OSLO, Norway, July 28, 2005 (PRIMEZONE) -- Petroleum Geo-Services ASA ("PGS" or the "Company") (OSE:PGS) (NYSE:PGS) announced today its unaudited second quarter 2005 results under U.S. GAAP.
- Operating profit improved substantially: Operating profit of $50.2 million, up $51.0 million compared to Q2 2004 (pro forma excluding Pertra). Pertra was sold March 1, 2005
- Further improved Marine contract margins, strong multi-client late sales: Contract margins increased further from Q1, despite marginal North Sea weather conditions. Q2 muli-client data sales were strong offshore West Africa, in the North Sea and Gulf of Mexico. Order backlog and current bidding levels form the basis for expectations of improved contract performance throughout the year and a continued strong market into 2006. Full year 2005 multi-client late sales are now expected to be at approximately 2004 levels
- FPSO performance impacted by previously announced matters: Production operating profits were negatively impacted by production disturbances caused by water separation issues on Petrojarl Foinaven/Foinaven field and high expenditures relating to maintenance projects which are typically performed in Q2 and Q3
- Debt repayment of $205 million: In April 2005, the Company repaid $175 million of the $250 million 8% Senior Notes, due 2006, at 102% of par value. In addition various capital leases were repaid throughout the quarter
Key figures as reported
Quarter ended Six months ended Year
June 30, June 30, ended
December
31,
2005 2004 2005 2004 2004
Unaudited Unaudited Unaudited Unaudited Audited
(In millions of
dollars)
Revenues $ 292.8 $ 271.5 $ 577.8 $ 519.2 $ 1,129.5
Operating 49.7 10.8 239.3 46.3 35.7
profit (loss)
Net income 23.7 (33.9) 179.2 (45.9) (134.7)
(loss)
Earnings (loss) 0.40 (0.56) 2.99 (0.76) (2.25)
per share ($
per share)
Adjusted EBITDA 99.8 96.0 191.4 195.2 412.2
(as defined)
Net cash 23.2 54.8 96.8 107.3 282.4
provided by
operating
activities
Cash investment (21.0) (9.6) (30.8) (24.8) (41.1)
in multi-client
Capital (21.9) (38.8) (37.1) (62.4) (148.4)
expenditures
Total assets 1,716.4 1,906.9 1,716.4 1,906.9 1,852.2
(period end)
Cash and cash 107.6 77.2 107.6 77.2 132.9
equivalents
(period end)
Net interest $ 820.0 $ 1,066.4 $ 820.0 $ 1,066.4 $ 995.3
bearing debt
(period end)
Pro forma key figures (a) excluding Pertra
Quarter ended Six months ended Year ended
June 30, June 30, December 31,
2005 2004 2005 2004 2004
Unaudited Unaudited Unaudited Unaudited Unaudited
(In millions
of dollars)
Revenues $ 292.8 $ 241.7 $ 551.5 $ 468.8 $ 1,017.5
Operating 50.2 (0.8) 89.6 23.9 9.5
profit (loss)
Adjusted $ 99.8 $ 77.5 $ 184.8 $ 161.3 $ 347.0
EBITDA (as
defined)
Svein Rennemo, PGS Chief Executive Officer, commented, "The second quarter results confirm that the Marine Geophysical markets are steadily improving. Demand for multi-client data in the second quarter resulted in late sales significantly exceeding our previous expectations. Contract performance improved, in line with our previous guidance of a 15-25 percentage point improvement in towed streamer margins in 2005 over 2004, despite marginal North Sea weather conditions during the second quarter. Order backlog, current bidding levels, and customer inquiries indicate further improvements in second half of 2005, and into 2006.
We have decided to accelerate our streamer upgrade program to include three of our vessels this year to further improve operational efficiency and capture more of the market upturn.
Our Onshore operations reported a weak second quarter as we previously have warned. Our expectations that 2005 will be better than 2004 in terms of revenues and operating profit remain unchanged.
Periodic maintenance costs, beyond the expected levels going forward, on our FPSOs significantly affected the Q2 operating profit in our Production segment. These expenses are a part of our strict maintenance philosophy for the FPSO vessels, which seeks to maximize the useful life and performance of these assets as well as their attractiveness and value for redeployment.
Our emphasis on strengthening the financial flexibility of the Group is underlined by $205 million of debt payment during the quarter."
