Petroleum Geo-Services (“PGS” or “the Company”) is a focused marine geophysical company providing a broad range of seismic and reservoir services, including acquisition, imaging, interpretation, and field evaluation. The Company’s MultiClient data library is among the largest in the seismic industry, with modern 3D coverage in all significant offshore hydrocarbon provinces of the world. The Company operates on a worldwide basis with headquarters in Oslo, Norway.
PGS is, effective January 2019, organized in three primary business units: Sales & Imaging, New Ventures and Operations & Technology.
- Sales & Imaging markets and sells PGS’ MultiClient library, contract acquisition services and imaging solutions to oil and gas companies.
- New Ventures initiates and acquires new MultiClient surveys, and manages the strategic positioning and portfolio development for new MultiClient investments.
- Operations & Technology manages vessel operations and marine seismic acquisition projects, as well as research and technology developments.
2018 Business Highlights
PGS allocated two thirds of its active 3D vessel capacity to MultiClient in 2018 to expand and further develop its portfolio of attractive MultiClient surveys. The Company invested $277.1 million in new surveys and expects to harvest from these investments in a strengthening market going forward.
Overall MultiClient Segment revenues grew by 22% in 2018, compared to 2017. MultiClient late sales were record high and ended at $371.9 million, an increase of 58% from 2017. The sales performance highlights the quality of PGS
MultiClient data library.
2018 was the first year PGS operated in a centralized, simplified and streamlined structure, after a comprehensive reorganization in the fourth quarter 2017. The flexible fleet strategy whereby the Company adjusts capacity according to seasonal demand swings, implemented as a part of the reorganization, proved to work as intended.
The reorganization resulted in a cost reduction of approximately $100 million and PGS was able to achieve the primary financial target for the year of becoming cash flow positive after debt servicing*. Capital expenditures were kept at a low level in 2018. The Company has an inventory of seismic in-sea equipment from cold-stacked vessels, which is used to re-supply equipment used by vessels in operation, securing low maintenance capital expenditures.
In November, PGS sold the fiber optic permanent monitoring solution, OptoSeis, as a part of the plan to divest non-core assets. Later in the same month PGS announced it was the preferred tenderer for sale of the Ramform Sterling to JOGMEC in Japan and a related service agreement of up to 10 years with annual renewals. The agreement to sell the vessel at a price of approximately $100 million was signed early 2019. PGS will reintroduce the Ramform Vanguard from the summer of 2019 to maintain the same operated fleet size in 2019 as in 2018.
PGS will strengthen its position as a leading fully integrated marine seismic acquisition and imaging company. Following decisions by WesternGeco and CGG to exit the seismic vessel acquisition market, PGS is the only seismic company offering a full range of towed streamer acquisition and imaging services through both contract and MultiClient business models. Being in full control of seismic vessels, imaging and technology positions PGS to deliver the best and most flexible solutions to clients under any business model. Further, being a fully integrated marine seismic company positions PGS to deliver on its strategic priorities in a way that distinguish it from competition.
*Is measured as Segment revenues less, gross cash costs, capital expenditures (as reported), taxes and interest paid and scheduled debt repayment.
The prolonged downturn in the industry, combined with capital expenditures relating to the Ramform Titan-class new build program, has led to a higher level of interest bearing debt than targeted. The Company will prioritize profitability, cash flow and debt reduction before growth and focus on delivering a competitive return on capital employed over the cycle. Debt reduction will be given priority to ensure PGS reaches a capital structure that will sustain future downturns.
PGS business strategy comprise the following key priorities:
- Through the downturn, PGS MultiClient business has demonstrated cyclical resilience with industry leading returns and a positive cash flow. PGS intends to continue to invest in, and profitably grow the MultiClient business. The Company is aiming at becoming the preferred MultiClient provider in the industry and targets a sales-to-cash investment ratio of at least 2.5 times.
- The 4D market troughed in 2016 and has grown significantly in subsequent years. For the repeat surveys over producing fields most clients focus on data quality. High capacity and productive vessels in combination with the proprietary GeoStreamer technology and integration with imaging positions PGS in front in the 4D market. PGS intends to build on its leadership and increase market share in the 4D market.
