eu oilfield services industry report

www.jpmorganmarkets.com

Europe Equity Research

19 January 2015

Equity Ratings and Price Targets

Mkt Cap Price Rating Price Target

Company Ticker ($ mn) CCY Price Cur Prev Cur Prev

Cape CIU LN 352.20 GBp 192 N OW 203 350

CGG CGG FP 990.82 EUR 4.84 UW N 3.80 7.20

Gulf Marine Services GMS LN 482.97 GBp 94 OW N 120 165

Lamprell PLC LAM LN 394.15 GBp 100 OW n/c 131 154

Petroleum Geo-Services PGS NO 1,110.43 NOK 38.94 UW n/c 30.00 24.00

Tecnicas Reunidas TRE SM 2,186.58 EUR 35.19 UW OW 29.00 47.00

TGS Nopec TGS NO 2,348.57 NOK 172.30 N n/c 165.00 127.00

Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 16 Jan 15.

European Oilfield Services

U-shaped oil price recovery may lead to multi-year

down-cycle; 2015 E&P capex to decline by 15%+

Oil Services & Equipment

Rahul Bhat AC

(44-20) 7134-9059

[email protected]

Bloomberg JPMA BHAT

Daniel Butcher

(44-20) 7742-8701

[email protected]

Fred Lucas

(44-20) 7134-5943

[email protected]

James Thompson

(44-20) 7134-5942

[email protected]

J.P. Morgan Securities plc

For Energy Specialist Sales

advice, please contact

Ian Mitchell

(44-20) 7134-1356

[email protected]

See page 50 for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

We see a challenging year ahead for the oilfield services sector. We expect a

U-shaped rather than V-shaped oil price recovery with prices likely to

languish below $60/bbl for the next couple of years. Our updated E&P capex

survey now shows planned 2015 spending to decline by ~9% YoY (vs. -5%

just one month ago). We believe that capex cuts are trending to exceed the

15% cut witnessed in 2009 without a rebound in 2016. We think the seismic

and offshore drilling sectors are generally at the greatest risk from these capex

cuts, although each company is positioned differently. We upgrade GMS to

OW and downgrade Tecnicas to UW, CGG to UW and Cape to N.

Global E&P capex likely to fall by >15% in 2015. Our proprietary global

upstream capex survey shows the planned aggregate reduction is 9%, with

the steepest cuts in the Independents (-22%), then IOCs (-8%) and NOCs (-

1%). If the oil price stays below $60/bbl as we forecast, during 2015 capex

cuts could exceed 15%, and 2016 could bring a second consecutive year of

capex cuts. This is concerning for high-beta stocks on page 9 we show

their exposure to a both a downturn and recovery.

Upgrade GMS to Overweight. GMS has high 2015 revenue coverage

(72% on firm contracts, 78% with options, 91% all-in), high exposure to

resilient ME NOCs opex spending, a reasonable balance sheet, and screens

cheap at 2015E P/E of 4.7x.

Downgrade Tecnicas to Underweight. The shrinking 2015 bid pipeline

may lead to contraction of backlog. TRE is a quality EPC contractor, in our

view, but its premium valuation 10.2x P/E is difficult to justify in the current

environment.

Downgrade CGG to Underweight. We believe the seismic market is in the

midst of a multi-year down-cycle. We expect CGG's asset heavy Acquisition

and Equipment businesses to fare poorly in a market that probably requires

structural change. We anticipate further earnings downgrades as the market

weakens. Our SOTP of 3.80 implies a 22% downside.

Downgrade Cape to Neutral. Risks of deferral of work in UK offshore and

low revenue coverage (50-60%) leave Cape highly dependent on order

intake in a weak market environment. Solid cash flow and dividend yield

provide some support; but we do not see enough upside at current levels.

Figure 1: Upstream Y-o-Y capex growth

Source: Company reports

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2Europe Equity Research

19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Table of Contents

E&P capex survey update........................................................3

Onshore/Offshore spending index............................................................................5

Overview of 2015 budgets.......................................................................................5

OFS sector revenue growth trend.............................................................................6

Lower for longer: OFS sector multiples .................................6

European OFS oil beta ...........................................................9

OFS sub-sector positioning for an oil price recovery ..............................................11

Further downside: misplaced optimism on margins ...............................................13

Silver lining: Possible M&A activity increase .......................................................15

Cape .....................................................................................................................18

CGG .....................................................................................................................20

Gulf Marine Services ............................................................................................23

Lamprell PLC .......................................................................................................26

Petroleum Geo-Services ........................................................................................27

Tecnicas Reunidas.................................................................................................29

TGS Nopec ...........................................................................................................32

Investment Thesis, Valuation and Risks ..............................39

Appendices

Appendix I: Methodology of the E&P capex survey ............34

Appendix II: Detailed capex breakdown...............................35


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

E&P capex survey update

We have refreshed our global upstream capital spend data for as many of the 99

companies that our proprietary survey spans. Preliminary 2015 capex budgets from

80 companies show deepening cuts by Independents, IOCs and NOCs alike. We now

measure an 8.9% capex decline in 2015, but caution that it is still early days. We

expect further capex cut announcements to come through with companies Q4

results. We believe 2015 capex cuts may be worse than what we witnessed in 2009

when spending fell 15%. A stronger US$ may exacerbate this trend, since not all

capex is US$-denominated. Both our onshore and offshore spend barometers show

weakness in 2015. As activity slows and deflationary pressures build, the outlook for

OFS suppliers remains very challenging.

In aggregate the National Oil Companies are budgeting a -1.2% decline in

upstream capex in 2015 (down from +0.6% growth earlier). The low oil price will

likely erode NOC spending capacity and probably cause the deferral of some

projects.

In aggregate the International Oil Companies are budgeting an -8.1% cut in

upstream capex in 2015 (down from -7.3% earlier). IOCs continue to moderate

their growth ambitions, capital intensity, and drive deflationary pressures on their

supply chains. We expect aggregate budgeted cuts to fall further as more IOCs

present their 2015 capex budgets along with their Q4 2014 results.

In aggregate the Independents are budgeting a -22.2% cut in upstream capex in

2015 (down from -10.8% earlier). The Independents are the group that is most

sensitive to the oil price and this could fall further as cash preservation and

balance sheet protection become the mantra in this oil price environment. In the

US, Independents are budgeting a capex cut of -20.0% (down from -8.2% earlier)

in 2015, reflecting reduced liquidity to fund capex. International independents are

budgeting a capex cut of -27.5% (down from -24.7%), while Canadian

Independents are budgeting a capex cut of -24.7% (down from -6.5%), reflecting

deferral of some higher cost Oil Sands projects.

2015 capex decline underscores the big challenge for OFS: History shows a

very strong correlation between upstream capex change and the average

European OFS sector revenue growth. This makes us wary that consensus

European OFS revenue growth in 2015 is still +4%. Indeed, the historical

correlation suggests that the OFS sector has more downgrades to come. Most oil

companies have announced flexible capex budgets for this year; with scope for

further reductions. We continue to expect 2015 capex cuts to focus more on

discretionary spend categories such as higher risk exploration rather than lower

risk infield drilling. Although given the level of capex cuts expected and the

lower for longer oil price, we could see the deferral of several marginally

economical projects. As a result, we see further downside risk for the whole OFS

sector with the asset heavy marine seismic companies (PGS UW, CGG UW)

expected to fare the worst.


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Table 1: Aggregate organic exploration and production capital expenditure, sector revenue growth and global rig count data

Source: Company reports, Bloomberg; 1. USD based on Bloomberg consensus data for Amec, Cape, CGG Veritas, Hunting, Lamprell, Petrofac, PGS, Saipem, Seadrill, Subsea 7, Technip,

Tecnicas Reunidas, TGS Nopec and Wood Group; 2. exploration and development spending split not disclosed by all companies. 2015 spending change estimate is based on smaller sample of

companies which have disclosed 2015 capex on a like-for-like sample basis.

Figure 2: Y-o-Y change in organic upstream capex for NOCs, IOCs and independents

Source: Company reports

Year Initial Current/ Actual Prior year YoY Sector1 Onshore Offshore Total Avg. Explor- Develop- Explor-

budgets final spending like-for-like change revenue avg. rig avg. rig avg. rig Brent ation ment ation

budgets spending growth count count count crude spending2 spending2 share2

($m) ($m) ($m) ($m) (%) (%) (%) (%) (%) ($/bbl) ($m) ($m) (%)

2003 133,500 na na +24 -2 +19 28.4 19,603 83,719 19.0

2004 143,869 149,552 150,535 133,500 +12.8 +12 +1 +10 38.0 21,955 96,679 18.5

2005 171,647 184,682 193,663 149,712 +28.6 +16 +6 +15 55.2 29,502 129,832 18.5

2006 225,238 236,044 240,444 193,337 +24.2 +12 +0 +11 66.4 41,559 171,478 19.5

2007 298,877 297,551 319,306 239,986 +32.8 +22 +3 -1 +2 72.6 50,348 225,183 18.3

2008 340,852 348,482 389,328 314,754 +21.9 +14 +8 +0 +7 97.8 60,845 251,756 19.5

2009 340,825 327,465 332,229 388,689 -14.7 -8 -33 -12 -31 62.7 56,938 235,853 19.4

2010 354,033 358,395 370,453 330,836 +11.5 +3 +33 +6 +30 80.2 61,994 268,460 18.8

2011 420,764 432,848 436,782 369,439 +17.9 +16 +18 -0 +16 110.4 75,628 315,218 19.3

2012 479,243 485,190 519,764 436,767 +19.0 +9 +1 +4 +2 111.2 86,744 380,490 18.6

2013 545,161 542,924 571,911 519,764 +10.0 +4 -4 +7 -3 108.4 79,065 370,558 17.6

2014E 592,506 584,180 571,911 +2.1 -0 +5 +2 +5 99.4 41,444 231,516 15.2

2015E 482,982 530,012 -8.9 +4 50.4 13,435 83,966 13.8

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2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E

%

NOCs IOCs Independents Total


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Onshore/Offshore spending index

Figure 3: Estimated change in onshore & offshore spending

Source: J.P. Morgan estimates, Company data.

