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Robert Hobbs - CEO

Kristian Johansen - CFO

Analysts

John Olaisen - ABG

Christopher Mollerlokken - SpareBank1 Markets

TGS-NOPEC Geophysical Company ASA (OTC:TGSNF) Q2 2014 Earnings Call July 31, 2014 9:00 AM ET

Robert Hobbs

Good morning. Welcome to TGS's Second Quarter 2014 Earnings Release Conference. I'm Robert Hobbs, Chief Executive Officer of TGS. And Kristian Johansen, our CFO, is here as well this morning and will later go through the financial portion of our presentation.

I'll just highlight the customary forward-looking statements in regards to the presentation this morning. We were pleased with our second quarter 2014 results. We had revenues of US$205 million compared to US$210 million in the second quarter of 2013. Our late sales were US$137 million, down 12% from the US$155 million that we had at the same time last year.

Net pre-funding revenues in the quarter were US$60 million and they were up 39%, funding 52% of TGS's investments for the quarter, which were US$114 million.

Our operating profit for the quarter was US$82 million. That's a margin of 40% of net revenues compared with US$98 million in Q2 of 2013, which was 47% of net revenues.

Dividend payments of NOK8.5 per share were paid in June during the quarter. And you'll see that reflected when Kristian goes through our cash and we were very active with acquisition during the quarter. We had four 3D vessels under full TGS control, one 2D vessel and one land crew operating during the quarter.

We also were participating in a few joint ventures. We had a 2D marine joint venture project offshore Canada operating here in the quarter, one high resolution P-Cable marine joint venture projects in the Barents Sea and one EM survey project during the quarter as well.

We announced this morning that we are very pleased to have been awarded pre-funding on a new, large 3D multi-client project offshore Australia on the Great Australian Bight. This is the second phase to a project called Nerites, which we were active in acquiring during Q1 and Q2 this year. We'll talk a little bit about that. I'll go ahead and do that with this slide.

This, on the map you'll see in red Phase 1, in blue is Phase 2, which we announced this morning. The Phase 2 portion of the survey in the Bight of Australia is 13,000 square kilometers and we expect to commence the survey either in late -- latter part of this year in the fourth quarter, or in the earliest part of 2015.

This second phase will fulfill our work commitment on the operator of these blocks. The blocks are EPP 44 and EPP 45 and the operator was awarded these blocks in November 2013 coincident with about the time we started the first phase of acquisition on Nerites. It covers very prospective frontier acreage. The main triggers for late sales for this project are when the operator is scheduled to start relinquishing acreage that they don't keep and that is expected to start in 2019. So because of that late sales trigger being further out in the amortization life of the project, while this project has very solid pre-funding, we are taking high amortization rates on this project given the late nature of late sales triggers.

So the operational highlights. Again we were very active in our acquisition programs during the quarter. The Barents Sea was extremely active. We had two 3D vessels operating there. The Akademik Shatskiy was involved in a 2D survey and we had two joint ventures, one was an EM survey with EMGS, and the other was a PK Walls high resolution 3D technology that we're employing with Westland GeoProjects in the Barents Sea.

The Polar Duchess was active of course on Nerites Phase 1 and she wrapped up that project in early June in the quarter and then mobilized elsewhere for Dolphin. I neglected to mention for Nerites Phase 2, we did sign a letter of award with Dolphin last night and have announced that this morning that Dolphin will be our acquisition vendor for Phase 2 on the Nerites.

The Sanco Spirit was active on a joint venture that we have with PGS off the Newfoundland Labrador Coast and we'll talk a bit about that later in the presentation in regards to the sales triggers there. We have the Alize from CGG active throughout the quarter on a 3D survey in Mississippi Canyon Atwater Valley area off the Gulf of Mexico called Francisco and we wrapped that project up, acquisition of that project up during the quarter. And we have one land crew working on expanding our onshore investments in the U.S. on the Texas, Oklahoma border.

In the Gulf of Mexico, I mentioned Francisco we wrapped up that 6,700 square kilometer survey in the second quarter. This while the survey is a narrow isthmus survey which is utilizing one high capacity 3D vessel, it is very complex narrows isthmus survey. We are towing 12 kilometers of streamer in the water; it's pretty much unprecedented in terms of a large widespread of streamers being towed at that sort of offset. It -- the design is specifically geared towards imaging a new play in the Gulf of Mexico so it's a frontier basin for fan play and it is adjacent to our core areas so builds our core area in the Mississippi Canyon Atwater Valley area off the Gulf and so we are able to leverage by migrating in data from surrounding particularly on the north side of Francisco utilize that data set in the processing of Francisco and we're utilizing Clari-Fi which is our broadband processing technique to extract broadband signal and final data set.

In East Canada, we plan throughout the acquisition season to acquire greater than 30,000 kilometers of 2D seismic. We will have two boats. We actually have two boats now operational on this project. The Sanco Spirit started in Q2 and then we had a second vessel, excuse me, start in Q3 on that project -- on that two vessel project.

The partnership we have there is with PGS. Both vessels are being operated by PGS utilizing Geostreamer Geosource. We are targeting specifically areas that the Newfoundland Labrador Government has announced for their Land Tender system that they have announced this year. The first bids for the first tranche of that acreage will be due later this year and this data will be used for subsequent licensing rounds. Actually, the first bids will be due in 2015. The subsequent license rounds every two years that the Newfoundland Labrador Government has announced this data will be used to inform interest of all companies. So in total before we acquire the 30,000 kilometers this year, we have already 47,500 kilometers of 2D data in this region.

In Norway, as I mentioned before, we were extremely active. You can see our core area in Norway in the North Central Barents Sea. This is an area called the Hoop Fault Complex. It's a location of the OMV discovery Wisting. There have been several other wells drilled. There's one other discovery in the area and two other non-successful wells in the area but the exploration, chance of success on these very shallow, very rapid, rapidly drilling wells or rapidly completed wells is quite high with the two discoveries that we had. We are quite excited about the play.

Of course, there's an area that is included in the Norwegian 23rd Round. We expect and the blocks have been nominated by industry, we expect to be officially announced by the government our focus both in this area as well as in the Southeast Barents Sea.

We are acquiring 2D data 9,300 kilometers of 2D that we call NBR14. This 2D data also extends into this new Southeast Barents Sea area. So we'll be able to tie many of the blocks that are included in this newly opened area in the Southeast Barents over towards the western portions of the Barents Sea on into the Hoop area, which is attractive to industry.

