Petroleum Geo-Services' (PGSVY) CEO Jon Erik Reinhardsen on Q4 2015 Results - Earnings Call Transcript

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Petroleum Geo-Services ASA (OTCPK:PGSVY) Q4 2015 Results Earnings Conference Call February 15, 2016 3:00 AM ET

Executives

Bård Stenberg - VP IR & Corporate Communications

Jon Erik Reinhardsen - CEO

Gottfred Langseth - CFO

Analysts

Terje Fatnes - SEB

Morten Nystrøm - Nordea

John Olaisen - ABG

Rahul Bhat - JPMorgan

Bård Stenberg

Welcome to this presentation of PGS Q4 and Preliminary Full Year 2015 Results. My name is Bård Stenberg, Vice President of IR and Corporate Communications in PGS.

Today’s presentation is being webcasted and we are also having a conference call in the parallel. Participants on the webcast and the conference call will also be invited to ask questions after the presentation. There will also be a conference call this afternoon at 03:00 p.m. CET, 9:00 a.m. Eastern Time.

Before we start, I would like to give some practical information, as this presentation is being webcasted, I kindly ask the audience here in Oslo to use the microphones provided when asking questions. Participants in Oslo, I would also draw your attention to the emergency exits in the back of the room. If the alarm is sounded, please evacuate immediately. I would also like to draw your attention to the cautionary statement showing on the screen, also available in the presentation and the earnings release published this morning.

Today’s presentation is being given by CEO, Jon Erik Reinhardsen; and CFO, Gottfred Langseth. So with that, it’s my pleasure to give the floor to you, Jon Erik.

Jon Erik Reinhardsen

Thank you, Bård, and good morning, everyone. The two highlights for 2015, is number one, MultiClient performance has come in relatively robust, not the least [ph] compared to peers. And during the year, we have strengthened our financial position in terms of liquidity and in terms of reduced net debt.

The numbers should be well-known by now when it comes to EBITDA of $484.4, robust MultiClient numbers and a robust liquidity reserve of $556.6 million. All of this, despite a very challenging market environment and factoring in that we also have paid out cash for -- or increased our debt, more correctly said, in terms of financial new builds.

To get there, we have implemented substantial cost reductions, over $300 million and significant CapEx reduction during 2015. And we also have taken proactive steps in addressing industry overcapacity, all of this we will come back to later in the presentation.

Our fleet has improved its productivity position even further this year, partly by stacking older capacity but more importantly by adding new highly productive capacity to the fleet, and this will continue in ‘16 and ‘17.

Focus now is clearly sales, further cost reductions, cash preservation, and capacity management. Those will be the drivers for what we put our efforts into during 2016. But we are positioned well relatively to our peers to navigate through the current market environment.

The numbers stack up, as you see on the slide and most notably, we still have nice contributions from operations in terms of cash flow.

And finally, as an introduction, order book, the last three quarters relatively stable, in particular if you factor in that we have less capacity to sell now than we had three quarters ago. The booking in percentage of available capacity as of February 5, so this is a later cut off point, is that we now have fully booked the first quarter which is significantly up from a year ago. We have 80% booked for Q2, which is also up from a year ago at this point in time and 50% booked now for Q3. So, the visibility in that sense has improved somewhat, even though with rates at low levels and still a challenging MultiClient environment.

Fair to say that these percentages are also a reflection of a somewhat better supply-demand balance in the industry, given all the capacity that’s been taken out. And I’ll come back to that later on.

So, with that as an introduction, I’ll hand over to Gottfred to take us through the numbers.

Gottfred Langseth

Thank you. Good morning everyone. I will cover the financial section. Start with the P&L summary, as always. Revenues ended $229.3 million for the quarter and $961.9 million for the full year. This represents a market-driven revenue decline of 34% in 2015 compared to 2014. Offsetting that we’ve been able to reduce cash costs enough to maintain stable EBITDA margin compared to last year, approximately 50%, both for the fourth quarter and for the full year. And EBITDA therefore ended $116.5 million for the quarter and $484.4 million for the full year ‘15.

We had some significant non-cash charges in the fourth quarter; and on this next slide, the most important ones are explained. $172.4 million of impairments, primarily goodwill but also some other intangible assets; these impaired assets more or less all relates to acquisitions made when the market was significantly stronger and in practice that relating back to 2007. Anyway, after recording this impairment at year-end 2015, there is no remaining book value of goodwill in our balance sheet. $102.5 million of impairments to the MultiClient library; and then lastly, we made provision for something called onerous contracts of $11.1 million in the quarter. This provision relates to loss in future periods on binding or signed customer contracts, i.e. it will cost PGS more to deliver the survey than the revenues that we receive, and the difference is provided for. When we calculate the cost to provide the services, we include depreciation and that accrual is not too far away from the depreciation cost relating these surveys or services, which is then, the provision is the result of pricing being less than what’s required to get EBIT breakeven results. The good thing is that obviously this provision will be released or reversed as the surveys are delivered.

