TGS ASA

OSE:TGS

Earnings Call Transcript 2018-Q3

[Kristian Johansen, executive]

Welcome, everyone, to the Q3 2018 Earnings Release for TGS. My name is Kristian Johansen, I'm the CEO of TGS and with me, I have Sven Borre Larsen, our CFO, who's going to go through the financial section. So let us start with the forward-looking statement and then our Q3 2018 highlights.

So you've all seen our net revenue numbers for Q3, they came in at $141 million, that's pretty much even with last year, where we had $142 million with a composition of revenues very different this quarter. So we're particularly pleased about our late sales of $106 million. That's up 35% compared to $79 million in Q3 of 2017.

We had pre-funding revenues of $33 million for the quarter, that's down from $62 million in Q3 of 2017, and that's funding 33% of our operational multi-client investments for the quarter. And as a result of lower pre-funding in the quarter and slightly lower pre-funding for Q4, we estimate that our pre-funding percentage for the full year is going to be about 40% compared to 45% to 50%. Then Borre will come back to the reasons for that but it's partly due to the delay in startup of our project in the U.S. Gulf of Mexico that has been announced, and secondly a larger project that we took on in Q3 that -- where prefunding is lower than what we expected, but we see, like, this the time to get into Brazil. And rather than wait for our clients to get the next year's budget, we want to get started immediately on that.

Operational multi-client investment is about $100 million in the quarter compared to $114 million in Q3 of 2017. And then, we had an operating profit of $24 million, which compares to $26 million in the same quarter of last year. That means that the earnings per share is $0.16 million, which is up 78% from last year. And a free cash flow, which is usually negative in Q3 for TGS, because of heavy acquisition season, but this year, it was positive free cash flow of $10 million, and that compares to minus $19 million in the same quarter last year.

We continue to have a very strong cash balance. Our cash balance now is $322 million and that comes, in addition, to an undrawn credit facility of $75 million. And again, this goes back to my previous comment on the pre-funding and the fact that we're actually starting service early rather than wait for next year's budget. So we have a very unique position in the seismic industry. We have a balance sheet where we can allow ourself to start early. We can allow ourself to rather wait for -- rather than waiting for next year's budget, we can get started and fulfill our plans for the year.

We had a quarterly dividend, which we maintained at $0.20 per share and that again is up 33% from last year.

I'll take you through the operational highlights of the quarter. So if we start with the operations and the vessels and land crews that we had active in Q3, we'll start in East Canada where you see we have 2 Ramform vessels, The Hyperion, during the quarter in East Canada, so I will come back to that. Then we have 2 onshore crews in the SCOOP and STACK in Oklahoma. And then, we completed a survey in the Permian where we also had a crew active in Q3. We had a multibeam and coring project in Brazil with TDI and then in the Eastern Hemisphere, we had four different 3D vessels, one on a JV with PGS in the Barents Sea and then 3 in the Norwegian Sea to complete that 45,000 square kilometer survey in the Atlantic Margin.

So in -- if we start with Norway and U.K., as you saw from the previous slides, we had 4 vessels operating in Q3, so it's a record high number of vessels working for TGS in that part of the world.

We had the Atlantic Margin, as I said, 45,000 square. In addition to that, Nansen, which is a 4,200 square in joint venture with PGS that's in the Barents Sea where you just saw Statoil had a discovery announced two days ago -- or Equinor, sorry. And then we have the Erlend Wild West, which is a 1,900 square multi-client 3D in the U.K. West of Shetland region, which is also very prospective region where we see great interest from clients.

In terms of the market in Norway and U.K., it actually has changed quite significantly over the past few years and what you've seen is a number of smaller E&Ps getting into Norway and you see a trend of super major recession moving out of Norway. And that's something we have been following very closely, because it, obviously, has an impact on our business.

So in general, we think this is very positive, because some of these smaller oil companies who are getting into Norway, they are very active and they're growth oriented rather than some of the supermajors who had Norway quite down, quite far down on the list and they haven't really been active portion in seismic for the past few years. So we think the market is now dominating by -- dominated by a few players such as Equinor, Aker BP, Lundin and Var. But in addition to that, you have a number of smaller players, who are quite active looking at data and really trying to understand the sub-basin. So that's a very positive trend.

And as a result of that we had actually a record high 38 companies applied for acreages of the APA 2018 round. And if you compare that with anywhere else in the world and the license rounds that we see elsewhere in the world, this is a very high number, it's higher than the U.S. Gulf of Mexico. It's significantly higher than Brazil. It is significantly higher than Mexico and Canada as well. So it's a positive development to the Norway market, which means that TGS has been active there for many years, and we will continue to be quite active shooting data in Norway.

What we also see in Norway is there is a trend shift in terms of technology, because there is a lot of data in Norway. We've been shooting data there since 1981. We've been shooting 3D in the Barents Sea as an example since 2009. So what we see now is the shift in technology, there is more need for high-tech acquisition solutions and we probably see more ocean-bottom node survey going forward in Norway as well, which is where TGS want to be well positioned, and where you will see future plans from TGS in the future as well.

