Dawson Geophysical Company
Q2 2015 Earnings Call Transcript

Published: 7 Aug 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 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 Exhibit 99.5 to its Form 8-KA 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 is covered by those statements. During this conference call, management will make references to the 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. Please also note that this event is also being recorded. I would now like to turn the conference over to Mr. Steve Jumper, President and CEO. Mr. Jumper, please go ahead.

[Steve Jumper:]

Well, thank you, Ed. Good morning and welcome to Dawson Geophysical Company’s second fiscal quarter 2015 earnings and operations call. As Ed 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, 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, Friday August 7, 2015, and therefore you are advised the time-sensitive information may no longer be accurate as the time of any replay listening. Before commenting on the second quarter financial 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 brand name in the United States – under the Dawson brand name in the United States and the Eagle Canada brand name in Canada, each well recognized and well respected in their markets. We are confident that our expanded equipment base and support services will lead to improved crew efficiencies and reduced dependence on third-party service providers resulting in a stronger revenue stream and reduced cost. We believe that 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 second quarter financial results. The merger transaction was accounted for as a reverse acquisition with Legacy Dawson Geophysical Company being deemed the accounting acquirer. The combined companies adopted a calendar year end December 31. Our results for the second quarter ended June 30, 2015 reflects the full-quarter results for the combined companies. Second quarter fiscal 2015 results are compared to the quarterly results for Legacy Dawson for the period April 1 through June 30, 2014 which at the time was legacy Dawson Geophysical’s third fiscal quarter of its fiscal year ended September 30, 2014 and did not include the operations of Legacy TGC. Due to this fact, the historical financial results for the quarter ended June 30, 2014 are not directly comparable to the combined Company's financial results for the quarter ended June 30, 2015. Selected pro forma financial information giving effect to the merger as if it had occurred on January 1, 2014 together with the assumptions thereto is presented at press release issued this morning and additional information regarding the merger and its impact on the Company's financial position is set forth in the Company's Form 10-Q for the quarterly period ended June 30, 2015. As mentioned in the second quarter 2015 press release, the dramatic reduction of the Company's overall utilization rates had a significant negative impact on revenue for the second quarter 2015, which was partially offset by weather stand-by charges on several of the Company's crews but at significantly reduced rates. Operating expenses for the June quarter were at reduced levels although not in direct proportion to the negative impact on revenue. Reflected in the current quarter is $690,000 of severance costs related to an approximately 30% reduction in work force since the closing of our merger. Demand for Dawson's services is at reduced levels from recent years and is anticipated to remain at such levels through 2015 in response to decreasing and uncertain commodity prices and reduced client expenditures. The Company anticipates operating eight to 10 crews in the United States with limited activity in Canada during the third quarter ending September 30, 2015. Based on currently available information, the Company anticipates operating eight to 10 crews in the United States through the balance of 2015. I will now turn control of the call over to Jim Brata, who will review the financial results then I’ll return with some final remarks about the outlook for the rest of the year. Jim?

[James Brata:]

Thank you, Steve and good morning. Before we get started, I’d like to review what Steve said earlier. Our results for the second quarter ended June 30, 2015 reflect the full quarter results for the combined companies. Second quarter fiscal 2015 results are compared to the quarterly results for Legacy Dawson for the period April 1 through June 30, 2014 which at the time is Legacy Dawson Geophysical’s third fiscal quarter of its fiscal year ended September 30, 2014 and do not include the operations of Legacy TGC. Due to the foregoing, the historical financial results for the quarter ended June 30, 2014 are not directly comparable to the combined Company's financial results for the quarter ended June 30, 2015. Revenues in the second quarter of 2015 was $43.3 million compared to $54.2 million in the same quarter of 2014. As Steve mentioned, we operated the equivalent of seven crews during the second quarter of 2015. Cost of services in the second quarter 2015 was $43.4 million compared to $49.6 million in the same quarter of 2014. Gross profit was flat in the second quarter of 2015 compared to $4.6 million in the same quarter of 2014. Selling, general and administrative expenses were $5.6 million in the second quarter of this year, compared to $3.5 million in the same quarter of 2014. Depreciation and amortization expense in the second quarter of 2015 was $12.4 million, compared to $10.3 million a year ago. As a percentage of revenues, depreciation and amortization expense was 28.6% in this year’s second quarter compared to 18.9% in the same quarter last year. Net loss for the second quarter of 2015 was $11.9 million, compared to net loss of $7.5 million in the same quarter last year. We recorded an income tax benefit of $6.4 million and an effective tax benefit rate of 34.9% and this compares to an income tax benefit of $1.4 million, an effective tax benefit rate of 15.8% a year ago. EBITDA in the second quarter of 2015 was negative $5.7 million, compared to $1.5 million in the same period a year ago, an EBITDA reconciliation was provided in our earnings release issued this morning. And now I’ll highlight some balance sheet items. Our balance sheet remains strong. As of the end of the second quarter of 2015, we had debt including obligations under capital leases of $14.9 million. Cash and short-term investments of $56.8 million. Our current ratio was 3.2 to 1. And finally, working capital was approximately $66.2 million. And with that, I’ll turn the call back to Steve for some comments on our operations.

