CGG – update and new position following the Q3 20 results
All,
Please find our analysis updated for the Q3 20 results and call here.
We have updated our forecasts, to take into account the more positive message from both CGG and PGS, and in the context of a recovering picture for both 2021 early leads and Brent crude. Note that the company’s decision to allocate costs and benefits across EBITDA, discontinued operations and opex, and timing differences between the new restructuring charges and the actual cash outs, are the main drivers of the unusual movement of these accounts in Q3 20, something which we expect to smooth out going forward following management’s comments.
We are increasing our position on the Second Lien USD notes from 2% to 4% of NAV at around 98 (YTM of around 15%). We maintain our position on the First Lien notes for 2% of NAV. The sector is bottoming out and E&P capex is slowly returning as crude oil demand recovers in the context of a 2021 economic recovery. CGG retains a strong liquidity position to weather this soft patch, and its equity and overall valuation cushion behind the bonds remains, supported by the value of its data library. The recent bids for the PGS’s data library during its restructuring process (USD600m) suggest that the book value of CGG’s data library (USD500m) is significantly below a true disposal value. As shown in our valuation coverage calculations, this would be enough to leave the Second Lien notes covered even in a liquidation analysis, which is far off.
In addition, investors may have excessively discounted CGG's valuation due to its recent record of significant cash outflows from discontinued operations, which have a credible reason to go away after 2020. As both restructuring costs and discontinued ops outflows reduce significantly from 2021 onwards, CGG would break even on a much lower revenue level than during the 2017-2019 period.
This leaves CGG strongly positioned for a full refinancing of its capital structure when the call price of the Second Lien bonds declines by 12.5 points to 100 on 21 February 21. During the last results call, management has once again reiterated that this is the intention.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
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