Marine revenues for 2008 totaled USD 1,638.8 million, an increase of USD 365.0 million (29%), from 2007. Revenues from contract seismic acquisition increased USD 373.2 mil- lion from USD 691.8 million in 2007 to USD 1,065.0 million in 2008, primarily driven by a stronger marine seismic market, more capacity allocated to contract work, increased prices and a larger fleet.Total MultiClient revenues (pre-funding and late sales combined) decreased by USD 64.5 million (13%), to USD 439.4 million in 2008, primarily driven by lower pre-funding revenues. MultiClient pre-funding decreased by USD 56.4 million (18%), from USD 306.0 million in 2007 to USD 249.6 million in 2008. MultiClient late sales decreased by USD 8.1 million (4%), to USD 189.8 million in 2008. Marine increased its cash investments in MultiClient library by USD 9.2 million (4%), to USD 223.7 million in 2008. Pre-funding as a percentage of cash investments in MultiClient data, ended at 112% in 2008 compared to 143% in 2007.The decrease in pre-funding level is driven by relatively more 2D activity and reprocessing, which, typically, are less pre-funded than MultiClient 3D opera- tions. In 2008 the fleet allocation (ac- tive 3D vessel time) between contract and MultiClient data acquisition was approximately 80%/20% compared to 64%/36% in 2007.
Onshore revenues for 2008 totaled USD 273.1 million, an increase of USD 26.6 million or 11% from 2007.The increase is primarily due to reactivation of the Latin American market (Mexico, Brazil and Peru) partially offset by lower activity in North Africa.Total MultiClient revenues (pre-funding and late sales combined) decreased USD 12.6 million (16%), to USD 68.6 million, primarily driven by lower late sales as a result of cuts in capital expenditures among clients in the second half of 2008, compared to 2007. MultiClient late sales decreased USD 8.3 million (40%), from USD 20.9 million in 2007 to USD 12.6 million in 2008. MultiClient pre-funding decreased by USD 4.3 million (7%), from USD 60.3 million in 2007 to USD 56.0 million in 2008.The decrease in pre-funding is primarily driven by a re- duction in MultiClient cash investments of 11% from 2007 to 2008.
PGS ANNUAL REVIEW 2008 38
Operating costs, which includes cost of sales, expensed research and de- velopments costs and selling, general and administrative costs, totaled USD 949.7 million in 2008 compared to USD 719.1 million in 2007, an increase of USD 230.6 million (32%).
Marine operating costs increased by USD 180.2 million (35%), mainly as a result of increased activity, more capacity and price inflation. Onshore operating costs increased by USD 31.7 million (19%), primarily related to higher activity than in 2007. In addi- tion operating costs in the Other seg- ment increased by USD 18.7 million to USD 52.0 million, primarily relating to PGS EM.
Reported research and development costs increased by USD 10.9 million (128%), to USD 19.4 million, while selling, general and administrative costs increased by USD 10.6 million (15%), to USD 83.1 million.The main driver behind the sharp percentage increase in research and development cost is related to EM applications and the Company's effort to complete development of a towed EM solution. Research and development costs are net of capitalized development projects totaling USD 11.5 million and USD 8.9 million for 2008 and 2007, respectively.The GeoStreamer® was put into production in the fourth quar- ter 2008 and of the USD 11.5 million, USD 5.0 million relates to developing the GeoStreamer®.The rest primarily relates mainly to development of OptoSeis®, the fiber optic solution for 4D monitoring.
PGS costs have generally increased in 2008 as the activity level increased. In addition, the Company spent more on chartered capacity to perform 2D surveys and to facilitate advanced 3D surveys and otherwise optimize the productivity of the Company's 3D vessels.There was a strong general cost increase for fuel, personnel, yard and maintenance and project-related costs, such as support and source ves- sels during 2008.
Depreciation and amortization for 2008 was USD 335.5 million com- pared to USD 313.1 million in 2007, an increase of USD 22.4 million (7%).The increase is mainly caused by higher
depreciation as a result of an increase in depreciation costs for vessels acquired in the acquisition of Arrow in November 2007, entry of Ramform Sovereign to the fleet in March 2008 and other investments made in 2008, partly offset by lower pre-funding on MultiClient surveys.
MultiClient amortization for 2008 decreased by USD 42.9 million (18%) compared to 2007. MultiClient amortization as a percentage of total MultiClient revenues was 38% in 2008, compared to 40% in 2007.The decrease is driven by less pre-funding and capacity allocated to new Multi- Client projects.
The net book value of the MultiClient library was USD 294.6 million as of December 31, 2008, compared to USD 173.9 million as of December 31, 2007.The low book value will result in relatively low ordinary amortization relating to sales from the existing library, while amortization relating to sales from new library investments will be higher.
Other operating income of USD 71.6 mil- lion in 2008 relates to the sale of Ram- formVictory to METI in January 2008.
In the fourth quarter of 2008, the Com- pany recorded impairments of long- lived assets of USD 161.1 million. USD 99.1 million relates to impairments of intangible assets recorded on acquisi- tion of MTEM as a result of weaker EM market development and reduced EM ambitions in 2009. Impairment indicators were identified for certain vessels due to challenging economic conditions.These included stacking of Polar Sea, deferral of the conversion of Southern Explorer and adjusting the carrying amounts of Polar Pearl. In addition, the cost of the new-build 532 is estimated to exceed the income it will earn under its original long- term lease agreement.These resulted in impairments charges of USD 59.9 million. In addition USD 2.1 million relates to oil and gas assets.
Operating profit was USD 542.7 mil- lion in 2008. Excluding impairments of long-lived assets the operating profit was USD 703.9 million, compared to an operating profit of USD 494.5 mil- lion in 2007.
