Petroleum Geo-Services ASA’s (OB:PGS) Sustainability In Question?

Petroleum Geo-Services ASA (OB:PGS) may be cheap for a reason. The company has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.

Petroleum Geo-Services ASA, a marine geophysical company, provides a range of seismic and reservoir services worldwide. Started in 1991, it operates in Norway and is recently valued at ØRE8.21B.

The first thing that struck me was the pessimistic outlook for PGS. A consensus of 18 NO energy equipment and services analysts covering the stock indicates that its revenue level is expected to decline by 9.91% over the next financial year. As PGS is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -US$523.40M to -US$102.20M over the same time period.

OB:PGS Future Profit Mar 30th 18
OB:PGS Future Profit Mar 30th 18

Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. A big red-siren warning for PGS is its high level of debt, which has been increasing over the past five years, exceeding its total level of equity. However, cash generated from its core operating activities makes up a decent portion of debt (0.23x), and it generates enough interest income to cover its interest payments. But there’s still room for improvement on the debt level front, which could be lowered to a more prudent amount. The current state of PGS’s financial health lowers my conviction around the sustainability of the business going forward. PGS has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. PGS has managed its cash well at a current level of US$47.30M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

PGS currently trades at ØRE24.25 per share. With 338.56 million shares, that’s a ØRE8.21B market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 1.19x vs. the industry average of 1.05x.

A good company is reflected in its financials, and for PGS, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.