Dawson Geophysical Company
Q3 2017 Earnings Call Transcript

Published: 5 Nov 2017

[Operator:]

Good day. And welcome to today's Dawson Geophysical Third Quarter 2017 Results Conference Call. 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 content 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. The call is scheduled for 30 minutes and the company will not provide any guidance. As a reminder, today's conference is being recorded. I would now like to turn the call over to Stephen Jumper, Chairman, President and CEO of Dawson Geophysical Company. Please go ahead, sir.

[Stephen Jumper:]

Well, thank you, Deanna. Good morning, and welcome to Dawson Geophysical Company's Third Quarter 2017 Earnings and Operations Update Conference Call. As Deanna stated earlier, my name is Steve Jumper, and I'm 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 I want 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 2, 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 third quarter financial results. We are encouraged by our third quarter results, which from an EBITDA standpoint is our best quarter in two years. Our third quarter results were positively impacted by the increased utilization of active crews, which drove revenue and EBITDA improvement. Operating revenues increased 62% to $45.6 million in third quarter of 2017 compared to $28.1 million for the quarter ended September 30, 2016. During the third quarter of 2017, the company operated six to eight crews in the United States with one crew active in Canada for a short period. The company is currently operating six crews in the U.S. and two in Canada. The fourth quarter in the U.S. historically has been challenging due to shorter workdays and the holiday season. We anticipate a temporary decline in utilization during the mid-fourth quarter range in the U.S. due to project readiness issues and expect that in the quarter, with six to seven crews in the field in the U.S. Utilization in the U.S. is expected to increase to six to eight crews through the first quarter of 2018. The winter season in Canada has began early as we currently have two crews in the field, and we anticipate operating two to three crews in Canada for most in the fourth quarter. Utilization in Canada is expected to increase to three to five crews through the first quarter of 2018. While bid activity in North America has remained steady, despite the recent movement in oil prices, we continue to experience a challenging market environment. The company completed a micro-seismic project in the second quarter of this year, followed by another micro-seismic project in the third quarter. In addition, we have then awarded a number of micro-seismic projects, one of which we are currently performing that will continue into '18. The company continues to operate its multi-component recording crews in the U.S. on a regular basis. While third quarter results are encouraging, we continue to maintain a conservative approach at Dawson, designed to reduce cost, protect the balance sheet and position ourselves as the leader of onshore seismic data acquisition services in North America. I will now turn the control of the call over to Jim Brata, who will review the financial results. Then I will return with some final remarks and our outlook into the fourth quarter of '17. Jim?

[Jim Brata:]

Thank you, Steve, and good morning. Revenues from the third quarter of 2017 were 45.6 million, up 62% compared to $28.1 million for the quarter ended September 30, 2016. As stated in our earnings release issued this morning, we operated six to eight crews in United States, with 1 crew active in Canada for a short period. The company currently is operating six crews in the U.S. and two in Canada. We anticipate a temporary decline in utilization during the mid-fourth quarter in the U.S. due to project readiness issues and expect to end the quarter with six to seven crews in the field. Utilization in the U.S. is expected to increase to six to eight crews through the first quarter of 2018. The winter season in Canada has begun early as we currently have two crews in the field, and we anticipate operating two to three crews in Canada for most of the fourth quarter. Utilization in Canada is expected to increase to three to five crews through the first quarter of 2018. Also services in the third quarter of 2017 was $36.6 million compared to $28.1 million in the same quarter of 2016. General and administrative expenses decreased to $3.4 million in the third quarter of this year compared to $3.7 million in the same quarter of 2016. Depreciation and amortization expense in the third quarter of 2017 was $9.7 million compared to 10.6 million in the same quarter a year ago. Net loss from the third quarter of 2017 was $2.8 million or $0.13 loss per share as compared to a net loss of $12.4 million or $0.57 loss per share in the same quarter last year. We recorded an income tax benefit of $1.4 million in the third quarter of 2017 compared to an income tax benefit of $1.6 million in the same quarter a year ago. EBITDA in the third quarter of 2017 was 5.5 million compared to negative EBITDA of $3.4 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 the third quarter of 2017, we had debt, including obligations under capital leases, of approximately $8.6 million, cash and short-term investments of $42.5 million, our current ratio is 3.6

[Stephen Jumper:]

