Svein Rennemo, PGS Chief Executive Officer, commented:
"PGS fourth quarter results reflect the strong upward trend in world-wide E&P activity and spending, and the continued motivation and drive from competent employees throughout PGS. We see an unparalleled strength both in Marine Geophysical contract and multi-client demand continuing in 2006.
Our average EBIT margin for towed streamer contract work was well above 25 percent for the quarter, and multi-client late sales were ahead of previous expectation. For 2006, we expect average PGS EBIT margins for streamer contract work to improve further to above 30 percent, more than 10 percentage points higher than 2005. We also expect a further rise in highly pre-funded new multi-client activity.
Our Onshore operations have successfully entered the North African market with contracts for a total of three crews in Libya. Front-end mobilization and start-up costs on these contracts, as well as on the Nigerian shallow water project that commenced in October, continued to negatively affect Onshore results in fourth quarter. Despite this, the fourth quarter shows significant improvement and results are expected to increase substantially in 2006.
Results in our Production segment improved in the fourth quarter, but the improvement was less than our forecast, primarily due to lower than expected production on the Varg field. We continue to see a high operational uptime and regularity, easing the negative impact of a higher ongoing level of costs for maintenance and repairs. We expect that the market for floating production services will be strong and offer good growth and redeployment opportunities in the years to come.
Our completion of a successful refinancing in December and our strong cash flow provides substantial flexibility and capacity to grow and pursue value enhancing structural moves.
We have made significant progress in the evaluation of a separation of our Geophysical and Production businesses. Currently, we believe a combined de-merger and share offering will be the most effective way to achieve separation. We expect to be able to present further information on the plan for the implementation of thereof around the end of the first quarter."
PGS group-- Revenues of $340.3 million, up $43.9 million (15%) from Q4 2004 (pro forma excluding Pertra), driven by strong increase in contract revenues in Marine Geophysical
-- Operating profit of $39.1 million, up $76.0 million from Q4 2004 (pro forma excluding Pertra), both quarters significantly affected by non sales related amortization of the multi-client library
-- Net loss of $80.4 million, including a one-time charge of $103.8 million from the refinancing completed in December
-- Refinancing completed
-- Repurchased substantially all of the $746 million 10% Senior Notes due 2010 as well as the remaining $75 million of the $250 million 8% Senior Notes due 2006 -- Successfully raised $1 billion senior secured credit facility consisting of a seven-year $850 million term loan and a five-year $150 million revolving credit facility, which replaced the previous $110 million secured credit facility
Marine Geophysical-- Revenues totaling $214.9 million, up $27.9 million (15%) from Q4 2004
-- Multi-client revenues $73.9 million, down 25% compared to a very strong Q4 2004. Full year multi-client revenues of $258.8 million, up 11% compared to 2004
-- Contract acquisition revenues of $130.8 million, up $53.8 million (70%) from Q4 2004
-- Operating profit of $29.4 million, up $60.4 million from Q4 2004. Both quarters were affected by year-end additional non sales related amortization of the multi-client library, which amounted to $31.5 million in Q4 2005
-- Strong contract order backlog at December 31, 2005 of $365 million compared to $170 million at the end of 2004 and $297 million at September 30, 2005
-- Conversion of 4C operation (Ocean Explorer and Falcon Explorer) to towed streamer operation started December after successful completion of North Sea project adding two vessels to towed streamer fleet at low conversion cost
-- Completed 10-year classing and upgrades of Ramform Explorer
Onshore-- Revenues of $48.8 million, up $20.9 million (75%) from Q4 2004
-- Operating loss of $1.3 million compared to loss of $9.4 million in Q4 2004
-- Performance negatively affected by mobilization and start-up costs in Libya and Nigeria
-- Order backlog at December 31, 2005 of $137 million compared to $66 million at the end of 2004
Production-- Revenues of $76.2 million, down $1.7 million (2%) from Q4 2004
-- Operating profit of $15.7 million compared to $15.4 million in Q4 2004
-- Entered into an agreement in January 2006 to purchase, for later FPSO conversion, the shuttle tanker MT Rita Knutsen for $35 million with the intention of targeting new upcoming projects
-- Talisman option to change the Petrojarl Varg production contract for the Varg field expired February 1, 2006 without being exercised, potentially freeing up the vessel for redeployment in 2008
Marine Geophysical-- Marine 3D industry seismic fleet at full capacity utilization with PGS streamer contract margins expected to improve by more than 10 percentage points compared to full year 2005
-- Multi-client late sales expected to be lower than 2005 as a result of low level of investment over recent years
-- Cash investments in multi-client library expected to double from an investment of $46 million in 2005, with continued high pre-funding levels
-- Planned capital expenditures of $90-100 million, primarily related to streamer expansion and replacement program
Onshore-- Revenues and operating profit expected to be significantly above 2005 levels
-- Cash investments in multi-client library expected to more than double from an investment of $8 million in 2005
-- Planned capital expenditures of approximately $10 million
Production-- Total oil production from the Company's four FPSOs is expected to be slightly lower than full year 2005, impacted by an expected decline on the Foinaven and Glitne fields, partially offset by an expected increase on the Varg field
-- Operating expenses, including maintenance, expected to be broadly in line with 2005
Petrojarl Varg production contract
Talisman and PGS entered in February 2005 into an option agreement enabling Talisman to change the termination clause in the contract between production license 038 ("PL038") and PGS Production. If exercised, the PL038 license holders would have had the right to use Petrojarl Varg for production of the Varg field until 2010, and would also have been obligated to pay PGS a fixed option fee of $22.5 million and further guarantee a minimum rate of $190,000 per day as compensation for the use of Petrojarl Varg. The option expired February 1, 2006 without being exercised.
