To compensate for the revenue loss, PGS substantially reduced costs and took measures to preserve liquidity. The swift response has enabled the Company to navigate through the downturn, preserve liquidity reserve and be positioned to return quickly to generating positive cash flow and repay debt when the market recovers.

PGS is an integrated 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 organized in three primary business units: Sales & Services, Technology & Digitalization and Operations.

• Sales & Services promotes and sells all PGS’ products and services to energy companies
• Technology & Digitalization manages research and development, PGS digital transformation projects and Enterprise IT
• Operations manages vessel operations and marine seismic acquisition projects

2020 Business Takeaways

The Covid-19 pandemic had a severe negative impact on the marine seismic market and PGS Segment revenues, excluding government grants, was reduced by 37% compared to 2019.

PGS has taken several actions to manage through the severe market challenge:

• Gross cash cost was reduced by more than $200 million, from a ~$600 million initial plan for 2020 to below $400 million expected for 2021, by stacking three vessels, reducing office-based personnel by approximately 40%, reorganizing office functions, renegotiating terms with suppliers and several other initiatives.
• 2020 capital expenditures were reduced by more the 50% compared to the ~$80 million initially planned for the year.
• After successfully completing a refinancing of most 2020 and 2021 debt maturities combined with a $95 million equity raise in February 2020, the Company had to, as a consequence of the Covid-19 pandemic, reach out to lenders to seek a postponement of amortization and maturities for interest bearing debt. With support from an overwhelming majority of lenders PGS has through a UK Scheme of Arrangement approved by an English court extended all debt maturities and amortizations to September 2022 and beyond. The agreements were implemented in February 2021.

PGS has delivered strong vessel and Imaging project execution in 2020, despite Covid-19 restrictions and challenges.

In August an unsolicited, conditional and non-binding proposal from TGS to acquire PGS’ MultiClient data library for $600 million was rejected. The Board and Management of PGS were of the view that the value of PGS’ MultiClient data library is significantly higher to PGS than the offer from TGS.

PGS has manifested its leading position in Egypt by securing 15 vessel months of Ramform Titan-class acquisition work, capitalizing on PGS’ integrated service offering.

The Company also entered a strategic partnership with TGS and CGG to offer clients a single point to access MultiClient data libraries. The partnership provides a shopping window to clients for accessing the three individual MultiClient data libraries, allowing customers to interactively find, visualize and download their subsurface assets and entitlements all in one place.

Moreover, the Company reached important milestones in the digital transformation process by developing a Cloud based MultiClient sales platform, achieved tangible results in optimizing vessel operating cost and efficiency and commenced commercial imaging projects in the Cloud.

Strategy

PGS is the only fully integrated marine seismic acquisition and imaging 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 acquisition vessels, imaging and technology, positions PGS to deliver the best and most flexible solutions to clients under any contract type. Further, being a fully integrated marine seismic company makes PGS able to deliver on its strategic priorities in a way that distinguishes it from competitors while providing superior value to its clients. At the same time PGS will continue to undertake selected technology development programs to further improve client value and operational effectiveness.

Capital expenditures relating to the Ramform Titan-class new build program, followed by the prolonged industry downturn from 2014 to 2018, has led to present levels of interest-bearing debt being higher than targeted. The Company will prioritize profitability, cash flow and debt reduction before growth and will 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 is sustainable through future downturns. The Covid-19 pandemic abruptly halted the improving seismic market experienced during 2019 and early 2020. Net interest-bearing debt (excluding lease liabilities ) is currently at $938 million and, while PGS has adjusted expenditures to mitigate the impact of lower revenues, it will need a market recovery to continue significant debt repayments and achieve the targeted level of $500-600 million. 

The PGS business strategy comprises the following key priorities:

• Build on leadership in the 4D market
  • The ongoing energy transition drives energy companies to focus on producing fields and proven hydrocarbon basins. As a result, the seismic market is increasingly moving towards more near field exploration and 4D reservoir optimization. Access to high-capacity vessels and differentiating technology is fundamental in the growing 4D reservoir market and PGS is uniquely positioned in this aspect with Ramform Titan-class vessels and the GeoStreamer technology.

