TGS ASA

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Earnings Call Transcript 2019-Q4

[Kristian Kuvaas Johansen, Chief Executive Officer]

Good morning, and welcome to the presentation of TGS Q4 2019 Earnings Release. My name is Kristian Johansen, I'm the Chief Executive Officer of TGS. And with me today, I have Dean Zuzic, our CFO, who is going to go through the financial section of the Q4. Before we start on the presentation, I just want to refer to our forward-looking statements and ask you to read that. And then start on the presentation by saying that 2019 was another year of outperformance for TGS. We're extremely pleased about a very strong year. I want to thank all our employees for an exceptional job in 2019 and looking forward to enter into 2020. We had a revenue growth in 2019, if you combine TGS and Spectrum, of 16%, and that's the pro forma figures for 2018 and 2019, so we're comparing apples-to-apples. That compares to the industry growth of about 5% in the same period. So once again, TGS outperforms the industry, clearly. We have a return on capital employed of 19%, that's up by 1 percentage point from last year. And I'm very pleased to note that our return on capital employed, which is a very important metric for TGS, is now approaching historical levels. Last but not least, a solid cash generation, which enables the continued dividend growth. Which leads me to the next slide where we look at the quarterly dividend that we announced this morning that we're increasing that by 39%. And that was not only increased by 39% in 2020, but it was increased by 33% last year and then another 33% the year before that. And if you look at the dividend per share, now, you see that $1.50 that we propose for 2020, that accounts with a strong dollar. Today, that accounts for almost NOK 14 per share. And if you look at that NOK 14 and you compare it back to the heydays back in 2013 and 2014, you see that it compares very, very favorably. And don't forget the fact that we're also buying back shares. So we still have another $6.5 million of additional cash that we are obligated to spend on buying our own shares, and we're probably starting that share buyback program again on Monday next week. So that again is a record high dividend yield for TGS. It's about 6.2% based on today's share price, and that's the highest it's ever been in history. The ex-date is 19th of February, 2020, and then the expected payment date is 4th of March, 2020. So let's have a look at the highlights for the quarter. We had net revenues, and that has already been preannounced, we came in $2 million higher, so $232 million. That compares to about $242 million in Q4 of last year. We had late sales of about $201 million. That's flat compared to last year. And then we had prefunding revenues of about $26 million, which compares to $36 million in the same quarter of last year, but based on postponed investments and lower investments in Q4 this year, which, again, had a very positive impact on the cash flow in the quarter. The cash balance after Q4 was $323 million and that comes in addition to a $100 million undrawn credit facility that we also have. Again, based on that, we are happy to increase the distribution to shareholders. And the plan is, going forward, we will have a combination of dividends, and I'm also pleased to say that we're going to go back to the general meeting this spring and seek an additional approval to buy back shares and continue our share buyback program. The backlog increased to $181 million in Q4 and that compares to $63 million in the same quarter of last year, which basically means that we have 3x the backlog that we had when we started 2019. And that's obviously a very comfortable situation to be in. And we also see a favorable development of some of the key markets of TGS. And one of the most exciting markets for TGS now and especially after the acquisition of Spectrum is Latin America, where we actually had 6 different operations in the quarter, which I will come back to on the next slide. So these are the operational highlights for the quarter. You see that we have 3 onshore crews active in Q4. We had 1 in Canada. We have 1 in Wyoming and we had 1 in the SCOOP and STACK in Oklahoma. Then you see that most of the activities are actually 6 different projects were taking place in Brazil and Argentina in the quarter. So we had the Malvinas project with 2 vessels, 2 3D vessels in Argentina. We had 1 crew active in the Campos area. We had 1 crew in the Santos area. And then we had 1 crew in the Para Maranhao area, which is further north in Brazil in the equatorial margins. Again, this has turned into a more and more important area for TGS, especially given the acquisition of Spectrum, and a market-leading position in probably the fastest-growing market in the world right now in terms of seismic spending. In the Eastern Hemisphere, we have the Oceanic Sirius, working in a joint venture together with CGG in Barents Sea, where we're testing some very interesting TopSeis technology of CGG. We have the Axxis crew, which is the first big OBN project carried out as a multiclient project in Norway and a project that we hope that we will continue also in 2020. And then we had a couple of operations active in Africa. We had the BGP Prospector doing a joint venture in Senegal. And then we have some coring activity in the MSGBC Basin. And then we have started a new multi-beam program also in Nigeria in early Q1. So a very active quarter and by far the most active Q4 ever in terms of vessel activity. And I'm pleased to say that Q1 is going to be as active. So we're going to have a lot of operations around the world in Q1 as well. So with that, I want to hand it over to Dean Zuzic, who is going to go through our financials, and then I will come back and talk about the outlook.

