CGG : 2022 Q1 Transcript

CGG Q1 2022 Financial

Results

Wednesday, 4th May 2022

Introduction

Christophe Barnini

Head of Communications & IR, CGG SA

Welcome

Thank you. Good morning and good afternoon, ladies and gentlemen. Welcome to this presentation of CGG's First Quarter 2022 Results. The call today is hosted from Paris, where Mrs Sophie Zurquiyah, our Chief Executive Officer, and Mr Yuri Baidoukov, our Group CFO, will provide an overview of the quarter results, as well as provide comments on our outlook.

Disclaimer

Let me remind you that some of the information contains forward-looking statements subject to risks and uncertainties that may change at any time. And therefore, the actual results may differ materially from those that were expected. Following the overview of the quarter, we will be pleased to take your questions.

And now, I will turn the call over to Sophie.

Q1 2022 Overview

Sophie Zurquiyah

Group CEO, CGG SA

Q1 2022 key segment financial highlights

Thank you, Christophe. And good morning, good afternoon, ladies and gentlemen, and thank you for participating in this Q1 2022 conference call. We will move to slide five now. And let me start with some general comments on the evolution of our businesses and market environment during the quarter.

Overall, Q1 was a slow start of the year with significant differences among our three business lines. Geoscience revenue was $75 million, up 36% year-on-year pro forma. Our Geoscience perimeter no longer include GeoSoftware and the Physical Asset Storage business of Smart Data Solutions, which we disposed of last year, and we will present year-on-year pro forma revenue comparisons to best show the underlying business performance.

Geoscience performed very well this quarter and continues to see steadily increasing activity. The level of bidding activity is up 51% year-on-year and the level of commercial bids pending was at $347 million early April, compared to $209 million early December 2021.

Earth Data, which is our renamed Multi-Client business, as we continue to expand the data types that we sell. Earth Data was in line with our expectations and up year-on-year with the typical low Q1 pre-funding revenue but stable year-on-year with stable CapEx. As you know, the pre-funding ratio is usually low at the beginning of the year and increases through the quarters. We expect to see the same trends in 2022.

The positive news is that Q1 after-sales increased 56% year-on-year, which confirmed our view of seeing after-sales continuing to strengthen as the year progresses.

As expected, and highlighted during our Q4 conference call, Sensing & Monitoring, which is the new name of Equipment business, as we continue to grow into new markets, had a low quarter in the business that tends to be lumpy and is increasingly driven by significant orders.

In addition, some sales this quarter shifted to later in the year. Large tenders in Saudi Arabia for land and OBN are positive signals for an active second half of the year and 2023. Overall, our Q1 revenue of $153 million was down 24% year-on-year pro forma with contrasting dynamics between the business lines.

Data, Digital and Energy Transition was up 34% year-on-year pro forma, whilst SMO, Sensing & Monitoring, was down 70% year-on-year. Segment EBITDA and adjusted segment EBITDA was €39 million, a 25% margin and up 31% year-on-year. Net cash flow was €68 million, including €90 million positive change in working capital.

Our core markets continued to recover, signalled by increasing commercial discussions with our clients and bids. We operate today in a favourable cycle driven by the need to replace depleting oil and gas reserves with the focus on short-cycle exploration. We're seeing also more consistent requests from energy companies to better understand the subsurface for their energy transition programmes.

Digital, Data and Energy Transition (ex-GGR) key financial indicators

We will move to slide seven now. DDE segment revenue was solid this quarter at €119 million, up 34% year-on-year pro forma, with growth in both Geoscience and Earth Data. DDE's business dynamics have historically been strongly correlated with E&P spend, and this is what we're experiencing in Q1 2022. Profitability significantly increased with a flow-through at 90% on incremental revenue.

Geoscience key business indicators

Now, in slide eight. Geoscience revenue excludes revenue from GeoSoftware and the Physical Assets business of Smart Data Solutions that we divested in 2021. Geoscience external revenue was €75 million in Q1, up 36% year-on-year pro forma with growth mainly coming from North America and EAME.

Year-on-year backlog was slightly down, which is related to the decreasing average size of the projects and does not reflect yet the rapidly growing commercial activity that we see. Several clients are now concerned about being able to access processing capacity for their upcoming needs, and rightfully so, as it will take some time to recruit people.

The total production per head KPI continues to improve as we are achieving the full effect of cost reductions, combined with improving utilisation of our resources. And to support our growth perspective in our core businesses and the development of our Beyond the Core businesses, particularly High Performance Computing, CGG recently signed a lease to build a new European HPC hub in Southeast England that will become operational in the first half of 2023 and increase our cloud HPC capacity by 50 petaflops initially and up to 100 petaflops as required.

Geoscience Q1 operational highlights

Going into slide nine. In Geoscience, our technology differentiations continues to make significant impact in our market position. We have been recently awarded several large projects, where our elastic full-waverform inversion imaging technology was viewed as uniquein the industry. In fact, these advanced algorithms contain more accurate physics and provides striking improvements in sub-salt imaging. They enabled our clients to access much clearer view and understanding of previously imaged reservoirs.

