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Equity Resear
17 January 20
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companiescovered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by equity research analysts based outsidethe US who are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 35.
European Oil Services & Drilling
Seismic: down, but not out
Over the past few weeks all of the seismic companies under our coverage have
announced an update, ranging from utilisation figures to a full corporate
restructuring vision. What is clear to us from all of these is that the upwards
progression of marine contract pricing has stalled and investors, we believe, are
expecting a much flatter environment. It is also clear, however, that the industry has
not lost control. Yes, more multi-client activity will enter the mix in low utilisation
periods, but aggressive pre-funding levels have not materialised, and capacity is
being removed where possible. Hence, while a flat outlook appears a sensible
planning assumption in an insipid demand growth environment, what that will look
like in a years time, in our view, is more likely to surprise on the upside than the
downside. As a result, we believe the seismic industry is down, but not out. With the
pure vessel plays PGS and Polarcus trading on 6-8x 2014F PE, we believe that thepoor market is largely factored into valuations. It may take indications of a better
late northern hemisphere summer season to catalyse share price performance, but
with all companies showing strong earnings growth, despite a tepid current
environment, we remain comfortable with recommending seismic stocks. Our
preferred play is PGS, whose unique vessels appear to us to offer an advantage and
whose dividend yield could soon remind investors of its capital discipline. Our least
preferred plays are CGG, which despite another restructuring programme is still
expecting only to generate below average industry margins, and TGS, which after
recent moves is fully factoring in its investment programme, in our opinion.
Downgrade Polarcus to Equal Weight: Polarcus has continued to do the right things
and we see it as undervalued. However, with a weak current market, we see covenantsas tight again and see our earnings out by 26% for the 2014F period. As a result, we
downgrade to Equal weight and cut our price target to NOK6.20 from NOK7.00.
Flatter outlook: We have moved our contract pricing assumptions to a flatter outlook.
Given operational gearing in the service model, this results in an average cut in our
earnings estimates for the contract players of 22% in 2014F and 16% in 2015F.
PGS remains our preferred play: With a good level of visibility on 2014F capacity, a
high-margin fleet, and a balance sheet that we believe can continue to support
shareholder returns, PGS is our top pick in the space.
INDUSTRY UPDATE
European Oil Services & DrillingPOSITIVE
Unchanged
For a full list of our ratings, price target andearnings changes in this report, please seetable on page 2.
European Oil Services & Drilling
Mick Pickup
+44 (0)20 3134 6695
Barclays, London
Haley Silverman
+44 (0)20 7773 4457
Barclays, London
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2
Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)
Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)
Old New 15-Jan-14 Old New %Chg Old New %Chg Old New %Chg
European Oil Services & Drilling Pos Pos
CGG (CGG FP / GEPH.PA) UW UW 12.53 19.00 15.00 -21 0.98 0.77 -21 1.74 1.24 -29
Petroleum Geo-Services (PGS NO / PGS.OL) OW OW 73.40 100.00 93.00 -7 1.24 1.09 -12 1.64 1.47 -10
Polarcus (PLCS NO / PLCS.OL) OW EW 4.55 7.00 6.20 -11 0.08 0.07 -12 0.16 0.12 -25
TGS (TGS NO / TGS.OL) UW UW 174.00 190.00 180.00 -5 2.38 2.53 6 2.62 2.58 -2
Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.
FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.
Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended
Industry View: Pos: Positive; Neu: Neutral; Neg: Negative
http://my.barcapint.com/BC/composite/GER_COMPANY?ticker=GEPH.PAhttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=PGS.OLhttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=PLCS.OLhttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=TGS.OLhttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=TGS.OLhttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=PLCS.OLhttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=PGS.OLhttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=GEPH.PA8/13/2019 European Oil Services & Drilling
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CONTENTS
Market is not what it was ......................................................................................................................... 4
CGG (UW, PT EUR15 from EUR19) ....................................................................................................... 12
PGS (OW, PT NOK 93 from NOK100) .................................................................................................. 16
Polarcus (EW, NOK 6.20 from NOK7) .................................................................................................. 21
TGS (UW, NOK 180, from NOK 190) .................................................................................................... 26
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Market is not what it was
Post summer 2013 the indications coming out of the seismic market have become more
tepid as some eagerly awaited large contracts got held up and winter demand, as has often
happened in the past, began to wane. In addition, the oil industry is on what we view as a
renewed health drive. Excess spending is being evaluated and, as has been the case in the
past, the seismic industry is again in the firing line.
As ever with the seismic industry all is not clear-cut. We see the signals as mixed. Demand
for 4Q13 was not as high as expected and 1Q14 appears to be shaping up similarly. This is
not an uncommon winter issue. On the positive side, however, some of six major new tenders
in the market that were delayed have been awarded and are starting to absorb supply and
those contracts that have been signed for 2Q14 and beyond are at improved rates. This is
ahead of the summer season which typically squeezes rates. On the negative side, using PGS
market that were delayed have been awarded and are starting to absorb supply and those
contracts that/y. This chart, however, can be volatile and has fallen, we believe, in the short
term as some of the major awards have been signed. In addition, the absolute level is still
above that at the end of 2011. Therein lies the contradiction. Yes, the market is not what was
once expected. But it is not, in our view, disastrous. US$ demand is still at levels only exceeded
in the 2007-09 period and that is largely due to pricing being some 50-100% higher than
current levels. In terms of vessel demand, the current market is at or near all-time high levels.
Six large sales leads convert into active tenders
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
USDmillions
Active tenders All sales leads (inc active tenders)
Source: PGS company data, Barclays Research
The above talk about current demand is purely short-term. Longer-term we see the shift of
seismic into the production arena and the ever-increasing need for higher resolution as
sustaining activity and the need to unlock new basins to drive down unit development costs.
We expect multiple new basins to open up over the coming years, highlighted in the below
chart. This positive trend is currently, we believe, being swamped by small delays that can
significantly impact quarterly numbers. These are very likely to be a continued feature for
the industry, but we believe the general trend is in the right direction.
Mixed signals
Longer-term thesis more in
balance
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New basins drive future growth
Source: Company data, Barclays Research
Importantly, in what we see as a constructive medium-term demand outlook, we see vessel
new building activity as rational. In previous cycles, when pricing was improving, we saw
15-35% capacity additions per annum. However, in 2013, there were only two larger 3D
vessels entering the fleet, net of two CGG retirements. This leads to what we believe to be
about 3% net new capacity globally. In 2014, we expect an improved picture, with four new
vessels being offset by three retirements. A net increase of one vessel is the lowest increase
that we have recorded. Furthermore, while we expect four net additions by 2015, indications
from CGG that it will remove 25% of its capacity by 2016 and PGS removing one vessel at theend of 2015, mean that by 2016 we expect to see a similar size fleet to 2013/14.
World marine seismic fleet
0
10
20
30
40
50
60
70
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014E 2016E
CGGVeritas WGeco PGS Fugro Polarcus BGP Dolphin Other Total
Source: Company data, Barclays Research
SouthAmerica:Uruguay,Falklands,
Brazil,Suriname, &
Guyana
North America: NovaScotia
Central America:Caribbean Mediterranean: Eastern
Med & Black Sea
East Africa:Mozambique, Tanzania,
Kenya
West Africa: Namibia,Angola, Gabon and S
Africa
Europe: Barents sea
Russian Arctic: Rosneft & Gazprom new acreage
Australasia: Myanmar,Australia , Chinese sea
Moderate capacity increases
mark this cycle as different
from previous ones
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The above positive supply-side picture could however be misleading. Firstly, the streamer
count is increasing at a faster pace than the vessel count. In 2014, while we see a flat vessel
count, we also see a 5% increase in the number of streamers. Secondly, we now believe that
this streamer count is no longer a reliable proxy for supply from which we can estimate
demand, given utilisation data. This has been highlighted by PGS in its recent presentations,
ostensibly in showing the benefits it is receiving from using its Ramform vessels.
As a rule of thumb, we would suggest that 10,000km
2
requires ca 10 months of vessel time.PGS argues this is the case for a 6-streamer vessel. However, as vessels increase in size the
amount of time per survey falls rapidly, such that by the time vessels are the size of its
newer Ramform vessels, they require only 102 days. In addition, its Geostreamer adds
efficiencies which it believes put it ahead of equivalent vessels in the market.
Time efficiency per 10k km2survey of Ramform Titan class vessels
0
50
100
150
200
250
300
350
6 8 10 12 14 16 18
Days
Streamer count
Source: Company data, Barclays Research
As a result of increased efficiency, since the average streamer count of the industry has grown
from 8.2 per vessel in 2006 to 11.2 in 2013, we have seen ca30% effective capacity creep.
Streamer per vessel over time
0
2
4
6
8
10
12
14
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Company data, Barclays Research
In an attempt to show this effect visually we have applied a scale factor to our vessel/streamer
count analysis. Assuming a purely arbitrary effective efficiency of 1 for a 6-streamer vessel,
increasing to 2 for 18 streamer +, we see that 2013 actually experienced an 8% effective
streamer capacity increase versus the 3% vessel capacity addition and 6.5% streamer additions.
Effective capacity grows faster
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Effective streamer count vs the actual streamer count Effective vessel count vs the actual vessel count
0
200
400
600
800
1,000
1,200
1,400
Streamers Effective streamers
0
20
40
60
80
100
120
Vessels Effective vessels
Source: Company data, Barclays Research Source: Company data, Barclays Research
Looking forward, beyond 2014, the effect continues. Over the 2014-16 period we see only
one net vessel added, we see the streamer count and effective streamer count increasing by
ca10%. Given that we expect capex to continue to increase in the high single-digit region
for the medium term, this would imply that the market should increase at a similar rate to
the supply side. It does not suggest to us that the market is going to tighten significantly,
nor does it suggest it is going to weaken. We have therefore based our medium-term
numbers off a flat outlook for unit pricing.
Multi-client on the up, but is the quality there?
