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Petroleum Geo-Services (OTCPK:PGSVY)

Q1 2013 Earnings Call

April 29, 2013 09:00 AM ET

Executives

Tore Langballe - Head of Corporate Communications

Jon Erik Reinhardsen - President and CEO

Gottfred Langseth - CFO and SVP

Sverre Strandenes - EVP, MultiClient

Analysts

Peter Testa – One Investments

Caroline Hickson - UBS

Tore Langballe

Good morning. Welcome to the presentation of the First Quarter results for PDS. My name is Tore Langballe, Head of Corporate Communications in the group. This presentation is being webcast and we have a conference call running in parallel.

Before we start, I’d like to give some practical information as we are broadcasting the events. Kindly use the microphones provided when you are posting questions for you in the auditorium here. No fire drills are planned so if the alarm sounds please evacuate immediately emergency exists, two at the front and one at the back.

I’d like to draw the attention to the cautionary statement showing on your screen, page two in the presentation, kindly study that carefully.

Today’s presentation will be given President and CEO, Mr. Jon Erik Reinhardsen and then CFO Gottfred Langseth will go through the numbers and we have with us today EVP Sverre Strandenes responsible for MultiClient, who will give you an updates on his field.

There will a conference call this afternoon at 3 o’ clock central European time which is 9 o’ clock Eastern Standard Time, details on the webpage.

So by that Jon Erik, I will give the word to you.

Jon Erik Reinhardsen

Good morning, we deliver another strong quarter and are happy to report profitability well above our 2012 levels.

We increasingly see the GeoStreamer coming through as a differentiating technology contributing to profitability and we also see a market that is continuing to improve and I will go a little bit more into details on that through the presentation.

Q1 financial performance EBITDA of 202.3 million up 39% from the first quarter 2012. EBIT of 96.8 million up 170% from Q1 2012 than group EBIT margin of 25%.

For 2013 for PGS, we estimate an average contract prices to be 10% to 15% above the 2012 level. This is slightly less than an indication we have given earlier on at about 15% but still a solid increase year-on-year from 12% to 13% and the slightly less adjustment is really some pressure we see driven by among peers that has showed a backlog that has led to some more active booking in the period we have behind us, likely a temporary phenomenon related to in particular the (inaudible) vessels that came into the fleet with a short backlog of CGG.

Further market strengthening and price increases in expected in 2014, and I'll come in more detail on how we see the supply and balance evolving. Ramform Titan to start a North Sea multi-client GeoStreamer campaign early July and we reiterate our full year 2013 guidance. Looking at the numbers in particular the very strong improvement in the EBIT figures, cash flow sit at 103 which is a bit softer than earlier quarters which is primarily working capital driven and then a temporary fluctuation. Order book sits at 600 million which is down from the previous quarter. Unit pricing in the backlog is maintained, duration per vessel has come down but still at a very comfortable level given where we are in the cycle and not a lease given the leads we see in the industry. Vessel booking at 95% from Q2, '13, 60% booked for Q3, '13 and 40% booked for Q4, '13.

When we talk about booking, we include in the book numbers activity that is determined for the vessels for instance yard stay and steaming that we cannot sell as capacity to the market, so what's left up to 100% is really saleable capacity the way it's displayed. And that also explains a little bit, when later you'll hear that we expect steaming and yard in Q2 than in Q1, why backlog is temporary shifting down that's part of the explanation in terms of the numbers here, but it's also a shorter duration which sits at about 5-5.5 months average for vessel, for the time being, which in the longer term perspective is very solid and very comfortable. And with that I hand over to Gottfred Langseth to go through the numbers.

Gottfred Langseth

Thank you, good morning, as usual I will start with the consolidated statement of operations summary, revenues of 294.8 million, that's 8% up compared to Q1 2012, EBITDA 202 million, 39% up, EBIT 96.8 million 160% up compared to Q1 last year. If comparing to Q1 2012, you will see that we have a 61 million EBIT increase on a 31 million revenue increase, which reflect our strong operating leverage and ability to control cost or avoid cost increase.

Net financial items in the quarter, 8.9 million; its 10 million EBIT more lower than Q12001. Primary reason is that we have a 7.5 million less from redemption and cancellation of the convertible notes last year.

