Dawson Geophysical Company
Q1 2015 Earnings Call Transcript

Published: 19 May 2015

[Operator:]

Good day and welcome to Dawson Geophysical First Quarter 2015 Earnings Conference Call and Webcast. All participants 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 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 the exhibit 99.5 and its Form 8-K A filed with the SEC on April 30, 2015. 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 are covered by those statements. During the conference call, management will 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, sir.

[Steve Jumper:]

Well, thank you Rocco. And good morning and welcome to Dawson Geophysical Company’s first quarter 2015 earnings and operations conference call, our first call since the completion of our recent transaction with TGC Industries. Details of the transaction can be found in prior company releases and SEC filings. As Rocco said, my name is Steve Jumper, Chairman, President and CEO of the company. Joining me on the call today is Jim Brata, Executive Vice President and Chief Financial Officer and Wayne Whitener, Executive Vice Chairman. I would like to take a minute to thank the diligent effort on behalf of our finance and accounting group to navigate to all the recent required filings since the completion of the transaction. 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, Tuesday March – excuse me, May 19, 2015, and therefore you are advised the time-sensitive information may no longer be accurate as of the time of any replay listening. Before commenting on the first quarter results, I would like to say a few words about the recently completed strategic business combination with TGC Industries. On February 11, 2015, Dawson Geophysical and TGC Industries announced the completion of the strategic business combination. The new Dawson Geophysical operates under the Dawson brand in the United States and Eagle Canada brand in Canada, each well recognized and well respected in their markets. We are confident that our expanded equipment basin support services will lead to improved crew efficiency and reduced dependence on third-party service providers resulting in a stronger revenue stream and reduced cost. The expanded client base will provide a foundation for deeper more geographically balanced order book resulting in increased crew and channel utilization rates when market conditions improve. And capital expenditure needs in the near term will be significantly reduced as the strategic combination provides a robust latest generation equipment base. Turning to our first quarter results. The merger transaction was accounted for as a reverse acquisition with the legacy Dawson Geophysical Company being gaining the accounting acquirer. The combined company has adopted the calendar year ending December 31. Our results for the first quarter ended March 31, 2015 reflects the full quarter results from legacy Dawson Geophysical and results from legacy TG Industries from February 12, 2015 through March 31, 2015. The first quarter results compare back to the legacy Dawson Geophysical quarter ended March 31, 2014 which at the time was legacy Dawson Geophysical’s second fiscal quarter of its fiscal year ended September 30, 2014. The second quarter of 2015 ending June 30, 2015 results will reflect a full quarter of combined entity operating results. As mentioned in the first quarter 2015’s press release, our first quarter results were negatively impacted by reduced client demand due to decreasing commodity prices, client delays, severe weather conditions in many areas of operations, a weaker than anticipated Canada season and reduced utilization rates of a deployed data acquisition crews in the lower 48 United States. During the first quarter, the post transaction company operated a peak of fourteen seismic data acquisition crews in the United States and a peak of four crews in Canada. We are currently operating eight to ten data acquisition crews in the United States and based on currently available information, we anticipate operating eight to ten in the United States with limited activity in Canada into the third quarter. Utilization rates on the company’s active data acquisition crews have been severely impacted to the middle of the second quarter primarily due to excessive wet conditions. 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 about the outlook for the rest of the year.

[James Brata:]

Thank you, Steve, and good morning. Before I get started, I’d like to review what Steve said earlier. The results for the first quarter of 2015 reflects the full quarter results of legacy Dawson Geophysical and results of legacy TGC Industries from February 12, 2015 through March 31, 2015. The first quarter results compare back to the second quarter of 2014 legacy Dawson Geophysical ended March 31, 2014. The second quarter of 2015 ended June, 30, 2015 results will reflect a full quarter of combined entity operating results. Revenues in the first quarter was $73.7 million, compared to $76.8 million in the same quarter of 2014. As Steve mentioned, we operate at a peak of 14 crews in the US and four crews in Canada during the quarter. Cost of services in the first quarter of 2015 was $64.8 million, compared to $60.1 million in the same quarter of 2014. Cost of services as a percentage of revenues in the 2015 first quarter was 87.9% compared to 78.3% in the same period last year. Gross profit was $8.9 million, compared to $16.7 million in the same quarter of 2014. Gross profit margin was 12.1% compared to 21.7% in the same quarter last year. Selling general and administrative expenses were $7.5 million in the first quarter of this year, compared to $3.7 million in the same quarter of 2014. SG&A expenses increased due to transaction cost of approximately $2.6 million and severance expenses of $530,000 associated with the merger. Depreciation and amortization expense in the first quarter of 2015 was $11.2 million, compared to $10.2 million a year ago. As a percentage of revenues, depreciation and amortization expense was 15.2% in this year’s first quarter compared to 13.3% in the same quarter last year. Net loss for the first quarter of 2015 was $6.6 million, compared to net income of $1.7 million in the same quarter last year. We recorded an income tax benefit of $3.3 million, an effective tax benefit rate of 33.4%, this compares to an income tax expense of $687,000, an effective tax expense rate of 29.4% a year ago. EBITDA in the first quarter of 2015 was $1.4 million, compared to $12.7 million in the same period a year ago, an EBITDA reconciliation was provided in our earnings release issued yesterday afternoon. And now I’ll highlight some balance sheet items. Our balance sheet remains strong. As of the end of the first quarter of 2015, we had long-term debt including obligations under capital leases of $7.9 million. Cash and short-term investments of $48.1 million. Our current ratio was 2.9 to 1. And finally, working capital was approximately $77.3 million. And with that, I’ll turn the call back to Steve for some comments on our operations.

