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Edited Transcript of DWSN earnings conference call or presentation 28-Feb-19 3:00pm GMT

Q4 2018 Dawson Geophysical Co Earnings Call

PLANO Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Dawson Geophysical Co earnings conference call or presentation Thursday, February 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James K. Brata

Dawson Geophysical Company - CFO, Executive VP, Secretary & Treasurer

* Stephen C. Jumper

Dawson Geophysical Company - Chairman, President & CEO

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Conference Call Participants

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* John Thomas Potratz

* Marshall Adkins

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Presentation

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Operator [1]

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Greetings. Welcome to Dawson Geophysical Fourth Quarter 2018 Results Conference Call. (Operator Instructions) Please note, this conference is being recorded.

Statements made by management during this call with respect to forecasts, estimates or other expectations regarding future events or, which provide any information other than historical facts, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual future results or performance to materially differ from any results of performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by 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 9, 2018.

Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in the company's press release issued this morning. And please note that the contents of this company's conference call this morning is covered by those statements.

During this conference call, management will make references to EBITDA, which is 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. I would now like to turn the call over to Stephen Jumper, Chairman, President and CEO of Dawson Geophysical Company. Please go ahead, sir.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [2]

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Thank you, Doug. Good morning, and welcome to Dawson Geophysical Company's fourth quarter 2018 earnings and operations update conference call. As Doug said, my name is Steve Jumper, Chairman, President and CEO of the company. And joining me on the call is Jim Brata, Executive Vice President and Chief Financial Officer.

Just to restate a little bit about what Doug said, before we start the call, we have few items we need to cover, if you want 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, February 28, 2019, and therefore, you're advised that time-sensitive information may no longer be accurate as of time of any replay listening.

So turning to our preliminary fourth quarter and 12 months ended December 31, 2018, financial results. For the fourth quarter ended 12/31/18, the company reported revenues of $27.7 million, a decrease of approximately 26% compared to $37.4 million for the quarter ended 12/31/17.

For the fourth quarter of '18, the company reported a net loss of $11.8 million or $0.51 loss per common share compared to a net loss of $4.8 million or $0.21 loss per common share for the quarter ended 12/31/17.

The company reported negative EBITDA of $5.4 million for the quarter ended 12/31/18, compared to positive EBITDA of $4 million for the quarter ended 12/31/17. For the year ended 12/31/18, we reported revenues of $154.2 million, a decrease of approximately 2% compared to $156.5 million for the year ended 12/31/17.

For the full year of '18, we reported net loss of $24.4 million or $1.07 loss per common share compared to a net loss of $31.8 million or $1.40 loss per common share for the year ended 12/31/17. For the year, we reported an EBITDA of $4.8 million for year ended 12/31/18, compared to $2 million for the year ended 12/31/17.

During the fourth quarter of '18, we operated at peak of 4 crews in the U.S., and a peak of 3 crews in Canada with varying utilization, the active crews during the quarter in both areas of operations. In the fourth quarter, in the U.S., historically, has been challenging due to shorter work days in the holiday season.

Based on currently available information, we anticipate operating up to a peak of 5 crews in the U.S., and up to a peak of 4 crews in Canada in the first quarter of '19, with varying utilization of the active crews during the quarter in both areas of operations.

The winter season in Canada concludes at the end of the first quarter of '19 with no further seismic activities anticipated thereafter and until the next winter season. In addition, we anticipate that we will conduct one seismic -- one microseismic project in the U.S. during first quarter of '19. Based on currently available information, we anticipate operating up to a peak of 4 crews in the U.S. with varying utilization during the second quarter of '19.

This point, I'll turn control of the call over to Jim Brata, who will review the financial results, then I'll return to make some final remarks in our outlook into the first half of '19 and then take questions. Jim?

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James K. Brata, Dawson Geophysical Company - CFO, Executive VP, Secretary & Treasurer [3]

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Thank you, Steve, and good morning. Revenues for the fourth quarter of 2018 were $27.7 million, a decrease of 26% as compared to $37.4 million for the quarter ended 12/31/17. As stated in our earnings release issued this morning, during the fourth quarter of 2018, the company operated a peak of 4 crews in U.S. and a peak of 3 crews in Canada with varying utilization during the quarter in both areas of operation.

The fourth quarter in the U.S. has historically been challenging due to shorter work days and the holiday season. Based on currently available information, the company anticipates operating up to a peak of 5 crews in the U.S. and up to a peak of 4 crews in Canada in the first quarter of 2019, with varying utilization of the active crews during the quarter, in both areas of operation.

