Merger highlights seismic-sector strength
The $3.1bn acquisition by French seismic survey group Compagnie Générale de Géophysique (CGG) of US rival Veritas has created the world's largest independent seismic firm, writes Ian Lewis.
The September deal has turned the spotlight on a booming part of the oilfield-services sector. The participants boast full orderbooks for months ahead and have been recording soaring profits as oil firms' ramp up exploration activity while oil prices are high.
The mixed cash and shares deal creates a company, CGG Veritas – roughly 65%-owned by CGG shareholders and 35%-owned by those of Veritas – whose immediate prospects look bright. The initial market reaction to the merger was to mark down CGG's shares by around 8%, as investors considered the high price paid for Veritas, which represented an implied premium of around 35% over its share valuation in August.
However, analysts say concerns over that price tag are outweighed by optimism over prospects for the sector. By early November, the company's share price had recovered September's losses.
With 20 ships, including 14 high-capacity 3-D vessels, now providing more thorough global coverage and two up-to-date seismic data libraries, CGG is predicting the synergies created by the merger will generate an extra $65m in annual pre-tax profits.
Bertrand Hodee, Paris-based oil and gas equities analyst at Kepler Equities, sees it as a sound strategic move. "What we like about the CGG Veritas merger is that it consolidates at the point where the entry barriers in the sector are toughest." The most important among these, he says, are the development of multi-client business and the expansion of data-processing activities, which are strong in both companies. "The aim to develop a new benchmark for data processing and imaging is a sound strategic move for the long-term value of the business," he adds.
Matt Moran, an equities analyst at Chicago research house Morningstar, agrees: "Veritas should fit CGG like a glove. Its extensive Gulf of Mexico (GoM) seismic complements CGG's Middle East coverage. Further, Veritas' customer list includes majors and independents, while CGG caters to many national oil companies. A seismic library is worth little without the ability to process the information and both companies excel in this regard."
The merger is a big step in the seismic industry's continuing consolidation. It came a year after CGG bought Norwegian seismic firm Exploration Resources and was followed up by the late-September purchase of the Scottish wireless-surveying pioneer, Vibtech, by Sercel, CGG's seismic-equipment manufacturing subsidiary.
Meanwhile, in May, Schlumberger bought the 30% of seismic surveyor WesternGeco that it did not already own from its minority partner, Baker Hughes, for $2.4bn in cash. WesternGeco remains the world's biggest seismic operator, with sales of around $2bn a year, compared with around $1.5bn-1.7bn for the combined CGG Veritas. The decision to buy Baker Hughes' stake in WesternGeco, adding seismic surveying to a vertically integrated package of oilfield services, may give Schlumberger's rivals in the sector pause for thought. "If Schlumberger is doing this, then Halliburton and Baker Hughes will need to think about the strategic merits of vertically integrated seismic services," says Hodee.
If they do, the way may be paved for further mergers, with the main services companies possibly considering acquiring large seismic firms, such as Norway's Petroleum Geo-Services (PGS) and TGS-Nopec. The independents may consider strategic mergers to ward off such interest. Both PGS and TGS-Nopec had been in the frame for link-ups with CGG and Veritas before their merger took place.
Enthusiasm for further merger activity will probably depend on continued demand for seismic services. Analysts say the outlook for the next two years is positive and this has been reinforced by strong corporate results across the sector. At CGG, results unveiled in September showed a 62% rise in group revenues to Euro312m ($396m); while Sercel exceeded forecasts with a 112% rise in revenues, to Euro166m. Schlumberger's group operating revenues rose by around 33% in third-quarter 2006 compared with the same period in 2005; WesternGeco's revenues increased by 51% to $0.66bn.
When unveiling their results, both firms' chief executive officers (CEO) were upbeat over the prospects for the seismic sector. "Our seismic market remains buoyant and the demand both in services and in equipment is strong for 2007 and beyond," said CGG's CEO, Robert Brunck. While Schlumberger's chairman and CEO, Andrew Gould, said revenue growth at WesternGeco was the result of "significant strength in multi-client data sales and high marine utilisation".
PGS also reported a surge in business in the third quarter, recording a 113% rise in operating profit to $95.2m, while revenues rose by 54%. As with its competitors, PGS also reported a healthy orderbook, with its backlog standing at a record $0.77bn – it attributed this to the acquisition of North Sea work for 2007 at stronger rates and margins than in 2006, as well as winning contracts to undertake big studies in the US GoM and Qatar.
Optimism over the sector's future has been reinforced by significant technological developments, which have made seismic surveying a tool to be used not just at the discovery stage of the oil business, but also as a monitoring instrument throughout a reservoir's life. "We are very positive about the industry because it combines huge technological breakthroughs with strong demand," says Hodee.
In particular, substantial improvements in the accuracy of sub-salt seismic technology have been a boon to firms operating in areas such as the deep-water GoM. Much of the seafloor is covered with a layer of salt, which previously would have shielded a detailed survey of the rock below. A major contributor to Schlumberger's earnings has been a just-completed multi-client, sub-salt surveying project, the largest of its kind. Known as E-Dog, it covers 20,250 square km and more than 800 blocks in GoM deep waters.
The need to use at least four times the number of 3-D seismic ships for sub-salt surveys as would be necessary in an equivalent conventionally mapped area is one driver behind a spate of seismic-vessel building. The number is forecast to rise from 32 at end-2005 to around 54 by 2009 – about the same number as in 1999, when the industry was losing profits during a cyclical downturn.
With the oil industry on a roll and the need to use more vessels for complex work, participants remain confident their expansion strategy is the right one. But some observers sound a note of caution. "Despite the rosy near-term outlook, we are much less enthusiastic about prospects in 2008 and beyond," says Morningstar's Moran. "Exploratory spending will absorb the projected 25% increase in capacity in 2006, but capacity is expected to jump by another 15% in 2007. After that, it's only a matter of when – not if – new players will emerge and add too much capacity."