ION Geophysical Corporation
Q2 2016 Earnings Call Transcript

Published: 7 Aug 2016

[Operator:]

Greetings and welcome to the Ion Geophysical's Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Abercrombie, Vice President of Corporate Communications for ION Geophysical. Thank you, Miss Abercrombie. You may begin.

[Karen Abercrombie:]

Thank you, Devin. Good morning and welcome to ION's second quarter 2016 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'll be using slides to accompany today's call. They're accessible via a link on the Investor Relations page of our website, iongeo.com. There, you will also find a replay of today's call. Moving onto Slide 3, information reported on this call speaks only as of today, August 4, 2016, and therefore you're advised that 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, that 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 into our press release issued yesterday. And please note that the contents of our call this morning are covered by those statements. I'll now turn the call over to Brian, who will begin on Slide 4.

[Brian Hanson:]

Thanks, Karen, and good morning, everyone. Yesterday, we reported a second quarter net loss of $25 million, or $2.22 per share, on revenues of $36 million. Our revenues were down 2% from the second quarter of 2015, but were up sequentially by 60% from the first quarter of this year. Excluding special items related to severance charges and our recently completed debt exchange, our second quarter adjusted net loss was $21 million or $1.85 per share. This compares to an adjusted net loss of $45 million, or $4.07 per share, in the second quarter of 2015. For the first half, we reported a net loss of $60 million, or $5.48 per share, on revenues of $59 million, down 24% from the first half of 2015; pretty much what we'd expect, given the reduction in E&P Capex budgets. Excluding special items in both periods, we reported an adjusted net loss of $56 million, or $5.10 per share, in the first half of 2016 compared to an adjusted net loss of $96 million, or $8.70 per share, in the first half of 2015. Our cash balances decreased by $24 million during the second quarter. This includes $20 million we used to complete our debt exchange, including fees, partially offset by $15 million we borrowed during the quarter under our revolving credit facility. As we mentioned on our last call in April, we completed our bond exchange offer, retiring $26 million in principal value of our $175 million high-yield bonds, issuing $121 million of new notes and extending the maturity date to December 15, 2021, with the interest rate increasing by 1% to 9.125%. After backing out our financing activities, our cash consumption in the second quarter was $17 million, in line with our expectations and an improvement from the $26 million we used in the second quarter of 2015. Of the $17 million of cash consumed during the quarter, $8 million related to the interest payments on our high-yield notes, $1 million related to severance payments, and the remaining $8 million was used to fund our operations, including the ramp-up of OceanGeo. I will discuss our outlook in more detail in a moment, but we expected the second quarter to be our low point in terms of liquidity and we currently anticipate that we will generate positive cash flows and increasing borrowing capacity under our revolver in the second half of the year. Overall, our first-half results were in-line with our expectations. We, along with the rest of the industry, have had a sluggish start to the year with oil and gas companies slow to set budgets and reluctant to spend. License rounds have been cancelled or delayed, contributing to soft data library sales. The third quarter will be considerably stronger than the second, as we already have between $60 million and $65 million of revenues committed across all our segments. Our third quarter committed revenues already exceed our total revenues from the first half of the year. There is a general consensus in the industry that the down cycle may have reached bottom and we're starting to see some early signs of recovery. In our conversations with select customers, we're hearing a renewed interest in the value of data. Those delayed license rounds I mentioned are building pent-up demand for business in 2017 and 2018. License rounds are becoming global events with host governments competing for a defined set of capital. This represents an opportunity for our multi-client imaging and advisory services, as evidenced by the work we did for the Tanzania Petroleum Development Corporation for their fourth deepwater license round in 2013. We helped them acquire regional data, evaluate their acreage, define blocks, assess what oil companies might bid, put together bid packages, and promote the license round. We are seeing increasing interest among host governments to provide these types of services to differentiate them as they compete globally to launch successful auctions. Through these types of services we look forward to creating value for host governments, license round participants, and also for ION and our shareholders in 2017 and beyond. Onshore, we've seen a slight resurgence of interest and activity in North America land, resulting in some second quarter sales of our existing land data programs and solid prospects in the works for the sales in the back half of the year. In the imaging business, overall proprietary project rates are down so we have diverted a large percentage of our data processing capacity and expertise to a few large, higher-potential 3D multi-client reprocessing projects in a challenging area in the Gulf of Mexico that should tie this capacity up through mid-2017. It's an area in which we have a lot of experience, covers blocks in upcoming license rounds, and is being supported with initial underwriting levels exceeding 100%. In our software business, we have solidified our position as the leading provider of optimization services for 4D projects. Although soft in Q1 and the beginning of Q2, in the second quarter we were awarded responsibility for in-field optimization of all five 4D towed streamer projects acquired during the second and third quarters in the Norwegian Continental Shelf, UK Continental Shelf, and the Danish sector. We are currently running at 100% utilization for optimization services on 4D projects. And our Marlin software for managing simultaneous offshore operations is gaining traction with deployments in 17 locations including seismic vessels, oil company offices, offshore platforms, and platform supply vessels. We're seeing ocean bottom seismic projects being awarded. During the second quarter, we mobilized our ocean bottom crew and vessels and began acquisition on a survey offshore Nigeria. We expect to complete data acquisition in the third quarter and are very pleased with the production and data quality we and our customer are seeing. We continue to work on two tenders with other customers in the region and hope to mobilize to these projects toward the end of the year. Although we expect a short gap in timing between projects, we have demonstrated our ability to quickly ramp down and up our crew and vessels with minimal cash burn between projects. With that, I'll turn it over to Steve to walk us through the financials and then I'll come back and share our views on the second half of the year.

