Dawson Geophysical Company
Q3 2018 Earnings Call Transcript

Published: 3 Nov 2018

[Operator:]

Good day, everyone, and welcome to the Dawson Geophysical Third Quarter 2018 Results Conference Call. Statements made by management during this call with respect to forecasts, estimates or other expectations regarding future events which provide any information other than historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual future results or performance to materially differ from future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including the company's annual report on Form 10-K filed with the SEC on March 9, 2018. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated on the company's press release issued this morning. And please note that the contents of this company's conference call this morning are covered by those statements. During this conference call, management will make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of non-GAAP measure to the applicable GAAP measure can be found in the company's current earnings release, a copy of which is located on the company's website, www.dawson3d.com. This call is scheduled for 30 minutes and the company will not provide any guidance. As a reminder, today's call is being recorded. And now, it is my pleasure to turn the conference over to Stephen Jumper, Chairman, President and CEO of Dawson Geophysical. Please go ahead, sir.

[Stephen Jumper:]

Well, thank you, Devin. Good morning and welcome to Dawson Geophysical Company's Third Quarter 2018 Earnings and Operations Conference Call. As Devin said, my name is Steve Jumper, Chairman, President and CEO of the company. Joining me on the call is Jim Brata, Executive Vice President and Chief Financial Officer. Before we get started, just a few things to cover. If you'd like to listen to a replay of today's call, it will be available via webcast by going to the Investor Relations section of the company's website at www.dawson3d.com. Information reported on this call speaks only of today, Thursday, November 1, 2018. And therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay listening. Turning to our preliminary third quarter and 9 months ended September 30, 2018 financial results. For the quarter ended September 30, 2018, we reported revenues of $40.4 million, a decrease of approximately 10% compared to $45.1 million for the quarter ended September 30, 2017. For the third quarter of 2018, we reported a net loss of $5.2 million or $0.23 loss per common share compared to a net loss of $2.9 million or $0.13 loss per common share for the third quarter of 2017, primarily due to decreased crew utilization. We reported EBITDA of $1.65 million for the quarter ended September 30, 2018 compared to EBITDA of $5.3 million for the quarter ended September 30 of '17. For the 9 months ended September 30, '18, we reported revenues of $126.5 million, an increase of approximately 6%, compared to a $119.1 million for the 9 months ended September 30, 2017. For the 9 months -- for the first 9 months of 2018, we report a net loss of $12.6 million or a $0.55 loss per common share compared to a net loss of $27 million or $1.19 loss per common share for the first 9 months of '17. We reported EBITDA of $10.2 million for the 9 months ended September 30, 2018 compared to negative EBITDA of $2.1 million for the 9 months ended September 30, '17. During the third quarter of 2018, we operated a peak of 5 crews in the United States and 1 crew in Canada for approximately half the quarter. We anticipate operating 3 to 5 crews in the U.S. and 1 to 2 crews in Canada in the fourth quarter of this year. In addition, we will conduct 1 microseismic project in the U.S. during the fourth quarter of '18. Based on currently available information, we anticipate operating 3 to 5 crews in the U.S. and up to 4 crews in Canada during the first quarter of 2019. I will now turn control of the call over to Jim Brata, who reviews financial results. Then I will return with some final remarks and our outlook going into the fourth quarter of '18. Jim?

[James Brata:]