We have also taken the data acquired by the NPD in previous two rounds in the Southeast Barents area. We're reprocessing that data through Clari-Fi and that data is also during this 23rd Round will be available for customers for licensing, the reprocessed version. So we are taking that data through Clari-Fi.

We have extended our Hoop Fall Complex 3D project. We've added 3,100 square kilometers of data to our Hoop Basin coverage, it takes us more than 20,000 square kilometers of 3D data and we think we've really found a core sort of sweet spot within the Barents Sea as evidenced by the recent exploration success.

We're employing some new technology because of the nature of these discoveries like Wisting, which tend to be very shallow in this section. We're acquiring a 3D or we're utilizing a 3D technology called P-Cable that is employed by a company called WGP. We partnered with them on this project, that's designed to acquire very high resolution images of the shallow traps that are being explored for in the northern Barents Sea and when we're finished with that survey we'll have 500 square kilometers of this type of high resolution 3D data.

And then finally in the Barents Sea, we focused on acquiring EM data over the blocks that have been nominated. Many of the blocks that have been nominated for the 23rd Round that's both in the North Central Barents, as well as the Southeast Barents. We've partnered with EMGS the EM player in our industry and have acquired -- and when we're done which we're almost complete with that project we'll have data over 18 blocks in the area.

West of Shetland we've continued our expansion of our coverage in this attractive area on the Atlantic margin. We wrapped up acquisition on the Brendan Basin survey which is 2,500 square kilometers utilizing a Polarcus vessel. That was completed in the early part of Q3 and we've now moved to a survey, a smaller survey 900 square kilometers called Erlend Basin. That's shown on this map in blue and that will be completed during the third quarter of this year also with that same vessel, the Polarcus vessel.

When all that's said and done, we'll have over 18,400 square kilometers of 3D data in this West of Shetland's Basin area and of course all of this is being, again being acquired using broadband technology or broadband Clari-Fi technology as we process the acquired data.

We finished up Nerites Phase 1. That project was 8,300 square kilometers and this is an area that has got -- that has quite a bit of interest in the Australia Bight and in the Ceduna sub-basin of the Bight. Not only is the operator that we're acquiring that is pre-funding this project active in the area, but several other operators have blocks that have been awarded in the area. And so it's a new frontier region of Australia that's getting quite a bit of interest. We were very pleased with the operations on Phase 1. As I mentioned before, we have -- we'll continue our relationship with Dolphin as our vessels vendor in this area for the second phase and hope by the end of this year or earliest part of next year to -- we will have started Phase 2 which is much larger than the first phase. Phase 2 will be 13,000 square kilometers.

We wrapped up really -- we started and wrapped up acquisition of 440 square kilometer multi-client 3D project on the Texas Oklahoma border called Rush Creek. This is a play called the Granite Wash; it's an unconventional play in the onshore U.S. We continue our focus on our investments in the onshore U.S. to the unconventional liquids plays. So we continue to be focused there and have been quite pleased with the progression of our onshore investments which we've making since 2012.

We announced earlier this year two new projects in the Utica Play and the eastern portion of Ohio. These two new projects Waterford and Freeport are currently in the permitting and surveying stage and we expect to start Waterford here in the next week or two in terms of recording the data, and at the point that we start recording data, actually recording and reporting data, is when we start reporting from an accounting perspective reporting investment as well as revenue recognition from the pre-funding revenue that we have committed to the project. Freeport will start in the middle portion of Q4. That's when we'll be ready to start Freeport.

We're -- our customers really value TGS with our ability to access whatever technology is necessary to solve their geologic problems. And I think we demonstrated very clearly during Q2 our ability to go out and access a live range of technology to solve their imaging and their geologic solutions problems.

I'll talk a bit about P-Wave which is a new high resolution 3D technique that we're employing with WGP. Second from the left is an image of our work with EMGS in the Barents Sea and the top diagram in that portion of the chart shows the Wisting discovery and the EM signature at the reservoir level of the Wisting discovery. So you can see clearly that there is an apparent EM, positive EM normally associated with the reservoir at Wisting. So we're quite pleased with our continued ability to utilize EM with these particular geologies to be able to continue to de-risk areas for our customers and also de-risk areas for TGS where we can expand our own project development for new 3D projects going forward.

We started in two areas. We've announced recently two new projects in which we're going forward and taking seabed sampling both in the Barents Sea as well as the Newfoundland Labrador area of Canada. This may seem somewhat low-tech where you're pulling up samples actually off from the seabed but in fact what you're doing with these samples that you're taking from shallow core samples of the seabed is some very -- is quite high technology. We're able to type the source rock from the oils that we see from the core samples to an actual age original source rock. And that's very important for all companies to be able to map migration pathways for potential hydrocarbons in the reservoirs.

In addition, we are able to look at the rocks that we pull up from these cores and age-date those rocks so that on the seismic profiles you have a very clear age correlation with the strata. So in areas where you have very little well control in these frontier areas because technology is really important to all companies for them to be able to understand the age of the section and the seismic data that they're interpreting. So it is very synergistic with the data that we've acquired in these frontier areas.

You've heard me mention several times today our Clari-Fi broadband processing technology. We have in the early part of this year, latter part of last year, we've undertaken a significant computer upgrades to our computing center primarily in Houston. We have one of the largest computer networks processing -- computer processing centers in the world and not only in the oil industry but in the defense and information IT industry, and a lot of this technology has been put together in order to apply these higher end geophysical algorithms like reverse time migration and Clari-Fi and we're getting a lot of continued interest and more customers for Clari-Fi. I think that's evidenced by the number of times I've mentioned Clari-Fi and talked today with the new projects that we're undertaking. It's a technology that's actually driving pre-funding to many of our projects.

I'll turn it over to Kristian and he'll go through the financials for the quarter.

Kristian Johansen

Thank you, Robert.

I'll start with the key financials. As Robert said we had net revenues of US$205 million in Q2 2014 that's compares to about US$210 million in the same quarter of last year, and is down from US$222 million in Q1.

If you look at the sales composition, I'll start with the pre-funding. We have US$60 million in pre-funding revenues for the quarter. That corresponds to a pre-funding ratio of 52% and is 55% year-to-date and that's up from last year so we have in general higher pre-funding in our project in Q1 and Q2 this year compared to the same period for last year.