Moving to Q4 operational highlights, total revenues MultiClient $165.5 million in the quarter, pre-funding $98 million, which corresponds to 140% pre-funding rate, and then late sales of $67.5 million. Marine contract, $43.5 million of revenues; this is a low number. And as you can see from the chart to the upper left, lower than we’ve seen historically, negatively impacted by clearly the low pricing but also steaming and mobilizing for new surveys, which happens to larger extent in Q4 than in other quarters and also a reduction in the capacity that we operate as a result of stacking four vessels during and primarily in the first part of Q4.

MultiClient revenues shown by quarter and by region, firstly you can see from the illustration that total revenues for 2015 in the MultiClient space has held up quite well compared to the two preceding years, despite difficult market. For the fourth quarter, pre-funding revenues were strongest in North and South America, while Europe was the main contributor to the late sales revenues.

This slide shows MultiClient library by year of completion of vintage. Total book value of the library is $695 million at year-end, quite moderate book values for the finished surveys, 2010 to 2015. As you are all or most of you aware, we entering into 2016, we are changing our amortization policy for MultiClient. And based on this new policy, we expect amortization for 2016 to be approximately $300 million, based on the current planned vessels schedule and pre-funding levels. Primary change with this new policy is that all amortization -- or most amortization relating to the finished library will be time-based and not sales-based. So, it would be linear and normally then more stable by quarter and not varied by sales or with sales.

I then move to the key operational numbers, a lot of details here; I will comment only on a couple of the lines. First, total revenues $229 million, relatively stable sequentially from 2015; operating cost also sequentially flat from the preceding quarter. Costs are down but we capitalized less to the library, so the amount charged to -- cost to the P&L is relatively stable from Q3 to Q4. The depreciation cost in the fourth quarter is sequentially up. That is due to a lower amount being capitalized to the library and not increasing depreciation, so gross expense. MultiClient amortization in the quarter $101.8 million that’s also sequentially up that is driven by the higher MultiClient revenues. The amortization rate in the fourth quarter was 61%, which taken together with the other quarters, gives a 57% amortization rate for the full year.

Lastly, we have a line called other charges or other charges/income but in this quarter we are talking about charges; $35.1 million in the fourth quarter, $24.7 million of this is relating to restructuring cost, as we have preannounced during the year and then the remaining $11.5 million relates to the provision for onerous contracts, which I recently tried to explain. Full year restructuring cost ended at $38.6 million.

Then vessel utilization obviously released quite while back, six weeks back. First important thing to note with the vessels statistics is that it excludes cold-stacked vessels. So, the vessels that we stacked during the fourth quarter have been taken out of the total available number. So, the total for Q4 is approximately 30 -- before we started -- distributed and allocated upto 100%, approximately 30% lower total in Q4 than the preceding quarters. We had 73% active time in the quarter, 52% of that again was used for MultiClient and the rest of this for contract. For 2016, we have said and continue to say that we’d use approximately 50% of active capacity for MultiClient; in the first quarter, the allocation to MultiClient will be lower.

Then the quarterly cost development, the cost is continuing to come down. The full year cash cost base is now -- or ended 29% down compared to 2014. We had a further cost reduction in Q4 compared to the prior quarters primarily due to vessels stacking but partially offset in the fourth quarter by certain non-recurring cost increases. So, the reported numbers are little bit over the expected trend line.

Moving to the full year cost picture; compared to 2014, the 2015 cost ended $280 million down if we include the restructuring cost; if you exclude those from the calculation, we’re close to $320 million down full year on full year. Looking into next year, we expect to be further net approximately $110 million down and end at approximately $725 million total cash cost. And now we are talking about the cost we report in the P&L plus what we capitalized in the library, some of those too.

Drivers for further cost reductions in 2016: Tight cost control, full year effect of what we implemented in 2016, and with the slight obstruct of $30 million relate -- or coming from the entry of Ramform Tethys to the fleet now in the first quarter, so some of -- or the net of all of that is $110 million. Cost discipline has high priority obviously, which follows from the market and is not unlikely that we will get below the 725 or to 700 or possibly below that as we proceed during the year.

