CGG - initiation

All,

Please find our initiation on CGG here.

CGG started its post restructuring phase in 2018 with significant cash serves, and has since surprised on the upside in terms of cash flow generation. In the oil services sector, the ability to withstand temporary dislocations of the oil market environment until it normalizes, in parallel with the dynamic adaptation of the cost curves throughout the value chain, is key to survive and prosper over the long term.

 - We are buying the First Lien USD notes at 102 for 2% of NAV. We are also buying the Second Lien USD notes at par for 2% of NAV. CGG's maintains significant valuation and cashflow cushion above these notes. In addition, our sensitivity analysis on the value of the library and liquid assets also suggests significant asset backing in a downside scenario, despite falling book values of the database. Investors may have excessively discounted CGG's valuation due to its recent record of significant cash outflows from discontinued operations, which have a credible reason to go away after 2020. As both restructuring costs and discontinued ops outflows reduce significantly from 2021 onwards, CGG would break even on a much lower revenue level than during the 2017-2019 period.

 - The company's cash position is strong enough to weather a prolonged period of depressed E&P with a mix of businesses that is less volatile than in the past.

 - We expect the company to refinance under most conceivable scenarios, on the basis that oil prices slowly recover - as markets are implying. So the trade could be looked at as an arbitrage on Oil where the bond price is not in line with Oil futures.   

We are looking forward to exchanging ideas on CGG with you.

Juliano