If you look at the late sales it's at the same level as Q1 and it's down by 12% compared to Q2 last year. But keep in mind that in Q2 this year we didn't really have any big sales figures. We didn't have any large or big license sales in our key regions. We expected a round announcement in Norway the 23rd round in Norway to be made in June that didn't happen before the holiday and obviously that had a certain impact on our numbers because we thought we would have some sales related to the announcements, which did not take place. And if you compare it to last year, we had the awards in Norway last year and obviously we had uplift revenues based on the awards. So just to cut it short on the explanation of the late sales we're very satisfied with the late sales for the quarter given that we did not have any significant sales figures in our key areas.

And then our proprietary revenues of about US$8 million for the quarter, you see it's down from Q2 of 2013 and the reason for that is we did not have any proprietary vessel activity in Q2 this year like we had in one month of Q2 last year.

If you look at EBIT it's at US$82 million for the quarter compared to US$98 million in Q2 2013. The main reason for lower EBIT is high amortization rate and we will come back to that later in the presentation.

Our cash flow is at US$66 million compared to US$34 million in Q2 of 2013 and down from a very strong Q1. As you see from the bar chart it's quite normal that we see a drop in Q2 because our cash flow is always very strong in Q1 and we'll come back to the cash flow later in the presentation as well.

And then finally, we have the multi-client investment of US$114 million, they're down from US$129 million as we told you after Q1 earnings release so it came down to US$114 for Q2 which is more what we expected for the quarter and that's in line with Q2 of 2013 as well.

The book value of the multi-client library at current is US$829 million and it increased from US$800 million after Q1, normally would increase in Q2 and Q3, and then in Q4 we would have normally higher amortization than investments in Q4 you will usually see a drop in the value of the multi-client library.

If you look at the net revenue breakdown you see that we had high composition of our sales coming from 3D, so we had 81% coming from 3D, compared to 68% in the same quarter last year. You see 2D with only 11% this quarter, compared to 24% last year. And then GPS has been quite constant around 8% now for several quarters in a row.

On the geographical composition of the sales, you see NSA standout. That's a very, very strong contributor to our revenues. So 50% of our multi-client revenue is coming from North and South America, compared to 37% in the same quarter last year. So another very strong quarter in NSA.

Europe was a bit disappointing but the reason for that slight disappointment in Europe is that we have this delay in the announcement of the 23rd round and hopefully that's going to happen sometime in Q3 and obviously you will see a stronger Europe whenever we have the right sales triggers in Europe.

And then AMEAP up from 14% of sales in Q2 2013 to 17% in Q2 this year and the reason for that is obviously the pre-funding or the high pre-funding we have on this Nerites one survey that was completed in Q2.

On the income statement just repeat the revenues of US$205 million, down 2% compared to last year. Cost of goods sold very low this quarter because we don't have any proprietary vessel activity like we had in Q2 of 2013, and then you see amortization rate is slightly up. It's up from US$78 million to US$85 million and that represents 43% in this quarter.

Personnel costs is up quite significantly from US$17 million to US$21 million but keep in mind that we have remuneration systems with variable pay that is based on the share price. In Q2 last year we had a very negative development in the share price and it was a negative cost related to our synthetic option program so that amounted to about US$2.2 million. So it should for when you compare the personnel costs.

Other operating expenses down from US$11 million to US$10 million, so slightly down. Cost of stock options at the same level and depreciation up from US$3 million last year to US$4 million this year. We had an operating profit margin of 40% that's US$82 million and that's down from US$98 million in the same quarter last year.

Net financial items positive by 2, but the reason why it was negative last year was we had interest based on this one-off tax payment that we had to do in Q2 last year so the interest on that was about US$3 million.

Profit before taxes of 41% and you see a net income of 30% corresponding to US$61 million. Our fully diluted EPS is US$0.59.

On the cash flow statement, you see the collection from our clients is slightly up from last year. It was US$153 million in Q2 last year, now it's up to US$163 million. You see we have payments of operational expenses pretty much in line with last year up from US$31 million to US$33 million.

And then you see very high taxes paid both in Q2 2013 but also in Q2 2014. So last year, as you remember, we had this extraordinary tax payment related to the resolution from the Norwegian tax authorities that was a one-off tax payment of US$58 million in Q2. This year is also affected by one-offs because we paid taxes that falls due in Q3. So the good thing about that is that you will see significantly lower tax payments in Q3. So our best estimate now as of Q3 and Q4 is that you will single digit numbers per quarter on paid taxes. There's going to be low tax payments compared to what you've seen in Q1 and Q2 so very much early in the year.

Investments in tangible and intangible assets down from US$15 million last year to US$9 million, partly due to more leasing of imaging equipments and you see the cash investments in the multi-client library of US$92 million compared to the accounting investments of US$140 million.

Interest received at the same level as year and you see dividend payments of US$126 million. In fact, our total dividend was US$144 million, but the withholding tax related to the dividend falls due on 15th of July so that was paid in early Q3.

And then the change in cash balance after dividend is about US$158 million, which means that we have a cash balance current of about US$208 million.

Year-to-date income statement, I'm just going to go through the headings. So we have revenues year-to-date of US$427 million slightly up from last year. We have an operating profit of US$176 million, that's down by 6%, but still an operating profit of 41% year-to-date. And you see a net income of US$129 million, which is in line with last year and the same goes with EPS, which is pretty much in line with the same quarter of -- of the same two quarters of 2013.

On the cash flow you see an improvement. Our operational cash flow improved from US$212 million last year to US$289 million. And then you see the change in cash balance after dividend is minus US$73 million this year compared to minus US$166 million last year.

On the balance sheet, we have cash, as I just said, of US$208 million that's up 21% from the same quarter last year. So usually Q2 is lowest quarter because of the dividend payment that we usually make in mid-June. And then financial investments available-for-sale, these are the auction rate securities that we've carried now for more than five years. The good news is that we've sold these securities in early July. So we will collect US$5 million of cash in July in the July financials and we won't have any financial investments after that.

It will also be gain in our P&L of US$1 million because we sold at par value and a fair value in our books were US$1 million lower than the selling price.

