TGS ASA (TGSNF) Q1 2023 Earnings Call Transcript
TGS ASA (OTCPK:TGSNF) Q1 2023 Earnings Conference Call May 11, 2023 3:00 AM ET
Kristian Johansen – Chief Executive Officer
Sven Børre Larsen – Chief Financial Officer
Conference Call Participants
Cristopher Møllerløkken – Sparebank 1
John Olaisen – ABG Sundal Collier
Kim André Uggedal – SEB
Erik Aspen Forsa – Carnegie
Steffen Evjen – DNB Markets
Good morning and welcome to the Q1 2023 earnings release from TGS. My name is Kristian Johansen, I’m the CEO of TGS. And with me today we have our CFO, Sven Børre Larsen, who’s going to go through the financial section of the presentation.
So I’ll start by referring to our forward-looking statements that you can read after the presentation and then hit the financial highlights right away.
So we had total POC revenues of $229 million in the quarter that compares to about $114 million in Q1 of 2022, so an increase of about 100%. We had late sales of $46 million in Q1, that’s down relative to $76 million in the same quarter of last year. And this is partly due to the transfer fees that we collected in Q1 of 2022. We had early sales of $98 million compared to $34 million, so almost a 300% increase from Q1 of 2022.
And then we’re also really pleased to see that our Acquisition business unit, so the former Magseis Fairfield, had net revenues of $79 million, but gross revenues of $97 million in the quarter. And that’s an 18% growth in net revenues. And the corresponding growth in gross revenues is about 26% year-on-year.
We had an EBITDA of about $119 million dollars in Q1, that compares to about $83 million in the same quarter of last year. We had a very strong free cash flow in Q1, $106 million and that compares to $26 million in Q1 of last year.
Finally, and last but not least, we see a continued momentum in contract inflow, we have $248 million in new contracts signed in Q1 2023. So we clearly see a continued recovery in sales and contract inflow. And I think this slide does a good job in terms of highlighting that. So number one is that you see a 30% year-on-year increase in POC Multi-client revenues. And then on the right hand side, you’ll see 113% increase in proforma contract inflow for TGS.
So although late sales came in slightly lower than most of you expected and lower than I expected as well for Q1, I think these slides really highlight the fact that the industry is still growing, and it’s growing at high multiples as we speak. And I think this slide also shows you that, so this slide is showing the activity level for Q1. And it’s a combination of Multi-client activity, Acquisition activity for our OBM crews and DES, so Digital Energy Solutions activity in the quarter.
And if we start on the left hand side, and start at the top there, we see a onshore project called MC or an MC project called Beyond Far East, that’s a Permian project. It’s one of the first onshore acquisition projects we’ve done in a long time. So we’re starting recording there sometime this summer or fall. We have then Multi-client projects in the US Gulf of Mexico Amendment 2 and Engagement 3, and you will continue to see new OBN projects in the US Gulf of Mexico in line with our strategy of really covering our underlying vast data now with OBN data.
We had a crew, an OBN crew in Guyana in the quarter. And that’s part of a long-term contract, which means that we’re going to stay in Guyana for quite some time. And then finally, we had two Multi-client surveys in Brazil, we had one in the Foz do Amazonas, and then we had one in Santos Sul further south in Brazil.
I’m glad to see more activity in Norway as well. We had an OBN crew in Norway during the quarter, we also had reservoir monitoring activity in Norway. And then finally in Denmark, we were part of the Greensands CCS project that we completed during Q1.
If you move further east, starting with Bangladesh, is one of these areas that are still considered very frontier and TGS is out there together with SLB acquiring 2D data in Bangladesh, a very promising area. We have OBM activity or had OBN activity in Malaysia during the quarter. We had a Multi-client survey that we completed in on the West Coast of Australia, which is called Capreolus.
So in summary, it’s probably the highest activity level that we’ve ever seen. And you see that from our investments in the quarter too. It’s been record high activity level. And this is obviously what’s going to produce late sales going forward. So very optimistic in terms of the activity level in Q1 and as you’ve seen from our annual guidance that’s just going to continue throughout the year with high investments and lots of interesting projects. And a lot of OBN as part of that mix. And obviously they’re part of the rationale for the acquisition of Magseis.
And talking about Magseis Fairfield, the Acquisition business unit, which is now called, so used to be the former Magseis Fairfield. We call it Acquisition now, it’s a separate business unit within TGS. And they’re off to a very good start and we’re very pleased to see that. We had a strong revenue growth of 18% in the quarter. And as I said, if you adjust for the elimination of internal revenues, we had a growth of 26% year-on-year with our Acquisition business unit.
