CGG - pour some oil on troubled waters
All,
Please find our unchanged analysis here.
We have already altered our stance on CGG for 2023 once this year. Due to the changing economic environment for CGG, we adjusted our cash flow forecast. The levers behind that change in view are still very much in play. There is more to CGG than changes in customer budgeting and this will impact the pace of change in the current environment.
Industry environment picking up:
- The deep Capex cuts in recent years needed to be partially reversed in 2022 and beyond to maintain production levels. Tight supply now means frontier sites are also coming back into fashion. All this plays into CGG’s data business.
- Discussions with clients prompted CGG to say they are now entering a multi-year upcycle. Oil & Gas prices are likely to remain high due to the Ukraine conflict and despite some shareholder constraints on exploration by the oil majors, activity by NOCs and other E&P companies will mean a boost in overall Capex spending in 2023 and beyond.
- The pace of delivery for CGG is constrained by human and physical resources in the Geoscience business. In Sensing and Monitoring, the replacement cycle will help boost orders in the next 2-years, but here as well, manufacturing capacity will constrain the pace of growth
Q2 numbers are in line with our model:
- Despite the better-than-expected results, we are currently maintaining our FY expectations. However, we may need to adjust 2023/2024 upwards.
- EBITDA margins were higher than expected due to strong orders in the Earth Science division. The resulting EBITDA was €20m above our expectations. Working capital was €7m better than we modelled pushing operating cash flow in Q2 €30m above our model. FY guidance has been maintained so we are not altering our H2 expectations yet. Free cash flow was well below our forecast at the cash from the HQ sale and leaseback was reduced by €45m acquisition along with an increase in Capex within the Earth Data business due in part to phasing.
Investment Considerations:
- We have not yet taken a position in the SSNs, but with the $ yielding 12% and the € 10.5%. We see potential upside for the $ notes as the more robust operating environment flows through to the bottom line. The CCC+ rating from S&P constrains some investors and reduces the pool of buyers. The downside risk of lower oil prices if the conflict in Ukraine ends soon is unlikely to play out immediately, energy security forces support for E&P investment
As always, I look forward to discussing this with you all.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055