The winter season in Canada concludes at the end of the first quarter of 2019 with no further seismic activities anticipated thereafter, until the next winter season. In addition, the company will conduct one microseismic project in the U.S. during the first quarter of 2019. Based on currently available information, the company anticipates operating up to a peak of 4 crews in the U.S. with varying utilization during the second quarter of 2019.

Cost of services in the fourth quarter of 2018 were $28.5 million, a decrease of 5% compared to $30.1 million in the same quarter of 2017. General and administrative expenses were $4.2 million in the fourth quarter of 2018 compared to $3.9 million in the same quarter of 2017. Depreciation and amortization expense in the fourth quarter of 2018 was $6.8 million, a decrease of 28.7% compared to $9.5 million in the same quarter of 2017.

Net loss for the fourth quarter of 2018 was $11.8 million or $0.51 loss per share compared to a net loss of $4.8 million or $0.21 loss per share in the same quarter of 2017. We recorded an income tax benefit of $409,000 in the fourth quarter of 2018, compared to an income tax benefit of $679,000 in the same quarter of 2017.

EBITDA in the fourth quarter of 2018 was negative $5.4 million compared to positive EBITDA of $4 million in the same period of 2017. And EBITDA reconciliation was provided in our earnings release issued this morning.

Now I'll highlight some results for the year ended December 31, 2018. Revenues for the year ended 12/31/18 were $154.2 million, a decrease of 1.5% as compared to $156.5 million for the year ended 12/31/17. Cost of services for the year of 2018 was $132.9 million, a decrease of 4.4% compared to $139 million for the year ended 12/31/17.

General and administrative expenses were $16.3 million for the year ended, 12/31/18 compared to $16.2 million for the year ended 12/31/17. Depreciation and amortization expenses for the year ended 12/31/18 was $30 million, a decrease of 23.6% compared to $39.2 million for the year ended 12/31/17. Net loss for the year ended 12/31/18 was $24.4 or $1.07 loss per share compared to a net loss of $31.8 million or $1.40 loss per share for the year ended 12/31/17.

EBITDA for the year of 2018 was $4.8 million, an increase of 140% compared to the EBITDA of $2 million for the year of 2017. And EBITDA reconciliation was provided in our earnings release issued this morning.

Now I'll highlight some balance sheet items. Our balance sheet continues to remain strong. At 12/31/18, we had debt including obligations under capital leases of approximately $12.8 million. Cash and short-term investments of $39.3 million. Our current ratio was 2.8:1.

And finally, working capital was approximately $49.7 million. And with that, I'll turn the call back to Steve for some comments on our operations.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [4]

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Well, thank you, Jim. As stated in our earnings release issued this morning, the fourth quarter of 2018 was a very difficult quarter for Dawson Geophysical as well as the entire oil and gas services sector. Crude oil began -- WTI began the fourth quarter at $74.68, only to close down 39% to 45.7 -- $45.72 on 12/31 of '18. Philadelphia Oil Service Index, referred to as the OSX, experienced an even more challenging fourth quarter as it became trading October 1 at $151.40 only to drop 47% to $80.60 on 12/31, after reaching a low of $75.70 on December 24, '18.

Despite the challenging fourth quarter, market conditions for the 12-month period ended 12/31/18, while revenues remain consistent with 2017 levels, we delivered 140% increase in EBITDA and a significant reduction in net loss as compared to the 12-month period ended 12/31/17.

Our ongoing emphasis on cost reduction, enhanced efficiencies contribute these improvements.

While our 12-month results improved as compared to the 12-month period ended 12/31/17, market conditions continue to remain challenging in both United States and Canada.

The increase in demand we anticipated for the second half of '18 did not materialize as oil prices softened. And the Canadian market was unfavorably impacted by the large differential between Canadian oil prices and WTI prices. In the Permian and Delaware Basins, takeaway capacity constraints resulted in a pricing differential through WTI throughout the year, further reducing effective oil prices.

Many industry professionals believe that Permian and Delaware pricing differential will further ease as additional takeaway capacity is added in '19 and in '20.

That said, we are encouraged by emerging trend related to areas of activity by exploration and production companies and multi-clients data library companies.

For much of 2018, seismic projects in the U.S. have been concentrated in the Permian and Delaware Basins, with little activity outside of those basins. In recent months, we have seen a slight increase in projects located outside of the Permian and Delaware. We have recently bid projects in the Niobrara and Powder River areas, SCOOP/STACK, Eagle Ford and Austin Chalk basins.

