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TGS ASA Earnings Release 2019
3774_10-k_2020-02-12_e7b844d8-9f17-4cce-890f-0e7567b4ca25.pdf
Earnings Release
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TGS EARNINGS RELEASE 4 th QUARTER 2019 RESULTS*
*The accounting standard IFRS 3 applies to a transaction that meets the definition of a business combination. As the transaction relating to the acquisition of Spectrum was effective from 14 August 2019, the sales and costs from the "Spectrum Group" are included in the TGS IFRS statement of financial position and in TGS' statement of comprehensive income for the period 15 August to 31 December 2019.
4 th QUARTER 2019 FINANCIAL HIGHLIGHTS
| IFRS (all amounts in USD 1,000 unless specified otherwise) | Q4 2019 | Q4 2018 | 2019 | 2018 |
|---|---|---|---|---|
| Net operating revenues | 218,846 | 274,515 | 585,610 | 614,239 |
| Operating profit (EBIT) | 69,581 | 145,913 | 128,998 | 230,025 |
| - Operating profit margin | 32% | 53% | 22% | 37% |
| Net income | 56,726 | 124,876 | 99,453 | 178,800 |
| EPS (fully diluted) (USD) | 0.48 | 1.21 | 0.91 | 1.73 |
| Organic multi-client investments in new projects | 53,946 | 63,353 | 327,622 | 256,926 |
| Risk-sharing investments | 4,850 | - | 11,889 | 7,343 |
| Inorganic multi-client investments | 3,256 | - | 183,505 | 6,502 |
| Amortization of multi-client library | 95,627 | 94,735 | 302,233 | 270,776 |
| Multi-client library net book value | 1,091,294 | 870,495 | 1,091,294 | 870,495 |
| Free cash flow (after multi-client investments) | 106,197 | -18,454 | 226,359 | 116,960 |
| Cash balance | 323,408 | 273,527 | 323,408 | 273,527 |
| Return on average capital employed1 | 12% | 24% | 12% | 24% |
| Segment reporting2 (all amounts in USD 1,000 unless specified otherwise) |
Q4 2019 | Q4 2018 | 2019 | 2018 |
| Net operating revenues | 232,486 | 188,348 | 772,574 | 621,680 |
| - Net pre-funding revenues | 26,115 | 34,114 | 127,332 | 105,062 |
| - Net late sales | 200,893 | 151,611 | 627,047 | 508,222 |
| - Net proprietary revenues | 5,478 | 2,623 | 18,194 | 8,396 |
| EBITDA | 189,116 | 156,679 | 641,967 | 530,631 |
| Operating profit | 58,966 | 68,409 | 221,192 | 171,948 |
| - Operating profit margin | 25% | 36% | 29% | 28% |
| Amortization of multi-client library | 119,882 | 86,074 | 397,272 | 336,295 |
| Multi-client library net book value | 830,803 | 726,143 | 830,803 | 726,143 |
| Pre-funding rate | 48% | 54% | 39% | 41% |
| Return on average capital employed1 | 19% | 18% | 19% | 18% |
12
1 12 months trailing.
2 Revenue recognition of projects in progress recognized on a Percentage of Completion basis. Please refer to note 4 for more details. Combined TGS and Spectrum revenues from 1 July 2019 to 31 December 2019 were USD 509 million.
- Strong sales momentum in Q4 2019 Segment net revenues of USD 232 million, year-on-year growth of 23% in Q4 and 24% in FY 2019
- Q4 EBITDA of USD 189 million, year-on-year growth of 21% in Q4 and 29% in FY 2019
- o Restructuring cost of 9 million booked in Q4 2019 related to the Spectrum acquisition
- Spectrum integration on track and synergies of USD 20 million are being realized
- Strong cash flow supporting dividend growth of 39% USD 0.375 per share to be paid in Q1 2020
- Backlog of USD 181 million represents an increase of 187% from Q4 2018
- 2020 financial targets:
- o Multi-client investments of approximately USD 450 million
- o Continued sector outperformance on cashflow and ROACE
- Target cash conversion above 20%
- Target ROACE above 20%
- Target cash conversion above 20%
- o Industry leading distribution to shareholders
- Quarterly dividend increase of 39%; proposed at USD 0.375 per share per quarter
- Continue buy-back program subject to AGM approval
FINANCIALS - IFRS REPORTING
Following the implementation of the IFRS 15 accounting standard from 1 January 2018, pre-funding committed prior to start-up of the project and late sales committed in the work-in-progress phase are not recognized until delivery of the data to the customer. For internal reporting purposes, TGS still prepares accounts in accordance with historical practice, with sales committed prior to completion of the project recognized on a Percentage of Completion basis. The discussion and analysis in this section is based on IFRS reporting standard.
Net operating revenues and operating profit
Net revenues amounted to USD 218.8 million in Q4 2019, a decrease of 20% from USD 274.5 million in Q4 2018. Revenues from projects completed during the quarter decreased by USD 18.3 million compared to last year, while proprietary revenues grew USD 2.9 million. Revenues from late sales were USD 110.1 million, a decrease of 28% from last year.
Amortization of the multi-client library amounted to USD 95.6 million in Q4 2019 versus USD 94.7 million in Q4 2018.
Headcount in Q4 increased as a result of the Spectrum acquisition. Personnel cost totaled USD 25.3 million, an increase of 17% compared to USD 21.6 million in Q4 2018. Other operating expenses amounted to USD 16.8 million, compared to USD 9.8 million in Q4 2018. The increase is mainly due to restructuring cost related to the Spectrum transaction.
Depreciation increased to USD 10.3 million in Q4 2019 from USD 2.2 million in Q4 2018 as a result of IFRS 16 implementation. This includes USD 3.9 million for impairment of a right of use asset due to unused office space arising as a result of the consolidation of offices across the TGS Group.
Operating profit amounted to USD 69.6 million (margin of 32%) in the quarter compared to USD 145.9 million (53%) in the same quarter of last year. Restructuring cost of USD 9 million was booked in Q4 2019 related to the Spectrum acquisition.
Financial items and profit before tax
Net financial items for Q4 2019 totaled USD -2.4 million compared to USD 1.3 million in Q4 2018. The decrease is mainly a result of currency exchange losses.
Pre-tax profit was USD 67.2 million in Q4 2019 compared to USD 147.2 million in Q4 2018.
Tax and net income
TGS reports tax charges in accordance with the Accounting Standard IAS 12. Taxes are computed based on the USD value of the appropriate tax provisions according to local tax regulations and currencies in each jurisdiction. The tax charges are influenced not only by local profits, but also by fluctuations in exchange rates between the respective local currencies and USD. This method makes it difficult to predict tax charges on a quarterly or annual basis. Currency effects within the current year are classified as tax expenses.
Based on the corporate income tax rate in Norway (22% in 2019) and in the US (21% in 2019), TGS has assessed the normalized operating consolidated tax rate to be approximately 22% for 2019.
The tax cost for Q4 2019 was USD 10.5 million (USD 22.3 million in Q4 2018), corresponding to a tax rate of 16%. For the full year the tax rate ended at 24% (24% in 2018), slightly above the assessed normalized operating consolidated tax rate due to increased activity in Latin America. The deviation of the tax rate in Q4 2019 from the assessed normalized tax rate is mainly due to currency fluctuation, and adjustments of prior quarters tax cost estimates based on the preliminary full year tax assessments.
Net income amounted to USD 56.7 million in Q4 2019, compared to USD 124.9 million in Q4 2018. This corresponds to a fully diluted EPS of USD 0.48 versus USD 1.21 in Q4 2018.
