PGS gross debt on firm facilities and maturities
Source: SEB
PGS debt maturity profile
Source: SEB 0
100,000 200,000 300,000 400,000 500,000 600,000
Q1/08 Q1/09 Q1/10 Q1/11 Q1/12 Q1/13 Q1/14 Q1/15 Q1/16 Q1/17E Q1/18E
USD per day 14 10 7 9 3
1 13
25 35
(17) (3) 11
5 (5)
0 18
37 49 46
39
17 4
16 29
15
(35) (55)
(35) (10)
10
(60) (40) (20) 0 20 40 60
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E
EBIT margin (marine contract seismic margin, %)
0 200 400 600 800 1,000 1,200 1,400
2015 2016E 2017E 2018E 2019E 2020E 2021E
USDm
Term Loan RCF Japanese EC Senior Notes
0 100 200 300 400 500 600
2016E 2017E 2018E 2019E 2020E 2021E 2022+
USDm
Term Loan RCF Japanese EC Senior Notes
SEB Equity Research 06 February 2017 38 Pricing of PGS' USD 400m Term Loan B, 1st priority
Source: Bloomberg, SEB
PGS’s main covenant on the USD 400m term loan and the USD 500m credit facility is the leverage ratio. In November 2016 PGS received consent from the bank syndicates to amend the leverage ratio maintenance covenant to 5.5x until Q2 2017. EBITDA used for calculation is adjusted for multi-client investments that are not covered by pre-funding. The covenant leaves PGS with high financial and operational flexibility, but is also a cautionary factor, as management cannot go ahead with significant multi-client programmes without pre-funding in place.
PGS leverage ratio
Source: SEB 40 50 60 70 80 90 100 110
Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16
Price vs par
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
Q1/04 Q2/05 Q3/06 Q4/07 Q1/09 Q2/10 Q3/11 Q4/12 Q1/14 Q2/15 Q3/16 Q4/17E
Leverage ratio (x)
SEB Equity Research 06 February 2017 39 PGS: estimated leverage ratio and covenants
Source: SEB
PGS’s main debt covenant (total debt/EBITDA – multi-client investments not covered by pre-funding) should not exceed 5.5x up to and including Q2 2017, thereafter declining by 0.25x per quarter until it reaches the original of 2.75x by Q3 2019. Based on our estimates, which assume that PGS will not divest any assets, will make multi-client seismic investments of USD 255m in 2017 and USD 275m in 2018 and have other capex of USD 130m in 2017 and USD 95m in 2018, we estimate that PGS will be within its new covenants for 2017 and 2018, when we estimate the leverage ratio will be 2.9x and 2.4x, respectively. In our new assumptions for 2016 and 2017, PGS will have some flexibility in capex as we have assumed a substantial cut in maintenance capex. In the event that covenants are breached, we believe that PGS will likely receive waivers on its covenants on its bank facility.
The 2021 term loan B with first priority collateral is now trading at 88% of par with a yield to maturity of 7.6%, suggesting that appetite to provide new liquidity from the bank market has improved substantially. For comparison, the Term loan yielded more than 18% in March 2016.
At the end of Q3 2016 the available liquidity was USD 417m, of which USD 340m on the credit facility and USD 77m in free cash. Through equity issues, PGS raised USD 260m in gross proceeds and used USD 225m for the bond exchange offer and had some quarterly instalments on the export loan facility. At the end of 2016 we estimate cash balance of USD 63m and USD 240m undrawn on the credit facility, leaving PGS with total liquidity of USD 306m. In addition PGS has available credit export financing for the last newbuild, Ramform Hyperion, which has scheduled delivery in Q1 2017. We assume that PGS will have to utilise the credit facility further and we estimate USD 81m will be drawn in 2017 leaving PGS with available liquidity of 253m end of 2017.
We have raised our DCF based target price from NOK 18 to NOK 35 per share reflecting our higher earnings estimates, improved cash flow, and new capital structure, which has reduced the financial risk significantly in our view. With improved market outlook and 2016 likely to have been the trough for the marine seismic market and 25% upside potential, we have upgraded our recommendation from Hold to Buy. Our target price implies P/BV of 1.0x, compared with 0.78x today.