Q2 Highlights
PGS group
-- Revenues of $292.8 million, up $51.1 million (21%) from Q2 2004 (pro forma excluding Pertra), driven by strong contract revenues and multi-client sales in Marine Geophysical
-- Operating profit of $50.2 million, up $51.0 million from Q2 2004 (pro forma excluding Pertra)
-- Net income of $23.7 million compared to net loss of $33.9 million in Q2 2004 (including Pertra)
-- Interest-bearing debt reduced by 17% by repayment of $205 million of interest-bearing debt and capital leases, including repayment of $175 million of the $250 million 8% Senior Notes in April 2005 at 102% of par
-- Q2 cash flow from operations of $23.2 million, affected by approximately $50 million of interest payments, as most of the interest on long-term debt is payable semi-annually, and temporary increases in working capital. Future interest payments will decline due to the $175 million repayment of the 8% Senior Notes
Marine Geophysical
-- Strong multi-client late sales totaling $73.3 million, up $16.0 million (28%) from Q2 2004. Sales were stronger than anticipated at the beginning of the year, driven by demand for West Africa and North Sea data
-- Contract acquisition revenues totaling $94.2 million, up $37.3 million (66%) from Q2 2004, despite reduction in contract revenues from the seafloor 4C crew
-- Operating profit of $58.2 million, up $72.9 million from Q2 2004
-- Operating expenses, excluding depreciation and amortization, were relatively high, primarily driven by maintenance and upgrade work on American Explorer, bonus accruals, variable cost relating to multi-client sales and other variable costs
-- Strong contract visibility with June 30, 2005 contract acquisition order backlog of $160 million compared to $170 million at the end of 2004. In addition, PGS is in an advanced stage of exclusive negotiation for two substantial projects in Brazil, amounting to approximately $70 million
Onshore
-- Weak results due to the previously announced slow down in activity level and timing of multi-client late sales. Operating loss of $6.3 million
-- Order backlog at June 30, 2005 of $93 million compared to $66 million at the end of 2004
Production
-- Revenues of $69.9 million, down $2.1 million from Q2 2004 mainly due to reduced production volume on Petrojarl Foinaven
-- Operating profit of $5.6 million, down $13.3 million from Q2 2004 mainly due to lower revenues and peak activity on maintenance projects, which as previously reported typically are performed in Q2 and Q3:
- Revenues on Petrojarl Foinaven reduced by water/oil separation issues as previously announced
- Ongoing maintenance projects, including a project to change Petrojarl Foinaven mooring lines and equipment generated a total maintenance expenditure of $15.5 million, which is approximately $5 million above the expected quarterly average for the year
-- Q2 production volumes on Petrojarl Varg were lower than expected due to down hole sediment and valve related issues. Production plans indicate that the reduction is temporary and that production levels will increase in the second half of 2005
Outlook Full Year 2005
Marine Geophysical
-- Marine 3D industry seismic fleet at full capacity utilization and streamer contract profitability expected to further improve in second half of 2005
-- Due to strong performance to date in 2005, full year 2005 multi-client late sales are now expected to be at approximately 2004 levels despite low sales from Brazilian library and limited investment levels in recent years. Visibility of late sales by quarter is generally low by nature
-- Increased multi-client amortization in second half of 2005 compared to first half as sales related amortization is expected to increase and an additional minimum amortization charge will be recorded in Q4
-- Cost levels impacted by general cost increases, including fuel costs, as well as activity related costs and depreciation of U.S. dollar compared to 2004
-- Accelerated upgrade of Nordic Explorer and Orient Explorer to solid 24 bit streamers increases forecasted capex in 2005 to around $60-65 million
Onshore
-- Full year revenues and operating profit expected above 2004 levels
-- Preparations for September 2005 start up of transition zone project in Nigeria on schedule
-- Continued strong activity in continental U.S.
-- Significant bidding activity expected in North Africa
Production
-- Total oil production from the Company's four FPSOs for 2005 is expected to be slightly lower than 2004, with second half production on par with the first half
-- Foinaven oil/water separation issues will continue to affect volumes in Q3. A two week shut down in August for installation of a system to re-inject produced water and a subsequent three week slow down period are scheduled
-- Planned Q3 maintenance shut downs for the three other FPSOs for one-two weeks each, but limited financial impact
-- Increased full year operating cost compared to 2004 due to increased maintenance costs (predominantly affecting Q2 and Q3) on the FPSOs as the time since deployment on their respective fields is increasing and due to the depreciation of the US dollar compared to 2004. Operating cost in second half of 2005 expected slightly lower than first half
Operations
The Company, after the sale of Pertra in Q1 2005, manages its business in three segments as follows:
-- Marine Geophysical, which consists of both streamer and seafloor seismic data acquisition, marine multi-client library and data processing;
-- Onshore, which consists of all seismic operations on land and in shallow water and transition zones, including onshore multi-client library; and
-- Production, which owns and operates four harsh environment FPSOs in the North Sea.