Petrojarl Varg will therefore continue to produce the Talisman operated Varg field for a fixed base day rate of $90,000 and a variable rate of $6.30 per barrel produced. PGS is, according to certain criteria, entitled to terminate the agreement if the production of the Varg field falls below 15,700 barrels per day. Based on the current production profile of the Varg field, Petrojarl Varg could become available for redeployment on a new field in 2008.
PGS sees potential upside in the accelerated redeployment opportunity arising from this event in terms of contract terms and capacity utilization. Petrojarl Varg is currently producing approximately 25,000 barrels per day, but has capacity to produce 57,000 barrels per day. The vessel is adaptable for most offshore environments both within the North Sea Basin and in other international markets. PGS Production has identified opportunities for potential redeployment and has started actively marketing the vessel both inside and outside the North Sea Basin.
Contingent proceeds from sale of Pertra
As a part of the agreement with Talisman relating to the sale of the Company's oil and natural gas subsidiary Pertra in 2004, PGS is entitled to an additional sales consideration equal to the value, on a post petroleum tax basis, of 50% of the relevant revenues from the Varg field in excess of $240 million for each of the years 2005 and 2006. The 2005 portion of the contingent consideration, which amounted to $8.1 million, was received in January 2006 and recognized as gain from sale of subsidiary in Q4 2005.
Purchase of shuttle tanker for targeted PFSO conversion projects
In January 2006 the Company entered into an agreement to purchase the shuttle tanker MT Rita Knutsen for $35 million. PGS Production has developed plans for a conversion of the ship to an FPSO. The vessel is considered as a possible FPSO solution for several upcoming projects, and a conversion will begin when a firm contract for the ship is secured in the market. Rita Knutsen is a double hull vessel of 124.472 dwt, built by the Daewoo shipyard in Korea in 1986 and will be operated by Knutsen OAS Shipping on a bareboat charter agreement until a decision to start conversion is made.
(a) Pro forma key figures as presented in the table show revenues, operating profit (loss) and Adjusted EBITDA as if Pertra had not been part of the consolidated PGS group of companies for any of the periods presented. Pertra was sold March 1, 2005.
-- Operating profit substantially improved: Q4 operating profit of $47.2 million. Excluding an $8.1 million additional gain from the sale of Pertra, operating profit of $39.1 million, up $76.0 million compared to Q4 2004 (pro forma excluding Pertra). Full year operating profit of $185.4 million, up $175.9 million compared to full year 2004 (pro forma excluding Pertra) -- Further strengthening in Marine contract performance: Average streamer contract EBIT margin above 25% in Q4 and above 20% for the full year. Strong order backlog and visibility into 2006 -- FPSO performance improved: Operating profit slightly down from Q4 2004 and strongly improved from Q3 2005 due primarily to increased production volumes on Petrojarl Foinaven and Petrojarl Varg. First steps taken to grow fleet further by acquisition of tanker vessel for future conversion -- Strong full year cash flow: Cash flow from operations was $65.5 million for the quarter and $279.1million for the full year -- Refinancing successfully completed: All of the Company's high coupon restructuring notes, issued in 2003, repaid in 2005. Strong improvement in financial structure, liquidity and financial flexibility
Key figures as reported
Quarter ended Year ended December 31, December 31, 2005 2004 2005 2004 Unaudited Unaudited Unaudited Audited (In millions of dollars) Revenues $ 340.3 $ 312.1 $ 1,196.3 $ 1,129.5 Operating profit (loss)/EBIT 47.2 (56.3) 343.2 35.7 Net income (loss) (80.4) (84.0) 121.2 (134.7) Earnings (loss) per share ($ per share) (1.34) (1.40) 2.02 (2.25) Adjusted EBITDA (as defined) 134.2 85.6 423.0 412.2 Net cash provided by operating activities 65.5 43.1 279.1 282.4 Cash investment in multi-client (6.0) (4.4) (55.7) (41.1) Capital expenditures (39.3) (44.9) (90.5) (148.4) Total assets (period end) 1,715.0 1,852.2 1,715.0 1,852.2 Cash and cash equivalents (period end) 121.5 132.9 121.5 132.9 Net interest bearing debt (period end) $ 828.7 $ 995.3 $ 828.7 $ 995.3 Pro forma key figures(a) excluding Pertra Quarter ended Year ended December 31, December 31, 2005 2004 2005 2004 (In millions of dollars) Unaudited Unaudited Unaudited Unaudited Revenues $ 340.3 $ 296.4 $ 1,170.1 $ 1,017.5 Operating profit (loss)/EBIT 39.1 (36.9) 185.4 9.5 Adjusted EBITDA (as defined) $ 134.2 $ 95.0 $ 416.4 $ 347.0
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