A 2022 story of negative divergence

Unlike peers that have enjoyed the upside momentum in the upstream investment cycle, CGG’s revenue growth stalled in the Q3, negatively affecting the company’s liquidity and increasing the leverage ratio whereas companies elsewhere in the sector made impressive progress on deleveraging. While the downward guidance revision is discouraging, the FY 2023 is expected to improve as projects have been shifted into next year

Q2 : Strong after sales

Good results with gains in DDE, thanks to very strong after sales ($88m vs $20m in Q2-21) and explaining the profitability, while Sensing & Monitoring was down 4% yoy at $46m. After sales were driven by transfer fees and sales in Latin America. All in all, the release confirmed the management’s positive outlook, seeing a favourable multi-year upcycle in capex spending.

Q1: miss but positive outlook remains intact

The Q1 results were below consensus with segment revenue of $153m, showing a 24% decline yoy, particularly due to low activity in Sensing and Monitoring, with revenue down 70% yoy. However, note that the 2022 outlook has been maintained. This is supported by the increasing level of commercial activity and management is expecting an acceleration in client decision-making during H2.

Q4: positive guidance

Positive results, confirming the trading update published in January. The recovery is a progressive one but the guidance for FY22 is above our estimates (EBITDA guided at c. $480m vs $450m in our estimates). Capital discipline remains in the sector but the group seems confident for FY22 as it is increasing its spending (Multi-Client spending at $200m vs $165m in FY21).

Q3: confirming the positive outlook

Positive release with EBITDA rebounding after the weak Q2. Management sees a solid Q4 in all businesses and therefore confirms the guidance for FY21. Management said that International Oil Companies are spending “well below” their allocated budgets this year. While some of this will ultimately go to the shareholders, we believe this, together with a strong oil price, supports a good Q4/H1 22.

Q2: weak H1, guiding for a stronger H2

Revenues were down 26% qoq with a pick-up in GGR sales (+10% qoq), more than offset by a decline in Equipment (-58% qoq). As International Oil Companies maintain a strong capital discipline, the outlook is revised with FY21 revenue to be flat yoy (vs low single-digit growth) and EBITDA at around $310m. This compares to an EBITDA of $78m for H1, and implies a strong ramp-up in H2.

Q1: weak quarter, outlook remains positive

Management hinted at a soft Q1 and this proved to be right. Segment revenues are down 21% yoy and EBITDA by 71% as equipment take a large share of the mix (53% vs 28% in Q1 20) with very low GGR revenues. At least CGG managed its working capital and spending to generate $28m of cash. Management is optimistic about H2 as it has seen commercial activity increasing since March on the back of higher oil.

Q4: capital discipline to prevail

EBITDA is up 48% qoq, slightly above consensus, but cash shows another working capital build. Liquidity is down 35% yoy, which might cause concern. The outlook guides for a small revenue increase, and stable EBITDA on a different sales mix. The environment remains challenging and CGG is cutting investments to focus on cash generation. No surprise, as there will not be a dramatic increase in spending this year, although a higher oil helps visibility.

Q3: revenues stabilise, more is needed

A mixed bag with revenues down 48% yoy but stable qoq, while the adjusted EBITDA improve by 18% qoq. However, the segment free cash flow deteriorated ($-59m), with a working capital build ($38m). Multi-client after-sales picked up, partly offset by lower pre-funding. Meanwhile, the activity weakened in geoscience and equipment. Cost reductions help the group in coping with this crisis, but the activity will need to rebound soon, as liquidity is down $159m since Q1.

Q2: mixed results

Revenues and segment EBITDA were in line with consensus, but non-recurring charges amounted to $94m in the quarter mainly on goodwill and asset impairment, leading to a net loss of $147m. Net cash flow was at $-77m (-$60m for H1 20). The guidance remains vague, which unfortunately will not help in understanding when the activity will restart.

Q1: capex cut before the inevitable slowdown

Most of the positive news from this release was already announced in the trading update. On the outlook, as the 25-30% cut in exploration investments will undoubtedly impact CGG’s turnover (particularly in multi-client after sales), the group focuses on delivering its backlog and reducing its own spending. Lastly, during the conference call, management said it has not received any cancellation of committed orders, which somehow validates the $256m backlog.

Q4: uncertain outlook blurs the performance

During the call, management discussed the possible reintroduction of the dividend in 2021. In our view, this reflects CGG’s remarkable turnover since the announcement of the strategic plan. Indeed, in 2019, the cash generation and operational performance have been improving, with good progress towards the 2021 targets. Yet, the lower oil price is weighing on the outlook. Even in an asset-light form, CGG will not be immune to lower spending from E&P companies, a likely outcome with oil at $50.

Q3: strong Multi-Client sales lift EBITDA

The release follows a positive trading update, which saw an increase in guidance. The quarter saw strong Multi-Client sales, even excluding exceptional one-offs and accelerated sales. Furthermore, the group is making good progress in its strategic partnership with Shearwater and is in advanced discussions for the sale of the multi-physics business.

Q2: strong land equipment in H1 to cool down in H2

The good results were toned down by management lacking visibility in H2 on the demand stemming from seismic “megacrews” that had supported growth in H1. The quarter remains positive with cash generation in continued operations and the strategic partnership signed in marine acquisition.

Q1: strong growth in land equipment

Good results from CGG, given the traditionally low seasonal quarter. Revenue is up 20% yoy at $282m, due to a 93% yoy increase in Land Equipment sales ($85m). An important feature of this release is the strong operating cash flow before working capital movement at $100m (vs. $-18m in Q1 18), confirming the good performance since the last quarter and putting CGG on the right track to reach its 2019 guidance (segment FCF targeted at $175-200m).