If we go to Brazil. Brazil, we continued our 200,000 square kilometers multi-client multibeam and seep study. This is covering both Campos and the Santos Basin. In addition to that, we signed up new survey this quarter it's big 3D, 15,000 square kilometer. This is in collaboration with Spectrum and it's in the out port Santos area, you see from the map, the orange color there. This is the project that we strongly believe in. We see that more and more exploration one is going into Brazil and Brazil is an area where we don't have a lot of 3D data. If you see all of the buoy in the Campos area but we don't have 3D in Santos, so this is our entry into that basin. And we're quite excited about that.

In terms of the market in Brazil, we see a higher license round transparency, we see a calendar that is now fixed out to 2021. We see seismic permitting process has become more streamlined. We just had election in Brazil, so new President in place, just a few days ago. Very positive for the Oil & Gas industry, much, much better than the alternative. And we also see that supermajors focus on this area lead to very competitive bidding. And that's both positive and negative. It's positive in terms of you see that oil companies are really putting a lot of money on the table for the license rounds, but that also means that it's harder for smaller E&Ps to get into this acreage. But what's going to happen over time is that these supermajors they're not going to do it by themself, they're going to start to form out of their acreage that they have picked up in the license rounds and you're going to see more and more smaller players also getting into Brazil. So that's a good sign for the multi-client business going forward.

East Canada, we have been very active in East Canada, it's our eighth season shooting data in Canada, or shooting 3D data in Canada. We had 4 projects going on in Q3, so we had Tablelands which is a new 8,000 square multi-client 3D in the Newfoundland area, then we had Lewis Hills, which is about 3,400 square, this is also in Newfoundland. Both projects together with PGS, where we have a long-term joint venture with PGS in that region. And then we completed 2 projects from the 2017 season as well, that was the Harbour Deep and that Cape Broyle. In total, that amounts about 2,700 square of data and again, together with PGS in joint venture.

In terms of the market in Canada, while the good thing is that we have a scheduled land tenure systems or system. We have a license round coming up in November, so as we speak, companies are preparing for that license round. Very stable and attractive fiscal regime compared to quite a few other basins in the world and very high prospectivity. And also don't forget the fact that Canada, the East cost of Canada is huge and still quite frontier in terms of data coverage. So there will still be many seasons with both 2D and 3D acquisition from the joint venture of PGS and TGS.

North America onshore is becoming more and more important for us and we finally see very strong results and if we compare the database onshore with offshore, it plays out really well. So we've done really well since we started our first project back in 2012 in the Utica basin. Since then, we moved some of our activity further south and you see that most of our activity today is either SCOOP and STACK in Oklahoma or the Permian basin. And I think you will see more activity going forward there, as an example, we have an area of mutual interest of about 5,000 square kilometers together with Fairfield in the Permian where we have decided to joint venture and kind of spread the risk and work together. So there will be more acquisitions both in Permian and SCOOP and STACK going forward. And we're also looking at the next basin, what is the next hot basin is going to be. If you go back 5 years, even the Permian wasn't that hot, SCOOP and STACK was relatively undeveloped and now we see the industry is changing and it's changing pretty much every day.

In terms of the onshore market going forward, I guess, U.S. is now the country with the highest oil production in the world and no one would expect that 10 years ago. But U.S. onshore has been an extremely important driver for production of oil, and going forward, we see that it's getting more and more complex. We see that more and more oil companies are starting focus on the geological complexity, which also means that you need more seismic. This is very different to what it used to be 5 years ago, where you had pretty much 75% oil in the ground and you knew that. It was more of an engineering game, where you just start drilling and you'll find oil. It's not a question of whether you find it. It's more a question of how do you get it out more efficiently.

Now it's getting more and more G&G focus. It means that oil companies really need to understand the sub-basin, which is very good for seismic of course.

And we did library M&A this quarter. So we acquired or we purchased Capreolus 3D from Polarcus, this is a 22,000 square kilometers multi-client survey that Polarcus shot back a few years ago. What happened -- that doesn't happen everyday, but it is very positive, is that just a few weeks after we signed that agreement there was a major oil discovery announced over that survey. So the oil discovery is called the Dorado, it's the largest oil discovery in Australia for about 17 years. As you know Australia is very gassy but there hasn't been a lot of successful oil discoveries. But what we see now is that the industry, the more of a question whole international industry is now looking at Australia again and trying to really understand what's going on with the Dorado discovery, and we're very, very hopeful that this database will attract a lot of seismic sales over the next two years.

As an effort to even improve the data, we're also reprocessing most of this data and trying to get a better quality of the data. And not only that, so we had the oil discovery, but the company that made the oil discovery called Quadrant Energy was then acquired by Santos just after the discovery took place, which again, means that you 2 very important driver, which is important for oil business: number one, you get an oil discovery; number two, you get an M&A and in total, that should be very good for both 2019 and 2020 for TGS.

So with that, I will hand it over to Sven Borre, who's going to go through the financials and then I will come back and talk about the outlook.

