Dawson Geophysical Company
Q4 2014 Earnings Call Transcript

Published: 12 Nov 2014

[Operator:]

Good day. And welcome to Dawson Geophysical Q4 and Year End Results Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) In accordance with the Safe Harbor provisions of Private Securities Litigation Reform Act of 1995, Dawson Geophysical Company cautions that statements made today in this conference call, which are forward-looking and which provide other than historical information involve risks and uncertainties that may materially affect the company’s actual results of operations. These risks include, but are not limited to the volatility of oil and natural gas prices, dependence upon energy industry spending, disruptions in the global economy, industry competition, delays, reductions or cancellations of service contracts, high fixed costs of operations, external factors affecting our crew, such as weather interruptions and inability to obtain land access rights of way, whether we enter into turnkey or term contracts, crew productivity, limited number of customers, credit risk related to our customers, the availability of capital resources, operational disruptions, the possibility that the business combination with TGC Industries Incorporated does not close when expected, excuse me, or at all because required regulatory, shareholder, other approvals and other conditions to closing are not received or satisfied on a timely basis or at all, the risk that the benefits from the business combination may not be fully realized or may take longer to realize than expected, the ability to promptly and effectively integrate the business of the company and TGC, the reaction of the companies' customers, employees and counterparties to the transition -- transaction and the diversion of management time on transaction-related issues. A discussion of these and other factors, including risks and uncertainties, is set forth in the company's Form 10-K for the fiscal year-ended September 30, 2013. Dawson Geophysical Company disclaims any intention or obligation to revise any forward-looking statements whether as a result of new information, future events or otherwise. During this conference call, we will make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of non-GAAP measures to the applicable GAAP measure can be found in our current earnings release, a copy of which is located on our website www.dawson3d.com. Please note this event is being recorded. I would now like to turn the conference over to Steve Jumper, President and CEO. Please go ahead, sir.

[Steve Jumper:]

Thank you, Denise. Good morning. And welcome to Dawson Geophysical Company’s fiscal fourth quarter and year end 2014 earnings and operations conference call. As Denise said, my name is Steve Jumper, Chairman, President and CEO of the company. Joining me on the call is Christina Hagan, Executive Vice President and Chief Financial Officer. The call is scheduled for 30 minutes and we will not be providing guidance, and I will make some remarks and then open the call up for questions. As mentioned in the fiscal fourth quarter year end 2014 press release of this morning, Dawson Geophysical reported revenues of $62,570,000 for the quarter ended September 30, 2014. The company's fourth fiscal quarter of fiscal ‘14 compared to $69,673,000 for the same quarter of fiscal 2013. Revenues for fiscal year end 2014 were $261,683,000, compared $305,299,000 for the prior fiscal year. We reported net loss for the quarter of -- for the fourth quarter of 2014 of $3.8 million or $0.49 per share attributable to common stock, compared with net loss of $2.79 million or $0.35 per share attributable to common stock in the same quarter of fiscal 2013. For fiscal 2014, net loss was $12.6 million or $1.59 per share attributable to common stock, compared to net income of $10.48 million or $1.31 per share attributable to common stock for fiscal 2013. EBITDA for the fourth quarter of fiscal 2014 was $3,748,000, compared to $6,635,000 in the same quarter of 2013. Fourth quarter EBITDA increased from $1,466,000 in the third quarter of fiscal 2014. EBITDA for fiscal 2014 was $22.73 million, compared to $57.262 million for fiscal 2013. Included in the fourth quarter of fiscal 2014 results is approximately $950,000 of transaction cost related to the recently announced business combination with TGC Industries. During the quarter we operated a peak of 10 crews and had no Canadian activity and limited microseismic activity. Our balance sheet coming out of September 30, 2014, remains strong with approximately $49 million of cash and short-term investments, $73.7 million of working capital, and $11.685 million of debt. As mentioned in the press release issued early this morning, fiscal 2014 was a difficult year for the worldwide geophysical industry and our company. Demand for services softened from 2012 and 2013 level. That said, current demand for services at Dawson do remain relatively steady. Many of the setbacks that negatively impacted utilization rates in fiscal 2014 were related to project readiness issues and client-driven project delays on awarded projects and not necessarily due to canceled contracts. Despite increment weather conditions late in the fourth quarter and short delays on several projects, we did notice a slight improvement in utilization rate as a peak of 10 data acquisition crews were deployed during the fiscal fourth quarter compared to average of eight crews in the third fiscal quarter of 2014. While not at 2012 and 2013 levels, our order book remains steady and is sufficient to sustain 9 to 10 crews throughout calendar '14 and into 2015 pending project readiness issues with crews predominantly in oil and liquid-rich basin, such as the Permian, Eagle Ford, the MidContinent, the Mississippi line of Kansas and Oklahoma. Capital expenditures for 2014 were reduced to $34 million, compared to $50 million in 2013. Capital expenditures for fiscal 2015 are anticipated to be at maintenance capital levels. As mentioned earlier, the balance sheet remained strong with close to $50 million of cash and short-term investments, approximately $74 million in working capital and $11.7 million of debt. As many of you have seen on October 9, 2014, we entered into a strategic business combination with TGC Industries. We believe that the combination of Dawson and TGC results in shared platforms of people, services and equipment that will better serve our valued clients, shareholders and employees. Collectively, our resources further position us to increase utilization rates, to reduce costs and provide avenues of growth for the combined company with the strong balance sheet. Details are outlined in the October 9 press release and conference call found on our website, www.dawson3d.com. Consistent with our previously announced quarterly dividend policy on November 10, 2014, the Board of Directors approved the payment on December 8, 2014 of a $0.08 per share quarterly dividend to company shareholders of record at the close of business on November 24, 2014, the record date. The quarterly dividend represents an aggregate distribution of approximately $645,000 based on the outstanding number of shares of common stock as of the declaration date, or approximately $2,580,000 on an annualized basis. Despite the recent pullback in oil prices, we believe the seismic technology remains a valuable tool for exploration and production companies. We believe the ability to high grade drilling locations and reduced development costs remains a priority for our clients. We believe that our robust equipment base, strong balance sheet and qualified employee base positions us for growth, to capture growth opportunities as they arrive. And with that, Denise, I believe we are ready for questions.