Moving to cash flow, we had strong cash flow from operations as compared to our profitability, both for the fourth quarter and the full year. Both of these periods benefitted from a positive working capital development. And as you will see from the numbers, if you study them, the cash from operations, both in the fourth quarter and the full year is higher than the reported EBITDA, which means that there is a positive working capital development compensating for cash back and other things that needs to be paid and deducted normally from EBITDA to get to operating cash flows. So, we’re satisfied with our cash management for this period.

The full year 2015 cash flow and did on a positive after CapEx or before financing activities. And for those you can see what I point at, it’s $61 million positive number on this slide, which is after the CapEx, after the new technology investments, after the new build CapEx of $116.6 million in the quarter. So that’s relatively strong. Obviously there are some positives counting in there as well in addition to that operating cash flow, including the sales and operating leaseback we did on PGS Apollo. Lastly, our cash position at the year-end obviously benefited from the proceeds of $104.4 million from the private placement that we made in the fourth quarter.

Balance sheet: We have strengthened our financial position during 2015 in a very challenging market. The net interest bearing debt is reduced by approximately $54 million to end at $994 million. The liquidity reserve is increased during the year by $102 million and ended at $556.6 million. In addition, we have $228.5 million of committed undrawn export credit facilities to cover the remaining yard installments on the two new build vessels. Equity ratio ended at 50%, even obviously after the impairments that we recorded in the fourth quarter.

Not a lot of change to our debt structure. The only thing I would like to comment on this overview is that we repaid most of the drawings on the revolving credit facility during the fourth quarter with a balance of $25 million outstanding at year-end.

With that, Jon Erik, I hand the word back to you.

Jon Erik Reinhardsen

Thank you. We will start this last section by just reminding everyone what is the basis for our strategy in order to come out of this downturn or any downturn as in a leading position. So, number one is of course the proactive financial management that you now have seen demonstrated by Gottfred in terms of what we have been able to achieve during 2015. Number two is solid MultiClient performance in order to reduce earnings volatility. There is no doubt that contract market is much more volatile than the MultiClient market, even though we do see pressure in the MultiClient space as well these days. But again, as you saw from the graph studies in 2015, the MultiClient has been the main contributor to stabilize our performance.

We are conservative in the MultiClient business when it comes to prefunding. There are several drivers for that. Of course, it protects cash flow. With the target pre-funding of around 100% means we are basically balancing the cash flow with investments we enter into. And we’ve said that there is a normal swing range of 80 to 120 that kind of we still consider within that 100% target. And if you go back and look at the pre-funding curve that Gottfred just displayed, you see that we are well in that range, as we operate. A pre-funding of 100ish, lower obviously the late sales risk, which these days is important and it also reduces the library buildup over time and therefore the exposure on the library. Still of course current market environment is challenged for any library. And therefore, we have also taken down some of the library value to reflect the weak market.

When it comes to new builds, our philosophy is to be fully funded. We’re not sitting here with an exposure of commitments that we don’t have cash or liquidity to serve. We have expert credit facilities in place that are committed and can be drawn upon. Then from an operating and competitive position, our formula is lowest cash cost wins and over time, delivers market share. And we’re looking upon this on a lowest cash cost per steamer because that’s a competitive element or productive element in our business. When we invest in vessels, we do it under a 25-year perspective, not easy in a market that could go through four or five cycles over that time period. But as long as you buy something that you know is much better than was out there, that’s how you create the protection to your peers. And of course, we focus on maximizing the value of life of the vessels.

Then, we are improving our fleet flexibility by blending in some chartered capacity. So that’s capacity that is available out there that we don’t need to own, where we don’t have to tie up our own CapEx and therefore we can reduce our own CapEx outflow over time by having the top swing capacity chartered in, over time with a staggered termination point. So, we can let go off capacity as we need to.

We continue to invest in technology at a lower level than we have done two, three years back but still we are investing in critical technologies as we see, will continue to create further differentiation, moving forward.

Cost is in focus. Core business is what we are putting our money behind. Given how these cycles play out, there is not a lot of access means available to go for long-term bets in other businesses that could be tempting to look into and also the previous history is a good demonstration of how that can go, if you get too exotic. And that’s also tied to the last point. We need to make sure that the capital commitments we have can be managed within what the core business can deliver of cash flows.

No surprise in terms of where we now operate; southern part of the globe. Four vessels in Africa, one in Brazil and four vessels in Asia, even though one of them is the Sanco Sword which is now being prepared for rigging for future operations for PGS as well as Sanco Swift up in -- on new way up to Norway shortly to get ready for the North Sea season.

Couple of slides on the markets: Given the oil price, given the spending pattern among the oil companies, we expect the seismic activity globally to come down also in 2016, as you also see indicated on the top graph. We expect an acquired volume of 3D seismic of about 300,000 square kilometers. That is still at par with strong years such as 2008 and 2009, which is very interesting. So, the reason we are in as tough a market as we are, is clearly an overexpansion on the supply side. There is an element here of more productive vessels as well that add to that challenge. But, the underlying market here still has a volume that it should be able to make money from, provided capacity was in balance with the market.