In 2015, we see both onshore and offshore capex falling (Figure 3). Onshore capex

showed relative strength in 2014, reflecting rising capital spending in US onshore

shale plays. Due to the recent softening of the oil price, however, capital spending in

US shale has been slowing down. Relatively high cost offshore capex is also

expected to continue its downward trend for the third successive year as offshore-

biased IOCs look to moderate capex, rebalance cash flows and protect cash returns to

shareholders.

Overview of 2015 budgets

Since our last survey was published (December 2014), we highlight a few of the

major capital budget updates for 2015.

Suncor: Suncor cut its 2015 capital spending program by $1bn, from C$7.2-

7.8bn to C$6.2-6.8bn this month. Of this total capital budget, the amount that it

expects to spend on upstream-related activities is C$5.6bn (at the midpoint of the

range), which in US$ terms represents an 8% reduction Y-o-Y. Suncor also

announced operating expense reduction of $600-800m over the next two years.

Crescent Point Energy (CPE): CPE announced a $1.45bn capex budget for

2015, which is 26% below its 2014 budget of $1.95bn. CPE also highlighted that

its budget assumed a 10% reduction in oil service costs but it could see greater

cost reductions if the low oil price persists.

MEG Energy: MEG Energy announced its 2015 capital budget of C$1.2bn in

early December. The continued collapse of the oil price prompted it to revise its

budgets lower to C$305m (down by c.75%) in mid-December.

Encana: Encana announced a 2015 capital budget of $2.7-2.9bn. This is an

increase of 10% from its 2014 budget of $2.55bn. The company highlighted that

it is focused on driving further cost efficiencies throughout its services supply

chain.

Pacific Rubiales: Pacific Rubiales announced a 2015 capital budget of $1.5bn in

early December. It then reduced its capex guidance to $1.1-1.3bn in mid-January,

this is down 48% Y-o-Y at the midpoint. The company also highlighted its

expectations of lower service costs for the year.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E

Change in offshore spend (%) Change in onshore spend (%)


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

OFS sector revenue growth trend

Figure 4: E&P capex Y-o-Y change and oil services revenue growth 2007-15E

Source: J.P. Morgan estimates, Company data, Bloomberg consensus estimates.

Oil Services sector revenue growth outpacing E&P capex: Historically, the

European Oil Service sectors average revenue growth has closely tracked global

upstream capex growth (Figure 4). We note that the average consensus revenue

growth expected in 2014 has fallen from +11.7% in May to +4.7% in September to

+1.9% in December to -0.4% in January (below the capex growth expected in 2014).

However, for 2015, the average consensus revenue growth is still expected at +4%

(down from +5.8% in December). This may well be at risk given our preliminary

2015 capex data point to a -8.9% fall in capex. We expect service sectors that are

exposed to discretionary exploration spending (seismic and drilling services) to be hit

more than other sub-sectors.

Lower for longer: OFS sector multiples

With the OFS sector heading rapidly towards a potential drawn out cyclical low in our

view, a key question is, what is the appropriate valuation multiple to use? Over the last

dozen years, the simple annual average P/E has ranged from a minimum of 8.8x

(current) to a maximum of 17.9x (2003) with a substantial dip along the way at 10.5x

(the 2008/09 oil price crash).

Figure 5: Sector P/E (year average) versus oil price and E&P capex change yoy (%)

Source: Bloomberg, J.P. Morgan estimates

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19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

A key issue for investors currently is what valuation multiple the sector will trade

towards in the short term. The oil price crash of 2008/09 provides the nearest in time

analogy, and the most meaningful sample size. However, we think this oil price and

sector downturn will be more severe than that of 2008/09, and therefore the likely

floor valuation multiple in 2015 must be lower, too. Some factors we considered in

concluding this are discussed below.

1. Lower for longer oil price doldrums may last longer than in 2008/09

We think there is a good probability that the current oil price slump will take years to

rebalance. We believe that as a base case, OPEC may be broken, for now, and will

not make timely production cuts. Lower prices are already curbing the growth in

emerging suppliers such as US shale. This is likely to result in a delayed U-shaped

oil price recovery, in contrast to the previous crash in 2009 which was a quick V-

shaped recovery. We think the most likely price is $49/bbl 2015, $57/bbl 2016,

$65/bbl 2017 and $75/bbl in 2018 (JPMe).

Figure 6: Historical Brent oil price ($/bbl) and JPM forecasts

Source: J.P. Morgan estimates, Bloomberg.

Table 2: Revised Brent oil forecasts

2015E 2016E

Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY LT

New 42.0 43.0 53.0 58.0 49.0 50.0 52.0 60.0 65.0 56.75 90.0

Prior 75.0 80.0 85.0 98.0 82.0 85.0 88.0 90.0 88.0 87.8 90.0

Source: J.P. Morgan.

The max-min fall in 2008/09 was very large ($146 to $36) compared to the present

situation ($115 to $46). However the oil price fall began in mid-2008 and recovered

substantially by mid-2009. Due to its quick recovery it was only below US$80/bbl

(which is the bottom of the range of long run marginal cost estimates) for around 13

months.

Furthermore, at the beginning of 2009, the consensus 2010 forecast was somewhat

robust at $74/bbl despite a spot price of low $40s. The market expected a healthy

rebound in prices (a V-shaped recovery) for most of 2009, only wavering for a few

months in the middle of 2009, when 2010 prices were expected to be in the $60s.

(Figure 7).

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Historical JPMe

"V" recovery 2009"U" recovery 2015-17e


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Figure 7: Median Brent oil forecasts over time

Source: JPMorgan, Bloomberg

2. E&P capex may fall more than the 15% in 2009 and stay lower

Capex budgets in 2009 benefitted from both spot price and expectations for 2010

being >$70/bbl for over half of 2009. Yet capex for the full-year dropped by 15%.

Our proprietary upstream capex survey shows that capex intentions for 2015 are

down 9% already which is a decrease of -4% versus just one month ago. We think

the fall in 2015 will be greater than in 2014 if oil outlook is close to our house

forecasts. It should also take longer for capex levels to recover if our base case

2016/17 oil price scenario is correct. This forecast implies oil will not revert back to

a reasonable incentive price for new production for 2 or 3 years.

We think a 15-20% aggregate fall in oil & gas upstream capex is a reasonable

assumption for 2015. We also think that investment could fall a further 5-10% in

2016 as the prices and the volume of backlog to support it also falls.

3. Valuation multiples should reflect lower for longer customer spending

Currently the Euro OFS industry trades on a 8.4x P/E. The 2009 full-year average

was 10.5x, but it is still well above the 2009 intra-year trough average of ~6x.

The P/E applied to a potential 24-36 months of low activity and slow rebound should

be lower than the P/E average across a year which mostly reflected expectations of

temporary fall in activity with a strong rebound.

We think the market is still too optimistic about where valuations might go on a one-

year view. It seems to believe too much in OPECs willingness to act cohesively or

Saudis willingness to act unilaterally this year.

We therefore think that the average P/E multiple for 2015 should reflect further

potential downside to market expectations if our bearish "lower for longer" scenario

eventuates (see discussion above).

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19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

We believe a discount to the 2009 average of at least 25% is justified. This suggests a

sector average P/E of 8x until the flood of bad news reduces and recovery becomes

evident.

We would not apply our 8x sector average multiple to every stock. Rather we apply a

premium or discount based on previous sub-sector lows, and subsector/company oil

beta.

In the following section, we look at the theoretical oil betas to a sharp decline in oil

companies spending and a U- or V-shaped oil price recovery.

European OFS oil beta

The 47% oil price decline in 2014 has resulted in oil companies cutting capex across

the board. Our global E&P capex survey now estimates a capex decline of 8.9% in

2015 (down from 5.1% a month ago). We expect capex to fall further as oil

companies continue to revise their budgets taking into consideration a lower oil

price. JP Morgans commodity team forecasts an average oil price of $49/bbl for

2015 and $57/bbl in 2016 which we believe sits below consensus in both years. With

the key drivers of oil field services deteriorating, we explore the potential high beta

names among the European oilfield service companies.

Capex exposure vs opex

We expect the falling E&P capex to have the most effect on companies that derive a

large portion of their income from capex-related activities and are more exposed to

the upstream part of the value chain. From Figure 8, we see that only two companies

derive almost their entire income from capex-related activities TGS and Tecnicas

Reunidas (TRE). Seismic companies in general receive a very large portion of their

revenues from capex-related activities (TGS, PGS and CGG). TRE on the other

hand, being an EPC company, has a large exposure to the capex market. Other EPC

companies like Saipem (SPM), Technip (TEC) and Petrofac (PFC) derive some

portion of their revenues from opex-related activities and hence rank lower on this

scale. On the other end of the spectrum, operations & maintenance (O&M) focused

companies like Cape and GMS naturally derive a larger portion of their income from

opex-related activities. Although we believe that O&M-related activities may also be

weak in 2015, we believe it will be affected to a lesser extent than capex-related

activities.

10


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Figure 8: Euro OFS capex exposure as a % of revenue


Upstream vs. downstream exposure

Upstream produces raw products such as crude oil, and the weak oil price signal

directly adversely affects construction and production volumes. Downstream, by

contrast, is a transformative process and some projects can benefit from the lower oil

prices. Most companies in the European OFS space are exposed to upstream

spending. Some sub-sectors like drilling (SDRL), seismic (PGS, CGG and TGS), oil

country tubular goods (HTG, VN, TEN) etc. are exposed purely to upstream-related

spending. Only companies under the Engineering (AMFW, WG/) and EPC (TRE,

PFC, SPM, TEC) sub-sector have exposure to downstream-related spending. Notable

among them is TRE, which derives c.70% of its revenues from downstream-related

projects. While we expect some spending slowdown in downstream-related

activities, it may not be as weak as upstream spending.