All of the above analysis is based on the contract market. We should bear in mind that the
multi-client market has been absorbing ca28% of capacity. Multi-client surveys have
historically been a key component of seismic companies ability to mitigate the cyclical
volatility in their business. As long as it is executed within sound financial rationale, then
multi client can provide a more stable earnings stream. In this respect, many companies
have talked of a long-run 30-40% allocation to multi-client as the ideal and indeed Polarcus
has just had its covenants revised to allow it to extend its activities. This could further aid
the perceived imbalance in the market at present. We would not see this as a desperate
measure to balance supply and demand of equipment as we believe many investors see it
and with good measure given behaviour at the turn of the last decade but rather a
mechanism to generate more consistent returns and to provide a base of cash flow should
we see a downturn in the market. It could, however, take some time of consistent multi-
client results before investors start to believe in it as a credible business model. Indeed, at
the moment, we see the companies as trapped. Excess multi-client work in a utilisation
update is likely to be seen as negative, as a cry for help on the utilisation front. Then several
quarters later if late sales come in, the results are typically seen as a low-quality beat.
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European seismic industry multi-client allocation (includes CGG, PGS and Polarcus)
0%
5%
10%
15%
20%
25%
30%
35%
40%
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
Source: Company data, Barclays Research
Two other factors are also at play. First, multi-client appears not only to be used as a
utilisation filler, but its use also appears to us to be being driven by the oil companies.
Sensing the appetite for multi-client from in both the newly awarded areas of Brazil and in
Norway in the Barents Sea, several operators have grouped together to put out a larger
tender (see Seismic cooperation in the southeastern Barents Sea (Statoil website)). This by
default becomes a more meaningful contract and desire for it should increase. In our view,
under the guise of geological understanding and fishery protection, it is an attempt to
reduce pricing, by converting what would once have been contract into a multi-client in
which the pricing is determined by a pre-funding reverse auction. It presumably also means
that the pre-funding is what the pre-funding is. There would appear to us little chance of
getting new entrants at a later date before finalisation of the survey. It could also limit the
after-sales potential.
A second effect, and more positive, is that for CGG multi-client is a mechanism whereby it
can utilise the skills it acquired when it bought the Geological and geophysical business ofFugro. With this acquisition, the company has greatly enhanced its sub-surface
understanding. As a result, it should be in a better place to determine what seismic to do,
thereby de-risking its activities.
The above is only one aspect of the multi-client model. The other is that the profitability of it
can be variable, especially on a quarterly basis. However, over time it tends to give a more
stable return. Indeed, 2Q13 was the fourth highest ever quarter for late sales, on our
estimates, and sixth highest for overall multi-client sales, despite lower-than-expected pre-
funding levels. Furthermore, TGS has just announced that 4Q13 will be its record late sales
quarter. This signals to us that the multi-client model is very much alive and kicking.
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European seismic sector multi-client revenues
0
200
400
600
800
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13
US$mn
CGG Marine multi-client pre-funding CGG Marine multi-client late sales
Polarcus Multi-client pre-funding sales Polarcus Multi-client late sales
PGS Marine Multi-client pre-funding PGS Marine Multi-client late sales
TGS Net pre-funding TGS Net late sales
Source: Company data (all prefunding/late sales definitions are as per company-specific definitions, hence cross
comparisons are difficult to make)
A price for everythingThe market outlook has deteriorated for seismic as we have moved through 2013 and our
expectations for 2014s momentum have waned. That said the seismic stocks have fallen by
an average of 24% since the beginning of 2013 (range: 2-44%) versus an average of 4% for
the rest of our coverage universe. Largely as consensus estimates have fallen eg CGG
2013F and 2014F EPS estimates have fallen by over 60% since the beginning of 2013.
Change in consensus EPS estimates and share price
Change in 2013
consensus EPS
Change in 2014
consensus epsChange in share price
CGG (65)% (62)% (45)%
PGS (22)% (30)% (23)%
Polarcus (66)% (58)% (31)%
TGS (12)% (20)% (4)%
Average (41)% (42)% (26)%
Source: Datastream, since 1/1/13 to present day
In the main the stocks have moved down similar to their earnings cuts, implying that the
multiple has only changed slightly. There has been little re-rating as earnings have been cut,
implying investors believe the longer-term picture has changed. However, pricing has not
collapsed and with the stocks trading at a ca 30% discount to their long-run multiples, we
see this as inappropriate.
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Historical 12-month forward PE vs 10-year average
0x
5x
10x
15x
20x
25x
30x
35x
2004 2006 2008 2010 2012 2014
12MForward PE
CGG CGG Avg
0x
5x
10x
15x
20x
25x
30x
2004 2006 2008 2010 2012 2014
12MForward PE
PGS PGS Avg
0x
5x
10x
15x
20x
25x
2004 2006 2008 2010 2012 2014
12MForward PE
TGS TGS Avg
0x
2x
4x
6x
8x
10x
2012 2013 2014
12MForward PE
Polarcus Polarcus Avg
Source: Datastream, Barclays Research
Polarcus PE is a 2-year history against a 2-year average.
While multiples are a good guide, we have always viewed them as a distraction within a
highly cyclical business, as they are unlikely to reflect the value of a business on an ongoing
basis. Our preferred evaluation metric has long been DCF-based and while we concede that
a range of answers can be forthcoming, we view it as the only way to view the types of
assumptions that the stocks are factoring in.
Our base case DCF, which we use across the Oil Service space, uses a 10% discount rate.
For vessel owners in the seismic space we add a further 100bp to reflect the more cyclical
nature of earnings and for Polarcus we add a further 200bp to reflect its high gearing and
stressed balance sheet. Only for TGS, which has no assets apart from its produce, do we use
the base case 10%.
In our DCF-based evaluation we use our discrete forecasts until 2015, then apply 10% per
annum growth for the 2016-17F period. We then reduce the business at a similar rate until
2019F, at which point we use a (WACC-growth) approach to determine a terminal value
using a standard 3% terminal growth rate. We note that this compares to oil industry capex
that has grown at over 7% per annum for the past 40 years and is expected to grow by
6.1% in 2014, according to Barclayss Global 2014 E&P Spending Survey.
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DCF-based evaluations
% Discount rateDCF base case
(Target price)DCF upside DCF downside
CGG, EUR 11% 15 20% 33 163% 11 (12)%
PGS, NOK 11% 93 27% 150 104% 60 (18)%
Polarcus, NOK 13% 6.2 36% 16 252% 2 (56)%
TGS, NOK 10% 180 3% 260 49% 110 (37)%
Source: Barclays Research
The key for us is the downside potential which, ex TGS, we see as limited. For our downside
cases we assume a 5% decline in pricing in 2014F and 2015F and a reduction in margin
thereafter the same as the price reduction reduces our 2015F. For the pure vessel owners,
this leaves downside potential of ca 20%, versus significant upside. In effect, we see current
share prices as factoring in declining prices over the 2014-15F period, contrary to our
expectations. Indeed, in this scenario pricing in 2015 would be at levels equivalent to the
troughs of 2010.
For TGS, we still see significant downside potential, but that is dependent on two factors
the level of investment going forward and the pre-funding. Our base case is predicated on
US$420-475mn of investment for the 2014-15F period and future investments based onthis level. It also expects a return to the 50% pre-funding level from the low 40% range
expected in 2013F, due to delays and competition.
As a result of this analysis, our preferred play remain PGS. At 7x 2014F PE and with 42%
upside potential, we see PGS as harshly treated in 2013F versus its actual performance.
For Polarcus, we see the upside potential as significant. However, with high gearing (both
operational and financial), negative moves in the market can significantly affect earnings, and
subsequently balance sheet strength. In this respect, 26% idle time in 4Q13 on top of a
weakening pricing environment have caused us to reduce our 2013F earnings estimates by
12%. In addition, the lack of any meaningful multi-client sales thus far leads us to cut our
expectations of multi-clients sales for 2014F, negatively impacting our EPS estimate by 20%.
This is turn brings the covenants threshold back into focus in the beginning of 2014F T a
situation we feel investors will focus on. As such, our reduced DCF-based price target is now
NOK6.2/share. While we admit this still leaves 38% potential upside, the worry for us around
sustained negative momentum in the market, and the sensitivity of earnings, leads us to
downgrade to Equal Weight.
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CGG (UW, PT EUR15 from EUR19)
Another New Vision
CGG gave perhaps the most radical vision for the future as it outlined how it was likely to
look in 2016 after a restructuring exercise. Following the acquisition of Fugro's vessels, a
move we view as the principal cause of the marine contract market dislocation in 2013, its
focus is to become more of a solutions provider. As such, the marine fleet will be
rationalised by as much as 25%, with less profitable units removed. Equipment sales and
hence profits will grow and Geology, Geophysics & Reservoir division (GGR) will become
central delivering not only its own growth, but being at the heart of an enhanced multi-
client offering. However, as ever the earnings potential of the business is dominated by the
marine fleet and by reducing capacity you reduce the earnings. The margin increase needed
to get the business to high single-digit EBIT margin is still some way off where we would
expect that division to be. Using the new company proforma vision we cut our earnings
estimates by as much as 29% in 2014F and 22% in 2015F. As such we reduce our price
target significantly to EUR15/share. With limited upside potential, we remain Underweight.
Pro-forma is hardly exciting:The company has not given guidance for 2016, it has given a
pro-forma outlook under current pricing conditions. This scenario largely ties in with our
assumptions. As a result we cut our 2015 earnings forecasts by over 25%. Essentially, in 2016,
CGG expects to earn US$600mn of EBIT, 10% less than what we were expecting in 2014.
Not all the plans are in place:While the company has indicated its pro forma vision there
are still uncertainties. Capacity in the marine fleet will be reduced by up to 25% but there is
no indication of whether this is vessels or streamers or the timing. Furthermore, the
presentation talks of a new extended ARGAS (the company's Saudi land joint venture) with
no details of the shape or extent of the structure.