1.57 1.17 1.37
1.60 1.70
0.98 1.28
1.88 2.19
2.91 2.85 2.37 3.50 3.50
3.25 3.25 3.003.00 2.75 2.75 4.00
5.50
4.75 3.50
0.00 1.00 2.00 3.00 4.00 5.00 6.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E
Covenant (X)
Estimated ratio (x)
Leverage ratio Covenant
SEB Equity Research 06 February 2017 40 Sum-of-the-parts valuation
(USDm) DCF value WACC (%)
MC seismic 1,834 10.5
Contract seismic 693 9.0
Enterprise value 2,527
Net interest bearing debt 1,082
Equity value 1,445
Mill. shares outs. 338
Equity value per share (USD) 4.3
Equity value per share (NOK) 35
Source: SEB
PGS price/book value (x)
Source: SEB -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0
PBV
SEB Equity Research 06 February 2017 41
Overview
Investment case ● The seismic industry has executed significant capacity reductions of the existing global fleet in the last three years, which has helped offset some of the decline in demand. We think demand was at trough in 2016 and modest recovery in 2017, but more significant recovery in 2018-19.
Company profile ● Petroleum Geo-Services (PGS) is a technology-focused oilfield services company, principally involved in providing geophysical services around the world. The company provides a broad range of geophysical and reservoir services including seismic data acquisition, processing and interpretation, plus field evaluation. Its main assets are Ramform seismic vessels capable of towing up to 24 streamers.
Having divested its onshore division, the offshore seismic operations generate most of the company's revenues and profits. PGS generates its revenues from contract seismic, multi-client seismic and processing.
Valuation approach ● Our DCF-based target price and valuation is based on a flat marine seismic market in 2017 and 15% growth in 2018, after a 30% drop in 2016.
Target price risks ● If the oil price should drop below USD 50 per barrel it would delay the recovery in customers' exploration spending for 2017-18. Postponement of planned lease sales could have a negative impact on multi-client late sales and the ability to secure pre-funding on new projects. Operational performance on contracts could have an adverse effect on contract margins.
Revenues by region PGS book value per share (USD)
Source: SEB Source: SEB
Norway: 18% Other Nordic: 0%
Other Europe: 11% Americas: 28%
Asia: 23% RoW: 21%
-10.0 -5.0 0.0 5.0 10.0 15.0 20.0
Q4/95 Q3/96 Q2/97 Q1/98 Q4/98 Q3/99 Q2/00 Q1/01 Q4/01 Q3/02 Q2/03 Q1/04 Q4/04 Q3/05 Q2/06 Q1/07 Q4/07 Q3/08 Q2/09 Q1/10 Q4/10 Q3/11 Q2/12 Q1/13 Q4/13 Q3/14 Q2/15 Q1/16 Q4/16E Q3/17E Q2/18E
USD per share
BV per share ex MC MC per share
SEB Equity Research 06 February 2017 42 Profit & loss statement - Petroleum Geo-Services
(USDm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Net Sales 1,375 1,520 1,918 1,486 1,135 1,253 1,518 1,502 1,454 962 790 849 923
Other revenues 0 0 0 0 0 0 0 0 0 0 0 0 0
Total revenues 1,375 1,520 1,918 1,486 1,135 1,253 1,518 1,502 1,454 962 790 849 923
Total expenses (744) (712) (878) (800) (672) (714) (741) (673) (750) (527) (453) (436) (414)
Profit before depreciation 631 808 1,039 686 463 539 777 828 704 436 337 413 510
