Transportadora de Gas del Sur SA TGS

Welcome to the TGS conference call. Throughout the call, all participants will be in listen-only mode. And afterwards, there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Christian Johansson. Please go ahead with your meeting.

Good morning, good afternoon, and good evening, depending on where in the world you're listening in from. My name is Christian Johansson. I'm the CEO of TGS. And with me today, I have our CFO, Fredrik Amundsen, who's based in our office in Norway. Like most employees in the U.S., I'm still working remotely, but I'm pleased to follow the developments in Europe where people are slowly returning back to work. As usual, we reported our preliminary revenues for the quarter on the sixth business day after quarter close. The numbers are therefore well known for you, but this morning we reported our full financials for Q1. I hope you've had a chance to review the numbers and that you have watched our pre-recorded presentation available at our website, tgs.com. We're also happy to take your questions at the end of the call. Q1 2020 was impacted by the COVID-19 crisis and the sharp drop in oil price. Protecting the health and safety of our employees at the same time as ensuring minimal disruption to the business have taken top priority. And in that regard, I'm extremely pleased with how the organization is had performed during these challenging times. With announced measures to protect cash flow, the company is well positioned to use the difficult market conditions to form the basis for further long-term value creation and continued industry-leading returns. TGS had net segment revenues of $152 million in Q1 2020. This is a 3% decline compared to last year. The quarter saw solid pre-funding revenues driven by Latin America and North America onshore, while late sales were hurt by the COVID-19 crisis and the large oil price drop towards the end of the quarter. At $125 million, EBITDA and Q1 came in 1% above last year as a result of favorable development in operating costs. We expect these operating costs to come down further as our cost-cutting initiatives start to kick in. TGS continues to deliver industry-leading return on average capital employed with 17% annual returns at the end of Q1 2020. Our balance sheet remains strong with a cash holding of close to $250 million at the end of the first quarter, allowing the company to pay a dividend of US dollar 0.125 per share in Q2 2020, despite the challenging market conditions. On April 8th, 2020, we announced several measures in response to the market turmoil. The highlights are, number one, a cost reduction from centralization of offices, a global salary freeze, temporary cut in employee bonuses, and right-sizing of the organization, leading to a 2020 cost state that is approximately 35% below the 2019 performer numbers. Number two, multi-client investments for 2020 reduced to approximately $325 million in from 450 million by postponing projects and reducing scope. And finally, the Q2 2020 dividend reduced to 0.125 per share from previously 0.375 per share. CDS has a history of maneuvering difficult times in such a manner that we come out in a stronger position at the end. And this is our goal in the current situation as well. But the measures I just described, we're ensuring that the balance sheet remains robust which will allow us to withstand a prolonged period with lower revenues, as well as taking advantage of interesting opportunities that tend to appear in periods such as this. These were the key points I wanted to cover initially. Thank you for your attention so far, and we will now open up for questions. Operator, please.

Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. And if you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while the questions are being registered. And we have our first question from Christopher from Carnegie. Please go ahead.

Yes, good afternoon or good morning. This is Christopher from Carnegie. Two questions, if I may. Regarding the multi-client library, do you have any book values remaining for your data offshore Gabon? And second question, in the Q1 release you said normalized tax rate of 22% was expected in 2020 and you referred to tax rates in US and Norway. But do you see any impact from your operations in Brazil and Argentina this year which would impact this tax rate this year? Thank you.

Thank you very much, Christopher. So I will cover the first part. The answer to whether we have book value left in offshore Gabon is yes, we have some book value in Gabon. It's part of the Spectrum transaction that we did last year, and Spectrum had a library in Gabon, as you well know. So I don't want to go in detail about what the book value is, but we still have some exposure to Gabon. Your second part of the question, which is related to taxes, I will refer to Fredrik, who's going to cover that.

Yes, it's Fredrik here. The tax rate will, of course, be influenced by the activity in a global organization. And we could see that that tax rate is coming up somewhat based on the higher tax rate in Brazil, based on the mix of the revenue going forward. So the short answer is it is possible that you see a slight increase in our tax rates for the current year.

Thank you.

Okay, thank you. As a reminder, if you wish to ask a question, please press 01 on your telephone keypad. And we have our next question from Mark Mistryn from Arctic Security. Please go ahead.

Yes, good morning. This is Morten Nyström from Arctic Security. First question relates to the balance sheet and the current assets. Do you see any risk of clients, and especially on the receivables, do you see any risk of clients not paying you either because of, I guess, the COVID-19 situation or due to potential default situation in some of our clients and I'm referring especially to the U.S. onshore clients.

