Dawson Geophysical Company
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good day and welcome to the Dawson Geophysical Second Quarter 2017 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 13, 2017. Furthermore as we start this call, please also refer to the statement regarding forward-looking statements incorporated in the Company's press release issued this morning 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 at www.dawson3d.com. The call is scheduled for 30 minutes and the Company will not provide any guidance. I would now like to turn the call over to Steve Jumper, Chairman, President and CEO of Dawson Geophysical Company. Please go ahead, sir.

[Stephen Jumper:]

Thank you, Melanie. Good morning and welcome to Dawson Geophysical Company's second quarter 2017 earnings and operations conference call. As Melanie said, my name is Steve Jumper, 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'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, August 3, 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 second quarter financial results, operating revenues and expenses increased in the second quarter of 2017 as compared to the same period in 2016. During the second quarter of 2017, the company operated 6 crews in the United States in June while effective crew count had been as low as 2 in April. The company operated 1 crew in Canada for a short period of time during the quarter. The low effective utilization in April was primarily due to weather delays and project readiness issues. As of the end of the second quarter, we were operating 6 crews in the U.S. and 1 in Canada. We are currently operating 8 crews in the U.S. and anticipate operating those 8 crews through the end of the third quarter. Bid activity in North America has shown improvement despite the recent pull back in oil prices. During the quarter, the company completed a fairly large surface micro-seismic project, first in over a year and we have been awarded a second micro-seismic project to be completed in the late third or early fourth quarter. The Company continues to operate its multi-component recording crew in the U.S. on a regular basis. Visibility into 2018, however, remains uncertain. While crew utilization is improving and bid activity is strengthening, we continue to operate in a difficult market environment. That said, we have recently been awarded some significant new projects. We believe the oil and gas companies are beginning to put capital back to work as the oil and gas markets reach a supply and demand rebalance. As oil and gas companies seek to minimize their production economics and efficiencies, seismic technology will continue to play an important role, as it has historically, with increasing reliance on improved high resolution subsurface images. I will now turn the control of the call over to Jim Brata, who will review the financial results. Then I'll return for some final remarks and our outlook into the third quarter of 2017. Jim?

[James Brata:]

Thank you, Steve and good morning. Revenues in the second quarter of 2017 were $30.5 million compared to $28.1 million in the same quarter of 2016. As stated in our earnings release issued this morning, we operated 6 crews in the United States in June while our effective crew count has been as low as 2 in April. The Company operated 1 crew in Canada for a short time during the quarter. We are currently operating 8 crews in the U.S. and anticipate operating those 8 crews through the end of the third quarter. Operating expenses in the second quarter of 2017 were $31.5 million compared to $26 million in the same quarter of 2016. General and administrative expenses were $4.5 million in the second quarter of this year compared to $4 million in the same quarter of 2016. Depreciation and amortization expenses in the second quarter of 2017 were $9.9 million compared to $11.3 million in the same quarter a year ago. Net loss for the second quarter of 2017 was $14.8 million or $0.68 loss per share as compared to a net loss of $11.6 million or $0.54 loss per share in the same quarter last year. We recorded an income tax benefit of approximately $400,000 in the second quarter of 2017 compared to an income tax benefit of $1.2 million in the same quarter a year ago. EBITDA in the second quarter of 2017 was negative $5.4 million compared to $2.1 million in the same period a year ago. An EBITDA reconciliation was provided in our earnings release issued this morning. Now I will highlight some balance sheet items. Our balance sheet remains strong. As of the end of second quarter of 2017, we had debt including obligations under capital leases of approximately $800,000, cash and short-term investments of $44.2 million. Our current ratio was 3.6 to 1 and finally working capital was approximately $51.3 million. And with that, I'll turn the call back to Steve for some comments on our operations.

