Andrew McBarnet suggests that the major marine seismic players are favourites to win in a crowded market.
You would never realise it from the current crop of financial results and muted forward-looking statements from CEOs of marine seismic vessel operators, but the total volume of 3D seismic work is actually at an all time high. The statistic is out there for all to see in the most recent presentation of results (2Q) from Petroleum Geo-Services (PGS), and there is no real reason to question the research behind the assessment.
Just judging from the number of marine seismic surveys in progress around the world, it’s obvious that there is plenty of work coming from the oil companies. All the demand indicators are favourable. There is plenty of catching up to do for E&P departments after the hiatus in expenditure in 2008/09, and at least anecdotal evidence that the financial community is beginning to loosen the belt strings to allow smaller players to come out of hiding.
Meantime the price of oil is holding over the magic figure of $70/bbl, and global demand for oil is climbing close to new highs which should get oil company pulses racing. The International Energy Agency (IEA) in August upped its oil demand estimates for 2010 and 2011 on stronger GDP assumptions and baseline adjustments. Demand is seen at 86.6 million b/d in 2010 (+2.2% or +1.8 million b/d year-on-year) and 87.9 million b/d in 2011 (+1.5% or +1.3 million b/d). According to the IEA, weaker economic recovery, a third lower than the base case, would cut the 2010 and 2011 prognoses by 290,000b/d and 1.2 million b/d, respectively; but the trend is surely auspicious for generating fresh enthusiasm for E&P investment.
The word auspicious derives from the ‘taking of the auspices’. This was the process by which the augurs of ancient Rome used to study the flight of birds to interpret the will of the gods and hence predict the future. The equivalent of taking the auspices today is based on economic indices and is hopefully more grounded. Yet, with all the economic birds seemingly flying in the right direction, we find the marine seismic industry struggling to make money.
Well, of course, there is one bird flying out of formation: our old friend overcapacity. On PGS figures there will be a 20% growth in streamer capacity in 2010 affecting the global seismic market. This is the tail end of the new vessel building explosion that began three or so years ago and will effectively finish off with another 5% increase next year. The result is that competition for survey work is, if anything, intensifying, putting pressure on prices and hence profitability. A complicating factor, but probably shortterm, is the disruption to normal business in the Gulf of Mexico caused by the Deepwater Horizon disaster.
It is also widely acknowledged that a better balance of supply and demand will not emerge overnight because no one is going to give up easily on their investment in capacity. The marine seismic contractors with the largest fleets - WesternGeco, PGS and CGGVeritas - are fairly blameless in this regard: all of them have retired some older, less competitive vessels and feel no compunction to reduce any further. The interesting speculation, therefore, is how well individual suppliers of marine seismic services will continue to cope with such a tight market given the tough conditions of the last year or two.
If you start at the top of the heap, there may only be five companies that for different reasons you could say were bullet-proof from more or less any eventuality. WesternGeco would be in this category simply by virtue of being part of the Schlumberger conglomerate which is the undisputed leader of the whole oil industry services sector and indeed just got a whole lot bigger following its purchase of Smith Industries. Even so it is worth taking a slightly closer look at how the company is performing. Its 2Q financials didn’t make particularly pretty reading with revenues, described as flat, of $476 million which were 1% higher sequentially but 15% lower year-on-year. Pretax operating income of $47 million decreased 31% sequentially and 52% year-on-year. These results include data processing and land seismic. The company said its marine revenue did increase in the quarter primarily due to the addition of two new vessels to the fleet and to greater productivity on a number of projects. Data processing revenue grew on higher activity in Europe and Africa and in North America. All the increases were partially offset by lower multi-client revenue, mostly in North America following a seasonally stronger first quarter, and by a decrease in land revenue following the completion of a contract in the Middle East.
The takeaway from the WesternGeco results is that the company’s marine seismic fleet looks to be delivering productivity gains, attributable to a vessel renewal programme and its differentiating Q-Marine technology which has earned a following in the industry. It is the pay-off for investment in vessels able to deliver the quality of high resolution 3D which companies know is possible: this in turn gives the company an edge over some of the competition when tendering for contracts is tight. WesternGeco’s immediate problem is that sales of its substantial investment in multi-client data in the Gulf of Mexico is being jeopardised by the current uncertainty in the region.
