Annual Report 2011 - PGS

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Board of Directors’ report We have implemented a profit improvement program targeting a $50 million run-rate improvement by year-end 2012. The improvement initiatives include specific cost reduction measures, a number of procurement initiatives and work-flow process improvements such as yard stays management and general logistics. As of December 31, 2011, PGS’ order book amounted to $678 million, compared with $584 million as of December 31, 2010. Seismic acquisition can be performed as contract seismic, whereby data is acquired under exclusive contractual agreements with a customer, or as MultiClient where PGS invests in seismic surveys that are licensed to multiple customers on a non-exclusive basis. MultiClient revenues are two-fold: pre-funding revenues relating to ongoing surveys and late sales from our library of completed MultiClient projects. Over the cycle, we have experienced MultiClient profitability being less volatile than proprietary contract work, given it is characterized by a pre-funding stage and late sales potential over a period of several years after data acquisition and processing have been completed. In order to optimize profitability and cash flow over the cycle, we take a proactive approach to the allocation of capacity between MultiClient and Marine Contract. Contract seismic work continued to dominate our business activities in 2011, with approximately 72 percent of active vessel time being spent on contract work. Pre-funding of new MultiClient surveys continued at high levels and amounted to 110 percent of capitalized cash investment of the MultiClient library in 2011. Data Processing & Technology PGS Beam Migration has been a key vehicle for advancing us to a leading position in high-end data processing and imaging. Beam Migration technology is used by all of our data processing centers around the world. PGS hyperBeam, which is based on the integration of PGS Beam Migration and holoSeis, improves client workflows from conception to production. It allows customers to iterate velocity models quickly, enabling them to make faster, more informed decisions that cut their costs and reduce risk. High-end imaging technology has contributed to data processing revenue growth and has resulted in higher-quality data, shorter cycle times, and better-informed decisionmaking by customers. Our goal is to provide services that are recognized as state-of-theart and consistently maintain best-in-class MultiClient data processing capabilities that secure a market share for data processing that approximates our seismic acquisition market share, which is in excess of 20 percent. Data processing for external customers is becoming an increasingly important revenue stream. In 2011, external processing revenues were $110.0 million, up from $103.5 million in 2010. The order book for external data processing has remained at high levels, and by year-end 2011 amounted to $97.1 million. GeoStreamer, the first-ever dual-sensor streamer and a proprietary PGS technology, represents a step change in streamer technology and the best proof of PGS’ technology differentiation. GeoStreamer delivers enhanced resolution, better penetration, and improved operational efficiency. To complement the GeoStreamer, we officially introduced the GeoStreamer GS technology at the 2011 EAGE conference in Vienna. GeoStreamer GS is a full de-ghosting solution, wherein GeoStreamer removes the receiver ghost and GeoSource (GS) eliminates the source ghost. GeoStreamer GS further improves GeoStreamer bandwidth and yields unrivaled image resolution. In 2011, we installed GeoStreamer on Ramform Viking and PGS Apollo. GeoStreamer upgrades will continue in 2012: Ramform Vanguard will be refitted by mid-year and all GeoStreamer vessels will have GeoStreamer GS capabilities by year-end 2012. OptoSeis is a fiber-optic seismic monitoring system that is permanently installed on the seabed. The system helps optimize reservoir recovery at producing fields by providing on-demand seismic monitoring of reservoir changes over time. In 2010, we signed an agreement with Petrobras to install a permanent seismic monitoring system at the Jubarte field in the North Campos Basin, Espirito Santo province, offshore Brazil. The equipment was manufactured in 2011 and will be installed in 2012. The acquisition phase starts in the second half of 2012. We continue our development of a towed Electro Magnetic (EM) survey system. The objective is the commercial launch of a towed EM system in 2012. We believe that our towed EM system can be a game changer in the EM market, redefining the efficiency benchmark for this technology. Two Ramform Titan-class Vessels Ordered In the fourth quarter of 2010, we announced our vessel expansion and renewal program and, in April 2011, we signed shipbuilding contracts with Mitsubishi Heavy Industries Ltd. for 58 PGS Annual Report 2011
