Seismic Services Group TGS Sails Out of Q4 with Higher Revenues
TGS has released its fourth quarter earnings report, along with an operational update for its seismic services.
FOURTH QUARTER HIGHLIGHTS
- Gross revenues were 13% higher than in Q4 2007.
- Consolidated net revenues were USD 172.4 million, up 2% from the USD 168.3 million in Q4 2007. This figure includes USD 16.6 million recognized from the settlement with Wavefield-Inseis.
- Gross late sales from the multi-client library totaled USD 133.9 million, down 10% from USD 148.7 million in Q4 2007. Net late sales of USD 104.1 million were 21% down from Q4 2007 due to higher revenue sharing.
- Net pre-funding revenues of USD 37.5 million increased 120% compared to Q4 2007 and funded 67% of the Company's operational investments into new multi-client products (USD 56.1 million).
- Operating profit (EBIT), after expensed merger costs of USD 4.4 million and a provision for bad debt of USD 4.0 million, was USD 80.0 million (46% of Net Revenues), down 9% from the record high USD 88.0 million in Q4 2007.
- Cash flow from operations after taxes but before investments was USD 110.3 million, versus USD 54.6 million in Q4 2007.
- The unrealized non-tax deductible loss on shares held in Wavefield-Inseis amounted to USD 9.3 million in Q4 2008.
- Earnings per share (fully diluted) were USD 0.56 versus USD 0.46 in Q4 2007.
FULL YEAR 2008 HIGHLIGHTS
- Consolidated net revenues were USD 582.4 million, an increase of 29% compared to 2007.
- Gross late sales from the multi-client library totaled USD 433.7 million, up 25% from 2007. Net late sales from the multi-client library after revenue sharing totaled USD 337.5 million, up 8% from USD 312.4 million in 2007.
- Operating profit (EBIT) was USD 269.0 million (46% of Net Revenues), up 21% from USD 222.0 million in 2007.
- Cash flow from operations after taxes but before investments was USD 350.8 million, versus USD 269.7 million in 2007.
- Operational investments in the multi-client inventory were 50% pre-funded and totaled USD 287.0 million versus USD 136.3 million in 2007.
- Unrealized losses on Wavefield shares during 2008 total USD 75.1 million. All shares were sold in January 2009 resulting in a USD 0.3 million gain which will be recognized in Q1 2009.
- Earnings per share (fully diluted) including non-operational items were USD 1.08 versus USD 1.26 in 2007.
"We are pleased to have fulfilled every aspect of our guidance for 2008," TGS's CEO Hank Hamilton stated. "The current economic recession, credit crisis, and low oil price environment are creating significant near-term challenges for our industry. Nonetheless, we remain optimistic about the longer term fundamentals for the energy sector. At TGS our strong backlog, solid financial position, and highly flexible business model uniquely position us to take advantage of new opportunities in this cycle."
The consolidated amortization charge associated with multi-client revenues was 39% of net multi-client revenues during Q4 2008 compared to 28% in Q4 2007. This rate does fluctuate from quarter to quarter, depending on the sales mix of projects. The amortization rate for the 12 months of 2008 was 35%, within management’s guidance (32-37%) for the full year.
Cost of goods sold, proprietary and other (COGS) were USD 2.9 million for the quarter, down from USD 11.8 million last year due to the lower proprietary contract activity. During Q4, TGS and Wavefield-Inseis settled the arbitration case over the merger dispute (see “Merger” section below). Further incurred merger costs of USD 4.4 million were expensed during Q4 as part of the other operating expenses. Also, following a year end analysis of its receivables, the Company booked a bad debt provision of USD 4.0 million to other operating expenses during this quarter. These items, together with the steady addition of new resources for the operations brought the personnel plus other operating costs to USD 30.6 million, an increase of 30% from Q4 2007.
