Seismic’s risk/reward balance is never
more extreme than during periods of
cycle inflexion. This has made the
sector a ‘consensus short’ in the
current environment, but we see upside
in high-end survey exposure, appraisal
work and 4D reservoir monitoring.
􀀗 Our ‘seismic scenario’ drives a much
weaker outlook – this takes 19% off
sector earnings, 20% off fair value – but
current share prices still factor in a
further 60-70% cut in 2009e earnings
􀀗 Despite these assumptions, we still see
upside in all seismic names, all rated
Overweight (V) – CGGVeritas (target
price EUR24 from EUR29), PGS (NOK75
from NOK110), TGS Nopec (NOK70 from
NOK90), Fugro (EUR40 from EUR45) –
our preferred name is CGGVeritas
Hard to avoid the macro call on E&P
With little guidance from contractors or clients, seismic is
hard to call right now – a classic high risk and high reward
situation. It remains in many ways a macro call on the E&P
cycle. Seismic has become less volatile in recent years,
however, with greater exposure to appraisal work and highend
capacity increasingly important. The industry also
remains highly consolidated, with 75% of 3D streamer
capacity in the hands of the three largest players by 2010e.
Matching the risks to the rewards
We prefer a scenario-based approach for valuing the
risk/reward in seismic – rolling this out across our coverage
takes on average 19% off 2009e net income and 20% off
target prices. Despite this, all seismic names remain on
Overweight (V) ratings – there are clear signs of value
although near term triggers are lacking. Our target prices are
now EUR24 for CGGVeritas (from EUR29), EUR40 for
Fugro (from EUR45), NOK75 for PGS (from NOK110) and
NOK70 for TGS Nopec (from NOK90). Our preferred name
in this group is CGGVeritas – soon to be the leader in
marine seismic if the Wavefield deal is successful.

Investment summary
􀀗 Let down by a classic lack of visibility – but upside potential via
high-end exposure, appraisal work, and 4D reservoir monitoring
􀀗 Our ‘seismic scenario’ model takes 19% off sector earnings, 20%
off fair value – but current levels price in a further 60-70% cut
􀀗 See upside in all names – CGGVeritas, PGS, TGS, Fugro – near
term might lack triggers, but our preferred name is CGGVeritas

At the naming ceremony of its new Ramform
vessel earlier this year, PGS's outgoing CEO
remarked “when a seismic company is setting off
fireworks in the daylight, you should ask whether
the cycle peak has passed or is still yet to come”.
His remarks were far from serious at the time, but
with the luxury of hindsight this may prove to be a
more accurate comment than he intended. The
infamous risk/reward balance of seismic is never
any more extreme than it is during periods of
cycle inflexion, and this has made the sector a
‘consensus short’ in the current environment.
With little guidance from contractors or clients,
seismic is hard to call – a classic high risk/high
reward situation. In many ways, this remains a
macro call on the E&P cycle – as is the case for
much of the oilfield services sector.
A scenario-based approach – we prefer not to
use a crude ‘visibility discount’ for valuing
seismic, but rather use a range of scenarios (from
little change to an almost 100% earnings impact)
and base our valuation framework around the
middle of this range. This ‘seismic scenario’ is
based on a 5% decline in rates for high-end 3D
work, a 15% decline for standard 3D work, and a

25% decline for 2D work, with corresponding
declines in multiclient pricing.
Downgrading our medium term view – rolling
this scenario out across our coverage takes on
average 19% off 2009e net income and 20% off
our target prices – with the highest cuts at PGS,
and lowest at Fugro. Our target prices are now
EUR24 for CGGVeritas, EUR40 for Fugro,
NOK75 for PGS and NOK70 for TGS Nopec.
Not the end of the cycle yet – the valuation
picture is, however, still attractive at current
depressed levels – even with our new lower
forecasts, current levels price in on average a
further 35-40% cut in EBITDA, 50-55% cut in
EBIT, and 60-70% cut in earnings. Current levels
are in our view close to pricing in ‘end-of-cycle’
conditions for this sector.
Seismic opportunities – the areas where we see
least risk in the medium term are high end marine
seismic, high channel count land surveys,
appraisal/reservoir monitoring work and certain
new technologies such as ocean floor surveys.
The industry remains highly consolidated, with
over 75% of 3D streamer capacity in the hands of
the three largest players by 2010e.

Seismic risks – we are more concerned about
work linked to financially less secure small &
mid-sized E&P players, such as basic multiclient
seismic (land and marine, where we also see risks
of data library writedowns), activity in Russia,
and the effect of activity in resource M&A, which
could delay exploration, particularly in frontier
regions. We’d also note that in the last downturn
IOCs cut back, but spending from smaller E&P
players was more robust, driving weakness in 3D,
but less so in 2D. This time IOC spending looks
more secure, but smaller E&Ps face risks related
to both oil price and funding issues.
Looking back over the cycle – we’ve also looked
at seismic’s historical performance over the last
decade in terms of valuations and the link
between valuations and oil prices. We favour
EV/sales due to the volatile (and loss-making)
trough earnings seen in this cyclical sector.
Historical EV/sales multiples since 1997 – PGS
and TGS Nopec (and Schlumberger) are very
close to historical EV/sales lows, whereas Fugro
and CGGVeritas are both 20-30% off the lows of
their respective historical trading ranges.

Oil prices show a 70-80% correlation with
multiples over recent years – current oil prices
(approx. USD60/bbl) imply EV/sales for
CGGVeritas of 1.7-1.8x, equivalent to a share
price of EUR24-25. For PGS this shows EV/sales
of 2.5x, equivalent to a share price of NOK145.
Conclusion – our preferred name in seismic is
CGGVeritas – all our seismic names are on
positive ratings, with the less diversified stocks
trading on around 1x 2009e sales and 2-3x 2009e
EBITDA. CGGVeritas (target price EUR24) is
our preferred name in the seismic group, helped
by 6-9 months of backlog cover for both seismic
and Sercel (equipment business), potential scale
benefits from the planned merger with Wavefield
which would move it to the top of the marine
seismic ladder, high exposure to financially secure
customers (60% of business comes from NOCs or
IOCs), leading seismic coverage of offshore
Brazil (including pre-salt regions), benefits from a
more favourable USD/EUR and a firm
commitment to additional shareholder return
(targeting dividends and/or buybacks in 2009e).