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Edited Transcript of DWSN earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 Dawson Geophysical Co Earnings Call

PLANO Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Dawson Geophysical Co earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm 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 of the Board, President & CEO

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Conference Call Participants

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* John Thomas Potratz;Researched Investments;Analyst

* Michael Thomas Melby

Gate City Capital Management, LLC - Founder & Portfolio Manager

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Presentation

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Operator [1]

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Statements made by management during this call with respect to forecasts, estimates or other expectations regarding future events or which provide any information other than historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including the company's annual report on Form 10-K filed with the SEC on March 6, 2019.

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 the company's conference call this morning is covered by those statements.

During this conference call, management will make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of the non-GAAP measure to the applicable GAAP measure can be found in the company's current earnings release, a copy of which is located on the company's website, www.dawson3d.com. The call is scheduled for 30 minutes, and the company will not provide any guidance.

I would now like to turn the call over to Mr. 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 of the Board, President & CEO [2]

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Well, thank you, Derek, and good morning, and welcome to Dawson Geophysical Company's Third Quarter 2019 Earnings and Operations Conference Call. As Derek 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.

I have just a few things to cover. If you'd like to listen to a replay of today's call, it will be available via webcast by going to the Investor Relations section of the company's website at www.dawson3d.com. Information reported on this call speaks only of today, Thursday, October 31, 2019, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening.

Turning to our preliminary third quarter and 9 months ended September 30, 2019 financial results, I'm pleased to report strong third quarter results for the company. For the quarter ended September 30, 2019, the company reported revenues of $37 million, a decrease of approximately 9% compared to $40 million for the third quarter of September 30, 2018. For the third quarter of 2019, the company reported net income of $2 million or $0.09 income per common share compared to a net loss of $5.2 million or $0.23 loss per common share for the third quarter of 2018. The company reported EBITDA of $7.2 million for the quarter ended September 30 of '19, compared to $1.7 million for the quarter ended September 30, 2018.

For the 9-month period ended September 30, 2019, the company reported revenues of $112.2 million, a decrease of approximately 11% compared to $126.5 million for the 9 months ended September 30, 2018. For the first 9 months of 2019, the company reported a net loss of $9.4 million, or $0.41 loss per common share compared to a net loss of $12.6 million or $0.55 loss per common share for the first 9 months of '18. The company reported EBITDA of $7 million for the 9 months ended September 30 compared to $10.2 million for the 9 months ended September 30 of '18.

During the third quarter of '19, the company operated a peak of 6 crews in the United States and included 4 large channel count crews compared to a peak of 5 crews equipped with smaller channel counts in the U.S. in the second quarter of '19, including microseismic operations and a single small channel count crew in Canada for a short period of time. Based on currently available information, we anticipate operating up to 5 crews in the U.S. during the fourth quarter of 2019 that could result in continued high levels of channel count and energy source utilization during the quarter, along with limited activity in Canada in the fourth quarter of '19.

We believe based on currently available information that such levels of activity could be sustained into the second quarter of 2020 in the U.S. and up to 4 crews during the fourth quarter of 2020 in Canada. We are currently operating 5 crews in the U.S. and 1 small crew in Canada as we ramp up for the winter season. As in recent quarters, the majority of our projects are on behalf of multi-client companies in the U.S. with some limited activity directly for exploration and production companies.

I will now turn control of the call over to Jim Brata, who will review the financial results. I will then return with some final remarks and our outlook into the fourth quarter, and first and second quarters of 2020. 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. We're very pleased to report net income of $2 million for the third quarter of 2019. Revenues for the third quarter of 2019 were $37 million, a decrease of approximately 9% compared to $40.4 million for the quarter ended September 30, 2018. As stated in our earnings release issued this morning, during the third quarter of 2019, the company operated a peak of 6 crews in the United States that included 4 large channel count crews compared to a peak of 5 crews with smaller channel counts in the U.S. in the second quarter of 2019 that included microseismic operations and a single small channel count crew in Canada for a short period of time. Based on currently available information, the company anticipates operating up to 5 crews in the U.S. during the fourth quarter of 2019 that could result in continued high levels of channel counts and energy source utilization during the quarter, along with limited activity in Canada in the fourth quarter of 2019. The company believes, based on currently available information, that such levels of activity could be sustained into the same quarter of 2020 in the U.S. and up to 4 crews during the first quarter of 2020 in Canada. The company is currently operating 5 crews in the U.S. and 1 small crew in Canada as it ramps up for the winter season.