[Dean Zuzic;Chief Financial Officer]

Thanks, Kristian. So let me run you through the figures, the IFRS 15, this was introduced '18, it's old news. So I -- we still have it here, so you can read it, those of you who are interested. Net revenue slide. If you look at our revenues, as Kristian mentioned, we totaled the fourth quarter with $232 million, which was $2 million up from what we had preannounced. And that is basically stemming from adjustments in the completion rate of the work in progress projects. Late sales, flattish compared to last year, $201 million, we had $203 million last year, a small decline of 1%. Prefunding revenues are down by 28% year-over-year, $26 million this year compared to $36 million last year, explained by the low investment rate due to postponements of projects. There was a lot of bad weather in Q4 that led to us losing about a week production dates on some of the projects, especially in Latin America. That resulted in lower investments and then lower prefunding revenue too. The proprietary revenues have doubled, 109% up compared to last year, but still comprised a pretty small portion of our total revenues. So $232 million was the final number for the year on the revenues. If we look at the expenses, operating expenses in Q4, adjusted for one-off items, we have -- with $37 million. We have booked $5 million in restructuring costs in our Q4 figures, $3.4 million related to personnel and $1.4 million were other operating costs. And these figures are adjusted for that. You see that we have lower operating cost this season than what we had last year as a combined company. And this is mainly driven to a more efficient use of personnel, a lower number of FTEs in total following the merger than what we had in Q4 of last year. Amortization, Kristian talked about that, $120 million. The amortization rate has basically been high for the whole of the year. The reason for a somewhat higher amortization rates than expected in Q4 -- than what the market expected was a structure of our sales. You have in the appendix a slide that shows the -- how sales are comprised per vintage. You will see that the work in progress, the WIP projects that we have undergoing now comprise a large portion of our sales. And they, due to the new amortization rules, lead to increased amortization of sales, amortization that has to be taken. But there'll be more on that later. EBIT, $68 million, again, adjusted for the $9 million. Now I say $9 million in restructuring costs. The IFRS 16 standard was introduced this year, which means that all leases related to premises are no longer booked as costs, but they are booked as an amortization. We are combining offices and offices we no longer will use have now been written-down by $4 million in value, and that's booked on the depreciation lines. So in total, restructuring costs of $9 million are in the fourth quarter figures, $3.4 million personnel, $1.4 million other OpEx and $4 million is a write-down of the right-of-use assets related to our office premises. We -- if you look at 2018 compared to 2019, we had a strong Q3 this year. When we look the EBIT, a bit weaker Q4 than what we had last year. If you look at the year-on-year comparison, you will see that our EBIT figure this year are up 19% to what we had as a combined company in 2018. So also a pretty nice increase. Operational investments and prefunding. In prefunding, we had $54 million were the operational investments, somewhat lower than what we had guided. But as we -- as I mentioned, the reason for that has basically been postponement of some investments and bad weather that led to a loss of a week of production. And that explains basically the difference to what we had guided. If we move on the income statement. Again, we've been through this. Just take the most important figures. Top line, $232 million. Our EBITDA came in at $189 million, adjusted for restructuring cost, $194 million, which was a 2% decrease compared to last year, but still a healthy and high stable number. The operating result. Our EBIT was $59 million. Amortization was, as I mentioned, higher than what we had last year. Tax cost warrants may be an explanation. It is a bit higher than what you have seen earlier. The reason for that is the structure of basically the composition of sales. Latin America is -- comprises a lot of our sales this quarter, and the corporate tax rate in Brazil and in Argentina are the highest of what we have in all jurisdictions. So when a lot of the net income comes from Argentina and from Brazil, you will see a higher tax rate for that quarter as related than what is the case if we have basically a normal distribution of sales. For the year, the tax rate was 24%, which is more in line with what our average corporate tax rate has been historically. The balance sheet items. Goodwill, we mentioned that Q3 basically is related to the acquisition of Spectrum and the PPA allocations. Cash came in at a healthy $323 million, 4% higher than what we had last year. Other current assets have increased. That, again, is a result, we have a lot of projects in progress now. That kind of explain the increase there. Equity, up 12% compared to last year, $1,611 million. And we see that other current liabilities also, which is kind of a mirror of other current assets, also increases by 30% during the quarter compared to the same quarter last year. Cash flow, solid cash generation, we have commented on. I mean that received payments from our customers, $303 million. Total net cash from operating activities, $221 million, much higher what it was in Q4 last year of $62 million. Our investments in multiclient, these are the paid investments, basically that -- they will usually be a quarter-to-quarter lag. So what we pay in Q4, basically investments that we did in Q3, that's why the number is much, much higher than what the investment figure in Q4 is. And dividend payout of $0.27 was paid out in Q4. That was a $32 million cash payout in addition to us purchasing our own shares in Q4. We purchased shares for $14.5 million. And as Kristian mentioned, there are $6.6 million left that we will start again the program from Monday of next week. Total net cash -- change in net cash was a plus $58 million compared to a negative $49 million last year. So I'm very satisfied with the cash generation in Q4. And then back to you, Kristian.