[Sven Larsen, executive]

Thanks a lot, Kristian, and good morning, everyone. First, please let me remind you that we are reporting two sets of accounts, we have the IFRS recount -- IFRS accounts, sorry, that are based on the revenue recognition of projects -- of ongoing projects or we don't recognize revenues on ongoing projects until those projects are completed. And then we have the accounts based on segment reporting where we do have a percentage of completion recognition of projects that are not yet completed.

So we feel that the -- by far most meaningful way of presenting our business is the segment reporting, so that is what we're going to focus on in this presentation. So you'll find the IFRS accounts in the appendix.

First, net revenues. Starting with late sales on the top left-hand chart. We had $106 million of late sales in the quarter. 45% increase over the same quarter of last year. We think this is a very strong number, particularly, taken into account that we did not have any licensing round figures in the quarter. Also in this quarter, we got some help from deals related to asset transactions. But even without these deals, we would have seen a meaningful increase over last year. On the pre-funding side, on the top right-hand chart, we continued to -- it continues to be difficult to get pre-funding commitments from our customers and pre-funding revenue in this quarter is down 47% compared to the same quarter of last year at $33 million booked in this quarter.

Then proprietary revenues, up 49% to $2 million in this quarter. So it's basically the same level plus/minus, that we've seen the past few quarters. And this is also the level we expect to see going forward.

All in all, this gave total revenues of $141 million for the quarter, which is more or less in line with the $142 million we had in Q3 of 2017. Then we're looking at the net revenues breakdown. Starting by the breakdown, by business unit or geography, if you want. North and South America, NSA, accounted for 62% of our revenues this quarter. Europe accounted for 18%. Africa, Middle East, Asia Pacific accounted for 4% and other business units accounted for 16% of revenues. Then looking at split by technology. 2D service accounted for 9% of the sales in this quarter; 3D, for 76% and geological products and services accounted for 14% of the revenues.

Then looking at the operating expenses, we had $21 million of total operating expenses in this quarter, 11% above the level we saw in the same quarter of last year. This increase is largely a result of performance-linked incentive schemes. So on underlying basis, we are continuing to show very strong cost discipline and this is very much still a focus internally, despite the improvements we've seen in the marketplace. Then looking at amortization, we book $93 million of amortization in this quarter, which is more or less in line with what we had in Q3 of 2017. But note that these $93 million include $10 million of impairments on 3 service in Brazil, U.S. Gulf of Mexico and in East Canada.

We have seen this year that the run rate on amortization has been slightly higher than we forecasted at the beginning of the year. And also including this $10 million impairment, we now expect the amortization for the full year to be around about $230 million, whereas, our previous expectation was more at or closer to $310 million.

Operating result EBIT on the bottom left-hand chart. We had $24 million of operating profit in the quarter corresponding to a margin of 17%. The cash flow continues to be strong. We had positive free cash flow of $10 million in the third quarter despite quite high investments into the library.

Then looking -- going more into detail on the library, first, we're looking at the investments and the pre-funding. We invested $100 million of operational -- well, we had $100 million of operational investments into our library in this quarter. And this was pre-funded 33% by our customers.

As I mentioned, it continues to be difficult to get pre-funding commitments from customers, they are still working, obviously, on their 2018 budgets, which we think at best our flattish compared to the 2017 budgets. So at this point in the cycle, we have chosen to take -- deliberately take a little bit more risk on our investments. And on top of that, as Kristian mentioned, the amendment project in Gulf of Mexico, which we originally had in our pipeline for startup in late Q4 will not start up till Q1 of next year. And we also suffered from smaller cost overruns, weather-related, in our acquisition season in East Canada and in the Barents Sea.

So as a result of all these factors, we maintain our investment guidance of around $260 million for the full year, operational investments, that is. But we lowered pre-funding ratio guidance down to approximately 40% from previously, 45% to 50%.

Looking at the development in the net book value of the multi-client library, we increased slightly this quarter due to the organic investments, but also due to the acquisition of the Capreolus survey that Kristian talked about, that closed in the beginning of August. So at the end of the quarter, we had $750 million of net book value of our library.

Looking at the investments and net book value by year of completion, as always these blue bars shows you the total investments in each of the vintages, whereas the diamonds tells you where the net book value is currently. And as we have said numerous times, we feel very comfortable with overall value of the library, but as highlighted by these impairments this quarter there is always risk on individual service. We had several hundred projects with book value in our library. And there will always be or very often be special circumstances with one or two of the service that requires some smaller or that leads to some smaller impairments.

Then looking at net revenues by vintage. As you can see, we continue to sell very well from our older service. This quarter, we had 34% of revenues coming from service that were completed prior to 2014, and we see this as a very good for -- stamp of approval for the quality of the library shows that the commercial life of our library is quite long.

Then looking at the income statement. Net operating revenues of $140.7 million in this quarter gave us a gross profit of $47.8 million. Subtracting personnel cost, other operational costs and depreciation, we ended up with an operating result of $24.4 million in the quarter, which was slightly below what we had in the same quarter of last year.