Other current assets of US$394 million that's pretty much in line with Q2 of 2013. These are mainly accrued revenues and accounts receivable. And keep in mind when you look at the accounts receivable is that you have to compare that to the gross revenues of TGS. We recognize accounts receivable as gross.

Intangible assets and deferred tax assets of US$138 million pretty much in line with Q4. Other non-current assets of US$56 million same as we had in Q4 but significantly up from Q2 of 2013. Multi-client library is up to US$829 million as we speak and we have fixed assets of US$56 million which is very much in line with what we have in Q4 of 2013.

Our current liabilities are US$321 million and non-current liabilities of US$17 million and a deferred tax liability of US$69 million. Altogether, we have an equity of close to US$1.3 billion by the end of the second quarter of 2014.

Now we look at the investments per vintage. So this is pretty much the quality of our library. And what you see from this slide, and what you've seen from the same slide in a couple of quarters in a row, is that we have certainly amortized much more than what we are forced to do from our accounting policies.

So if you look at and start with 2010 you see that we only have 5% left in our books from the 2010 vintage that has to be written off by year-end. So that's hopefully going to be amortized by sales over the next two quarters. Then you see in 2011 we're down to 9% now and it should be down to 20 by year-end. So we have amortized far more than what we are forced to do. And then 2012 is a very good vintage for TGS and it's been very good for a longtime since we only have 12% left of an original book value of US$270 million and we can still carry 40% by year-end with two quarters to go.

2013 is down to 43% now, should be down to 60% by year-end and then you see the work-in-progress, which could still carry 100% by year-end because the projects are not completed yet but it's already down to 52%. So altogether we're very happy with the quality of our library.

And you will see from the next slide on the revenues of the different vintages and revenues are quite widely spread between the vintages about half of our sales coming from new projects not completed so that would typically be pre-funding of new projects.

You see 2013 considered quite well with 11% of our sales. To all of us it's very good vintage like I said with 13%. 2011 there is not much left and we had 2% of our sales coming from that vintage but it only represents 2% of our total book value. Then 2010 was very strongest quarter and pre-2010 which is any vintage older than 2010, also considered quite well in Q2 although not as strongly as in Q1 this year, which was quite extraordinary.

So we continue our growth and we expect to continue to return cash to shareholders. The shareholders just received a dividend of NOK8.5 per share for the 2013 accounting year and that dividend was paid out on the 18th of June. And in addition you all know that we have -- or the Board has authorized management to buy back shares. In total we have about US$30 million that is expected to be used for share buybacks in 2014. So far we've only used US$3.4 million but I guess you can expect that we will continue to buy back shares in Q3 and Q4, and based on the share prices right now I think you would expect to see that rather soon.

So the dividend to share buyback program represents approximately US$170 million in cash returns for shareholders and that represents about NOK10.3 per share.

So with that I would hand it over to Robert again who is going to go through the outlet. Thank you very much.

Robert Hobbs

So as we mentioned before we are pleased with our growth in many of our core markets, one of which is Asker, Norway. We are in the midst of the 23rd exploration round. We have seen a delay in the conduct of the Norwegian 23rd round. It will be extended longer than what previous rounds have been extended. So we, in a fact though the delay in the formal announcement of the blocks to be included in the round have, as Kristian pointed out have moved typical triggers that we would have in Q2 in terms of late sales later in the process. The blocks have normally been announced yet; it's unclear when they will be. I think that the effect of this longer process in the 23rd round is going to result in a longer process in late sales of our Norwegian particularly the Barent Sea data library.

Despite the delays in the formal announcement of the blocks, we see good interest in our data library, and not only from our 3D, but some of the new technologies that I've mentioned before again on the back of some exploration success we've seen in the North Central Barent Sea.

We announced earlier in the quarter a 36,000 kilometer multi-year project of the East Coast of Greenland. We will be starting that project in Q3 and we will be utilizing the Akademik Shatskiy, as well as an icebreaker that will cut its way through the existing ice in the area that we will be acquiring for the Akademik Shatskiy to acquire its data. So we are quite pleased about our continued expansion of our data set in Northwest Europe.

A lot of exciting things were happening in North and South America. Specifically the regulators in North America are starting to work on the next five-year plan, which kickoff, the plan will start in 2017. We're now in a -- the Government is now in a, it's actually expires tomorrow July 31 the comment period for the public to comment on what they would like to see from the regulators in terms of the next five-year plan the big push. For those of us involved in the industry in the U.S. is to see additional acreage offered by the Federal Government from what's been offered in the past, namely the big push is offshore Atlantic. So you will probably see and in fact the Government has now published rules and will start the permitting process for seismic data to be acquired off the East Coast of the U.S. in the Atlantic. So we are excited to see how that’s going to progress.

The industry in general is not very happy with some of the mitigation measures, and some of the regulations which are new and are being imposed on the seismic industry in this particular area. But I think in general we know our customers are excited to start seeing data acquired in an area in which there hasn't been any seismic data acquired since the late 1970s or early 1980s so it's a frontier area that tends to be that is very data poor.

We have the Newfoundland Labrador Government has now started of a land tender system and I will talk about that in just a second when we go to license rounds.

We have also announced earlier in Q2 that we have entered into a frame agreement with Seabird to provide vessels to acquire multi-client data for TGS off of offshore Mexico. I'm sure you’ve seen press reports about how legislation has been progressing on schedule in Mexico to open up the offer. We're quite pleased to see how that's been moving. We're very close to having all of the regulations and laws approved by the Mexican Parliament that will allow the regulators of Mexico to start permitting the seismic projects. So we are very well poised to start this work with the vessels that we procured for the project.

We also are returning very soon to the Utica Play, which has been very good for TGS and the onshore, U.S. off the -- in the eastern portion of Ohio.

After Middle-East, Asia-Pacific we're quite pleased to have won the second season for Nerites.

In addition this morning we announced that our intentions in Q4 to start a 17,000 kilometer 2D multi-client survey off the northwest coast of New Zealand. This is again a frontier area, very little data; very important project for us. We're currently in the permitting stage for that survey. So pending permitting, we will start a project there later this year. We have signed a letter of award receiver to acquire the data for us offshore New Zealand.