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Thank you, Dean. So before we go to the outlook section, let's discuss long-term value creation at TGS. And what I mean by that is, how do we measure our performance internally in TGS and how do we like you to measure performance for TGS. And the reason why that is getting increasingly important for us is that, as you know, we had new accounting rules impacting multiclient companies from first of January 2016. And since then, you've seen a sharp increase in the amortization rates for most multiclient players. And that means that amortization must be seen as an increasing fixed cost, which, again, means that it leads to increased volatility, both in terms of EBIT, increased volatility in terms of EPS, and in our opinion, not the best way to value a multiclient seismic companies. I'll spend a little bit of time on that before I go to the outlook section. So first of all, let's repeat the financial priorities for TGS. First of all, maximize return on capital employed. This is probably the most important number, and it's even more important when you have a significant over-amortization, that I would call it. And the reason for that is that it kind of neutralized the impact of that. Yes, it impacts the EBIT negatively, but it also impacts the book value of the library, so that it writes-down the book value much quicker than we would normally do. So again, the way to neutralize that is to look at return on capital employed. And I'm happy to see that TGS continues to deliver very strong industry-leading return on capital employed, and we will continue to do so in the future. Number two is to maximize cash flow. Why is that important? Well, it is critical in terms of being able to returning excess capital to shareholders. And I think today -- so this morning's announcement means that we are serious when we say that we are returning excess capital to shareholders. We don't have any plans to be overcapitalized for the long term of our business. We want some flexibility in terms of taking on new investments and having the gunpowder to do so even in poor or weak markets. But again, we have no plans to be overcapitalized for the long term. So if we look at that, and if we look at these 3 metrics, and we see, how does that compare to the industry and how is our value creation over time. Well, I think this is a great way to look at it where you have the x-axis is the return on capital employed and then the y-axis is what we call free cash flow conversion. Basically, that number is just taking your free cash flow and divided that by revenues. And if you look at TGS in this perspective, you see that we have a free cash flow conversion of almost 30% in 2019, and that's combined with a return on capital of about 20% or 19%. And that's truly unique, no matter who you compare TGS to. So if you start to compare us with a traditional asset-heavy seismic players, you see that they typically place in the lower left corner of this graph. And then you see the big integrated old service players such as Halliburton and Schlumberger, they also tend over time to be in the lower left-hand corner of this graph. And then if you look at data companies, such as Verisk, who the owner of Wood Mackenzie; or if you look at IHS, which has a ticker of INFO, then you see even these companies are lagging TGS on those 2 metrics. And the last one is Core Lab, who actually mentioned TGS in their Q4 report, which said that they were the #1 in the industry in terms of return on capital employed, just followed by TGS. That's right. If you look at this graph, you see that they're slightly higher in terms of return on capital, but TGS is clearly #1 in terms of free cash flow conversion. So for every dollar of revenue in 2019, we were able to turn almost 30% of that into free cash flow, which is truly outstanding, no matter what company you compare TGS with. And the big question when you look at a graph like this is: What is a peer group of a company like that? Should you compare TGS to the asset-heavy seismic companies? We believe no. Should you compare us to the integrated oil service company? Probably not. Should you compare us to data/information companies or companies such as Core Lab, who is also a data company? Probably yes or even closer. That's our opinion in terms of who we like to compare ourselves with. And why do I say that? Well, I say that partly because that's what we look at when we compare our performance to other listed peers. We look at data/information companies because, let's face it, TGS is a data company, we're not really a seismic company. We happen to be in seismic, but we happen to be in a lot of other different products other than seismic as well. And we're asset-light just as a data company. I want to discuss amortization. And the basis for starting any amortization discussion, especially in the past before the new accounting rules, is that you look to -- look at sales to investments. So if you look at sales to investment of TGS in a 13-year time period -- or 12 years as we look at here, you see that the average sales to investment is 1.9 from 2008 through 2019. So 1.9 is slightly short of our own ambition, which is to be somewhere between 2, 2.5, but the average is about 1.9. What is interesting to see here is that over the last 4 years, we've been even -- either at or above average in terms of sales to investments. And you all know that seismic spending is less than half of what it used to be at peak, but we still managed to be at around average or slightly above average. And you see that 2018 and 2019 are clearly outstanding in terms of the sales to investment performance of TGS. Then we all know that in the past, before the new accounting rules were introduced, you used to -- when you were going to estimate the amortization rate of a company that had a sales to investment of 2, you would basically use the inverse and then you would adjust for the sales that happened from fully written-off surveys. Which means that a sales to investment of 2 usually equated to an amortization rate of somewhere between 40% and 45%. That's the way it used to be. Let's see how it is right now. So the amortization rate