BALANCE SHEET & CASH FLOW
The net cash flow from operations for the quarter, after taxes, before investments, totaled USD 110.3 million compared to USD 54.6 million in Q4 2007. For the full year 2008, cash flow from operations, after taxes, but before investments was USD 350.8 million versus USD 269.8 million in 2007.
As of December 31, 2008, the Company’s total cash holdings amounted to USD 148.3 million compared to USD 116.4 million at September 30, 2008 and USD 82.0 million at December 31, 2007.
As of December 31, 2008 TGS held USD 58.8 million in Auction Rate Securities (ARS) comprised of USD 5.5 million of AA-rated municipal bonds and USD 53.3 million of AAA-rated closed-end funds. As described in footnote 14 in TGS’s Annual Report for 2007, an ARS is an instrument for which the interest rate is reset when the instrument trades, typically every 7, 28, or 35 days, through a descending price auction. When an ARS is up for trade, buyers submit a bid and the lowest rate necessary to sell the last available share establishes the clearing rate. If there are not enough buyers, then a failed auction occurs.
A failed auction is not a default; the holder of the ARS continues to hold the security and receive interest payments at the failed rate -- a maximum rate defined by the issuer. The most significant impact of a failed auction is a loss of liquidity; the security for which an auction has failed will continue to pay interest and be auctioned every 7, 28 or 35 days until there are buyers, the issuer calls the security for redemption, the issuer establishes a different form of financing to replace the security or the security matures. TGS began experiencing failed auctions in February, 2008, but has experienced no loss of principal. Since experiencing the first failed auction, TGS has received redemptions totaling USD 32.4 million of ARS at par value. Of these, USD 26.8 million were redeemed prior to September 30th, and USD 5.5 million during Q4 2008.
TGS currently classifies ARS as current financial investments available for sale. The market for these securities is still distressed. As TGS has no need to liquidate these securities within the near future at discounted prices, TGS has valued its ARS at year-end at “fair value” based on a third party valuation that considered actual market trades as well as a discounted cash flow valuation method. This resulted in an appreciation of the book value of the ARS’s held at year-end amounting to USD 0.7 million. In accordance with IFRS, this unrealized appreciation is not recognized in the Income Statement but is recorded directly to equity in Q4 2008.
TGS has sufficient cash and financial capacity to finance its operations, repay its bond loan of USD 43.7 million in May 2009, and cover other known potential liabilities without selling the ARS. TGS intends however, to sell these given the right opportunities. The Company believes that no impairment to goodwill and other intangible assets exists.
The Company issued in 2004 a five year 300 MNOK bond loan. The bond loan matures in May 2009. In accordance with IAS 39 the loan is measured at amortized cost and is now recognized as a current liability in the balance sheet (USD 42.9 million at December 31st, 2008). To eliminate the currency risk associated with the NOK bond loan the Company at the same time entered into a derivative currency swap contract that fixes the amount to be repaid at maturity (May 2009) at USD 43.7 million. As the Company does not apply hedge accounting for the transaction the fair value of the derivative instrument (USD -0.8 million) is in accordance with IAS 39 recognized as a separate current liability and included under the line item "Other current liabilities" in the balance sheet.
Total equity per December 31st, 2008 was USD 661.1 million, representing 69% of total assets. No new shares were issued during Q4 2008. TGS purchased 455,600 of its own shares for USD 2.2 million during the quarter and now holds 4,054,900 treasury shares.
During Q4, vessels under TGS's control through charter included four 2D vessels, three 3D vessels, and a 3D OBC crew. The company also had one wide-azimuth crew and two 2D vessels chartered by others working on TGS marketed projects.
TGS temporarily suspended acquisition of the Freedom Wide Azimuth Multi-client (MC) 3D survey in the Mississippi Canyon area of the Gulf of Mexico on October 3rd. This survey, acquired in partnership with WesternGeco, was 48% complete at the end of Q4. TGS and WesternGeco will return in February with a dual receiver vessel crew. This change in survey configuration will allow for the project to be completed in a more efficient manner. During Q4, TGS secured several new license commitments to the survey.
