SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

Commission File Number 001-14622

 

 

Compagnie Générale de Géophysique-Veritas

(Exact name of registrant as specified in its charter)

CGGVeritas

(Translation of registrant’s name into English)

Republic of France

(Jurisdiction of incorporation or organization)

Tour Maine Montparnasse

33, avenue du Maine

75015 Paris France

(Address of principal executive offices)

Stephane-Paul Frydman

Chief Financial Officer

CGGVeritas

Tour Maine Montparnasse

33, avenue du Maine

75015 Paris France

tel: +33 (0) 16467 4500

fax: +33 (0) 16447 3429

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

71/2% senior notes due 2015

73/4% senior notes due 2017

91/2% senior notes due 2016

(Title of class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

151,506,109 Ordinary Shares, nominal value €0.40 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o     No þ

 

Note — checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP o

 

International Financial Reporting Standards as issued by the International Accounting Standards Board þ     Other o

 

If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 o     Item 18 o

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

 

 

PRESENTATION OF INFORMATION

 

On January 12, 2007, CGG merged with Veritas (the “merger”) in a part cash, part stock transaction and upon completion of the merger, CGG was renamed Compagnie Générale de Géophysique-Veritas (abbreviated as CGGVeritas). Accordingly, where this annual report provides information for dates prior to January 12, 2007, such information relates to CGG only. We have also provided certain information relating to Veritas prior to January 12, 2007. Information in this annual report on or after January 12, 2007 relates to CGGVeritas.

 

As used in this annual report “CGG” refers to Compagnie Générale de Géophysique and its subsidiaries, except as otherwise indicated, “Veritas” refers to Veritas DGC Inc. and its subsidiaries before the merger and to CGGVeritas Services Holding (U.S.) Inc. following the merger. “CGGVeritas” refers to Compagnie Générale de Géophysique-Veritas, and “we”, “us”, “our” and “Group” refers to Compagnie Générale de Géophysique-Veritas and its subsidiaries after the merger and Compagnie Générale de Géophysique and its subsidiaries before the merger, except as otherwise indicated.

 

In this annual report, references to “United States” or “U.S.” are to the United States of America, references to “U.S. dollars”, “$” or “U.S.$” are to United States dollars, references to “France” are to the Republic of France, references to “Norway” are to the Kingdom of Norway, references to “NOK” are to Norwegian kroner and references to “euro” or “€” are to the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Union.

 

As our shares are listed on the New York Stock Exchange (in the form of American Depositary Shares), we are required to file an annual report on Form 20-F with the SEC. Our annual report includes our annual financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) and its interpretations as issued by the International Accounting Standards Board (IASB). These consolidated financial statements were also prepared in accordance with IFRS as adopted by the European Union at December 31, 2010.

 

Unless otherwise indicated, statements in this annual report relating to market share, ranking and data are derived from management estimates based, in part, on independent industry publications, reports by market research firms or other published independent sources. Any discrepancies in any table between totals and the sums of the amounts listed in such table are due to rounding.

 

FORWARD-LOOKING STATEMENTS

 

This annual report includes “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties, including, without limitation, certain statements made in the sections entitled “Information on the Company” and “Operating and Financial Review and Prospects”. You can identify forward-looking statements because they contain words such as “believes”, “expects”, “may”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates” or similar expressions that relate to our strategy, plans or intentions. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We have based these forward-looking statements on our current views and assumptions about future events. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this annual report.

 

Important factors that could cause actual results to differ materially from our expectations (“cautionary statements”) are disclosed under “Item 3: Key Information — Risk Factors” and elsewhere in this annual report, including, without limitation, in conjunction with the forward-looking statements included in this annual report. Some of the factors that we believe could affect our actual results include:

 

 

 

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements included in this annual report, including those described in “Item 3: Key Information — Risk Factors” of this annual report.

 

TABLE OF CONTENTS

 

 

Not applicable.

 

Not applicable.

 

Selected Financial Data

 

The selected financial data included below should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and “Item 5: Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data included below are for CGG prior to the merger with Veritas, which was completed on January 12, 2007, and for CGGVeritas thereafter. The selected financial data for each of the years in the five-year period ended December 31, 2010 have been derived from our audited consolidated financial statements prepared in accordance with IFRS.

 

 

 

Exchange Rates

 

The following table shows, for the periods indicated, information concerning the exchange rate between the U.S. dollar and the euro. This information is provided solely for your information, and we do not represent that euros could be converted into U.S. dollars at these rates or at any other rate. These rates are not the rates used by us in the preparation of our consolidated financial statements.

 

The data provided in the following table is expressed in U.S. dollars per euro and is based on noon buying rates published by the Federal Reserve Bank of New York for the euro. On April 15, 2011, the most recent practicable day prior to the date of this annual report, the exchange rate as published by the Federal Reserve Bank of New York was €1.00 = U.S.$1.4443.

 

 

 

Notes:

 

 

Capitalization and Indebtedness

 

Not applicable.

 

Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

Risk Factors

 

Our business, financial condition, results of operations and cash flows and thus the value of an investment in our Company, could suffer material adverse affects due to the following risks. We have described the specific risks that we consider material to our business but there may be additional risks that we are unaware of or that we currently consider immaterial which could impair our business operations.

 

Risks related to our business

 

  Current economic uncertainty and the volatility of oil and natural gas prices could have a significant adverse effect on our financial condition, our results of operations, our cash flows and our ability to borrow.

 

Global market and economic conditions are uncertain and volatile. In the past, economic contractions and uncertainty have weakened demand and lowered prices for oil and natural gas, resulting in a reduction in the levels of exploration for hydrocarbons and demand for our products and services. See “Risks related to our industry — The volume of our business depends on the level of capital expenditures by the oil and gas industry, and reductions in such expenditures may have a material adverse effect on our business.”

 

Uncertainty about the global economy has had and is likely to continue to have a significant adverse impact on commercial performance and financial condition of many companies, which may affect some of our customers and suppliers. The current economic climate may lead customers to cancel or delay orders or leave suppliers unable to provide goods and services as agreed. These developments could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and which of our products and services will be adversely affected. We may have impairment losses as events or changes in circumstances occur which reduce the fair value of an asset below its carrying amount. As a result, these conditions could adversely affect our financial condition and results of operations, and we may be subject to increased disputes and litigation because of these events and issues.

 

Turmoil in the credit markets, such as was experienced in recent periods, could also adversely affect us and our customers. Limited access to external funding has in the past caused some customers to reduce their capital spending to levels supported by their internal cash flow. Some companies have found their access to liquidity constrained or subject to more onerous terms. In this context, there can be no assurance that our customers will be able to borrow money on a timely basis or on reasonable terms, which could have a negative impact on their demand for our products, and impair the ability of our customers to pay us for our products and services on a timely basis, or at all.

 

In addition, the potential impact on the liquidity of major financial institutions may limit our ability to fund our business strategy through borrowings under either existing or new debt facilities in the public or private markets and on terms we believe to be reasonable. Persistent volatility in the financial markets could have a material adverse effect on our ability to refinance all or a portion of our indebtedness and to otherwise fund our operational requirements. See “Risks related to our indebtedness — To service our indebtedness, we require a significant amount of cash, and our ability to generate cash will depend on many factors beyond our control.”

 

  We are subject to risks related to our international operations that could harm our business and results of operations.

 

With operations worldwide, including in emerging markets, our business and results of operations are subject to various risks inherent in international operations. These risks include:

 

 

 

We are exposed to these risks in all of our foreign operations to some degree, and such exposure could be material to our financial condition and results of operations in emerging markets where the political and legal environment is less stable.

 

We cannot assure you that we will not be subject to material adverse developments with respect to our international operations or that any insurance coverage we have will be adequate to compensate us for any losses arising from such risks.

 

Revenue generating activities in certain foreign countries may require prior United States government approval in the form of an export license and may otherwise be subject to tariffs and import/export restrictions. These laws can change over time and may result in limitations on our ability to compete globally. In addition, non-U.S. persons employed by our separately incorporated non-U.S. entities may conduct business in some foreign jurisdictions that are subject to U.S. trade embargoes and sanctions by the U.S. Office of Foreign Assets Control. We have typically generated revenue in these countries through the performance of data processing and reservoir consulting services and the sale of software licenses and software maintenance. We have current and ongoing relationships with customers in these countries. We have procedures in place to conduct these operations in compliance with applicable U.S. laws. However, failure to comply with U.S. laws on equipment and services exports could result in material fines and penalties and damage to our reputation. In addition, our presence in these countries could reduce demand for our securities among certain investors.

 

Certain of our clients and certain tax, social security or customs authorities may request that we or certain of our subsidiaries post performance bonds or guarantees issued by banks or insurance companies, including in the form of stand-by letters of credit, in order to guarantee our legal or contractual obligations. We cannot assure you that we will be able to provide these bonds or guarantees in the amounts or durations required or for the benefit of the necessary parties. Our failure to comply with these requests could reduce our capacity to conduct business or perform our contracts. In addition, if we do provide these bonds or guarantees, our clients or the relevant authorities may call them under circumstances that we believe to be improper, and we may not be able to challenge such actions effectively in local courts.

 

We and certain of our subsidiaries and affiliated entities also conduct business in countries where there is government corruption. We are committed to doing business in accordance with all applicable laws and our codes of ethics, but there is a risk that we, our subsidiaries or affiliated entities or their respective officers, directors, employees or agents may act in violation of our codes and applicable laws, including the Foreign Corrupt Practices Act of 1977 or any laws enforced by the US Office of Foreign assets control. Any such violations could result in substantial civil and/or criminal penalties and might materially adversely affect our business and results of operations or financial condition.

 

  We are subject to certain risks related to acquisitions, and these risks may materially adversely affect our business, financial condition and operating results.

 

In the past we have grown by acquisitions, some of which, such as the merger with Veritas in 2007 or the Wavefield acquisition in 2008, were quite significant. Such transactions, whether completed, pending or likely to be completed in the future, present various financial and management-related risks that can be material, such as integration of the acquired businesses in a cost-effective manner; implementation of a combined business strategy; diversion of management’s attention; outstanding or unforeseen legal, regulatory, contractual, labor or other issues arising from the acquisitions; additional capital expenditure requirements; retention of customers; combination of different company and management cultures; operations in new geographic markets; the need for more extensive management coordination; and retention, hiring and training of key personnel. Should any of these risks associated with acquisitions materialize, it could have a material adverse effect on our business, financial condition and results of operations.

 

  We may need to write down goodwill from our balance sheet.

 

We have been involved in a number of business combinations in the past, leading to the recognition of large amounts of goodwill on our balance sheet. Goodwill totaled €2,012.00 million on our balance sheet as of December 31, 2010. Goodwill is allocated to cash generating units (“CGUs”) as described in note 11 to our consolidated financial statements for the year ended December 31, 2010. The recoverable amount of a CGU is estimated at each balance sheet date and is generally determined on the basis of a group-wide estimate of future cash flows expected from the CGU in question. The estimate takes into account, in particular, the removal from service of

certain assets used in our business (such as decommissioning or coldstacking vessels) or any significant underperformance in cash generation relative to previously-expected results, which may arise, for example, from the underperformance of certain assets, a deterioration in industry conditions or a decline in the economic environment. At each balance sheet date, if we expect that a CGU’s recoverable amount will fall below the amount of goodwill recorded on the balance sheet, we may write down that goodwill in part or in whole. Such a write-down would not in itself have an impact on cash flow, but could have a substantial negative impact on our operating income and net income, and as a result, on our shareholders’ equity and net debt/equity ratio.

 

  We invest significant amounts of money in acquiring and processing seismic data for multi-client surveys and for our data library without knowing precisely how much of the data we will be able to sell or when and at what price we will be able to sell the data.

 

We invest significant amounts of money in acquiring and processing seismic data that we own. By making such investments, we are exposed to the following risks:

 

 

  Our results of operations may be significantly affected by currency fluctuations.

 

We derive a substantial portion of our revenues from international sales, subjecting us to risks relating to fluctuations in currency exchange rates. Our revenues and expenses are mainly denominated in U.S. dollars and euros, and to a significantly lesser extent, in Canadian dollars, Brazilian reais, Australian dollars, Norwegian kroner and British pounds. Historically, a significant portion of our revenues that were invoiced in euros related to contracts that were effectively priced in U.S. dollars, as the U.S. dollar often serves as the reference currency when bidding for contracts to provide geophysical services.

 

Fluctuations in the exchange rate of the euro against such other currencies, particularly the U.S. dollar, have had in the past and will have in the future a significant effect upon our results of operations, which are reported in euros. For financial reporting purposes, depreciation of the U.S. dollar against the euro will negatively affect our reported results of operations since U.S. dollar-denominated earnings that are converted to euros are stated at a decreased value. Moreover, and in addition to the impact of the conversion of the U.S. dollar at a decreased value, since we participate in competitive bids for data acquisition contracts that are denominated in U.S. dollars, the depreciation of the U.S. dollar against the euro harms our competitive position against companies whose costs and expenses are denominated to a greater extent in U.S. dollars. While we attempt to reduce the risks associated with such exchange rate fluctuations through our hedging policy we cannot assure you that we will maintain our profitability level or that fluctuations in the values of the currencies in which we operate will not materially adversely affect our future results of operations. As of the date of this annual report, our annual fixed expenses in euros are equal to approximately €400 million and as a consequence, an unfavorable variation of U.S.$0.1 in the exchange rate between the U.S. dollar and the euro would reduce our operating income and our shareholders’ equity by approximately U.S.$40 million. As of December 31, 2010 we and our subsidiaries whose functional currency is the euro had dollar-denominated assets and liabilities of U.S.$1,732.2 million and U.S.$1,726.7 million, respectively. Our net balance sheet exchange rate exposure was thus U.S.$5.5 million before hedging and U.S.$27.8 million after taking into account hedging arrangements of U.S.$33.3 million. As a result of our compliance with IAS 12 (Income Taxes), our results of operation are also exposed to the effect of exchange rate variations on our deferred tax amounts when the functional currency for an entity that owns an asset is not the same as the currency used for taxation purposes.