[Stephen Jumper:]

Thank you, Jim. As stated in our earnings release issued this morning, seismic data continues to play an increasingly important role in unconventional drilling programs. Our clients find value in the high resolution images our seismic technology provides. The difficulty in the current market environment lies not necessarily the need for seismic data, but rather in the highly concentrated areas of primary drilling activity in the Permian and Delaware basins of West Texas as we stated in our first quarter earnings release. As such, our primary near term objective is to reduce and eliminate cash burn from the balance sheet while remaining a top tier provider of seismic services with the ability to respond quickly to changes in market conditions. The Company anticipates a capital budget for fiscal 2017 to be at maintenance levels below the $10 million capital budget approved by our board of directors. As Jim stated, our balance sheet remains strong with approximately $44.2 million of cash and short-term investments, $51.3 million of working capital and $800,000 of debt and capital leased obligations as of June 30, 2017. In closing, while market conditions remain difficult, we believe we continue to be well-positioned to withstand the commodity cycle downturn. The Dawson brand and our balance sheet remain strong and our technology is state-of-the-art and our personnel are among the most well respected in the industry. We continue to be well positioned to meet the needs of our clients and our shareholders as market conditions improve. And with that, Melanie, I believe we are ready for questions.

[Operator:]

Thank you. [Operator Instructions] We'll go first to Praveen Narra with Raymond James.

[Praveen Narra:]

Hi, good morning, guys.

[Stephen Jumper:]

Good morning, Praveen.

[James Brata:]

Good morning.

[Praveen Narra:]

I guess in terms of the concentrated activity driving more multi-client, I guess could you go through kind of what's causing that and why that's picking up so much steam. And I know you guys do have the opportunity to win that work in terms of shooting that data not as they do in the library, but can you talk about how that's playing out?

[Stephen Jumper:]

Praveen, I think the multi-client model has been around our industry for a long time. I think you and I and others have talked about this in the past and while it's not a business model that we actively participate in, we do as you stated get the opportunity to bid on such projects for the multi-client providers and what has surfaced or occurred primarily in the Permian and the Delaware Basin areas is the E&P companies have as we all know have taken substantial acreage positions, but these acreage positions are not necessarily contiguous. And so there is some interlocking between various operators out there, various E&P companies and in order to get an accurate image over your acreage, you typically have to shoot a survey that encompasses areas beyond your acreage. And so we've been in a period of time obviously in the last few years where capital budgets have been constrained all the way through the system. Capital budgets have been loosened a little it on the E&P – not a little bit, but quite a bit on the E&P side relative to drilling and completion. But they haven't quite opened up on the geophysical side as they have in prior time periods. And so these multi-client companies are able to go in and put together a group of two to three or four companies that will basically share the cost of that survey and they get more data for fewer dollars and they get better data. And so we've worked on these projects before. They've occurred all over the country over time, but the Permian and the Delaware right now appear to be where the primary drilling activity is. It's where the primary focus is of many E&Ps and I think their desire for seismic data on the large scale, we're talking projects that are several hundred square miles, if not larger. It gives them the chance to get a good image at a good cost point and provides opportunities for us. And so we have good relationships with all of those multi-client providers, we work for a wide variety of them and the competition among those companies is fierce and strong and it takes them a while to put some of their programs together and therefore we're dealing not just with the concentration of activity, but we're dealing to a certain level of timing things that are beyond our control, but we're very happy to have the work and happy to work with them and I think they're all providing good data and we just need to see a little more boost in commodity prices that will increase activity meaningfully outside the Permian and Delaware.

[Praveen Narra:]

Right, I mean it does sound like bidding activity is increasing. You just talked about really – on the call about eight crews potentially working which is great. In the release, you also talked about the micro-seismic potential. Can you talk about how E&Ps – have we seen enough of a shift to guys wanting to run more micro-seismic or these kind of some guys that just really like it doing some pretty big projects?

[Stephen Jumper:]

Well as we have talked about in prior years, there's two components of a micro-seismic project, there is the downhole component where you're actually putting sensors in a well bore and listening to frac from an adjacent well bore and there is more activity in the borehole micro-seismic work currently and historically and we currently are not in that part of the business. And so we over the last several years, as have others, have worked on surface recording, in other words, putting sensors on the surface around a well bore and listening to the frac and hoping to tell or get an indication from activity – fracturing activity as to direction and/or possibly magnitude of the fracture. And so we had a series of those projects several years back. Obviously that went a little bit quiet, we haven't talked about that in quite some time, but during the second quarter, we completed a – about a 40-day job in the SCOOP/STACK area that had very positive results according to our client and we've been awarded another project in that – up in the same area and so we're starting to see some positive results and I think we've made reference in the press release to these ducks – these drilled uncompleted wells, which I'm sure a whole lot more about it than I do, but those appear to be a potential to bring revenue or some operation to the Company. I would caution that it works better in areas such as the SCOOP/STACK and from the Eagle Ford for example from a surface standpoint than it has to date in the Permian and the Delaware, the rocks are just a little bit different and so will we continue to see activity from the micro-seismic standpoint in certain areas, I believe so, but we're very pleased and optimistic to have had the resurgence of these opportunities in our order book.