There are a number of tender rounds we've talked about before; we will talk about here in a moment, offshore Africa that we are still awaiting and that will obviously play the important triggers for late sales of our West Africa data library. And we can start there with this map which is you're used to seeing from past presentations where we highlight some of the more important license rounds of course off of Liberia and Sierra Leone these are the rounds that we are working with the Government to assist them to hold and we continue to expect those rounds to kickoff this year. So our discussions with those Governments continue to move positively towards license rounds held there. And not only those two areas but also offshore Madagascar.

We talked a bit about the Newfoundland Labrador area off the East Coast of Canada. The first bids are due in November of this year 2014, and then the next tranche will be available and due in November 2015 and then subsequently two years after that in 2017. This we've been now I guess three seasons offshore Newfoundland Labrador and those three seasons have been dedicated towards acquiring data in preparation for these license rounds so we are very happy to see those kick off.

I guess another important round I mentioned from this map is what's happening in Brazil. We are joint owners of the largest 2D database offshore multi-client database offshore Brazil. In addition we have entered into the 3D multi-client market with our first 3D survey that we acquired in Q4, Q1 of this year, Q4 of last year and Q1 of this year in partnership with Dolphin. And the authorities in Brazil the AMP have indicated that the next license round in offshore Brazil will be sometime in 2015. So we're watching that very closely and are quite excited to see those rounds continue offshore Brazil.

Backlog continues to stand close to an all-time high at US$224 million in commitments from customers for future work. And that's up from last quarter and again close to an all-time high that we had in Q4 2013.

As I've mentioned several times we've had a very active Q1 and Q2 in terms of 3D project work around the world. And Q3, I guess could be characterized by a very active 2D season with the number of 2D projects that we've announced offshore Canada, Greenland, and in Europe that will continue throughout Q3 and into the early part of Q4.

We will be kicking off very shortly our onshore season up in Ohio again with the Waterford project and then finish of the year by kicking off three ports also in the eastern portion of Ohio. And then, we're also working on a number of projects onshore Canada as well in preparation for the season, the onshore season, which is occurs -- acquisition occurs in Canada during the winter months instead of the summer months.

Capacity both for marine crews, as well as onshore crews, is quite high. As you can imagine in the market that we're in right now so we don't have to announce awards to vendors until we're very close to starting a project, we're able to negotiate that capacity pretty late in the process. So you probably should not expect this chart to be static as we move in through the second half of the year and we would be announcing additional work subsequent on into the second half of the year.

So in summary we are on track with 2014 with revenues of US$205 million. We are also on track with our expectations for profit of US$82 million for the quarter and that was margin of 40% net revenues. We had investments of US$114 million in Q2 just slightly down from Q1 of this year. We are very gratified from our customers with our commitments to future projects. We continue to see strong backlog.

We believe that that confidence from our customers and those commitments are based upon and built upon the quality of the investments that we bring forward to them. And that's absolutely core to TGS business is project development and the quality of the projects that we develop and take forward to our customers. Part of that is applications and new technologies to solve their problems. And I think our customers are recognizing that we have the capability to access to best state-of-the-art technology available out there.

So we reinforce our guidance for 2014. And guidance remains unchanged of investments between US$390 million to US$460 million. Those investments will be pre-funded between 45% and 55%. We expect our amortization rate to be somewhere between 40% and 46%, and net revenues we expect that to be for the year of between US$870 million to US $950 million, again approximately 5% of those total revenues will be from proprietary projects, the vast majority of which being from our seismic processing business where we process all companies and own data for them.

So we are very pleased with how the year is progressing so far. I think our business continues to deliver for our investors. We are thankful for our investors for speaking by us and recognizing the value that TGS brings to the marketplace and to our customer base and that allows us continue to deliver really unprecedented returns to the investment community that have their trust in TGS.

So thank you very much and we will open the floor to your questions. We have a microphone. So if you could just raise your hand, if you have a question and microphone will be brought to you. If you can announce your question in the microphones the webcast folks can hear what the question is.

Question-and-Answer Session

Robert Hobbs

Yes, John.

John Olaisen - ABG

Yes, good morning. It's John Olaisen from ABG. In your report on the page where you have the outlook comments you are saying that several energy companies have indicated an intention to reduce explorations pending in the year. Is that something that you have received or is that something -- are you quoting their quarterly numbers or outlook statements, because very few oil companies have actually said they're going to reduce exploration?

Robert Hobbs

Yes, so I think that we certainly look at analyst reports from folks that go out and regularly do E&P spending surveys. And I think we continue to believe that first of all E&P spending will be -- there'll be growth in E&P spending but that growth is likely to be focused on the P side of the share. So we expect growth somewhere in the mid-single-digits. And again a lot of that is from spending surveys that we see from analysts such as yourself. And others that go out and talk to -- actually talk to oil companies.

We do our own workload. I mean we have our sales people going out and constantly talking to our customers. I think that we expect seismic spending to probably be somewhat flat this year and that seems to be confirmed both from reports that we see from analysts but also from our customers that we see out there. We're projecting, if you look at our guidance, we're projecting growth in our business this year and so we expect based upon our data library we expect to gain market share in a market like we're in right now. And I think we're on track certainly on track to do that.

So I think we're pleased with how our library is delivering right now and I think we have certainly high expectations for the second half of this year to continue that. But I think that all companies are -- we're in a period now where all companies are being a bit more cautious in terms of their exploration spending and they continue to be focused on as you've seen in their quarterly releases, certainly this past quarter they're focused on returning cash back to the shareholders.

John Olaisen - ABG

If you could elaborate a little bit on that. Are you expecting flat seismic spending in 2014? But if you look at Q1, all the seismic companies, they're talking revenues were down about 15% year-on-year. And in Q2 so far PGS has reported multi-client revenues down, off the top of my head, 15%, and Western GeoProjects 15% and yourself slightly down. So Q2 we're probably looking at another quarter with 15% decline year on year. Is this the first half year effect and the market will jump up 15% for the industry as a whole in the second half?

Robert Hobbs

Yes, I'm certainly not going to talk.

John Olaisen - ABG

We just needed to have flat year on year.

Robert Hobbs

Yes, I'm certainly not going to talk about out peer group, the other guys in the market.

John Olaisen - ABG

Obviously others in the market.

Robert Hobbs

Yes, I can speak for what see in our business which we feel you saw, I think you've seen in the first half of this year we're slightly -- we're flattish from last year, slightly up in revenues in the first half. I think we again obviously refer to our guidance where we show a slight growth, if you use the midpoint in our guidance in terms of revenues this year and I think we're comfortable with that. From the customer conversations, the direct conversations we're having with our customers right now.

