Dawson Geophysical Company
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day and welcome to the Dawson Geophysical First Quarter 2016 Earnings Conference Call and Webcast. All participations will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Statements made by management during this call that are forward-looking and which provide other than historical information 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 any 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 in Exhibit 99.5 to its Form 8-K/A filed with the SEC. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in the company’s press release issued yesterday afternoon. And please note that the contents of the company’s conference call this morning, is covered by those statements. During this conference call, management may make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of the non-GAAP measures 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. The call is scheduled for 30 minutes and the company will not provide any guidance. Please also note this event is being recorded. I would now like to turn the conference over to Mr. Steve Jumper, President and CEO. Please go ahead.

[Steve Jumper:]

Thank you, Nyhan. Good morning and welcome to Dawson Geophysical Company’s first quarter 2016 earnings and operations conference call. As Nyhan said, my name is Steve Jumper, I’m the Chairman, President and CEO of the company. Joining me on the call is Jim Brata, Executive Vice President, Chief Financial Officer. Before I start the call, I have a few items to cover. If you would 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 and I believe that it will be there for approximately 30 days. Information reported on this call speaks only of today Tuesday, May 10, 2016 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. On February 11, 2015, legacy Dawson Geophysical Company and legacy TGC Industries consummated their previously announced strategic business combination. The merger transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical being deemed the accounting acquirer with the results of legacy TGC Industries Incorporated being reflected in the company’s reported consolidated financial results only for periods from and after February 11, 2015. The combined companies adopted a calendar fiscal year ending December 31. Due to the foregoing, comparative financial results that include periods prior to February 11, 2015 are not comparable to financial results that include periods from and after February 11, 2015. As mentioned our first quarter 2016 press release, operating revenues decrease in the first quarter of 2016 as compared to the same period in 2015. Operating expenses for the March quarter decreased proportional. Demand for Dawson services is at reduced levels from recent years and is anticipated to remain at such levels through March of 2016 in response to lower and uncertain commodity prices and reduced client expenditures. The company operated four to six crews in the United States for the most of the quarter with a peak level of eight crews early in the quarter. Utilization of several crews was unfavorably impacted by inclement weather conditions in several areas of operation late in the quarter that continued into the second quarter. The company operated an average of two crews in the Canadian market with a peak level of three crews for a short period during the first quarter. The company is currently inactive in the Canadian market as the winter season has come to a conclusion. We anticipate operating four to six crews in the U.S. through the second quarter of 2016.Uncertain oil and gas prices however limit our visibility beyond the second quarter. I will now turn control of the call over to Jim Brata, who will review the financial results, and I will return with some final remarks about the outlook for the rest of the year.

[Jim Brata:]

Thank you, Steve, and good morning. Before we get started, I would like to review what Steve said earlier. On February 11, 2015, legacy Dawson Geophysical Company and legacy TGC Industries, Inc. consummated their previously announced strategic business combination. The merger transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical Company being deemed the accounting acquirer with the results of legacy TGC Industries, Inc. being reflected in the company’s reported consolidated financial results only for periods from and after February 11, 2015. The combined companies adopted a calendar fiscal year ending December 31. Due to the foregoing, comparative financial results that include periods prior to February 11, 2015 are not comparable to financial results that include periods from and after February 11, 2015. Revenues in the first quarter of 2016 were $47.1 million compared to $73.7 million in the same quarter of 2015. As Steve mentioned, we operated four to six crews in the United States for most of the quarter with a peak level of eight crews early in the quarter. The company operated an average of two crews in the Canadian market with a peak level of three crews for a short period during the first quarter. Cost of services in the first quarter of 2016 was $40.1 million compared to $64.8 million in the same quarter of 2015. Gross profit was $7.0 million in the first quarter of 2016 compared to $8.9 million in the same quarter of 2015. Selling, general and administrative expenses were $5.6 million in the first of this year compared to $7.5 million in the same quarter of 2015. Depreciation and amortization expense in the first quarter 2016 was $12.0 million compared to $11.2 million a year ago. Net loss of the first quarter of 2016 was $8.6 million compared to a net loss $6.6 million in the same quarter last year. We reported an income tax benefit of $1.0 million compared to an income tax benefit of $3.3 million a year ago. EBITDA increased 74% in the first quarter of 2016 to $2.5 million compared to $1.4 million in the same period a year ago. And EBITDA reconciliation was provided in our earnings release issued this morning. And now, I will highlight some balance sheet items. Our balance sheet remains strong as of the end of the first quarter 2016. We had debt including obligations under capital leases of $8.4 million, cash and short-term investments of $62.6 million. Our current ratio was 3.8