Asset intensity

The falling oil price and capex can affect asset heavy companies with the risk of low

asset utilization the most. This is because asset heavy operations usually have high

fixed costs and low variable costs. So, margins for cash breakeven can be competed

to very low levels until it forces some asset/firms to retire/withdraw. Among the

European OFS space, we see GMS and CGG as some of the most asset heavy

companies. GMS owns lift boats (or SESVs) that provide well intervention and

other support services to offshore wells. CGG has a fleet of 13 seismic vessels and

also owns equipment manufacturing facilities. On the other end of the spectrum, TGS

and TRE are two asset light companies that we currently cover. Although TGS is a

seismic company, it does not own any vessels and usually charters vessels on a

project-by-project basis. TRE, an EPC company, sub-contracts its construction work

and thus does not own any yards or related assets.

Operational leverage

Most asset-heavy companies are naturally operationally levered, although some asset

light companies also show significant operational leverage. This means that earnings

will likely fall disproportionately in response to declining revenue in the downturn,

due to inflexible cost bases. Notable among these in the European OFS space is

Cape, which has relatively low asset intensity but high operational leverage due to

the labor-intensive nature of its business.

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TGS TRE SPM HTG SDRL LAM PGS SUBC CGG AMFW TEC PFC WG/ GMS CIU

Capex exposure

11


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Financial leverage

Financial leverage magnifies the impact of operating profit changes; it is a double-

edged sword. In a severe downturn, large debt obligations can lead to liquidity issues

and force asset sales at unfavorable prices, among other things. We use consensus

ND/EBITDA as a proxy for the financial leverage of a company. Among the

European OFS companies, Seadrill (SDRL) is amongst the highest-levered

companies. It has a 2015E ND/EBITDA of 4.6x based on Bloomberg consensus. On

the other end of the spectrum we have TRE, TGS, TEC (Technip) and LAM

(Lamprell) which are net cash companies.

Table 3: European OFS - Theoretical oil price beta

Source: JP Morgan estimates

Overall, we believe the theoretical oil price beta of a company should be high if it

has (i) high exposure to capex-related activities; (ii) high upstream exposure; (iii) an

asset heavy business; (iv) high operational leverage; and (v) high financial leverage.

OFS sub-sector positioning for an oil price recovery

Brent oils 59% fall in the last six months has led to the European OFS sector losing

c.39% of its market cap and 2014 consensus revenue expectations falling from

growth of 11.7% to a decline of 0.4%. The key question likely in investors minds is

how to position themselves for any eventual recovery in the oil price. While JP

Morgans commodity team believes that the Brent can still fall further (expect an

average price of $38/bbl in March), they forecast an eventual recovery in the price in

the second half of the year (2015 average price of $49/bbl). For 2016, they forecast

an average Brent price of $57/bbl. Thus we may see a low oil price scenario for the

next couple of years or see a U-shaped' recovery of the oil price. Although we

believe it is unlikely, the oil price may also show a quick recovery similar to what we

saw in 2008-09 or a 'V-shaped' recovery.

12


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Table 4: European OFS sub-sector breakdown

Seismic Offshore drillers OCTG Land drillers Upstream EPC Engineering Downstream EPC

Operations &

Maintenance

PGS Seadrill Vallourec Eurasia Drilling Petrofac

Amec

FosterWheeler

Tecnicas

Reunidas Cape

CGG Tenaris Technip Wood Group GMS

TGS Hunting Saipem

Subsea 7

Lamprell

Source: J.P. Morgan estimates.

We expect the path to recovery will be different for each company and sub-sector in

the European OFS space. Our base case assumes a gradual oil price recovery to a

long-term oil price of $90/bbl by 2019. We believe that low oil prices for 2015 and

2016 could put severe pressure on the cash flows of oil companies (NOCs, IOCs and

Independents alike) and lead to consecutive years of capex declines. In such a

scenario, we believe that sub-sectors that have high exposure to discretionary

exploration spend could face severe structural challenges. The seismic and offshore

drilling sectors rank highest among those exposed to exploration spending. Low oil

prices for 2015 and 2016 could see asset utilization for companies in this sector fall

significantly and may also require capacity reduction.

The next in line with exposure to exploration-related spending are oil country tubular

goods (OCTG) companies and land drilling companies. Companies from this sub-

sector may also face similar asset utilization and capacity issues. Oil companies to

some extent are also expected to delay marginally economical projects and postpone

investments. This could affect the bid pipeline of upstream EPC companies and

engineering-focused companies. Lowest on the scale of companies that would likely

suffer operationally as a result of a U-shaped recovery in the oil price are those that

are highly exposed to the operations & maintenance and/or downstream sectors.

Overall, we believe that companies that have a lower oil price beta (as outlined in

the section above) would be in a relatively better position to recover from a weak

market.

Figure 9: Sub-sector preference for a U-shaped oil price recovery


In the event of a relatively quicker-than-forecast oil price recovery or a V-shaped

recovery, we may see a faster recovery in capex spending and thus exploratory

spending. In such a scenario, we expect operations of offshore drillers, marine

seismic, land drillers and OCTG companies would recover the quickest followed by

the engineering, EPC and O&M companies. Overall, in a V-shaped oil price

Offshore

drillers

Marine

seismic

OCTG

Upstream

EPC

Engineering

Downstream

EPC

Operations &

Maintenance

Land

drillers

13


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

scenario, companies with a high oil price beta (as defined in the section above)

could recover quicker.

Figure 10: Sub-sector preference for a V-shaped oil price recovery


Further downside: misplaced optimism on margins

In the section above we show that each sub-sector of the OFS space has a different

oil price beta'. Two sub-sectors that we believe would fare worst if the oil prices and

capex remain under pressure are seismic and offshore drilling companies.

Figure 11: Seismic sector EBITDA margin performance

Source: J.P. Morgan estimates, Bloomberg. * PGS, CGG, TGS and Fugro considered.

Figure 12: Offshore drilling sector EBITDA margin performance

Source: J.P. Morgan estimates, Bloomberg. *Seadrill, Diamond Offshore, Noble Corp,

Transocean and Ensco considered.

The seismic and offshore drilling sectors live at the sharp end of the capex cycle.

From Figure 11 and Figure 12 we can see that the peak-to-trough falls in the average

margins for the seismic and offshore drilling sectors during the last oil price collapse

were 8% and 29%, respectively. We anticipate the recovery in the oil price to be

slower this time around, which could lead to greater margin decline and a much

slower recovery in margins than is currently anticipated.

However, as we see from the figures above, consensus is still forecasting margin

expansion for the seismic companies over 2014-16 and a gradual reduction in

margins for the offshore drilling companies over the same period. We expect this to

correct (i.e. fall by a greater extent) as market weakness becomes more apparent.

Offshore

drillers

Marine

seismic

OCTG

Upstream

EPC

Engineering

Downstream

EPC

Operations &

Maintenance

Land

drillers

35%

39%

43%

47%

51%

55%

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Average Seismic*

8% fall in margin

25%

30%

35%

40%

45%

50%

55%

60%

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Average Off. Drilling*

29% fall in margin

14


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Figure 13: OCTG sector EBITDA margin performance

Source: J.P. Morgan estimates, Bloomberg. * Tenaris, Vallourec, Hunting, Schoeller-Bleckmann

and Core Labs considered.

Figure 14: EPC sector EBITDA margin performance

Source: J.P. Morgan estimates, Bloomberg. *Amec FosterWheeler, Petrofac, Wood Group,

Saipem, Tecnicas Reunidas and Technip considered.

The OCTG and EPC sectors are other sectors where we could see further margin

compression. In the OCTG sector, the 2008-09 oil price collapse led to a c.4% fall in

margins. Consensus forecasts currently expect only a 1% margin compression. We

believe this could be higher given the slower expected recovery of the oil price and

of capex compared to the 2008-09 period. The 2008-09 oil price collapse left EPC

margins largely unscathed. We believe that the continued investment over 2008-09

by Middle Eastern NOCs helped these companies achieve stable margins. Over the

2014-16 period, however, we expect investments by Middle Eastern NOCs to slow

down (unlike the 2008-09 period) due to the expected prolonged low price

environment. Thus the margin expansion being forecast for these EPC companies

may not materialize and in our view could even lead to a decline in margins.

22%

24%

26%

28%

30%

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Average OTCG*

6%

7%

8%

9%

10%

11%

12%

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Average EPC*

15


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Silver lining: Possible M&A activity increase

The poor performance of the oilfield services sector raises the question of potential

M&A activity, both offensive and defensive. Acquisitive companies may look to

target assets and businesses that are now cheap where once they traded at a premium.

On the defense, companies under financial pressure may be willing or forced to sell

themselves, or assets or divisions, despite the less attractive prices.

Below we make some general observations about likely company characteristics on

both sides of a possible transaction within the current environment. We analyze these

characteristics in the sections below under:

Funding strength of OFS companies (as potential acquirers)

Financial weakness or attractiveness of OFS companies (as potential targets)

Relative bargains (recovery upside) and digestibility (i.e. size)

As a general comment we do not think many obvious potential deals exist based

purely on strategic rationale. That would not preclude a deal happening of course.

M&A history across all sectors is littered with examples of management hubris

regarding such decisions. If pushed, we think an intercontinental merger to create a

larger footprint and cross-sell products, like the Amec Foster Wheeler deal, is among

the more logical and potential scenarios. A buyer from outside OFS, looking to move

into a new arena at seemingly relative bargain prices, may also be one of the more

probable scenarios. We think further inter-European OFS proposals, like the

Technip-CGG proposal last quarter, are less likely than the others.

Financial strength indicators

One of the key questions then is financial strength of both potential acquirers and

potential targets. For acquirers, equity values in the space are generally depressed,

meaning their takeover currency is devalued and they are loathe to issue equity for

cash. But, debt is still very cheap by historical standards. For targets that are under

financial pressure, mergers may give companies some breathing space via

synergies and a stronger competitive position and business mix.

