SeaBird Exploration : Plc: Fourth quarter report 2014

2014 SUMMARY OBSERVATIONS FOR THE FOURTH QUARTER

• Revenues for the quarter were $28.1 million, a decrease of 27% compared to Q4 2013 and up 24% relative to Q3 2014.
• Contract revenues for the period were $23.5 million, down 30% from Q4 2013 and an increase of 44% from Q3 2014.
• Multi-client revenues were $4.6 million, down 11% from $5.1 million reported in Q4 2013 and a decrease of 28% from $6.3 million reported in Q3 2014.
• EBITDA was negative $28.5 million compared to positive $3.9 million for Q4 2013 and negative $2.1 million for Q3 2014.
• EBIT for the quarter was negative $68.6 million compared to negative $4.6 million for Q4 2013 and negative $11.1 million for Q3 2014.
• Vessel utilization for the period was 57%. Contract surveys during the fourth quarter represented 52% of vessel capacity compared to 35% during the third quarter 2014. Multi-client surveys accounted for 5% of vessel capacity compared to 30% in the prior period.
• Non-recurring costs in the period of $21.0 million relating to lay-up of 3D vessels, bad debt provisions, loss on insurance settlements, financial restructuring and office relocation costs.
• Impairments were $31.5 million during the quarter.

Operational review

Fourth quarter revenues increased from the prior period due to higher contract utilization. However, the overall seismic market continued to be negatively impacted by the weakness in oil prices. Although all operating sectors were affected by the softness in the oil services markets, the 2D and source segments have been less impacted than the niche 3D market.

Vessel utilization was 57%, down from 65% in the third quarter. Technical downtime for the fleet was 6%, up from 3% for Q3. The Geo Pacific experienced significant technical challenges on its 3D survey in West Africa and this had a substantial impact on overall downtime for the period.

Contract surveys represented 52% of vessel capacity compared to 35% for the third quarter of 2014. Aquila Explorer completed one 2D multi-client survey in the Philippines and thereafter mobilized for a new 2D contract survey in Australasia. Osprey Explorer continued working on the 2D survey in the Gulf of Mexico throughout the quarter. Harrier Explorer completed a 2D multi-client survey off-shore Ireland and performed a contract survey in Africa. Munin Explorer continued its long-term source contract and was mobilized to South America towards the end of the quarter. Hawk Explorer and Northern Explorer remained off hire awaiting start-up of new 2D contracts. Geo Pacific was employed on its 3D survey in West Africa during the quarter.

In light of the weakness experienced in 3D market demand, the company decided to lay up the Voyager Explorer in November. Furthermore, the company has opted to lay up the Geo Pacific after its Africa survey, which was completed in the early part of Q1 2015. Non-recurring cost of sales resulting from the implementation of the lay-up of Geo Pacific and Voyager Explorer amounted to $9.0 million during the quarter. The cost provision covers estimated net losses until redelivery of Geo Pacific in 2015 and Voyager Explorer in 2016.

Multi-client surveys represented 5% of vessel utilization for Q4 compared to 30% for Q3. Multi-client revenues were $4.6 million during the quarter.

No additional yard stays were performed during the quarter.

The company's health, safety, security, environment and quality (HSSEQ) controls continued to prove effective and resulted in a Lost Time Injury Frequency (LTIF) rate of zero for the quarter.

As a part of the restructuring and refinancing effort, the company incurred $1.7 million in non-recurring advisory costs for the period and $1.1 million in relation to the closure of the Dubai office. In addition, the company made a provision of $8.1 million for bad debt related to certain long-dated receivables. These charges were all reported under selling, general and administrative expenses. Further, the company had a loss on insurance settlements of $1.0 million, which was booked under other income and expenses.

Property, plant and equipment impairments amounted to $24.8 million during the quarter. The impairments relate to vessels and equipment and were triggered by the current market weakness. The recent reduction in oil prices is also expected to delay and reduce revenues from selected multi-client surveys, and triggered an impairment of $5.5 million during the quarter. The company also performed its annual review of goodwill and decided to make a goodwill impairment of $1.3 million.

Regional overview

Europe, Africa and the Middle East (EAME) represented the largest portion of revenues during the quarter.

Sales in EAME of $17.4 million accounted for 62% of total revenues. The increase in EAME revenues compared to the prior period was mainly due to higher contract utilization. Munin Explorer worked in the region under its long-term charter agreement. Harrier Explorer completed a multi-client project off the coast of Ireland and also completed a 2D contract survey in the region. Geo Pacific continued to work on its 3D contract in Africa during the quarter.

Asia Pacific (APAC) sales of $5.6 million accounted for 20% of total revenues. APAC revenues were down compared to the third quarter of 2014 due to the decline in seismic demand. Aquila Explorer completed a multi-client survey in South East Asia by mid-October and subsequently mobilized for a contract survey in Australasia.