[Steve Jumper:]

Well, thank you, Jim. As mentioned in our press release 2016 will likely be the most difficult year in my roughly thirty plus years with the company and in the industry. Oil and gas prices remain uncertain exploration. Production companies have maintained a cautious approach towards spending. Despite today’s challenging environment, Dawson Geophysical is strategically positioned to withstand the commodity cycle downturn. Our strong balance sheet, diverse client base and a management team with more than 100 years of combined industry experience provides us with the tools and resources required to successfully navigate today’s market. Equipment purchases made during recent years further enable us to successfully serve our valued client base while simultaneously operating below previously established CapEx levels. The price of oil is up approximately 65% from the decade low reached earlier this year on February 11. Although we have not seen an increase in proposals to-date, this positive development is very encouraging. The oil market appears to be slowly entering a rebalancing phase. We believe oil and gas companies will start to put capital back to work, and seismic surveys should play an important role in helping these companies maximize their production economics. We continue to work with our valued clients through these difficult times and we are prepared financially, operationally and from a human resources perspective to quickly respond to the market as conditions improve. We do expect pretty difficult quarters, but our people are focused on those things that they can control. We continue to work through the integration process and believe the combination of Dawson and TGC Industries will provide long-term growth opportunities when market conditions improve. We will continue our focus on rightsizing our operations to fit current demand levels while remaining in a position to respond quickly to market conditions, maintaining a strong balance sheet and commitment to our expanded client base by providing higher resolution subsurface images in a shorter cycle time. We anticipate a capital budget for 2016 at maintenance levels below the $10 million capital budget approved by our Board of Directors. Our balance sheet, as Jim said, remains strong with approximately $62.6 million of cash, cash equivalents and short-term investments, $70.2 million of working capital and $8.4 million of debt and capital lease obligations. On a personal note, I would just like to take a moment here to thank Christina Hagan for her service to the company and wish her the best as she moves onto her planned retirement later this month. Chris played an instrumental role in the growth and development of Dawson Geophysical Company. Over the past 28 years, Chris has navigated the company through three public offerings, the implementation of Sarbanes-Oxley, and the recent merger with TGC Industries, all while building a first-class accounting and finance group, as well as mentoring many people inside and outside the company, including yours truly. She is an outstanding professional who has served Dawson as Controller, Secretary, Chief Financial Officer and most recently as Executive Vice President, Secretary and Chief Accounting Officer prior to her resignation from such officer positions last week. We wish Chris the best, will miss her greatly and I look forward to partnering with her again in the near future on the golf course. Christina’s primary duties will be absorbed by James Brata, who’s on the call with us, who currently serves as Executive Vice President, Chief Financial Officer and Treasurer. Jim succeeded Christina as the Secretary of the company effective at the close of business on May 5, 2016. Prior to our strategic business combination, James served as Vice President, Chief Financial Officer, Secretary and Treasurer of TGC Industries, Inc. In closing, while market conditions remain difficult, we believe we are well-positioned to withstand the commodity downturn. Our strong balance sheet, diverse client base and a business combination with TGC Industries provides us with the tools and resources to successfully navigate today’s market and quickly respond when market conditions improve. And with that, Nyhan I believe we are finished and ready to open line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Marshall Adkins of Raymond James. Please go ahead. Okay, Mr. Adkins is dropped out of the queue. Mr. John Deysher of Pinnacle will ask our first question.