is, for some reason after 2016, significantly higher than what the sales to investment should imply. So what you see is in the period from 2008 to 2014, the amortization rate is pretty much the inverse of the sales to investment where it should be, which means that we had quite a lot of transparency and visibility in terms of what the amortization rate should be for any given quarter. But then you see a big step-up in 2015. We know the reason for that is that our sales to investment dropped significantly. But then after 2015, so for '16, '17, '18 and '19, there is a big gap because despite the fact that our sales to investment is higher than it's ever been, the amortization rate is also higher than it's ever been. And that's where the true disconnect happens. So again, amortization rate well above historical average past 4 years, despite stronger-than-ever sales to investment. If we look at the cash flow, and let's start to look at investments versus amortization first because that's quite an interesting analysis. So if you look at our multiclient investments and you compare that with amortization over the past 4 years, again, let's focus on the '16 through '19 because that's the -- after the introduction of the new accounting policies, what we see here is that we constantly invest -- or we constantly amortize more than we invest. So for every year, we amortize more than we invest, and you know the result of that is that the book value of the library continues to go down and down and down. And if we continue to do that, if you look at the gap between those 2 lines, it's almost $150 million over 4 years. If we continue to do that, then in less than 10 years, the book value of TGS will approach close to 0. And obviously, that doesn't make sense. And that's what we want to focus on, return on capital, and we focus on free cash flow generation. If you look at free cash flow versus EBIT. And this is truly outstanding, you won't find any other company where you have that kind of comparison. So the free cash flow is consistently above EBIT every year from 2016 through 2019, with the exception of 2018, where they're about the same level. So again, that means that we're able to generate the free cash flow that is higher than EBIT. Why is that? Because we amortize too much, according to ourselves. And the result of that is quite clear. The net book value of the multiclient library continues to go down and down and down, and you can continue to draw that line. And I think if you look at your own research reports, nobody expects TGS to have a book value of 0 in 10 years. And why is that? Well, because amortization either has to come significantly down over time or we need to change the way we amortize the projects. And the best way to test that is to look at the return on your library. So if you look at that multiclient library of TGS, it's basically the only asset that we have. And if you look at as reported, if you just take late sales divided by their book value of the multiclient library, the yield of our multiclient library is 81% in 2019. If you find any other oil service company who has a yield on pretty much their only asset of 81%, I mean, that's a big surprise to me. If you look at that and you look on the right-hand side bar, and you look at what would the yield of the data library be if we apply the sales based -- the old sales-based amortization, it would still be 65%. So it's a pretty good yield, pretty good yield, even with the old amortization scheme. But my point, again, on the new amortization scheme, is that we amortize the library way too aggressively. And that's why looking at EBIT and looking at EPS are probably not the right metrics to look at for analysts and investors who want to understand TGS. Internally, we don't even look at that. So again, what is the summary? Well, our finance priorities are very clear: maximize return on capital employed; number two, maximum cash flow; and again, as a result, returning excess capital to shareholders. And I think we've provided a good story this morning about how to do that. Well, we're going to do it by a 39% increase in the dividend. In addition to that, we're going back to the general meeting this spring to ask for a further approval to buy back shares. We're continuing to outperform our peer group, regardless of who that peer group is, and that's for you to decide. And then last but not least, new accounting rules have significantly impacted amortization rate, and as a result, the earnings volatility. So how relevant is it to look at the pricing, so price relative to book. So if you look at enterprise value over book, if you agree that we amortize the book way too quickly, it means that in 10 years, our stock is going to be really, really expensive because the book value is going to be close to 0, right? So cash flow is becoming a more relevant metric to measure performance. And again, that's how we measure our business internally. Let's have a look at the outlook and guidance. And as you know, there's been a lot of discussions around ESG, probably more in Europe than it's been in the U.S. But we constantly hear from our shareholders that what is your plan in terms of ESG. How do you plan to help your clients become more sustainable? Or what are your long-term ESG targets? I think for TGS, we certainly want to help the industry to be more sustainable, for sure. But I think it's also about tell the world and tell our clients what we already do that is very positive in terms of reducing -- or helping them to reduce their carbon footprint. So I think this slide kind of summarizes very well what we already do through our business model. Number one, the multiclient model is an excellent tool for all companies to lower their emissions through shared economics. Because the way it works is that we are now obligated for many of our clients to report on ESG emissions. So we're obligated. When we sell a survey, we're also obligated to say, okay, how much emissions is related to that survey. Well, what we can do, we can go to a company and say, well, but guess what, the emission is x, but you only account for y percent of that because there are 10 other companies sharing that survey. They love that. Secondly, data reprocessing. In 2020, we're going to do more reprocessing