From Vision to Reality

Transcription

1 From Vision to Reality Building a 21 st Century Reservoir Imaging Company Lehman Brothers CEO Energy/Power Conference Bob Peebler, President/CEO and Brian Hanson, EVP/CFO September 2, 2008

2 Forward-looking Statement All presentations today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of These forward-looking statements include statements as to expectations, beliefs and future financial performance, such as statements relating to the Company s business prospects, future sales, market growth, gross margin and other statements that are not of historical fact. Investors are cautioned that all forward-looking statements are based on management s current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company s actual results or performance to materially differ from any future results or performance expressed or implied. These risks and uncertainties include the timing and development of the Company s products and services and market acceptance of the Company s new and revised product offerings, and other risk factors disclosed by the Company from time to time in its filings with the SEC, including in its Annual Report on Form 10-K for the year ended December 31, [ 2 ]

3 Today s Discussion ION Geophysical Corporation: A Quick Introduction Market Drivers: Driving our Technology Investments ION s Strategy in the Land Market The ARAM Acquisition FireFly Commercialization Update Summary Select Financial Data [ 3 ]

4 The History of ION A Leading Technology-Focused Seismic Solutions Provider Founded in 1968 (NYSE: IO) Public in 1991 Pioneered 3D land seismic New management team in 2003 Acquisition of Concept Systems and GX Technology in 2004 Today an integrated offering Number 1 or 2 in core markets Customers both E&P firms and seismic contractors Global footprint with approximately 1,500 employees In the process of acquiring ARAM Systems Global presence via 20 international offices Hardware, Software & Services Across the Workflow Survey Design Land & Marine Acquisition Technology ION regional office Headquarters Imaging Services [ 4 ]

5 ION Geophysical Corporation An Integrated Offering ISS Integrated Seismic Services FireFly Seabed Geophysical Solutions Survey design Data processing Geophysical Services Land equipment Marine equipment Software (GMG & CSL) Seismic data libraries Geophysical Products State-of-the-art hardware, software and services Available stand-alone or as a customized, end-to-end solution (including management of field acquisition) [ 5 ]

6 Our Systems Businesses Recognized Leaders in Seismic Acquisition Technology Land Imaging Systems Driving efficient, high-station count, full-wave acquisition Energy source (Vibroseis) and source control systems Analog geophones and 3C MEMS sensors (VectorSeis) Cable-based and cableless land recording platforms Marine Imaging Systems Intelligent systems for streamer and seabed acquisition Command & control software Energy source and source control systems Streamer positioning and control systems Streamer and seabed acquisition platforms [ 6 ]

7 Our Solutions Businesses Services that Provide Best-in-Class Images of the Subsurface GXT Imaging Solutions Advanced data processing services for complex reservoirs Leaders in PreSDM and full-wave imaging Award-winning tools for subsalt imaging (RTM) Award-winning tools for anisotropic reservoirs (AZIM) Specialists in advanced geophysical and reservoir analysis (including unconventional and fractured reservoir characterization) Integrated Seismic Solutions Full-scope services for E&P firms and asset owners End-to-end, proprietary and multi-client seismic programs Basin-scale imaging of petroleum systems (BasinSPANs) Geo-consulting services (including lease round advisory) [ 7 ]

8 Our Solutions Businesses Game-changing Approaches to Full-wave Imaging FireFly Solutions A next-generation approach to land imaging Centered upon the cableless FireFly acquisition platform Enables highly productive, HSE-friendly acquisition of high-station count, full-wave seismic data Includes data processing by the GXT Imaging Solutions team (and potentially oversight of field acquisition by our ISS team) Stands to revolutionize land seismic imaging by providing better seismic images, more quickly, and at less cost Seabed Solutions A next-generation approach to marine imaging Platforms for seismic data acquisition from the ocean bottom VectorSeis Ocean for redeployable seabed recording A joint venture with Octio (partially funded by StatoilHydro) for permanent reservoir monitoring from the seabed Includes data processing by the GXT Imaging Solutions team (and potentially oversight of field acquisition by our ISS team) Stands to revolutionize marine imaging in areas of complex infrastructure or subsurface conditions (e.g., subsalt) [ 8 ]

