Dawson Geophysical Company
Q4 2016 Earnings Call Transcript

Published: 2 Mar 2017

[Operator:]

Good day and welcome to today's Dawson Geophysical Fourth Quarter 2016 Results Conference Call. Today's conference is being recorded. Statements made by management during this call with respect to forecasts, estimates or other expectations regarding future events or 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 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 the company's annual report on Form 10-K filed with the SEC on March 16, 2016. 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 will make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of the 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. At this time, I'd now like to turn the conference over to Mr. Steve Jumper, President and Chief Executive Officer. Please go ahead, sir.

[Stephen Jumper:]

Well thank you Lauren. Want to apologize first off to everybody. I’ve got a little bit of a throat problem, so if I apologize, if I clear my throat. Good morning, and welcome to Dawson Geophysical Company's fourth quarter and year end 2016 earnings and operations call. As Lauren 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 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. Information reported on this call speaks only of today, Thursday, March 2nd, 2017 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 fourth quarter financial results, operating revenues decreased in the fourth quarter of 2016 as compared to the same period in 2015, operating expenses for the December quarter decreased proportionately. Demand for seismic services in North America continues to be soft in response to low and uncertain oil prices and reduced client expenditures. During the quarter ended December 31, 2016, oil prices averaged approximately $49 per barrel, an increase from the September 30, 2016 quarter average of approximately $45 per barrel. While encouraging, it remains to be determined if the recent strengthening in oil prices can be sustained, and the price increases have yet to result in a meaningful increase in demand for our services. As we experienced uncertainty in oil and gas prices during the first three quarters of 2016, our client base continues to take a cautious approach to their capital spending. Based on currently available information, seismic service demand levels and the winter season in Canada, we believe we will operate four to six crews in the United States and Canada through the first quarter of 2017. Visibility beyond the first quarter of 2017 remains unclear. 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 into the first quarter of 2017. Jim?

[James Brata:]

Thank you, Steve and good morning. Before we get started, I would like to review the recent business combination. 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 the periods from and after February 11, 2015. The combined companies adopted a calendar 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. Turning to our preliminary fourth quarter results, revenues in the fourth quarter of 2016 were $30.1 million compared to $55.1 million in the same quarter of 2015. As Steve mentioned, we will operate four to six crews in the United States and Canada through the first quarter of 2017. Cost of services in the fourth quarter of 2016 was $27.5 million compared to $47.2 million in the same quarter of 2015. Gross profit was $2.6 million in the fourth quarter of 2016 compared to $7.9 million in the same quarter of 2015. General and administrative expenses decreased to $3.6 million in the fourth quarter of 2016 compared to $4.6 million in the same quarter of 2015. Depreciation and amortization expense in the fourth quarter of 2016 was $10.3 million compared to $11.5 million in the same quarter of 2015. Net loss for the fourth quarter of 2016 was $7.2 million or $0.33 loss per share as compared to a net loss of $4.9 million or $0.23 loss per share in the same quarter of 2015. We recorded an income tax benefit of $2.7 million in the fourth quarter of 2016 compared to an income tax benefit of $2.7 million in the same quarter of 2015. EBITDA in the fourth quarter of 2016 was $313,000 compared to $3.9 million in the same period of 2015. An EBITDA reconciliation was provided in our earnings release issued this morning. Now I will briefly highlight our full year results. Revenues for 2016 were $133.3 million compared to $234.7 million in 2015. Cost of services for 2016 was $121.7 million compared to $205.6 million in 2015. As a percentage of revenues, cost of services was 91.2% in 2016 compared to 87.6% in 2015. Gross profit for 2016 was $11.7 million compared to $29.1 million in 2015. Gross margin in 2016 was 8.8% compared to 12.4% in 2015. General and administrative expense was $16.8 million in 2016 compared to $22.7 million in 2015. Included in the yearly amount for 2015 were $3.3 million of transaction cost related to the completed business combination with TGC Industries, Inc. Depreciation and amortization expense in 2016 was $44.3 million compared to $47.1 million in 2015. We reported a net loss of $39.8 million or $1.84 loss per share in 2016 compared to a net loss of $26.3 million or $1.27 loss per share in 2015. EBITDA for the full year of 2016 was a negative $2.0 million compared to $7.5 million in 2015. And now I will highlight some balance sheet items. Our balance sheet remains strong. As of the end of the fourth quarter of 2016, we had debt including obligations under capital leases of $2.4 million, cash and short-term investments of $54.9 million. Our current ratio was 5.01 and finally, working capital was approximately $60.7 million. And with that, I will turn the call back to Steve for some comments on our operations.

[Stephen Jumper:]

Well, thank you, Jim. As we mentioned in our press release, 2016 was no doubt a difficult year for our company and our industry. The early stages of 2017 have started off difficult as well and I believe we still have some difficult days ahead. That said, the price of oil has materially increased from the decade low reached in February of 2016 and although we have not seen a positive, we have not seen a meaningful increase in proposals as previously discussed, this positive development is very encouraging. The oil market appears to be slowly working through a rebalancing phase. We believe oil and gas companies will gradually start to put capital back to work and seismic has a potential to play an important role in helping these companies maximize their production economy. Despite today's very challenging environment, Dawson Geophysical is strategically positioned to withstand the market uncertainties. 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 CapEx levels. As we experienced during our first three quarters of 2016, our client base continues to take a cautious approach to their capital spending. Based on currently available information, seismic service demand levels and the winter season in Canada, we believe we will operate four to six crews in the United States and Canada through the first quarter of 2017. Visibility beyond the first quarter of 2017 remains unclear. In response to these factors, we will continue our on-going effort to control costs and maintain a strong balance sheet, our experienced personnel and our position as a leading onshore seismic data acquisition company in North America. The company anticipates a capital budget for 2017 to be at maintenance level below the $10 million capital budget approved by our board of directors. As Jim said, our balance sheet remains strong with approximately $54.9 million of cash in short term investments, $50.7 million in working capital and $2.4 million of debt and capital lease obligations as of December 31, 2016. In closing, while market conditions remain difficult, we believe we are well-positioned to withstand the commodity cycle downturn. Our strong balance sheet, diverse client base and the 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, Lauren, I believe we are ready to take questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question comes from Pravin Narra with Raymond James.