[Steve Jumper:]

Well, thank you, Jim. 2014 was a challenging year as the significant drop of oil prices negatively impacted demand for services. During the first quarter of 2015 ended March 31, the company operated a peak of 14 crews and lowered 48 United States and four crews in Canada. We believe our current order book is sufficient to sustain eight to ten crews predominantly in the oil liquid-rich basins, regions of the Continental US. Revenues for the quarter were negatively impacted by the severe weather conditions in many of areas of operations, a weaker than anticipated Canadian season and reduced utilization rates to deploy crews in the United States. Expenses for the quarter reflect transaction-related cost of $2.6 million related to the recently completed business combination with TGC, along with an increase – an additional increased organizational integration cost. Operational results will continue to be challenging for the remainder of 2015. Commencement of a multi-component surface recorded micro seismic project is scheduled to begin late in the June quarter. Based on currently available information, demand for the company’s multi-component crew remains – is anticipated to remain steady for the balance of 2015. We continue to work through the integration processes. Although we anticipate fiscal 2015 to be very challenging, we believe the combination of Dawson and TGC will provide long-term growth opportunities when market conditions improve. We will continue our focus on right-sizing our operations to fit current demand levels while remaining in a position to react to market conditions quickly, maintaining a strong balance sheet and commitment to our expanded client base by providing higher resolution, tough surface images in the shorter cycle time. We anticipate a capital budget for fiscal 2015 at maintenance levels below the approved budget – below the capital budget approved by the Board of Directors. Our balance sheet remains strong as Jim said, with approximately $48.1 million of cash and short-term investments and $77.3 million in working capital. In closing, we appreciate your patience through these challenging quarters. Your company has experienced down cycles in the past and each time we have successfully emerged stronger and better positioned. And with that Rocco, we are ready to take questions.

[Operator:]

[Operator Instructions] And our first question comes from Marshall Atkins with Raymond James. Please go ahead.

[Marshall Atkins:]

Good morning guys. Steve, the integration of TGC, could you update us on the timing and the progress of when you think you are going to be satisfied that’s fully integrated and all of the cost savings have been rung out of the system?

[Steve Jumper:]

I think we are getting close, Marshall. The – I think from an operational level, I think we – the integration process has gone very well. We are - just as a few examples, some areas where we are getting a little bit of help as we are – have brought a significant level of the cable and geophone repair in-house to the legacy TGC facility. Geophone and cable repair is a fairly large expense and has been outsourced for legacy Dawson. So, we began that process moving that over on a significant level in April. We are in the position of utilizing some of the legacy TGC dynamite drilling operations on some projects that we have and so we’ve had a little – realized some level of less dependence on third-party providers in that area. We’ve been able to move a little bit of equipment between the two companies in cross border to reduce to a certain level the need for any rental equipment that are particularly related to the multi-component gear. And so, we’ve still some things to do. We’ll continue to consolidate entities through the summer, clean up the corporate structure. We’ve really been running a dual track in finance and accounting up to this point. And so, we’ll be able to streamline that operation here. I believe during this quarter, we’ll get some things moved over on payroll this quarter. So, I think we are in good shape. It’s unfortunate given the market conditions that we’re not going to realize some of the benefits that we felt like were in place back in August and September when we entered into this transaction and even back in 2011. And so, the weakened demand level are certainly going to reduce quite a few of the benefits that we talked about when the market conditions improve and we get back to a more consistent deployment level where we can continue to move channels back and forth and focus on rate more of a regional deployment strategy. I think, we will start to realize more. But, we should be pretty well through the integration process by the end of this quarter, I would hope.