In context, expense 25.4 million, that's a 29% tax rate. We have a favorable impact from operating vessels in the tonnage tax ratio in Norway. This quarter it was offset more or less by currency fluctuations.

Total MultiClient revenues were 151.5 million in Q1. Late sales revenue 58.9 and pre-funding revenues 92.6 million which represents a robust 126% of MultiClient cash investments in the quarter. Marine Contract revenues were 207.3 million that's an 18% increase from Q1 2012 with an EBIT margin of 30%.

We have external Data Processing revenues in the first quarter of 27.1 million. This is lower than preceding quarters. The primary reason for that is we spend more of our processing capacity for MultiClient processing.

The strong pre-funding revenues were driven by project in Africa and South America primarily. Late sales in the quarter dominated in particular by Europe but also by Middle East and Asia Pacific. For the full year, as earlier, we expect pre funding to be above 110% of MultiClient cash investment.

Moving to vessel utilization, we had strong year in vessel utilization in the first quarter with 92% active vessel time. Q2 and Q4 will have significantly more both steaming and yard time.

On the key operational numbers, I have commented already on the most important revenue lines except maybe the last one which is other revenues 8.9 million which is as you can see significantly lower than the 24.3 we had in the fourth quarter. The reason is that we reported the OptoSeis system delivery to the Jubarte field as revenues in the fourth quarter. The revenues in the first quarter of 2013 includes only invoice service like revenues, no equipment deliveries.

Operating cost 192.5 in the P&L lower or slightly lower than Q4 and also lower than what we had in Q1 last year. MultiClient amortization 68.2 million corresponds to 45% amortization rate compared to 47% amortization rate for the full year last year. We had CapEx of 71 million in the quarter and MultiClient cash investments of almost $73 million.

Moving to our usual slide on total cash cost development, stable development of total cost in the quarter we had $265 million of total cost. it is a total cash cost in the P&L and capitalized to the library which is a reduction from $272 million in Q1 ’12 and 268 million in Q4 2012, so a slight reduction compared to fourth quarter we had lower cost in Q1 particularly relating to the fact that we completed delivery of the OptoSeis system in December last year.

We had slightly higher cost relating to amortized steaming cost and certain other project related costs compared to Q4. Cash flow from operating activities 102.7 million in the quarter compared to 151 in Q1 last year. The improved earnings that we had in this quarter was offset by an increase of working capital. The working capital change is primarily project driven and also reflecting usual seasonality and from a low year in 2012 in working capital number.

Further down in the cash flow statement you will see the line financing activities or cash used in financing activities. This line includes a net of $12 million used to repurchase or purchase treasury shares in the quarter.

Now to my last slide. Our balance sheet position is very strong. Some key numbers multi-client library $410 million in book value. Shareholders’ equity $1964 million corresponds to 60% of total assets. Liquidity reserve $661 million and net interest bearing debt of $504 million.

On that note I will give the word back to Jon Erik. Thank you.

Jon Erik Reinhardsen

Thank you Gottfred. Just a quick review of vessel operations mid-April. One vessel already up in the North Sea. Heavy focus on Southern Atlantic which has been the focus for this winter and for the basis for the numbers delivered. Few more vessels are on the way North as we speak; so a couple of comments to the market fundamentals.

Notably the curve in grey oil sales leads continue to trend strongly upwards and looks very promising for ’14 which is basis for the comment I made earlier about ’14. Number of areas where we see increased activity compared to ’13, obviously Brazil licensing round being very important. Increased activity in the Russian shelf, a number of larger service in the Black Sea in the leads table now.

South Atlantic will remain very active in ’14. We expect Canada to become very active licensing round in Egypt and Cyprus and more for that matter but those two maybe important in volume. And not the least for us the GeoStreamer reacquisition market continues to be a very significant market contributor for us.

On the other hand we see the active tenders trending down which is an effect of a number of awards in the North Sea, and shouldn’t be abnormal in our view in terms where it sits. You can actually see the same trend in earlier years. Both in ’12, in ’11, ’10 and in ’09 in the same quarter.