Equipment holding up:Earlier in 2013 there had been some concerns that the company's
Equipment division had peaked. It appears as if the company's view is one of growth as the
new 508XT land system is taken up by some of the mega-crews that it sees being awarded
in the Middle East. EBIT margins should stay above 28% and with reductions in the marinefleet, the Equipment contribution to group sales should grow back above 28%.
GGR at the heart of the business: The acquisition of Fugro's Geology & Geophysical
division was a change of direction for the company in 2013. By rolling multi-client into it the
company has created a business that goes from the consulting level to the library. The
thesis is that the acquired skills will create a much enhanced multi-client offering. However,
spending will likely be less than we had expected and, hence, as with TGS, returns thereafter
will likely be lower. In addition, pre-funding of 70%, late sales, and investment expectations
are in line with our current assumptions, which is a slightly disappointing outlook to us,
given the enhanced offering.
Earnings estimates cut by 22-29% in 2014-2015F: As a result of flat pricing and lower
capacity we are reducing our 2014-2015F EPS estimates by 22-29%, and thus our DCF-based price target to EUR15/share from EUR19/share previously. We remain Underweight.
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CGG Veritas - Income statement
US$ mn 2011A 2012A 2013F 2014F 2015F 2016F
Acquisition 2,218 1,970 1,924 1,704
GGR 1,307 1,350 1,450 1,540
Equipment 1,087 1,150 1,270 1,300
Eliminations (793) (670) (624) (506)
Net operating revenues 3,184 3,414 3,820 3,800 4,020 4,038
Cost of operations (2,647) (2,685) (3,021) (2,910) (3,025) (2,961)
Gross profit 537 729 800 890 995 1,077
Gross profit margin 17% 21% 21% 23% 25% 27%
R&D (77) (93) (113) (92) (102) (104)
SG&A (287) (280) (326) (266) (261) (262)
Other/Goodwill reduction 34 (27) 49 (60) (60) (60)
(Loss)/income from ops 208 329 410 472 572 650
Financial expenses, net (174) (176) (202) (180) (170) (170)
Exchange gains (losses), net 0 0 0 0 0 0
Income before tax 34 153 208 292 402 480
Income taxes (63) (99) (81) (99) (137) (163)
Tax rate, % 187% 65% 39% 34% 34% 34%
Minority Interest (14) (17) (5) 0 (1) (1)
Equity income 16 37 15 28 34 34
Goodwill 0 0 0 0 0 0
Adjusted net income (27) 74 137 221 298 350
Shares issued, ave.,undiluted, mn 151.8 162.1 176.9 176.9 176.9 176.9
Shares issued, ave.,diluted, mn 165.5 163.4 202.4 178.2 178.2 178.2
EPS, Basic (0.18) 0.46 0.78 1.25 1.69 1.98
EPS, Diluted (0.18) 0.45 0.77 1.24 1.67 1.96
Growth, y.o.y. n/a n/a n/a 61% 35% 17%
Gross margin 17% 21% 21% 23% 25% 27%
EBITDA 836 1018 1225 1219 1298 1331
EBITDA margin 26% 30% 32% 32% 32% 33%
Operating margin 7% 10% 11% 12% 14% 16%
Pre-tax margin 1% 4% 5% 8% 10% 12%
Net margin (1)% 2% 4% 6% 7% 9%
Tax rate, % 187% 65% 39% 34% 34% 34%
Source: Company data, Barclays Research
Income analysis:
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CGG Veritas - Cash flow
US$ mn 2011A 2012A 2013F 2014F 2015F 2016F
Adjusted net income (27) 74 137 221 298 350
Minorities 14 17 5 0 1 1
Adjusted depreciation 629 655 800 719 692 647
Change in working capital 117 61 (260) 3 (37) (3)
Other items (69) (12) 238 34 36 38
Cash flow from operations 663 796 921 977 990 1,033per share 4.4 4.9 5.2 5.5 5.6 5.8
Capital expenditure (366) (369) (325) (375) (250) (250)
Investment in multi-client (203) (364) (479) (400) (400) (400)
Net cash flow from operations 94 63 116 202 340 383
Acquisitions (11) (53) (1,177) 0 0 0
Divestments 21 6 5 0 0 0
Proceeds from share issues 3 515 1 0 0 0
all other items 9 45 222 0 0 0
Surplus/Deficit 117 576 (832) 202 340 383
Source: Company data, Barclays Research
Non recurring items:
CGG Veritas - Balance sheet
US$ mn 2011A 2012A 2013F 2014F 2015F 2016F
Cash 531 1,520 320 320 320 320
Other current assets 1,578 1,953 1,954 1,944 2,055 2,064
Current liabilities (1,089) (1,170) (1,260) (1,254) (1,327) (1,333)
Net fixed assets 1,183 1,160 1,765 1,863 1,876 1,934
Intangibles 3,553 3,350 4,357 4,315 4,260 4,205
Other non current assets 343 350 350 350 350 350
Long term creditors (267) (266) (207) (148) (148) (148)
Capital employed 5,832 6,897 7,278 7,390 7,385 7,391
Ordinary shareholders funds 3,803 4,493 4,632 4,853 5,151 5,501
Minority interests 87 99 104 104 105 106
Short term debt 71 52 52 52 52 52
Long term debt 1,872 2,253 2,491 2,381 2,077 1,732
Capital employed from debt 5,832 6,897 7,278 7,390 7,385 7,391
NBV per share 25.1 27.7 26.2 27.4 29.1 31.1
Net debt 1411 785 2,222 2,113 1,809 1,464
Net debt per share 9.3 4.8 12.6 11.9 10.2 8.3
RoE, % (0.7) 1.8 3.0 4.7 6.0 6.6Net debt to equity, % 36.3 17.1 46.9 42.6 34.4 26.1
Net debt to debt plus equity, % 24.2 11.4 30.5 28.6 24.5 19.8
Return on gross capital employed, % 1.8 3.3 3.9 4.7 5.6 6.3
Source: Company data, Barclays Research
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European Oil Services & Drilling Industry View: POSITIVE
CGG (GEPH.PA) Stock Rating: UNDERWEIGHT
Income statement ($mn) 2012A 2013E 2014E 2015E CAGR Price (15-Jan-2014) EUR 12.53
Price Target EUR 15.00
Why Underweight?Seismic pricing in the short termappears to be under pressure. However, the medium-
term outlook appears to be more robust, supportingstable to increasing prices. However, despite thisoutlook, we see CGG as less attractive than its otherseismic peers given its multiple premium and hencerate the stock Underweight.
Upside case EUR 32.97
We assume that marine contract seismic pricingimproves at 15% points better than our estimates in2014 and 2015, towards peak levels seen in 2008. Inaddition, we factor in 5% per annum faster growth inthe equipment sector.
Downside case EUR 11.00
We assume that marine contract seismic pricing falls
at 10% points worse than our estimates in 2014 and15% in 2015, towards trough levels seen in 2010. Inaddition, we factor in 5% per annum further fall in theequipment sector.
Upside/Downside scenarios
POINT Quantitative Equity Scores
Source: POINT. The scores are valid as of the date of thisreport and are independent of the fundamental analysts'views. To view the latest scores, please go to the equitycompany page onBarclays Live.
Revenue 3,414 3,820 3,800 4,020 5.6%
EBITDA 1,018 1,225 1,219 1,298 8.4%
EBIT 329 410 472 572 20.2%
Pre-tax income 153 208 292 402 38.1%Net income (adj) 74 137 221 298 59.0%
EPS (adj) ($) 0.45 0.77 1.24 1.67 54.5%
Diluted shares (mn) 163.4 202.4 178.2 178.2 2.9%
DPS N/A N/A N/A N/A N/A
Margin and return data Average
EBITDA margin (%) 29.8 32.1 32.1 32.3 31.6
EBIT margin (%) 9.6 10.7 12.4 14.2 11.8
Pre-tax margin (%) 4.5 5.5 7.7 10.0 6.9
Net (adj) margin (%) 2.2 3.6 5.8 7.4 4.8
ROA (%) 1.0 1.6 2.5 3.4 2.1
ROE (%) 1.8 3.0 4.7 6.0 3.9
ROACE (%) 3.3 3.9 4.7 5.6 4.4
Balance sheet and cash flow ($mn) CAGR
Intangible fixed assets 3,350 4,357 4,315 4,260 8.3%
Cash and equivalents 1,520 320 320 320 -40.5%
Total assets 8,333 8,746 8,792 8,860 2.1%
Short and long-term debt 2,305 2,543 2,433 2,129 -2.6%
Other long-term liabilities 266 207 148 148 -17.7%
Total liabilities 3,741 4,010 3,835 3,604 -1.2%
Shareholders' equity 4,493 4,632 4,853 5,151 4.7%
Minorities 99 104 104 105 2.0%
Net debt/(funds) 785 2,222 2,113 1,809 32.1%
Capital employed 5,377 6,958 7,070 7,065 9.5%
Change in working capital 61 -260 3 -37 N/A
Cash flow from operations 796 921 977 990 7.5%
Capital expenditure -733 -804 -775 -650 N/ADividends paid N/A 0 0 0 N/A
Net cash from operations 63 116 202 340 75.3%
Free cash flow 63 116 202 340 75.3%
Net cash surplus/(deficit) 576 -832 202 340 -16.1%
Valuation and leverage metrics Average
P/E (adj) (x) 37.7 22.2 13.8 10.2 21.0
EV/EBITDA (x) 3.8 4.4 4.3 3.8 4.1
Equity FCF yield (%) 2.3 3.8 6.7 11.2 6.0
P/BV (x) 0.6 0.7 0.6 0.6 0.6
P/Sales (x) 0.9 0.8 0.8 0.8 0.8
Dividend yield (%) N/A N/A N/A N/A N/A
Net debt/capital (%) 14.6 31.9 29.9 25.6 25.5
Total debt/capital (%) 42.9 36.5 34.4 30.1 36.0Net debt/equity (%) 17.1 46.9 42.6 34.4 35.3
Selected operating metrics
Backlog ($mn) 1,240 N/A N/A N/A
Order intake N/A N/A N/A N/A
Source: Company data, Barclays ResearchNote: FY End Dec
Value
Quality
Sentiment
Low High
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PGS (OW, PT NOK 93 from NOK100)
Our preferred seismic player
While PGS's 2014 guidance was a touch behind our expectations, it was so only because of
lower pricing expectations, the company now basing its assumptions on a slight decline for
its remaining capacity. That said, some 60% of 2014 is now booked, highlighting once
again to us that PGS has an offering that is valued. With its unique vessels, efficiency benefit
and physical broadband solution we see PGS as the least likely to suffer from capacity
utilisation issues. While this does not insulate it from the vagaries of pricing movements, it
does suggest to us that it is least likely to get caught in the demand droughts that happen
periodically. As such, with sector-leading margins, PGS remains our preferred play. With
27% upside potential to our reduced NOK93/share price target, we remain Overweight.
