Transportadora de Gas del Sur SA TGS

Good morning and welcome to TGS Q3 presentation. My name is Bart Steinberg, Vice President of Investor Relations in TGS. Today's presentation will be given by CEO Christian Johansen and CFO Sven-Bette Larsen. Before we start, I would like to give some practical information. For those of you on the webcast, you can type in questions on the webcast platform. We will address those after management's concluding remarks. I would also like to draw your attention to the forward-looking statement showing on the screen and available in today's earnings release and presentation. So please study that carefully. With that, I give the word to you, Christian.

Thank you, Bård, and thanks to everyone who's watching the webcast or are in this room together with us. So I think, first of all, before we hit the highlights for Q3, we're obviously part of a world with geopolitical tension and macro uncertainty, which are impacting the oil price volatility. And in times like that, I want to say A big thank you to all our 2,000 people for delivering a very strong result, keeping their eyes on the ball in terms of not only keeping safe operations, but also building a strong backlog of streamer seismic for the winter season, continuing to deliver strong operational results in our OBM business, and a great multi-client result in Q3. So hitting the highlights, we had total revenues of 501 million. That compares to about 455 million in Q3 last year. We had an EBITDA of 280 million, and that compares to 268 million in the same quarter of last year. Keep in mind, we had $16 million or $16.4 million of non-recurring merger-related costs in the quarter. This number has not been adjusted for that, but if you adjust for that, the number is 296, and that is a growth of more than 10% compared to last year. Our EBIT was 104 million. That compares to 82 million in Q3 of 2023. But again, if you adjust for that, the number is 120 and 120 obviously compares very favorable to last year. We're also very happy to say that we have realized a lot of the total merger synergies that have been announced. We have a target of $110 to $130 million. And we're ahead of the plan. And we're actually adjusting where we expect it to be at the end of Q3 to $55 million of annual run rate synergies. And then we're going to be at $70 million by the end of the year. So that's even up from what we announced a couple of weeks ago at the Capital Markets Day. Last but not least, substantial credit rating upgrades by Moody's and S&P. And as we expected, we have a far better rating than the former PGS. And obviously, that's going to be key to realize the synergies related to financial costs in the future. I'll give you a brief business update on the data acquisition activity that we had in Q3 of 2024. I'm not going to go through each and every dot on the map. But what I can say is that you see a lot of operations in Norway in terms of seismic. You see our NES or New Energy Solutions activities mainly centered around Europe, but there's also a DOT outside California. So we just started a new project measuring wind and ocean metadata outside California in preparation for the licensing rounds taking place in that part of the world. You see a lot of activity in the US, Gulf of Mexico this quarter. You see Brazil with two operations this quarter, one multi-client and one 4D contract. Africa is becoming more and more important, and that's going to be important to fill up the vessel schedule for the winter time as well. But you see both an OBN operation and a contract vessel operation in Africa this quarter. And then we see continued growth in Asia Pacific. So you see a or operations both in Indonesia and Malaysia this quarter. So very busy quarter, you can clearly see from the map that TGS is a bigger company now. And obviously with operations in both multi client OBN streamer seismic and new energies. I'll give you a quick update on the different business units. So we'll start with multi-clients. Again, a strong quarter driven by material M&A transfer fees and solid pre-funding of ongoing projects. You look at the financials below the picture there, you see we had multi-client sales of $277 million. That compares to 268 in Q3 of last year. But if you look at the investments, you see that investments are down from 181 to 129, meaning that the last 12 months sales to investment is now 1.9 this quarter compared to 1.7 in the same quarter of last year. Just look at this quarter in isolation. We're about 2.5 or sorry, 2.15 versus 1.5 last year or so. very good quarter in terms of multi client sales. And obviously, this is probably the more volatile part of our business. But it's always good to come back and beat expectations on the multi client side, which we did this quarter. And then on the contract, or before we go to that, a few new surveys that have been announced. Palma 3D, big survey in Brazil that we started this quarter and clearly leveraging the value of the integrated model. This is a survey that we do 100% TGS. And in previous surveys in Brazil, we typically had to split up the project such that we share the multi-client parts with partners. And then we have a, different company doing acquisition for us. So we have to pay for acquisition services. And on top of that, we've not been doing processing ourselves. So we've shared that with partners as well. In this project, we keep 100% of the profits, while in comparable projects in the past, it's been somewhere between 30 and 50%. So it's clear evidence that the model that we're pursuing now really has value and value that we can leverage going forward. We also announced a 2D multi client survey in the Sierra Basin. This is in Indonesia. And as it says here on the slide, it underscores TGS commitment to the region. This is one of the regions where we see significant growth and where TGS has a big combined library together with PGS and obviously well positioned to acquire more data in the future. Then it's time to go to contract. So strong growth in contract revenues driven by high OBN activity and improved streamer pricing. So if we look at the financials for the contract business, we had OBN contract revenues of 127 based on record high activity. And it may not look like that if you compare it to the 126 we had last year, but last year we had $9 million of equipment sales that were not activity related and obviously fell straight down to the EBITDA line. This quarter, the 127 was not impacted by any sales of equipment. On the streamer contract side, we had revenues of $164 million. This is gross revenues. All the numbers I'm showing here are gross. 