to consider going out and change the guidance officially, but that’s probably the – approximately the range we are looking at. Then we have a question from John Olaisen, ABG. Do you expect to see any transfer fees in the second half of the year? And could you indicate the most important upcoming licensing rounds that could drive TGS late sales over the coming quarters?

[Kristian Johansen, Chief Executive Officer]

Yes, there will be transfer fees also in the second half of the year, but they are not going to be as big as we have seen in the first half of the year. That’s – that much we can already say because if a transaction hasn’t been announced yet, we are probably not going to collect transfer fees within the next four months to five months. But in that regard, I also have to say that transfer fees is part of our business. I think Q2 was obviously really good for the entire industry as it was with TGS. But if you look back historically, I mean it’s usually been in the range of $20 million to $50 million every year as far as I have been with the company. And I think that’s what you could expect for the future as well. So, while transfer fee is a good kind of short-term thing, it’s slightly more negative in the long-term, because we see clients are disappearing. So, we want to have as many clients as possible. The good thing though is that we also see new start-ups coming out of that and we hope to continue to see that trend as well. So yes, there will be transfer fees in the second half of the year. They won’t be as big as in the first half of the year, but there will still be transfer fees. Second part of this question was related to…

[Sven Børre Larsen, Chief Financial Officer]

Yes. The upcoming licensing rounds. Yes.

[Kristian Johansen, Chief Executive Officer]

Upcoming licensing rounds. Yes, I think what we see now is a significant pickup in late sales, particularly in Africa, but also parts of South America. I think going to – if you want to talk about licensing rounds that have been announced for the second half of the year, I think Canada is one, obviously, where we have new data that is going to be presented before the licensing round. There is a couple of them in Africa as well, where you will see that it’s going to trigger licensing rounds. And I think first and foremost, you see a lot of African nations now coming to us and our competitors discussing plans for 2023 and thereafter because they obviously see that the current oil price and the lack of energy and the high prices of energy really triggers more activity in that regard.

[Sven Børre Larsen, Chief Financial Officer]

And then a couple of questions from Kevin Roger from Kepler Cheuvreux. It seems like you want to reinforce your position in the seismic business. Why don’t you move on? Why don’t you move on the imaging business?

[Kristian Johansen, Chief Executive Officer]

Yes. We really do. I think the acquisition of ION was probably more driven by improving our imaging position than the multi-client data library, although the data library is fantastic and has a good fit. But we really have high ambitions for our processing business as well. We think there is a little bit of a gap to close to number one in that industry, but we also hear from clients that they are really keen on helping someone trying to close that gap, and that’s really the ambition to make the acquisition of ION. So, we – our strategy is really being a top tier across the value chain. We want to be top tier, obviously, multi-client, which we have been for 40 years. We want to be a top tier in processing, and I think we can get there with the acquisition of ION. And we are already a Tier 1 company in OBN with the acquisition of Magseis. It’s a great position to be in. And I think when we look back on this, whether it’s in a year or in a decade, we are going to feel really good about what the strategic changes that we made in early July.

[Sven Børre Larsen, Chief Financial Officer]

And then he asks about the transfer fees, whether the data was fully amortized. And what we can say there is, it’s a mix. Some of the data that was involved in the transfer fee is obviously fully amortized and some of it wasn’t. It’s a mix. And it doesn’t seem to be more questions, so.

[Kristian Johansen, Chief Executive Officer]

Well, in that regard, I want to say thank you very much for your attention today. I want to wish you all a great summer regardless of where you are going to celebrate the summer. It’s pretty hot in most places in the world. So, I would recommend Norway, which is 16 degrees Celsius this morning. So, it’s very comfortable and nice. I really hope to see you when we announce our Q3 presentation later this fall, and I wish you a great day. Thank you very much.