Balance sheet
As of 31 December 2019, the Company had a cash position of USD 323.4 million, an increase of USD 49.9 million from 31 December 2018. Interest-bearing debt increased to USD 2.8 million in Q4 2019 from USD 2.5 million in Q4 2018, resulting in a net cash balance of USD 320.6 million (USD 271.0 million in Q4 2018).
Goodwill was USD 284.8 million as of 31 December 2019, an increase of USD 216.8 million from December 31, 2018 due to the Spectrum acquisition. Please see note 9 for further details.
The net book value of the multi-client library was USD 1,091.3 million as of 31 December 2019, compared to USD 870.5 million as of 31 December 2018. The net book value reflects an increase of USD 180.2 million due to the Spectrum acquisition.
Total equity as of 31 December 2019 was USD 1,532.1 million, 70.1% of total assets. On 31 December 2018, total equity amounted to USD 1,232.6 million (77.9% of total assets). No new shares were issued in Q4 2019. As of 31 December 2019, TGS held 1,742,100 treasury shares.
Cash flow
Net cash flow from operations for the quarter totaled USD 221.9 million, compared to USD 62.3 million in Q4 2018. Investments in the multi-client library were USD 115.7 million, compared to USD 80.8 million in Q4 2018, resulting in a free cash flow (cash flow from operations after investments in the multi-client library) of USD 106.2 million versus negative USD 18.5 million in Q4 2018. Net increase in cash for Q4 2019 was USD 57.7 million (decrease of USD 48.7 million in Q4 2018).
FINANCIALS – SEGMENT REPORTING
For internal reporting purposes TGS uses segment reporting, with net revenues from projects-in-progress recognized based on Percentage of Completion (POC), as opposed to the IFRS accounts where revenues are not recognized until the relevant project is completed.
Net operating revenues
Net operating revenues for Q4 2019 amounted to USD 232.5 million, an increase of 23.4% from the USD 188.3 million recognized in Q4 2018. Net pre-funding revenues totaled USD 26.1 million in the quarter (USD 34.1 million in Q4 2018), which funded 48% (54% in Q4 2018) of the USD 53.9 million (USD 63.4 million in Q4 2018) of organic investments in the multi-client library (excluding riskshare investments and inorganic investments).
Net late sales for the quarter amounted to USD 200.9 million, an increase of 32.5% compared to the USD 151.6 million booked in Q4 2018. Proprietary contract revenues increased by 108.8% to USD 5.5 million from USD 2.6 million in Q4 2018.
Revenue distribution
EBITDA, amortization and operating profit
After subtracting operating costs as described in the IFRS section, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) totaled USD 189.1 million in Q4 2019, compared to USD 156.7 million in Q4 2018, an increase of 20.7%.
Amortization of the multi-client library amounted to USD 119.9 million in Q4 2019, up from USD 86.1 million in Q4 2018. The increase is mainly due to higher sales amortization resulting from increased sales of projects-in-progress.
Operating profit in Q4 2019 amounted to USD 59.0 million (margin of 25%), down from USD 68.4 million (margin of 36%) in Q4 2018. TGS booked restructuring cost related to the Spectrum transaction of USD 9 million in Q4 2019. These costs are mainly related to employee redundancies, accrual for rental expenses and other professional services.
Multi-client library
Organic multi-client investments amounted to USD 53.9 million in Q4 2019, 15% lower than the USD 63.4 million invested in the same quarter of 2018. In addition, investments contingent on sales (risk share investments) amounted to USD 4.9 million in Q4 2019 versus none in Q4 2018.
This resulted in a net book value of the multi-client library of USD 830.8 million as of 31 December 2019, compared to USD 726.1 million as of 31 December 2018. The change in book value is related to the acquisition of Spectrum in August 2019.
Backlog
TGS' backlog amounted to USD 181 million at the end of Q4 2019, compared to USD 63 million at the end of Q4 2018.
DIVIDEND AND SHARE BUYBACKS
It is the ambition of TGS to pay a cash dividend that is in line with its long-term underlying cash flow. When deciding the dividend amount, the TGS Board of Directors will consider expected cash flow, investment plans, financing requirements and a level of financial flexibility that is appropriate for the TGS business model.
Since 2016, TGS has paid quarterly dividends in accordance with the resolution made by the Annual General Meeting. The aim will be to keep a stable quarterly dividend through the year, though the actual level paid will be subject to continuous evaluation of the underlying development of the company and the market.
The Board of Directors has resolved to pay a dividend of USD 0.375 per share in Q1 2020. The dividend will be paid in the form of NOK 3.47 per share on 4 March 2020. The share will trade ex-dividend on 19 February 2020.
On 14 May 2019 TGS announced the initiation of a share re-purchase program of up to USD 50 million. The program will be in place until the Company's annual general meeting in May 2020, or such earlier time as the maximum number of shares has been acquired or the Board resolves to terminate the program. At 31 December 2019, USD 43 million of the re-purchase program had been utilized.
In Q4 2019, 502,000 shares were repurchased at an average price of NOK 263.03 per share, corresponding to a total cash spending of USD 14.5 million. For 2019, 1,647,370 shares were repurchased at an average price of NOK 237.7 per share, corresponding to a total cash spending of USD 43.4 million.
OTHER MATTERS
On 14 August 2019 TGS announced the completion of the acquisition of Spectrum ASA ("Spectrum") enhancing its position as a leading multi-client subsurface data company globally. The transaction was conducted as a statutory merger pursuant to Norwegian corporate law. The integration process is well underway and USD 20 million in expected annual cost savings have been reconfirmed.
During the fourth quarter TGS announced several data purchases that will provide TGS clients with access to a more comprehensive onshore US subsurface data library and previously unavailable historical production data:
-
On 29 October 2019 TGS announced that it had completed the transaction to acquire 100 percent of the Kingfisher 3D seismic survey to add to its Oklahoma database. The survey encompasses 714 km2 and increases TGS' contiguous 3D data coverage in the SCOOP and STACK to over 10,000 km2 . Exploration & production (E&P) companies will now have a more comprehensive onshore subsurface data set in this region for optimal well positioning and lateral drilling hazard mitigation.
-
On 19 December 2019 TGS announced that it had completed a transaction to purchase over 2,000 km2 of onshore seismic 3D surveys in the SCOOP-STACK of the Anadarko Basin, Powder River Basin, and Permian Basin.
- During Q4 2019, TGS also announced the first major update to its online data portal R360TM. Users are now able to experience a more intuitive interface that includes a fresh look and feel, streamlined navigation and additional, simplified search functionalities to view TGS' extensive Well Data Library. In addition, during the quarter, TGS and WhiteStarTM announced a partnership to jointly provide a robust solution combining TGS well data and WhiteStar land grid GIS data, coupled with field and pool data.
In early Q1 2020, TGS announced a multi-year agreement with Google Cloud. The agreement secures TGS access to cloud-based ondemand compute power and complements TGS' on-premises compute capacity. The flexible hybrid compute solution enables TGS to deliver on complex, compute intensive projects and to focus on cycle-time reduction while preserving superior data quality. The collaboration agreement with Google further supports TGS' strategy to help customers de-risk their exploration activities faster.
OPERATIONAL HIGHLIGHTS
TGS had, under contract, five 3D seismic vessels (two operated under joint venture agreements), two 2D vessels (one operating under a joint venture agreement), two multibeam / coring vessels, one OBN crew and three land crews in operation in Q4 2019.
In Q4, TGS continued its SeaSeep project in the MSGBC Basin, offshore northwest Africa. The program will cover an area of approximately 113,500 km2 and will incorporate around 260 cores from the seabed, located based on multibeam backscatter anomalies. Final results are expected to be available in Q2 2020.
