TGS Nopec (TGSGY, Financial) is a service provider to oil and gas companies. TGS and Nopec were both started in 1981 before merging in 1998. TGS’ primary business is to provide geoscience data to energy companies worldwide. As noted on the company’s website, “TGS is committed to providing the global energy industry with the right subsurface data, in the right place, at the right time, so that our customers can make informed drilling decisions… we are the principal resource for global geoscientific data products and services in the oil and gas industry.”
The company’s business is focused on multi-client surveys. This approach shares the cost of acquiring survey data among multiple exploration and production (E&P) firms, along with a portion funded by TGS, which avoids duplicative work and results in lower costs. Survey data enables E&P companies to make more intelligent decisions - information that can help them decide whether or not they should commit tens of millions or even hundreds of millions of dollars to drill a well.
Much of TGS Nopec’s survey work is pre-funded, which means that one or more of their clients has committed to licensing the data before the acquisition process has begun. After its initial work, TGS Nopec retains ownership and control of the data, which can be licensed to others (called “late sales”). Late sales account for a significant portion of the business. As shown in the 2018 annual report, one-third of TGS’ revenues in that year were attributable to surveys completed in 2014 or earlier. As you can imagine, this comes with high incremental margins.
One of the key attributes that has drawn me to TGS Nopec is their asset-light business model. Note that they do not own their own ships and equipment, or even employ their own seismic crews. The data acquisition is outsourced. What TGS is responsible for is processing the data. Considering that the industry is prone to boom / bust cycles, the ability to flex the cost structure is critical to ensuring the long-term sustainability of the business. As an example, note that oil and gas seismic spending declined by more than 50% from 2012 to 2018.
As shown below, revenues for TGS Nopec have been volatile over the past 15 years, with the drop off in the past few years roughly mirroring the industry result. (The company’s revenues in 2017 to 2019 were roughly 40% below the peak result in 2012.)
The same has also been true for the company’s profitability. To give some sense for the long-term (full cycle) results, the company’s revenues over the past 5 and 10 years have averaged $550 million and $670 million, respectively. In terms of operating income, the company has averaged $140 million and $250 million over the past 5 and 10 years, respectively.
In terms of capital allocation, TGS has returned most of its earnings to shareholders. Over the past 5 years, dividends have totaled $430 million, equal to roughly 80% of TGS' adjusted net income over the same period. As noted during the 2019 Capital Markets day event, “It is the ambition of TGS to pay a cash dividend that is in line with its long-term underlying cash flow.”
In addition to dividends, the company has repurchased its own shares:
“For 2019, 1.65 million shares were repurchased at an average price of NOK 237.7 per share, corresponding to a total cash spending of $43.4 million.”
Note that the stock currently trades at 110.3 Norwegian Kroner ($10.5) per share – more than 50% below the average price paid to repurchase shares in 2019.
The company plans on paying a dividend of NOK 3.47 per share in the first quarter, with an expectation that this rate would be maintained throughout 2020. If that proves accurate, the current dividend yield is north of 10%.
Shortcut
One shortcut that I use to assess business quality is long-term stock performance. While equity returns can be noisy in the short-term due to changes in market perception, I have found that long-term returns on a stock are generally comparable to gains in intrinsic value. In the case of TGS, the performance of the stock suggests solid results for the business over the past 15 years.
But while the stock has performed well over the long-term, that has not been the case lately: the stock is down by more than 50% over the past year. That reflects the expected impact on the industry from lower oil prices. Based on where things stand today, we are likely to see a significant reduction in E&P spending around the world, with less demand throughout the supply chain – including for TGS Nopec. As noted in a recent report from Goldman Sachs, seismic is quick to see spending freezes in a downturn.
A recent Bloomberg article headline sums it up nicely: “The Global Oil Market is Broken.”
I’m not in the position to intelligently comment on the energy industry. One thing I am confident in saying is that eventually, as reserves deplete, additional investment will be required. E&P companies will search for new resources to pull out of the ground, with others like TGS supporting those efforts. That will require supply and demand to come back into balance; until then, TGS has a business model and a balance sheet that I believe will enable them to play offense throughout the downturn.
Given the boom / bust nature of the industry, I don’t think it makes much sense to focus on earnings in any given year. Instead, I think we should try to value the business on full cycle results. As I noted earlier, TGS has averaged $140 million and $250 million in annual operating income over the past 5 and 10 years, respectively.
Currently, the company has an enterprise value of $1 billion, with a market cap of $1.3 billion and $320 million in net cash. Using $200 million a year as a baseline, the stock is trading at roughly five times normalized operating income. That sounds reasonable to me.
For what it’s worth, TGS has traded at nearly four times EV / EBITDA over the past decade; today, it trades at closer to 1.5 times trailing EV / EBITDA. All that said, I still don’t know the industry that well. Put differently, I might be the patsy at the poker table.
For that reason, I don’t plan on making this a large position. I have a pending buy order that, if filled, will make TGS less than 1% of my portfolio (I'm finding out now that the ADR is thinly traded). My hope is this article will put me in contact with some individuals who are more knowledgeable about this company and will help me become more convicted in my decision.
Disclosure: Long TGSGY
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