In the analysis below we firstly look at the European OFS sector key gearing ratios.

Companies with the high ND/EBITDA and ND/EV are generally at most financial

risk: Figure 15 and Figure 16. We argue such companies may also be at a higher

probability of receiving an opportunistic offer, or of needing to divest good

businesses to others.

However we would not discount the likelihood of companies with strong (or cash-

rich) balance sheets also being targets. It is true they are better able to defend

themselves against opportunistic offers. However companies that are net cash could

effectively self-finance their own acquisition, to an extent: Figure 16.

Large absolute debt capacity means a greater ability to make potential acquisitions:

Figure 17. We think any acquiring company is likely to eschew equity issuance given

low share prices. They therefore would need to fund with debt and cash. We

simplistically assume for this illustrative purpose that ND/EBITDA of 2.5x is the

maximum the typical OFS acquirer would contemplate as many covenants for the

sector have been around 3.0x undisturbed.

M&A activity could give

investors an attractive exit

16


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

We test our analysis against a recent deal. For one of the deals proposed recently,

Technips approach to CGG, the metrics line up. Technip shows the third-strongest

ND/EBITDA and ND/EV ratio in the sector, and the largest absolute debt capacity

by a factor of 2x. Its proposed target CGG has the third-weakest ND/EBITDA and

equal weakest ND/EV, and the second-weakest absolute debt capacity.

Figure 15: Euro OFS sector Net debt / EBITDA

Source: Bloomberg Note: 2015E consensus data used for all stocks

Figure 16: Euro OFS sector Net debt / Enterprise Value

Source: Bloomberg Note: Dec 2014E consensus data used for all stocks

Figure 17: Euro OFS sector net debt capacity at 2.5x ND/EBITDA

Source: Bloomberg Note: 2015E consensus data used for all stocks

1.2 0.6

1.4

2.9

2.2

0.6

1.2

1.8

2.8

0.4

(0.8)(0.4)

0.2

4.6

0.7

(2.0)

(1.0)

-

1.0

2.0

3.0

4.0

5.0

Aker

Am

ecFW

Cape

CG

G

GM

S

Huntin

g

Lam

pre

ll

Petr

ofa

c

PG

S

Saip

em

Subsea 7

Technip

Tecnic

as

TG

S

Wood

Seadrill

Average

25%12%

30%

71%

35%

16%24%

47%60%

8%

(16%)

(50%)

(14%)

9%

71%

11%

(100%)

(50%)

-

50%

100%

Aker

Am

ecFW

Cape

CG

G

GM

S

Hunting

Lam

prell

Petro

fac

PG

S

Saip

em

Subsea 7

Technip

Tecnic

as

TG

S

Wood

Seadrill

Avera

ge

442

1,447

121

(360)

41 496 586

1,361

393

(523)

2,403

5,162

1,420 1,836

1,387

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

5,000

6,000

Aker

Am

ecFW

Cape

CG

G

GM

S

Huntin

g

Lam

pre

ll

Petr

ofa

c

PG

S

Saip

em

Subsea 7

Technip

Tecnic

as

TG

S

Wood

Seadrill

17


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Bargain price indicators

Our second piece of analysis is to consider the bargain factor that an acquirer

might see in a company. By nature, a trade acquirer is likely to be positive on the

potential upside in the sector. They will be taking a long-term view incorporating an

anticipated recovery cycle.

To provide a rough measure of this, we look at which companies have the greatest

differential between their respective 2014 peaks and current price. We plot this

against market cap as well to highlight smaller companies the assumption being

that smaller bolt-on acquisitions are more likely to happen than mega acquisitions

requiring additional external financing (the exception to this tendency would be a

part scrip deal, similar to the Amec and Foster Wheeler acquisition structure.

However that deal was premised on industrial logic and less on opportunistic pricing

that we are analyzing here).

Again, one recent merger target, CGG, fits our profile. It is small in market cap

(more digestable for a potential large acquirer) and could be considered attractively

priced relative to its previous highs (at a better point in the cycle). We would suggest

that smaller companies on the bottom left of Figure 18 are relatively more likely to

be attractive on a corporate level if and when a further round of M&A begins.

Again, applied to a recent real life M&A proposal, this analysis holds some merit.

CGG has the third-greatest peak-trough valuation spread and is one of the smallest

market caps. Technip, its suitor, is one of the largest and its share price drop is better

than more than half the sector.

Figure 18: Share price decline since 2014 share price high (%), bubble size = market cap

Source: Bloomberg, JPMorgan

SDRL

SPM

CGG

PFCHTG

PGS AKSO

SBMOLAM

SUBC

TEC GMS

AMFW

CIU

WG/

TRE

TGS

(80%)

(70%)

(60%)

(50%)

(40%)

(30%)

(20%)

(10%)

-

0 2 4 6 8 10 12 14 16 18 20

18


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Cape

Neutral

Company Data

Price (p) 192

Date Of Price 16 Jan 15

Price Target (p) 203

Price Target End Date 31-Dec-15

52-week Range (p) 335-177

Market Cap ( bn) 0.23

Fiscal Year End Dec

Shares O/S (mn) 121

Cape plc (CIU.L;CIU LN)

FYE Dec 2013A 2014E 2015E

(Prev)

2015E

(Curr)

2016E

(Prev)

2016E

(Curr)

Adj. EPS FY (p) 23.58 26.48 30.25 27.10 34.53 28.64

Bloomberg EPS FY (p) 23.40 26.90 - 30.80 - 34.20

Revenue FY ( mn) 697 660 696 663 732 668

EBITDA FY ( mn) 58 64 72 68 77 70

EBITDA Margin FY 8.3% 9.7% 10.4% 10.3% 10.5% 10.5%

EV/EBITDA FY 5.0 5.6 6.7 5.1 5.7 4.7

ROE FY 19.4% 23.9% 24.7% 22.4% 25.0% 21.7%

Adj P/E FY 8.1 7.3 6.3 7.1 5.6 6.7

Source: Company data, Bloomberg, J.P. Morgan estimates.

Challenging offshore UK and low revenue visibility Downgrade to N

UK offshore business expected to be very weak in 2015. We anticipate that the

significant fall in oil prices will lead to severe pressures on margins of offshore

contractors in relatively higher cost oil producing regions. Additionally, we see

risk of delays to maintenance, refurbishment and other discretionary spending

work. As a result we expect revenues from Capes UK offshore business, which

accounts for c.20-30% of its group revenues, to fall in 2015 and 2016.

MENA growth rate moderated. The oil price collapse has also hurt the cash

flows of NOCs and we note the recent delays/cancellation of several large EPC

projects (the $2.5bn Ras Tanura refinery in Saudi Arabia, $7.4bn Al-Sejeel and

$6.4bn Al-Karaana petrochemical projects in Qatar etc.). Cape is usually

involved in the construction phase of projects, which typically starts a year or two

after the EPC contract is awarded. Hence, while this does not affect Cape's near-

term earnings, it is expected to dampen its medium-term growth expectations in

the region. We could start seeing projects that have already been awarded getting

delayed this is a near-term risk to Capes earnings.

Typically low revenue visibility adds downside risk. Compared to the rest of

the European OFS sector, Cape displays low revenue visibility. Cape typically

has a forward year revenue visibility of between 50-60% by its year-end results.

This leaves its revenues relying heavily on order intake during the year. We

believe in this low oil price and falling capex environment there is a risk that

order intake may slow, which could result in revenue and earnings downgrades.

Strong cash generation and dividend yield. Although we expect Cape to have a

relatively high net book leverage ratio of 73% by end 2015, Cape has robust cash

generation capabilities. We expect Cape to generate an equity free cash flow of

yield of 12% in 2015 and 16% in 2016. We also expect Cape to continue paying a

stable dividend of 14p (2015E dividend yield of 7%).

H2 2014 results preview. Cape is scheduled to report its year-end 2014 results

on 18 March. We make no changes to our 2014 numbers and expect Cape to

deliver 2H 2014 revenues of 338m, up 4% Y-o-Y and up 5% sequentially,

operating profit of 25m, up 18x Y-o-Y and 18% sequentially, and net income of

15.3m, up from a loss of 8m in 2H 2013 and up 22% sequentially.

Downgrade to Neutral. We update our model and reduce our 2015/16 EPS to

27.1p/28.6p, which is now 12%/16% below consensus forecast. We believe that

Capes revenues face strong near- to mid-term headwinds. We downgrade Cape

19


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

to Neutral, reduce our 2015E target PER from 11.5x to 7.5x and reduce our end-

2015 price target to 203p (6% upside).

Table 5: Cape - Interim estimates

Source: Company reports and J.P. Morgan estimates.

