Transportadora de Gas del Sur SA TGS

Hi everyone and welcome to the Q3 2023 earnings release from TGS. My name is Kristian Johansen, I'm the CEO of TGS and with me today we have Sven-Berg Larsen, our CFO. I'll refer you to the forward-looking statements that you can read after the presentation. And then I'm very pleased to report a Q3 result that is delivering on all parameters. Very pleased about our results in all areas. So if you start on the upper left-hand corner, continued strong early sales momentum. We have a year-on-year growth of 129%. We finally saw late sales recovery in Q3. It's up 11% compared to last year and came in slightly above our own and the market expectations. And we had acquisition delivering its best quarter ever with a year on year growth of 27%. So very, very pleased about the development of our OBM business. DES is continuing its positive progress with strong growth. So 41% year on year. I'm also particularly pleased about the strong operational performance and cost control, which resulted in an EBIT margin of 23% in Q3. And then last but not least, and probably the most important, very solid cash flow, free cash flow of $45 million in Q3 of 2023. So I'll touch on the financial highlights. So we had POC revenues, so total revenues of $293 million compared to $119 in Q3 last year. And again, this number was announced to the market on the sixth business day of the quarter. Again, as I said, I'm pleased about late sales. We had $72 million in Q3. That's up from $65 million in the same quarter of last year. We had early sales of $88 million, and that compares to $39 million in the same quarter of 2022. Proprietary revenues, if you combine acquisition business unit with our processing and proprietary processing work came in at $133 million, but 126 of that came from former MagSize or our OBM business. So again, very, very pleased about the performance of our acquisition business and also very pleased about the integration, the synergy take out. And of course, as I said, the operational performance. We had an EBITDA of 170 million in the quarter that compares to 80 million in the Q3 of 2022. Positive momentum in POC revenues. It's driven by strong growth in both multi-client sales and the acquisition contract revenues. Very solid contract inflow, $355 million of new contracts signed during the quarter. And then last but not least, that leaves us with a POC backlog, including acquisition of $475 million, which is also up from previous quarters. Just touching on the POC revenues, so pro forma, and then we have included mag size in the numbers for 2020, 21 and 22. And as you see, a significant increase in year to date 2023, where we're up 27% compared to year to date 2022. And again, these are pro forma numbers. So in that sense, we're comparing apples to apples. I'll touch on some of the operational highlights. And again, I will start with going back to the acquisition business. We have signed two large contracts in our ocean bottom node business in the U.S. Gulf of Mexico. First one is a multi-year contract. This is with a super major. It's a three-year frame agreement. And they're going to be working with one of our crews in the Gulf of Mexico for the next three years. Again, this is great for our backlog and visibility going forward and provides a lot of security and certainty around our backlog for 24 throughout 26. So really good. And not only that, but we also announced yesterday a new contract for a repeat customer in the US Gulf of Mexico. This project starts on November 1st and it's going to finish sometime in Q1 of 2024. And again, these are just some evidence of the quality, the customer satisfaction and the operational stability of our old BN business that we are very, very pleased about as we speak. Q3 was a busy quarter in terms of acquisition activity. You see that from our relatively high investment level. We had eight multi-client operations in the quarter. And you can see from the dots where we were operating in Q3, so very high activity in In our multi-client business, we had four OBN crews working as well. You can see that on the same map. And then finally, we had three different DES operations, with the biggest ones being in the New York Bight area of New York and also in Utsera of Norway. Then I'll give you an update on the PGS transaction. So the merger agreement and merger plan were signed yesterday or last night. That means that we're going to have extraordinary general meetings in both companies in late November. As customary practice, there's going to be a six-week creditor notice following the EGM approvals. And then, of course, regulatory approvals are still pending. But we estimate to have that in place, and we estimate closing sometime in the first half of 2024. And we're getting increasingly optimistic that that's going to happen sooner rather than later. So we're probably targeting sometime late Q1 or early Q2 rather than late first half. So that's the situation as we speak. We also upped our synergy potential or our estimates for synergies of the PGS transactions. So if you look on the bar chart here, you see that we estimate now cost synergies of about 60 to 70 million dollars per annum. And this is based on further insight into PGS numbers and obviously some discussions of non-confidential information between the two