Pretax profit was $28.4 million and the tax cost was $11.6 million corresponding to the tax rate of 41%. So the tax rate is higher than the normalized tax rate of 23% due to currency movements during the quarter. This gave us net income of $16.8 million in the quarter corresponding to an EPS of USD 0.16, which is 78% above the $0.9 that we had in the same quarter of last year.

Then to the cash flow statement. We had strong cash flow from operations in this quarter as well, $96.1 million, which is 11% above what we had in the same quarter of last year.

Investment activities, we had $90.7 million in cash flow to investment activities. And then, cash flow from financing activities was minus $20.8 million, and the vast majority of that is, obviously, the quarterly dividend payments.

So all in all, the cash position was reduced by $15.4 million in the quarter. So this means that we continue to have a very strong balance sheet cash position of $322.2 million at the end of the quarter, and for all practical purposes no interest-bearing debt. So we should be in a very strong position to continue to invest organically, and hopefully, also grow our organic investments over time at the same time as we grow dividends. Talking about dividends, the board has once again resolved to pay out $0.20 per share in dividends this quarter in line with the stated policy. This corresponds to NOK 1.68 per share. The x date is set to one week from now, 8th of November, and the payment date is 3 weeks from now, 22nd of November.

And by that, I hand over back to you, Kristian.

[Kristian Johansen, executive]

Thank you, Sven Borre, so let's go back to the outlook section. So first of all, what this bar chart shows is -- the fact that multi-client spending is still somewhere of the pre-2015 levels. I think you see that very clearly from the bar chart that the market dropped about 50% in terms of aggregated revenues of all the multi-client players and then, although, we see a recovery in the market since early 2016, we still see that is going relatively slow.

TGS kind of stands out compared to the rest of the industry. We have a 29% growth year-on-year this year or year-to-date, which is, obviously, very good. And we are extremely pleased about that. But I think it's still important to be a bit cautious about the speed of the recovery. And I think the next slide illustrates that very well. This is on the left-hand, it's showing the volume level of the year-on-year change in global activity measured by volume. And on the right side, you see the year-on-year change in total spending. So while the left one is volumes, the right one is US dollar spending. And what you see is that the activity level in 2017 and 2018, as I see, grown quite significantly, but we still see that the spending level measured by US dollars is relatively lower and it's a year-on-year change of only a few percentage points. And the reason for that is obviously, that there is still significant price pressure, both in our industry but also other subsectors in Oil & Gas.

So if you look at subsea, or if you look at the drilling industry, or if you look at seismic, there is still a significant price pressure and when clients are planning for the future and they talk about their record low breakeven cost, I think they forget to take into account that, that there will have to be some kind of inflation on prices going forward. And the reason why we mentioned that is that, if you look TGS 2 or 3 or 5 years from now, obviously, a lot of the growth is going to come from volumes. But we see also a significant growth coming from being able to charge higher prices when the activity level remains constant over time. And that obviously points us back to what's going to happen to the vessel market, and again, our -- and our answer to that is we really hope that vessel prices go up, because higher vessel pricings means that there is more demand for seismic and that means we're going to sell and we're going be able to charge more from our existing data that is record high as we speak, given our counter-cyclical investments during the down cycle.

If you go to the recent history and look at the alignment between TGS data and exploration activity and see what's going on right now, we see a -- actually a slight pickup in the number of discoveries. I just mentioned Dorado discovery in Australia, which obviously attracts a lot of interest from international players who want to see what's going on the West Coast of Australia. You also read about Equinor's discovery in the Barents Sea the other day and, although, it's not very big, it's close to existing infrastructure and other discoveries, which again is very, very healthy sign for the industry and particularly for the players in the Barents Sea.

And as you see from the map here, and you see the blue dots on the map, you see that our data library is extremely well positioned to the ongoing exploration activity and, obviously, the discoveries that have taken place over the past 3 to 6 months. In addition to that, we have seen very high activity related to acreage turnover and farm-ins. I've been with TGS for 9 years, but when I look at this map and I look at what's happened over just last 6 to 12 months, we've never seen something like it in terms of a number of M&A transactions, the number and the volumes of asset sales and swaps.

And just to touch on a few of those, because they have been obviously important for us given that our database is well positioned. Talos/Stone is a stone, went bankrupt and Talos goes in and take a major position in U.S. offshore, which is, obviously, very important given that this is our major playground. Total/Maersk is more of a global deal while Var is a new player on the Norwegian shelf, and again, going back to what I said previously about that change in client mix in Norway, it's actually very positive, wasn't it? It actually drives a lot of activity, because some of these players are very aggressive and growth oriented compared to the players who are leading continental shelf. COX/Energy XXI is another U.S Gulf of Mexico deal. Energy XXI went into bankruptcy and COX is now buying the assets of Energy XXI, which is positive.

