TGS ASA

OSE:TGS

Earnings Call Analysis

TGS Reports Q4 2023 Results with Optimism

TGS, a global energy solutions provider, experienced a mixed Q4 with overall revenues of $206 million, down from $227 million in Q4 2022. Late sales significantly dropped to $59 million from $137 million the previous year, compensated by a jump in early sales to $59 million, and proprietary revenue increase to $88 million. EBITDA declined slightly to $137 million, but the company saw a 21% surge in backlog to $545 million, positioning well for 2024. The PGS acquisition closure is anticipated in Q2 2024. Overall, TGS enjoyed a 128% surge in early sales with a commensurate decline in late sales, reflecting a major mix change but robust market demand. The 14% pro forma revenue increase signals the seismic market's growth mirroring energy industry trends, with expected normalization in 2024.

TGS Q4 2023 Results: A Story of Growth, Transition, and Future Outlook

TGS, a major player in the geoscience data industry, under the leadership of CEO Kristian Johansen and CFO Sven Borre Larsen, reported their Q4 2023 results, revealing a business in transition with multiple milestones. Total revenue from percentage of completion (POC) was $206 million, down from $227 million year-on-year, but showing strong signs in early sales which soared 128%, and proprietary revenue rising to $88 million from 2022's $60 million. The backlog grew by 21% to $545 million, indicating potential growth for 2024. Strategically, TGS is preparing for the PGS transaction closure expected in Q2 2024, which should enhance their positions in essential markets globally.

Investment Shift and Market Reactions

Amidst a shifting landscape in sales mix, TGS achieved a higher EBITDA than anticipated at $137 million, though slightly lower compared to the previous year's $151 million. The company's strategic move in recent times has been driven by a pivot in sales types, as it now benefits from a notable increase in early sales, which represent a mix of pre-funding and cash collected within 12 to 24 months post-survey start. Despite a 36% decline in late sales due to the absence of transfer fees in 2023, the company adapts with flexibly planned investments and solid contract inflow.

Innovative Projects and Expansion

TGS showcased its operational agility by securing contracts for Ocean Bottom Node (OBN) and 4D surveys in attractive regions such as the Gulf of Mexico and North Sea while also extending existing contracts in Europe. This underscores their commitment to technological advancement and client satisfaction. Engagement Phase 5 in partnership with WesternGeco and Schlumberger promises comprehensive data coverage in the Gulf of Mexico using advanced elastic full-waveform inversion technology for imaging.

Financial Scaffolding

Despite certain challenges such as an effective tax rate over 100% due to jurisdictional tax asset recognition limitations, the company's balance sheet remains robust with a strong net cash position of $197 million. TGS exhibits sound financial management by maintaining its dividend policy, offsetting a negative capital trend with a cash flow from operations at $148 million and keeping investor returns in focus.

Market Outlook and Guidance

Looking ahead, TGS anticipates the exploration market to continue its growth, although at a slower pace in 2024 relative to 2023. The expectations for the industry are buoyed by disciplined client spending and strong growth forecasts. For its financial guidance in 2024, TGS expects an early sales rate to exceed 85%, with multi-client investments estimated at $300 million to $350 million. Amid uncertain times, TGS remains determined to meet its target of 2x sales to investment ratio, drawing from its significant backlog and strategic market positions enhanced by the PGS transaction.

Earnings Call Transcript 2023-Q4

[Kristian Johansen, executive]

