Seismic Pulse

“We aggressively apply new proprietary imaging technologies to our own multi-client library, and make that technology available to existing and new customers as upgrades to existing datasets,” says Robert Hobbs, chief operating officer, TGS-Nopec Geophysical.

?Seismic activity has fallen in lockstep with the rig count. Still, work continues in this vital sector of the oil and gas business that is among the most upstream components of the process of exploring for and producing oil and gas.

Oil and Gas Investor: conducted a virtual roundtable discussion with four prominent geophysical-sector executives for their take on the seismic market and particular readings on these challenging times.

Participating were Jon Erik Reinhardsen:, president and chief executive officer of Oslo-based Petroleum Geo-Services; Robert Hobbs:, Houston-based chief operating officer of TGS-Nopec Geophysical Co.; Stephen C. Jumper:, chief executive of Dawson Geophysical Inc., Midland; and Richard F. Miles:, president and chief executive of Geokinetics Inc., Houston.

Investor: What is your take on today’s business environment for firms in the seismic sector?

Hobbs: We expect the climate to be difficult throughout 2009. Although some major oil companies appear to be maintaining E&P spending on long-term projects, it is clear that, as a whole, E&P spending on G&G data will be down in 2009.

Reinhardsen: We see a tight market going into 2010. There is more capacity than demand, and this will lead to a shut-down of low-end capacity throughout the world seismic fleet. Fortunately, PGS’ backlog situation is quite good. We have eight months of backlog as of year-end 2008, and that has built from five months at the end of 2007. Our guidance still speaks to a good year for PGS.

Miles: There are differences between international and domestic seismic markets. In North America, we see substantially weakened demand for data acquisition. Outside the U.S. and Canada, however, the market is much more resilient, and it’s led by national oil companies. Barclays Capital’s semi-annual survey for E&P capex showed that U.S. budgets are expected to drop 26% in 2009, as compared with 2008 spending. International budgets are expected to drop by only 6%. As of year-end 2008, Geokinetics’ backlog was up 33% to $548 million, with more than 80% of that coming from customers outside the U.S. Any business we’ve lost in the U.S. has been more than offset by additional orders from international customers. In 2008, our revenue was split 60% international and 40% North America. This year, I expect international to be at least 75%.

Jumper: The seismic data-acquisition market has softened and demand for our services is down, but there is still quite a bit of activity taking place in the U.S. in large shale plays, such as the Haynesville, Fayetteville and Marcellus. We think that, as oil prices recover, we will see activity increase in the Bakken and Barnett oil-shale plays.

Investor: What trends do you see in international geophysical markets?

Miles: Growth trends in the international markets remain strong and projects are focused on oil prospects. Revenues and margins are typically better internationally than in the U.S., but equipment utilization has been less. As national oil companies take on greater roles in exploration, we are seeing a trend of larger international jobs that last longer. We recently started a 12-month contract in Angola, and expect to start another 18-month job there midyear. We just signed a two-year contract extension in Brazil, and added a 10-month job in Bolivia.

Reinhardsen: Going forward, the industry is looking for oil and gas reserves in deeper waters, deeper reservoirs and more complex geologic environments, such as subsalt and sub-basalt plays. We’re undergoing geographic shifts, such as the opening of exploration in the Arctic. These all speak to the need for high-capacity vessels. We also see more use of 4-D seismic for reservoir monitoring, which requires higher data densities and top-end vessels.

Seismic crew counts have declined in North America but are strong elsewhere around the globe, driven by national and international companies’ search for oil. Source: IHS Inc.

Investor: How would you describe your market niche?

Reinhardsen: We serve the high-density segment of the marine geophysical market, and we expect that segment to grow faster in the current downturn. This year, PGS will have around 75% of our streamer capacity in the high-end segment. Onshore, which is about 15% of our overall revenues, our focus is exactly the same: high-channel-count, high-density acquisition.

Miles: Geokinetics operates exceptionally well in transition zones and difficult-to-operate areas. Transition-zone work includes our high-margin, ocean-bottom-cable projects in water depths up to 500 feet, and our difficult-to-operate frontier projects are in regions such as the jungles of Latin America.

Jumper: Dawson Geophysical focuses on onshore seismic acquisition and processing, and we are the leader in the number of active crews operating in the Lower 48. We have a thorough understanding of geological objectives and operational issues specific to Lower 48 basins.