Now there has been a lot of questions lately that we have had from investors in terms of sensitivity to oil price. So we included one slide here from a Goldman study that came out recently covering the marginal top 380 oil fields, and that is oilfields, the breakeven for oilfields of non-producing and recently put on-stream oil assets. So these are assets that we expect, will be important in terms of evaluating production going forward, a study I would recommend people to have a look at.

What comes through there is, is the deepwater and in particular ultra deepwater dominates the lower-end of the cost curve which speaks to, that’s the segment that is actually most robust to oil price fluctuations going forward, which is supporting of course the case we see of continuing to expand our business and the demand increase we see reflected in the previous slide.

Another reflection of this is obviously that since the ultra deepwater, deepwater will grow and have sustainable growth, more robust oil price and other of the alternatives. We will also expect size of survey to come up. And we have done an analysis of that over the last 10 years. And this is sort of the average size of a survey measured in square kilometers, both in contract alone and in combined contract at MC in the blue curve, MultiClient in blue curve. And we see that the average size has doubled, or more than doubled over the last 10 years. So it's going from a level of about 1,000 square kilometers per survey to close to 2,000 square kilometers per survey and it’s trending strongly up.

And again this is the main argument for continuing to invest in vessels that are even larger than the current high-end vessels, continuing to invest in ultra-high-end vessels, which is sort of the next generation we are building now.

And I am just coming back here on Saturday from the naming ceremony of this vessel here, the Ramform Titan that will take Seismic acquisition to a new level. High focus on safe operations, highest number of streamer possible in the industry, largest production capacity in the industry and the right response for deep water and high density seismic acquisition and of course offering the oil companies the best possible understanding of the subsurface.

A phenomenal vessel having now walked through and seen what we have coming this way and we will try to have an open day in June at a port stop before we go out to do the first acquisition here in the North Sea in MultiClient. This is the most efficient marine seismic vessel ever built and we get four of these over the next two and half years.

So to the demand and supply, we continue to see growth in square kilometer for this year, partly driven by larger survey so you get more square kilometers out of each vessel as well given the trend you saw on the pervious slide. This curve starts to become more capacity constrained, there has been periods along this curves at the top in terms of square kilometers done that has been capacity constrain and of course has course prices to hike.

We have seen still a growth year of 12% annually since 2006 and holding this up against then the curve below which is a proxy to supply, having discussed the proxy to demand. We see a growth this year into streamer capacity; active streamers are 4% next year of 5% and currently 10% in 2015.

And with that I will hand over to Mr. Sverre Strandenes to go through some more specifics on MultiClient.

Sverre Strandenes

Thank you, Jon Erik. I’m pleased to get the opportunity to present a snapshot of the MultiClient business to you today. And I’ll do that by giving a brief state of the library where we compare net revenues, net book value and the rates of net revenues to net book value between PGS and some of our largest peers.

PGS is not always rent, please also note that the three at least peers contain both onshore and offshore revenues. We can see a strong growth in revenues since 2010 when the company was restructured to put more focus on MultiClient. We have the lowest net book value and we have the best trend in revenue of net book value. We have a library that generates strong cash flow driven by good prefunding and we are improving profitability. And so, we believe this speaks to a healthy and well performing library.

Although it may not feel like it spring has arrived, which means that North Sea season has started. We are in the fifth season of the GeoStreamer North West re-shoot campaign. In the graph where you can see on the bars, the volume of Seismic acquired every year, so far we have acquired 35,000 square km GeoStreamer data and we plan to add another 12,000 square km this year.

The line represents in relative scale, the investments and the associated prefunding collected the same year which speaks to a high quality market, there is continued interest and very high activity in the North Sea.

We now have the new state of the art 3D GeoStreamer database in the North Sea that we have sold in license to more than 50 odd companies. And finally, we are very pleased to see the Titan arrive around July 1 to require approximately 4,500 square km of MultiClient 3D this season.

Another core area for PGS is the eastern Mediterranean in Lebanon. We have about 11,000 square km of MultiClient 3D which constitutes more than 75% of the available 3D data in this area. Our focus has been on the margin and near shore and the reason for that is we believe this is the most oil-prone part of the Lebanese offshore area. All the gas-prone part is more on the outwards side. There is a quite a lot of interest in the upcoming license round where about 46 companies now are prequalified.