Well, 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 as exploration and production companies continue to focus on returns by lowering costs and increasing production. Our clients find value in the high-resolution images our seismic technology provides. There are difficulties in the current market environment that lie not in the need for seismic data, but rather in the highly concentrated areas of primary drilling activity in the Permian and Delaware basins of what -- primarily in the Permian and Delaware basins of West Texas, as stated in our second quarter earnings release. The majority of the seismic activity in these concentrated areas is currently driven by multi-client data library companies, a model we do not participate in, but we do act as a contractor for several of the largest providers. The competition between various multi-client providers remain strong and affects project timing of seismic programs are put together with multiple participants, a situation which is beyond our control. It is our belief that seismic data acquisition activities will increase in producing basins outside of the Permian and Delaware basins as commodity prices improve and those basins become more economic. During the third quarter, the Board of Directors approved an increase in our capital budget from $10 million to $16 million for 2017 in response to an attractive opportunity to acquire seismic data acquisition equipment. The company had capital expenditures during the quarter -- third quarter of $9.1 million that included an $8 million strategic capital lease at favorable rates for previously deployed multi-component GSX equipment. Capital expenditures for 2017 were $15.3 million through September 30, 2017. Also, during the quarter, the company retired its final remaining equipment note payable. Our balance sheet, as Jim said, remained strong with approximately $42.5 million of cash and short-term investments, $56.2 million of working capital and $8.6 million of debt and capital lease obligations as of September 30, 2017. In closing, while market conditions remained challenging, we believe we are well positioned to withstand this commodity cycle downturn that's been going on for several years. The company -- excuse me, the Dawson brand and our balance sheet remains strong, 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 shareholders and clients as we delivered the best-in-class, high-resolution sub-surface images that enable our clients to reduce cost and improve their operating efficiency. And with that, Deanna, I believe, we are ready for questions.

[Operator:]

[Operator Instructions] We'll go first to Marshall Adkins of Raymond James.

[Marshall Adkins:]

Mr. Jumper, $5 million of EBITDA. That's pretty good quarter there.

[Stephen Jumper:]

We're encouraged. Thank you.

[Marshall Adkins:]

I'm more encouraged or at least as encouraged. So you got six to eight crews which you were running. And I know you've been going up in channel count per crew. How much of your channel count was being utilized during the quarter? Because in old days we might have thought, for all your channels, you maybe could run as many as a dozen or more crews? Are we -- the question, I guess, is based on the channel count, are we getting closer to full utilization in the crew count would adjust?

[Stephen Jumper:]

I think that's a fair assessment, Marshall. I think that's, in my opinion and my belief, is that, that continues -- the channel count continues to increase all across North America. And I think that channel utilization for us and industry-wide is probably higher than what you would consider the old-style crew utilization. And that particularly for us and the current environment with a multi-component year, which is why we made the move, we made on that attractive opportunity based on what -- Canada historically is multi-component or primarily multi-component recording. And so we've got pretty big -- pretty large multi-component crew go in the U.S. and one in Canada. So if you think about we've got a project with about 20,000 multi-component boxes on it, which means that crew is 60,000 channels in reality. So it's not uncommon for us to be in the 15,000, 20,000, 25,000 channel range.

[Marshall Adkins:]

Which is way higher than you would have been three or four years ago.

[Stephen Jumper:]

Yes. I think there is no such thing as an average because we do run some that will be down in the 5,000 to 8,000 channel range as well. But it's probably based on where we're working, primarily West Texas with the 15,000 channel per crew world today. And it was probably a 10,000 channel per world, maybe 2, 3 years ago, something like that.

[Marshall Adkins:]

That's a big deal. So does that -- I assume everyone else in the industry is doing some similar deed. Are you seeing as we get more tighter utilization on a channel count, if you will, are we seeing any potential for pricing leverage?

[Stephen Jumper:]

Pricing has pretty well stayed relatively steady. The way we're shooting things now compared to the way we shot things three years ago in terms of energy, effort and the tightness of the grade, has changed quite a bit. And so our productivity on turnkey jobs is really, really high. We -- the crews are performing very well. And so I think pricing right now, I would call it steady. It certainly has not seen significant recovery. But I see productivity and utilization -- or excuse me, productivity and efficiency has greatly increased. Going forward, we're still in a challenging market environment, I think, particularly with certain types of equipment like multi-component stuff. I think there's certainly potential for some movement. I don't think we're there yet. And we're still having to the work within the capital budgets of what our clients have allocated for seismic activity, which is still not -- while there's activity, it's still not been a meaningful increase in those budgets today. And we think that's coming, but it's not there yet. So I think the potential is there. Certainly, as channel count begin to get utilization increase is that possibility is certainly there.

[Marshall Adkins:]

So if pricing isn't moving yet to -- I mean, obviously, a massive sequential improvement in margins here and it sounds like a lot of that is just you're highly productive and efficient. Can you maintain that efficiency going forward? In other words, is it reasonable to think of $5000 or $5 million of EBITDA a quarter is a repeatable event? Or is that kind of a one-off just because you're really efficient this quarter and it falls back going forward?