In Q4, TGS commenced a new conventional 3D MC survey in the Central Gulf of Mexico designed to image blocks that have experienced considerable leasing activity in recent MMS lease sales as well as acreage that has been recently made available for exploration after 20 years of leasing moratorium. This survey, called Hernando, is being acquired by the BOS Arctic. The project covers approximately 300 OCS blocks and acquisition is scheduled to be complete in early June. Advanced time and depth imaging algorithms, customized to image the unique geologic setting underlying the survey, are being applied to the data.
TGS continued work on the 3182 km2 Cameron SAD Ocean bottom cable (OBC) 3D survey on the Gulf of Mexico shelf. TGS extended this survey from the original 2200 km2 under a charter agreement with RXT. The MC survey was completed early in Q1, 2009. This data is designed to image the attractive deep gas play on the Gulf of Mexico shelf.
TGS has continued to innovate in the imaging of sub-salt and other complex geologic settings with new proprietary data processing algorithms. Industry’s interest in these technologies has encouraged the funding of several new multi-client imaging products in the Gulf of Mexico including the industry’s first multi-client Reverse Time Migration (RTM) product on the Stanley 3D. This 8,900 km2 survey covers some of the highest bid value acreage ever awarded in the Gulf of Mexico. TGS also commenced reprocessing of three additional surveys through anisotropic Kirchhoff 3D pre-stack depth migration, providing unprecedented accuracy in the positioning of geologic structures in the subsurface. These reprocessed surveys (Eastern Mississippi Canyon, Deep Resolve and Sophie’s Link) are available to previous license holders for an upgrade fee. The application of this enhanced technology to these previouslyacquired surveys also has attracted new licensees to the original data.
TGS's Geological Products Division commenced the latest Facies Map Bowser (FMB) interpretation project in the Santos Basin of Brazil. Established as the industry standard well and interpreted facies database in Northwest Europe, FMB allows explorationists to visualize the distribution of and relationship between the various elements of a petroleum system within a depositional basin. This multi-client product is funded by several companies and covers acreage in Brazil that has experienced a significant amount of exploration success in recent years.
In Q4, TGS continued acquisition of a heavily funded 9000 km2 multi-client 3D survey offshore Liberia. The BGP Pioneer completed acquisition of the 3000 km2 first phase of the survey in Q4. The GeoBarents arrived on prospect in Q4 and will continue acquisition of the remaining 6000 km2 into Q2 of 2009. Additional phases are expected to be added to this survey and acquisition is expected to continue through much of 2009.
TGS completed a small highly funded 2D multi-client survey in the Mediterranean with the Northern Genesis before mobilizing the vessel to commence an 8,600 km 2D multi-client project offshore Ghana. This survey ties the recent Jubilee discovery in western Ghana and is expected to grow as TGS’ geological understanding of the area develops.
The Nordic Venturer and the Mezen continued work on a large regional 2D survey in South East Asia. This 15,000 km 2D survey was completed in Q4 and processing of this data is ongoing. Upon completion of this work, the Mezen transited to Indonesia, where the vessel commenced a 5626 km2 2D multi-client survey off of the west coast of Sumatra.
TGS completed its 2008 Northwest Europe acquisition season early in Q4 after adding over 49,000 km of multi-client 2D data to the company's North Sea, Norwegian Sea, and Barents Sea Renaissance program. Processing of this data continued through the quarter.
TGS completed a full acquisition season in Greenland by adding a significant amount of data to its already dominant position there. During the season, TGS added approximately 50,000 km of aeromagnetic/aerogravity data offshore Greenland in the Ungava East and Labrador Seas. Also in Q4, TGS completed its previously announced 2D seismic operations off the northeast and west coasts of Greenland.
TGS's backlog declined 5% to USD 180.6 million at the end of the fourth quarter, but stands 46% above the level of one year ago.
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