of our existing data than we've ever done before. Why is that? Because it's partly pushed by our clients that they want to reprocess existing data rather than going out and buy and acquire a lot of new data. Number three, analytics and cloud computing. We're actually pursuing a very similar model in cloud computing that we do in terms of our vessel charters. So what we do is that we just signed a big multiyear agreement with Google. The agreement allows us to use excess capacity whenever there is excess capacity. When we don't need that capacity, we don't pay for that capacity, someone else pays for that. That's also an excellent example of shared economics and how we can help our clients reduce the carbon footprint. We have an ESG strategy with clear goals. Number one, we are going to reduce our GHG, so greenhouse gas emissions. We are working on improving the workforce diversity, where we are actually doing pretty well. Number three, we're supporting local governments and communities. We've done that for many, many years. Whenever we do business in Africa or we help a country to do or set up or facilitate a license round, I mean that's the way for that country to get out of poverty. Ensuring supply chain alignment with our values and practices. We are also going to require that our suppliers are aligned with our practices for how to conduct our business. Maintaining best practice in corporate governance, that goes without saying. And last but not least, considering the ESG impact of new investments, which we are basically forced by our clients to do because there is now an obligation for us to report on emissions as part of licensing a seismic survey. I think the next slide is showing a very interesting case study, and it goes back to the first point of my previous slide. So this is how we can reduce emissions through the -- or clients can reduce emissions through the multiclient model. This is just a survey that we shot back in 2015 using Polarcus Adira. Survey size is about 3,279 square kilometers. Six customers have licensed some or all of the data. It hasn't been a great survey in that regard. But it means that when we report on this and we've licensed this survey to our clients, we can tell our clients that their greenhouse gas emissions per square kilometer is actually 55% lower than if similar volumes were acquired proprietarily. Again, that's music in the ears of all companies who are now under significant pressure to reduce their emissions. So our financial targets for 2020. Number one, we are going to invest about $450 million. Are we going to take market share? Yes, a clear yes to that because what -- because our clients -- or our competitors, sorry, have guided investments of about $250 million. So all our 3 main competitors have indicated to the market that they're going to invest about $250 million each. We're going to invest $450 million, and I feel very comfortable about that figure based on what we already have committed for the year. Number two, we're going to continue to outperform our sector in terms of cash flow and return on capital employed, which are the 2 main metrics for TGS. We target a continued cash conversion about -- above 20%. In addition to that, we target a return on capital employed above 20%. And that, again, means that we're going to continue to be the company who provide industry-leading distribution to shareholders. We announced a dividend increase of 39% this morning. That's about $0.375 per share per quarter. It accounts to about $1.5 per year, which again equates to about NOK 14 per share. And we are going to continue our buyback program, subject to AGM approval later this spring. Where are these investments going to be? Well, I think this slide shows approximately where we plan to invest for 2020. So onshore is going to be about 20% of the overall investments. North America is going to be less than 20%, but more than 15%. Latin America is close to 40%, so you see a significant step-up in our investments in -- particularly in Argentina and Brazil. AME and AP, relatively low investments, but we are quite hopeful in terms of late sales in those 2 regions. And the reason for that is AME, you have 2 major license rounds that have already been announced, one in Senegal and one in Liberia. And in AP, we have a lot of farming activities around our data in 2020. And then Europe, slightly lower than previous years, but still accounting for somewhere between 10% and 14% of total investments. Of course, there's still some uncertainty related to this, but this is the way we look at our portfolio and this is how we plan to allocate capital in 2020, in addition to all the capital that you are getting from TGS. So the project schedule is getting more and more busy, so I think we have to split it up in 2 slides from now. But it's -- you see we have 4 onshore projects planned in the first half of the year. We have 5 big 3Ds, 2 big ones in Argentina, as you see, and then we have quite a lot of 2D/seep activity as well. I'm not going to go into further details on that. But that equates to a backlog that has increased to 3x the number that we had in the same period of last year. So we have a backlog of about $181 million, which compares to $63 million in Q4 of last year, which again, puts us in a rather unique position relative to peers and relative to TGS in historical years. We're guiding $450 million of investments, that is up from $407 million in 2019. And I know the question will come up, what kind of vessel rate increase have you taken into account in your guidance? The answer to that is that it's flat. And why is it flat? Well, because we have committed to most of that activity already. So in summary, we have net revenues of $232 million, slightly higher than what we preannounced for the quarter. Cash flow is the key performance metric. We outperformed once again with $226 million in 2019, and that again means increased distribution to you and other shareholders. For 2020, we see a favorable development in order backlog, and that positions us really well to take market share in a market that we expect to remain pretty much flat in 2020. So with that, I want to say thank you very much for your attention. I want to open up for questions, and I want to ask Dean to come up as well.