Board of Directors’ report delivery of two Ramform Titan-class vessels in 2013, with options for another two vessels to be delivered in 2015. The estimated cost per vessel, including seismic equipment, is $250 million. By ordering new industry-leading capacity, we continue to strengthen our efficiency lead and position PGS to take full advantage of a recovery in the marine seismic market. Financial Results Total revenues were $1,253.3 million, compared to $1,135.1 million in 2010, an increase of 10 percent. Revenues from marine contract seismic acquisition decreased slightly from 2010, and the contract EBIT margin for the full year 2011 was 4%, compared to 17% in 2010. The lower profitability is caused by a sharp increase in fuel prices, lower utilization and production as a result of extended yard stays and maritime issues in the second half of the year, in addition to reduced profitability on certain long term contracts. Total MultiClient revenues (pre-funding and late sales combined) increased by $111.3 million, or 28 percent, to $501.8 million in 2011, driven by increased demand for MultiClient. Europe, Gulf of Mexico and Asia Pacific were the regions contributing the most to total MultiClient sales. Cash investment in the MultiClient library increased by $37.2 million, or 22 percent, to $203.9 million in 2011. Pre-funding as a percentage of capitalized cash investment was 110 percent in 2011, compared to 119 percent in 2010. The decrease in pre-funding level was driven by lower pre-funding on MultiClient projects acquired in Asia Pacific and offshore Australia, where the pre-funding level is normally lower than in a majority of the other regions where we operated in 2010. In 2011, the fleet allocation factor (active 3D vessel time for marine contract vs. MultiClient data acquisition) was approximately 72:28, compared to 70:30 in 2010. Operating costs, which include cost of sales, expensed research and developments costs, and selling and general administrative costs, totaled $718.5 million in 2011 compared to $659.7 million in 2010, an increase of $58.8 million. The increase primarily reflects a net growth in vessel and processing capacity as well as higher fuel costs and an unfavorable development in the US dollar. Reported research and development costs increased by $2.5 million to $24.3 million in 2011. The increase is primarily due to more activity to develop a towed EM solution ready for commercial launch in 2012. The research and development costs mainly relate to efficiency improvements in the core business activities of marine seismic acquisition and processing, as well as our efforts to develop the towed EM solution. Capitalized development cost totaled $18.4 million in 2011, compared to $13.2 million in 2010. Capitalized development costs primarily relate to OptoSeis and towed EM. As disclosed earlier we implemented a change of our accounting policy for costs relating to major overhauls of vessels with effect from January 1, 2011. The change was made to better reflect economic reality, reduce volatility and align accounting with more common industry practice and general practice among vessel owning companies. Following this change, PGS capitalizes all costs relating to major vessel overhauls and depreciates relevant assets over the estimated periods between major overhauls, which typically range from three to five years. The former policy was to expense substantially all such costs when incurred. Reported periods prior to January 1, 2011, have been restated accordingly Depreciation and amortization for full year 2011 amounted to $397.9 million compared to $344.9 million in 2010, an increase of $53.0 million or 15 percent. Depreciation increased by $13.4 million. Depreciation increased due to full year effect of PGS Apollo, which entered operations mid May 2010, investments in GeoStreamer and equipment on the chartered 2D vessel Sanco Spirit, partially offset by an increase in depreciation capitalized to the MultiClient library and de-rigging of the Beaufort Explorer during Q1 2011. MultiClient amortization for 2011 increased by $39.5 million, or 20 percent compared to 2010. MultiClient amortization as a percentage of total MultiClient revenues was 47 percent in 2011, compared to 51 percent in 2010. The net book value of our MultiClient library was $334.1 million as of December 31, 2011, compared to $310.8 million as of December 31, 2010. In 2011, we recorded a net impairment charge on long-lived assets of $2.6 million. In 2011 we participated in the establishment of the E&P focused investment company Azimuth Ltd. (Azimuth) primarily by contributing our existing equity holdings in smaller E&P companies. We own 45 percent of Azimuth and have entered into a cooperation agreement whereby we provide certain services to Azimuth and whereby Azimuth has the right to buy, for cash and at fair value, up to 50 percent of any future equity settlement that PGS may receive as payment for its library services. This transaction resulted in other operating income of $4.4 million. PGS has no obligation to provide further funding to Azimuth and has no guarantees outstanding. Operating profit in 2011 was $138.7 million. PGS Annual Report 2011 59
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