I'm not going to talk about the other participants in the marketplace. I'd rather just kind of stick with what we're seeing in terms of our product line. I think we're pretty comfortable with the guidance right now that we see a slight growth in our business.

John Olaisen - ABG

Yes, I was more talking about the market. It's impressive that you're delivering when everybody else is disappointing.

Kristian Johansen

I think the question we guess from talking to our clients is that their plans are pretty much unchanged there will be flat spending compared to last year, that's kind of the indication we guess.

John Olaisen - ABG

And Western GeoProjects has said they expect weak multi-client sales in Q2 -- in Q3, sorry, and then lower than the normal season uptick in Q4. Is that something you're seeing or not?

Robert Hobbs

No, we're not going to comment on Q3 and Q4.

John Olaisen - ABG

If I may have a couple of questions on 2015. You now have a big project in Australia. Could you tell us a little bit more how -- the investment on that project? I think Dolphin said they could only last for about nine months, the collection process, giving -- well, they're indicating the day rates. That would mean US$80 million, US$90 million for you guys in investments. Is that --?

Robert Hobbs

So yes they have communicated I think what you will probably see is a two vessel, ultimately a two vessel project. So we have, what we will start with is a single vessel and likely hold that up with a second vessel that will help us achieve what we need to acquire within the season. Season lasts until like it did this year until early June. So you have about -- you started in January you have about a six-month season to acquire that much work.

John Olaisen - ABG

I think Dolphin said about -- I think they wrote in their report that it's nine -- the whole collection process will be around nine months.

Robert Hobbs

Nine vessel months -- vessel months

John Olaisen - ABG

Nine vessel months?

Robert Hobbs

Yes.

John Olaisen - ABG

Oh, right. Have you an option for another -- for a second vessel?

Robert Hobbs

I'm sorry.

John Olaisen - ABG

Do you have an option for a second vessel?

Robert Hobbs

We have not announced an option; we have not announced a second vessel.

John Olaisen - ABG

And on that job, you had the option for the Dolphin vessel. And I think, if I remember correctly, you entered into the option almost a year ago, or half a year ago, and it does seem that contract prices have weakened since then. Did you manage to renegotiate the price for the Dolphin vessel or --?

Robert Hobbs

So the way this, so you can probably assume that option was anticipation for the second phase of Nerites because we announced that the initial charter and the option back when we started the first phase in late last year. We got that first phase because we were the only company within the environmental permits in that area.

Now what has happened for the second phase is the operator actually went out and went to tender and tested the market, went out to the market, and received additional proposals, both proprietary as well as multi-client. So we were pleased to have won sort of a competitive process and you could probably assume that throughout that competitive process we also sort of tested the waters with vessel vendors. And so you probably -- it's probably fair to assume that we treated the second phase of Nerites as a separate project than the first phase in terms of procuring vessel.

But we are very pleased to have arrived at an arrangement with Dolphin because their performance was outstanding on the first phase. And so from a technical perspective, operational perspective we couldn't have in their ability to operate down in that sort of environment, which is actually difficult seismic environment to operate due to weather. We were quite pleased of to have been able to take that.

John Olaisen - ABG

So Dolphin seem to be communicating flat prices.

Robert Hobbs

What's that I'm sorry?

John Olaisen - ABG

Dolphin seem to be communicating flattish prices. It's the same price as they achieved a year ago, 415, which would mean flattish prices over two years.

Robert Hobbs

As you know, we don't comment on pricing for specific vessels. I think what we've communicated for this year in general over the entire year, I do think we're going to see software pricing over the entire year for our vessel commitments. So we didn't see last year on the order of 10-ish-percent probably -- 10 %to 15% probably

John Olaisen - ABG

10% to 15% in 2015?

Robert Hobbs

For the entire, for 2014 versus 2013.

John Olaisen - ABG

15%, no?

Robert Hobbs

10% to 15%.

John Olaisen - ABG

Wow. And this winter is it weakening even worse?

Robert Hobbs

I think it's going to be seasonal like it's -- like in normal years. I think you're going to see normal seasonality in the seismic business. I don't see why this year would be any different than last year.

John Olaisen - ABG

I've got a lot more questions, but I'll leave the word to some others first.

Robert Hobbs

Thanks John.

Christopher Mollerlokken - SpareBank1 Markets

Christopher Mollerlokken from SpareBank1 Markets. Just follow up on the Nerites survey. As you said this was won in that competitive tender. And several of your competitors are currently operating cash flow breakeven if you adjust for all the cost to capitalize on the multi-client libraries. But I would assume that you would require more than one times say some multi-client investments there. Could you roughly indicate where this survey would be, you previously highlighted out some surveys you can't accept lower return requirements if the cash flow qualifies, if they improved by having cash to secured faster through high pre-funding?

Robert Hobbs

Well I think well, the short answer is no. But I'm going to talk about specific financials of that in the second phase. I think it can be characterized as a project that is very heavily pre-funded. And I guess I could say we're quite pleased with where it fits in our portfolio.

When you look at the portfolio of investments that we look to execute on and you're probably familiar Christopher with the famous chart we don't show on this presentation day but we show the chart between high pre-funding, may be lower sales to cost ratio investments, high IRRs versus lower pre-funding, high sales to cost ratios. It's certainly on the left side of that chart in a big way probably.

I would also characterize this as probably -- it's probably a typically to the left side of the chart. So it's an unusual project. Unusual in terms of the level of pre-funding, unusual in terms of the amortization rate that we will recognize, as we recognize the revenue as we conduct the project. There will be high amortization rates; you can expect that as we acquire the project.

But again a reason for that as I mentioned before is the timing of the late sales figures which would be April to around Christmas which would be towards the far latter part of the amortization life of the project, given our accounting principle. So I think that we're quite enthusiastic about the potential of the project but the timing, the amortization rate, and pre-funding levels are admittedly a bit unusual the typical projects that we did.

Kristian Johansen

I think to add to that. I think by year-end 2015 you could expect that the book value of this project is close to zero because we take a very conservative view giving the timing of the latest because the figures comes after 2009. But it's still a very good survey for us because of the pre-funding.