[Operator:]

(Operator Instructions) And our first question is from Veny Aleksandrov from FIG Partners. Please go ahead.

[Veny Aleksandrov:]

Good morning.

[Steve Jumper:]

Good morning Veny.

[Veny Aleksandrov:]

My first question is on the outlook and you find it in the press release. It seems to me that there is a little bit change in the language. Am I reading too much and can you say our billing is very stable and yeah, we are struggling with utilization. We’re pleased to see where it’s coming down the road. (Indiscernible) demand is stable but it’s still lower than ‘12, ‘13. Is it worse than it was six months ago? Can you spend a little bit time talking about that?

[Steve Jumper:]

Veny, I think our order book has stayed relatively steady for the last 6 to 12 months. It is not as we’ve talked about in the past at 2012 and 2013 level. Conversations we're having with people continue to be positive going into calendar ‘15. I think we've been awarded some new project here recently. We have several bids outspending that indicates that based on what we see today the information we have today that the activity level for ‘15 appears to be about where it is in ‘14, maybe we'll see some improvement later in the year. Of course, it’s depending on oil prices and what the E&P companies do related to capital budgets in ‘15. But I don’t think that we’ve really intended to change any language. We’ve struggled quite a bit in -- excuse me, in ‘14 with the utilization issues. Those have gotten better in fiscal Q4. And they appear like in calendar Q4 and into calendar Q1. We’ll continue to be able to operate. We think 10, it could drop to nine for short period of time but it’s not an overly robust market out there, not like it was in ‘11, ‘12, early part of ‘13 timeframe. But it certainly has not gone completely dead either on the U.S. side.

[Veny Aleksandrov:]

Got it. Thank you. And then the microseismic grew, you had limited work during the quarter. When you talk about order book and how you see your crews operating for until the beginning of ‘15, what’s going to happen with the microseismic group. Do you have work to give out for them?

[Steve Jumper:]

We did complete one project. I think part of it was the tail end of fiscal ‘14, some that rolled in -- most of it rolled into October, I believe. We’re still trying to gain some traction in the microseismic world from the surface standpoint. I think we’ve got a couple of proposals out there for projects later this quarter or early part of calendar ’15. And so, I would anticipate ’15 levels to be about ’14 levels, which should be maybe one or two projects a quarter going into ’15. I think it’s an emerging. It continue to be an emerging technology certainly from the surface side, which is a different technology than the down hole, bore-hole, bore-hole to bore-hole business that we are not in. I think the results that we are seeing continue to be positive. As I have said, ever since we’ve made into this business line, I think the burden is going to be on weather, not the technology, a, you can actually get useful data from it and what the value of that data is going to be. Similar to what we’ve been in with multi-component data in the past. In ‘14, we saw quite a bit of activity with multi-component work in the U.S. and in Canada, and I think microseismic’s along the same line. I think it’s still going to be a small part of our operations and certainly in the early part of ’15.