Thank you, Stephen. Good morning. Revenues for the third quarter of 2018 were $40.4 million, a decrease of 10.3% as compared to $45.1 million for the third quarter ended September 30, 2017. As stated in our earnings release earlier in this morning, during the third quarter of 2018, the company operated a peak of 5 crews in the United States and 1 crew in Canada for approximately half of the quarter. The company anticipates operating 3 to 5 crews in the U.S. and 1 to 2 crews in Canada in the fourth quarter. In addition, the company will conduct 1 microseismic project in the U.S. during the fourth quarter of 2018. Based on currently available information, the company anticipates operating 3 to 5 crews in the U.S. and up to 4 crews in Canada during the first quarter of 2019. Cost of services in the third quarter of 2018 were $34.4 million, a decrease of 5% compared to $36.2 million in the same quarter of 2017. General and administrative expenses were $4.1 million in the third quarter of this year compared to $3.4 million in the same quarter of 2017. Depreciation and amortization expense in the third quarter of 2018 was $7.1 million, a decrease of 24% compared to $9.7 million in the same quarter a year ago. Net loss in the third quarter of 2018 was $5.2 million or $0.23 loss per share compared to a net loss of $2.9 million or $0.13 loss per share in the same quarter last year. We recorded an income tax benefit of $232,000 in the third quarter of 2018, compared to an income tax benefit of $1.4 million in the same quarter a year ago. EBITDA in the third quarter of 2018 was $1.65 million compared to EBITDA of $5.32 million in the same period a year ago. An EBITDA reconciliation was provided in our earnings release issued this morning. Now I'll highlight some results for the 9-month period ended September 30, 2018. Revenues for the 9 months ended September 30, 2018 were $126.5 million, an increase of 6.2% as compared to $119.1 million for the 9-month period ended September 30, 2017. Cost of services for the 9 months -- first 9 months of 2018 was $104.4 million, a decrease of 4.2% compared to $109 million in the same period of 2017. General and administrative expenses were $12.1 million for the 9 months ended September 30, 2018 compared to $12.3 million in the same period of 2017. Depreciation and amortization expense in the 9 months ended September 30, 2018 was $23.2 million, a decrease of 22% compared to $29.8 million in the same period a year ago. Net loss for the 9 months ended September 30, 2018 was $12.6 million or $0.55 loss per share compared to a net loss of $27 million or $1.19 loss per share in the same period a year ago. EBITDA for the first 9 months of 2018 was $10.2 million compared to negative EBITDA of $2.1 million in the same period a year ago. An EBITDA reconciliation was provided in our earnings release issued this morning. Now I'll highlight some balance sheet items. Our balance sheet remained strong as of the end of the third quarter of '18. We had debt, including obligations under capital leases of approximately $12.5 million. Cash and short-term investments of $45.7 million. Our current ratio was 3.5

[Stephen Jumper:]

Well, thank you, Jim. As stated in our earnings release issued this morning, despite recent market -- recent challenges in market conditions, we were pleased to report for the 9-month period ending September 30, 2018 that we delivered a 6% improvement in revenues, a significant reduction in net loss, and an increase of over $12 million in EBITDA compared to the 9-month period ended September 30, 2017. Our continued focus on improved efficiencies and cost cutting initiatives feel much about our success, particularly early in the year. Despite the improved 9-month results, market conditions remain challenging in both the U.S. and Canada. The increase in demand we had anticipated for the back half of 2018 has not materialized to degree that we originally expected. Our optimism for opportunities in the Canadian market has lessened somewhat with the recent large differential between Canadian oil prices and WTI prices. In the Permian and Delaware basins, capacity constraint issues continue to weigh on oil prices as a large pricing difference remains in place. Many industry professionals believe that Permian and Delaware pricing differential is temporary and will ease as additional takeaway capacity as added in 2019 and '20. In addition, as we entered into the second month of the fourth quarter, we are beginning to experience a slight improvement of bid activity and have secured additional work in various basins including the Permian and Delaware. Although oil prices have risen in recent quarters, project visibility remains constrained. Hardest constraint revolves around our project driven multi-client data library customer base, a model we do not actively participate in, but do work as a contractor for several of the largest providers. The multiple participants and long lead times associated with these projects makes seismic planning decisions more difficult and are often beyond our control. We believe part of the late 2018 slowdown in demand is related to 2018 capital budget exhaustion on behalf of our client base as they maintain overall spinning levels within cash flows. It is our belief that sustainability of oil prices at current to improved levels will result in increased activity in exploration in multiple basins including the Permian and Delaware, and lead to improve project visibility as exploration in production companies generate greater cash flows. During the quarter, our Board of Directors approved an increase in 2018 capital budget from $10 million to $17 million in response to a strategic opportunity to require certain seismic recording equipment. Capital expenditures for the third quarter were $8.2 million, in total $13.8 million for 2018 to date primarily for seismic data acquisition equipment and replacement vehicle. Our balance sheet as Jim said remains strong with $45.7 million cash in short-term investments, and $58.6 million of working capital as of September 30. While we are encouraged by the slight uptake and bid activity that we have seen in the first month of the fourth quarter, we remain cautiously optimistic as our clients evaluate 2018 capital budget expenditures. We continue to maintain our commitment to protecting our balance sheet, take advantage of opportunistic purchases and positioning ourselves to meet the needs of our valued shareholders and clients as we deliver best in class high resolution subsurface images. And with that, Devin, I believe we are ready to take questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Marshall Adkins with Raymond James.