[Praveen Narra:]

Right, perfect and then I guess just the last one for me. Obviously volatility in commodity prices, recently weakening and then kind of strengthening back up a little bit. Have you actually seen any orders push to the right or anything – any discussion that had been fairly firmly get pushed or it has just mostly been kind of consternation on the operator side?

[Stephen Jumper:]

No, we really haven't seen anything pushed significantly here recently. I think sometimes maybe we're waiting from concept to funding on some of these projects maybe it's taking a little bit longer than we've anticipated. I don't think that necessarily has been driven by the commodity price drop. We've actually had steady to slight improvement in the bidding activity and as well as just conversation about opportunities, which isn't necessarily uncommon at the end of the year. When you start to get to the back half of the year, people have kind of saved some budget, now they're looking to put some of that budget to work. And then we're also at the point where they're starting to look at some 2018 budget anticipation and so we feel pretty good about the eight crews. I'd probably feel better about our crew count now over the next two, three months than I have in quite some time. There's always things we can't control, there is weather and there is cancellations and scope changes and all those kinds of things that we talk about, but I think if we get decent weather and we have good long days now. I think we've got a chance to do some positive things in the third quarter. I think we've got the opportunity to maintain those eight possibly into the fourth in the U.S. and maybe exit the year somewhere around the six range would be kind of what I would estimate now. I think we're seeing some activity interest. There's certainly improvement in the Canadian market, which has been – we had a pretty decent Canadian season last year. I think we've got a chance to have a better Canadian season. So back half of the year, we are cautiously optimistic, it's a little early for us now to project into 2018 and if you look historically, we've been able to look six, nine, 12 months out with some visibility and we're in a market right now where that's probably closer to four, five or six months look forward. So I think we've got a good chance to do some good things here. We'll just – we'll keep working hard at it.

[Praveen Narra:]

That’s perfect. Thanks very much guys.

[Operator:]

[Operator Instructions] We'll go next to Bruce Berger, Private Investor.

[Unidentified Analyst:]

Hi, thank you. I was surprised by the size of the EBITDA loss and wondering how much of that was from the delays in April.

[Stephen Jumper:]

We had a significant – I would say is the word I would use, a loss in April. We had a very difficult April, showed meaningful improvement in May and actually had a much improved June. I will even say overwhelming majority of the issue occurred in April, which is something that has happened to us over the last year on a few quarters, maybe the last 18 months where we've had a really the timing of one really bad month has obviously skewed our numbers and the same thing can be said on the positive side. We can have a very short period that can skew numbers the other way. We have historically said that on a quarterly and annualized basis that our results are unpredictable to a certain level and can be up and down, but in the past, we've said that the trend would be up and to the right and I think where we are right now is some of those cycles in terms of projects being ready and utilization issues are a little more short cycle concentrated than they have been in the past, but to answer, it's a long way around the block to say it was an overwhelming majority of the issue occurred in April.

[Unidentified Analyst:]

So I think you mentioned in the press release these significant new projects, it sounds like these EBITDA losses going forward are going to narrow significantly is what I'm guessing?

[Stephen Jumper:]

Well we're certainly headed in that direction and with intent and possibility. I always caution people that there – what we think today can certainly change tomorrow or next week, but I think we've certainly done some things internally to streamline our operation. I think we've done some things internally to improve our efficiency and our product at the same time and I think we've got everybody row in the same direction and I think we certainly have a chance to show improvement, but I think, we're – in the market we've been in the last couple of years, I do remain cautious, but I am optimistic about our short term opportunities for sure.

[Unidentified Analyst:]

Great. Thank you so much.

[Stephen Jumper:]

Thank you.

[Operator:]

We'll go next to John Potratz with Researched Investments.