PGS focuses almost solely on marine seismic and does not have the safety net from a parent which WesternGeco enjoys. But what the two companies have in common is recent investment in high quality vessels plus a differentiating technology, in the case of PGS its GeoStreamer acquisition system which in two years’ time will be on all its vessels. The size of these companies’ fleets helps too (PGS has 16 vessels), so they are able to cover opportunities anywhere in the world without incurring unnecessary transit time and cost between jobs. Like WesternGeco, PGS’ last reported group performance (including data processing, etc) was not great. 2Q 2010 revenues were $214.9 million, with a corresponding EBIT of $5.3 million, compared to revenues of $294.3 million in 2Q 2009 and an EBIT of $32.9 million.
The 2Q revenues were lower compared with the same period last year, primarily driven by more time spent steaming and at yard, lower prices for marine contract work with 2009 having benefited from activity priced before the credit crunch, and lower multi-client prefunding revenues. PGS said that industry capacity additions scheduled for 2010 would also continue to put pressure on conventional streamer pricing.
It is hard to break out the figures, but some industry sources suggest that WesternGeco and PGS in current conditions are probably managing an operating margin for their marine seismic survey activities of 10%-15%, nothing like what was possible in the good years from 2005 to 2008/09 but positive. The only company with indisputably encouraging numbers is the multi-client specialist TGS. With no vessel ownership, its business model is of course different, and in the current market, it can benefit from excellent chartering rates.
When TGS reported its 2Q results and first six months highlights, CEO Robert Hobbs said sales in the second quarter were negatively affected by a delay in the announcement of Norway’s 21st licensing round as well as some early effects of regulatory uncertainty in the US Gulf of Mexico. Some negative. Consolidated net revenues for the first half were $260.6 million, an increase of 34% compared to 1H 2009. Net late sales from the multi-client library totalled $138 million, up 21% from $114.4 million in 2009. Operating profit (EBIT) was $92.3 million (35% of net revenues), up 24% from $74.1 million in 2009.
No other company chalks ups such routinely stellar results as TGS. Of course it is a much smaller operation than the biggest marine seismic contractors, but it is almost as if the company is cheating. There is obviously an enviable expertise in spotting and exploiting multi-client opportunities but at the same time it just doesn’t seem fair that it can operate without the overhead of vessel ownership! The only time in recent memory that the company has faltered was when it tried to take over Wavefield-Inseis but encountered resistance and finally abandoned, leaving CGGVeritas to snap up the company at a much cheaper price less than a year later. TGS, in many people’s view, dodged a bullet by not buying the company. At the time TGS was concerned that the survey boom would reduce its access to vessels available for short-term charter. Wavefield would have provided an instant fleet, yet vessel ownership contradicted the whole ethos on which TGS prospered.
CGGVeritas certainly acquired Wavefield-Inseis at a very attractive price. The purchase not only included a useful quota of ready-to-go vessels to meet the rampant demand for marine seismic at the time. It also gave the company access to a fibre-optic solution to life of field seismic which is actually being installed on the ConocoPhillips-operated Ekofisk field. Today the company acknowledges that its marine seismic fleet may have some catching up to do on its rivals. According to its 2Q lacklustre results which showed group revenue down 17% compared with the previous year, marine contract revenue was down 25% year-on-year in dollar value. This was said to be mainly due to the planned decommissioning of nine of the company’s lower-end vessels. Weaker than expected multi-client sales were also experienced, just like its rivals.
The company says it is on schedule with the upgrade of six of its high-end vessels to its Nautilus streamer steering device this year and has initiated the deployment of SeaPro Nav, its integrated navigation and positioning systems for all in-water equipment. The CGGVeritas new flagship vessel Oceanic Vega was delivered in July and has begun its first contract in the North Sea (OE last month). With a maximum towing capacity of 20 Sercel solid Sentinel streamers and Nautilus streamer steering devices Oceanic Vega should be up there in providing high-end marine services. One shiny new boat, however, does not completely eradicate the impression that some CGGVeritas vessels, notably the Wavefield-Inseis inheritance, may struggle to compete against companies with more modern vessels in their fleet to offer customers. That said, the company’s fleet is big enough to operate successfully worldwide, and like WesternGeco and PGS, it has a distinctive technology approach to offer. Maybe just as important, CGGVeritas as a group has the cushion of a full range of geophysical services to offer and is particularly strong on the data processing side. In addition, the CGGVeritas group has as a subsidiary the extraordinarily successful Sercel manufacturing unit, which is a significant supplier of revenue to the group. It has been providing solid streamers for new vessels and upgrades and is totally dominant in the supply of land seismic recording equipment.