Sales in North and South America (NSA) of $5.0 million, an increase of 124% from Q3, represented 18% of total revenues for Q4. NSA revenues increased from the previous period as a result of Osprey Explorer being employed on a contract survey in the Gulf of Mexico. The vessel is expected to remain in the region for the foreseeable future.

Outlook

Global seismic market demand continued to be soft through the fourth quarter. The decline in oil prices and the cautious spending approach from oil companies delayed contract start-ups and had a negative impact on seismic demand. Nevertheless, the company continued to secure additional 2D contracts during the quarter and significantly strengthened the backlog for 2015.

In light of the challenging market, the company decided to lay up two 3D vessels, which will reduce costs and improve vessel utilization. The company continues to evaluate and execute savings initiatives to reduce the company's overall cost level.

We expect the current seismic market softness to continue to impact the seismic sector in 2015. Longer term, we expect that continued interest in frontier exploration and the scheduled exit of a number of 3D vessels currently operating in our markets will benefit the company. We also believe the company's financial restructuring effort has had a negative impact on contract awards and expect this to improve with the completion of the refinancing. Multi-client activity was robust in the fourth quarter with completion of two projects and solid sales from recently completed projects in Asia and Europe. The company views multi-client investment as a core part of its operation and will capitalize on multi-client investment opportunities with attractive risk reward characteristics.

Financial comparison

All figures below relate to continuing operations unless otherwise stated. For discontinued operations, see note 1.

The company reports a net loss of $71.2 million for Q4 2014 (net loss of $8.7 million in the same period in 2013).

Revenues were $28.1 million in Q4 2014 ($38.7 million). The decreased revenues are primarily due to reduced contract rates during the period.

Cost of sales was $40.1 million in Q4 2014 ($30.0 million). The increase is predominantly due to non-recurring provisions related to the decision to lay up the Geo Pacific and Voyager Explorer.

SG&A was $15.6 million in Q4 2014, up from $5.2 million in Q4 2013. This is principally due to an increase in non-recurring bad debt charges against certain long-dated receivables, restructuring advisory costs and expenses associated with the office relocation from Dubai to Limassol and Oslo.

Other income (expense) was negative $1.0 million in Q4 2014 (positive $0.4 million); resulting from a net loss on insurance claims of $1.0 million for the Osprey streamer incident booked during the quarter.

EBITDA was negative $28.5 million in Q4 2014 (positive $3.9 million).

Depreciation, amortization and impairment were $40.1 million in Q4 2014 ($8.5 million). The impairments are related to vessels ($24.8 million), multi-client library ($5.5 million) and goodwill ($1.3 million).

Finance expense was $2.3 million in Q4 2014 ($3.1 million). The decrease is primarily due to a reduction in amortized interest.

Other financial items, net expense, of positive $0.2 million in Q4 2014 (negative $0.7 million).

Income tax expense was $0.5 million in Q4 2014 ($0.2 million in Q4 2013).

Capital expenditures in the quarter were $0.1 million.

Multi-client investment was $1.6 million in Q4 2014 ($1.4 million), which related to completion of two 2D multi-client projects.

Liquidity and financing

Cash and cash equivalents at the end of the period were $7.0 million ($12.2 million), of which $1.0 million was restricted in connection with deposits and tax. Net cash from operating activities was negative $2.1 million in Q4 2014 (negative $0.29 million).

The company has one bond loan, one convertible loan and the Hawk Explorer finance lease.

• The 6% secured bond is recognized in the books at $80.9 million per Q4 2014 (face value of $81.9 million less principal amounts in the bond service account of $1.0 million). The bond loan's stated maturity is 19 December 2015 and has principal amortization due in semi-annual increments of $2.0 million that started 19 December 2012.
   
• The 1% unsecured convertible loan with Perestroika AS is recognized in the books at face value of $14.9 million. The company was unable to repay the convertible loan at maturity of 30 September 2014 and no interest on the convertible loan was paid during Q4 2014.
   
• The lease of Hawk Explorer is recognized in the books as a finance lease at $5.1 million per Q4 2014. No installments and interest were paid during Q4 2014 ($1.0 million and $0.3 million in Q4 2013, respectively).

 Net interest-bearing debt was $95.2 million at the end of Q4 2014 ($87.1 million).

Accrued interest for Q4 2014 was $2.7 million ($0.1 million).

The company was in breach of covenants of the convertible loan from Perestroika as of 30 September as a result of the inability to repay the $14.9 million face value at maturity. Moreover, the company was in breach of balance sheet ratio covenants and cross-default provisions in SBX03 bond agreement. The company has negative equity as of Q4 2014 and requires new sources of funds to sustain its operations.

