* H1 2015 undershoots on weakness in Acquisition markets and low streamer orders / Middle East delays in Sercel
* But Sercel is preserving market share, and GGR is proving to be a resilient and higher quality earnings stream
* Cut 2015/16e EBITDA by 19%/13%; TP cut to EUR5.50 (from EUR7.50); reiterate Buy on share price weakness
* Stuck in a rut, but not sunk: Over the past five months, CGG has underperformed our
sector coverage by around 15% on oil price volatility, further cutbacks in customer capital
spending, and on-going balance sheet concerns. In H1 2015, Acquisition disappointed as
pricing worsened beyond our expectations, there’s been delays to the ramp-up of the
mega-crew land contracts in the Middle East, whereas GGR again delivered a robust and
resilient performance. In aggregate for Q2 2015 results, this led to a c20% EBITDA miss
on revenues that were 14% below consensus.
* 2015 is a game of two halves for Sercel: With CGG’s marine fleet scaled back to 11
vessels (from a peak of 23), internal streamer sales have dwindled as CGG cannibalises
inventory preserved from stacked / scrapped assets (internal sales were just 6% of revenue
in Q2 vs about 20% historically). Looking into H2, the ramp-up of the Middle Eastern
mega-crew contracts should drive sequential volume improvements notwithstanding a
lacklustre offshore market. About 75% of Sercel sales are derived from onshore currently
(previously around 60%) with this mix unlikely to change until offshore markets improve
– opportunities for new business look promising, particularly in the Middle East.
* GGR a growing, and high quality portion of the P&L: GGR currently accounts for
55% of CGG’s external revenue, and despite significant pressure on discretionary seismic
spend, continues to deliver >20% margins. In our view, CGG’s library is well placed to
capitalise on upcoming licence block sales in Brazil (Round 13 in late 2015) and the US
Gulf of Mexico, where CGG has invested around USD600m on the IBALT library -
deepwater investment in mature markets has continued to be robust despite the downturn.
* Cut TP to EUR5.50 but with shares at new cycle lows, we reiterate our Buy rating.
Acquisition year to date has disappointed, despite CGG’s commendable efforts to right
size the fleet, and Sercel volumes / margins are at historical lows. We reflect this in
5%/19% lower sales / EBITDA in 2015e with further cuts of 5%/13% in 2016e. This
drives a cut in TP to EUR5.50 (from EUR7.50). However with acquisition pricing
bottoming out, a sequential recovery in Sercel in H2 likely and continued strength in
GGR, we see reduced P&L turbulence in H2 and valuation support – Buy on weakness.