PGS and Veritas prepare for an April wedding in hopes of providing a little more competition for WesternGeco.
Arranged marriages might work in some cultures, but they're not likely to appeal to as maverick a group of individuals as the seismic industry.
So while pundits have been telling this sector of the oil industry that consolidation is crucial to continued survival, the actual mating ritual was left up to the geophysical contractors themselves - tentative first glances, shy hand-holding, a few successful dates and then the engagement announcement.
Two by two, the happy couples have begun to saunter down the aisle. Last year it was Western Geophysical and Geco-Prakla, with proud parents Baker Hughes and Schlumberger watching from the pews. This year it's likely to be Veritas DGC and Petroleum Geo-Services (PGS). But while the WesternGeco marriage might have seemed like the joining of two high-powered families, the Veritas-PGS merger might seem more like an elopement, with observers scratching their heads and wondering what the attraction is.
Both companies had a tough 2001, with PGS announcing surprisingly low earnings in the second quarter and Veritas taking a hit on its stock price in the third. Even analysts who follow the sector, who I guess could be considered society gossip columnists in our marriage analogy, were unprepared for the announcement.
"It comes as a surprise," admitted Jim Wicklund of Bank of America Securities. "The companies have competed against each other for a long time. And it would appear from the way the two companies were run that they had very little in common in terms of philosophy."
Yet at a conference call announcing the merger, Veritas management indicated the PGS business philosophy is similar to its own, in spite of the fact that Veritas is quite debt averse while PGS has managed to rack up US $2.4 billion in debt. PGS also has attempted to diversify with a production division while Veritas has traditionally stuck to a more core set of geophysical offerings.
Maybe it's true that opposites attract. Or it could also be true that the WesternGeco merger has the second-tier companies - Veritas, PGS and CGG - running scared. Rumors of some sort of pairing among this trio have been percolating through the seismic community since Western and Geco first announced their intentions in May 2000. After all, their choices are limited. Already too large to compete in specific geographic areas as niche players and chasing shares of an ever-diminishing market, these three companies could hope for little sunshine on the horizon unless they gained some critical mass.
The new company's assets would include more than 154,440 sq miles (400,000 sq km) of 3-D data; 21 marine seismic crews; 83,000 land seismic channels capable of fielding 25 to 30 high-tech 3-D crews; four harsh-environment floating, production, storage and offloading (FPSO) vessels; more than 20 data-processing centers; and eight data-visualization centers. It will be the operator of more than 20 production installations in the North Sea, including six floaters.
In Wicklund's view, consolidation is an alternative to the sort of market share swapping that typically occurs in this industry. "The 3-D technology is now 10 years old, and there doesn't appear to be any commercially feasible breakthroughs on the horizon," he said. "So the only way for one company to grow its business is at the expense of a competitor."
With no net demand increase, the only way to gain an advantage in market share is to offer the same services at a lower price. This approach has characterized the way many seismic companies have operated in the past decade or so and, along with overcapacity, has virtually crippled the industry. A company with enough discipline to avoid playing this game will have to take on the gigantic specter of WesternGeco in some other way. And size is one way to do that.
A combined PGS-Veritas entity will not be as large as WesternGeco. But it will be a more fearsome competitor than either company could be on its own. Its 21-vessel fleet will allow for a more global reach. And a report released jointly by the two companies in November stated that the more balanced business mix will diversify the revenue and cash-flow streams, while more predictable FPSO earnings are expected to offset any fluctuations of the multiclient seismic business.
Beyond that, the details - and some of the rationale - remain sketchy. Does Veritas really want the FPSO business? Wicklund had a problem with this point. "In the 4 years that PGS has owned the production business, it has by most measures underperformed," he said. "They're saying, 'We've finally got it fixed.' But it's some leap of faith since it hasn't been fixed before."
A feasible scenario would be for the new entity to spin off the production part of the business into a separate company and use the cash from that to pay down some of the debt. It would then be a larger and more formidable challenger to WesternGeco, with the PGS Ramforms added to Veritas' smaller fleet and a stronger balance sheet to attract more equity.
"The significant fiscal credibility that Veritas has, combined with the now dramatically increased size, should definitely help the combined company's ability to access cheaper capital," Wicklund said.
For the seismic industry in general, the move is seen as a positive one. A Houston Chronicle article reported that analysts predict survivors of this type of consolidation will be more cautious about adding new vessels to the world's supply, which will eventually increase the prices they command for their services.
If the deal goes through, the article stated, WesternGeco and the PGS-Veritas entity would control nearly 80% of the upper-end 3-D seismic vessels. A Veritas official estimated the two companies would control between 60% and 65% of the global seismic market share, including land and marine data acquisition and processing.
The merger "accomplishes much-needed consolidation in an industry plagued by excess capacity, irrational pricing and poor returns," Bill Herbert of Simmons & Co. International told the Chronicle.
Overall, analysts predict a gradual improvement for the seismic industry in 2002.
In my view, the seismic industry is long overdue for change. I don't see any quick fixes in sight. But I think fewer larger companies that have deep enough pockets to exercise a little discipline when times are tough is certainly a step in the right direction.
Jodi Wetuski, Houston bureau chief for Hart's Petroleum Finance Week, helped compile this information.

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