Pertra was sold March 1, 2005 and revenues and expenses of Pertra are included in consolidated revenues and expenses through February 2005 and in comparative numbers for 2004. Pro forma revenues and operating profit, which are not U.S. GAAP measures, are provided to illustrate the effect on these income statement lines had Pertra been excluded from the consolidation effective January 1, 2004.
Consolidated revenues in Q2 2005 were $292.8 million, an increase of $21.3 million or 8% compared to Q2 2004 ($271.5 million). Pertra revenues of $46.0 million were included in consolidated revenues for Q2 2004, and had, after the elimination of inter-segment revenues (primarily related to Petrojarl Varg), a net effect of $29.8 million on consolidated revenues for Q2 2004. On a pro forma basis, excluding Pertra, revenues increased $51.1 million or 21% compared to Q2 2004.
The increase in pro forma consolidated revenues is primarily attributable to Marine Geophysical, where revenues increased $62.9 million reflecting significant increases of both contract revenues and multi-client sales. Onshore revenues decreased $11.3 million, while Production revenues decreased $2.1 million compared to Q2 2004.
Consolidated operating profit showed strong improvement totaling at $49.7 million for Q2 2005 compared to $10.8 million in Q2 2004, as reported. On a pro forma basis (excluding Pertra) operating profit for Q2 2005 was $50.2 million compared to an operating loss of $0.8 million in Q2 2004. The increase is caused by a strong, $72.9 million, improvement in Marine Geophysical operating profit, partly offset by decreased operating profit for Production and an operating loss in Onshore.
In Q2 2005 the Company accrued $7.8 million in estimated expense related to the 2005 employee bonus program, of which $4.2 million relating to Marine Geophysical. The bonus program is performance based and the accrued amounts reflect 50% of the full year bonus as estimated based on information available at the end of Q2. Operating profit for Q2 2005 further includes a gain of $2.2 million from the release of liabilities related to the Company's UK leases reported as other operating (income) expense, and an expense of $0.5 million relating to an adjustment of the gain on the Q1 2005 sale of Pertra.
Marine Geophysical. Total revenues increased $62.9 million, or 49%, from $127.6 million in Q2 2004 to $190.5 million in Q2 2005.
Multi-client late sales increased $16.0 million, or 28% from $57.3 million in Q2 2004 to $73.3 million in Q2 2005. The strong market for multi-client data continued, and the increase from Q2 2004 related primarily to certain library components offshore West Africa which sold significantly beyond expectations, partly offset by a reduction in sales from the Gulf of Mexico library which were at high levels in Q2 2004.
Multi-client pre-funding revenues increased $6.9 million, or 141%, from $4.9 million in Q2 2004 to $11.8 million in Q2 2005. This increase relates to several factors, including high pre-funding levels for certain streamer projects in the North Sea and increased multi-client investments. Capitalized cash investments in multi-client library were $17.5 million in Q2 2005 compared to $7.4 million in Q2 2004. The increase relates primarily to seafloor 4C, rented 2D capacity and reprocessing of existing library, whereas towed streamer multi-client activity declined slightly with approximately 8% of total streamer capacity used in multi-client acquisition compared to 10% in Q2 2004. Pre-funding revenues as a percentage of cash investment were 67% in Q2 2005 compared to 66% in Q2 2004.
Contract revenues increased $37.3 million, or 66%, from $56.9 million in Q2 2004 to $94.2 million in Q2 2005, primarily as a result of improved pricing and performance and deploying a larger portion of the streamer vessel capacity in contract acquisition, partly offset by reduced contract revenues for the seafloor 4C crew that acquired multi-client for most of Q2 2005. Approximately 76% of total streamer capacity was used for contract work in Q2 2005 compared to 69% in Q2 2004. Q2 2004 was negatively affected by weather and other operating disturbances in the completion phase of a large project offshore India.