Good morning, everyone, and welcome to the Presentation of TGS Q4 2023 Results. My name is Kristian Johansen, I'm the CEO of TGS. And with me today, we have Sven Borre Larsen, our Chief Financial Officer.So, take you through the forward-looking statements first that you can read after the presentation. And then we go to the first slide, which highlights the summary of Q4. And obviously, as we usually do, we have reported this on the sixth business day of the quarter, but I'm still going to go through the numbers.So we had total POC revenues or percentage of completion revenues of $206 million in Q4, that compares to $227 million in the Q4 of 2022, but with a very different mix of sales. So first of all, we had late sales of $59 million. That compares to $137 million in Q4 of 2022. And then we had early sales of $59 million, which compares to $31 million in the last quarter of 2022. And then finally, we had a strong quarter in terms of proprietary revenue, mainly related to our acquisition activities from the former Magseis, where we had $88 million compared to $60 million in Q4 of 2022.We had a stronger-than-expected EBITDA. We had $137 million, that compares to $151 million in Q4 of last year. We had solid contract inflow, $275 million of new contracts signed in the quarter. And given that we signed more contracts than we had revenues, we increased our backlog, and our backlog as of the 31st of December now is -- including acquisition is about $545 million, which is about 21% higher than it was in the same quarter of last year. Last but not least, the PGS transaction is expected to close in the second quarter of 2024 and the integration planning is well underway, with teams from both companies trying to do the necessary analysis to be ready to kick off on day one after the close.So just summarizing the full year of 2023 and the POC highlights, so we had continued strong early sales momentum. So early sales were up 128% year-on-year. We had good performance by acquisition, 26% growth in acquisition. We had a backlog growth, as I said, of 21%. So we're well positioned for growth also in 2024, based on a strong backlog.We see our DES business or Digital Energy Solutions, which mainly consists of our activities within new energies, growing rapidly with a 62% year-on-year growth. We have an EBIT margin of 18%, partly driven by operational performance and strong cost control. And then last but not least, a robust cash flow of $154 million for the full year.Again, we had significant growth in full-year revenues of 2023, but a significant change in the revenue mix. And this is something we have spent quite some time on since the 6 business day in terms of surprising the market negatively in terms of our late sales. But I think it's really important that you all see this in a bigger context and you look at the overall sales, because, as you know, every sale is cash. It's not like late sales gives more cash than proprietary sales or early sales. It's just the timing of it that is different.So our proprietary sales are up 25% for 2023. And again, this is driven by very good performance in our acquisition business unit. So we can already conclude that the timing of the acquisition of Magseis and obviously, the execution and the integration of that acquisition has been really good. And I'm very pleased with all the new colleagues who have joined from Magseis who've now become true TGS employees and integrated well into the overall company.You see, our early sales are up 128%. It's partly driven by higher investments. We invested more in 2023. As you see from our guidance, it's going to come down slightly in 2024. And this is very much in line with our plans. This was our plan for '23, and it's been part of our long-term plan that the first year of an expected upcycle, we invest more, and then we take the foot off the gas pedal in year 2, 3, and 4 to improve the sales to investment and improve the free cash flow. And that's really our plan for the next couple of years.So, again, early sales up 128%, and then that's partly compensated negatively by late sales down 36%. And again, as most of you probably know, we had a very strong 2022 in terms of late sales. This was driven by quite significant transfer fees. And we pretty much had 0 transfer fees in 2023. And then we expect 2024 to be probably more similar to '22 than it is to '23, because, as you know, there's been a significant consolidation activity among our clients in 2023, waiting to be closed or waiting to be integrated then in 2024.So summarize, pro forma revenues up 14%, which certainly signals that seismic spending continues to be strong. Seismic spending continues to grow with overall spending. It's just a different mix than what we saw in 2022, and that mix could easily be back again to more normal in 2024.So I'll touch on operational highlights. So start with the OBN contract secured in the quarter. Again, you saw our backlog was record-strong at the end of the year. It was 21% higher than it was at the end of 2022. So sets it up really well in terms of our activity level for '24. We were awarded 2 4D surveys in the Gulf of Mexico in Q4, and we're going to acquire these surveys simultaneously utilizing the same vessels, and possibly by deploying the full spreads, and then acquire with source vessels that basically acquire data from both surveys. We expect this to be complete in Q2 of 2024. And again, it highlights our strong position in the U.S. Gulf of Mexico for OBN, and particularly 4D.Number two is that we had a new contract signed for a repeat customer in the North Sea. We were awarded a contract that is probably going to be between 3, probably closer to 4 months of an OBN contract this summer. We're going to shoot this in Q2 and Q3 of 2024. And then last but not least, it's great to see that we get renewals of these multi-year reservoir monitoring contracts that we have in Europe. So again, this is an extension to a monitoring and source contract. It's in the North Sea and it's with a client that has been working with us for quite some time. So really good, and it's a quality stamp in terms of both HSE and also operational performance.Then we have Engagement Phase 5 that we announced in the U.S. Gulf of Mexico. So, so far, we've done 7 surveys, if you include this. It's all in partnership with WesternGeco, SLB, and we have 2 amendment surveys that we did together. And this is the fifth phase of the engagement surveys. And as you see from the map, we're about to cover the entire Gulf of Mexico in terms of new data, better data, higher technologies, and this is obviously driven by great customer interest.So this data set is about or covers about 157 OCS blocks. It's about 3,650 square kilometers. It's a relatively big OBN survey. We are going to apply the new elastic full-waveform inversion technology in imaging and started the project in Q1. And again, fast-track data is going to be available from H2 of 2024. This reminds me about an important point in terms of the strict focus on late sales. And if you look at this survey, it started in Q1 of 2024. We're going to have fast-track data available early next year. So about 14 months after we start acquisition. Then the final data is probably going to be available towards the end of 2024 and into early 2025. That's when we start to call it late sales.But everything we sell from now on until second half of 2025 possibly is going to be what we call late participants to early sales. So it's still going to be recorded as early sales. And that's why it is extremely important that you guys look at the mix and you look at the total sales rather than trying to carve out late sales and basically base your market or market assumption based on that number only. This survey is not going to be called late sales again until probably second half of 2025.Okay. If we move on, we had a 2D in offshore Malaysia. This is a collaboration with PGS and SLB. It's also the seventh phase in a multi-year program. It's a 5,000 kilometers of new 2D seismic acquisition, 2,600 kilometers of legacy processing and then 2,800 square kilometers of what we call 2D-cubed processing, which is basically a way to stitch a lot of older 2D data in terms of getting 3D result through processing. Acquisition of this is completing or completes in Q1, fast-track data available for the Malaysian Bid Round late in the year and again supported by good industry funding.And then this map shows a lot of the activities that we had in Q4. And you see typically Q4 is kind of a low point in terms of activity. But you see we were quite busy around the world, whether it was multi-client projects, whether it's OBN operations or operations related to our new energy solutions business. So another active quarter in that regard, despite the fact that Q4 is typically a low point in terms of acquisition activity.So a quick update on the PGS transaction. So transaction was approved with close to 100% majority by the Extraordinary General Meetings of both companies. I think everybody we talk to understand the rationale of this transaction. I think we're very excited about getting together and really starting to kick off the integration work and we think we can build a great company together, a fully integrated company that has activities pretty much all over the world and very strong positions in the leading basics.We're going through on the regulatory reviews in Norway and the U.K. As you saw yesterday, the Norwegian Competition Authority has, as expected, resolved to continue its assessment of the transaction in a Phase 2 review. And I'm going to show you the timeline on that on the next slide. As I also mentioned, the post-merger integration planning is well underway with people from both companies and then we estimate closing in the second quarter of 2024. So nothing has changed in that regard and in terms of our expectations of a closing date.And if you look at that in more details, and I'm not going to take you through everything here, but you see the Norwegian Competition Authorities have just finished the Phase 1 which took 25 working days. They're now entering into Phase 2, which is another 45 working days. And if you compare that with the U.K. authorities process, you see that it fits really well with their Phase 1. And hopefully, we end after Phase 1 in U.K. and after Phase 2 in Norway, and that should put us in a good position to close sometime in late May or possibly early June. But again, everything is going according to plans. They have a job to do and they obviously need to be educated too about the marketplace and how the different players see the marketplace going forward as well.So with that, I'll hand it over to Sven, who's going to go through the financials, and then I'm going to come back and talk about the outlook for 2024. Thank you very much and welcome, Sven.