[James Adkins:]

Couple of questions here. The new equipment that you just bought, give us little more detail on what's going on there? Did you buy it at a substantial discount or is this equipment we need to stay competitive or crew sizes or channel counts going up so much, you need more channels? What's driving that?

[Stephen Jumper:]

Well, Marshall, I think you answered it for me. It's all the above. We know that despite the fact that we're -- demanded is little soft here in Q4 of '18, we know that channel count is going to continue to increase. And so we were presented with an opportunity really in 2 places; one was conventional recording equipment, our cableless recording equipment; and the other was some 3 component equipment. Both had become available, each of which we believe overtime will -- channel counts going to increase. And so the opportunity was there for us to move on that equipment. This is something that Legacy Dawson and TGC both had done in the past, is move on these opportunities. So price -- cost wise, it was advantages. From a channel count growth prospective, I think the timing was good, particularly with some of the 3C gear. We do have some very large 3C requirements particularly in the Canadian market this winter related to 1 project in particular. And so I think it's all the above. And, Marshall, I think as we go forward, as we've talked about crew counts going to continue to be flat, but I think channel count per crew is going to continue to grow and eventually the channel count issue could, I think, become a constraining factor. And I think channel count capacity could fill up early next year, so we want to be ahead of that.

[James Adkins:]

So is it -- just a little more clarification there. Is it brand new equipment from manufacturer? Is it...

[Stephen Jumper:]

It is not.

[James Adkins:]

I'm guessing, and again I don't want to answer for you. But it's been a tough environment for all seismic guys, and lot of your competitors are going by the way side. So this is I'm now guessing, stuff that was left over from other guys?

[Stephen Jumper:]

Predominantly, it is equipment that is coming out of lease pools, that either independent lease companies or manufacturers themselves have had. So it's -- in essence, it's related to some stuff that could have come back, but this is mainly out of lease pools.

[James Adkins:]

Well, that bring me into my next question. Discuss where the current competitive landscape stands today. Lot of your competition has gone out of business, but when you got a business, the owners change hand, the equipment is still there. They come back as a new company. Where does that stand now and how is that affecting pricing?

[Stephen Jumper:]

Really in the last quarter or two, we -- I believe we talked last quarter about there was a bankruptcy and then one of our competitors had purchased that equipment through an asset sale and has basically replaced that particular competitor in the Lower 48 and in Canada. And so I really don't think, Marshall, that the competitive landscape has changed a whole lot in the last quarter or so. You're right. It's been a tough go in the seismic space, not just for the contractors, but the equipment folks. And so it has been tough. The pricing question, it's always been difficult to get me to talk about that. What I will say is that where this industry has struggled in down turn is -- has not been as much in the pricing model quote per unit of databases where that square mile or whatever the case may be. It's been more of the fact that we provide more channels for the same pricing level. And so the pressure I think right now, pricing issues are related to price per channel and we're certainly have seen an increase in channel counts in the last 6 months to a year, probably another step change that we haven't seen in a few years. And so I think we're all probably behind the curb a little bit on channel counts. And I think certainly, there is some room for improvement regardless of what the actual competitive landscape is out there. Everybody's ability to put out large channel count crew is going to be a key in the next 12 to 18 months. So I think that's where -- there's probably rooms for improvement.