9 Financial Results and Business Mix Since the Inception of Our New Strategy in Consolidated Revenues ($ Millions) CAGR = 48% Mix of Business by Segment (Percentage of 2007 Revenues) 100% = $713 million $173M (24%) ION Solutions $37M (5%) CSL $178M (25%) Marine Imaging Systems $325M (46%) Land Imaging Systems E [ 9 ]

10 Today s Discussion ION Geophysical Corporation: A Quick Introduction Market Drivers: Driving our Technology Investments ION s Strategy in the Land Market The ARAM Acquisition FireFly Commercialization Update Summary Select Financial Data [ 10 ]

11 Formulating our Vision for Growth Key Beliefs Underpinning our Strategy (Circa 2003) The E&P industry is entering a long up-cycle Supply-demand imbalance will result in higher oil and gas prices A changing playing field of opportunities Renewed land exploration - new technology cycle Reservoir characterization + 4D (land and marine) Emerging NOCs industry structure change E&P challenges driving need for new generation data and processing HS&E and escalating costs driving need for new delivery systems - access is a growing problem [ 11 ]

12 Business Increasingly International Location of Discoveries > 100 MMBOE Discoveries mmboe mmboe mmboe 1000 UP mmboe Source: CERA. [ 12 ]

13 A View on OFSE Cycles Technology-intensive Providers Benefit in Long Up-cycles [ 13 ]

14 R&D and Revenue Changes Building Long-term Earnings Power ($ Millions) R&D(1) Revenues $60.0 $50.0 $49.6 Million $800.0 $713.1 Million 16% $600.0 $ % +131% 20% $30.0 $20.3 Million $400.0 $20.0 $10.0 $0.0 51% 22% 27% 33% 18% +277% +64% $200.0 $0.0 $150.0 Million 32% 56% 12% 64% Mature-rising Tide Fix & Gain Market Share Change the Game Mature-rising Tide Fix & Gain Market Share Change the Game Significant historical R&D investments, with the ability to efficiently scale future R&D spending depending on near-term cash flow generation goals with little impact to 0 5 year earning potential R&D investments in the game-changers consuming near-term earnings Expect payoff starting in 2008 (FireFly, Scorpion VC, DigiFIN, etc.) Forecast 2012 game-changer revenues to range from 40-50% of consolidated total (vs. 16% in 2007) [ 14 ] (1) R&D totals include the addition of sustaining engineering costs to show fully burdened development expense.

15 Today s Discussion ION Geophysical Corporation: A Quick Introduction Market Drivers: Driving our Technology Investments ION s Strategy in the Land Market The ARAM Acquisition FireFly Commercialization Update Summary Select Financial Data [ 15 ]

16 Majority of Global Resource Base is Onshore Hydrocarbon Distribution in the Top 25 Basins 16 Known Reserves + Mean Undiscovered Resources Billions of Barrels of Oil Equivalent (Gas + Oil + LNG) 40 34* % = 3,058 Billion BOE Known Reserves = 2,141 Undiscovered = 917 Offshore 29% Source: USGS 2000 Worldwide Reserves Assessment (as published in Hart s E&P) Onshore offshore splits were estimated in mixed basins Some geographically-proximate basins were combined to simplify the illustration * Western Canada excludes tar sands and heavy oil (assessment was for conventional resources only) Onshore 71% [ 16 ]

17 Key Elements of ION s Land Strategy Leadership in emerging cableless high-density, full-wave systems Regain market share in mainstream cable-based analog systems Strong local presence in key land markets Former Soviet Union China/India North Africa/Middle East Use solutions approach to establish leadership in full-wave imaging China Sinopec project Most recent Durham Ranch FireFly shoot FireFly productivity to help drive acceptance of digital, full-wave [ 17 ]

