CGG - Looking over the horizon - Positioning
All,
Please find our refreshed analysis here.
CGG will generate free cash flow in FY23. However, the positive momentum in Oil Field Services in H223 needs to be considered alongside the most recent poor economic data from the US and China. Q3 showed an improvement in the Data business and the equipment business was also strong overall. The replacement cycle for equipment will support this business in the next 12 months and renewed exploration (particularly by national oil companies) will support the Data division. CGG will look to refinance its bonds in 2025/26 and we are expecting a slow pull to par over the next 18 months. In light of that we are taking a 3% NAV long position in the €2027s.
Investment Rationale:
- We are taking a 3% NAV position in the €2027 bonds, yielding 12%. We expect to be refinanced either in 2025 or 2026. Revenue and profitability are beginning to benefit from growing oil production and orders. The upside is 5 points as the bonds pull to par. The downside is 5 points if there is a recessionary-driven drop in oil production. This is a macro trade on oil production over the next 18 months.
- Despite a strong Q3 performance and increased cash flow guidance, CGG equity is down along with the entire sector. The equity performance has more to do with a lower oil price driven by weak recent US and Chinese economic data. Given the strong short-term outlook from the EIA, we are more bullish on the global economy,
- 2024 should see industry capex on imaging data rise and the Equipment replacement cycle finally crank into gear.
- The business has $275m in cash and $100m in RCF availability if the Oil Services market is softer into 2024.
- CGG is further supported by the value of its debt library.
The oil industry production dynamics are generally supportive:
- The EIA STOE expects Brent to end 2023 at around $90pb and average $93 in 2024. The EIA expects WTI to trade sideways. The voluntary cuts from OPEC+ will partially underpin prices. However, routine cheating on quotas could bring prices down.
- Crude oil inventories have fallen as the world recovered from COVID-19. There was a spike at the time of the Russian invasion of Ukraine.
- The most recent economic data from the US and China does point to the potential for a global economic slowdown in 2024. However, these are a couple of data points so far.
The 3rd quarter showed the promised stronger operating results:
- Q3 was strong, with DDE and Earth Data divisions seeing a rise in orders in the quarter. The promised stronger H2 seems to be materializing.
- CGG effectively increased its cash flow guidance from breakeven, before working capital, to USD30m. Working capital is expected to be cUSD33m negative. Liquidity was USD275m plus an undrawn USD95m RCF, and the minimum cash required to operate is USD150m.
- Management said it would consider using excess cash to retire debt, but we will not hold our breath. Consistently generating cash flow remains a perennial challenge for CGG.
- SMO:- 9M 23 Marine equipment has had a strong year so far in equipment sales. Land has been slower, with several major projects in the Middle East pushed into 2024.
- DDE; - After a slow start, Q3 saw a significant acceleration in orders and prefunding.
- Earth Data was lagging in H1, but orders in Q3 provided a significant boost.
- Geoscience grew external top line 13% in Q3 (9M 10%)
- Free cash flow guidance; previously breakeven, now $30m for the FY
I look forward to discussing this with you all,
Aengus
T: +44 203 744 7055