[Sven Larsen, executive]

Thank you for that, Kristian. Good morning, everyone. As always, I will start with going through our POC revenues by the different types of revenue streams that we have, starting with early sales on the top left-hand quarter, we had $59 million of early sales in the quarter. It's a bit down compared to what we've seen in the previous quarters, but that's down to the seasonality of our investment profile and very much as expected. And as you can see, it's a pretty significant increase and almost a doubling from what we had in the same quarter of last year. And it's a reflection of the improvement in the customers' willingness to support new multi-client projects.Then moving on to late sales, we came in at $59 million in the quarter. And as you can see, that's a pretty significant reduction from what we had last year. I'm not going to go into the details of the reasons for that, because Kristian is going to cover that later in the presentations. But of course, that was a disappointing number not only to the stock market, but also to us internally.Then looking at proprietary sales, came in at $88 million, which is 47% year-over-year increase. And also here we see that it's down on a quarter-to-quarter basis, again related to the seasonality of our OBN business. This gave total revenues of $206 million, which is a little bit down compared to the $227 million that we recorded in the same quarter of 2022.Then looking at the revenues by business unit, multi-client and imaging on the top left-hand side had $113 million in this quarter, which is a 27% reduction compared to the same quarter of last year. And that is, as I already discussed, related to the drop in late sales. So despite a growth, sharp growth in early sales, the drop in late sales outweigh this. And we had a reduction of 27% year-over-year.Then looking at the Digital Energy Solutions, as you can see, we had a massive increase in revenue stream from our Digital Energy Solutions business. This has partially to do with an XHR data acquisition project we did for a CCS project in Gulf of Mexico in the quarter. But also the more recurring revenue streams continues to increase. So even excluding this XHR project, so these XHR revenues tend to be quite lumpy and we haven't lined up any new contracts in the next few quarters, although we are looking at some leads. But even adjusting for this, we saw close to 40% increase in the more recurring revenue streams year-over-year in the DES business. So we're very happy with the development on the revenue side with respect to Digital Energy Solutions.Then looking at the Acquisition business unit on the bottom left-hand chart, our -- the gross revenues ended up at $77 million, which is a 26% increase compared to the same quarter of last year. And if you remove elimination of internal work, we had $75 million, which is a reduction -- which is an increase, sorry, of 39% compared to the same quarter of last year. Again, there is a component of seasonality here, as you can see, with a difference from Q3 and Q2 to Q4. And also the project mix that we were doing in Q4 had -- we typically did -- or we did some projects with less scope than we typically do, which means that the margin in percentage terms is higher, but the revenue is a bit lower. But the net contribution in dollar terms should be the same. And that partially explains the strong percentage margin that you saw in the acquisition business in this quarter.And then looking at our costs in the quarter, starting with the cost of goods sold, which is related to our proprietary revenues. Here, you see that we recorded $25 million in this quarter. And if you compare that to our proprietary revenue, you'll see that we had a very strong gross margin in the quarter. But be aware that there is a one-off included in this number. So we had reclassified $7.8 million of cost of goods sold to depreciation. We have basically agreed or changed the valuation of some of the lease obligations which has led to this reclassification. So there is a one-off that has reduced the cost of goods sold by $7.8 million in the quarter.But even adjusting for that, you see that we have a very strong gross margin in the quarter, and this has partially obviously to do with strong operational performance, partially to do with what I alluded to about the lower scope of some of the projects that we are doing compared to what we normally do, and partially as we enter into some lease arrangements or longer-term leases for source vessels and node handling vessels in the quarter, which is -- and these are vessels that we had on shorter-term contracts earlier, which basically removes a little bit of cost from cost of goods sold to depreciation or depreciation of right of use assets. So there are several reasons for the low cost of goods sold. But even adjusting for this, we had very strong operations in the quarter.Then looking at personnel cost coming in more or less in line with expectations at $32 million, which is, yes, the same more or less level as we have seen over the past few quarters, and we also expect it to remain at this level going forward. Other operating costs came in at $12 million. So we show strong cost discipline as you can see. We expect this number to remain at a quarterly run rate of $13 million to $15 million going forward, although it may be a bit lumpy from time to time. This gave us a strong EBITDA in the quarter of $137 million. So despite the sharp reduction in late sales, our POC EBITDA did not fall that much compared to the Q4 of 2022.Then amortization, straight line amortization increased a little bit in the quarter, and that has to do with the fact that some projects were completed in the quarter. You can see that our accelerated amortization were low $8 million in the quarter and that we had a small impairment of $1 million. The $8 million of accelerated amortization means that we had a really strong profit on our early sales revenue, not only for the quarter, but that as at -- for the year as a whole, we saw that early sales actually contributed, if you just subtract the accelerated amortization from the early sales, you'll see that it had a contribution of $200 million in 2023 as a whole. So it's a very profitable part of our business.Then depreciation was high in the quarter. This includes the $7.8 million of reclassification that I talked about from cost of goods sold to depreciation. And it also reflects that some -- these new leases that we enter into in Q4. This gave us a POC operating result of $47 million, which is to be compared with $75 million in the same quarter of last year. Multi-client investments were $71 million in the quarter. We had 84% early sales rate in the quarter, which brought the full-year early sales rate up to 77%, 78%.This chart here shows the bridge between POC revenues and IFRS revenues, which brings us to the IFRS profit and loss account, $199 million of revenues. You'll see that early sales here is significantly lower than POC early sales, but that has only to do with timing, obviously.Cost of goods sold $25 million, personnel cost $32 million, and other operational cost $12 million. As we have already discussed, gave us an IFRS EBITDA of $121 million. We had straight-line amortization, which is the same in POC and IFRS. $43 million accelerated amortization of $27 million, which is higher than what we had in our POC accounts. The impairment is the same, $1.4 million, and depreciation is the same. This brought the operating result on IFRS basis down to $10 million or $11 million for this quarter.Adding on net financials, we ended up with a pre-tax profit of $15.6 million. And then you'll see that we have a high tax cost in the quarter. We actually have an effective tax rate above 100%. And this has to do -- mainly to do with some impacts from some tax assets that we have not been able to recognize in the quarter. So unlike, for instance, in Norway, where you can utilize tax assets between group companies, you have certain jurisdictions where you cannot do that. And if you accumulate a loss in one entity, you cannot basically take the tax deduction in another entity. But it doesn't mean that the tax asset is lost. If we can allocate some profit to those entities in the future, you'll see a reversal of this. So it's partially of a technical and preliminary nature. So this actually gave a net income or net that was negative of $109 million, which gave a negative EPS of $0.07 in the quarter.Looking at the balance sheet, other than noting that the balance sheet remains strong with $197 million of net cash sitting on the balance sheet at the end of the quarter, you should also note the fairly unusual development for a Q4 in working capital. So you actually see a negative or a reduction of net working capital. And that obviously has to do with the low late sales that we saw in Q4.Then the cash flow statement. Cash flow from operations $148 million in this quarter. And this has been reduced by the $7.8 million or -- sorry, increased by the $7.8 million of reclassification of cost of goods sold that I talked about earlier. We had net cash flow from investing activities of $107 million. And then we had cash flow to financing activities of minus $48 million. And again, this is reduced by the same $7.8 million under repayment of lease liabilities. So that reclassification also affects the mix that you see in the cash flow statement. But obviously the net cash flow is the same at minus $7.6 million in the quarter, which gave us $197 million in cash at the end of the quarter.Then dividend, the Board has resolved to keep the dividend unchanged at $0.14 per share, which corresponds to NOK 1.47 per share in this quarter. The ex date is a week from now, 22nd of February, and the payment date will be on the 7th of March. We have chosen to not change the allocation strategy for now. We will wait until we have closed the PGS transaction and then the Board will revert with a new allocation strategy after that. But you should expect us to focus more on buybacks in the allocation strategy going forward, but we'll revert with that later in the year.And by that, I'll hand the word back to you, Kristian.

