ION Geophysical Corporation
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Greetings and welcome to the Ion Geophysical's Third Quarter 2016 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, Rachel White, Vice President of Corporate Communications. Thank you. You may begin.

[Rachel White:]

Thank you, Christinie. Good morning and welcome to ION's third 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, November 3, 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 Rachel. Good morning, everyone. Yesterday, we reported third quarter net income of $2 million, or $0.14 per share, on revenues of $79 million. Our revenues were up 18% from the third quarter of 2015, and up sequentially by 117% from the second quarter of this year. This third quarter net come compares to a net loss of $20 million, or $1.86 per share, in the third quarter of 2015 or an adjusted net loss of $17 million or $1.54 after excluding special items from the prior year results. Our adjusted EBITDA for third quarter 2016 tripled $24 million compared to $8 million a year ago. In addition, we generated $10 million of cash during the third quarter, a significant improvement compared to the $29 million of cash we consumed in the third quarter of 2015. As we stated in our second quarter earnings call, we expected higher revenues and positive cash generation in the back half of 2016, both of which are reflected in our third quarter results. Our revenues for the third quarter exceeded our total revenues for the first half of the year, driven in part by our ocean bottom services group going back to work and by a sizeable increase in multi-client data library sales across our geographically diverse portfolio. $12 million of income from operations during the quarter is the first time since the second quarter of 2014 that we've had -- we've been profitable and indicates that the $95 million of annual savings from our cost reduction initiatives has right size our business to reflect current market conditions. There is a general consensus in the industry that the E&P down cycle has probably reached bottom and we are starting to see some early green shoots in select areas. Although many IOCs' financial results have been significantly impacted by the low commodity pricing in the first half, and their respective leverage has increased substantially, we are hearing a renewed interest in the value of data with select customers who are looking at this period opportunistically. License round cancellations and delays have continued to contribute to soft data library sales, but we expect a typical end of year data library sales uplift as all companies spend excess budget especially in mature proven provinces with stable bid round such as Mexico. In our E&P Technology and Services segment, a bright spot has been our 3D multi-client Campeche reimaging program and partnership with WesternGeco. The program consist of the three survey areas covering approximately 82,000 square kilometers offshore Southern Mexico where we anticipate continued strong client interest to inform their license round and development decisions. This data is relevant to the next deepwater round schedule for December of this year as well as future rounds. We received very positive customer feedback on a highly efficient processing timeline and significant imaging improvement we made in both sub-salt and above salt imaging. As I mentioned during the last call, this is an example of where we diverted a portion of our data processing capacity, the higher potential projects versus low margin proprietary work. We properly scaled our imaging services group to be fully utilized. We've continued to expand our portfolio of offerings into the production space. Our E&P advisors group partners with oil and gas operators, energy industry regulators and financial institutions to capture and monetize E&P opportunities worldwide. We provide technical analysis and commercial and strategic evaluation across the exploration of production value chain from basin to reservoir scale. We are pleased that our E&P advisors group was recently registered by Mexico's National Hydrocarbon Commission to conduct petroleum reserve audits, one of only eight qualified companies. ION E&P advisors also recently served as a geophysical and geological consultant for a Mexican E&P company, qualifying them to participate in the recent offshore round. We delivered a comprehensive evaluation of the round one onshore block, outlining the valuation and upside potential in risk. ION has continue to help to winning operator develop the block. Our E&P operations optimization segment continues to be hampered by extremely low utilization levels and day rates among our contractor customers. Despite sluggish software sales, we closed the fleet- wide Orca deal with the major customer, upgrading them from our legacy spectra platform. We anticipate lower seasonal utilization and potential for further vessel stacking during the winter among our customer base, which is typical as activity in the North Sea slows down. We completed three deployments of our simultaneous offshore operations management software, Marlin, during the quarter. And we continue to receive high praise and great feedback about it. In our Ocean Bottom Services segment, we successfully completed our OBS survey offshore Nigeria during the third quarter. Our overall performance on the survey exceeded our expectations especially given that our crew and vessels have been stacked for almost a year, a strong testament to the dedication and experience of our OBS crew and management. At the completion of the project, we cold- stacked our crew and vessels while we actively pursue tenders for longer-term work in the region. We anticipate significant improvement in the OBS market next year and we believe we are well positioned for our crew to go back to work in a near term, specifically we've completed both the technical and commercial phases of tendering for a long-term project and are simply waiting the invitation to negotiate the contractual terms of the contract. Although, we've been told by the customers that this project is moving ahead, we remind ourselves daily of the challenging conditions the IOCs are facing these days, borrowing capital to cover their dividend commitments. And we would not be surprised if it takes a while before the phone rings. In the interim, we will leave the crew cold-stacked to avoid cash burn. With that I'll turn the call over to Steve to walk through the financials and then I'll wrap before taking questions.

