Ion Geophysical Corporation

Greetings and welcome to the IONG of Physical Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require assistance during the conference, please press star then zero on your telephone. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rachel White, Vice President, Investor Relations. Thank you. You may begin.

Good morning and welcome to ION's second quarter 2021 earnings conference call. We appreciate your joining us today. As indicated on slide two, our hosts today are Chris Fusher, President and Chief Executive Officer, and Mike Morrison, Executive Vice President and Chief Financial Officer. We will be using slides to accompany today's call, which are accessible via a link on our website, iongeo.com. There you will also find a replay of today's call. Before we begin, let me remind you that certain statements made during this call may constitute forward-looking statements. These statements are subject to various risks and uncertainties, including those detailed in our latest 10-K and other SEC filings, which may cause our results or performance to differ materially from those projected in these statements. Our remarks today may also include non-GAAP financial measures. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release issued yesterday. I'll now turn the call over to Chris, who will begin on slide four.

Thank you, Rachel. Good morning, everyone, and thanks again for joining us. In our prepared remarks today, we'll discuss our financial results, strategy execution progress, and outlook for both the energy and maritime operations market. I will also describe our promising new energy transition, sustainability, and digitalization strategies for today's rapidly evolving market. We delivered a 40% sequential improvement in revenues during the second quarter. Adjusted EBITDA was slightly positive, benefiting from the over $40 million of cost reductions from 2020 that remain intact. The second, significantly larger phase of our North Sea 3D program is proceeding ahead of schedule, and we made great progress on our maritime visualization strategy in new markets during the second quarter. In April, we completed our bond exchange and rights offering, which Mike will describe shortly. Before I get to the operational highlights of the quarter, I'll describe the market dynamic and our strategy for both the energy and maritime operations industry. The global economy is improving, and commodity prices have rebounded nearly 50% this year, above pre-pandemic levels, with Brent crude currently around $70 a barrel. However, our core sizing market is expected to remain challenging in the near term as energy companies' capital discipline remains firmly at play with a priority on cash flow generation. The majority of spending today is tied to legacy projects and existing commitments with very limited discretionary funds. On the positive side, analysts predict minimum downside risk to the current seismic spending level above $50 a barrel. We still believe discretionary spending will eventually return above $50 a barrel, and we are selectively investing where we anticipate that capital will be directed. We expect data purchases to largely be aligned with lower risk, higher return strategies focused on proven basins and infrastructure-led exploration that leverages existing nearby facilities. Encouragingly, even in this uncertain environment, we are seeing early movers start to strategically purchase data again. Our customer mix is also changing as major shifts in investment to renewables, creating opportunities for independent and national oil companies to fill the void. Investment in the energy transition is rapidly approaching that of traditional oil and gas. We are focused on helping companies efficiently find and develop energy resources with lower emissions and environmental impacts whether it's more traditional sources or renewable ones. For example, our data is already being used to help evaluate potential sites for carbon storage to help combat climate change. Even in the most aggressive energy transition scenarios, offshore oil and gas is expected to remain an important part of the energy production mix needed to meet global demand for at least the next few decades. We expect the seismic market will continue gradually improving and that our strategic decision to participate in the 3D new acquisition multi-client market will enable us to capture market share even without an improvement in industry conditions. That said, we are also focused on rapidly diversifying outside of energy into much larger markets where we can increase the stability and share of recurring software revenue in our business. Our strategy is to empower clients to sustainably use marine resources and combat climate change through our technology. We are focused on optimizing port management, energy logistics, and maritime digitalization markets. In these large, capital-intensive industries, there are significant visualization opportunities to enable smarter, safer management of maritime assets and people and reduce environmental impact and greenhouse gas emissions. In our E&P technology and services business, multi-client revenues improved sequentially, primarily due to starting our Mid-North Sea High 3D multi-client program and an increase in 2D data library sales. Importantly, this portfolio pivot towards 3D, which initially commenced through 3D re-imaging, shifts our new product investment closer to the reservoir. Our client spend tends to be more consistent, and programs have larger scale revenue and earnings potential. In the last five years, our 3D data library has grown nearly 10,000% from approximately 4,000 square kilometers to 400,000 square kilometers today, with substantially all of the 3D investment in basins that are well positioned to support the E&P sector in the energy transition, such as the North Sea and offshore Brazil. By comparison, our 2D data library increased 35% during the same timeframe. The UK remains attractive for investment with one of the highest global returns per barrel. Until recently, parts of the Zechstein play in the North Sea had been largely overlooked because 5MEC technology wasn't able to properly resolve this complex variable play. Our Mid-North Sea High 3D program demonstrates how new high-quality data can unlock the potential of promising new acreage. In May, we