• Joint Contract and MultiClient approach
  • PGS integrated service offering makes PGS agnostic to whether acquisition is done using the Contract or the MultiClient business model. By offering both business models, PGS is involved in all client dialogues. PGS holds MultiClient acquisition permits in numerous areas which allow for flexibility in acquisition model and timing, enabling more swift turnaround and reduced time to access high quality seismic data for clients. The client can use more time analyzing data for better well-placement and improve chances of discovery.

• Grow MultiClient in proven hydrocarbon basins with high pre-funding
  • PGS’ MultiClient business has demonstrated cyclical resilience, strong returns, and positive cash flow through the cycles. PGS intends to continue to invest in, and profitably grow the MultiClient business in proven hydrocarbon basins with high pre-funding. The ongoing energy transition increasingly drives interest to these regions, where PGS’ MultiClient library has a solid footprint and is well positioned to expand further.

• Optimize operating cost and efficiency
  • In early 2020, PGS entered a strategic cooperation with Cognite to reduce vessel operating cost and improve vessel efficiency. By contextualizing data PGS has identified five focus areas: energy efficiency, optimal vessel speed, streamer maintenance, eBird maintenance and improved safety for small boat operation and use of personal protection equipment. These initiatives have delivered measurable results and they are implemented across PGS’ active fleet. PGS intends to continue to harvest the productivity improvements and further capitalize on these initiatives. PGS has also experienced significant client interest from the improvements.

• R&D focus on digital solutions for imaging and acquisition
  • PGS is advancing in its digital transformation and has reached several important milestones to accelerate strategy execution. The Company focuses its research and development resources on differentiating technologies leveraging the benefits of digitalization. Examples are identifying processing patterns in historical data sets to minimize testing and accelerate data delivery. PGS is also moving an increasing number of repetitive manual processing tasks to computer resources to reduce cycle times.

Markets and Main Businesses

PGS is one of the largest participants in the global marine 3D seismic market, with a market share in 2020 of approximately 35%, measured by number of streamers operated.

Entering 2020 there were expectations of a continuation of the improving seismic market from 2019. In March 2020 the precautionary measures to reduce the spread of the coronavirus caused a major disruption of the oil markets and energy companies reduced their investment plans significantly. PGS and the seismic industry were immediately impacted by the abrupt negative change through sharply reduced MultiClient sales and seismic survey activity. In early second quarter, there was a dramatic decline in bidding activity for contract seismic work. Volumes increased somewhat in the consecutive quarters, but generally remained low as a majority of the planned 2020 seismic contract acquisition work was pushed into 2021 and 2022 to preserve cash among energy companies.

For new MultiClient projects it was challenging to secure sufficient pre-funding, and sales from MultiClient data libraries were primarily limited to license round activity and commitments energy companies have on acreage in their portfolio.

The energy transition will impact the seismic market. However, PGS expects that over the next decades, oil & gas will continue to be an important part of the energy mix. There will be significant demand for seismic to secure sufficient hydrocarbon resources and maximize recovery from existing fields.

With the energy transition, the seismic market is likely to gradually move from traditional greenfield exploration areas towards proven hydrocarbon basins, near-field exploration and producing fields. Near-field exploration and production (4D) reservoir optimization seismic will consequently be increasingly important. The number of companies applying 4D to one or more of their fields have increased five-fold over the last decade. PGS has a solid market share in the 4D segment because of the Company’s GeoStreamer offering providing superior data quality, as well as steerable streamers and sources making it possible to precisely replicate earlier 3D surveys and baseline 4D surveys. 

The operated 3D vessel capacity in the seismic industry decreased by approximately 20% in 2020 compared to 2019 and is now at the lowest level since the mid-1990s, as a result of the substantial demand decline caused by the Covid-19 pandemic. Despite the significant capacity reduction, utilization in the industry has been generally low through the year. 

