ION Geophysical Corporation
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Operator:]

Greetings, and welcome to the ION Geophysical Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rachel White, Vice President, Investor Relations. Thank you. You may begin.

[Rachel White:]

Good morning, and welcome to ION's fourth quarter 2020 earnings conference call. We appreciate you joining us today. As indicated on slide 2, our hosts today are Chris Usher, President and Chief Executive Officer; and Mike Morrison, Executive Vice President and Chief Financial Officer.

[Chris Usher:]

Thank you, Rachel. Good morning, everyone and thanks again for joining us today. Today, I'll discuss our fourth quarter and full year performance strategy execution progress and operational highlights. Mike will elaborate on our financial results and bond restructuring support agreement then I will wrap-up with our outlook and strategic elements for success in a rapidly evolving market that presents exciting new energy transition and digitalization opportunities. Given considerable press coverage in the US, I will also touch on what we believe to be the negligible impact on our business of the Biden administration's brief suspension on oil and gas leasing, and drilling permits given ION's diversified global footprint and international offshore focus. We delivered substantial sequential improvement in our revenue and earnings in the fourth quarter. We continued to benefit from the refined strategy, cost cuts and digital approach we outlined in early 2020. While our annual revenue decline is consistent with the contraction in E&P spending our net loss improved by $11 million year-over-year, primarily, due to the previously mentioned strategic structural changes and associated cost reductions. As expected the impact of COVID-19 and associated oil price volatility was most pronounced on our new ventures program activity in our offshore services and equipment sale. Given that data sales tend to be disproportionately impacted by budget cut and our sector saw a nearly 50% decrease in multi-client data spend in 2020, I am encouraged with our relative performance for the year. I am also pleased with the progress we made executing our refined strategy this year in spite of unprecedented macroeconomic disruptions. We successfully acquired the initial phase of our Mid North Sea High 3D multi-client program and built backlog for the significantly larger second phase this summer. We commercialized our proprietary Gemini source technology now seen as the key ingredient for unveiling better 3D images, the derisked drilling in the complex geological settings where customers continue to invest.

[Mike Morrison:]

Thanks Chris. Good morning everyone. We had some positive momentum in the fourth quarter with sequential revenue and earnings growth. Our fourth quarter revenues of $27 million improved 68% sequentially. Revenues in our E&P, Technology & Services and Operations Optimization segments increased 98% and 20% on a sequential basis respectively. Both increases are the result of improving market conditions and year-end spending. We also generated positive adjusted EBITDA in the fourth quarter. Importantly, our backlog the majority of which we expect to recognize as revenue over the next year increased for the second consecutive quarter due to both our strategic entry into the 3D new acquisition multi-client market and commercialization of our Gemini source. Backlog which consists of commitments from multi-client programs and proprietary imaging and reservoir services work was $20 million or an 11% higher sequentially and 4% higher versus last year. Moving to the full year. Our revenues of $123 million were down 30% compared to the prior year, consistent with the reduction in E&P spending. While full year 2020 revenues declined by over $50 million, our net loss improved by $11 million primarily due to the over $38 million of structural changes and associated cost reductions implemented during the first half of 2020. Our full year adjusted EBITDA was $18 million compared to $32 million last year. E&P Technology & Services segment revenues of $92 million decreased 27% for the full year primarily due to delays in new program activity as well as reduced E&P spending levels. The COVID-19 travel and border restrictions impacted the timing and availability of crews for new acquisition programs and delayed access to existing data for new reimaging programs. Operations Optimization segment revenues of $31 million declined 37% versus the prior year due to the COVID-19-related slowdown in offshore seismic activity and associated demand for our services and equipment. As a result of lower revenues, we expected to consume cash during the quarter. Our cash balance was $38 million at the end of the year including the $23 million we drew on our revolver last March. Our total liquidity defined as a combination of our cash balance and the available borrowing capacity under our credit facility was $45 million. We still expect to close a $12 million sale of our 49% equity stake in the non-strategic INOVA joint venture. However, the regulatory review is taking longer than anticipated and we now expect to close during 2021. To address the upcoming maturity of our $120 million second lien notes, we executed a restructuring agreement in late December supported by the majority of our bondholders. Once complete, the deal will extend the bond maturity by four years to December 2025 with a lower 8% interest rate and has a conversion feature to reduce our financial leverage as we execute our strategy over the next couple of years. In addition, shareholders have the opportunity to participate in concurrent rights offering to minimize dilution from the transaction, which provides us with additional liquidity for increased flexibility to operate the business through the tail end of the pandemic and to support our diversification strategy as markets recover. Based on the 20 trading day VWAP since the initial announcement, the equity price was set at $2.57 and the conversion price was set at the high end of the collar at $3 protecting shareholder equity. While it has been worth the extra time to reach this mutually beneficial conclusion because we are now within 12 months of the maturity date the debt became current on our balance sheet triggering a going concern issue. We are working diligently to complete the restructuring transactions, and anticipate doing so, by the end of March. We are holding a special meeting February 23rd, to request, shareholder approval on three proposals. The first is, to approve the bond restructuring transactions. The second is, to increase the number of shares available for issuance, required to execute the deal. The third is, to allocate a small portion of those shares to provide appropriate stock-based incentives to retain key employees, which I'll speak to in a moment. We expect to execute the exchange offer and the rights offering, as soon as practical thereafter. For additional details regarding the transactions, please refer to our press release issued, on December 23rd. Before I wrap-up, I'd like to discuss the rationale of Our Long-Term Incentive Plan or LTIP for short. Following the restructuring and recapitalization of the company, it will be critical to reincentivize our key employees. We have to be able to compete to attract and retain the best and brightest, especially in our industry which is cyclical by nature. To keep costs down, since the protracted downturn began in 2014, we froze merit increases for five years and reduced salaries for four of the last seven years, making equity-based award an especially useful tool, during these tough times, to provide value to our shareholders by allowing us to attract and retain first rate talent, while tying our employees' financial compensation to the performance of the company. We're asking shareholders to approve adding 3.5 million shares to our LTIP. Once approved, the shares available on our LTIP will approximate 7% to 9% of the shares outstanding on a diluted basis, post-restructuring and post-conversion. And will enable us to continue providing employees appropriate stock-based incentives, over the next five years. We ask that you support this initiative and would like to extend an open invitation to call us to discuss in more detail. With that, I'll turn it back to Chris.

