Jefferies: Seismic industry needs consolidation for long-term profitability

By OGJ editors
HOUSTON, Dec. 12 -- Seismic companies have started taking strategic steps to revamp themselves, but the industry needs consolidation to boost its long-term profitability, said Stephen D. Gengaro, oil service analyst for Jefferies & Co. Inc.

"Disciplined business tactics, cost-savings initiatives, and downsizing on the operational level, coupled with financial restructuring and more appropriate capital spending plans, are the building blocks for a more stable business," Gengaro said in a Dec. 12 research note.

Since the 1990s, the seismic industry has fallen upon "very difficult times due mainly to mistakes by several major players. The major missteps included excessive new marine equipment additions and an over abundance of multi-client seismic surveys performed with little or no discipline," he said.

Consolidation
"The industry is in dire need of consolidation and asset rationalization," he said. "While some consolidation occurred in the late 1990s, there is still too much capacity. Companies have acknowledged the capacity issue, particularly on the marine side, but we believe more progress is needed. Meanwhile, tight pricing as competition increases on tenders continue to depress overall operating margins."

He believes that solid fundamentals exist to drive spending on seismic surveys.

"We believe several near-term issues will continue to dampen an industry recovery," he said.

He forecast a modest pick-up in seismic activity during the next several quarters, but he also expects that overcapacity will constrain both pricing and profitability. Meanwhile, seismic spending remains at low levels both in absolute terms and as a percentage of total exploration capital expenditures.

"We expect overall E&P spending to rise in 2004, but with E&P companies' emphasis seemingly on production vs. exploration, seismic spending will probably remain lackluster," Gengaro said.