companies where we are getting increasingly comfortable that synergies are going to be higher than the 50 that we announced at the time of the transaction. And it's probably going to be somewhere around 60 to 70 on the pure cost synergies that have an EBITDA impact. In addition to that, we think there are synergies on higher fleet utilization. So we think the fleet utilization will grow by another two to three percentage points, which again means that we have another 15 to $20 million of fleet utilization synergies on top of the pure cost synergies. Then on the financing cost, we estimate the synergies to be between 15 and 20 million per year. And that's simple math. We apply 300 to 400 basis points lower interest cost on about $500 million of gross debt. And that takes you to about 15 to 20 million per annum. So in total, we feel quite confident about synergies or annual synergies of somewhere between 90 and 110 million dollars. And in addition to that, we have additional savings from deferred tax assets. So if you look at the annual synergies as a percentage of the price of the target or the market cap of the combined company, this is clearly a very strong synergy case and a good transaction that makes sense for so many different reasons. So with that, I'm going to hand it over to Sven Börre. He's going to cover the financials, and then I will come back and talk about the outlook for the remainder of the year and obviously more focus on the long term. Thank you very much.

Thank you for that Kristian and good morning everyone. So I'll start as always by going through the revenues. our different revenue streams, starting with the early sales on the top left-hand side of this chart. We had strong early sales, as we have had in the previous quarters as well, driven obviously by a significant increase in our investment activity. And it's very encouraging to see that our customers are very keen on supporting new projects, new multi-client projects in different areas. So in this quarter, we had $88 million of early sales, POC early sales. This compares to 39, only 39 million in the same quarter of last year. And that's a growth of 129% year over year. So really good to see the strong performance on early sales. Then late sales on the next chart. We had $72 million of late sales, which is 11% higher than what we had in the same quarter of last year. And it's also 16% higher compared to the previous quarter. So although it's still not... spectacular late sales number. We feel very good about seeing late sales at least coming up to a more acceptable level than we have seen in Q1 and Q2 of this year. So that's really good to see. Proprietary revenues came in at $133 million in this quarter, and obviously the change compared to last year is largely made up by the acquisition of MagSize, which was included from Q4 of last year. And then total revenues, POC revenues came in at $293 million compared to 119 in the same quarter of last year. But if you also include mag size in the same quarter of last year, we had a pro forma year over year growth in our POC revenues of 34% in Q3. And then looking at the POC revenues by business unit, first multi-client and imaging is lumped together on the top left hand chart here, $156 million in this quarter, which is a growth of 42% year over year. Then we're also happy to see that our digital energy solutions business continue its strong progress in the quarter, 41% year-over-year growth in revenues, mainly driven by continued performance and continued growth in 4C offshore, and our LiDAR buoy wind measurement projects that we are continuing to deploy more and more of these buoys. Then the acquisition business unit on the bottom left-hand chart, as you can see, we had $126 million of revenues from acquisition. This is actually the best quarter ever also when looking at the performer numbers for our acquisition business unit. As you can see, we didn't have much internal work in the quarter, only $1 million on top of the $126 million in internal work. This strong performance in the acquisition business units is obviously driven by three different factors. Firstly, we have higher rates rolling over to contracts with generally higher rates. Secondly, we have higher contract coverage. And finally, and probably most importantly, we have very strong operational performance. So all in all, a very, very strong quarter for our acquisition business unit. Then looking at the operating expenses, cost of goods sold, which is largely or entirely linked to our proprietary revenues and mostly our acquisition operations, $72 million in the quarter. And this makes up 54% of proprietary revenues. We have previously guided that you should expect on a normalized basis that number to be in the low 60 to 65%, but it will vary a little bit from quarter to quarter. But this quarter we have a very strong operational performance, which drives this cost of goods sold percentage down or increases the gross margin. And personnel cost came in at $34 million in the quarter on an underlying basis, excluding bonuses. We continue to be fairly stable in the high 20s. And then with the strong profitability we're showing in the quarters, the bonus payments to employees also goes up. And thereby we ended up with $34 million of total personnel cost in this quarter. Other operating costs came in