[Chris Usher:]

Thanks Mike. In summary, I'm proud of the strategic achievements we've made this year, in spite of the challenging market backdrop combined with the 30% reduction in our cost structure. As described, both business segments are singularly focused on diversifying into larger markets. We entered the 3D new acquisition multi-client market and demonstrated traction with our Marlin software business. We ended the year with a sequential improvement in revenue, earnings and backlog, positioning us well entering 2021. Looking ahead, while we expect the market will remain challenging in the near-term we have seen a number of positive developments. Oil prices have rebounded to their highest levels in a year. And the energy industry has started to recover. There's consensus around increasing oil price stability for 2021, the consistency of which is as important for investment, as the price itself. While clients are still setting budgets analysts expect the offshore E&P market to modestly improve as the year unfolds and digitalization to continue growing at a rapid pace. Oil and gas exploration on a point forward cost basis, remains competitive with the development of existing opportunities in assets, supporting the case for investment. We are starting to see license round activity return in key ION geographies, such as the recently announced, Brazil Round 17 taking place later this year. However, our near-term visibility on seismic activity remains limited, due to the uncertainty related to COVID-19 and E&P budget. With regard to the administration's recent review order, that temporarily suspends new exploration activities on public lands, we do not expect a material negative impact on ION's business. Our global footprint and diversified portfolio, helps minimize the impact of any regional or country-specific slowdown. We are primarily focused internationally offshore and unlike our peers, have a fairly modest exposure to the U.S. Gulf of Mexico. Furthermore, our 2D data library there is mature and exploration-focused offering which has been well subscribed by incumbent block holders. Our small 3D data library assets onshore North America, cover private not, public acreage. Should the moratorium result in longer-term change, this could drive large-scale E&P companies' portfolio investment more towards international offshore, which would be well aligned with our offerings. The E&P industry is participating in the energy transition at an increasing pace. And the pandemic has only accelerated these changes. With wide-ranging views of the shape of change companies are assessing impacts on their E&P portfolios and carving out distinct energy strategies. Within oil and gas, E&P companies will seek to rebalance their portfolios to geographies with lower cost barrels, better fiscal regimes and lower carbon footprint. These trends, along with associated M&A activity will create opportunities for new players and for ION to license data to a new set of customers. There is also a clear focus on reducing costs across the sector, augmented by real benefits from digitalization initiatives. We believe, long-term oil and gas fundamentals are strong, and that exploration and development will continue to be a salient requirement to meet the world's energy needs for some time. The energy industry will remain important to ION, but we are also diversifying into attractive new markets where our technology and capability have the potential to create value. We have re-crafted ION's platform for growth including recent realignments within our executive team to more effectively map our strengths to the evolving industry dynamics. We are highly attuned to the industry's driving themes and rapid pace of change and are developing new offerings to capitalize on our strengths and address key industry needs associated with the energy transition such as portfolio rebalancing, environmental compliance, sustainability, and digitalization. With that, we'll turn it back to the operator for Q&A.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. Our first question will come from the line of Colin Rusch from Oppenheimer. You may begin.