Hobbs: TGS pursues a multiclient business model, where we acquire data for our own library and then license this data to multiple customers. We do not own vessels or acquisition systems. This “asset light” model allows us to have a very flexible cost structure and permits our staff to focus fully on creating and funding new projects to build the library, as well as selling existing inventory.

“Going forward, the industry is looking for oil and gas reserves in deeper waters, deeper reservoirs and more complex geologic environments, such as subsalt and sub-basalt plays,” says Jon Erik Reinhardsen, president and chief executive officer, Petroleum Geo-Services.

Investor: What technologies do you bring to the market that distinguish you from your competitors?

Hobbs: The imaging algorithms developed by TGS clearly establish us as a company focused on quality. We aggressively apply new proprietary imaging technologies to our own multi-client library, and make that technology available to existing and new customers as upgrades to existing datasets. Recently, we have been awarded significant contracts to apply these algorithms to customers’ proprietary data, and that flows from exposure to these technologies through our library. I will also say that our staff of project developers is known for creating the right project in the right place and at the right time, and that differentiates us from others in the multi-client space.

Reinhardsen: PGS has a high-capacity fleet, different tools to apply to different types of challenges, and we are able to use the tools in optimum ways. Some are nonexclusive and others are exclusive, such as our new geoStreamer technology. That’s a tool that can be applied in areas with more complex geological structures. In data processing, we have developed our imaging systems to deal with high-density services, and we have acquired new technology.

Miles: Geokinetics brings different technologies to each area; in international work, every job is custom. In Canada, we provide multicomponent data. We are seeing some high-channel-count multi-component jobs materialize, as digital geophones and passive recording devices have made it possible to increase channel count substantially. For transition-zone and shallow-water environments, we offer four-component, ocean-bottom-cable systems. All our services and technologies are designed to further enhance subsurface resolution and provide higher returns on investments for our clients.

Jumper: Dawson currently owns more than 117,000 recording channels and 147 energy-source units. We’ve grown from an average of 2,000 channels per crew to as many as 10,000 channels on several crews. Margins increase with increasing channel count, efficiencies improve and the cost per unit of data goes down. We provide our clients with enhanced subsurface resolutions, and we believe that increased recording capacity will continue to define the seismic data-acquisition industry.

“We will likely see a shift toward turnkey contracts going forward and, for us, that means more upside and more risk potential,” says Stephen C. Jumper, chief executive of Dawson Geophysical Inc.

Investor: How can seismic help lower finding and development costs?

Miles: Seismic is still the No. 1 tool for oil and gas exploration. The use of the technology and computer implementation has clearly lowered the unit cost to the point at which processes like anisotropic-wave equation, shot migration and reverse time migration are routinely used, not only for imaging but also for building velocity models. This was unthinkable three to five years ago.

Hobbs: The industry is making step changes in our ability to image more geologically complex plays using such technologies as wide-azimuth 3-D acquisition and application of imaging advances. Most recently, time-lapse seismic has improved successes in development wells. When we compare well cost today with the cost of geophysical data, it makes financial sense to access as much data as possible to help minimize drilling risk.

Jumper: Seismic data are used in all phases of the life cycle of an oil and gas asset, from exploration to evaluation to exploitation. In the U.S., our clients use seismic data primarily as an evaluation tool to strategically place well locations. Seismic data help reduce the number of locations needed for maximum recovery of in-place resources.

Reinhardsen: In my view, the two levers we can offer are sharing of costs and efficiency. It’s all about quality, and getting the cost per square down. One way is for companies to buy multiclient library data, and we’re a large player in that field. Another is to use higher-capacity vessels on larger surveys to improve efficiency.

Investor: How can you reduce your own costs? Can you pass this on to your customers?

Jumper: It’s not easy to reduce costs. We are a high-fixed-cost business. That said, we have always been a cost-conscious company. Going forward, we will reduce crew count and, as we consolidate crews, we will gain efficiencies from more experienced labor, lower fuel costs and fewer maintenance issues. Costs naturally come down with crew consolidation, but the key for us is maintaining as high a utilization rate as possible. We have operated with a 50/50 mix between turnkey and dayrate contracts during the past few years. We will likely see a shift toward turnkey contracts going forward and, for us, that means more upside and more risk potential. For our clients, it means predictable costs.