 

  Our working capital needs are difficult to forecast and may vary significantly, which could result in additional financing requirements that we may not be able to meet on satisfactory terms, or at all.

 

It is difficult for us to predict with certainty our working capital needs. This difficulty is due primarily to working capital requirements related to the marine seismic acquisition business and related to the development and introduction of new lines of geophysical equipment products. For example, under specific circumstances, we may have to extend the length of payment terms we grant to customers or may increase our inventories substantially. We may therefore be subject to significant and rapid increases in our working capital needs that we may have difficulty financing on satisfactory terms, or at all, due notably to limitations in our debt agreements.

 

  Technological changes and new products and services are frequently introduced in the market, and our technology could be rendered obsolete by these introductions, or we may not be able to develop and produce new and enhanced products on a cost-effective and timely basis.

 

Technology changes rapidly in the seismic industry, and new and enhanced products are frequently introduced in the market for our products and services, particularly in our equipment manufacturing and data processing and geosciences sectors. Our success depends to a significant extent upon our ability to develop and produce new and enhanced products and services on a cost-effective and timely basis in accordance with industry demands. While we commit substantial resources to research and development, we may encounter resource constraints or technical or other difficulties that could delay the introduction of new and enhanced products and services in the future. In addition, the continuing development of new products risks making our older products obsolete. New and enhanced products and services, if introduced, may not gain market acceptance and may be materially adversely affected by technological changes or product or service introductions by one of our competitors.

 

  We depend on proprietary technology and are exposed to risks associated with the misappropriation or infringement of that technology.

 

Our ability to maintain or increase prices for our products and services depends in part on our ability to differentiate the value delivered by our products and services from those delivered by our competitors. Our proprietary technology plays an important role in this differentiation. We rely on a combination of patents, trademarks and trade secret laws to establish and protect our proprietary technology. Patents last up to 20 years, depending on the date of filing and the protection accorded by each country. In addition, we enter into confidentiality and license agreements with our employees, customers and potential customers which limit access to and distribution of our technology. However, actions that we take to protect our proprietary rights may not be adequate to deter the misappropriation or independent third-party development of our technology. Although we do not believe that any current litigation involving our intellectual property rights or the intellectual rights of others will have a material impact on us, such litigation may take place in the future. See “Item 4 — Legal Proceedings”. In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent as either the laws of France or the laws of the United States, which may limit our ability to pursue third parties that misappropriate our proprietary technology.

 

  The nature of our business subjects us to significant ongoing operating risks for which we may not have adequate insurance or for which we may not be able to procure adequate insurance on acceptable terms, if at all.

 

We are exposed to significant ongoing operating risks:

 

 

We have put in place insurance coverage against operating hazards, including product liability claims and personal injury claims, damage, destruction or business interruption related to our equipment, data processing centers, manufacturing centers and other facilities to the extent deemed prudent by our management and in amounts

we consider appropriate in accordance with industry practice. Whenever possible, we obtain agreements from customers that limit our liability.

 

However, we cannot assure you that the nature and amount of insurance will be sufficient to fully indemnify us against liabilities arising from pending and future claims or that our insurance coverage will be adequate in all circumstances or against all hazards, and that we will be able to maintain adequate insurance coverage in the future at commercially reasonable rates or on acceptable terms.

 

  Disruptions to our supply chain may adversely affect our ability to deliver our products and services to our customers.

 

Our supply chain is a complex network of internal and external organizations responsible for the supply, manufacture and logistics supporting our products and services around the world. We are vulnerable to disruptions in this supply chain from changes in government regulations, tax and currency changes, strikes, boycotts and other disruptive events as well as from unavailability of critical resources. These disruptions may have an adverse impact on our ability to deliver products and services to our customers.

 

  Our failure to attract and retain qualified employees may materially adversely affect our future business and operations.

 

Our future results of operations will depend in part upon our ability to retain our existing highly skilled and qualified employees and to attract new employees. A number of our employees are highly skilled scientists and technicians. We compete with other seismic products and services companies and, to a lesser extent, companies in the oil industry for skilled geophysical and seismic personnel, particularly in times when demand for seismic services is relatively high. A limited number of such skilled personnel is available, and demand from other companies may limit our ability to fill our human resources needs. If we are unable to hire, train and retain a sufficient number of qualified employees, this could impair our ability to compete in the geophysical services industry and to develop and protect our know-how. Our success also depends to a significant extent upon the abilities and efforts of members of our senior management, the loss of whom could materially adversely affect our business and results of operations.

 

  CGGVeritas has had losses in the past and there is no assurance of our profitability for the future.

 

We have experienced losses in the past. In 2007 and 2008, our net profit attributable to shareholders amounted to €245.5 million and €332.8 million, respectively. In 2009 and 2010, we recorded a net loss attributable to shareholders of €264.3 million, and €54.6 million respectively. There is therefore no assurance as to our profitability for the future.

 

Risks related to our industry

 

  The volume of our business depends on the level of capital expenditures by the oil and gas industry, and reductions in such expenditures may have a material adverse effect on our business.

 

Demand for our products and services has historically been dependent upon the level of capital expenditures by oil and gas companies for exploration, production and development activities. These expenditures are significantly influenced by hydrocarbons prices and by expectations regarding future hydrocarbons prices. Oil and gas prices may fluctuate based on relatively minor changes in the supply of and demand for oil and gas, expectations regarding future supply of and demand for hydrocarbons and certain other factors beyond our control. Lower or volatile oil and gas prices tend to limit the demand for seismic services and products.

 

Factors affecting the prices of hydrocarbons (and, consequently, demand for our products and services) include:

 

 

 

  Our backlog includes contracts that can be unilaterally terminated at the client’s option.

 

In accordance with industry practice, contracts for the provision of seismic services typically can be canceled at the sole discretion of the client without payment of significant cancellation costs to the service provider.

 

As a result, even if contracts are recorded in backlog, there can be no assurance that such contracts will be wholly executed by us and generate actual revenue, or even that the total costs already incurred by us in connection with the contract would be covered in full by any cancellation clause.

 

  We are subject to intense competition in the markets where we carry out our operations, which could limit our ability to maintain or increase our market share or maintain our prices at profitable levels.

 

Most of our contracts are obtained through a competitive bidding process, which is standard for the seismic services industry in which we operate. Competitive factors in recent years have included price, crew availability, technological expertise and reputation for quality, safety and dependability. While no single company competes with us in all of our segments, we are subject to intense competition in each of our segments. We compete with large, international companies as well as smaller, local companies. In addition, we compete with major service providers and government-sponsored enterprises and affiliates. Some of our competitors operate more data acquisition crews than we do and have greater financial and other resources. These and other competitors may be better positioned to withstand and adjust more quickly to volatile market conditions, such as fluctuations in oil and gas prices and production levels, as well as changes in government regulations. In addition, if geophysical service competitors increase their capacity (or do not reduce capacity if demand decreases), the excess supply in the seismic services market could apply downward pressure on prices. The negative effects of the competitive environment in which we operate could have a material adverse effect on our results of operations.

 

  We have taken significant measures to adapt our fleet to changes in the seismic market, and we may take temporary additional measures in the future that could impose one-time charges.

 

In order to adjust to reduced demand in the seismic market and to reposition our fleet toward the high-end of that market (more than 10 streamers), we decided in 2009 to reduce our fleet capacity to 18 vessels by decommissioning nine medium-capacity 2D and 3D vessels. This decommissioning program was fully completed as of September 30, 2010. In 2010, we began implementing a vessel upgrade plan in which four vessels (Viking Vanquish, Geowave Master (now named Oceanic Phoenix), Geowave Endeavour (now named Oceanic Endeavour) and Geowave Champion) will enter dry dock between the third quarter of 2010 and the fourth quarter of 2011 for an upgrade of propulsion and streamers (to increase their capacity to 12 streamers). These vessels will be removed from the market during their time in dry dock, which we expect to be approximately three to four months per vessel. In an effort to reposition the 3D fleet toward high capacity vessels, we intend to terminate our charter contract for the eight streamer Commander vessel prior to its scheduled expiration in 2013. Conditions in the seismic market could lead us to further adjust our marine acquisition capacity on a temporary basis, for example by cold stacking some of our vessels, which could trigger additional one-time charges.

 

  We have high levels of fixed costs that are incurred regardless of our level of business activity.

 

We have high fixed costs and data acquisition activities that require substantial capital expenditures. As a result, downtime or low productivity due to reduced demand, weather interruptions, equipment failures or other causes could result in significant operating losses. We estimate that our 2011 vessel upgrade plan will lead to a reduction in our vessel availability rate of approximately five points.

 

Otherwise, CGGVeritas announced, by the end of 2010, a saving plan in order to reduce costs up to U.S.$75 million. These savings will essentially consist of a rationalization of the operations management (lower general and administrative expenses) and of a decrease in costs of sales (purchasing and supply optimization and reduction of non-quality costs).

 

  The revenues we derive from land and marine seismic data acquisition vary significantly during the year.

 

Our land and marine seismic data acquisition revenues are partially seasonal in nature. The marine data acquisition business is, by its nature, exposed to unproductive interim periods due to necessary repairs or transit time from one operational zone to another during which revenue is not recognized. Other factors that cause

variations from quarter to quarter include the effects of weather conditions in a given operating area, the internal budgeting process of some important clients for their exploration expenses, and the time needed to mobilize production means or obtain the administrative authorizations necessary to commence data acquisition contracts.

 

  Our business is subject to governmental regulation, which may adversely affect our future operations.

 

Our operations are subject to a variety of federal, provincial, state, foreign and local laws and regulations, including environmental, health and safety and labor laws. We invest financial and managerial resources to comply with these laws and related permit requirements. Our failure to do so could result in fines or penalties, enforcement actions, claims for personal injury or property damages, or obligations to investigate and/or remediate contamination. Failure to obtain the required permits on a timely basis may also prevent us from operating in some cases, resulting in crew downtime and operating losses. Moreover, if applicable laws and regulations, including environmental, health and safety requirements, or the interpretation or enforcement thereof, become more stringent in the future, we could incur capital or operating costs beyond those currently anticipated. The adoption of laws and regulations that directly or indirectly curtail exploration by oil and gas companies could also materially adversely affect our operations by reducing the demand for our geophysical products and services.

 

We may be affected by new environmental laws or regulations intended to limit or reduce emissions of gases, such as carbon dioxide and methane, which may be contributing to climate change, may impact our operations or, more generally, the production and demand for fossil fuels such as oil and gas. The European Union has already established greenhouse gas regulations, and many other countries, including the United States, are in the process of doing so. This could cause us to incur additional direct or indirect costs resulting from our customers and/or suppliers incurring additional compliance costs that get passed on to us or reduce demand for our products or services.

 

In particular, in the United States, new regulations governing oil and gas exploration and development are being put in place following the Deepwater Horizon platform disaster in the Gulf of Mexico. These new regulations may have a significant financial impact on oil and gas companies that wish to carry out exploration and development projects in deep water Gulf of Mexico. Our client mix could be altered with the disappearance of small and medium sized players, which could decrease our sales of multi-client data. In the short term, as a result of the implementation of new regulations, the United States government may postpone lease sales of blocs identified for March 2011 and August 2011 until late 2011 or 2012, which could have an effect on the profile of multi-client sales in 2011.

 

Risks related to our indebtedness

 

  Our substantial debt could adversely affect our financial health and prevent us from fulfilling our obligations.

 

We have a significant amount of debt. As of December 31, 2010, our net debt, total assets and shareholders’ equity were €1,150 million, €5,324 million and €2,812 million, respectively. We cannot assure you that we will be able to generate sufficient cash to service our debt or sufficient earnings to cover fixed charges in future years.

 

Our substantial debt could have important consequences. In particular, it could:

 

 

  Our debt agreements contain restrictive covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities.

 

The indentures governing our 7 1/2% senior notes due 2015, 9 1/2% senior notes due 2016, and 7 3/4% senior notes due 2017 (the collectively the “senior notes”), the US$1,140 million credit agreement dated January 12, 2007 (the “Senior credit facilities) and our US$200 million French revolving facility dated February 7, 2007 (the “French

revolving facility”) contain restrictive covenants that limit our ability and the ability of certain of our subsidiaries to, among other things:

 

 

Complying with the restrictions contained in some of these covenants requires us to meet certain ratios and tests, relating notably, to interest coverage, total assets, net indebtedness, shareholders’ equity and net result. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures, or withstand a continuing or future downturn in our business.

 

During 2010, we amended our senior credit facilities and our French revolver facility, which now require that we meet the following ratios:

 

 

  If we are unable to comply with the restrictions and covenants in the indentures governing our senior notes, senior facilities agreement, the French revolving facility agreement and other current and future debt agreements, there could be a default under the terms of these indentures and agreements, which could result in an acceleration of repayment.

 

If we are unable to comply with the restrictions and covenants in the indentures governing our senior notes or in other current or future debt agreements, including the senior facilities agreement and the French revolving facility agreement, there could be a default under the terms of these indentures and agreements. Our ability to comply with these restrictions and covenants, including meeting financial ratios and tests, may be affected by events beyond our control. As a result, we cannot assure you that we will be able to comply with these restrictions and covenants or meet such financial ratios and tests. In the event of a default under these agreements, lenders could terminate their commitments to lend or accelerate the loans and declare all amounts borrowed due and payable. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable. If any of these events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us.