[Marshall Atkins:]

Is there anything surprising in the acquisition either positive or negative that you’ve seen?

[Steve Jumper:]

I am very pleased with the expanded client base. I think that’s a real positive. I am really pleased with the integration and level of support services that each side brings to the table. I think, I had envisioned that those combinations were there and will be beneficial. I don’t know that I see any real negatives, market conditions have been tough obviously and so we are not in a position to realize in a short-term all the benefits that we think we have. So, I don’t know that anything is really jumped out at me one way or the other, Marshall.

[Marshall Atkins:]

All right. The rig count seems to be bottoming activity overall on that side of the business seems to be exhausted and at least in terms of its downward moves. How does your side look? Are you starting to see more enquiries or we – do you think we are near bottom in terms of ex the weather, I know that’s been terrible as probably – it seems like it’s raining out there today too.

[Steve Jumper:]

Yes, it’s storm here, last night. It rains about every five days.

[Marshall Atkins:]

Yes, sounds like Houston. So, anyway, are you seeing any firming in the bidding like it seems we are doing on the rig side?

[Steve Jumper:]

Marshall, we saw a little flurry of activity that was encouraging about a month ago. It’s – I think that’s probably flattened out here recently. Having some conversations with several E&P companies about plans they have for the back half of the year, some of them are significant opportunities. Those bids have been not formally arrived and I think companies are continuing to work through their strategy. I think that there is – would be reduction in drilling activity. I sense that some of our clients are beginning to look long-term at better ways to reduce their costs, reduce their finding cost, obviously service cost or adjusting to commodity prices. But looking for ways to de-risk locations. And, so, often times, when you are getting these kinds of slowdowns and you are getting this reset, people will begin to look forward more from a strategic standpoint and an asset evaluation standpoint as opposed to pushing rig counts really high. So I think that could be a positive. I think we are seeing some signs of that as we – it hasn’t come to fruition as of today. So, I hopefully – this quarter is going to be extremely difficult. Utilization rates are impacted in many areas of operations. We’ve not seen a significant increase in our backlog in recent weeks. So, like I said, we’ve got some projects that are out there. The phones aren’t dead, people are talking to us. And so, I am anticipating – we are also in the time of a year where we are getting to summer time and we typically have a little bit of a low in bid activity. But I would anticipate that, given commodity prices that continue to move up a little bit and get into a stable environment that people can count - look for, I would anticipate to see improvement in the –hopefully, in the back half of the year in terms of bidding activity, realizing that that backlog might take a little bit longer than it’s been a quarter or two just on the amount of time it takes to get a project ready. So, if I’d add a bottom, I anticipate that we are close to it given what we are seeing today and given, if so, we will get another class and commodity prices from where they are.

[Marshall Atkins:]

Along those lines, when did you book the project you are going to start to do, when was that actually booked?

[Steve Jumper:]

Say that again.

[Marshall Atkins:]

The big project you have coming up in June, when did you actually book that? Was it recently, or is it long time ago?

[Steve Jumper:]

Well, it’s a project that we are on right now and it’s going to roll into a micro seismic reporting or reporting here probably at the end of this month, early part of next month. But, our life time with several of our projects are actually decreasing, I think some of the projects that were about to move on and hopefully we’ll get an up tick in utilization here in June later this month or in June. But, West Texas stuff can probably turn in less than a month and get it ready if it’s a South Texas or East Texas or some other parts it can take two to three months to get that. And or maybe longer to getting it where you are, but I think the sizable time from what we are seeing right now from bid award to actually commencement is improving somewhat.

[Marshall Atkins:]

Thanks, Steve.

[Steve Jumper:]

Thanks, Marshall.

[Operator:]

And our next question comes from [Indiscernible] from FIG Partners. Please go ahead.

[Veny Aleksandrov:]

I think it’s me Veny Aleksandrov.

[Steve Jumper:]

How are you Veny? Yes, okay, you came in under lately. Okay.

[Veny Aleksandrov:]

I heard FIG Partners. So I guess, it’s me.

[Steve Jumper:]

Yes, I think it’s you and that too I was anticipating.

[Veny Aleksandrov:]

Okay, so, my first question and Marshall touched a little bit on it, the back of your order book, do you expect 8 to 10 crews, but based on the order book that you have right now and if you exclude weather, are these crews going to have good utilization?