[Kristian Johansen, executive]

Thank you, Sven. And let's touch on the outlook for 2024, and then we're going to open up for Q&A after that. So let's start with the overall market. What you see on the right-hand side of this slide is E&P guidance or CapEx guidance for the largest E&P companies. And you see the list of companies below the bar chart.Overall, we saw a growth in 2023 of 12%. So quite healthy growth. It's going to grow quite healthy in 2024 as well, but it's going to be at lower multiples, about 7% versus 12% in '23. But keep in mind that this is overall E&P CapEx, and we're very small. This industry is about 2% or slightly less than 2% of overall E&P. So this may vary a lot from year to year in terms of data purchases and subsurface data as a percentage of E&P CapEx.What we see from talking to some of these customers is that they have data needs. There's no question about that. Everyone is going to continue to do exploration for the future is probably a bit short of data. They still have relatively large subsurface departments and they need data in the future as well. So I think overall, it probably corresponds quite well to what we're seeing in the market. There's definitely going to be growth in 2024, and some clients are playing catch-up games, meaning that that growth could be quite significant. Others are being very disciplined and they would guide at a relatively flattish development in terms of '24 versus '23.But I think overall, if I were to summarize this, we think that growth is going to be quite healthy for 2024. We saw a little bit of inflationary pressure that particularly towards the end of the year. A lot of the super majors had no money left at the end of the year because they overspent on other segments and they had to kind of borrow from seismic and data purchases towards the end of the year. We think that this year they will probably budget where or set the budget where it should be in terms of cost inflation. We don't see cost inflation continue to go up. It's probably flattening out a little bit. There's probably more visibility on that going into '24 than it was into '23 when they were caught by some surprises on that. So overall, a relatively optimistic signals from customers, which means that we feel pretty good about 2024, and we'll come back and talk more about that when we get to the guidance slide.Well, we see strong growth and we are pretty certain about that because there are relatively long sales cycles is in the OBN market. So this is showing the global mid- and deepwater OBN market from 2020 to 2024. And you see a very strong growth from '20 through '23. And then in '24, we're basically providing you with 3 different scenarios. It's a low case, which is very similar to what has already been committed for the year, and then we have a mid-case, and then we have a high case. And the reason why there is such a gap between the low case and the high case is that this is very dependent on some bigger contracts, India, for example, Gulf of Mexico also plays a big role. And if things get pushed out, then obviously we're going to get closer to the mid-case or possibly even closer to the low-case. But if it goes according to plans, we are going to have another very strong year for the global OBN market in 2024.And we see that from the acquisition activity plan. As I said previously, we've signed up a lot of contracts in Q4. We're still continuing to cover some of these white spots. You see OBN Crew 3 has worked until the end of -- probably sometime in end of April, early May. And obviously, there is a bit of a white spot going into Q3 and Q4. But overall, this is a schedule that we are very pleased about and it reflects a strong market for OBN. So we're -- we feel certain that we're going to have another good year for our OBN business and our proprietary revenues in that regard.So, talking about multi-client, so late sales clearly affected by lack of year-end spending, but also low inventories. If we start on the left-hand side, you see Q4 of 2023, we only had 23% of our sales, or our late sales coming from our biggest customers. And these would typically be the super majors. That same customer group accounted for 69% of our Q4 sales in 2022. It's a significant difference, and this caused us to miss our own forecast as well as your expectations for the quarter. As late as the 11th of December, we were pretty much tracking the same line as we did in 2022. What happened in '22 is that we saw the normal significant uptick in spending towards the end of the year. We didn't see it this year, and the reason why we didn't see it is partly explained by this bar chart.In a normal Q4, we would typically have 50% of spending covered by these clients that I refer to. A very unusual quarter in that regard. And obviously, we have talked to all these clients after the quarter trying to understand what happened and again, it really goes back to what Sven mentioned and what I also mentioned at the beginning of the presentation. A lot of them overspent in other areas and more discretionary type of spending that they usually have a lot of in late December that didn't come into play in 2023.And then the second part of this slide, if you look on the right-hand side, it's showing late sales versus vintage library over the last 12 months. And what you see here is that there is a negative trend in 2023, but a very positive trend in '21 and '22. You also see that the library is smaller. It's smaller because we invested less, obviously during the COVID period, but pretty much lasting all the way until 2022. So we have a smaller library and we see a year-on-year drop in late sales as a percentage of that library. That is mainly due to the transfer fees.So I was talking about significant transfer fees in 2022, no transfer fees in 2023, but relatively good visibility on transfer fees in 2024. What I'm basically saying then is that the size of the library is not going to change a lot. But what you're going to see is hopefully a trend that turns quite significantly upwards in 2024, and if you look at the comparables that we have, because now we're comparing to '23, a year without transfer fee, obviously it makes us far more optimistic in terms of beating