- Substantially reduced time spent at each stage of the seismic value chain, from survey planning to data delivery is becoming increasingly important. PGS aims to deliver the fastest turnaround time in the industry and being a fully integrated marine seismic company with both acquisition and imaging services PGS is ideally placed to do so. Clients will benefit from a shorter lead time to access seismic data while PGS will benefit from a more efficient and cost effective work process and a closer relationship to clients.
- In the wake of the GeoStreamer, the Company has developed dual-sensor imaging technologies and received acknowledgement for unique imaging capabilities. PGS will leverage the strong imaging technology, including dual sensor processing products, with a target to process all of the seismic data the Company acquires.
- PGS Ramform fleet is unique in the industry with the lowest average age, flexible solutions for all survey designs and high productivity. PGS will continue to capitalize on these assets in a cost effective manner by developing acquisition configurations that leverage productivity, the GeoStreamer technology platform and the Company’s imaging capabilities.
- PGS differentiates on technology and the Company will invest in imaging and acquisition technologies where sustained differentiation is or could be achieved.
PGS will aggressively leverage digitalization to deliver on the business strategy, reduce costs and increase efficiency.
Markets and Main Businesses
PGS is one of the largest participants in the global marine 3D seismic market, with a market share in 2018 of approximately 35%, measured by number of streamers operated.
The seismic industry started on a positive trend in 2018, building on the momentum from the fourth quarter 2017. The sentiment was supported by an improvement in the oil price through most of the year, however the oil price fell and had a volatile period towards the end of the year.
Both PGS and the industry experienced an increase in demand for, and sales of, MultiClient data. On the back of substantial investments in the MultiClient library, PGS had record high late sales, with a growth of 58% from 2017.
The higher oil price also impacted sales leads and active tenders for contract work, and towards the end of 2018 these indicators reached the highest levels for more than 3.5 years. Improved demand and more production seismic in the contract mix made pricing improve, compared to 2017. Despite the improvement, the contract market was still challenging and lossmaking in 2018.
Vessel utilization in the latter part of the year was more difficult than expected due to a seasonal reduction of activity levels and unforeseen project delays and cancellations.
PGS invests considerable resources to develop and deliver solutions for customers focusing on efficiency and best-in-class imaging quality.
GeoStreamer, the first-ever dual-sensor streamer and a proprietary PGS technology, represented a game changer in streamer technology and the best proof of PGS’ technology differentiation.
GeoStreamer affects the entire E&P life cycle, reducing exploration risk, improving the delineation of reservoir details, enabling accurate reservoir characterization and better production management. For example, the unique design of GeoStreamer has created several new paradigms for how seismic data is used by PGS’ customers. Separated Wavefield Imaging (“SWIM”) is a technology that significantly improves understanding of shallow geology and drilling hazards whilst simultaneously enabling improvements in survey efficiency - a concept previously viewed as contradictory. Complete Wavefield Imaging (“CWI”) is an associated seismic workflow that uses seismic wavefield information previously inaccessible to geophysicists to improve the understanding of seismic velocities in rocks, especially those in the first kilometer below the seafloor where historically available methods have failed. This renewed confidence translates to a more accurate structural understanding of deep drilling targets, higher resolution at all depths, and reduced exploration and drilling risk. SWIM and CWI are examples of unique solutions made possible by GeoStreamer data.
In 2018 PGS implemented the new revenue recognition standard, IFRS 15, as the Company’s external financial reporting method. This change impacts the timing of revenue recognition for MultiClient prefunding revenues and related amortization. For internal management purposes PGS continues to use the revenue recognition principles applied in previous years, which are based on percentage of completion, and uses this for numbers disclosed as Segment Reporting. See note 2 in the annual financial statements for a description of the change in revenue recognition resulting from the implementation of IFRS 15.
The comments below relate to both the Company’s primary financial statements with the adoption of IFRS 15 from January 1, 2018 (“As Reported”) and segment financial information “Segment” unless otherwise stated.
In 2018, As Reported revenues amounted to $874.3 million. Following implementation of IFRS 15, As Reported revenues for MultiClient prefunding are not comparable to previous periods.
