TGS ASA, a major player in geoscience data services for the oil and gas industry, recently held its Q1 2024 earnings call. While the headline figures showed a company performing well, with strong late sales and high early sales rates, a deeper dive into the transcript reveals a potentially risky strategy emerging within TGS, one that could leave them exposed in a rapidly changing energy landscape.

The most striking takeaway from the call is the disconnect between TGS's optimistic outlook on oil and gas exploration and the broader industry trends. CEO Kristian Johansen repeatedly emphasized the need for continued oil and gas exploration, citing rising global energy demand and the steep decline in production from existing fields. He even quoted Occidental Petroleum CEO Vicki Hollub's warning of an impending oil shortage by 2025. This narrative, while compelling on the surface, paints a potentially misleading picture of the energy future.

While it's true that global energy demand continues to rise, the sources of that energy are shifting rapidly. Renewable energy sources like wind and solar are experiencing exponential growth, while major economies are enacting policies to accelerate the transition away from fossil fuels.

Moreover, TGS's own diversification into "Digital Energy Solutions" suggests an internal recognition of these shifts. However, their actions tell a different story. Despite acknowledging the growth of offshore wind and the need for a "complete data set" that combines subsurface, wind, and metocean data, TGS's investment strategy appears heavily skewed towards traditional oil and gas exploration.

The company increased their full-year multi-client investment guidance from $350 million to $400 million. While not explicitly stated, it's reasonable to assume that a substantial portion of this investment is directed towards oil and gas, given their current activity plan and backlog. This stands in stark contrast to their relatively limited investments in renewable energy data acquisition, despite the rapid growth in this sector.

TGS's acquisition of Magseis, a leading provider of ocean bottom node (OBN) technology, further exemplifies this focus on traditional exploration. OBN technology is primarily used for high-resolution seismic surveys in mature oil and gas fields, contributing to increased production from existing reserves rather than discovering new ones.

While the acquisition has undoubtedly bolstered TGS's financial performance, it also binds them more tightly to the fate of the oil and gas industry. The transcript reveals an almost exuberant confidence in the OBN market, with Johansen boasting of a "very high level of activity" and asserting that TGS is poised to become the go-to provider for high-tech data in the maturing U.S. Gulf of Mexico.

This confidence might be misplaced. As the energy transition gathers pace, the long-term demand for OBN services could be significantly impacted. If oil and gas exploration declines, as predicted by many analysts, TGS's reliance on OBN could become a liability.

A crucial question emerges: is TGS strategically investing in a sunset industry? Their planned merger with PGS, another major player in marine seismic acquisition, raises further concerns. While touted as a move towards a "leading position in all different verticals of the seismic industry," the merger could further solidify their commitment to oil and gas at the expense of future-oriented energy solutions.

The transcript doesn't provide concrete details on the combined company's investment strategy, but the synergy targets – focused heavily on cost reductions and fleet utilization – hint at a potential consolidation of existing practices rather than a radical shift towards renewable energy.

TGS's actions suggest a bet on the continued dominance of oil and gas, despite increasing evidence to the contrary. Their significant investments in multi-client oil and gas data acquisition, their acquisition of an OBN specialist, and their planned merger with PGS all point towards a strategy deeply intertwined with the fossil fuel industry.

While this strategy might yield short-term gains, it carries a significant long-term risk. If the global energy transition accelerates, TGS could find itself holding vast amounts of valuable but increasingly irrelevant data, leaving them lagging behind competitors who have embraced the energy future.

Revenue Breakdown: Oil and Gas vs. Digital Energy Solutions

To assess TGS's reliance on oil and gas, let's examine their Q1 2024 revenue figures. The following chart illustrates the disparity between their traditional and renewable energy revenue streams.

As evident from the chart, TGS's Digital Energy Solutions, while growing, still constitute a minor portion of their total revenue. Their financial success remains heavily tethered to the oil and gas industry.

Furthermore, their acquisition backlog, primarily driven by OBN contracts, has surged to $360 million since the end of Q1. These figures suggest a company heavily reliant on oil and gas for its financial success.

"Fun Fact: Did you know TGS's data library contains over 3 million kilometers of 2D seismic data and 1.2 million square kilometers of 3D seismic data? That's enough to circle the globe almost 75 times with 2D data and cover the entire landmass of India with 3D data! But the question remains: how much of this vast data library will be relevant in a future dominated by renewable energy sources?"

Only time will tell whether TGS's bet on oil and gas will pay off. However, their current strategy, veiled behind positive earnings figures and optimistic rhetoric, could leave them vulnerable in a rapidly evolving energy landscape.