CGG - Comments on Q2 20 results and call

All,

 CGG’s Q2 20 results were severely impacted by the significant decline in oil prices and E&P capex budgets. It appears that E&P companies reacted more quickly this time around. Despite a number of exceptional cash restructuring outflows already in Q2 20, liquidity was better than expected, mainly due to working capital variations.

 In an environment of very little visibility on the reaction function of E&P clients to the current environment, we see the main thesis of the CGG investment story as intact. CGG is likely to have enough liquidity reserves to arrive at the other end of the process of the normalization of the oil price environment, while previous and current cost cutting efforts should bring the break-even level of revenues to a lower level, especially with regards to discontinued operations.

 Key takeaways:

- Revenue contraction at -41% in Q2 20 yoy, reflecting the rapid reaction function of E&P companies during the peak of the coronavirus crisis and associated impact on oil prices.

- EBITDA (pre IFRS 16) down -61% yoy to USD61m, reflecting the significant portion of fixed costs in the CGG structure.

- Q2 20 cash at USD546m. Most of the cash burn vs the USD610m of YE2019 is accounted for the USD41m of outflows for discontinued operations, which are scheduled to go away in 2021 as part of the settlement struck in 2019.

- Management emphasizes the non-Oil&Gas related business of CGG, which remains small but should increase over time. We do not see it as being a meaningful game changer for the investment horizon of the bonds.

- Management notes this is the most intense shift in the market environment they have seen; expects to see some stabilization in Q4 20, if pandemic remains under control and oil prices remain above USD40.

- Some shift in multi-client revenues from Q2 20 to Q3 20 due to pricing negotiations.

- USD25m of cash restructuring costs in Q2 20, including USD7m of severance costs.

-Cost cutting efforts to generate USD35m of savings during 2020, or USD135m on an annualized basis.

- Visibility remains very limited in the sector; has not seen any material impact on the business from the recent recovery of oil prices.

- Watching M&A picture for potential opportunities on data rights transfer fees. 

  Feel free to reach out if you would like to exchange ideas on the name.

Juliano