Clearly CGGVeritas is strong enough to weather some potential buffeting in the marketplace while it completes its repositioning on the marine seismic side. This is true too of marine seismic contractor Fugro-Geoteam, which is part of the larger Fugro group and is therefore not likely to find itself overexposed. Fugro’s corporate half yearly result showed total revenues of €1042.4 million, but a decrease in its net result compared with the same period last year – a decline of 10.1% to €101 million from €112.4 million in 2009. The company stated that the net result wasn’t that bad given the pressure on pricing thanks to the company’s market position and focus on securing utilisation for key assets.
On the marine side Fugro has been quietly pursuing its fleet renewal programme, this year with the introduction of its third and fourth C-class vessels Geo Caspian and Geo Coral, both able to tow 16-streamer spreads. It is aiming at a fleet size of around ten 2D and 3D vessels to maintain its place in the market. Any vulnerability might centre on the lack of a technology differentiator compared with WesternGeco, PGS and CGGVeritas, but this has never been a major issue in the past, so seems unlikely to be this time around given the improvement in the quality of its fleet.
The question worth pondering is how other high profile marine seismic contractors outside the five mentioned will be able to sustain operations should today’s pressured price market conditions continue to prevail. All eyes are of course on the emerging fleet of vessels from Dubai-based Polarcus. The company revenues for 2Q of $24.8 million were up 124% on the first quarter translating into EBITDA of $4.6 million, and a positive EBIT of $0.1 million. Two vessels in the company’s fleet, Nadia and Naila, are out working, and Asima is following after a pre-commissioning hiccup in the propulsion department. Samur has been postponed until 4Q.
It is still not clear whether Polarcus will be taking delivery of the fifth and sixth vessels – Alima and Selma, due out in 2011 – because so far they are only being described as optional for the company. It is scarcely speculation that the company has to tread very warily. It has taken on substantial debt and investor money to get established, which puts huge pressure on cashflow now that operations have begun. Compared with the major players there is very little financial wriggle room if the vessels are not kept very busy. Latest word from Polarcus is that its fleet is fully booked for 3Q and 25% booked for 4Q with strict control in place for both SG&A and vessel operating expenses.
That has to be a good sign, but Polarcus has to combat the problem of being a small fleet when it comes to tough global competition with steaming time between contracts a significant cost. This might not have been an issue in better times. Oddly, in some observers’ view, the forthcoming Samur is only a six streamer vessel as opposed to the 12 streamer capacity of the company’s three other vessels raising questions over where its work will come from.
Polarcus is riding on the belief that its new vessel strategy will win the day. The killer for new enterprises is usually the level of debt. CGGVeritas has a debt ratio of 39% which is high but sustainable for a larger established enterprise even if it constantly tries to negotiate a better deal. But looking at a smaller company like SeaBird Exploration, it is obvious that debt management is a major focus. Its fleet of 2D/3D vessels are mainly conversions and, as a result of market conditions, they are not making as big a contribution as the company would like.
This is leaving the company’s ocean bottom node operations with the Hugin Explorer and source vessel Munin Explorer to provide as much as half of the company’s revenue. Such dependence on one vessel’s operations in a niche market clearly leaves the company exposed. Interestingly, directors have started wondering whether the addition of a second ocean bottom node vessel might be a good idea. Raising the money might be an issue.
The bottom line is that operating a competitive global fleet requires deep pockets especially when the market is over-crowded. Predictably the larger fleet operators with investment in technology to support them are in the best position to sustain their business. The all too public struggles of a company like Reservoir Exploration Technology are proof that, even with an innovative technology approach, in this case for ocean bottom cable seismic, creating a viable operation is very tough for a start-up. Regrettably, there are those who have not survived to tell their story, and others may follow suit. OE