TGS also announced that it commenced acquisition of a new multi-client survey in the MSGBC Basin. The Senegal South Ultra-Deep 3D survey covers over 4,500 km2 and is being undertaken in partnership with GeoPartners using the vessel BGP Prospector. Fasttrack data is expected to be available in early Q2 2020, with final data expected to be available in Q3 2020. Later in the quarter TGS announced a Senegal North Ultra-Deep 3D survey, which commenced acquisition in November 2019. The 5,100 km2 project, in partnership with GeoPartners, is expected to have fast-track data available in Q2 2020 and final datasets available by Q4 2020. Further, TGS announced that it added an additional 1,500 km2 of 3D seismic data offshore Gambia. The survey covers blocks A2/A5 and will be reprocessed and pre-stack merged into the Jaan program.
In Nigeria, TGS and its joint venture partner TGS-PetroData announced the country's first regional multi-client Multibeam and Seafloor Sampling Study. The study will cover approximately 80,000 km2of the offshore Niger Delta and will incorporate around 150 cores from the seabed. Final results will be available in Q3 2020.
In Egypt, TGS announced that it has been granted exclusive rights with its partner, AustinBridgeporth, to acquire the world's highest resolution gravity imagery, eFTG (enhanced Full Tensor Gravity Gradiometry). The program will begin with a regional airborne eFTG multi-client survey, together with magnetic and Lidar data. The survey is expected to commence in Q1 2020 and is planned to continue as a multi-year acquisition that aims to cover both onshore and offshore Egypt.
In Brazil, TGS continued its acquisition of the expanded 22,500 km2Santos multi-client 3D program. Acquisition of TGS' 14,100 km2 multi-client 3D seismic survey in the Campos Basin continued in Q4 2019. Fast-track deliverables for the project were available ahead of Bid Round 16. Further intermediate deliverables will be available in 2020 with final deliverables expected for 2021. In addition, TGS commenced acquisition of the 8,443 km Para-Maranhao 2D multi-client project. Final data is expected to be delivered in Q3 2020.
In Argentina, acquisition was completed on the 3,150 km Colorado Basin 107 & 109 multi-client 2D project, with final data expected to be available in the first half of 2020. In addition, acquisition commenced on the 17,800 km2 Malvinas 3D multi-client project in the Malvinas Basin. Initial products are expected to be available in early 2021 with final products expected in H2 2021. In Q4, TGS also commenced acquisition of the 4,349 km Argentina 111/113 2D multi-client project. Final data is expected to be delivered in Q3 2020.
In the U.S. Gulf of Mexico, TGS announced the Declaration Refocus next generation M-WAZ imaging program in Mississippi Canyon. The program comprises data covering more than 380 Outer Continental Shelf (OCS) blocks (~8,860 km2 ) from orthogonal 3D WAZ programs previously acquired by TGS between 2010 and 2015. Full product delivery of the program is expected at the end of 2020.
In the Norwegian North Sea, TGS, in a JV with AGS, completed acquisition of the 2019 portion of the Utsira OBN survey. Delivery of final volumes is expected in Q1 2020 (for 2018 acquisition season) and Q2 2020 (for 2019 acquisition season). During the quarter, acquisition was also completed for the 5,151 km2 Greater Castberg multi-client TopSeis 3D project in the Barents Sea, in collaboration with CGG. Fast-track data is expected to be available in Q2 2020, with final data expected to be available in Q4 2020.
For TGS' onshore operations, acquisition was completed in Q4 for the 1,500 km2 Gloss Mountain 3D multi-client project in the Anadarko Basin as well as the 680 km2 Railgun 3D multi-client project in the Powder River Basin and the Midnight 3D multi-client project in the Inga/Fireweed area of British Columbia in Canada. Final data is expected to be available for the three surveys during the first half of 2020, respectively. In addition, during the quarter, TGS announced the 100 km2 South Halfway project also in the Inga/Fireweed area of British Columbia in Canada.
TGS' Geologic Products and Services Division (GPS) continued to add to its inventory of multi-client products in the quarter. The well data library grew with the addition of approximately 9,000 new digital well logs, 6,400 new enhanced digital well logs and 52,700 new validated well headers.
OUTLOOK
During the last year, the industry has been increasingly exposed to several key trends that impact long term planning and TGS' strategy. First, increased pressure from communities, governments and shareholders to reduce carbon emissions is impacting how E&P companies allocate capital and manage their operations. The multi-client business model inherently assists the goal of low-carbon operations by reducing duplication and increasing efficiency of vessel allocation. TGS is committed to work with our clients to monitor and reduce emissions, while also looking for opportunities to support the oil and gas industry as it diversifies into renewable and other low-carbon strategies such as carbon capture and storage.
Secondly, a continuation of demand-driven oil price volatility with recent geopolitical events, trade negotiations and the potential impact of the coronavirus on the global economy. These factors are all outweighing supply-side factors and testing OPEC's ability to maintain Brent oil price above \$60 per barrel.
Finally, there is a growing recognition among E&P companies, both big and small, that they need to replenish reserves and the world will still need more oil and gas to support economic development, even in future low-carbon scenarios. Following several large discoveries off the Brazilian coast and the west coast of Africa, we see a gradual shift in E&P companies' focus towards frontier prolific basins in the Southern Hemisphere.
Our clients' continued focus on cost, capital discipline and more efficient use of technology combined with increased interest in frontier basins in the Southern Hemisphere fits well with TGS' geographical footprint and strategy of making new generations of technology available on a large scale through the multi-client model. Recent examples are the newly announced 3D projects offshore Argentina and Senegal, the multi-client Ocean Bottom Node (OBN) projects initiated in the US GoM and the North Sea and the Declaration M-WAZ reprocessing project that signals the start of next generation imaging in the US GoM.
Building on this strategy, TGS is continuing to develop its technology offering. Several initiatives have been launched within the imaging area to enhance TGS' position as a leading data processing company. Furthermore, TGS has added substantial resources to the data and analytics area over the past couple of years and will continue to do so. Through combining artificial intelligence (AI) and advanced data analysis capabilities with our strong geoscience knowledge and vast library of geophysical and geological data, we are further enhancing the value offering to our clients.
Over the past few years, the structure of the subsurface data industry has changed significantly. Most of the companies are now either pure vessel providers or pure multi-client companies. Greater discipline and cold-stacking by vessel providers have reduced the available fleet to less than half of the 2014 level. M&A activity has resulted in a more consolidated industry and TGS' acquisition of Spectrum has enhanced its position as a leading, global multi-client company. Together, these changes should contribute to a healthier industry in the longer-term, with more focus on quality and improved economics.
TGS continues to focus on strategies that maximize return on average capital employed ("ROACE") and free cash flow ("FCF"), factors that have high correlation to maximizing total shareholder return. The company's asset-light business model and capital discipline encourage capital efficiency and are designed to produce more predictable and superior long-term ROACE.
TGS is in a unique position to benefit as E&P companies seek to increase their reserves through exploration activities, supporting further investment growth. TGS has already announced several projects for 2020 and approximately USD 181 million of investments were committed as per end of Q4 2019. The investment plan will continue to mature over the coming months. Financial goals for 2020 are as follows:
- o Multi-client investments of approximately USD 450 million
- o Continued sector outperformance on cashflow and ROACE
- Target cash conversion above 20%
- Target ROACE above 20%
- o Industry leading distribution to shareholders
- Quarterly dividend increase of 39%; proposed at USD 0.375 per share per quarter
- Continue buy-back program subject to AGM approval
Asker, 11 February 2020
The Board of Directors of TGS-NOPEC Geophysical Company ASA The Board of Directors of TGS-NOPEC Geophysical Company ASA
Henry H. Hamilton III Mark S. Leonard Wenche Agerup Chairman Director Director
__________________ __________________ __________________
Irene Egset Torstein Sannes Vicki Messer Director Director Director
Tor Magne Lønnum Christopher Finlayson Kristian Johansen Director Director Chief Executive Officer
__________________ __________________ __________________
__________________ __________________ __________________
ABOUT TGS
TGS provides multi-client geoscience data to oil and gas Exploration and Production companies worldwide. In addition to extensive global geophysical and geological data libraries that include multi-client seismic data, magnetic and gravity data, digital well logs, production data and directional surveys, TGS also offers advanced processing and imaging services, interpretation products and data integration solutions.
