IG Seismic Services - Statement re 2016 financial and operational result

IG Seismic Services

09/06/2017 14:27

RNS Number : 7129H

IG Seismic Services PLC

09 June 2017

IG Seismic Services PLC

Selected financial and operational information for the first and the second half of 2016

Principal activities and nature of operations of the Group

The principal activity of the Group during the year continued to be the provision of land and transition zone seismic data acquisition and data processing and interpretation to the petroleum industry in the Russian Federation, the Commonwealth of Independent States ("CIS") and other countries outside of the CIS.

Changes in group structure

During the first and the second half of 2016 there were no changes in the structure of the Group. The Group does not intend to perform any acquisitions or mergers.

Seismic Services Market Conditions

Group's results of operations are affected by the conditions in the seismic services market, and more generally, the oil and gas field services market in Russia and the CIS. Oil production in Russia was steadily and dynamically growing throughout 2000s thanks to the intensification of production at existing fields and implementation of technologies to enhance oil recovery rate. Over the period of 2000-2010 production grew more than 1.5 times exceeding 500 mln tones a year. During the crisis of 2008-2009 there was a trend towards production decline, but timely tax cuts by the government helped stabilize production and even promote its growth. Since 2010, conditions in this market have been gradually improving due to positive oil price dynamics and changes in Russian upstream and corporate taxation.

2014 year saw significant economic changes in the country. Due to sanctions imposed by the OECD against Russia and slumping oil prices down to US $45 per barrel, oil and gas companies have encountered new issues. During 2015, the oil prices have been volatile at the beginning and end of the period, but mostly remaining around US $50 per barrel, due to market over supply. Geopolitical uncertainties and risks remain. In the beginning of 2016 oil prices have deteriorated substantially down to US 27$ per barrel.

Despite the first signs of gradual revival in demand for seismic services from the second quarter of 2016 as oil prices stabilized after the high volatility of the beginning of the year and even demonstrated some growth starting from the fourth quarter supported by the OPEC deal, any substantial recovery in 2017 might not be expected and a further risk of market volatility is envisaged.

Nevertheless, the market continues to show solid longer-term fundamentals. With a rising share for depleting and hard-to-recover reserves in Russia, the seismic services are becoming increasingly important, not only in order to explore new terrain, but also to intensify productivity and to adjust drilling strategies at traditional basins. The main supportive factors to the industry are the high importance of the oil and gas industry for the Russian economy, with stable long-term production being the key priority for the state; and the less competitive nature of the Russian market when compared to those globally, particularly that in the US.

Furthermore the Group generates most of its revenues in Russia and benefits from the greater resilience of the Russian OFS market to a low oil price environment compared to global peers. The concurrent strengthening of rouble, the current tax regime, and relatively low production costs largely offset the negative pressure of low oil prices on domestic oil companies.

Seasonality of business

Revenues from field seismic works operations comprised approximately 95% of total Group`s revenues. There is a limited season for conducting such operations in Siberia as seismic crews cannot access many areas in certain periods due to flooding caused by spring thawing and the melting of bogs, following which, the working area is usually characterized by swampy conditions. These conditions restrict the provision of field seismic services in Siberia to a period from December to April-May.

In the first half of the year, The Group's order book is typically lower than in the subsequent quarters, as the Group usually enters into contracts for the next season in the second half of the year.

The seasonality also affects the amount of shot points and production volume of the Group during the first and second half of the season. Thus, the Group performed 801,153 shot points in the second half of season 2015-2016 (period from January to June). Meanwhile the production volume of the first half of season 2016-2017 (period from July to December) was equal to 320,504 shot points.

This is due to the fact that during the first half of the season the major types of works performed are of preparatory nature, such as repairs, mobilization, topographical surveying, whereas the major part of performance the shot points are done during the second half of the season.

Due to this fact the cost of one shot point also varies within the halves of the season. Thus, the cost of one shot point in the first half of the seismic season (period from July to December) is typically higher than the same measure of the second half (period from January to June) for the reason that the major part of preparatory works are performed in July-December.