the year-on-year figures.But probably even more important is that this is compensated by higher early sales. And as I mentioned, early sales is not only pre-funding that we get prior to starting a survey, but it's also the sale that we make probably over the next 12 months to 24 months after a survey is started. And you have to take this into account, because if you look at the 2 different graphs, if you go back to the previous one and see the negative trend in terms of late sales caused by lack of transfer fees, then you see the corresponding increase on the multi-client revenues. On the left-hand side, you see the dark blue, which is the pre-funding is coming up quite significantly. So it's compensating for that. And it's just a shift of sales. It's not sales disappearing, it's a shift from late sales to early sales. And in many ways, in isolation, that's a positive thing because we collect the cash earlier. So in terms of IRR, this is actually a good thing. Of course, we want to see late sales also increasing. And I think I've said between the lines today that we expect that to happen in 2024.If you look at the pre-funding rate on the right-hand side, there is a similar trend on the pre-funding rate as there is a negative trend on the late sales, meaning that overall we're in very good shape. It's just a mix. So I think this is extremely important to understand. And I've seen, obviously, an increased and an exceptional focus on late sales, which I, to a certain degree, accept and respect. But at the same time, you need to see the full picture, and you need to keep in mind that starting 2021, we reported this differently to the past. So again, I'm not going to dwell more or mention that more today, but I think this is really important for both investors who are invested or prospective investors in TGS and obviously, for the analysts who are guiding these investors in the future.So that leads me to the contract backlog and inflow. So you see the contract inflow of $275 million in the quarter, and you compare that to Q4 of '22, when we had a pretty similar number of $283 million. But if you look at the last 2 bars, so look at the $355 million for Q3 and the $275 million for Q4, and then you compare that to the same numbers of last year, you see that we're building significant backlog towards the end of the year, and this is a backlog that is going to drive our investments and obviously our proprietary activity in 2024.So again, we have a backlog of about $545 million. It's up 21% compared to last year. And this is really what we're going to be doing in '24 and gives us a lot of visibility in terms of the early sales and obviously the acquisition revenues in 2024. You see the pie chart on the right-hand side. That's a timing of the expected recognition of our acquisition part of the backlog. So that's referring to the $322 million that you see on the left-hand side. So it helps you a little bit with a timing of backlog and help you to do your estimates on that.So financial guidance for 2024. So basically 3 bullet points, I think I'm going to start with the last one. So our early sales rate is expected to be above 85%. So what you can read from that is that we feel very certain that early sales is going to be good. This is partly driven by the fact that we have a lot of backlog already committed. So we know that a lot of the investments we already have strong funding on that, and it also reflects a relatively healthy outlook in terms of the early sales of projects that are in operation today.Number two, our multi-client investments, we expect our investments to be about $300 million to $350 million. We've talked about that before, and this is and has been part of our plan is that we invest countercyclically, which means that ideally we invest more when the market is down. And I think this time around we were probably a bit late to escalate or accelerate our investments, because in 2021, I think we were all very uncertain about where is this market going to be. In hindsight, we should probably have invested even more in '21 and '22. But late '22, we saw that this market is going to pick up and it's going to be healthy, and we started to invest quite extensively in 2023. So our investments in '23 were $400 million. But as we've always done with TGS, in the second, third and fourth year, we take the foot off the gas pedal and then we start to harvest in terms of increasing our sales to investments, improving our cash flow and the overall return on capital.There's a lot of questions after 2023. Are you able to reach your target of 2x in terms of sales to investment? Is there a structural change in the market? Are the good times behind us? No, it's not. We are planning and our ambition is that we're going to be at that 2x mark in 2024. We may be wrong. Of course, we've proven through Q4 of 2023 that this is a low-visibility game. But there's nothing in our projects that indicate that we should set the bar lower for the future. And if we set the bar close to 2x, again through the cycles, it's going to vary a lot depending on our investment profile, but it's a normal course of action and the normal course of business for TGS. Year 1, we invest heavily and it's going to hurt our sales to investment and cash flow. Year 2 and 3, we take the foot off the gas pedal and we're going to improve our sales to investment.So, in summary, total POC revenues of $206 million compared to $227 million for last year. Our EBITDA, as we mentioned today, came in stronger than we expected at $137 million, pretty close to the $151 million that we had in Q4 last year. We have seen strong development in proprietary sales and early sales, and again negatively offset by week late sales. Solid contract inflow, solid backlog, 21% higher than last year. We see continued growth in exploration spending and we hear that from our clients as well. And again, we feel we are very well positioned to benefit from this with leading positions in all segments and these leading positions being even stronger after the transaction with PGS.So that's what we have today. We obviously have a lot of questions, both from people not being in the room today, but hopefully also from you guys who are present in the room.

