More vessels at any cost!
  from: Offshore Engineer
  by: Andrew McBarnet
  Monday, April 07, 2008

There’s been nothing festive about the latest rush for more seismic vessel capacity. Andrew McBarnet has been watching the fall-out.

You would have thought that it should be the season of goodwill for the major players in the marine seismic business. They have a lot to celebrate, such as an almost unprecedented run of spectacular financial results, bulging order books, and seemingly every prospect of another bonanza coming up in 2008.

So, what you may ask, could possibly spoil the party? In a word, business. Enough is never enough for investors and the company managements that serve them. The constant imperative to grow and keep up with or beat out the competition takes no vacation. As a result these last few weeks have seen a frantic scramble for extra vessel capacity, hopefully based on an accurate forecast of future demand.

In hindsight, it looks as though the proposed acquisition of Wavefield Inseis by TGS-Nopec Geophysical Company (TGS), which has now hit turbulent waters, set off the current flurry of activity (OE September). One interpretation of that manoeuvre was that the TGS business model of sticking more or less exclusively to multi-client surveys was reaching its limit and restricting the company’s opportunities for growth. But the other incentive was to create a fully fledged marine geophysical contracting company with an existing fleet. At the time of the merger announcement, the two companies were expecting to have six 3D and seven 2D vessels at their command. In other words TGS was in one respect buying capacity, some of which had been ordered by Wavefield but not actually in the water. Indeed mid-October Wavefield announced the intended addition of another high-end 10 streamer 3D vessel in Q3 2008, to be delivered from an Asian shipyard.

One suspects that this may have spurred Schlumberger and Petroleum Geo-Services (PGS) into some recalculation of the size and modernity of their fleets and whether they would be sufficiently competitive going forward when all the new vessels under construction come on the market between 2008 and 2010. Past experience suggests that failure to invest can have devastating consequences, as Halliburton Geophysical Services discovered 15 or so years ago. The big H decided in the late 1980s to create the largest seismic company in the world by acquiring and merging Geophysical Services Inc and Geosource, two of the biggest names of the day. Their fleet was only rivalled by Western Geophysical in its size and technology. Yet Halliburton Geophysical Services basically crumbled, and somewhat humiliating, ended up being merged with Western Geophysical in 1994. A main reason for its demise was the failure to upgrade its fleet just as the demand for 3D seismic requiring more sophisticated vessels was building to a crescendo.

Whatever the decision-making process, both Schlumberger and PGS clearly concluded that they needed to increase their investment in newer capacity vessels although both already have newbuildings on order. But given how busy the seismic business has made shipyards around the world, it was evident that an entirely new vessel commission would not be up and running until sometime in 2010 at best. Rather than start at the end of the queue in the ordering process for new ships, both companies realised that there was a potentially very attractive alternative along the lines adopted by TGS. It would be much better to mop up one of the newer Norwegian companies which have been building seismic fleets on a wave of investment enthusiasm for marine seismic worldwide. In the process they would be fulfilling the long held prediction that these smaller companies would sooner or later have to consolidate or be acquired in order to survive, especially if the going got tough. Some would say they were actually created as merger or consolidation vehicles.

For Schlumberger, the takeover of Eastern Echo proved to be trickier than expected as a result of spirited resistance to its initial bid by key shareholders and unexpected spoiling tactics from rival contractor CGGVeritas. The rejection of Schlumberger’s first bid by the Eastern Echo board and some shareholders showed some chutzpah, but was not entirely surprising given the team of industry veterans who created the company less than two years ago. Among the luminaries involved are company chairman Tore Karlsson, ex-Saga Petroleum, Geco-Prakla and Schlumberger, and key investor Bjarte Bruheim, one of the driving forces behind PGS in its 1990s incarnation and nowadays chairman of marine seismic equipment manufacturer Odim and a backer of Electromagnetic Services (EMGS). Carl-Gustav Zickerman, a founder and director of the Norwegian upstart company Seabird Exploration, is also on the board and a prime mover in the company.

