SeaBird Exploration : Plc: Third Quarter Report 2014

2014 SUMMARY OBSERVATIONS FOR THE THIRD QUARTER

• Revenues for the quarter were $22.7 million, a decrease of 55% compared to Q3 2013 and down 49% relative to Q2 2014.
• Contract revenues for the period were $16.4 million, down 67% from Q3 2013 and a decrease of 60% from Q2 2014.
• Multi-client revenues were $6.3 million, up 250% from $1.8 million reported in Q3 2013 and an increase of 70% from $3.7 million reported in Q2 2014.
• EBITDA was negative $2.1 million compared to positive $13.2 million for Q3 2013 and positive $12.6 million for Q2 2014.
• EBIT for the quarter was negative $11.1 million compared to positive $6.7 million for Q3 2013 and negative $2.6 million for Q2 2014.
• Vessel utilization for the period was 65%.  Contract surveys during the third quarter represented 35% of vessel capacity compared to 72% during the second quarter 2014.  Multi-client surveys accounted for 30% of vessel capacity compared to 13% in the prior period.

Operational review

Third quarter revenues decreased from the prior period as a result of a continuous softening in seismic market demand. The increased competition from 3D vessels entering the 2D and source markets also impacted utilization.

Vessel utilization was 65%, down from 85% in the second quarter. Operational performance for the quarter remained strong, with the exception of the technical issues encountered by the Geo Pacific in West Africa. Technical downtime for the overall fleet was 3%, down from 6% for Q2. 

Contract surveys represented 35% of vessel capacity compared to 72% for the second quarter of 2014. Aquila Explorer completed two 2D surveys in Australia, while Osprey Explorer started a 2D survey in the Gulf of Mexico. Hawk Explorer completed a survey in the Middle East and remained off hire afterwards. Munin Explorer performed source operations in the North Sea during the period while Northern Explorer was idle. Geo Pacific commenced a new survey in Ghana at the end of the quarter. Voyager Explorer and Harrier Explorer worked nearly exclusively on multi-client surveys.

Multi-client sales increased significantly and represented 30% of vessel utilization for Q3 compared to 13% for Q2. Nearly half of the multi-client revenues related to prefunding for new surveys commenced in the period, which are in addition to partner contributions that are reported as a reduction in capitalized cost.  Remaining multi-client revenues related to prefunding for Geo Pacific's West African survey and late-sales from the existing multi-client library. An additional impairment of $0.6 million was charged to Geo Pacific's multi-client survey.

Osprey Explorer completed its scheduled maintenance in Curacao in July. Yard stay represented 2% of vessel capacity during the quarter.

During the quarter the company extended the lease of the 3D vessel Voyager Explorer at a reduced rate of $13,200 per day. The firm period of the lease is two years, with another three yearly extension options. Additionally, the Hawk Explorer lease was renegotiated. Under the revised lease terms, the remaining principle will be repaid over 17 months from 1 September 2014 and the vessel with related equipment will be delivered to the company at the completion of the lease term. 

The company delivered another quarter of solid health, safety, security, environment and quality (HSSEQ) results. The controls in place are still proving effective to maintain the Lost Time Injury Frequency (LTIF) rate at zero for the quarter. The methodology of ratifying these performance dynamics has been by focusing on compliance of established procedures, effective supervision and avoiding complacency.  Furthermore, there has been a campaign to verify management system processes by increasing the audit frequency and type in order to identify areas of concern and seek opportunities for improvements.

Regional overview

Revenues were down in all of our geographic regions as a result of a global weakening in market demand. 

Sales in Europe, Africa and the Middle East (EAME) of $11.8 million accounted for 52% of total revenues. The decrease in EAME revenues compared to the prior period was mainly due to lower contract utilization. Munin Explorer worked in the region under its long-term charter agreement. Harrier Explorer completed a multi-client project in the North Sea and commenced a second multi-client survey in the region.

Asia Pacific (APAC) sales of $8.7 million accounted for 38% of total revenues. APAC revenues were down compared to the second quarter of 2014 due to the decline in seismic demand. Aquila Explorer completed two contract surveys in Australasia by mid-August and subsequently mobilized for a multi-client project in South East Asia. Voyager Explorer completed a 2D multi-client project within the same region.

Sales in North and South America (NSA) of $2.3 million represented 10% of total revenues. NSA revenues were down from the previous period as only one vessel was active in the region during the quarter. Osprey Explorer commenced a 12,000 km 2D contract survey in the Gulf of Mexico towards the end of August, following its scheduled maintenance. The vessel is expected to remain in the region for the foreseeable future.

Outlook

Global seismic market demand weakened substantially through the third quarter. In addition to a reduction in the volume of contract surveys, the large number of 3D vessels operating in the 2D and source markets also increased the pressure on the company's core business segments.