[Kristian Johansen, executive]

So we'll start with John. Please go ahead.

[John Olaisen, analyst]

Yes. I'll wait for microphone to just ask a question.

[Kristian Johansen, executive]

I think there is a microphone.

[John Olaisen, analyst]

Very good. Two questions for me, if I may. First, on the multi-client investment for 2024, [ $300 million to $340 million ], is it possible to give a little bit of a split up? How much is OBN, how much is towed-streamers and how much is others like, well logging, et cetera?

[Kristian Johansen, executive]

Yes, I think OBN would probably be plus/minus [ $100 million ] and then streamer seismic would be probably closer to [ $150 million ]. And then the rest would be a mix of new energies, well, data products, et cetera, et cetera.

[John Olaisen, analyst]

All right. And my second question is to the everlasting question about late sales. Firstly, I would say the -- I sure agree with you the confusion about the late sales versus early revenues. And I think your previous definitions of the 2 were much better. It told us more about the risk that you're actually taking on your investments, and it also told us more about the underlying sales profile and the risk of that as well. So I would recommend you to go back to your old definition.Anyway, I wonder about the short term here. Late sales were a week in Q4, and one possible explanation was the delay in the Gulf of Mexico lease round that took place on the 20th of December. And I think you've been quoting in the past, you said in the second half repeated that most likely will have limited late sales ahead of the lease round, but potentially after the lease rounds, because the old companies already had conventional seismic and they could buy leases on behalf of what they had, and then afterwards, potentially they could buy your expensive OBN. So now that we are 2 months, almost 2 months after the end of that lease round, I just wonder if you've seen any sales so far in Q1, since you didn't see any sales in the last 10 days of December. Have those -- have late sales related to the lease round in Gulf of Mexico happened so far in Q1?

[Kristian Johansen, executive]

I guess the answer is yes, we've seen some late sales and we've also seen some early sales related to that. And I can't be more specific. What I can tell you is that if you look at late sales and only that late sales part, which is related to the old and finished library, that typically has an extremely back-end loaded structure. I mean, we're talking sometimes 90% of the quarterly revenues would come in the last 2 weeks, 90%. So it's like a flat curve and then it goes steeply up. And we've seen that. We saw that in Q4 of last year, as I said, and we typically see that in any given Q1.I think to help you a little bit with your question, without being too specific, it's probably started out less extreme in Q1 than we would normally see where 90% comes in the last 2 weeks. But again, this is a combination of what we call early sales, driven by projects that are still in the processing phase, and late sales, which are the older projects that we shot and acquired prior to 2021. So it is a combination. But overall, we feel we are where we should be.

[John Olaisen, analyst]

But you don't want to quantify like how many sales.

[Kristian Johansen, executive]

No.

[John Olaisen, analyst]

Is it possible to say how many sales you generated from this round?

[Kristian Johansen, executive]

No, I don't want to start indicating that.

[John Olaisen, analyst]

Okay. I got more questions. I could come back after -- later.

[Kristian Johansen, executive]

Yes, very good. Any other questions here before we move on to the web or let's go with a couple of questions from here.

[Sven Larsen, executive]

Yes, it's a question from [ Jon Holton ]. Are there any plans of listing the new TGS in the U.S.?

[Kristian Johansen, executive]

I think, in general, I mean, it's not top of the list in terms of integration activities that we're going to go through. But I think you should all be aware that we are going to have both Norwegian listings in terms of the equity. But what is going to be new with this transaction is that we potentially going to have listing of debt too, right? So we're obviously looking into the U.S. markets in terms of debt as we also look into the Norwegian and international bank market. So, too early to say anything about that. But obviously this company is going to be quite big and it's going to be very international and it's something we would always consider.

