ION Geophysical Corporation
Q4 2016 Earnings Call Transcript

Published: 10 Feb 2017

[Operator:]

Greetings and welcome to the ION Geophysical Fourth 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, Miss Rachel White, Vice President, Corporate Communications for ION Geophysical. Thank you Miss White, you may now begin.

[Rachel White:]

Thank you, Manny. Good morning and welcome to ION's fourth 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 on to Slide 3, information reported on this call speaks only as of today, February 9, 2017, 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 in our press release issued yesterday. And please note that the contents of our conference 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've reported fourth quarter net loss of $6 million or $0.55 per share on revenues of $35 million. Our revenues were down 54% from the fourth quarter of 2015. Excluding special items, we reported an adjusted net loss of $12 million or $0.99 per share compared to a net loss of $6 million or $0.51 per share in fourth quarter 2015. One important point I'd like to make is that, we had strong sales of our 3D Multiclient Campeche Reimaging Program during the quarter. However, since our program is still in progress with final data delivery scheduled for 2017, we increased our backlog instead of recognizing revenue during the quarter. If we have been able to recognize those sales, we would have had positive earnings for the quarter. For the full year 2016, we reported revenues of $173 million, down 22% from 2015. Our net loss was $65 million or $5.71 per share, compared to an adjusted net loss of $119 million or $10.83 per share in 2015. Another positive point that Steve will provide more details on in a moment is that during the quarter, we generated $16 million in cash flows, excluding the patent litigation payment we made to WesternGeco and repayments we made under our revolving credit facility. For the full year 2016, the business generated breakeven cash flows after excluding the patent litigation payment and the cash we used on our second quarter bond exchange. The fact that we are able to cash flow breakeven for the year demonstrates that we have right-sized our business to reflect 2016 market conditions and indicates that we would expect to be cash flow breakeven at revenues of approximately $175 million. As anticipated, 2016 was another challenging year for us and our industry. Oil prices remained low and E&P spending declined approximately 22% from 2015 levels. While the revenue we recognized during the fourth quarter was below our expectations, we closed a significant amount of new deals related to our 3D multi-client Campeche reimaging program in partnership with Schlumberger. Because the program is still in progress with final data delivery schedule for 2017, we were unable to recognize all the revenue in the fourth quarter, so we ended up increasing our backlog for 2017 revenue recognition. Our multi-client new venture programs and data processing backlog increased $15 million to $34 million at year-end, up from $19 million at year-end 2015. This increase in backlog should translate to higher new venture revenues in the first quarter of 2017, compared to the first quarter of 2016. In our E&P Technology and Services segment, all businesses continue to be impacted by the slowdown and exploration spending. However, bright spot has been our 3D multi-client Campeche reimaging program. We continue to receive very positive customer feedback on the unprecedented turnaround time and significant imaging improvement we made in both subsalt and above-salt imaging. Our Imaging Services group remains close to being fully utilized with a large portion of our capacity dedicated to these higher potential projects. Our E&P Operations Optimization segment continues to be hampered by extremely low utilization levels and day rates among our contract customers. However, during this period of reduced activity, we have now successfully completed 22 deployments of our simultaneous offshore operations management software, Marlin and we continue to receive great client feedback about it. In our Ocean Bottom Services segment, we continue to actively pursue multiple tenders for longer-term work, while our crew in vessels remain cold stacked to minimize costs. We anticipate significant improvement in the OBS market for 2017 and believe we are well positioned for our crew to go back to work this year. The Nigerian OBS project last year demonstrated our ability to quickly ramp-up the crew, flawlessly execute the program and generate significant amounts of cash. With that, I'll turn it over to Steve to walk us through the financials and then I'll wrap up before taking questions.

[Steve Bate:]