We had a positive EBIT margin, and a positive free cash flow in Q1. And that’s particularly impressive given the history of the company and the history of losses. And it has strengthened our belief that we can turn this into a profitable business already in 2023. So that’s really good to see. We got a great backlog, acquisition backlog of about $283 million, as we speak. And that number continues to go up, because we have a strong pipeline of new opportunities as well.
The synergy realization is ahead of plan. Right now we have realized about $7.5 million of synergies from the transaction. Obviously, it comes at a cost too and Sven will go through some of the one-off costs that we’re charging relative to the synergy takeouts. But it’s really good to see that we’re ahead of the plan. And we think we’re going to take out synergies in total of somewhere between $10 million and $15 million, probably in the higher end of that range. And again, we’re on track or slightly on ahead of our plans in terms of synergy realization from Magseis Fairfield.
We got a new organizational structure. So Carel Hooijkaas, the former CEO of Magseis Fairfield is heading our Acquisition business unit. And he’s got a new team consisting of former TGS operational people and former Magseis Fairfield people. And we think we got a winning combination there. And we’re, again, we’re very optimistic to the future of that business. And we feel the timing of that acquisition was as good as it gets.
Last, but not least, and this is obviously important in an Acquisition business unit, continued safe operations, where we track pretty much in the upper 10% or 15% of the industry in terms of our safety results.
And then the DES or Digital Energy Solutions, which consists of a lot of our renewable activities, you see strong growth. We have revenue growth of 63% year-on-year from Q1. And if you adjust for acquisitions the pro-forma corresponding number is about 40%. But it’s still a very impressive growth rate in our DES business.
And I talked about the Lidar Buoy campaigns that are progressing well. We now have four Lidar Buoy in New York Bight. There’s going to be more or more Lidar Buoys added, we’ve just gone through a strategy in that regard. And we’re ready to place our new Lidar Buoys in line with our strategy of what we’ve done in seismic over the years.
We apply exactly the same business model where a Lidar Buoy would be basically the same as a seismic vessel. It’s out there and collecting data for about 12 months. And then we’re licensing this data to multiple clients. We get good prefunding on the projects. And we expect strong late sales, as well as, as long as you have all these awards that you see, particularly in the New York Bight, but you will see this growing all over the world in the future.
4C Offshore, our intelligence company that we acquired back in 2021, continues to show profitable growth. So very happy about the acquisition of 4C. We see CCUS opportunities materializing in North America, particularly based on the Inflation Reduction Act that Biden announced more than half a year ago now. But that’s really put the entire industry on steroids in terms of activity levels, so quite optimistic about the future of that as well.
And then very strong customer engagement. We just got back from a Wind Conference in Copenhagen. And was far better attended and most of the oil and gas conferences that we visit. So really, really good to see that this industry is growing fast, and a high acceptance of our products that we bring to the market. So the team has done an excellent job in really putting TGS on the map, also on the offshore wind industry.
And you see the revenues on the right hand side, but you see the growth, but you also see that this starts to become quite a material part of the overall revenues. And if you apply the industry growth to this number, you will see that over time, this is going to be quite a sizable business for TGS.
It’s also good to see that we continue to perform well on the ESG area. This just shows that we’re a great place to work we just were was a winner of something called the ALLY Grit Awards in Houston. And then we are a member of the Bloomberg Gender Equality Index, meaning that we satisfy the criteria of a balanced workforce which is obviously critical for an international company like TGS.
So with that, I want to hand it over to Sven Børre who’s going to go through the financials and then I’ll come back and talk about the outlook. Thank you very much.
Sven Børre Larsen
Thank you for that Kristian, and good morning to you all. As we indicated during our Capital Markets Day in March, we are going to — in the Analysis part of the financial presentation, we’re going to focus on percentage of completion revenues where early sales are recognized or measured in accordance with percentage of completion of the different projects that we are doing at each — every point in time. Whereas the P&L account, the balance sheet and cash flow will still be in accordance, obviously with the IFRS standards.
So on this page here, we have listed our POC revenues by type or by kind of the commercial nature of the revenue streams. So starting with, with early sales, on the top left hand corner, we had high early sales, strong increase sequentially, and also year-on-year in early sales. And that, obviously has to do with a strong order inflow that we experienced during the second half of last year, and also in Q1 of this year, which has resulted in a steep increase in our Multi-client investments. And that, of course, gives us a correspondingly steep increase in POC early sales. So $98 million dollars recognized in Q1 2023.
Late sales, as Kristian already alluded to, were a bit weak in the quarter and also weaker than we anticipated ourselves at the beginning of the quarter. And it was also obviously weaker than the analysts in the market expect. And you can only speculate on the reasons for that. But of course, the financial turmoil related to banks in the US and Europe, didn’t — it wasn’t positive to put it that way, towards the end of the quarter but it’s obviously difficult to quantify the effect. And also when you compare to with the same — with the numbers for the same quarter of last year, you need to bear in mind that we had substantial transfer fees booked in Q1 of 2022, so all-in-all, a fairly weak late sales number in Q1.