Kosmos is a new player in the U.S. Gulf of Mexico as they're acquiring all the assets of Deep Gulf Energy. And then, Santos as I mentioned, driven by Dorado discovery in Australia. Santos goes ahead and acquires Quadrant Energy. On the asset sales and swaps and this just shows some of the dynamics in the industry right now. Fieldwood is buying all the deepwater assets of Noble who used to be a major deepwater player in the U.S. GOM. BP goes onshore buying the assets of BHP, who takes the opposite view, and they go to U.S. Gulf of Mexico and take some more aggressive view on the U.S. GOM offshore.

And there are several deals here that just illustrates the point that we're trying to make is that the dynamic right now and the activity level in Oil & Gas is actually really, really high. But we still need to see higher pricing going forward in order to see a significant growth for the overall, industry.

Then we have license round activity. I mentioned a few already, so we have the central and Western GOM where we have now 2017 plan that goes into 2022 where we have 2 license rounds every year, we have the March and August. Newfoundland Labrador, where we're going to have a license rounds, bids are due in November 2018, so basically as we speak. In Latin America, it's particularly important right now because Brazil has been in -- has actually announced 3 different license rounds, the sixth pre-salt round, the 16th round, which is going according to plans, and then, in November 2018, you have the permanent offer process for that. Mexico may be slightly delayed, there will be a license round in early 2019, February 2019.

But then there is some political instability in Mexico with a new government taking place in December this year and the whole industry is now sitting back and waiting for what's going to happen in terms of their plans for future license rounds. But this will still be a lot of offshore exploration activity in Mexico. I guess, question is more related as to whether it's going to take form in terms of license rounds, held by CNH or if it's going to be Pemex who's basically driving the farm-in, farm-out processing in Mexico going forward.

In Europe, we have the APA round, that I just mentioned. So the APA round is, in many ways, taking the attention off from the number rounds. So while we've seen a slight delay in the number rounds, I guess, we have a -- 2 years until the next round. The APA is taking over for that and we see significantly interest in the APA data, Madagascar is important, a round launched in November 2018, and then we have both Australia and Indonesia with rounds expected late this year or next year.

In terms of our backlog, it continues to grow but it grows slowly. But I think if you look at this and compare it to last year, you see we managed to grow our backlog from 63 in Q3 of 2017 to about 103 in Q3 this year. I think this a good sign in terms of what we see for next year because in all the question is going to come up how do you expect or what do you expect in terms of investments for 2019. And what I can do, I can certainly look at this slide and feel more confident than I did at the same time last year. And that's probably all I'm going to say about next year's investments.

In terms of the project schedule and that also gives you a good indication of where we are going to invest next year and because some of these investments are actually carried over from Q4 of this year and into next year. And it gives us good visibility for 2019.

First of all, because we have, on the 2D side, we have 2, our multi-beam and Coring projects in Brazil that is carrying over to 2019 or continuing into '19. Then we have a SeaSeep program in West Africa that has just started or just about to start and then that also carries over into 2019.

If you look on the 3D side, we have our first 3D in West Africa in about 4 years, taking place in the MSGBC Basin in Northwest Africa. That's a relatively large 3D that we are starting or just started last month. And that's going also into 2019.

And then, we have the Santos JV with Spectrum that again has just started and will go way into 2019 because it's a 15,000 square km survey.

We also have, in the U.S. Gulf of Mexico, we have an ocean bottom node survey that we announced at the Q2. So this is the survey that is covering about 103 blocks in the Mississippi Canyon of the U.S. Gulf of Mexico. It's a big survey. We were originally planned to start that survey in Q4 this year and have a relatively active acquisition season during Q4.

Then the crew has been delayed and it's going to start in probably the latest I've heard is, 1st of February next year. But that also looks very good in terms of visibility for 2019. So while it's been pushed out of this season, it's very good in terms of the future.

So onshore, I expect that we will probably aim to invest even more next year, given the strong results we've shown and given our strong position in both SCOOP and STACK and Permian, which are the most active areas in the U.S. onshore right now. So I would expect that we continue to take a rather aggressive view on onshore and invest as much or hopefully, even more in 2019.

So with that, let just give you a quick summary of Q3. Another strong quarter for TGS despite cautious approach from E&P companies. We are obviously, waiting for new budgets now, to come out for 2019, we are hopeful that some of the cash flow that they're making now because they're making much stronger cash flow than they expected at the start of the year. So we hope that some of that will turn into higher budgets for next year.

But again, back to our quarter, we had net revenues of $141 million. We had very strong late sales up 35% year-on-year. Earnings per share is up 78% year-on-year and, we had a positive free cash flow, which is again very unusual for Q3 for TGS, which means that our cash balance is still record high at $322 million, which again obviously, puts some pressure on us in terms of how we're going to spend our cash. And again, I will just repeat what I've said previously, number one, is that we really want to invest more. If we see the right opportunities to invest more we're certainly going to prioritize that. Number two is that, we really hope that we can pay an even higher dividend going forward. And number three, we still continue to look at M&A opportunities.

So it basically ticks off 3 boxes in terms of what you should be looking at in terms of pricing this stock. 2018 guidance, we expect multi-client investments about $260 million, prefunding of 40%, that again compares to our original expectation of 45% to 50%. And I think we have explained that today. And then, amortization is expected to be approximately $310 million for the full year.

