A Quarterly Review of 3D Marine Seismic Fleet Growth
Fragility is the quality of things that are vulnerable to volatility. – Nassim Nicholas Taleb
Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. – George Soros
The Q2 2015 financial reports are in from the majority of marine seismic industry players now. The news is not too promising. There is not any near term turn-around in sight. In such times as these, it is good to remember that the marine seismic industry has had a tumultuous history of which this is only its newest chapter. Marine seismic companies are formed and then merged or dissolved on a regular basis. Polarcus was formed in 2008. Dolphin Geophysical (Dolphin) started in 2010. CGG merged with Veritas in 2006 and was called CGGVeritas until they renamed themselves back to CGG in 2013. CGGVeritas acquired Wavefield Inseis in 2007 after TGS’ temptation for vessel ownership fell through. (Yes, that’s right, TGS contemplated vessel ownership not so long ago.) More recently, CGG acquired the seismic fleet of Fugro in early 2013. In 2007, Schlumberger’s WesternGeco (WG), another merged entity which was formed in 2001, acquired the vessels of a holding company Eastern Echo. Eastern Echo had never even completed a survey. Petroleum Geo-Services (PGS) since that time has filed and emerged from Chapter 11 bankruptcy as well as sold off its interests in both ocean bottom cable seismic and onshore operations to focus on marine streamer acquisition and data processing. PGS has steadily upgraded and added to their fleet introducing Ramform Titan class vessels equipped with 24 tow points. The Titan and Atlas, came into production during 2013 and 2014. PGS is scheduled to launch an additional two Titan class vessels, Tethys and Hyperion, in 2016. Polarcus and Dolphin had been growing and adding vessels to the global fleet as the younger companies in the sector. Dolphin continued its growth spree until recently when it added its final – for the time being anyhow – high capacity Polar Empress during Q2 2015. CGG acquired capacity through acquisitions, as did WG. However, WG also upgraded their own fleet with two new build Amazon class vessels, Conqueror and Warrior, during the past 14 months. The growth of the seismic vessel fleet was creating fervent competition and cost pressures for contractors prior to the rapid and steady decline in oil prices. However, the significant reductions in offshore exploration spending exacerbated the over-capacity and highly competitive sector leaving each marine seismic contractor company having to make tough decisions in an effort to stabilize and survive through the current stormy market conditions. Reduced exploration spending and vessel over-capacity led WG and CGG to decisively announce that they would slash their fleets, aware that Dolphin and PGS were still adding new-build capacity into market conditions offering fewer high-revenue generating opportunities.
In such a volatile climate of uncertainty, it is a good time to reflect on the current condition of the marine seismic sector and to consider the strategy and options for the companies fighting for market share. This article will focus on the predominantly 3D marine seismic streamer companies PGS, Polarcus, and Dolphin. These companies will be analyzed from the perspective of operational streamer capacity rather than vessels. This limited view is for simplicity. CGG and WG combined control significant 3D marine seismic streamer capacity. However, these companies are more diversified beyond the 3D marine seismic streamer data acquisition sector and also have already decimated their fleets (and operational streamers). Similarly, the 3D marine seismic streamer capacity of BGP and SMNG also impact the availability and pricing dynamics of the market, but to parse out the impact of only their 3D seismic streamer components would be challenging. Predominantly 2D marine seismic acquisition companies are also impacted by the 3D fleet reductions which have replaced their 2D streamer vessels with converted lower end 3D capacity vessels. It is fair to recognize the analysis as incomplete. The analysis will concentrate on the changes of streamer capacity from the beginning of 2014 and project those dynamics into 2016. Figures 1 shows the streamer vessels and capacity at the beginning of 2014. Figure 2 shows projected streamer vessel capacity of the global 3D marine seismic fleet into 2016. The maximum streamer spread was capped at 16 streamers, assuming normal NAZ configurations with 100 meter separations. Also, WG does not publish too many details about their fleet. Therefore, except for the two Amazon class vessel, the other vessels remaining in their fleet were assumed to be 12 streamer capacity and a 40% reduction of streamer capacity from 2014 to 2015 (projected into 2016). It is important to emphasize that these tables contain estimated values only, but are based on published information.
