ION Geophysical Corporation
Q4 2015 Earnings Call Transcript

Published: 11 Feb 2016

[Operator:]

Greetings, and welcome to the ION Geophysical Fourth Quarter Earnings Conference Call. At this time, all participants are in 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 Communications for ION. Thank you, please go ahead.

[Karen Abercrombie:]

Thank you Mellissa. Good morning and welcome ION's fourth quarter 2015 earnings conference call. We appreciate you 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 link on the investor relations page of our website, iongeo.com. There you will find a replay of today’s call. Moving on to Slide 3, the information reported on this call speaks only as of today, February 11, 2016 and therefore you are 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 the statements. These risks and uncertainties include the risk factors disclosed by ION from time to time in our filings with the SEC, including on our annual report on Form 10-K and on our quarterly report 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 conference call this morning are covered by these statements. I will now turn the call over to Brian, who will begin on Slide 4.

[Brian Hanson:]

Thanks Karen. Good morning everyone. As we announced yesterday, we reported a full year 2015 net loss of 25 million on revenues of 222 million, a loss of $2.29 per share. We’ll provide more color here in a moment, but all our share amounts have been adjusted to reflect the impact of our recent 1-for-15 reverse stock split. Excluding special items our full year adjusted net loss was 119 million, a loss of $10.83 per share compared to an adjusted net loss of 34 million on revenues of 510 million, a loss of $3.12 per share in 2014. In terms of liquidity, we ended the year with a solid 125 million in cash and availability under our revolver. By all majors it was a very challenging year for both ION, our peers and our E&P customers. Steadily deteriorating oil prices resulted in decline in revenues followed by industry wide operational and financial restructurings. While I don’t think I need to recap 2015 oil and gas microeconomics on this call, I do want to spend a few minutes looking at our fourth quarter performance because I think it was more indicative of what lies ahead for us than our full year results. To our cost reduction initiatives during the year, we were able to appropriately scale our business to bring it in line with our lower revenue streams while maintaining all of our core capabilities and continuing to strategically invest in commercial opportunities and research and development of new technologies. By the fourth quarter we were able to see the majority of the results of those cost reduction initiatives, generating a slight positive net cash flow before financing activities during the quarter. Taking into consideration our stock buybacks from our recently implemented stock repurchase program and debt service, we consumed only 3 million of cash during the quarter, a significant improvement from our cash burn earlier in the year. From a revenue standpoint, as usual our fourth quarter was our strongest. In our Solutions segment our multi-client data library revenues were up 6% over fourth quarter 2014, primarily due to increased sales of our Latin American programs. In addition we generated revenues from our newly acquired industry funded MexicoSPAN program and we’re the first to market with fast track data of the region in advance of Mexico's licensing Round 1. In the data processing arena, we were recently awarded an extension to our existing multi-year contract with Pemex, under which we are providing a broad range of seismic data processing for multiple offshore and onshore service. Pemex plans to continue to invest in hydrocarbon exploration and production in the year ahead and this contract extension was a solid vote of confidence in our ability to employ our differentiated technologies to deliver superior images within Pemes's required timeframes. Our software and system segment revenues were hampered by contractor customers taking vessels out of service. Despite decline revenues the software segment continued to generate string gross and operating margins during the fourth quarter, end of year. And our Ocean Bottom segment, we are still working and are in a leading position on securing multiple projects. We have found in this environment that the contracting process is slow and my primary concern is although our customers are going through the motions, they simply may not have the funds behind their desire to shoot the surveys. Eventually these surveys will be completed and although we have cold stacked our crew we have maintained our full capability and are ready to go back to work as soon as contracts are ultimately awarded and finalized. I spoke earlier about our improving cash position, now I want to address our stock price. In December of last year we announced a special shareholder meeting to address delisting issues through a reserve split of ION stock. On February 1st, our shareholder voted in favor of the reverse split and our finance committee approved a reverse split ratio of 1-to-15. We began trading based on the new price on February 5th, with the current float of 10.5 million shares we would have to see a market cap drop below 11 million to risk a delisting again. On November 4, 2015 we announced the stock repurchase program, at that time our Board of Directors authorized ION to repurchase between November 10, 2015 and November 10, 2017 up to 25 million in shares of our outstanding common stock. Our intension was to use this to guard against the risk of auto-delisting from the New York stock exchange which would have occurred had our stock drop below $0.15. Were that to happen we would have lost our opportunity to cure the stock price deficiency, our intension was to use this as a tool to support the stock while we implemented the reverse split. Between November 2015 and February 2016, we purchased just over 450,000 share adjusted for our reverse split at a total net cost of about 3 million reducing our float by 4%. While the program remains in effect we are not actively making purchases at this time. We may elect to make purchases under the plan at later time. Now that we have addressed the risk of delisting we have turned our attention to the nearing maturity of our debt instrument. We are currently considering all the options available for delevering our business including repurchasing bonds in the open market, redemptions, maturity extensions, exchange offers and other retirements. The implementation of any such steps would depend on how well the option maximizes shareholder value, our liquidity objectives, contractual restrictions and other factors. There is no doubt that 2015 was a very tough year, but we went into it with a set of delivered objectives and they were more than to simply whether the storm. We went into the year determined to right-size the company, while maintaining our core capabilities and continuing to strategically invest in R&D and commercial opportunities so that when the market comes back we are ready to take full advantage. We believe we have accomplished that. With that I’ll turn the call over to Steve to walk us through the financial in our ramp up [ph].