[Steve Jumper:]

I think, if we are in a unique position right now, Veny, and it’s a position that we get in from time-to-time. Due to the weather issue, we’ve got several crews in the Eagle Ford and West Texas have been severely impacted in their day-to-day operation by the weather. It’s probably is difficult to weather conditions as I’ve seen in quite some time. We also have several crews that have projects in those areas that we can’t get to. And so, we’ve got some crews that are deployed and having difficulty and we’ve got some crews that have backlog or projects ahead of them that we just can’t get to them just because of conditions in various areas. I think, once the weather, if the weather gets off of it in some of these areas and we get an opening here in March or excuse in the May or early part of June, I think the utilization on those eight to ten crews are going to get very high. We’ve got some projects that have been delayed because of weather. Some projects that have been delayed earlier in the year based on clients and so we’ve got a mid-summer, early summer focus where we are going to be and we are going to go from a famine to a fish type environment for utilization. And so, my feel at this point, and indications that I am getting based on the outlook that we have is that, once we can get to the feel here in the next week to ten days with the forming of the balance of the eight to ten crews, get up to ten, I think those will remain steady through the summer. We have some projects that continue to fill those boys or that backlog later into the fall, things that are on in discussion that we’ve talked, there hasn’t been since the bid. We do have a little bit of Canadian work this summer, which is encouraging. We don’t quite yet know how many days or how long that’s going to be. But I feel like we are going to be operating at a pretty good utilization rates for the eight to ten over the summer time and into the third quarter if we can get some breaks in the weather. Now that’s well below the combined 14 that we operated in the first quarter, but given the ones that are deployed and we are structuring right now and continuing to structure our operation to be eight to ten near-term with the ability to move back up to 14 in the US if and when market conditions improves.

[Veny Aleksandrov:]

Thank you, and actually, Canada was my second question. The little bit of warrant that you have here in the summer, is it legacy Eagle Canada, one that they usually do in the summer or it’s new clients and new interest?

[Steve Jumper:]

I think, it’s new work. I do not think it is a traditional work that legacy TGC has done in the summer. Is that correct, Wayne?

[Wayne Whitener:]

Yes.

[Veny Aleksandrov:]

Great. Thank you. And my last question, the downturn you kept all of your key people and you had some reduction in terms of people, but now they are all placed at the same philosophy at this time?

[Steve Jumper:]

That’s what we are today. This is a cyclical industry. And we recognize that. We feel like that we are in our current position where we are now. We have a little more work to do in some areas and we recognize that. But, we feel like, that we are in good shape to respond to the market when it turns and by maintaining the operational and technical and professional expertise that we spent many, many years cultivating and developing. As we move into the summer, obviously, weather has been a huge impact. And so, the income statement is going to be rough over the next quarter or so. But, we are looking down the road, balance sheet is in strong shape. We are in a position to be able to capture growth opportunities as they present themselves. But, Veny, that is always – whether we are in an up-cycle or down-cycle, those are the things that we are always take under consideration and do continue to valuations. And so, our strategy will be to maintain the personnel and the equipment base and the balance sheet to move quickly, but at the same time, we are going to make every effort to be right-sized as we move through to the rest.

[Veny Aleksandrov:]

Thank you so much.

[Steve Jumper:]

Thanks, Veny.

[Operator:]

And our next question comes from Georg Venturatos of Johnson Rice. Please go ahead.

[GeorgVenturatos:]

Good morning guys.

[Steve Jumper:]

Hey, Georg. How are you?

[GeorgVenturatos:]

Doing well. Steve, I was hoping, maybe you could just talk about some of the trends you are seeing in today’s environment, I guess, related to the average project size, and I guess, also channel count. Just trying to get a sense for where you stand from a channel count utilization on the combined basis now?

[Steve Jumper:]

You know, Georg, good question. We don’t think to have as many of the smaller projects out to bid as I would have anticipated. I think those could continue to arise particularly when you start looking at some of the smaller operators that are focused on more conventional type stuff. And so, I think the average size of the project remains fairly large and I am hesitant to give a number because, our backlog and our bidding level is not deep enough to really get a full train to given where we are today. I think we are in great shape from a channel count standpoint. I think from a actual number of channels reporting on the ground, I think we probably hit a little bit of a plateau. When you look at the things dictating channel count more than anything right now is probably project size and configuration and I think we are in really good shape there. I think, if everything comes together as anticipated in the summer, we could have a little bit of stress on some of the equipment platform, particularly the single channel cable-less equipment. I am very encouraged that we have continued to see increase in interest in the multi-component recording equipment which I think we own about 25,000 stations between the two companies in cross-border of 3C equipment at 75,000 channels. And, if there is a trend I am seeing, that there seems to be an increase in interest level and so, if we have a stress level on equipment where it is on the 3C side, but, I think our equipment base in great shape to handle the markets considering where we are.