Year end Dec 1H12 2H12 2012 1H13 2H13 2013 1H14E 2H14E 2014E

Revenue 360 386 746 371 326 697 322 338 660

YoY revenue growth (%) +7 -0 +3 +3 -16 -7 -13 +4 -5

Operating profit before other items 15 12 28 25 16 41 23 26 49

Operating profit margin (%) 4 3 4 7 5 6 7 8 7

Amortization of intangible assets 0 0 0 0 0 0 -1 0 -1

IDC costs 0 -1 -1 0 -15 -15 0 0 0

Ex ceptional items 0 -159 -159 -16 0 -16 -1 0 -1

Total operating profit 15 -148 -133 9 1 10 21 25 46

Finance income 1 1 2 1 1 2 1 1 1

Finance costs -6 -6 -12 -6 -6 -12 -5 -5 -10

Net finance income -5 -5 -10 -5 -5 -10 -4 -5 -9

Profit before tax 10 -153 -143 4 -4 0 17 21 38

Income tax ex pense -2 -17 -19 0 -3 -3 -3 -5 -8

Tax rate 21% -11% -13% -7% -75% #### 20% 22% 21%

Profit/(loss) from cont operations 8 -170 -162 4 -7 -3 14 16 30

Profit attributable to discount operations -1 -42 -43 -3 -2 -5 -1 0 -1

Profit/(loss) for the y ear 7 -212 -205 2 -9 -7 13 16 29

Minority interests -1 -1 -2 -1 1 0 -1 -1 -1

Net profit to equity shareholders 6 -212 -207 1 -8 -7 13 15 28

Adjusted net profit 8 7 15 16 12 29 16 17 32

Adjusted diluted EPS 6.9 5.8 12.7 13.5 10.1 23.6 12.9 13.5 26.5

20


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

CGG

Underweight

Company Data

Price () 4.84


Price Target () 3.80


52-week Range () 12.83-4.25


Shares O/S (mn) 177

CGG (GEPH.PA;CGG FP)

FYE Dec 2013A 2014E

(Prev)

2014E

(Curr)

2015E

(Prev)

2015E

(Curr)

2016E

(Prev)

2016E

(Curr)

Adj. EPS FY ($) (3.95) (3.15) (2.99) 0.18 (0.37) 0.49 0.05

Bloomberg EPS FY ($) 0.50 - 2.48 - 2.64 - 0.21

Revenue FY ($ mn) 3,768 2,990 3,022 3,110 2,776 3,198 2,738

EBIT Margin FY (11.1%) (5.8%) (4.6%) 7.8% 3.3% 9.2% 6.5%

EV/EBITDA FY 2.7 4.2 3.8 3.5 4.0 3.3 3.8

P/BV (x) FY 0.26 0.31 0.30 0.30 0.31 0.29 0.31

ROE FY (16.9%) (15.9%) (15.0%) 1.0% (2.0%) 2.6% 0.3%

Adj P/E FY NM NM NM 30.8 NM 11.5 110.0


Acquisition and Equipment to suffer as seismic market contracts D/G to N

Weak seismic market could last until 2016. We anticipate that oil companies

may refocus their capital spending objectives as they adjust to a low oil price

environment in 2015 and 2016. This could mean that the weak marine seismic

market witnessed in 2014 could continue well through 2015 and into 2016 as oil

companies conserve cash and put off exploration spending.

More vessel retirements may be needed. We believe a large portion of 2014

vessel retirements were in response to the weak seismic market during 2014. We

anticipate the seismic market to be far weaker in 2015 compared to 2014 and thus

expect further vessel retirements from the market as demand falls.

Consensus expected to fall further. We forecast CGG's asset heavy Acquisition

and Equipment segments facing further pressure on revenue and margins. In

2015, we expect CGGs Acquisition segment to continue being in the red and see

revenues for its Equipment segment falling by 5%. Overall we now forecast

2014/15/16 EPS of $(2.99)/$(0.37)/$0.05 which is 138/20/20c below 2014/15/16

consensus.

More impairments to come. The weak seismic market may require CGG to

write down some of its goodwill, MC library and/or vessels. We note that CGGs

goodwill/MC library is 76%/31% of its expected end-2014 equity. While

goodwill is a mere (lagging) accounting entry, it confirms the company sees

rough times ahead and in the worst case can signal internal expectations are

lower than the market.

Q4 2014 preview. CGG is scheduled to report its Q4 2014 results on 26

February. CGG pre-reported record MC sales of $290m in Q4 along with its

vessel availability and production rates. Adjusting our numbers for these, we now

forecast 4Q14 revenues of $832m (Bloomberg consensus: $716m), EBIT of

$27m (consensus $45m), recurring EBIT of $11m, net income of $(45)m

(consensus $(9)m) and EPS of $(0.25) (consensus of $(0.04)).

Table 6: CGG impairments history

Year Impairment ($m)

2007 0

2008 7

2009 533

2010 131

2011 0

2012 36

2013 818

2014 296

Source: Company data, J.P. Morgan estimates.

21


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Table 7: CGG - Quarterly estimates


Valuation

We update our SOTP valuation away from an acquisition-based scenario (where we

used normalized earnings and multiple) to one that better reflects the current weak

outlook for the seismic market. We reduce the multiple used for CGG's vessels from

1.0x to 0.9x of book value to reflect the weak expected demand for vessels in this

downturn. For the GGR segment, we use the average 2015-16 EBITDA and apply

TGS's average 2009 (bottom cycle) EV/EBITDA. For its Equipment segment we

apply a 4.5x multiple (slight premium to the average of its peers in Table 9). We thus

value it at 3.8/share, which implies a 2015E EV/EBITDA multiple of 3.8x. We

downgrade CGG to Underweight and our Dec-15 price target of 3.80 offers 22%

downside from current levels.

Year end Dec 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14E 4Q14E 2014E

Operating revenues 871 1,032 908 955 3,766 806 689 694 831 3,021

Other income from ordinary activ ities 1 1 0 1 2 0 1 0 0 1

Total income from ordinary activities 871 1,032 908 956 3,768 807 690 694 831 3,022

Growth (%) +11 +24 +6 +2 +10 -7 -33 -24 -13 -20

Operating costs -591 -682 -600 -702 -2,574 -588 -554 -462 -510 -2,114

EBITDA 281 351 309 255 1,194 219 136 232 322 908

EBITDA margin (%) 32.2 34.0 34.0 26.6 31.7 27.1 19.7 33.4 38.7 30.0

EBITDA growth (%) +28 +50 +7 -14 +15 -22 -61 -25 +26 -24

Multi-client survey s depreciation & amortization -72 -102 -96 -129 -399 -80 -114 -89 -202 -486

Other depreciation & amortization -112 -116 -112 -873 -1,213 -104 -207 -156 -92 -560

Total depreciation & amortization -183 -218 -208 -1,002 -1,612 -184 -322 -245 -294 -1,045

Op income before impairment of goodwill 97 132 100 -747 -417 34 -186 -14 27 -138

Operating income margin (%) 11 13 11 -78 -11 4 -27 -2 3 -5

Impairment of goodw ill 0 0 0 0 0 0 0 0 0 0

Restructuring costs 0 0 0 0 0 0 0 0 0 0

Other non-recurring income 55 -11 -21 0 23 0 0 0 0 0

Operating income 152 122 79 -747 -395 34 -186 -14 27 -138

Ex penses related to financial debt -47 -47 -52 -48 -193 -48 -63 -45 -45 -201

Income prov ided by cash & cash equivalents 1 0 0 0 2 1 0 0 0 2

Cost of financial debt - net -46 -47 -51 -48 -192 -48 -62 -45 -45 -200

Variance on derivative on convertible bonds 0 0 0 0 0 0 0 0 0 0

Other financial income (loss) -5 0 -8 -10 -22 3 -47 -5 0 -49

Income (loss) before taxes 101 75 20 -805 -609 -11 -295 -63 -18 -387

Income tax es -32 -35 -11 -6 -83 -12 -16 -43 -9 -79

Net income from consolidated companies 69 40 10 -810 -692 -23 -311 -106 -26 -466

Equity in income (losses) of investees 11 -5 -6 0 1 -17 -13 -10 -17 -56

Net income (loss) 79 36 4 -810 -691 -39 -325 -116 -43 -522

Net income margin (%) 9 3 0 -85 -18 -5 -47 -17 -5 -17

Minority interests -2 -1 -2 -3 -8 -1 -2 -2 -2 -7

Net income 77 35 2 -813 -699 -40 -327 -118 -45 -530

Fully diluted # shares 202 178 178 177 177 177 177 177 177 177

Basic EPS 0.43 0.20 0.01 -4.59 -3.95 -0.23 -1.85 -0.67 -0.25 -2.99

Diluted EPS 0.43 0.20 0.01 -4.59 -3.95 -0.23 -1.85 -0.67 -0.25 -2.99

Diluted EPS growth (%) -9 -55 -98 -815 -14 -94 +708 -68 -91 +1084

22


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

While this might screen cheap on an EV/EBITDA basis, we caution that the seismic

industry may be at the brink of structural change. The low oil price in 2015 and 2016

is expected to force oil companies to moderate their upstream capex. We believe this

could lead to a three-year down-cycle for the seismic industry the longest in recent

memory and could result in severe asset under-utilization and write-downs.

Table 8: CGG - Sum of the parts value

Tangible net

book value

2014E ($m)

Avg. EBITDA

(2015-16E, $m)

Multiple (x) Value ($m)

Vessels 425 0.9 383

GGR 728 2.5 1,819

Equipment 192 4.0 768

Other land and building 200 1.0 200

Net debt YE 2015E -2,383

Total 786

Shares in issue (diluted) 177

Value ($/Share) 4.4

Value (/Share) 3.8

Implied 2015E EV/EBITDA (x) 3.8


Table 9: Sercel peer valuation metrics

Source: Bloomberg.

