CGG – Seeking a sustainable future

All,

Please refer to our updated analysis here.   

 At the back end of 2022, we sat up and took notice as the level of E&P Capex finally began to recover from its Covid impacted lows. Our uplift was modest, as increased exploration has been a contentious point from a sustainability perspective for a few years. However, conflict-driven oil prices above $100bbl will lead to more oil being pumped and the energy security pressure to supplant Russian oil will challenge the opposition to drilling. We have therefore done further work on our cash flow forecast.  

  

 Free Cash Flow breakeven in 2022:   

- Our model has €213m of free cash flow for the year (including the €59m proceeds from the sale and leaseback of the company HQ). We have improved our expectations on revenue, although given the back-ended nature of the orders, there is a high probability that it will be in part of working capital at the year-end rather than cash. Given the distortions created by order and revenue recognition, we have changed our approach to modelling working capital. We are running it flat and will comment quarterly on working capital developments. We recognise that Q1 usually sees an inflow with Q2-Q4 seeing outflow.  In our model, before working capital, CGG generates free cash flow. Since emerging from sauvegarde in March 2018, CGG has done a good job of avoiding investing too much in working capital. Long term financial sustainability for CGG will depend on continuing to manage this relationship to preserve cash and be sustainable.  

  

2022 E&P CapEx is likely to be at the top end of industry guidance:   

- We expect the rise in industry CapEx to flow through to the top line   

- The post covid catch up in E&P spending finally began in the 2nd half of 2021, so even before the Ukraine conflict, CGG had expected steady growth in 2022/23. The drilling environment going to remain looser and will support spending on new E&P.  

–CGG guided its Geoscience and Earth Data (Multi-Client) seismic data business for ~18% growth in 2022. The revenue will be backloaded, but we have modestly raised our H1 expectations.  

- The Sensing and Monitoring (Equipment) business was expected to be stable but additional orders from Saudi Arabia will boost the business in the second half. Some of the additional business will fall into 2023 as CGG has constraints on what additional equipment it can manufacture this year.   

- CGG has said it is seeing more willingness for governments to lease out new blocks to the supermajors for exploration. This trend is likely to accelerate over the rest of the year. Initially, the supermajors will look to produce more from existing wells, however, they will need to replenish reserves which mean more seismic data. For now, CAPEX discipline is being maintained. Revenue will rise but it’s not a bonanza.  

- The National Oil Companies are continuing to invest in data. The GCC states are switching more of their focus to offshore data. The replacement cycle had been expected to take off in 2023 driven by the offshore segment but the industry will see some growth both onshore and offshore in 2022.   

  

Investment Considerations   

- We have not taken a position in the SSNs, the $ notes are trading at 96c/$ and the € (9.7%) trade at 97c/€ (8.4%). We see potential upside for the $ notes as the more robust operating environment flows through to the bottom line. The bonds traded at 102 in February before the Ukraine conflict started. However, the CCC+ caps that upside for now. The downside could come if a conclusion to the conflict led to a lower oil price, but our analysis points to increased CapEx spending enhanced by new E&P as part of energy security plans.  

  

As always, I look forward to discussing this with you all.   

Aengus 

E: amcmahon@sarria.co.uk
T: +44 203 744 7055

www.sarria.co.uk

Aengus McMahonCGG