Figure 1 Global 3D Seismic Streamer Capacity 2014 (estimate)
Figure 2 Global 3D Seismic Streamer Capacity 2016 Projected Estimate
PGS, Polarcus, and Dolphin have all decided to stack vessels and remove streamer capacity from the market more recently. PGS will stack their two older Ramform vessels Explorer and Challenger. PGS also has entered into a lease-back agreement for the PGS Apollo non-Ramform vessel. PGS will, however, still operate Apollo. Recently, PGS related that they believed that streamer capacity still needed to be reduced by 15% to stabilize the market. From the presentation, it was not clear what baseline they referred to. Yet, in Q1 2016, PGS will be receiving high capacity Ramform Tethys, and in Q3 2016 Ramform Hyperion. Polarcus decided to stack their vessel Nadia. Dolphin will convert one of their 3D vessels to 2D. Dolphin also received delivery of Polar Empress and plan to review or renegotiate lease terms for the vessels which they operate and maybe reduce their fleet further. All three of these companies have different business models which impacts how they can respond to a climate of reduced exploration spending and very competitive pricing with lower margins. However, what Tables 1 & 2 indicate is that even following the stacking of many vessels, the estimated aggregate impact of fleet reductions will amount to between only 20-25% less operational streamers in the global fleet. This is due to the fact that many older vessels with lower streamer towing capacity are being retired while the new vessels with higher towing capacity are being introduced simultaneously.
Streamers are effectively the revenue generators for seismic data acquisition companies. It is the data collected from the sensors which is ultimately sold to offshore license operators. The vessels are the vehicles which move the sensors to where data needs to be measured. One of the disadvantages to reducing fleet sizes is that with fewer vessels it is more difficult to have vessels close to surveys which thereby increases the steam time for vessels to reach new projects. This is an added expense. On the other hand, lower priced oil also reduces the costs of such transits. Vessels move from one project to the next with each survey having their own special constraints and challenges, as well as pricing models. To simplify analysis, fleet streamer performance is normalized to the number of operational streamers for each financial quarter. There will also be a change of perspective of how company financial performance is viewed. Quarterly EBIT (Earnings Before Interest & Tax) is an indicator of company profitability and long term interest bearing debt (DEBT) is an indicator of a company’s liability. These values have been graphed for each financial quarter along with the estimated fleet streamer capacity count during the financial quarter for PGS (Figure 4), Polarcus (Figure 5), and Dolphin (Figure 6).
Don’t be seduced into thinking that that which does not make a profit is without value. ~ Arthur Miller
Figure 3 PGS Quarterly Financial Performance and Streamer Capacity
Figure 4 Polarcus Quarterly Financial Performance and Streamer Capacity
Figure 5 Dolphin Quarterly Financial Performance and Streamer Capacity
Since it is the streamers which are effectively the revenue generators, the quarterly EBIT and DEBT will be related to the number of streamers in operation. From this, the EBIT/streamer and DEBT/streamer are calculated for each financial quarter. These are graphed in Figures 6 & 7.
Figure 6 Quarterly EBIT / STREAMER
Figure 7 Quarterly DEBT / STREAMER
Analysis – Summary
Oil prices continue to fall with no stable plateau – up or down – in sight. Although, a six-year low in crude oil trading values was reached last week, few analysts have predicted a return to oil prices to over $70/bbl in early 2016. Oil over $100/bbl is what spurred the increase in streamer capacity in the first place, and is even further away. Oil majors are continuing to downsize entering Q3 2015. The negative revenue generation per streamer as seen in Figure 6 seems to confirm an over-capacity market. Lower pricing brought by fierce competition, longer transits, and reduced spending is making it difficult for fleets to make money. So, what adjustments should be made? The impact of the latest fleet reductions may provide opportunities to allow remaining streamer capacity to earn positive revenue. There do seem to be some improvement of opportunities from Q1 & Q2 2015. But, most expect 2016 to continue to be challenging. For Q3 & Q4 2015 the global 3D marine seismic operational streamer count capacity, without more vessels being stacked, will be around 550. If there still remains 15% over-capacity in the global market, as was related in some reports, then 6-7 more 12-streamer vessels will need to be taken out of production to stabilize the work-streamer capacity balance.
Reducing capacity also reduces revenue generation potential, as well as adds expense, albeit less than keeping a vessel with no paying work operational. The market capitalization, as noted in the reduced share prices, has reduced dramatically for all companies analyzed.
Even with clear signs that there needs to be further reductions in streamer capacity, companies also need to maintain a certain number of efficient vessels to remain viable in the global market, as transit costs will eat away at operational efficiency and cost cutting measures. And then there is the elephant in the room. Two additional high-capacity Ramform vessels – approximately $285 million each – will be entering in only a few more months. How will a low price market support the high technology introductions from Dolphin and PGS?
Dolphin is betting on operational excellence, along with clever maneuvers managing vessel terms, as Dolphin charters its vessels. Polarcus and PGS are dealing with the debt attached with vessel ownership. Every single one of the 3D marine seismic streamer players are concentrating on cost cutting. License operators may be in the position to decide the terms and survival of the 3D marine seismic streamer companies. Less spoken about is the impact downstream from fewer lower streamer capacity. There will be less data processing and imaging, as well as further analysis with less data in the pipeline. Operational excellence and trusting relationships with strong commitments to serve customers will be critical. The next few months will be both interesting and of the utmost importance for all the players. And with that, Godspeed into the storm.
The will to persevere is often the difference between failure and success. ~ David Sarnoff