In addition to the 3D, we have 25 kilometers of recent MultiClient 2D in Lebanon and Cyprus and we recently added 12,500 kilometers in Greece. So in sum, we have a unique coverage in this part of the Mediterranean.

Positioning in Frontier areas is important because this potentially represents the growth areas for the company. We have just completed a very interesting project in Russia, close to 9,000 km of regional 2D, the sign to increase the geological understanding of the Russian Arctic we have covered a Kara Sea and Barents Sea up to the new Norwegian territory.

We have both Seismic and interpretation reports available for export and international licensing.

In Namibia, we are acquiring as we speak 10,000 km of MultiClient 2D GeoStreamer GS data in preparation of an upcoming deep water license round. And in Greece, as I mentioned we have acquired 12,500 of MultiClient 2D (inaudible) also in preparation for the 2014 license round.

In Canada we are preparing to resume the third season of (inaudible) so far we have 32,000 kilometers of 2D and we expect to continue both this season and next season with this program.

Finally I would like to draw your attention to a new business model that is emerging, favoring a company like PGS having vessels, owning vessels and leading edge technology; this is driven by regulators, shortening the time from license awarded to the first one. We also see that larger license areas are becoming available, which means that the turnaround time for seismic is becoming a very critical part of the project.

This is also means that there is less margin for error, which in term poses high demand for state of the art technology. This favors MultiClient operators that owns vessels and can guarantee that the vessel shows up on time and also providing leading edge technology that reduces the error, as I mentioned. We have two good examples recently. Both the Angola Kwanza GeoStreamer project and the Uruguay GeoStreamer project were awarded to PGS, partly because of the GeoStreamer technology and partly because we could guarantee a high capacity vessel to show up immediately after signing of the production sharing agreement. Two other interesting examples are Greece and Namibia where we were awarded exclusive rights, in preparation for license round and this was also partly because we could guarantee vessel availability and GeoStreamer technology. With that I give over back to Mr. Reinhardsen.

Jon Reinhardsen

Thank you Sverre, we will finish up with a few slides, just quickly reviewing our strategic ambition highlighted in five main bullets, to care, which is really about our ambition and deliveries within health, safety, quality and the environment, to deliver productivity leadership which you have seen being reflected also in our investment now in the Ramform Titan, and the Titan class vessels but also in GeoStreamer Deep Tow productivity gains, to deliver superior data quality that is mainly about GeoStreamer and all of the spin off products coming off the GeoStreamer suite of products. To innovate we believe that this industry still has enormous dynamics in terms of new products coming through and we believe innovation will be critical to differentiation also going forward.

And finally, to perform over the cycle where profitability and robust balance sheet are key parameters in a world and a market where currently we enjoy strong oil prices but history has shown that these prices can fluctuate quite a bit. Most importantly, the focus is absolute on being best in our market segment.

Having reviewed the Titan, I am just going to quickly show a slide reminding ourselves that the GeoStreamer has become and will continue to be our new business platform and our new technology platform and there are numerous products continue to come out of the GeoStreamer idea as we move forward in terms of both upgraded cables and upgraded products in the imaging field.

And with that in mind, I think this slide tells a very strong story in terms of what we will be able to offer to the market going forward. There is more demand for GeoStreamer that we have been able to supple even though we have a quick most of the current fleet with GeoStreamer capacity.

What remains to come obviously is the four Titans and upgrade of the two S classes which are the six vessels that are superior to any other vessel available in this industry the ultra-high-end, so we actually have most streamers to come on the right-hand side of this slide than we currently have on the left hand side of the slide, so that speaks to where we put our money generated, we invest in capacity for growth and capacity for improved earnings capacity.

Then a quick reminder on our OptoSeis permanent monitoring product that is not installed in Brazil for the Jubarte field, first survey has been, excellent data quality and what we see in this for PGS is potential for future long-term backlog that we serve a base load for future earnings and again be an element of stabilizing earnings through cycles.

So visionary looking forward, regular supplies of these systems on new fields and then service contracts of the back of the field running 5 to 10 years where we do acquisitions and processing, so you get an aggregator fact overtime here that we think will be an important addition to what we do today.

