CGG - Sarria Daily Comments 05/11/2021

CGG (Aengus) — With oil prices at or above $75bbl, the outlook for E&P capex is good and the knock-on impact for CGG in 2021 and 2022 is positive. We adjusted our model to reflect the company’s guidance in October, but we were surprised at the size of the IFRS 15 adjustment. We think this will take a couple of quarters to flow through to cash. The impact will not change our overall view but will push EBITDA and Working Capital flows out by a quarter. We had expected WC outflow of US$86m in Q3, this will be mainly shifted to Q4 and Q122. Given US$240m of cash on hand this is not a major change, but we will update our model to reflect this.

- The IFRS15 adjustment of US$59 IFRS adjustment was large but not abnormal. CGG reports Multi Client prefunding on a percentage of completion basis, the IFRS requires this revenue to be recognized only on delivery of data. In a quarter where prefunding rose from c70% to over 100% there was always going to be a difference. This will reverse over the next few quarters. 

- We are expecting a strong Q4 as local management at oil majors spend their 2021 budgets. Oil majors are currently below their capex guidance spend for 2021 and whilst some of that may be retained or paid out to shareholders, local managers will be keen to spend as much as they can in Q4. In 2021 CGG has relied more on quicker spending recovery by the National Oil Companies (NOCs) but CGG management is confident that the oil price will spark capex increases.