2018 Segment Revenues were $834.5 million, compared to $838.8 million in 2017, a decrease of $4.3 million, or 1%. The decrease is primarily driven by a change in vessel deployment from contract services towards MultiClient investment activity and a lower average prefunding level on new MultiClient surveys. This was offset by record high MultiClient late sales revenues of $371.9 million, up 58% compared to 2017.
Contract revenues ended at $149.5 million, compared to $241.3 million in 2017, a decrease of $91.8 million, or 38%, primarily as a result of less capacity allocated to contract work. This was partially offset by higher prices.
In 2018, As Reported MultiClient prefunding revenues were $322.2 million, predominantly driven by completion of surveys in Europe and North America. Following implementation of IFRS 15, MultiClient prefunding revenues are not comparable to previous periods.
Segment MultiClient prefunding revenues in 2018 were $282.4 million, compared to $299.4 million in 2017, a decrease of $17.0 million, or 6%. Segment MultiClient prefunding revenues for 2018 were highest in Europe and North America.
Segment MultiClient prefunding revenues as a percentage of capitalized cash investment (excluding capitalized interest) was 102%, inside the Company’s targeted range of 80-120%, compared to 140% in 2017. The high prefunding level in 2017 was primarily driven by more sales from surveys in the processing phase. Cash investment in the MultiClient library ended at $277.1 million, compared to $213.4 million in 2017, an increase of $63.7 million, or 30%. The higher MultiClient cash investment is mainly due to more 3D vessel capacity allocated to MultiClient following a strategic choice to increase investments, which is expected to benefit future sales.
MultiClient late sales in 2018 were record high with $371.9 million, compared to $235.0 million in 2017, an increase of $136.9 million, or 58%. Higher late sales revenues were primarily driven by an improving MultiClient market, in combination with a geographically diverse MultiClient data library attracting good licensing interest from a variety of clients. Late sales were distributed across regions and highest in Europe and South America.
Total Segment MultiClient revenues (prefunding and late sales combined) increased by $119.9 million or 22%, compared to 2017 and ended at $654.3 million.
The fleet allocation ratio, active 3D vessel time for marine contract versus MultiClient data acquisition, was approximately 34:66 in 2018, compared to 57:43 in 2017.
External imaging revenues ended at $25.8 million, compared to $51.0 million in 2017, a decrease of $25.2 million, or 49%. The reduction comes as a result of a challenging market for imaging services, overall reduced capacity and increased use of capacity for processing of MultiClient data, as the Company has changed its focus to more internal use of Imaging resources.
The Company closely monitors the development of the gross cash costs. Gross cash costs are the sum of reported net operating expenses (excluding depreciation, amortization, impairments, deferred steaming, net and other charges, net), the cash operating costs capitalized as investments in the MultiClient library, and capitalized development costs. In 2018 gross cash costs ended at $601.6 million, a decrease of $95.9 million, or 14%, compared to 2017, in line with the target set for the reorganization at year-end 2017.
Net operating expenses, which include cost of sales, expensed research and development costs, and selling, general and administrative costs, totaled $318.6 million in 2018, compared to $464.7 million in 2017, a decrease of $146.1 million, or 31%. The decrease is primarily due to a significant cost reduction from the reorganization, as well as more costs capitalized as MultiClient investment, partially offset by higher fuel cost, less deferred steaming cost and less capitalized development costs.
Full year 2018, gross research and development (“R&D”) costs decreased by $9.7 million, or 33%, to $19.7 million. Capitalized development costs decreased by $2.9 million, or 25%, compared to 2017, resulting in overall R&D costs in 2018 to be 39% lower than in 2017. The Company’s R&D costs are mainly incurred to support and develop core business activities of marine seismic acquisition and imaging.
In 2018, total MultiClient amortization, As Reported, was 52% of MultiClient revenues. The Company recognized accelerated amortization of $145.1 million on projects completed in 2018. Following implementation of IFRS 15, MultiClient amortization, As Reported, is not comparable to previous periods. See note 2 for further information.
