UPDATE 2-CGG to cut seismic fleet as oil firms rein in spending

Thu Feb 27, 2014 6:54am EST

Related Topics

* $800 mln charge leads to $691 mln net loss

* Sales rose 10 pct vs 15-17 pct target

* To cut vessel fleet to 13 from 18 by 2016

* Shares down nearly 9 pct (Adds quotes from call, details, shares)

By Michel Rose

PARIS, Feb 27 (Reuters) - French seismic surveyor CGG plunged to a net loss last year after booking an $800 million charge, mainly to account for plans to cut its fleet of vessels because of a drop in exploration spending by oil industry customers.

After a sustained rise in oil prices encouraged producers to spend more on exploration in increasingly remote areas, oil companies have recently come under pressure from shareholders to rein in spending and improve returns.

France's Total, for example, said earlier this year it would scale back capital spending.

That has cut demand for firms that supply specialised services or equipment to oil companies such as CGG, whose seismic data allow the design of more precise three-dimensional maps of fields deep under the seabed.

Rival Norwegian surveyor PGS, for example, forecast a weak first quarter earlier this month, while French steel tube maker Vallourec struck a cautious tone on oil and gas sales on Wednesday.

"We are operating in a constrained environment. Exploration chiefs at oil companies tell us that they have reduced budgets," CGG Chief Executive Jean-Georges Malcor said on Thursday.

CGG shares were down 8.9 percent to 11.055 euros by 1115 GMT, reversing a 5-percent rise at the open. The stock dropped 44 percent in 2013 after two results warnings.

To adjust to the tougher environment, CGG said it would cut its fleet of high-end vessels it uses to map the seabed to 13 from 18 by the end of 2016.

As a result, it took an $800 million charge which drove it to a net loss of $691 million for last year. Sales rose 10 percent to $3.77 billion, below an already reduced target of 15-17 percent.

Natixis analysts said the one-off charge was bigger than the $500 million they expected, although they noted an improvement in operating margins at seismic exploration equipment making unit Sercel last quarter to 32 percent.

"We remain rather cautious on the potential for a quick pick-up in the share price compared to other stocks in the oil services sector," CM-CIC Securities analysts said in a note.

NOCS TO THE RESCUE

Like Vallourec, CGG's Malcor said he expected spending by state-controlled national oil companies (NOCs) to somewhat offset the cuts by oil firms pressured by their shareholders.

"NOCs account for about 50 percent of our portfolio today and it's rising, we have excellent relations with these companies who face different challenges than majors, including the optimisation of existing fields," he said.

"That's the point of our strategic partnership with (Saudi-based surveyor) Argas, which was put in place to target national oil companies in the Gulf including Saudi Aramco," he added.

He also noted that Brazilian giant Petrobras had confirmed a rise in its exploration budget.

For these reasons, Malcor said he remained optimistic in a medium- and long-term and confirmed 2016 targets of $4 billion in sales and a 400 basis point improvement in the group's margin on earnings before interest and tax (EBIT) compared with 2013.

Malcor said the French-flagged CGG Symphony vessel, one of the largest seismic ships in the world, had already stopped operating in February and would be de-rigged.

"For the four others, we favour solutions that would withdraw these boats from the seismic market. They won't necessarily be de-rigged, they could be designated for other activities, some could be sold too," he added. (Additional reporting by Gilles Guillaume; Editing by David Goodman and Mark Potter)

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