Dear PGS shareholders
In 2019 we saw increased demand for our services. This positively impacted vessel utilization and contract prices. Our strong position in the production monitoring (4D) segment and integrated approach accelerated our contract price achievement.
With better financial results and sale of the Ramform Sterling we were able to reduce net interest bearing debt by more than $100 million. The order book increased through the year and we have good visibility going into 2020. We expect the marine seismic market to continue to improve and are well positioned to deliver positive results and significant free cash flow going forward. We have started our digital transformation process to execute our strategy more effectively.
It is generally accepted that the world’s GDP will grow significantly over the next decades and demand for energy will continue to increase. At the same time the world will need to produce energy with lower carbon emissions. A world which meets both the challenge of increasing energy demand and the challenge of lowering carbon emissions will still need significant amounts of oil and gas. Therefore, we need to continue to replace production. This combination necessitates a search for new oil and gas resources and a focus on increasing recovery from existing fields. PGS is committed to serving our customers in these important and valuable tasks and we expect increasing demand for our services going forward.
During 2019 we experienced growing activity among energy companies to replace reserves and extract more from producing fields, driving the overall demand for seismic upwards. We were able to achieve a close to 40% increase of pricing for contract acquisition compared to the average for 2018. We are now generating positive EBIT margins on our contract work, which was significantly loss making during the downturn. The price improvement comes as a result of an improving seismic market, more 4D work in the mix and our ability to benefit from being a fully integrated seismic company.
We are well positioned in the growing 4D market with our high capacity Ramform vessels, steerable streamers, steerable sources and the GeoStreamer technology. Energy companies recognize the value of higher quality data when surveying producing fields. Our technology edge creates value for both clients and ourselves.
Over the last years, the structure of our industry has changed. Two of our large competitors decided to exit the marine acquisition market and only focus on MultiClient. At the same time, our two vessel operating competitors are focusing on acquisition services only. We have taken a decision to remain an integrated seismic company, offering both contract acquisition and MultiClient, as well as imaging and geoscience expertise. As we are now the only remaining fully integrated seismic company, we are taking advantage of our unique position. During 2019 we have seen numerous examples of the benefit of being integrated.
In 2019 the fleet utilization improved significantly, and adjusting for the warm-stacked capacity in the first quarter, we are almost back to pre-downturn utilization levels. In addition, as a result of a generally higher activity level, we have been able to secure projects for all of our eight operational 3D vessels over the 2019/2020 winter season.
We had a slow start to 2019 for our MultiClient sales with low pre-funding in the first quarter and disappointing late sales in the second quarter. We were not able to recover the lost revenues in the second half, but MultiClient late sales in the fourth quarter were encouraging. This was the third strongest fourth quarter MultiClient late sales performance in PGS history, proving the attractiveness of our geographically diverse and high data quality MultiClient library.
To accelerate our strategy execution we kicked off our digital transformation process in 2019. We established an internal digital transformation team responsible for overseeing and advising on the digital transformation processes, and we signed an agreement with Google Cloud as our preferred cloud provider. Short-term our ambition is to image seismic data in the cloud, launch a cloud-based MultiClient sales platform, improve vessel energy efficiency and seismic equipment maintenance, as well as start using machine learning and artificial intelligence for subsurface data analytics.
The key operational aspects of our strategy are to; continue developing our MultiClient business, build on our leadership position in the 4D market, further develop our integrated position, image all the data we acquire, leverage our fleet productivity and technology and to develop differentiating technologies.
A relentless focus on HSEQ is the most important element of our vessel operations and our safety statistics are still industry leading. However, we still believe we can improve safety performance further and we will during 2020 continue to drive this effort.
A key strategic goal is to reduce interest bearing debt and improve our capital structure. During 2019, we reduced net interest bearing debt by more than $100 million. Longer-term we are targeting a net debt level not to exceed $500-600 million, which is well within reach in an improving market environment. Early 2020 we successfully completed a refinancing of our 2020 and 2021 debt maturities combined with a $95 million equity raise. The refinancing strengthened our balance sheet and significantly extended the maturity of our debt.
We believe that the looming challenge of maintaining and building reserves to meet future energy demand will benefit the marine seismic market going forward. We experienced a fundamental market improvement for contract work in 2019. Our order book almost doubled during the year and booked positions across the industry are improved going into 2020. We believe contract pricing will continue to increase in 2020, aided by healthy cash flow among the energy companies and increased activity combined with relatively stable supply side capacity, albeit at a more modest pace compared to last year.
During February 2020 we have seen escalating global concerns over the corona virus outbreak, with a material impact on capital markets and the oil price. As of the date of this letter, while we have appropriate mitigating measures, there is a risk of negative impact on our operations or demand for our services.
Rune Olav Pedersen
President & CEO
February 28, 2020