TGS-NOPEC - 2nd QUARTER 2005 RESULTS

 

 

"Late sales from our data library exceeded our expectations again this quarter," stated TGS CEO Hank Hamilton. "We are starting to see more urgency from our customers in the data purchasing process as exploration programs become a higher priority." 

 

TGS began reporting under the IFRS accounting standard in Q1 2005. Under IFRS, the theoretical, non-cash cost of stock options is expensed in the profit and loss statement. Intangible assets are no longer depreciated, but are subject to an annual impairment test. To make comparisons more meaningful, the 2004 quarterly profit and loss figures are restated using the same IFRS standards. For reference, see the tables  "2004 P&L figures restated to IFRS for comparison", the Q1 2005 earnings release and the IFRS section in our 2004 Annual Report at http://www.tgsnopec.com/investor_relations/investor_relations.asp

 

Consolidated gross late sales in Q2 were USD 51.9 million, up 68% from last year, representing 83% of gross revenues for the quarter. Net late sales were up 65% compared to Q2 2004. Net pre-funding revenues totaled USD 8.5 million, funding 39% of the Company's operational investments into new multi-client products during Q2 (USD 21.8 million). Proprietary contract revenues in the TGS Imaging and A2D well log segments during the quarter totaled USD 1.1 million compared to USD 0.6 million in Q2 2004. The Company recognized USD 0.2 million in proprietary contract revenue from seismic acquisition work compared to 2.4 million Q2 2004.

 

The consolidated amortization charge associated with net multi-client revenues was 41% of net multi-client revenues during Q2 2005 compared to 45% in Q2 2004. This rate does fluctuate from quarter to quarter, depending on the sales mix of projects.  The year-to-date amortization rate of 39% is lower than management's expected range (42-47%) for the full year.

 

Costs of materials were negligible for the quarter as a direct consequence of low proprietary seismic acquisition contract activity.  Personnel and other operating costs payable for the quarter, excluding materials, were USD 9.9 million, an increase of 20% from Q2 2004 (USD 8.2 million) as a result of higher employee profit-sharing bonuses and the higher employee cost base following the acquisition of NuTec in Q3 2004 for TGS Imaging.

 

The theoretical, non-cash cost of employees' stock options in accordance with IFRS was USD 0.7 million in Q2 2005, versus USD 0.3 million in Q2 2004. 

 

Operating profit (EBIT) for the quarter of USD 21.9 million represented 40% of net revenues. This was 66% higher than the USD 13.2 million in Q2 2004.  

EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) for the three months ended June 30th was USD 44.3 million, 81% of net revenues, up 45% from USD 30.6 million in Q2 2004.

 

For the full year, TGS reports tax charges in accordance with the Accounting Standard IAS 12. Under this method, tax charges are computed based on the USD value relating to the appropriate tax provisions according to local tax regulations and currencies in each jurisdiction.  Following TGS' change of functional currency from Norwegian Kroner to US Dollars beginning in January 2003, the tax charges are influenced not only from local profits, but also from fluctuations in exchange rates between the local currencies and USD. This method makes it more difficult to predict tax charges on a quarterly or annual basis. Management charges a tax provision to the profit and loss statement during the first three quarters of the year based upon the flat local tax rate of calculated USD pre-tax profit in each company in the Group, assessed to be approximately 33% on a consolidated basis. Adjusted for the non-cash, nondeductible charge for employees' stock options, the estimated tax rate for first six months of 2005 is 34.3%. 

 

Net income for Q2 2005 was USD 14.6 million (27% of net revenues) up 78% compared to USD 8.2 million (20% of net revenues) from Q2 2004. Quarterly earnings per share (EPS) were USD 0.54 fully diluted (USD 0.57 undiluted), an increase of 77% from Q2 2004 EPS of USD 0.31 (USD 0.33 undiluted).

 

TGS' largest business segment is developing, managing, conducting, and selling non-exclusive seismic surveys. This activity accounted for 91% of the Company's business during the quarter. A2D, a digital well log and solutions provider, accounted for 8% of consolidated net revenues in the 2nd quarter. TGS Imaging's contract data processing activity and proprietary seismic acquisition work represented the remaining 1% of total revenues.

 

The Company's operational investments in its data library during Q2 2005 decreased 15% compared to Q2 2004 to USD 21.8 million. The Company recognized USD 8.5 million in net pre-funding revenues in Q2, funding approximately 39% of its operational multi-client investments during the quarter.  