Proprietary sales, $86 million. This includes, obviously the Acquisition business unit that makes up the majority of that, but it’s also some revenues related to proprietary imaging projects included and also some proprietary revenues from our Digital Energy Solutions business included in this number. So this is, we obviously see a steep increase here since Magseis was not included in the comparables for Q1 of ’22, so $86 million in this quarter in proprietary sales.
This gave us total revenues, total POC revenues of $229 million in the quarter. And that is essentially a doubling from what we had in the same quarter of last year. But if you look at it on a pro-forma basis and include the net revenues of Magseis, in Q1 2022, the underlying growth was about 27%.
And then we look at the POC revenues by business unit. In the first chart on the top left hand side, we have lumped Multi-client & Imaging together. They have $138 million combined in POC revenues compared $107 million in this quarter of last year.
Then you see Digital Energy Solutions. We’re really happy to see a strong growth there. Parts of it, roughly 20 percentage point of the 63% year-on-year growth is related to the acquisition of Prediktor that we closed in July. Which means that organic growth accounts for roughly 40% or was — we had roughly 40% year-over-year growth organically in the Digital Energy Solutions business.
Looking at the Acquisition business unit, which essentially consists of Magseis, we had $79 million of net revenues. And then we had $18 million of work that the Acquisition business unit conducted on behalf of our own Multi-client business and that was obviously related to the Amendment 2 project that we that we conducted in — or that we did in Gulf of Mexico during the quarter.
We are also going to do a little bit of internal work in Q2. So it should be $6 million, $7 million of eliminations in Q2. But apart from that, we haven’t really booked any internal work for the remainder of the year. So the elimination part of this chart should be much smaller, going forward. And again, total revenue to $229 million, as I already alluded to on the previous page.
Then looking at operating costs, cost of goods sold were $58 million in the quarter. And this is obviously tightly linked to the proprietary revenues. So if you look at cost of goods sold, it accounted for 67% of proprietary revenues this quarter, that’s probably a little bit higher than we expect going forward. So this percentage number should probably be in the low 60s going forward.
Personnel cost was $31 million in the quarter. Here you should note that we had roughly $2.4 million of non-recurring restructuring charges, severance packages and things like that related to the Magseis integration process. So the underlying personnel cost was somewhat below $30 million. And as we said, on the Capital Markets Day in March, we expect this to be plus minus $30 million as a quarterly run rate, going forward.
Other operating costs were $21 in this quarter, and this includes $5.5 million dollars of non-recurring restructuring charges, mostly onerous lease provisions related to office contracts that we no longer need in the combined business. So here, we expect this number or this, the quarterly run rate to be a little bit below $20 million per quarter going forward. This gave us a POC EBITDA of $119 million and this is to be compared with $83 million dollars in the same quarter of last year.
And then, as we also discussed on the Capital Markets Day, we have introduced a POC amortization number. And we show that on the chart on the top left hand side. So you see at the lower part of the bars, they represent the straight line amortization, which is the same in POC and in the IFRS world. And as you can see, this is a fairly stable number going forward, it doesn’t move much from quarter to quarter. It can move, obviously depending on the new projects that are completed, and other projects that are becoming fully written down during a certain quarter, but it should be reasonably stable from quarter to quarter.
And then we have the POC accelerated amortization chart. This number is calculated by measuring the accelerated IFRS amortization in accordance with POC on the individual projects. And this will run jump around a little bit dependent on where early sales are in each and every quarter. It can, in certain circumstances also be affected by extraordinarily high late sales on certain projects but that’s not going to happen every quarter. So we’ll discuss that as it happens.
But if I was an analyst and wanted to estimate this going forward, I would link it to early sales as a percentage of early sales. So this quarter, it was 37%. And I would think that it’s going to be 40 something percent on a normalized basis going forward, although be prepared that it may jump around a little bit from quarter to quarter. So this quarter in total had $76 million of POC amortization and this is to be compared with $58 million dollars in the same quarter of last.
And then depreciation on the top right hand chart, so obviously going significantly up due to the inclusion of Magseis Fairfield. So we booked $19 million in this quarter. And that obviously also should be fairly representative for a run rate going forward. And this gave us a POC operating results of $25 million this quarter compared to $21 million in the same quarter of last year.
And then the Multi-client investments, as I said initially, were quite high in the quarter, $133 million and we had an early sales rate of 73%. We stick to our guidance. We, as you may remember, we updated the guidance on the 7th of March in connection with our Capital Markets Day, where we said that we expect it to be above $350 million. And we stick to that guidance and we expect early sales rates to be minimum 70% for the year as a whole. But it will be a front-end loaded investment profile, where it should decline gradually in the coming quarters.