Depreciation - Fixed assets (217) (313) (317) (407) (405) (401) (483) (446) (599) (866) (462) (461) (455)
Depreciation - Other assets 0 0 0 0 0 0 0 0 0 0 0 0 0
Amortisation - Goodwill 0 0 (180) (51) 0 0 0 0 0 0 0 0 0
Amortisation - Other intangibles 0 0 0 0 0 0 0 0 0 0 0 0 0
Operating profit 414 494 543 228 58 138 294 382 105 (430) (125) (48) 55
Associated companies 0 (2) (16) 2 (10) (12) (4) (13) (31) (16) (30) (10) (8)
Net interest expenses (53) (37) (42) (44) (47) (42) (37) (32) (30) (30) (45) (39) (39)
Foreign exchange items 0 0 0 0 0 0 0 0 0 0 0 0 0
Other financial items 1 3 (35) 38 (3) (20) (23) (9) (27) (30) (2) (2) (5)
Value changes - Fixed assets 0 0 0 0 0 0 0 0 0 0 0 0 0
Value changes - Financial assets 0 0 0 0 0 0 0 0 0 0 0 0 0
Value changes - Other assets 0 0 0 0 0 0 0 0 0 0 0 0 0
Reported pre-tax profit 362 459 450 224 (2) 64 229 328 17 (505) (202) (99) 3
Minority interests 59 1 1 (1) 9 (1) 0 0 0 0 0 0 0
Total taxes (130) 11 (27) (58) (13) (30) (43) (90) (59) (22) 10 0 (1)
Reported profit after tax 291 471 424 165 (7) 33 186 238 (42) (528) (192) (99) 2
Discontinued operations 0 0 0 0 0 0 0 0 0 0 0 0 0
Extraordinary items 0 0 0 0 0 0 0 0 0 0 0 0 0
Net Profit 291 471 424 165 (7) 33 186 238 (42) (528) (192) (99) 2
Adjustments:
Discontinued operations 0 0 0 0 0 0 0 0 0 0 0 0 0
Interest on convertible debt 0 0 0 0 0 0 0 0 0 0 0 0 0
Minority interests (IFRS) 0 0 0 0 0 0 0 0 0 0 0 0 0
Value changes 0 0 0 0 0 0 0 0 0 0 0 0 0
Goodwill/intangibles amortisations 0 0 180 51 0 0 0 0 0 0 0 0 0
Restructuring charges (55) (3) 0 0 0 0 0 0 0 0 0 0 0
Other adjustments 0 (150) (72) 81 73 0 0 15 0 0 0 0 0
Tax effect of adjustments 0 0 0 0 0 0 0 0 0 0 0 0 0
Adjusted profit after tax 236 318 532 297 67 33 186 253 (42) (528) (192) (99) 2
Margins, tax & returns
Operating margin 30.1 32.5 28.3 15.3 5.1 11.0 19.4 25.4 7.2 (44.7) (15.9) (5.7) 5.9
Pre-tax margin 26.3 30.2 23.4 15.1 (0.2) 5.1 15.1 21.9 1.1 (52.5) (25.6) (11.7) 0.3
Tax rate 35.8 (2.4) 6.0 25.8 n.m. 47.2 18.8 27.3 354.3 (4.4) 5.0 0.0 25.0
ROE 62.1 70.2 45.0 12.7 (0.4) 1.9 10.1 12.0 (2.1) (31.3) (12.8) (6.7) 0.2
ROCE 36.7 32.6 23.5 9.7 2.0 4.8 10.4 12.4 2.4 (15.7) (6.0) (2.2) 1.8
Growth rates y-o-y (%)
Total revenues n.a. 10.5 26.2 (22.5) (23.6) 10.4 21.1 (1.1) (3.2) (33.8) (17.9) 7.5 8.8
Operating profit 122.0 19.6 9.8 (58.0) (74.6) 139.5 112.3 30.1 (72.6) n.m. n.m. n.m. n.m.
Pre-tax profit 148.8 26.8 (2.0) (50.2) n.m. n.m. 255.9 43.2 (94.9) n.m. n.m. n.m. n.m.
EPS (adjusted) 224.5 34.5 71.4 (47.4) (79.1) (54.2) 461.7 36.5 0.0 0.0 0.0 0.0 0.0
Cash flow
(USDm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Net profit 291 471 424 165 (7) 33 186 238 (42) (528) (192) (99) 2
Non-cash adjustments 157 360 511 469 407 414 488 459 630 882 492 471 463
Cash flow before work cap 448 831 936 634 401 447 674 698 588 354 300 371 465
Ch. in working capital / Other 4 176 (123) (185) (35) 33 (21) (33) (28) 90 9 (3) (4)
Operating cash flow 453 1,007 813 450 366 480 653 664 560 444 309 369 462
Capital expenditures 370 (1,623) (753) (372) (177) (529) (662) (871) (807) (427) (524) (385) (370)