[Stephen Jumper:]

Well, we don't give forward-looking guidance. But I would tell you that if you look at our company historically, and you look at our industry historically. Our quarter-to-quarter results have always had a high level of variability, primarily related to utilization issues that in the past were predominantly driven by weather issues. In today's world, where we've been this year, probably the last 18 months, is that primary utilization issue that we deal with is project readiness. In other words, would it being a multi-client world, getting the participants in, getting the job permitted and surveyed and ready. And so I think we're still, the answer to the question is somewhere in between the two. We're certainly, remain in a challenging environment. We remain in a highly concentrated area of activity, generally speaking. And I think we're going to continue to be somewhat lumpy certainly in the near term.

[Marshall Adkins:]

We'll let me come at a different way. You didn't exactly have great weather last quarter. I mean, being here in Houston, there was that little storm that kind of rolled through. You had a bunch of rain up in the Permian from time to time, so weather wasn't exactly favorable for the quarter, was it?

[Stephen Jumper:]

We had very little impact, if any, from the hurricane event. We did have some weather in West Texas, but I wouldn't consider the weather in this quarter to be extraordinarily impactful for us.

[Marshall Adkins:]

Two more for me, and I will turn it over to somebody else. The equipment you bought, attractive opportunity. Define attractive opportunity. You're buying the stuff for $0.50 on the dollar or what?

[Stephen Jumper:]

I really can't go there. Because I think that's a tough because this is used equipment. It fits right in with our existing equipment base. And it came out of a rental pool, and it was a situation where it had some recent, some near-term need. And we felt like it was more attractive, I mean, certainly, being the cost of equipment was favorable. But it was more -- it made more sense for us to purchase it at a favorable term than it was to put in the…

[Marshall Adkins:]

Clearly, less than new build cost.

[Stephen Jumper:]

Absolutely, yes. Yes.

[Marshall Adkins:]

Give me an overview of how I should think about profitability of the crews that were running this last quarter versus this quarter we're shifting to Canada? So Canada versus whatever profitability. And likewise, you mentioned in your release, these micro-seismic projects, how do the profitability of micro-seismic projects compared to conventional projects? So just compare and contrast profitability in a conventional world like third quarter to how Canada looks in these micro-seismic things coming up?

[Stephen Jumper:]

The micro-seismic crews are really nice projects to have. They probably carry, from a margin standpoint, the best margin out there because they're typically just -- it's equipment on the ground and a much a smaller personnel crew. So -- and there's not active energy sources. So micro-seismic projects do well, I think it's too early right now to tell what the net impact of the -- what the profitability impact is going to be on Canada. They do have 2 working -- it feels like, at least for our Canadian operations, that there's even -- could begin to really firm up into Q1. And if you look at Canada historically, Canada historically has carried higher margins with the work that they do because it's such as a short-cycled season and they had to get quite a bit down in that November-to-March time frame. So I think where we are into the fourth quarter is -- looking ahead, is going to be highly contingent upon this mid-quarter slump that we're going to have. And we're going to have several crews go down, it feels like, the mid-quarter because the project readiness issues, they're going to come back again. And then we'll see what weather impact we're going to have for the quarter. So as I said -- as we said in the release, this quarter has historically been our toughest one just because the weather concerns and the fact that we got these shorter days. And so -- I mean it gets dark at 5 -- at 6

[Marshall Adkins:]

Well, you certainly made my modeling a lot more easier after this call, thank you Steve.

[Operator:]

[Operator Instructions] We'll go next to John Potratz of Researched Investments.

[John Potratz:]

In the press release, you talked about the multi-component providers in the Permian Basin. My sense is that it just takes these people long time to put projects together. And that you can get a sense that there's projects being developed out there, but they're not coming to fruition because you have to take in -- have a very large component area to put together and get under a lease before they can come to you and get it, before you can do the seismic. So that takes a long time for that process to get going. Is that correct?

[Stephen Jumper:]

That is correct. We really have to look at three things. It's what you consider -- first of all, all of our contracts that we have, have always been cancelable or can be modified on very short notice in terms of scope. So a large project can be reduced in size. A smaller project can be increased in size. And so you really have to look at the market where we are today in three phases. You have what you would consider is contracted order book, and then you have a project that had been awarded that not you're really sure what their timing's going to be. And you have projects that are in the bid phase that they're trying to put together. And sometimes, because of the variables that are out there with land positions and participants and those types of issues, those three items move around more so now than they ever have. In other words, you could have one that's in the bid phase, it becomes very active very quick and becomes crew-ready very quick. And you may have one that's sitting out there that you think is crew ready, but it may actually grow in size with a late participant, which puts that program farther on the schedule -- further back on the schedule. And we've always dealt with some level of that issue in the past. It's probably a little bit more variable today based on the number of multi-client providers that are operating in the Permian as well as the size of the projects that are being shot, their projects are larger than they have been historically. And just the fact that we continue to operate the primary areas of operation for us and other service companies and E&P companies still aren't what I'd considered to be fairly concentrated areas of the Permian and Delaware. And so there's a lot of factors in there, but I think, generally speaking, I would agree with your assessment.

