Ion Geophysical Corporation (IO) 2017 Q2 法說會逐字稿

Greetings and welcome to the ION Geophysical second quarter earnings conference call. (Operator Instructions) A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rachel White, Vice President, Corporate Communications. Thank you, Ms. White, you may begin.

Thank you, Deven! Good morning and welcome to ION's Second Quarter 2017 Earnings Conference Call. We appreciate your joining us today. As indicated on Slide 2, our hosts today are Brian Hanson, President and Chief Executive Officer; and Steve Bate, Executive Vice President and Chief Financial Officer.

Before I turn the call over to them, I have a few items to cover. We will be using slides to accompany today's call. They are accessible via the link on the Investor Relations page of our website, iongeo.com. There you will also find a replay of today's call.

Moving on to Slide 3, information reported on this call speaks only as of today, August 3, 2017, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay.

Before we begin, let me remind you that certain statements made during this call may constitute forward-looking statements, which are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by ION from time to time in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q.

Furthermore, as we start this call, please refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements.

I'll now turn the call over to Brian, who will begin on Slide 4.

Thanks, Rachel. Good morning, everyone.

Over the last 18 months, we have targeted opportunities less dependent on cyclic recovery, such a specific geographic areas and production optimization offerings, and we are starting to see these efforts pay off. Similar to the first quarter, our second quarter revenues improved significantly, up 27%, driven by continued strong sales of our 3D multi-client reimaging programs as well as a 2D new venture program we launched during the quarter. Excluding Ocean Bottom Seismic services, our revenues are up over 50% from the second quarter of last year. We reported a net loss of $10 million in the second quarter, an improvement from our adjusted net loss of $21 million last year, and our adjusted EBITDA for the second quarter was a positive $14 million compared to a negative adjusted EBITDA of $3 million in the second quarter one year ago. This is the first time since 2014 that we reported four consecutive quarters of breakeven or better adjusted EBITDA.

Our first half results were in line with our expectations with revenues up 34% compared to the first half of 2016. The second quarter revenues improved on the first quarter by 41%. We see the third quarter stronger than the second and the fourth quarter being stronger than the third, with each quarter EBITDA improving over the one before it for 2017, partially driven by the significant backlog we built.

We ended the quarter with $48 million in backlog compared to $25 million sequentially and $30 million one year ago. Multi-client backlog is the highest it's been since the third quarter of 2013. Since the end of the quarter, momentum has continued to build throughout July, and our backlog is now at over $62 million. First half revenues of $79 million and $62 million of backlog is setting up what we believe will be a very nice second half.

As a reminder, our E&P Technology & Services segment is comprised of three synergistic verticals: our Ventures programs, Imaging Services and E&P Advisors groups. This quarter, we experienced a significant increase in new venture and data library revenues compared to the second quarter of last year, further indicating the bottom of the cycle is behind us. We continue seeing strong demand for our 3D multi-client Campeche reimaging program due to the regional framework it provides for bid round investment strategies for years to come. In fact, due to client demand, we are actively pursuing two extensions to the program. In July, the CNH announced blocks to the next offshore round, Round 2.4, which will be held in January 2018. The CNH plans to hold twice yearly oil auctions moving forward with three rounds planned for 2018, all of which are relevant to the Campeche program. Round 2.4 as well as these future auctions and the Talos discovery, which I'll elaborate on in a minute, will continue to drive incremental Campeche data sales, both in 2017 and for multiple years to come.

Last quarter, we said we anticipated this program could generate $60 million to $80 million in revenue over the next 12 to 18 months, and in the second quarter through early August, we closed $38 million in sales, recognizing $15 million as revenues in the second quarter and adding $23 million to backlog. We are extremely pleased with this program's performance and remain confident we'll meet those projections.

We are continuing to see new venture activity pick up. In the first quarter, we sanctioned three new programs that met our strict underwriting standards that we expected to launch in the next 90 days. Of the three we sanctioned, one has been acquired offshore Gabon, expanding our West Africa data library; one is in progress offshore Brazil; and the third, we anticipate starting acquisition in the next month.

The new program in Brazil, Picanha, is another large 3D multi-client reimaging program, and like Campeche, will provide a valuable regional framework for license rounds for multiple years. We have extensive data and imaging experience in the area and are already delivering much higher quality images that reduce risk and deliver prospect-level resolution. Brazil has announced 11 license rounds through 2019 and the Picanha program will be relevant to at least seven of those. Brazil has announced four rounds for 2017, four in 2018 and three in 2019, which will make this program relevant for multiple years to come.

In addition to those three programs, we expect two new multi-client reimaging programs to begin in the third quarter.