Well your question is related to the receivables and what I can say about that is first of all you know our clients typically tend to be quite large and especially onshore you see in our clients Mick you see that it's a is a higher portion of larger companies. And typically some of these mom and pop shops who are exposed to Permian and Scoop and Stack, they typically don't use a lot of seismic, so they're not really big on our client list. So I guess the answer to that is that we haven't seen any losses so far. We haven't had any negotiations with clients who are trying to push out payments yet. I would say onshore the risk is very manageable, very minor. And the same goes with offshore, where obviously the majority of our clients are rather big, and even in today's market, they have an ability to pay. So I guess to summarize my answer is that we're not too concerned about that. They will always be high on our agenda to follow up the payments, but we haven't really seen any issues so far. Onshore, I'm not particularly concerned about that.

Okay, and my second question, I guess it's for you, Christian, and let's try to get our heads around how the next quarters will develop. I remember that when you hosted the COVID-19 conference, you were asked about potential late sales for Q2 and Q3, I guess. your answers were somewhere in the range of hoping to do similar numbers in Q2 and Q3 as you did in Q1. Has this changed? And also, are you able to say anything about how much of your late sales you did in March?

Yeah, I can. I guess I can partly answer that question. So I cannot give you the full details, of course. But in terms of late sales, so we had $63 million of late sales in Q1. And as you know, Q1 was only impacted pretty much for the last month out of three months. Then you're absolutely right. You know, I said that for the next couple of quarters, I I hope that we can keep up that level of late sales. I would still say, I hope to do that. I think 63 million for Q2 would be a really good achievement. I would be extremely happy if we can get to 63. I saw some speculation today that the lowest it's ever been is $38 million in a quarter, which was Q1 of 2016. It's not the lowest ever, but it's the lowest over the past few years. And yeah, And also referring to Q1 2016 actually being better, the market is more dramatically down now than it was in Q1 of 16. We should also be aware that we have a bigger data library now and we have a data library that is probably better positioned for this kind of market. So I think, you know, if we drop down to a level of 38, I would be very disappointed. If we get to 63, I would be very pleased. And with that, I kind of give you an indication of what we hope to do in Q2. your second question is related to what we've seen so far or, or, um, and how much, how much was related to March in, in Q1. Uh, yeah. Um, I think Q1 was probably less backend loaded than what you usually see because the crisis started in March. So typically we would have higher late sales in the quarter and we would have a really good March. Now we didn't have a good March and, and, uh, our quarter ended as it, as it was at $63 million. So I think, um, I think we certainly started to see the impact of COVID in March. No question about that. We've seen that in April as well, of course. April is always a very challenging quarter in terms of late sales. And this time around, it was obviously even more challenging.

Thank you.

Thanks, Martin.

Thank you. And our next question is from John Orleissens from ABG. Please go ahead.

Good morning and good afternoon. A question on the multi-client investments for the rest of the year. How firm is the guidance for 325? Because when I look at your slide of the project schedule, it's very little committed beyond April, really, especially beyond May. So two questions. Maybe to say first, how much of the 325 is committed already? and elaborate a little bit on the rest of this.

Yeah, I guess you're referring to slide 23 in our earnings release package. And as you'll see from that slide, we had very high investment, a lot of activity in Q1. And we actually had quite a lot going into Q2 as well. So investments will be quite high also in Q2. But then after that, there's there's basically two projects. It's the engagement OBM survey in the Gulf of Mexico and it's Atlantic margin survey in Norway. Both surveys are actually quite big. So they take up quite a big portion of the second half of the year in terms of investments. I think if we stopped here, if we do nothing else for the rest of the year, we're probably going to fall slightly short of 300. So it means that we are still planning for a few investments probably in the latter part of the year. It will most likely be 2.4. It should be one or two investments before that as well. But I think we need another couple of projects to fill up our 3.25, if that's our goal. But I would have to say that these investments are highly subject to good pre-funding and good near-term returns. We're not obligated to do anything at all. We don't have any vessel commitments. and we would look very carefully at the market conditions and the pre-funding.

Also, I hear that you are not participating in PGS offshore campaign West Canva this year, which would be the first in many years that you did not. I just wonder if you could tell us why you're not participating there, please.