[John Deysher:]

Good morning

[Jim Brata:]

Good morning.

[John Deysher:]

I was just curious on the income statement. SG&A was about $5.6 million versus $4.6 in the fourth quarter up about $1 million. I was just curious what the reason was behind that.

[Jim Brata:]

But most of that has to do with severance cost as we are rightsizing the company.

[John Deysher:]

So roughly $1 million is severance costs?

[Jim Brata:]

Just slightly less than $1 million.

[John Deysher:]

Okay. So going forward we should model SG&A at $5.5 million per quarter roughly?

[Jim Brata:]

Well, not quite, we might have some further severance. And there’s also some moderate reason there so.

[Steve Jumper:]

I would anticipate our SG&A levels to be at about where we were towards to end of the year in the $4.5 million to $4.9 million range going forward. We continue to look at some of the cost that we incur and most of the severance cost should be rolling off here over the next quarter. So I think we’ll see a reduction there and then we have some adjustment in some professional fee. So I think – I think right around some where $4.5 million to $5 million range is about where we should be John.

[John Deysher:]

Okay, that’s helpful, Steve, thanks. And in – on the CapEx side, what was CapEx for the – the first quarter it was $4.2 million, but you expect for the total year to be below $10 million, so that implies right about $2 million per quarter?

[Jim Brata:]

Probably. I believe year in 2015, we came in somewhere in the $7.5 million range, I believe somewhere in the mid $7 million. We had a little bit of a bump in Q1 as we talked about in the press release, we had lost quiet a bit of equipment in our – in the flood about a year ago. I guess it was in April and May of last year in Southeastern part of Texas collected some insurance proceeds from those and then purchased some replacement channels. So we spent $4.2 million, a good chunk of that was on the replacement channels which was – which wasn’t funded in large portion by insurance proceeds. So I anticipate the CapEx budget number to be right at and maybe below last year’s level. Now I will say this, that’s our anticipation. Legacy Dawson and legacy TGC both our companies that when we’ve been in this position if we had found opportunities in the marketplace to move on equipment or opportunity we’ve done so, but outside of that I would anticipate our number to be at below last year’s.

[John Deysher:]

Okay, great. Thank you.

[Jim Brata:]

You got it.

[Operator:]

Our next question comes from Gregg Hillman of First Wilshire Securities. Please go ahead.

[Gregg Hillman:]

Yes, good morning. Steve, could you talk about just what macro drivers or indicators you look at for your particular industry in terms of when you – that gives a sign of an upturn, what might maybe you mentioned the price of oil, but what other kind of industries it takes you to keep your eye on.

[Jim Brata:]

Well, the first thing we do is we stay in very, very close contact with our client base. We’re a relatively small industry, and even inside the E&P companies, the G&G, SaaS are relatively small. So we have very, very strong relationships with our client base. And so our first indication outside of just the macro events of oil and natural gas prices comes from relationships. And we do know that – we do have client, a client base that is looking at projects. We know that they have projects in the mill that they would like to get done that they view as necessary for future development. Many of those projects are just sitting on the sideline and waiting for some level of funding and some level of movement. And so the oil and gas prices are certainly number one. Number two, I think its relationships in what our client base is thinking and where they’re moving at. I don’t know that we look all that hard at rig count, I think I don’t know that we’re completely tied to the rig count number, but obviously rig count strengthening is something that would be a positive for everybody. We’re in a little bit unique situation in this cycle than we have been in the past, if we don’t really have a full handle on how many wells are actually out there that are drilled but uncompleted, that is something that could ramp up fairly quickly. But I think just as a general rule, it’s commodity prices, it’s client intel, and it’s just the overall sentiment in spending levels. We continue to see or hear our clients talk about reduced spending, and so it really just gets down to what number the oil prices starts to make generate good cash flows for our clients.

[Gregg Hillman:]

Yes. And Jim, what part of business now is kind of tied in to production, let’s say, to optimize fracking and to do seismic work for that purpose. And is that – do you see a future in that business?

[Jim Brata:]

Can you repeat the question, I think...