Generally the Group incurs the major part of its costs at the stage of preparation and mobilization which usually take place during the period from August to October and pays for these costs at the expense of credit resources, which typically results in an increase in Group`s debt and working capital levels.

The seasonality also affects the distribution of operational cash flows within the halves of the seismic season. Thus, during the second half of the seismic season (period from January to June) the cash flow is usually positive as the payments of customers for the works falls to this period.

Meanwhile the operational cash flow of the first half of the season (period from July to December) is typically negative as the Group incurs costs for preparation and mobilization. Also the volume of shot points performed in December are normally being billed to and paid by the customers only in the beginning of the following year.

The Group expects to continue our geographic diversification to reduce the impact of seasonality on its operations, in particular by re-deploying seismic crews to other locations, such as Southern Russia, south CIS countries and certain countries outside the CIS, during off-peak seasons in Siberia.

With the particular aim of improvement of the quality, analysis and comparability of information presented in the financial statements the Group has made the decision to switch to seasonal reporting.

Switch to seasonal reporting

Due to high seasonality of the Group's business it was decided to prepare and publish seasonal reports rather than reports for the calendar year. Taking into account the switch, the Company will make public financial results for the season 2016-2017 by 31 October 2017, in accordance with the regulatory deadlines for periodic financial reporting.

According to IFRS rules (IAS 1.36) in case the Group publishes financials for the year ended 31 December 2016, it must report the either period from 1 January 2017 to 30 June 2017, or 18-months-period ended 30 June 2017, both of which would not be indicative of seasonal operating results of the Company's business. Therefore decision not to publish audited financials for the calendar year ended 31 December 2016 was made.

Therefore below are presented extracts from financial information for the periods from January to June 2016 as a transitional to new reporting period and from July to December 2016 as an interim information for the annual period ended 30 June 2017 and balances as of 30 June 2016 and as of 31 December 2016 respectively.

Review of results, developments, position and performance of the Group's business

Certain deterioration of the group's performance was a result of the continuous low prices prevailing in the industry during first half of 2016 in which the Group is operating. The second half of 2016 demonstrated considerable recovery in the seismic market in Russia as discussed above.

Select financial information based on management accounts:

in thousands of roubles, unless otherwise stated
July - December
of 2016
January - June
of 2016
Revenue
5,789,264
7,289,625
Operating cash flow *
(1,912,962)
2,676,087
Capital Expenditures
315,802
407,527
Net Debt
20,090,614
16,611,166

Operational statistics:

July - December
of 2016
January - June
of 2016
Kilometers
2D (km)
2,144
6,364
3D (sq.km)
2,264
7,305
HD (sq.km)
1,138
583
Shot Points performed by IGSS crews
2D
42,886
116,313
3D
147,294
490,826
HD
130,324
194,014
TOTAL performed by IGSS crews *
320,504
801,153
including
Russia
214,999
797,466
Kazakhstan
105,505
3,687

* please refer to section Seasonality of business for the analysis of changes of the measures between the halves of the year

Order Book

SEISMIC SERVICES

Order Book (in million roubles including VAT)

As of 31 December 2016
As of 30 June
2016
Western Siberia
11,734
6,167
Eastern Siberia
5,926
8,336
Timano-Pechora
5,045
4,208
South of Russia
2,410
3,203
Kazakhstan
208
734
TOTAL, including
25,323
22,648
Contracts Signed*
19,842
19,379
Tenders won, contracts to be signed
5,481
3,269

Order Book Breakdown by Years (in million roubles including VAT)

As of 31 December 2016
As of 30 June
2016
2016
-
5,923
2017
16,594
11,155
2018
5,775
4,575
2019
2,013
532
2020
705
463
2021
236
-
TOTAL
25,323
22,648

SEISMIC DATA PROCESSING AND INTERPRETATION

31.12.2016
RUR mln
30.06.2016
RUR mln
Contracts Signed*
287
451
Tenders won, contracts to be signed
-
84
TOTAL
287
535

* Signed contracts may be subject to renegotiation of volumes and/or other terms or even cancellation, and both signed contracts and tenders won may not proceed as originally planned at all.