And that has to a large extent come close to that balance during 2015. And since we now see a reduction in active streamers, which is the measurable capacity that is compatible to square kilometers of more than 50 or approximately 50% since the peak in 2013. So, there has been a significant capacity reduction in this industry over the last couple of years. Still, we expect this weak market to continue 2016 when it comes to the demand side. And you also see this reflected on the two curves that we continuously monitor, the sales leads, which is the gray or lighter blue curve and the active tenders, which is the darker blue curve. They are both at low levels. There are two factors of course you have to had in mind when you observe this, one is that these curves are in U.S. dollars; they are probability weighted and in the current environment, both of those two factors bring them down, compared to just looking at square kilometers because the value of each bid is lower. And then secondly, less and less of the total market is now contract; so overall in 2015 we saw a on average 60% MultiClient, 40% contract, which a record high MultiClient share over the market, which is not reflected in these two curves.

Still, the demand we see in seismic that still is estimated to be 300,000 squares is partly oil companies that are positioning for important or strategically important license round as they consider it, which means there is still an element of land grab sitting out there in the sense of if there is a license round in Canada or in the North Sea, if you don’t participate now, somebody else will take it and your opportunity’s gone. And if you have a view that this industry will last for another 10-20 years, you have to play in these rounds, if you’re going to build your own future. Most of this is obviously MultiClient driven in today’s market. And similarly, if you then get awards on some of these blocks, they normally come with some seismic commitment that you have to do within a certain timeframe. So, those two elements drive a bit of the demand that we see today. There’s still some opportunistic spending we see that okay the rates are low, it’s an attractive environment to acquire some seismic, so we expand the survey a little bit, we do a survey that we could avoid to two years to do, out there still. And then finally, there is still an element of production seismic whether it’s baselines for future developments or monitors or 4D monitor surveys.

Today, the best contract opportunities are in the South Americas and Africa and we see some emerging opportunities in Europe for the summer season; some has been awarded, some are to be awarded.

So, a couple of further slides on the MultiClient performance. If you look at the top graph here and the curve, you clearly see a relatively stable revenue to investment ratio over the last three years, which is quite interesting, given the strong deterioration in the oil price and the market for seismic services over the last three years. You see a revenue that has declined somewhat, not much as Gottfred alluded to. And you see investments coming down, primarily driven by lower costs in our system. So, we are able to do similar amounts of square kilometers in terms of what we invest in but at the lower costs. And also when you look at the pre-funding ratio, here you again see that this 80 to 120 range as a normalized range percentage is clearly what we are aiming at. And of course, the blue curve is again on the high side of that average, probably averaging out somewhere between 110% and 120%, which is healthy from any perspective and give us the robustness we are seeking from the MultiClient business for the time being.

Now, how does this look relative to peers. We have included, since everybody has now reported, slide from Nordea that compares the four larger players on some key parameters. You can compare MultiClient in many ways; this one has a cash flow angle to it which is never bad. And you see how PGS’ performance relative to peers on this parameter is robust and in this setup, quite leading. And also if you look at the lower right hand corner which is the kind of the slide you would used to look at impairment risk of library, we are relatively healthy compared to peers in terms of what we are able to get out of the library.

Then to the operations: We have this last quarter deployed by far the world’s largest streamer spread with the Ramform Titan. When we decided to build these Titan vessels, it was driven by the fact that we saw an opportunity to deliver productivity that no one else could do. We have already done 16, 500-meter separation streamer spreads. Here we are now operating in Myanmar 18 streamers by 7 kilometers 100-meter separation that is far beyond what any other competitor had done or are capable to do with their hardware. So, we have 127 kilometers of streamers in the water. And so far the daily production is up to 175 square kilometers a day with an 18 streamer spread.

Excellent production since deployments and it speaks to the benefits of these Titan class vessels. Its productivity, its safety, stability and of course in these vessels there is lot of redundancy built in that you don’t find in cheaper or lower end vessels. So, these high stream accounts of course give good data quality, is relatively dense cross-line sampling, 100-meter and therefore you get a very cost efficient acquisition through the wide tows with a very high data fidelity.

So in summary, significantly more streamers in the water and therefore significantly more data acquired that what any competitor could be close to do.

On the vessel side, and as I mentioned, we have soon in a year’s time six ultra high-end Ramforms that are better than what you can get from any other competitor out there, in terms of high stream accounts and therefore high fidelity data acquisitions jobs.