[Steve Jumper:]

Thank you, James. Despite today’s challenging environment Dawson Geophysical is strategically positioned to withstand the commodity cycle downturn. Our strong balance sheet, diverse client base and the management team with more than a 100 years of combined industry experience provide us with the tools and resources required to successfully navigate today’s market. The equipment purchases made during recent years further enable us to successfully serve our valid clients, while simultaneously operating below previously established CapEx levels. Severe weather conditions that began in mid-April and that were subsequently followed by Tropical Storm Bill later in the quarter negatively affected Texas and certain parts of the Mid-Continent region where many of our crews were deployed. These multiple weather delays impacted utilization on seven of the active crews and delayed deployment of three additional crews on new projects. In addition to the negative weather in the quarter, the continuing actions to right size our organization to meet industry demands further impacted our quarterly results. We’re currently operating 10 crews in the United States, weather conditions improved for July, allowing us to operate at a higher utilization rate for the month as compared to the second quarter of 2015. We continue to work through integration processes; although we anticipate the balance of fiscal 2015 to continue to be very challenging, we believe the combination of Dawson and TGC Industries 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 at a position to react to the market conditions quickly maintaining a strong balance sheet and a commitment to our expanded client base by providing higher resolution sub surface images in a shorter cycle time. We anticipate a capital budget for fiscal 2015 at maintenance levels below the $10 million capital budget approved by our Board of Directors. Our balance sheet remains strong with approximately $56.8 million of cash in short-term investments, $66.2 million in working capital and $14.9 million of debt and capital lease obligations. From time to time, we received increase from certain value share holders concerning return of capital. As most are aware earlier this year, our Board of Directors suspended payment of the Legacy Dawson quarterly dividend due to uncertain market conditions. With regard to increase about the implementation of the stock repurchase program, our Board after several consideration and keen awareness of current stock prices believe it is in the best interest of the company and its shareholders at this time to continue to monitor our balance sheet, working capital level and cash and cash equivalent positions as we navigate through these challenging times in our industry. In closing while market conditions remain difficult, we believe we are positioned to withstand the commodity cycle downturn, our strong balance sheet, diverse client base and the business combination with TGC Industries provides us with the tools and resources to successfully navigate today’s market and quickly respond when conditions improve. And with that, Ed we are ready for questions.

[Operator:]

Absolutely sir. We’ll now begin the question-and-answer session [Operator Instructions] Our first question comes from Marshall Atkins of Raymond James. Please go ahead.

[Marshall Atkins:]

Good morning, Steve. 100 years of experience, I didn’t realize you were that old.

[Steve Jumper:]

I hold up well.

[Marshall Atkins:]

Very good discuss the weather impact versus the structural deterioration in the market for the quarter, I mean obviously things were down more than most of us thought, we also know that, it rained a whole lot last quarter, how much of this should we interpret is kind of a temporary phenomenon versus structural deterioration of demand?

[Steve Jumper:]

Marshall had we not had the weather issues in the quarter, I’m confident we could have maintained our 8 to 10 crew level thought-out the quarter as we talked about in the conference call back in May, if you recall back in the middle of May, we did our March 31 conference call and I had stated in there that we felt like our demand level was in the U.S. was staying in the 8 to 10 crew range that still holds true today, now if you compare that back to where we were a year ago, I think we - Legacy Dawson was probably operating somewhere in the neighborhood of 12 crews and Legacy TGC was probably operating 4 to 5 something like that. So if you look at the pro forma comparison revenue from year-over-year aren’t down quite 50% but they’re down substantially. So where we sit today, we still believe that there is backlog in place to maintain 8% to 10%. And so when we talked in May, I had foreshadowed a little bit in May at mid quarter that we had some weather issues in April and early May and we thought we would get that cleaned up and cleared up a little bit and we felt like we would get back to 8% to 10% by the end of June and that really didn’t happen. We operated the equivalent of seven crews and on those seven crews utilization was well below what you would consider normal for seven. So weather had a below utilization impact on seven which was below 8 to 10. So weather was a big a huge issue, I’m pretty new at this. I’ve been doing it 30 years and this is probably the worst weather period I’ve seen that impacted as many crews as we had, we had the big Memorial Day flood that came through East Texas, it’s followed by a tropical storm build. So weather was a big impact, it feels like when we talked in May, we talked about at that time, oil was 60 range and we talked about 60 to 65 that we felt like if it stayed in that area that we could see some visibility through the end of 2015 and beyond. We felt like that our clients were going to focus on high grading and getting out in front of rigs and with good images and more in development of asset type and also said if oil dropped back down who knows and so weather is a big impact, we think 8 to 10 which is substantially below where we were year-ago in the industry, all across the industry. It’s probably achievable through the end of the year where it’s a little early to tell what’s going to happen in 2016 as well as the Canadian winter season.

