Description

Seismic is the red-headed stepchild of offshore energy as its been a widow-maker industry for many analysts (fits and starts over the past 14-years) and remains to this day hated on (mere mention of seismic makes most PMs want to puke), mis-understood (widely held belief industry facing structural issues / not cyclical) and under-appreciated. In the meantime, industry has significantly changed (consolidation in vessel arena / TGS vertically integrated w/ other vessels now + consolidation in MC portion that most market participants ignore) and 2024 has increasing potential to be an inflection year for demand (2023 was lousy for various reasons, but 2024 signals appear to be bright around offshore exploration budgets / seismic being the tail benefits from the bullwhip if / when it comes.

As noted in prior threads, I’m fond of these inflection situations (aka a sucker for pain and often early) and accordingly am long TGS NO equity. Ironically, in the past, I’ve often viewed TGS w/ envy through a glass window and have acknowledged it was just too high quality (i.e. low cost + excellent sharpshooter capital allocators in mgmt, and given superior performance rich valuation premium to rest of industry, etc) and instead chose the lonely path of sweating it out at night w/ PGS (admittedly a traditional dirty dwag w/ heightened BS leverage +  capital intensity of vessels + repeated sloppy capital allocation w/ equity raises to pay down debt). More recently, after dusting off notes and noticing TGS equity down meaningfully since the PGS deal announcement in Oct 23 (~140-150 NOK then … vs ~121 now), decided to revisit TGS and still envy TGS for all the reasons above but now can purchase at a “hated on” multiple and low-hurdle market expectations given: 1) TGS / PGS merger is v close to being finalized (my sense is next 45-days if not sooner) + 2) logic of the merger is extremely sound (vertical integration w/ vessels is savvy given vessel S/D is getting v tight) which should drive improved sentiment and focus on the situation (i.e. multiple) + 3) seismic tailwinds are in play in 2024 – i.e. earnings power follows seismic demand + 4) market under-appreciates the modest leverage profile and FCF story (~20%+ FCF / equity once synergies realized).

Lot of ways to triangulate value in TGS, but I assume a punitive ~6 – 7x EBIT multiple (reasons to believe this should trade at ~8x) and value the biz on 2025E (some synergies) EBIT which gets to ~85%+ upside to current values (not to mention collect a ~5% dividend kiss along the way). Market right now underappreciates the modest leverage at closing (my guess is the ~430MMish of net debt at YE 23 will be closer to ~250MM when the merger finalizes), and if you assume the combined market cap is inside of ~2.1Bln … I estimate the implied TEV is closer to ~2.35Bln at closing which implies the enterprise is trading at ~3.5x 2025E EBIT (unleveraged FCF proxy).

Where the divergence if at all on the “e”: Market fatigued on seismic as there’s been fits and starts … and easier to focus on offshore development stories (ala drillers) versus exploration (lumpy and difficult to forecast). 2023 was a murky year for seismic w/ spend up low single digits, my view is seismic spend will be up substantially in 2024 given more robust budgets, M&A activity heating up (transfer rights) and took time for pig to move through python on these big cap expenditures (seismic is the tail that gets bullwhipped the most when exploration spend comes back again). Difficult to gauge w/ precession, but my guess is seismic demand will be up 10-20% in 2024E … ultimately, once synergies are captured over next 18-months, combined TGS should be doing 650MM+ of EBIT on a TEV that I estimate is <$2.35Bln at closing (call it Q2 2024).

Why the multiple isn’t right: logical next question is why should TGS be worth more than ~3.5x EBIT on 2025E particularly if industry facing structural issues. My view is seismic more a play on cycle than structural + seismic is showing strides in diversifying into Green (wind, etc) that also makes their products more relevant in the future. Accordingly, ~4x EBIT is way too punitive particularly for a BS that will be net cash in the near future … using a 6-7x EBIT multiple seems more reasonable and TGS has trades at 8-10x EBIT for most of its past (granted the PGS merger puts vessels into play as well)

Why now: Q1 initial flash comes out next week / April 9^th and should set the tone for 2024 … my view is we’re going to see a healthier backdrop in 2024 for seismic. Additionally, given the merger hasn’t closed yet (sometime Q2), sell-side will be updating their numbers in the not too distant future and getting ahead of sell-side is prudent as couple of them are restricted given working in the merger process …

Catalyst

Q1 revenues flash on April 9th 

Completion of PGS merger in Q2 period (likely next 45-days)

2024 cadence next 3-9 months