18 ION Land Acquisition System Strategy In the Context of Technology Adoption Cycles* High Channel Count Analog [Middle East, North Africa] Low Channel Count Analog [US Mid-continent - Conventional] II High Channel Count Digital [China, Russia, India, W. Canada] Cableless [US Rockies, Unconventional] Version 2 Innovators Early Adopters Early Majority Late Majority Laggards * Courtesy of Geoffrey Moore and The Chasm Group [ 18 ]

19 Today s Discussion ION Geophysical Corporation: A Quick Introduction Market Drivers: Driving our Technology Investments ION s Strategy in the Land Market The ARAM Acquisition FireFly Commercialization Update Summary Select Financial Data [ 19 ]

20 Background on ARAM Privately held, Canadian-headquartered manufacturer of high productivity, contractor-oriented, cable-based land seismic acquisition systems ~200 employees, officed in Calgary, Houston, Moscow, Dubai, and China Founded in 1972 as Geo-X Systems, a seismic data processing firm Introduced the ARAM land acquisition system in 1991 Has grown to be the second largest independent provider of land seismic systems Divested of the data processing business in 2006 Strong financial performance (unaudited) Generated more than $120 million in revenues in 2007 Revenue growth ( 07 to 09) projected to exceed 10% per year [ 20 ]

21 Land Systems Providers Estimated, Back-of-the-Envelope Market Shares 100% = US $500 - $700 Million in Worldwide Land Acquisition System Sales per Year Full-wave Analog ION ARAM Others [ 21 ]

22 The Land Acquisition Market Present State Sensor Type Illustrative: Market Segment Sizes Digital, 3C MEMS Analog Geophone The vast majority of the existing market is for cable-based systems outfitted with geophones ION s offerings for this Main Street market segment include: Scorpion recording systems Sensor geophones The post-closing portfolio would expand to also include: ARAM s Aries recording system Cable-based Cableless Recording System Architecture [ 22 ]

23 The Land Acquisition Market Potential Future State for ION Sensor Type Illustrative: Market Segment Sizes Digital, 3C MEMS Analog Geophone A more robust, next-gen cable-based, full-wave recording system Analog, cable-based system segment may become relatively smaller, but Still a sizeable segment May not actually shrink in absolute dollar size as: Crew counts expand Station counts expand F I R E F L Y Cable-based Cableless Recording System Architecture [ 23 ]

24 ARAM Integration ARAM will manage the land cable business (analog and digital) Position ARAM Aries as the analog land cable system High margin Reliable system with satisfied customer base Sustain/support Scorpion Analog Scorpion will remain ION s digital land cable high-end hybrid system Combined R&D efforts for next-generation cable system, including hybrid FireFly/cable system Some cost savings from integration effort [ 24 ]

25 Today s Discussion ION Geophysical Corporation: A Quick Introduction Market Drivers: Driving our Technology Investments ION s Strategy in the Land Market The ARAM Acquisition FireFly Commercialization Update Summary Select Financial Data [ 25 ]

26 Land Acquisition Challenges Limitations of the Traditional Cable-based System Labor intensive Direct and indirect labor costs HSE issues Costly to scale Hard to compete against low-labor cost players Inventory/Asset Management Lack of flexibility Reliability issues related to cables Hard to differentiate low margins / poor returns Different ground electronics / cable configurations Cost of cable inventory Transportation / mobilization costs Animals chewing on cables Weather related problems (lightening, etc.) Multiple connections Geometric problems with increasing channel count Low entry barriers Logistics business vs. technology business Small technological difference among contractors [ 26 ]

27 The FireFly Ecosystem A Comprehensive Approach Navigation and positioning Survey design for optimum image Node-based, full-wave recording system GIS planning and operations support Comprehensive data management [ 27 ]