The right fleet: As we described earlier, the efficiency of the world fleet is improving,
rendering the counting of vessels, or indeed streamers, a virtually meaningless task. PGS is
at the forefront of this, building four new Ramform vessels (two still under construction). It
is also removing older capacity. As such the company sits at the high end of the efficiency
scale (as shown below). At todays costs and at todays pricing level (even though we feel
this is potentially too punitive) we find the retirements of low-margin vessels and the
additions of the new Ramforms could add 9% to average EBITDA margins per vessel per
month. This, of course, assumes PGS is able to book out all its capacity at current pricing
levels, which will surely fluctuate over time, but gives us an idea of the value-added capacity
additions the company is delivering.
PGS fleet averages better margins than industry peers
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0PGS vessels Potential Retirements
Scheduled Additions Current Average Pricing Level
Current Average PGS cost Future average PGS cost
Source: PGS company data, Barclays Research
Multi-client compares well:We believe PGS has a straightforward approach to multi-client.
Both its team and the contract team compete for capacity based on returns. As a result wehave seen revenues stabilising and pre-funding levels, although not comparable with those
of some of its peers due to definitional differences, have remained robust in the 80-120%
range. 2013 pre-funding is expected to be ca 95% and should rise to nearer 100% in 2014.
While the fall below 100% in 2013 could be seen as a cause for concern, it is in the face of
high multi-client in 4Q13, which took multi-client utilisation to over 50% for the year. This is
some way ahead of a more normal 40% that we expect in 2014.
More cash returns:Capex has been high over recent years with 2013, for example, likely to
be in the US$450-475mn range and 2014 will be US$400-450mn, on our forecasts. This is
largely due to the new-build programme, underlying maintenance capex being just
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US$180mn. Post 2015 capex should therefore fall sharply, at which point on relatively flat
assumptions, free cash jumps to US$405mn, as the new builds start to contribute. This is a
potential 20%. In the meantime we see the potential for enhanced returns. In 2012, the
company instigated a dividend distributing 25-50% of earnings. 2013 was at the lower end
at 30%, but the company has indicated that enhanced payments could be discussed with
the full-year results. In our numbers, we have moved to the upper end of the range, in
absolute terms US$0.50, representing 4% yield.
Earnings cut by 11-21% in 2014-2015F: While we are still positive on the companys
ability to navigate a flat market in 2014 and we feel the market has more than priced in a
negative scenario, we conservatively reduce our EPS estimates for 2014-2015F by 11% and
21% respectively. Our reduced DCF-based price target is now NOK93/share from
NOK100/share previously, implying 27% upside. Thus we remain Overweight.
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PGS - Income statement
USD, '000 2011A 2012A 2013F 2014F 2015F 2016
Marine Contract Seismic 627,015 623,520 725,368 963,215 1,236,495 1,401,91
Marine Multi-client Sales 501,807 728,180 636,073 648,683 664,901 717,141
Marine Data Processing 110,031 124,421 125,717 132,003 145,203 159,723
Marine - Other 14,186 41,912 25,300 30,000 30,000 30,00
Marine 1,253,039 1,518,033 1,512,458 1,773,901 2,076,599 2,308,78
Other 260 251
Net operating revenues 1,253,299 1,518,284 1,512,458 1,773,901 2,076,599 2,308,782
Growth, y-o-y 41% 21% (0)% 17% 17% 11%
Cost of sales (643,434) (642,423) (616,730) (762,435) (948,247) (1,016,870)
Gross profit 609,865 875,861 895,727 1,011,465 1,128,353 1,291,913
Gross profit margin 48.7% 57.7% 59.2% 57.0% 54.3% 56.0%
R&D (24,281) (38,323) (35,307) (35,478) (37,379) (41,558)
SG&A (50,822) (61,372) (59,163) (62,087) (64,375) (71,572)
D&A (397,881) (484,276) (430,096) (465,112) (492,938) (551,572)
Impairment (2,583) 811
Other 4,400 1,084 600
(Loss)/income from operations 138,698 293,785 371,761 448,789 533,661 627,210
Operating profit margin 11% 19% 25% 25% 26% 27%
Income (los s) fr om associated companies (12,389) (4,214) (1,500)
Interest income 300
Interest expense (42,170) (37,787) (38,400) (38,000) (34,000) (34,000)
Other financial items, net (19,626) (23,310) (1,000)
Income before tax 64,513 228,474 331,161 410,789 499,661 593,210
Income taxes (30,045) (42,933) (96,900) (93,237) (99,898) (127,963)
Tax rate 47% 19% 29% 23% 20% 22%
Income from discontinued ops 589
Minority Interest (1,367) 2
Adjusted net income 33,690 185,543 234,261 317,552 399,763 465,247
Growth, y-o-y (70)% 451% nm 36% 26% 16%
Shares issued, ave. 217,240 216,635 215,072 215,072 215,072 215,07Weighted shares, ave. 217,814 217,468 215,782 215,782 215,782 215,78
EPS, Basic 0.16 0.86 1.09 1.48 1.86 2.16
EPS, Diluted 0.15 0.85 1.09 1.47 1.85 2.16
DPS, Basic 0.18 0.26 0.50 0.55 0.65 0.75
Gross margin 49% 58% 59% 57% 54% 56%
EBITDA 534,762 777,459 816,258 913,901 1,026,599 1,178,78
EBITDA margin 43% 51% 54% 52% 49% 51%
Operating margin 11% 19% 25% 25% 26% 27%
Pre-tax margin 5% 15% 22% 23% 24% 26%
Net margin 3% 12% 15% 18% 19% 20%
Tax rate, % 47% 19% 29% 23% 20% 22%
Source: Company data, Barclays Research
Income analysis:
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PGS - Cash flow
USD, '000 2011A 2012A 2013F 2014F 2015F 2016
Adjusted net income 33,690 185,543 234,261 317,552 399,763 465,24
Minorities 1,367 (2)
Adjusted depreciation 397,881 484,276 430,096 465,112 492,938 551,57
Change in working capital 10,638 40,311 (14,032) (13,072) (15,135) (11,609)
Other items 36,804 42,775 11,100
Cash flow from operations 480,380 752,903 661,426 769,592 877,566 1,005,210per share 2.21 3.48 3.08 3.58 4.08 4.67
Capital expenditure (299,060) (358,465) (465,000) (430,000) (510,000) (230,000)
Investment in multi-client (203,922) (297,444) (369,900) (345,000) (350,000) (370,000)
Dividends (41,510) (60,900) (107,536) (118,289) (139,797)
Net cash flow from operations (22,602) 55,484 (234,374) (112,944) (100,724) 265,414
Non recurring items:
Acquisitions (94)
Divestments 29 4,308 10,445
Proceeds from share issues 4,203 7,094
all other items (121,486) (66,883)
Surplus/Deficit (139,856) (91) (223,929) (112,944) (100,724) 265,414
Source: Company data, Barclays Research
PGS - Balance sheet
US$ thousands 2011A 2012A 2013F 2014F 2015F 2016F
Cash 518,390 482,624 482,624 482,624 482,624 482,62
Other current assets 442,213 439,949 468,862 549,909 643,746 715,723
Current liabilities (349,034) (367,913) (393,239) (461,214) (539,916) (600,283)
Net fixed assets 1,292,583 1,437,718 1,760,808 2,030,577 2,366,791 2,403,78
Intangibles 608,698 664,937 746,651 786,770 817,617 829,04
Other non current assets 275,295 248,755 237,655 237,655 237,655 237,655
Long term creditors (79,874) (67,494) (67,494) (67,494) (67,494) (67,494)Capital employed 2,708,271 2,838,576 3,235,867 3,558,826 3,941,023 4,001,060
Ordinary shareholders funds 1,771,498 1,921,720 2,095,081 2,305,098 2,586,571 2,912,021
Minority interests 192 39 39 39 39 3
Short term debt 183,107 979 979 979 979 97
Long term debt 753,474 915,838 1,139,767 1,252,711 1,353,434 1,088,021
Capital employed from debt 2,708,271 2,838,576 3,235,867 3,558,826 3,941,023 4,001,060
No. of shares in issue, mn 217 217 217 217 217 21
NBV per share 8.2 8.9 9.7 10.6 11.9 13.4
Net debt 418,191 434,193 658,122 771,066 871,789 606,37
Net debt per share 1.9 2.0 3.0 3.6 4.0 2.8
Ratios
RoE, % 1.9 10.0 11.7 14.4 16.3 16.
Net debt to equity, % 23.6 22.6 31.4 33.4 33.7 20.
Net debt to debt plus equity, % 15.4 15.3 20.3 21.7 22.1 15.
ROACE, % 3.6 8.6 8.7 10.2 11.3 12.3
Source: Company data, Barclays Research
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European Oil Services & Drilling Industry View: POSITIVE
Petroleum Geo-Services (PGS.OL) Stock Rating: OVERWEIGHT
Income statement ($k) 2012A 2013E 2014E 2015E CAGR Price (15-Jan-2014) NOK 73.40
Price Target NOK 93.00
Why Overweight?PGS is positioned to benefit fromthe increase we expect in seismic pricing.