During the quarter, the company's Board of Directors approved an increase to our 2018 budget from $10 million to $17 million in response to a strategic opportunity to acquire certain seismic recording equipment. While capital expenditures for the quarter were $2.3 million, in total $16.1 million for the 12 months ended 12/31, primarily for seismic data acquisition and replacement vehicles.

Our balance sheet, as Jim said, remained strong with $39.3 million of cash and short-term investments and $49.7 million of working capital as of 12/31/18.

We have notes payable and capital leases obligations totaling $12.8 million as of 12/31, and our board has approved an initial capital budget of $10 million for '19.

While '18 proved difficult for Dawson Geophysical as well as many companies in oilfield service sectors, we continue to believe that seismic remains a valuable technology for identifying -- identification and development of both conventional, unconventional hydrocarbon reservoirs by our clients in the industry. Reducing costs and improved production economics are just some of the benefits that we believe our technology affords our clients.

For the year so far, WTI is up approximately 21%, and we and others expect oil prices to rise in the first half of '19. We anticipate reduced bid activity during the first quarter of '19 but remain cautiously optimistic as our clients evaluate their 2019 capital budget expenditures. And with the increasing interest in several key basins outside of the Permian and Delaware, we continue our commitment to maintaining our strong balance sheet, taking advantage of opportunistic equipment purchases and positioning our sales to meet the needs of our value shareholders and clients as we deliver our best-in-class high-resolution subsurface images.

And with that, Doug, I believe we're ready to open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Marshall Adkins with Raymond James.

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Marshall Adkins, [2]

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You switched your description of your crew counts to peak of 4 crews and peak of 3 crews, model it as an average. Can you help give us what the average was for the fourth quarter?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [3]

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Marshall, we were probably -- it's probably in the -- I would guess, in the 2.5 range, somewhere in there. I mean we had 4 crews for a short period of time and then finished the year with 2. So if I had to guess, I would say, an average would be somewhere around 2.5 for the quarter.

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Marshall Adkins, [4]

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For the U.S. And then maybe Canada?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [5]

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Yes. 1.5, 2 probably for an average for the quarter in Canada.

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Marshall Adkins, [6]

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And likewise, you mentioned this quarter we're in right now, anticipating a peak of 5 in the U.S. and 4 in Canada, how would that translate your….

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [7]

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Marshall, I'm not trying to avoid the question at all, but it is kind of difficult. I mean we started with 2. I think we probably started the quarter in U.S. with 2. We're going to end that -- and we're probably at 5 here. Mid-February, we'll probably finish the quarter with 5. The way our backlog -- excuse me, the way our order book looks right now, even with the 5 that will be operating in March, for example, or later in the quarter, they'll be moving around quite a bit, finishing some projects and moving to others. So that has somewhat of a negative effect on the utilization just based on moves. And so we're going to be in that 3.5 to 4 range, maybe something like that but it's really hard to tell. It's hard to come up with an average but that's probably as close as I can get.

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Marshall Adkins, [8]

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Yes, that helps. That's what I was looking for...

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [9]

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And so here's how we're trying to describe the market. It is very cyclical short-term. I mean we're going from 2 to 4, 5, and then we may have some weak moments in there with 4 and 5 and then we'll come back down to -- we'll drop a few crews for an extended period of time. So while we'll have 4 or 5 crews, when we talk about those numbers, they could be 4 -- 3 crews for 10 days, and then we'll have another one come up, and so the majority of our projects are large in scale. We don't have that. We've talked about this for several, probably, years that the majority of our projects are very large in scale and scope, and there's not a large number of smaller projects to fill the utilization weaknesses that we see. And so it is somewhat difficult to model and predict, Marshall. That's kind of where I'm trying to get the narrative to.

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Marshall Adkins, [10]

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Right. I get that. Let me ask you this, is it -- are we more hypersensitive to moves in crude now, given what you've just described? Or has it been something else like competitive landscape or weather or something else?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [11]

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Really, the weather in the U.S. has not been a major impact for us in Q4 and in Q1, to-date. Obviously, there's a little bit with some rain and wind for example. But I know in the Canadian market, early in the quarter, we had a little bit of the late start. Of course, we had some really tough cold days in Canada when that Northern storm blew through the northern U.S., where it was just absolutely too cold to operate. But the real issue right now, Marshall, and I think, it's been this way for a little bit of time, I think, it'll continue to be here, we've just got a -- I would say the model is more sensitive to overall utilization short-term than any other factor. And we're starting -- the projects continue to be large and we, as an industry are having to model how to address that better than we've currently been addressing it in recent years.