So at current stage of the cyclical upturn, growth is driven by cash flow and acreage turnover. And we are quite excited. We are looking forward to 2019. We think 2019 you will see higher E&P spending, but we think in 2020 will certainly see even higher E&P spending and we think we are very, very well positioned for that. So with that, I will end the presentation. I will thank you very much for your attention. I will have Sven Borre come up here, and then we'll answer your questions.

So I think Charles has the microphone there. So thank you, very much.

[Kristian Johansen, executive]

While we wait for the first I would like to just point out it should be $330 million expectation for amortization. It was just a small error in the slide there.

[Charles Stone, analyst]

Up from $310 million?

[Kristian Johansen, executive]

Up from $310 million.

[Charles Stone, analyst]

And that includes the $10 million in the...

[Sven Larsen, executive]

That include impairments, yes.

[Charles Stone, analyst]

And may I ask a little bit on those Brazil, Canada and Gulf of Mexico? I'm somewhat surprised. I thought your library in Brazil was extremely small and also Gulf of Mexico has been pretty good sales this year. So I am somewhat surprised by those 2 in particular, and maybe also Canada actually, given your optimistic comments about Canada. Can you comment a little bit more on those?

[Sven Larsen, executive]

I can comment on that. The Brazil one is what we internally refer to as a sales impairments. So with the new amortization scheme where we have straight line amortization of completed service, when we do a sales and like in this is the oil, the [ voice ] that we have in Brazil. So we do our kind of the last sale that we are forecasted there. And we have to, at the same time, remove the remaining book value of the sale. So it's linked to our sale we did in the quarter. So it's kind of a positive event in a way. When it comes to Canada that partially associated with what we said, we have had some weather-related cost overruns, some in Canada. So that impairment is partially -- that part of it is partially related to that. And in Gulf of Mexico, I mean, the Gulf of Mexico has been good, but we have -- don't forget we have quite a few service in Gulf of Mexico. So this is more service-specific than Gulf of Mexico related.

[Charles Stone, analyst]

And for Q4, are there any risk of a further effects like this?

[Sven Larsen, executive]

There is always risk. We evaluate our library values constantly. We don't think there is any sort of risk for any, call it, larger library-wide or regionally based impairments. But as I said, have quite a few service in our library. And there will always be special circumstances, special events that affects given certain service and we may have to do smaller impairments. So there is always a risk.

[Kristian Johansen, executive]

I think it's fair to say, for every survey that we've done, we probably have 20 that we could have written off. We cannot do that of course. So we're trying to take very cautious approach whenever we see that there is a survey that don't fit the criteria going forward, we just write it down.

[Charles Stone, analyst]

And tax-wise you give the tax shield this year due to those one-offs.

[Kristian Johansen, executive]

Of course.

[Charles Stone, analyst]

In Brazil, because the lower pre-funding guidance was somewhat of a surprise. You blamed part on the project in Brazil, which I presume has 0 prefunding. You say you're very confident about that project. Just technically, first, technically, if you book, say, in Q4 I presume it's late sales for you so it won't impact the prefunding rate. Is that correct? And also, do you expect to close the sale in Q4 for that project?

[Kristian Johansen, executive]

I don't want to comment on that because it's probably much more significant for our partner if we close the sale in Brazil. But I think in general, we started Brazil, probably usually we wouldn't do something like that without funding. But we had very, very strong indications from at least 3 clients that they want to put this into their next year's budget. And again, very strong indication that they will have cash or funding for this in 2019 and we feel that, that statement was so strong and gave us so much support that we felt that this was very, very low risk.

[Charles Stone, analyst]

And then you highlighted your multi-client sales are up quite strongly this year, but the market is -- the rest of the market is flattish. Of course, that's mostly due to Schlumberger closing their multi-client, the rest is 70% and lack of prefunding. But you're going to tell us, what you expect for Q4 this year for the industry? Do you expect a flat market year-on-year in Q4 as well for the industry in total in terms of sales in Q4? Do you expect them extraordinary strongly flush on the factors -- yearend flush factors in?

[Kristian Johansen, executive]

It's hard to say whether it's going to be extraordinary because it's always extraordinarily strong in Q4. I think it's going to be extraordinarily strong this year too. I think you will see whether it's going to be significant growth year-on-year, it's still hard to say. But based on the conversations we have with clients, there are significant or big Supermajors who say that they want to spend their budgets in Q4. And they still have quite a lot to spend. So I think, we're looking at Q4 as a promising quarter.

[Charles Stone, analyst]

Promising. Have you had any firm indications so far? PGS said at their Q3 presentation, that they had more leads than they have had over the last few years for since Q4. Have you seen the same, same thing?

[Kristian Johansen, executive]

I think what we haven't seen and referring to the comment from Schlumberger, is that they didn't see this yearend spending coming up in Q4, as usual. I would strongly regret that. I think discussions that we have been clients is that there are -- they certainly have money to spend in Q4. And again, I don't want to be specific on it because what they do now is that they have these lists that they send out to multiple suppliers and they say give me best price, and there is a lot of competition for that. And we don't want to go crazy when we look at those bids. And we don't -- we certainly don't want to discount too much on that. So it's hard to say what the final result is, but what I can confirm is that there will be yearend spending. Whether it's going to be unusually high is hard to say but it's going to be significant spending this year too.