The Group is currently in the process of contracting for 2017-2018 and 2018-2019 seasons which implies that current order book does not provide an accurate indication of revenues in 2017 and current order book trends could change.

Financial Review

The following table sets forth the financial information in relation to the performance of the Group for the first half of 2016 and for the second half of 2016. The information presented is based on management accounts in thousand roubles.

July - December
January - June
Field seismic operations
5,464,092
7,035,463
Data processing and interpretation
299,702
204,173
Other revenue
25,470
49,989
Total revenue
5,789,264
7,289,625
Labour and wages
(1,494,988)
(2,494,669)
Social contribution
(353,246)
(765,133)
Depreciation of property, plant and equipment and amortization of intangible assets
(1,173,474)
(1,312,109)
Materials and supplies
(918,761)
(1,692,327)
Transportation services
(464,015)
(313,339)
Operating lease
(125,236)
(512,742)
Oilfield services
(266,511)
(362,538)
Other third parties services
(191,141)
(291,512)
Other
(51,791)
(52,590)
Total costs of sales
(5,039,163)
(7,796,959)
Gross profit / (loss)
750,101
(507,334)
Labour and wages
(340,767)
(364,342)
Social contribution
(78,746)
(115,901)
Third party services
(87,396)
(88,903)
Taxes, other than income tax
(49,766)
(58,685)
Operating lease
(44,386)
(42,887)
Depreciation of property, plant and equipment and amortization of intangible assets
(26,753)
(27,213)
Other
(52,086)
(63,815)
Total general and administrative expenses
(679,900)
(761,746)
Other operating income
40,607
59,376
Penalties and fines with counterparties
(72,446)
(89,727)
Net loss from service plants and facilities
(6,771)
(13,193)
Welfare assistance
(7,241)
(6,582)
Free-of-charge transfer of assets and charity
(4,997)
(4,839)
Other expenses
(24,260)
(21,639)
Total other operating expense
(115,715)
(135,980)
Total operating loss
(4,907)
(1,345,684)
Finance expense, net
(1,625,312)
(1,298,983)
Loss before tax
(1,630,219)
(2,644,667)
Deferred income tax benefit
326,044
528,933
Loss for the period
(1,304,175)
(2,115,734)
Weighted average number of ordinary shares adjusted to the effect of dilution, if any
20,833,400
20,833,400
Loss per share (in roubles)
(62.60)
(101.55)

The following table sets forth the information in relation to balance sheet position of the Group as of the end of the first half of 2016 and as of the end of the second half of 2016. The information presented is based on management accounts in thousand roubles.

31 December 2016
30 June
2016
Non-current assets
Property, plant and equipment used in operating activity
9,070,760
9,858,540
Property, plant and equipment designated for sale
456,517
538,660
Intangible assets
312,270
339,428
Long-term receivables
215,610
82,710
Advances issued for CAPEX
108,838
-
Deferred tax assets
709,171
383,127
Other non-current assets
4,311
4,311
Total non-current assets
10,877,477
11,206,776
Current assets
Inventories
1,906,450
1,466,439
Accounts receivable and prepayments
9,385,091
8,674,712
Other financial assets
91,852
88,724
VAT receivable
359,637
203,649
Prepayments for income tax
196,855
114,135
Other current assets
18,254
14,402
Cash and cash equivalents
308,971
167,988
Total current assets
12,267,110
10,730,049
Total assets
23,144,587
21,936,825
Equity
Share capital
6,513
6,513
Equity reserves
3,580,535
3,930,695
Accumulated losses
(8,191,542)
(6,887,367)
Total equity
(4,604,494)
(2,950,159)
Non-current liabilities
Loans and borrowings
3,680,834
7,986,059
Deferred tax liabilities
539,388
408,238
Long-term payables for CAPEX
292,656
551,344
Total non-current liabilities
4,512,878
8,945,641
Current liabilities
Loans and borrowings
16,716,255
8,789,480
Accounts payable
2,497,827
2,867,351
Accounts payable for CAPEX
833,999
645,323
Payables to employees
695,309
414,791
Taxes payable
2,490,317
3,220,783
Finance lease liabilities
2,496
3,615
Total current liabilities
23,236,203
15,941,343
Total liabilities
27,749,081
24,886,984
Total liabilities and equity
23,144,587
21,936,825