Technology

PGS is focusing its research and development resources on differentiating technologies for imaging and seismic acquisition. The Company capitalizes on digital solutions to achieve improved efficiency, reduced capital expenditures and ultimately higher prices for the Company’s services.

GeoStreamer, the first-ever dual-sensor streamer and a proprietary PGS technology, was 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. 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. SWIM is an example of a unique solution made possible by GeoStreamer data.

The GeoStreamer was originally developed to improve seismic data quality. PGS has now developed the Next Generation GeoStreamer, which will have a significantly lower manufacturing cost, extended design life and several operational benefits. This is achieved without compromising on the data quality. PGS expects to commence production of the Next Generation GeoStreamer in 2021.

PGS is also making significant R&D progress with seismic sources. The Company has the industry leading source steering technology, and through new technology and improved towing configurations, PGS can deliver improved acquisition efficiency by leveraging wide source separation. In 2020 PGS reached an ultimate milestone for wide-tow multi-source acquisition when Ramform Tethys conducted a seismic survey with a penta-source configuration delivering 315-meter total separation, compared to a normal separation of 100 meters.

Financial Results

Following implementation of the accounting standard for revenues, IFRS 15, in 2018, MultiClient pre-funding revenues are recognized at delivery of the final process data, which is typically significantly later than the acquisition of the seismic data.

For internal management purposes PGS continues to use the revenue recognition principle applied in previous years before implementation of IFRS 15, which is based on percentage of completion and uses this for purposes of Segment Reporting. See Note 4 in the annual financial statements for description.

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 2020, As Reported revenues amounted to $512.0 million, compared to $930.8 million in 2019.

2020 Segment Revenues were $595.9 million, compared to $880.1 million in 2019, a decrease of $284.2 million, or 32%. The decline is mainly driven by the weak market as energy companies have significantly reduced spending in response to the disruptions in the oil market caused by the Covid-19 pandemic.

Contract revenues ended at $146.7 million, compared to $318.8 million in 2019, a decrease of $172.1 million, or 54%, primarily as a result of a significantly weaker market, fewer vessels in operation and a lower share of the active capacity allocated to contract work.

In 2020, MultiClient pre-funding revenues, As Reported, were $134.7 million, predominantly driven by completion of surveys in Europe and Asia. This was a decrease of $172.5 million, or 56%, compared to 2019, owing to less surveys completed and delivered to customers in the period.

Segment MultiClient pre-funding revenues in 2020 were $218.6 million, compared to $256.5 million in 2019, a decrease of $37.9 million, or 15%.  In 2020 the active vessel capacity allocated to MultiClient projects was 70% of total available fleet time, which was an increase from 50% in 2019. In combination with the reduced number of vessels in operation, this resulted in a 10% reduction in vessel acquisition time for MultiClient projects in 2020compared to 2019.  MultiClient pre-funding revenues in 2020 were highest in the Middle East and Africa.

Segment MultiClient pre-funding revenues as a percentage of capitalized cash investment (excluding capitalized interest) was 98%, inside the Company’s targeted range of 80-120%, compared to 105% in 2019. Cash investment in the MultiClient library ended at $222.3 million, compared to $244.8 million in 2019, a decrease of $22.5 million, or 9%. The lower MultiClient cash investment is mainly due to less 3D vessel capacity allocated to MultiClient.

MultiClient late sales in 2020 were $167.3 million, compared to $273.1 million in 2019, a decrease of $105.8 million, or 39%. The decrease comes as a result of lower demand as clients significantly reduced their spending in response to the low oil price from March onwards and delays in completing license round award processes in several countries. MultiClient late sales were highest in Europe and South America.

Total Segment MultiClient revenues (pre-funding and late sales combined) decreased by $143.7 million or 27%, compared to 2019 and ended at $385.9 million.

The Company recorded Covid-19 related cash support from the Norwegian Government amounting to $38.8 million as other income.

The fleet allocation ratio, active 3D vessel time for marine contract versus MultiClient data acquisition, was 29:71 in 2020, compared to 50:50 in 2019.