Then we have provided here a bridge between POC revenues and IFRS revenues. As we already discussed POC revenues are $229 million in the quarter. And then we recognized $42 million of revenues related to projects that were completed during the quarter or performance obligations that we met on WIP or work in progress projects during the quarter. And then we had $98 million of revenues recognized on a POC basis in the quarter which resulted in IFRS revenues of $173 million in the quarter. And you can find the $173 million here in the P&L on the total revenues line there. So that’s the bridge between POC and IFRS.
The cost elements are the same in the POC world and IFRS world. So this gave us an IFRS EBITDA of $63.5 million. And you can see that the straight line amortization is at $39.6 million, which is the same as we looked at on the POC charts, whereas accelerated amortization is different. It was $12.2 million in IFRS in the quarter. Then we had depreciation of $18.5 million, which is the same, which gave us an operating result of minus $6.8 million in the quarter.
As you can see, we had $6.1 million negative in net financial items. This is partially due to some one-off effects, partially due to currency movements and we expect it to be somewhat lower than this or a somewhat lower negative figure, going forward. Also as we have now completed the refinancing of their old Magseis facility and with the TGS credit rating, we all obviously get a lower interest rate from basically from 1st of May and going forward.
Subtracting tax or adding tax cost of 4.0 or a positive tax contribution of $4.2 million, we ended up with a net income of minus $8.7 million in our IFRS accounts which corresponds to negative $0.07 per share in EPS in the quarter.
Looking at the balance sheet, it’s not much to say here other than concluding that the balance sheet remains strong. The $45 million of interest, net interest bearing debt is included in current liabilities in the balance sheet as of 31st of March because we triggered the change-of-control clause in the Magseis loan agreement when we acquire them. But as I said, we concluded the refinancing at the end of April, so it’s now considered to be a non-current liabilities going forward.
Looking at the cash flow statement, we had strong cash flow from operations in the quarter. And that is obviously mainly related to the strong late sales that we had in Q4. As you know, we collect a lot of the late sales that we have in any given quarter in the quarter afterwards. Since a lot of the late sales is happening in the last month of the quarter.
Also, you should note that the investments in Multi-client in our library, the cash investments in Multi-client library, were only $67 million in the quarter. And as you as we saw earlier, the capitalized investments in the Multi-client library were $133 million in the quarter, which means that it’s been a payable build up during the quarter, which means that although we had very strong cash flow in Q1, we expect to see a much lower negative cash flow in Q2.
So you should see that the net cash flow is significantly negative in Q2 then we expect it to be fairly thrilling Q3 and then quite positive again in Q4. So net cash flow from investing activities were minus $72 million in Q1 and then we had minus $85 million of net cash flow related to financing activities. This includes $11.6 million of lease payments related to vessel contracts that Magseis or our Acquisition business unit have.
And also, the acquisition of the remaining Magseis shares of $54.4 million is picked as a financing activity, it’s basically buying out the minority interest that we had at 31st of December. So this gave us fairly strong net cash flow in the quarter. Despite the investments in Magseis shares and despite the dividend payment, we had net cash flow $20.6 million in the quarter, which gave us cash balance of $208 million at the end of the quarter.
And obviously, the strong cash flow and the solid balance sheet allows us to continue to pay a dividend despite increasing our investments quite significantly. So the Board has once again resolved to pay $0.14 per share as dividends in Q2, the Ex date due to public holidays and so on in Norway next week, will be on 22nd of May. And the payment date will be the 5th of June.
And with that I hand it back to you, Kristian.
Thank you, Sven Børre. And I’ll just kind of talk about the outlook for the remainder of the year and obviously the years to come after that. But I think in general, after the quarter ended, and we were a bit disappointed about the late sales.
And I actually met with six or seven of our largest clients and ask them, what happened in late Q1, we typically see a big pickup in late sales. And it’s interesting to hear their reaction because their reaction is that we spent a lot of money with TGS in Q1, why are you complaining? And the fact is that they don’t distinguish between late sales and prefunding or new commitments to new survey, they just look at what kind of commitments they’re making to us. And they felt like in Q1, they’ve made larger commitments to TGS than they’ve done in a very, very long time. And they told me that there has been no changes whatsoever in terms of their spending plans for the future.
And I think that leads me to the first slide here, which shows that the year-on-year change in E&P CapEx was 32%, in Q1 of 2023. It’s up from 21% in Q4. It’s a very strong increase in terms of E&P CapEx. And if you look at the Multi-client spending, and you look at the year-on-year increase in Multi-client spending, you see that it was lagging, the overall E&P spending, which is not unusual, because we’re more exposed to the exploration area. But in general, you now see that it’s really picking up and we see a stronger year-on-year growth in Multi-client spending that we see in overall E&P CapEx, which is a very strong sign.