Secondly, on the EM, we’re now getting through very nice results from our activities in November last year and we’re firming up our 2013 EM program which as we have indicated earlier will be about three months with Nordic Explorer. Stepwise approach, low capital required and very great flexibility in terms of how we use vessels and we can deploy this to different vessels that are available in the industry.

Finally, as we said earlier, we expect the 2013 marine contract pricing to be up 10%-15% from ’12 a significant increase. We do highlight that two quarters will have more steaming and yard than the other two quarters being second quarter and fourth quarter and yard activity you can find indicated at the back of the presentation.

We also believe market pricing will further strengthen in ’14 based on the strong sales leads curve I showed you and that's another reason why we are not particularly concerned about backlog as I commented earlier. But also based on current price negotiations that indicate opportunity to charge more than we currently do in ’13, and that is still at a very early stage of negotiating deals for ’14 earlier than we have seen over the last year. So it is a good sign in itself that customers are engaging earlier and of course another good sign that we can discuss prices over the 2013 level.

Finally, GeoStreamer interest continues to increase to new record levels. Guidance is just to reiterate it as we had it a quarter ago. And finally in conclusion PGS well positioned company in a growing market. We see strong fundamental despite the slight move we have had in terms of sales in the last quarter driven by short backlog among some of our peers. We are continuing to improve in productivity and scale. We see that GeoStreamer is delivering improved quality on data, on performance, and pricing. We have leading edge imaging capabilities. We continue to see technology differentiation as important. We have maintained a strong balance sheet and are very competitively positioned to perform through the cycle. And with that I hand over to Tore Langballe for managing the questions.

Tore Langballe

Thank you, Jon Erik. Then we open up for questions initially from the audience here in Oslo and then we will take questions from the web and from the conference call in a few minutes. The first question is from (inaudible).

Question-and-Answer Session

Unidentified Analyst

Thank you, in terms of the comment on bidding activity and the fact that backlog declined as much as it did in first quarter, it seems like you didn’t book much contracts post the presentation of fourth quarter. Is it fair to assume that when one of your competitors concluded the merger that they started bidding low to secure and work for its merged capacity?

Jon Erik Reinhardsen

We have booked around 100 million of new contract work in the quarter which is a significant number but we have tried to stay out of any sort of price more related to securing backlog because we think the marketing is stronger than that, we don’t need to do it. The sales lead indicates there is no need to do it. And when you see at our booking horizon we don’t have any sort of major short-term concerns about that. It is really a focus on Q4 for us where we think it’s possible to continue to do. The only thing we have sort of adjusted slightly is an indication that pricing would be up approximately 15% to say 10% to 15%. So that’s sort of the impact this translates to in our view of this year’s pricing.

Unidentified Analyst

But is that pricing comments because you are then willing to lower the increase slightly this year versus the previous year, or is it any other thing impacting that?

Jon Erik Reinhardsen

It’s just an adjustment of what we think we have to land on to sort of book that capacity to the rest of the year given the current environment in pricing. I mean it’s not very sophisticated it’s just a realistic view of where we think the market sits. We think we can charge more for our technology than what we see our peers do. On the other hand, we don’t live in isolation there will always be some effect that you can’t run ahead in a limited way, if there is another market that you have to relate to.

Unidentified Analyst

First quarter was very strong in both pricing and margin. Would you say it's mainly a pricing impact in first quarter or it’s also productivity element that you had strong production in first quarter.

Jon Erik Reinhardsen

It is also a productivity element in first quarter and does very little steaming yard as you saw from the utilization we announced earlier. So, it’s a combination of this effect.

Unidentified Analyst

And finally, low offer in first quarter is that would come up in second quarter, is it fair to assume that it will be more done those typical 15% of our use in seismic?

Unidentified Company Representative

We expect more than 15%, for the second quarter we currently expect steam to be between 15% and 20%, yard you can see in the back of the presentation.

Tore Langballe

There are more questions in the audience here, if not we take a couple of questions from the web. The first one comes from (inaudible). He asks with the limited changes to the new secure work in Q1 '13 and Q4'12 and you state that you focus on Q4 and early 2014 work. Are you saving capacity at this point in anticipation of a strong North Sea season or should we take it as overall softness in tender activity?

