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Executives

Neal Coleman - President and CEO

Pamela Wicks - VP, Finance and CFO

Analysts

Dan Trang - Stonegate Securities

Andrew Rodman - AR Consulting

Peter Prattas - Cantor Fitzgerald

Pulse Seismic Inc. (OTCQX:PLSDF) Q4 2013 Results Earnings Conference Call March 18, 2014 1:00 PM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Pulse Seismic, Inc. 2013 Fourth Quarter and Year-End Conference Call. I would now like to turn the meeting over to Mr. Neal Coleman, President and Chief Executive Officer of Pulse Seismic. Please go ahead, Mr. Coleman.

Neal Coleman

Thank you, operator. Good day everyone. And welcome to our year-end conference call. And thank you for your participation. We are pleased to present the operating and financial results for Pulse Seismic, Inc. for the year-ended December 31, 2013.

I’m Neal Coleman, President and CEO of Pulse. Joining me on this conference call is Pamela Wicks, our Vice President, Finance and CFO.

Approximately two hours after we completed this conference call, a recording will be available at the telephone listed on the conference call news release. We also post a link on our webcast on our website at www.pulseseismic.com.

Please remember that today’s call and the answers to any questions you ask may constitute forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based upon current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to vary and in some instances differ materially from those anticipated in forward-looking information.

I direct you to the forward-looking information section of Pulse’s news releases and management discussion and analysis which has been filed on SEDAR for an explanation of risks that could affect the Company’s operational and financial results.

We will start by providing an overview of 2013, then a look at our financial and operating highlights, and then discuss our future outlook. We will conclude the call with a question-and-answer session.

We entered 2013 with optimism and confidence due to strength of Pulse’s finances including the flexibility provided by the new credit facility as well as the increased coverage provided by the recent data acquisitions. However, we caution that data library sales have poor visibility and discuss some of the risk facing Western Canada’s oil and natural gas industry.

Our revenue fluctuates regularly from year-to-year and is a normal part of the seismic business. Data library sales are driven by factors beyond standard industry metrics such as commodity prices and drilling new rig utilization.

Varying business conditions tested our business model in 2013 and allowed us to demonstrate our enduring strength. Pulse’s data library incurs nominal maintenance costs, generating high cash margins. In a challenging year, we showed that we could still generate cash EBITDA and shareholder free cash flow under much lower revenue than the year prior.

We generated a cash margin of 71% on $27.1 million of data library sales. This enabled us to deliver meaningful returns through dividends and share repurchases to all of our shareholders.

During 2013 Pulse’s exceeded historic first quarter seismic data library sales, except for the first quarter of 2012 which included a single record sale of $27.8 million. We were disappointed with sales for the remainder of 2013. Sales were lower than in prior years in part due to decline in overall industry demand as well as lower corporate transaction based sales than in the past recent years.

Pulse’s customers are generally focused on liquids rich natural gas and oil opportunities down primarily in the deep basin area in Alberta as compared to British Columbia where dry gas is more prevalent. The pricing of natural gas liquids such as propane, butane and condensate is going to crude oil improving the economics of developing liquids rich targets over dry gas, which has suffered very low pricing for several years now.

Data library sales for the year were strongest in the Kakwa and Fox Creek Edson areas which hold liquids rich natural gas reservoirs in multiple zones, much of which we licensed with relatively recently short data and customers included intermediate type producers, majors and international super majors.

Investors have begun to realize that we are not a typical oilfield services business. Our assets are very long lived and require no maintenance capital, instead our sales generate very high margin and provide management with discretionary cash flow available for reinvestment or to return to shareholders.

Energy service companies including the geophysical companies that carry seismic surveys, require large capital intensive equipment fleets. Generating revenue depends entirely on equipment utilization which incurs high operating costs. Pulse does not own any equipment or any tool; it is not a company’s whose performance is measured by utilization rates. Our business and revenue generating capacity are decoupled from equipment and field operations.

Our data is digitally warehoused and is licensed on a non-exclusive, non-transferable basis with the customer paying the [copying] cost upon licensing the data. There is minimal incremental cost in making a sale or maintaining a larger database.

In 2013, Pulse completed its largest survey program in the company’s history. We shot three participation services totaling 1,200 square kilometers of high quality 3D data, for a total gross cost of $58 million. $34 million of that was prefunded by the participating clients. McKinley and Fox Creek surveys are located in the greater Kaybob area and the Pembina survey in the Edson-Carrot Creek area.