Segment MultiClient Amortization for 2018 decreased by $4.3 million, or 1%, to $362.1 million, compared to 2017. Segment MultiClient amortization as a percentage of total Segment MultiClient revenues was 55% in 2018, compared to 69% for the full year 2017.
2018 gross depreciation was $203.4 million, a decrease of $22.6 million, or 10%, compared to 2017 as a result of a generally lower investment levels over recent years. Capitalized depreciation was $85.9 million in 2018, an increase of 14.3 million, or 20%, compared to 2017 since more capacity was allocated to MultiClient projects, partially offset by reduction in gross depreciation.
PGS did not record any impairments of property and equipment in 2018, compared to an impairment of $40.6 million for the full year 2017, which primarily related to reduced 3D vessel operations, including cold stacking of Ramform Vanguard.
The Company has recorded significant impairment charges in the period 2014 to 2017 as a consequence of a weak seismic market. The market for seismic services is still uncertain and further impairments may arise in future periods.
Operating profit As Reported in 2018 was $39.4 million. Following implementation of IFRS 15, As Reported MultiClient prefunding revenues and amortization are not comparable to previous periods.
Operating profit according to Segment Reporting, excluding impairment and other charges net, in 2018 was $36.3 million, compared to an operating loss of $147.1 million in 2017.
For the full year 2018, the share of results from associated companies amounted to a loss of $18.9 million, compared to $20.7 million in 2017.
The loss was primarily related to exploration expense and impairments in the Azimuth Group, where PGS has an ownership of approximately 35%. PGS has a right, but no obligation to provide further funding of the Azimuth Group and has no guarantees outstanding.
Gross interest expense amounted to $69.1 million in 2018, compared to $64.4 million in 2017, an increase of $4.7 million, or 7%, primarily as a result higher interest rates on the Company’s floating rate debt due to an increase of USD LIBOR, partially offset by reduced credit margin on the Revolving Credit Facility.
Other financial expense, net, of $6.4 million in 2018 is primarily related to fees on debt instruments, partially offset by interest income, compared to other financial expense, net, of $6.0 million in 2017.
Income tax expense, which consists of current and deferred tax expense, was $40.0 million in 2018, compared to $55.2 million in 2017. The 2018 current tax expense was $40.0 million, up from $12.3 million in 2017. Current tax expense relate primarily to foreign taxes, including withholding taxes, and increased in 2018 primarily due to increased profits in Brazil. There were no deferred tax expense for the full year 2018, since all the deferred tax assets in the balance sheet was expensed in 2017, compared to $42.9 million of deferred tax expense in 2017.
PGS is subject to taxation in many jurisdictions around the world with increasingly complex tax laws. PGS has identified issues in several jurisdictions that could eventually make the Company liable to pay taxes relating to prior years in excess of the liability recognized in financial statements. Reference is made to note 11 and 22 of this annual report for a description of significant tax contingencies.
Loss to equity holders of PGS ASA was $81.1 million in 2018, compared to a loss of $519.8 million in 2017.
Cash Flow, Financial Position and Financing
Net cash provided by operating activities totaled $445.9 million in 2018, compared to $281.8 million in 2017. The increase is mainly driven by higher earnings as a result of more MultiClient sales.
Cash and cash equivalents totaled $74.5 million as of December 31, 2018, compared to $47.3 million as of December 31, 2017. The liquidity reserve, cash and cash equivalents and the undrawn part of the Revolving Credit Facility (“RCF”), was $159.5 million as of December 31, 2018, compared to $257.3 million as of December 31, 2017.
As of December 31, 2018, drawings of $265.0 million were outstanding on the RCF. The RCF matures in September 2020 and has a drawing limit of $350 million, reduced by $50 million from $400 million in September 2018.
Restricted cash of $43.2 million includes $38.3 million held in debt service reserve and retention accounts related to the export credit financing (“ECF”) of Ramform Titan, Ramform Atlas, Ramform Tethys and Ramform Hyperion.