Share price Shares in Reporting

Company LCU issue (m) LCU $m 2013A 2014E 2015E 2013 2014 2015 2013A 2014E 2015E 2013A 2014E 2015E 2013A 2014E 2015E Currency

Seismic Equipment

Geospace Technologies 24.2 13 318 318 -2 -53 0 316 265 318 72 81 34 0.0 -0.7 0.0 4.4 3.3 9.2 USD

Mitcham Industries 5.5 12 66 66 -11 0 0 55 66 66 37 38 39 -0.3 0.0 0.0 1.5 1.7 1.7 USD

Other OFS equimpent manufacturers

Hunting 436.5 148 648 983 206 193 146 1,188 1,176 1,128 297 258 252 0.7 0.7 0.6 4.0 4.6 4.5 USD

Vallourec 19.5 131 2,546 3,000 2,249 1,944 1,861 5,249 4,944 4,862 1,271 981 956 1.8 2.0 1.9 4.1 5.0 5.1 EUR

Tenaris 11.5 1,181 13,553 15,972 -911 -1,014 -1,339 15,061 14,958 14,632 2,795 2,684 2,665 -0.3 -0.4 -0.5 5.4 5.6 5.5 USD

National Oilwell Varco 58.0 431 24,960 24,960 -286 -1,203 -3,177 24,674 23,757 21,784 4,178 4,564 4,383 -0.1 -0.3 -0.7 5.9 5.2 5.0 USD

Average 4.2 4.2 5.2

Average ex Geospace 4.2 4.4 4.3

STD 1.5 1.5 2.4

Market value Net debt ($m) EV ($m) EBITDA ($m) ND / EBITDA EV/EBITDA

23


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Gulf Marine Services

Overweight

Company Data

Price (p) 94






Shares O/S (mn) 339

Gulf Marine Services (GMS.L;GMS LN)

FYE Dec 2012A 2013A 2014E 2015E 2016E

Adj. EPS FY ($) 0.16 0.25 0.24 0.30 0.40

Bloomberg EPS FY ($) - 0.21 0.23 0.30 0.38

Revenue FY ($ mn) 143 184 196 244 306

EBITDA FY ($ mn) 93 121 125 157 200

EBITDA Margin FY 65.5% 65.8% 63.7% 64.2% 65.3%

EV/EBITDA FY 8.2 6.7 6.2 5.4 3.8

ROE FY 29.7% 40.1% 30.3% 26.2% 27.0%

Adj P/E FY 8.9 5.8 5.9 4.7 3.6


High revenue visibility and exposure to low-cost producing region U/G to OW

High exposure to the Middle East. We believe the Middle East (ME) region,

which produces some of the lowest-cost oil in the world, will continue to invest

to maintain production from its fields even at the low prevailing oil price,

especially if the core of OPEC wants to hold market share. GMSs main

customers in the ME (Saudi Aramco, ADNOC, Adma-Opco) are some of the best

capitalized NOCs in the world and are thus most likely suitably equipped to

weather the low oil price. GMS, which provides vessels for well maintenance

operations (i.e. opex-related spending), is the market leader in the SESV market

in the ME. It derived 64% of its H1 2014 income from ME, and we expect this to

go up to 72% in 2015.

Relatively high visibility. Most of GMSs vessels are on long-term contracts

with NOCs in the ME. Thus, GMS benefits from relatively high revenue visibility

with its current backlog we estimate 72% of GMSs 2015 revenues are covered

by firm contracts. This increases to 78% if we include options (since 2007 over

90% of options on GMS's vessel have been exercised). On adding non-charter

income (income from its AHTS vessel, catering services etc.), which is not part

of its backlog, we estimate 91% of GMSs 2015 revenues are covered. A long-

term contract for the Enterprise would increase sales visibility to 100% +, based

on our calculations.

Sound balance sheet, strong cash generation. Although GMS has a relatively

high B/S gearing (77% in 2015E), it has high revenue visibility and cash

generation. In 2015, we expect GMS to generate limited free cash flow after

meeting its capex commitments (JPMe $139m). In 2016, we estimate GMS will

generate substantial cash (2016E FCFF yield of 21.3%) as its new vessels

contribute to cash generation and capex tapers off. GMS also has a capex facility

of $110m in place to finance its acquisition of the Keloa and Pepper in 2015 and

2016, respectively.

Market placing at these levels not a risk. One of GMSs principal shareholders,

Gulf Capital (owns 52%) had stated its intention to exit the company over a two-

year period. We believe the risk of a substantial market placing is highly unlikely

at these levels (share price down 28% since IPO, 42% since highs in April 2014).

2015E target P/E multiple of 6.0x. GMS currently trades on 2015E PER and

EV/EBITDA multiples of 4.7x and 5.3x, respectively. This compares to a peer group

average 2015E PER and EV/EBITDA of 5.5x and 5.7x, respectively, using

Bloomberg consensus data (Figure 20) and European OFS average 2015E PER and

24


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

EV/EBITDA of 8.4x and 4.6x, using consensus data. GMS thus trades at a 15% PER

and 6% EV/EBITDA multiple discount to its peer group and at a -44% PER and

+16% EV/EBITDA multiple difference to the European OFS sector average. We

believe GMS's advantaged business model, high revenue visibility, high EBITDA

margin along with a low tax rate should allow it to trade at a premium to its peers.

We value GMS based on a target 2015E PER of 6.0x (c.10% premium to its peer

group and at a c.30% discount to average European OFS sector). This implies an

end-2015 target price of 120p (28% upside from current levels) based on the spot

/$ FX.

Key catalysts in 2015. (i) Long-term contract for large SESV Enterprise: The

Enterprise is expected to finish its current contract in early Q1 2015 and

management had earlier indicated that it was bidding on a couple of long-term

contracts in the MENA region a long-term contract could increase its revenue

visibility to over 100% of our 2015 forecast; (ii) option exercise for small SESV

Kudeta: GMS Kudetas current contract is expected to finish late Q1 2015 and its

customer has the option to extend the contract for another six months; and (iii)

full year 2014 results in February-March which will be accompanied by updated

guidance.

Figure 19: GMS vessel contract snapshot


Rig Type Location Type of work From To Option

Endeavour (E2) Large North Sea Maintenance Apr-15 Apr-17 Apr-19

Endurance (E1) Large UK Maintenance Aug-12 Feb-16 Aug-16

Enterprise (E3) Large MENA Maintenance Sep-14 Dec-14 Jan-15

Shamal (M1) Mid MENA Well serv ice Jul-15 Jul-17 Jul-20

Pepper eSmall MENA NA Feb-15 Jan-18 Apr-20

Kudeta (K5) Small MENA Maintenance Sep-14 Mar-15 Sep-15

Kinoa (K7) Small MENA EOR Aug-12 Aug-15

Kikuyu (K3) Small MENA Maintenance, W.S. Dec-12 Feb-16

Kawaw a (K4) Small MENA Well serv ices Sep-11 Sep-15 Sep-16

Naashi (K1) Small MENA Well serv ices Jan-13 Jan-16 Jan-18

Keloa (K6) Small MENA Maintenance Mar-13 Mar-16 Mar-18

Kamikaze (K2) Small MENA Well serv ices Jul-13 Jul-16 Jul-18

Jan

Apr

Jul

Oct

2018

Jan

Apr

Jul

Oct

2015 2016 20172014

Jul

Jan

Apr

Jul

Oct

Jan

Apr

Jul

Oct

Jan

Apr

Oct

25


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Figure 20: GMS peer group valuation table


Share price Shares in Reporting

Company LCU issue (m) LCU $m 2013A 2014E 2015E 2013 2014 2015 2013A 2014E 2015E 2013A 2014E 2015E 2013A 2014E 2015E Currency

Europe

Farstad Shipping 39.4 39 1,537 203 1,294 1,288 1,332 1,496 1,491 1,534 258 225 236 5.0 5.7 5.6 5.8 6.6 6.5 NOK

Gulf Marine Services 94.0 350 329 498 326 280 354 824 778 851 121 125 157 2.7 2.2 2.3 6.8 6.2 5.4 USD

Prosafe 21.4 236 5,050 666 666 996 1,179 1,332 1,662 1,845 307 309 370 2.2 3.2 3.2 4.3 5.4 5.0 USD

Siem Offshore 3.0 389 1,153 152 902 1,192 1,128 1,054 1,344 1,280 123 188 214 7.4 6.3 5.3 8.6 7.1 6.0 USD

Solstad Offshore 67.0 39 2,592 342 1,323 1,364 1,253 1,664 1,705 1,595 253 227 222 5.2 6.0 5.6 6.6 7.5 7.2 NOK

USA

Gulfmark Offshore 21.1 26 555 555 440 489 464 995 1,044 1,018 164 172 160 2.7 2.9 2.9 6.1 6.1 6.4 USD

Hornbeck Offshore 21.8 36 793 793 625 870 813 1,418 1,663 1,606 257 290 330 2.4 3.0 2.5 5.5 5.7 4.9 USD

Seacor Holdings 71.6 18 1,263 1,263 328 362 279 1,591 1,625 1,542 235 244 278 1.4 1.5 1.0 6.8 6.7 5.6 USD

Tidewater 31.0 50 1,542 1,542 1,455 1,331 1,481 2,996 2,872 3,022 369 437 459 3.9 3.0 3.2 8.1 6.6 6.6 USD

Rest of World

Ezion Holdings 1.2 1,579 1,823 1,374 920 1,033 1,007 2,294 2,408 2,381 159 297 415 5.8 3.5 2.4 14.4 8.1 5.7 USD

Mermaid Marine Australia 1.0 369 358 294 251 270 208 545 564 502 58 124 150 4.3 2.2 1.4 9.4 4.6 3.3 AUD

Average 7.5 6.4 5.7

STD 2.7 1.0 1.0

Share price

Company LCU 2010 2011 2012 2013 2014E 2015E 2010-12 2013-15 2013A 2014E 2015E 2013 2014E 2015E 2013A 2014E 2015E

Europe

Farstad Shipping 39.4 2.36 2.60 1.41 1.16 1.23 1.51 -23% 14% 4.5 4.2 3.5 0.51 0.41 0.49 9.8% 7.8% 9.5%

Gulf Marine Services 94.0 NA 0.07 0.16 0.25 0.24 0.30 NM 11% 5.8 5.9 4.7 0.00 0.98 1.35 0.0% 0.7% 0.9%

Prosafe 21.4 0.81 0.71 0.80 0.85 0.83 0.97 -1% 7% 3.3 3.4 2.9 0.60 0.49 0.23 21.2% 17.1% 8.0%

Siem Offshore 3.0 0.03 -0.02 -0.01 0.05 0.09 0.14 NM 60% 7.3 4.4 2.8 0.00 0.03 0.03 0.0% 6.6% 7.7%

Solstad Offshore 67.0 0.10 -0.98 1.88 2.01 2.63 2.44 342% 10% 4.4 3.4 3.6 0.85 0.67 0.65 9.6% 7.6% 7.3%

USA

Gulfmark Offshore 21.1 1.86 1.90 0.78 2.54 2.40 1.70 -35% -18% 8.3 8.8 12.4 1.00 1.00 1.00 4.7% 4.7% 4.7%