Asset disposals 0 0 0 0 (57) 0 0 0 0 0 0 0 0
L/T financial investments 0 0 0 0 0 0 0 0 0 0 0 0 0
Acquisitions / adjustments (184) (48) 2 124 0 0 0 0 0 0 (53) (23) (9)
Free cash flow 639 (664) 62 202 132 (49) (8) (207) (247) 17 (268) (39) 83
Net loan proceeds (642) 1,020 (133) (338) (130) (31) (50) 103 125 (60) (25) 75 (32)
Dividend paid 0 (300) 0 0 0 0 (40) (89) (81) (19) 0 0 0
Share issue 0 0 0 121 299 0 0 0 0 101 261 0 0
Other (0) 0 0 (0) 0 0 0 0 0 0 0 0 (0)
Net change in cash (3) 55 (71) (16) 301 (80) (99) (193) (203) 39 (32) 36 51
Adjustments
C/flow bef chng in work cap 448 831 936 634 401 447 674 698 588 354 300 371 465
Adjustments 0 0 0 0 0 0 0 0 0 0 0 0 0
Int on conv debt net of tax 0 0 0 0 0 0 0 0 0 0 0 0 0
Cash earnings 448 831 936 634 401 447 674 698 588 354 300 371 465
Per share information
Cash earnings 2.49 4.62 5.32 3.39 2.0 2.05 3.1 3.22 2.72 1.62 1.25 1.1 1.38
Operating cash flow 2.51 5.59 4.62 2.4 1.83 2.2 3.01 3.07 2.59 2.03 1.29 1.09 1.36
Free cash flow 3.55 (3.69) 0.35 1.08 0.66 (0.23) (0.04) (0.95) (1.15) 0.08 (1.12) (0.12) 0.24
Investment cover
Capex/sales (%) (26.9) 106.8 39.3 25.0 15.6 42.2 43.6 58.0 55.5 44.4 66.4 45.4 40.1
Capex/depreciation (%) (171) 518 238 91 44 132 137 195 135 49 113 84 81
Source for all data on this page: SEB
SEB Equity Research 06 February 2017 43
Balance sheet - Petroleum Geo-Services
(USDm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Cash and liquid assets 143 211 110 136 437 471 397 278 75 101 69 104 155
Debtors 399 527 557 731 469 400 440 485 583 370 327 341 360
Inventories 0 0 0 0 0 0 0 0 0 0 0 0 0
Other 0 0 0 0 0 0 0 0 0 0 0 0 0
Current assets 542 738 667 867 906 872 837 763 658 470 395 446 515
Interest bearing fixed assets 0 0 0 0 0 0 0 0 0 0 0 0 0
Other financial assets 0 0 0 2 0 0 0 0 0 0 23 36 37
Capitalized development cost 0 0 0 0 0 0 0 0 0 0 0 0 0
Goodwill 0 0 0 0 0 0 0 0 0 0 0 0 0
Other intangibles 0 0 0 0 0 0 0 0 0 0 0 0 0
Fixed tangible assets 836 2,150 2,398 2,060 2,096 2,265 2,437 2,781 2,906 2,444 2,505 2,429 2,345
Other fixed assets 0 0 0 0 0 0 0 0 0 0 0 0 0
Fixed assets 836 2,150 2,398 2,062 2,096 2,265 2,437 2,781 2,906 2,444 2,528 2,465 2,382
Total assets 1,378 2,888 3,065 2,929 3,002 3,137 3,274 3,544 3,564 2,914 2,924 2,911 2,897
Creditors 347 606 514 454 384 349 368 380 385 274 239 251 266
Other trade financing 0 1 0 0 0 0 0 0 0 0 0 0 0
S/T interest bearing debt 20 272 22 26 0 183 1 11 25 25 25 25 25
Other 0 0 0 0 0 0 0 0 0 0 0 0 0
Current liabilities 367 880 536 481 384 532 369 391 410 298 264 276 290
L/T interest bearing debt 313 1,080 1,215 883 784 753 916 1,020 1,160 1,100 1,075 1,150 1,118
Other long-term liabilities 98 141 134 86 91 63 59 62 77 51 51 51 51
Convertible debt 0 0 0 0 0 0 0 0 0 0 0 0 0
Pension provisions 0 0 0 0 0 0 0 0 0 0 0 0 0
Other provisions (0) (0) 0 0 0 0 0 0 0 0 0 0 (0)
Deferred tax 0 46 34 31 21 17 9 6 6 2 2 2 2
Long term liabilities 411 1,268 1,383 1,000 896 833 984 1,088 1,243 1,152 1,127 1,202 1,170
Minority interests 0 (1) 0 1 1 0 (0) (0) (0) (0) (0) (0) (0)
Shareholders' equity 600 741 1,146 1,448 1,721 1,772 1,922 2,066 1,912 1,464 1,533 1,433 1,436