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Marshall Adkins, [12]

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So there weren't any projects -- short cycled projects called off because of the Q4...

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [13]

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There has been some delayed. We've had several that were in Q4 and we've had some early in Q1 that have been pushed back or delayed. You know, if you back up to it and you think about where seismic fits, we're not an early indicator anymore. We're probably may be in the late cycle entry into a certain area. And so when oil price is softened and budgets get cut, I think its seismic activities and those types of things are probably early to get pushed back. But the fact that what we do is beneficial. 6 months, a year from now, I think, there's been people that -- we talked about this last year, that look at the strip, and when the strip was somewhat negative during the middle of the year last year, I think -- and really early part of year, I think, that was beginning to affect in hindsight our demand in going forward. And when prices moved, we did have some projects that probably didn't affect our Q4 as much and maybe our early part of Q1. But yes, we've had some movement, but then again, we've had some things come in last couple of weeks that have been encouraging. So it is a difficult market and somewhat unpredictable right now, I would say.

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Marshall Adkins, [14]

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Right. The capacity adds -- you upped your CapEx over last year, there's apparently some available equipment. Was this -- you seem to hint that, that was more just maintenance capital. It was replacement (inaudible) rather than additional capacity? So help me understand how much of that was maintenance versus new capacity.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [15]

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I would probably say, roughly 50/50, would be my guess. We had some -- we had lost some channels over the years and so we replenished those and some rolling stock, obviously, and those types of things. And then we've had -- we had some capital spend that was related to compute power and storage necessary to handle these larger channel count jobs. And then the real add that we've probably had, more than anything else, is the multicomponent equipment, which we used primarily in, I guess, the Canadian market is primarily multicomponent market. So all those channels are deployed in Canada right now, but when they come back to the states, we've been able to keep that multicomponent equipment busy for the better part of 3 years now. And so, some of it, probably half is maintenance. There is another part that's growth related to non-channels that allow us to grow channel count and then there's been some addition -- that was really growth, but when you add the multi-components stuff that starts to step over in little bit of a technology advancement. So that equipment became available and we had a place to put it to work near term and when you look at rental rates, lease rates in today's markets versus purchase that just makes more sense long-term to go ahead and pull the trigger. I think we're in great shape CapEx wise or equipment wise for '19, and I don't see one of those out there, again, like we've seen last couple of years at this point. But I probably talk too much, but that's where we are, Marshall, on the CapEx side.

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Marshall Adkins, [16]

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Okay. Last one from me is, you seem to have mentioned that the downturn this last quarter was more activity related than price driven. So assuming that's correct, and I'm always going to ask this every quarter, but could you comment on the competitive landscape? Has there been any meaningful changes in there? And how is pricing doing? And was I right on assuming it's more activity driven and price driven?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [17]

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Yes, I appreciate that Marshall. To answer the question, the majority of our issue in Q4 and currently is activity level and overall demand. And we're seeing -- and that's just not unique to the U.S., I think, that's worldwide. And I think, we see hints and signs that it will improve from time to time, but I think we continue to be in a hit and miss with regards to demand and where -- activity levels.

In terms of the competitive landscape, there's not much change in North America from where we were over the last couple of quarters. We did have one exit the market in the July timeframe worldwide as a result of a bankruptcy. And those assets were picked up by another company that used that entry point into the U.S., lower 48 markets, they had been active in Canada, Alaska and South America and other parts of the world. So the competitive landscape isn't -- hasn't changed a whole lot, there continue to be some formidable small players. The number of active crews working in the U.S., obviously, are well down from where they've been in recent years.

In terms of pricing, I think, the seismic market, and we've talked about this in the past, has never really recovered in terms of a pricing model. Now from the last downturn, it seems like every time we kind of get a little bit of momentum then we get a softening in oil prices and capital spending. So I think there is no doubt that we haven't been able to recover to historical levels. But having said that, I think, we understand that we need to be able to provide better data and more value to the industry and, I think, we continue to do that, and in not just our company, but our industry. And so there's no doubt that there continues to be some softening in that area, but activity is the overall issue at this point.

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Operator [18]

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(Operator Instructions) Our next question comes from the line of John Potratz with Researched Investments.