164 compares to 134 in the same quarter of last year. The EBITDA margin for the contract business as a whole is 26%. So around where we've been on average for the past few quarters and slightly below our target, which would be around 30% for our contract business. You look at the normalized OBN crew utilized this quarter, it was about 3.8, which is very, very close to full activity or full utilization. So if we could stay at between 3.5 and 3.8, this is gonna be a very profitable business. On the active vessel time, we had 77% in Q3 of 2024, and that includes, of course, multi-client. Last quarter we had, or the same quarter last year, we had 86% active vessel time. The reason why our streamer contract revenues are significantly higher despite lower active vessel time is mainly due to the areas we operate. So as you know, certain regions have significant uplifts in terms of the cost and we can charge a higher vessel rate as a result of that. On top of that, we still see that we can or vessel rates are continuing to increase slightly. So it's It's a pretty bright outlook for the contract business right now. I know a lot of you are concerned about the utilization of the vessels for the winter season. I'm not concerned at all. In fact, our multi-client department is concerned because there's not a whole lot of capacity for our own multi-client projects. It's a good situation to be in, and I know that we need to get the final signatures and announcements in place. But I've been here long enough to not go out and promise stuff like that without being very, very sure. that this is just around the corner. So in terms of new contracts, we had an OBN contract in North America announced this quarter, and we also had a 4D streamer contract in the Southern Atlantic, and that contract was announced, it was probably the first vessel announcement that we had since May. So I certainly understand why you guys were getting concerned about the vessel utilization. And again, if you go back three or four weeks, I was probably more concerned than what I am today. But finally, we see that things are about to materialize. So in that regard, it's positive development for the contract business. On the new energy solutions side, we see continued growth in revenues and with improving margins. And you can see that from the table below the pictures. We had contract revenues of 16 million this quarter compared to 10 in the same quarter of last year. We had multi-client revenues of 3 million versus 2 million of last year and total revenues of 19 versus 12. So significant double-digit growth in our NES business. Again, our goal is to continue to grow this business with double digits going forward. It's still going to be a bit lumpy because it's impacted by the vessel activity. And whenever we go out and we do one of these ultra high resolution surveys, it adds a lot to the revenue line and also the profit line. But these surveys will come in certain quarters and then there will be certain breaks in between. EBITDA margin is strong, it's 22%, and obviously this is a quite diversified business where we have operations in both CCS, offshore wind, and we also have activity through our subsidiaries 4C, which is a data intelligence company or market intelligence company, and then Predictor. who actually signed a contract now with RKBP this quarter in terms of digitalization of the Yggdrasil area, which is a great contract for Predictor. And it's great for us to put the whole TGS behind Predictor in terms of signing a contract with a partner who's probably ahead of most other EMP companies in terms of digitalization efforts. A great partner to have in terms of digitizing the Yggdrasil area going forward. On the CCS side, we do a lot of interesting stuff in terms of assessing CO2 storage capabilities. We've done that now at the US Gulf Coast, the Illinois Basin and Michigan Basin. And again, using a lot of the data that we already have and targeting and tapping into different accounts, which has been the strategy for CCS. So it's not going to be massive investments related to this because most of the data is already there. So it's more about preparing the data and packaging the data in a different way to sell to a different audience. In offshore wind, we just completed a ultra high resolution 3D survey in the New York Bight. And this is for the community offshore wind. And again, this is where we continue to see growth. And again, applying the same assets and applying a lot of the same technologies and methodologies that we've been using in seismic for more than 40 years to a different market. So very optimistic about the outlook of this business continues to grow fast. Again, it's going to be lumpy in terms of quarterly performance. But I think overall, we've seen great growth at profitable margins. And then last but not least, we have the imaging and technology, flat year-on-year revenues and actually a negative margin this quarter. You