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Letter to Shareholders


 

Dear Fellow Shareholders,

In 2016, lower oil and gas prices led to substantial reductions in global exploration and production spending, resulting in the most challenging year in decades. Sharply reduced exploration activity had a particularly negative impact on demand for seismic data, which is a product primarily utilized for exploration purposes.

Despite the significant drop in exploration spending, TGS managed to grow net cash flow before dividends by 198% from 2015 to USD 86 million. The strong cash flow enabled us to pay a dividend of USD 59 million to our shareholders, and we are proud to be one of few international oil service companies which have maintained a dividend throughout the severe down cycle.

True to TGS' historic ability to utilize its strong balance sheet in a challenging period for the industry, the Company was able to once more take a countercyclical investment posture in 2016. While our dollar investments were reduced from previous years, we were able to take advantage of seismic acquisition economics that were very favorable for TGS. The amount of data acquired in 2016 was therefore comparable to the average volume acquired of the last five years. Lower seismic acquisition rates, risk-sharing with suppliers and significant reductions in processing unit rates made this possible and highlights the strength of our flexible, asset light business model.

An important milestone for TGS in 2016, was the completion of acquisition of the Gigante project in Mexico. This is the largest multi-client 2D survey in the world, including more than 186,000 km of 2D seismic and 600,000 km² of multibeam, coring and geochemical analysis. In addition, TGS was active acquiring marine 2D and/or 3D data in Newfoundland and Labrador, US Gulf of Mexico, Greenland, Australia and North West Africa in 2016. Data from these projects are critical for clients to get a better understanding of the subsurface prior to future license rounds.

In our onshore business in North America, TGS continued to grow the data library with new data in the Duvernay fairway in Canada, while new project opportunities were developed in the Permian basin in the U.S. TGS has a data library with more than 430,000 well logs in the Permian basin and sees great opportunities to acquire the right seismic data based on this strong market intelligence.

TGS' asset light, technology-neutral business model makes us a trustworthy partner for clients who want to utilize new technologies. In 2016, we completed acquisition of a proprietary P-Cable survey in the Barents Sea. In addition, we delivered final processed data volumes of TGS' first two ocean-bottom full azimuth nodal projects on the U.S. Gulf of Mexico shelf. Finally, TGS, in collaboration with Schlumberger, commenced acquisition of our first dual coil survey in the U.S. Gulf of Mexico. Our Imaging groups in Houston, Calgary and London continue to gain industry recognition for new technologies helping to improve subsalt images.

An important part of our countercyclical strategy has been to pursue non-organic investment opportunities. Following the acquisition of Polarcus' data library in 2015, TGS signed a letter of intent to acquire the multi-client data library of Dolphin Geophysical in 2016. The transaction, which was closed in early 2017, was in partnership with PGS, and the library is very complementary to TGS' existing data sets in prolific regions such as the Barents Sea, North Sea, West Africa, Brazil and Australia.

In this period of weak exploration spending, the Company has continued its' extraordinary focus on cost management. Reported operating expenses were reduced 22% from the previous year, head count was reduced by another 18%, and our processing center in Perth was closed. The staff reductions were particularly difficult but necessary in what is one of the worst exploration spending climates in decades.

TGS' flexible, asset light business model and ability to rapidly adjust costs allow us to deliver significant shareholder value even in a difficult market. In May 2017, the Board will propose to the AGM authorization to pay further quarterly dividends for the following 12 months. Management's focus is to deliver long-term shareholder growth.

Turning the page to 2017, market visibility remains limited. A potential recovery will depend on commodity prices, which will impact our customers' exploration budgets. Due to the exploration cuts, discovery of new hydrocarbon resources have been down to historically low levels over the past couple of years. This has driven reserve replacement ratios down to unsustainably low levels. Energy companies will need to increase exploration efforts at some stage in order to grow production levels in the longer term to meet the expected long-term growth in demand.

When energy companies return to the business of replacing the reserves that they are producing, they will need geoscience information. TGS' unique culture, people and quality library assures that it will be the leading company providing this information when companies return to exploring for hydrocarbons.

TGS has become the largest and most successful multi-client geoscientific data provider in the world. The employees of TGS are strongly committed to our core values of quality, service, integrity and growth. Our financial platform and a highly competent organization position us well to handle both the up and down cycles in the industry.

On behalf of the TGS family, I would like to thank our shareholders and clients for their continued confidence in us. I would also like to thank our employees for all the hard work, passion and client focus during a challenging year for our industry.

 

K.J signature

Kristian Johansen
Chief Executive Officer - TGS