Our Imaging Services group, which provides data processing services for both ION's multi-client programs and proprietary third-party projects, remains fully utilized with a large portion of our capacity dedicated to higher-return multi-client programs.

The proprietary work we do take on is in the high end of the market, which keeps our cutting-edge technologies and skills sharp, solving some of the toughest geophysical and imaging challenges. For example, the Gulf of Mexico is geologically one of the most complex oil and gas provinces and requires advanced techniques to truly understand the challenging subsurface. In Mexico, we reprocessed and reimaged the data for Talos that contributed to the recently announced Zama-1 discovery containing over a billion barrels of oil with their partners, Premier and Sierra. The joint venture considers it to be the fifth largest discovery in the world over the last five years. According to Wood Mackenzie, it was one of the 20 largest shallow water fields discovered globally in the last 20 years.

This significant discovery is further testament to the untapped potential of the Campeche basin and the value of ION's Imaging Services, as demonstrated on the proprietary work for Talos and on our Ventures' Campeche multi-client reimaging program to help guide investment strategies for all oil and gas companies in this prolific basin.

Quoting John Parker, Executive Vice President of Exploration for Talos, in a recent press release, he stated, "The successful evaluation of the Zama prospect is a result of the tremendous collaboration between Talos, our consortium partners Sierra Oil and Gas and Premier, and ION. Talos launched this proprietary reprocessing project in March 2016, confident that ION could achieve significant improvement in imaging compared to the original data. ION's proprietary reprocessing over blocks 2 and 7 delivered significant uplift with superior images of multiple prospects, including Zama. ION completed the project on time and on budget. The Zama-1 results make a number of these additional prospects, both shallow and deep, look very attractive."

I'm pleased we recently closed a number of proprietary Imaging Services contracts in the high end of the market. We are continuing to invest in geophysical R&D, focusing on transformational workflows that deliver more detailed reservoir images to optimize production. We are being recognized as leaders in ocean bottom seismic imaging, and this technology differentiation enabled our success and recent awards of two high-profile ocean bottom seismic processing and imaging projects.

Historically, our E&P Advisors were internally focused on supporting our Ventures programs and Imaging Services. Over the past three years, we have expanded their focus to more broadly advise host governments, oil and gas companies and private equity firms employing novel business models where we share the value we create, being paid for both the services we provide and participating in the success we create for our customers. To date, revenues have been modest, but this is gaining significant traction and shaping up to be a nice additive business for 2018. Recently, the group was awarded their third license round management contract. In this host government advisory role, we'll conduct a technical evaluation of distressed fields for rejuvenation in a major oil province, as well as evaluations of new exploration blocks to be offered. This is a long-term multi-year engagement where we expect to recognize a few million dollars of services revenue in the back half of 2017 and has the potential for setting up 2018 and beyond with significantly more success-based revenue, potentially for 2018 in the range of 4x to 7x 2017 service revenues. In a world of heightened competition globally to attract E&P investment, this advisory service is designed to help host governments promote their assets to attract maximum investment.

Our E&P Operations Optimization segment, which, as a reminder, is comprised of our mission-critical software, devices and complementary engineering services that enable offshore operational optimization, continues to be hampered by low utilization levels and day rates among our contracted customers. However, we are actively diversifying and expanding this segment into adjacent markets. For example, Marlin is expanding into the production segment offshore and Devices is targeting scientific and military applications.

Our Devices revenues increased 16% over last year due to new technology sales to non-traditional customers and incremental sales from new offerings we introduced to you on the last earnings call. In fact, 50% of Devices sales in the quarter came from customers for use in scientific and military applications, not in traditional seismic operations. In addition, $1 million of revenue was from incremental devices we recently commercialized, that I introduced to you on the last call.

Optimization Software and Services revenues were flat compared to the second quarter of 2016. Excluding the effect of foreign currencies, revenues were actually up 11%.

While exploration spending remains subdued, the majority of E&P investment is focused on production activities, especially on reservoir management. For example, the number of ocean bottom seismic and 4D projects is expected to more than double in 2017 compared to 2016 and continue growing in 2018 and beyond. We've been working diligently to align our offerings to growth segments within our industry, and our production offerings are a great example of that. For example, our services revenues, which are derived from the application of our software, coupled with our in-field engineering services for planning and managing complex surveys, such as 4D operations, our 2.5x 2016 levels for the first half of 2017. 4D, or time-lapse surveys, are designed to detect fluid movements in the reservoir over time by comparing repeat surveys. This information enables E&P companies to optimize production in existing fields. Oil and gas companies hire us to actively consult on and optimize their surveys executed by other contractors. In 2017, our engineering team is 100% utilized, optimizing offshore projects.