[John A. Schj. Olaisen, Co]

It's John Olaisen from ABG. A couple of questions. One, you don't provide any guidance on prefunding for this year, which is the first time in -- since you were listed, I think. Why is that?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I think we want you to do some of that work and -- for us. And we provide a quite detailed vessel backlog, and from that vessel backlog, you should be able to calculate a reasonable number on the prefunding. What I can say, in terms of without being too specific on guidance, is that we expect prefunding to be higher in '20 than it was back in '19. Part of the reason for that is a slightly higher proportion of what we call converted contracts, where Argentina is a great example, where we have quite significant prefunding on those 2 vessels that we have in Argentina.

[John A. Schj. Olaisen, Co]

And then Argentina is very heavy [indiscernible] -- are we talking 70%, 80% on those projects?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I don't want to confirm that, but a very high prefunding is the right way to look at that, yes.

[John A. Schj. Olaisen, Co]

And I know you don't provide any guidance on late sales, but is it possible to say something on the momentum? Your late sales in the second half was a little bit disappointing compared to consensus estimates, and we saw the whole industry disappointed in Q4. And there are a lot of comments that things were going a little bit slower. If you could provide a little bit of thoughts on that in general, please?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I think Q3 was fantastic, obviously, and there were some particular reasons for that, but Q3 was a second-best quarter we've ever had. Then Q4, obviously, slightly lower than that. I guess I could agree that it was slightly disappointing in Q4. I think there is still a lot of price pressure in our industry, which we are impacted by. I think for 2020, all I can say is that we expect an exploration market and seismic spending that is going to be pretty much flat compared to 2019. Our ambition is to take market share, so we need to aim to grow our late sales. I don't want to be more specific than that.

[John A. Schj. Olaisen, Co]

And how will all these converted contract projects influence your late sales in this year, technically?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I think in general, I mean, you need to look at that in a longer perspective because 2019, we probably had a slightly higher proportion of frontier projects, which we expect very good late sales from in 2020. Yes, it may be slightly higher proportion of prefunding versus overall revenues. But I mean, over time, that's going to kind of be a washout because you have contribution from several vintages and it's really hard to say. All I can say is that we expect the market to be flat for 2020, but our ambition is to continue to take market share.

[John A. Schj. Olaisen, Co]

Overall seismic spending flat?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I think so, yes.

[John A. Schj. Olaisen, Co]

And -- but sir, on the late sales, in the first half and in the first quarter, you have a lot of converted contract jobs in Argentina. I presume -- let's just for thoughts, assuming it's 80% prefunding on those projects, I mean, I guess, those prefunding will be booked as prefunding revenues.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes.

[John A. Schj. Olaisen, Co]

But since this is converted contract jobs, you're not able to book a lot of late sales on that project in the near term, I would presume.

[Kristian Kuvaas Johansen, Chief Executive Officer]

In the near term, you're right.

[John A. Schj. Olaisen, Co]

Yes, yes, yes. In the first half, it will be a negative effect on those converted contract jobs when it comes to late sales.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, if you just compare apples-to-apples, but then obviously, you're going to have late sales from whatever you did back in '18 and '19. So it's really hard to estimate that conclusions.

[John A. Schj. Olaisen, Co]

Are there any signs of improvements in the U.S. Gulf of Mexico in terms of exploration?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Could you repeat that, please?

[John A. Schj. Olaisen, Co]

In the U.S. Gulf of Mexico, where you still have a big footprint in terms of multiclient library, is there any sign of improvements for oil companies spending more money on exploration in the U.S. Gulf of Mexico?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, we actually see a slight improvement. And Q4 was actually pretty good in the U.S. GOM in terms of late sales. So I think U.S. GOM is slowly recovering and getting better. Latin America is very hot, as we speak. Europe is probably the area where we've seen the lowest growth or negative growth, partly driven by some of the changes in the license round scheme in Norway, also partly driven by an increased ESG focus, I think. So Europe has been a bit disappointing. Onshore was a bit disappointing in Q4, but it's going to be strong in Q1 because we have a strong order backlog there for new projects with high prefunding. And then Africa, Middle East and Asia Pacific, as I said, we have a few license rounds in Africa now where we are perfectly well positioned. We have a few farm-ins that we expect to happen in Asia Pacific this year, which will be very good for us. And I guess, there is no secret that the 17th round in Brazil is pretty much all over our data, so that's also very positive.

[Dean Zuzic;Chief Financial Officer]

[indiscernible] I have a question here on the web, if we can cover that, pal. It should be pretty easy to answer.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, yes.

[Dean Zuzic;Chief Financial Officer]

It was from [indiscernible]. Obviously, it will be more beneficial to implement the share buyback at lower prices, i.e., now versus the start of the year. Can you share the valuation metrics you use when deciding when to ramp up or slow down the share buyback program?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Not really. But I think in general, there are quite strict regulations for share buybacks under the EU safe harbor rules. So you cannot really be too opportunistic. What we obviously can do, and you probably saw that, we were more aggressive when the share price was NOK 220 than when it was NOK 290. I mean that goes without saying. It doesn't say that we think NOK 290 is an expensive share price, but it's obviously more expensive than NOK 220. So I guess, where it is right now. I haven't checked this morning, but obviously, it's more attractive than it was 2 or 3 months ago. So we can probably assume that our remaining $6.5 million or $6.6 million will be used rather quickly if we -- if the share price stays where it is right now.

[Christopher Møllerløkken, Research Analyst]

Christopher from Carnegie. Just two questions. I might have misread, but it seems to be in the report that it's -- you had secured $180 million of your planned 2020 program. And given the backlog of $180 million, it seems like your work for 2020 is 100% prefunded. Or is my math incorrect?