 

  We and our subsidiaries may incur substantially more debt.

 

We and our subsidiaries may incur substantial additional debt (including secured debt) in the future. The terms of the indentures governing our senior notes, the senior facilities agreement, the French revolving facility agreement and our other existing senior indebtedness limit, but do not prohibit, us and our subsidiaries from doing so. As of December 31, 2010, we had drawn €3.5 million (U.S.$5 million) under the US revolving credit facility that is part of our senior credit facilities, and we had long-term confirmed and undrawn credit lines amounted to €251 million.

 

If new debt is added to our current debt levels, the related risks for us could intensify.

 

  To service our indebtedness, we require a significant amount of cash, and our ability to generate cash will depend on many factors beyond our control.

 

Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures depends in part on our ability to generate cash in the future. This ability is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

We cannot assure you that we will generate sufficient cash flow from operations that we will realize operating improvements on schedule or that future borrowings will be available to us in an amount sufficient to enable us to service and repay our indebtedness or to fund our other liquidity needs. If we are unable to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing or debt restructuring would be possible, that any assets could be sold or that, if sold, the timing of the sales and the amount of proceeds realized from those sales would be favorable to us or that additional financing could be obtained on acceptable terms. Disruptions in the capital and credit markets, as have been experienced since 2008, could adversely affect our ability to meet our liquidity needs or to refinance our indebtedness, including our ability to draw on our existing credit facilities or enter into new credit facilities. Banks that are party to our existing credit facilities may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time.

 

  Increases in interest rates could adversely affect our results of operations.

 

A significant proportion of our debt consists of fixed-rate bonds, along with some fixed-rate finance leases and fixed-rate medium-term bank credit facilities with variable maturities. This debt is not exposed to interest rate fluctuations. However, drawings under our credit facilities incur interest at variable rates that are reset at each interest period (generally between one and 12 months). As a result, our interest expenses on this debt¹ vary in line with movements in short-term interest rates. In particular, our senior facilities are subject to interest based on U.S. dollar LIBOR with 1.50% floor. Any increase by 50 basis points of LIBOR above the 1.50% floor would increase our interest expense by U.S.$3 million per year.

 

Introduction

 

We are a global participant in the geophysical seismic industry, as both a manufacturer of geophysical equipment and a provider of a wide range of services (including seismic data acquisition and related processing and interpretation software) principally to clients in the oil and gas exploration and production industry. Our operations are organized into two segments: Services and Equipment, in accordance with our internal reporting system, which we use to manage and measure our performance.

 

Our geophysical Equipment segment operates through our subsidiary Sercel, the market leader in the development and production of seismic acquisition systems and specialized equipment in the land and marine seismic markets.

 

The geophysical Services segment is composed of the following activities:

 

 

 

We are a recognized leader in data processing, imaging and reservoir services, which we provide through a worldwide network of 28 open seismic data processing centers and 13 client-dedicated centers. As a result of our

 

 

 ¹ 72% of our debt is fixed rate and 28% of our debt is variable rate.

suite of advanced technologies, developed and improved through continuous innovation, seismic data processing is increasingly integrated into reservoir studies providing enhanced reservoir knowledge and allowing for improved exploitation.

 

We also offer the Hampson-Russell software that has delivered innovative interpretive solutions since 1987. The Hampson-Russell software makes sophisticated technology accessible to the working geophysicist. It has an installed base of more than 1,400 licenses at over 500 petroleum and service companies worldwide.

 

CGGVeritas has more than 100 years of combined operating experience (through CGG and Veritas) and a recognized track record of technological leadership in the science of geophysics. We believe we are well placed to capitalize on the growing importance of seismic technology to enhance the exploration and production performance of our broad base of clients, which includes independent, international and national oil companies.

 

Services accounted for 72% and Equipment accounted for 28% of our consolidated operating revenues for the year ended December 31, 2010.

 

For the year ended December 31, 2010, 27% of our consolidated operating revenues were from North America, 13% from South and Central Americas, 40% from Europe, Africa, Middle East, and 20% from Asia Pacific.

 

Compagnie Générale de Géophysique-Veritas is the parent company of the CGGVeritas Group. We are a société anonyme incorporated under the laws of the Republic of France and operating under the French Commercial Code. Our registered office is at Tour Maine Montparnasse, 33, avenue du Maine, 75015 Paris, France. Our telephone number is (33) 1 64 47 45 00.

 

Our Strategy

 

We intend to continue to strengthen our competitive position in the global geophysical services and equipment markets by capitalizing on growth opportunities resulting from both the application of new technologies in every sector of the oil and gas business — from exploration to production and reservoir management — and from our worldwide presence.

 

To achieve this objective, we have adopted the following strategies:

 

  Actively respond to the current market environment.

 

The volatile and adverse global market and economic conditions commencing in late 2008 and the decreased level of capital expenditures by oil and gas companies adversely affected demand for seismic products and services in 2009. Demand started to recover in 2010 as exploration expenses of oil and gas companies began to increase again. In response to current market conditions, we are rigorously reducing costs across the organization in line with our market outlook. We removed vessels from our fleet in 2009 and 2010, postponed new builds and plan to remove more. In addition, to meet current and future market demand, in particular for increased streamers per vessels, we upgraded one vessel in 2010 and plan to upgrade three additional vessels in 2011. See “Services — Marine Business Line — Marine Seismic Acquisition Fleet”. In addition, we are taking a disciplined approach to capital spending in order to focus on our priority of free cash flow generation. We stabilized capital spending on our multi-client library in 2010 at a level that we plan to maintain in 2011. We are also maintaining strong research and development spending levels and further increasing our focus on leadership in advanced technology.

 

  Focus on growth areas for geophysical services.

 

We believe that our proprietary equipment and software provide us with a competitive advantage in specific growth markets, such as data acquisition in transition zones and difficult terrain, where recent technological advances have made seismic acquisition more feasible. We intend to focus on developing our technological capabilities in emerging markets for geophysical services, such as reservoir appraisal and production monitoring. We also believe that we have unique experience and expertise in complex land seismic acquisition projects in both desert and arctic regions. Further, we believe our geographic footprint will allow us to respond to the growing demand for seismic imaging and reservoir solutions.

 

We also intend to maintain our position in the marine and land seismic market for multi-client data by developing our multi-client data library. We believe that a strong position in this market segment enhances our global competitive position and may provide opportunities for continuing future sales. In developing our multi-client data library, we carefully select survey opportunities in order to maximize our return on investment. We also intend to apply the latest advances in depth imaging technology to a selected part of our existing library.

 

Given the growing importance of geophysics in reservoir characterization, we intend to further develop the synergies between our data processing and reservoir services. This approach places us in a better position to meet the requirements of our clients with an extensive range of integrated services. With the increasing use of wide-azimuth and high resolution surveys and the growing demand for advanced imaging capabilities, we also intend to increase our processing capability in developing disciplines, such as reservoir description and monitoring, including wide-azimuth, multi-component and 4D studies. We also plan to continue promoting and developing our dedicated processing centers within our clients’ offices and developing our regional centers. We opened our thirteenth dedicated processing center in September 2010 for Maersk Oil in Copenhagen.

 

We also intend to set up targeted partnerships through joint-ventures (JVs) in order to address specific market segments or to gain a privileged access to high potential local geographical markets. These include a JV with Gardline in the marine market segment established in May 2010, a JV with Petrovietnam Technical Services Corporation (PTSC) for the Vietnamese offshore market announced in December 2010, a JV with PT Elnusa Tbk (Elnusa) for the Indonesian offshore market announced in February 2011 and a JV with JSC Geotech Holding (Geotech) for the Russian offshore market announced in February 2011.

 

  Develop technological synergies for products and capitalize on new generation equipment.

 

We believe Sercel is the leading manufacturer of land, marine and subsea geophysical equipment. We plan to continue developing synergies among the technologies available to Sercel and to capitalize fully on our position as a market leader. Through our research and development, we seek to improve existing products and maintain an active new product development program in all segments of the geophysical equipment market (land, marine and ocean-bottom).

 

  Develop and utilize innovative technology.

 

The significant technological developments in seismic services over the last decade have produced a marked change in the sector. The development of 4D and wide-azimuth techniques (providing time lapse views and enhanced illumination of the reservoir as well as improved image resolution) now allows operators to better locate and monitor reservoir performance. This possibility broadens the use of seismic techniques from pure exploration (early cycle) into a tool for reservoir development, management and production (late cycle). Importantly, these techniques require more vessel time than traditional data acquisition. For example, three to six times more vessel time is required to shoot wide-azimuth data than traditional 3D.

 

Launching BroadSeis was our main technological event in 2010. This technique improves considerably the quality of data acquired by streamers by widening the range of recorded frequencies. When less attenuated, low frequencies allow for clearer images much deeper into the earth, whereas high frequencies enhance the image resolution at a level never attained before. BroadSeis relies on the combination of three differentiation factors developed by us: (i) the Sercel solid streamer, the most quiet in the market ; (ii) an original acquisition set-up based on a specific positioning of streamers at variable depth in water; and (iii) innovative processing algorithms that are adapted to this specific acquisition configuration. Patent applications have been filed for the different components to ensure we maintain exclusive rights over this technique. Around ten test acquisitions were carried out in 2010, most of them in association with customers, which we believe indicates a real interest for this new technology. The industrialization phase of BroadSeis will now enable us to quickly expand the use of this process, which will be a key differentiation factor for our marine acquisition in 2011.

 

We believe that growth in demand for geophysical services will continue to be driven in part by the development of new technologies. The industry is increasingly demanding clearer seismic imaging and better visibility, particularly underneath salt layers. We expect multi-azimuth, wide azimuth, multi-component (3C/4C) surveys and time-lapse (4D) surveys to become increasingly important for new production-related applications, particularly in the marine sector, and expect specialized recording equipment for difficult terrain to become more important in land seismic data acquisition, particularly in transition zones, shallow water and arctic areas. We believe that to remain competitive, geophysical services companies will need to combine advanced data acquisition technology with consistently improving processing capacity in order to reduce further delivery times for seismic services.

 

Our strategy is to continue our high level of research and development investment to reinforce our technological leadership. We also intend to take advantage of our full range of integrated services to enhance our position as a market leader in:

 

 

 

  Emphasize client service.

 

We believe it is important to operate in close proximity to our clients to develop a better understanding of their individual needs and to add measurable value to their business processes. We respond to these needs by creating new products or product enhancements that improve the quality of data and reduce the data delivery time to clients. We believe that our regional multi-client and dedicated data processing centers in our clients’ offices provide us with an advantage in identifying contract opportunities, optimizing service to clients and developing products responsive to new market demands, such as seismic techniques applied to reservoir management. We believe that we are well positioned to benefit from the industry trend towards increased outsourcing. This trend is leading oil and gas companies to place greater emphasis on relationships and service quality (including health, safety and protection of the environment) in their selection of third party service providers, including geophysical services providers.

 

  Provide integrated services.

 

We are committed to providing clients with a full array of seismic data services, from acquisition and processing to data interpretation and management. We believe that integration of compatible technology and equipment increases the accuracy of data acquisition and processing, enhances the quality of our client service and thereby improves productivity in oil and gas exploration and production. Our clients increasingly seek integrated solutions to better evaluate known reserves and improve the ratio of recoverable hydrocarbons from producing fields. We are continuing to develop our ability to provide geosciences solutions through a combination of various exploration and production services, including technical data management, reservoir characterization and interpretation of well information.

 

  Develop well-positioned data libraries.

 

We intend to take advantage of our recent vintage, well-positioned seismic data libraries and will capitalize on our strong experience in the wide azimuth technology. The industry’s growing interest in wide-azimuth technology to explore complex geological environments has translated into high pre-funding levels for our Walker Ridge, Green Canyon, Garden Banks and Three Corners surveys in the Gulf of Mexico. Onshore, our land library offers additional potential in North America, particularly in the shale gas plays. Our seismic data library is a strength in a market where a global library portfolio is increasingly attractive to clients.

 

  Develop reservoir applications.

 

Seismic data was historically mainly used by oil and gas companies for exploration purposes and later became a recognized tool for field development and reservoir management. We are now progressively extending our core business towards compiling and analyzing seismic data of existing reservoirs. Through high-resolution images and our expertise in 4D seismic and permanent monitoring, we aim to assist hydrocarbon producers in better characterizing and predicting the static properties and dynamic behavior of their reservoirs.

 

  Enhance our cash liquidity position.

 

We are also taking steps to enhance our cash liquidity position, increase our flexibility under our credit facilities, extend our existing debt maturities, and bolster our balance sheet in an uncertain global economic environment. To those ends, we repaid €35 million under our French revolving facility on February 26, 2010, we amended our US senior facilities agreement on July 15, 2010, and we amended our U.S.$200 million French revolving facility, dated February 7, 2007, on November 4, 2010.

 

These amendments increased our flexibility under the financial covenants by modifying the interest coverage and leverage ratios, and extended some of our existing debt maturities. In consideration of these additional amendments, we increased by 100 points basis the applicable percentage for borrowing under the tranche of the US senior facilities whose maturity was extended and we increased the applicable percentage for borrowing under the French revolving facility by 25 basis points and will be further adjusted taking into account our corporate ratings. See “Item 5: Operating and Financial Review and Prospectus — Liquidity and Capital Resources — Financing Arrangements”.

 

Industry Conditions

 

Overall demand for geophysical services and equipment is dependent on spending by oil and gas companies for exploration, production development and field management activities. This spending depends in part on present and expected future oil and gas prices and the ability of our customers, particularly the small independent oil and gas companies, to secure financing for their projects. On the seismic supply side, decisions for capacity adjustments are based on estimates of demand for seismic services in the coming months (for land crews) or in two to three years ahead (for marine seismic vessels). As a result, the supply and demand balance in seismic services is affected by decisions that were made up to three years earlier based on projected demand and from actual exploration expense levels of oil and gas companies.