We saw this downturn coming down to seven, so therefore owning six is a pretty safe bet, especially when they are as differentiating as they are. But then we start to build now a flexibility in terms of chartering in high-end conventional vessels. But for a while still, we will also have flexible capacity related to the five older Ramforms that we aim at bringing back into the marketplace, as the market comes back and of course where you would have to take a streamer investment on these vessels to bring back but steamers that we then can of course deploy on other vessels should we then in turn take them out again of the fleet.

Not much to say about the guidance; this is pretty much the same as we said at capital markets day with a commentary that Gottfred alluded to, we believe the cash cost will come down further; it’s still in focus as it was for 2015 and there is also $10 million increase in the CapEx due to cut off issues from ‘15 to ‘16.

And with that I’ll just sum up. We had a ‘15 with what we consider a best-in-class MultiClient sales performance. We are continuing to improve our fleet flexibilities with the measures we took in ‘15 and also in terms of productivity through the new build program. We are still having cash flow as our number one priority to maintain a solid liquidity reserve. And we are proactively addressing the short-term overcapacity, while we at the same time improve our longer term fleet flexibility and reduce our longer term need for CapEx investments. Focus remains on sales, cost reduction, cash and capacity management. And we see ourselves competitively positioned to navigate the current market environment.

And with that, I hand over to Bård Stenberg, who will manage the questions.

Bård Stenberg

Thank you, Jon Erik. We can start with questions from the audience here in Oslo.

Question-and-Answer Session

Q - Unidentified Analyst

Jon Erik, you’re strategic for navigating this downturn operationally. I’m just curious on the financial side; you have a bond trading of 65% of base value. So, the market is pricing in significant risk. You did pay down revolver to support it. But what will take you to buy back the bond or taking more [indiscernible] both the revolver and bond matures in 2018. So, there is no sort of long term is really affecting this?

Gottfred Langseth

We observed the trading of the bond but that is what it is. Our focus, I don’t think you should expect us to aggressively buy back bonds at this stage and bond trading we have to assume relates to perceived uncertainty in the market and the oil price going forward. And our priority is to focus on and manage our cash flow and cash position, which is the same as we have communicated earlier.

Unidentified Analyst

But you would reduce your debt by $150 million if you can buy back entire bond at market prices, so this will be a significant improved effect to you also.

Gottfred Langseth

Then, I don’t clearly understand your question, if you bought back all of the bonds, we would reduce our net debt if you handed it from other borrowed sources. For example, a revolving cared facility, net debt would reduce by 150 million but then we would not have any remaining liquidity reserve. And I am not sure -- still not sure I understand your question.

Unidentified Analyst

Just it seems like in terms of percent of liquidity within markets is quite low for covenants. Sometime in the year, if the market persists to be quite forward, by buying back the bond you would reduce the financial risk in the company, you would reduce the debt level.

Unidentified Company Representative

I already confirmed that. We agree on that but I am not sure I have anything more to comment. Have I have misunderstood anything? So you are saying all our liquidity reserve to repay out the debt during doing 2018 and that would be a good idea.

Unidentified Analyst

Part of it, yes.

Gottfred Langseth

Yes, I think you can assume that we as management consider relatively thoroughly all our options and obviously and the potential opportunity to buy back, policy is also that something that we do consider our focus near term is to make sure that we have the liquidity that the Company might need over the downturn to make sure we are in control.

Unidentified Analyst

Thanks.

Terje Fatnes

Terje Fatnes, SEB. Can you comment a little bit on the competitive landscape? And based upon, suggesting that has been any change over the past few months or what you give us?

Jon Erik Reinhardsen

Basically there are four vessels owners in play. WesternGeco seems to focus still mostly on MultiClient relatively -- what you say -- willing to start surveys as relatively low pre-funding as you can see from the numbers on the comparative slide. CGG is playing with a much reduced fleet, coming down to five vessels but still active to some doing degree and contract some degree in MultiClient, aiming at more MultiClient as we read it and hear it. And then Polarcus is currently is mainly trying book up in wherever there is opportunity; it looks like lately more in the contracts base. I think a common thread though is across the global fleet is that you will see most likely, according to our focus, less idle time than you saw in 2015, given a slightly better market balance between the 300,000 squares and the available capacity. That’s how we read it at the moment.

Terje Fatnes

But you have any data points on pricing over the last few months?

Jon Erik Reinhardsen

I don’t think it will get any lower in 2016 than we saw being booked at the latter half of 2015. Whether we are able to move these data points up, there is a given probability for that but it’s too early to conclude for that now.

Terje Fatnes

And then question on the Sanco vessels. Have you actually taken delivery off the vessels now?