TGS-NOPEC Geophysical Company ASA is listed on the Oslo Stock Exchange (OSLO:TGS). TGS sponsored American Depositary Shares trade on the U.S. over-the-counter market under the symbol "TGSGY". Website: www.tgs.com
CONTACT FOR ADDITIONAL INFORMATION
Dean Zuzic, Chief Financial Officer tel +47 41 43 35 60
************************************************************************************************************************* All statements in this earnings release other than statements of historical fact are forward-looking statements, which are subject to a number of risks, uncertainties and assumptions that are difficult to predict, and are based upon assumptions as to future events that may not prove accurate. These factors include TGS' reliance on a cyclical industry and principal customers, TGS' ability to continue to expand markets for licensing of data, and TGS' ability to acquire and process data products at costs commensurate with profitability. Actual results may differ materially from those expected or projected in the forward-looking statements. TGS undertakes no responsibility or obligation to update or alter forward-looking statements.
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| Note | 2019 | 2018 | 2019 | 2018 | |
|---|---|---|---|---|---|
| (All amounts in USD 1,000s unless noted otherwise) | Q4 | Q4 | |||
| Net revenues | 4 | 218,846 | 274,515 | 585,610 | 614,239 |
| Cost of goods sold - proprietary and other Amortization and impairment of multi-client library |
5 | 1,252 95,627 |
278 94,735 |
2,413 302,233 |
584 270,776 |
| Personnel costs | 25,295 | 21,592 | 86,345 | 70,318 | |
| Other operating expenses | 16,823 | 9,799 | 42,120 | 33,639 | |
| Depreciation, amortization and impairment | 10,268 | 2,197 | 23,503 | 8,897 | |
| Total operating expenses | 149,265 | 128,602 | 456,613 | 384,214 | |
| Operating profit | 4 | 69,581 | 145,913 | 128,998 | 230,025 |
| Financial income and expenses | |||||
| Financial income Financial expenses |
993 -1,725 |
1,032 -383 |
10,385 -3,672 |
6,980 -991 |
|
| Net exchange gains/(losses) | -1,665 | 652 | -4,500 | 756 | |
| Net financial items | -2,396 | 1,302 | 2,213 | 6,746 | |
| Profit before taxes | 67,185 | 147,215 | 131,211 | 236,771 | |
| Taxes1 | |||||
| 10,459 | 22,339 | 31,758 | 57,971 | ||
| Net income | 56,726 | 124,876 | 99,453 | 178,800 | |
| EPS USD | 0.48 | 1.22 | 0.92 | 1.75 | |
| EPS USD, fully diluted | 0.48 | 1.21 | 0.91 | 1.73 | |
| Other comprehensive income: | |||||
| Exchange differences on translation of foreign operations | -3,000 | -1,931 | 230 | -899 | |
| Other comprehensive income/(loss) for the period, net of tax | -3,000 | -1,931 | 230 | -899 | |
| Total comprehensive income for the period | 53,726 | 122,945 | 99,683 | 177,901 |
1 Tax expense includes estimated expenses in some jurisdictions.
INTERIM CONSOLIDATED BALANCE SHEET
| Note | 2019 | 2018 | |
|---|---|---|---|
| (All amounts in USD 1,000s) | 31-Dec | 31-Dec | |
| Goodwill | 284,753 | 67,925 | |
| Multi-client library | 5 | 1,091,294 | 870,495 |
| Other intangible non-current assets | 13,703 | 8,366 | |
| Deferred tax asset | 11,260 | 884 | |
| Buildings | 2,396 | 3,518 | |
| Machinery and equipment | 22,314 | 19,308 | |
| Right of use asset | 25,811 | - | |
| Other non-current assets | 11,061 | 180 | |
| Total non-current assets | 1,462,592 | 970,676 | |
| Accounts receivable | 223,211 | 215,046 | |
| Accrued revenues | 10 | 101,153 | 91,442 |
| Other receivables | 73,815 | 31,353 | |
| Cash and cash equivalents | 323,408 | 273,527 | |
| Total current assets | 721,587 | 611,368 | |
| TOTAL ASSETS | 2,184,179 | 1,582,044 | |
| Share capital | 4,094 | 3,668 | |
| Other equity | 10 | 1,528,053 | 1,228,938 |
| Total equity | 3 | 1,532,147 | 1,232,606 |
| Long-term debt | 2,809 | 2,500 | |
| Other non-current liabilities | 1,503 | 2,514 | |
| Lease liability | 19,589 | - | |
| Deferred taxes | 10 | 43,376 | 48,354 |
| Total non-current liabilities | 67,277 | 53,368 | |
| Accounts payable and debt to partners | 108,087 | 39,922 | |
| Taxes payable, withheld payroll tax, social security | 32,732 | 27,062 | |
| Other current liabilities | 10 | 443,935 | 229,086 |
| Total current liabilities | 584,754 | 296,069 | |
| TOTAL EQUITY AND LIABILITIES | 2,184,179 | 1,582,044 |
INTERIM CONSOLIDATED STATEMENT OF CASH FLOW
| Note | 2019 | 2018 | 2019 | 2018 | |
|---|---|---|---|---|---|
| (All amounts in USD 1,000s) | Q 4 |
Q 4 |
|||
| Cash flow from operating activities: | |||||
| Received payments from customers | 303,429 | 119,916 | 786,035 | 551,368 | |
| Payments for salaries, pensions, social security tax | -27,628 | -14,919 | -87,216 | -70,828 | |
| Payments of other operational costs | -39,922 | -13,992 | -99,879 | -55,099 | |
| Paid taxes | -13,996 | -28,643 | -38,293 | -35,419 | |
| Net cash flow from operating activities 1 | 221,883 | 62,362 | 560,648 | 390,022 | |
| Cash flow from investing activities: | |||||
| Investments in tangible and intangible assets | -3,041 | -10,686 | -20,969 | -16,369 | |
| Investments in multi-client library | -115,686 | -80,816 | -334,289 | -273,062 | |
| Investments through mergers and acquisitions | - | - | 14,627 | -6,501 | |
| Interest received | 993 | 1,382 | 6,261 | 6,980 | |
| Net cash flow from investing activities | -117,734 | -90,120 | -334,370 | -288,952 | |
| Cash flow from financing activites: | |||||
| Interest paid | -132 | -383 | -778 | -991 | |
| Dividend payments | 3 | -31,762 | -20,508 | -114,640 | -81,440 |
| Repayment of interest bearing debt | -57 | - | -16,283 | - | |
| Proceeds from share issuances | 3 | - | -6 | 1,512 | 4,971 |
| Purchase of own shares | 3 | -14,483 | - | -43,151 | - |
| Net cash flow from financing activites | -46,434 | -20,897 | -173,340 | -77,460 | |
| Net change in cash and cash equivalents | 57,715 | -48,655 | 52,938 | 23,610 | |
| Cash and cash equivalents at the beginning of period | 265,460 | 322,150 | 273,527 | 249,917 | |
| Net unrealized currency gains/(losses) | 233 | 3 2 |
-3,057 | - | |
| Cash and cash equivalents at the end of period | 323,408 | 273,527 | 323,408 | 273,527 | |
| 1) Reconciliation | |||||
| Profit before taxes | 67,185 | 147,216 | 131,211 | 236,771 | |
| Depreciation/amortization/impairment | 105,895 | 96,932 | 325,736 | 279,672 | |
| Disposals at cost price | - | - | 4,666 | - | |
| Changes in accounts receivables and accrued revenues | 138,490 | -107,904 | 8,020 | -94,148 | |
| Unrealized currency gains/(losses) | - | 1,085 | - | -899 | |
| Changes in other receivables | 13,395 | -7 | 1,386 | 6,135 | |
| Changes in other balance sheet items | -89,089 | -46,317 | 127,919 | -2,090 | |
| Paid taxes | -13,995 | -28,643 | -38,292 | -35,419 | |
| Net cash flow from operating activities | 221,880 | 62,362 | 560,646 | 390,022 |
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ending December 31, 2019
| Other | Currency | ||||||
|---|---|---|---|---|---|---|---|