Kaybob is in the heart of Duvernay Shale play and is prospected for multiple other zones. The surveys were conducted efficiently coming within approximately $200,000 of budget with zero loss time safety incidents. It is extremely important to Pulse to follow best practices in the safety and environmental management of its 3D Seismic participation surveys.

After completion of these surveys in the second quarter of 2013, Pulse’s data library now consists approximately 340,000 net kilometers of 2D data and 28,300 net square kilometers of 3D data. This is a second largest licensable seismic data library in Western Canada.

During the 2013, 2014 winter season, we have examined many opportunities to launch new participation surveys but none met our technical and economic criteria. This has been the first year that Pulse has not conducted winter surveys. We continue to evaluate projects for the upcoming year and are hopeful that we will find prospects that do meet our requirements and allow us continued organic growth.

Pamela Wicks, VP, Finance and CFO will now address our 2013 financial highlights.

Pamela Wicks

Thank you, Neal. Even though Pulse experienced a challenging year with low data library sales, we were able to generate positive cash EBITDA and shareholder free cash flow, our most important key performance metrics. In looking at our year-over-year comparatives, it is important to know that contributing to the key performance indicators for the prior year was that company’s single largest data sale of $27.8 million that Neal has already alluded to.

Data library sales for 2013 were $27.1 million compared to $64 million in 2012. Of this $27.1 million, approximately 41% was generated from older fully amortized seismic data. Total seismic revenue of $40.5 million for the year included $13.4 million of participation survey revenue compared to a total of $86.4 million in 2012, which included $22.3 million of participation survey revenue.

Pulse incurred a net loss of $18.8 million, $0.31 per share in 2013 compared to net earnings of $27.4 million, $0.44 per share in 2012. Using the percentage of completion method of revenue recognition for participation surveys, the company recognized $20.5 million of the related $34 million of participation survey revenue for the 2012-2013 winter seismic surveys in 2012. The initial amortization on the $58 million of gross cost of these surveys was recorded on completion of the surveys in the first half of 2013. This contributed greatly to the 2013 loss. The related participation survey revenue in 2013 was only $13.4 million, while the amortization was $29 million.

Of course, we continue to believe the appropriate key financial performance and valuation metrics of shareholder free cash flow and cash EBITDA, not earnings or loss. Our definition of cash EBITDA is cash data sales, less cash operating costs and cash G&A with any non-recurring G&A added back. This financial metric eliminates the non-cash impact of the amortization provision and also the impact of prefunding on our participation surveys which is recorded as revenue.

Shareholder free cash flow is cash EBITDA minus interest and current income taxes, which are both cash, but are non-discretionary expenses. This financial metric increases transparency with respect to cash availability, we use our cash for discretionary purposes such as dividends, the purchase of Pulse shares and making capital expenditures to grow our data library or to pay down the principal portion of long-term debt.

2013 cash EBITDA was $19.1 million, $0.32 per share compared to 2012 cash EBITDA of $54.7 million or $0.87 per share. For 2013 shareholder free cash flow was $20.7 million, $0.34 per share compared to 2012 $50 million, $0.80 per share. In 2013, shareholder free cash flow exceeded cash EBITDA due to the recovery of income taxes paid for 2012.

The $37 million decrease in data library sales during 2013 is the reason for the decline in the company’s key performance metrics compared to the prior periods. We had lower selling, general and administrative expenses, as well as much lower financing costs and a credit-to-tax expense, but the savings in our low cost business model of approximately $8 million led to the $29 million shareholder free cash flow reduction.

Pulse utilized cash on hand and cash provided by operating activities during 2013 for the following major cash outlays: Investing activities which consisted mostly of seismic data acquisitions including surveys of $36.3 million; purchase and cancellation of 2.4 million common shares through our normal course issuer bid for a total cost of $8.4 million or an average of $3.42 per share including commission. We had dividend payments of $4.8 million and net repayment on our long-term debt of $4.6 million.

Upon completion of the 2012-2013 winter season Pulse added nearly 1,200 square kilometers of new high quality 3D data to the data library. Of that $58 million, total program cost, $21 million was incurred in 2013 and $37 million in 2012. $34 million or 60% of the participation surveys were prefunded by our customers.