[Charles Stone, analyst]

Do you think it will be better we see year-to-date with the flat market multi-client part of Brazil?

[Kristian Johansen, executive]

Possibly, yes.

[Charles Stone, analyst]

And my final questions regarding multi-client investments. Can you tell us how much of the $260 million multi-client investment guidance for 2018 that is U.S. onshore?

[Kristian Johansen, executive]

I guess, the answer that is that we cannot tell you that in great amount of detail. But I think we're looking at 15%, 20% would be onshore.

[Charles Stone, analyst]

15%, 20% of the $260 million. And you said you expect that to be even more in '19? Can you start indicating a little bit investments next year more investments in the U.S. onshore? How about U.S. Gulf of Mexico with the node project going there?

[Kristian Johansen, executive]

Yes, I mean, if you look at what we have invested in 2018, we haven't really done much in the U.S. Gulf of Mexico. We have one -- so, one 3D streamer survey which wasn't that big in 2018. So we'd expect to see growth in the U.S. growing base on the ocean bottom node survey. I think where we have invested very heavily this year is Norway because there was a second season of the Atlantic Margin.

So in Norway, you may -- if we see a flat investment next year, we should be quite pleased. I think it can even be down. But again, that's going to be well compensated by U.S. onshore and U.S. Gulf of Mexico. And then, in terms of Africa, we didn't invest -- we haven't invested in quite a few years, so you see higher investments in Africa.

Asia Pacific is still going to be low. It continues to be low. And then, Canada, I expect that we will be relatively flat and we have been quite flat for the last couple of years in Canada. So I think that, covers most of it. Brazil is new compared to this year of course. Mexico, it's still very uncertain so I think we're still waiting to see the impact of the new government take place and what's going to happen to license rounds.

[Charles Stone, analyst]

So you're starting to paint the picture -- you started to paint the picture we have multi-client investments up significantly next year.

[Kristian Johansen, executive]

Well that's your interpretation.

[Charles Stone, analyst]

Well, you mentioned 6 areas here and 2 of them significantly...

[Kristian Johansen, executive]

But I didn't give you numbers for the areas. So I guess, it all depends on how much we see Norway for next year because Norway has been a significant part of our investments in 2018. And again, we have completed our 45,000 square kilometer in the Atlantic Margin. So that's going to be kind of the swing factor I think.

[Unknown Analyst]

You touched on this little bit earlier, in terms of smaller E&P companies versus the larger spenders. Do you see any sort of shift in your revenue composition or in terms of inquiries from customers being, is it more smaller players coming in or is it still dominated by big ones? Any changes there?

[Kristian Johansen, executive]

It has. We've actually seen quite big change over the last 5 years because what happens is when we went into the down-cycle, we had a very high portion of our clients coming from small independents. And then, the market shifted and we saw most of our revenues and a significant part of the revenues coming either from national companies or Supermajors. And what we see now, is certainly Norway with the higher number of small independents. We see the same trend that the U.S. Gulf of Mexico as well.

[Unknown Analyst]

Okay. And also, could you give some color on what are your clients saying these days? Are there fed up because they don't get enough exploration budget or are they happy and content with what they have bought over the last couple of years? What's the feedback there?

[Kristian Johansen, executive]

Well, it kind of differs from company to company, but I think in general, your first statement is actually really good. If we talk to exploration people, they are a bit frustrated. And take Total as an example. So Total goes out in a capital markets day and say #1 priority is to reduce our debt, #2 priority is to pay a dividend or buy back shares and #3 priority is the growth of CapEx. It's not a good sign in terms of what we are going to make from that company in the future. So it obviously means that the people are working G&G and exploration there. They're a bit frustrated overall, that management don't see that. You need to grow your reserves or certainly you need to replace your reserves. So I think there is some kind of frustration. I think that it's a question of time before Wall Street also starts to pick up in the fact that reserves the coming down year after year. And what they're doing right now is that the keep changing the reserves, they keep trading reserves, but they don't find a lot of new oil, and they need to get their exploration budgets up again.

[Unknown Analyst]

[ Terje, Vesbile Markets ]. You set out targets, significant part of your revenue over the past few quarters has been uplift revenue in relation to M&A. Could you indicate how much?

[Kristian Johansen, executive]

No. We can't because -- and this is partly due to we don't want to provide thorough transparency into how much we make from a deal like that because the client is going to call me the next and say, what the heck are you guys doing? So every single deal is different. There are some transfers, so there are some M&A activity that doesn't require any seismic. There are others that, where we get a really good deal out of it, and we don't want to be too specific on how much we make.

[Unknown Analyst]

Could you indicate was it a higher portion in Q3 compared to Q2?

[Kristian Johansen, executive]

No, it was not. It was lower.