Hobbs: The current economy has already put pricing pressure on the cost to charter acquisition vessels. This benefits TGS, since we contract these services from other geophysical companies. We anticipate pricing for seismic acquisition services to continue to be under pressure throughout 2009 as new vessels that were ordered in better times are delivered later this year. Still, acquiring new multiclient projects in these uncertain times carries significant risk. We are looking for higher pre-funding than in the recent past. Due to this, our customers will not see a significant difference in project pricing. However, multiclient data enables operators to significantly stretch E&P dollars over more projects, because the cost to license data is a fraction of the cost of proprietary acquisition. Operators can also save by underwriting or pre-funding a multiclient survey. Early participation gives operators pre-funding discounts and technical influence over the project. Additionally, they can take advantage of volume pricing on library data, which reduces unit cost.

Reinhardsen: We started very early in this cycle to take out costs. To sharpen our own competitive edge, we’ve cut overhead and travel costs, terminated charters on lower-capacity vessels, and lowered third-party expenses.

Miles: During the past 18 months, we invested $165 million to upgrade equipment, increase productivity and improve image resolution. That increases the value to the customer. We’re constantly developing techniques that make seismic more affordable for our clients. For example, we have completely containerized our crews—we recently finished a job in Mozambique in East Africa, and the next job was in Cameroon in West Africa. We accomplished the move in two days; previously, it would have taken six weeks. That reduces costs to the customer. In our transition-zone work, we’re working to improve our efficiencies in bottom-laid cable so we can get our costs more competitive with towed streamers.

Investor: What do you plan to spend this year?

Reinhardsen: This year, PGS has a capex program of $400 million and a multi-client program of $200 million. We are funding all this from cash flow. We are absolutely in good shape: the first major payment on our long-term financing is in 2012. We have low interest rates, and we secured our financing in late 2007 when it was still possible to get good terms.

Hobbs: TGS plans to invest $230- to $270 million in new multiclient data in 2009, and that will be financed by cash flow.

Jumper: We have $20 million approved for the year, which for Dawson started in September. We spent $3.6 million in the first fiscal quarter and, for the short term, are limiting spending to only necessary capital items. We will watch the market very closely, and be able to move quickly on a technology or a change in the market conditions.

Miles: Geokinetics’ board of directors approved a capital budget of $37 million, which is 50% down from the 2008 level. We definitely plan to spend within our cash flow, and plan to substantially reduce our debt during 2009.

Investor: What are the key components of your story that Investor:s should find attractive?

“Any business we’ve lost in the U.S. has been more than offset by additional orders from international customers,” says Richard F. Miles, president and chief executive officer, Geokinetics Inc.

Hobbs: The TGS “asset light” model allows us to control our cost in difficult markets. We have a long track record of achieving excellent margins even during periods of low oil prices. With 69% equity on our balance sheet and essentially no debt, TGS will be cautiously looking for growth opportunities in this market.

Jumper: Dawson has been around a long time, and this is not the first time we have experienced a down-cycle. Seismic contracting is a cyclic business within a cyclical industry, and we have been through this many times during our 56-year history. Our balance sheet is very strong. We own everything we operate, are debt-free and have $63 million of working capital. We will use our balance sheet to leverage our position. During the last downturn, we were successful at increasing our channel count and the number of energy sources that we operated. We added experienced personnel and acquired peripheral technologies. That is what we plan to do this time.

Miles: We have a global presence and exposure to the relatively strong international market. Last year, we took important steps to increase the productivity and efficiency of our international operations, by concentrating our crews in core markets. These are areas with long-term visibility for our niche in ocean-bottom-cable and transition-zone work. We are improving our margins by reducing crew moves and increasing productivity, which we expect will increase cash flow and enable us to both strengthen our balance sheet and build on our competitive advantage. Our prospects for growth are very good. If I didn’t look at the TV or read the news each day, I’d think life was wonderful because we have so many opportunities.

Reinhardsen: The market is evolving to exploration in more complex areas for oil and gas, and PGS has the most competitive and productive fleet in the world. We have a high-end focus in data processing, onshore and fleet acquisition. We have a large and very-high-return multiclient library, and we have the new geoStreamer that is a generation shift in streamer technology. Our outlook is positive going forward. The seismic industry has good growth potential, and that comes on the back of the world’s need to find oil and gas supplies. Over time, most analysts believe there will be a fundamental shortage of oil in the world. We still see a race for reserves, and we have a key strategic role to play in this search.