At December 31, 2018, the Company had approximately 50% of its debt at fixed interest rates. The Q4 2018 weighted average cash interest costs of gross debt reflects an interest rate of approximately 4.9%, including credit margins paid on the debt. PGS has a debt structure with no material scheduled maturities until the second half of 2020, except the ECF, which is repaid in separate semi-annual instalments. Total annual ECF instalments for 2019 will be approximately $47.2 million and each subsequent year until they taper off following maturity of one after one of the four facilities in the period 2025 to 2027.
The undrawn portion of the RCF constitutes a significant portion of the Company’s liquidity reserve. The Company is in compliance with the Total Leverage Ratio (“TLR”) covenant applicable to the RCF. At December 31, 2018 the TLR was 2.58:1, well below the maximum level of 3.50:1. The maximum TLR will be reduced by 0.25:1 each of the following three quarters to come down to 2.75:1 by end of Q3 2019 and will thereafter stay at 2.75:1 for the remaining life of the facility.
If the Company were to breach the TLR covenant, this would represent a default under the loan agreement. In such case the Company may be able to continue to access the RCF if it receives a waiver of the breach.
PGS interest-bearing debt includes the following components:
|(In USD million)||2018||2017|
|Term Loan B||381.0||385.0|
|Revolving Credit Facility||265.0||190.0|
|Japanese Export Credit Financing||369.3||416.5|
|Senior Notes, due 2018||0.0||26.0|
|Senior Notes, due 2020||212.0||212.0|
|Total||1 227.3||1 229.5|
Net interest-bearing debt (interest-bearing debt less cash and cash equivalents, restricted cash, and interest-bearing investments) was $1,112.8 million as of December 31, 2018, compared to $1,139.4 million as of December 31, 2017.
In 2018, total MultiClient cash investment, excluding capitalized interest, amounted to $277.1 million, compared to $213.4 million in 2017, an increase of $63.7 million, or 30%. The increase is primarily due to more 3D vessel capacity allocated to MultiClient.
Capital expenditures, whether paid or not, totaled $42.5 million in 2018, compared to $154.5 million in 2017, a decrease of $112.0 million, or 72%. The decrease is primarily a result of the Company’s new build program coming to an end in 2017 with the delivery of the fourth Ramform Titan-class vessel in March 2017.
Financial Market Risk
The Company is exposed to market risks such as interest rate risk, currency exchange risk, credit risk, liquidity risk and commodity price risk, as discussed below. The Company’s risk management policies are approved by the Board of Directors. The treasury function reports regularly to the Company management and any breach of limits set in the policy shall be reported to the Board of Directors.
Interest Rate Risk
PGS has a mixture of fixed and floating interest rate debt combined with financial instruments, such as interest rate swaps, to manage the impact of interest rate fluctuations.
As of December 31, 2018, the debt structure of PGS included $743.1 million of floating interest rate debt, with interest rates based on up to six month LIBOR rates, plus a margin. $125.0 million of this floating interest debt is swapped into fixed interest by use of interest rate swaps. Fixed interest rate debt amounted to $484.1 million. Taking the interest rate swaps into account, $618.1 million of the Company’s debt is exposed to floating interest rates while $609.1 million have fixed interest rates. For every (hypothetical) one percentage point increase in LIBOR, the annual net interest expense of the PGS’ net debt, including finance leases, would increase (with some delay) by approximately $5.4 million.
Currency Exchange Risk
PGS conducts business primarily in US dollars (“$” or “USD”), but also in several other currencies, including British pounds (“GBP”), Norwegian kroner (“NOK”), Brazilian real (“BRL”), euro (“EUR”), and occasionally currencies like Egyptian Pounds (“EGP”), Nigerian Naira (“NGN”) and Japanese Yen (“JPY”). PGS is subject to foreign currency exchange rate risk on cash flows related to sales, expenses, financing, and investment transactions in currencies other than the US dollar.
PGS predominantly sells products and services in US dollars, and to a limited extent in other currencies. In addition to USD, a significant proportion of PGS’ operating expenses are incurred in NOK and GBP. Less substantial amounts are incurred in various other currencies. Thus, regarding expenses and revenues in currencies other than US dollars, such expenses will typically exceed revenues.
