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Edited Transcript of DWSN earnings conference call or presentation 1-May-19 2:00pm GMT

Q1 2019 Dawson Geophysical Co Earnings Call

PLANO May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Dawson Geophysical Co earnings conference call or presentation Wednesday, May 1, 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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* James Marshall Adkins

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research

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Presentation

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Operator [1]

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Greetings. Welcome to the Dawson Geophysical First Quarter 2019 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 future results of 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 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 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, Jeremy. Good morning, and welcome to Dawson Geophysical Company's First Quarter 2019 Earnings and Operations Conference Call. As Jeremy stated, my name is Steve Jumper, Chairman, President and CEO of the company. Joining me on the call is Jim Brata, Executive Vice President and Chief Financial Officer.

Just a few comments, if you 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 speak only of today, Wednesday, May 1, 2019. Therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening.

Now turning to quick first quarter financial results for the quarter ended March 31, 2019. The company reported revenues of $51 million, an increase of approximately 3% compared to $49.9 million for the quarter ended March 31, 2018. For the first quarter of '19, we reported a net loss $137,000 or $0.01 loss per common share compared to a net loss of $1.7 million or $0.07 loss per common share for the first quarter of '19. We reported EBITDA of $5.9 million for the quarter ended March 31, '19, compared to EBITDA of $6.9 million for the quarter ended March 31, '18.

During the first quarter of '19, we operated a peak of 5 crews in the United States and a peak of 4 crews in Canada with varying utilization of the active crews during the quarter in both areas of operation compared to a peak of 9 in the U.S. and a peak of 4 crews in Canada in the first quarter of 2018. The winter season in Canada concluded at the end of the first quarter of '19 with limited seismic activities anticipated until the next winter season.

Based on currently available information, we anticipate operating 2 to 4 crews in the U.S. during the second quarter of '19 and up to 5 crews in the third quarter. As in recent quarters, the majority of our projects are on behalf of multi-client companies in the U.S. In addition, we anticipate that we will conduct a total of 2 microseismic projects in the U.S. during the second and third quarters of '19.

I will now turn control of the call over to Jim Brata who will review the financial results, and I'll return with some final remarks. 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 first quarter of 2019 were $51.2 million, an increase of approximately 3% as compared to $49.9 million for the quarter ended March 31, 2018. As stated in our earnings release issued this morning, during the first quarter of 2019, the company operated a peak of 5 crews in the U.S. and a peak of 4 crews in Canada with varying utilization during the quarter in both areas of operation. The winter season in Canada concluded at the end of the first quarter of 2019 with limited seismic activities anticipated until the next winter season.

Based on currently available information, the company anticipates operating 2 to 4 crews in the U.S. during the second quarter of 2019 and up to 5 crews in the third quarter. As in recent quarters, the majority of the company's projects are on behalf of multi-client companies in the U.S. In addition, the company anticipates that it will conduct a total of 2 microseismic projects in the U.S. during the second and third quarters of 2019.

Cost of services during the first quarter of 2019 were $40.9 million, an increase of 5% compared to $38.8 million in the same quarter of 2018. General and administrative expenses were $4.5 million in the first quarter of 2019 compared to $4.1 million in the first quarter of 2018. Depreciation and amortization expense in the first quarter of 2019 was $6.1 million, which is a decrease of 30% compared to $8.7 million in the same quarter of 2018.

Net loss for the first quarter of 2019 was $137,000 or $0.01 loss per share compared to a net loss of $1.7 million or $0.07 loss per share in the first quarter of 2018.

We did not record an income tax benefit in the first quarter of 2019 and that's compared to an income tax benefit of $31,000 in the same quarter of 2018. EBITDA in the first quarter of 2019 was $5.96 million compared to $6.99 million in the same period of 2018. An 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. And as of March 31, 2019, we had debt including obligations under finance leases of approximately $11.3 million; cash and short-term investments of $34 million; our current ratio was 3:1; and finally, working capital was approximately $52.9 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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Thank you, Jim. As stated in our earnings release issued this morning, our first quarter results were primarily a result of increased utilization of active recording channels in the U.S. and a better-than-anticipated late winter season in Canada.

While the overall crew count the U.S. was down from recent quarters, channel utilization peaked with a project in West Texas that included a peak of 48,000 channels. The project in West Texas, which was started and completed during the first quarter, combined with a 34,000-channel project in Eastern New Mexico completed in the second quarter, represents a peak of 82,000 channels and 42 vibrator energy storage units over 2 crews that generated approximately 1.4 petabytes of field recorded data and approximately 157 terabytes of output high-density, high-resolution 3D seismic data.