The Company closely monitors its gross cash costs. Gross cash costs are defined as 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 2020 gross cash costs ended at $426.2 million, a reduction of $153.6 million, or 26%, compared to 2019.

PGS has implemented substantial measures to reduce cost and respond to lower activity levels. During Q2 and Q3 2020 the Company stacked the vessels PGS Apollo, Sanco Swift and Ramform Vanguard. Further, in Q3 2020 PGS completed a comprehensive reorganization to reduce office-based personnel by approximately 40% compared to the start of the year, renegotiated terms with suppliers and implemented several other initiatives. Cost levels through 2020 also benefited from a weak Norwegian krone and lower fuel prices. The cost measures have reduced PGS annual gross cash cost run rate to below $400 million a reduction of more than $200 million from the initial 2020 guiding of ~$600 million.

Net operating expenses, which include cost of sales, expensed research and development costs, and selling, general and administrative costs, totaled $198.2 million in 2020, compared to $324.0 million in 2019, a decrease of $125.8 million, or 39%. The decrease is primarily a result of the factors mentioned above, partially offset by less costs capitalized as MultiClient investment.

Full year 2020, gross research and development (“R&D”) costs decreased by $0.5 million, or 3%, to $17.2 million. Gross development costs capitalized increased by $0.5 million, or 6%, compared to 2019, resulting in overall R&D net expense in 2020 being 10% lower than in 2019. The Company’s R&D costs are mainly incurred to support and develop core business activities of marine seismic acquisition and imaging.

In 2020, total MultiClient amortization, As Reported, was 76% of MultiClient revenues, compared to 72% in 2019. The Company recognized accelerated amortization of $105.2.0 million on projects completed in 2020.

The Company recorded impairments on the MultiClient library of $34.9 million in 2020, compared to $17.9 million in 2019.

Segment MultiClient amortization for 2020 decreased by $47.6 million, or 13%, to $296.3 million, compared to 2019. Segment MultiClient amortization as a percentage of total Segment MultiClient revenues was 77% in 2020, compared to 65% for the full year 2019.

2020 gross depreciation was $176.2 million, a decrease of $27.7 million, or 14%, compared to 2019. The decrease comes as a result of a generally lower investment level over recent years and impairment charges for the year 2020.

For Property and Equipment, the company recorded impairments amounting to $107.4 million in 2020, compared to nil for 2019. The impairment reflects lower estimated recoverable value of vessels due to vessel stacking in 2020, increased WACC and a downward adjustment to future expected cash flows.

Operating profit s Reported in 2020 was a loss of $188.0 million, compared to an operating profit of $54.6 million in 2019.

Operating profit according to Segment Reporting, excluding impairment and other charges net, in 2020 was $12.2 million, a decrease of $84.2 million, or 87%, compared to an operating profit of $96.4 million in 2019.

For the full year 2020, the share of results from associated companies amounted to a loss of $30.0 million, compared to a loss of $20.1 million in 2019. The loss was primarily related to 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 $80.5 million in 2020, compared to $63.6 million in 2019, an increase of $16.9 million, or 27%, primarily as a result of fully drawing the Revolving Credit Facility in Q1 2020 and a higher average interest rate on debt in 2020, compared to 2019.

Other financial expense, net, of $10.0 million in 2020 is primarily cost related to amendment and extension of debt agreements, partially offset by interest income and currency exchange gains, compared to other financial expense, net, of $4.6 million in 2019.

Income tax expense, which consists of current and deferred tax expense, was $15.1 million in 2020, compared to $34.1 million in 2019. The 2020 current tax expense was $15.1 million, down from $34.8 million in 2019. Current tax expense relates primarily to foreign withholding tax and corporate tax on activities in South America, Africa and Middle East.

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 12 and 23 of this annual report for a description of significant tax contingencies.

Loss to equity holders of PGS ASA was $321.5 million in 2020, compared to a loss of $71.7 million in 2019.