[Veny Aleksandrov:]

Thank you. Appreciate that.

[Steve Jumper:]

Thank you, Veny.

[Operator:]

And our next question is from Jim Rollyson from Raymond James. Please go ahead.

[Jim Rollyson:]

Good morning, Jumper.

[Steve Jumper:]

Hey Rolly. How are you?

[Jim Rollyson:]

Pretty good. When we look back to this quarter and think about the cost side of things as it relates to weather and some of the moving delays and what not, if you normalize for that, just any sense of kind of what a base margin would look like ex-the kind of extracurricular impacts?

[Steve Jumper:]

Rolly, I think it would be difficult for me to put a number on it. I think we had a pretty good August. In July, we did have 10 crews most of the quarter. We got off to a slower start in July than we had hoped, didn’t finish the quarter quite a strong due to weather and so we had 10 crews in the field operating. But I would say that we didn't fully realize the benefit of what we would consider 10 crews on a normal quarterly basis. And so I think we potentially left due to a slower start up in July with crew moves and getting things deployed and weather impact and the short delays. I think we left quite a bit out there, Rolly.

[Jim Rollyson:]

And when you think about that, at least with the slower start and particularly the moves and you kind of compare that to what you guys are going to be doing once you get the TGC merger closed, does that helps solve some of that problem where you’ve got equipment in places that help improve or cut down those longer moves?

[Steve Jumper:]

Well, we certainly think so. We know that our industry being relatively small, we know that there have been instances where we’ve moved out of the region and they moved into a region almost at the same time. One of the things that we have struggled with, Jim and this backlog or order book thing is always hard to articulate. It’s difficult to articulate in terms of dollars or time or any of those things because you never really sure, how that order book or that backlog moves forward. I have heard 50% comes forward in this quarter and those kinds of things. And that’s a difficult thing to project. The issue that we deal with and I think has been in our industry for a long time is you schedule these projects out and you have to maintain a certain level of capacity to maintain that project load looking out over time. And if you get any hiccups in that schedule, whether it’d be a client delay or land access delay or weather delay or all those things that happen in our business, you have to have an order book that has not just depth to it, but has some width to it. And it’s hard to -- when you get down to the 8, 9, 10 crew range, it’s hard to manage the short-term utilization issues versus the long-term utilization issues. And we believe in addition to the crew move issues than in addition to the shared resources and being able to reduce our dependence on third party issues, we believe combining the company’s order books and might help us alleviate some of the scheduling issues and allow us to make a better attempt to right size capacity on a crew count level, maximize utilization on a channel count level, and continue to meet our clients' timings and our clients' needs and at the same time give us some relief on what I believe our industry all through the U.S. is dealing with, and that’s the short-term utilization issues.

[Jim Rollyson:]

That’s perfect. That’s helpful. Last one for me. On the 9 to 10 crews you’re kind of looking at for 4Q, maybe what your outlook is right now on utilization of that and just usually we get into holidays and stuff that sometimes causes some havoc. So what’s your thought there?

[Steve Jumper:]

In the U.S. though, we are approaching the most difficult, the U.S. is not like Canada in the strict distance of the word that it’s seasonal, but we are in that time frame where we get some holidays coming up and holidays compound issues, your clients are making their own personal and business arrangement. The land owners are making arrangements and crew personnel are doing things. So the holiday while a great time of the year are obviously somewhat disrupted. It gets dark early here in West Texas. It’s getting dark around 6 o'clock and on the Eastern side of time zone it’s 5 o'clock and still the days are shorter. And so this is the most difficult time of the year. However, I think we had a pretty good October. I haven’t seen everything in yet, but utilization was pretty good in October. Utilization in November feels pretty good. The use of the cableless equipment that we are operating 10 and probably six of them were cableless and four cable. Particularly on the cableless side, we have a little less issue with daylight than we have with the cable crews and that that equipment is up and running earlier. And so you are actually recording data a little bit earlier so than you are traditionally with a cable system. So I think we’ve got a little bit of help with that daylight issue on particularly the cableless crews.

[Jim Rollyson:]

Okay. Appreciate the color. Thanks, Steve.

[Steve Jumper:]

Thanks, Rolly.

[Operator:]

And our next question is from Jason Wangler from Wunderlich Securities. Please go ahead.

[Jason Wangler:]

Hey. Good morning, Steve.

[Steve Jumper:]

Jason, how are you?