 

BALANCE SHEET & CASH FLOW

The net cash flow from operating activities (including multi-client investments) for the quarter was positive, totaling USD 16.0 million. As of June 30th, 2005, the Company's total cash holdings amounted to USD 110.1 million compared to USD 96.6 million at March 31st, 2005. The bonds issued by the Company in 2004 represent USD 43.7 million in long-term debt, and will mature on May 5th, 2009.  Since the gross value versus the market rate of the derivative currency swap contract on the bond loan must be reflected when presenting the balance sheet under IFRS, the bond loan is presented as a liability of USD 45.8 million in the balance sheet as per June 30th, 2005. The difference between this theoretical value and the real liability for the Company (USD 43.7 million), USD 2.1 million, is presented and included in long-term receivable assets.

 

The Company repurchased 84,200 of its own shares during May at an average price of NOK 167.63 per share totaling a cost of USD 2.2 million.  In July, 4,950 shares were distributed to the non-executive Directors of the Board as part of their remuneration fixed by the General Assembly in June.  Following this distribution, the Company holds a balance of 79,250 shares.

 

Total equity per June 30th, 2005 was USD 272.2 million, representing 72% of total assets.

 

Acquisition of TGS' Deep Resolve 3D project in the Gulf of Mexico continued throughout the 2nd quarter. In parallel to this effort, TGS started a new 4,500-square kilometer Gulf of Mexico 3D survey in June called Sophie's Link, which will connect the Deep Resolve and Mississippi Canyon 3D programs. Like the Deep Resolve project, Sophie's Link will require a combination of ocean-bottom-cable (OBC) and streamer recording technologies. In Europe, TGS launched the 2005 continuation of the North Sea Renaissance (NSR) long offset 2D survey with plans to acquire between 20,000 and 25,000 kilometers during this year's summer season. Also in Europe, TGS conducted its first multi-client controlled source electromagnetic (CSEM) survey in conjunction with OHM Limited over a prospective area in the Norwegian Barents Sea, originally identified with TGS 2D and 3D seismic coverage. Offshore Egypt in the Mediterranean Sea, TGS acquired a new 8,000-kilometer multi-client 2D survey designed to tie key wells regionally and provide more detailed coverage over an area to be offered in an upcoming competitive license round.

 

In June TGS signed a letter of intent with Exploration Resources to extend the charter of the 3D seismic vessel Polar Search by one year to September 30, 2006. Under terms of the agreement, the vessel will be upgraded with additional recording equipment and towing capabilities to allow faster and more efficient 3D data acquisition.

 

During the quarter A2D secured two multi-year comprehensive well log contracts with large independent oil companies in the US.  Demand for A2D's well log digitizing services continues to strengthen, showing a 33% increase over Q1 2005 and a 47% increase over the same quarter last year. A2D remains on track to complete its conversion of the Riley hardcopy well log inventory to digital raster images by mid-2006. Total well log revenues were 19% higher during the first six months of 2005 than the first six months of 2004. 

 

TGS' backlog for new seismic projects and services was USD 27.4 million per June 30th, 2005. This was 39% higher than one quarter ago and 102% higher than one year ago. A2D backlog at the end of Q2 was USD 11.2 million, 19% higher than one year ago. Total Company backlog increased 24% during the quarter and stands at USD 38.6 million at the end of the 2nd quarter, 68% higher than one year ago.   

 

The market for seismic services and products continues to strengthen. Based on a clear and definite increase in exploration focus from oil companies, TGS plans to expand its original 2005 investment plan beginning in Q3. New 2D projects are now underway in Greenland, the Sea of Okhotsk, and the Barents Sea. The seismic vessel resources necessary to execute the expanded plan have been secured.

 

Accordingly TGS management now updates its expectations for the full year 2005 as follows: multi-client library investments of USD 95-110 million (up from USD 80-90 million), average pre-funding in the range of 45-55% of investments (unchanged), average annualized multi-client amortization rate in the range of 42-47% of net revenues (unchanged), and an approximate 30% increase in net revenues (up from 20%).

 

The Board of Directors of TGS-NOPEC Geophysical Company ASA   

 

TGS-NOPEC Geophysical Company ASA is listed on the Oslo Stock Exchange (OSLO:TGS). 

Web-site: www.tgsnopec.com