So again, our clients have not changed their view on the markets, they’re committed to invest, they’re committed to invest in TGS data. And they were surprised about my question about why don’t you buy more. So I think that’s a really important distinction for you guys to be aware of is that our clients don’t look at whether they spend money on old data or new data or new commitments for the future. They look at what they’re committing overall and that number was really good in Q1.
And that’s also highlighted by their license round activity that we see in 2023 and onwards. I mean, there is a record high number of licensing rounds. If you start in North America, you see Canada, you see US Gulf of Mexico, that’s going to be the last lease sale of the current five year plan. Then there is a new five year plan in the making right now, that may take a bit of time to finish that plan. But we think that if there is not going to be a lease sale in 2024, we surely think it’s going to happen in 2025. And keep in mind that the service that we are acquiring in the US Gulf of Mexico now are not really impacted by lease sales because these surveys are mainly over held acreage. And we have very strong pre-funding on the surveys. And I expect the late sales will continue to tick in and we haven’t seen any reduction in that in the recent months.
In Latin America, we have the permanent APA Round in Brazil. We have rounds in Suriname, Guyana, Barbados, Trinidad, Uruguay and Argentina. And the good news is at TGS is present in all these countries. We have a lot of data in Latin America and we’re in probably stronger position for this than any one of our peers.
Europe we have the APA round in Norway, and then if you move to Africa, which is also really interesting, you see a sharp pickup in activity. You see countries like Angola, Egypt, Gabon, Ghana, Lebanon, etc., etc. I’m not going to go through all of them but I’ll talk a little bit about Liberia where you saw Exxon picked up some blocks in Liberia, and they made an agreement with the government in Liberia.
And you know what happens when some of these Americans enter into a new country where there has been limited exploration activity for a while, the other guys tend to follow. So I think that’s a really, really good news for Liberia. We see high activity in Nigeria, where TGS has data. We see Senegal, Sierra Leone and Somalia were a combination of TGS and Spectrum had a lot of data already. So we’re very well positioned for the uptick that we see now in Africa.
And then if you move further east, and you look at Asia Pacific, countries, like India, Indonesia, Malaysia, and Bangladesh have this perfect combination of a very high population, a fast growing population, and a huge need for energy. So the push now to do more exploration in some of these countries is just enormous, as we speak. And again, these are countries where TGS already has a strong database. These are countries where TGS is doing a lot of reprocessing of that data to make sure that we’re well prepared for the uptick that you see in the activity level. This is a very interesting slide to look at. And it makes us really optimistic about the future, whether it’s 2023, or the years following 2023.
I want to turn back to our Acquisition business. And this is the activity plan for the remainder of 2023 for the former Magseis Fairfield and now the Acquisition business units. As you see is pretty much filled up for the remainder of the year, the ZXPLR 1 is fully booked for the remainder of the year, it’s going to work in Guiana. You see the ZXPLR 2, there is a gap in Q4. But obviously that’s we’re part of a number of tendering rounds as we speak.
And then obviously, we have Multi-client projects that are competing with some of these tenders to get the capacity. Just what we thought and just what we planned for when we acquired Magseis is that we should have this combination of a strong proprietary market. But we also have these Multi-client projects that are being lined up now for more acquisition activity, particularly in the US Gulf of Mexico.
Z700 had a relatively open Q1, but then you see activity is filling up. So we’re filled up until the end of Q3 and we think that’s going to, that’s we were part of tender rounds as we speak on that one as well, which means that we’re probably going to fill that over the next few months. The Mass crew is has been busy in Africa, Middle East, Asia Pacific. It’s moving to Europe and then it’s moving to the US Gulf of Mexico to do a proprietary contract that we are awarded quite recently.
We have full utilization, long term contracts on our reservoir monitoring crews. And it’s also great to see that we see a pickup in activity related to renewables where we basically filled up our capacity in Q1 of 2023. So very much according to our plan, and probably slightly ahead of the plan that we announced after we acquired Magseis Fairfield.
That leads me to the contract backflow and an inflow. So we have a backlog in the — Acquisition backlog of $283 million and now at the lower left corner of the slide, so $283 million in Acquisition. In addition to that, we have $183 million in Multi-client backlog. So the total of that is about $470 million. And then we have an additional $175 million of IFRS backlog. So projects that have not been recognized revenues from in the IFRS accounts.
The contract inflow was particularly strong in the quarters. Sven touched on that, but $250 million, and you see three quarters in a row with very strong contract inflow, which of course means that we are very confident in terms of our overall guidance on investments for 2023.
