ION Geophysical Corporation
Q2 2018 Earnings Call Transcript

Published: 5 Aug 2018

[Operator:]

Greetings, and welcome to the ION Geophysical Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel White. Thank you, Ms. White, you may begin.

[Rachel White:]

Thank you, operator. Good morning, and welcome to ION's Second Quarter 2018 Earnings Conference Call. We appreciate your joining us today. As indicated on Slide 2, our hosts today are Brian Hanson, President and Chief Executive Officer; and Steve Bate, Executive Vice President and Chief Financial Officer. Before I turn the call over to them, I have a few items to cover. We will be using slides to accompany today's call. They are accessible via a link on the Investor Relations page on our website, iongeo.com. There, you will also find a replay of today's call. Moving on to Slide 3; information reported on this call speaks only as of today, August 2, 2018, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay. Before we begin, let me remind you that certain statements made during this call may constitute forward-looking statements, which are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control and may cause our actual results or performance to differ materially from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by ION from time to time in our filings with the SEC, including in our annual report on Form 10-K and our quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. I'll now turn the call over to Brian, who will begin on Slide 4.

[Brian Hanson:]

Thanks, Rachel, and good morning, everyone. First, I'd like to state how dissatisfied we are with our second quarter results, which were well below our internal expectations. Personally, I was very disappointed with the number of deals that did not close in the quarter. The good news is that most of these deals didn't disappear, the timing of the decision simply slipped into the third and fourth quarters, and for a few, into early 2019, setting up what is potentially a strong back half of the year. License round timing is the primary driver of multi-client sales in today's disciplined capital spending environment, and the delay of the Panama license round announcement pushed sales out of the second quarter. I'll speak more to this later. During the downturn, we surgically invested in areas where capital was slowing to ensure we had new programs that would deliver superior results. The performance of our Campeche 3D reimaging program in 2016 and 2017 is an excellent example of a quality revenue stream that was clearly linked to license round timing. I've always cautioned not to judge the quality of the business on a quarterly basis, but on a full year basis because of the timing of purchase decisions relative to license rounds and the way our customers spend their full year budgets. The second quarter is a great example of that. Two other key new programs that we invested in where we anticipate high-quality revenue streams are in areas where license round timing was not conducive to second quarter sales. The first is our new 2D multi-client program offshore Panama, where we have only -- where we have the only modern data set available, but the license round announcement was delayed a quarter. The second is our anonymous 100,000 square kilometer Picanha 3D reimaging program offshore Brazil, where we believe a series of upcoming license rounds and farm-in activity will drive sales of the next couple of years. Based on license round timing and heightened activity in our business, we still believe that 2018 will be a significant improvement on 2017 on a full year basis. Given the dependency of our results on some of the leading indicators in our business, we're going to discuss these metrics in detail and why we still believe the velocity of the business is strong. We'll cover six key metrics

[Steven Bate:]

Thanks, Brian. Good morning, everyone. Our total second quarter revenues were down 46% compared to the second quarter of 2017. Revenues in our E&P Technology & Services segment decreased by 55% and revenues in our Operations Optimization segment decreased by 21%. Within E&P Technology & Services, multi-client revenues were $10 million, a decrease of 67%. As Brian described in detail earlier, both new venture and data library revenues experienced significant declines compared to the second quarter of 2017. Imaging Services revenues were $5 million, a 28% increase, due to an increase in proprietary ocean bottom nodal imaging projects. Within the Operations Optimization segment, optimization software and services revenues were $5 million, an 8% increase from the second quarter of 2017. The increase in optimization software and services revenues was due to an increase in Gator ocean Bottom command and control deployments. Devices revenues were $5 million, a 38% decrease from the second quarter of 2017. Devices continued to be impacted by reduced towed streamer seismic contractor activity, resulting in further declines in new system sales as well as repair and replacement revenues. Overall, we reported a net loss for the second quarter of $26 million or $1.86 per share compared to net loss of $10 million or $0.88 per share in the second quarter of 2017. The second quarter of 2018 included special items. Excluding those items, we had an adjusted net loss of $23 million or $1.68 per share in the second quarter of 2018. Our adjusted EBITDA was a negative $8 million in the second quarter of 2018, down from $14 million one year ago, and breaking a string of seven consecutive quarters of breakeven or better adjusted EBITDA. As Brian mentioned, overall, we are disappointed by our results for the first of the year, but still expect that 2018, although more back-end loaded than we originally expected, will be a significant improvement over 2017. Net cash flows from operations during the quarter was a use of cash of $1 million compared to a generation of cash of $2 million during the second quarter of 2017. Including both investing and financing activities, we consumed $6 million of cash in the second quarter of 2018, which is comparable to the same amount one year ago. As of June 30, 2018, we had only a $0.5 million of current debt outstanding and our remaining long-term debt obligation is $121 million of second-lien bonds that mature in December 2021. Our total net debt was $73 million at the end of the quarter. With that, I'll turn it back to Brian.