[James Adkins:]

So when you say everybody, when I look at the competitive landscape -- and again I'm not as in tune whether it's you which is what I'm asking. It's you and maybe 1 or possible two other guys that are of similar size in capability to use that, is that accurate?

[Stephen Jumper:]

Well, where we currently are, there is probably 2, 3, I would say there is three other companies. Some can run 1 to 2 crews. Others can run 3 to 4 crews that are active in the Lower 48, most of them private. There is 1 public competitor in Lower 48. But there -- this industry has always been one that there is always folks hanging around, they can access equipment and have some experience and can enter the market. And so we have not seen that yet. But I would say in the last couple - last year, the competitive landscape really hasn't changed much, Marshall. There has been some name change and the deck has been - the chairs have been shuffled a little bit, but in terms of overall capacity, not a whole lot of change. What is changing I think is we're starting to see continued pressure on channel count. And that's going to - that could become a meaningful factor in the near future.

[James Adkins:]

So when I think about channel count per crew going forward, just from modeling perspective, should we think about maybe next year on average being 10% more channels per crew on average? Or give me a ballpark? And I know it's going to vary depend on where you work and all, but just...

[Stephen Jumper:]

Yes. We just don't get that many have a many more that are below 10,000 channels for a crew. We get a few projects that are -- that we can get by with, but it's not uncommon for us to be in the 15,000 to 20,000 range. And so I would say that over the last year - and a lot of this is being driven by two factors; 1 is we continue to look at ways to increase the density of the channels in an area. And I think there are some issues particularly Delaware, where this is going to become key. But it's a size of these surveys. And so I would say 50% increase is possible, but it's going to be a moving number. I mean, we've got some that are 30,000 channels, and we've got some that could get as high as 50,000. And there is just - it's a very difficult thing at this point to see where this is actually going to settle out because both based on density of the channels per area and size of projects, we're all feeling a little bit of - we're excited about the opportunity going forward, but there is going to be continued growth there. So to answer your question, maybe 50% on an average something like that.

[James Adkins:]

That's big. All right. How about Canada versus U.S.? Is there a major difference in channel count size between the regions?

[Stephen Jumper:]

From a conventional channel count standpoint, the U.S. probably has a greater demand on just conventional single component cableless channels. The Canadian market is dominated by the 3 component equipment. And so we've seen similar things in the U.S. or in Canada, that we've seen in the U.S. related to three component. What projects are coming out and are being talked about have a real high density of 3 component equipment. So similar thing going on, but this is related more towards 3 component versus the conventional type work that we've historically done in the States. We've done 3 component work in the States for years now, but Canada is driven by that market. And then back up to the answer on the previous question, I think the 50% number is probably from -- is some now we'd say that was occurring from last year going into next year. And so I think over the last 12 to 18 months, we've seen some of that growth really start to head that direction.

[James Adkins:]

Last one from me just a kind of bring it all home. You're spending - you're getting a great dealing of the equipment. But you need it because channel count keeps going up. If you have to keep buying more and more equipment, is there a path here to positive free cash flow as we look out over the next 2 or 3 years?

[Stephen Jumper:]

I think so, Marshall. There is not anything right now that's a major expenditure. I mean if you look at what we just did at the end of this year, that - those - some of those channels were also replacement channels that we - there is attrition issues related to the cableless equipment. So some of that was factored in there. And I think that these opportunities that we just went through, we had one at the end of last year and we've had one here at late Q4. I think those are probably limited. Those opportunities are - will be more limited going forward. So at that point, people are going to be looking at new equipment and new type of build out which is going to take obviously a stronger market they were in right now. But had this - we would have been right at it this year on a free cash flow basis, had this not...

[James Adkins:]

I got you pretty close this year and that's why I'm asking this. We're going to keep spending more and more...