I’m not going to spend too much time on the timing of expected recognition of the Multi-client backlog but you can see the pie chart to the right here and obviously make up your own numbers in terms of what you expect from prefunding in the next couple of quarters. So we certainly believe we have a compelling investment case. It’s a combination of a sharp expected recovery in E&P spending, which I think you’ve seen on some of our slides today.
We are ready to capitalize on the M&As and investments that we’ve done during the down cycle. TGS has been known to take some risk and make counter cyclical investments in the down cycles. We did that this time too. And we’re extremely pleased about that position as we enter into a better market.
The OBN margin improvement and free cash flow, again, we reported in Q1 a positive margin and a positive free cash flow from our Magseis business. So the Acquisition business unit, very pleased on that. We’re capitalizing on the energy evolution with a 63% growth within our DES business which is a promising growth rate and which I feel — I’m feeling very, very certain that we’re going to continue to see growth in our new energy business, which is great to see. And everything backed by a very strong financial strength and obviously a balance sheet.
So that leads me to the summary of today’s presentation. So we had total POC revenues $229 million, it’s up by about 100% compared to last year. We had late sales, we discussed that. Yes, it was slightly weaker than we expected and weaker than you expected but we had early sales of $98 million, which is about three times what we had last year. And we have the Acquisition business unit that is showing profitability and strong growth. EBITDA of $119 million, very strong cash flow, $106 million, and then continued momentum in terms of contract inflow, and about $250 million of new contracts signed in the quarter.
So with that, I want to leave it to questions and open up for questions here and also from the people who are watching us on the webcast. So Sven will come up and go through those questions.
A – Kristian Johansen
So any questions from the room here? We’ll start with Christopher.
Christopher from SB 1, just two questions. First, could you indicate the EBITDA contribution from the Acquisition business in Q1? And secondly, I know late sales are back-end loaded. But could you give some flavor on how you’ve experienced second quarter so far?
Why don’t you take the first and I’ll take the second.
Sven Børre Larsen
Yeah, so the EBITDA contribution from the Acquisition business unit was probably around roughly $14 million, $15 million, I would say I haven’t done the exact calculation, so but that should be around that level.
And then on late sales, let’s go back, because I’m not going to answer your question specifically, as you know, but I think what I can do is to give you some indication. So in Q1, again, it was slightly disappointing compared to our expectations. Part of the reason for that was that Q4 in 2022 was way better than we expected. So if you look at the two quarters overall, we’re actually quite pleased with the late sales. But I think what happened in Q4 is that we had really, really good and big sales to our super major clients and IOCs, so really strong in that regard. So that also means that we should expect to get a lower contribution from those guys in Q1 because they’re working the data and they have less capacity than they did in the past to work all these datas, they acquired massive amounts of data in Q4.
So we were actually dependent more dependent on NOCs in Q1. And as you know, with NOC, some of these processes takes much longer than with IOCs. And we had a little bit of that that was delayed, and it was pushed into Q2, some of that has already been closed in Q2. We think most of it will eventually be closed in Q2, but we’re not in full control of the timing of such deals. So that’s partly the answer to your question.
Next question. John and Kim both have their hands up.
Thank you, this is John from ABG. Recently, we’re all looking closely at late sales, and particularly and there may be too much. But anyway, like new term is important indication for the medium term as well. And you said that Q1, the oil companies told you that in Q1, they spent a lot of money with you guys but you are investing so much, so they spend it on Multi-client prefundings that are late sales.
I just want to, in Q2, your Multi-client investments level is going to be high in Q2 as well. Is that an indication that late sales also will be suffering, like losing market share, so to speak in Q2?
We don’t have any reason to believe that. And I think, if you look at some of our competitors, in Q1, they also posted relatively weak late sales. And I think if you look at our percentage of the overall market, it was actually pretty good. Our market share of late sales was actually really good in Q1, we were far better than our peers. But I think going into Q2, we don’t expect to see any — I mean, there is no reason to believe that it’s going to be lower than what we thought at the beginning of the year. So we have no data points that indicate that
Sven Børre Larsen
But and let me just add also, on that topic that when you look at Q2 late sales, you have to also remember that comparables for Q2 last year contain quite significant transfer fees.
Sven Børre Larsen
So that that’s really important to bear in mind.
I think if you look at the overall industry and the transfer fees collected back and I’m not going to touch on TGS transfer fees, but I think the overall industry, we’re talking about a few $100 million dollars, right?
And we will probably number three or four of those players in terms of collecting that transfer fee. Say, it’s a very unusual Q2 of 2022 but you know that.
For sure. But do you have any transfer fees in your backlog now?
We always have two or three potential transfer fees that we are discussing. And as you know, and you probably saw that from one of our peers who reported quite recently, I mean, clients are not easy. It’s not — they’re not easy to deal with, even if it’s contractually obligated to transfer the data. I mean there’s still tough discussions to be had. And I think what we’ve been very clear on at TGS is we’re not going to give away anything, because if it is a contractual commitment, we’re really going to push that hard.