[John Potratz:]

Hi. Good morning, Stephen. When I look at your multi-client data libraries, it seems like you would tend to know that these are developing and a sense there's going to be work, but to take so much longer to develop and that's really seems to be more of a lag time in the future work. Is that sort of the sense that I'm getting, but you do know that they're developing because you're not going to just start a big project on day one without really contacting these people I assume?

[Stephen Jumper:]

Yes, I think of course we're not directly involved and necessarily in the development of those projects, and so – but we certainly get a feel from talking to the multi-client providers who are very valuable clients for us as well as our E&P clients that there are projects that are developing and coming down the pike, but it kind of really depends on when they get their participants signed up as to what level before they're going to commence field operations. In some of the projects, the timing varies. Sometimes the projects will be almost not quite crew ready, but they'll be survey ready when they're awarded and really out in the public and then sometimes they're not even started on the permitting phase when they're awarded and begun. And so the timing can vary kind of depending on which multi-client company is doing the project and how they do their work, but there is some lag time involved probably more so in this current environment than we've seen in the past working more on the proprietary side and we do have some proprietary work direct for E&P customers and so I don't want to indicate that all the work is on the multi-client side, but certainly a large portion of it is.

[John Potratz:]

And that's the major shift in the market structure that you've had in the last two or three years compared to say 10 or 20 years ago.

[Stephen Jumper:]

Yes the multi-client providers have always been out there, but the multi-client model is kind of like real estate, its location, location, location and we've seen areas over time that lend themselves to the multi-client model and we've also seen shifts in multi-client activity over time related to where we are in a cycle. Downcycles historically have driven some multi-client work, but in this particular case, I think it is quite unique in that it's not just tied to a downcycle, but it's tied to advantageous acreage positions on behalf of the E&P companies that make the location, location, location thing work very well and so we've seen some of this in the past in the Marcellus for example, in the Eagle Ford and all of these basins over time have had some of this component of activity, but it's probably a little more concentrated in the Permian right now than we've seen in the past.

[John Potratz:]

Okay, great. And is there any chance that there will be other areas besides the Permian and Delaware that you'd be working in other areas where the economics of lot of the other basins don't work at this current dollar price settled for oil and gas.

[Stephen Jumper:]

No, we've got isolated projects currently, recently and in the order book that are outside of the Permian and Delaware. We've got some stuff in Louisiana for example and we've been in Oklahoma in the SCOOP/STACK region and we've been in Kansas and we've been in a little bit in and out of the Eagle Ford area. And so there is some level of activity outside the Permian, but it's not levels of activity like in the past where we've been able to keep one or two crews busy long term in one basin and we've had one or two crews active in another basin and back in 2011, 2012, 2013, we talked about geographic diversity of our projects and we still have some of that, it just so happens that the high level of concentration all across the energy space is the Permian and Delaware, which – when these projects get very large, which they are with a multi-client, the wide open spaces West Texas tend to get little crowded.

[John Potratz:]

I see. Well congratulations on getting – if any crews working in, thank you very much for your efforts.

[Stephen Jumper:]

Well, our folks have been working hard and putting out great effort. Thank you for your interest and your comments. End of Q&A Operator] And that will conclude our question-and-answer session for today. I'd like to turn the conference back over to Steve Jumper for any additional or closing remarks.

[Stephen Jumper:]

Well thank you, Melanie. First I want to thank everybody for listening in to our call and your interest and your support in our company, your company. As we've said before, we continue to be in a difficult market. I think we've rehashed quite a bit here today and in recent calls. I continue to think that this is as difficult of a time as I've been in, in my 30 plus year career. We're obviously disappointed with our second quarter results. We are cautiously optimistic about our opportunities in the third and the fourth quarter and as we stated visibility into 2018 remains somewhat uncertain, but I think we've done some nice things, our people have done some nice things internally to improve our efficiency and our product and our value to our clients and I really want to take this opportunity to thank our valued clients, E&Ps and multi-client providers for their trust in our services. I certainly thank our shareholders for their continued support. We certainly understand the situation that we're all in, but I really want to take the time to thank and show our appreciation to our very valuable employee base that continues to work very hard and continues to be very dedicated and bought into the brand and the services that we provide and we thank them for their efforts and we'll continue to work through this difficult time and hope everybody has a good day and we look forward to talking to you again in November. Thank you very much.

[Operator:]

This does conclude today's conference. We thank you for your participation. You may now disconnect.