 

In this context, we believe that the short-term outlook for the geophysical services sector, particularly the marine segment, is characterized by a continuing recovery in demand that will eventually satisfy the current market overcapacity and trigger a price increase. We also believe that this continuing recovery in demand should sustain the current investment level in seismic equipment. Our short-term outlook lies on the following market analyses:

 

 

Longer term, we believe that the outlook for both the geophysical services sector and the geophysical equipment segment is fundamentally positive for a number of reasons:

 

 

 

Each day, three to four million barrels of new oil have to be found in deeper and more complex geology in order to offset the declining rates of the existing reserves. Gas production from shale rocks, where seismic studies are used to enhance the yield, has developed remarkably well in North America, and may expand to other continents. We expect these fundamental trends to continue to drive increased demand for high-end seismic equipment and services in the medium-term. We believe that we are in a strong position to benefit from these long term trends.

 

History and Development of the Company

 

CGG was established on July 23, 1931 to develop and market geophysical techniques for appraising underground geological resources. Since that time, CGG gradually specialized in seismic techniques adapted to oil and gas exploration and production, while continuing to develop a broad range of other geophysical activities. On January 12, 2007, CGG acquired Veritas through a part cash, part stock transaction. CGG was renamed Compagnie Générale de Géophysique-Veritas (“CGGVeritas”), a société anonyme incorporated under the laws of the Republic of France and operating under the French Code de commerce, with a duration until 2030.

 

Over the course of the last three years, we have completed various acquisitions and disposals which are described under “Item 5: Operating and Financial Review and Prospects — Factors Affecting our Results of Operations — Acquisitions and Disposals” included elsewhere in this annual report. Our historical and ongoing capital expenditures and sales of tangible assets are described under “Item 5: Operating and Financial Review and Prospects — Liquidity and Capital Resources” included elsewhere in the annual report.

 

Business Overview

 

Our operations have historically been organized into two main segments: Services and Equipment. Services accounted for 72% and Equipment accounted for 28% of our consolidated revenues for the year ended December 31, 2010.

 

As part of a global group reorganization, we reorganized the structure of our Services segment in July 2010. Our Services segment was previously organized by region. Since July 2010, our Services segment has been organized by division in order to enhance our operational excellence, leverage on our advanced technologies and better promote our entire range of services, with a specific focus on providing comprehensive solutions to our clients. We believe that our capacity to provide integrated geophysical solutions is a significant competitive advantage.

 

We also created three new group transverse functions: Technology, Global Operational Excellence and Geomarkets and Global Marketing. These are in addition to the existing functions of Finance and Strategy, General Secretary and Human Resources.

 

The Technology function prepares the R&D strategy of the Group, follows its implementation and fosters innovation. It is also responsible for the management of our intellectual property.

 

The mission of Global Operational Excellence is to promote operational efficiency and the sharing of best practices within the Group. In addition, this function is in charge of managing the Sourcing & Supply Chain department, the Quality department, and the IT infrastructure, security and internal services.

 

Geomarkets & Global Marketing is in charge of coordinating the commercial action plans in respect of customers and the Group’s prospects and is the Group’s local representative, at country level, for customers and administrative authorities.

 

The commercial activities for Equipment and Services are carried out in 19 key countries or geomarkets, including the United States, the United Kingdom, UK, France, Brazil, Russia, China, India, Saudi Arabia and Asia.

 

In 2010, our two most significant customers accounted for 6.9% and 6.0% of our consolidated revenues compared with 6.8% and 5.3% in 2009 and 3.9% and 3.8% in 2008.

 

Operating Revenues Data

 

  Revenues by Activity

 

The following table sets forth our consolidated operating revenues by activity in millions of euros or dollars, as the case may be, and the percentage of total consolidated operating revenues represented thereby, for the periods indicated:

 

 

 

Notes:

 

 

  Revenues by Region (by location of customers)

 

The following table sets forth our consolidated operating revenues by region in millions of euros or dollars, as the case may be, and the percentage of total consolidated operating revenues represented thereby, for the periods indicated:

 

 

Services

 

The geophysical Services segment is composed of the following activities:

 

 

  Land Business

 

  Land Seismic Acquisition

 

Land seismic acquisition includes all seismic surveying techniques where the recording sensor is either in direct contact with, or in close proximity to, the ground. Our land business line offers integrated services, including the acquisition and on site processing of seismic data on land, in transition zones and on the ocean floor (seabed surveys). We undertake land surveys with both a contract and multi-client basis.

 

We are a significant land seismic acquisition contractor worldwide, including in North America, and particularly in difficult terrain. In 2010, we had an average of 15 active land crews performing 3D and 2D seismic surveys. Total land seismic acquisition activities accounted for 18% of our consolidated operating revenues in 2010. Contracts for land seismic acquisition accounted for 13% and land multi-client surveys accounted for 5% of our consolidated operating revenue in 2010.

 

Our land operations include surveying and recording crews. Surveying crews lay out the lines to be recorded and mark the sites for shot-hole placement or equipment location (except for “stakeless” operations where the sources locations are indicated through GPS tools rather than marked on the field). Recording crews produce acoustic impulses and use recording units to synchronize the shooting and record the seismic signals via geophones. On a land survey where explosives are used as the acoustic source, the recording crew is supported by several drill crews. Drill crews operate ahead of the recording crew and bore shallow holes for explosive charges which, when detonated by the recording crew, produce the necessary acoustic impulse. Seismic surveying in transition zones and on the sea-bed is carried out by laying cables or other stationary measuring devices on the ocean floor.

 

Land seismic crews are equipped with advanced equipment and software adapted to the various types of terrain and conditions, including: the Sercel 408UL and 428XL seismic data recorders; the Sercel SeaRay bay cable and the Trilobite autonomous recording node for sea-bed operations; the Sercel Nomad 65 vibrators, the Sercel VE 432 and VE 464 vibrator electronic control system used to synchronize and verify the emission of acoustical waves by vibrators; DSU3 Sercel digital 3 components sensors; patented high vibroseis technologies such as HPVA and V1 which seek to increase the productivity of a crew; patented vibroseis broadband solution (EmphaSeis) which seek to broaden the frequency content of the signal emitted; and on-site processing software for acquired data.

 

We believe that our technology and our experience enable us to offer high quality, fully integrated land seismic services. We have pioneered real-time positioning of geophones and seismic sources, quality control of positioning during land surveys, and on-site processing, which together increase the accuracy and efficiency of such surveys.

 

One of the challenges inherent in land seismic acquisition surveys is gathering data without disrupting the sensitive ecosystems in which such surveys are frequently located. We have developed a strong position in environmentally sensitive zones, such as mountainous regions, tropical forests and swamps, by following a strict policy of preserving the natural environment to the extent possible. We also work in conjunction with the local community at site locations, hiring local employees and obtaining necessary local authorizations to alleviate potential opposition to our operations.

 

The difficulty of access to survey sites is a major factor in determining the number of personnel required to carry out a survey and the cost of a survey. A full crew for a land or transition zone survey may range from a total of less than 100 to a few thousand members (principally composed of local employees in the latter case), and the cost of a survey can range from several hundred thousand to several million dollars per month, depending on the size of the team and the type and difficulty of the survey.

 

We work closely with our clients to plan surveys in accordance with their specifications. This provides us with a competitive advantage in being selected to carry out surveys, whether such surveys are awarded based on competitive bids or directly negotiated agreements with clients. We regularly conduct land seismic acquisition surveys for national and international oil companies.

 

We have developed partnerships with local industry-related companies in several countries, including Saudi Arabia, other Gulf Cooperation Council (GCC) countries, Indonesia and Colombia. We contribute our international expertise, technical know-how, equipment and experienced key personnel to these partnerships as needed, while local partners provide their logistical resources, equipment and knowledge of the environment and local market.

 

In Saudi Arabia, our land seismic acquisition activities are conducted through Arabian Geophysical & Surveying Co. (“Argas”), a joint venture owned 49% by us and 51% by TAQA, our local partner. Since June 2006, our other Middle East operations are conducted through Ardiseis, a joint venture owned 51% by us and 49% by TAQA.

 

  Land multi-client Library

 

In 2010, we invested €64 million (U.S.$85 million) in multi-client land seismic surveys, mainly in North America. Total revenues from multi-client land seismic surveys in 2010 were €110 million (U.S.$146 million), a 44% increase in dollar terms year on year. Multi-client after-sales were €52 million (U.S.$69 million) for 2010 driven by demand in our Canadian and US lower 48 states data library. The pre-financing level was high at 90% and as of December 31, 2010, the net book value of our land multi-client library was €101 million (U.S.$135 million).

 

  Land Seismic Acquisition Business Development Strategy

 

Our land seismic acquisition services are geographically and technologically well placed for high-end positioning and further development of local partnerships. We have developed a unique expertise in North America’s arctic regions, in the Middle-Eastern deserts and in shallow water / transition zone areas.

 

In North America, we believe that the demand for land seismic acquisition services and for technology in particular should experience moderate growth for contract activities. The strong interest for shale gas and shale oil plays should represent an opportunity for the land multi-client production and the microseismic services in which we intend to play a significant role in the future. In other geographical areas, the national oil companies are notably requesting increasingly advanced technologies, either in desert areas with very large channel count crews and high vibroseis productivity, or complex shallow water surveys using Ocean Bottom Cables such as the 4C Sercel SeaRay system. Our strategy for the land acquisition division is therefore to:

 

 

We also plan to continue investing in multi-client land seismic data libraries, especially in the U.S, where we have a strong and recent vintage library.

 

  Marine Business

 

  Marine Seismic Acquisition

 

We provide a full range of 3D marine seismic services, principally in the Gulf of Mexico, the North Sea and off the coasts of West Africa and Brazil, as well as in the Asia-Pacific region. We also have expertise in frontier areas and have been pioneering in the Arctic seas and the East coast of Africa.

 

Marine seismic surveys are conducted through the deployment of submersible cables (streamers) and acoustic sources (airguns) from marine vessels. Such streamers are each up to 10 kilometers long and carry hydrophone groups normally spaced 12.5 meters apart along the length of the streamer. The recording capacity of a vessel is dependent upon the number of streamers it tows and the number of acoustic sources it carries, as well as the configuration of its data recording system. By increasing the number of streamers and acoustic sources used, a marine seismic operator can perform large surveys more rapidly and efficiently.

 

We undertake both contract and multi-client marine seismic surveys. Contract surveys generally provide for us to be paid a fixed fee per square kilometer of data acquired. When we acquire marine seismic data on a contract basis, the customer contracts to pay for and directs the scope and extent of the survey and retains ownership of the

data obtained. Some contracts also compensate us for external factors preventing acquisition such as abnormal weather. In regions where there is extensive petroleum exploration, such as Brazil, the Gulf of Mexico, West Africa, the Mediterranean Sea and the North Sea, we also undertake multi-client surveys, in which we fund the survey ourselves and retain ownership of the seismic data. This enables us to provide multiple companies access to the data by way of license. As a result, we have the potential to obtain multiple and higher revenues, while our customers who license the data have the opportunity to pay lower prices. The capacity to both acquire and process marine seismic data is an important element of our overall strategy to maintain and develop our leading position in marine seismic data acquisition and processing.

 

We operated more than 83% of our high-end 3D fleet on contract in 2010.

 

Total marine activities accounted for 40% of our consolidated operating revenue in 2010. Marine seismic acquisition contracts accounted for 27% and multi-client marine accounted for 13% of our consolidated operating revenue in 2010.

 

  Marine Seismic Acquisition Fleet

 

We operated a combined fleet of 19 vessels at the end of 2010, including seven high capacity 3D vessels (12 or more streamers), eight 3D vessels with 8 to 10 streamers, and four small capacity 3D/2D vessels. With this fleet we can increase our geographical coverage and minimize unproductive time by reducing vessels’ transit between areas of operation. Each vessel is equipped with geophysical recording instrumentation, digital geophysical streamer cable, cable location and geophysical data location systems, multiple navigation systems, a source control system that controls the synchronization of the energy source, and a firing system that generates the acoustic impulses. Streamer cables contain hydrophones that receive the acoustic impulses reflected by variations in the subsurface strata.

 

The CGG Alizé, Oceanic Challenger, Symphony, Viking Vision, Viking Vanquish, Geowave Endeavour (now named Oceanic Endeavour) and Oceanic Vega are each capable of deploying at least twelve streamers simultaneously. Most of our high capacity 3D vessels are equipped with Sentinel solid streamers, which offer numerous advantages over fluid- or gel-filled streamers, such as the ability to work in rougher seas and to record more desirable frequencies with less noise and less downtime and also eliminate the risk of oil spills due to damages to streamers. In 2010, we continued performance upgrades, equipping four more vessels, the Oceanic Vega, Veritas Viking II, Viking Vanquish and Geowave Endeavour (now named Oceanic Endeavour), with the Nautilus system allowing us to control the lateral positioning of the towed streamers.

 

Our 2D vessels are used for 2D surveys or, when required, as source vessels for more complex operations, which have higher margins, such as for wide azimuth or complex undershooting surveys.

 

In addition, in 2010 we announced a modernization plan for our fleet of vessels to strengthen our position in the 12-streamer seismic vessel segment. Following the upgrade of the Viking Vanquish completed in 2010, we plan to dry dock three additional high-capacity vessels (the Geowave Master (now named Oceanic Phoenix), the Geowave Endeavour (now named Oceanic Endeavour) and the Geowave Champion) in 2011 for upgrades to their propulsion systems and streamers. As part of our efforts to reposition our 3D fleet towards the high-capacity segment, we also intend to cancel the charter of the Geowave Commander, a vessel capable of towing only 8 streamers, in 2011, prior to its scheduled expiration date in mid-2013. Those adaptation measures are part of an overall savings plan announced by the Group end of 2010, which resulted in a restructuring charge of U.S.$37 million.

