CGG - Waiting for the CapEx train
All,
Please find our updated model here.
After CGGs guidance for Q3 and with the full figures due on 4th November, we have made some adjustments to our model. We have modestly lowered our initial 2020 expectations due to a slow start in H1. Whilst H2 will be stronger it will not quite make up for the first half weakness. We expect the momentum to be carried into 2022.
Our thesis is that a higher oil price in the next 2 years (vs 2019/2020) and a recovery in oil consumption will increase E&P capex, leading to strong operating cash flow for service providers like CGG. Company guidance for Q3 demonstrates that E&P capex has already started to be reflected in top line and margin, and we expect a strong end to 2021. In 2022 and beyond, even if the oil price stalls and OCF is lower than we predict, CGG has ample liquidity to weather any storm. On June 30, the company had $500m of liquidity, including $285m of cash. The company has no major maturities prior to 2027. The first calls on both SSNs is in April-2024 at (par plus half the coupon). Finally, the bonds have a 10% pa, par call feature which will also serve as a cap on returns.
Positive operating environment:
- Rig counts are already rising, and E&P capex is beginning to follow. CGG is highly exposed to the oil price as reflected in changing E&P capex budgets
- Over the next 2 years the price of Brent crude will slowly return to the $62 - $65/bbl range. This is lower than the current $79/bbl, but above the >$60/bbl needed to keep the Capex spigot open.
- Global oil production is still below the 100m bpd levels of 2020. We expect production to reach 100m bpd in 2022 driven by consumption rising and current historically low levels of inventory.
- Against this backdrop we expect CGGs revenue to rise from 2020’s $886m to $930m in 2021 and $1.05bn in 2022. The operational leverage inherent in CGG’s business model should also see EBITDA recover rapidly to $320m in 2021 and $430m in 2022. We expect Free Cash flow of $140m between 20211/22 (skewed to 2022) giving leverage of 3.0x by the end of 2022.
- In 2021 we would expect E&P clients to be spending their full budgets for 2021 and we see some upside in our Q4 21 projections.
Investment Considerations:
- We have not yet taken a position in the SSNs, the $SSNs trade at 9.0% and the € trade at 8.0%. We could see 5 points of upside in both as free cash flow generation picks up into 2022. A 100bp tightening would equate to a price of around 104, we think that is unlikely to be immediate (after the 4 November call), but would see it as a target for year-end.
- The company will publish its full Q3 results on 4 November. Despite a strong third quarter CGG maintained FY2021 guidance for flat Revenue, EBITDA of around $310m and positive net cash flow. We see some upside in this and expect the call to be upbeat.
- Downside comes from any re-introduction of social distancing rules across various countries as another wave of Covid19 is spreading through Europe and could lower expected demand for Oil and Gas in the next year. We are not assuming that such measures will be taken again as vaccination levels throughout most of Europe and the United States at least should have reached a sufficient level to continue re-opening their respective economies.
Looking forward to exchanging views on this with you.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055