Cost of services in the third quarter of 2019 was $26 million, a decrease of 24% compared to $34.4 million in the same quarter of 2018. General and administrative expenses were $3.8 million in the third quarter of 2019, down 8% compared to $4.1 million in the third quarter of 2018. Depreciation and amortization expense in the third quarter of 2019 was $5.2 million, a decrease of 26.5% compared to $7.1 million in the same quarter of 2018. Net income for the third quarter of 2019 was $2 million or $0.09 income per share compared to a net loss of $5.2 million or $0.23 loss per share in the third quarter of 2018. We recorded an income tax benefit of $25,000 in the third quarter of 2019 compared to an income tax benefit of $232,000 in the same quarter of 2018.

EBITDA in the third quarter of 2019 was $7.2 million compared to $1.7 million in the same period of 2018. An EBITDA reconciliation was provided in our earnings release issued this morning.

Now I'll highlight some results for the 9 months ended September 30, 2019. Revenues for the 9 months ended September 30, 2019, were $112.2 million, a decrease of 11% compared to $126.5 million for the 9 months ended September 30, 2018. Cost of services for the first 9 months of 2019 was $92.2 million, a decrease of 12% compared to $104.4 million for the same period of 2018. General and administrative expenses were $13.4 million for the 9 months ended September 30, 2019, an increase of 11% compared to $12.1 million in the same period of 2018.

Depreciation and amortization expense for the first 9 months ended September 30, 2019, was $16.6 million, a decrease of 28% compared to $23.2 million in the same period a year ago. Net loss for the 9 months ended September 30, 2019, was $9.4 million or $0.41 loss per share compared to a net loss of $12.6 million or a $0.55 loss per share in the same period a year ago. EBITDA for the first 9 months of 2019 was $7 million compared to $10.2 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 continues to remain strong. As of September 30, 2019, we had debt, including obligations under finance leases of approximately $3.3 million, cash and short-term investments of $27.1 million. Our current ratio was 2.9:1. And finally, working capital was approximately $48.3 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 of the Board, President & CEO [4]

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Well, thank you, Jim. As we've said, we are very pleased to report strong results for our third quarter with net income of $2 million and EBITDA of $7.2 million. Our improved quarterly results were attributed -- attributable to continued diligent efforts designed to further reduce costs and improve productivity while operating much larger channel count crews, favorable weather conditions and higher utilization of recording channels in the quarter. In addition to greatly increased channel utilization compared to the second quarter, we experienced very high utilization of energy source units as well and we continue to move toward a channel and energy source utilization model rather than a crew-based model.

Despite challenging times, the oil and gas sector increased demand for large channel count projects by our client continues to drive today's seismic data acquisition market. During the third quarter, we continued operation of the large 44,000 station multicomponent crew with 132,000 total channels that we mentioned in our last quarterly earnings call and 2 35,000-plus channel count crews, along with intermittent smaller channel count crews. Each of the crews operated between 16 and 22 energy source units. Several of these projects will continue well into the fourth quarter. We're conducting these projects using our industry-leading inventory of wireless channels and energy source equipment. Our current inventory, while tight, is sufficient to meet current client needs.

Visibility into 2020 appears positive compared to recent quarters. Based on currently available information, we anticipate both channel and source utilization to be much improved over our second quarter but below the level of our third quarter utilization. Early indications are for a Canadian season similar to last year with up to 4 crews operating and with high channel count and source utilization in the U.S. in the first quarter of 2020. After the completion of the Canadian season, the equipment will redeploy to the Lower 48 in the second quarter. We are anticipating strong channel energy source utilization in the second, in the U.S., into the second quarter of 2020. As in prior years, the winter season in the Lower 48 is historically difficult with shorter days, holiday season and increased weather exposure.

Capital expenditures for the third quarter were $644,000 and a total of $2.8 million for the first 9 months of '19, primarily for maintenance capital items. Our balance sheet, as we've said, remained strong with $48.3 million of working capital as of September 30, 2019. We have notes payable in finance leases totaling $3.3 million as of September 30.

In closing, we are pleased to report -- while we are pleased to report solidly improved third quarter results and increased visibility of channel energy source utilization, the seismic market and the overall oil and gas sector remains challenging as project delays, cancellations or change in scope continue to be the primary factors in overall activity and utilization. We continue to be encouraged by ongoing conversations with our clients, primarily multi-client companies, with regard to future projects.

And with that, Derek, I believe we are 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) And we have no current questions in the queue. (Operator Instructions)

And we have a question from John Potratz with Researched Investments.

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John Thomas Potratz;Researched Investments;Analyst, [2]

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Steven, beautiful, beautiful results. Just sort of wondering, the sense of the market out there. You said that you've had some cancellations and -- but very strong prospects. Do you get a sense that there's -- that the people are talking to you about the potential projects over the next 6 months versus what it might be a year ago, that they're at least talking about it, starting to see what they could do with you and they might have some -- that they might result in some additional crews being utilized?

