About turn – the next transformation
Tough times call for drastic measures. With the continued depressed state of the
marine contract market, CGG has announced a downsizing and a rebirth as a multiclient
(MC) focussed business within the acquisition segment. Ultimately the active
vessel count of the company will fall to just five vessels, from a peak of twenty vessels,
with headcount expected to be down over 43% since the end of 2013. This is a stark
about turn for CGG. Over the past ten years the company has been the aggregator of
seismic, acquiring Veritas, Exploration Resources, Wavefield and latterly Fugro’s
assets. However, despite the apparent thirst for vessels, the company has focussed on
its technological prowess and remains, in our opinion, at the forefront of the
processing market. Coupled with the Subsurface Imaging and Reservoir (SIR)
business, the company has built up a strong knowledge-based company, but it has
often been overshadowed by the vagaries of the asset-driven contract market. With
its current move, the company therefore has held up its hands. The contract market, it
believes, has struggled to cover its capital requirements and has been commoditised.
The move, we believe, creates a business that should have more sustainable returns
and offer a differentiated proposition for investors. The problem is that CGG is
capitalised for a perpendicular vision. Its balance sheet is encumbered by goodwill,
albeit now somewhat lower, and a debt level that looks inappropriate for the new
vision. The company is looking at strategic alternatives, either a sale of a minority or
an equity raise, the latter needing to be announced in the relatively near term in order
to satisfy cash needs in 2016F. On our numbers, we see the company needing to raise
ca US$120-480mn, depending on its needs, but with that can build a business that is
stronger on the other side of the downturn and could potentially post industryleading
returns should a recovery happen. The difficulty is knowing exactly what the
financing of the company will look like. Hence we remain Underweight with an
unchanged EUR6.2/share price target.