Moving on to another offering relevant in the production space and beyond, we have now successfully completed 50 deployments of our offshore operations management software, Marlin, and we continue to receive great client feedback on the value it delivers. Marlin supports our effort to diversify our offerings more broadly in the E&P market and beyond into a much larger marine logistics market. While today we are taking it to market as a service, we are actively transforming Marlin from a software-based service offering into a shrink-wrapped software solution that can be deployed more broadly to optimize offshore operations. We are currently targeting to commercialize the shrink-wrapped software solution in the second quarter of 2018. In addition, we are beginning to evaluate alternate markets outside of oil and gas for Marlin, such as offshore wind and port management.

I'd like to share an example of how we're revolutionizing offshore operations and the value we're providing with Marlin. Recently, Marlin was deployed to plan and execute an autonomous underwater vehicle, or AUV, survey of sub-sea infrastructure offshore West Africa for an oil and gas major. The survey needed to be acquired as safely and as efficiently as possible in a busy offshore area congested with floating production storage and offloading vessels, platform supply vessels, drill ships, emergency response and rescue vessels, et cetera. The AUV survey was successfully completed well ahead of project deadlines. Marlin provided the team onshore and offshore with enhanced real-time situational awareness and resulted in the client recommending Marlin be deployed on all future AUV projects. The oil and gas client said, and I quote, "The ION specialist was very proactive using Marlin for planning suggestions that allowed us to remove a number of transits from the project. This service was therefore very important for our operation, leading to lots of time saved." This is the kind of significant economic impact we're making in operations. We believe that Marlin has the potential to develop into a very nice software business for ION.

In our Ocean Bottom Seismic Services segment, we continue to actively pursue multiple tenders or longer-term work while our crew and vessels remained idle during the quarter. Aligned with oil and gas companies' focus on production, we expect significant improvement in the OBS market in 2017 and beyond. Due to the industry downturn, many projects were delayed over the last two years, building pent-up demand for OBS surveys. 2017 is shaping up to be a $750 million market with almost double the amount spent on OBS surveys compared to 2016, and while not all 2018 work has been tendered, awarded projects indicate approximately 25% growth next year. As competitive technologies develop around us, the sweet spot for our current technology, VSO, is becoming increasingly narrow in geographic scope and due to ongoing political issues in those areas, we don't envision the crew going back to work in the near-term.

Our new OBS technology, we mentioned last quarter, 4Sea, opens up a much larger market for us due to the system's increased flexibility and efficiency. We introduced this system to the major customers of Ocean Bottom Seismic at the European Association of Geoscientists and Engineers Annual Meeting in June, a major trade show we participate in, and it was extremely well received. 4Sea will provide a step change in both image quality and efficiency, improving the economics so OBS can be applied to more production projects. We've worked quietly for over three years to develop this system and believe it will be extremely competitive. We are now bidding all future projects that start in late 2018 and beyond with ION's new 4Sea system.

With that, I'll turn it over to Steve to walk us through the financials, and then I'll wrap it up before taking questions.

Thanks, Brian. Good morning, everyone.

Our total second quarter revenues were up 27% from the second quarter of 2016. Revenue in our E&P Technology & Services segment increased by over 80% and revenues in our E&P Operations Optimization segment increased by 9%. Our OBS Services segment had no revenues in the second quarter of 2017 as our operations remained idle during the quarter. The second quarter of last year reflected $6 million of revenues related to the Nigeria project that began in late June and finished in the third quarter of 2016.

Within our E&P Technology and Services segment, our new venture revenues were $20 million, an increase of over 300%, and our data library revenues were $10 million, an increase of 55% over the second quarter of 2016. Our Imaging Services revenues were $4 million, a 46% decrease. The increase in new venture revenues was the result of continued revenue from our 3D multi-client reimaging programs, in addition to the new venture program that Brian described earlier. The increase in our data library sales spanned the breadth of our diverse global portfolio without concentration in a particular geographic region. The decrease in Imaging Services revenues reflects the shifts we made to allocate resources to higher-return multi-client programs. The imaging revenues from multi-client programs are reflected as part of new ventures revenues, whereas revenues from proprietary imaging programs are reflected as part of Imaging Services. The Imaging Services group is fully utilized with a large portion of our capacity dedicated to these higher-return potential programs.

In our E&P Operations Optimization segment, our Devices revenues increased by 16% and our Optimization Software and Services revenues were flat compared to the second quarter of 2016. Our E&P Operations Optimization segment continues to be impacted by reduced seismic contractor activities, but as Brian mentioned, the increase in Devices revenues is related to sales to non-traditional customers and from new products we commercialize this year.