 

We own some of our vessels, we co-own two and we use the others pursuant to time charters or bareboat charters. This flexibility allows us to adjust our fleet according to market requirements. The 3D vessels we own are the Oceanic Challenger, Amadeus, Geowave Voyager (since January 2011) and the Symphony. The low capacity 3D/2D vessel we own is the Princess. We co-own the CGG Alizé and the Oceanic Vega. The other vessels are chartered.

 

In 2007, we entered into an agreement with Eidesvik Seismic Vessel AS for the supply of two large newly-built seismic vessels. The two vessels are of an extremely advanced specification, incorporating many unique features based on the most recent X-BOW design of Ulstein Design AS. The first, Oceanic Vega, was commissioned in July 2010. The second one, Oceanic Sirius, will be delivered in September 2011. Both of them are under 12-year charter agreements (a bareboat charter for Oceanic Vega and a time charter for the Oceanic Sirius to be assigned to Oceanic Seismic Vessel AS as the new owners). These two high-capacity, innovative vessels are key components of our strategy of progressive fleet renewal, involving the staged retirement of the former generation of lower capacity vessels in conjunction with the introduction of these new platforms. The new vessels are purpose-designed for the efficient deployment of industry-leading Sercel solid streamer technology and Nautilus steerable streamer capability and configured for spreads of up to 16 long streamers, or 20 streamers for high-density applications.

 

In 2010, three low capacity 2D vessels (the Malene Ostervold, Pacific Titan and Pacific Sword) were decommissioned as part of the marine capacity adjustment program that we began in 2009. In 2011 the Pacific Finder will replace the Veritas Voyager which is due to be decommissioned at end of its time charter in July 2011.

 

The following table provides certain information concerning the seismic vessels we currently operate.

 

 

 

Notes:

 

 

  Marine multi-client Library

 

Our policy is generally to require a minimum share of the estimated cost of each multi-client survey to be covered by pre-commitments from clients (pre-funding) prior to commencement. We treat these multi-client projects as investments. In determining whether to undertake multi-client surveys, we consider factors that include the availability of oil and gas companies to pre-fund the survey, the location to be surveyed, the probability and timing of any future lease concessions and development activity in the area and the availability, quality and price of competing data. Once the final products are available to the market, customers license the data as-is (“after-sales”).

 

Multi-client survey production accounted for 17% of our high-end 3D fleet utilization in 2010. See “Item 3: Key Information — Risk Factors — Risks Related to Our Business — We invest significant amounts of money in acquiring and processing seismic data for multi-client surveys and for our data library without knowing precisely how much of the data we will be able to sell or when and at what price we will be able to sell the data.”

 

The multi-client libraries provide “prospect-ready” 3D or 2D data and therefore accelerate the exploration-production process. We believe that having a high quality and well located multi-client data library is important for our ability to generate cash flow in the future.

 

In 2010, we expanded the size and the value of our US Gulf of Mexico, Brazilian, and North Sea multi-client dataset by acquiring new blocks in key areas and by imaging the subsurface with our latest processing technology. In particular, we used wide azimuth technology in the deep offshore waters of the Gulf of Mexico for improved sub-salt illumination.

 

In 2010, we invested U.S.$206 million (€155 million) totally in multi-client library acquisition and processing. Total revenues from multi-client marine seismic acquisition were U.S.$388 million (€292 million) in 2010, a 6% decrease in dollar terms from 2009.

 

The pre-funding level was at 80% while well positioned multi-client libraries benefited from increased customer interest. As of December 31, 2010, the net book value of our marine multi-clients library was U.S.$468 million (€350 million).

 

In 2010, our wide-azimuth surveys in the Gulf of Mexico continued to receive a very high level of interest from all actors involved in deep water exploration. Our last wide azimuth survey Three Corners, was acquired during the first half of 2010. At the end of 2010, our wide-azimuth coverage stood at approximately 2,060 OCS blocks, more than 50,000 square meters The implementation of the drilling and seismic moratorium in the Gulf of Mexico following the Deepwater Horizon platform disaster slowed the development of our long term programs. We anticipate however that this situation will stabilize in the first half of 2011.

 

In Brazil we continued to extend our existing Cluster survey in the Santos basin to the south, targeting key pre-salt prospects. The Brazilian coverage now stands at approximately 90,000 square meters. The Depth reprocessing of our existing survey has provided enhanced images of pre-salt areas where most of the recent key discoveries were made.

 

In the North Sea a new core area was identified in the Southern Basin and the first phase of a multi-year program was completed in the last quarter 2010.

 

  Seabed

 

Marine seismic data can also be acquired on the seabed and Ocean Bottom Seismic (OBC) data is of superior quality, but because this method was cumbersome and expensive in the early days, the towed streamer method became the dominant way to collect seismic data at sea. In recent years the improvements in equipment and survey efficiency and the need for more sophisticated data have revived OBC as a viable seismic data survey method. Today, oil companies frequently consider OBC to be the best seismic method for complex and subtle reservoirs analysis. For many years, we have been a leader in OBC both in shallow and deep waters. The two most common ways to collect OBC data are by deploying a cable or by placing discrete point receivers (nodes) on the seafloor which record data before retrieval and redeployment to cover a wide area. We are currently the only company in the industry that offers both methods. Our OBC group, with its strong focus on R&D, is located in the city of Bergen, on the west coast of Norway.

 

Recently, another dimension has been added to seabed seismic data acquisition by trenching cables into the seafloor for permanent reservoir monitoring. An early mover in this area, we offer high-end electrical cables through Sercel and modern fiber optic cables through Optoplan. We believe we are the only company in the industry that can offer a total package of equipment, installation, data collection, processing and reservoir characterization for permanent reservoir monitoring.

 

  Marine Seismic Acquisition Business Development Strategy

 

     Marine contract

 

We believe that marine seismic services constitute one of the essential pillars of a firm presence in the seismic sector and therefore want to maintain a strong position especially in the high-end 3D seismic segments in contract and multi-client surveys.

 

Our marine capacity adjustment program initiated in mid-2009 will contribute to rejuvenating the fleet, with the average vessel-age decreasing below 11 years, and to repositioning the fleet in the high -end 3D segment, with the average number of towed streamers per 3D vessels increasing above 11 in 2011.

 

  Marine multi-client

 

We intend to take advantage of our recent vintage, well positioned seismic data library. We anticipate resuming our investment in wide azimuth programs in 2011 if the situation clarifies in the Gulf of Mexico and we will actively pursue our investment in other established data library areas.

 

For 2011, we intend to continue to develop our library in the North Sea and to diversify our portfolio by entering into new core areas identified in the Far East. We will continue using advanced technologies such as Wide Azimuth and Broadseis. New surveys are expected to contribute to both portfolio renewal and expansion of existing surveys.

 

  Processing, Imaging and Reservoir Business

 

  Processing, Imaging and Reservoir

 

Seismic data processing operations transform seismic data acquired in the field into 2D cross-sections, or 3D images of the earth’s subsurface or 4D time-lapse seismic data using Geovation and Hampson-Russell software, our proprietary software products, or third party applications. These images are then interpreted by geophysicists and geologists for use by oil and gas companies in evaluating prospective areas, selecting drilling sites and managing producing reservoirs.

 

We provide seismic data processing and reservoir services through our network of data processing centers and reservoir teams located around the world. We operated 42 worldwide processing and imaging centers, including 13 dedicated client centers on December 31, 2010, with over 2,300 staff. Contract revenues from our Processing, Imaging and Reservoir business accounted for approximately 13% of our consolidated revenues in 2010.

 

  Data Processing Activity

 

We process seismic data acquired by our land and marine seismic acquisition crews as well as seismic data acquired by non-affiliated third parties. Wide-Azimuth and high-density acquisition trends in marine and land seismic data have been a significant source of the growth in demand for our data processing services. In addition, we reprocess previously processed data using new techniques to improve the quality of seismic images. Demand for processing and imaging remained relatively strong overall in 2010. High-end imaging technologies were in high demand.

 

Innovation and the rapid development and deployment of new processing and imaging technologies are a very important component of our activities particularly for our own multi-client datasets.

 

We complement our network of international centers with both regional centers, open to all our customers, and dedicated centers that bring processing facilities within our clients’ premises. 13 of our data processing centers are “dedicated” centers that are located in clients’ offices. We believe that these dedicated centers are responsive to the trend among oil and gas companies to outsource processing work. Typically we acquire our computer equipment on two year operating leases, allowing for frequent upgrades to keep pace with rapid changes in computer technologyy.

 

Beyond conventional processing and reprocessing, we are also increasingly involved in reservoir-applied geophysics, an activity that encompasses large integrated reservoir studies from reprocessing to full reservoir simulation. It also includes advanced technology studies such as reservoir characterization, stratigraphic inversion and stochastic reservoir modeling. Our delivery time has decreased in recent years, enabling delivery of data to clients within the same timeframe as work performed directly onboard marine vessels.

 

We operate visualization centers in our Houston, London and Singapore hubs which allow teams of our customers’ geoscientists and engineers to view and interpret large volumes of complex 3D data. The visualization centers have imaging tools used for advanced interpretive techniques that enhance the understanding of regional as well as detailed reservoir geology. These visualization centers allow us to offer our expertise combined with the type of collaborative geophysical model building that is enabling oil companies to explore areas of complex geology such as the large sub-salt plays in the deepwater Gulf of Mexico.

 

We have groups of scientists available to perform advanced geophysical and geological interpretation on a contract basis. These experts work around the world, using third party and our own proprietary software to create subsurface models for our clients and advise them on how best to exploit their reservoirs. Their work is related to exploration as well as production activities.

 

Additionally, we license our proprietary Hampson-Russell and processing software to companies desiring to do their own geophysical processing and interpretation

 

  Data Processing Business Development Strategy

 

Our position in data processing and imaging as well as the skills and reputation of our experts and geoscientists make us the industry benchmark in this segment. Our strategy for the Processing Imaging and Reservoir business is to enhance our particular competences in advanced technologies such as depth imaging, wide azimuth, 4D

processing and reservoir characterization as well as to reinforce our close links with clients through both our open and dedicated centers.

 

Equipment

 

We conduct our equipment development and production operations through Sercel and its subsidiaries. We believe Sercel is the market leader in the development and production of seismic acquisition systems and specialized equipment in the land and marine seismic markets. Sercel is operated as an independent division and makes most of its sales to purchasers other than CGGVeritas. Sercel currently operates five seismic equipment manufacturing facilities, located in Nantes and Saint Gaudens in France, Houston, Singapore and Alfreton in England. In China, Sercel operates through Sercel-JunFeng Geophysical Equipment Co Ltd (“JunFeng”), based in Hebei (China), in which Sercel acquired a 51% equity stake in 2004 and through Sercel Junfeng’s subsidiary Xian Sercel Petroleum Exploration Instrument Co. Ltd (“Xian Sercel”), which Sercel previously owned jointly with BGP and acquired full ownership of in November 2010. In addition, four sites in Toulouse, Les Ulis, Toulon and Brest (France) are dedicated to borehole tools, marine sources and submarine acoustic instrumentation, respectively.

 

In 2010, Sercel had revenues of U.S.$1,000 million (€754 million), a 17% increase in dollar terms from 2009 levels U.S.$858 million (€616 million). Sercel represented 28% of our consolidated revenue in 2010.

 

We estimate that the worldwide demand for geophysical equipment in 2010 increased within the same magnitude, after a decline of one third in 2009. The 2010 increase was driven by the marine demand and the equipment needed for new build vessels while land demand was decreasing with a lower activity in North America and China. Sercel’s market share in the seismic equipment market is estimated at around 60%.

 

  Sercel Activity

 

Sercel offers and supports worldwide a complete range of geophysical equipment for seismic data acquisition, including seismic recording equipment, software and seismic sources, and provides its clients with integrated solutions. Sercel’s principal product line is seismic recording equipment, particularly the 400 family of recording systems, the 408UL and the 428XL.

 

The 428XL was launched on November 2005 as a successor to the 408UL system. We believe that our 400 product series represents the market standard. The 428XL continues the characteristics that made the 408 a success, such as an evolutive architecture and the option of mixing different communication media (cable, radio, micro-wave, laser and fiber-optic) to form a true network allowing the user to define data routing and hence avoid obstacles in the field. In addition, the 428 XL offers enhanced possibilities in high density and multi-component land acquisition and is compatible with 408 field equipment.

 

Like the 408 system, the 428 system can be used with the digital sensor unit (DSU) featuring three component digital sensors based on MicroElectroMechanicalSystems (MEMS). Sercel enhanced its product range in September 2006 by acquiring Vibration Technology Ltd., a Scottish company specialized in wireless acquisition systems whose Unite technology is now fully integrated in the 428 environment.

 

Sercel is also a market leader for vibroseismic vehicles and for vibrator electronic systems (VE 464). Sercel’s latest vibrator family, called Nomad, offers high reliability and unique ergonomic features. Nomad is available with either normal tires or a tracked drive system. The track drive system allows Nomad vibrators to operate in terrain not accessible to vehicles with tires. In sand dunes or arctic conditions, this can improve crew productivity. In particular, the Nomad 90 is capable of exerting a peak force 90,000 pounds and is believed to represent the heaviest vibrator on the market.

 

In the downhole domain, Sercel is offering its latest generation VSP tool, MaxiWave^®,which has been well received by our customers.