The large channel count project in West Texas is the largest seismic project completed by the company today in the U.S., as measured by the number of single-channel recording units and number of energy sources in operation. It also represents an approximate 15x increase in data density and volume as well as the average number of data source points acquired per day compared to our typical projects. While such data acquisition projects are currently not typical projects for the company in the U.S., there continues to be a growing trend toward larger, more complex projects. Projects require an increase in channel count, energy source unit and data management capabilities.

During the first quarter in Canada, we successfully completed a high-density 3D multi-component project requiring 32,000 3-channel multi-component seismic data recording units or 96,000 channels that generated approximately 1.6 petabytes of field-recorded data and 60.5 terabytes of high-density -- of output high-density, high-resolution seismic data. With these channel count projects in the U.S. and Canada, data gathering and throughput were equally as impressive as the seismic equipment requirements.

In the 67-year history of our company, no projects have demanded such unprecedented heights of seismic equipment, technical expertise and enormous data handling requirements that may be signaling an evolution in seismic programs. We were recently award a project in the Midland Basin in the third or fourth quarter, which could require up to 44,000 3-channel multi-component seismic data recording units or 132,000 channels with approximately 12 vibrator energy source units.

Despite a reduction in overall crew count in the first quarter, our operations group successfully drove channel count utilization to full capacity while simultaneously streamlining operational efficiencies and instituting cost reductions over the previous year to generate improved financial results from recent quarters. However, market conditions remain difficult as we navigate the second quarter. The Canadian season has ended and management anticipates reduced utilization of both channels and crews in the U.S. during the second quarter.

In response to the decrease in overall crew count, we have reduced our workforce approximately 23% since the end of 2018 and nearly 47% from the end of 2017. The reduction in head count is a response to an anticipated lower crew count, higher channel count requirements and operational improvements.

Capital expenditures for the first 3 months of 2019 were $1 million, primarily for maintenance capital items. Our balance sheet, as Jim said earlier, remained strong with $34 million in cash and short-term investments and $53 million of working capital. We have notes payable and finance leases totaling $11 million as of March 31, 2019.

In closing, while the second quarter appears challenging, we are well positioned going forward as seismic data acquisition projects continue to increase in scale and both multi-client companies and exploration and production operators are requesting more channels per project in order to develop a more vivid and robust subsurface image. We believe that Dawson Geophysical, with our industry-leading equipment base, experienced personnel and overall knowledge is uniquely positioned to capitalize on this trend.

And with that, Jeremy, we are concluded, and we will 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 from Raymond James.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [2]

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I've got a bunch of questions here, starting with -- it seems like your business model has changed meaningfully in the last year. And what I'm referring to is, you generated about the same revenues as the same quarter of last year, but you had a peak of 5 crews this year versus 9 crews last year. So clearly, the crew size has gotten bigger. You're capturing a lot more data. And from your commentary, it sounds like this is going to continue into the future.

So first of all, I'd like you just to comment on that. Or is this the state of the industry from here on? Or just -- we're just we're talking giant crew count -- channel counts per crew. And the reason I'm asking this is our modeling -- well, we've been modeling crews. It almost sounds like we need to model channels rather than crews going forward. So just give us some help on that.

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

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Thanks for the question, Marshall, and the -- we believe that the trend is headed, without question, to higher channel count. And we have seen this going back many, many years as we've seen the jump from 2,000 to 5,0000 to 10,000 and then to 15,000. But we began to see significant changes -- or increased channel count requirements up in the 20s, 30s, and you're seeing some in the 40s.

There are 2 things driving the increased channel count. One is just the scale and size of a lot of the projects that come out. A 100 square mile project was a big project. Now you're seeing things that are -- projects that are 300, 400, 500 square miles. And we've even seen some, in the last few years, that are 1,000 square miles and they require 2 high-channel count crews and so part of it is the size of the project, just the number of channels it takes to complete the project efficiently.

The second thing that's happening is we're really starting to see an increase in density of both channels and sources in a per square mile in the States or per square kilometer in Canada, for example. And so we're seeing increases. At one point, we would have 100 of each to now we're seeing 300, 400, 500 in places where the density is really, really getting tight.

And so we're -- the attributes involved in the surveys is getting more pixels, for lack of a better word, tighter imaging. At one time, we were collecting data points subsurface that were every 100 feet or so. And now we're seeing sub-50, sub-30-feet spacing. In Canada, it's down to almost sub-meter spacing.

So those 2 things are working towards channel count. We did have a very successful first quarter of channel utilization. It's something that we've been thinking would be on the horizon. And so in terms of the model yet, we're -- it will -- it's moving more towards the channel count model. How we measure that and how we look at that, we're still trying to get our arms around that.