[Brian Hanson:]

Thanks, Steve. To sum up, we continue seeing increasingly positive signs of growth and recovery in the oil and gas industry. The market is pretty well balanced due to robust global demand and more stable production. E&P free cash flow is projected to be at its highest level since 2007. E&P spending is on track to increase 8%, and we are starting to see some of our customers once again allocate budget to exploration, which has been almost nonexistent for the last 3.5 years of the downturn. We continue to be optimistic about the long-term oil and gas fundamentals and eventual resumption of exploration activity due to the combination of higher oil prices, improved cash flow, declining production and inventory levels and sustained -- un-sustainably low reserve replacement rates. There is heightened activity and increasing momentum in all but one aspect of our business, which is potentially setting up our third and fourth quarters to be very strong. We have not seen as robust a deal pipeline for the third and fourth quarters since before the downturn, now it's our job to close them. The acceleration in new program activity, which is driving the backlog, is the best near-term indicator of the velocity in our business over the long term. With five new programs already sanctioned this year out of the six to eight we're targeting, we're off to a good start. We continue to expect we'll invest $35 million to $45 million in our multi-client programs compared to $24 million in 2017 and $15 million invested in 2016. In addition, our data library is exceptionally well positioned for the uptick in upcoming license round activity as well as for any resumption in exploration activity to replace reserves, which pre-downturn, was a very significant business for ION. For the first time since the downturn, we're also seeing imaging tenders increase, now 50% higher than a year ago. Our imaging services group strategy to focus on the high-end, technology-driven proprietary projects is paying off with higher revenue and better margins. The majority of projects in our backlog have met this criteria, such as the ocean bottom and FWI work we're doing. E&P Advisors is employing new success-based business models with baritones, expanding the scope of our offerings and leveraging new partnerships. Our Optimization Software & Services business is up due to increasing ocean bottom activity and new crews entering the market. Marlin is crossing the chasm and really taking hold in the market with accelerating deployments. We're also gaining traction moving into adjacent markets and commercializing 4Sea technology. There is a lot more potential to diversify over the next five years as we strategically evaluate where to focus our efforts. While we're disappointed with the number of closed deals in the second quarter, we recognize our business has a history of being lumpy and are encouraged by the overall activity levels which are setting up what could be a very strong back half. With that, we'll turn it back to the operator for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Colin Rusch from Oppenheimer & Company.

[Colin Rusch:]

Thanks for the commentary on the macro level. I think we're all seeing something very similar to what you're talking about. But can you speak specifically to what your customers are telling you around timing, decision-making, to -- when to release funds? Because I think that's what's really a concern for your investor base at this point.

[Brian Hanson:]

Yes, I think there's a very interesting dynamic that's occurring today. And what's happening is when we went into the downturn, it was the procurement side of the oil and gas companies that really took control and took control of the purchasing decisions. What we're seeing now, is we're seeing exploration teams really reengaging, trying to develop long-term planning, expressing desire to buy data and having almost an internal struggle with the procurement side of the business. My interpretation is that there will be a little bit of a power struggle between those teams and procurement over the course of the next, call it, several quarters. But I believe control will gradually shift back to the exploration side of the house because they're being tasked with putting these programs together, but struggling getting resources to do them. I think with the higher cash flows, they'll get those budgets and they'll get more control over their spending patterns. So what we're seeing for 2018 is we're seeing a number of the deals that we would have anticipated closing earlier in the year because the exploration teams are the ones who want the data, but procurement still has a significant amount of control over the process, so that's why we see these deals pushing out into Q3 and Q4, especially as they -- as the procurement guys -- they know two things. One, they know they have to spend their budget by the end of the year; and two, they're trained to believe they get the very best deal at the end of the year. So that's kind of the dynamics are going on now.