 

The Seal, our marine seismic data recording system, capitalizes on the 408 architecture and on our many years of experience in streamer manufacturing and is now implementing the latest 428 technological enhancements. The Seal is currently the sole system with integrated electronics. In 2005, Sercel launched the Sentinel solid streamer, a new product in its Seal line that is the outcome of the technological synergies realized in recent acquisitions. We estimate that Sentinel cables are used to equip a majority of new seismic vessels. In November 2006, Sercel launched SeaRay, an ocean bottom cable offered under several configurations for depth of 100 to 500 meters. This cable is based on the 428 family acquisition systems technology and integrates DSU 3 components.

 

The marine range of products has been further improved with the Nautilus, a totally integrated system for positioning seismic streamers, and the launch of SeaProNav, a navigation software that will allow real-time positioning for streamers.

 

Recently, Sercel, through Optoplan, delivered to a client the first permanent seabed recording system with fiber optic cable.

 

In addition to recording systems, Sercel develops and produces a complete range of geophysical equipment for seismic data acquisition and other ancillary geophysical products such as geophones, cables and connectors. Sercel significantly expanded its product range and increased its market share in the seismic equipment industry with the acquisitions of GeoScience Corporation in December 1999 and Mark Product in 2000. In October 2003, Sercel acquired Sodera S.A., a leading provider of air gun sources used mainly in marine seismic data acquisition. In January 2004, Sercel acquired a division of Thales Underwater Systems Pty Ltd. that develops and manufactures surface marine seismic acquisition systems, particularly solid streamers, and seabed marine seismic acquisition systems. The acquisition of a 51% stake in JunFeng, based in China, in January 2004 reinforced our manufacturing capabilities for geophone, cables and connectors, as well as our presence on the Chinese seismic market. Both Thales’ seismic equipment business and JunFeng have been consolidated within the CGG Group from January 2004. In addition, through the acquisitions of Createch and Orca in 2004, Sercel is continuing its expansion while strengthening its position in two areas with perceived growth potential: sea-floor seismic systems and borehole seismic tools. In September 2006, Sercel acquired Vibration Technology Ltd, a Scottish company specialized in wireless systems. In May, 2008, Sercel acquired Metrolog, specialized in down-hole gauges, and in December 2008, Sercel acquired Quest Geo Solutions, a UK company focusing on navigation software. Early in 2009, Sercel acquired Optoplan, the Norwegian subsidiary of Wavefield specialized in permanent seabed recording systems using fiber optic technology.

 

As a result of these acquisitions, Sercel is a market leader in the development and production of both marine and land geophysical equipment. It is a global provider for the seismic acquisition industry with a balanced industrial position in terms of both product range and geographical presence.

 

  Equipment Business Development Strategy

 

Our strategy for the Equipment segment is to:

 

 

Seasonality

 

Our land activity has increased in North America in the first quarter due to the Alaskan and Canadian winter season but significantly decreases thereafter. In marine seismic acquisition activities are seasonal in nature. We generally experience decreased revenues in the first quarter of each year due to the effects of weather conditions in the Northern Hemisphere and to the fact that our principal clients are generally not prepared to fully commit their annual exploration budget to specific projects during that period.

 

We have historically experienced higher levels of activity in our equipment manufacturing operations in the fourth quarter as our clients seek to fully deploy annual budgeted capital. The same happens in our multi-client activity with oil and gas companies that seek to fully deploy their exploration budget in the last quarter of the year.

 

Intellectual Property

 

We continually seek the most effective and appropriate protection for our products, processes and software and, as a general rule, will file for patent, copyright or other statutory protection whenever possible. Our patents, trademarks, service marks, copyrights, licenses and technical information collectively represent a material asset to our business. However, no single patent, trademark, copyright, license or piece of technical information is of material importance to our business when taken as a whole. As of December 31, 2010, we held or had applied for 235 patents in respect of different products and processes worldwide, including the Optoplan patents acquired with Wavefield. These patents last up to 20 years, depending upon the date filed and the duration of protection granted by each country.

 

Competition

 

  General

 

Most contracts are obtained through a competitive bidding process, which is standard for the industry in which we operate. Important factors in awarding contracts include service quality, technological capacity, performance, reputation, experience of personnel, customer relations and long-standing relationships, as well as price. While no single company competes with us in all of our segments, we are subject to intense competition with respect to each of our segments. We compete with large, international companies as well as smaller, local companies. In addition, we compete with major service providers and government-sponsored enterprises and affiliates. Some of our competitors operate more data acquisition crews than we do and have substantially greater financial and other resources.

 

  Land

 

The land seismic market is extremely fragmented and characterized by intense price competition in its low end segment. The entrance on the international market of a significant number of formerly national competitors has driven prices down. In addition to CGGVeritas, the other significant service providers in the land seismic market are WesternGeco, Global Geophysical Services, BGP, and Geokinetics, with its recent purchase of PGS onshore. We believe that technology, quality of services and price are the principal bases of competition in this market, as well as relationships with local service providers, which are important, as is experience in challenging terrain. CGGVeritas is positioned in the high end segment of this market with, in certain cases, partners who bring local know-how. After a decrease of 15% with a negative impact on prices in 2009, volume in the land seismic market rebounded and increased marginally in 2010, though, with stable market prices.

 

  Marine

 

The offshore sector has four leading participants: WesternGeco, PGS, Fugro and CGGVeritas. From 1999 to mid-2004, the offshore market experienced excess supply, which put downward pressure on prices. Because of the high fixed costs in this sector, excess supply was not reduced by operators but rather channeled into multi-client libraries. Whereas supply remained flat in 2003, demand increased gradually until mid-2004 and more rapidly thereafter, leading to a rapid and significant price recovery .The market upturn was confirmed in the second half of 2004 with a continuous increase of contract volumes and multi-client sales of existing and new libraries, which continued until mid-2008. Following the decline in oil prices in the second half of 2008 and in 2009, demand in seismic services significantly decreased, which, together with the increase in the global fleet, has led to over-capacity in the offshore acquisition market and subsequent downward pressure on prices. We therefore implemented a capacity adjustment plan in 2009, as did some of our major competitors. We estimate the number of 3D vessels (six streamers or more) decreased from 58 vessels at the end of 2008 to 49 at the end of 2009. However, in 2010, as the demand grew again, a significant number of new vessels which were ordered prior to the downturn entered the marine market. In addition, the seismic vessels that were operating in multi-client surveys in the Gulf of Mexico at the time of the “Deepwater Horizon” platform disaster were redeployed to the international contract market. Despite the growth in demand, the marine market remained oversupplied during all of 2010. We estimate the number of 3D vessels (six streamers or more) began increasing again, to 61 vessels at the end of 2010. We foresee an additional capacity increase in 2011, but smaller than 2010. See “— Our Strategy — Actively respond to current market conditions” for certain steps that we are taking to address current market conditions.

 

  Processing, imaging and reservoir

 

The processing, imaging and reservoir sector is led by CGGVeritas and WesternGeco. This market is characterized by greater client loyalty than the acquisition sector, as evidenced by the presence of processing centers on client premises. Processing capacity has multiplied in recent years as a result of improvements in computing technology. This increase in computing power has allowed improved processing quality and deadlines, as well as the use of more complex and accurate algorithms. We estimate that the processing market was down 15% in 2009 and flat in 2010.

 

Equipment

 

Our principal competitor for the manufacture of seismic survey equipment is Ion Geophysical Inc. The market for seismic survey equipment is highly competitive and is characterized by continual and rapid technological change. We believe that technology is the principal basis for competition in this market, as oil and gas companies have increasingly demanded new equipment for activities such as reservoir management and data acquisition in difficult terrain. Oil and gas companies have also become more demanding with regard to the quality of data

acquired. Other competitive factors include price and customer support services. The volume of sales in the seismic equipment market decreased by around one third in 2009, but rebounded by around 15% in 2010, for both marine equipment (streamers for newbuilds and existing vessels upgrades) and land equipment (denser acquisition trend).

 

Organizational Structure

 

CGGVeritas SA is the parent company of the CGGVeritas Group. Its principal subsidiaries are as follows:

 

 

In 2010, to streamline operations and realize other benefits, we continued reorganizing our Services segment by moving several of our subsidiaries, including CGG Nigeria (100%), CGG Vostok (100%), CGGVeritas Services (UK) Holding B.V. (5.65%), CGG Canada Services Ltd (39.16%) to CGGVeritas Services Holding B.V.

 

On January 13, 2011, we bought the shares of the company Voyager A.S. (to be renamed Exploration Vessel Resources II AS), a company registered in Norway, owning the seismic vessel Geowave Voyager.

Property, Plant and Equipment

 

The following table sets forth certain information relating to the principal properties of CGGVeritas Group:

 

 

 

 

We also lease other offices worldwide to support our operations. We believe that our existing facilities are adequate to meet our current requirements.

 

Information concerning our seismic vessels is set out under “Marine Business Line” above.

Environmental Matters and Safety

 

Our operations are subject to a variety of laws and regulations relating to environmental protection. We invest financial and managerial resources to comply with such laws and regulations. Although such expenditures historically have not been material to us, and we believe that we are in compliance in all material respects with applicable environmental laws and regulations, the fact that such laws and regulations are changed frequently prevents us from predicting the cost of impact of such laws and regulations on our future operations. We are not involved in any legal proceedings concerning environmental matters and are not aware of any claims or potential liability concerning environmental matters that could have a material adverse impact on our business or consolidated financial condition.

 

Efforts to improve safety and environmental performance over the last few years continued as some procedures were strengthened and others implemented to increase awareness among personnel and subcontractors, including obligatory regular meetings in the field and onboard our vessels. A comprehensive Health, Safety and Environment management system, placing particular emphasis on risk management, has been in place for many years, covering all activities and is continuously adapted for each segment of activity. It is now fully integrated into a sustainable development program which is in place company-wide, and monitored through our PRISM (People Responsibility Integrated Sustainable Management) reporting system.

 

Legal Proceedings

 

From time to time we are involved in legal proceedings arising in the normal course of our business. We do not expect that any of these proceedings, either individually or in the aggregate, will result in a material adverse effect on our consolidated financial condition or results of operations.

 

ION litigation

 

On October 20, 2006, a complaint was filed against our subsidiary Sercel Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges that several of Sercel Inc.’s seismic data acquisition products that include micro electromechanical systems (MEMS) infringe a U.S. patent allegedly owned by ION. On January 29, 2010, a Texarkana jury found that Sercel Inc. infringed United States Patent N° 5,852,242 and that ION was entitled to U.S.$25.2 million in lost profits. Sercel Inc. asked the court to overturn the jury’s finding on several grounds, including ION’s failure to prove by a preponderance of the evidence that the patent was infringed by Sercel Inc. and the invalidity of the patent due to ION’s failure to disclose in the patent the best way of making the invention.

 

On September 21, 2010, the court rejected the jury’s verdict that faulted Sercel Inc. for infringing US Patent N° 5,852,242 as claimed by ION. This court upheld the jury’s verdict validating the patent, and confirming that the patent had been infringed on certain other grounds. The court concluded that ION’s claim with respect to loss of profits (U.S.$25.2 million) was not admissible and reduced the amount of damages to U.S.$10.7 million.

 

The United States District Court for the Eastern District of Texas entered its final judgment and permanent injunction with regards to the patent lawsuit between Sercel and ION on February 16, 2011. Sercel has and will continue to challenge the verdict and any adverse judgment and injunction as well as any claim for damages by ION. This judgment will be appealed to the United States Federal Circuit Court of Appeals.

 

The injunction exclusively covers the Sercel digital sensor “DSU” technology and is limited to the territory of United States. It does not restrict Sercel to use, manufacture, sell or deliver the DSU products anywhere else in the world. It also does not relate to the Sercel 408UL and 428XL recording systems. Sercel can continue to promote, sell and deliver these systems in the United States. Specifically, the injunction states that the offer to sell the DSU when the manufacture, sale and delivery occur outside the United States does not constitute an act of infringement or a violation of the injunction. Furthermore, the promotion or marketing of the DSU technology in the United States does not violate the injunction when the manufacture, sale and delivery occur outside of the United States.

 

On March 8, 2011 we posted the bond amounting to U.S.$12.8 million corresponding to the total damages award plus a 20% interest and we filed the notice of appeal.

 

The Company does not expect this claim to have any material impact on the Group’s results of operation, financial position, or cash flows. Thus, no provision was recorded in the consolidated financial statements.

 

None.

 

Introduction

 

Beginning July 1, 2010, our Group has been organized in five divisions and currently operates in two industry segments:

 

 

 

 

We report financial information by operating segment in accordance with our internal reporting system and the internal segment information that is used to manage and measure our performance.

 

Operating Results

 

The following operating and financial review and prospects should be read in conjunction with our consolidated annual financial statements and the notes thereto included elsewhere in this annual report, which have been prepared in accordance with IFRS (International Financial Reporting Standards) as issued by the IASB (International Accounting Standards Board) and as adopted by the European Union on December 31, 2010.

 

Factors affecting our results of operations

 

Our operating results are generally affected by a variety of factors, including changes in exchange rates, particularly the value of the euro against the dollar, and changes in oil prices, which are also generally denominated in dollars. See “Trend Information” and “Geophysical market environment” herein.

 

Foreign exchange fluctuations

 

As a company that derives a substancial amount of its revenues from sales internationally, our results of operations are affected by fluctuations in currency exchange rates. Movements between the U.S. dollar and euro or other currencies may adversely affect our business by negatively impacting our revenues and income.

 

As certain trends in our business may be obscured by currency fluctuations, we have converted certain euro amounts in this Operating and Financial Review and Prospects into U.S. dollars. Converted figures are presented only to assist the reader in understanding our results and are not part of our reported financial statements and may not be indicative of changes in our actual or anticipated results. See “Trend Information — Currency Fluctuations” below.