[Jason Wangler:]

I’m doing all right. I just had one, you mentioned the 2015 CapEx is basically be in maintenance. I’m not trying to pin-down over the number, but could you may give what that historically look like and maybe with the equipment, you guys bought the last few years, now just kind of where that looks?

[Steve Jumper:]

Our -- most of our CapEx in the last three to four years has been on two things. It’s been -- the big numbers have been energy source units and cableless recording equipment. I think for now most of that is behind us. I think, we’ll continue to see incremental additions and replacement of these -- of the wireless channels. The attrition rate on wireless channels can be a little bit more than on the cable side. So, Jason, it’s always, how we sound invasive, I know that. But it’s always difficult to really take a hard -- put a hard number on the maintenance CapEx. I think, probably, for fiscal 2014, I think, we’re probably somewhere around $8 million for the maintenance capital level. So I would anticipate $8 million to $10 million, somewhere in that range, that’s rolling stock. That’s a --and there maybe some relief off of that, because our crew count down a little bit and then, once we get the opportunity to combine the two company’s, I think that number probably will stabilize somewhere around that number $8 million to $10 million, is what I think.

[Jason Wangler:]

That’s helpful. I appreciate, Steve.

[Steve Jumper:]

Thanks, Jason.

[Operator:]

(Operator Instructions) Our next question is from John Deysher from Pinnacle. Please go ahead.

[John Deysher:]

Hi. Good morning.

[Steve Jumper:]

Good morning.

[John Deysher:]

Basic question, revenues for the quarter were down about 10%. G&A even excluding the $950,000 of transaction-related fees, if we back that up that was 3.7 versus 3.2. Can you provide any color as to why G&A went up 16% or so, while sales were down 10%?

[Christina Hagan:]

I think there is a couple of things, we’re implementing a new software system and that’s been a kind of expensive for us as far as having the personnel, we run a pretty lean shot with G&A. But when we’re adding something as significant as new software system, we’re going to add some folks on, both contract and employee. So that’s part of it. I think that just overall -- just even with kind of coming on with the merger and so forth. There is some other expenses that we have that aren’t picked up as transaction costs but do affect that line.

[John Deysher:]

Okay. So, going forward, it would make sense just to annualize that $3.7 million, $3.8 million?

[Christina Hagan:]

I think so.

[John Deysher:]

Okay. And then one merger-related question, where is the headquarters of the combined company going to be?

[Steve Jumper:]

Midland.

[John Deysher:]

It will be in Midland. Thank you.

[Steve Jumper:]

Thank you.

[Operator:]

And our next question is from Steve Kavulich from Gates Capital Management. Please go ahead.

[Jeff Gates:]

Yeah. It’s actually Jeff. What are the closing conditions have to be met and regulatory approvals do you need for the merger?

[Steve Jumper:]

Well, we’ve got the Hart-Scott-Rodino filing, that’s been filed and then we’ll have the -- so we’ll get that. We’re in that process and then there’s the filing of the S4 which was filed, I believe, last Thursday that’s in for SEC review. And then of course, the shareholder vote, once the proxy is out.

[Jeff Gates:]

Thank you.

[Operator:]

And we have a follow-up question from Veny Aleksandrov from FIG Partners. Please go ahead.

[Veny Aleksandrov:]

My question is on Canada, what -- I mean we’re in November now, what are you hearing? While you’ve heard a lot of request, do you have any contracts sign or contract that’s going through, what’s going on there?

[Steve Jumper:]

Veny, the Canadian market is tougher than I think anybody anticipated. I think we’re still optimistic on our side that we have secured project. We have some proposals out and are waiting to hear on some other projects. But at this point, I think, we’re hoping to get one crew deployed for the season. We got a little bit earlier start last year. We were out in the field in December. And it’s just been little bit tougher up there then it has been certainly in recent years. And so we’re still hopeful that we’ll get one deployed for the season but where we are today is little to earlier to commit to that.

[Veny Aleksandrov:]

Thank you.

[Operator:]

I’m showing no further question at this time. That concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Steve Jumper:]

Well. Thank you, Denise. And I want to thank all of you for participating in the call. As we’ve pretty well outlined where we are with our business as of today, we’re extremely excited about the business combination with the TGC Industries. Hopefully, we’ll have a closing in the first calendar quarter of ‘15. We encourage your support and look forward to welcoming them and their shareholders into the group. I want to thank our clients, our employees, and our shareholders for their continued support and trust. And we look forward to talking to you again soon. Everybody have a wonderful happy holiday season and we’ll talk to you soon. Thank you.

[Operator:]

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