International markets driving revenue growth, margins for Geokinetics

OIL & GAS FINANCIAL JOURNAL: Geokinetics has successfully deployed data acquisition crews around the world. The company operates both seismic onshore and offshore. Tell us a little about your vision for growing the company.

RICHARD MILES: Geokinetics is a dynamic company with numerous growth opportunities in 2010 and beyond. As far as specifics, we operate both offshore and onshore environments. In the offshore arena, we operate in the highly-profitable ocean-bottom cable (OBC) sector. OBC is used in waters too shallow to use marine streamer techniques or when subsurface image resolution is critical. While most of the industry has ignored the OBC market OBC has proven to be a growth driver for Geokintics. However, before I go any further it might help to provide your readers with some background on Geokinetics.

Geokinetics developed a successful business model that delivers value for exploration and production companies by reducing risk and increasing asset returns. We have successfully grown the company since 2005 when we acquired Trace Energy Services. The acquisition of Trace provided Geokinetics with a larger presence in the US and Canada. In 2006, we entered the highly-prized international arena with our acquisition of Grant Geophysical.

So, for the first few years after making these acquisitions, our operations were divided equally between our domestic and international business. Internationally, we realized higher revenue and better margins, but our profitability was mitigated upon the utilization rate which was only in the 60% range because of the logistics costs associated with moving equipment over large distances from one country to the next compared to domestic which at the time had 100% utilization.

We began to shift our attention to our international business because of our expertise in those areas, especially in the jungles and profitable mountainous regions of Latin America. We also focused on "transition zone," (TZ) and shallow ocean environments, which are areas too shallow for streamer vessels to operate, where they do not have the capability to follow the seismic line onto dry land where our land crews take over. TZ and OBC areas have been largely ignored, because it's the highest unit cost for seismic. The cheapest means to acquire seismic data is with streamer vessels because they work 24 hours a day, while the transition zone vessels are typically daylight operations so it's much slower going. In transition zone environments you're going through swamps, over reefs, through the surf, and just about any obstacle you can think of. We have worked hard to reduce the cost associated with TZ or OBC acquisition and developed a productive system that has made us more efficient. We've been able to lower the cost to our oil company clients, which has generated an increased interest in that zone.

What's driving interest in TZ and shallow water regions is the push to find new, large oil discoveries, because most onshore environments have been substantially explored. Not many companies can do what we do and our expertise in TZ and OBC data acquisition gives us a competitive advantage.

In terms efficiency and productivity, we operate in the mature basins around the world that offer good opportunities for long-term work — and if not larger jobs — then several smaller jobs that we can piece together and increase the utilization in those areas. The next area of expansion is the high channel count, high density desert work in North Africa and the Middle East. Our acquisition of PGS Onshore on December 3, 2009 extends our offerings into this market. PGS Onshore has the expertise and the equipment to do that. [On Dec. 3, 2009, Geokinetics signed an agreement to acquire the onshore seismic data acquisition, processing, and interpretation services of Norway-based Petroleum Geo-Services (PGS) in a transaction valued at about $210 million. The deal is expected to close in the first quarter of 2010.]

OGFJ: The transition zone area that you just described sounds a bit like South Louisiana. Do you have a lot of work concentrated in that area?

MILES: Actually, the transition zone area that I was referring to is all international. The Grant Geophysical acquisition gave us the international transition zone expertise. Although the original Geokinetics had a presence in the swamps and shallow waters of Louisiana, international is where the growth in TZ work is coming from.

OGFJ: Eighty percent of the company's revenue in the first half of 2009 was sourced from international jobs. Has the percentage of revenue from international work always been this high?

MILES: In 2007, the first full year we had Grant Geophysical, our revenues were 50% international, 50% US. While we had more equipment overseas, our utilization rate in the US was much higher — about 100% — so it balanced out. In 2008, we began to target international areas that had prospects for longer term jobs, and we also entered the ocean bottom cable market, which is different from the transition zone in that we'd go out to 500 feet (depth) with that. So in some cases, we are now competing with the [coast] streamer market and doing so effectively, because the image quality from OBC is better than what can be obtained by streamer methods.

OGFJ: Geokinetics has made several key acquisitions over the past five years. Based on your experience, what are the key factors for a successful integration of these companies?

MILES: That's a great question. Really it's having the right framework, the right people, and the right procedures. We had that in place with all of our acquisitions. The three companies that we brought together to form today's Geokinetics each had a unique core expertise. We then exploited the synergies and leveraged the best practices of each. Then, we gave our people what they needed to get the job done for our customers. The PGS acquisition fits the model of all our past successful acquisitions. They bring a wealth of experience in areas where we don't have a presence, such as North Africa and the Middle East. They also have a very strong presence in Mexico, where we currently don't operate. And our management cultures share many similarities with a focus on quality, service, productivity and safety. So the key to successful integration is to recognize the expertise that people bring to the table, allow them to continue to do their job, and provide them with equipment and support.