Prices and margins for streamer contract work continue to show positive development, but Q2 performance did not fully capture the improvement partly due to the natural delay in "working off" the older order backlog and partly due to marginal Q2 weather conditions in the North Sea.
Marine Geophysical reported an operating profit of $58.2 million in Q2 2005 compared to a loss of $14.7 million in Q2 2004. This improvement was driven by a significant increase in both contract revenues and multi-client sales combined with significantly lower amortization rates on multi-client sales due to the low book value of several surveys. Operating expenses (before depreciation and amortization) increased $12.3 million compared to Q2 2004 due primarily to costs related to scheduled repair and maintenance work on American Explorer, charter of third party 2D vessel capacity, accrual of 50% of estimated full year personnel bonus costs, variable costs relating to multi-client sales and general cost level increase for fuel and personnel costs, partly offset by an increase of cost capitalized as multi-client investment. In Q2 2005, American Explorer was significantly refurbished and equipped with solid streamers, resulting in a strong improvement in performance potential.
Onshore. Total revenues decreased $11.3 million, or 28%, from $39.7 million in Q2 2004 to $28.4 million in Q2 2005. Contract revenues decreased $10.0 million (30%) to $23.4 million in Q2 2005, while multi-client revenues (including pre-funding) decreased $1.3 million to $5.0 million in Q2 2005. The weak quarter relates primarily to the previously disclosed slow down in activity due to crew scheduling, with start-up of new projects, including a Nigeria transition zone project, in Q3. In addition, the timing of expected multi-client late sales revenues caused low sales levels in Q2.
Onshore recorded an operating loss of $6.3 million in Q2 2005, down from a $0.9 million operating profit in Q2 2004.
Production. Total revenues decreased $2.1 million, or 3%, from 72.0 million in Q2 2004 to $69.9 million in Q2 2005. Total average produced volume on the Company's four FPSOs was 110,735 barrels per day in Q2 2005, compared to 119,111 barrels per day in Q2 2004, with the reduction primarily caused by reduced production on Petrojarl Foinaven.
Revenues from Petrojarl Foinaven decreased by $3.1 million in Q2 2005 compared to Q2 2004 as a result of lower production. Production volumes were, as previously disclosed, impacted by problems related to oil/water separation. A two week production shut down is planned in the latter part of August to install a system for re-injection of produced water. Subsequent to the shut down, a three week production slow down is planned to allow for cleaning of the separators. Production will receive a reduced day rate during the shut down period; the shut down and slow down periods are expected to cause a revenue reduction of approximately $2 million compared to normal production levels.
Petrojarl I revenues decreased by $0.2 million in Q2 2005 compared to Q2 2004 with production levels slightly increased.
Revenues from Petrojarl Varg increased $1.2 million in Q2 2005 compared to Q2 2004, with production volumes in line with Q2 2004. Production in Q2 was somewhat negatively affected by ongoing drilling activities on the Varg field. In addition, some of the wells had reduced production as a result of down hole sediment and valve related issues. Current production plans indicate continued production at current levels through most of Q3 and an increase in production in the latter part of the year.
Ramform Banff revenues decreased $0.2 million in Q2 2005 compared to Q2 2004. Revenues are recorded based on the minimum day rate provision in the contract. Production levels increased slightly from Q2 2004.
Production recorded an operating profit of $5.6 million Q2 2005 compared to $18.9 million in Q2 2004. The reduction was partly caused by decreased revenues for Petrojarl Foinaven as described above, but primarily relates to increased operating expenses relating to maintenance expenditures as previously communicated and accrued bonus expenses of $1.6 million. Operating expenses (before depreciation and amortization) were $53.2 million in Q2 2005 compared to $42.0 million in Q2 2004. Maintenance projects are ongoing on all the FPSOs during the 2005 summer season, and expenditures increased $6.6 million compared to Q2 2004 mainly due to a project on Petrojarl Foinaven to change mooring lines.
Depreciation and Amortization
Gross depreciation (before capitalization to multi-client library) was $29.5 million in Q2 2005 compared to $37.2 million in Q2 2004. Pertra was consolidated in Q2 2004 with depreciation of $6.9 million; adjusted for Pertra, depreciation on a pro forma basis decreased $0.7 million.
Amortization of the multi-client library totaled $24.1 million (27% of sales) in Q2 2005 compared to $46.6 million (67% of sales) in Q2 2004. Sales related amortization declined partly due to significant minimum amortization recorded in 2004 which reduced the carrying value of certain surveys and partly due to high sales in 2005 of surveys with a zero net book value. Late sales of surveys with zero net book value amounted to $55.4 million in Q2 2005 compared to $18.4 million in Q2 2004.