Pulse purchased the 2.4 million common shares under its normal course issuer bid in 2013 for $8.4 million, but in total since initiating, the NCIB program in November 2006, the company has purchased approximately 11.9 million common shares at a total cost of $29 million.

In 2013, Pulse paid the quarterly dividend of $0.02 per share, totaling $4.8 million for the year. In 2013, Pulse’s shareholders received a return of over $13.2 million in cash from the company through the share repurchases and dividends.

Pulse’s total long-term debt at December 31, 2013 was $21.8 million and the net debt position was $20.1 million. In December 2013, Pulse renewed its three year $50 million syndicated revolving credit facility. The three year revolving facility’s maturity was extended to February 13, 2017. The terms include a reduced applicable margin on the top three tiers that will lower Pulse’s financing cost. The renewal and terms signal the lender’s confidence and support for Pulse’s business model.

And finally at year-end, our strong balance sheet contained the following solid financial ratios. We had working capital of 3.7:1, long-term debt-to-equity of 0.33:1 and a long-term debt-to-cash EBITDA ratio of 1.14:1

That’s the end of our financial update. So, I will pass back to Neal to conclude.

Neal Coleman

Thank you, Pam. Now in terms of our outlook for 2014, Pulse is financially strong and very well positioned operationally. Even though the timing and level of data library sales continue to be unclear, the company can continue to operate under a low revenue levels and still provide returns to our shareholders.

Overall, we are cautious going into 2014. On a positive note, natural gas pricing is much higher than a year ago; having climbed to what could be a sustained level of above $4 per gigajoule. In addition, there is better visibility for expansion of takeaway capacity for oil and natural gas out of Western Canada. This is offset by the considerably lower provincial mineral land lease revenue or land sales in 2013, as well as forecast for another year of relatively low oil and natural gas well drillings.

Energy service companies generally reported weaker activity in 2013 consistent with Pulse’s experience. More recently, some reported a pick-up in activity and financial results for the fourth quarter of 2013 and some have issued considerably stronger outlooks for 2014. Greater drilling and hydraulic fracking activity for service companies implies higher capital budgets among oil and natural gas producers.

Additionally on a positive note, recent reports of asset transactions plus some investment research which is anticipating a busier year for M&A activity, signals the potential for data licensing opportunities.

Regarding the longer-term, the producing sectors and investment community have shown great interest in the LNG proposed facilities in British Columbia’s Pacific Coast. This is a complex story with many factors remaining uncertain. We can say however that the gas demand for two or three LNG projects would be enormous, triggering increased upstream activity.

Pulse offers good data coverage over some of the critical LNG supply areas, the Montney and Duvernay in particular, as well as areas likely to experience secondary effects, such as the Alberta Deep Basin. Strong gas demand for LNG could even revive drilling for traditional dry gas. Anything that stimulates field activity should be good for Pulse’s business. In principle, the same goes for added takeaway capacity, such as new pipelines or greater oil-by-rail exports.

Investors continue to develop an understanding of our variable yet free cash flow business model. Despite persistently low gas prices, Pulse’s capable of generating $20 million in shareholder free cash flow in a lean year, yet also as the capacities generate $50 million as it did in 2012. In the meantime Pulse will practice prudent cost and capital management and remain focused on generating returns for shareholders.

That completes the presentation portion of our conference call. And now we look forward to entertaining any questions you may have.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions). And your first question is from Dan Trang from Stonegate Securities. Please go ahead.

Dan Trang - Stonegate Securities

Hi. Thanks for taking my question. Regarding the data sales going into 2014, can you provide some color behind any other factors aside from the price of natural gas and oil that would be contributing factor to that?

Neal Coleman

Yes. I mean we believe that we have thought in 2013 we’d see more corporate based transaction, M&A activity, asset sales and joint ventures. Last year was very, very slow in all of that regard. And you are already seeing a pick-up in activity so far in 2014 with some deals that have been announced lately. And I think that’s going to be main reason why our revenues were down from the previous year was the corporate based transactions.

Dan Trang - Stonegate Securities

Okay. So you are saying that basically you are seeing a pick-up already right now, so you expect growth going into 2014 on the data sales side?

Neal Coleman

Yes. I mean we hope, obviously we have growth over our 2013 numbers from analyst reports and from what’s happening in the first three months of the year as I think is a good sign leading up towards a revival of that type of revenue for us.

Dan Trang - Stonegate Securities

Okay. Thank you.

