CGG – Cranking into gear.
All,
Please find our slightly updated analysis here.
CGG operationally continues to improve, and we expect FCF/Cash interest at 1.4x in 2024. National Oil Companies have already increased expenditure, and the majors are now expanding capex. We expect the bonds to continue to tick towards par and remain long.
Investment Considerations:
- We took a 3% NAV long position in the €2027 bonds at 88.9c/€ in December 23. The bonds are now trading at 93.75 (mid-price). The upside is 6 points as the bonds pull to par. The downside is 5 points if there is a recessionary-driven drop in oil production.
- Despite a strong Q3 performance and increased cash flow guidance, CGG equity is down along with the entire sector. The equity performance has more to do with a lower oil price driven by weak US and Chinese economic data. We are more bullish on the global economy.
- 2024 should see industry capex on imaging data rise and the Equipment replacement cycle finally crank into gear.
- CGG has $275m in cash and $100m in RCF availability if the Oil Services market is softer into 2024.
- The valuation is further supported by the value of its debt library.
23Q4 Trading Review:
- CGG generated cash in both the final quarter and the year. The Data business is expected to remain strong over the next two years. Equipment is still waiting for the uptick in Streamer (marine) orders, but for now, there is a high reliance on onshore mega crews (particularly in the Middle East).
- Q4 total revenue was in line with our forecast, although Data was ahead on strong external geodata, and Equipment was lower as some orders slipped into Q124.
- EBITDA was ahead of our modelling on a better-than-expected Eearth Data performance.
- Net Cash Flow beat our expectations by $68m, $36m from working capital on lower-than-expected inventory levels and $30m from lower capex/investment.
- In 2024 CGG expects to generate a similar cash flow (rising to $100m in 2025). The company is targeting $30m of bond buybacks but has not decided whether this will be a tender or via market buyback. A full refinance is expected in 26Q1. CGG has more scope for liability management (including bond buybacks now that the minimum cash needed to operate has been reduced to $100m.
I look forward to speaking to you all on this.
Aengus
T: +44 203 744 7055