And that may sometimes have an impact on the timing of collecting that. We never recognize a transfer fee until it is collected, by the way. But I think in general, I think there’s perhaps one or two that could happen in either Q2 or Q3. It’s lower visibility right now than we had at the same time last year, because last year, we had some of those big transactions taking place, one in Norway, and one mainly in the US Gulf of Mexico.
And the ones that you are mentioning is that like, could happen? Is that like you potentially could book the revenues? Or is it like an oil M&A that could take place?
No, it’s more of a transactions that have happened and then we have discussions with the clients, whether they’re either going to turn back the data, or they’re going to take it all, and they’re going to pay us or they’re going to negotiate some kind of material between —
Is it material, potentially material?
We’re talking about five to 10.
And then if I may, a couple of questions from the OBM business. First, when it comes to short term here as well, the — is the integral of the backlog slide, a good indication of revenues for Q2?
Sven Børre Larsen
For, sorry, I didn’t?
The backlog slide that you showed on the outlook.
The pie chart?
Sven Børre Larsen
For the OBN. Is the integral, of course like integral over the flat columns an indication of the revenues for Q1?
Sven Børre Larsen
Yeah, for the OBN business or the Acquisition business, you should look at the chart, the activity chart that we provided. And you — yeah, you see the backlog number, and then you kind of can figure out an approximate distribution of that backlog by looking at the contract chart that we provided. So that’s probably the best way of looking at it.
I may ask, the Guyana job in particular, I know that’s a big job and a potential multi-year extension as well and that’s what seems like to be very fairly high rates. Is it the first time that you would be doing open Magseis has been doing OBN in Guyana? And may I ask, how is the project developing? I know you had from time to time in the past you have had OBN and Magseis has had problem when entering a new areas, they did realize that the currents and wind and difficult yard players, where they needed help?
Sure. Yeah, I mean, the answer is it’s the first contracting Guyana. And I think we all know what the client is behind that, the commitment. So, so far, it’s been a good survey. It has been, the operational track record has been good so far. And we’re making a profit on that contract.
So no operational hiccups or issues so far?
And then very quickly on the — sorry, Kim but the final question. My final question.
In fact, the history shows that well Magseis has a tendency to lose money when TGS is the client on the other hand. The other side and obviously, that’s a good problem to have. And that was actually the case in Q1 as well. So —
Yeah. May I, just a housekeeping question on the EBITDA that you mentioned in December, $14 million to $15 million US dollars ballpark. I presume when Magseis is working for you guys, the revenues equals the cost. So there’s no EBITDA contribution. Is that correct interpretation?
Sven Børre Larsen
Thank you. That’s all for me. Thank you, for now at least.
Kim André Uggedal
Kim from SEB. I guess it’s the same question. Let me try to ask it slightly different. If we play around with Multi-client sales, you had a slide there showing that the industry is up some 30% to 35% or Multi-client sales. You are probably looking to double your early sales this year compared to last with increased investments. Industry may be slightly behind but in that magnitude. So does that mean that early sales are absorbing a bit bigger part of the Multi-client budgets in ’23 versus ’22?
We haven’t done that calculation. But I think, as far as I understand, and when you look at some of the guidance from our peers, I mean, it’s significantly lower in terms of investment than what we do. And I think in that regard, we’re going to increase our market share significantly on both new investments but also on the prefunding side of the revenue. So I think there is still plenty to be spent on late sales as well. And I’m not too concerned about that. And as I responded to John’s question, I mean, we haven’t seen any indication that it’s going to go that way.
Yes, Q1 was weaker than we expected. But again, Q4 was way better than both you and I expected, right? So I think we need to see this in a longer term perspective. And I think we have a tendency to forget very easily. And I hope we can forget Q1 very easily as well, in terms of the late sales but Q4 probably came in $20 million, $25 million, $30 million higher than what you expected and I expected, right? So if you add that to the Q2 to the levels of Q4, but if you add that to Q1, it was pretty decent quarter. So we haven’t seen any kind of long-term trend in that regard but I understand your question.
Kim André Uggedal
Okay, and a follow up maybe on the Acquisition side, looks to be increasingly busy on the fleet. Can you share some guidance on CapEx node replacements as activity is picking up?
Sven Børre Larsen
Yeah, we have an old inventory of roughly 30,000 nodes and they have an at least an economic life of around 10 years, right? So which means that, theoretically speaking, we would have to replace a few 1000 nodes every year, and they cost a few $1,000 each. So that’s kind of keeping the node inventory, more or less as is, you can do the calculation yourself. And then of course, it depends on growth. On top of that, if we want to grow the old inventory, and we’re probably not going to share all plans in that respect here but it can be shown.