[Steve Bate:]

Thanks Brian. Good morning, everyone. Our total third quarter revenues were up by 18% from the third quarter of 2015. This increase was driven by OceanGeo going back to work and increased data library sales but was personally offset by declines in the other areas of our business. Our improved revenues, coupled with the impact of our implemented cost cutting initiatives resulted in income from operations of $12 million, a significant improvement from our adjusted loss from operations of $9 million a year ago. We reported a positive net income of $2 million for the quarter, our first positive adjusted net income quarter since the first quarter of 2014. Our adjusted EBITDA for the third quarter was $24 million, compared to $8 million last year. Given the sizable improvement in the third quarter, our year-to-date adjusted EBITDA turned positive to $4 million compared to negative $60 million in the first nine months of 2015. As we look forward to fourth quarter, we expect to finish the year strong, driven in part by normal year end spending on data library with continued cash generation and liquidity improvement. We generated positive net cash flows of $10 million during the third quarter of 2016 compared to a consumption of cash of $29 million in the third quarter of 2015. Our cash balance at September 30 increased to $63 million which included $15 million, we previously borrow under our revolving credit facility that remained outstanding. In addition, for the first nine months of 2016, we reduced our debt by approximately 20% from $183 million to $149 million excluding the revolver. At September 30, our total liquidity was $78 million, an increase of $14 million from June 30. Our total liquidity consists of $62.5 million in cash and $16 million of remaining availability on our revolving credit facility. Our credit facility availability increased compared to the end of March and June but still remains below the maximum amount due to a decline in eligible receivables including in the borrowing base calculation since December 2015. However, we expect our availability to increase by December 31 due to higher anticipated fourth quarter data library revenues which should increase the amount of eligible receivables providing collateral under the credit facility. With that I'll turn the call back to Brian.

[Brian Hanson:]

Thanks Steve. We expect the strong finish to the year with continued work on our industry funded new venture program offshore Mexico, traditional year end spending on data library in the fourth quarter, and our equipment and software licensing recurring revenues. In addition to increasing revenues we should fully benefit from the cost cutting measures we have put in place over the last eight quarters. For those reasons, we currently expect to continue to generate positive cash flows in the fourth quarter, continuing to increase our cash balance and improve our liquidity. We also anticipate that our working capital will continue to increase in the fourth quarter, providing liquidity into 2017 and restoring the borrowing base of our revolver. In addition, I am very pleased we've reduced our overall leverage this year by 20%. So in general we are guardedly optimistic that we've turned the corner. With that, we'll turn it back to the operator for Q&A.

[Operator:]

[Operator Instructions] Thank you. Our first question comes from the line of David Steinberg with DLS Capital. Please proceed with your question.

[David Steinberg:]

Hi, guys. Great job on turning the Company given the tough environment. I'm a newer shareholder for my firm. My question is, in terms of your customer base, is there any diversification, or is it lumpy? Obviously you are just starting to bring stuff on. How much -- what's the largest customer represent, and how many customers are you servicing, is question number one. Question number two is, of the revenues that you've got, how much is re-annuitized business, and how much is not -- where they've got to re-up it on a shorter-term basis? So can you give me just a little color and flavor for the mix of revenues as you are seeing it now? I'm sure it's different than it was in the heyday, three or four years ago.

[Brian Hanson:]

Yes. David thanks for your comments on the quarter. I can answer the first part of your question, a little easier than the second; I'd suggest for the second question that maybe you do a follow up call with Steve after the earnings call, simply because of the complexity of our offering which ties back to the first question. We -- our offering is very much targeted on the all company side of IOC, the NOC, small, medium, independent and it is a global offering. So our customer base is very broad and across the world. When you look at the E&P optimization area of our business, that customer base are all the marine contractors that are servicing the E&P clientele so we've a very broad customer base. And we have a number of offerings to target them so I don't have a simple answer for you.

