We have stated previously that when it comes to investing in seismic companies the
best analogy is that “nobody marries a seismic company” (Reflections on an affair,
26 January 2012). In current market conditions, expanding the analogy, we believe
that they may struggle to be accepted onto an online dating portal, such is the
prevailing negativity. The pricing for spot contract marine seismic appears to have
hit the 2010 lows and the business models that were put in place to protect cash
flows in an industrial downturn are now being tested earlier than anticipated.
However, share prices also reflect the negativity, with the three asset owing seismic
stocks that we cover down by an average 58% ytd (versus an index down by 22%
(BEUOILS Index (Bloomberg)), such that they are now trading on average at 39% of
book value and 56% of book value less the multi-client library, thus assuming the
multi-client library is valueless. This, in our opinion, appears extreme, but until
numbers correct across the market and there is some belief that the pricing slump
that we have seen has stabilised, it is hard to see investors coming back to the
stocks. In the meantime the companies need to work on themselves – prune back
capex, restore if needed, concentrate on costs, have a makeover – and then when
the market recovers, it being a highly cyclical business after all, they may then be
found to be significantly more attractive. For now, we have set all our pricing
expectations for the 4Q14-2016F period back at current post levels, reducing our
estimates for PGS and CGG at the operating level by up to 70%, highlighting the
strong operational gearing in the businesses.