The Company amortizes its multi-client library primarily based on the ratio between the cost of surveys and the total forecasted sales for such surveys. In applying this method, surveys are categorized into three amortization categories with amortization rates of 90%, 75% or 60% of sales amounts. Each category includes surveys where the remaining unamortized cost as a percentage of remaining forecasted sales is less than or equal to the amortization rate applicable to each category. The Company also applies minimum amortization criteria for the library projects based generally on a five-year life, but with individual profiles established when PGS adopted fresh-start reporting in 2003. Furthermore, the Company records as amortization expense write-downs of individual multi-client surveys that are based on changes in project specific expectations and that are not individually material.
The Company calculates and records minimum amortization individually for each multi-client survey or pool of surveys at year-end. At June 30, 2005 the Company estimates that in Q4 2005 it will record such minimum amortization for 2005 in an amount of approximately $30.0 million in addition to normal sales related amortization, predominantly related to the Brazil library. This estimate is based on the Company's expectations for normal sales related amortization for the remainder of 2005 and is uncertain and subject to change.
Other Operating (Income) Expense, Net
Other operating (income) expense, net, was income of $2.2 million in Q2 2005 compared to expense of $3.1 million in Q2 2004 and constitutes a release of previously recognized liabilities related to tax indemnifications on UK leases (see paragraph on UK Leases below).
Interest Expense
Interest expense for Q2 2005 was $23.0 million compared to $27.4 million for Q2 2004, a reduction of $4.4 million which corresponds to a reduction interest-bearing debt and capital leases.
Capitalized interest for multi-client surveys in progress was $0.5 million in both Q2 2005 and Q2 2004.
Other Financial Items, Net
Other financial items, net, for Q2 2005 was income of $1.2 million compared to expense of $3.8 million in Q2 2004. Other financial items, net, for the quarter included:
-- Interest income of $2.3 million in Q2 2005 compared to $1.2 million in Q2 2004
-- Foreign exchange gain of $6.1 million in Q2 2005 compared to a loss of $1.2 million in Q2 2004
-- $3.5 million of redemption premium charged to expense relating to redemption of $175 million of the 8% Senior Notes at 102% of par in Q2 2005
-- Other financial expense including interest rate variation expense for UK leases, net of amortization of deferred gain, of $3.7 million in Q2 2005 compared to $3.8 million in Q2 2004
Income Tax Expense (Benefit)
Income tax expense (benefit) was $2.4 million for Q2 2005 compared to $14.4 million in Q2 2004. Deferred taxes represented $1.8 million for Q2 2005. The relatively low deferred tax charge primarily results from a favorable effect on tax positions in countries with statutory currencies other than US dollar due to exchange rate movements and includes a reversal of $3.1 million of the estimated realization of pre fresh start operating loss carry forwards. Under fresh start accounting, deferred tax assets associated with operating loss carry forwards are charged to tax expense as those carry forwards are realized. Valuation allowances against such deferred tax assets are recorded as a reduction of intangible assets until such intangibles are exhausted and then recorded directly to shareholders' equity. Current tax expense of $0.6 million relates primarily to foreign taxes in regions where the Company is subject to withholding taxes or deemed to have a permanent establishment and where it has no carryover losses.
As a multi-national organization, the Company is subject to taxation in many jurisdictions around the world with increasingly complex tax laws. As previously disclosed, the Company has an issue pending with the Norwegian Central Tax Office ("CTO") for 2002 relating to two of its subsidiaries that withdrew from the Norwegian tonnage tax regime. If the CTO position is upheld, the Company estimates that taxes payable for 2002, without considering mitigating actions, could increase by up to $24 million. The Company also has tax issues in several other jurisdictions that could eventually result in material amounts of taxes relating to prior years. The Company has established accruals for identified tax contingencies based on its best estimate relating to each contingency.
Capital Investments
Cash investments in multi-client library (Marine Geophysical, Onshore and Reservoir) totaled $21.0 million in Q2 2005 compared to $9.6 million in Q2 2004.