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

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Well, Jay, thank you for the comments and the question. I'll just try to answer that as briefly as I can which is -- which I know is not common for me. But we really haven't experienced any cancellations as of late. We continue to deal with some project delays, primarily related to land access arrangements. The permitting phase, getting access or permission from land and mineral owners continues to be a difficult thing in the seismic market, whether -- it's really worldwide, but particularly in the Lower 48. So that can affect short-term utilization, obviously, from quarter-to-quarter, and those things are beyond our control.

We continue to deal with timing of when projects wrap up and the next one begins that could impact utilization due to a [moving] or demobilizing of crews. We are encouraged by our conversations with our client base about opportunities going into 2020. I would caution that the market remains, the overall oil and gas markets, capital spending levels remain constrained and tight, and so that can always be an issue that we deal with, and then our projects can be canceled on short order. But we are encouraged, we are optimistic.

Looking forward, we think that we're going to continue to have a high utilization of both recording channels and energy source units. Whether that will result in additional crews is difficult to say in the next -- I can say that we could have one large 30,000 channel crew from -- for a period of time, and then that crew can split into 2 15 channel (sic) [15,000 channel]. So our equipment base, both the energy source units and recording channels, are very fluid when it -- as to the number of crews, that's why we're kind of starting to look at channel and source utilization, going forward. We're cautious, but we're optimistic.

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John Thomas Potratz;Researched Investments;Analyst, [4]

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It sounds like when you say you're very -- that the crews can be split up and reallocated, that you have a lot more flexibility in your overall system than you used to have maybe 2 years ago, which means that you're better able to respond to opportunities in the marketplace.

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

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Yes. I think this has been something that's been developing and we've talked about it over the years that it's becoming a more channel-intensive market, which is -- which (inaudible) the industry has always done this. It moves from -- as crews continue to get larger, you have to have an equipment base that can move, have some fluidity and flexibility on getting equipment to crews, not only the amount that they need but when they need it. And I think our operations folks have done a fantastic job over the years of understanding how that works and getting things where they need to be in a timely manner. And so what -- really, what's going on is the surveys that we're shooting today are, as we've talked about, they're just larger in scale and aerial extent, so they need more channels from an aerial coverage standpoint. We're putting them in on a tighter grid to create higher-resolution images. I don't see that changing any time soon. As a fact, I see that continuing to increase. We'll just have to see what happens in 2020 with regards to overall spending, which ultimately is the one thing that controls our demand level.

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John Thomas Potratz;Researched Investments;Analyst, [6]

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Right. Spending is important, but the other thing that impressed me last year, you were talking about making the overall operations more efficient and had a new manager of the operations. And my sense is that's done fairly well, and you're feeling that the overall operating costs of Dawson have come down and you've gotten a lot more overall efficiency within the company. That's my feeling sense. Is that a good way to look at it?

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

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Yes, I think so. I think that's running through the entire operation. From operations to the upfront services, getting things ready, the data-handling guys on the back side are just performing at a very high level when you think of how much data we're actually handling today. So I'm very proud of the effort that our entire teams put into this to get to where we are today.

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John Thomas Potratz;Researched Investments;Analyst, [8]

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Right. But remember, have a team and have -- you have to have a good leader, and for which I'm very appreciative of what you do, and I thank you very much. And there may be some other questions. Thank you very much for what you do. And I know you're following the footsteps of Decker, and you're doing very well. Thank you again.

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

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Thanks, sir.

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Operator [10]

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(Operator Instructions) And we do have a question from Michael Melby with Gate City Capital Management.

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Michael Thomas Melby, Gate City Capital Management, LLC - Founder & Portfolio Manager [11]

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Steve, Jim, congrats on the improved results. I was curious, as you're looking out into 2020, if anything's changed geographically from a demand standpoint, and where you might be seeing areas of strength?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [12]

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I appreciate it, Mike. It's good to hear from you. We -- the majority of our work that we're looking at and having conversations about going forward continues to be in the Permian. It kind of shifted from the Delaware Basin back to more the Permian area. Still a lot of areas that need new data over them. I think -- I'm confident in -- at least I'm confident, personally, that with the data that we're acquiring today, the high-resolution, tight-grid data that lends itself to a much better attribute analysis, I'm confident that the science and the technology will continue to play a very important role and continue to bring value to the E&P companies, the end users. We have had some work recently up in Wyoming. We've had some work in Oklahoma. We've had some work down in the Texas side, the Austin Chalk. We're about to start a job in Louisiana. And so we continue to have some projects that come up from time to time in other areas. But the Permian, more so than Delaware right now, continues to be where a significant part of our conversations are occurring.