[Colin Rusch:]

Thanks so much guys. Can you give us a sense of how much of your OpEx spend is going towards exploring the adjacent markets and building out those opportunities for the platform?

[Chris Usher:]

Yes, this is Chris. Thanks for joining Colin. Yes. Right at the moment on the adjacent market stuff or new markets stuff I would say about a -- it's just fixed cost with developers predominantly and business development teams within our software unit in Edinburgh. So, it would be about probably -- currently growing up to about 25% of the cost base in Edinburgh. So, that's -- it's not a huge number relative to the cost base we have in the company, but it's a significant focus. We have a dedicated team for Marlin and all the Marlin web apps that cover all the use cases for ports and E&P logistics, et cetera. So, it's -- if you think of the revenues of the operations optimization unit, half of those being software. If you think about the cost base of that being about 25% let's say.

[Colin Rusch:]

Okay, that's helpful. And then as we go through this recovery and coming out of COVID, can you talk a little bit about your expectations around normal seasonality for the revenue for this year? Do you guys have a sense of that at all at this point?

[Chris Usher:]

Yes, I would say sticking with the premise that we've said before and others have said too that we think it's a broad U-shaped recovery for the E&P space and probably seismic as well. So, our premise has been really -- we started the year strong in 2019 and then hit hard by the pandemic and oil and gas geopolitics. And obviously got some momentum in Q4 there that you've seen and I think there's a seasonality element there. And we think that the first half of 2021 will be a rebuilding and re-stabilization period with the second half being stronger in the back end of that broader U-shape recovery. So, I don't think Q4 is the beginning of the U-shaped recovery. I think that's a seasonality piece pretty much. So, I think we still have overprinted on our business and our peers do too is the kind of the Q4 effect on data library buying. But going forward I think as we get more into the 3D acquisition which can be taking place at any time it has underwriting you get away from just that data library buying at the end of the year. So, we'll -- our EPTS business will also be more stable and probably steady through the year rather than back-end loaded and then the software and devices business will be pretty steady state.

[Colin Rusch:]

Okay. And then the last one is this really around kind of customer activity and what you're seeing? I'm assuming that a lot of folks have gone through kind of restructuring on the -- for the customers and are now potentially getting more focused on how they're going to carry forward from a strategic perspective. But can you just talk about health levels of activity and net quality of activity with those customers?

[Chris Usher:]

Yes. So, the customer landscape is very interesting and I'm sure you've seen all the highlights out in the market with the big oils shifting some of their portfolio into energy transition things like wind and solar and wind predominantly. If we look at our customer base that is normally the buyers of our data library, it's all over the map. You have some that have finished some of their -- the cost cuts that came out of last year and finished the reorganizations and have announced budgets and some of them are up slightly year-on-year which is good. You have others that have actually -- ironically have actually cut some of their G&G people that announced larger budgets. You have others that are still finishing their cost cuts. Some of the big majors are still kind of doing that. But you've got smaller companies who have budgets and are buying. So, it is -- there is a varied number of strategies that you're seeing between the large oil companies, the national oil companies and the smaller independent. Generally speaking though, I would say that the sentiment is better. We're having a lot more dialogues than we were middle of last year. Q4 was really the marker where the dialogues started increasing. And really in just the last few weeks, we've seen coming out of the kind of quiet New Year period, some of the major companies that had delayed really almost no projects last year starting to discuss projects. And you also see that with our -- some of our acquisition customers. They're starting to get backlog and bookings that they were mainly projects delayed from last year, that have now moved to the right into 2021. So as expected, that stuff is starting to happen. And we're seeing knock-up benefits there with that customer base and we're also seeing that with the end customers who support that also who are our data library buyers and underwriters of new programs. It is improving. It's probably -- I'd characterize that as -- you've seen comments that E&P spending offshore could be up single digits in 2021 versus 2020. And we're seeing that level of dialogue occurring with them.