at $17 million in the quarter, slightly higher than Q2, but lower than Q1. This includes roughly $3 million of one-off costs, mainly related to an arbitration case that we inherited from when acquiring MagSys. This gave us a POC EBITDA of 170 million dollars in this quarter compared to 80 million dollars in the same quarter of last year. Then going further down, the P&L focusing now on POC amortization. The straight line amortization this quarter is $41 million, which is more or less stable compared to the previous quarters as expected. The POC accelerated amortization was $35 million in the quarter. And then we have impairments of roughly $5 million in the quarter. As you can see from the history as well, we quite often have smaller impairments related to individual service that are subject to special circumstances. So it's not unusual that we have smaller impairments in some of the quarters. Depreciation, $21 million increased a little bit and that reflects some investments we've done this year in more equipment in the acquisition business unit. So $21 million in depreciation this quarter. This gave us an operating result of $68 million compared to a loss of $7 million in the same quarter of last year. and this represents an operating margin of 23% and it's a result we're quite happy with. Multi-client investments 113 million dollars in this quarter so high investments and a 78% early sales rate. We were probably hoping earlier in the quarter and also earlier in the year for a somewhat higher early sales rate But we haven't seen the same level of call it late early sales or sale of almost completed projects that we were anticipated earlier in the year. And when it comes to investments, we have invested around $330 million so far this year. And as Christian will cover in more detail afterwards, we're upping our investment guidance for the full year to around $400 million. And the bridge of POC revenues to IFRS revenues, as you can see, we ended up with IFRS revenues of $225 million in the quarter, and that is lower because we had very few multi-client projects that came to completion during the quarter. And this... leads us to look at the IFRS profit and loss account. As I said, $225 million of IFRS revenues in the quarter, cost of goods sold of $72 million, personnel cost $35 million, and other operational cost of $17 million. million dollars gave us an EBITDA of 103 million dollars and then subtracting straight line amortization of 41 million dollars which is the same in IFRS and POC but very low accelerated amortization in the quarter basically since we had low IFRS early sales of 9 million dollars impairments of 4.7 which is the same depreciation of 21 which is the same as in PUC gave us an operating result of $26 million in our IFRS accounts. The result before tax was $28 million. Then we had a tax cost of $12 million in the quarter, which is a fairly high tax rate but the tax rate will jump around a little bit depending on different movements mostly related to currencies so you should look at the the the tax rate more in a long-term perspective and as you'll see on a year-to-date basis we're down to 16 effective tax rate so all in all this gave us a net income of 17 million dollars corresponding to an eps of 13 cent per share in the quarter Looking at the balance sheet, this includes the share issue that we did in connection with announcing the PGS transaction to shore up the balance sheet of the combined company that gave us a net proceed of 86-87 million dollars. So the balance sheet is even stronger than it was in Q2 and in the same quarter of last year, basically in the expectation of taking over PGS sometimes early next year. Our multi-client library, of course, continues to increase in value given the high investments, $745 million at the end of Q2. Q3 we had a strong cash position of more than 200 or around 200 million dollars at the end of the quarter. You will also see that we paid down the 45 million dollars of interest-bearing debt that we had that we took over from the MagSize transaction. So we paid that down during the quarter and at the end of the quarter we had zero gross debt or interest-bearing debt. So the balance sheet remains very strong. Looking at the cash flow, we had $203 million of cash flow from operations in the quarter, and we had $158 million of negative cash flow to investments in the quarter, which gave us a free cash flow of $45 million in the quarter, which is slightly higher than what we anticipated when we started the quarter, because we had extremely good cash collection in the quarter but this this towards the end of the quarter but this of course will will result in a corresponding reduction of our expectations for the q4 cash flow just so you're aware of that and then you'll see that we had we paid down the loan of 45 million dollars as i said and you also see the dividend payment and the share issue as part of this cash flow statement. And all in all, this gave us a net cash flow, a net increase in cash of $56 million during the quarter. And as I said, this gave us a cash position of $200 million at the end of the quarter. Dividends, we continue to pay the same level of dividends, 14 cent per share. The X date is 2nd of November and the payment date is the 16th of November. And by that, I'll hand the word back to you, Christian.