Hornbeck Offshore 21.8 1.29 -0.13 1.13 2.17 2.80 2.98 -6% 17% 10.1 7.8 7.3 0.00 0.00 0.00 0.0% 0.0% 0.0%

Seacor Holdings 71.6 9.94 0.89 1.91 1.39 2.82 3.73 -56% 64% 51.5 25.4 19.2 - - - NM NM NM

Tidewater 31.0 4.89 2.06 2.09 3.03 3.62 3.80 -35% 12% 10.2 8.6 8.1 1.00 1.00 1.00 3.2% 3.2% 3.2%

Rest of World

Ezion Holdings 1.2 0.04 0.06 0.07 0.12 0.12 0.17 33% 20% 7.3 7.1 5.0 0.00 0.00 0.00 0.1% 0.1% 0.1%

Mermaid Marine Australia 1.0 0.17 0.20 0.23 0.27 0.20 0.18 16% -19% 3.0 4.0 4.6 0.11 0.10 0.10 14.4% 13.0% 12.5%

Average 26% 16% 10.5 7.5 6.7 0.41 0.47 0.48 6.3% 6.1% 5.4%

Average ex-Seacor 6.4 5.8 5.5

STD 13.8 6.3 5.0

Market value Net debt ($m) EV ($m) EBITDA ($m) ND / EBITDA EV/EBITDA

PEREPS growth DPS ($)EPS (US$) Dividend Yield

26


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Lamprell PLC

Overweight

Company Data

Price (p) 100






Shares O/S (mn) 260

Lamprell PLC (LAM.L;LAM LN)

FYE Dec 2013A 2014E 2015E 2016E

Adj. EPS FY ($) 0.12 0.27 0.17 0.23

Bloomberg EPS FY ($) 0.08 0.25 0.19 0.22

Revenue FY ($ mn) 1,092 1,046 941 1,035

EBITDA FY ($ mn) 77 119 94 111

EBITDA Margin FY 7.0% 11.4% 10.0% 10.7%

EV/EBITDA FY 4.3 2.0 2.8 2.0

ROE FY 7.2% 15.6% 8.7% 10.9%

Adj P/E FY 12.8 5.6 8.7 6.5


High revenue visibility, strong B/S protects downside; NDC options offer upside

High revenue visibility: On our estimates, Lamprell has 67% of its 2015 and

51% of its 2016 sales covered by its current backlog. Including walk-in work

(short duration rig refurbishment work) that Lamprell regularly wins during the

year, its coverage is a healthy 83% for 2015 and 65% for 2016.

Option exercise to secure 2016 revenue visibility: Lamprell has two Ensco

options and three NDC options that are due to expire in Q1 2015. Exercise of

these options could add another $938m to its backlog, which stood at $1.2bn at

the mid-year 2014 point. We see Lamprells exposure to the Middle East region,

where large NOCs benefit from lower cost of operations, as a positive. We see a

very high probability of NDC exercising these outstanding options, albeit a small

delay will not be a surprise.

Well-funded balance sheet, cash generation: Lamprells net cash at YE 2014 is

expected to be around $275m, down slightly from $280m at the mid-year point.

The cash position is expected to weaken marginally through 2015, but overall the

refinancing and rights issue appear fortuitously timed for a market downturn.

Reduce Dec-15 PT to 131p: Lamprell trades at a 2015 PE of 8.7x and an

EV/EBITDA of 2.8x vs. an European OFS average of PE of 8.4x and

EV/EBITDA of 4.6x. Lamprells YE14 cash balance of $275m (ex-prepayments)

is c.53% of its current market capitalization of $518m. We believe that

Lamprell's 39% EV/EBITDA discount to the European OFS average is

unjustified. We reduce our target 2016E PER from 10.0x to 8.5x which results in

a December 2015 price target of 131p (31% upside from current levels).

ENSCO options a key event in Q1. Lamprell was the second-best-performing

company in the European OFS space in 2014 (TSR -2%). However, YTD

performance has been in line with the sector. In our view, this is partly due to

concerns that the two options outstanding with ENSCO, due to expire during Q1

15, may lapse. If they are awarded, it could add a further $390m to its backlog, so

they are an important element of the near-term outlook.

27


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Petroleum Geo-Services

Underweight

Company Data

Price (Nkr) 38.94


Price Target (Nkr) 30.00


52-week Range (Nkr) 75.15-31.50

Market Cap (Nkr bn) 8.39

Shares O/S (mn) 215

Petroleum Geo-Services (PGS.OL;PGS NO)

FYE Dec 2013A 2014E 2015E 2016E

(Prev)

2016E

(Curr)

Adj. EPS FY ($) 1.10 0.16 0.23 0.28 0.24

Bloomberg EPS FY ($) 1.19 0.44 0.31 - 0.41

Revenue FY ($ mn) 1,502 1,437 1,265 1,298 1,265

EBIT Margin FY 25.4% 12.9% 9.1% 9.7% 9.1%

EV/EBITDA FY 2.2 2.8 3.4 4.2 3.7

P/BV (x) FY 0.54 0.54 0.53 0.52 0.52

ROE FY 12.0% 1.7% 2.3% 2.8% 2.5%

Adj P/E FY 4.7 32.2 22.7 18.5 21.3


Asset heavy profile to hurt in a possible multi-year seismic market downturn

Weak seismic market could last until 2016. We anticipate that oil companies

may refocus their capital spending objectives as they adjust to a low oil price

environment in 2015 and 2016. This could mean that the weak marine seismic

market witnessed in 2014 could continue well into 2016 as oil companies

conserve cash and put off exploration spending.

More vessel retirements may be needed. We believe a large portion of 2014

vessel retirements were in response to the weak seismic market during 2014. We

anticipate the seismic market to be far weaker in 2015 compared to 2014 and thus

expect further vessel retirements from the market as demand falls.

Consensus expected to fall further. While PGS has already guided to trough

contract margins in 2015, we expect margins in 2016 to also be under pressure. In

2015, we expect contract revenues to be down 14% and MC sales to be down

10% YoY. Overall we forecast 2014/15/16 EPS of $0.16/$0.23/$0.24 which is

28/8/17c below 2014/15/16 consensus. We retain our target 2015E target P/BV

multiple of 0.40x but increase our end-2015 PT to NOK 30 (23% downside) after

updating our $/NOK FX to the current spot rate.

Q4 2014 preview. PGS is scheduled to report its Q4 2014 earnings on 12

February. We adjust our 2014 numbers for PGS's vessel allocation in Q4 and now

forecast revenues of $413m (Bloomberg consensus: $412m), EBIT of $42m

(consensus $48m), net income of $(7.9)m (consensus $15.3m) and EPS of

$(0.04) (consensus of $0.11).

28


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Table 10: PGS - Quarterly estimates


Year end Dec 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14E 2014E

Total revenues 395 382 366 360 1502 293 337 394 413 1437

Revenue growth (%) +8 -6 -6 -0 -1 -26 -12 +8 +15 -4

Operating costs -193 -172 -150 -159 -673 -154 -166 -213 -200 -733

EBITDA 202 210 216 201 829 139 171 182 213 704

EBITDA margin (%) 51 55 59 56 55 47 51 46 52 49

Gross depreciation and amortization -59 -56 -66 -62 -244 -63 -72 -71 -69 -274

Depreciation capitalized to MC library 22 18 39 34 113 33 28 20 18 99

Amortization of MC library -68 -60 -81 -93 -302 -64 -72 -54 -120 -309

Total depreciation and amortization -106 -99 -108 -120 -433 -94 -116 -105 -171 -485

Other operating income 0 0 0 0 1 0 0 0 0 1

Operating income before impairment 97 111 108 81 397 45 55 77 42 220

Impairment of long-lived assets 0 0 0 -15 -15 0 -9 -25 0 -34

Operating profit 97 111 108 66 382 45 46 52 42 186

Operating profit margin (%) 24.5 29.0 29.6 18.5 25.4 15.5 13.7 13.3 10.2 12.9

Operating profit growth (%) +170 +28 -2 +10 +30 -53 -58 -52 -36 -51

Income (loss) from assoc companies -2 -1 -3 -8 -13 -16 -2 -9 -1 -28

Net financials -7 -12 -8 -14 -41 -17 -9 -17 -21 -64

Pre-tax profit 88 97 98 45 328 13 35 27 20 94

Tax es paid -25 -26 -24 -15 -90 -8 -5 -19 -28 -60

Profit after taxes from continued operations 62 72 74 30 238 5 30 8 -8 35

Net income (loss) from discontinued operations 0 0 0 0 0 0 0 0 0 0

Net profit 62 72 74 30 238 5 30 8 -8 35

Minority interests 0 0 0 0 0 0 0 0 0 0

Net profit 62 72 74 30 238 5 30 8 -8 35

Net profit margin (%) 15.8 18.7 20.3 8.4 15.9 1.6 8.8 2.1 -1.9 2.4

Adj diluted EPS (c) 0.29 0.33 0.34 0.14 1.10 0.02 0.14 0.04 -0.04 0.16

Adjusted EPS growth (%) +395 +57 -14 -24 +29 -93 -58 -89 -126 -85

29


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Tecnicas Reunidas

Underweight

Company Data

Price () 35.19


Price Target () 29.00


52-week Range () 46.62-33.35


Shares O/S (mn) 54

Tecnicas Reunidas (TRE.MC;TRE SM)

FYE Dec 2013A 2014E

(Prev)

2014E

(Curr)

2015E

(Prev)

2015E

(Curr)

2016E

(Prev)

2016E

(Curr)

Adj. EPS FY () 2.38 2.53 2.51 2.94 2.66 3.26 2.88

Bloomberg EPS FY () 2.46 - 2.48 - 2.76 - 2.92

Revenue FY ( mn) 2,854 3,146 3,131 3,527 3,362 3,777 3,602

EBITDA FY ( mn) 157 172 170 196 180 217 196

EBITDA Margin FY 5.5% 5.5% 5.4% 5.6% 5.4% 5.8% 5.4%

EV/EBITDA FY 8.4 8.7 7.3 7.1 6.5 6.0 5.5

Adj P/E FY 14.8 13.9 14.0 12.0 13.2 10.8 12.2

ROE FY 29.5% 29.5% 29.2% 30.3% 27.7% 29.7% 26.9%


Challenging market outlook, bid pipeline shrinking Downgrade to UW

First signs of MENA project awards slowing. The oil price collapse has hurt

the cash flows of NOCs and we note the recent delays/cancellation of large EPC

projects on which Tecnicas was reportedly bidding like the $2.5bn Ras Tanura

refinery in Saudi Arabia and the $6.4bn Al-Karaana petrochemical project in

Qatar. We also note that Saudi Aramco, one of the biggest NOCs, has reportedly

asked its contractor (Saipem) to slow the execution of the Khurais oil field

expansion project (Source: MEED). We believe these are early indications that

NOCs in the Middle East are also carefully prioritizing their investments.