[Steve Bate:]

Thanks, Brian. Good morning, everyone. Our total second quarter revenues were down slightly, by 2%, from the second quarter of 2015. Our second quarter revenues in our solutions, systems, and software segments were down 17%, 14%, and 34% respectively from the second quarter of 2015, but these declines were mostly offset by ocean bottom services crew and vessels going back to work in June. Sequentially, our revenues were up 60%. Excluding our OBS segment revenues, our other segment revenues were up a combined 31% compared to the first quarter of 2016. As we indicated at the start of the year, we expected the first half of 2016 to be sluggish with activity picking up during the second half of the year. Within our ocean bottom services segment, we began survey acquisition in mid-June and anticipate completion of the project in the third quarter. As a result, a large majority of the project revenues will be recognized in the third quarter. Despite only a slight drop in same-quarter year-over-year revenues, our adjusted operating loss, while still negative, improved to $15 million in the second quarter of 2016 compared to an adjusted operating loss of $39 million in the second quarter of 2015. Our adjusted EBITDA was a negative $3 million in the second quarter of 2016 compared to a negative $29 million a year ago. These improvements were the result of our ongoing cost reduction initiatives started in late 2014. As Brian mentioned, we consumed cash, before financing activities, of $17 million during the second quarter of 2016 compared to $26 million in the second quarter of 2015. Our cash balance at June 30 was $52 million, which included the $15 million we borrowed under our revolving credit facility that remained outstanding at June 30. Given the slow start to the year and the anticipated impact of extremely low first quarter revenues and its carryover impact into second quarter collections, our cash balances are about where we expected they would be. At June 30, our total liquidity was $64 million, consisting of $52 million in cash and $12 million of remaining availability on our revolving credit facility. Similar to the first quarter, we experienced a decrease in the amount available under the facility due to the decline in eligible receivables included in the borrowing base calculation. However, we expect that, as our revenues increase in the back half of the year, our revolving credit facility availability will increase based on higher levels of accounts receivable. With that, I'll turn it back to Brian.

[Brian Hanson:]

Thanks, Steve. The first quarter was rough, the second better, and we expect continued sequential improvement in the second half with the completion of our OBS survey offshore Nigeria in the third quarter, our equipment repair and replacement and software licensing recurring revenue streams, our continued work on our industry-funded new venture programs in the Southern Gulf of Mexico, and traditional year-end spending behavior on data libraries in the fourth quarter. We have good visibility into our pipeline for the second half and already have more committed backlog for Q3 than we booked in the first half of the year. In addition to increasing revenues in the third and fourth quarters, we should fully benefit from the cost-cutting measures we have put in place over the last seven quarters. For those reasons, we currently expect to generate cash flows in the second half of the year, rebuilding our cash balance. We also anticipate that our working capital will increase in the second half of the year, providing liquidity into 2017 and restoring the borrowing base of our revolver. So, all in all, we are guardedly optimistic that we have turned the corner. Before we wrap up, we'd like to give a brief preview of a new financial reporting structure we will introduce next quarter. Steve is going to take us through it.

[Steve Bate:]

Thanks, Brian. Our new three-segment structure to be implemented in our third quarter is in line with our strategy of developing and leveraging innovative technologies to deliver solutions that address oil and gas companies' most challenging problems throughout the E&P lifecycle. Since embarking on this strategy, we have evolved from being a broad-spectrum, low-margin equipment manufacturing business to becoming a provider of higher-value and higher-margin solutions. At the same time, we have shifted our focus from land to marine and are now, with a few opportunistic exceptions, solely focused on the marine environment. We will have three interrelated and complementary segments. The first is our E&P operations optimization segment, through which we develop and deliver our services, software, and optimization services offerings that enable better control and optimization of seismic and non-seismic operations. While, over time, as a company, we have shifted our focus from developing and delivering products to seismic contractors to developing and delivering solutions to E&P companies, we still have very viable contractor-facing software and devices businesses within this segment. It's a business with a recurring revenue model and a massive installed base. As you will hear on our next quarter call, in this part of business we have shifted from developing fully-integrated marine systems to a toolkit of mission-critical devices and software and the integration of them to deliver smart devices that help companies optimize operations. Our second segment is E&P technology and services, through which we develop and deliver our imaging services, multi-client data library, and advisory services to E&P companies, host governments, and others in the E&P industry to enable them to make better decisions, reduce risk, and maximize their assets. And our third segment is our ocean bottom services segment, through which we acquire and deliver superior OBS data through OceanGeo to help oil and gas companies gain insights for reservoir development decisions. So, now, instead of being a one-size-fits-all, we are very focused on the right areas of the business to get the best returns on our capital. We look forward to walking you through this in much greater detail on our third quarter call. In the meantime, to assist you in understanding this new financial reporting structure, in the Investor Relations portion of our website, iongeo.com, you will find slides that depict our Q2 and first-half financial results expressed in both our existing and new reporting segments. With that, we'll turn it back to the operator for Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Zach Huston with Footprints Asset. Please proceed with your question.