Capital expenditures totaled $21.9 million in Q2 2005 compared to $38.8 million in Q2 2004. Capital expenditures for Marine Geophysical were $16.7 million in Q2 2005 compared to $11.1 million in Q2 2004. Onshore expenditures were $4.0 million in Q2 2005 compared to zero in Q2 2004. In Q2 2004 Pertra was consolidated with capital expenditures of $27.5 million. Shares
PGS' Annual General Meeting on June 8, 2005, approved the split of the PGS shares in the ratio of three for one. Following the share split, the Company has 60,000,000 ordinary shares, all one class and with equal rights, issued and outstanding. The ordinary shares are listed on the Oslo Stock Exchange. The Company's American Depository Shares ("ADS") are listed on the New York Stock Exchange and were split in the same ratio as the ordinary shares.
Liquidity and Financing
At June 30, 2005 cash and cash equivalents amounted to $107.6 million compared to $332.1 million at March 31, 2005 and $132.9 million at December 31, 2004. The reduction in Q2 2004 relates mainly to repayment of debt.
Net cash provided by operating activities was $23.2 million in Q2 2005 compared to $54.8 million in Q2 2004. The reduction relates primarily to an increase in working capital which is expected to reverse in Q3 2005. Interest on PGS' 10% and 8% Senior Notes is payable semi-annually, at the end of Q2 and Q4. Consequently, high interest payments, totaling approximately $50 million in Q2 2005 had a negative effect on cash provided by operating activities in Q2 2005.
Restricted cash amounted to $30.8 million at June 30, 2005 compared to $35.4 million at March 31, 2005 and $35.5 million at December 31, 2004.
The Company has a $110 million two-year secured working capital facility (maturing March 2006), $70 million of which can be used for general corporate purposes. The remaining $40 million is available for issuance of letters of credit to support bid and performance bonds associated with PGS' day-to-day operations. At June 30, 2005, no amounts were outstanding under the revolving credit portion of the facility.
Interest bearing debt was approximately $958 million as of June 30, 2005 compared to $1,159 million as of March 31, 2005 and $1,164 million as of December 31, 2004. Net interest bearing debt (interest bearing debt less cash and cash equivalents and restricted cash) was approximately $820 million at June 30, 2005 compared to $792 million at March 31, 2005 and $995 million as of December 31, 2004.
In April 2005, the Company repaid $175 million of its $250 million 8% Senior Notes, due 2006, at 102% of par value. In addition, various capital leases were repaid in accordance with their lease terms bringing total debt repayment to approximately $205 million in Q2 2005.
PGS conducts business in various currencies and is subject to foreign currency exchange rate risk on cash flows related to revenues, expenses and financing and investing transactions in currencies other than the U.S. dollar. The Company's cash flows from operations are primarily denominated in U.S. dollars, British pounds ("GBP") and Norwegian kroner ("NOK"). Revenues are predominantly denominated in U.S. dollars while a portion of operating expenses is incurred in GBP and NOK. In Q1 2005, the Company started hedging a portion of its foreign currency exposure related to operating expenses in NOK by entering into contracts to buy NOK forward. While the Company enters into these contracts with the purpose of reducing its exposure to changes in exchange rates, it does not account for the contracts as hedges. Consequently, all outstanding forward currency contracts are recorded at estimated fair value and gains or losses are included in other financial items, net. At June 30, 2005 the Company had open forward contracts to buy NOK amounting to approximately $8 million with an estimated fair value of $(0.3) million.
UK Leases
The Company entered into capital leases from 1996 to 1998 relating to Ramform Challenger, Valiant, Viking, Victory and Vanguard; the FPSO Petrojarl Foinaven; and the production equipment of the Ramform Banff for terms ranging from 20-25 years. These leases are described more fully in PGS' Annual Report on Form 20-F for the year ended December 31, 2004.
The Company has indemnified the lessors for the tax consequences resulting from changes in tax laws or interpretations thereof or adverse rulings by the tax authorities ("Tax Indemnities") and for variations in actual interest rates from those assumed in the leases ("Interest Rate Differential"). There are no limits on either of these indemnities.