Our loss from operations was $4 million during the quarter of 2017 compared to an adjusted operating loss of $15 million in the second quarter of 2016. Adjusted EBITDA, which we believe better reflects our financial performance given the substantial amount of straight-line amortization related to our historical data library investments, was $14 million in the second quarter of 2017 compared to a negative $3 million in the second quarter of 2016. The second quarter of 2017 represents our fourth consecutive quarter with a breakeven or better adjusted EBITDA. The year-over-year improvement in our operating loss and adjusted EBITDA was the result of a higher margin revenue mix along with savings from prior cost-cutting initiatives we implemented over the last two and a half years. As previously mentioned, we expect our back half of the year to be significantly stronger than the first half with adjusted EBITDA growing sequentially.

We generated net cash flows from operations of $2 million during the second quarter of 2017, a significant improvement compared to a net cash use from operations of $15 million one year ago. Including both investing and financing activities, we consumed total net cash flows of $6 million in the second quarter of 2017 compared to a consumption of $24 million in the second quarter of last year.

Our cash balance, excluding borrowings under our credit facility, was $33 million at June 30. We had outstanding borrowings of $10 million and another $12 million remaining availability on our $40 million credit facility at quarter-end. Our borrowing base continues to be reduced because a significant portion of our receivables for the Campeche reimaging program are effectively purchased by E&P companies through our Mexican entity and are excluded from the borrowing base calculation. We continue to evaluate options under our existing credit facility or other financing options that would include these receivables in the borrowing base.

Combining our cash balances and availability under our current revolver, our liquidity was $55 million at June 30, 2017. Overall, we expect to generate cash in the back half of the year, and with our expected increase in revenues, we also expect the availability under our current revolver to increase as the year unfolds. This should lead to a meaningful increase in our liquidity in the back half of the year.

We recently received a notice from the New York Stock Exchange that we are not in compliance with their continued listing standards as our average market capitalization was less than $50 million over a 30-trading-day period and the stockholders' equity was below $50 million. There is no immediate impact on our stock, and we have already begun preparation on our plan to restore compliance as our business continues to improve, and we will work cooperatively with the New York Stock Exchange to return to compliance.

With that, I'll turn the call back to Brian.

Thanks, Steve.

You've heard me mention that we maintained our core competencies and key R&D programs through the downturn. These programs were key to positioning us for the recovery we're beginning to see in our business. I'd like to touch on just a couple of the programs we've been working on to give you a sense of the innovation on the horizon.

ION has a long history of providing cutting-edge instrumentation and services to better understand subsurface geology. We got our start developing and manufacturing land seismic equipment and sensors almost 50 years ago. We launched our first OBS system in 2004, and from 2004 to 2014, we provided ocean bottom seismic technology to seismic contractors. However, with the acquisition of GeoRXT in late 2014, we transitioned to being a solutions provider to E&P companies, leveraging our technology as a competitive differentiator to access a bigger market with a higher potential return on our technology.

OBS activity and market share has continued to grow as the share of offshore seismic activity from just 4% in 2006 to approximately 15% today. OBS data provides superior production quality images of reservoirs and works in obstructed areas where towed streamer technology cannot. As a result, OBS has become an increasingly important tool for reservoir management. This increase in OBS adoption has been made possible by generations of new technology delivering step changes in efficiency. We believe there are several technology cycles to come that will further increase efficiency and improve the economics, enabling a much broader application of OBS on more fields.

Our newest OBS technology, 4Sea, is an integrated nodal system designed to increase the value of OBS data to E&P companies by providing a step change in image quality, safety and efficiency. As a result, the increased efficiency will reduce costs and improve the economics so it can be commercially viable in more fields. The faster turnaround time will also deliver data more rapidly into E&P company workflows and increase the value to them by impacting more of their critical business decisions. In addition, we have an acquisition and geophysical roadmap of enhancements to keep the system at the forefront, such as a completely automated back deck and the next generation sensor technology.

Next, you may recall that we acquired Global Dynamics' assets and intellectual property in March 2016 to gain access to their proprietary SailWing technology. SailWing is an innovative foil-based alternative to conventional bulky marine diverters that maintains streamer or source umbilical positioning towed behind vessels. SailWing configurations can be employed to optimize source arrays and augment towed streamer deployment systems yielding significantly less drag, faster towing, improved fuel efficiency and safer operations through their flexible and smaller footprint. As a result, surveys can be acquired faster and at lower cost.