[Sven Larsen, executive]

Then there is a question from Christopher Mollerlokken. Is it possible to disclose what EBITDA Magseis had in Q4 '23?So if you look at our -- the notes, the segment note in our quarterly report, you'll see that our acquisition business unit had an EBIT of $9 million in the quarter, which is quite strong given that it's low season. The EBIT for the full year actually ended up at $55 million, which is very good given that we acquired a company for a little bit more than $200 million, only a little bit more than a year ago. So you'll find some details about the different business units in the notes to the quarterly report.Another question from Christopher Mollerlokken. I suspect he posted a question before the presentation was finished. What caused appreciation to nearly double in Q4 '23 versus Q3 '23, and what would be a fair run rate going forward?And as I alluded to, there was a reclass of $7.8 million. And also we entered into some longer-term leases in the quarter, which will move a little bit of cost of goods sold to depreciation. So the run rate is not [ 38 ] as we had in this quarter, but if you remove close to [ 8 ] of reclass, you're pretty close to where it should be going forward.And then there is a question from Kevin Roger. Good morning. Number one, can you help me understanding how the cost of goods sold are so low while proprietary revenues are so high, even compared to Q4 last year, $30 million more revenues proprietary but lower cost of goods sold?And it's partially, as I said, due to this reclass, partially due to a -- and that's a one-off, partially due to these new leases that we entered into which are moving some cost from cost of goods sold to depreciation and partially due to strong operational performance and partially due to this point I mentioned about the scope of each of the contracts that we are doing in acquisition, the mix of the type of projects. So there are several explanations to that, but it doesn't dilute the fact that operations were really strong in the quarter as well.Then there is another question from Christopher Mollerlokken. Could you provide some guidance on how you expect 2024 multi-client investments to be spread between the quarters?It will probably be reasonably front-end loaded, depending on a few things, but reasonably front-end loaded.Another one from Christopher. Could you provide some guidance or how you expect activity within acquisition to be in Q1 '24 versus Q4 '23?And I guess that answer is on the backlog slide with a pie chart.And then it's a question from [indiscernible]. When the merger with PGS was announced, it was clearly stated that dividends from TGS would be compensated to PGS shareholders with immediate effect. However, for Q3, nothing was paid out or compensated. What's going on here?No, the agreement says that the compensation was supposed to happen from 2023, so this dividend that we are paying now is going to be compensated, but the dividend that was paid out before the transactions were approved by the EGM on 1st of December was not compensated for.Then, do you expect to continue to pay out dividends in 2024?The answer to that is yes, but we will revisit the dividend and share buyback strategy once the transaction is closed.And then there is a question, can you quantify the level of transfer fees in 2022 and the level that you expect in 2024?

[Kristian Johansen, executive]

Yeah. I think overall, '22 was really good. Without being specific on this, we were definitely over [ $50 million ] for the full year and 2023 is very close to 0 and 2024 is probably going to be closer to that 2022 number. But it's always hard to say at the start of the year before we start negotiating that.

[Sven Larsen, executive]

And then there is long questions here, or several questions related to -- several questions in one actually related to the pre-funding of new service, and whether the fact that we reduce investments or the guidance for 2024 relative to 2023 is in fact a reflection of a lower opportunity set.

[Kristian Johansen, executive]

Yes. That's not the case. And I think we've covered that quite extensively in terms of there is still opportunities to invest. There is still opportunity to invest with very high pre-funding if you invest in some of these converted contracts. But we want to high grade and we want to invest in the right projects, and we think we're extremely well positioned to make a good return on somewhere between $300 million and $350 million.

[Sven Larsen, executive]

And then there is a question from Steffen Evjen from DNB. In light of the reclassification of leases and gross profit, could you guide on future gross profit margins for proprietary revenues and also quarterly lease repayment as this increased meaningfully in Q4?So the lease payments for the next few quarters should be, if you adjust for the $7.8 million, that should give you a fairly good indication on the run rate going forward. As to the gross margin, of course, as I said, we have moved a little bit of cost of goods sold to lease cost or to depreciation as we enter into this couple of long-term leases, which means that there is a slight improvement of the gross margin compared to what we have communicated earlier, and a slight increase of -- corresponding increase of depreciation.

[Kristian Johansen, executive]

Let's see if we have any questions from the room before we move on. We get 2. We start there.

[Unknown Analyst]

When you show the slide on the OBN market going forward, the midpoint of that range is roughly 11% up year-on-year. So the question is, do you expect that market to grow faster than the traditional seismic market?

[Kristian Johansen, executive]

There's probably been a bit of a shift. I mean, clearly, if you look at the last 3 years, you see a higher growth in the OBN segment than you see in the overall vessel segment. But at the same time, the vessel segment has consolidated hugely over that same period of time. So I think, going forward, that's probably going to stabilize more. I think the vessel market will grow pretty much in line. It was extensive growth from '20 to '23. Of course, that's not going to continue forever, but overall very healthy market. I don't see why it should from now on grow significantly faster than vessel market because it is part of the same market in a way you're acquiring seismic.

[Unknown Analyst]

And then if you sort of exclude the discussion about the split between early sales and late sales, I mean, you are obviously dependent on the growth in the top line.

[Kristian Johansen, executive]

Yes

[Unknown Analyst]

So the exploration budgets and the discussions that you are having with your clients, are we sort of ballpark at the same pace where the E&P CapEx are or is there any catch-up effect to be seen given the change in allocation we have seen in 2023?