Christopher Mollerlokken - SpareBank1 Markets

Jumping out there in terms of the Atlantic Coast U.S. proposed mitigation measures which are not popular among the seismic industry, would you expect that to prevent seismic acquisition to happen or would you just assume that the extra cost that these measures imply would just be passed on to basically the E&P companies?

Robert Hobbs

I guess my expectation is that the data acquisition is going to be more costly to be able to achieve these mitigation measures. It will be interesting to see whether those higher costs we've, the industry is already been communicating to our customer base that with these mitigation measures they can expect higher cost to seismic data in this region. But let's keep in mind we're in a very competitive marketplace in the industry. So whether our industry will be able to pass those cost through or not in general is will be interesting to see.

Keep in mind that there are eight to nine permits that are waiting in line to get approved to acquire data off the East Coast of the Atlantic. So there is no shortage of interest from the seismic companies to acquire data there. And this presumably I believe all these permits are presumably for multi-client data sets in preparation for rounds that would be held in the next five-year plan which start in 2017.

So I think you could -- I don't think these mitigation measures would prevent seismic from being acquired but I think the industry will have to pass that cost through the customer and whether they are able to do that or not will be -- I hope so.

Christopher Mollerlokken - SpareBank1 Markets

Final question. You do have multi-client data both onshore and offshore Russia. But my understanding it's that the revenues from Russia have been fairly marginal for TGS part. Could you just indicate the Russia exposure you have?

Robert Hobbs

Yes it's almost immaterial it's very small. We have some regional 2D data that we acquired in partnership with a Russian partner Dalmorneftegeofizika in past years. This is regional 2D data. It's a very small part of our data library in terms of net book value and it's a very, very small again immaterial contributed to revenue.

Kristian Johansen

Probably less than 1%.

Unidentified Analyst

(Inaudible) from (inaudible) Invest. You talk about E&P spending from analysts reports, mid-single-digit but the P growing faster than the E this year-end but that has a lot to do with sanctioning of projects last year and the year before. Kind of, beyond the point of no return you got to continue with the project. An old industry report from Goldman Sachs indicate that sanctioning levels will considerably down in 2014 and 2015. And historically I guess exploration spending has grown more in a growing market and fall more in a falling market and the P or the development side. If you see sanctionings coming down you're going to see the D side or P side coming down in the coming years do you think the exploration spending will be affected similarly or do you think -- how do you see that going in 2015 and 2016 overall.

Robert Hobbs

Yes, it's too early for us to make a call right now on what we think our customers behaviors are going to be in 2015 and 2016. I think I would agree that most analysts reports are seemed to be predicting somewhat flattish exploration spending probably in 2015 and 2016, flattish growth I guess.

So -- but it's too early for us to make a call right now on our business what we will continue, as we're doing so this year in what appears to be a flattish exploration spending market, we're always going to be looking for opportunities to increase our market share and we have shown in the past where we have been able to do that quite effectively.

So that's what we're going to keep our eye on. I think it's fair to say that these things run in cycles. If you've been in the industry as long as I have, you've seen many of these cycles. And you never want to predict where in the cycles you are because most of the time you're going to be wrong. So -- but I think that -- I think it's fair to say that oil companies can only hold back from exploration for a certain period of time before they start being punished for not being able to replace the reserves that they are producing.

And so I'm confident that I think from a long-term perspective given sort of macroeconomic development what we believe and what most analysts see as hydrocarbon demand going in the future, from a long-term perspective only increasing, I think the future of our business is quite bright from a long-term perspective. But these short-term cycles, it's quite hard to predict. And frankly, as what our business, our business model is designed to take advantage of those, right. So we're always going to look for ability to do that.

John Olaisen - ABG

And a follow-up on Christopher's question on the eastside of the U.S. And I know -- well, according to upstream you have handed in application for collecting 2D data. Could you tell us a little bit, when do you we expect that you will be actually able and allowed to shoot 2D data offshore U.S. is --?

Robert Hobbs

Yes. So the -- so what's been called the record of decision on these mitigation measures has just been released as of two weeks ago I guess by the regulators in the U.S. So the regulators will now start to process of looking at these permits. The permitting process for the Atlantic is going to be much more cumbersome than say to get a permit in the Gulf of Mexico. In the Gulf of Mexico, you can get a permit in a number of weeks. Where probably, not only do you go to the main regulator, which is the Bureau of Ocean Energy Management BOEM to get a permit, you have to go to another organization, the fisheries organization to get a permit as well.

And so in this new process it will probably be a matter of months before you're peers going to start seeing permits being granted. So I would be very surprised if you see a seismic company go out and start acquiring data before the end of this year, yes. So I think we're talking about 2015. I think it's probably may be safe to say mid-2015 before you will start seeing the first seismic acquired off the Atlantic. Just because of this longer process to get permits, there is more of these federal agencies that we have to go to, to apply for permits and (inaudible).

John Olaisen - ABG

And that's very fair not too far away in time. But do you expect -- well you said eight or nine applicants already. Do you expect a lot of vessels in that area next year in '15?

Robert Hobbs

It's too early to tell. I suspect what's going to drive a lot of this pre-funding. Who can go out and get, who are the first companies to go out and get pre-funding. Who have the -- who has the sufficient pre-funding commitments to go out and start acquisition. So I think you could probably -- it's probably fair to say that that's the process that all these companies are going through right now is meeting with.

Now that we know what the rules are going to our customer base and talking to them about, proposing projects to them. These projects -- this is a vast area, it's a huge area that is going to be opened up for G&G studies. And so there is certainly room for multiple geophysical companies to start projects there. And different geophysical companies have different library styles. And so you probably expect to see different types of surveys in different areas being acquired.

John Olaisen - ABG

Is it the whole coast that's being opened?

Robert Hobbs

No, it's Mid-Atlantic.

John Olaisen - ABG

Especially Gulf of Mexico?

Robert Hobbs

Yes. So it's -- I don't know the exact states John but it's not Florida and it's not north of the southern portion of New Jersey for example. So it's what's called the Mid-Atlantic.

John Olaisen - ABG

All right. Could it be a big investment for you guys in '15, dollar terms?

Robert Hobbs

I think we would like to see us there in '15, acquiring 2D data. But mind you, it's just a 2D project, right. So it would be a -- like a typical regional 2D project for TSG so.

John Olaisen - ABG

Yes. When is the most likely 3D service to be sure? It will be 2016?