Jon Erik Reinhardsen

I mean in tender our curve is down a bit post North Sea awards but available capacity we have to sell in Q2, Q3 is mainly Q3 and there is still a lot of opportunities that is relevant for our vessels in that timeframe. So, that’s why we say the main focus is really now establishing a good backlog for Q4 and into next year where we can sort of start to build for other on our strong position. I think the rest of the question is partly what we discussed just now with Christopher.

Tore Langballe

Take another question from (inaudible) can you comment on the work efficiency in Q1? Are you happy with your achieve there or prefunding in Q1 on the survey?

Unidentified Company Representative

I think that apart from slightly worse weather unexpected we are more or less on track both when it comes to productivity and the prefunding for that particular project.

Tore Langballe

Okay. Then we take one from Ivan (inaudible) regarding down price improvement through 10% - 15% versus 15% previously while contract EBIT margin was 30% in Q1. How should we expect the EBIT margin development to be throughout the remaining of the year, how much do you see prices up for ’14 based on your current sales data on going price negotiations?

Jon Erik Reinhardsen

We are not prepared to guide on EBIT margin quarter-on-quarter for contract work. So, we stick to the overall guidance parameters but I think what you can read from that slight adjustment is that it is probably going to be a flattish on average pricing through the year and then sort of further up in '14 when it enters the pricing, from the level we have established now.

Tore Langballe

Thank you. They were ready for some question from the conference call, operator, can you please assist us?

Operator

(Operator instructions). We take our first question from Mr. Peter Testa calling from One Investment, please go ahead.

Peter Testa – One Investments

The first one, it’s just on the Q3 where you’re 60% booked, I think that’s post to North Sea awards, can you give us just may be some better feel; geographically where you feel the opportunity is on to build that for the balance of the year and the extent to which those same opportunities will help you with the Q4 backlog selling?

Jon Erik Reinhardsen

There is still some opportunities left in the North Sea but predominantly this is south Atlantic and then work that could continue into Q4, some of it being MultiClient, some of it being contract.

Peter Testa – One Investments

Okay. Would that reduce the steaming need given the sort of different balance of North Sea?

Jon Erik Reinhardsen

It would pretty much be in line with the steaming guidance we now have given that sort of mushrooming a pattern of steaming that takes the vessels to the North Sea that we plan to have in North Sea. So there is no big change in this if it plays out the way I indicated now.

Peter Testa – One Investments

Okay and then on the GeoStreamer prefunding ratio that you have showed the chart up through the end of 2012, can you give us sense of what do you think the 2013 ratio would be roughly the same as ’11 ’12 or different number?

Tore Langballe

A good guidance would be along the same line as we have seen the past couple of years.

Peter Testa – One Investments

Okay great and last question please just on the MultiClient late sale view, whether do you have any thoughts about what you consider the key triggers from MultiClient late sales to be for the balance of the year?

Tore Langballe

I think that the MultiClient business is part of the same market as the contract business. We see that, there is generally good interest in the MultiClient data sales and both prefunding and the late sales so we expect a steady development over the late sales going forward.

Operator

Thank you sir, we'll now go to Sanath Sachin (ph) of Nomura. Please, your line is open.

Unidentified Analyst

Hi, good morning thanks for taking my question, just one question on costs, after you've completed your profit improvement program last year what cost efficiencies are you expecting from your new vessels that will be coming online across 2013, '14 and '15? If you can quantify that, that will be helpful, otherwise qualitative guidance would be nice, thanks a lot.

Tore Langballe

I think what we said on the relative cost efficiency of the new vessels the Ramform Titan class vessels is that we expect on average to operate them with more streamers than we do with the S class and that's close to 15% productivity improvement, there will be not too high or significant differences in operating costs, so I think that's the indication we want to at this table for now.

Jon Erik Reinhardsen

I could add maybe in terms of productivity that so far we haven't seen any of our peers being able to sustainably operate 14 streamers. So the dominancy or high end among peers is 12 streamer operations, 12 by 8 and that on its own maybe a stretch for some of the vessels. with this vessel here we have dialogue with clients that wanted a 16 by 8 and that speaks directly to a ratio of productivity gains that could be possible, but then depending on how much of a full year of a Titan we could utilize at a 16 streamer configuration, it will obviously not be all the jobs but it will fluctuate and more and more be dominated by that and the back (inaudible) market wise is the increase in size of service that you've seen we are coming through now.