[GeorgVenturatos:]

Okay, I appreciate that Steve. And then, I guess, with the assumption that we are kind of troughing out here with the eight, ten crews and hopefully we get to a situation where we took out port as some of those delays kick in. On the cost side, can you maybe talk about what else you have to potentially take out of the cost structure going forward and maybe where we should expect that G&A line to be on a go-forward basis, post that 1Q level?

[Steve Jumper:]

I think, G&A this quarter was what, Jim?

[James Brata:]

It was $7.5 million this quarter, but there was $2.6 million of transaction and there is $530,000 of severance. I believe that the normalized G&A will be at a $4.2 million $4.4 million range and we should see a little bit of tapering there as we go through the rest of the year.

[Steve Jumper:]

Yes, and I think, we’ve had the headcount reduction and so, we’ll continue to see some cost savings there. As I mentioned earlier, I think we’ll see some cost savings that will be realized through some of the repair facilities. We’ve consolidated the repair facilities, the larger equipment is being done in Midland and geophones and cables are being done in Dennison. So, I think that’s going to be an improvement and we are continuing to run-off insurance cost. For example, on one side, versus insurance cost on the other side and so, we’ve still got some work to do. And I am a little hesitant right now, Georg, to go much deeper than that.

[GeorgVenturatos:]

Understood. Well, thanks a lot for the answer, Steve.

[Operator:]

And our next question comes from Rudy Hokanson of Barrington Research. Please go ahead.

[Rudy Hokanson:]

Thank you. Good morning. What are you finding as you are going out and submitting bids in terms of what pricing looks like from the seismic side? I mean, we hear everyone pushing back on a lot of their suppliers right now. But in your bidding process, and your capacity utilization, can you give us a flavor of what’s going on in terms of pricing?

[Steve Jumper:]

Rudy, the seismic sector in the last up-cycle never really moved to the levels of some of the other oil field service companies did. And so, I don’t sense that there is a tremendous amount – these 30%, 40% stuff that you read about on some other services. Pricing is competitive. It is a competitive market out there, obviously. And I think pricing is such that if we continue to do okay with the – if we can get the utilization issues resolved in the weather off I think pricing is in an area that we can do okay. But there is certainly very competitive out there. If we – I am not in a position to tell you where pricing is upward or downward from a percentage standpoint. But it is a - demand is not robust. It is difficult and so, we are responding accordingly.

[Rudy Hokanson:]

Thank you. And then on demand right now, the issue of demand. Can you maybe flush out what your various regional activity levels are? I mean, like what it – you are talking about Texas and the weather and the Eagle Ford and West Texas. But for instance, are you seeing some areas continuing to have demand like the Niobrara or areas where you just start to know when demand is going to come back, let’s the Bakken, I mean just throwing these out, could you maybe give us a feel for what it is in some of the regions and what implied you’ve seen in terms of allocation of your resources?

[Steve Jumper:]

We’ve got activity levels in the Permian, the Delaware Basin regions, West Texas and Southeastern New Mexico. We’ve got some, I guess, it would be Niobrara stuff that, Niobrara DJ Basin programs that are out there to be done in the not too distant future. Got quite a bit of activity level in the star eastern – Northeastern edge of the Eagle Ford right, where we’ve had significant levels of rainfall. Obviously, that’s been one real area of concern. We had a little bit of conversation about some opportunities back in the – maybe the Utica and western part of the Marcellus and still have things in and out of the miss line but, for the most part it’s Permian and Eagle Ford activities.

[Rudy Hokanson:]

Okay. Thank you.

[Operator:]

And this concludes our question and answer session. I would like to turn the conference back over to Mr. Jumper for any closing remarks.

[Steve Jumper:]

Well, thank you, Rocco. I want to thank everybody for participating in the call. It’s been a while since we’ve been off, had a call due to all of the activity related to the transaction. We are very excited about the transaction and we think it’s a significant long-term opportunity for our shareholders. We think it’s a long-term opportunity for our employees and will bring benefit to our valued clients. We are going to continue to navigate our way through these challenging times. So, we’ll continue to maintain our conservative financial management schedule or plan. And want to thank our employees and our shareholders and our clients for their continued trust in our services. And with that, I am going to sign off and we will talk to you in 90 days. Thank you.

[Operator:]

And thank you, sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a great day.