[Colin Rusch:]

Yes, that's super helpful. So then what do you think that means for pricing and the EBITDA leverage that you've got on the platform? So it seems likely that you're able to close some of these deals, but then, are you going to have to engage in a price renegotiation or how do you expect that to play out in the back half?

[Brian Hanson:]

It's always a constant negotiation right up until the deal closes. The perception of our customers is that they get the best deal at the end of the quarter; they'll get the absolute best pricing. The reality is we walk a very delicate line, and we do put -- we try to incentivize them to close the deals. So I don't think you'll see any deterioration in pricing or any deterioration in leverage because that's the normal process we go through every quarter.

[Operator:]

[Operator Instructions] Our next question comes from the line of Akil Marsh from Janney.

[Akil Marsh:]

In regards to the downtick in revenue in both multi -- or in new venture and data library, you obviously touched on Panama and Brazil. Assuming that those activities would have happened as you initially projected, can you give us a sense of what the numbers would have looked like?

[Steven Bate:]

I don't think I would be able to do that. I mean -- all right, let me put it this way. I don't think it would be meaningful to do that. Just it's -- I caution not to look at the business on a quarterly basis. It really is important to step back and look at it on a full year basis. Procurement -- if procurement's going to control the process in 2018, it's going to step up a big fourth quarter. If the exploration teams can convince the procurement to release funds earlier, it'll step up a big third quarter. And the last thing it's really going to drive results in both the third and fourth quarter are the timing of the upcoming license rounds. We believe Panama will be a very significant contributor to the third quarter and we believe that Brazil will as well.

[Akil Marsh:]

Is there any risk that the big third or fourth quarter slips out such that this is really more of a 1Q '19? Or is the procurement process such that these budgets really need to be spent by year end?

[Steven Bate:]

The budgets need to be spent by year end. The clock gets reset for the oil companies every year.

[Akil Marsh:]

When -- I know you touched on that you have 13 active programs. By year end, is there still the potential that, that could be up to 14, 15? Or is it probably going to be flat for the remainder of the year?

[Brian Hanson:]

We're still targeting, doing six to eight total programs this year, and we've sanctioned five. So we're still chasing up to three more programs.

[Operator:]

Our next question comes from line of [indiscernible].

[Unidentified Analyst:]

Brian, being that you're very bullish going forward on the longer-term prospects of the business, I was just wondering why recently -- if you could speak to why you've recently reduced -- meaningfully reduced your personal stake in the business. And just if you could kind of give us some comfort there, being that you're so bullish?

[Brian Hanson:]

Yes, sure. First, I've been accumulating stock in ION since 2006. And if you just take a look at the stock chart, and it's very interesting, with the fall of the stock price, I ended up with a really sweet-tax asset. Second, a large part of what I sold, I personally acquired by shifting my personal portfolio into ION stock when it was trading around $3. And quite frankly, I was just way too heavily exposed to one stock. So in 2017, I put a 10b-5 program in place to responsibly rebalance my portfolio in a very tax-effective way. The 10b-5 called for sales of stock at a predetermined floor of $22.50 that was put in place when the stock was trading significantly lower, low double digits. And so that was the logic behind it. But quite frankly, my exposure hasn't really been meaningfully significantly reduced. I only reduced about one-third of my total exposure to the company. And when you look at restricted stock options, stock appreciation rights, stock I currently still hold, I've got about a $5 million exposure to the company.

[Operator:]

[Operator Instructions] And Mr. Hanson, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

[Brian Hanson:]

Okay. Well, thank you for taking the time to attend the conference call. We look forward to talking to on our third quarter call.

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.