[Kristian Johansen, executive]

Yes. I think it varies a lot and I think when you talk to them, they would probably characterize minus 10 to plus 10 as flat, right? So in that regard, I think if you talk to 10 companies, probably 5 of them would indicate flat-ish and then 3 would indicate significantly catch-up need. There is no question that some of them have been holding back a lot. So I mean, that could be 20%, 30%, 40%, 50%, right, when they say significantly up and then you have a few who would probably lean more to the E&P spending guidance of that particular company, which is more in the 7% range as we discussed. It's kind of hard to draw a conclusion from that and put a number to it. But I mean, we feel pretty good that '24, you will see increased spending and hopefully, increased spending in excess of the overall E&P spending.

[Unknown Analyst]

And then, do you think that maybe some of the clients loaded up on the data during the weak years '21, '22 maybe and now they are sort of working with that access data set before they sort of start spending again? Is there in your view any...

[Kristian Johansen, executive]

It varies a lot. And again, the range is relatively wide here. I met recently with a company who said they had 2,000 people in their subsurface department and they hardly had anything to do and they felt the need to get these people utilized and that would be one extreme and in terms of positive. And then you would have some negatives in terms of, we are not doing frontier exploration. We're going to do ILX and we're going to buy the ILX data we need, but frontier is not of interest.So there is a big range in terms of what we hear from clients. But I think overall, when you were to summarize it, it gives us reason to be optimistic for '24 and partly driven by transfer fees where we have more visibility than we had last year, partly based on our strong backlog, which is 21% higher. And partly due to the fact that we're guiding higher pre-funding for a reason. We have visibility into that number.John, you had a question?

[John Olaisen, analyst]

Yes. Regarding the OBN margins and the competitive situation, I just noticed that PXGEO seemed to be very aggressive in bidding. We've seen that in Brazil, for instance, with the official numbers, and they're also saying they're ramping up capacity. We also see Shearwater winning the first big contract in India for the Pearl node, for -- contract for the Pearl node. Just wonder, how do you experience the OBN competitive situation? Is there margin pressure? Or is the market growing sufficiently to absorb the aggressive players?

[Kristian Johansen, executive]

No, I think overall the market is healthy. I mean, we have -- at the same time, we won a big multi-year contract with a super major who has been working with at least one of these companies you referred to in the past. I mean, we are pleased about the customer satisfaction that we measure, very pleased about that. We have a good backlog for 2024 and think we can continue to deliver good margins. And again, margins and profitability is very important to us. It may be less important in a startup phase where you're trying to break into a market or that kind of stuff. But overall, we're not going to sacrifice on that. We need a return. Our goal is to be here through the cycle. So we're going to be here when both you and me are retired from this industry. TGS is still going to be around.

[John Olaisen, analyst]

So you are saying no to jobs if prices are too low?

[Kristian Johansen, executive]

Absolutely.

[John Olaisen, analyst]

And then on the towed-streamer contract market, I know that's not a part of you yet, but it will soon be. And year-to-date, there hasn't been published a single towed-streamer contract in the market. A small like offshore wind mapping project from PGS. And Shearwater and PGS, they normally report all significant contracts. And I noticed today that PGS has available capacity for Q2, which is starting in 6 weeks. That makes me worry a little bit about the contract market. And yes, PGS is not a part of you yet, but you are effectively buying PGS or merging with them. So just wondering if you could give a few comments on the outlook for the contract toward seismic market as you see it, please?

[Kristian Johansen, executive]

Sure. Well, obviously, we don't have a lot of insight into that because we don't own or we're not one company yet. But I think what I can tell you is that we definitely have projects in the pipeline that we can help PGS to utilize their vessels.

[John Olaisen, analyst]

In terms of multi-client projects?

[Kristian Johansen, executive]

Absolutely. But when you look at our backlog and our guidance, is there any PGS work there that has not been awarded yet? Absolutely. So it's going to help, for sure. But again, I agree with you. We obviously follow the market from an outside-in perspective, and it's been surprisingly low for -- I mean, it's always low in Q4 and Q1, but we haven't seen a lot of contract announcements. I just skipped through their earnings release this morning and I see that things are looking better for sure for Q2 and Q3, which is always the case. I think pricing is relatively healthy in the vessel market, saying that as a client or a customer. So overall, we haven't seen any big surprises in that regard.

[John Olaisen, analyst]

Why isn't the contract market better? I mean, normally this would be fully booked for the summer, both Q2 and Q3. Why isn't it better?

[Kristian Johansen, executive]

Well, I think there's been a shift to OBN. I think the OBN market has been really good. There has been a lot of contracts announced in OBNs. There is a little bit of that. But of course that goes back to what we say is that being fully integrated and having products and services across the value chain is a way to reduce volatility in this industry, because it could easily be that in Q3, things switch, and you see more vessel backlog on the streamer side than on the OBN side. So these markets are not kind of completely independent. We're talking to the same clients. The clients always have the option whether to go for vessel or OBN, and we're going to play in both markets in the future.

[Sven Larsen, executive]

And then we're getting to an end there. But there are still a few questions. One on the dividend again, but more -- as I already covered that, but it's also a question how the PGS shareholders will be compensated and that will be a cash compensation or a cash proceed on closing? And then there are a couple of questions about the regulatory processes in Norway and U.K.I think Kristian already covered that to quite some detail in the material. We are, as he said, optimistic that we will get the positive result of that eventually. But these competition authorities, the seismic market is not similar to any other market that you can immediately think of. So they need a bit of time to understand the market and the dynamics. And that's why it's dragging out as expected.And, yeah, I guess that covers all the questions that we got in.

[Kristian Johansen, executive]

All right. [Technical Difficulty]