Geokinetics operates shallow draft DIB boats to safely access surf zones and shallow water areas for laying cables.

OGFJ: When you look at acquiring a company, I know you're looking for things that complement your existing assets. However, there's bound to be some overlap and redundancies. Have these acquisitions resulted in employee layoffs in some cases, including the management team of the acquired company?

MILES: Our motive for any acquisition is to take advantage of the company's expertise, so we pretty much leave their internal structure intact. We will improve their structure and leave their team alone unless there is overlap. We are not growing for the sake of getting bigger. We're growing because it makes sense to offer those services to our customers. There's been very little operational overlap in the companies we've acquired to date. Where there is a duplication of effort, it is usually at the corporate overhead level, which may provide some opportunities for cost reduction or cost improvement on a percentage basis, but again, we don't buy companies just to cut costs and add cash flow, we do it to better serve our customers.

OGFJ: Is there a number attached to that corporate overlap in the case of the recent PGS acquisition?

MILES: We should be able to save in the neighborhood of $10 million, and that's not all corporate overlap. But certainly a large portion of it is.

OGFJ: Does the PGS acquisition provide some additional crossover opportunities between the two companies?

MILES: Absolutely. The PGS acquisition adds another 13 seismic crews and equipment, which gives us another 13 crews feeding date to our processing group, so so we do expect our data processing business to realize growth from this combination. There are other opportunities as well, given that this is a strategic move by PGS. They will end up owning in excess of 12% of Geokinetics. It gives us a partner for jobs that require a marine component, and there are quite a few jobs these days that require that, so it gives us a ready-made partner to compete jointly for those jobs.

The PGS Onshore acquisition is truly transformational, because it makes Geokinetics the second largest provider of onshore seismic data services in the world, at least in terms of crew count. Post-acquisition, we will have 38 crews operating over 207,000 channels with 150 vibroseis units. The acquisition extends the range of our services, our global operational presence and in one stroke strengthens our multi-client offerings.

OGFJ: Fiscal 2009 was a challenging year for many companies that operate in the seismic industry. How did Geokinetics cope with the challenges in 2009, and how is the 2010 landscape shaping up?

MILES: Well, 2009 is behind us and we've covered how last year was one of growth and positioning Geokinetics for the future. In 2010, we will continue to emphasize international work, so our focus will be on being in the markets offering the potential for long-term engagements that give us the opportunity to improve our utilization internationally, which means finding bigger jobs or more jobs in the same country to minimize down time as you move through customs from one country to the next.

We achieved success by strategically relocating some equipment and personnel from the US to international operations. Our solid infrastructure and our highly qualified staff allowed us to bid on a lot of jobs around the world and create opportunities that otherwise would not have existed. to bid on a lot of jobs around the world and understand the regions that we're in.

In 2010, I think North America is still going to be a challenge. There's still a lot of idle capacity and overcapacity in the US marketplace, Internationally, there are a lot of opportunities in the areas that Geokinetics possesses a competitive advantage in; especially in OBC and TZ work.

OGFJ: To what extent are you involved in shale resource plays in North America?

MILES: We started a joint venture with a company called Geophysical Pursuit, Inc. to do a multi-client [study] in the Marcellus shale. That was very successful for us in 2009. We have one or two key clients that are underwriting and funding that initiative, and it looks like we are going to stay busy with that in 2010. PGS Onshore had plans to go to the Marcellus in Pennsylvania for some jobs there; also in a multi-client capacity. In addition, we have another opportunity we're working on in the Haynesville area in Louisiana. Last but not least, we have one or two of our other crews working for various clients in the Barnett shale in North Texas.

Geokinetics excels in seismic data acquisition in challenging environments. This mountaineer working on a job in Bolivia is shown rappelling down a sheer cliff face.

So, to answer your question another way, without the shale plays, the decline in the US market would have been a lot worse. I think the forecast I saw was that spending would be down 38% among US companies in the US, and by my calculations, the seismic market is down by over 50%.

OGFJ: What are some of the countries and regions where Geokinetics is currently operating?

MILES: We're currently in Brazil, Colombia, Peru, Bolivia, and Ecuador and through the PGS acquisition will have three crews in Mexico as well. Obviously we're in the US. We're also in North Africa (land crews and shallow water crews) and West Africa (land crew and transition zone). We're in various regions of the Far East with both land crews and transition zone crews. We're also getting ready to go back into Australia with a transition zone crew.

OGFJ: Who are your customers in these various regions?

MILES: The majority of our international customers are national oil companies. If they're not actually leading the project, they're certainly in the background making a lot of the decisions.

OGFJ: How does Geokinetics differentiate itself from other companies in the seismic sector?

MILES: Our greatest advantage and our key differentiator is our relationships with our customers and our crews. In Brazil, for example, we have about 550 employees and they're all Brazilian. We have over 200 employees in Colombia, and they're all Colombian. And we mostly compete with local companies, so we have the face of an international company with international standards for environmental controls and safety procedures.