28 Durham Ranch Moffat County, Northwestern Colorado Satellite image courtesy of Google Earth [ 28 ]

29 Durham Ranch A Closer View The Durham Ranch seismic survey 31 square miles high-density, full-wave Significant varying topography Significant environmental and safety challenges BLM restrictions related to protecting native species Farm animals and active ranching/farming activities Significant elevation changes from 7100 ft at staging area up to 9,000 ft. elevations Fractured shale/carbonate play Full-wave seismic for fracture identification and horizontal well planning Future frac design Satellite image courtesy of Google Earth [ 29 ]

30 Survey Parameters Densely Sampled, Full-wave Data Program FireFly Version 2.0 with 6,100 full-wave VectorSeis sensors Connex command & control software from Concept Systems 10,597 receiver points (comprising 327 line miles ) 7,271 dynamite source points (comprising 327 line miles ) Source and receiver density = 346 per square mile Nominal fold = 107 [ 30 ]

31 Varying Topography Land Under BLM Stewardship Significant parts of the survey area was under The Bureau of Land Management (BLM). Concerns for wild life Protected species such as raptor nests Minimize the disturbance to local flora and fauna BLM was a strong supporter of FireFly which clearly decreases the seismic acquisition foot print compared to a cable system. Helped speed up permitting [ 31 ]

32 Varying Topography High Mountain Meadows with Livestock Upper Left: One of the helicopter drop-points for the bags containing FSUs and VectorSeis. Lower Right: An FSU and VectorSeis along the road, seemingly having no effect on the native residents! Unlike most cable-based seismic surveys, the cows have not been chewing on the equipment. [ 32 ]

33 Varying Topography Rugged Exposed Cliffs Upper Left: Crew has navigated to the receiver point using the NavTool (left) and is now drilling the hole for the VectorSeis sensor (middle). Once the sensor is in place, the FSU (right) will be connected in order to record and store the acquired data. Lower Right: Sensors and FSUs are also deployed on the buttes lining the valley, requiring professional climbers for layout and retrieval. VectorSeis tilt insensitivity is critical on this steeply sloping topography. [ 33 ]

34 The Durham Ranch Schedule Challenges The Timeline for the FireFly Survey at Durham Ranch Permitting Shot-hole drilling Crew mobilization System deployment Acquisition System retrieval Processing FEB MAR APR MAY JUN JUL AUG SEP Time Line Challenges Getting the BLM permits in time Strong interest in FireFly made it possible Farming activities prevented the shot from starting until mid-july Customer got no-bids from contractors for normal cable-based job due to topography challenges combined with short time frame Hard stop on Sept. 1 st due to the beginning of hunting season which increased the risk of the survey Acquisition was successfully completed on Aug 26 th! No HSE issues Demonstrated the productivity of FireFly in difficult terrains Excellent data set Met production expectations [ 34 ]

35 The Technologies Making it Possible Stakeless Deployment (VectorSeis and FSUs) One of the Geokinetics deployment crews at work. Similar to the method of source deployment, the traditional method of deploying sensors relies on surveying, staking, and flagging. FireFly has been designed to eliminate these steps so that crews can deploy receivers in the exact locations intended, thereby eliminating guesswork and added cycle time in pre-processing. Connex command & control software is the brain behind the stakeless operation, with specific location data downloaded to the NavTool being used by the crew member on the left. [ 35 ]

36 The Technologies Making it Possible Staging Trailer for Power and Data Management The Staging Trailer enables multiple tasks in the acquisition operation. It provides the initial charge to the FireFly systems when they arrive in the field, and ongoing power boosts as required. At the same time they are charging, the FSUs receive the latest firmware updates, are quality controlled before deployment, and download any acquired data for quick-look, QC reviews by observers in the field. [ 36 ]