[Steve Bate:]

Thanks, Brian. Good morning, everyone. Our fourth quarter revenues were down 43% year-over-year, while all of our segment revenues were down, a bright spot for the quarter was a 6% increase in our data library revenues within our solution segment, the result of an increase in yearend spending. Also while our data processing revenues continued to be hampered by overall market conditions, the extensions of our Pemex contract will enable us to more fully utilize our data processing capacity as we head into 2016. The decline in our systems and software revenues is the result of reduction in activity by seismic contractors that have taken vessels out of service over the past year. Our systems and software fourth quarter revenues reflect the current run rate of software licenses and repairing replacement revenues of marine equipment with very little new software of system sales. Looking forward into the first half of 2016, we would expect our fourth quarter run rates to approximate the continued level of activity within these segments. Our Ocean Bottom services segment contributed no revenues in the fourth quarter as our OceanGeo crew and vessels were still cold stacked. As Brian mentioned we’re working through the tendering process on multiple projects. At the same time we have significantly reduced our quarterly OBS cash burn rate to approximately 3 million in the fourth quarter while maintaining our core competencies in the segment. If we were not awarded a contract in the first quarter we were revisit this spend again and may reduce it further, but we’ll maintain our ability to tender on contracts and reactivate the crew. Our operating profit for the fourth quarter was a slight loss of under 1 million a 0% operating margin on revenues of 77 million compared to an adjusted operating profit of 6 million, a positive operating margin of 4% on revenues of 137 million in the fourth quarter 2014. The decrease in quarter-over-quarter operating profits and margins was driven by the revenue decrease and was partially offset by the cost savings initiatives we implemented throughout 2015. Despite our decline in revenues, our net loss for the fourth quarter improved to a net loss of 5 million, a loss of $0.51 a share compared to an adjusted net loss of 11 million, and adjusted loss of $1.01 per share in the fourth quarter of 2014. Our adjusted EBITDA in the fourth quarter of 2015 was 18 million compared to 25 million in the fourth quarter of 2014. During the quarter we used approximately 3 million of cash, excluding our fourth quarter stock repurchases and debt service cash flow for the quarter was slightly positive, a significant improvement from our cash flow profile during the first nine months of the year. At December 31st, our total liquidity was 125 million consisting of 85 million in cash and the full 40 million available on our revolving credit facility. Our net debt defined as total debt less our cash balances was 101 million at December 31, 2015. With that I’ll turn it back to Brian.