But to answer your question that -- in another way, we kind of start the quarter with less than 5 working in the U.S. and less than 4 and we end up with 5 total. But somewhere around late January, early February is when the channel count utilization really came into play, and that allowed us to do quite a couple things.

One, if you look at a project to the end user, the cost per unit of data is going down because we're just acquiring so much of it and because of the density and the intensity and we can do it much more efficiently. And so it creates some issues for us that we're still having to work through as we're trying to figure out true capacity and that we shoot these projects very, very efficiently and quickly. And so we're having to work through how -- the time it takes to get a project ready versus how long it takes to actually shoot it. So we've got some work to do, but yes, this is a trend and yes, I believe the future is going to be channel utilization on a bigger scale.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [4]

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So what I hear you saying is both increase in density and the overall scale of jobs is just larger in terms of square miles, right?

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

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Yes. Yes. And so those are very nice projects, and I think it's the future. And particularly, as we're having to -- in several areas of operation, we really need to see improved data quality, but it's...

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [6]

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Why is that? Spend a second on that. What exactly are the operators dealing with this increased quality? Is it for better wellbore placement within these horizontal zones? Or is it avoiding fractures? Or what's going on?

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

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Well, when you increase the density of the attributes inside a survey, when you...

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [8]

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Right. You're going to get better pixels, better definition, but what do they use...

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

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Better picture and all that. And so...

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [10]

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What are they using that better picture for is what I'm curious about.

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

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Yes. And so we're not always privileged to know exactly how the end -- exactly what the end users are doing. But a lot of that is in-house proprietary stuff that happens long after we deliver it. But what my suspicion is, is that we're moving farther away from geohazard mapping, which is -- I don't say historically because we haven't been doing long laterals in -- for very long.

But I would say, in recent years, the seismic information has been a geosteering project. And we've kind of looked in the past, Marshall, about whether or not seismic activity is a leading indicator, a lagging indicator. And we used to be a leader and then we kind of were a lagger, and I'm not sure we're either one. I think we're almost a mid-cycle type tool now where they got the land positioned, now they're trying to develop it.

So we've move beyond, I think, geohazard, more into some geosteering, and I believe we're starting in some areas to get enough information that analytics will help with some level of fracture detection, some level of potential rock type, just getting a better, for lack of a better word, a better characterization of the unconventional.

And so I think with this level of intensity, particularly when you put a multi-component project in there, I think your ability to move beyond just geohazard and geosteering -- and I don't want to go to the point where we're saying sweet spot identification but maybe more favorable well positioning, maybe more favorable areas to look at how you're completing.

So while we're not working with the -- through a lot of multi-client groups now, where -- at sometimes we are arm's length away from the E&P, and so there are some services that are being -- and work being done beyond what we provide that we're not always in -- up to speed on in real time. But that's where -- those are the things that I believe are going on.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [12]

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All right. So that's very useful and thank you for that color.

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

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And one more thing, Marshall. I hate to interrupt you, but seismic, for lack of a better example, seismic data clarity is kind of like talking in -- on your cell phone. If you're indoors, you get a good clean signal. If you're outside, you may not be as clean of a signal. If you're in a windy environment, talking to someone with a cell phone is kind of hard. You can make it out, but it's kind of hard to hear. Well, that is how -- that is related to how that cell phone is picking up "noise" around it, things that affect the input signal, which is the voice.

Different bases in the U.S. respond to seismic data the same way. And so you can be in parts of the U.S. where you get a very clean image at -- with less density, but you can be in other places of the U.S. and they happen to be in some areas where there's a lot of activity going on right now where it's almost like talking on a cell phone in -- on a windy day. We just -- our answer to that is not filtering. Our answer to that is more statistics, more analytics that help us get the signal down to the depths that we need to get to through the rock type that we've got. And so that is an imaging issue that is related to the density issue in particular basins. The farther west you go from Midland, of course, that becomes more key. So I thought I would just throw that in there.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [14]

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Got it. Got it. Let's shift gears to your second quarter guidance and thoughts. We're 1 month into it, you mentioned kind of 2 to 4 crews in the U.S. versus a peak of 5 last quarter. But again, with the changing channel counts, that doesn't really help us too much from a modeling perspective. So let me maybe ask it a different way. If you were in the U.S., pretty much 100% utilized on channel count last quarter, how much lower do you -- would you expect your channel utilization to be in Q2 versus say, Q1? Is that a way I can think about it?

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

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Yes. It -- channel count is going to be -- obviously, in Canada, channel count utilization is going to be way down, and I mean way down. But we've got some timing issues, Marshall, on some projects that are kind of difficult to model right now because a high-channel count job -- and I apologize, I'm not avoiding the question -- but a high-channel count job can happen -- when they hit, they can move things pretty quickly.

