TGS-NOPEC - 3rd Quarter 2005 Results

 

Consolidated net revenues were USD 71.3 million, an increase of 64% compared to Q3 2004.

Net late sales from the multi-client library totaled USD 56.1 million, up 99% from USD 28.2 million in Q3 2004.

Operating profit (EBIT) was USD 30.6 million (43% of Net Revenues), up 108% from USD 14.7 million in Q3 2004.

Cash flow from operations after taxes was USD 10.8 million, versus USD 9.5 million in Q3 2004.

Fully diluted earnings per share were USD 0.77 (USD 0.81 undiluted), up 127% compared to USD 0.34 (USD 0.36 undiluted) in Q3 2004.   

 

 

Consolidated net revenues were USD 165.1 million, an increase of 46% compared to 9 months 2004.

Net late sales from the multi-client library totaled USD 132.0 million, up 78% from USD 74.0 million 9 months 2004.

Operating profit (EBIT) was USD 66.7 million (40% of Net Revenues), up 92% from USD 34.8 million 9 months 2004.

Cash flow from operations after taxes was USD 53.1 million, versus USD 2.3 million 9 months 2004.

Fully diluted earnings per share were USD 1.66 (USD 1.74 undiluted), up 98% compared to USD 0.84 (USD 0.90 undiluted) for 9 months 2004.   

 

"In spite of significant business disruptions in our largest market from two devastating hurricanes, our 3rd quarter results are the best in our company's 25-year history," stated TGS CEO Hank Hamilton.  "The sharp improvements we have experienced in data library sales across all regions signal a shift in the oil industry's strategic thinking about the importance of exploration and reserve replacement."

 

 

 

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.

 

 

Consolidated gross late sales in Q3 were USD 59.1 million, up 89% from last year, representing 77% of gross revenues for the quarter. Net late sales were up 99% compared to Q3 2004 as a result of lower revenue share of sales with partners. Net pre-funding revenues totaled USD 12.4 million, funding 39% of the Company's operational investments into new multi-client products during Q3 (USD 31.5 million). Net pre-funding for the 9-month period ended September 30th represented 40% of multi-client investments. Proprietary contract revenues during the quarter totaled USD 2.8 million compared to USD 1.5 million in Q3 2004.  

 

 

The consolidated amortization charge associated with net multi-client revenues was 40% of net multi-client revenues during Q3 2005 compared to 43% in Q3 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 due to strong sales from fully amortized projects.

 

Personnel and other operating costs payable for the quarter, excluding materials, were USD 12.3 million, an increase of 41% from Q3 2004 (USD 8.7 million) as a result of higher employee profit-sharing bonuses, employer's taxes on stock option exercises and a slightly higher organizational cost base compared to Q3 2004.

 

On September 16th the Company issued a notice to the Oslo Stock Exchange that it had discovered an error in the computation of the non-cash, theoretical cost of stock options reported in its IFRS financial statements for Q1 and Q2 of 2005 as well as its initially posted IFRS financial statements (as restated for comparison purposes) for Q3 and Q4 of 2004. Accordingly, TGS has reversed the excess cost reported for Q1 and Q2 2005, totaling USD 638,000, in this Q3 report to reflect correct year-to-date figures.  The actual computed cost for stock options was USD 0.4 million in Q3 2005. Following the correction applied for the first six months of the year, the reported cost for the quarter is negative USD 0.2 million in Q3 2005, versus USD 0.4 million in Q3 2004.

 

 

Operating profit (EBIT) for the quarter of USD 30.6 million represented 43% of net revenues. This was 108% higher than the USD 14.7 million in Q3 2004.  

 

EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) for the quarter was USD 58.8 million, 82% of net revenues, up 73% from USD 34.0 million in Q3 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. 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, non-deductible charge for employees' stock options, the estimated tax rate for first nine months of 2005 is 33.6%. 

 

 

Net income for Q3 2005 was USD 20.8 million (29% of net revenues) up 128% compared to USD 9.1 million (21% of net revenues) from Q3 2004. Quarterly earnings per share (EPS) were USD 0.77 fully diluted (USD 0.81 undiluted), an increase of 127% from Q3 2004 EPS of USD 0.34 (USD 0.36 undiluted).