[John Potratz:]

That working on these projects, they haven't put them together, that looks like you're going to have quite a bit of business. But we don't know until they really come together. The psychology is much more positive to say that was, say, six months ago?

[Stephen Jumper:]

I would agree with that. I think we had a rough Q2. We had the one, in particular the early part of Q2, we had a significant drop in utilization. We're going to have a drop in utilization in Q4, but it doesn't feel like what was happening to us in Q2 nor does -- in terms of how long that drop's going to be. So I agree that bid activity seems to be pretty steady. I sense that more and more E&P companies have a desire for seismic data to be a part of their drilling program. Going back to your question that Marshall asked earlier, one -- the seismic data because of the amount of time it takes to get a project ready, we don't have that as much of a short-term demand boost that you'll get from other services that can happen very quickly. And so, yes, sentiment is better. We sense more optimism. Certainly, with this week, with the commodity prices making a little bit of movement. It certainly feels more positive, but we continue to operate in a challenging environment in the short term.

[John Potratz:]

And I noticed that in the West Permian that The Wall Street Journal article that Exxon and Chevron are dramatically increasing their -- in the West Texas, and said that Exxon plans to boost output by 45% a year through the end of the decade. Are you seeing any net benefit or any interest on companies like Exxon? Are they very slow to implement? But does that -- is that still a positive environment for you in the Permian?

[Stephen Jumper:]

It is. The several of the majors have had very high activity levels in the Permian, and including seismic activity. Many times, particularly with the multi-client world, we don't always know exactly who the driver is behind a particular program. So we may or may not be aware if it's a major or it's an independent. I mean, we'll generally know some of the players involved in a program, but we may or may not know everybody that was involved. And if you go out and you shoot a survey with a couple of hundred square miles, we may not be fully -- have full knowledge of all the precipitants in that survey. So it's kind of hard for us to tell exactly and directly which majors or independents are directly involved.

[John Potratz:]

But if Exxon and Chevron were saying they plan to increase production, you have a sense that you're probably going to get some business, but you don't know who, when, where. But even if a Xelvin comes in, wants to sit in Permian basin, they'd probably get some component of it?

[Stephen Jumper:]

Correct.

[John Potratz:]

And are there other expansions to other areas like the STACK, the Eagle Ford or North Dakota at this time, are they developing?

[Stephen Jumper:]

We continue to operate a few crews, from time to time, in other parts of the country in other basins. But likely we've talked about in the Q2 call, they can be a project here and then a project there, which is not like in the past, where you could put a crew under a particular basin and they would string together two or three projects. So I would say the project outside of the -- these two primary basins tend to be one-offs. And I think there will be increased activity in other basins, but I think we're going to have to have a little more help on commodity pricing. For that to happen, I don't know exactly what the trigger point will be but -- in terms of commodity price. But I do think that we're going to have to have some help to get meaningful activity in other basins outside the Permian and Delaware.

[John Potratz:]

And finally, on the equipment. So this -- the equipment you've added is -- [indiscernible] equipment are a lot lower cost component that what you have currently and it was just -- it's like going to a fire sale. You got -- there was some equipment there you just couldn't refuse.

[Stephen Jumper:]

Well, we needed it and...

[John Potratz:]

Oh you needed it. Oh okay.

[Stephen Jumper:]

And it was really a situation where when you looked at cost of rental basis versus a purchase basis, we felt like it was an attractive situation. It was equipment that immediately went to the field and is currently in operations. So there were multiple factors, multiple variables that affected that decision.

[Operator:]

[Operator Instructions] And with no further questions holding, I'd like to turn the conference back over for any additional or closing remarks.

[Stephen Jumper:]

Well, thank you for your time and for listening in to our call. We appreciate your interest. As we've said, we are encouraged and pleased by our quarterly results. We continue to operate in a challenging environment. I think we'll continue to -- the utilization be somewhat of a variable moving to '18. But at this point, I think it's fair to say that we're encouraged. I really like to thank -- an opportunity once again, to thank our employees and their continued dedication and their hard work. They continue to be more efficient and more energetic than ever. And I believe they're working hard on behalf of both our client base and our shareholder base. And I would like to extend on behalf of company and the shareholders of our greatest gratitude to them. Certainly, I want to thank our valuable clients for their trust in our services. And certainly, we want to thank our shareholders for their support and interest. And wish everybody a great holiday season. It was nice to see the Astros win last night and will be back in touch with you probably in February to discuss our year-end results. Thank you.

[Operator:]

Thank you for your participation. That does conclude today's conference. You may now disconnect.