The following table sets forth the information in relation to the operating, investing and financing cash flows of the Group for the first half of 2016 and for the second half of 2016. The information presented is based on management accounts in thousand roubles.

July - December
January - June
Operating activities:
Loss for the period before tax
(1,630,219)
(2,644,667)
Adjustments for loss before tax
2,825,539
2,638,305
Working capital adjustments
(2,972,692)
2,708,481
Cash flow before income tax
(1,777,372)
2,702,119
Income tax paid
(135,590)
(26,032)
Net cash from operating activities
(1,912,962)
2,676,087
Investing activities:
Purchases of property, plant and equipment and intangibles
(314,403)
(406,272)
Proceeds from the sale of property, plant and equipment
16,273
98,396
Short-term borrowings issued
-
(36,620)
Repayment of short-term borrowings issued
6,368
-
Interest received
9,747
10,000
Net cash used in investing activities
(282,015)
(334,496)
Financing activities:
Proceeds from loans and borrowings
6,499,380
3,381,163
Repayment of loans and borrowings
(2,392,414)
(4,240,363)
Repayment of bonds
(387,277)
-
Repayment of finance lease obligations
(1,399)
(1,255)
Interest paid
(1,386,972)
(1,625,089)
Acquisition of non-controlling interest
-
(5,250)
Net cash received from / (used in) financing activities
2,331,318
(2,490,794)
Net increase / (decrease) in cash and cash equivalents
136,341
(149,203)
Cash and cash equivalents at the beginning of the period
167,988
317,701
Effect of foreign exchange on cash and cash equivalents
4,642
(510)
Cash and cash equivalents at the end of the period
308,971
167,988

Capital resources

The following table sets forth loans and borrowings in thousand roubles as of 31 December 2016 and as of 30 June 2016:

31 December 2016
30 June
2016
Short-term bank loans
12,600,000
3,596,250
Current portion of long-term bank loans
3,739,085
5,193,230
Current portion of bonds
377,170
-
Total short-term loans and borrowings
16,716,255
8,789,480
Long-term bank loans
1,460,912
5,003,385
Bonds
2,219,922
2,982,674
Total long-term loans and borrowings
3,680,834
7,986,059
Total loans and borrowings
20,397,089
16,775,539

In October 2016 the Group restructured its RUB 3 billion bond due in 2018 through the exchange for an amortizing RUB 3 billion bond maturing in October 2019, thus having increased the maturity by one year. The coupon rate is equal to key rate of Central Bank of Russia plus 3% p.a. and the repayment schedule envisage downpayment of 10%, amortization during the period until maturity date and 50% balloon payment on October 2019. Downpayment in the amount of 300,000 was paid to bondholders in 2016.

All loans and borrowings presented in the table above are denominated in Russian rubles. A number of loan agreements and revolving credit line agreements were secured by property, plant and equipment, and rights to claim cash.

Interest expenses in relation to Group's loans and borrowings, including coupon under bonds comprised the following:

- Interest expenses on loans and borrowings amounted to 1,101,245 for the first half of 2016 and 1,159,496 for the second half of 2016, respectively.

- Coupon expenses on bonds issued amounted to 160,397 for the first half of 2016 and 175,755 for the second half of 2016, respectively.

To assess the debt levels the Group uses Gross Debt measure which is a sum of loans and borrowings, promissory notes issued and finance lease obligations as at reporting date and Net Debt which is calculated by deduction of cash and cash equivalents and other financial instruments easily convertible to cash from Gross Debt as presented in the table below in thousand roubles.