 

 

TGS' largest business segment is developing, managing, conducting, and selling non-exclusive seismic surveys. This activity accounted for 93% of the Company's business during the quarter. A2D, a digital well log and solutions provider, accounted for 6% of consolidated net revenues in the 3rd quarter. TGS Imaging's contract data processing activity and other proprietary revenue represented the remaining 1% of total revenues.

 

The Company's investments in its data library during Q3 2005 increased 45% compared to Q3 2004 to USD 32.2 million, composed of USD 31.5 million in operational investments and USD 0.7 million in data purchases.  The Company recognized USD 12.4 million in net pre-funding revenues in Q3, funding approximately 39% of its operational multi-client investments during the quarter.  This pre-funding ratio was lower than management's previously stated expectations due to the negative impacts on operational productivity in the Gulf of Mexico during Q3 from Hurricanes Katrina and Rita.

 

BALANCE SHEET & CASH FLOW

 

The net cash flow from operating activities (including multi-client investments) for the quarter was USD 11.4 million. As of September 30th, 2005, the Company's total cash holdings amounted to USD 122.0 million compared to USD 110.1 million at June 30th, 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 September 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 assets as a long-term receivable.

 

In July, TGS distributed 4,950 shares to the non-executive Directors of its Board as part of their remuneration fixed by the General Assembly in June.  Following this distribution, the Company holds a balance of 79,250 of its own shares.

 

Total equity per September 30th, 2005 was USD 299.5 million, representing 72% of total assets.

 

 

TGS continued field operations on two large Gulf of Mexico 3D projects in the 3rd quarter utilizing both an ocean-bottom-cable (OBC) crew and a two-vessel streamer crew. Hurricanes Katrina and Rita interrupted both projects, causing delays and increased costs that lowered the effective pre-funding ratios and slightly increased the projected amortization rates. Acquisition of Deep Resolve was completed during the first week of October.

 

In the eastern hemisphere, TGS continued operations on the 2005 campaign of its North Sea Renaissance (NSR) long offset 2D survey and acquired a new 5,000-kilometer 2D survey in the Barents Sea. In addition TGS started new 2D projects in the Sea of Okhotsk near Sakhalin Island and offshore west Greenland to expand its industry-leading data libraries in both areas.

 

During the quarter A2D secured another multi-year unlimited access contract to its Log-Line Plus database with a large independent oil and gas producer. A2D added 180,000 digital logs from 75,000 wells to its database in Q3 bringing its library to 2,500,000 log images from 1,222,000 wells. As a result of Hurricane Katrina, A2D promptly relocated its Minerals Management Service (MMS) support operations from New Orleans to Houston and continued to service its customers with minimal interruption. Revenues from data conversion services were negatively impacted by lost production time during the evacuation for Hurricane Rita.

 

On September 16th TGS signed a letter of intent to purchase Aceca Limited, a privately held company specializing in the creation and sale of multi-client geophysical and geological interpretation products and studies for USD 10 million in cash plus USD 2.5 million in TGS shares. The transaction is expected to close in November 2005.

 

TGS' backlog for new seismic projects and services was USD 22.8 million as of September 30th, 2005. While this is 17% lower than one quarter ago due to seasonal factors, it is 10% higher than one year ago. A2D backlog at the end of Q3 was USD 13.5 million, 57% higher than one year ago. Total Company backlog decreased 6% during the quarter and stands at USD 36.3 million at the end of the 3rd quarter, 23% higher than one year ago.   

 

 

Based on initial Q3 sales reports from its operating units, TGS management issued a notice to the Oslo Stock Exchange on October 10th, updating its revenue expectations for the full year. Because TGS' revenue stream is largely composed of late sales from our data library, the magnitude and timing of which are difficult to forecast, it is our policy not to issue specific quarterly revenue guidance. Nevertheless, we do now believe it is more likely than not that our full year 2005 revenues will exceed our previous expectation of 30% annual growth. After a thorough evaluation of detailed Q3 results, we now further update our expectations for the full year 2005 as follows: multi-client library investments of USD 95-110 million (unchanged from previous guidance), average pre-funding in the range of 40-50% of investments (down from 45-55%), and an average annualized multi-client amortization rate in the range of 40-45% (down from 42-47%).

 

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