Jon Erik Reinhardsen

Yes.

Terje Fatnes

And you say that the Sword will not commence operation before Q4. Why is that?

Jon Erik Reinhardsen

No. It’s just a matter of Sword is suppose to substitute Vanguard. And Vanguard has a work program committed to clients that we need to finish before we phase in Sword. So, you can say the seismic equipment and the seismic crew on Vanguard will be transfer to Sword when we are ready to do that transfer.

Terje Fatnes

And how will this be treated in the vessel utilization? Will it be treated as cold-stacked and not included or will you include it in the utilization numbers?

Gottfred Langseth

They will be included in the total available 3D capacity from the time they are ready and available for operations. So Swift will be included in the total 36 total available capacity from early Q2 and Sword, unless there is a change or tweaking plans from early Q4.

Terje Fatnes

Okay. And final question is on -- for Gottfred, on working capital. You indicated there should be an increased working capital in the Q4 from customer receivables going up. Can you comment on that?

Gottfred Langseth

Yes. You will note that we have had the same language in for the last five quarters. So, this is not something new that we started say now during fourth quarter. I think it is fair to say that our experience has been and we expect that to continue to be at periods for the full price drops some of the adjustment and that’s -- or initiatives that some oil companies are doing is to seek to get things done but push payments out in time. And that we just caution that that might present upward pressure on sales outstanding. Looking at it for through or for the whole of 2015 has been some but not enough to move the needle a lot on our working capital but it’s just a cautionary sort of heads up that that could push DSO up. It’s too early to say but it’s fairly to like this estimate.

Morten Nystrøm

It’s Morten from Nordea. First, the question on type and the contract in Myanmar. Is that a day rate contract or is that a contract which is paid based on production?

Gottfred Langseth

It is primarily a day rate contract.

Morten Nystrøm

Okay, which basically means that the efficiencies then the oil companies gain and...

Gottfred Langseth

Most of it; that is true. So, we a happy client. I think it’s fair to say.

Morten Nystrøm

And also on the -- I didn’t see the Tethys in the fleet schedule. I think on the map, this March.

Gottfred Langseth

No, we include them and -- maybe a bit inconsistent in presenting the Sanco vessels versus Tethys but haven’t -- it is still in Nagasaki expected to leave Japan during March and expected and plan to go through the launch date to start on project there late April.

Bård Stenberg

Okay. We have a couple of questions from the people on the webcasts. Jørgen Lande at Clarckson, asks any possibility that you can delay the new builds further? If so, can you walk us through any implications?

Jon Erik Reinhardsen

Well, it’s a question that you and others have asked several times during this new build program and we have commented, if and when we have news to comment. And we have just put in place what we have now. Tethys will come, as Gottfred just said. And then when it comes to Hyperion, the current plan is delivery late January next year. If things change, we will communicate that. It will always to enough push CapEx further beyond 2017, as we see it today. So, you have to assume that Hyperion comes in, in 2017.

Bård Stenberg

Mr. Lande has another question. Can you comment on how much of the 2016 MultiClient investments are secured by now?

Jon Erik Reinhardsen

It’s a number I don’t have from top my head, more than half something like that.

Gottfred Langseth

More than half of what we conservatively planned are from -- on some of these again some on the pre-funding payment, not all of the pre-funding yet have been signed up.

Bård Stenberg

Okay. The next Kim Andre Uggedal at Fearnley. Does 100% booking in Q1 include Tethys and Sanco sisters?

Gottfred Langseth

The answer is no. That’s I’ve tried to explain earlier.

Bård Stenberg

On page 18, there is a new note to the covenants carve-out drawing under the ECF and RCF, can you explain the change; does this limit the use of the RCF to buy back bonds?

Gottfred Langseth

No, I think the clarification to the opposite. This is a clarification relating to incurrence tests which applied to primarily the term loan. And incurrence test means it’s something different than a maintenance covenant. Maintenance covenant needs to maintain all the time all the way the facilities. And default maintenance test which we -- sorry an incurrence test which we have in term loan B is something if you are over that level, you are prohibited from incurring more debt. So, this was an attempt, I believe to clarify that RCF drawings and drawing the export credit facilities are excepted from the impact of such incurrence test as carved out. So we can make drawings on the revolving facility and export facilities regardless of leverage ratio. So, it’s the opposite effect.

Bård Stenberg

We have Mr. Lande again. What is preventing annual demand to grow lower or to go lower than around 300,000 square kilometers in 2016 in your view?