[Gregg Hillman:]

It was basically, what part of your business is tied in production right now such as you seeing in a seismic to optimize fracking activity?

[Jim Brata:]

We entered into the microseismic recording phase of the business probably three, four years ago. And we have some partnerships with some folks that are very qualified in helping us process that information and provide meaningful results back to our client base and we’ve had really good success with the surface recording microseismic and multiple basins including the Permian. That has – the use of microseismic recording has certainly reduced greatly. So at this point we’re not as tied to the wellbore and drilling results as we’d like to be. We’re not as tied, it closed to the wellbore as we think we can be. If you look at very high resolution 3D imaging combined with microseismic information, then you can get a little more information on best practices when it comes to completion. I don’t know that we are in a position right now where our company is actually guiding any type of frac work that we’re certainly able to help them understand to a certain level what’s happening in certain zone. So we’re not as tied to the true production side at the wellbore as we think we can be. But most of the areas in which we operate now are really not an exploration tool or area, they’re really in areas that are undergoing a development in production phase. So from that standpoint, I think us being able to provide images that will help them keep that drill bit in the zone of interest for a longer, lateral as well as maybe help them identify different rock types, I think its something where we’re headed to probably in the early stages.

[Gregg Hillman:]

Okay. So it could eventually mature into a material business for you…

[Jim Brata:]

Well, we think so. When we were active, didn’t have a whole lot of activity insisting with microseismic, had a decent level of activity in 2014 from the recording standpoint which is where we were primarily involved, surface recording standpoint. The channel count requirement is much less than a conventional 3D seismic crew, the personnel costs are certainly much less just from the size of the operation and size of the crew. But from a bottom line standpoint it is a very meaningful piece of business that kind of flows through the income statement, pretty cleanly and pretty well. And so if we could keep one or two small crews busy on an annualized basis, it’s roughly the equivalent that hasn’t a full blown 3D crew working. So, yes, it has some – a meaningful opportunity to it just the proof and the science and need the capital expenditures included in the process.

[Gregg Hillman:]

Okay. Thanks for the comments.

[Jim Brata:]

Thank you.

[Operator:]

[Operator Instructions] Our question comes from Marshall Adkins of Raymond James. Please go ahead.

[Steve Jumper:]

Did you hang up on me or I hang up on you?

[Marshall Adkins:]

I’ve pretty much assumed it was Chris playing one last prank on me before she left. But congratulation Chris on putting Jumper until bias behind you, that’s quite an accomplishment.

[Steve Jumper:]

You’re pretty happy, I can tell you that.

[Marshall Adkins:]

Thirty plus years of experience in your comment, that’s pretty good, you look a lot old than that Jumper. All right, let’s say, how big of a deal…

[Steve Jumper:]

Deal man, it’s a job.

[Marshall Adkins:]

How big of a deal was weather, I mean would you have had seven, eight crews running versus…

[Jim Brata:]

No, I think Marshall we were probably on four to six – I think we exited the quarter actually with five. Probably we had an impact on a few crews late in the quarter, they just couldn’t get some things going on. And then we had one crew that really didn’t start moving until April. They probably would have been in the mix in mid-March and we did not had the weather issues, so we would have exited the quarter probably with six with little better utilization on maybe one or two of the five that we are out there. And then moving forward till the quarter, we’re still anticipating a four to six number. But it probably, the comment they’re really geared towards, it probably kept one from deploying earlier and certainly carried into the April timeframe on several others. So it made April little tough.

[Marshall Adkins:]

All right. You’re clearly in better financial condition than most other competitors out there at this stage. How big of a deal is this downturn as far as changing the competitive landscape? Are you seeing guys fall off or is it just too early yet?