Competitive edge

On the surface Eastern Echo was just the latest of a number of very similar companies founded in the last few years to take advantage of market conditions in the marine seismic business. But unlike some of the others it was actually offering something to potentially give it an edge. The company in the space of a few months raised some eyebrows by ordering six high-end seismic vessels, four from Spain and two from Dubai, with the distinctive new X-Bow hull shape created by Ulstein Design which claims to provide a quieter vessel with improved performance in adverse conditions. Since the first order of four vessels at the beginning of this year, CGGVeritas has through shipping company Eidesvik independently ordered a newbuild to this design, a healthy endorsement of Eastern Echo’s choice of vessel.

After the initial shock at the ambition of Eastern Echo in launching a six-vessel fleet from a standing start, probably the biggest question mark was how the company would attract enough professionals to run the vessel operations given the global competition for scarce personnel. Apparently basing the company in Dubai and Cyprus has proved an attraction (as well as being tax efficient) and the quality and experience of the senior management has helped too. However, you have the feeling that all these creations that make their way onto the Norwegian stock listings (Eastern Echo was already on Oslo Axess on its way to the Børs), have a dual strategy: they can go it alone, but in reality the whole exercise is more about a quick killing, ie seducing one of the main contractors into buying them. Of the new wave of companies,Wavefield Inseis, created in 2005, was the first to win the attention of one of the bigger players (TGS), but Eastern Echo has been spectacularly successful in almost immediately attracting the money bags of Schlumberger with CGGVeritas a jealous onlooker in the wings.

In its initial cash offer for the company Schlumberger highlighted Eastern Echo’s six vessels on order with the option of another two. In other words a fleet expansion of eight ships already in the pipeline. Andrew Gould, Schlumberger chairman and CEO, said: ‘The potential acquisition of Eastern Echo will further boost our plans to meet continuing substantial demand for market-leading WesternGeco Q-Marine seismic technology services.’

The company stated that the offer price reflected the potential synergies the Eastern Echo vessels and management would offer when combined with Schlumberger seismic markets and technology. It also added that its WesternGeco business segment had the required organizational resources to deploy and manage the vessels upon delivery. This statement must have just deepened the foreboding in the CGGVeritas camp which could see hundreds of millions of dollars’ business about to evaporate. For its first two vessels Eastern Echo had already ordered $48 million worth of solid Seal Sentinel seismic streamers from the CGGVeritas subsidiary Sercel. It had also secured options to equip the next four vessels with the same set up. CGGVeritas was also hoping to develop a relationship with Eastern Echo that might extend to opportunities to cooperate on such things as data processing and multi-client surveys.

There is no need to rehearse the gory details here, but the rejection of Schlumberger’s first bid for Eastern Echo looked like a fairly conventional play to get the offer sweetened. Schlumberger duly obliged with an offer that the Eastern Echo board could accept. In the interim, however, CGGVeritas announced to the world just how worried it was by buying a strategic 12.67% of Eastern Echo in the open market. Its reasoning was to the point: ‘Our intent, with this minority stake, is to best position the CGGVeritas Group, and especially Sercel, for continuing cooperation with Eastern Echo in the expanding seismic market.’ In other words, we don’t want to see the uncommitted vessels all being equipped with WesternGeco’s proprietary Q-Marine acquisition system, nor do we want to lose our special relationship with Eastern Echo. In passing, this seems a case which conflicts with the longtime claim by CGGVeritas that being a contractor and a supplier of equipment in the same marketplace presents no problem.

Schlumberger and CGGVeritas have had what are described as amicable discussions about the business-related issues arising from the Eastern Echo takeover. It is not clear yet what if anything will transpire from these and any further talks which will sweeten a bitter pill for CGGVeritas.

Merger hiccups

Meanwhile a much uglier genie has crept into the merger deal struck in August between TGS and Wavefield Inseis. The fly in the ointment, actually more like a hornet, has been a dispute over the profit shortfall by TGS in its Q3 earnings announced in October. The market reaction took a huge chunk out of Wavefield’s share price as a result of the announcement and the company’s principals have been understandably perturbed. They have immediately wondered why the problem didn’t come to light during the merger discussions.

The story from TGS regarding its Q3 earnings report is that multi-client and contract revenues were both adversely affected by productivity issues on two newly delivered 3D vessels. In addition, Gulf of Mexico multi-client library sales were below management’s expectations due to difficulties in closing sales at the end of the quarter, normally the time of highest sales commitment activity. The company’s management put the delay down to a shifting of the usual scheduled time of the Central Gulf of Mexico lease sale from its expected date of March to October. Apparently this created a different buying pattern among TGS customers for its multi-client surveys. As a result, net late sales were down 16% compared to Q3 2006.