[Stephen Jumper:]

Yes. It would have been there had this opportunity not come up. So the answer to your question is, yes, but historically, that's one thing our industry is always struggle with is when times are good, there is capital needs. When times are tough, your cash flow falls. But I do think that given where we've been in cycle, as long as I've been around here, we're in better shape as a company right now from an equipment and capital expenditure needs than we ever have been coming into what we hope to be a growth opportunity.

[Operator:]

Our next question comes from the line of John Potratz with Researched Investments.

[John Potratz:]

You mentioned here that the slowdown advantage of later 2018 capital budget exhaustion on behalf of your client base. I assume that when you talk with the clients, they haven't given you contracts, but their basic sense is they will be increasing their budgets and they will have more work next year. But that's something you don't have in contract right now because you can't contract until they have the back seat budget approval. I assume that's what it based on having dealt with these people for years and having great personal relationships.

[Stephen Jumper:]

Yes. If you just look all across, not just related to seismic activity, but if you look at overall oil field service activity, there is indication that there could be some slowdown in Q4 in various phases or various areas. And so a lot of that is a fact that that we're - there has been some high level of spending, where they're approaching the year end budgetary numbers. There has been these issues with price differentials related to takeaway capacity. And so it's not uncommon for the end of the year to slowdown as they run -- work through their year-end budget. I think this year maybe a little more amplified than years past. And so right now they're looking at approving capital budget for next year. We won't know for sure how those budgets are going to move. I suspect that budgets will increase. And we are - we have been awarded some projects that we hope will get active in the fourth quarter and the first, and there's been some conversation about activity projects in early part of '19. And so all that's positive. You are right. We don't have a -- all of it contracted yet, but there is some conversation. And as I want to leave you with this comment and is that we've seen a recent uptick in bid activity. We're cautiously optimistic, but the market remains challenging. It remains somewhat still concentrated. We're starting to see some activity in some other areas of the Permian and Delaware basins, and in Oklahoma and Wyoming and Louisiana and other places. But it's still -- market conditions are still tough. And we think they're going to improve next year, but we won't know till we'd learn more about budgets.

[John Potratz:]

So basically based on your prior historical dealing with these people, at the end of the year, they would start to run out of money. They're going to cut back. But their planning -- the sense is they're planning to do a lot more in next year, but they don't have approval yet, and you don't have any contracts in place because you're not going to sign the contract until the budgets and everything else are approved.

[Stephen Jumper:]

Correct.

[John Potratz:]

And you said you're seeing interest outside the premium particularly in the [indiscernible], in Oklahoma, in Louisiana. Is this increased interest that you haven't seen before?

[Stephen Jumper:]

It's a little increase from what particularly in -- recently in Oklahoma and in Louisiana and Wyoming I guess. But it's still not to the level that we - that our industry and our -- really needs. It's still - it's a slight improvement, but it's not a -- word is not meaningful. It's not strong improvement.

[John Potratz:]

It's an interest, but nothing really contractual that you would say, "We're going to 7 crews". We can't say that. It just - there is this sense something is going to happen?

[Stephen Jumper:]

Correct.

[John Potratz:]

But we don't - but there is no guarantee at all?

[Stephen Jumper:]

That's right.

[John Potratz:]

And when I look at the number of crews, it looks like if we add up the Canada and U.S., you're between 5 and 7 crews, that if everything works out, you could be a lot, lot more fully utilized, but you just don't know until people sign the contracts?

[Stephen Jumper:]

Correct. Correct.

[Operator:]

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

[Stephen Jumper:]

Well, thank you, Devin. I - we appreciate the questions and we appreciate everybody listening into the call. As we've said, in summary, market conditions remain tough. We had a very much improved first 9 months of 2018 compared to 2017. We're approaching a fourth quarter that has got a market conditions are little softer than we had anticipated in the day, and the same for Canadian activity. We are seeing increase in channel count. And we are cautiously optimistic that channel count increase would be a factor - a driving factor in our opportunities going forward. I want to thank our shareholders for their support. I want to thank our employees for their continued dedication and hard work, and our clients for their continued trust in our services. I look forward to talking to you next quarter. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.