[Jim Brata:]

I think it is too early. I’m going to step back and just say that I think this downturn is making it very difficult on all oil field service outside of just our industry. I think the service side is certainly under great pressure as our E&P that’s flowing down. And so I think there is a pretty large fundamental shift in service all across the Board. And I think the next several quarters are going to be interesting to see how it all plays out specific to our sector – that our sector has been an evolving sector for many, many years. I think I’ve made the comment when thirty years ago there were – I don’t know many companies we’re operating boarding in the U.S., but there were probably close to 700 crews working, a lot smaller sized crew, they were each 100 channels or so. So there might have been 70,000 channels working in the U.S. Now I think there’s probably where we are today, there’s probably somewhere in the low-teens that are working in terms of crew count, of course the channel count has exploded. But our industry is kind of – our sector is kind of been a little bit of a deep issue now since about 2014. We’ve had a couple of bankruptcies, we have one going on right now in our industry and the public filings on some of them indicate that there’s some balance sheet stress. And so I think the next couple of months are going to be interesting. We’re going to focus on our balance sheet, do everything we can to maintain our strong position. And I think we’re going to be in a position from a personnel standpoint, a balance sheet standpoint, and equipment standpoint to move pretty quickly and react positively when the – not if, but when the market turns.

[Marshall Adkins:]

Well, that brings me out to my next question is, as you are aware, we’re looking for a pretty big rebound on oil prices and activity over the next couple of years. So if we get back to, let’s say, 1,200 rigs and running in 2018. We’re around just about 400 right now. Is that mean you go from an average of 5 crews to 15 crews? Should we look at, it’s kind of a linear move with the rig count in terms of just how we should think about it?

[Steve Jumper:]

I don’t think it will be linear in terms of rig – crew count, Marshall. I think our industry for many years has have gone to fewer but larger crews, I mean larger crews can do larger projects, higher resolution, all those things we’ve talked about, and the efficiency on those crews are going to be continue to improve. I mean it’s just really unbelievable how much data we record today in a single day compared to even four or five years ago. So I don’t think it’s linear, I think maybe 10 to 12 something like that could be the number in…

[Marshall Adkins:]

Such bigger crews?

[Steve Jumper:]

But there will be bigger crews. And the key to us in managing crew count I think is always what is the utilization going to look like. We’ve talked about this before getting a seismic project, put together, and it gets more, more complicated between private and public land ownership positions. And those types of things particularly with the size, you hit up the projects that are couple of 100 square miles. It takes a while to put those together. And so I think the big key on crew count is going to be not just a long-term what you’re going to need, but volume keep busy in the short-term. But I don’t think it will be a linear number, I think it’s going to be fewer but bigger.

[Marshall Adkins:]

It sounds like you’re saying it will – in old days you used to lead activity on the way up now, we’re probably going to lag activity on the way up due to permitting and just get organizational issues within suites. Is that…

[Steve Jumper:]

No, we were in a lagging position in the unconventional natural gas place back in 2004, 2005, 2006, we were lagging position coming down of the back side when things really started to slow down in 2009, we were in a lagging position which was different for our industry. I mean our industry historically has been a leading indicator. I think on the unconventional oil side I think we got in the same situation. I think we were a lagging indicator. You had the land rush and then you had proven by drilling and then we kind of got in the game a little bit light. I think what you’re seeing now is people divesting of different assets and consolidating their focus in certain areas. I think when people start to focus in certain areas and they start to look at returns and maximization of production. I think that may not bring us to a leading indicator, but I think it brings us closer to the front. I don’t know who will be in front of it, but I think we will be contemporary with uptick once we get past whatever is out there on the docks.

[Marshall Adkins:]

Perfect. Thanks, Steve.

[Steve Jumper:]

Thanks, Marshall. Appreciate it.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Steve Jumper:]

Oh, thank you, Nyhan. I appreciate everybody listening and appreciate you’ve taken the time and the interest, certainly want to thank our shareholders for their continued support and thank our clients for their continued trust and certainly want to thank our employees for their continued exemplary efforts. We are in a tough period, there’s no question about that. We’ve got a few tough quarters ahead of us. But I think we are well positioned from equipment personnel and balance sheet strength to continue to not just survive the cycle, but look for opportunities to prosper and grow. So thank you for your time and we’ll be back here in August to report our second quarter results. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.