A stronger US dollar reduces PGS’ operating expenses as reported in US dollars. It is estimated that a 10% change of the US dollar against the two most significant non-USD currencies, NOK and GBP, would have an annual impact on gross cash cost of $12-15 million, and $5-7 million, respectively, before currency hedging.
PGS hedges parts of the foreign currency exposure related to operating income and expenses by entering into forward currency exchange contracts. While PGS enters into these contracts with the purpose of reducing the Company’s exposure to exchange rate fluctuations, the contracts are not treated as hedges unless they are specifically designated as hedges of firm commitments or certain cash flows. Consequently, these forward currency exchange contracts are recorded at estimated fair value with gains and losses included as currency exchange gain (loss) in Other financial expense in the consolidated statements of profit and loss.
As of December 31, 2018, PGS had net open forward contracts to buy/sell GBP, NOK, BRL and JPY. The total nominal amount of these contracts was $177.0 million, compared to $101.7 million as of December 31, 2017. Of the total nominal amounts of forward exchange contracts, $102.8 million was accounted for as cash flow hedges, as of December 31, 2018, compared to $31.9 million as of December 31, 2017. Outstanding contracts at year-end 2018 had a net negative fair value of $4.1 million, compared to a net positive fair value of $1.1 million at year-end 2017.
A 10% depreciation of the US dollar against all the currencies in which PGS holds derivative contracts would decrease the fair value of these contracts by approximately $5.6 million. The effect on the consolidated statements of profit and loss would have been positive $5.0 million.
All interest-bearing debts are denominated in US dollars.
PGS’ accounts receivable are primarily from multinational, integrated oil companies and independent oil and natural gas companies, including companies that are owned in whole or in part by governments. PGS manages the exposure to credit risk through ongoing credit evaluations of customers. Due to the nature of PGS’ customer base, a low level of losses on accounts receivable has been incurred over the years. Due to the current market circumstances, where requests for extended credit terms may be more frequent, PGS has implemented additional processes to monitor and follow up credit risk.
PGS has a structured approach to monitor the credit risk of the Company’s banking partners, including derivatives counterparties and the institutions in which cash is held on deposit.
As of December 31, 2018, PGS had cash and cash equivalents of $74.5 million and the total liquidity reserve, including cash and cash equivalents and the undrawn part of the RCF, was $159.5 million, compared to $47.3 million and $257.3 million respectively as of December 31, 2017. At December 31, 2018 the total leverage ratio was 2.58:1, well below the maximum level of 3.50:1.
The un-drawn portion of the RCF is a significant portion of PGS’ liquidity reserve. According to the loan agreement the TLR has to be below 3.50:1 by December 31, 2018, with subsequent step downs, as described above.
PGS’ actual TLR was substantially below the required level at December 31, 2018 and already below the level required after the step downs that will take effect in 2019 (2.75:1). Based on current plans and projections, the Company expects to be in compliance with the required TLR level going forward. Still there is a risk that PGS’ TLR may increase in the future to be close to or exceed the agreed maximum TLR. If such risk becomes significant, PGS would seek to agree further amendments to ensure that the RCF is available for drawing or to implement other available measures to avoid a covenant breach. If PGS ultimately ends up breaching this covenant, the breach would represent an event of default under the loan agreement. In such case PGS may be able to continue to access the RCF if PGS receives a waiver of the breach or implements remedial actions acceptable to the lenders thereunder. Should a breach continue without a waiver or remediation by PGS, the RCF agent or a majority of the RCF lenders would be entitled to declare default and demand a repayment of drawings under the RCF, which in turn would represent an event of default in most of the Company’s other loan agreements and debt instruments.
However, this scenario is in PGS’ view unlikely since firstly the Company believes it has plans and available measures to avoid an event of default and secondly, even in an event of default, several viable alternatives to avoid acceleration would exist.
Based on available liquidity resources and the current structure and terms of the Company’s debt, it is the Board’s opinion that PGS has sufficient funding and liquidity to support the Company’s operations and investment programs.
Operation of seismic vessels requires substantial fuel purchases, thus PGS is exposed to fuel price fluctuations. Based on the Company’s fuel consumption in 2018, a 10% increase in fuel prices would increase the total annual fuel costs by approximately $6 million. The Company seeks to pass fuel price risk to customers on a majority of contract work.