We differentiate ourselves in the shallow water market by using vessels we designed specifically for the task. This skill set allows us to deploy our crews more productively and more efficiently. There is however a downside to a lot of transition zone and shallow water operations.

Often you get to a job site and you find a convenient vessel in the area that you can utilize. Unfortunately you have a learning curve for the new crew working on that vessel. The learning curve can result in an increased inefficiencies and lower margins. When the job is completed the next assignment can be 1,000 to 2,000 miles away, and the vessels you contracted for are too small to get their by themselves, and, as a result, need to be transported to the new location. So you end up going to the new location and looking for new vessels there, and repeating that exercise. This can be a very expensive and inefficient process.

Geokinetics, however; designed our equipment to fit in 40-foot containers so that we can keep our crews and equipment together. Our crews know how to use their equipment literally out of the box and are capable of mobilizing extremely fast and efficiently.

Just recently, we moved a crew from Tanzania in East Africa to Cameroon in West Africa, and we flew everything there in a heavy transport plane. Our purpose-built equipment enabled our crew to move to a new location in 24 hours, whereas it would take most crews up to a month [to relocate with their equipment].

OGFJ: What do you see as the primary growth drivers for your company and the seismic industry in 2010?

MILES: We're seeing a lot more demand for bottom-laid cable. In the transition zone, you have to adhere to specific procedures because there's no other good way to do it. But when you get deeper than 100 feet where the streamer vessels can go, by laying cable on the seabed, not only do you get the hydrophone, which hears better on the ocean floor, but you can add components and pick up a lot more information. OBC costs more, anywhere from three to 10 times as expensive as alternatives, but you're getting more data and a better final product.

One of our goals is to reduce the cost of an ocean-bottom cable survey to where it's closer to the cost of a streamer survey. Several of the large oil companies have told us that they plan to increase their budgets for bottom cable work. This is definitely a trend. We've probably bid on three times as much work in the last six months as we did in the previous two years, so we expect OBC wil be a growth driver for us.

OGFJ: You touched on this before, but let me ask you again directly: Has your company's international operations sheltered you somewhat from some of the worst of the economic recession?

MILES: Oh, yes. Our international work kept us active during the downturn. When natural gas prices in the US collapsed and the financial crisis set in, the independents that typically drove our business didn't have access to cash, so that stopped everything in its tracks. Internationally, most of our business is with national oil companies, and they have different strategic objectives than other oil and gas producers and typically have longer-term decision horizons. When the price of oil fell below $40/bbl at the end of 2008, we were still holding more than $150 million in contracts from national oil companies that were not driven by the price of oil.

OGFJ: You give a lot of credit to your employees and operations for the success of your company. However, wouldn't you say that the business processes and procedures and methodology that you have in place contribute to Geokinetics' success as well?

MILES: Well, since you say that, I'd have to agree with you. [Laughter] But, seriously, we take things like that for granted because that's how we do it. I left England when I was 18, so I've been doing this for 43 years. But in the end, this is a business about people, processes and relationships. I'm happy to say that Geokinetics has the best in each of these areas.

OGFJ: Obviously it must help to have offices in the regions where you work and to have local employees on the payroll.

MILES: It's the knowledge of the major regions that makes the difference. We've got a major center in Rio de Janeiro and another in Colombia. From there, we can spread out to the other countries in Latin America. We have an office in Dubai and another in Egypt. We've established ourselves on the west coast of Africa, which was a deliberate plan. We see a lot of opportunities in the shallow waters along the African coastline. We've establish ourselves in Singapore, again mainly for the opportunities we see in the shallow waters of Malaysia, Indonesia, India, and in Australia on the northwest shelf. And we have an office there, too. We rely on local expertise in all of these places.

OGFJ: It sounds like your game plan for 2010 is to continue pursuing international business because of your expertise in that sphere and because there are currently more opportunities there than in North America.

MILES: Yes, that's right. Mostly it will be what we've done before, but on a slightly larger scale. Latin America looks very strong for 2010. The US is going to be a tough market in 2010. The one exception would be the multi-client opportunities, particularly in the shale plays. We, as a company, haven't engaged in this before, so this will be a new area of growth for us. We'll also be working more in North Africa this year, and we'll be doing more bottom-laid cable jobs in various parts of the world.

OGFJ: In January, a team led by New Orleans' McMoRan Exploration announced it had made one of the biggest discoveries in the Gulf of Mexico's shallow waters in decades. What effect, if any, will a find like this have on your business?

MILES: Anything that excites people to look in the areas where we operate helps us. Our limit in offshore activity is currently 500 feet. We chose that for a reason. We think there is a lot of work in 500-foot water depths and less. So whenever anything happens that suggests more people should be looking in those areas, that's obviously going to help.

OGFJ: Thanks very much for your time, Richard.

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