In light of the decline in oil prices, we expect oil companies to take a more cautious spending approach. This has impacted all of the company's business units. Moreover, we anticipate the financial uncertainty of the company to possibly delay new contract awards. However, we are seeing interest in longer-term 2D contract opportunities from select clients. Nevertheless, we expect the current market softness to impact earnings and utilization in the remaining part of 2014.

Given the challenging market situation, the company is actively looking at savings initiatives to reduce the company's cost level.  As a part of this effort, we are also reviewing the lay-up of vessels until market demand recovers.

Longer-term, we expect that the scheduled exit of a number of 3D vessels currently operating in our markets will benefit the company. 

Multi-client activity was increased in the third quarter and we commenced four new well-prefunded projects which also allowed us to improve fleet utilization. We continue to see multi-client activity as a key business area in the company, although we expect our late sales to remain erratic until the library is properly scaled.

FINANCIAL REVIEW

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 $20.2 million for Q3 2014 (net income of $4.0 million in the same period in 2013).

Revenues were $22.7 million in Q3 2014 ($50.9 million). The decreased revenues are primarily due to lower fleet utilization during the period.

Cost of sales was $19.8 million in Q3 2014 ($33.7 million). The decrease is predominantly due to increased capitalization of costs to the multi-client library and lower vessel utilization for the period.

SG&A was $5.1 million in Q3 2014, up from $4.7 million in Q3 2013. This is principally due to an increase in personnel related expenses associated with the office relocation. This has been  partially offset by a reduction in consultancy costs and office travel expenses.

EBITDA was negative $2.1 million in Q3 2014 (positive $13.2 million).

Depreciation, amortization and impairment were $9.0 million in Q3 2014 ($6.5 million). The increase is predominantly due to an increase in multi-client sales amortization and impairment.

Finance expense was $8.1 million in Q3 2014 ($2.9 million). The increase is primarily due to the accelerated finance charge recognized as a result of the change in maturity of the SBX03 bond loan triggered by the breach of loan covenants.

Other financial items, net expense, of negative $0.3 million in Q3 2014 (negative $0.5 million).

Income tax expense was $0.7 million in Q3 2014 (tax benefit of $0.6 million).  

Capital expenditures were $2.0 million in Q3 2014 ($5.0 million). The majority of the capital cost incurred during the quarter related to the purchase of seismic equipment to be utilized across the fleet. The remaining portion was related to the completion of the dry docking of Osprey Explorer.

Multi-client investment was $13.5 million in Q3 2014 ($1.0 million), which related to four 2D and one 3D multi-client projects.

Liquidity and financing

Cash and cash equivalents at the end of the period were $10.0 million ($14.0 million), of which $3.5 million was restricted in connection with deposits. Net cash from operating activities was $14.3 million in Q3 2014 ($7.4 million).
The company has one bond loan, one convertible loan and the Hawk Explorer finance lease. 

• The 6% secured bond loan is recognized in the books at face value of $81.9 million per Q3 2014. 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 loan which was previously recognized at amortized cost has been recognized at face value due to a breach of covenants and change in maturity.
   
• The 1% unsecured convertible loan with Perestroika AS is recognized in the books at face value of $14.9 million. Interest on the convertible loan of $0.1 million was paid during Q3 2014 while the company was unable to repay the convertible loan at maturity of 30 September 2014.
   
• The lease of Hawk Explorer is recognized in the books as a finance lease at $6.2 million per Q3 2014. Installments of $1.0 million against the Hawk lease principal and $0.2 million against the interest portion were paid during Q3 2014 ($1.0 million and $0.3 million in Q3 2013, respectively). During the third quarter 2014, the company extended the charter agreement and postponed the delivery of the vessel to February 2016.

Net interest-bearing debt was $92.9 million at the end of Q3 2014 ($87.0 million). 

Accrued interest for Q3 2014 was $1.4 million ($1.3 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 ratios covenants and cross-default provisions in SBX03 bond agreement. The company continues the dialogue with equity holders and lenders regarding a long-term capital structure and expects them to remain supportive in this process.

The company's accounts have been prepared on the basis of a going concern assumption. Reference is made to the Going Concern section in selected notes and disclosures for further details on the current financial position of the company.

The Board of Directors and
Chief Executive Officer
SeaBird Exploration Plc
27 November 2014

The third quarter 2014 presentation will be transmitted live at http://www.sbexp.com/investor-relations.aspx:
http://www.sbexp.com/investor-relations.aspx.

With reference to the announcement on 1 October 2014 on the company's refinance efforts; pending further clarification, SeaBird has requested that Oslo Børs maintains suspension of its shares and SBX03 bonds.