I think we have a lot of interesting discussions as we speak in terms of our future strategy in that regard. And, you know, finally, we’re in a situation in the node market where there is a huge demand for nodes is higher than supply. And in any normal market, you will see prices increase as a result of that. And we want to see that because this has been an industry where no one has made money over many, many years. So we don’t want to destroy that industry, when it’s finally ready to make some money, you shouldn’t go out and just build more nodes, right? So, so far, I think that’s our strategy that we want to stay very disciplined in that regard. And we hope our peers also understand that that’s the way to make money over time is to make sure that you balance supply and demand. Yes [on that].
Kim André Uggedal
The price with respect of new nodes?
Yeah, I’m not going to tell you that because that’s a, first of all, because you probably know the answer to that. And secondly —
Kim André Uggedal
Really I don’t —
Yeah, yeah, it varies a lot. But and I think that’s kind of — that’s a competitive secret, I guess. Yes?
Erik Aspen Forså
Yes, Erik Forså from Carnegie. I was just want to touch upon the different levels, it’s been quite stable over the last few quarters. And now with the Magseis acquisition behind you, and integration going well. And even though you’re increasing Multi-client investment quite a lot, I think the cash flows seem to be quite strong and should probably support higher the inventory levels going forward. When — what kind of milestones or what you would look at or what do you look at to decide if you’re keeping a stable or if you’re going to increase at all? Yeah.
I mean, it’s very much related to our investment plans, and our CapEx plans, of course. And Sven alluded to, we had a very strong free cash flow in Q1. It is going to be weaker in Q2 because of the working capital. You can easily see that from the numbers. I think, overall, our plan is not to sit with $200 million of cash. So I mean, if that was kind of the plan going forward, it will be extremely conservative. So I think our hope is that we can increase our dividend, for sure. If we can, we will.
But right now, I mean, we still have a big pickup of investments in 2023. It’s really a year where we are going to take market share, we see some of our peers are pulling back a little bit, doing more proprietary. We feel like this is a chance to really dominate the Multi-client markets. I think that is always our priority number one, is that we are going to grow our library, we’re going to grow our data offerings. And again, I think over time, we can do both, we can increase our dividend, but we can also increase our investments.
Erik Aspen Forså
So maybe if you see it stabilizing or coming a bit down?
Yeah, I don’t think it’s going to increase over the next couple of quarters. But I think, our plan is always to increase over time and in 2024 would probably be the first chance to do that.
Erik Aspen Forså
Yeah, perfect. Thank you.
Yes, it’s Steffen from the DNB Markets. Two questions, first on the Acquisition business. EBITDA of $14 million to $15 million.
Please speak up a little bit.
Yeah, EBITDA are $14 million to $15 million, roughly margin south of 20% with higher activity levels and cost synergies also increasing. Should we then see margins now in the high 20s going forward? And my second question is, given where your share is trading, how do you consider share buybacks versus dividends?
Sven Børre Larsen
With respect to the margin and I’m not going to provide you with EBITA guidance on that. But as I said, the cost of goods sold should — which was 67% of sales in Q1 will probably be a bit lower going forward, so low 60s. And then the personnel cost and other operating costs as part of the Acquisition business unit should be fairly, fairly stable going forward, perhaps going a little bit down as we realize more and more synergies but fairly stable. So that’s, that’s probably how you should look at it.
So we see an improvement potentially even in the short term. And then obviously, in the longer term, as we roll over our new contracts and so on, we expect even further improvement. And with respect to share buybacks, the way we think about buybacks versus dividends is that we will, the dividend will remain our main tool for returning cash to shareholders. And but we want to keep it fairly stable and hopefully growing over time. And then we will cover some of the more short term volatility with buybacks. As of now we don’t have any — launched any programs or have any concrete plans for buybacks. But we’ll measure that as we go. It’s not ruled out, of course.
Sven Børre Larsen
There is a question online from Jørgen Lande. Can you comment on, the Q1 OpEx level seems a bit higher run rate than initially guided for?
I don’t think that. I think we guided for or indicated that op — personnel cost would be plus minus $30 million, it was $31 million in the quarter and other operating costs would be around $20 million. And it was $21 million in the quarter. So I guess that is more or less in line with what we indicated. But that includes in total $7.9 million of restructuring charges. That’s not going to repeat itself. So on an underlying basis, we’re actually better than what we indicated. And there shouldn’t be much restructure, maybe a little bit in Q2, but it shouldn’t be much.
Probably another $2.5 million or something like that.
Sven Børre Larsen
Yeah. And then there is a question about cost of goods sold. And I think we already answered that. So, yeah.
All right, any final question from the audience or? If not, I want to thank you very much for the attention and welcome you back to our Q2 presentation later this summer. So thank you very much.