Operator

Thank your question we'll now go to (inaudible).

Unidentified Analyst

Thank you. I wasn't knowing if you could give us any sequential trend on pricing for the coming two or three quarters. Do you see the sort of strengthening regarding the price you get here for contract in Q1 and in the future? Thank you.

Jon Erik Reinhardsen

I think I touched on that already, I think what's underlying what we say here having a strong quarter and a good margin in contract is that it would be a fair assumption to say that the pricing for this year would be flattish and then there would be fluctuations on margin related to more operational things, steaming, yard, et cetera, et cetera, and then we do see that it's possible to improve that further into '14.

Unidentified analyst

So that means the price increase you could get in the coming quarters, will be offset by more steaming in full margin at subsequent since what you get in Q1 will not evolve for the rest of the year.

Jon Erik Reinhardsen

Yes, I think what I have said is what we have prepared to share here you know.

Operator

We will go now to Mr. Jeffrey Stern of (inaudible). Please go ahead sir.

Unidentified Analyst

Yes just wanted to fill up on prices. I have some difficulties to reconcile your indication of a 10-15% price increase. Why there is no mentioning's that you have flat prices and getting back to your backlog, whereas if you want to achieve a 10-15% price increase this year, we also need to assume the second half of this year prices to increase by around 10%. So, can you just elaborate a bit on this?

Jon Erik Reinhardsen

The 10-15% is an average pricing ’13 versus an average pricing in ’12. That's the comparison we're making. And then first quarter is one data point in that full year. Some that we will see when the year is over and that translates into margin and given the high operational leverage we have in this company with sort of fixed cost most of that increase will then translate into margin, that's how it plays out in reality.

Unidentified Analyst

Okay and just a follow up; how do you explain here you said in the comments from (inaudible) which mentioned that in 2013, prices will be flattish compared to last year. The difference is driven by like say a technology or a fleet being allocated to different regions? How can we understand that?

Jon Erik Reinhardsen

It is, I cannot obviously explain what they have in mind when they say that, that's why I was a bit unclear when we started here saying this is PGS’ view on the prices we achieve and then others will have to respond to what they achieve and how they are able to deliver. But needless to say I mean no one is in a vacuum here. So the prices one party plays out will have an effect on the total. But the indication we give for the full year is relevant for the pricing we see we're able to get in the market.

Unidentified Analyst

Okay just maybe a final one with regard to capacity addition. It sounds like you already do one vessel to the total supply cost for ’14 or ’15 what is it basically?

Jon Erik Reinhardsen

The difference between our capacity slide for that we had a quarter ago and now is really the additional Dolphin vessel that was announced almost the day we had the last quarterly presentation. So that's why it was not included or the day before I think it was, which is now in the numbers we have.

Operator

We will now go to Rob (inaudible) of Morgan Stanley. Please go ahead sir.

Unidentified Analyst

Just a couple of questions from me and since quite a few have been asked already; first of all the coverage on your backlog for 3Q and 4Q this year has not changed very much, could you just clarify whether that is relating to seasonality of actually signing contracts or whether this is a bit slowdown in terms of oil companies actually sort of going ahead in contracting vessels for surface and that’s the first question and the second question is if you could just repeat your comment about steam in Q2, I didn’t quite catch what you said about the level? Thank you.

Jon Erik Reinhardsen

We still see a very active market when it comes to clients interest for securing work and so we are not very concerned in that prospect under the whole curve would lead which is sort of those surveys that comes a bit shortly supports that very much so there is nothing we pick up that indicates any weakness in demand but we have as I indicated try to stay away from any sort of eagerness to secure backlog at lower price because we think for market supports maintaining a higher price level all the time and obviously some of the capacity that is not booked will also be taken by MultiClient projects in Q3 and Q4.

Would you repeat Gottfred your statement on steaming?

Gottfred Langseth

Our forecast for future steaming is between 15% and 20% of total time. I didn’t say anything specifically on the yard time, the fund yard base are including in as attachment to the presentation. So, as yard would also be higher than what you’ve seen in Q1.