[Kristian Kuvaas Johansen, Chief Executive Officer]

No. I mean some of that $181 million in backlog is late sales and it's not related to new investments. So that's why there is some kind of a discrepancy in the figures.

[Christopher Møllerløkken, Research Analyst]

But you agree that the work you have secured for 2020 is highly prefunded.

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes.

[Christopher Møllerløkken, Research Analyst]

Yes. And the second question was, even though it seems like the accountants will make my life slightly more miserable every time they do some accounting reform, could you share...

[Kristian Kuvaas Johansen, Chief Executive Officer]

Don't get me started.

[Christopher Møllerløkken, Research Analyst]

Could you share your view of -- your thoughts regarding a fair assumption for multiclient amortization in 2020?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I think it's probably going to continue to be at an unreasonably high level. I think that's what I can share. I think it will probably be slightly higher than it was in 2019.

[Dean Zuzic;Chief Financial Officer]

[indiscernible] We -- Kristian showed you a slide that showed basically that we've been amortizing more than what we've been investing over the last 4 years. As a result of the new accounting rules, we still have the same rules that we have to apply to in 2020. So I think it's a reasonable assumption that you'll see the same trend in 2022. Amortization, a bit higher than what the investment will be. But this is obviously something that we -- we have it on our radar and it's something that we will initiate discussions with the rest of the industry and with the accounting community about -- because, obviously, the change from 2016 has not given us better quality. [indiscernible]

[Kristian Kuvaas Johansen, Chief Executive Officer]

And I think it's important to say that for a cash flow-oriented company, it's actually a good thing. If you also start to look at cash flow, it's a good thing. We save a lot of taxes because we over-amortize the data libraries. I'm actually surprised that the tax authorities let us do that year after year after year, but that's a different story.

[Christopher Møllerløkken, Research Analyst]

And over time, multiclient amortization should be more close to investments?

[Kristian Kuvaas Johansen, Chief Executive Officer]

It will have to be, because, again, you can draw that line, and you will see that in 10 years' time, there's hardly going to be any book left. That means that price to book is going to be extremely high, but the returns are also going to be fantastic.

[Dean Zuzic;Chief Financial Officer]

I have another question here online, maybe we can take, from [indiscernible]. You are guiding for flat market year-over-year. Does that take into account the extraordinary high transfer fees you had in 2019? Or do you mean flat year-over-year excluding those extraordinary transfer fees?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. When we're saying flat market, we don't talk about TGS results, we talk about what we see in the exploration market and what we see in the seismic spending going forward. So if you look at some of the E&P spending reports that have been published, they range somewhere between 0% and 5%, but then E is typically weaker than P in this environment. So exploration for 2020 is most likely to remain pretty much flat, which I don't think comes as a big surprise to all of you.

[Dean Zuzic;Chief Financial Officer]

Having said that, there's a -- maybe I can comment, I mean, transfer fees are an integral part of our business model. We have transfer fees every year, so it's not as if it's a one-off in 2019. Although we do, they were exceptionally high in 2019. I have another question here online from Sahar Islam from Goldman Sachs. Is there upside potential to the revenue synergies of $20 million for Spectrum? Have all these synergies been implemented with the $9 million charge? Or should we expect another charge related to Spectrum?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. The charges have been charged to the accounts in Q4, so we don't foresee any additional restructuring charges related to the takeout of the synergies. And what I can say about the synergies that we're on track. We will see those synergies in 2020. And whether there is upside, it would be stupid for me to say that there is upside because then expectations are going to be even higher next time we meet. But I think $20 million is what we promised and $20 million is what we believe in, and that's what we're going to deliver. Yes?

[John A. Schj. Olaisen, Co]

Yes, it's John from ABG, again. Allow myself a couple of more questions since there are so few questions. But when you say the total seismic market flat, I presume it means some of all the revenues of all the seismic players out there. But when we listen to the contract players, they all say that their rates are going up this year, like the most aggressive one saying 25% to 30% up, and the most conservative one saying 10% up. So it looks like your contract market is going to have higher revenues this year. Do you agree on that -- about that? And I realize that you yourself, you have booked flat prices. But nobody is saying price is down. So it looks like contract market is going to go up this year. So do you expect the multiclient market to fall this year?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Well, let me answer that question in a different way. I think the reason why you've seen increased rates in 2019 and you may see a slight increase also in 2020 is purely supply-driven rather than demand-driven. It's based on the fact that you've seen a significant consolidation of the vessel fleet and pretty much 70% of the vessels are now sitting with 3 players. So I think that's the reason why there has been slightly more pricing power on the vessel suppliers in '19 than what you saw in '18. I don't think that the market and that the spending of all companies is significantly higher in '20 compared to what it was in '19. And I don't think their willingness to pay significantly higher rates have changed. We fight for every deal. We have...

[John A. Schj. Olaisen, Co]

Are they not telling the truth?

[Kristian Kuvaas Johansen, Chief Executive Officer]

I'm not saying that. What I can refer to and what TGS can refer to is what we pay, right?