 

Unless otherwise indicated, balance sheet data expressed in U.S. dollars have been converted from euros at the exchange rate on the relevant balance sheet date, and income statement data in U.S. dollars have been converted from euros at the average exchange rate for the relevant year. The exchange rates as of December 31, 2008, 2009 and 2010 were U.S.$1.3917, U.S.$1.4401 and U.S.$1.336, respectively, per euro, and the average exchange rates for the years 2008, 2009 and 2010 were U.S.$1.4793, U.S.$1.3923 and U.S.$1.3285 respectively, per euro.

 

Geophysical Market Environment

 

Overall demand for geophysical services and equipment is dependent on spending by oil and gas companies for exploration, development and production and field management activities. We believe the level of spending of such companies depends on their assessment of their ability to efficiently supply the oil and gas market in the future and the current balance of hydrocarbon supply and demand.

 

The geophysical market has historically been extremely cyclical. We believe many factors contribute to the volatility of this market, such as the geopolitical uncertainties that can harm the confidence and visibility that are

essential to our clients’ long-term decision-making processes and the expected balance in the mid to long term between supply and demand for hydrocarbons. In this context, oil and gas companies, especially the large international oil companies, have budgeted an overall 15% to 20% increase in exploration and production spending in 2011, with a special focus on exploration. This should drive the progressive recovery of our seismic services divisions, especially marine, while Sercel should continue to reap the benefit of its large installed base and the sustained demand for technology intensity.

 

See “Item 4: Information on the Company — Industry Conditions” for a discussion of developments in the geophysical Industry.

 

Acquisitions and disposals

 

Acquisitions and disposals have had a significant impact on our year-on-year revenues. Recent acquisitions and disposals have included:

 

During 2010

 

 

On January 22, 2010, we sold our seismic vessel Harmattan for U.S.$3.4 million.

 

On February 9, 2010, we exercised our purchase option for the seismic vessel Geo Challenger (now named Oceanic Challenger) for NOK250 million. We also sent a termination notice for our time charter on the Pacific Titan.

 

On July 1, 2010, we took delivery of the Oceanic Vega, our new seismic vessel. Eidesvik Vessel A.S., owning the Oceanic Vega, is accounted for under the equity method in our financial statements.

 

 

On June 30, 2010, we entered into an agreement with Norfield AS providing for us to acquire full ownership of the seismic vessel Voyager in exchange for the Venturer and other assets as part of the restructuring of Norfield AS. As a result of such agreement, €59 million of assets to be transferred were classified as “held for sale” on our balance sheet as of December 31, 2010. This agreement was subject to certain conditions precedent that were fullfiled on January 13, 2011.

 

 

On July 2, 2010 CGGVeritas Services Holding BV signed a Memorandum of Association with Gardline Geosurvey Limited to incorporate a new company in Singapore to operate the seismic vessel Duke in the Indian Ocean. CGGVeritas owns 49% of Gardline CGGV Pte. Ltd. This ownership interest is accounted for under the equity method in our financial statements as of December 31, 2010.

 

 

On October 1, 2010, we took delivery of our new headquarter building in Massy pursuant to a 12 year lease contract with a purchase option exercisable from the end of the sixth year until the end of the lease agreement.

 

 

On November 4, 2010, our 51% owned subsidiary Sercel Junfeng acquired full ownership of Xian Sercel through the contribution by Sercel Holding and BGP of their shares in Xian Sercel. Prior to that date, Xian Sercel was accounted for under equity method and is fully consolidated in our financial statements as of December 31, 2010.

 

During 2009

 

 

On January 8, 2009, Cybernetix conducted a €4 million share capital increase that was entirely subscribed by Sercel Holding, bringing its stake to a total of 749,480 shares, representing 46.10% of Cybernetix’s share capital and 43.07% of its voting rights. The French financial markets regulator (Autorité des Marchés Financiers) exempted Sercel Holding from the requirement to conduct a tender offer for all shares when its holding exceeded 33.33%. The consideration for the share capital increase was €2 million in cash and the incorporation of a €2 million cash advance granted by Sercel Holding to Cybernetix in November 2008. Following disposals in 2009, Sercel Holding owned 44.56% of Cybernetix’s share capital and 42.98% of its voting rights as of December 31, 2009. Cybernetix is accounted for under the equity method in our financial statements as we do not have the control.

 

Pursuant to the general meeting of Norfield AS’s shareholders held on May 19, 2009, Wavefield subscribed to a capital increase in Norfield for approximately €3.6 million (U.S.$5 million) by capitalizing an outstanding long-term loan owed to it by Norfield. The capital increase was pro rata to the shareholders’ existing interests in Norfield.

 

 

On May 29, 2009, Statoil Hydro Venture AS exercised its put option with our subsidiary Wavefield with respect to a 37% stake in Multifield for €2.9 million (NOK26 million). As a result, our shareholding in Multifield increased to 80.97%. Multifield is fully consolidated in our financial statements since June 30, 2009.

 

 

On December 10, 2009, Exploration Investment Resources II AS, a wholly-owned subsidiary of CGGVeritas, set up a joint venture with Eidesvik Shipping AS in order to share ownership of the two X-BOW vessels that are currently under construction. As of December 31, 2009, the Group’s interest in the joint venture, Eidesvik Seismic Vessel AS is 49%. This company is accounted for under the equity method in our financial statements as of December 31, 2009.

 

During 2008

 

 

On May 26, 2008, Sercel acquired Metrolog, a privately held company, for €25.7 million paid in cash (including legal fees). Metrolog is a leading provider of high-pressure, high-temperature gauges and other downhole instruments to the oil and gas industry. The purchase price allocation resulted in a goodwill of €14.3 million.

 

 

On June 25, 2008, in conjunction with the Oman business transfer from Veritas DGC Ltd to Ardiseis, we subscribed to the increase of 805 shares in the capital of our subsidiary Ardiseis, and sold 407 Ardiseis shares to Industrialization & Energy Services Company (TAQA) for a total consideration of U.S.$11.8 million. At the end of this transaction our interest in Ardiseis remained unchanged at 51%.

 

 

On October 20, 2008, CGGVeritas Services Holding BV was incorporated in the Netherlands. This allows us to benefit from a structure comparable to similar-sized international industrial groups, within a tax and legal environment better suited to our business needs. With the creation of CGGVeritas Services Holding B.V., all Services operations are conducted under a unified structure at the level of this new entity by the Services management team, which also oversees CGGVeritas Services SA.

 

 

On November 25, 2008, we launched a voluntary exchange offer to acquire 100% of the share capital of Wavefield-Inseis ASA (“Wavefield”). We offered Wavefield shareholders one newly issued CGGVeritas share for every seven Wavefield shares. A total of 90,480,237 shares were tendered in the offer, representing 69.9% of the share capital of Wavefield. In consideration of the Wavefield shares tendered to the offer, we issued 12,925,749 new shares on December 18, 2008. The fair value of those issued shares amounted to €139.0 million.

 

On December 30, 2008, we launched a mandatory public offer for the remaining 38,903,024 outstanding shares (i.e, 30.1% of the share capital) as well as for the 2,892,875 shares that could result from the exercise of stock options. The offer price calculated in accordance with the provisions of Chapter VI of the Norwegian Securities Trading Act amounted to NOK 15.17 per share to be paid in cash. At the end of this mandatory offer period, which expired on January 27, 2009, we acquired 37,043,013 additional shares for a total of 98.6% of Wavefield’s share capital. We then launched a squeeze-out process for the remaining outstanding shares of Wavefield at a price of NOK 15.17 per share to be paid in cash. In February 2009, we acquired Wavefield’s remaining shares for €62 million, which was paid after the objection period expired. As a result, the minority interests on our balance sheet at December 31, 2008, recognized as a financial debt of €62 million due to our obligation to conduct a mandatory public offer, have been cancelled.

 

As of February 13, 2009, we owned 100% of Wavefield’s share capital. Wavefield was de-listed from the Oslo Bors on February 16, 2009. The preliminary goodwill determined as of December 31, 2008 has been revised upwards by an additional €87.7 million, resulting in a total goodwill related to the acquisition of €96.3 million as of December 31, 2009. The principal adjustments were related to fixed assets and unfavorable time charters. The total consideration for the

acquisition in our financial statements, including the remaining 30.1% acquired in February 2009, was €207.1 million (U.S.$288.2 million).

 

Total direct transaction costs related to the acquisition (including advisory fees and legal fees) amounted to €5.9 million and were recognized as part of the cost of the acquisition.

 

 

On December 12, 2008, Sercel acquired Quest Geo Solutions Ltd (“Quest”), a UK-based company, for a price of €5.1 million (GBP3 million, with an additional GBP1 million that will be paid in 2011 provided a certain level of revenues is achieved). Quest is specialized in navigation software for the seismic industry and was already cooperating with Sercel with respect to its SeaProNav products at the date of the acquisition. The purchase price allocation resulted in goodwill of €2.8 million.

 

Backlog

 

Backlog estimates are based on a number of assumptions and estimates, including assumptions as to exchange rates between the euro and the U.S. dollar and estimates of the percentage of completion contracts. Contracts for services are occasionally modified by mutual consent and in certain instances are cancelable by the customer on short notice without penalty. Consequently, backlog as of any particular date may not be indicative of actual operating results for any succeeding period.

 

Backlog for our Services segment represents the revenues it expects to receive from commitments for contract services it has with its customers and, in connection with the acquisition of multi-client data, represents the amount of pre-sale commitments for such data. Backlog for our Equipment segment represents the total value of orders it has received but not yet fulfilled.

 

Our backlog for our Services and Equipment segments was U.S.$1.45 billion as we entered 2011.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies, which we have applied consistently, are fully described in note 1 to our consolidated financial statements included elsewhere in this document. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations, and these are described below.

 

In applying our accounting policies, management makes estimates, assumptions and judgment about uncertain matters that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ materially from those estimates under different assumptions or conditions.

 

Our significant estimates relate mainly to the expected cash-flows used to measure the recoverability of certain intangible assets such as deferred tax assets, our multi-client data library and goodwill and to determine the amortization rate of our multi-client surveys. To calculate the recoverable amount of our goodwill, we use estimates that are based on our outlook for the seismic industry, as well as the expected cash flows in our three-year plan and what we consider to be normative cash flows for the years thereafter. In 2010, our outlook for the seismic industry assumed a recovery starting progressively in the second half of 2011. See note 11 to our consolidated financial statements included elsewhere in this document for the key assumptions used in our determination of asset recoverability and the sensitivity in changes in assumptions. Changed assumptions, in particular the discount rate and the normative cash flow, could significantly affect our impairment result.

 

Operating revenues

 

Operating revenues are recognized when they can be measured reliably, and when it is likely that the economic benefits associated with the transaction will flow to the entity, which is at the point that such revenues have been realized or are considered realizable.

 

Multi-client surveys

 

Revenues related to multi-client surveys result from (i) pre-commitments and (ii) licenses after completion of the surveys (“after-sales”).

 

Pre-commitments — Generally, we obtain commitments from a limited number of customers before a seismic project is completed. These pre-commitments cover part or all of the survey area blocks. In return for the commitment, the customer typically gains the right to direct or influence the project specifications, advance access

to data as it is being acquired, and favorable pricing. We record payments that it receives during periods of mobilization as advance billing in the balance sheet in the line item “Advance billings to customers”.

 

We recognize pre-commitments as revenue when production has started based on the physical progress of the project, as services are rendered.

 

After sales — Generally, we grant a license entitling non-exclusive access to a complete and ready for use, specifically defined portion of our multi-client data library in exchange for a fixed and determinable payment. We recognize after sales revenue upon the client executing a valid license agreement and having been granted access to the data. Within thirty days of execution and access, the client may exercise our warranty that the medium on which the data is transmitted (a magnetic cartridge) is free from technical defects. If the warranty is exercised, the Company will provide the same data on a new magnetic cartridge. The cost of providing new magnetic cartridges is negligible.

 

In case after sales agreements contain multiple deliverable elements, the revenue is allocated to the various elements based on specific objective evidence of fair value, regardless of any separate allocations stated within the contract for each element. Each element is appropriately accounted for under the applicable accounting standard.

 

After sales volume agreements — We enter into a customer arrangement in which we agree to grant licenses to the customer for access to a specified number of blocks of the multi-client library. These arrangements typically enable the customer to select and access the specific blocks for a limited period of time. We recognize revenue when the blocks are selected and the client has been granted access to the data and if the corresponding revenue can be reliably estimated. Within thirty days of execution and access, the client may exercise our warranty that the medium on which the data is transmitted (a magnetic cartridge) is free from technical defects. If the warranty is exercised, the Company will provide the same data on a new magnetic cartridge. The cost of providing new magnetic cartridges is negligible.

 

Exclusive surveys

 

In exclusive surveys, we perform seismic services (acquisition and processing) for a specific customer. We recognize proprietary/contract revenues as the services are rendered. We evaluate the progress to date, in a manner generally consistent with the physical progress of the project, and recognize revenues based on the ratio of the project cost incurred during that period to the total estimated project costs as far as they can reliably be assessed.

 

The billings and the costs related to the transit of seismic vessels at the beginning of the survey are deferred and recognized over the duration of the contract by reference to the technical stage of completion.

 

In some exclusive survey contracts and a limited number of multi-client survey contracts, we are required to meet certain milestones. We defer recognition of revenue on such contracts until all milestones that provide the customer a right of cancellation or refund of amounts paid have been met.

 

Equipment sales

 

We recognize revenues on equipment sales upon delivery to the customer when risks and rewards are fully transferred. Any advance billings to customers are recorded in current liabilities.

