Malcor – CEO, CGG – France
CEO of the French oil and gas service champion CGG, Jean-Georges Malcor was one of the first to predict the downturn in demand for seismic services in 2013: as a result of the changes he implemented, the company had two excellent quarters at the end of 2014. EnergyBoardroom sat down with him recently to discuss the future of CGG and the global oil and gas service industry.
The seismic market is expected to shrink by 6 percent, the market for survey equipment by 15 percent and exploration spending from IOCs and NOCS will fall 7 percent. How do you cope with these difficult conditions?
The market is undoubtedly slow and will most likely remain so throughout 2015. We must remember that we operate in a very upstream position within the value chain. Fortunately, since October 2013 we have been anticipating this downturn. In December 2013 we outlined the details of our transformation plan, which consisted in reducing our footprint in acquisition, and reducing our cost base in order to become more agile. The objective was for GGR to dominate our revenue by 2016, with data acquisition at 30 percent and Sercel between 25 and 30 percent of our revenue. This rebalancing was already set out in this plan and perfectly matches the different cycles of the market. In 2014, when market conditions deteriorated further than we expected, we decided to enhance our transformation plan and implement it as early as 2014. The process was arduous. We had to reduce our fleet of vessels from 18 to 13 and our global headcount by 12 percent. This situation paradoxically helped us complete this transformation faster than expected. There has fortunately been positive feedback from the market. We subsequently enacted the second phase of our plan, which consisted in further cost-cutting and the removal of two more vessels from our fleet.
How did your customers and shareholders welcome these drastic measures?
I would first like to underline the fact that we were among the first companies to sound the alarm in 2013. Most of our competitors are pure players, whether in marine and land acquisition or processing. It is therefore difficult for analysts to compare and contrast CGG with pure players. We tirelessly strove to explain that we are not pure players but rather a fully integrated geoscience group. This message made sense within a deteriorated market. Our GGR activity is doing well for instance. For 2014, we posted excellent results for the last two quarters. These performances helped to reassure the financial markets. We were initially penalized on the share price but the market credited our efforts and strategy to acknowledge the situation and launch a plan in response.
You called 2014 a resilient year. How would you name 2015?
I dearly hope that in 2015, the cycle will be renewed and revitalized. The economic situation is still precarious but CGG is armed to face it. I expect to see a stabilization of our activity.
How does your growth strategy balance between organic and external growth?
Our growth model relies on both types of business expansion. The strategy we deploy depends on the activity involved. We work in three different segments: equipment, data acquisition and GGR (geology, geophysics and reservoir). Regarding the equipment segment, we hold a very large market share, which varies between 56 and 70 percent. This remarkable achievement is the outcome of our commitment to consistently allocate at least 6 percent of our turnover to R&D, coupled with strategic acquisitions of technological ‘gold nuggets.’ Our equipment division Sercel specializes in acquiring, integrating and enabling these promising companies to grow. The combination of R&D and acquisitions constitutes a robust business model and contributes to our success at securing a very significant market share.
Does your market leadership come with responsibilities?
Market dominance comes with pressures and obligations. CGG must constantly come up with innovative strategies and introduce new products to remain a market leader. The situation is slightly different for our data acquisition stream, which has a 20 percent market share. After manufacturing the sensors, we acquire data (mainly onshore and offshore but also airborne). Data acquisition is a capital-intensive activity, which calls for a completely different business model. We started with land acquisition before progressing to the high-valued-added compartments of the business. For instance, we conduct land acquisition surveys in geologically challenging conditions. As regards big crews, we are mainly competing with Chinese firms and Schlumberger. Since the year 2000, our marine activity has primarily hinged on external growth.
What about your third business line, GGR?
Once the data is acquired, we process and extract a three-dimensional image, which we then interpret. This process requires a diverse set of skills, mainly in geophysics, computing science and geology. This activity is noticeably service-oriented.
CGG was a pioneer in geophysics at its creation in 1931. It has now become a world leader in geoscience. How do you explain this resilience throughout the years?
CGG was founded in 1931 by Conrad Schlumberger. Over the years, the company has gone through the various cycles of the oil and gas sector, but always keeping a strong focus on our initial DNA: subsurface data acquisition and processing. More recently, CGG has elected to diversify its business to include all activities relating to geoscience. Historical milestones were reached over the last decade when CGG completed a series of acquisitions overseas, which contributed to CGG’s growth.