| (All amounts in USD 1,000s) | Share | Treasury | Share | Paid-In | Translation | Retained | Total |
| Capital | Shares | Premium | Capital | Reserve | Earnings | Equity | |
| Closing balance as of 31 December 2018 | 3,672 | - 4 |
67,355 | 45,248 | -22,473 | 1,138,814 | 1,232,606 |
| Net income | - | - | - | - | - | 99,453 | 99,453 |
| Other comprehensive income | - | - | - | - | 230 | - | 230 |
| Total comprehensive income | - | - | - | - | 230 | 99,453 | 99,683 |
| Share issue Spectrum merger | 456 | - | 349,516 | - | - | - | 349,972 |
| Transaction cost share issues | - | - | - | - | - | -739 | -739 |
| Distribution of treasury shares | - | 1 | - | - | - | 249 | 250 |
| Purchase of own shares | - | -35 | - | - | - | -43,365 | -43,401 |
| Cost of equity-settled long term incentive plans | 5 | - | - | - | - | 8,411 | 8,416 |
| Dividends | - | - | - | - | - | -114,640 | -114,640 |
| Closing balance as of 31 December 2019 | 4,133 | -38 | 416,871 | 45,248 | -22,243 | 1,088,182 | 1,532,147 |
For the year ending December 31, 2018
| Other | Currency | ||||||
|---|---|---|---|---|---|---|---|
| (All amounts in USD 1,000s) | Share | Treasury | Share | Paid-In | Translation | Retained | Total |
| Capital | Shares | Premium | Capital | Reserve | Earnings | Equity | |
| Closing balance as of 31 December 2017 | 3,663 | - 6 |
62,771 | 39,722 | -21,574 | 1,115,531 | 1,200,102 |
| Adjustments IFRS 15 | - | - | - | - | - | -54,895 | -54,895 |
| Adjustments prior years, see note 10 | - | - | - | - | - | -19,093 | -19,093 |
| Opening balance 1 January 2018 | 3,663 | - 6 |
62,771 | 39,722 | -21,574 | 1,041,543 | 1,126,114 |
| Net income | - | - | - | - | - | 178,800 | 178,800 |
| Other comprehensive income | - | - | - | - | -899 | - | -899 |
| Total comprehensive income | - | - | - | - | -899 | 178,800 | 177,901 |
| Paid-in-equity through exercise of stock options | 9 | - | 4,584 | - | - | - | 4,594 |
| Distribution of treasury shares | - | 0.4 | - | - | - | 377 | 377 |
| Cost of equity-settled long term incentive plans | - | - | - | 5,526 | - | - | 5,526 |
| Dividends | - | - | - | - | - | -81,906 | -81,906 |
| Closing balance as of 31 December 2018 | 3,672 | - 4 |
67,355 | 45,248 | -22,473 | 1,138,814 | 1,232,606 |
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Note 1 General information
TGS-NOPEC Geophysical Company ASA (TGS or the Company) is a public limited company listed on the Oslo Stock Exchange. The address of its registered office is Lensmannslia 4, 1386 Asker, Norway.
Note 2 Basis for Preparation
The condensed consolidated interim financial statements of TGS have been prepared in accordance with International Financial Reporting Standards (IFRS) IAS 34 Interim Financial Reporting as approved by EU and additional requirements in the Norwegian Securities Trading Act. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with TGS' annual report for 2018 which is available at www.tgs.com.
The same accounting policies and methods of computation are followed in the interim financial statements as compared with the annual financial statements for 2018 except for the implementation of IFRS 16 Leases with effect from 1 January 2019. Please see note 7 for further explanation.
Note 3 Share capital and equity
| Ordinary shares | Number of shares | ||
|---|---|---|---|
| 1 January 2019 | 102,647,790 | ||
| Shares issued during Q1 2019 | 0 | ||
| Shares issued during Q2 2019 | 0 | ||
| Shares issued during Q3 2019 | 16,258,988 | ||
| Shares issued during Q4 2019 | 0 | ||
| 31 December 2019 | 118,906,778 |
| Treasury shares | Number of shares | ||
|---|---|---|---|
| 1 January 2019 | 104,630 | ||
| Net change in period | 1,637,470 | ||
| 31 December 2019 | 1,742,100 |
The Annual General Meeting held 8 May 2019 renewed the Board of Directors' authorization to distribute quarterly dividends on the basis of the 2018 financial statements. The authorization shall be valid until the Company's Annual General Meeting in 2020, but no later than 30 June 2020.
On 8 May 2019, the Board of Directors resolved to pay a quarterly dividend of the NOK equivalent of USD 0.27 per share (NOK 2.36) to the shareholders. The dividend was paid to the shareholders on 31 May 2019.
On 24 July 2019, the Board of Directors resolved to pay a quarterly dividend of the NOK equivalent of USD 0.27 per share (NOK 2.34). The dividend was paid to the shareholders on 15 August 2019.
On 29 October 2019, the Board of Directors resolved to pay a quarterly dividend of the NOK equivalent of USD 0.27 per share (NOK 2.49). The dividend will be paid to the shareholders on 20 November 2019.
On 11 February 2020, the Board of Directors resolved to pay a quarterly dividend of the NOK equivalent of USD 0.375 per share (NOK 3.47). The dividend will be paid to the shareholders on 4 March 2020.
| Account | ||||
|---|---|---|---|---|
| Largest Shareholders as of 31 December 2019 | Country | type | No. of shares | Share |
| 1. Folketrygdfondet | Norway | 11,241,056 | 9.6% | |
| 2. State Street Bank and Trust Comp | USA | NOM | 10,098,273 | 8.6% |
| 3. The Bank of New York Mellon SA/NV | The Netherlands | NOM | 8,507,076 | 7.3% |
| 4. Verdipapirfondet DNB Norge (IV) | Norway | 3,942,478 | 3.4% | |
| 5. RBC Investor Services Trust |
Canada | NOM | 3,654,892 | 3.1% |
| 6. State Street Bank and Trust Comp | USA | NOM | 2,924,415 | 2.5% |
| 7. JPMorgan Chase Bank N.A. London | USA | NOM | 1,931,803 | 1.6% |
| 8. State Street Bank and Trust Comp | USA | NOM | 1,828,452 | 1.6% |
| 9. Pareto Aksje Norge Verdipapirfond | Norway | 1,788,549 | 1.5% | |
| 10. JPMorgan Chase Bank N.A. London | USA | NOM | 1,760,987 | 1.5% |
| 10 largest | 47,677,981 | 41% | ||
| Total Shares Outstanding * | 117,164,678 | 100% |
* Total shares outstanding are net of shares held in treasury per 31 December 2019
| Average number of shares outstanding for Current Quarter * | |
|---|---|
| Average number of shares outstanding during the quarter | 117,482,887 |
| Average number of shares fully diluted during the quarter | 118,662,376 |
* Shares outstanding net of shares held in treasury per 31 December 2019 (1,742,100 TGS shares), composed of average outstanding TGS shares during the quarter
| Share price information | |
|---|---|
| Share price 31 December 2019 (NOK) | 267.10 |
| USD/NOK exchange rate end of period | 8.78 |
| Market capitalization 31 December 2019 (NOK million) | 31,760 |
Note 4 Segment information
TGS reports Segment information based on the information reported to the management. Segment revenues related to multi-client pre-funded contracts are measured by applying the percentage of completion method to estimated total contract revenues. As such the timing and assessment of amortization will follow the timing of revenue recognition. Management believes the segment reporting provides useful information as to the value generated by the company relative to the related activities and resources employed.