Additionally, it is strengthening its position in the highend of the market with the construction of newgeneration Ramform vessels.
Upside case NOK 150.00
We assume that marine contract seismic pricingincreases at 20% per annum faster than ourestimates, towards the peak levels seen in 2008. Thisthen forms a high case for our DCF-based valuation.
Downside case NOK 60.00
We assume that marine contract seismic pricing fallsat 5% points worse than our estimates in 2014 and2015, back towards the trough levels of 2010. Thisthen forms a lower base for our DCF-based valuation.
Upside/Downside scenarios
POINT Quantitative Equity Scores
Source: POINT. The scores are valid as of the date of thisreport and are independent of the fundamental analysts'views. To view the latest scores, please go to the equitycompany page onBarclays Live.
Revenue 1,518,284 1,512,458 1,773,901 2,076,599 11.0%
EBITDA 777,459 816,258 913,901 1,026,599 9.7%
EBIT 293,785 371,761 448,789 533,661 22.0%
Pre-tax income 228,474 331,161 410,789 499,661 29.8%Net income (adj) 185,543 234,261 317,552 399,763 29.2%
EPS (adj) ($) 0.85 1.09 1.47 1.85 29.5%
Diluted shares (k) 217,468 215,782 215,782 215,782 -0.3%
DPS ($) 0.26 0.50 0.55 0.65 36.3%
Margin and return data Average
EBITDA margin (%) 51.2 54.0 51.5 49.4 51.5
EBIT margin (%) 19.3 24.6 25.3 25.7 23.7
Pre-tax margin (%) 15.0 21.9 23.2 24.1 21.0
Net (adj) margin (%) 12.2 15.5 17.9 19.3 16.2
ROA (%) 5.8 6.7 8.2 9.3 7.5
ROE (%) 10.0 11.7 14.4 16.3 13.1
ROACE (%) 10.5 10.3 11.8 13.0 11.4
Balance sheet and cash flow ($k) CAGR
Intangible fixed assets 664,937 746,651 786,770 817,617 7.1%
Cash and equivalents 482,624 482,624 482,624 482,624 0.0%
Total assets 3,273,983 3,696,600 4,087,535 4,548,433 11.6%
Short and long-term debt 916,817 1,140,746 1,253,690 1,354,413 13.9%
Other long-term l iabi lit ies 67,494 67,494 67,494 67,494 0.0%
Total liabilities 1,352,224 1,601,479 1,782,398 1,961,823 13.2%
Shareholders' equity 1,921,720 2,095,081 2,305,098 2,586,571 10.4%
Minorities 39 39 39 39 0.0%
Net debt/(funds) ($mn) 434,193 658,122 771,066 871,789 26.2%
Capital employed 2,355,952 2,753,243 3,076,202 3,458,399 13.7%
Change in working capital 40,311 -14,032 -13,072 -15,135 N/A
Cash flow from operations 752,903 661,426 769,592 877,566 5.2%
Capital expenditure -655,909 -834,900 -775,000 -860,000 N/ADividends paid -41,510 -60,900 -107,536 -118,289 N/A
Net cash from operations 55,484 -234,374 -112,944 -100,724 N/A
Free cash flow 96,994 -173,474 -5,408 17,566 -43.4%
Net cash surplus/(deficit) -91 -223,929 -112,944 -100,724 N/A
Valuation and leverage metrics Average
P/E (adj) (x) 14.1 11.1 8.2 6.5 10.0
EV/EBITDA (x) 3.9 4.0 3.7 3.4 3.8
Equity FCF yield (%) 3.7 -6.7 -0.2 0.7 -0.6
P/BV (x) 1.4 1.2 1.1 1.0 1.2
P/Sales (x) 1.7 1.7 1.5 1.3 1.5
Dividend yield (%) 2.1 4.1 4.6 5.4 4.1
Net debt/capital (%) 18.4 23.9 25.1 25.2 23.2
Total debt/capital (%) 38.9 41.4 40.8 39.2 40.1Net debt/equity (%) 22.6 31.4 33.4 33.7 30.3
Selected operating metrics (NOKmn)
Backlog ($mn) 829 N/A N/A N/A
Order intake 0 0 0 0
Source: Company data, Barclays ResearchNote: FY End Dec
Value
Quality
Sentiment
Low High
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Polarcus (EW, PT NOK 6.20 from NOK7)
Right things, but tough market
Polarcus continues to do the right things, in our opinion. It has focused on debt reduction
over the year and renegotiated its covenants, enabling it to take on more, if still small
amounts, of multi-client work. However, with high gearing, negative blips in pricing hit the
company hard. In this respect 26% idle time in 4Q13 on top of weakened pricing will likely
have a large impact on earnings we cut our FY 2013 net income forecast by 12%. In
addition, we reduce our estimates for marine late sales, given limited success so far,
reducing our 2014F EPS by over 20%, albeit caUS$15mn in absolute terms. The problem
that we foresee is that with a weak 4Q13 and likely 1Q14, the companys rolling 12-month
debt service ratio covenant will, on our numbers, come under pressure, albeit not broken, as
the limit steps up to 2.25x from 2x in 1Q14. This should not be an issue once seasonal
pricing hits in the summer months, and given the transitory nature and the relationship the
company has with its lenders, we do not see it as an issue. However, with sharply reduced
numbers our price target falls to NOK6.20 a share, and while still offering 37% upside
potential, with the balance sheet likely to once again be a concern, we downgrade to Equal
Weight.
Small move, big swings: We have argued in the past that small moves in pricing for
Polarcus lead to large swings in earnings, partly because we are dealing with relatively small
numbers and partly because of the companys high interest charge. For example, in 2013
we expect over 60% of EBIT to go toward debt service. This burden will reduce over time
and the company is making strides to accelerate that where possible, but in the meantime,
by moving towards a flatter outlook for pricing, we reduce our estimates sharply.
Covenants again: In 3Q13 the company renegotiated its debt covenants. The key is the
debt service ratio (EBITDA/(total interest+principal repayments)). To its credit, the company
gives its debt service requirement and hence it is purely a matter of looking at the last
twelve months EBITDA. Through 2013 the ratio has been running at ca 2.1x versus a limit
of 2x. Since we expect pricing to be flat around the turn of the year then as the ratio steps
up to 2.25x, a level not recorded in the past twelve months, then the rolling nature of thecovenant could become an issue. We would note that this is only transitory and on our
numbers the company is slight slightly above it, given a 10% step down in debt service
requirements at the same time. In addition, a lot depends on the multi-client late sales. The
company now has a library of US$85mn, with a gross investment over US$100mn by year
end on our numbers, and the ability now, with revised covenants, to allocate more capacity
to the business. As yet, however, late sales have amounted to just US$17mn, albeit, with
such a small library sales will predictably be lumpy. Our numbers do include some sales over
the 4Q13-1Q14 period, but not to the level that a US$85mn library would imply.
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Debt service ratio limits appear achievable
0
1
2
3
4
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
x
Debt service ratio (EBITDA/int expense) New Debt service ratio Limit
Source: Company data, Barclays Research
Earnings cut by 7-26% in 2014-2015F: Due to the operating and financial leverage of this
small cap stock, we are cutting our 2014F EPS by 26% and 2015F by 7%. Thus, we are
reducing our DCF-based price target to NOK 6.2/share from NOK7/share previously and
downgrade to Equal Weight.