 

Software and hardware sales

 

We recognize revenues from the sale of software and hardware products following acceptance of the product by the customer at which time we have no further significant vendor obligations remaining. Any advance billings to customers are recorded in current liabilities.

 

If an arrangement to deliver software, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement is accounted for as a production-type contract, i.e. using the percentage of completion method.

 

If the software arrangement provides for multiple deliverables (e.g. upgrades or enhancements, post-contract customer support such as maintenance, or services), the revenue is allocated to the various elements based on specific objective evidence of fair value, regardless of any separate allocations stated within the contract for each element. Each element is appropriately accounted for under the applicable accounting standard.

 

Maintenance revenues consist primarily of post contract customer support agreements and are recorded as advance billings to customers and recognized as revenue on a proportional performance basis over the contract period.

Other geophysical sales/services

 

Revenues from our other geophysical sales/services are recognized as the services are performed and, when related to long-term contracts, using the proportional performance method of recognizing revenues.

 

Customer loyalty programs

 

We may grant award credits to our main clients. These award credits are contractually based on cumulative services provided during the calendar year and attributable to future services.

 

These credits are considered as a separate component of the initial sale and measured at their fair value by reference to the contractual rates and the forecasted cumulative revenues for the calendar year. These proceeds are recognized as revenue only when the obligation has been fulfilled.

 

IFRIC 13 “Customers Loyalty Programs” issued by the IASB in June 2007 has been applied from December 31, 2008 with the accumulated impact, net of tax, on previous periods recorded in equity as of December 31, 2008. The impact was not material.

 

Multi-client surveys

 

Multi-client surveys consist of seismic surveys to be licensed to customers on a non-exclusive basis. All costs directly incurred in acquiring, processing and otherwise completing seismic surveys are capitalized into the multi-client surveys (including transit costs when applicable). The value of our multi-client library is stated on our balance sheet at the aggregate of those costs less accumulated amortization or at fair value if lower. We review the library for potential impairment at each balance sheet date at the relevant level (independent surveys or groups of surveys).

 

We amortize the multi-client surveys over the period during which the data is expected to be marketed using an amortization rate applied to recognized revenues.

 

Depending on the category of the survey, we use amortization rates of 50%, 65%, 75%, 80% or 83.3% corresponding to the ratio of total estimated costs over total estimated sales.

 

Multi-client surveys are classified into a same category when they are located in the same area with the same estimated sales ratio, such estimates generally relying on the historical patterns. The 65% amortization rate is applied to the surveys acquired as a result of our acquisition of Veritas.

 

For all categories of surveys and starting from data delivery, a minimum straight-line depreciation scheme is applied over a five-year period, if total accumulated depreciation from the applicable amortization rate is below this minimum level.

 

Multi-client surveys acquired as part of the business combination with Veritas and which have been valued for purchase price allocation purposes are amortized based on 65% of revenues and an impairment loss is recognized on a survey by survey basis in case of any indication of impairment.

 

Development costs

 

Expenditures on research activities undertaken with the prospect of gaining new scientific or technological knowledge and understanding are recognized in the income statement as expenses as incurred and are presented as “Research and development expenses — net”. Expenditures on development activities, whereby research finding are applied to a plan or design for the production of new or substantially improved products and processes, are capitalized if:

 

 

The expenditures capitalized include the cost of materials, direct labor and an appropriate proportion of overhead. Other development expenditures are recognized in the income statement as expenses as incurred and are presented as “Research and development expenses — net”.

 

Capitalized development expenditures are stated at cost less accumulated amortization and impairment losses.

 

We amortize capitalized developments costs over 5 years.

 

Research & development expenses in our income statement represent the net cost of development costs that are not capitalized, of research costs, offset by government grants acquired for research and development.

 

Impairment

 

In accordance with IAS 36 “Impairment of assets”, the carrying values of our assets (excluding inventories, deferred tax assets, assets arising from employee benefits and financial assets) are reviewed at each balance sheet date. If any indication exists that an asset may be impaired, we estimate the recoverable amount of this asset. Factors we consider important that could trigger an impairment review include the following:

 

 

The recoverable amount of tangible and intangible assets is the greater of their net fair value less costs to sell and value in use.

 

Goodwill, assets that have an indefinite useful life and intangible assets are allocated to cash generating units. We estimate the recoverable amount of these cash generating units at each balance sheet closing date.

 

We determine the recoverable amounts by estimating future cash flows expected from the assets or from the cash generating units, discounted to their present value using a discount rate that reflects the expected return on invested capital given the characteristics and risks attached to the asset.

 

We recognize an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

 

Impairment losses are recognized in the income statement. Impairment losses recognized in respect of a group of non independent assets allocated to a cash-generating unit are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

 

A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the income statement unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase.

 

Impairment losses recognized on goodwill cannot be reversed.

 

Onerous contracts

 

We record a provision for onerous contracts equal to the excess of the unavoidable costs of meeting the obligations under the contract over the economic benefits expected to be received under it, as estimated by the Group.

Year ended December 31, 2010 compared with year ended December 31, 2009

 

Operating revenues

 

The following table sets forth our consolidated operating revenues by business line, and the percentage of total consolidated operating revenues represented thereby, during each of the periods stated:

 

 

 

Note:

 

 

Our consolidated operating revenues for the year ended December 31, 2010 decreased 2% to €2,186.1 million from €2,233.2 million for 2009. Expressed in U.S. dollars, our consolidated operating revenues decreased 7% to U.S.$2,904.2 million for the year ended December 31, 2010 from U.S.$3,109.3 million for 2009. This decrease was due to our Services segment.

 

Services

 

Operating revenues for our Services segment, which was impacted by the events in the Gulf of Mexico and the continued oversupply in the marine market, decreased 8% to €1,566.9 million for the year ended December 31, 2010 from €1,708.5 million for 2009 and decreased 12% in U.S. dollar terms.

 

Land contract

 

Operating revenues from our Land contract division increased 5% to €286.9 million for the year ended December 31, 2010 from €274.2 million for 2009 and was stable in U.S. dollar terms mainly due to higher activity in North America, driven by oil sand multi-component projects, and Middle East. We operated on average 15 crews worldwide in 2010 compared to 12 crews in 2009, including Argas crews in Saudi Arabia.

 

Marine contract

 

Operating revenues from our Marine contract division for the year ended December 31, 2010 decreased 24% to €585.2 million from €774.5 million for 2009 and decreased 28% in U.S. dollar terms mainly due to challenging market conditions as overcapacity was prolonged by the reduction of activity in the Gulf of Mexico.

 

In 2010, our vessel availability rate was 88% and our production rate was 91%, compared to 89% for 2009 for both.

 

Processing, Imaging and Reservoir

 

Operating revenues from our Processing, Imaging and Reservoir division increased 1% to €292.7 million for the year ended December 31, 2010 from €289.6 million for 2009 and decreased slightly 3% in U.S. dollar terms, which evidences a very good resistance of this segment at the bottom of the cycle. Demand for our high-end depth imaging technologies continued to grow.

 

Multi-client data library

 

Operating revenues from our Multi-client Division increased 9% to €402.1 million for the year ended December 31, 2010 from €370.2 million for 2009 and increased 4% in U.S. dollar terms.

 

Multi-client marine data library revenues decreased 2% to €292.2 million for the year ended December 31, 2010 from €297.2 million for 2009 and decreased 6% in U.S. dollar terms. Prefunding was €127.9 million for the year ended December 31, 2010 with a prefunding rate of 83% compared to €188.1 million for 2009. After-sales increased 50% to €164.3 million for the year ended December 31, 2010 from €109.2 million for the year ended December 31, 2009 and 43% in U.S. dollar terms. This increase was mainly fueled by high marine sales worldwide, including sales in the Gulf of Mexico and Brazil.

 

Multi-client land data library revenues increased 50% to €109.9 million for the year ended December 31, 2010 from €73.0 million for the comparable period of 2009 and increased 44% in U.S. dollar terms. Prefunding was €57.9 million with a prefunding rate of 90% for the year ended December 31, 2010 compared to €40.0 million for 2009. After-sales increased 57% to €51.9 million for the year ended December 31, 2010 compared to €33.0 million for 2009.

 

Equipment

 

Operating revenues, including intra-group sales, for our Equipment segment increased 22% to €753.6 million for the year ended December 31, 2010 from €616.2 million for 2009. In U.S. dollar terms, revenues increased 17% to U.S.$999.6 million for the year ended December 31, 2010 from U.S.$858.0 million for 2009. Marine equipment sales increased significantly due to Sentinel solid streamer demand for new builds and vessel upgrades.

 

Operating revenues, excluding intra-group sales, increased 18% to €619.2 million from €524.7 million for 2009 and increased 12% in U.S. dollar terms.

 

Operating Expenses

 

Cost of operations, including depreciation and amortization, increased 2% to €1,746.3 million for the year ended December 31, 2010 from €1,710.5 million for 2009. As a percentage of operating revenues, cost of operations increased to 80% for the year ended December 31, 2010 from 77% for 2009. Gross profit decreased 16% to €443.1 million for the year ended December 31, 2010 from €530.2 million for 2009, representing 20% and 24% of operating revenues, respectively.

 

Research and development expenditures, net of government grants, decreased 8% to €57.0 million for the year ended December 31, 2010 from €62.1 for 2009, representing approximately 3% of operating revenues for both periods.

 

Marketing and selling expenses increased 2% to €61.7 million for the year ended December 31, 2010 from €60.6 million for 2009, representing approximately 3% of operating revenues for both periods.

 

General and administrative expenses decreased 8% to €168.4 million for the year ended December 31, 2010 compared to €182.7 million for 2009. As a percentage of operating revenues, general and administrative costs were stable at 8% for the year ended December 31, 2010 compared to 2009.

 

Other expenses amounted to €88.8 million for the year ended December 31, 2010 compared to €167.8 million for the year ended December 31, 2009. As announced on December 16, 2010, we launched a performance plan that led us to recognize restructuring costs of €28.1 million (U.S.$37 million) and we impaired €70.4 million (U.S.$94 million) of multi-client surveys.

 

Other expenses in 2009 included primarily our fleet restructuring plan, an impairment of goodwill of €216 million (U.S.$300 million) on our marine cash generating unit and an impairment loss of €64 million (U.S.$89 million) of the legacy Veritas multi-client surveys acquired before 2007.

 

Operating Income (Loss)

 

Our operating income was €67.2 million for the year ended December 31, 2010 compared to an operating loss of €160.6 million for 2009 as a result of the factors described above. Before restructuring costs and impairment losses, operating income was €165.7 million (U.S.$220 million) for the year ended December 31, 2010 compared to €220.2 million (U.S.$309 million) for 2009.

 

Operating loss from our Services segment was €68.6 million for the year ended December 31, 2010 compared to €236.7 million for the year ended December 31, 2009. In U.S. dollar terms, operating loss was U.S.$91.5 million for 2010 compared to U.S.$329.5 million for 2009. Before restructuring costs and impairment losses, operating income for 2010 was approximately U.S.$37.1 million compared to U.S.$203.4 million.

 

Operating income from our Equipment segment increased 62% to €217.2 million for the year ended December 31, 2010 from €133.8 million for 2009. In U.S. dollar terms, operating income increased 55% to U.S.$288.2 million from U.S.$186.3 million.

 

Financial Income and Expenses

 

Cost of net financial debt was stable €105.5 million for the year ended December 31, 2010 and decreased slightly 4% in U.S. dollar terms.

 

Other financial gain was €8.5 million for the year ended December 31, 2010 compared to a financial expense of €11.2 million for 2009 due to favorable changes in currency exchange rate.

 

Equity in Income (Losses) of Affiliates

 

Income from investments accounted for under the equity method decreased to €0.7 million for the year ended December 31, 2010 from €8.3 million for the year ended December 31, 2009 mainly due to our share in the income of Argas, our joint venture in Saudi Arabia.

 

Income Taxes

 

Income taxes amounted to €13.5 million for the year ended December 31, 2010 compared to tax credits of €9.8 million for 2009. Income taxes for the year ended December 31, 2010 included a deferred tax asset of €42.2 million related to loss carry forward in France.

 

Net Income (Loss)

 

Net loss was €44.0 million for the year ended December 31, 2010 compared to €258.9 million for 2009 as a result of the factors discussed above.

 

Year ended December 31, 2009 compared with year ended December 31, 2008

 

Operating revenues

 

The following table sets forth our consolidated operating revenues by business line, and the percentage of total consolidated operating revenues represented thereby, during each of the periods stated.

 

 

 

Notes:

 

 

Our consolidated operating revenues for the year ended December 31, 2009 decreased 14% to €2,233.2 million from €2,602.5 million for 2008. Expressed in U.S. dollars, our consolidated operating revenues decreased 19% to U.S.$3,109.3 million for the year ended December 31, 2009 from U.S.$3,849.8 million for 2008. This decrease was mainly due to the decline in demand in our Equipment segment while our Services segment benefited from the change of consolidation scope with the acquisition of Wavefield in December 2008.

Services

 

Operating revenues for our Services segment decreased 7% to €1,708.4 million for the year ended December 31, 2009 from €1,837.3 million for 2008 and decreased 12% in U.S. dollar terms. This decrease, due to weak market conditions, was offset in part by the addition of Wavefield to the marine business line, continued robust processing performance and strong multi-client sales in the last three months of 2009.

 

We began implementation of our vessel capacity reduction and high-end fleet refocusing plan with the decommissioning in 2009 of six seismic vessels including four mid-capacity 3D vessels (Harmattan, Fohn, Orion and Search) and two 2D vessels (Duke and Discoverer II), with three additional vessels to be decommissioned in 2010.