Thank you, Sven. And let's have a look at the outlook going forward. And we'll start with a slide that you have seen before, but it's been slightly updated since then. So we have new estimates from OPEC that you probably saw last week. We have Exxon's long-term energy outlook that came out in July. And we have the IEA steps. And as you can see on the left hand side, the three estimates vary quite a lot. But I think OPEC and Exxon are pretty much in line in terms of what's going to happen over the next few years. And OPEC last week said that in 2028, the demand for oil and gas is going to be about 110 million barrels. And if you compare that to about two years ago, when a lot of so-called experts expected peak oil to be next year, then we can clearly conclude that they were wrong in their estimates. But again, if you look at OPEC, Exxon and even IEA steps, who's the most negative, we see that there is a tremendous need for more oil and gas over the next 27 years, which the forecast period here goes to about 2050. With a current depletion rate of 7% for oil and 5% for gas, and you see the gap between even the IEA steps, which is the most negative. You see the gap there, the white gap is quite considerable going forward. If you look on the right-hand side, you see the estimated 2050 oil and gas share of the energy mix. So today it's about 55%. So oil and gas represents about 55% of the mix. According to Exxon, it's going to be 54% in 2050, and it's going to be based on significantly higher demand. So it's going to be continued to grow at a rate of about 1% per year. OPEC is very much in line, but their forecast goes to 2045, but they still expect 54% of the energy mix in 2045. It's going to be represented by oil and gas. And then IEA steps is the most negative or conservative if you like, but they're still at 46% versus 55 today. And it's based on higher or slightly higher demand, as you see on the left hand side. So again, the fundamentals are just really good for this industry. And they've completely changed over the past couple of years in terms of people getting more realistic in terms of where the energy sources are going to come from for for the future. On top of that, we see a really tight oil market in the short term. If you look at the numbers from EIA on the left hand side, you see the build and draw of inventories and you see a period of about six quarters where we've actually been building inventories throughout 2022 and 2023. Despite the fact that we've been building inventories, the oil price has stayed very strong throughout that period. And now we expect Q3 of 2023 is going to be a draw on inventories. It's going to be a draw for the next two quarters after that. And then it's going to be basically neutral for the period after that and going throughout 2024. So in summary, what you can tell from that graph is that there is very strong fundamental for a continued high oil price going forward. And that is further explained by the graph to the right hand side. So what you see there is a shaded area is the average high and low, or it's actually the high and low for the period from 2018 to 2022 of the US commercial crude oil stocks. And then you see the blue line there and you see the blue line is now currently lower than the average, despite the fact that there is some seasonality and some seasonal uptake. In October 2023, you still see that the blue line is below the average of the period from 2018 to 2022. So again, very strong fundamentals for a continued strong oil price, which is obviously positive for our industry. And then if we look at the acquisition activity plan, and this is obviously getting increasingly important for us, given that we own MagSize and we have a quite substantial acquisition business in TGS. So you see there Z Explorer 1, where it's been in Guyana for quite some time, and it's going to continue there throughout the end of the year. Z Explorer 2 is going to work in the US Gulf of Mexico. So you see that... bar to the to the end of q4 of 2023 that's a contract that we announced yesterday so it's going to start on november 1st and then go throughout q1 of 2024. z700 is mainly working in europe so you see there is a gap there for q4 that's that is a planned or scheduled gap and there is going to be a gap on that crew going into next year too but now we're competing for some contracts in asia pacific to hopefully fill that such that we don't wait until the Europe season opens, as you can see that we did last year. And then we have the MAS crew that is working in Africa as we speak, and it's going to continue to work in Africa for the first couple