No, I think it's all about securing cash or preserving cash and securing our financial position. And when we look at our project, we look at pre-funding, of course. We look at near-term revenue potential and we look at the overall return of the project. And these projects this year didn't satisfy our financial criteria for return. So we decided to opt out for this year. It doesn't mean that we're out of Canada. We will still will probably participate whenever the market becomes better.

Is that at your discretion, the deal with PGS? Could you decide to join in 50-50, or is it at your discretion, or how does it work, that agreement?

Yeah, I obviously cannot go into details about that, but as you understand, it is a discretion that we have to opt out, and the agreement is a long-term agreement where You know, if you look at every project and you evaluate every project, then it's your choice whether you want to participate or not. So far, we both have participated in all projects for the past eight years. And before that, it was only TGS. But for the future, as I said, we still believe Canada would come back. But at the current oil price, it's very, very challenging, of course, because, as you know, it's... It's a lack of infrastructure, and the break-even is quite high, especially in the northern part of Canada.

And my last question on the multi-client investment side is regarding non-organic investments. In Q1, you spent $50 million in buying an onshore library in Canada. I just wonder, are there more opportunities for that onshore in the U.S. at the moment? Because I guess everything has come to complete standstill. Would it be... You can just imagine it could be a great time to do some acquisitions onshore or rakeage onshore in the U.S.

Yeah, it's a great point. In fact, I got exactly the same question in a board meeting yesterday from one of the board members. So, yes, that's absolutely something where we're looking very closely at because we know that this is obviously a boom and bust market. And right now, obviously, onshore is suffering from a very low and extremely volatile oil price. But we think over time that will probably normalize and we will see bigger players. We will see significant consolidation. We will see transfer fees as a result of the consolidation. So our belief is that the onshore market will still stay quite robust. It's just that it's very volatile right now, which means that there will come up opportunities and we will certainly look at that for sure.

And just for the record, did you book any transfer fees in Q1?

No, we did not.

All right. Those were my questions. Thank you.

Thank you.

Okay. Thank you. And as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. And we have our next question is from Sahar Islam from Goldman Sachs. Please go ahead.

Thank you for taking my questions. I had two, if that's okay, please. Firstly, just on the cost savings, could you give us some more color as to where the cost savings are coming from and how much is from vessel deflation? And then secondly, related to the vessel side, could you talk a bit about the vessel owners, your relationships with them, given obviously some of them have quite high leverage in this downturn and whether you're worried about that side of your supply chain? Thank you.

Yeah, I think your first question, which is related to cost. I mean, when we talk about reducing our operating costs by 35%, that's excluding any vessel-related costs. So this is purely our salaries and other operational costs, cash costs. So the way we reduce that cost is obviously, as we have announced, we have centralized some offices, so we're closing down offices. We're obviously accelerating the takeout of synergies from the spectrum transactions. We are unfortunately having to right-size the organization, so that process has already been going on for about a month or so. And then obviously there is a much higher focus on cost in general. So we feel confident that we're going to be 35% lower than last year, meaning that last year we had about $150 million of operating costs. And this year it's going to be 100 and hopefully even lower than that. And if you look at the run rates for the first quarter, you'll understand that for the second half of the year, it will be significantly lower than what you saw last year. So we feel quite confident that we're able to deliver on that and we have a lot of actions already being implemented. So on the second part of the question on vessels, I mean, in We haven't seen any drop in vessel rates yet, and typically that takes a bit of time before you see that cost is starting to come down. So that's part of the reason why we're a bit careful by entering into new contracts right now, is that we still see that rates are relatively high. Relationships with vendors are very good. I mean, we are dependent on each other. We are probably their largest clients, and... and they are by far our largest supplier. So we have a very professional, healthy, and good relationship with our vendors. Yes, you're right, some of them have some financial constraints, and obviously that's a situation we're following very closely. That's all I want to say about that.

Okay, thank you.

Thank you.

Okay, thank you. Our next question is from John Mascot from BNP. Please go ahead.

Yeah, it's John Mascot from BNP here. I have one question on the backlog, 160 million, and given sort of what you said on committed investments, it's pretty much the same amount as the remaining investment under that. Could you give some indication of scheduling or pacing of that backlog? And also, how big are the the late sales contribution and the percentage of completion of that backlog?