Operational and Other Risks
Demand for the Company’s products and services depend on the level of spending by oil and gas companies on hydrocarbon-resource exploration, field development, and production. Spending levels are heavily influenced by oil and gas prices and the oil and gas companies’ focus areas. In addition to the risk of less demand for PGS’ services or for data from the MultiClient data library, the Company is subject to a large number of other risk factors including, but not limited to increased competition, the attractiveness of technology, changes in governmental regulations affecting the markets, technical downtime, licenses and permits, and operational hazards such as weather conditions.
Contracts for services are occasionally modified by mutual consent and in certain instances may be cancelled by customers on short notice without compensation. Consequently, the order book as of any particular date may not be indicative of actual operating results for any succeeding period.
Shares, Share Capital and Dividend
As of December 31, 2018 PGS had 338 579 996 shares issued and outstanding, all of which are of the same class and carry equal voting and dividend rights. Each share has a par value of NOK 3.
PGS’ ordinary shares are listed on the Oslo Stock Exchange (ticker: PGS) and denominated in Norwegian kroner. The PGS share continues to be traded as an American Depositary Share (“ADS”) over the counter in the US (ticker: PGSVY). Quotes are denominated in US dollars and each ADS represents one share.
As of December 31, 2018, the Company held 1,739 treasury shares.
Due to the current market conditions, the Company’s need to maintain an adequate liquidity reserve, the Company’s strategic target of reducing debt and limitations in existing loan agreements, a dividend will not be proposed for 2018. The Company will prioritize debt reduction over the coming years.
Health, Safety, Environment and Quality (“HSEQ”)
Assessment and mitigation of risk, to people and assets, are at the heart of how PGS manages its business.
The PGS organization (core fleet vessels and PGS offices) had the following number of health and safety incidents in 2018:
|Lost time injures||1||1|
|Restricted work day cases||3||0|
|Medical treatment cases||2||3|
|High potentials incidents||1||3|
The Company’s activity level (core fleet vessels and PGS offices) in 2018 was lower than that of 2017, with 5 250 840 man-hours in 2018, compared to 6 708 271 in 2017.
|Lost Time Injury Frequency ("LTIF")||0.19||0.15|
|Total Recordable Case Frequency ("TRCF")||1.14||0.60|
The number of total recordable cases and lost time injuries in relation to man hours increased somewhat in 2018, but still remained at a very low level. PGS has a strong focus on HSEQ and to improve further the Company has multiple ongoing initiatives and a system to ensure that practices and experiences are shared fleet-wide.
To continue minimizing the number of incidents going forward, the Company will keep focus on long-term key areas, such as HSEQ leadership and behavior, risk management, planning of tasks and ongoing improvement of the HSEQ management system.
PGS had an average of 1,258 and 1,715 regular active employees in the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, PGS employees represented 53 nationalities; 31% of the office based employees are women (4% of offshore employees are women). Among staff working in Norway, 34% are women. The Board of Directors has three male and two female shareholder elected directors and one male and two female employee-elected directors.
At the headquarters in Oslo, 26% of management positions are held by women, and 9% of women working for the Norwegian organization of PGS work part-time. PGS consciously strives to improve the gender diversity of staff through reporting and actively encouraging development and promotion of women to management roles. The primary development processes are the Performance Management and Potential Assessment systems. Improving gender diversity has become increasingly challenging due to the weak seismic market, but it is a continued priority for the Company.
Being a global company, PGS has long-standing practices to ensure that offshore crews are culturally diverse, and that cultural sensitivity training is offered to employees.
The average monthly salary of all active regular employees as of December 2018 was $7 866 ($6 476 for female employees and $8 245 for male employees) based on 1 February, 2019 exchange rates.
PGS headquarter is located in Oslo, Norway. The Company also has offices and warehouses in other cities in Norway, and in 14 other countries: Angola, Australia, Brazil, China, Egypt, Ghana, Indonesia, Japan, Malaysia, Mexico, Nigeria, Singapore, United Kingdom and United States of America.