see we had revenues of $26 million gross, external imaging revenues of $10 million, and you see an EBITDA margin that is minus 3%. But again, this is one of the areas where you're going to see the highest synergies from the acquisition of TGS and PGS, and you will start to see the cost spaces gradually coming down for imaging and technology. We've also made a few announcements this quarter in terms of technology partnerships, one with Petrobras, where we're going to partner in terms of scientific research related to imaging technologies. And it's obviously a great achievement by the team in terms of being selected by Petrobras for such an important project. Our software, Imaging Anywhere, is something we acquired from the acquisition of ION. You've probably seen already the announcement of a four-year deal with Shell. The Shell's deal is more than just a pure software deal. It's also a collaboration on imaging R&D going forward, so something we're very, very excited about. And last but not least, following that, we will continue to market our software and make it available for other clients as well. And this is an area where you will see that we will continue to sign up new contracts in terms of other companies like Shell and Supermajors and even NOCs who are looking at this. On the merger integration status, again, I said we're ahead of our plan. Our plan is to deliver 110 to $130 million of annual synergies, and we should get there by year end 2025. We've already delivered on 55, and it doesn't mean that you see 55 in the books already. But it means like the run rates that we have achieved so far is $55 million of annual synergies. And that's up from an estimate of 45 at the capital market stay in late August. By the end of Q4, we're going to be around $70 million. That again is up from 60 as previously communicated. So again, we've remained on track. And again, my initial thank you to the organization definitely is valid for this one as well. I mean, the organization has been under severe pressure for the past three months in terms of delivering on the Synergy takeout plan, the merger integration, but at the same time delivering strong results for Q3. So again, a big thank you to our employees for that. So, with that, I'm going to hand it over to Sven, who's going to go through the financials, and then I'll come back and talk about the outlook. Thank you.

Thank you, Kristian, and good morning, everyone. So obviously this is the first quarter with PGS included, so there will be, we have introduced a new reporting format that fits better with the business that we are now after that acquisition. Let me start by going through the group financials. As you can see on the chart on the top left-hand side, we had $501 million of produced revenue measured by percentage of completion on the ongoing multi-client service in the quarter. So that, as Christian alluded to, was a very strong quarter with 10% growth over what we had last year. And what you see in the historical quarters here are pro forma numbers. So that's comparing apples to apples. So a strong quarter in terms of the revenue development. net operating expenses came in at 221 million dollars this quarter you will see that's a little bit up and that has to do obviously with how much we be capitalized or eliminate in each and every quarter so it will fluctuate a little bit with that in this quarter compared to the last quarter we of course have more external revenues on on the vessels, which plays a role also for this line. So whenever we have more external contracts versus internal contracts, the net OPEX that is charged to the P&L obviously will be higher. And also as Christian I mentioned we have some operations, some vessel operations in high cost countries, which means that you have a more more quality flow through costs that is charged to the P&L. But you also have the associated revenue. Then looking at Yeah, and also let me just mention that it includes $16.4 million of non-recurring murder related costs in this quarter. And then depreciation and amortization. Depreciation came in at 59 million dollars in this quarter and out of this we had IFRS 16 depreciation of leases of a little bit more than 20 million dollars. And then we had amortization of the multi client library of $116 million this quarter. All in all, this resulted in an EBIT or an operating result of $104 million this quarter. So a significant improvement compared to the previous quarters, as you can read quite clearly from the chart. And if you adjust for the $16.4 million of merger related non-recurring costs, we're actually up at 120 with a 24% EBIT margin. So indeed, a very strong quarter for us. And then I'm going to go through each of the business units and the financial performance there. We see multi-client here first, $277 million of multi-client revenues in this quarter. And that was, as discussed already, driven by strong library sales, which were obviously supported by material transfer fees in this quarter. But we also had relatively high multi-client investments and solid pre-commitments from customers backing that. So all in all, a very strong development in our multi-client revenues in this quarter. Then we had, of course, a high EBITDA, which you always will have in a multi-client business of $259 million. Multi-client investments came in at $129 million this quarter, so significantly up from the previous quarters in this year, but significantly below what we had in the same quarter of last year. We have reduced our guidance slightly in our communication this morning and we now expect a full year of 425 to 450 million dollars on a pro forma basis on multi-client investments. incurred $327 million year to date as of the end of Q3, which means that you should expect it to be somewhere