Thanks, Brian. Good morning, everyone. Our total fourth quarter revenues were down 54% from the fourth quarter of 2015. Revenue in our E&P Technology & Services segment decreased 60% and revenue in our E&P Operations Optimization segment decreased 29%. Similar to the fourth quarter of 2015, our Ocean Bottom Services segment had no revenues as we completed our Nigerian survey in the third quarter of 2016. The decrease in our E&P Technology & Services segment was the result of the slowdown in exploration spending and revenue recognition deferral associated with the majority of our multi-client sales in the fourth quarter. As Brian mentioned, we closed a significant amount of transactions related to our Campeche reimaging program substantially increasing our backlog at the end of the year. The decrease in our E&P Operations Optimization segment was the result of reduced seismic contractor activity. Our loss from operations was $8 million during the fourth quarter of 2016, compared to an operating loss of $400,000 in the fourth quarter of 2015. This operating loss in the fourth quarter of 2016 was driven by the significant decline in revenues, but was partially offset by the $95 million in annualized cost reductions, we implemented over the last two years. Our adjusted EBITDA for the fourth quarter was $7 million, compared to $18 million last year. Even though our adjusted EBITDA was down from one year ago, considering our low level of revenues during the quarter, we are pleased that our adjusted EBITDA remain positive, which once again reflects that we are now fully benefiting from our prior cost cutting initiatives. We consumed $10 million of cash during the quarter, which was in large part driven by a $21 million payment to WesternGeco regarding our patent litigation and $5 million of repayments under our revolving credit facility. After excluding these two items, we generated positive cash flows of $16 million during the quarter compared to a consumption of cash of $3 million in the fourth quarter of 2015. For the full year we consumed $32 million of cash which included the $21 million litigation payment, a $22 million payment we made during the second quarter related to our bond exchange and $10 million of net borrowings under our revolving credit facility. Excluding these items, we were cash flow breakeven for the full year compared to the consumption of cash of $89 million for the full year of 2015. Our cash balance, excluding borrowings under our credit facility at December 31, is $43 million. As a result of our bond exchange during the year, we reduced our debt by approximately 20%, down from $183 million to $149 million at the end of the year, excluding our revolver. We were also able to extend the maturity on $121 million of our bonds by 3.5 years to the end of 2021. As announced in December, we initiated an at-the-market equity program, under which we may issue and sell from time to time, shares of our common stock based on certain conservative criteria established by the company. The ATM program to gross up to $20 million over time and was initiated to allow us to be better positioned to capitalize on opportunities, such as acquiring complementary distressed assets, further deleveraging through buying back bonds at discounted rates or other value added transactions. The program has been in place for over a month and as of today, we have not sold any of our common stock under the program. But we do sell stock under the program. It will be done in a manner designed to minimize significant dilution or downward pricing pressure. The program is in place to give us the ability to be opportunistic, if opportunities that require additional capital present themselves and we expect the program to be active for multiple quarters before reaching the $20 million program cap. This program was not put in place to issue a large volume of equity quickly pressuring our stock price and we may ultimately not raise any capital under this program. With that, I'll turn it back to Brian.

[Brian Hanson:]

Thanks, Steve. 2016 was a tough year, but we've navigated it successfully. We've been proactive, disciplined and creative regarding our balance sheet management. We believe we have right-sized our business and our current liquidity coupled with our operational and financial restructurings will enable us to weather the severe industry downturn. We believe that the E&P industry reached the bottom of the cycle during 2016 as we are starting to see leading indicators of recovery. Supply and demand are coming in to balance, stabilizing oil prices in E&P company balance sheets. Most analysts are suggesting a modest increase in AP spending this year, however, we expect growth in seismic spending, the lag behind some segments of the oil and gas sector, especially offshore marine activity, which remains our primary focus. That said, tenders have already started picking up in the OBS market and we are seeing renewed interest in underwriting new venture programs for the first time in two years. We believe 2017 will be a transition year for ION, as the market starts to recover later in the year and as usual, we believe the first half will be softer than the back half. Due to our past rightsizing initiatives, we should be able to run our business through 2017 and position ourselves for recovery in our area of the industry in 2018. We've been able to maintain our capabilities, our workforce and our R&D programs and we are actively positioning ourselves to take full advantage of a more normal 2018. With that, I'll turn it back to the operator for Q&A.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Robert Jones of Simple and Partners. Please go ahead.

[Robert Jones:]

Good morning Brian and Steve.

[Brian Hanson:]

Good morning.

[Steve Bate:]

Good morning.

[Robert Jones:]

Could you guys broadly talk about the current OBS environment and what I'm trying to get out is, how competitive are the tenders? Just a sense of generating cash flow for the company, should you win one of those tenders?