Cash Flow, Financial Position and Financing

Net cash provided by operating activities totaled $366.5 million in 2020, compared to $474.3 million in 2019. The reduction is primarily driven by lower earnings, partially offset by working capital changes.

Cash and cash equivalents totaled $156.7 million as of December 31, 2020, compared to $40.6 million as of December 31, 2019. In Q1 2020 PGS fully drew the Revolving Credit Facility to hold everything in cash. The liquidity reserve, cash and cash equivalents including the Revolving Credit Facility (“RCF”), was $156.7 million as of December 31, 2020, compared to $210.6 million as of December 31, 2019.

Restricted cash of $76.6 million includes $47.5 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, compared to $40.6 million in 2019. The increase in restricted cash is mainly due to the legal deposit in Brazil of $17.7 million to challenge a CIDE (service) tax dispute. Since the Company considers it more likely than not that these contingencies will be resolved in its favor, no provision has been made for any portion of the exposure.

Reference is made to the description of rescheduling of debt below. As of December 31, 2020, all interest-bearing debt, excluding lease liabilities, was classified as current pending completion of final agreements on debt rescheduling. On February 9, 2021, the rescheduling agreements became effective.

At December 31, 2020, the Company had approximately 50% of its net debt (excluding lease liabilities) at fixed interest rates. The weighted average cash interest rate was approximately 6.16%, including credit margins paid on the debt as of December 31, 2020, compared to 4.82% as of December 31, 2019. The higher cash interest rate is a result of increased credit margins on debt refinanced in Q1 2020 and the Company’s decision to fully draw the RCF in Q1 2020 and hold the liquidity reserve in cash.

The RCF is subject to a Minimum Consolidated Liquidity and a Maximum Total Net Leverage covenant. The liquidity covenant requires that the consolidated unrestricted cash and cash equivalents and the undrawn and unused Revolving Commitments shall not be less than $75 million or 5% of net interest-bearing debt. The Maximum Total Net Leverage covenant establishes a maximum total net leverage ratio of 2.75:1.0 for the duration of the RCF, but this covenant is suspended for December 31, 2020. On December 31, 2020 the Total Net Leverage was 2.82:1. The debt covenants changed when agreements to reschedule debt were made effective February 9, 2021. Further details described in next section.

Rescheduling of debt

Due to the dramatic negative market change caused by the Covid-19 pandemic, PGS renegotiated its main credit agreements to extend near-term debt maturities and amortization profiles to preserve liquidity.  On February 2, 2021 a UK Scheme of Arrangement (the “Scheme”) was sanctioned by an English court allowing the implementation of the financing transaction with main terms as listed below (the “Transaction”). The Scheme had support of lenders to the RCF/TLB facilities representing 95.3% by value of debt and 99.5% by number of creditors voting. The Transaction closed with effect February 9, 2021.

With the Transaction PGS extended its current near-term maturity and amortization profile under its RCF/TLB and ECF facilities by approximately two years. Together with the cost saving initiatives previously announced, the Transaction strengthens PGS’s liquidity profile in the currently challenging operating environment.

The main terms of the Transaction include:

• The ~$135 million RCF due 2020, the ~$215 million RCF due 2023, and the ~$2 million TLB due 2021 are converted into a new TLB on the same terms as the ~$520 million 2024 TLB
• Quarterly amortization payments of up to 5% per annum of the original principal amount of the ~$520 million 2024 TLB have been replaced by the new amortization payments described below
• The total debt under the new TLB facilities (including PIK fees and offsetting exchange of loans into the convertible bond as described below) of $873.0 million maturing in March 2024 will have the following amortization profile payable pro-rata to all TLB lenders:
  • $135 million amortization payment due in September 2022
  • $200 million amortization payment due in September 2023
  • $9.2 million quarterly amortization starting March 2023
• Quarterly amortization payments totalling ~$106 million due over the next two years under the ECF will be deferred and repaid over four quarters starting December 2022
• The current excess cash flow sweep for the RCF/TLB facilities is replaced by an excess liquidity sweep for any liquidity reserve in excess of $200 million at each quarter end, with such amounts to be applied against (i) the deferred amounts under the ECF and (ii) the $135 million TLB amortization due in September 2022, until they have both been paid in full. Thereafter, any liquidity reserve in excess of $175 million at each quarter end will be applied against the remaining TLB amortizations
• The financial maintenance covenants are amended, with the maximum net leverage ratio to be 4.5x through June 30, 2021, 4.25x through December 31, 2021, 3.25x through December 31, 2022 and 2.75x thereafter. The minimum liquidity covenant will continue to be $75 million with an extra reporting obligation if cash and cash equivalent falls below $115 million. There are customary cure periods and provisions.
• Strengthening of the lenders’ security package
• Total fees across the lender groups of $8.0 million payable in cash and $8.4 million payable in kind (i.e., added to the loan balance)
• Issuance of a NOK 116.2 million 3-year 5% unsecured convertible bond (the “CB”) which can be converted into new PGS shares at NOK 3 per share (corresponding to 38,720,699 shares, equalling 10% of the currently outstanding PGS shares). Certain lenders under the RCF and TLB facilities have subscribed for the CB against conversion of a corresponding amount of their existing secured loans (NOK 67.1 million,~$7.9 million) and for cash (NOK 49.1 million/~$5.8 million). PGS will be able to require that bondholders convert the CB into shares if the PGS share price exceeds NOK 6 for 30 consecutive trading days

Investments

In 2020, total MultiClient cash investment, excluding capitalized interest, amounted to $222.3 million, compared to $244.8 million in 2019, a decrease of $22.5 million, or 9%. The decrease is primarily due to less 3D vessel capacity allocated to MultiClient.

Capital expenditures, whether paid or not, totaled $36.1 million in 2020, compared to $59.1 million in 2019, a decrease of $23.0 million, or 39%. The decrease is primarily a result of measures taken to reduce capital expenditures in a weaker seismic market.

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 Company management and any breach of limits set in the policy are 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, 2020, the debt structure of PGS included $689.3 million of floating interest rate debt, with interest rates based on up to six-month LIBOR rates, plus a margin. $225.0 million of this floating interest debt is swapped into fixed interest by use of interest rate swaps. Fixed interest rate debt amounted to $256.5 million. Taking the interest rate swaps into account, $689.3 million of the Company’s debt is exposed to floating interest rates while $481.5 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 $4.9 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”) and Nigerian Naira (“NGN”). 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 $10-12 million, and $5-6 million before currency hedging.

As of December 31, 2020, PGS had no open forward contracts. The total nominal amount as of December 31, 2019 was $107.7 million. Of the total nominal amounts of forward exchange contracts, $24.0 million were accounted for as cash flow hedges as of December 31, 2019. Outstanding contracts at year-end 2019 had a net positive fair value of $0.9 million.

All interest-bearing debts are denominated in US dollars.

Credit Risk

PGS’ accounts receivable is 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 on 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.

Liquidity Risk

As of December 31, 2020, PGS had cash and cash equivalents totaling $156.7 million, compared to $40.6 million as of December 31, 2019. In Q1 2020, PGS fully drew the Revolving Credit Facility to hold the liquidity reserve in cash. The liquidity reserve, cash and cash equivalents including the Revolving Credit Facility (“RCF”), was $156.7 million as of December 31, 2020, compared to $210.6 million as of December 31, 2019.

Based on available liquidity resources and the structure and terms of the Company’s debt after implementation of the debt rescheduling (see more details in the section “Cash Flow, Financial Position and Financing”), it is the Board’s opinion that PGS has sufficient funding and liquidity to support the Company’s operations and investment programs. Based on its forecasts, the Company expects to comply with the financial maintenance covenants and to be able to address maturities when they resume in the second half of 2022 through cash flow and/or refinancing.