[Zach Huston:]

Good morning, Steve and Brian. Thank you for taking my call and congratulations on another second quarter results.

[Brian Hanson:]

Thanks, Zach.

[Steve Bate:]

Thanks, Zach.

[Zach Huston:]

I guess my first question, Brian, I was just wondering if maybe you could fill us in on maybe some of the signs that you're seeing in the industry kind of making you feel that you're starting to see maybe the bottom in the industry, so to speak.

[Brian Hanson:]

Yes. If I kind of went around and due to the [lengths] of the segments that we are going to be reporting in, the first thing I'd say is that on the optimization side of the business, what we're seeing is the fleet of contractors' vessels has pretty much stabilized. So, we're not seeing any more stacking. We're seeing, actually we've seen a couple of more vessels mobilized in the second quarter. So, I think we've seen kind of the bottom there and I also see that they're continuing to turn through equipment and wear out the kit that they have. So, at some point in time, that has to lead to an increase in refurbishment and replacement of that stuff. And, as demand picks up and more vessels are mobilized, it's just going to be a positive event for the software side of our business. Probably more importantly, on the E&P technology and services side of the business, we're starting to see customers almost start to migrate into two groups; those who are simply not interested in exploration at this time and are really strapped down, and those that are actually, surprisingly, seeing a tremendous value in acquiring data today because they recognize in the future they have to figure out – they've got to figure out the solution to exploration. Somebody has to be focused on it. So, we're seeing a select group of companies look at that and look at the value in data. And I can tell you, I've heard this from three different significant-sized oil companies in the last couple of months; they're looking at the value of data relative to the cost to acquire it today versus the cost to acquire a survey. So, I expect that we're going to see activity from those customers in the fourth quarter as they kind of look at their budgets and take their excess capital and start putting it to work. And on the ocean bottom side, we're seeing projects being awarded now. So, in the last quarter there's been a couple of projects awarded. It was almost everything got frozen and pushed out and pushed out and what you thought was going to happen in ’14 and then pushed to ’15 didn't happen in ’16. Now, we're starting to see those projects that had been on the drawing board for a long time being awarded. It's slow, but it's meaningful because each project is fairly significant. So, we're pretty optimistic that we're also going to see the same for our business and we're hopeful that we'll have a very significant project awarded to us that will keep us pretty busy in ’17. They're just some of the highlights I'm seeing.

[Zach Huston:]

Okay. Thank you. That was helpful. And then I guess my follow-up question was do you feel that the current downturn in the industry, do you see that recovery being similar to past downturns within the industry?

[Brian Hanson:]

I think this downturn really has to – it's been deep. It's been hard. We've broken much more than normal. I'm not even sure we can equate it to the 1980s. So, I would say, no. I think what we're going to see, first and foremost, is, as commodity pricing heals, I think there's going to be more of a focus on inventory levels dropping and companies are going to be guarded. So, I don't expect you're going to see the capital spending increase quickly. The second thing I think is that a lot of companies are going to looking to restore balance sheet health before they start deploying capital. And third, I think what's going to be different about this one is I think you're going to see kind of the super-majors are going to take a different track. I think they're going to take one where they're going to continue to be focused on return on invested capital and shareholder returns. And, as such, they're going to be – I think that group of customers will probably be more focused on capital deployment discipline and less on exploration activity because I think they'll take the approach, look, we'll buy. We'll buy the opportunity down the road versus trying to do the exploration work. So, I think there's going to be a fundamental shift in our – and we've been seeing it for two years in our customer base. So, I think it will be much more the medium, large independents and NOCs and that's where we're going to focus our activity.

[Zach Huston:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of [Indiscernible].

[Unidentified Analyst:]

Good morning. Thanks for taking the call. This is [Tom McKay for Malone]. I just wanted to be absolutely clear that you're saying that, based on the backlog for the third quarter that you're seeing, that you'll generate positive cash flow. And then, I thought you also said that the cash balance of the company would be higher at year end than it is today. And I assume that means without any additional borrowing so that you'll actually, on a net basis, generate cash, the way it's looking now. Did I get that right?

[Brian Hanson:]

Yes, Tom. That's right. It's our best current thinking and projections are absolutely that. And typically our strongest quarter is our fourth quarter. Our third quarter is shaping up to be a pretty strong quarter in itself, given the fact we have $60 million to $65 million already committed. So, our expectation absolutely is we'll be positive cash generating. The borrowing base of our revolver will increase. We're also going to be kind of replenishing some working capital in the back half of the year. So, those levels will increase, and that is without additional borrowings.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

There are no further questions at this time. I'd like to turn the floor back over to Mr. Hanson for closing comments.

[Brian Hanson:]

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

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.