Neal Coleman

Thanks Dan.

Operator

Thank you. The next question is from Andrew Rodman from AR Consulting. Please go ahead.

Andrew Rodman - AR Consulting

Hey Neal, how are you?

Neal Coleman

I am great, how are you?

Andrew Rodman - AR Consulting

Good, thank you. I have a question; two questions. First on the buyback, are you going to continue in ‘14 to repurchase shares and…..?

Pamela Wicks

Yes Andy, we are going to continue. We actually started today, if I can say that. We haven’t done our insider reporting yet. But we have been in black out a lot in Q1, but we’ve started back to re-buy and we have budgeted to do so. But we do look at it as each quarter goes by and consider a lot of factors like what our other capital requirements are and what type of -- what sort of sales levels we're achieving and what the price of these shares is trading at? So, but yes, we're committed to continue that program.

Andrew Rodman - AR Consulting

And my next question is on doing another study or another 3D shoot. You said you didn't do one in ‘13 and ‘14 is here, what in your mind, what type of revenues do you think you’d need to produce over last year to be interested in doing or feel comfortable doing another shoot?

Neal Coleman

Yes. This was the first winter that we haven't started any [participation] surveys. We did just finish in Q2 last year, our largest…

Andrew Rodman - AR Consulting

Right, that was right.

Neal Coleman

So, this winter pass we looked at a lot of projects, but none met our economic or technical criteria. We did review a lot of projects in a lot of different areas, but again we felt, we just felt that we couldn't get comfortable with understanding where we're going to get data sales from these projects into the future.

So, because we don't have any crews or equipment, we have that flexibility, it's although a capital allocation. And we decided to look at other avenues.

Andrew Rodman - AR Consulting

And then any of your competitors do any big shoots over the winter?

Neal Coleman

Yes. There were still some activities from our competitors in some of their core areas that I think that more or less were additional data that were added to their additional programs or the part of their existing programs that are out there. But none met and they were done over the winter time as well.

Andrew Rodman - AR Consulting

Got it. Alright, well thank you very much.

Neal Coleman

Thanks Andy. Appreciate your call.

Pamela Wicks

Thank you.

Andrew Rodman - AR Consulting

Okay, sure. Bye, bye.

Operator

Thank you. The next question is from Peter Prattas from Cantor Fitzgerald. Please go ahead.

Peter Prattas - Cantor Fitzgerald

Hi Neal, Hi Pam.

Pamela Wicks

Hi Peter.

Neal Coleman

Hi Peter, how are you?

Peter Prattas - Cantor Fitzgerald

Good, thank you. I just want to go over your library sales there; obviously they’re lumpy and unpredictable. But I am just wondering, are there any internal sales indicators that you look at like quotation levels that you can give us I guess some sort of comparison versus last year, how they are looking like this year?

Neal Coleman

Yes. I mean we are obviously, we are cautious going into 2014 obviously with the three quarters, the past three quarters have been a bit weaker than we would have anticipated and assuming that obviously the fourth quarter as well which is historically we’ve had higher sales.

So we are cautious going into this year and we have a modest budget that we are that we want to obtain. And we do see some good signals out there though, an increase in gas price, you have an increase in some mergers and acquisitions, you are seeing some money come back into the market on some bought deals. So you are starting to see a revival of some drilling activity which is our positive indicators going forward for companies like ourselves for 2014.

Peter Prattas - Cantor Fitzgerald

Got you. And you had maybe mentioned there on a previous question about a pick-up in Q1 and I just want to make sure I didn’t misunderstand. But I think you had a strong start to last year with $13 million plus in library sales, so you are not saying necessarily that Q1 of this year is going to compare favorably versus Q1 of last year rather than there is a pick-up of activity that bodes better for 2014, is that right?

Pamela Wicks

Yes, that’s right Peter. We are not saying anything really about Q1 yet. We’d certainly don’t give guidance as you know. But from what we see right now, we would anticipate 2014 having higher activity levels that could translate into sales for us in this year more than last year.

Peter Prattas - Cantor Fitzgerald

I understood, okay. Thank you very much.

Neal Coleman

Thanks Peter.

Operator

Thank you. (Operator Instructions). There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Coleman.

Neal Coleman

Great. There are no more questions; I’d like to thank you for your interest in Pulse and for your participation in this conference call. Thanks everyone.

Pamela Wicks

Thank you. Bye.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.

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