[Marshall Atkins:]

So we’ve seen oil prices pullback here pretty sharply 25%, 30% in the last six weeks or so, are customers backing off at all yet, or is it just too early to tell?

[Steve Jumper:]

Marshall, our backlog order book as it states we’re not really call it backlog because as we’ve talked about for many, many years, our contract can be cancelled in very short order delayed or changed in size and scope and having said that the order book we have in place where we sit today on 8 to 10 through the end of the year, has held up pretty well. We’ve had some delays that occurred in the spring in earlier part of the summer related to weather and then some other things that related to land access but it feels like we’re going to have a little bit of flurry towards the end. Now some of that Marshall is going to be catch up for what we couldn’t get done in this prior quarter and so part of that is delay in backlog getting pushed back a little bit due to weather. Six weeks ago, there was little more conversation about some projects that we could look at into 2016 and felt positive about that, those projects in the U.S. really haven’t gone away, I think conversation have slowed and people have kind of gone into wait and see mode. I think we’ll know a little bit more about what 2016 looks like as people start to take second look at budgets and I had made the comment several times at where we said mid-year that, if the budget stay flat as projected earlier in the year, I felt pretty good if they down, there is a down revision in budgets that occurred here over the next few weeks or months. I don’t have any way to predict that. The Canadian markets, we have operated one crew in the Canadian market often on this summer, it’s a little early yet. We’re seeing some bids in Canada but it’s still little early for the 2015, 2016 season to project where that’s going to be but our suspicion is that demand will be greatly reduced in Canada as opposed to last several years.

[Marshall Atkins:]

Thanks Steve. That’s helpful.

[Steve Jumper:]

Thanks Marshall.

[Operator:]

Our next question comes from John Deysher of Pinnacle. Please go ahead.

[John Deysher:]

Hi, good morning.

[Steve Jumper:]

Good morning.

[John Deysher:]

I was wondering could you bring us up to-date in terms of the integration effort, what’s left to do there?

[Steve Jumper:]

Well we have from an operation standpoint, we have had a obviously related to the integration as well as related to overall demand issues of the combined company has had an unfortunate 30% reduction in work force since the combination of February 11, I think on the operations side, I think we’re doing quite well. I think we’ve done a nice job of integrating the personnel. We’re still rolling off little bit of transaction related cost and the severance cost. I think we’ve done a really nice job of integrating the support services that we felt like were so critical to this transaction when we contemplated right at a year ago, I think we have reduced our dependence on third parties to a large level. I will say that given the market conditions where they are. We’re not realizing the effect of the potential, I should say of the third-party service utilization or excuse me in-house utilization and reduction of third party yet. I think from a finance and accounting standpoint, I think we had a lot to do in the spring time, lot of filings, lot of integration between accounting and signing in. So I think that’s gone very well, I think we’ve got the company’s or the offices and departments tied together well. So I think we’re on a good pace with integration. I think we’re standardizing things and picking in the best of both company’s processes and implementing. Obviously the equipment, that came to the table for the combined company has really put us in a nice position and ease our capital expenditure requirements for this year. We anticipate them to be well below the $10 million level, the expanded client base is certainly helpful and we’re continuing to stay in close contact with all of our clients, so I think we’re pretty well down the road, I think our strategy here is to continue to improve on our internal processes and the product and service we delivered our clients and monitor this market as both companies have had a history of being very conservative from a fiscal standpoint. And we have a lot of Marshall made reference to the 100 years both companies have been around a long time, and have been management teams have been through this. So our goal right now is to preserve the balance sheet and maintain a strong position there, reduce whatever expenses we can, where we can.

[John Deysher:]

That’s helpful. You mentioned a 30% headcount reduction, where is the headcount as of June 30?

[Steve Jumper:]

It’s probably in the 11.50 range something like that.

[John Deysher:]

Okay. Do you anticipate that to come down anymore in the balance of the year?