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Income statement
$ mn 2011A 2012A 2013F 2014F 2015F 2016F
Contract revenues 274,757 495,218 504,509 493,360 503,112 523,464
Multi-client pre-funding sales 20,572 14,818 24,153 36,000 51,000 51,000
Multi-client late sales 0 15,080 8,961 25,000 30,000 35,000
Other income 3,248 4,171 529 0 0 0
Total revenues 298,577 529,287 538,152 554,360 584,112 609,464
Vessel operating expenses (188,932) (312,680) (304,207) (306,714) (292,635) (295,135)
SG&A (33,327) (26,343) (30,139) (28,000) (30,000) (30,000)EBITDA 76,318 190,264 203,806 219,646 261,476 284,328
Depreciation and Amortisation (60,800) (91,461) (91,268) (97,461) (101,440) (103,690)Impairments and exceptiona s 0 (7,405) 0 0 0 0
EBIT 15,518 91,398 112,538 122,184 160,036 180,638
EBIT margin 20.9% 22.0% 27.4% 29.6%
Financial income 5,762 10,093 6,289 2,800 3,000 3,000
Financial expense (59,472) (93,449) (79,114) (58,080) (52,774) (39,502)
Other financial items 6,720 3,650 (73) 0 0 0
Profit before tax (31,472) 11,692 39,561 66,904 110,262 144,137
Taxation (25) (1,864) 0 (4,683) (8,270) (14,414)
Tax rate, % 0% 16% 0% 7% 8% 10%
Minorities 0.0 0.0 0.0 0.0 0.0 0.0
Net income reported (31,497) 9,828 36,255 62,221 101,993 129,723
Net income adjusted (31,497) 9,828 36,255 62,221 101,993 129,723
Average number of shares 420,790 498,863 507,196 507,196 507,196 507,196
Diluted number of shares * 431,592 577,229 585,562 585,562 585,562 547,870
EPS, basic (0.07) 0.02 0.07 0.12 0.20 0.26
EPS, diluted adjusted, US$ (0.09) 0.02 0.07 0.12 0.19 0.24
EPS, diluted adjusted, NOK (0.5) 0.1 0.4 0.7 1.1 1.5Source: Company data, Barclays Research. * excludes warrants and the 2008 co nvertible, 2011 co nvertible anti-dilutive in 2011
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Cash flow
$ mn 2011A 2012A 2013F 2014F 2015F 2016F
Adjusted net income (31,497) 9,828 36,255 62,221 101,993 129,723
Minorities 0 0 0 0 0 0
Depreciation & amortisation 77,241 91,461 91,268 97,461 101,440 103,690
Change in working capital (16,315) 10,813 (54,833) 16,981 21,019 (1,268)
Other items (35,018) 24,100 58,706 4,418 54,233 57,275
Cash flow from operations (5,589) 136,202 131,396 176,663 278,685 289,420
per share (0.0) 0.3 0.3 0.3 0.5 0.6
Capital expenditure (299,990) (321,749) (62,119) (44,000) (46,000) (46,000)
Investment in multi-client (17,282) (41,486) (45,186) (60,000) (85,000) (85,000)
Dividends 0 0 0 0 0 0
Net cash flow from operations (322,861) (227,033) 24,091 72,663 147,685 158,420
Non recurring items:
Acquisitions 0 (4,846) 0 0 0 0
Divestments 0 0 128,003 0 0 0
Proceeds from share issues 41,106 38,935 16 0 0 0
all other items (9,853) (6,846) (20,208) (13,333) (13,333) (13,333)
Surplus/Deficit (291,608) (199,790) 131,902 59,330 134,352 145,087Source: Company data, Barclays Research
Balance sheet
$ mn 2011A 2012A 2013F 2014F 2015F 2016F
Cash 84,019 52,191 67,012 81,818 81,057 125,001
Other current assets 112,406 268,001 129,242 117,192 116,822 121,893
Current liabilities (58,618) (89,687) (62,036) (66,967) (87,617) (91,420)
Net fixed assets 872,213 999,825 987,857 963,506 944,966 926,426
Other non current assets 28,060 0 0 0 0 0
Other non current liabilities (381) (185) (9,257) 4,076 8,494 8,494
Capital employed 1,048,881 1,282,562 1,214,733 1,232,429 1,257,960 1,343,815
Ordinary shareholders funds 429,756 481,407 523,110 585,330 687,323 817,046
Minority interests 0 0 0 0 0 0
Short term debt 38,274 109,547 36,061 36,061 36,061 36,061
Long term debt 580,850 691,607 655,563 611,038 534,576 490,708
Capital employed from debt 1,048,880 1,282,561 1,214,733 1,232,429 1,257,960 1,343,815
No. of shares in issue 420,790 498,863 507,196 507,196 507,196 507,196
NBV per share 1.0 1.0 1.0 1.2 1.4 1.6
Net debt (incl leases) 535,105 748,963 624,611 565,281 489,580 401,768
Net debt per share 1.3 1.5 1.2 1.1 1.0 0.8
Ratios
Net debt to equity, % 124.5 155.6 119.4 96.6 71.2 49.2
Net debt to debt plus equity, % 51.0 58.4 51.4 45.9 38.9 29.9
RoE,% (7.7) 2.2 7.2 11.2 16.0 17.2
RoACE, % 1.6 6.6 8.7 9.3 11.9 12.5Source: Company data, Barclays Research
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European Oil Services & Drilling Industry View: POSITIVE
Polarcus Ltd. (PLCS.OL) Stock Rating: EQUAL WEIGHT
Income statement ($k) 2012A 2013E 2014E 2015E CAGR Price (15-Jan-2014) NOK 4.55
Price Target NOK 6.20
Why Equal Weight?Despite short-term pressure onmarine contract pricing, we see it continuing to move
higher and the company deleveraging rapidly.
Upside case NOK 16.00
We assume that marine contract seismic pricingincreases 17-20% points per annum more than ourestimates in 2014 and 2015, towards peak levels seenin 2008, and this then provides a higher base for ourDCF-based valuation.
Downside case NOK 2.00
We assume that marine contract seismic pricing fallsat 10% points worse than our estimates in 2014 and2015, towards trough levels seen in 2010, and thisthen provides a lower base for our DCF-basedvaluation.
Upside/Downside scenarios
POINT Quantitative Equity Scores
Source: POINT. The scores are valid as of the date of thisreport and are independent of the fundamental analysts'views. To view the latest scores, please go to the equitycompany page onBarclays Live.
Revenue 529,287 538,152 554,360 584,112 3.3%
EBITDA 190,264 203,806 219,646 261,476 11.2%
EBIT 91,398 112,538 122,184 160,036 20.5%
Pre-tax income 11,692 39,561 66,904 110,262 111.3%Net income (adj) 9,828 36,255 62,221 101,993 118.1%
EPS (adj) ($) 0.02 0.07 0.12 0.19 114.7%
Diluted shares (k) 577,229 585,562 585,562 585,562 0.5%
DPS ($) 0.00 0.00 0.00 0.00 N/A
Margin and return data Average
EBITDA margin (%) 35.9 37.9 39.6 44.8 39.6
EBIT margin (%) 17.3 20.9 22.0 27.4 21.9
Pre-tax margin (%) 2.2 7.4 12.1 18.9 10.1
Net (adj) margin (%) 1.9 6.7 11.2 17.5 9.3
ROA (%) 0.8 2.7 4.8 7.7 4.0
ROE (%) 2.2 7.2 11.2 16.0 9.2
ROACE (%) 7.0 9.2 9.9 12.7 9.7
Balance sheet and cash flow ($k) CAGR
Intangible fixed assets 52,417 101,915 132,805 194,238 54.7%
Cash and equivalents 52,191 67,012 81,818 81,057 15.8%
Total assets 1,372,434 1,286,026 1,295,320 1,337,083 -0.9%
Short and long-term debt 801,154 691,624 647,099 570,637 -10.7%
Other long-term liabilities 185 186 186 186 0.2%
Total l iabilities 891,026 753,846 714,252 658,440 -9.6%
Shareholders' equity 481,407 523,110 585,330 687,323 12.6%
Minorities 0 0 0 0 N/A
Net debt/(funds) 748,963 624,611 565,281 489,580 -13.2%
Capital employed 1,230,370 1,147,721 1,150,612 1,176,903 -1.5%
Change in working capital 10,813 -54,833 16,981 21,019 24.8%
Cash flow from operations 136,202 131,396 176,663 278,685 27.0%
Capital expenditure -363,235 -107,305 -104,000 -131,000 N/ADividends paid 0 0 0 0 N/A
Net cash from operations -227,033 24,091 72,663 147,685 N/A
Free cash flow -227,033 24,091 72,663 147,685 N/A
Net cash surplus/(deficit) -199,790 131,902 59,330 134,352 N/A
Valuation and leverage metrics Average
P/E (adj) (x) 38.9 10.8 6.3 3.9 15.0
EV/EBITDA (x) 5.9 4.9 4.3 3.3 4.6
Equity FCF yield (%) -60.9 6.4 19.2 38.9 0.9
P/BV (x) 0.8 0.7 0.6 0.6 0.7
P/Sales (x) 0.7 0.7 0.7 0.6 0.7
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Net debt/capital (%) 60.9 54.4 49.1 41.6 51.5
Total debt/capital (%) 65.1 60.3 56.2 48.5 57.5Net debt/equity (%) 155.6 1 19.4 96.6 71.2 110.7
Selected operating metrics ($k)
Backlog 265,000 N/A N/A N/A
Order intake 0 0 0 0
Source: Company data, Barclays ResearchNote: FY End Dec
Value
Quality
Sentiment
Low High
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TGS (UW, PT NOK 180, from NOK 190)
Steady, but investments down
TGS remains, in our opinion, one of the best-run seismic companies. And, following the
disappointment of 3Q13, its latest update is encouraging. Late sales in 4Q13 surpassed
short-term expectations, bucking what we feel will be the trend elsewhere, highlighting
once again, to us that it is the quality of multi-client not the quantity that counts. However,
when quality is consistent, for investors it is the quantity that drives share price. Hence, an
investment level of US$390-460mn, encompassing our US$450mn estimate, while
encouraging that it was not a further disappointment, is still some 20% off where we
thought it might be a year ago. Less investment equals less value generation and with
limited upside to our reduced NOK180/share price target, we remain Underweight.
Investment equals value: We believe TGS is doing the right thing. It has scaled back its
investment level, partly in the face of increased competition, and continues to focus on the
best return potential projects. Its focus and lack of assets allow it to be rigorous. However,
the value of TGS is largely a mathematical exercise. It is to us an investment vehicle with a
defined return. That return, while under pressure, appears to be holding, but the investment
level has fallen. The top end of the range for 2014 is some 20% lower than guidance for
2013 a year ago. This level, in our opinion, drives the share price and hence, as the chart
below shows, we see limited upside potential.
TGS total shareholder returns versus investment guidance
0
100
200
300
400
500
600
0
2
4
6
8
10
12
14
16
Guidance mid pnt $mn indexed share price
Source: Company data, Datastream, Barclays Research
Right areas for late sales:The key to the multi-client business, in our opinion, is having the
right data in the right place, at the right time. TGS's business model is dedicated to this. It
appears also that 2014 could be good for late sales as well. The announced central Gulf of
Mexico sale in March 2014, rounds in Nova Scotia in April 2014, the 23rd round in Norway
in 2H14 and the 28th licence round in the UK in 1H14 all bode well. Furthermore, the
potential Madagascar round in 1H14 could help the company.
Ahead of the curve on vessels for 1H13: From its published activity chart the company
looks to us to have been busy in securing early capacity, taking advantage of the weak
4Q13 contract market. Furthermore, the company believes that pricing may wane and help
it later in the year. 1Q14 looks particularly busy with five 3D vessels, two 2D vessels and
three land crews active. Furthermore, the company has secured capacity for the North Sea
summer season, protecting against any price spike that could occur, however unlikely.
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Earnings left largely unchanged: TGSs recent guidance for 2014 was in line with our
expectations, leading to minimal EPS changes of a 2% reduction in 2014 and 1% increase in
2015. However, beyond that we have implied a lower level of investments in the medium
term, leading to a cut to our DCF-based price target of NOK180/share from NOK190/share
previously and we remain Underweight.