[John A. Schj. Olaisen, Co]

Sure.

[Kristian Kuvaas Johansen, Chief Executive Officer]

And we have committed the entire -- I mean, you look at our vessel schedule, and I can confirm that, that's pretty much flat rates. Obviously, that varies from minus 10% to plus 20%, but it's pretty flat if you look at the overall commitments that we have made. What the vessel players see in their own backlog, I mean, that's up to them.

[John A. Schj. Olaisen, Co]

Let me rephrase. So you expect a flat contract market in dollar spending?

[Kristian Kuvaas Johansen, Chief Executive Officer]

For TGS.

[John A. Schj. Olaisen, Co]

But -- for the market, sorry. So my question is really, do you expect multiclient market, total multiclient seismic market spending in 2020 to be flat compared to '19?

[Kristian Kuvaas Johansen, Chief Executive Officer]

We expect multiclient to be flattish compared to '19.

[John A. Schj. Olaisen, Co]

But do you expect to take market share?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes.

[John A. Schj. Olaisen, Co]

And then a follow-up on the vessels. On your Slide #6, I noticed that a lot of the vessels you're renting now are from Asian, Russian players. There are very, very few Western vessels in your fleet, abnormally low. And I wonder is that because what we just discussed that the PGS, Shearwater and Polarcus have turned prices up, but you're able to get lower prices because you're taking more low-end capacity?

[Kristian Kuvaas Johansen, Chief Executive Officer]

No, I don't think that's the case. I think if you look at our vessel schedule for 2020, I mean, part of it is seasonality. We have already locked into some capacity. Some of that is on risk share contracts, which we are obviously going to continue to do, in line with what Spectrum did quite heavily back in 2018 and '19. I think for the summer season, we will probably see a slightly higher proportion of Western vessels. But I mean, we don't really look at the flag, we look at the pricing and we look at the performance of the vessels. But I certainly wouldn't rule out that you will see -- I mean, in Canada, as an example, we're probably going to have 1 or 2 3D vessels in Canada, and that's going to be in a joint venture with PGS, of course.

[John A. Schj. Olaisen, Co]

Do you care about ESG at all when you look at -- when you choose vessels?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes, we do.

[John A. Schj. Olaisen, Co]

So when you look at the Chinese vessels, probably they are worst end of the scale when it comes to ESG issues. Both CO2 emissions but also the way they treat their employees, their conditions, et cetera, et cetera. Do you care about that at all when choosing a vessel?

[Kristian Kuvaas Johansen, Chief Executive Officer]

Yes. I mean, it's certainly not as bad as you're indicating. But again, I can confirm that we are looking at that, and it is a metric that we look at when we charter a vessel, absolutely. And we also do -- we do more HSE work with vessel crews and on the vessel now than we did historically, and especially with vessel providers that we haven't worked with before, we spent a lot of time on the pre-meetings and the HSE meetings together with the crew. And if you look at the performance in terms of HSE, we don't see any difference, whether it's an Eastern or Western vessel.

[John A. Schj. Olaisen, Co]

And another follow-up on that. You said that investments in Q4 were lower because a lot of -- a few projects are pushed into Q1. You said -- you mentioned weather and a general delay. And it seems like you don't -- you don't pay -- you've already committed the vessels for that, but you don't pay them when they're waiting for better weather, et cetera. At least it doesn't appear in your cash flow and your investments. Is that true? And then I wonder, do you still manage to get those kind of agreements? Because all the vessel providers are saying they're getting better terms, and now they're getting paid for weather standby, et cetera. But...

[Kristian Kuvaas Johansen, Chief Executive Officer]

I don't want to comment on that because it's quite visible what vessel we are talking about. So I think, in general, I mean, our business model is great, and it's worked really well through the cycles. And obviously, it gives us a lot of flexibility in terms of delays. So that's all I want to say about that.

[Dean Zuzic;Chief Financial Officer]

We have other questions online here from Lillian Starke, Morgan Stanley. Some of -- she's asking about processing capabilities. Some of the peers in your reference, you referenced to have higher processing capabilities. I was wondering if there is any processing that you outsource to these players? And if that is the case, would you be interested in making further investments to expand these capabilities and bring them in-house? Or do you prefer to continue to outsource?

[Kristian Kuvaas Johansen, Chief Executive Officer]

We do a little bit of outsourcing, but it's actually less than what the combined company has done in the past. And I think going forward, as I said, we signed a multiyear agreement with Google, which basically gives us unlimited capacity in terms of processing. So we're not too concerned about capacity right now. Obviously, we need to pay for that capacity, but that will be passed out to -- or passed over to our clients. So we're less concerned about compute capacity now than we were probably 6 months ago in terms of human capital capacity, I mean, that's always kind of a bottleneck. So that's something we're looking at, and we're hiring people, as we speak, in our processing departments. All right. I want to thank you very much for your attention and welcome you back later this spring for the Q1 presentation of 2020. Thank you very much.