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John Thomas Potratz, [19]

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Question on the Permian Basin, that's an area where you have a mature amount of work. I know that BP bought $10.5 billion worth of resources in 2008, and it's -- they've got the capacity constraint of being able to export oil from that -- from the Permian Basin. Do you see any shift, is the new business safe from BP and other people? And do you see that with the ability to export the oil out of the Permian Basin that, that should lead to additional work?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [20]

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Yes, there's a lot in that question. Let me back up and say from -- in a direct natured, our company, I don't think, we're going to see any change in activity level directly from the name you mentioned or some others as they move in and out of the Permian Basin. We have one sell out and one buy in. And so directly, in today's market, I don't think we see it, nor do I think the ability to export out of the Permian affects us as much as it would affect maybe, drilling and completions guys. But having said that, the majority of our work today is with multi-client data library companies. Some very formidable names out there, public as well as private names that are putting together very large surveys, hundreds of square miles that cover very broad acreage positions. And their model is to take that data and license it to participants and we're not always privy to who their participants are. And so sometimes, the names you mentioned, we may be working directly for them in certain areas and other times, we might be working indirectly through a multi-client and not be aware of who's actually involved in the survey.

I will tell you that we firmly believe that seismic data are valuable technology even in the unconventional reservoirs, whether it's staying in zone or high grading or proper well placement and most everybody out there at some degree are utilizing seismic data in their overall development phase. And so it's just -- I'm confident that companies, like you mentioned, will be a participant at some level.

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John Thomas Potratz, [21]

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Sounds exciting. The other thing is, when you have a downturn and you're not fully utilizing crews, the fact you really need to keep the people available. You keep them on the worksheets so they're available when the new crew -- new project comes along. Doesn't that, sort of, in a way, increase your expenses during that quarter when there's that volatility in the number of crews being used, and that makes the quarter look a little bit worse, but it's really -- you needing to keep the people there available.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [22]

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The people are important, obviously. There's no question about that. And people are expense, I mean they're not capitalized, but they're an investments. There's folks that you put a lot of time into, and we've had quite a bit of carnage in the oilfield service space over the years and in particular the geophysical space. So when you go back to Marshall's question -- Marshall's comments earlier in the call, you're trying to figure out, is it going to be 5 crews of x channels or it could be 4 crews of larger channels. And we've seen a significant increase, believe it or not, in the back half of the year with channel requirements and how channels are deployed across fewer crews as opposed to what we were doing even a year ago.

And so, we're going to have to find a way to manage our way through that and people are going to be a big key in whether we go to 3, 4, 5 crews, the number of people it takes to handle those channels is going to be critical. So we continue to evaluate all of our efficiencies and cost structures across the board, but to answer your question, John, yes, they are folks that you got to have sitting around. You just don't find seismic people just sitting anywhere. So we try to do our best to be in a position to respond to our client's needs on very short order.

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John Thomas Potratz, [23]

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So you have to keep those people on the -- working? Or keep on...

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [24]

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We do, we do.

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John Thomas Potratz, [25]

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And then -- but then 3 weeks later, they go and work on a project. So it just has a little more expense during the quarter, but it also, as you pointed out, the crew sizes have increased. So even though you -- maybe your number of crews are going down, the net revenue generation may actually be going up because there is more -- the bigger crew size?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [26]

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Correct.

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John Thomas Potratz, [27]

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Okay, good. And the other thing I noticed very interesting was the number of filings with the SEC of over 5% ownership. And they listed 4 different firms. They're now 25.4% of the Dawson's stock ownership. How did you attract like BlackRock to mention fund and Grace White to…

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [28]

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We -- some shareholders we have called, and they've been a part of the stock for a long time and move their positions around, and we've got some Investor Relations folks to do some work for us. And I think the thing that's attractive to us by most people today is probably a value play, and we tend to attract some of that. But we're working really hard every day for our shareholders and trying to make the right decisions and doing the right things, and I believe our employees and management are committed to that. And so we look forward to those conversations and the new shareholders. So we're always excited when we have people that have a keen interest in our company and what we're doing.

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John Thomas Potratz, [29]

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So no particular presentations that, all of a sudden people go, oh my god, I have got to buy Dawson or something of that nature?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [30]

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No sir.

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Operator [31]

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There are no further questions in the queue. I'd like to hand the call back to the management for closing comments.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman, President & CEO [32]

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Well, thank you, Doug. And thank you, everyone, for listening in to our call and your interest in our company. We thank you for the questions. And just to sum up, it was a tough quarter as we've said, demand has been -- has softened a little bit, we're encouraged by some activity levels that we're seeing. At least, interest in activity level is going forward, and we'll continue to provide best-in-class services to our clients and maintain our commitment to the balance sheet and continue to look for opportunities to improve efficiencies and reduce cost and bring value to our shareholders. And we look forward to speaking to you again in approximately 90 days. Thank you.

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Operator [33]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.