Alkaid #2 test - follow-on potential project economics

Forecast update

Diversified Energy will report a FY22 update in February and ahead of this we update our estimates for the lower gas price while also highlighting that the group's unique operating model substantially protects it from lower gas prices and higher interest rates, thereby ensuring it remains well placed to pay one of the highest dividend yields in the FTSE350.

Arrow Exploration Corp. (AIM: AXL): High 3Q22 production in Colombia and US$4 mm free cashflow

• 3Q23 production of 1,503 boe/d was above our expectation of 1,262 boe/d on higher production at Rio Cravo (860 bbbl/d) and Ombu (215 bbl/d). This suggests a continued strong performance of the RCE-2 well. • Corporate production in November has ranged between 1,900-2,000 boe/d with current net production of 887 bbl/d at Rio Cravo (up from 760 bbl/d on 01 November). While the RCS-1 well is still cleaning up, the newly perforated C-7A zone is already adding 165 bbl/d net (330 bbl/d gross) produc

This Week's AIM Highlights 20th January 2023

i3 Energy - Valuation Update

We are adjusting our fair value estimate for i3 Energy to align our commodity price estimates with weaker actual pricing than we had anticipated. We are lowering our 2023 WTI estimate to $84/b from $99/b and lowering our 2023 benchmark US gas price estimate to $5.50/mmbtu from $6.50/mmbtu. We have also updated our model to reflect the capex and production guidance provided by the company on 22 December 2022. Our updated 2023 cash flow from operations estimate amounts to $US109.6M, which equa

IOG (IOG LN) - Trading update

IOG has released a trading update. This reports that operations at the Southwark A2 development well continue, with new plans to isolate three of the six stimulated zones, reperforate two other zones and then flow test the well again. IOG reported last week a disappointing 4.2mmcf/d maximum gross flow rate achieved at A2, and we would hope to see a much higher number, perhaps over 20mmcf/d based on original expectations, once the remediations are in place. The experience on A2 is also being used

Q1 2023 Operational Update

Tharisa has released its production report for Q1 2023 today. The quarter has been impacted by unprecedented rainfall at the Tharisa mine. However, the company was able to minimise the impact on production through the use of their stockpiles to maintain plant throughput. PGM and Chrome concentrate production reduced by 6% and 8% QoQ respectively. Gross and net cash have increased by 49% and 29% respectively, in part due to the successful bond raise of US$31.8m and the continued strong free cash

Tungsten West: Revised plan to optimise Hemerdon for higher energy prices & other costs

Tungsten West (“TUN”) has published an updated Bankable Feasibility Study (“BFS”) post its re-optimisation of the Hemerdon project in light of higher energy prices and other key input costs. The revised plan reduces capex by ~£20m and cuts energy intensity, trading this off against slightly reduced tungsten output and lower payabilities. The completion of the BFS is a key milestone on the path to securing project financing. Site refurbishment and staff recruitment activities have continued since

Q4 Production Update

Shanta Gold (AIM: SHG), the East Africa-focused gold producer today released a production and operational update for Q4 2022 which was effectively in line with expectations. The Company did just miss its 2022 guidance set 12 months ago (68-76koz) producing 65.2koz but AISC was within the range guided at US$1,270/oz. The CEO, Eric Zurrin, commented that there are numerous initiatives underway for 2023 to optimise production including more open pit mining capacity and an extra underground producti

i3 Energy - Historical evolution of EV/CF multiples in Canadian E&P Sector + Comps

Figure 1 provides the historical EV/CF multiples for selected high-growth peers of i3 Energy operating in Canada. Table 1 provides the EV/CF multiples for our selection of the “best of the best” of Canadian junior E&P stocks, of which i3 Energy is one. We highlight that i) the outlook for the oil price has rarely been so robustly supported into the long-term and ii) the wells being drilled systematically in Canada today are some of the most economic wells being drilled by Canadian E&P companies

Hybridan Small Cap Feast - 17 Jan 23

17 January 2023 @HybridanLLP Status of this Note and Disclaimer This document has been issued to you by Hybridan LLP for information purposes only and should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This document has no regard for the specific investment object

Hybridan Small Cap Feast - 25 Jan 23

25 January 2023 @HybridanLLP Status of this Note and Disclaimer This document has been issued to you by Hybridan LLP for information purposes only and should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This document has no regard for the specific investment object

SHORE CAPITAL - Scotgold Resources+ (SGZ, House Stock at 54.5p)

Zephyr Energy Plc (AIM: ZPHR): Paradox well encounters substantial hydrocarbons while drilling

• The State 36-2 LNW-CC well in the Paradox basin encountered a significant influx of natural gas and condensate from the Cane Creek reservoir. The well has been stabilized and currently has a high flow rate to surface where production is currently being flared. • The influx was caused by the well intersecting an apparent major natural fracture network in the reservoir. • Encountering natural facture networks has historically been the key to delivering major wells in the basin. For instance, th

West Kenya Project Resource Update

Shanta Gold (AIM: SHG), the East Africa-focused gold producer has this morning released an update on the resource at its West Kenya Project (WKP). The total resource at WKP has increased from 1.55Moz to 1.7Moz with more ounces in the indicated category – see fig1. Within this is the Kakamega camp which has 1.3Moz grading 10.6g/t of which 722Koz are now in the indicated category.