| (USD 1,000) | North & South America |
Europe & Russia |
Africa, Middle East & & Asia/Pacific |
Other segments/ Corporate |
Segment reporting consolidated |
Adjustment | IFRS reporting |
|---|---|---|---|---|---|---|---|
| Q4 2019 | |||||||
| Net external revenues | 170,458 | 24,977 | 22,531 | 14,520 | 232,486 | -13,641 | 218,846 |
| Operating profit | 73,822 | 10,249 | 10,036 | -35,143 | 58,966 | 10,614 | 69,581 |
| Q4 2018 | |||||||
| Net external revenues | 98,921 | 45,112 | 28,371 | 15,944 | 188,348 | 86,168 | 274,515 |
| Operating profit | 41,736 | 23,303 | 20,876 | -17,506 | 68,409 | 77,504 | 145,913 |
| YTD 2019 | |||||||
| Net external revenues | 524,886 | 114,250 | 62,365 | 71,072 | 772,574 | -186,965 | 585,610 |
| Operating profit | 219,971 | 53,078 | 37,050 | -88,910 | 221,192 | -92,194 | 128,998 |
| YTD 2018 | |||||||
| Net external revenues | 356,395 | 144,137 | 52,717 | 68,431 | 621,680 | -7,441 | 614,239 |
| Operating profit | 131,579 | 69,176 | 19,735 | -48,543 | 171,947 | 58,078 | 230,025 |
There are no intersegment revenues between the reportable operating segments.
The Company does not allocate all cost items to its reportable operating segments during the year. Unallocated cost items are reported as "Other segments/Corporate costs".
Impact on Income Statement
| Q4 2019 | Q4 2019 | ||
|---|---|---|---|
| (All amounts in USD 1,000s) | As reported | Adjustments | Segment |
| Net revenues | 218,846 | 13,641 | 232,486 |
| Amortization and impairment of multi-client library | 95,627 | 24,255 | 119,882 |
| Total operating expenses | 149,265 | 24,255 | 173,520 |
| Taxes | 10,459 | 8,764 | 19,223 |
| Net income | 56,726 | -19,379 | 37,347 |
| 2019 | 2019 | ||
|---|---|---|---|
| (All amounts in USD 1,000s) | As reported | Adjustments | Segment |
| Net revenues | 585,610 | 186,963 | 772,574 |
| Amortization and impairment of multi-client library | 302,233 | 95,039 | 397,272 |
| Total operating expenses | 456,613 | 95,039 | 551,652 |
| Taxes | 31,758 | 28,178 | 59,936 |
| Net income | 99,453 | 64,016 | 163,469 |
Impact on Balance Sheet
| 31-Dec-19 | 31-Dec-19 | ||
|---|---|---|---|
| (All amounts in USD 1,000s) | As reported | Adjustments | Segment |
| Multi-client library | 1,091,294 | -260,492 | 830,803 |
| Deferred tax asset | 11,260 | -435 | 10,825 |
| Total non-current assets | 1,462,592 | -260,927 | 1,201,665 |
| Accrued revenues | 101,153 | 161,521 | 258,506 |
| Total current assets | 721,587 | 161,521 | 878,940 |
| Equity | 1,532,147 | 79,427 | 1,611,574 |
| Deferred taxes | 43,376 | 33,666 | 77,042 |
| Total non-current liabilities | 67,277 | 33,666 | 100,944 |
| Accounts payable and debt to partners | 108,087 | 66,343 | 174,430 |
| Other current liabilities | 443,935 | -283,009 | 160,926 |
| Total current liabilities | 584,755 | -216,667 | 368,088 |
Note 5 Multi-client library
| (Numbers in USD millions) | Segment Q4 2019 |
IFRS Q4 2019 |
Segment Q4 2018 |
IFRS Q4 2018 |
Segment YTD 2019 |
IFRS YTD 2019 |
Segment YTD 2018 |
IFRS YTD 2018 |
|---|---|---|---|---|---|---|---|---|
| Opening balance net book value | 888.5 | 1,124.7 | 749.6 | 902.6 | 726.1 | 870.5 | 799.0 | 799.0 |
| Adjustment opening balance | 0.2 | 0.2 | -0.8 | -0.8 | -3.1 | 0.0 | 0.0 | 78.9 |
| Non-operational investments | 3.3 | 3.3 | 0.0 | 0.0 | 165.5 | 183.5 | 6.5 | 6.5 |
| Operational investments | 58.8 | 58.8 | 63.4 | 63.4 | 339.6 | 339.6 | 256.9 | 256.9 |
| Amortization and impairment | -119.9 | -95.6 | -86.1 | -94.7 | -397.3 | -302.3 | -336.3 | -270.8 |
| Closing net book value | 830.8 | 1,091.3 | 726.1 | 870.5 | 830.8 | 1,091.3 | 726.1 | 870.5 |
| Net MC revenues |
227.0 | 213.5 | 185.7 | 271.9 | 754.4 | 567.4 | 613.3 | 605.8 |
| Change in MC revenue |
22% | -21% | 20% | 23% | -6% | 26% | ||
| Change in Operational MC investment |
-7% | -7% | 67% | 67% | 32% | 32% | -20% | -20% |
| Amort. in % of net MC revs. |
53% | 45% | 46% | 35% | 53% | 53% | 55% | 45% |
| Change in net book value | 14% | 25% | -3% | -5% | 14% | 25% | -6% | 5% |
| Contract Revenues | 5.5 | 5.5 | 2.6 | 2.6 | 18.2 | 18.2 | 8.4 | 8.4 |
Note 6 Related parties
No material transactions with related parties took place during the quarter.
Note 7 Changes in accounting standards
IFRS 16 Leases
IFRS 16 Leases is effective from the financial year starting at 1 January 2019. The new standard is replacing IAS 17 Leases.
The TGS Group has chosen the modified retrospective approach for the implementation of IFRS 16 Leases where comparative figures are not restated. The reclassifications and adjustments on implementation are recognized in the opening balance of 2019. The Group will apply transition reliefs where the lease asset will be equal to the lease liability at the transition date.
The Group has used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17.
- Applied the exemption not to recognize right-of-use assets and liabilities for leases with less than 12 months of lease term
- Excluded initial direct costs from measuring the right-of-use assets at the date of initial application
- Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease
As of 1 January 2019, the TGS Group recognized lease liabilities for properties and other assets. The liabilities were measured at the present value of the remaining lease payments. The remaining lease payments were discounted using the incremental borrowing rate as of 1 January 2019. The incremental borrowing rate applied was 4.45 %. As of 1 January 2019, a lease liability of USD 36 million was recognized. A corresponding right-of-use asset was recognized measured at a value of USD 36 million.