As an example here, the image on the lower right shows much more distinctly the continuity of the various layers below the salts and will substantially improve the interpretation of this area. A client recently mentioned how this technology enabled them to identify an extra 500,000 barrels of oil.

Geoscience activity has picked up, starting with North America, and more recently, Europe, with a few of our imaging centres running at near full capacity already in early May. We are encouraged by the high level of commercial activity which will drive improvements in other parts of the world.

We also continue to develop and promote our Beyond the Core businesses. And this quarter we launched TailingsPulse, a smart mine monitoring solution for structural integrity. We released new GeoVerse studies, a product from our Earth Data library for lithium brine, geothermal resource evaluation and carbon storage identification, all leveraging our geology capabilities and historical geological database.

We signed strategic partnerships, including one with Kent, another with Carbon Management Canada, and a third with GCE Ocean Technologies cluster. Our aim is to be the partner of choice for subsurface understanding and monitoring for the energy transition.

Ambitions & Goals: CGG Data Hub

Slide 10. We'd like to continue to introduce you to our Beyond the Core businesses. And this quarter, we will highlight our data hub offering. During the last few years, building on our digital data management and subsurface expertise, CGG put considerable efforts towards building a unique data ecosystem that enables our clients to effectively ingest, classify, access, visualise and utilise the diverse datasets they need to optimise their subsurface understandings, both for their oil and gas portfolios and for the energy transition.

It is very different from the analytic solutions offered by the hyperscale cloud providers because we use a geologic taxonomy and ontology that we have developed over the last 45 years. This allows clients to digitally associate the diverse datasets geologically, including their own data and data from other vendors in a meaningful way.

This software is typically provided as a service and we conservatively see the market to be at a few hundred million dollars per year in the short term, given the amount of subsurface data that our clients manage. For clients that wish to move their data to the cloud, we can also leverage our CGG HPC cloud and Data-as-a-Service offering.

In summary, data hub offers digitalisation services that create robust, integrated and structured subsurface datasets or modules which enable users to efficiently discover, access and utilise all their data in order to overcome subsurface challenges and reduce cycle time. We have just been verbally awarded a significant multi-million-dollar contract to perform this type of work over a period of 18 to 24 months for a super major.

Earth Data (ex-Multi-client) key business indicators

If we move to Earth Data now. Earth Data sales were $44 million, up 28% year-on-year. Cash CapEx of $33 million this quarter was stable year-on-year. We started a marineprogramme offshore Brazil that represented a significant portion of our CapEx. Our pre-funding revenue of $15 million was stable year-on-year and pre-funding is typically low in the first half of the year and builds throughout the second half.

After-sales were stronger this quarter at $30 million, up 56% year-on-year sustained by the US and North Sea.

Earth Data Q1 operational highlights

Now on slide 12. In Brazil, after the completion of the vast and successful Nebula programme, we started Antares located in the South Santos Basin. With good weather and fewer mammal interruptions, the Antares acquisition has been very productive so far. The new data will provide a second azimuth with a longer offset to improve images of the pre-salt.

Nebula A processing is now complete and we have confirmed that the dual-azimuth data provides significant image improvement.

In the US GoM, our reimaging projects continue to draw pre-funding and we began the reprocessing of our large StagSeis Deux programme with solid pre-funding. In the North Sea, we just started our 2022 summer campaign and secured significant pre-funding from different clients for North Viking Graben East-West programme. We are adding 1,800 sparse nodes to this 9,000 square kilometre streamer programme. This will create hybrid north streamer data to better invert for subsurface velocity, and thus improve the identification of target structures supporting the search for short cycle near step-out exploration opportunities.

And finally, our GeoVerse geology and well data library is now fully accessible as a service and we have closed several commercial projects.

Energy transition: lithium brine and geothermal energy studies

Now on slide 13. In support of energy transition, we carried out screening studies for geothermal energy and geothermal lithium brine. These data-rich studies capitalise on CGG's wealth of Geoscience data, know-how and data science expertise, and they address a wide spectrum of application from geothermal resource assessment through critical mineral exploration to carbon sequestration.

These are just a few examples of the vast amount of geologic and geophysical data available through our GeoVerse platform that can be used to explore for oil and gas, explore for the various minerals necessarily for the energy transition, and may even be used to search for geothermal opportunities by looking for favourable gradients and anomalies. The data includes over 550,000 quality-controlled data points, and viewing and selection of the data is made easy in the GeoVerse platform.

Sensing & Monitoring (ex-Equipment) key financial indicators

We will now move to Sensing & Monitoring, slide 14. Our Sensing & Monitoring segment revenue was low this quarter at $34 million, down 70% year-on-year. While the SMO business is lumpy in nature based on large acquisition programmes globally and we had a strong Q1 in 2021 based on year-end 2020 mega-crew sales, revenue was lower than expected this quarter as some sales of land equipment shifted to later in the year. Marine sales continued to be limited to repair and maintenance.