Income statement
US$ '000 2010A 2011A 2012A 2013F 2014F 2015F
Net late sales 380,300 419,400 563,825 644,400 645,000 677,250Net pre-funding 162,700 147,400 338,200 178,400 210,000 237,500
Other (incl. Stingray) 25,300 41,700 30,200 59,078 62,000 65,100
Exceptional 0 0 0 0 0 0
Total revenues 568,263 608,567 932,225 881,878 917,000 979,850
Operating costs (83,496) (119,672) (130,148) (146,557) (150,000) (155,000)
EBITDA 484,767 488,895 802,090 735,321 767,000 824,850
Multi-client amortisation (247,874) (241,509) (387,305) (345,044) (376,200) (402,490)
Other depreciation & amortisation (9,785) (6,984) (12,480) (14,453) (14,000) (14,000)
EBIT 227,108 240,401 402,305 375,824 376,800 408,360
Net financing income 1,452 2,975 4,813 2,559 3,700 4,200
Other financial items (815) (2,229) 432 (4,513) 0 0
Profit before tax 227,745 241,147 407,550 373,870 380,500 412,560
Taxation (71,962) (70,459) (123,017) (112,612) (114,150) (123,768)
Tax rate, % 32% 29% 30% 30% 30% 30%
Minorities 0 0 0 0 0 0
Net income reported 155,783 170,688 284,533 261,258 266,350 288,792
Net income adjusted 155,368 171,125 284,533 261,258 266,350 288,792
Average number of shares 102,595 101,984 101,827 101,827 101,827 101,827
Diluted number of shares 104,406 103,416 103,166 103,166 103,166 103,166
EPS, basic reported, US$ 1.52 1.67 2.79 2.57 2.62 2.84
EPS, diluted reported, US$ 1.49 1.65 2.76 2.53 2.58 2.80
EPS, diluted adjusted, US$ 1.49 1.65 2.76 2.53 2.58 2.80
EPS, diluted adjusted, NOK 9.0 9.3 16.0 14.8 15.4 16.7
DPS, NOK 5.0 6.0 8.0 8.5 8.8 8.3
Payout ratio 55% 64% 49% 58% 58% 50%Source: Company data, Barclays Research
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Cash flow
US$ '000 2010A 2011A 2012A 2013F 2014F 2015F
Adjusted net income 155,368 171,125 284,533 261,258 266,350 288,792
Minorities 0 0 0 0 0 0
Depreciation & amortisation 257,659 248,493 399,785 359,497 390,200 416,490
Change in working capital 24,503 16,182 (16,168) (4,526) (3,512) (6,285)
Other items (28,762) 50,664 (5,105) (6,111) (4,000) (4,500)
Cash flow from operations 408,768 486,464 663,045 610,118 649,038 694,497
per share 4.0 4.8 6.5 6.0 6.4 6.8
Capital expenditure (5,201) (13,078) (25,927) (44,000) (44,000) (25,000)
Investment in multi-client (271,323) (283,217) (482,691) (436,495) (420,000) (475,000)
Dividends (64,742) (93,407) (103,325) (140,033) (148,273) (151,163)
Net cash flow from operations 67,502 96,762 51,102 (10,410) 36,764 43,334
Non recurring items:
Acquisitions (3,625) (43,851) (75,750) 0 0 0
Divestments 375 0 0 0 0 0
Proceeds from share issues (25,875) (14,263) 6,563 0 0 0
all other items 1,865 2,677 4,598 6,111 4,000 4,500
Surplus/Deficit 39,867 41,325 (13,487) (4,299) 40,764 47,834Source: Company data, Barclays Research
Balance sheet
US$ '000 2010A 2011A 2012A 2013F 2014F 2015F
Cash 290,185 335,709 338,673 334,374 375,139 422,973
Other current assets 312,542 296,698 461,876 418,172 434,679 464,219
Current liabilities (207,743) (210,241) (374,525) (326,295) (339,290) (362,545)
Net fixed assets 15,245 19,562 32,025 63,072 94,572 107,072
Intangibles 545,149 644,263 818,390 908,341 950,641 1,021,651
Other non current assets 53,796 29,331 34,725 34,725 34,725 34,725
Other non current liabilities (100,402) (142,300) (142,804) (142,804) (142,804) (142,804)
Capital employed 908,772 973,022 1,168,360 1,289,585 1,407,662 1,545,291
Ordinary shareholders funds 908,771 973,021 1,168,360 1,289,585 1,407,662 1,545,291
Minority interests 0 0 0 0 0 0
Short term debt 0 0 0 0 0 0Long term debt 0 0 0 0 0 0
Capital employed from debt 908,771 973,021 1,168,360 1,289,585 1,407,662 1,545,291
No. of shares in issue 102,595 101,984 101,827 101,827 101,827 101,827
NBV per share (US$) 8.9 9.5 11.5 12.7 13.8 15.2
Net debt (290,185) (335,709) (338,673) (334,374) (375,139) (422,973)
Net debt per share (US$) (2.8) (3.3) (3.3) (3.3) (3.7) (4.2)
Ratios
RoE,% 17.8 18.2 26.6 21.3 19.7 19.6
RoACE, % (gross) 17.7 18.1 26.2 21.4 19.6 19.4Source: Company data, Barclays Research
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European Oil Services & Drilling Industry View: POSITIVE
TGS-NOPEC Geophysical Company ASA (TGS.OL) Stock Rating: UNDERWEIGHT
Income statement ($k) 2012A 2013E 2014E 2015E CAGR Price (15-Jan-2014) NOK 174.00
Price Target NOK 180.00
Why Underweight?Based on our sum-of-the-partsanalysis, we believe that there is limited upside to the
value attributed to TGS's future investments.
Upside case NOK 260.00
Group revenue growth is 10% in 2013 -2015, weassume a long-term sales to capex ratio of 2.2x andthe stock trades at a 20% premium to DCF.
Downside case NOK 110.00
We assume that TGS will attain a long-term sales tocapex ratio of 2.0x. Less impressive growth leads tothe stock trading only in line with DCF.
Upside/Downside scenarios
POINT Quantitative Equity Scores
Source: POINT. The scores are valid as of the date of thisreport and are independent of the fundamental analysts'views. To view the latest scores, please go to the equitycompany page onBarclays Live.
Revenue 932,225 881,878 917,000 979,850 1.7%
EBITDA 802,090 735,321 767,000 824,850 0.9%
EBIT 402,305 375,824 376,800 408,360 0.5%
Pre-tax income 407,550 373,870 380,500 412,560 0.4%Net income (adj) 284,533 261,258 266,350 288,792 0.5%
EPS (adj) ($) 2.76 2.53 2.58 2.80 0.5%
Diluted shares (k) 103,166 103,166 103,166 103,166 0.0%
DPS (NOK) 8.0 8.5 8.8 8.3 1.3%
Margin and return data Average
EBITDA margin (%) 86.0 83.4 83.6 84.2 84.3
EBIT margin (%) 43.2 42.6 41.1 41.7 42.1
Pre-tax margin (%) 43.7 42.4 41.5 42.1 42.4
Net (adj) margin (%) 30.5 29.6 29.0 29.5 29.7
ROA (%) 18.9 15.2 14.6 14.7 15.8
ROE (%) 26.6 21.3 19.7 19.6 21.8
ROACE (%) 38.9 29.5 26.6 26.6 30.4
Balance sheet and cash flow ($k) CAGR
Intangible fixed assets 818,390 908,341 950,641 1,021,651 7.7%
Cash and equivalents 338,673 334,374 375,139 422,973 7.7%
Total assets 1,685,689 1,758,684 1,889,756 2,050,639 6.8%
Short and long-term debt 0 0 0 0 N/A
Other long-term liabilities 142,804 142,804 142,804 142,804 0.0%
Total l iabilities 517,329 469,099 482,094 505,349 -0.8%
Shareholders' equity 1,168,360 1,289,585 1,407,662 1,545,291 9.8%
Minorities 0 0 0 0 N/A
Net debt/(funds) -342,362 -338,063 -378,828 -426,662 N/A
Capital employed 825,998 951,522 1,028,834 1,118,629 10.6%
Change in working capital -16,168 -4,526 -3,512 -6,285 N/A
Cash flow from operations 663,045 610,118 649,038 694,497 1.6%
Capital expenditure -508,618 -480,495 -464,000 -500,000 N/ADividends paid -103,325 -140,033 -148,273 -151,163 N/A
Net cash from operations 51,102 -10,410 36,764 43,334 -5.3%
Free cash f low 154,427 129,623 185,038 194,497 8.0%
Net cash surplus/(deficit) -13,487 -4,299 40,764 47,834 N/A
Valuation and leverage metrics Average
P/E (adj) (x) 10.4 11.3 11.1 10.2 10.8
EV/EBITDA (x) 3.2 3.5 3.3 3.0 3.3
Equity FCF yield (%) 5.3 4.5 6.4 6.7 5.7
P/BV (x) 2.5 2.3 2.1 1.9 2.2
P/Sales (x) 3.1 3.3 3.2 3.0 3.1
Dividend yield (%) 4.6 4.9 5.1 4.8 4.8
Net debt/capital (%) -41.0 -35.1 -36.5 -37.8 -37.6
Total debt/capital (%) 0.0 0.0 0.0 0.0 0.0Net debt/equity (%) -29.0 -25.9 -26.6 -27.4 -27.2
Selected operating metrics ($k)
Backlog 142,700 N/A N/A N/A
Order intake 0 0 0 0
Source: Company data, Barclays ResearchNote: FY End Dec
Value
Quality
Sentiment
Low High
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Comparative valuations
PE pre g/w - historic at year high 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013F 2014F 2015F
Aker Solutions 34.8 21.6 29.4 9.2 17.5 43.6 16.4 24.8 14.0 11.4
CGGVeritas 18.6 24.7 15.8 nm nm nm 72.6 39.7 13.1 9.7
Hunting 16.8 19.2 35.9 33.8 27.1 21.1 16.8 16.5 11.2 9.9
Maire Tecnimont n/a 39.0 32.8 36.8 45.1 nm nm 22.5 8.8 5.5
Petrofac 21.3 19.3 15.2 15.2 19.6 17.1 15.3 14.2 9.8 8.2
ex IES n/a n/a n/a n/a n/a 14.2 14.3 14.5 10.2 9.2
Petroleum Geo-Services 10.4 11.7 13.7 13.8 nm 110.6 21.3 16.5 8.2 6.5
Polarcus n/a n/a n/a nm nm nm 64.4 18.5 6.2 3.9
Saipem 24.2 23.9 18.6 14.6 19.9 18.5 19.5 (42.1) 12.4 8.9
SBM Offshore 21.8 21.9 25.5 16.5 15.2 nm (16.7) 13.2 7.4 5.3
Seadrill 29.3 19.4 nm 8.6 12.4 20.4 17.2 14.3 9.4 8.0
Subsea 7 SA 18.5 42.1 16.5 12.2 21.1 22.1 16.6 25.2 9.9 8.3
Technip 38.3 56.7 14.7 13.0 18.8 17.5 20.4 19.6 11.3 9.9
Tecnicas Reunidas 23.5 32.8 22.7 15.4 26.3 19.6 15.4 15.6 13.7 12.1
TGS 15.1 16.5 9.5 11.8 15.2 18.4 12.7 15.6 11.0 10.2
Wood Group 21.4 23.9 17.6 13.1 21.8 16.5 16.3 14.1 9.3 9.0
AVG (ex Seismic, SDRL, SPM (2013)) 24.8 26.3 21.8 16.1 20.6 18.8 16.8 16.1 10.8 8.9
EV/EBITDA adj1- historic at year high 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013F 2014F 2015F