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Michael Thomas Melby, Gate City Capital Management, LLC - Founder & Portfolio Manager [13]

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Yes, that's helpful. And maybe just a little bit more color on areas like the Permian. I guess, my sense would be that a fair amount of that has already been shot from a seismic standpoint. Could you talk maybe about the life cycle of prior shoots and what that might mean as you go forward in reshooting certain areas?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [14]

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I think I can. Here, again, I don't want to say too much, and I'm accused of that sometimes. But the -- we have mentioned -- there's really 2 questions in there, Mike. We've mentioned in the past that it's been about over 20 years since there's been really any high level of seismic data acquisition activity in the Permian, Delaware areas. And that -- going back to the mid-'90s and then we kind of started back here about 2014, '15 or so, working diligently in the area. And then we've talked about that we have worked in very highly concentrated areas of the Permian. We've been -- we were kind of focused on the Southern Permian, and then we kind of moved out to the Delaware, and we had a lot of focus in the Delaware. And so we're kind of moving back into, I guess, it'd be the Northern Midland area, maybe east of the Delaware, west of the -- west of the Midland Basin. So there's still some open areas that need to be -- need new data.

In terms of the life cycle, we really haven't gone back over any of the stuff that we've done in recent times, I would say, last 5 to 7 years. We really haven't started back over any of that, but there is some -- there's always conversations about new techniques and denser data that could lead to that. But we're still getting most of our work from what I would consider areas that are currently being drilled from a lateral -- long lateral standpoint, but really haven't had data on them yet.

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Michael Thomas Melby, Gate City Capital Management, LLC - Founder & Portfolio Manager [15]

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Got it, that's helpful. And it sounds like utilization of your equipment, you expect it to be fairly high over the next few periods. Any thoughts on the need to expand your equipment base from current levels?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [16]

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Well, I think our equipment base is in good shape right now. We do anticipate high levels of utilization. But as Jay kind of alluded to in his question, there's a lot of flexibility in the equipment base. And so some of that, certainly, if needed, could be supplemented, and we're always looking at those opportunities. But we feel pretty comfortable that the way we're operating and the ability to move channels in short order from one area to the next, I think we've gained some flexibility there. So we're always looking at that. And certainly, if the market continues to improve, whether it's supplemental or something that might be additive to us, we would certainly take a look at it. But at this point, we're comfortable with just the capital budget that we've got allocated, and we think we'll be at maintenance levels between here and the end of the year. But having said that, if something comes up that makes sense, as always, we would certainly take a look at it.

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Operator [17]

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(Operator Instructions) We'll next go to [Bill Silk] from [Grayson White].

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Unidentified Analyst, [18]

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Congratulations on the quarter. I just wonder if you could give a little more color. It sounds like you're optimistic on the winter season up in Canada. Could you give a little more color on that? Is it more oil versus gas? Any lingering impact from the pipeline issues? Just some more color there.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [19]

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Well, Bill, I appreciate it. I, by no means, am a Canadian expert. So my understanding is that most of the opportunities that our Canadian group has are more in the heavy oil area. That's my understanding. And I think it looks a lot like last year, it's pretty concentrated area. And they're indicating that they think they can get up to 4 crews, and I'm not sure yet today what the channel count impact on those crews are going to be. I don't know if they'll be as high. Last year, we had one very high channel count job in particular. And I get the sense that it's some smaller projects with less channel count needed but continues to be a very intense, high-density-type reporting.

So just to answer the question briefly, I think it continues to be heavy oil stuff. And in terms of top line impact, yes, I'll just say that the Canadian market, best I can tell, continues to be very challenging for everybody up there for -- but not much work in the gas area.

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Operator [20]

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And gentlemen, it does appear we have no further questions in the queue at this time.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [21]

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Well, thank you, Derek. And I want to thank everybody for listening in to our call. Obviously, we are very pleased with the quarterly results. We are, as we've said on the call and our press release, we are cautiously optimistic going forward, at least in the next few quarters, in terms of channels and energy source utilization. I would just want to remind everybody that, as we've said, that the oil and gas markets continue to be challenging, capital spending levels continue to be tight, and so we continue to be subject to cancellations, delays and change in scope. But we are optimistic. We're entering into the fourth quarter with some favorable tailwind. But as we've said, the fourth quarter continues to be our most challenging in the Lower 48, with shorter days and weather exposure and the holiday seasons and those types of things.

And so I'd just like to take a moment to express my gratitude to our employees, from the field level, hard-working folks, all the way up to the support groups, administrative staff, to mid-level management, and in that order of importance, for their perseverance through some very difficult times, continued hard work and dedication to the company to help us get to this point.

I'd also like to thank our valued clients for the opportunity they give us and their trust in our services.

And lastly, I'd like to thank our shareholders for their continued support. One in a row doesn't make a streak, but it certainly ended one, and we're pleased to be here and look forward to talking to you in -- at the end of the fourth quarter, the end of the fiscal year. Thank you.

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Operator [22]

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Thank you. That does conclude today's call. We do thank you again for your participation. You may now disconnect.