Michael Rae, an analyst at Goldman Sachs (NYSE: GS), in mid-January published a research report warning that lower oil prices would sap demand for marine seismic services in 2014, while planned capacity additions would exert further pressure on day-rates in 2015.
Rae’s negative outlook for the industry prompted him to cut his rating of Petroleum Geo-Services, a pure play on marine seismic, to a sell from a buy. The analyst also downgraded shares of Compagnie Generale de Geophysique Veritas (Paris: CGG, NYSE: CGG), while maintaining his neutral rating on TGS Nopec Geophysical (Oslo: TGS, OTC: TGSNY), which stands to benefit from lower day-rates because its asset-light business model involves leasing vessels to build its library of multi-client seismic surveys. Accordingly, shares of TGS Nopec Geophysical, which had lagged the competition prior to 2013, have rallied in recent weeks.
Over the past few years, providers of marine seismic services have enjoyed a significant spike in sales of multi-client surveys in the fourth quarter, as exploration and production companies seek to allocate the remainder of their capital expenditures. However, with the exception of TGS Nopec Geophysical, which grew its late multi-client survey sales by 39 percent from year-ago levels, this revenue bump fell short of expectations in the fourth quarter of 2012.
Petroleum Geo-Services, for example, suffered a disappointing 38.8 percent decline in late sales, while Compagnie Generale de Geophysique Veritas posted a 53 percent drop in fourth-quarter late sales of multi-client surveys. But investors shouldn’t read too much into these shortfalls: Fourth-quarter sales activity hinges on the geographic mix of a company’s multi-client survey library and its exposure to upcoming licensing rounds. Several management teams in the industry attributed this disappointment to delays in the official announcement of Brazil’s highly anticipated licensing rounds for offshore blocks. Although not necessarily a sign of deteriorating fundamentals, these hiccups also spooked investors.
After turning in an impressive performance in 2012, the group was due for a breather. For one, many of these stocks traded in a tight price range heading into year-end, unable to breach their 52-week highs. And with the global fleet of seismic vessels operating at elevated utilization rates, continued pricing improvements and a tight supply-demand balance represent the biggest upside drivers for industry profit margins.
Although we’re not surprised that shares of marine seismic-service providers have pulled back in recent trading sessions, we see several reasons to remain bullish on this highly cyclical industry in general and shares of Petroleum Geo-Services in particular.
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