The company continued its financial restructuring dialogue with stakeholders during the quarter and reached agreement on terms subsequent to quarter closing. The company's accounts have as a result been prepared on the basis of a going concern assumption. Reference is made to the Financial Restructuring below and the Going Concern section in selected notes and disclosures for further details on the current financial position of the company.

Financial restructuring

Subsequent to quarter closing, the company announced an agreed restructuring proposal to reduce indebtness and provide additional funding.

• Issue of new equity for a total of approximately $11.6 million or 884,687,500 new shares and 884,687,500 new warrants to acquire one share per warrant at an exercise price of NOK 0.10 per share.
   
• Issue of a new 3-year secured bond in two tranches ("SBX04") subscribed by TGS-NOPEC Geophysical company ASA for $5 million in tranche A and $24.3 million in tranche B originating from a debt conversion of the existing SBX03 bond, Perestroika convertible bond, charter hire and financial advisory payables.
   
• The SBX04 bond will be a secured bond issued in two tranches, one Tranche A carrying a 12% interest per annum and one Tranche B carrying an interest of 6% per annum, to be secured against certain assets of the SeaBird group. Interest will be paid quarterly commencing in August 2015. The first principal payment date will occur two years after the date of settlement of the SBX04, which is expected in Q1 2015, at which time $2.0 million shall be payable on that interest payment date and quarterly on each following interest payment date with a bullet payment to be made on maturity.
   
• Issue of a 3-year secured credit line facility of $2.4 million. The facility will carry an interest of 6% per annum, will be secured against certain assets of the SeaBird group and credit line amount will be reducing from April 2017 and each interest repayment date at the same proportion as the installment amounts under SBX04. Interest will be payable quarterly in arrears with first interest date falling three months after settlement date.
   
• Issue of a $2.1 million loan. The loan will be unsecured, will carry interest of 6% per annum and its maturity date will be 1 January 2018. The principal will be repayable in nine equal installments commencing 1 January 2016. Accrued interest will be paid quarterly in arrears with first interest payment in April 2015.

Approximately $16.2 million of the outstanding amount under the SeaBird Exploration Plc Senior Secured Callable Bond Issue 2011/2015 ("SBX03") is to be converted into SBX04 and the remaining approximately $64.7 million of SBX03 is to be converted into equity at NOK 0.30 per share. Further, approximately $3.0 million of the company's convertible loan with Perestroika AS to be rolled into SBX04 and the remaining approximately $11.9 million of the Perestroika Loan to be converted into equity at NOK 0.30 per share. Additionally, the outstanding charter hire for the Munin Explorer, Geo Pacific, Hawk Explorer and Voyager Explorer (the "Charterers") to be partially converted into SBX04 or a loan, partially converted into equity and/or partially written down and the ongoing charter obligations to undergo certain amendments including a reduction in total charter hire of above $25,000 per day, yielding an annual pre-tax cash flow improvement of above $9 million. Moreover, $0.7 million of restructuring advisory fees to be converted into SBX04 and $2.8 million of restructuring advisory fees to be converted into equity at NOK 0.30 per share. In addition, $11.6 million of equity is to be raised from certain investors, at NOK 0.10 per share, (which includes a subscription by SBX03 holders of all monies standing to the credit of a bond service account pledged in favor of SBX03), and where each new share thus subscribed will entitle the subscriber to a three-year warrant to subscribe for another share at a subscription price of NOK 0.10 per share. Fuel vendors' outstanding balances of $3.4 million are to be converted into SBX04 Tranche B and $2.4 million to be converted to the secured credit facility.

On 18 February 2015, the bondholders of SBX03 approved the restructuring proposal with the requisite majority in a bondholder meeting. Furthermore, on 3 February 2015, the company called for an extraordinary general meeting ("EGM1") on 19 February 2015, for the creation of a new Class A of shares, conversion of debt into equity and exclusion of preemption rights in relation to new shares, all in order to carry out the restructuring as proposed. In the general meeting, all proposals on the agenda were adopted with requisite majority. Additionally, the company has called for a second extraordinary general meeting ("EGM2")to be held on 5 March 2015 to approve conversion of Class A shares into ordinary shares and reduction in capital with simultaneous increase of authorized capital to its former amount. Implementation of the restructuring remains subject to final documentation and customary closing conditions. We refer to press releases issued by the company to provide further details on the announced restructuring.

The third quarter 2014 presentation will be transmitted live at

http://www.sbexp.com/investor-relations.aspx:
http://www.sbexp.com/investor-relations.aspx.

This information is subject of the disclosure requirements pursuant to section 5-12 of the Norwegian Securities Trading Act.