between $100 and $125 million in Q3. So we still have some opportunities that we are looking at and that we may conclude to do or may conclude not to do. And we also have some projects that have been deferred into 2025. And as you can see, then, given the strong development in our multi-client revenues, we see that the sales to investment ratio, which is a very important value driver in this multi-client business, here measured on a last 12-month basis, because it doesn't really make sense to look at it on a quarterly basis, is trending upwards 1.9 at the end of Q3. And this is more or less in line with the historical average. We've been at 1.92-ish in terms of the historical average on a consolidated basis. Then, contract business, and this consists of both OBN and Streamr vessels now. On the chart there, you can see that we had $194 million of external revenues in the OBN business, and we had $97 million of business conducted on behalf of our own mostly on behalf of our own multi-client business, but also a little bit in the MES business related to a site characterization campaign that we did in the quarter. So this gave a total revenue, a total gross revenue for this business of 291. million million dollars the obn business accounted for approximately 127 million dollars of this and in the obn business almost all that we did was external on behalf of external customers so no or very limited multi-client capitalization of multi-client or obn activity in this quarter which means that the remaining part of it was related to the streamer vessels. So as you can see also when you look at gross revenue of 291 that compares to 260 if you add the two bars in Q3 2020. three, which represents a growth of 12%. So also on the contract activity side, we had a quite strong quarter. We had a contract EBITDA of $77 million, which represented a margin of 26% and more or less in line with where we have been the past few quarters. On utilization of the 3D streamer fleet, which is obviously a very important value driver on the streamer part of the business, we had 77% commercial utilization of the fleet. And this has been split by 57% on the multi-client side and 20% on the external customer side or contracts with external customers. And then we have introduced a new KPI for the OBN business, where we have normalized the crew count, depending a little bit on the size and what the content of that particular campaign that we're doing. 3.8 in this quarter. You can see that that's quite high in a historical perspective. We expect it to remain high for that. for Q4. So we indeed have a very solid order backlog for the OBN business. And this measure here will be useful also for estimating the revenues generated by our OBN crews. this is of course something we are going to report every quarter and you can already seen from the pre-announcement that we did on the sixth trading day of after a quarter quarter end that we also included information about fleet utilization on the streamer side and this normalized crew count in addition to the multi-client investment so those are the three parameters that we intend to uh to pre-announced on the sixth trading day after quarter close every quarter imaging revenues 10 million dollars of external revenues in this quarter plus 16 million dollars of internal revenues and that's of course mostly related to data processing of our own multi-client This is a low margin business, but of course we have an intention of improving the margin in this business also significantly. We have had a very robust order inflow year to date in this business, so we expect margins to improve and our target going forward is to keep that margin well into the positive territory. On the NAS side, we had $19 million of revenues this quarter, and we had $4 million of EBITDA resulting from those $19 million of revenue. So a reasonably solid EBITDA margin in a strongly growing business. Bear in mind that this business or the top line here will be quite lumpy because we have an an underlying business which ticks in a more stable manner every quarter. But then the site characterization business or whatever kind of subsurface data we are collecting using our streamer vessels will vary a little bit from quarter to quarter depending on the campaigns we have. And so far, that part of our business is a bit seasonal where we do most of those type of campaigns. in the northern hemisphere during the summer half of the year. So just be prepared that it will be a bit lumpy, although there is an underlying growth rate, of course, in that business. This takes me to the cash flow statement and as our IFRS cash flow statement tend to be a bit difficult to understand because there is a quite strong disconnect between the IFRS operating results, IFRS EBITDA and our cash flow. We have created this table which starts with produced EBITDA instead and as you know our produced numbers or POC numbers are much more linked to our cash flow and you'll see here that the change in balance sheet items line here will vary much less than you will see in a similar IFRS setup. So I think this setup will be helpful to understand the cash flow a bit better. But cash flow is cash flow, so the end result will be the same in both IFRS and our produced accounts obviously. So this quarter we had 265 million dollars of cash flow from from from operations and then we capitalized multi-client investments where 129 million dollars as we as we discussed earlier and then after adjusting for the non-cash elements of the multi-client investments and the multi-client investments that were capitalized in other periods we had paid multi-client investments of 122 million dollars. So there you also see the link between the reported or capitalized multi-client investment number and what actually we pay for