Total liabilities and equity 1,378 2,888 3,065 2,929 3,002 3,137 3,274 3,544 3,564 2,914 2,923 2,911 2,896
Net debt (m) 190 1,142 1,127 773 347 465 520 753 1,110 1,024 1,031 1,070 988
Working capital (m) 52 (80) 43 277 85 51 72 105 198 96 88 91 94
Capital employed (m) 933 2,093 2,383 2,358 2,506 2,708 2,839 3,096 3,096 2,588 2,632 2,608 2,578
Net debt/equity (%) 32 154 98 53 20 26 27 36 58 70 67 75 69
Net debt/EBITDA (x) 0.3 1.4 1.1 1.1 0.8 0.9 0.7 0.9 1.6 2.4 3.4 2.7 2.0
Equity/total assets (%) 44 26 37 49 57 56 59 58 54 50 52 49 50
Interest cover 7.8 13.2 13.0 5.2 1.2 3.3 7.9 11.9 3.5 (14.6) (2.8) (1.2) 1.4
Valuation
(USD) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
No of shares, fully dil. (y/e) 180.0 180.0 176.0 198.0 217.8 217.8 217.3 216.7 215.8 239.6 338.3 338.3 338.3
No of shares, fully dil. avg. 180.0 180.0 176.0 187.0 200.5 217.8 217.3 216.8 215.8 218.8 239.6 338.3 338.3
Share price, y/e 146.5 157.8 27.7 66.5 90.9 65.5 95.4 71.5 42.3 36.4 27.9 27.9 27.9
Share price, high 148.8 173.0 163.5 70.7 94.9 96.0 104.5 101.0 75.2 55.8 37.2
Share price, low 67.0 118.0 20.7 20.7 52.3 51.4 64.3 63.8 31.5 30.4 14.9
Share price, avg 109.3 149.6 101.1 42.4 72.2 75.4 84.5 82.6 55.9 40.5 22.5
EPS (reported) 1.62 2.62 2.41 0.88 (0.03) 0.15 0.86 1.10 (0.20) (2.41) (0.80) (0.29) 0.01
EPS (adjusted) 1.31 1.76 3.02 1.59 0.33 0.15 0.86 1.17 (0.20) (2.41) (0.80) (0.29) 0.01
Cash earnings/share 2.49 4.62 5.32 3.39 2.00 2.05 3.10 3.22 2.72 1.62 1.25 1.10 1.38
Dividend/share 0.00 1.67 0.00 0.00 0.00 0.19 0.30 0.38 0.09 0.00 0.00 0.00 0.00
Enterprise value/share 24 35 10.4 15.4 17.1 13.1 19.5 15.2 10.8 8.4 6.4 6.5 6.3
Book value/share 3.3 4.1 6.5 7.3 7.9 8.1 8.8 9.5 8.9 6.1 4.5 4.2 4.2
Adjusted equity/share 3.3 4.1 6.5 7.3 7.9 8.1 8.8 9.5 8.9 6.1 4.5 4.2 4.2
PER (adjusted) 17.8 16.5 1.3 7.2 46.6 71.6 20.0 10.0 n.m. n.m. n.m. n.m. n.m.
CEM 9.4 6.3 0.7 3.4 7.8 5.3 5.5 3.6 2.1 2.6 2.7 3.1 2.5
Dividend yield 0.0 5.7 0.0 0.0 0.0 1.7 1.8 3.2 1.6 0.0 0.0 0.0 0.0
EV/EBITDA 7.0 7.9 1.8 4.4 8.2 5.4 5.5 4.0 3.5 4.8 7.1 5.5 4.2
EV/EBITA 10.7 13.0 2.6 10.9 78.2 22.6 14.7 8.9 31.7 (4.5) (14.0) (38.0) 45.4
EV/EBIT 10.7 13.0 3.5 13.3 78.2 22.6 14.7 8.9 31.7 (4.5) (14.0) (38.0) 45.4
EV/Sales (x) 3.20 4.20 0.95 2.05 3.28 2.27 2.79 2.19 1.61 2.09 2.75 2.61 2.31
Price/Book value 7.02 7.08 0.61 1.57 1.96 1.34 1.94 1.23 0.64 0.68 0.75 0.80 0.80
Price/adjusted equity 7.02 7.08 0.61 1.57 1.96 1.34 1.94 1.23 0.64 0.68 0.75 0.80 0.80
Free cash flow/Market cap (%) 19.5 (11.7) 8.6 3.6 6.1 (2.1) (0.2) (8.2) (20.1) 1.9 (26.6) (1.4) 8.0
Operating cash flow/EV (%) 10.3 15.8 44.6 14.7 9.8 16.9 15.4 20.2 23.9 22.1 14.2 16.7 21.7
EV/Capital employed (x) 4.7 3.1 0.8 1.3 1.5 1.1 1.5 1.1 0.8 0.8 0.8 0.8 0.8
Main shareholders Management Company information
Name (%) Votes Capital Title Name Contact
Ferd AS 10.1 10.1 COB Walter Qvam Internet www.pgs.com
Folketrygdfondet 7.3 7.3 CEO Jon Erik Reinhardsen Phone number (47) 67 52 64 00
STATE STREET BANK AND TRUST CO. 5.8 5.8 CFO Gottfred Langseth
IR Bård Stenberg
Source for all data on this page: SEB
SEB Equity Research 06 February 2017 44