Below is a reconciliation of total operating lease commitments as of 31 December 2018 to the lease liability recognized at 1 January 2019.
| Non-cancellable operating lease commitments as at 31.12.2018 | 53,861 |
|---|---|
| Adjustments for property tax and other lease related costs not incl in lease commitment | -11,370 |
| Discounting using the incremental borrowing rate | -6,607 |
| Lease liabilities recognized at initial application | 35,884 |
| The weighted average incremental borrowing rate applied | 4.45% |
| The right-of-use asset recognized at initial application | 35,884 |
| Amount recognized in retained earnings at initial application | - |
Note 8 Økokrim charges and related civil matters
Reference is made to Note 23 to the 2018 Annual Report, which includes a detailed description of charges issued by Økokrim in 2014 and certain subsequent civil claims, including a claim by the Norwegian Government for losses arising from alleged unwarranted tax refunds arising from the transactions with Skeie and the claims of joint responsibility by Skeie and certain affiliated persons, as well as DNB. This note provides an update as to any matters that have occurred since 31 December 2018.
In October 2018, the Oslo District Court issued its decision following the trial on the charges earlier in 2018, holding TGS guilty and assessing a corporate fine of NOK 90 million (approximately USD 11 million) (which was as expected, due to the rejection of the fine in March 2017). The decision was split, with the majority holding TGS guilty, and the minority finding no guilt. TGS appealed the decision, which deferred the payment of any fine. The appellate trial before Borgarting Lagmannsrett began in November 2019 and will conclude in February 2020, with a decision expected mid-2020. Despite the Oslo District Court's decision, TGS maintains that it acted diligently in connection with the transactions with Skeie and did not commit the alleged violations of law. TGS believes that the Oslo District Court's reasoning in the verdict is both legally and factually inaccurate and is not reflective of the evidence presented at trial. Accordingly, the Company does not consider it probable that an outflow of resources embodying economic benefits will be required to settle the obligation and no provisions have been made. new acquisition, reprocessing and interpretation reports. Reconciliation of lease commitments to lease liabilites (USD 1,000) 01-Jan-19
The civil matters that have arisen relate to the transactions that form the basis for the Økokrim charges, and the outcome of these matters will depend in large part on the outcome of the Økokrim matter. Given the early stage of these proceedings, it is impracticable to render an accurate assessment of the outcome. However, consistent with the Company's belief that Oslo District Court's decision in the Økokrim case was erroneous and the appeal will confirm that TGS did nothing wrong, the Company also believes these claims of liability are not well-founded, and it intends to challenge the claims vigorously. As a result, the Company does not consider it probable that an outflow of resources embodying economic benefits will be required to settle the obligation and no provisions have been made.
Note 9 Business combinations & significant transactions
TGS-NOPEC Geophysical Company ASA has acquired 100 % of the outstanding ordinary shares in Spectrum ASA with effective date from 14 August 2019. The consideration for the acquisition was 0.28 x ordinary shares of TGS for each Spectrum share (the "exchange ratio"), in addition to a cash consideration of USD 0.27 multiplied by the exchange ratio.
Spectrum provides innovative multi-client seismic surveys and high-quality seismic imaging services to the global oil and gas industry from offices in the Norway, UK, USA, Brazil, Australia and Singapore. Spectrum designs, acquires and processes seismic data to deliver high quality solutions through its dedicated and experienced workforce. Spectrum holds the world's largest library of multi-client 2D marine seismic data and a significant amount of 3D seismic data. The company's strategy focuses on both the major, established hydrocarbon-producing regions of the world as well as key frontier areas identified by the experienced team of geoscientists. The Spectrum library of multi-client data contains projects from many of the foremost oil producing regions of the world. These include The transaction enhances TGS' position as a leading multi-client geophysical data provider with a 2D and 3D seismic data library covering all major mature and frontier basins worldwide. Spectrum has successfully built a substantial presence in the South Atlantic and other important frontier regions. With TGS' extensive library and financial robustness, the combined entity will be well positioned to accelerate 3D seismic investment plans in an improving market. Furthermore, the combined libraries will have a scale that will help accelerate TGS' data analytics strategy.
As the transaction was effective from 14 August 2019, the sales and costs from the acquired library for the period 15 August to 31 December 2019 are reflected in the TGS statement of financial position and in TGS' statement of comprehensive income.
The fair value of the goodwill represents the excess purchase price after all the identifiable assets, liabilities and obligations are recognized. The goodwill arising from the acquisition consists mainly of synergies and economies of scale expected from combining the operations of TGS and Spectrum. None of the goodwill recognized is expected to be deductible for tax purposes.
In the period from 15 August 2019 to 31 December 2019, the acquired Spectrum Group contributed with net revenues of USD 51.0 million, and profit before tax amounting to USD 9.3 million. This is reflected in the consolidated statement of comprehensive income for TGS. If the acquisition had been completed as of 1 January 2019, management estimates that consolidated net revenue for the 12 months ended 31 December 2019 would have been USD 690.9 million, and consolidated profit/loss before tax for the same period would have been USD 125.9 million. These amounts have been determined by applying TGS' principles and assumes that the fair values arising on the date of the acquisition would have been the same if the acquisition had occurred on 1 January 2019.
The following table summarizes the acquisition date fair value of each major class of consideration transferred.
| Consideration transferred (USD 1,000) | 14-Aug-19 |
|---|---|
| Cash | 4,341 |
| Equity instruments (16 076 047 shares) | 349,972 |
| Total consideration transferred | 354,312 |
The fair value of the ordinary shares issued was based on the listed share price of the company at 14 August 2019 of NOK 194.65.
TGS incurred acquisition-related costs of USD 2.0 million, consisting of legal fees and due diligence costs. USD 1.3 million have been included in operating expenses and USD 0.7 million have been recorded in equity as share issuance costs.
The following table summarises the preliminary fair value of assets acquired and liabilities assumed at the date of the acquisition.
Assets
| Segment opening |
|||
|---|---|---|---|
| Non-current assets | balance Adjustment | PPA | |
| Multi-Client library | 162,225 | 18,024 | 180,249 |
| Investment in Joint Ventures | 2,524 | - | 2,524 |
| Deferred tax assets | 13,277 | - | 13,277 |
| Software | 1,466 | - | 1,466 |
| Fixtures, fittings and office equipment | 1,599 | - | 1,599 |
| Right-of-use assets | 7,699 | - | 7,699 |
| Non-current other receivables | 5,035 | - | 5,035 |
| Total non-current assets | 193,826 | 18,024 | 211,850 |
| Current assets | |||
| Restricted cash | 2,291 | - | 2,291 |
| Cash and cash equivalents | 18,968 | - | 18,968 |
| Total current assets | 21,259 | - | 21,259 |
| Equity | |||
| Segment equity adjustment | -8,702 | 8,702 | - |
| Total segment equity adjustment | -8,702 | 8,702 | - |
| Non-current liabilities | |||
| Deferred tax liability | -6,886 | 3,879 | -3,007 |
| Long term interest bearing debt | -8,545 | - | -8,545 |
| Other long term liabilities | -10,809 | - | -10,809 |
| Total non-current liabilities | -26,240 | 3,879 | -22,361 |
| Current liabilities | |||
| NWC | -35,052 | -30,604 | -65,656 |
| Short term interest bearing debt | -8,465 | - | -8,465 |
| Other tax liabilities | -1,599 | - | -1,599 |
| Total current liabilities | -45,116 | -30,604 | -75,720 |
| Total identifiable net assets acquired | 135,028 | - | 135,028 |
The adjustment between the purchase price allocation (PPA) and the segment opening balance relates to sales amortisation of USD 18.0 million and net revenue of USD 30.6 million that are presented in the segment opening balance.
The Multi Excess Earnings Method (MEEM) has been applied for measuring the fair value of the multi-client library, as a market price for the individual assets does not exist. The MEEM have been estimated for each multi-client library by projecting the future cash flow for a period of four years for each multi-client library. The cash flow has been discounted with an average discount rate of 12.18%. The discount rate varies between the CGU's based on the geographical risks in the regions. The discount rate is based on, among other, a risk-free rate of 1.6 % and an asset beta ratio of 1.