Interest expense was USD 56.6 million in 2008 compared to USD 37.5 million in 2007.The increase is primarily due to increased interest bearing debt, partially offset by an increase of capitalized interest to the MultiClient library and construction in progress. Other financial items, net amounted to a loss of USD 35.0 million in 2008 compared to a loss of USD 7.1 million in 2007.The increased loss is primarily attributable to foreign currency loss of USD 33.1 million as a result of appre- ciation of the US dollar in second half of 2008. A stronger US dollar general- ly favors operations since a significant portion of costs of operations are in- curred in other currencies. PGS holds foreign currency positions, including derivative financial instruments, to balance operational currency expo- sure.These positions are generally not accounted for as hedges, but marked to market at each balance sheet date together with receivables and paya- bles in non US currencies, causing the short-term effect to be negative when the US dollar appreciates. Impair- ments of shares available-for-sale was a loss of USD 7.3 million in 2008 and relates to ownership in Borders & Southern and Endeavour whose share price declined significantly in the fourth quarter 2008. During 2008 PGS repurchased USD 45.5 million of nominal value of the convertible notes resulting in a gain of USD 12.1 million.
Income tax expense was USD 32.8 million in 2008 compared to a ben- efit of USD 11.1 million in 2007.The income tax expense for 2008 was positively impacted by the planned entry of parts of the vessel operations to the NTT from January 1, 2008 and developments relating to exit from the previous shipping tax regime, effec- tive January 1, 2002, aggregating USD 107 million.The tax benefit in 2008 is also positively impacted by foreign exchange movements.The 2008 tax charge included current tax expense of USD 75.8 million, compared to a current tax expense of USD 43.2 million in 2007. Current tax expense relates primarily to withholding taxes or income taxes in countries where PGS has no carry forward losses or where there are limitations on use of such losses.
PGS has substantial deferred tax
assets in different jurisdictions, predominantly in Norway and the UK. At year-end 2008, deferred tax asset amounted to USD 221.8 million in the consolidated balance sheets while remaining unrecognized deferred tax assets are USD 88.6 million.
Income from discontinued operations, net of tax, was USD 1.5 million in 2008 compared to USD 1.0 million in 2007, relating to additional proceeds from activities sold in 2003 and 2002.
Net income to equity holders of PGS ASA was USD 417.4 million compared to USD 470.0 million for 2007.
Arrow new-Builds From the acquisition of Arrow Seis- mic, PGS has four 10-12 streamer seis- mic 3D vessels under construction at the Factorias Vulcano shipyard group in Spain (the Arrow new-builds (NB)). In 2008 the Company entered into revised agreements with the shipyard, Pymar (the Spanish shipbuilders as- sociation) and WesternGeco on incen- tives, delivery times and guarantees. The shipyard group is experiencing substantial delays and a tight liquidity situation, and the Company is moni- toring the status of the yard closely.
The first two vessels (NB 532 and 533) are on charters to WesternGeco.The agreements with the shipyard and WesternGeco, respectively, are gener- ally designed to be “back-to-back”. According to the revised agreements, Arrow is entitled to terminate if the relevant vessels are not delivered within 120 days of the agreed delivery dates of November 30, 2008 and March 31, 2009, respectively. If either of the NB's 532 or 533 is delayed more than 120 days, Arrow will have to notify WesternGeco that Arrow has a right to terminate the shipbuilding contract with the yard. WesternGeco may then decide to terminate the charter party and any related agree- ments with Arrow or they may instruct Arrow not to terminate the shipbuild- ing contract.
In early March 2009 PGS received formal notification by Factorias Vulcano that the shipyard intends to deliver hull number 532 to satisfy the shipbuilding contract specified for hull number 533.The Company is cur-
rently assessing the legality of such substitution. Since the shipyard will not deliver NB 532 within the termina- tion date, Arrow has received from WesternGeco a notice of intention to terminate the charter for NB 532 and Arrow has sent a notice of termina- tion of the shipbuilding contract to the shipyard.
For NB 532 and 533, Arrow has made the contractual installments to the yard of approximately EUR 39 million per vessel, of which approximately EUR 32 million (per vessel) are se- cured by on-demand refund guaran- tees from banks. If NB 532 or 533 is more than 120 days delayed and both WesternGeco and Arrow should de- cide to terminate the contract related to the vessel, Arrow would be entitled to receive repayment from the yard of all installments made on the vessel as well as interest. If such termina- tions were to occur, PGS would be exposed to an impairment charge of close to USD 100 million (total for the two vessels) relating to the fair value adjustment recorded at the acquisi- tion of Arrow Seismic and subsequent capitalization of interests and other costs.
The two other new-builds, PGS Apollo and PGS Artemis, are intended to be a part of PGS' seismic operations when completed. In the case of termination based on delays beyond 120 and 200 days respectively for PGS Apollo and PGS Artemis of the agreed delivery dates of June 15, 2009 and January 31, 2010 respectively, Arrow would be entitled to receive repayment from the yard of all installments made on those vessels. All installments are secured by on-demand refund guarantees, except for the second to last one which amounts to approximately EUR 7 million for each vessel. Such termi- nation would expose us to substantial impairment charges, including the fair value adjustment recorded at the acquisition of Arrow Seismic.
On July 7, 2008, CGGVeritas issued a claim against Arrow Seismic ASA of USD 70 million. CGGVeritas claims to have a binding agreement with Arrow for a charter and ultimately the pur- chase of NB 534 (now renamed PGS Apollo). PGS views the CGGVeritas claim against Arrow as unfounded.
PGS ANNUAL REVIEW 2008 39