However, even with the debt rescheduling, the Company remains highly leveraged and may become financially challenged should it not comply with the applicable financial maintenance covenants or ultimately fail to generate sufficient cash flow and/or refinance to address the amended amortization and maturity profiles. The Company expects to comply with financial covenants based on its forecasts, but in the event that it cannot, the Company believes it would have several viable alternatives such as negotiating further extensions with its lenders. Consequently, the Board does not consider there to be a material uncertainty related to Going Concern, and as such the Going Concern assumption to be appropriate.

Commodity Risk

Operation of seismic vessels requires substantial fuel purchases, thus PGS is exposed to fuel price fluctuations. Based on the Company’s fuel consumption in 2020, a 10% increase in fuel prices would increase the total annual fuel costs by approximately $5 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 energy companies on hydrocarbon-resource exploration, field development, and production. Spending levels are heavily influenced by oil and gas prices and energy companies’ focus areas. The covid-19 pandemic caused a major disruption in the oil market and a significant short-term reduction of the oil price. Energy companies responded by cutting their investment plans to protect cash flow, which had an immediate negative effect on seismic spending and PGS ability to generate revenues.

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, 2020 PGS had 387,206,996 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, 2020, the Company held 1,739 treasury shares.

PGS has issued a NOK 116.2 million 3-year 5% unsecured convertible bond, which can be converted into new PGS shares at NOK 3 per share, corresponding to 38,720,699 shares, equalling 10% of the currently outstanding PGS shares. PGS will be able to require that bondholders convert the CB into shares if the PGS share price exceeds NOK 6 for 30 consecutive trading days

Due to the Company’s financial situation a dividend will not be proposed for 2020.

Health, Safety, Environment and Quality (“HSEQ”)

Health, safety and reliability are at the core of PGS’ business. The Company works hard to ensure that employees return home safe and well every day.

The global COVID-19 pandemic represented a significant challenge for PGS in 2020. Despite local restrictions and lockdowns, the onshore organization was able to sustain business continuity by working remotely for extended periods of time. For the periods where offices could be held open with full or restricted manning, strict measures were put in place to ensure a safe working environment for our employees.

The offshore operations were affected by global travel and entry restrictions. Through careful planning all planned crew changes were executed and operations were sustained with only minor occasional disruptions. To ensure the health and safety of offshore personnel, strict protocols for quarantine, testing and precautionary measures on the vessels were put in place. During 2020 there were zero positive COVID-19 cases in our fleet during seismic production.

The PGS organization (core fleet vessels and PGS offices) had the following number of health and safety incidents in 2020:

The Company’s activity level (core fleet vessels and PGS offices) in 2020 was significantly lower than that of 2019, with 4,595,282 man-hours in 2020, compared to 5,783,139 man-hours in 2019. The decrease in man-hours was due to the reduction of activity caused by the Covid-19 pandemic.

PGS experienced three lost time injuries in 2020 and the number of total recordable cases in relation to man hours was lower in 2020 than in 2019.

The Company has performed thorough investigations succeeding these lost time incidents and followed up with specific actions to prevent reoccurrence. As a further response to these incidents, the company implemented safety stand-downs, a hazard hunt initiative and safety campaigns.

In 2020, PGS implemented the IOGP Life-Saving Rules, which replaced the previous “PGS Key Safety Risks”. These nine rules describe actions that employees can take to protect themselves and their colleagues from serious injury and fatalities. The adoption of the IOGP Life Saving Rules is part of the Company’s effort to streamline our safety management system and align with the safety management practices used by our clients and the wider offshore industry.

PGS continues its efforts to reduce the environmental impact of its activities. With respect to climate change, PGS is committed to reducing CO2 emissions from its vessel operations and general business activity. Over the past decade, PGS has reduced its CO2 emissions per data unit[1] by 30% as a result of developments in seismic acquisition technology, vessel technology, drag optimization and efficiency improvements. The Company has set a target to reach 50% by 2030. Ongoing digitalization efforts will be key to achieve further reductions. In 2020, PGS developed real-time energy efficiency monitoring for the entire fleet that enables benchmarking across the fleet and optimization in any mode of operation.