While SailWing is still in development, we are well down the path to commercialization, and it's already received a lot of client interest from multiple industry segments. We believe it's going to be a good incremental business with the potential to yield significant revenues. We are targeting commercialization in the first half of 2018.

These are just a couple of examples of how we've been transitioning our business over the last 18 months. We have targeted opportunities less dependent on cycle recovery, such as selecting specific geographic areas and production optimization offerings and commercialization of unique and differentiated technologies, and we are starting to see these efforts pay off. We're a niche business in a large market and are surgically targeting areas that are attractive, which is supporting the recovery of our business.

With that, I'll turnover it over to the operator for Q&A.

(Operator Instructions). Our first question comes from the line of Dave Steinberg with DLS Capital. Please proceed with your question.

You guys did a spectacular job getting this company turned around so far. I want to say that right off the bat. I have a question on -- your EBITDA margin, it looks like, was around 29% for the quarter roughly or whatever. And I know it was about that or higher in past quarters when the business was running. Is that something we would expect moving forward with each sales dollar, as you said incrementally, you're going to have increased EBITDA per quarter. So that is my first question. Second question is on the backlog. What is that backlog timing wise? Is that a backlog for one quarter, two quarters going forward and how does that work? Generally, I think it's great that you've given the number out. So if you could you start with those first two questions?

Yes, sure. First on your EBITDA question. You're precisely right. I mean we have a -- we sort of have a base level of expense in the business and then as we generate incremental revenues, it really translates nicely into positive EBITDA generation. So I think you can -- I think it's fair to say that as revenues increase over Q2 levels, that the EBITDA percentage as a percentage of revenue will increase as well. The second comment to your backlog is the majority of that backlog, really we see working through that in 2017. So it's pretty near-term stuff.

Okay. I think it's great that you've brought the backlog back as a number. It's a great reference, you should keep it up just as a comment. And then on the OBS business, I mean, obviously it's a 0. You used the term near-term, what do you view as near-term like one quarter, two quarters, one year or you don't have your arms around it at the moment?

It's really difficult because of the sort of the political disarray with the -- in the areas that we're really well positioned. There is quite a bit of a political turmoil that really has been driven by the low commodity price for an extended period of time, and I'm -- disproportionately, unbalanced budgets of those countries, and I'm sure you can get a feel for that. So they're having hard time meeting their obligations -- their current obligations. So they're struggling to find ways to fund those surveys. I don't see that correcting in the next year. So I think our next best opportunity, and I am -- I could be wrong, I'm not totally closing the door, but I think it's much more of a higher probability that the next survey we go shoot is probably with our next generation technology in late '18 with the new technology than it is with our current technology, VSO. However, I could be wrong and they could get their act together and they could get things straight with their partners and they could get a survey going by early '18. So I haven't got an exact answer for you.

Okay, that's fine. Next one. You guys -- last quarter, you guys turned the corner and you got to be recovering in '18. Obviously, your businesses is improving. You guys are still under the same sense that the general industry is going to have a recovery in 2018 or better a better looking year going forward? Is that still where you're at?

Yes. I'm not sure I would make a comment as broad as the general industry. The nice thing about our business is we really repositioned it sort of niche-y very -- we're trying to go where the capital is flowing, and we can do that and we can -- we're nimble enough to change course where I think there's many in our peer group, especially the ones that are asset heavy, that I think they're going have a lot tougher time. Certainly, they're going to struggle a little bit in '17. I'm not sure their businesses will come back as much in '18. Certainly, our business seems to sort of decoupled from the whole commodity price and has -- is healing just based on the merits of our offerings.

Got it. Just two comments. Number one, like I said, you've done a great job. It looks like this thing is going to turn. It should be a very good performer. I would -- it's just a suggestion, if usually you have limited research coverage, any kind of insider buying would be another great signal that this company has turned around. I know the last insiders bought in December, and I also understand they got crushed over the last couple years, but it's just something I want to leave in your thoughts, how I identify this I'm a generalist, not an oil and gas specialist. That's just a comment for you.

I appreciate your comments. Thank you.

Our next question comes from the line of Scott Smallman with Wedbush Securities. Please proceed with your question.

You guys have done a good job in cleaning up balance sheet-related issues, but you've still got that bit of debt due next May. Is there a specific plan to issue something new to use to redeem that? Would you do it out of cash or what's your current thinking on that?

Yeah, thanks for the question. I think if you look at the way our liquidity is building and the way our EBITDA is performing, I think our liquidity position will allow us to handle that maturity just out of the organic growth in the company over the back half of the year and into '18.

(Operator Instructions) It appears there's no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Thank you for taking the time to attend our conference call. We look forward to talking to you again on the third quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.