Jon Erik Reinhardsen

There is nothing preventing anything from going down but I think the shift we would have to see for this to come further down is basically that there are no license rounds or much less license rounds coming, so there is no need for oil companies to position for the future in terms of the offshore. A lot of our revenues in the MultiClient space here is North Sea, Canada related, as you can see from the graphs and then of course also prefunding driven from Brazil and some other markets in Africa. So, if you were to see a shift for oil companies in general starting to say I don’t care about offshore anymore, yes, you might see further declines. But the demand we see now is driven by oil companies saying over the next 10-20 years, we still need to be an offshore, we still need to secure acreage. And if acreage becomes available tomorrow, I have to grab it because if not, it’s going to be available the day after tomorrow, if this is seen as strategically interesting opportunity. And that’s why we still see in attractive areas interest in Canada and North Sea in particular, part of the attractiveness in these two markets is predictability, good governance and tax regimes that work. And that’s why you see clients paying interest in these areas.

Bård Stenberg

And then we have another question from Mukhtar Garadaghi at Citi. Can you comment on your discussions with clients on MultiClient project and also where do you see the total market is moving directionally in percent term in 2016?

Jon Erik Reinhardsen

MultiClient has become an interestingly competitive environment, given that now every player with boat or without a boat is playing in MultiClient. So clearly, as I see ‘16, there will be continuous pressure on the MultiClient business. And you basically have now six players plus trying to grab MultiClient opportunities in a market that has less to grab for, if you like. While in contract we have moved a little bit in the other direction, in the sense that there are opportunities where we’re down to a couple of bidders or three bidders more regularly but some with higher pricing assumed in what you put forward. The share of MultiClient of the totality is still expected from our perspective to increase further. We took a big leap in favor of MultiClient in 2005; we might not see a further leap in -- sorry in ‘15, we might not see a further leap in ‘16, but I think we will expect that it at least stabilizes at the 60-40 level in ‘16 and with an expectation that it might go further, as we move forward.

Bård Stenberg

Then we have a question from Can now we have question from Teodor Sveen-Nilsen in Swedbank. Have you seen any changes with regards to the 2016 demand over the past quarter? And also, how much should we expect in restructuring costs in 2016?

Jon Erik Reinhardsen

To the latter, I don’t have a good number at the moment. We’re working currently on plans in terms of how to create even more robustness on the cost side. Most of what you see in the slides Gottfred presented has been implemented in ‘15 and therefore the structuring costs have been allocated in ‘15. So, I’ll leave that open. The first part was.

Bård Stenberg

Have you seen any changes with regards to 2016 demand over the past quarter?

Jon Erik Reinhardsen

Not materially I would say. I think what we see now the estimate of the 300,000 squares is pretty much what we had later in the fall. At the moment, there is a slight uptick in leads but then there is a probability factor coming in here. So, it’s hard to say whether this is a good early indicator or whether this is just a fluctuation and now there are some budgets they can plan with and then when they are spent way back to where we were. So I wouldn’t go too far out and say that we have a turning point behind us but that’s how it’s looking at the moment.

Bård Stenberg

And then we have a question from Daniel Ravik at Handelsbanken. [Ph] Coming back to the booking question is potential booking of Tethys and the Sanco vessels included in the backlog figure of $240 million?

Jon Erik Reinhardsen

There is some of the bookings related to those vessels, yes.

Bård Stenberg

Okay, Morten?

Morten Nystrøm

Yes, Morten, Nordea. Just a question to the three, four brand new vessels, which doesn’t have an owner the Rieber vessels; what is your thinking of this? Do you see them in competition; do you consider doing the similar move as you did with the Sanco vessels; will they be sacked or will they continue in this loose thing we can read about in the newspaper? Thank you.

Jon Erik Reinhardsen

Limited comments. There are significant limits to what kind of appetite and capacity we have to do more. And the other comment I would offer, it’s not easy to operate a fleet of two or four vessels in the current environment without any capital support, working capital, call it whatever you want. So, I think it’s -- yes, we see that there is vessels being kept alive; we understand it’s basically to fulfill work that had been committed to or close to being committed to pre the bankruptcy. It remains to be seen what comes out of this.

Morten Nystrøm

[Question Inaudible]

Jon Erik Reinhardsen

No, we don’t really.

Bård Stenberg

Okay. Operator, can you help us with the questions from the people on the conference call?

Operator

Thank you. [Operator Instructions] And we will take our first question. Your line is open; please state your name before posing the question.

John Olaisen

Good morning, gentlemen. This is John Olaisen from ABG in Oslo. The question is slide number 18, it seems like the revolving credit facility has been lowered from $19 to $25 in terms of nominal amount. Is that a pure liquidity thing or is this some reason why the nominal amount has been drawn down?

Gottfred Langseth

It is just a liquidity management effect. We repaid the revolver during -- most of the revolver during the fourth quarter.