And so take the 3C, the multi-component gear that was -- that's coming from the States to -- or Canada to the States, it'll be active sometime probably late second, early third quarter. Other than that, the -- we've had some projects roll off. And so the -- for a period of time in Q2, we're going to have a significant drop in channel count. It's probably, I would say, in Q2 that the channel -- that the crew count guidance will -- would be in line with the channel count utilization just based on crew size. So it's going to be down. It -- without giving you an exact number, it's going to be down significantly in Q2. Q3 looks like a lot of those channels go back to work.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [16]

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All right. So let me kind of down narrow that down. I know your guidance is -- and visibility isn't great on any of this stuff and obviously, ours isn't either. But should we be thinking on -- from a top line revenue perspective maybe, we're running at 2/3 the rate in Q2 that we were in Q1? Or is it half the rate? Just from a ballpark perspective.

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

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I think you're probably -- you're directionally correct. Keep in mind too that we've got the Canadian dropoff, so the Canadian contribution was there. So that's really about all I can give you right now, Marshall.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [18]

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Wow, immensely helpful. So you do move your Canadian channels -- you are going to move the Canadian channels down to the U.S. for the summer months until next winter. Is that -- did I hear that correctly?

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

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Yes. We do that. We do move channels across the border as needed. And so the Canadian season or the Canadian market is overwhelmingly a 3C market. So we get those channels up to the Canadian entity in late calendar year and then back out after the first quarter. And then they have historic -- or recently stayed active in the States when they're not used in the Canadian season.

So while we do move some single channels back and forth, most of the channel movement is the 3C gear. While the U.S. -- while the Canadian market is 80%-plus of 3C channels, the U.S. market is much less than that. Typically, we've kept 35,000 to 40,000 of 3C channels busy in the States in the non-Canadian season. So that's the -- typically, we don't move energy sources. It's typically just 3C channels.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [20]

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All right. That's good. And it does seem like you mentioned in the release that you've got a lot fewer people than you had before. So this larger crew -- larger channel count means maybe less channels -- or less people per crew generally or less people overall employed maybe is a better way to think about it, and that your crew profitability is probably better than we've been used to seeing at 1 year, 2, 3 years ago.

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

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That's certainly the direction we're headed. I will throw a couple of comments in there. We can -- and I know that sometimes it sounds evasive, but we're really trying to understand better the channel utilization model. And so we're continuing to have utilization issues. I mean we still have projects that are -- that will be in line, but they'll get delayed and pushed back and -- or all of a sudden, they'll grow in scale, which causes a delay because there's been some add-on work to it. And so the utilization issue continues to be problematic for our industry, not just us.

And demand continues to be sporadic. It will come in spurts, pretty high demand and then it'll slow down for a while. And so our visibility, as you said, is real difficult. But on the other side of that, we've been trying to look at what do we look like in terms of capacity going forward, and our operations group has done a great job of being able to move more equipment on a daily basis. A lot of that has to do with the density, the tighter they get. You just don't have to move the equipment as far. You move more of it, but you don't move it as far when you're picking up and laying out equipment. And crew configurations kind of change a little bit.

And so the -- as you increase channel count, the pressure moves from moving channels to moving energy sources. So just by nature of what the crew configuration looks like, we're able to do more with less. So we think that we have worked on some good ways to do that, and we think you're seeing it the right way. And stated again, utilization is going to be the issue over the next few quarters.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [22]

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All right, last one for me. CapEx, you spent $1 million on CapEx this quarter. Where do you see that for the rest of the year?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [23]

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I see as -- just at this point, I see as just at maintenance level.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [24]

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You're saying $1 million a quarter roughly?

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [25]

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Yes. About the same run rate. I don't see anything out there that changes anything at this point materially. But most of that is rolling stock, UTVs, computer hardware, those kind of things.

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Operator [26]

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We have reached the end of the question-and-answer session. And at this point, I would like to turn the call back to management for closing remarks.

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Stephen C. Jumper, Dawson Geophysical Company - Chairman of the Board, President & CEO [27]

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Okay. Jeremy, I appreciate it. I want to thank everybody for listening in to our call. And while we're -- I appreciate the questions. And while we're very pleased with our first quarter results, as we said, we're going to have a challenging second quarter. But looking forward, we believe that we're going to continue to see projects that increase in scale and in scope and in channel count. And I appreciate the operations group and all the hard work that they've done to put us in this position. I want to thank our valued shareholders, their continued support and our valued clients for their trust in our services. And we look forward to talking to you again in 90 days. Thank you.

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Operator [28]

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This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.