During 2020, PGS approached its management of Environment, Social and Governmental (ESG) issues in a systematic and comprehensive way through the work of a dedicated ESG working group. The most prominent development has been to renew the materiality assessment and identify the key indicators, which are of highest concern to our stakeholders and highest impact on PGS value creation.

More information regarding PGS environmental initiatives can be found in PGS’ ESG report 2020, available on www.pgs.com (follow the links: “Responsibility” – “Responsible Business”).

Organization

PGS had 862 and 1,248 regular active employees as of December 31, 2020 and 2019, respectively. The reduction of more than 30% is a result of a comprehensive reorganization of the Company to reduce cost in a challenging seismic market caused by the Covid-19 pandemic.

As of December 31, 2020, PGS employees represented 50 nationalities; 30% of the office-based employees are women (2% 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, 28% of management positions are held by women, and 3% 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.

Being a global company, PGS has long-standing practice of embracing cultural diversity, and cultural sensitivity training is offered to employees.

The average monthly salary of all active regular employees as of December 2020 was $8,396 ($7,265 for female employees and $8,675 for male employees) based on February 1, 2021 exchange rates.

Board of Directors and Corporate Governance

As of December 31, 2020, the Board of Directors has the following members: Walter Qvam (Chairperson), Anne Grethe Dalane, Trond Brandsrud, Richard Herbert, Marianne Kah, Anette Valbø, Hege Renshus and Grunde Rønholt. 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), Trond Brandsrud and Grunde Rønholt. The committees predominantly 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, 2020, this committee consists of Harald Norvik (Chairperson), Terje Valebjørg, Alexandra Herger and Ole Jacob Hundstad.

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 2011, 2013, 2014, 2015, 2016, 2017 2018 and 2019, and will be published on or about the date of issuance of the 2020 annual report as well. The Company has signed up to the 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.

By conducting a materiality assessment PGS has identified its priorities on sustainability, and concluded to focus on five of the  United Nation’s Sustainable Development Goals (“SDGs”), which are number, 4-Quality Education, 9-Industry, Innovation and Infrastructure, 13-Climate Action, 14-Life Below Water and 16-Peace Justice and Strong Institutions. More information regarding what PGS does and how it is done can be found in PGS’ ESG report for 2020, to become available on www.pgs.com (follow the links: “Responsibility” – “Responsible Business”).

Outlook

The oil price has recovered from the low levels triggered by the Covid-19 pandemic, and now the oil price is trading in excess of $60 per barrel. With an oil price above $50 per barrel, energy companies on average generate positive cash flow from their oil and gas activities.

In the seismic market, both order books and leads and bids for contract work have increased, and several of the projects withdrawn from the market last year are now awarded for 2021 or back for tender.

The Board expects the improved oil price, a likely global recovery from the Covid-19 pandemic, and the effects of deferred projects from last year to support a gradual increase of demand for seismic services in 2021. Despite the impacts of the Covid-19 crisis, energy consumption is expected to continue to increase longer term with oil and gas being an important part of the energy mix as the global energy transition evolves. Offshore reserves will be vital for future supply and support demand for marine seismic services. The recovery of the seismic industry is also likely to benefit from the recent industry capacity reductions.

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 2020 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 2020

The financial statements of the parent company, PGS ASA, are prepared and presented in accordance with generally accepted accounting principles in Norway (“NGAAP”). PGS ASA reported a net loss of NOK 3,054.9 million for 2020, compared to a net loss of NOK 19.5 million in 2019. PGS ASA is a holding company with no material operating activities.                                  

The Board proposes that the net loss for 2020 of NOK 3,054,900,000 is transferred from other equity. Total shareholders’ equity in PGS ASA as of December 31, 2020 was NOK 2,273,800,000 corresponding to 20% of total assets.

Oslo, February 23, 2021
Board of Directors PGS ASA

Walter Qvam Chairperson | Anne Grethe Dalane | Marianne Kah | Richard Herbert | Trond Brandsrud
Anette Valbø | Hege Renshus | Grunde Rønholt | Rune Olav Pedersen Chief Executive Officer