31 December 2016
30 June
2016
Loans and borrowings payable
20,397,089
16,775,539
Finance lease obligations
2,496
3,615
Gross debt
20,399,585
16,779,154
Less: cash and cash equivalents
(308,971)
(167,988)
Net debt
20,090,614
16,611,166

Capital Expenditures

The combined capital expenditures were RUR 315.8 million in the second half of 2016 and RUR 407.5 million in the first half of 2016. Capital expenditures consist primarily of purchases of equipment and software used in the operations and repayment of liabilities under finance lease agreements. Capital expenditures are presented on the basis of cash outflows in the table below in thousand roubles.

July - December
of 2016
January - June
of 2016
Investing activities: Purchases of property, plant and equipment
314,403
406,272
Financing activities: Repayment of finance lease obligations
1,399
1,255
Total cash CAPEX
315,802
407,527

As of 31 December 2016 and as of 30 June 2016, the Group had no firm commitments in respect of future capital expenditures.

Off-Balance Sheet Arrangements

As of 31 December 2016 and as of 30 June 2016, the Group did not have any material off-balance sheet arrangements.

Dividends

The holders of ordinary shares are entitled to receive dividends as declared. One share has one vote at the annual and general shareholders' meetings of the Company. No dividends were declared or paid for ordinary shares during first or second half of 2016.

Principal risks and uncertainties

The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. In 2016 and 2015 the Russian economy was negatively impacted by low oil prices, ongoing regional political tensions and continuing international sanctions against certain Russian companies and individuals, all of which contributed to the country's economic recession characterised by a decline in gross domestic product.

The financial markets continue to be volatile and are characterised by frequent and significant price movements and increased trading spreads. This operating environment has a significant impact on the Group's operations and financial position. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

The Group's activities expose it to a variety of financial risks including credit, interest rate, market, liquidity, currency and other risks arising from adverse movements in the price of oil, foreign currency exchange rates and changes in interest rates. The Group's overall risk management objective is to reduce the potential adverse effects of these risks on financial performance.

The Group's risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

Credit risk

Credit risk is the risk that a customer or counterparty to a financial instrument will fail to pay amounts due or fail to perform obligations causing financial loss to the Group. The Group's credit risk principally arises from cash and cash equivalents and from credit exposures of its customers relating to outstanding receivables. The Group has not used any financial risk management instruments in this or prior periods to hedge against this exposure.

The Group only maintains accounts with reputable banks and financial institutions and therefore believes that it does not have a material credit risk in relation to its cash or cash equivalents.

The Group has policies in place to ensure that sales of services are made to customers with an appropriate credit history. The carrying amount of accounts receivable, net of provision for impairment of receivables, represents the maximum amount exposed to credit risk. The Group has no significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the allowance already recorded.

Market risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. The Group manages market risk through periodic estimation of potential losses that could arise from adverse changes in market conditions. Market risk consists of interest rate, liquidity and foreign exchange risks relating to the Group.

Competitive environment

The Russian seismic services market is very fragmented and characterized by intense competition. Most contracts are obtained through a competitive bidding process, which is standard for the market where the Group operates. The most important factors in awarding contracts include reputation, service quality, technological capacity, track record (history of performance), and experience of personnel, customer relations, long-standing relationships and price.

Different large and smaller local companies compete with the Group in the land and transition zone seismic market and large international players compete with the Group in the data processing and interpretation market. In addition, the Group competes with government-sponsored companies and affiliates.

Competitive factors in the markets where the Group operates include timing, price, quality and technical proficiency and product and service delivery. Ability to enhance existing products and services and technical proficiency, while controlling costs, is of primary importance to the Group's ability to compete effectively.

Future developments of the Group

The Group does not expect any significant changes in the activities of the Group for the foreseeable future. The Group's strategic objective is to strengthen its position as the leading seismic player in Russia. The Group will also continue to focus on effective cost management.

Branches

The Company did not operate through any branches during the year.

This information is provided by RNS

The company news service from the London Stock Exchange

  END

STREADKNEALXEFF