Probability-weighted order intake cut by 29%. We reduce our probability-

weighted order intake expectations for Tecnicas by 29% (from $4.5bn to $3.2bn)

as we remove the Ras Tanura and the Al-Karaana projects from the pipeline. We

also caution that while our earlier expectations were of these projects being

awarded in the next 6-12 months, given the current environment, we believe there

now is a higher likelihood that some of these projects get delayed and the actual

number of contract awards is lower.

Risk of backlog contraction high. We believe that the deterioration of the

investment climate in some of Tecnicas key markets like the Middle East,

Canada and Russia, and the shrinking of its bid pipeline has resulted in a high risk

that Tecnicas backlog will shrink from the record levels seen in 2014.

Margin recovery to be more gradual. As NOCs and IOCs get more cautious on

every dollar that they spend, we believe it is likely that these customers will start

challenging and holding back payments on variation orders (as already witnessed

by some of Tecnicas' peers). Tecnicas work on low-margin petrochemical

projects in Saudi Arabia (expected to reach its peak and complete in 2015) is also

expected to weigh on its margins.

Premium valuation unjustifiable. Tecnicas trades at a cash-adjusted 2015E

PER of 10.2x vs. the European OFS sector average of 8.4x based on Bloomberg

consensus data. We do not believe this 22% premium is justifiable. While we

acknowledge the strength of Tecnicas balance sheet, stable dividend and high

revenue visibility, we believe the recent oil price collapse and the deteriorating

investment outlook in the Middle East (as witnessed by recent project

cancellations) should affect its order intake. We expect the resulting fall in its

backlog would lead to a multiple compression as witnessed earlier in 2010-11

(Figure 21).

30


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Q4 2014 preview. Tecnicas is yet to announce the date of its Q4 2014 results.

We forecast revenues of 830m, up 11% YoY and 1% sequentially, operating

profit of 42m, also up 11% YoY and 1% sequentially, margin of 5.0%, net profit

of 35m, up 31% YoY and 7% sequentially, and EPS of 0.66.

Downgrade to Underweight. The deteriorating investment outlook in the Middle

East has resulted in the shrinking of Tecnicas' probability weighted bid pipeline

by 29%. We believe there is high risk of Tecnicas backlog contracting over the

coming year. We downgrade Tecnicas to Underweight and reduce our cash

neutral target 2015E PER multiple from 13.4x to 8.0x (in line with the target

2015 European OFS sector average). We reduce our end-2015 price target from

47 to 29 (downside of 17% from current levels).

Figure 21: TR - share price vs. backlog (RHA)


2000

3000

4000

5000

6000

7000

8000

9000

10

20

30

40

50

60

Jun

'06

Dec

'06

Jun

'07

Dec

'07

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'08

Dec

'08

Jun

'09

Dec

'09

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'10

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'10

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'11

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'11

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'12

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'12

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'13

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'13

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'14

TR price (in ) TR Backlog (in mn)

31


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

Table 11: Tecnicas Reunidas - Quarterly estimates


Year end Dec 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14E 2014E

Oil & gas 622 655 665 672 2,614 695 710 775 780 2,960

Pow er 24 16 22 18 79 14 16 25 30 85

Infrastructure and industry 45 33 24 51 153 20 25 19 20 83

Revenues 691 704 711 741 2,846 728 750 819 830 3,128

Other operating income 3 2 -3 6 8 1 1 2 0 3

Total revenues 694 706 708 746 2,854 729 751 821 830 3,131

Revenue growth (%) +11 +8 +5 +5 +7 +5 +6 +16 +11 +10

Operating costs -654 -668 -668 -707 -2,697 -689 -710 -776 -785 -2,961

EBITDA 40 38 40 40 157 40 41 44 45 170

EBITDA margin (%) 5.8 5.3 5.6 5.4 5.5 5.5 5.5 5.4 5.4 5.4

EBITDA growth (%) +7 -3 -1 -2 +0 +0 +9 +12 +12 +8

Impairment loss amortization -2 -2 -3 -2 -9 -3 -3 -3 -3 -12

Fix ed asset depreciation 0 0 0 0 0 0 0 0 0 0

Operating profit 38 35 37 38 148 37 38 41 42 158

Operating profit margin (%) 5.5 5.0 5.2 5.1 5.2 5.1 5.1 5.0 5.0 5.1

Net financial income 2 3 2 -1 5 1 3 1 1 7

Foreign currency gains/losses 1 0 -1 0 0 0 0 0 0 0

Net financials 3 2 2 -1 5 1 3 1 1 7

PANF 40 37 39 37 153 39 41 42 43 165

PANF margin (%) 5.8 5.3 5.5 4.9 5.4 5.3 5.5 5.1 5.2 5.3

Associated income 0 0 1 -4 -3 0 0 0 0 -1

Profit from ordinary activities 41 38 39 33 151 38 41 42 43 164

Profit margin (%) 5.8 5.3 5.6 4.4 5.3 5.3 5.4 5.1 5.2 5.3

Ex traordinary items 0 0 0 0 0 0 0 0 0 0

Profit before tax es 41 38 39 33 151 38 41 42 43 164

Tax pay able -6 -5 -5 -6 -22 -6 -7 -9 -8 -30

% of PBT 13.8 13.3 13.0 19.0 14.6 15.9 16.4 21.5 18.5 18.1

Profit after tax 35 33 34 27 129 32 34 33 35 135

Minority interests 0 0 0 0 0 0 0 0 0 0

Net profit 35 33 34 27 129 32 34 33 35 135

Net profit margin 5.0 4.6 4.8 3.6 4.5 4.4 4.5 4.0 4.2 4.3

Net profit growth (%) +8 -4 -2 -24 -6 -7 +5 -4 +31 +5

# shares (m) 53.7 53.7 53.7 53.7 53.7 53.7 53.7 53.7 53.7 53.7

EPS () 0.65 0.60 0.64 0.50 2.39 0.60 0.64 0.61 0.66 2.51

Net profit growth (%) +8 -4 -2 -24 -6 -7 +5 -4 +31 +5

32


19 January 2015

Rahul Bhat

(44-20) 7134-9059

[email protected]

TGS Nopec

Neutral

Company Data

Price (Nkr) 172.30


Price Target (Nkr) 165.00


52-week Range (Nkr) 210.70-

143.20

Market Cap (Nkr bn) 17.74

Shares O/S (mn) 103

TGS Nopec Geophysical (TGS.OL;TGS NO)

FYE Dec 2013A 2014E

(Prev)

2014E

(Curr)

2015E

(Prev)

2015E

(Curr)

2016E

(Prev)

2016E

(Curr)

Adj. EPS FY ($) 2.60 2.51 2.54 2.23 1.87 2.36 1.97

Bloomberg EPS FY ($) 2.53 - 2.49 - 1.83 - 1.95

Revenue FY ($ mn) 883 878 915 871 744 898 767

EBIT Margin FY 43.8% 40.3% 38.9% 37.0% 36.0% 38.2% 37.0%

EV/EBITDA FY 2.8 3.0 2.7 3.1 3.2 3.0 3.2

P/BV (x) FY 1.82 1.71 1.66 1.64 1.57 1.54 1.48

ROE FY 21.9% 19.4% 19.3% 16.3% 13.2% 16.4% 13.2%

Adj P/E FY 8.8 9.1 9.0 10.2 12.2 9.7 11.6


Possible end of earnings downgrade cycle captured in premium valuation

Conservative 2015 guidance in line with consensus: TGS introduced its 2015

guidance during its recent CMD. Although its revenue guidance of $750m

implies a Y-o-Y decline of 18%, it was in line with consensus expectations. We

believe TGSs revenue guidance implies a 24% fall in late sales. This may seem

excessive given late sales fell by only 5% in 2009 (the last oil price/capex

collapse), but we believe this is very feasible given the structural challenges

being faced by the seismic sector in todays environment. We now forecast

2014/15/16 EPS of $2.54/1.87/1.97 which is at a +2%/-2%/-2% difference to

consensus (Source: SME Direkt).

Exit from the PRM business: TGS announced its intention of exiting the

permanent reservoir monitoring business (PRM). We believe the PRM market

has been very slow to take off and management has shown willingness to exit this

low RoE business. This should help TGS better deploy its capital going forward.

Looking for opportunities to acquire cheap data: TGS is one of the only net

cash positive seismic companies in the market and it reiterated its intention to

acquire cheap seismic data sets from the market as and when the opportunity

arises.

MultiClient (MC) model expected to gain market share in the downturn. We

anticipate the MC data model could gain further market share in 2015/16 as oil

companies concentrate exploration more on the lower risk mature basins and opt

for cheaper non-exclusive MC data. This could add further pressure to the

eu oilfield services industry report

Documents

consecutive year of

oil price stays

global ep capex likely

updated ep capex survey

downgrade cgg

vshaped oil price recovery

cgg cgg fp

downgrade tecnicas