Aker Solutions 16.2 13.5 15.2 6.9 9.8 15.5 9.1 9.8 7.6 6.4
CGGVeritas 7.8 10.8 8.2 9.5 15.9 12.9 9.7 9.7 6.6 5.7
Hunting 7.1 9.8 11.4 8.3 10.8 13.3 10.4 9.6 6.8 5.8
Maire Tecnimont n/a 20.3 20.9 20.3 20.8 nm (8.6) 9.8 7.6 4.6
Petrofac 11.5 10.8 10.1 8.6 12.1 10.9 11.3 10.4 7.0 5.9
Petroleum Geo-Services 9.8 11.7 8.9 6.1 12.6 13.9 10.1 8.6 5.5 4.9
Polarcus n/a n/a n/a n/a 20.1 18.0 7.8 6.8 4.9 3.9
Saipem 13.3 13.6 11.1 9.0 11.1 9.7 10.2 26.7 8.1 5.0
SBM Offshore 11.4 12.2 13.6 7.8 7.9 8.6 9.6 8.7 6.7 5.4
Seadrill 24.5 18.8 11.0 10.2 11.4 11.9 13.1 12.4 9.0 8.0
Subsea 7 SA 11.1 13.2 9.4 5.6 8.4 8.8 8.0 8.7 4.2 3.4
Technip 13.7 17.3 7.2 4.9 8.5 8.7 9.7 9.2 6.4 4.6
Tecnicas Reunidas 26.2 29.3 19.8 11.3 15.2 14.9 11.4 10.4 8.6 7.0
TGS 9.6 10.6 6.2 7.5 8.5 11.2 7.8 9.4 6.5 5.9
Wood Group 10.9 13.0 10.4 7.4 10.9 11.9 10.3 9.1 6.4 5.3
AVG (ex Seismic, SDRL, (SPM (2013)) 13.1 14.9 12.0 8.0 10.7 11.5 10.1 11.3 6.9 5.51Adjus ted for cash downpayments - cash level set to 10% o f SF where prepayments n umber no t availa ble
Seismic multiples based on E BITDA minus multi-client amortization
Source: Company data, Barclays Research estimates (Seadrill covered by James W est) Price as per 15 January 2014
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Valuation Methodology and Risks
European Oil Services & Drilling
Aker Solutions (AKSO NO / AKSO.OL)
Valuation Methodology:Our price target for Aker Solutions is derived from a DCF-based methodology. We have used our forecasted cash flowsfor the 2013-2015F period and thereafter assumed a cyclical growth (10% pa) until a turn in 2017 when revenues fall (10% pa) until 2018.Margins used for 2016-18F period are comparable to peers. Our terminal value is then taken on a (WACC-g) basis assuming 3% long-termgrowth. Our discount rate used is 11%, more conservative thn the 10% that we use for the sector. The valuation is then checked against
historical trading multiples.Risks which May Impede the Achievement of the Barclays Research Price Target:All our estimates are based on Barclays Capital European Oil& Gas equity research teams estimates for future energy supply-demand patterns, exchange rates, commodity prices and the availability ofassets within the oils service industry. These estimates are subject to revision and may be materially different from eventual out comes. Inaddition workload is executed on a global basis in many regions with unstable regimes. All estimates assume no marked changes in the currentpolitical landscape. For Aker Solutions specifically, some earnings are exposed to lump sum contracts, which if executed incorrectly can producesignificant negative margins. In addition backlog award can be lumpy and profit recognition on projects is often in a non-linear fashion. As aresult there may be periodic swings in profitability.
AMEC plc (AMEC LN / AMEC.L)
Valuation Methodology:Rating Suspended
Risks which May Impede the Achievement of the Barclays Research Price Target:Rating Suspended
CGG (CGG FP / GEPH.PA)
Valuation Methodology:CGGVeritas: Our price target for CGGVeritas has been derived from a DCF-based methodology. We have used our
forecasted cash flows for the 2013-2015F period and thereafter assumed a cyclical growth (15% pa) until a turn in 2017 when revenues fall(10% pa) until 2019. Margins used for 2016-19F period are comparable to those over the 2004-2008 period. Our terminal value is then taken ona (WACC-g) basis assuming 3% long-term growth. Our discount rate used is 11%, ahead of the 10% that we use for the sector to account forthe extreme cyclicality seen in the seismic industry. The valuation is then checked against historical trading multiples.
Risks which May Impede the Achievement of the Barclays Research Price Target:All our estimates are based on Barclays Capital European Oiland Gas equity research teams estimates for future energy CGGVeritas: All our estimates are based on Barclays Capital European Oil & Gas equityresearch teams estimates for future energy supply-demand patterns, exchange rates, commodity prices and the availability of assets within theoils service industry. These estimates are subject to revision and may be materially different from eventual out comes. In addition workload isexecuted on a global basis in many regions with unstable regimes. All estimates assume no marked changes in the current political landscape.For CGGVeritas specifically the earnings in seismic companies depend on the supply of new boats. Also the company executes multi-client work,using its own capital. Future sales of this work may materially change results.
Hunting (HTG LN / HTG.L)
Valuation Methodology:Our price target for Hunting has been derived from a DCF-based methodology. We have used our forecasted cash flowsfor the 2013-2015F period and thereafter assumed a cyclical growth (15% pa) until a turn in 2017 when revenues fall (10% pa) until 2018. Ourterminal value is then taken on a (WACC-g) basis assuming 3% long-term growth. Our discount rate used is 10%, in-line with the 10% that weuse for the sector. The valuation is then checked against historical trading multiples.
Risks which May Impede the Achievement of the Barclays Research Price Target:All our estimates are based on Barclays Capital European Oil& Gas equity research teams estimates for future energy supply-demand patterns, exchange rates, commodity prices and the availability ofassets within the oils service industry. These estimates are subject to revision and may be materially different from eventual outcomes. Allestimates assume no marked changes in the current political landscape.
Maire Tecnimont (MT IM / MTCM.MI)
Valuation Methodology:Maire Tecnimont: Our price target for Maire Tecnimont has been derived from a DCF-based methodology. We haveused our forecasted cash flows for the 2012-2014F period and thereafter assumed a cyclical growth (10% pa) until a turn in 2015 whenrevenues fall (10% pa) until 2017. Margins used for 2015-17F period are comparable to those over the 2006-2008 period. Our terminal value isthen taken on a (WACC-g) basis assuming 3% long-term growth. Our discount rate used is 12%, ahead of the 10% that we use for the sector toaccount for its low free float and liquidity. The valuation is then checked against historical trading multiples.
Risks which May Impede the Achievement of the Barclays Research Price Target:All our estimates are based on Barclays Capital European Oil& Gas equity research teams estimates for future energy supply-demand patterns, exchange rates, commodity prices and the availability of
assets within the oils service industry. These estimates are subject to revision and may be materially different from eventual out comes. Inaddition workload is executed on a global basis in many regions with unstable regimes. All estimates assume no marked changes in the currentpolitical landscape. For Maire Tecnimont specifically, earnings are exposed to lump-sum contracts, which if executed incorrectly can producesignificant negative margins. In addition backlog award can be lumpy and profit recognition on projects is often in a non-linear fashion. As aresult there may be periodic swings in profitability.
Petrofac (PFC LN / PFC.L)
Valuation Methodology:Our price target for Petrofac has been derived from a DCF-based methodology. For the non-IES businesses we haveused our forecasted cash flows for the 2013-2016F period and thereafter assumed a cyclical growth (15% pa) until a turn in 2017 whenrevenues fall (15% pa) until 2018. Margins used for 2016-18F period are comparable to those over the 2004-2009 period. Our terminal value isthen taken on a (WACC-g) basis assuming 3% long-term growth. Our discount rate used is 10%, in line with the 10% that we use for the sector.For IES we have used and asset-by-asset sum-of-the-parts, methodology using DCF(10%) where appropriate on a field based model or bookvalue of non E&P assets. We then apply a 30% premium to DCF ex-IES based on historical trading patterns within the sector and the 0-30% thatwe have used for the sector. The valuation is then checked against historical trading multiples.
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Valuation Methodology and Risks
Risks which May Impede the Achievement of the Barclays Research Price Target:All our estimates are based on Barclays Capital European Oil& Gas equity research teams estimates for future energy supply-demand patterns, exchange rates, commodity prices and the availability ofassets within the oils service industry. These estimates are subject to re