Robert Hobbs

I would think that what you would see is probably a wave of 2D data acquired prior to a round and dependent upon what that 2D data shows and the ability of industry to go out and track pre-fundings. So yes, I wouldn't expect you would see 3D in 2015, it would be my opinion. You're going to see a wave of 2D data first.

John Olaisen - ABG

And then, in Mexico, could you tell us a little bit -- update us a little bit as to what's happening there? When do you expect to start shooting in Mexico?

Robert Hobbs

Yes. So the lower house of parliament in Mexico published the final rules for the opening of for both G&G studies and also for tendering to international oil companies. The -- when they approved those rules, they made some slight edits, and so it has to go back to the upper house again, which had previously approved the rules. It's expected -- we understand, it's expected that the upper house will approve the edits. They were relatively -- they were acceptable politically as what we understand.

So -- and what we -- what press is reporting is that the final approvals will be granted from parliament by sometime in early August. So we're talking about a couple of weeks. And then the regulator will start to be able to process permits, G&G permits. Again, that's a scenario where it's not likely we are going to see seismic in 2014 probably there in Mexico. If we see seismic -- well, let me just say, we're not going to see it in Q3, it's possible we will see seismic, probably the earliest seismic in Q4.

But again that's all hinging on pre-funding signatures from oil companies and the timing of the permitting process. And there is -- we haven't -- while the government, the regulators have been preparing for this permitting process, they're doing it for the first time, right. So we'll have to see how that progresses.

John Olaisen - ABG

Okay. And my final question is, if you could show us Slide number 8 please. Gulf of Mexico and oil Shell made a big discovery in Q3. If you could highlight where that is, because if I remember correctly, it's in the middle of your area?

Robert Hobbs

Yes. So Shell made a discovery in what's called the Norphlet Play, which is a Jurassic play. And it's a play that we have been focusing on. The Shell discovery is -- I can't really reach in, but it's just right here and just a survey.

John Olaisen - ABG

All right.

Robert Hobbs

Okay.

John Olaisen - ABG

It's pretty close to Mecando, is it?

Robert Hobbs

Mecando is -- yes, it's just to the northeast of Mecando by few blocks, yes. But it's a very different play. It's much deeper than Mecando. So the Mecando reservoirs are up here. This new Shell discovery is much deeper in the section.

So these are sands. These Norphlet sands produce very prolific sand --gas fields up in Mobile Bay. And so industry is now been pushing this play down to the south and this drilling technologies allowed us to drill much, much deeper. A lot of what's driving interest in Hernando Justice, eMC 3D that area of the map that you see up there with our data library is this new Norphlet replay. And Shells had -- it's probably the second or third big discovery that Shells had in the area. They are clearly the leaders.

John Olaisen - ABG

That will help -- will contribute to your strong Q2 late sales or sales in North America? Which area is the biggest contributor to the strong Q2 sales?

Robert Hobbs

Well, I'm not going to be specific on what projects we have lay Shells from I guess. But I think it's fair to say that certainly when you have a customer that has exploration success that drives interest in same things North Central Barents with our Hoop data sets. This is clearly a core area for TGS. We've been active here since the late 90s. Some of our most successful multi-client projects and they continued with whoever. And when a customer has success it continues to create interest there.

John Olaisen - ABG

But my final question is on technology. You had a slide showing that you are applying a lot of new technologies. Is there any chance of new technology in that area, in your core Gulf of Mexico area, Ocean-bottom seismic, OEM?

Robert Hobbs

Yes. So what we have been doing --

John Olaisen - ABG

On the overshooting in that whole attractive area?

Robert Hobbs

Yes. So what we have been doing John is, we've gone through the first wave wide-Azimuth, Freedom and Justice. And then we followed that up with -- I guess, I could use this, yes we -- I can see it -- we followed it up with full-Azimuth over Patriot. And so the push now is not only from TGS but it's other -- some of our peer companies in other parts of the Gulf of Mexico acquired full-Azimuth. And so you could probably assume we're thinking about full-Azimuth techniques expanding that in this particular area in various forms.

There is -- and we have stated before, we have a lot of interest in Ocean BOEM technology. This area specifically would probably not be in area where you would see us employee that initially, because it's deeper water. And you would probably expect us to see us employee that in shallower water areas. But it's something that we're certainly looking at because we think as we're -- as costs are coming down, as technology develops in these -- in our -- in these ocean-bottom companies we're able to acquire this data at less and less cost. That is something we will be able to utilize on larger survey. So we are watching it very closely. And I think you are going to see that kind of technology applied in Gulf of Mexico. May be not specifically here but first, eventually may be here. Right, eventually may be here as costs gets continues to decline. Yes.

John Olaisen - ABG

You haven't got a lot of exposure to the area where it's PGS and CCG overshooting each other at the moment?

Robert Hobbs

We have 2D data there that we have acquired in the early 2000s. We are quite strong 2D player, but we don't really have any 3D data in the area.

John Olaisen - ABG

Have you thought about doing 3D in there?

Robert Hobbs

We --

Kristian Johansen

It's too late now?

Robert Hobbs

Yes. We -- I mean, we -- yes, I probably won't say it's announced, so a full-Azimuth survey and --

John Olaisen - ABG

It could be full, did you consider doing it?

Robert Hobbs

Yes. We -- I think it's fair to say, we look at various plays in the Gulf of Mexico and evaluate -- outside of this area evaluate where we could acquire wide-Azimuth, full-Azimuth from the Gulf. And we're able to yield good returns on our investment. And we haven't done it there. And we felt very comfortable sticking with the area we know. Admittedly, we know this geology very well. We know our customer base very well. So it's been logical for us to expand our investments in this area.

John Olaisen - ABG

Any chance for EM in that area?

Robert Hobbs

I think you're going to see EM applied. In fact, we are talking to EMGS not in this particular area but other parts of the Gulf of Mexico about potential relationships that would yield EM data. Again, EM data, we really like the technology, but it's a technology that is highly dependent upon the geology and your ability to image resistivity using EM. And so it's not a technology that is universal kind of like seismic data is. You have to apply it in right places.

John Olaisen - ABG

Thank you.

Robert Hobbs

Okay. Well, thank you very much. And I look forward to speaking with you after Q3.

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Source: TGS-NOPEC Geophysical Company's (TGSNF) CEO Robert Hobbs on Q2 2014 Results - Earnings Call Transcript

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