The Company has been informed that the UK Inland Revenue generally deferred agreeing to the capital allowances claimed under such leases pending the outcome of a case that was appealed to the UK House of Lords, the highest UK court of appeal. In November 2004, the House of Lords ruled in favor of the taxpayer and rejected the position of the UK Inland Revenue. As a result of the November 2004 decision by the UK House of Lords, the Company believes it is unlikely that its UK leases will be successfully challenged by the Inland Revenue. In connection with the adoption of fresh start reporting in November 2003 and before the House of Lords' ruling, the Company recorded a liability of $28.3 million. The Company releases applicable portions of this liability if and when the UK Inland Revenue accepts the lessors' claims for capital allowances under each lease. The Company has been informed that in the first half of 2005, the Inland Revenue accepted the lessors' claims to capital allowances for four of the Company's UK leases, and consequently the Company released $6.4 million of the liability in Q1 2005 and $2.2 million in Q2 2005. The amounts were included in other (income) expense. The remaining accrued liability as at June 30, 2005 is $22.0 million and relates to the Petrojarl Foinaven, Ramform Banff and Ramform Challenger leases.
With respect to the Interest Rate Differential, the defeased rental payments are based on assumed Sterling LIBOR rates between 8% and 9% (the "Assumed Interest Rates"). If actual interest rates are greater than the Assumed Interest Rates, the Company receives rental rebates. Conversely, if actual interest rates are less than the Assumed Interest Rates, the Company is required to pay additional rentals.
Over the last several years, the actual interest rates have been below the Assumed Interest Rates. When the Company adopted fresh start reporting in November 2003 it recorded a liability of 30.5 million British pounds (approximately $51.6 million), equal to the estimated fair value of the future additional rental payments. This liability was amortized to 23.3 million British pounds (approximately $42.3 million) and 24.6 million British pounds (approximately $47.2 million) as of June 30, 2005 and December 31, 2004, respectively.
Basis of Unaudited Financial Statements
The unaudited consolidated financial statements for Q2 2005 are prepared in accordance with U.S. GAAP, using the same accounting principles as were used for the 2004 U.S. GAAP audited financial statements in the Company's Annual Report on Form 20-F for the year ended December 31, 2004. Consolidated statement of operations, balance sheets and statements of cash flows based on Norwegian GAAP are included in the attached supporting tables. The Company's financial statements prepared in accordance with Norwegian GAAP are, as previously reported, different from those prepared in accordance with U.S. GAAP in certain material respects.
International Financial Reporting Standards ("IFRS")
PGS' primary financial reporting is in accordance with U.S. GAAP. Effective January 1, 2005 publicly traded companies in EU and EEA countries are required to report financial statements based on International Financial Reporting Standards ("IFRS"). Several EU/EEA countries, including Norway, have established transition rules allowing companies that are listed for public trading in the U.S., and therefore, have prepared complete financial statements under U.S. GAAP, at least from and including 2002, to defer adopting IFRS reporting until January 1, 2007. PGS has concluded that the transition rules apply to the Company and intends to defer its IFRS reporting until January 1, 2007.
Material Weaknesses
PGS has previously disclosed material weaknesses in its internal controls over financial reporting. PGS has taken extensive actions to address these material weaknesses and has developed and is continuing to implement a plan to remediate these weaknesses. While the actions the Company has taken have significantly improved the quality of its internal controls over financial reporting, the Company still had material weaknesses in certain areas for the period relevant for the preparation of its 2004 financial statements. PGS is committed to remediating the material weaknesses and deficiencies in internal controls over financial reporting as expeditiously as possible and believes that those actions already implemented and those ongoing will achieve this result.
For additional support to the unaudited, second quarter 2005 results under U.S. GAAP and related news release and presentation; please visit our web site www.pgs.com.
PGS expects to announce its unaudited third quarter 2005 results under U.S. GAAP on October 28, 2005.
Petroleum Geo-Services is a technologically focused oilfield service company principally involved in geophysical and floating production services. PGS provides a broad range of seismic and reservoir services, including acquisition, processing, interpretation, and field evaluation. PGS owns and operates four harsh environment floating production, storage and offloading units (FPSOs). PGS operates on a worldwide basis with headquarters at Lysaker, Norway. For more information on Petroleum Geo-Services visit www.pgs.com.
The information included herein contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on various assumptions made by the Company, which are beyond its control and are subject to certain additional risks and uncertainties as disclosed by the Company in its filings with the Securities and Exchange Commission including the Company's most recent Annual Report on Form 20- F for the year ended December 31, 2004. As a result of these factors, actual events may differ materially from those indicated in or implied by such forward-looking statements.
(a) Pro forma key figures as presented in the table show revenues, operating profit (loss) and Adjusted EBITDA as if Pertra had not been part of the consolidated PGS group of companies for any of the periods presented. Pertra was sold March 1, 2005.
The full report can be downloaded from the following link: http://hugin.info/115/R/1004103/154413.pdf