[Brian Hanson:]

Thanks, Steve. Looking ahead we believe that the exploration landscape throughout 2016 as it impacts our business will be similar to 2015. As commodity prices continue to decline and as many of our E&P customers have still not yet finalized their 2016 budgets, we expect our first quarter to be our weakest with improvement expected in the back half for the year. We believe our current liquidity coupled with the results of our cost reduction initiatives will enable us to continue to weather the storm, we do not expect to see early signs of recovery in the markets we serve until sometime in 2017. Consistent with our asset light strategy, I believe we've demonstrated our ability to scale up or down as business dictates. With that, I'll turn it back to the operator for Q&A.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is comes from the line of Ariel Rothman, Tegean Capital. Please proceed with your question.

[Ariel Rothman:]

Thanks for taking the question and solid quarter on the cash burn. I was just looking for some color and thoughts on 2016 in terms of multi-client investment levels and CapEx investment level and thoughts on investment there.

[Brian Hanson:]

Sure, I think 2016 and multi-client is going to be a little bit of challenging year, I think the areas of the world that we'll be able to do programs will actually be a little bit counter cyclical meaning that there is probably a couple of places in the world that are still very interesting for oil companies but in general for the most part I think multi-client is going to be challenging. So I would expect that our level of investment this year is probably going to be somewhere between $10 million and $30 million, but it will have to be in programs that are properly underwritten.

[Ariel Rothman:]

Okay and generally on CapEx? I mean, there was a step-up [indiscernible] was probably related to Ocean Bottom, I would assume it will be down next year versus the 19.2 that you spent in ’15?

[Brian Hanson:]

Well in the CapEx number you've got both investment, there's investment on multi-client as -- excluding the investment on multi-client, we’ve spend very little money on CapEx.

[Ariel Rothman:]

Right. So, is that [Audio Gap]?

[Brian Hanson:]

Pardon me.

[Operator:]

Thank you. I'm sorry. Our next question comes from the line of Peter Carmak [ph] Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Just a quick question as it relates to the debt side of the balance sheet, I know you mentioned today repurchase agreement or repurchase program on the common stock and I see that one through with some dollars in Q4, any thoughts or comments that you can make as it relates to potential repurchase on the bond side, with the bond trading at a pretty significant discount from [indiscernible].

[Brian Hanson:]

Yes, Peter as I said on the prepared remarks, we're considering all options right now for delevering our business and extending maturities and that includes everything, nothings off the table. Repurchasing bonds in the open market, redemptions, maturity extensions, exchange offers, other retirements. So, we're taking a good heart look at that right now.

[Unidentified Analyst:]

Nothing actively being pursued with the second though?

[Brian Hanson:]

We are just taking a very good hard look at that right now.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Ken Funston with FAMCo. Please proceed with your question.

[Ken Funston:]

Congratulations on at least getting to plan on the cash flows. And you've already answered a lot of my questions. I guess, I'll just return to the question that was already asked. You've got so much in cash and so much in bonds due and the bonds are trading at $0.50 on $1 and you’ve got a stock worth X and if you just look at current share, you've got a considerable amount of working capital, et cetera, but how much of that is diluted? So I could go back to the question of what plans you're considering? I’d enjoy any color on that, but is there an informal committee of bond holders that you’re negotiating with?

[Brian Hanson:]

Ken, I can't say anything more than we're considering all options, nothings off the table and if you have any ideas, we'd welcome your phone call.

[Ken Funston:]

Okay. I might take you up on that.

[Brian Hanson:]

Okay.

[Ken Funston:]

The ideas aren’t too complex, there is not too many moving parts here, other than the price of oil.

[Brian Hanson:]

Never seizes to amaze us.

[Operator:]

Thank you. Our next question comes from the line of Brendan O'Boyle with Gates Capital Management. Please proceed with your question.

[Unidentified Analyst:]

This is Jeff. I had a question, Brian, could you talk about the cost competitiveness of where your customer base is on the global cost curb for oil and maybe also based on the geographic regions and where you've typically done work?