Operator

(Operator Instructions) We will now go to Ms. Caroline Hickson of UBS. Please go ahead.

Caroline Hickson - UBS

Hi, just following on from Rob's question on the steaming, I’m just wondering whether you’re getting paid for this in 2Q or basically why you’re doing it in what is traditionally a better season and equally why you’re doing the yard stays then?

Gottfred Langseth

To respond to that question whether we are paid for steaming that requires quite a bit of time. Generally we are and neither are all other companies paid specifically through steaming days. What we do is obviously calculating the cost for the steaming base on the jobs that benefit from the steam. The primary driver for the higher steaming in the second quarter is moving vessels to the North Sea which is relatively that often happens early second quarter, then there are other steams as well including moving Titan to the North Sea from the yard in Japan.

Caroline Hickson - UBS

Okay. And on Titan it sounds like you are putting this first Titan vessels is going on multi-client in the North Sea. It wasn’t able to get a contract or you just thought would be better to use there?

Jon Erik Reinhardsen

No, we actually won a contract for Titan , but with the flexibility that we could substitute her with another vessel if we wanted to, and as we always do we tried to optimize the use of the vessels in terms of where they could make most money and we have concluded that it would be better to do that contract job with another vessel and use Titan for MultiClient, just due to the size of survey and the ability to use the productivity at a fuller extent in the MultiClient survey, basically because the survey is larger than the contract won. So that’s the background for that basically.

Caroline Hickson - UBS

Okay, thank you. Just one final one, do you have any update on the financing plan for the next two vessels, the 2015 ones?

Gottfred Langseth

We are in the process. And we have discussions with the bank and the relevant export credit institutions in Japan, but there is nothing new. It will take quite a bit of time until that is concluded, and my best guess would be this fall.

Tore Langballe

Operator, we will take a couple of questions from here now. Next question is from (inaudible) of Arctic Securities.

The Lebanese license run is expected to be kicked off this week. Have you received any indications that this will not to go ahead as planned? Some of your peers have reported, so did Brazil and (inaudible) in Q1, how do you currently see your library in Brazil performing?

Jon Erik Reinhardsen

For the time being we have no reason not to believe that the Lebanese license run will go ahead as planned, and there is generally good interest from the oil companies that have been prequalified. In terms of Brazil, I think there has been quite a lot of activity from the equatorial margin which is driven by a license run to occur there. We have as we have communicated before a limited library, irrelevant in that part of the region. Our library is mostly dominated by the vessels, special areas and this year (inaudible) but we are eagerly awaiting getting the activity back in that (inaudible) which is where we have our highest and largest library.

Unidentified Company Representative

Thank you and we have a question from (inaudible). When do you expect the contracts for 2014 which are currently under negotiations? What is your view on new building activity today, relative to 2006 and 2007, did you notice any change in customer behavior on the recent decline in oil prices?

Jon Erik Reinhardsen

Yes to start with the last, we haven’t seen any change in customer behavior based on oil price fluctuations that is still sort on predominantly in north of $100 a barrel, then to the booking obvious it seems we have very early on discussion relative to 2014 it may still take a while to formalize the discussions but these clients are keen to get in place, it’s a commitment from us and for us to commit from them that it is not necessarily translate into a contract shortly because we have a lot of time at our hands but still we have a mutual understand that we are going to do work with them and continue that way. So, we will just report quarter-by-quarter as we see this coming through and then there was one question in the middle there which is of you a new building activity. There is clearly much less newbie's in the pipelines now that we saw ’06 and ’07 which is very good for a long term price improvement in the industry even though what you see coming through now in ’15 is a number that is getting closer to the average annual increase in square km so at the same time we would not like to see more capacity hit in ’15 than we start to sought to come closer to where we see the demand is growing. So, that is a message to everybody, we plans to build new vessels.

Operator

Thank you. Do you have any further questions from the audience here? No, we will see if we have a couple of more questions from the conference call at the end of the session. Operator?

Operator

At this time sir, we have nobody queuing.

Jon Erik Reinhardsen

Okay, then we thank you all for joining us today and have a good day, thank you.

Operator

Ladies and gentlemen this concludes the conference call. You may all disconnect.

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