Ahead of a Wavefield EGM requested by shareholders last month, TGS with the consent of Wavefield initiated an external review of the sequence of events by PricewaterhouseCoopers (PwC). Wavefield supported the review but made clear that it had not been invited to participate in the review itself or its terms of reference. The subsequent report by PwC based itself on analyzed data concerning revenue distribution from late sales within the last month of each TGS quarter over several years, together with historical success ratios and the high volume of outstanding quotes. The report’s conclusion was that no information likely to alter the assumptions expressed by the TGS management for obtaining the third quarter revenue forecast had been identified. It observed that other companies’ sales record regarding the Gulf of Mexico in the same period reflected a similar downward trend. According to CEO Hank Hamilton: ‘The findings and conclusions from the thirdparty review support the facts that TGS performed all its obligations in accordance with its high corporate governance standards.’

The hastily compiled report from PwC was not enough to appease Wavefield shareholders who at an EGM on 19 November voted overwhelmingly for a postponement of the merger until such time as there was an independent third party review with unrestricted access to the relevant TGS company material. A rider noted that should improved merger terms be forthcoming from TGS, these could be considered ahead of the outcome of any review. At this point TGS played hardball, stating: ‘TGS stands by its previous public statements concerning its position. Namely, there is no legal basis for a delay in the merger, TGS is not in a position to consider a revision to the terms of the existing agreement, TGS believes that the PwC report covers all relevant issues hence TGS will not consider another third-party investigation into its third quarter revenues. TGS is reviewing its full range of legal alternatives and its rights under Norwegian law.’ At the time of writing it seemed as though Santa was going to have his work cut out to resolve the two positions before Christmas.

The travails of its competitors must be a source of some merriment at PGS because last month the company achieved an expansion of its fleet without attracting any controversy, doing exactly what Schlumberger and TGS have been struggling with. It announced mid-November that it had acquired 78% of Arrow Seismic, another Norwegian seismic company that has only been in existence for a couple of years but has built up a significant fleet with some newbuilds to come. The PGS purchase, which was to be followed by a mandatory offer of NKr96 per share valuing the company at NKr2256 million, represented a premium of 50% in relation to the last closing price of NKr64 and a premium of 37% to the issue price in the IPO in May 2007 of NKr70 per share.

Market heat

Such premiums underline how hot the market is and the measures the larger companies are prepared to take in order to maintain or increase their fleets to maximize their participation in the benefits. Arrow Seismic, the PGS takeover target, owns and operates two 3D vessels and has three vessels under conversion to 2D/source vessels, including one vessel with possibilities for upgrade to six-streamer operation. The company also has four purpose-built high capacity seismic new buildings on order for delivery in 2008 and 2009. Of these nine vessels, four are currently chartered to other seismic companies, while the intention is to include the remaining five vessels in PGS’ operations, including the last two high capacity newbuildings with delivery in Q2 and Q4 2009 and the three 2D/source vessels.WesternGeco will get its hands on two of the new Arrow vessels as part of options already exercised.

PGS said the acquisition was in line with its strategy of growth in the highend segment of the seismic acquisition market. It noted that it would gain access to two state-of-the-art 10-12 streamer newbuild vessels at cost and delivery times which were substantially more attractive compared to alternative newbuild projects. The source/2D vessels were also expected to be useful given the increase in wide azimuth seismic surveys.

Not mentioned anywhere was that the sale of Arrow Seismic represents an extraordinary repeat performance for the Reiber Shipping Group in the space of two or three years. It seems only yesterday, actually 2005, that CGG as it was then acquired ExRe (Exploration Resources), in which the prize was Multiwave Geophysical and its small seismic fleet of 2D, 3D and OBC vessels. In fact both ExRe and Multiwave were offshoots of Rieber Shipping’s seismic interests. Inadvertently the sale of ExRe resulted in the departure of a number of disaffected senior Multiwave management who went on to form Wavefield (see above!).

Meantime Arrow Seismic was founded by Rieber Shipping in October 2005, Oslo Axess listed in May this year, and sold in December. Rather intriguingly, the company had no employees, a virtual company . . . all its personnel were on hire from Rieber Shipping. In this case a Happy Christmas all round. OE

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