[Colin Rusch:]

Okay, awesome. Thanks guys.

[Chris Usher:]

Thank you.

[Operator:]

Our next question will come from the line of Amit Dayal from H.C. Wainright. You may begin.

[Amit Dayal:]

Good morning. Thanks. I have a lot of static in my line so if you can't hear me clearly I'm happy to follow up offline, but if you can we can then go ahead with the questions.

[Chris Usher:]

Hey Amit. Your line is breaking up a little bit. I didn't catch that. I don't know if Mike did.

[Amit Dayal:]

I'm getting a lot of static on my line guys. Maybe I'll just follow up offline. Sorry about this.

[Chris Usher:]

Yes, it's a little bit better now, if you want to try it again.

[Amit Dayal:]

Okay. And let me just sort of a diversified set of opportunities now. And the energy market is beginning to stabilize. Do you anticipate backlog continuing to grow sequentially for you and potentially 2021 being revenue growth year for you compared to 2020?

[Chris Usher:]

Yes. So Amit, I did catch that. So, yes. So two questions there's -- with the energy transition and also the increasing in backlog we've talked about and the customer activity I just described, do we see 2021 being a growth year and backlog increasing? So yes, we do see 2021 being a growth year over 2020. So, yes. And then secondly, yes, we do see -- we're happy with the backlog growth we've had sequentially. We do anticipate we'll see that growing. Right now, the backlog is comprised of underwriting for the Mid North Sea High 3D program this summer and also backlog around our proprietary services, both data processing imaging and the Gemini source on a proprietary basis. So that's all good. And I think, we will consume some of that obviously, but we'll see it also -- I think we'll see it growing as well.

[Amit Dayal:]

Understood. And then does the backlog, right now have any software revenues in it like Marlin et cetera as well?

[Chris Usher:]

Yes. So I did mention that in the script. Basically, as we said it before, that we actually don't count the long-term software contracts as backlog. We could I suppose, but we just traditionally have not. So for apples-to-apples, we keep it simple. But we have actually seven contracts, long-term contracts for software that really provide the bulk of the revenue stability in the software business. Of 2020 software, revenues well over two-thirds of that came from long-term contract subscriptions for the core software …the revenue stability in the software business. Of 2020 software revenues, well over two-thirds of that came from long-term contract subscriptions for the core software, which includes Marlin in it. And then we also have two long-term contracts now with ports and harbors. So that takes us to nine long-term contracts. And we have one Software-as-a-Service Marlin contract with one of the largest oil and gas companies on the planet. So that takes us to about 10 long-term contracts, which -- in software. So that provides essentially backlog for the software business.

[Amit Dayal:]

Understood. Thank you for that. Just on the...

[Chris Usher:]

…in the order of, say, something like $12 million annually kind of thing, that's backlog, let's say.

[Amit Dayal:]

Okay. Understood. In terms of the INOVA deal, is it anything particular from a regulatory perspective that's holding the transaction up, or is it just bureaucracy?

[Chris Usher:]

Yes. It's a little bit of everything. I think its COVID-19 pandemic slowdown on pretty much everything. It's also some bureaucracy between the buyer and the filing requirements they believe they have and the provision of that information from kind of the Chinese side of our joint venture, just don't look at issues there. So I think, yes, that's what's taken the time. Still good interest from the buyer. Good general support as well from BGP who's our partner in the JV. So I think we'll get there. We still -- we're not forecasting it for Q1, let's put it that way.

[Amit Dayal:]

Understood. That’s all I got. Thank you.

[Chris Usher:]

Amit, thank you so much for joining.

[Operator:]

Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Chris Usher for any closing remarks.

[Chris Usher:]

Yes. Thank you, operator. Yes, thank you, everyone, for joining the call today. I answered an interesting inflection point with coming out of the pandemic period and building backlog and identifying growth for the future, both in our core business and in our new businesses and we're pretty excited about that. We look forward to having you back on the Q1 call to see how we're progressing that and progressing the closure of our bond restructuring as well. Thanks so much.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.