Board of Directors and Corporate Governance
As of December 31, 2018, the Board of Directors has the following members: Walter Qvam (chairperson), Anne Grethe Dalane, Richard Herbert, Morten Borge, Marianne Kah, Anette Valbø, Hege Renshus and Espen Grimstad. The latter three are employee elected Board members.
The Board has established two sub-committees: an Audit Committee, comprising Anne Grethe Dalane (chairperson), Richard Herbert, Marianne Kah, Anette Valbø and Hege Renshus, and the Remuneration and Corporate Governance Committee, consisting of Walter Qvam (chairperson), Morten Borge, and Espen Grimstad. The committees act as preparatory bodies for the Board of Directors and assist the Directors in exercising their responsibilities.
PGS also has a Nomination Committee elected by the shareholders. As of December 31, 2018, this committee consists of Harald Norvik (chairperson), C. Maury Devine, and Terje Valebjørg.
PGS’ corporate governance principles are adopted by the Board of Directors. The Board periodically reviews these principles. Statements of the corporate governance structure are described in more detail in the corporate governance section of this annual report. The Company’s articles of association, in addition to full versions of the rules of procedures for the Board of Directors, the Audit Committee charter, the Remuneration and Corporate Governance Committee charter, the Nomination Committee charter, and PGS’ Code of Conduct are available on the Company’s website www.pgs.com (follow the links: “About us” – “Corporate Governance”).
Since 2004, PGS has maintained a compliance hotline operated by an external service provider in order to facilitate reporting of any concerns regarding inappropriate business conduct. The Company encourages use of the hotline by anyone who has concerns relating to compliance with laws and regulations, breaches of the code of conduct, fair treatment, or any other matter. Concerns can also be raised directly with the General Counsel or any Board member.
Corporate responsibility reports were published in combination with annual reports for 2013, 2014 2015, 2016 and 2017, and will be done in combination with the 2018 annual report as well. The Company has signed up to UN Global Compact and going forward, progress of corporate responsibility activities will be reported in accordance with the 10 principles of UN Global Compact and published on the Company web site. In 2017, PGS also analyzed the UN Social Development Goals (“SDGs”) in light of our strategic priorities identifying SDG Nos. 3 (Good Health and Well Being), 4 (Quality Education), 14 (Life Below Water) and 16 (Peace Justice and Strong Institutions). For 2018, the Company re-evaluated the materiality of each goal and priority area to us as a company and to PGS stakeholders which has led the Company to introduce an additional SDG being No. 8 (Decent Work and Economic Growth).
World GDP and demand for energy is expected to continue its growth going forward. Even though renewables are expected to be the fastest growing energy source, fossil fuels is, and will remain a significant source of global energy supplies for several decades. With the added challenge of natural decline of existing fields, significant investments will be required to meet future demand for oil and gas.
Integrated oil and gas companies have adjusted to a lower oil price environment and despite the oil price correction experienced in the fourth quarter 2018 they report solid results. At the current oil price level, oil companies will continue to report strong cash generation going forward.
PGS expects significant cash flow generation among customers and an increase in exploration and production spending, including offshore spending, to contribute to strengthen the recovery of the marine seismic market going forward.
The Board emphasizes that valuations in the financial statements and forward looking statements contained in this report are based on various assumptions made by management, depend on factors beyond its control, and are subject to risks and uncertainties. Accordingly, actual results may differ materially.
Pursuant to section 3-3a of the Norwegian Accounting Act, the Board confirms that the 2018 financial statements have been prepared based on the assumption of a going concern and that it believes that this assumption is appropriate.
Allocation of Parent Company’s result for 2018
The financial statements of the parent company, Petroleum Geo-Services ASA (“PGS ASA”), are prepared and presented in accordance with generally accepted accounting principles in Norway (“NGAAP”). PGS ASA reported a net loss of NOK 581.3 million for 2018, compared to a net loss of NOK 5 318.2 million in 2017. PGS ASA is a holding company with no material operating activities.
The Board proposes that the net loss for 2018 of NOK 581 300 000 is transferred from other equity. Total shareholders’ equity in PGS ASA as of December 31, 2018 was NOK 4 486 700 000 corresponding to 32% of total assets.