[Pravin Narra:]

Hey good morning guys.

[Stephen Jumper:]

Good morning, Pravin. How are you?

[Pravin Narra:]

I am good. How are you guys doing?

[Stephen Jumper:]

Good.

[Pravin Narra:]

With regard to kind of the what your customers are saying obviously it’s still soft as we go into the early part of the year, but what do you think they need to see in orders to start picking up on that activity?

[Stephen Jumper:]

Well you know that’s a good question, Pravin. I think we are starting to see as you well know and as others know an increase in the rig count, we’re starting to see a little bit of you know maybe more than a little bit increase in demand for other services which are primarily the pressure pumping guys. And so if you think about where we are in today’s cycle, we are not – I wouldn’t say that we are a leading indicator of activity as we were maybe 20 years ago, I think we are a little bit lagging indicator and so you know we appear to come in a little bit later in the cycle than we have in conventional plays. And so that’s encouraging that some things are opening up. I think it is going to continue to be – I should say it looks like there is going to be improvement in spending and I think it’s a matter of timing for us. I think what’s important for us is obviously we’ve got activity in Permian and in the Delaware and we had some activity in the SCOOP, STACK and got isolated activity in other places, but prices continue to increase I think that opens up some other basins for us. So I think particularly right now in the Delaware in the Permian that some of it’s just getting the process ramped back up again and so right now we don’t have a whole lot of visibility beyond we say the first quarter but it’s probably into the second quarter, but there seems to be more conversation than we’ve had in the past. So it’s encouraging and we think it’s coming. We think we’ve needed, we think we bring a whole lot of valuable information to the table, geohazard identification, well steering and even some rock properties were to help people guide these laterals. So the longer the laterals get, the more important we become I think.

[Pravin Narra:]

Absolutely. And then when we think about that – in terms of the competitive landscape, still haven’t seen any real or haven’t seen as much competition in terms of those guys going back towards either end?

[Stephen Jumper:]

Well I think it’s tough on everybody out there. And not just in North America, but worldwide land and marine seismic spending has been way down over the last few years, and probably is down as it’s never been in my career and I’m by no means an expert. But there is certainly competition in the U.S. There is mainly out of the private group, there is the public companies have pretty well either gone private or gone away but there is a few companies that have been able to add capacity and so it’s still a very competitive market out there. I think we differentiate ourselves a little bit with the additional services that we bring to the table. Our equipment capacity and our ability to respond quickly in terms of [Indiscernible] so it’s still going to be tough for a while not just for our company but for the seismic industry as a whole.

[Pravin Narra:]

Right. And then I guess last one from me. During the [Indiscernible] you guys have been actually been able to pretty keep your cost and keep margins actually in pretty good order given the environment. As we think about, as the activity improves, can we hold cost more steady and get better incremental? How do you think about it?

[Stephen Jumper:]

That’s a really good question, Pravin. And first of all I would say that I want to reiterate the very tail end of 2016 nearly part of 2017 have been particularly tough and so we’ve done the best we can do on cost, but crew count stabilizing a little bit and so we are going to see a little bit of increase in cost. But we had spoken on this call in our industry over the years about efficiencies and the efficiencies driven by on the ground productivity gains, but I do think there are places in this system that we’ve learned through this downturn to pick up some financial efficiency related to crew sizing and equipment sizing and so much of that is related to overall utilization, right. And right now we’ve got, we’ve bad [ph] and low crew count in difficult utilization and so you know as that begins to improve I think that gives us even a better chance to maintain our cost. The most things we deal with now is the cost in up and down of crews in that downtime that up start up and wind down cost and a lot of that will smooth out as we begin to get steady utilization of some crew bags. But, I think we’ve learned a lot on how to handle the larger channel counts and not just being more efficient on the ground but be more efficient throughout the entire system.

[Pravin Narra:]

Perfect. Thank you very much, and hope your throat feels better.

[Stephen Jumper:]

Yes I found a whole lot worse and I feel for Wayne [ph] but I [Indiscernible].

[Operator:]

[Operator Instructions] It appears there are no further questions at this time, Mr. Jumper. I’d like to turn the conference back to you for any additional or closing remarks sir.

[Stephen Jumper:]

Well thank you Lauren very much. And once again I apologize for my sound today. I do want to thank each of you for participating in our call. Certainly want to thank our valuable employees for their tremendous efforts in these tough times. I want to thank our clients and the shareholders for their continued trust in our company and continued support. As we’ve said it’s been a difficult 2016, very difficult run for several years. I think we have some more difficult days ahead of us not just as a company but as a seismic industry, but we believe better days are ahead. There are encouraging signs and we certainly believe our technology that we provide brings added value to the drilling and production chain. In terms of our company, we believe that we are well positioned in terms of personnel and equipment and balance sheet to not just withstand this cycle that’s gone on longer than we anticipated but to capitalize on opportunity as they arise in the future. So thank you once again for listening in and we’ll be back in touch with you early part of May. Thank you.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may now disconnect.