John Olaisen

And then my second question is related to slide number 24 where you show the revenues divided by the investments over the last six years, it’s been plus-minus two times, just wonder is that a ratio that you have to with the -- that kind of ratio for the MultiClient operations?

Gottfred Langseth

Yes, I think the relatively short time that I think that’s the ratio that we can live with. I’m not sure whether happy or live with a good sort of quantitative terms but it’s fairly close to what you can get a sensible return on capital.

John Olaisen

And is that a relevant ratio to look at when we are going to look at long-term return on capital employed for the MultiClient business because one thing is the cash investments. But if you include capitalized interest expense which is by all means a cash outlay and the capitalized depreciation, then that revenue divided by investment ratio would look completely different, probably 60%, 70% lower say the investment ratio and that would make it look very different. And if you do that, it looks like the sales to investment ratio is closer to one. So, I just wonder how do you look upon the depreciation charge; is that sunk cost in your view? So, are you focusing on the cash -- sales investment ratio on cash basis? And going forward you should be happy with two going forward on cash basis or how do you view upon the sunk [ph] cost?

Gottfred Langseth

This is not the way we look at it. We -- generally depreciation is not sunk cost, it’s a cost. And we generally -- we measure our performance internally, we look at return on capital employed on a comparative basis, we look at the discounted margin that we achieved on a full cost basis in MultiClient compared to contract. And we don’t look at the sales investment ratio as a key and good indicator for performance. But, it is a very good indicator for benchmarking. And the purpose of this slide is primarily to benchmark and not quantify whether performance is good or bad.

John Olaisen

All right, so the benchmarking on page 25, when you look at your own cash base sales investment ratio 1.9, do you think is it relevant to compare that ratio to 1.2 for TGS?

Gottfred Langseth

Yes, we think that is a fairly relevant. There are differences in -- to some extent between how much cost is capitalized and cost levels; there is all sorts of differences. So, we think it’s a relevant benchmarking. It’s not 100% correct.

John Olaisen

So, the answer is yes, you think it’s relevant to compare your 1.9 last year to TGS’ 1.2?

Gottfred Langseth

At least the trends; there may be differences which would explain that there should be differences over time or in each year, but we think the trends are relevant.

Operator

And now we will take our next question. Please go ahead, your line is open. Please state your name before you ask your question.

Rahul Bhat

Hi this is Rahul Bhat from JPMorgan. Couple of questions from me please. On the MultiClient library impairment, could you give any color on which vintage was impaired; were any 2014, ‘15 vintages impaired by any chance?

Jon Erik Reinhardsen

Yes, I will look in a precise allocation in most impairments across the vintages, it’s fair to say and it included service also in the ‘14 and ‘15 vintage.

Rahul Bhat

Okay, understood. And finally, on the unproductive vessel time for 2015, I think John Erik said earlier that he expects standby time to go down because the market is slightly more balanced but of steaming time et cetera, do you think that changes much, does that also reduce because it seems as if last year was more of a scheduling issue also along with the oversupply issue?

Gottfred Langseth

Most of the -- there were more negative contributions from idle times than from steaming. I do not foresee a significant change in steaming though in ‘16 because there is an element that you have, each player has on average slightly less vessels, so you would expect that to flow into slightly more steaming. But then, there is this balance between a tighter market could give you a better opportunity to optimize for less steaming on the other hand. So I don’t -- there’s no reason to expect a significant change for ‘16 as we see today, on the steaming.

Rahul Bhat

Okay, understood. And my last question is on MultiClient data. On the contract size, obviously it’s a day rate that dictates the pricing. But on the MultiClient side do you sell -- I’m assuming you sell data based on a per square kilometer basis. Are you seeing any pricing pressure over there and are you ready to give any discounts or how are conversations with clients going on that side?

Gottfred Langseth

As I said earlier, there is pressure on the MultiClient model, whether it’s unit pricing or how you package; I think all the players experience this in the dialog with their clients today. Still in this environment, which we have had pretty much through 2015, we have come out of it pretty well with a relatively modest decline in revenues and a decline in investment. So, healthy balance, I would say.

Rahul Bhat

Okay, fair enough. Thank you.

Bård Stenberg

Operator, I think we will conclude the Q&A session on the conference call. We spent one hour and five minutes already. And also thank the audience in Oslo for coming, the people on the web for watching us and also the people on the conference call for listening in to the presentation. I also would like to remind you all of the conference call at 3 p.m. this afternoon. So, there’s an opportunity to ask more questions on that conference call. I will also be available for questions, if there are more questions from people. So with that, I thank you all for coming. And have a nice day.

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