[Brian Hanson:]

Yes, I can tell you that the first overreaching formula I would make is that, a number of projects that had gone to tender or around were to go to tender for execution in 2015 and 2016 were pushed out. And what we're seeing is a number of those being awarded or being re-tendered on those projects will be executed in 2017 and 2018. So, we're actually seeing quite a robust OBS marketplace at this particular point in time. The second comment I'd make is, not all OBS projects are created equal, they are not all the same. So depending on the operating conditions you're working in, one competitors equipment maybe particularly suited for versus another. So, there are particular areas in the world that we're extremely competitive because of the way we should - OBS with our particular technology. And so those, those projects, we're pretty disciplined about the ones we bid on, we don't bid on all tenders and the ones that we do bid on, we feel that we're very competitive and they're actually very good jobs when it comes to cash generation.

[Robert Jones:]

Okay, that’s helpful. Thanks guys.

[Operator:]

Thank you. Our next question is from Bradley Kane of Osterweis Capital Management. Please go ahead.

[Bradley Kane:]

Thank you. With the $21 million payment now on WesternGeco, where does that leave you guys with the lawsuit?

[Steve Bate:]

It's a little bit of an unusual order by the judge. We really didn't enter a judgment in and so the case is still at the trial court level. We're waiting for hearings to proceed. So it's still active, so that wasn't a final judgment, it's just a very strange order from the judge for us to pay $21 million of royalties to WesternGeco, so we're still engaged with them.

[Bradley Kane:]

Okay. So you still have potential liability or is it…

[Steve Bate:]

I mean the case is certainly not over.

[Bradley Kane:]

And what do you think the next steps are timing?

[Steve Bate:]

The next step is for the judge to hold another hearing and he'll ultimately decide on the issue that was remanded back to him from the Supreme Court to the Appellate Court, which was to evaluate whether under our new standard we were willful in the case and if that's the case, he could apply further damages. If he applies further damages, I would expect then that it would appeal and we'll go back to the Federal Appellate court and then, depending on the outcome of that, it would probably be appealed to the Supreme Court and then it would - so the long - sort of the long answer, or the short answer is this thing to be wrapped up in litigation for quite a while. I think the only course of action that would draw conclusion to this case in the short-term would be for the parties to come to some kind of a settlement agreement.

[Bradley Kane:]

If I remember correctly, the - when you've got the original workload when WesternGeco got the original word and you had it reduced - it was reduced down to around $21 million, wasn't it?

[Steve Bate:]

Right.

[Bradley Kane:]

Okay. Alright, thanks.

[Steve Bate:]

You’re welcome.

[Operator:]

Thank you. The next question is from Scott Smallman of Wedbush. Please go ahead.

[Scott Smallman:]

Good morning, guys. Couple of questions, first of all, in terms of the joint venture that you're doing with Schlumberger, what do you guys bring that Schlumberger couldn't do themselves?

[Steve Bate:]

I think the first thing to recognize that when you're working in a limited marketplace, there's a lot more collaboration that goes on between companies and so you're not just seeing ION working with Schlumberger, you're seeing all sorts of collaboration with the competitors that typically go head-to-head. And in this particular case, what we're bringing to the party is we're bringing our reimaging expertise, so we're actually doing the processing on the data and Schlumberger is bringing their business development skill set, so they're on the front lines marketing the data.

[Scott Smallman:]

The second question is you reported a cash figure for the end of the year and end of the quarter, what do you have to have been cast just to run the business day to day?

[Steve Bate:]

That's a good question and I'm not sure that I can give you an exact answer. I can tell you that during the financial crisis of 2009, we were running the business on less than $10 million.

[Scott Smallman:]

So that might be a minimum level?

[Steve Bate:]

Yes.

[Scott Smallman:]

And then I guess the related question is, you still have your debt outstanding that's due in just over a year. Is there a definite plan in place yet for dealing with that shorter-term portion of the remaining debt?

[Steve Bate:]

Yes. That debt matures in about 17 months, I believe and we have several options for considering for it.

[Scott Smallman:]

Would that include issuing new debt of some kind?

[Steve Bate:]

Possibly.

[Scott Smallman:]

Okay. Those were my questions. Thank you.

[Steve Bate:]

Thanks.

[Operator:]

[Operator Instructions] The next question is from David Steinberg of DLS Capital. Please go ahead.

[David Steinberg:]

Hey guys, good job, managing through difficult period. The other questions were answered from the other analysts that had ask questions. So thank you very much.

[Brian Hanson:]

Appreciate it, David.

[Steve Bate:]

Thanks, David.

[Operator:]

[Operator Instructions] We have no further questions at this time. I would like to turn the conference back over to management for closing remarks.

[Brian Hanson:]

Well, thank you for taking the time to attend our call and we look forward to talking to you on our next call.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.