of months of 2024. The rest of our monitoring crews are fully booked and you see they've been fully booked throughout the year and we expect that to be the case next year too. And then we have a renewables crew that is currently working in NSA and where you will continue to see high bidding activity throughout 2024. So overall feel very good about the acquisition activity plan. You see it's been high utilization throughout 2023. We expect the same thing to be the case for 2024. And again, that means that we're going to continue to see good numbers from MagSize or our acquisition business, given that the current level of production efficiency can continue. And that takes me to the contract backlog and inflow. So we start with the contract inflow. You see, we have the second highest inflow ever. If you look at this timeline in Q3 of 2023, we saw new contracts of about $355 million, and there's only one quarter, and that was Q3 of 22, where we had higher contract inflow. And that means that the contract backlog is now pretty close to $500 million. And that's a combination of 236 from acquisition. And then on top of that, we have about $240 million of multi-client backlog at the end of Q3 of 2023. Also see on the right hand side, you see the pie chart there with the timing of the expected recognition of our early sales. And that's something that's going to help you in estimating the next couple of quarters in terms of early sales. License round activity, if we start in North America, there is a round in Canada this fall. There is also a GOM sale, so that's going to take place on the 8th of November. It's going to be the last lease sale now for quite some time. So the next one, according to the new five-year plan, is going to be in 2025. And according to that same plan, it's going to be lease sales in 25, 27 and 29. But again, there is a lot of uncertainty related to that because nobody knows what's going to happen with the next election in the US. And that election may obviously change the plan for the next five years of the US go for Mexico. In Brazil, we have the permanent offer round in Q4 of 2023. You see we have rounds also that are quite important for TGS, both in Uruguay, which is May and November, that takes place on an annual basis, and then Argentina, where there is an offshore round that is currently open. Europe, we have the APA round, the awards in Q1 of 2024. And then we have an open round again in Q2 of 2024. And APA is probably more important to PGS than to TGS. But at the time when the APA round is open again, we hope to have closed the transaction with PGS. Africa is busy. I'm not going to touch on the individual rounds in Africa, but all I can conclude is that there is a higher number of rounds than we've seen in quite some time. And then in Asia Pacific, you see important rounds in both Indonesia, Malaysia and Bangladesh, where TGS has a lot of data. As Sven alluded to, we're increasing our multi client investment guidance. So from a level of more than $350 million, we're now more concrete on that number. And we say that the number for the full year is going to be approximately $400 million. And you see on the right hand side, you see how that stacks up to recent years. And you got to go all the way back to the period of 2012 to 2015 to see the same level of investments in a multi client business. Early sales is expected to be above 75%, where the previous guidance was a minimum of 70%. And I think the combination of the two figures there is quite important, because if you compare back to 2012 to 2015, we invested more, but we had significantly lower pre-funding on our investments too. And in summary, total POC revenues of $293 million compares to $119 million in Q3 last year. EBITDA was very strong, $170 million compares to $80 million in the same quarter of last year. Positive momentum in POC revenues, that's driven by strong growth in both our multi-client business and acquisition contract revenues. Merger agreement with PGS is signed. Very pleased about that. And closing of that transaction probably sometime in either late Q1 or early Q2 of 2024. But certainly the best estimate is that it's going to happen in the first half of 2024. Continued growth in exploration spending is expected and TGS again is very well positioned and probably even better with the acquisition of PGS with a leading position in all different verticals of the seismic industry. So with that, I want to say thank you very much for the attention. I want to bring up Sven Berger here and then we're going to take the questions from the room or the questions from the web. Thank you very much.