started the second, significantly larger phase for our mid-north sea high 3D multi-client program. We are pleased to be partnering with Shearwater again on the data acquisition, which, upon completion in late September, will increase the survey area six-fold. We deployed our proprietary digital technologies to collect the data in a more efficient, eco-friendly manner. Prior to the survey start, we evaluated several climate motion analyses in May System Survey to design the survey in the most efficient manner. Then, in the field, ORCA, incorporated impacts from ocean currents into the survey plan to optimally bar the lines in an order that maximizes efficiency while minimizing emissions. In addition, through Marlin, we are collaborating with fisheries to minimize disruptions to both operations by coordinating vessel and equipment movement. The combination resulted in about 25% time savings on the first phase of our Mid-Norsey High program. Our team is actively cultivating additional 3D program opportunities. Almost all our multi-client programs in progress consists of 3D data. In addition to the North Sea, we are continuing to expand the highly successful Pecania 3D re-imaging data set offshore Brazil. Our carbon footprint per dollar of revenue is significantly less than our peers, principally due to our re-imaging emphasis and highly efficient proprietary software infrastructure that maximizes the quality and insights of existing subsurface data. In addition, we continue to benefit commercially from the global 2D data collaboration with CTS, which helps diversify both companies' geographic exposure to opportunities globally and while also increasing sales efficiency. Our innovative Gemini extended frequency source continued to perform extraordinarily well during the quarter as we wrapped up its first proprietary deployment. Shell nearly doubled the initial program size offshore eDIPS and highlighted Gemini's role in enhancing exploration insights in a more eco-friendly manner. The innovative acquisition design paired with Gemini delivered the expected uplift in low-frequency content in this large, long-offset survey. Many attractive geographies for continued investment are in complex geological settings where more accurate imaging of the subsurface is essential for effective resource development. Industry demand for low-frequency data continues to build as clients recognize the value it provides and involve survey designs to take advantage of new technologies such as Gemini. We have submitted several proposals for additional Gemini deployments on both multi-client and proprietary projects. In the quarter, we were also approached by customers to tender vertical-sided profiling, VSP, production applications of our stores. We continue to commit the majority of ION's imaging capacity to distinguish our multi-client offering while deploying the balance of resources on challenging proprietary projects that help maintain our top-tier capabilities. During the quarter, we secured the first project commitment under the multi-year umbrella contract with an energy major that we mentioned on last quarter's conference call. Operations optimization revenues improved during the quarter, during the second quarter, consistent with offshore seismic activity improving seasonally. Seismic tender activity is increasing primarily for production-focused contract work. The multi-year command and control subscriptions and routine equipment spares and repairs business provide a level of stability for this business segment. Remote services engagements of ION Anywhere continue to enable clients to overcome COVID-19 operational access challenges, a significant departure from what was historically an in-person services-led business for ION. We continue to advance our diversification strategy in new maritime markets across software and devices. In our software group, the Marlin SmartPort deployments across nearly 28 UK ports continue to receive positive client feedback on the value our software delivers, such as enhancing decision-making via simple visual dashboards. Based on the local success in the UK, our business development team recently expanded and increased outreach in North America, Latin America, and Africa. The climate-smart digital infrastructure we are promoting with U.S. Department of Commerce support is garnering significant interest for country-scale digitalization solutions spanning maritime detection, port management, and illegal fishing, with an initial engagement focus on coastal Africa. These multimillion-dollar government projects are well aligned with the qualification criteria for Ex-Im Bank financing, and introductions have already been made to more than 15 countries. Our technology is focused on creating high-value information that drives efficiency and related resource utilization and reductions in HSD exposure and greenhouse gas emissions. For example, in the energy logistics market, our largest development effort is to analyze planned versus actual supply vessel schedules, identifying opportunities for clients to minimize fuel consumption, decrease emissions, and operate with just-in-time efficiency. Based on the range of use cases we've uncovered and magnitude of efficiency and environmental benefits our technology can deliver, We are optimistic about accelerating adoption. Our devices diversification strategy is to develop real-time monitoring solutions that improve the safety and environmental compliance of offshore oil and gas operations, from well abandonment to carbon storage application. Well Alert leverages our core competencies from the CBA advisement world and targets the growing market associated with sustainability and aligns with our strategy to provide decision support data and analytics. Our expectation is that regulators will drive adoption of proactive monitoring systems that provide more frequent, accurate measurements to assure safe operating environments. We are systematically working to understand the challenges and requirements of these systems in various geographies. Well-alert conversations have advanced beyond our initial target market, receiving positive feedback in a number of regulatory environments, and as a result, we started developing a full-scale prototype. With that, I'll turn it over to Mike to walk us through the financials, and then I'll wrap up before taking questions.