[David Steinberg:]

Okay. It was such a remarkably good turn that I'm trying to figure out if it's more of a one-time thing or you're seeing -- and I know you mention it looks like you've seen stabilization and bottoming, where maybe we're going to see quarter after quarter. It's not necessarily good, bad, or indifferent; but good stabilization and stability in revenues and cash flows. And that was where the basis of the question came from.

[Brian Hanson:]

Yes. I think that's a little easier to address. I think the comp-- because the quarter is a result of a couple of things, it is a result of us demonstrating that we can scale this business appropriately and we worked very diligently to do that over about six quarters and we are seeing the benefit of that now with $95 million of cost being removed from our operations. And secondly, our business is typically a little cyclic in the first half of the year is weaker than the second half that's stronger. Our first quarter is usually soft because all companies are not opening their check books and writing checks. But by the third quarter they are and the portion of their budget that comes our way is a pretty small portion. So it is a little bit of spend of them and it is very meaningful to us. So I think you would expect in general if I look forward that you'd see a similar pattern but I think that we've removed enough cost to stabilize this business. And we should demonstrate on a full year basis that we can both generate cash and drive profitability. But you are going to see lumps quarter-to-quarter.

[David Steinberg:]

Got it. I wouldn't expect to not see some lumps. Anyway, once again, you did a great job. I'll give Steve a call. And keep up the good work.

[Operator:]

[Operator Instructions] Thank you. Our next question comes from the line of Phyllis Camara with Pax World Funds. Please proceed with your question.

[Phyllis Camara:]

Hi, thanks. Good quarter, gentlemen. It's nice to see. I just was curious about you were talking about the data library for the fourth quarter, and how you were expecting to see a renewed interest in that which is typical. Have you already started to see it for the quarter, or is it something that you're expecting to see? I was just wondering how much is ongoing so far in the fourth quarter that you can talk about.

[Brian Hanson:]

Good morning, Phyllis. If you think about the way data library is sold and that sales process starts from obviously kind of an expression of interest or conversation around with an oil company around whether they are interested in data, and then there is a whole process that they go through to sort of technically validated and then commit to the purchase. Most times that commitment comes very much towards the end of the quarter because naturally in our industry they believe they can get the very best deal on their holding sort of holding you to your quarter results. So I can tell you that when we look at that pipeline, the number of conversations we are having and who are having them with and the areas in the world that are in our portfolio, the activity level supports our thesis that we're going to have a good quarter for data library.

[Phyllis Camara:]

Okay, good, okay. And then the ongoing work in the Gulf of Mexico for the -- I don't know if it's the Mexican government or Mexican Pemex. Can you talk a little bit more about what you are expecting to see for that, for this quarter, and what segments it's going to be in?

[Brian Hanson:]

Yes. I think primarily it is going to be in the data library sales area because we are working on a project and partnership with WesternGeco, we've taken basically through Mexico's deregulation process, they pulled together a ton of their data they acquired over the years and they made it available to us so purchase that data with the WesternGeco. And we are reprocessing all that data or imaging it so that all companies who are looking at participating in the offshore rounds that are upcoming in Mexico and purchase the data and be able to evaluate the opportunity. So we would expect in fourth quarter that we will sell licenses to that data library set in Campeche base.

[Phyllis Camara:]

Okay. Okay. And then can you talk about the WesternGeco lawsuit? Where does that stand right now? I know they -- I believe they appealed the decision that was made. And I just was wondering where we are with that.

[Brian Hanson:]

Yes. Actually I can't give the latest update on that honestly, we will have an appropriate disclosure in our Q1 when we file it. And the only reason I can't tell is I literally have not set down and got an accurate update from our legal counsel. So I’d be little uncomfortable to say something that I get slapped for after the call. But happy to take a call after and gives you the right answer.

[Operator:]

Mr. Hanson, it appears we have no further questions at this time. I'd now like to turn the floor back over to you for closing comments.

[Brian Hanson:]

Okay. Thank you very much taking the time to attend the conference call. We look forward to talking to you on our fourth quarter call.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your line at this time. Thank you for your participation. And have a wonderful day.