1Q16 previews and model updates – it’s going to get worse before it gets any better
TGS’ profit warning earlier this month confirmed the negative momentum
building across the seismic space. We now anticipate seismic demand
declining by ~30% in 2016 (after the 34% fall in 2015) and remaining
broadly flat in 2017. Against this backdrop, we think contract segment
margins will remain in the red and MC impairments should continue. We
continue to forecast both PGS and CGG risk breaching their covenants by
end-2016 and that both will likely need another round of renegotiations
with lenders. We continue to advise caution across the sector and remain
UW PGS, and N CGG and TGS. For an investor bullish on the oil price,
we recommend exposure to the relatively higher-quality TGS.
* Seismic demand to remain weak through 2017. We expect seismic
demand to decline by ~30% in 2016, implying demand could be only
~40% of 2012 peak levels (in $ terms). We sense some hope in the
market for a recovery in 2017. However, we forecast E&P capex
declining by another 10% in 2017 and, thus, forecast seismic demand
remaining broadly flat as a base case.
* Contract and MC markets to remain challenged. This weak demand
may require further correction from the supply side to keep a floor under
day-rates. When the market does recover (2017E+), we think day-rates
are likely to remain below previous mid-cycle levels due to the
significant stacked vessel capacity available to the market. Vessel
utilization in 2016 should be helped by the relatively robust multi-client
(MC) capex by vessel operators (Figure 5). We forecast sector MC late
sales declining by another 30% in 2016 and anticipate another round of
MC impairments at YE16.
* Sufficient liquidity, but covenant renegotiations likely required. Post
the successful capital raising, both the levered seismic companies (CGG
and PGS) have sufficient liquidity to last until YE17, in our opinion.
However, we continue to forecast both companies likely requiring
another round of renegotiations from their respective lenders or risk
breaching their covenants by YE16. We think CGG’s capital structure
remains unsuitable for the company and expect the company to address
this in 2017 (link to note).