in the cash flow statement. Then we had capex of 24 million dollars and then you see the impact of the PGS merger in the next line investments through M&A. That's simply the cash that we took over through the cash on the balance sheet that we took over through the PGS merger. And then a little bit of interest, which means that all in all cash flow from investment activities were $59 million negative in this quarter. And then you have cash flow from financing activities there. There are a few things to note there as well. On the interest paid, it's $35.6 million this quarter. So it varies a bit from quarter to quarter because on the big bond loan, the $450 million bond loan, we have semi-annual interest payments. So it happens in Q3 and Q1, which means that the interest payments will be significantly lower in Q4. of course. And then we had dividend payments, our regular dividend payments of 27.5 million dollars. But as you know, we also compensated the previous PGS shareholders for the dividend that TGS paid prior to the merger in Q1 and Q2, and that amounted to 18.8 million dollars paid in early July. So all in all, we had negative cash flow from financing activities of $123 million this quarter. And when we sum all of this up, it meant that our cash balance increased by $82.6 million in the quarter, and we ended up by $214 million at the end of the quarter. And then we have the IFRS profit and loss account. I won't spend a whole lot of time on this. So I will just mention that also here, the one-off costs, that the $16.4 million of one-off costs are, of course, charged to the IFRS P&L as well. 10 on the personnel cost line that amounted to 10.6 million dollars which is mostly related to severance packages in connection with the headcount reduction and then 5.8 million dollars on the other operating cost line related to mostly to onerous lease charges in relation to vacated office space as a result of the the uh the merger uh and and all in all uh on the ifs side we then had net income of 37.5 million dollars uh compared to 16.8 million dollars in the same quarter of last year And then if you look at the balance sheet, again, the IFRS balance sheet, and of course there has been significant changes this quarter because it's the first quarter where we do include PGS. And for the IFRS numbers we're looking at here, that goes for the P&L as well. The comparables are not from formal numbers, so they are as reported. So I'll not go through all the different items in the PPA. There is a note to the quarterly report that you can read. But let me just point out a few interesting or a few significant developments. Of course, Goodwill has increased by $176 million approximately as a result of that. the transaction and then you see a significant increase of course on the on the multi-client library side which now stands at 1.2 billion dollars that was and the PGS contribution to that increase is 426 million million dollars so we have increased the value In the PPA, we have increased the value of the PGS multi-client value by $102 million relative to what PGS had in their books at the end of Q2, which was $325 million. And then on deferred taxes, we have increased that as a result of the PGS transaction by $160 million. So the PGS balance sheet contributes by $160 million there. And that obviously includes the conservative estimates of the tax value of the losses carried forward that we inherited from PGS. And then other non-current assets have increased significantly due to inclusion of the PGS streamer fleet. And we have included that at the same value as PGS had in their books, which was approximately $750 million. And then finally on the debt side, you should note that we have written up the debt. We have done a mark-to-market on the bond loan, so we have added $60 million through the PPA on the debt side. But that's not the obligation, the repayment obligation, so that may be a bit confusing. So the repayment obligation is still the nominal value of that debt. But bear in mind, if we are going to use the whole option in March at $106.75 million, the market of 60 in the PPA is in reality around 30. But in the balance sheet, we reflect a market of $60 million in the PPA. And then, as Christian also talked a little bit about, we have seen substantial upgrades of the credit rating. So we're very happy to see that both the credit rating agencies, S&P and Moody's, has done substantial upgrades. S&P by three notches, Moody's by two notches, which means that they are both more or less aligned now in terms of the way they look at the credit risk in Moody's. in TGS. So we have a double B minus with a stable outlook in S&P and B83 with a stable outlook in Moody's and those ratings are of course comparable. And this is extremely important to get in place before we go out and refinance the debt that we inherited from PGS. And our intention is to do that in the short to medium term in order to realize quite material synergies that we will see on the interest rate side. Our target net debt level as we communicated on the capital markets day is 250 to 350 million dollars and we're above that now. It was 425 excluding lease liabilities at the end of Q3. And then finally, we continue to pay a dividend in line with the financial policy that we outlined on the capital markets day. So once again, the board has resolved to pay a dividend of 14 cents, which translates into 1.53 krones. This quarter, the X date is set to 31st of October and the payment date is at 14th of November. We see a significant upside to the shareholder distribution in the medium to longer term, but we want to get into that communicated net debt band or range before we start increasing distribution to shareholders. So by that I leave the word back to you Christian for the outlook section.