37 Completing the Picture Bags in Staging Area, Heading out for Deployment Bags filled with FSUs and VectorSeis sensors get from the Staging Trailer area to deployment crews in the field. In the Durham Ranch survey, helicopters are used to speed up deployment, cope with variations in terrain and topography, and minimize traffic on the gravel and dirt roads in the survey area. [ 37 ]

38 Completing the Picture FireFly Recording Trailer Perched on a bluff roughly 1,000 feet above the valley floor, the FireFly Recording Trailer acts as the command & control center once acquisition operations begin. The Recording Trailer is outfitted with Connex software, providing a detailed picture of the entire operation on the seismic battlefield. The Recording Trailer powers FSUs on and off and monitors the shooting crews in the field (who ultimately set off the dynamite charges) for maximum safety and productivity. It also receives selected attributes of the recorded data to provide a high level of comfort in the integrity and quality of the operation. [ 38 ]

39 Today s Discussion ION Geophysical Corporation: A Quick Introduction Market Drivers: Driving our Technology Investments ION s Strategy in the Land Market The ARAM Acquisition FireFly Commercialization Update Summary Select Financial Data [ 39 ]

40 Summary We believe we are in a long cycle where technology will become the main driver of profitability. Since 2003, ION has repositioned its strategy and portfolio to capitalize on these trends. We have benefited from the rising tide in the industry.but have re-invested much of the profits in R&D. We expect to begin capturing the payback on our game-changing investments in 2008 and believe we are building a technology differentiated company with long-term earnings power - 21 st Century Reservoir Imaging Company. [ 40 ]

41 Today s Discussion ION Geophysical Corporation: A Quick Introduction Market Drivers: Driving our Technology Investments ION s Strategy in the Land Market The ARAM Acquisition FireFly Commercialization Update Summary Select Financial Data [ 41 ]

42 Net Revenues Q2 YTD 2008 vs ($ Millions) $800 $ $600 $ $400 $ $200 $ $ Q2 YTD 2008 [ 42 ]

43 Revenues and Gross Margin Percent Q2 YTD 2008 vs Revenues ($ Millions) Gross Margin % Q2 YTD Q2 YTD 2008 [ 43 ]

44 Segment Revenues Q2 YTD 2008 vs ($ Millions) Land Imaging Systems Q2 YTD 2008 Seismic Imaging Solutions GXT Q2 YTD Marine Imaging Systems Q2 YTD 2008 Data Management Solutions Concept Systems Q2 YTD 2008 [ 44 ]

45 EBITDA Q2 YTD 2008 vs ($ Millions) (10) (35) (60) * Q2 YTD 2008 EBITDA (earnings before net interest expense, taxes, depreciation, and amortization) * Restated [ 45 ]

46 Diluted EPS Q2 YTD 2008 vs $0.60 $0.50 $0.52* $0.40 $0.30 $0.20 $0.10 $0.22 $0.33 $0.24 $ Q2 YTD 2008 * Excludes one time charges [ 46 ]

47 Balance Sheet Highlights 12/31/05 12/31/06 12/31/07 6/30/08 Total LT Debt $71.5 MM $71.0 MM $9.8 MM $7.9 MM LT Debt/Cap 12.1% 11.9% 2% 1% Net Debt/Cap 10.2% 10.2% -2% 1% Cash & Equity $15.9 MM $17.1 MM $36.4 MM $18.8 MM [ 47 ]

48 Updated Annual Guidance Full-Year Revenues $780 $830 MM Diluted EPS $0.70 $0.85 [ 48 ]

49 ION Total Revenues Revenues in $ Millions ION Solutions Land Marine CSL E Gross margin 30.6% Op margin 7.9% 35 37% 15 18% [ 49 ]

50 [ 50 ]

51 Financial Highlights Acquisition price of CDN $350 million US $275 million in cash Remainder (~US $75 million) in ION common stock Details of the cash-component financing have not yet been finalized Will be debt financed Commitments have been secured Transaction is expected to be earnings neutral in 2008 and accretive to net income, EPS, and EBITDA in 2009 [ 51 ]