The fair value of receivables is measured at USD 43.7 million (accounts receivable of USD 25.9 million and other receivables of USD 17.8 million classified as NWC). The gross contractual amounts of the receivables are USD 44.6 million. The best estimate of contractual cash flows not expected to be collected are USD 0.9 million.
Liabilities are measured at fair value. Contingent liabilities have not been recognized as these are not considered probable to occur.
Goodwill arising from the acquisition has been recognised as follows:
| (USD 1,000) | |
|---|---|
| Consideration transferred | 354,312 |
| Fair value of identfiable net assets | -135,028 |
| Goodwill | 219,285 |
| Deferred tax liability | -2,456 |
Total Goodwill 216,829
If new information obtained within one year of the date of acquisition, relating to facts or circumstances that existed at the date of acquisition that requires adjustments to the above amounts, or relating to additional provisions that existed at the date of acquisition, then the accounting for the acquisition will be revised.
Note 10 Correction of prior period misstatements
| 1 January 2018 | ||||
|---|---|---|---|---|
| (USD 1,000) | Previously reported | Adjustment | Restated | |
| Deferred tax liability | 23,721 | 19,093 | 42,814 | |
| Total non-current liabilities | 29,071 | 19,093 | 48,164 | |
| Other equity | 1,196,443 | -19,093 | 1,177,350 | |
| Total equity | 1,200,102 | -19,093 | 1,181,009 |
| 31 December 2018 | ||||
|---|---|---|---|---|
| (USD 1,000) | Previously reported | Adjustment | Restated | |
| Deferred tax liability | 29,261 | 19,093 | 48,354 | |
| Total non-current liabilities | 34,275 | 19,093 | 53,368 | |
| Other equity | 1,248,031 | -19,093 | 1,228,938 | |
| Total equity | 1,251,699 | -19,093 | 1,232,606 |
During 2019, the TGS Group discovered errors in the technical computation of temporary differences arising for non-monetary items in other currencies than USD when assessing tax positions. The Group has previously applied spot rates to calculate temporary differences in the tax calculations; in accordance with IAS 12 the historical rate shall be applied. This has been recognized as an opening balance adjustment of USD 8.9 million in the financial year 2018.
Further the TGS Group has adjusted the deferred tax liability related to TGS' Mexican branch. Due to timing differences between taxable revenue and costs between Norway and Mexico, part of the tax liability in the Mexican branch of one of the Norwegian Group companies will not be deductible under Norwegian taxation. This tax liability has been recognized in the balance sheet as an opening balance adjustment of USD 10.1 million for the financial year 2018.
In addition, the Company has revised the classification of accrued unbilled revenue and deferred revenue as of 31 December 2018. In the restated amounts as of 31 December 2018, accrued unbilled revenue are shown net of deferred revenue of USD 42.4 million.
There is no material impact on the Group's basic or diluted earnings per share in 2018 and no impact on the total operating, investing or financing cash flows for the year ended 31 December 2018.
DEFINITIONS – ALTERNATIVE PERFORMANCE MEASURES
TGS' financial information is prepared in accordance with IFRS. In addition, TGS provides alternative performance measures to enhance the understanding of TGS' performance. The alternative performance measures presented by TGS may be determined or calculated differently by other companies.
EBIT (Operating Profit)
Earnings before interest and tax is an important measure for TGS as it provides an indication of the profitability of the operating activities.
The EBIT margin presented is defined as EBIT (Operating Profit) divided by net revenues.
Prefunding percentage
The prefunding percentage is calculated by dividing the multi-client prefunding revenues by the operational investments in the multiclient library, excluding investments related to projects where payments to the vendors are contingent on sales (risk-sharing investments). The prefunding percentage is considered as an important measure as it indicates how the Company's financial risk is reduced on multi-client investments.
EBITDA
EBITDA means Earnings before interest, taxes, amortization, depreciation and impairments. TGS uses EBITDA because it is useful when evaluating operating profitability as it excludes amortization, depreciation and impairments related to investments that occurred in the past. Also, the measure is useful when comparing the Company's performance to other companies.
| Q4 2019 | Q4 2019 | Q4 2018 | Q4 2018 | |
|---|---|---|---|---|
| (All amounts in USD 1,000s) | Segment | IFRS | Segment | IFRS |
| Net income | 37,347 | 56,726 | 61,303 | 124,876 |
| Taxes | 19,223 | 10,459 | 8,407 | 22,339 |
| Net financial items | 2,396 | 2,396 | -1,302 | -1,302 |
| Depreciation, amortization and impairment | 10,268 | 10,268 | 2,197 | 2,197 |
| Amortization and impairment of multi-client library | 119,882 | 95,627 | 86,074 | 94,735 |
| EBITDA | 189,116 | 175,475 | 156,679 | 242,846 |
| 2019 | 2019 | 2018 | 2018 | |
|---|---|---|---|---|
| (All amounts in USD 1,000s) | Segment | IFRS | Segment | IFRS |
| Net income | 163,469 | 99,453 | 137,602 | 178,800 |
| Taxes | 59,936 | 31,758 | 41,090 | 57,971 |
| Net financial items | -2,213 | -2,213 | 6,746 | -6,746 |
| Depreciation, amortization and impairment | 23,503 | 23,503 | 8,897 | 8,897 |
| Amortization and impairment of multi-client library | 397,272 | 302,233 | 336,295 | 270,776 |
| EBITDA | 641,967 | 454,734 | 530,631 | 509,698 |
Return on average capital employed
Return on average capital employed (ROACE) shows the profitability compared to the capital that is employed by TGS, and it is calculated as operating profit divided by the average of the opening and closing capital employed for a period of time.
Capital employed is calculated as equity plus net interest-bearing debt. Net interest bearing debt is defined as interest bearing debt minus cash and cash equivalents. TGS uses the ROACE measure as it provides useful information about the performance under evaluation.
| 31-Dec-19 | 31-Dec-19 | 31-Dec-18 | 31-Dec-18 | |
|---|---|---|---|---|
| (All amounts in USD 1,000s) | Segment | IFRS | Segment | IFRS |
| Equity | 1,611,574 | 1,532,147 | 1,265,397 | 1,251,699 |
| Interest bearing debt | 2,809 | 2,809 | 2,500 | 2,500 |
| Cash | 323,408 | 323,408 | 273,527 | 273,527 |
| Net interest bearing debt | -320,598 | -320,598 | -271,027 | -271,027 |
| Capital employed | 1,290,976 | 1,211,549 | 994,370 | 980,673 |
| Average capital employed | 1,142,673 | 1,096,111 | 973,528 | 966,679 |
| Operating profit (12 months trailing) | 221,192 | 128,998 | 171,947 | 230,025 |
| ROACE | 19% | 12% | 18% | 24% |
Free cash flow (after MC investments)
Free cash flow (after MC investments) when used by TGS means cash flow from operational activities minus cash investments in multiclient projects. TGS uses this measure as it represents the cash that the Company is able to generate after investing the cash required to maintain or expand the multi-client library.
| (All amounts in USD 1,000s) | Q4 2019 | Q4 2018 | 2019 | 2018 |
|---|---|---|---|---|
| Cash flow from operational activities | 221,884 | 62,362 | 560,649 | 390,022 |
| Investments in multi-client library | -115,686 | -80,816 | -334,289 | -273,062 |
| Free cash flow (after MC investments) | 106,198 | -18,454 | 226,360 | 116,960 |
Backlog
Backlog is defined as the total value of future revenue based on segment reporting from signed customer contracts.