[Steve Jumper:]

We’re going to have crews that move up and down obviously with the 8 to 10 and we’re running at a pretty lean level right now. We’re going to continue to monitor excuse me be in a position to deliver the services at a level but our client base has been accustomed to both, from both companies for a long time. And so we’re to going to continue to, this is like moved up and down obviously, at the end of the day this is a people business as a capital intensive, high working capital requirements fixed cost business and we’ve recognized that and I truly believe that the people we have in place is that all across from the design to permitting to surveying to operations those are the folks that our clients rely on to deliver the products that we deliver and they truly are an asset to us and so we’re going to continue to look at ways to improve efficiencies and reduce operating expenses to right size demand levels as we navigate through the cycle.

[John Deysher:]

Okay, that’s fine and then finally you’ve mentioned reducing operating expenses I’ve noticed the SG&A went up sequentially excluding the non-recurring items, I think Q1 it was $4.4 million, this quarter it was $4.9 million why is that?

[Steve Jumper:]

Well, in the, that is the result on a comparative basis year-over-year that’s the result of the combination about.

[John Deysher:]

Sorry.

[Steve Jumper:]

But the comparison back to Q1, our Q1, our March 31 numbers only was Legacy Dawson for the full quarter and Legacy TGC from February 12 to March 31. So there was a full-quarter effect of Legacy TGC results, is that correct James?

[James Brata:]

Yes.

[Steve Jumper:]

Yes.

[John Deysher:]

All right. So going forward we should model it closer to $5 million per quarter.

[James Brata:]

$5 million is between $4.5 million and $5 million.

[John Deysher:]

Okay, all right. Very good, that’s helpful. Thank you.

[Steve Jumper:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from [John Poitras] (Ph) of Research Investments. Please go ahead.

[Unidentified Analyst:]

Yes, good morning Steve Jumper and the reason for my call is to understand what are the pricing trends they’ve been coming down have it sort of flattened out and do you get the sort of sense from you top two customers that they’re sort of accepting the level of pricing or we still under some pricing downtrend?

[Steve Jumper:]

I will appreciate that question, we don’t comment a lot about pricing because we contract it couple of ways, we contract some projects through day rate. Most of our work right now is turnkey and under a turnkey contract, we obviously have more upside, but we’re exposed to more risk and so we are primarily on turnkey contracts and our projects vary in size quite a bit and so giving an apples-to-apples comparison is difficult. Now what having said that I would comment that a pricing in the Geophysical seismic data acquisition sector over the last three to four years did not reach the level of that some other oilfield service companies maybe drilling contractors and pressure corpus achieved and so they’ve had, my estimation or understanding is they’ve had quite a bit more pressure on their pricing than we are probably experiencing. So we never had to come off of the high that we had think or that others are saying and so pricing is fairly stable obviously there is budget concerns and obviously there are not as many dollars to go around with the E&P companies and we’ve recognized that and our business has always been high resolution images more cost effectively in a shorter cycle time and we understand that we get a little bit the first thing starts to happen is some of the third-party services and some other contract terms outside of the pure seismic data acquisition number begins to take a little bit of pressure and we’re seeing some of those other contract terms under a little bit of pressure. But there is no question, it is a competitive market out there one of the issues you deal with was seismic data acquisition is unlike some other services either in up trends or down trends we typically do not have a larger inventory of ready projects and so our industry in the U.S. suffers from short-term utilization pressure from time-to-time just because of delays and because of that we experienced time-to-time when there is a project it comes available and somebody has availability to go shoot that we will see periodic softness in pricing that’s really based on utilizations of the peer group and I think we’re seeing some of that as well. So it’s a long way to say that we haven’t had a complete collapse in pricing but it’s competitive and certainly probably down from where it was a year ago but probably not to the extent that other oilfield services have mentioned publicly.

[Unidentified Analyst:]

Thank you very much.

[Steve Jumper:]

Thank you. End of Q&A

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Steve Jumper for any closing remarks.

[Steve Jumper:]

Thank you, Ed, for hosting our call. I want to thank everybody for listening in to the call. Obviously, we’re in a difficult environment as a company and as an industry and in oilfield service in general. We’ve been here before, we have the balance sheet strength to and the equipment base and the people assets and the client base to weather this. And we appreciate your patience, very difficult quarter for us particularly in term of weather, want to thank our employees for their great effort through not only the business combination, integration and transition but their hard effort during these difficult times. Thank our valued client base for their continued support and relationship and thank our valued shareholders for their patience and their interest in our company and we look forward to talking to you again in 90 days. Thank you.

[Operator:]

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