[Unknown Analyst]

Okay. And then, just working back to some of the last questions here regarding industry activity and as you highlighted most E&P companies, they tell us that they want to stay disciplined and give priority to dividend and reduce debt. We know that a lot of companies, they are reporting much debt now than previously. So do you believe them when they say that this will be the discipline in 2019 as well?

[Kristian Johansen, executive]

Yes, and no I guess. I think the recent down-cycle is still very fresh in mind. Which means that they are going to be more disciplined than what they have been in the past. But I really struggle to see that you won't have a quite decent growth in E&P spending next year because again, quarter after quarter they make higher cash flow than what they expected and if you take that accumulative number of cash flow that they have delivered compared to their own expectations, it's just, we're talking billions of dollars. So I think in general, you will see some of that turn into higher seismic spending and exploration spending, but I think again, they're still going to a bit cautious compared to previous up-cycles.

[Sven Larsen, executive]

If I may add, of the statements that you've seen, you haven't heard anyone on them as saying that they think prices for services are going to go up next year. So they all seem to be planning for a flattish kind of development in service prices. And we -- as we've said in the presentation, we feel that there is an upside to pricing.

[Unknown Analyst]

Okay. My last questions is actually related to just that topic. [ Clear on this how -- take your word in this presentation that the seismic you're shooting ] now is -- of course has a much lower cost compared to previous periods. So have you seen an indication of day rates for summer season 2019 yet?

[Kristian Johansen, executive]

We haven't seen that yet. We haven't really started to look at investor charters for next summer but I saw Polarcus comments this morning that says the rates are up, and I take that as a very positive sign that the industry is gradually recovering. So if we look at next summer season, and if we see an uptick in prices of 5% to 10%. I guess we're quite pleased with that. We don't see that as a negative sign. We don't think it's going to be any higher than that although, you're coming from a very low level but I think you will see kind of a marginal increase next year. And again, we are prepared to pay that.

[Unknown Analyst]

You seem to want to increase your technology footprint by doing more OBN. This carries kind of let's say, roughly 3x higher unit cost. Obviously, you do get high prefunding on that. But how should we think on returns and also timing on doing more of these investments going forward? I mean, potentially, GOM alone should be around $600 million to $650 million. So just some thoughts around that?

[Kristian Johansen, executive]

Well, I think in general, we have been through that many times. At TGS we went from 2D to 3D. We went from 3D to wide azimuth, we did wide azimuth to Full Azimuth. And now we're going Full Azimuth to nodes. So we've been through that. And over time, we haven't seen returns really change. I mean, they've continuously been very strong in -- especially in the U.S. Gulf of Mexico. So I guess, this is an opportunity to grow our investments going forward. And obviously, when we look at investment growth, we look at profitable growth as we always have done. So I don't see, really any change in that regard. What we do is that the beauty of U.S. GOM is that the blocks are so small, so even if you do a very expensive survey, as long as you have several block holders, you will still be able to get quite a good profit out of that.

[Unknown Analyst]

Okay. And just housekeeping on tax, you've basically not paid any tax in 2018, so far. Haven't paid real tax in '17 from the cash flow statement. What's -- when are you planning to -- what's the tax going to be in 2019?

[Sven Larsen, executive]

That depends on the profit of course, as always. But we've had a tax loss carried forward from the impairments we did in Q4 of 2015. So the -- I would certainly expect the cash tax to be higher in the coming 2, 3 year period than it has been in the past 2, 3 years period.

[Christopher Møllerløkken, analyst]

Christopher from Carnegie. In terms of the projects you're doing together with Spectrum in Brazil, this was announced in October but it started in July. Did it impact the Q3 investment level for you guys?

[Kristian Johansen, executive]

No it didn't. So we're part of the project from the beginning. So we share 15,000 square kilometers, 50-50 joint venture but we didn't have investment in Q3 related to that.

[Christopher Møllerløkken, analyst]

So it would be a catch-up now in fourth quarter, as you are buying in to something that was started in July?

[Kristian Johansen, executive]

That's right.

[Christopher Møllerløkken, analyst]

Okay. And the second question was, on this ocean bottom survey in Gulf of Mexico, I understand that parts of the equation is that the nodes are spaced sparsely, to put it that way.

[Kristian Johansen, executive]

That's right.

[Christopher Møllerløkken, analyst]

But if you the same survey 5 years ago, could you color how much the costs have come down in that period?

[Kristian Johansen, executive]

Yes. I guess, we can because we looked at that about 5 years ago. I think we are down at least 50% in acquisition cost compared to what we were back then.

I think, going back to that question, I mean this is a sparse node project. So we're talking about 1,000 meter separation. So it's a project that would probably not be very good by itself. But when you combine it with the underlying wide azimuth data, it's of fantastic quality. And it really proves how important it is to have the underlying data because it's basically TGS and WesternGeco who have underlying data and -- or WAZ data in the Mississippi Canyon. And obviously, we want to take advantage of that in the node market going forward.

All right. Thank you very much for your attention, and welcome back to Q4 presentation sometime, I guess, in early February. Thank you.