Could you tell us more about the “passion for geoscience” you advocate to your human resources and the CSR projects CGG has initiated?
We have established several partnerships with prominent universities such as the Colorado School of Mines, Imperial College London, and the universities of Oxford and Perth in order to recruit the most talented engineers. Depending on our business line, we are seeking different profiles. For our equipment division, we require many engineers, designers and producers. For data acquisition, we seek adventurous spirits and pioneers able to work in shifts in the field and operate in challenging conditions. Passion is the common denominator of our people. CGG is open to different backgrounds and cultures, and people with the ability to think outside the box but also young computer scientists, geologists and geophysicists
We generally try to involve local populations in our projects. These projects have social, logistical and environmental implications that go beyond business.
The best example is our nomadic acquisition business, where CGG regularly sets up corporate social responsibility projects for the benefit of local communities who are dependent on the onshore or offshore territories where we have the privilege of operating. We often donate sanitary equipment or help renovate existing orphanages or schools. When we set up a land seismic camp for a few months, we can, for example, offer to rehabilitate the local community’s water pumps or organize school road safety campaigns, etc.
Around all of CGG’s permanent sites, CGG strives to be a good neighbor. We support the community through targeted social responsibility projects seeking to improve community education/training with a special focus on promoting Earth Sciences, environmental protection or health and safety. CGG primarily sponsors initiatives in which employees take an active part. In the UK, for example, employees can take leave for a short-term volunteering assignment in partnership with Planète Urgence to support a local association or administration in a developing country like Madagascar. In the UK, they can also participate in the STEMNET initiative, where employees share their passion for geoscience all year round with children and young people to encourage them to pursue STEM (Science, Technology, Engineering and Mathematics) careers. On a more global scale, CGG has been a long-term supporter of Geoscientists Without Borders, an industry association promoting humanitarian applications of geosciences by having mentored students conduct projects benefiting the most needy communities such as putting in place landslide monitoring and prevention systems.
Another point I would like to raise regarding CGG is our commitment to integrating the best aspects of different cultures in order to foster a rich and stimulating working environment. We employ people of more than 100 different nationalities. It would be wrong for CGG to be solely French-centric or US-centric.
How did the Fugro Geoscience acquisition back in 2013 constitute a major development and step forward for CGG?
This acquisition marked a key milestone in the history of CGG. Prior to this, we realized the importance of bringing together the three segments I have already mentioned to become a fully integrated geoscience company. We guarantee our clients data accuracy from A-Z. It starts from the sensors to the final image we deliver. Put simply, we listen to the Earth. The only time our clients are able to verify that the subsurface image we’ve produced corresponds to the geological reality is during the drilling phase, which as you know, implies considerable investment. Hence the importance of producing the right or most accurate image. Our clients actually like the fact that we are responsible for the entire process, leading to the delivery of a reliable image. Since 2013, our objective has been to preserve all three businesses, while redefining each activity’s role within the company. We chose to reduce our stakes in acquisition and promote our GGR activity that is very successful and less capital-intensive. From that perspective, the Fugro Geoscience acquisition facilitated this transition to rebalance our portfolio. It was actually well perceived by the market and the financial analysts. We were formerly depicted as a mere data acquisition company while today both our equipment and data acquisition streams serve our inherent mission: GGR. Our intent is to provide our customers, as I said, with the best final image.
With CGG being very focused on seismic surveys, what is your assessment of the current locked-in situation in France regarding shale oil and gas, and does CGG have a role to play if the debate moves forward?
We are lacking the French spirit of enlightenment, curiosity and ingenuity that made France famous during the 18th century, the so-called Siecle des Lumières. The sensible approach would have been to frame what we mean by shale oil and gas. For example, a series of seismic surveys could have been conducted to gain more insight. We need the answers to a few fundamental questions: what does shale oil and gas entail? How much will it cost? How deep is it? What kind of quantities are we talking about?
The last time a professional survey was commissioned on the ground dates back to the 1990s. Scientists at the time employed outdated technologies! If an impartial study was conducted, a discussion could take place as to which process to implement in order to limit the risks, and yes, CGG would be happy to take part in this. Today’s debate on shale oil and gas has become completely dogmatic, which is very frustrating.