[Brian Hanson:]

Jeff, if you look at what's really going on, two things are really going on. It’s never been cheaper for our company with our assets light strategy to go and shoot programs, and that's simply because there are contractors out there that are absolutely selling their wares below their costs. So, we can be extremely cost competitive because we're not making decisions that are tied to utilizations, so we're not out here trying to keep our vessels occupied. So, we can be competitive, the problem is the oil companies aren’t spending money. So, it really is less about cost and more about just simply demand, the only areas of the world right now that we're seeing opportunity and where capitals flowing to are primarily three regions, one is naturally in the Mexican side of the Gulf of Mexico, where Mexico has been opening up in the last year, year and half. So that's one area we're seeing capital flow to. The second area, a little more surprisingly we've seen capital flow into South America, and so our programs that have been shot down there have -- we've got quite a bit of success with those in the fourth quarter and the third area I believe will be a good area in general for the industry in '17 will be Myanmar, as Myanmar is opening up and really for the first time in 20 years too so, but absent those three regions I struggle to see where in the world capital will flow in '16 and the programs.

[Unidentified Analyst:]

Let me refine that, I mean if you look back traditionally where you’ve worked geographically and the customers with whom you’ve worked, where are those regions and those customers on the global cost curb for oil, like what price do you need for those regions in your view for those regions and for those customers to increase their activity again?

[Brian Hanson:]

We have -- our footprint is so broad, it is absolutely global. When you go to our website you can see that, we’ve shot our programs all up and down the North and South America and Mexico and all over -- around Africa, on both sides of the continent and up into the arctic regions, both Russia, U.S., Canadian, Greenland, we've got program shot over in Southeast Asia, and they all have a little bit of different story to them. So I can't give you a simple answer to that question.

[Unidentified Analyst:]

Alright, my last question is that, you talked about 80 million of annualized cost savings with what you've done in -- I guess last year and this year and it looks like from the numbers that you gave for operating expenses, you got about 40 million of that realized in 2015 and so should we expect to see an incremental 40 million of cost reduction in '16 or will you see some of that given back by normal cost inflation?

[Steve Bate:]

Hi, Jeff, this is Steve. I would expect that there is certainly going to be some additional cost savings flow through in 2016. I would also tell you that when you have to look at the numbers, there are some of the cost savings that are above the line and aren’t in the OpEx number, but there is no doubt we did not realize the full value of our cost control initiatives in '15 and there is more savings that will flow through in '16.

[Unidentified Analyst:]

So how much of the 80 million did you get in 2016?

[Brian Hanson:]

Well, let me put it this way, in the fourth quarter, we realized about two thirds of our quarterly goal and we'll have a little bit a drag in the first quarter and then by the second quarter we've realized a 100% of the annualized 80 million.

[Unidentified Analyst:]

Okay, that's helpful and so normal CapEx will be -- company final CapEx will be relatively modest, so is that something under 5 million?

[Brian Hanson:]

I would say so.

[Unidentified Analyst:]

Okay and then the multi-client, you said it will be 10 million to 30 million depending on the programs.

[Brian Hanson:]

Exactly.

[Unidentified Analyst:]

And when did the next P&C appraisal?

[Steve Bate:]

I don't think that's set, certainly they do an appraisal on an annual basis but that hasn't set yet.

[Unidentified Analyst:]

When was the last one completed?

[Steve Bate:]

We had an appraisal as we did the amendment in August of last year.

[Unidentified Analyst:]

Okay. Thank you very much. Good luck.

[Operator:]

Thank you. Mr. Hanson, there are no further questions at this time. I'd like to turn the floor back to you for any final concluding remarks.

[Brian Hanson:]

Thank you for taking the time to attend our conference call. And we will look forward to talking to you on the first quarter call.

[Operator:]

Thank you. This concludes today teleconference. You may disconnect your lines at this time. Thank you for your participation.