I mean, it's a mix. So first of all, you need to account for the fact that between 20 and 25% of that backlog is related to our well-beta product business or GPS business. So that obviously adds to the backlog or is part of the 160. So I would estimate that to be somewhere between 20 and 25% of that figure. And then if you look at the remaining backlog, then yes, most of it will be taken out this year in terms of pre-funding of new projects. You've seen what we announced in terms of both engagement and the Atlantic Margin Survey. So that's part of it. And then we also have pre-funding for projects that are not part of the vessel schedule yet because we haven't decided whether this is going to take place in 2020 or 2021. So take Argentina as an example. We haven't completed our Argentina project. They haven't decided whether we're going to come back in 2020 or whether we're going to push that into 2021. So most of the backlog is 2020, and most of it is seismic, and certainly the majority is pre-funding of new projects.

Okay, thank you. Thank you. As a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. And we have a follow-up question from Christopher from Carnegie. Please go ahead.

Yes, with regards to your operations in Brazil and Argentina, have you seen any impact from the COVID-19 situation, especially in Brazil, and also the significant travel restrictions that have been put in place, which have made crew changes on seismic vessels difficult to perform?

Yeah, I mean, it's taken a lot of focus and the dedication and work from our operations department to manage this, and obviously a very close collaboration with our suppliers. If you look at our project schedule, you see that most of it ends sometime in early or late April. So I think the majority of these contracts were completed on time, and we had... No issues other than keeping the crew longer on the particular vessel to avoid the crew change. So we haven't had any big issues related to that, but obviously it's taken a lot of focus on the organization. So you're asking specifically about Argentina and Brazil. I think Argentina, you'll see from the vessel schedule that we are, you know, one vessel has completed and another one is due to complete this week. And then in Brazil, we also had no significant interference to our operations in the quarter. But as you see, from early May, we hardly have any operations outside Gulf of Mexico and Norway.

And now, as we are in mid-May, could you describe how you have experienced the first half of second quarter in terms of late sales?

Hmm.

Yeah, obviously I cannot be specific on that. As I said in the previous question today, April is always a very tough month in terms of late sales. There are no real drivers and it's the first month of a typically quite challenging quarter in any market. So April was certainly not good. It was pretty much as we expected. That's all I can say. We had late sales. It was not zero. We had probably a handful plus. They're not big, but we had sales. And then for the reminder of the quarter, we still have some relatively big deals that we are trying to get close and we have good interaction with our clients. And when you ask me what is a big deal today, I think in today's market, a big deal would be anything... above $3 to $5 million. So we have some of those deals that we are looking at and hopefully able to close. And I have to say our customer engagement and our interaction with clients has been extremely good. I think we go through the list of meetings every Monday in the executive team and the activity is pretty much just as good as it was before the crisis. So we have multiple meetings with clients I think the decision-making process is a bit slower with the clients, which you can expect in a market like this. But there is activity out there. It's just that it's harder to get it over the finish line, of course.

Many thanks and good luck.

Thank you.

Thank you. We have another follow-up question from Mark Mustern from Arctic Security. Please go ahead.

Yes, it's Martin Nystrom from Arctic Security. Again, I guess, Christian, you answered partly my question. Now, my question was, your team and also, I guess, your clients are still at home office, at least in the US, and, you know, this social distancing team theme is still the case. I was just wondering if this is expected to have any let's say, negative impact on deals you're trying to secure over the next month, especially in May?

Yeah, as you said, I answered partly that question. I think, as I said, the activity level just measured by number of meetings and number of contact points with clients is probably as good as it was prior to that. to the down cycle. And that's certainly something we've been pushing very hard from executive management too and making sure that the activity is kept up. I would probably lie to you if I say that it's business as usual. I mean, obviously, it's harder to interact over Teams or Skype than it is to have physical meetings. And sometimes, you know, you have these data shows where you're showing data to clients and it's a bit more cumbersome to do that electronically than doing it in a physical meeting room with all the technology and equipment in place. So I guess we're all looking forward to get back to the office. I think that's going to make it easier, but I'm positively surprised about how we've been able to manage this crisis in that regard.

Thank you.

Thanks, Nathan.

Okay, thank you. As a reminder, if you wish to ask a question, please press 01 on your telephone keypad. If you wish to ask a question, please press 01 on your telephone keypad. There are no further questions at this time. I'll pass the floor back to Christine.

Yeah, with no further questions, I would just like to thank you for your attention. We remain committed to deliver industry-leading returns for our shareholders and your constructive input and questions are highly regarded in that sense. So I hope you stay safe and healthy and looking forward to see you in Q2 and hopefully see you in person as well. So thank you very much and stay safe.