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Executives

Steve Jumper - President and CEO

Chris Hagan - EVP and CFO

Analysts

Pierre Conner - Capital One

Collin Gerry - Raymond James

Gary Linhoff - Ironworks Capital

Dawson Geophysical Company (DWSN) F1Q09 (Qtr End 12/31/08) Earnings Call February 4, 2009 10:00 AM ET

Operator

Good morning my name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the Dawson Geophysical First Quarter 2009 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions).

I would now like to turn today's call over to Steve Jumper, President and CEO of Dawson Geophysical. Please go ahead, sir.

Steve Jumper

Thank you, Cynthia and good morning and welcome to Dawson Geophysical Company's first quarter 2009 earnings and operations conference call. As Cynthia said, my name is Steve Jumper; I am President and Chief Executive Officer of the company. Joining me on the call today are Christina Hagan, Executive Vice President and Chief Financial Officer; Decker Dawson, Founder and Chairman of the Board; and Ray Tobias, Executive Vice President and Chief Operating Officer.

As in the past, today's call will be presented in three segments. Following these opening remarks, Chris will discuss our financial results, I will then return for an operations update and then we will open the call up for questions. As in the past the call is scheduled for 30 minutes, and as always we will not provide any guidance.

At this point, I will turn control of the call over to Chris Hagan, our CFO, to discuss our financial results for the first quarter.

Chris Hagan

Thank you, Steve. First, I will share our Safe Harbor provisions. In accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, Dawson Geophysical Company cautions that statements made today in this conference call, which are forward-looking and which provide other than historical information, involve risks and uncertainties that may materially affect the company's actual results of operations. These risks include, but are not limited to, the volatility of oil and natural gas prices, disruptions in the global economy, dependence upon energy industry spending, limited numbers of customers, credit risk related to our customers, cancellations of service contracts, high fixed costs of operations, weather interruptions, inability to obtain land access rights of way, industry competition, managing growth, the availability of capital resources and operational disruptions. A discussion of these and other factors including risks and uncertainties is set forth in the company's 10-K for the fiscal year ending September 30, 2008.

Dawson Geophysical Company disclaims any intention or obligations to revise any forward-looking statements, whether as a result of new information, future events or otherwise.

During this conference call, Dawson will make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to the applicable GAAP measure can be found in Dawson's current earnings release, a copy of which is located on the Dawson website, www.dawson3d.com.

With that, today we reported revenues of $80,216,000 for the quarter ending December 31, 2008. Our first quarter of fiscal 2009 compared to $77,599,000 for the same quarter in fiscal 2008, an increase of 3%.

Revenues in the first quarter of fiscal 2009 continued to include third party charges related to the use of helicopter support services, specialized survey technologies and dynamite energy sources.

Due to same high level of these charges is driven by continued operations in areas of limited access such as Appalachian Basin, Arkansas, Val Verde Basin of Texas, and in Eastern Oklahoma. We are reimbursed for these expenses by our clients.

Net income for the first quarter of fiscal 2009 was $7,734,000 compared to $7,704,000 in the same quarter of fiscal 2008. Earnings per share for the first quarter of fiscal 2009 were $1. Included in the first quarter earnings results was a 19% increase in depreciation charges from the prior year period reflecting our capital investment and growth during fiscal 2008.

EBITDA for the first quarter of fiscal 2009 was $19,162,000 compared to $17,970,000 in the same quarter of fiscal 2008, an increase of 7%.

With that Steve I will turn it back to you.

Steve Jumper

Thank you, Chris. While we are pleased with our first quarter results in what has been historically our most challenging quarter due to shorter days, adverse weather conditions, and the holiday season. During the quarter we experienced a significant decrease in the demand for our services due to the global economic slowdown and resulting weakness in commodity prices from reduced demand for oil and natural gas. As a result of the decrease in commodity prices most if not all of our E&P clients have greatly reduced their capital budget to our exploration and development activities.

During the quarter, several large projects were delayed or reduced in size, and a small number of projects were cancelled. The demand reductions will begin to impact crew scheduling and utilization in the later part of the second quarter. As a result, we anticipate a reduction in crew count of up to four crews. We currently operate 16 data acquisition crews. While a reduction in crew count is not optimal it allows us to align our services with demand decisions being driven by our exploration and production company client. The reduction will help us maintain our solid financial structure and not add any long-term debt. The reduction positions the company to quickly respond, once increased demand by exploration and production companies returns.

Equipment from the discontinued crews will be deployed to existing data acquisition crews, and we will retain the most skilled and adept crew employees. As we have stated in the past, crew count is not the only metric by which a seismic acquisition company is measured. The redeployment of equipment on the other existing crews we believe will give us a competitive advantage in channel count for crew by allowing for increased productivity and crew efficiency.

In today's cost sensitive environment, we believe this will allow us to continue to provide added value to our clients by providing cost effective high resolution subsurface images in a shorter cycle time.

Capital expenditures of $3,575,000 during the first quarter were used to purchase an ARAM ARIES II reporting system equipped with channel from existing crew along with replacement vehicle. The ARAM ARIES II system replaced an I/O MRX recording system on an existing crew. The Company maintained the operation of the I/O MRX II system on a small 2D crew into late January of '09.

Due to current market conditions, the company plans to limit its capital expenditures in the near-term to necessary maintenance requirements rather than investing in additional equipment as in the past few years. The Board of Directors had originally approved a capital budget for fiscal 2009 of $20 million.

There have been many down cycles in our 56 year history, which gives us the experience and insight required to respond to this down cycle proactively without sacrificing service quality or safety. The need for exploration and production companies, even with reduced capital budgets, to diminish dry-hole risk and minimize finding and development costs are always key operating priorities and will be even more important than ever in today's environment. And while today's environment is difficult and there are uncertainties in both our industry and other sectors of the economy, we are not without optimism. We just delivered our 21st consecutive quarter of profitability. We have a strong balance sheet and financial structure.

We have and will stay committed to our business strategies. We retain and employ the best people in the industry. We operate with a conservative financial structure as evidenced by our debt free balance sheet. We provide a wide range of services necessary to compete at the highest level. We stay focused on our core business helping our clients find oil and natural gas, and lower 48. We operate the most technologically advanced equipment and process as available to the industry. And we supply our services in response to our client demands and needs while maintaining strong relationships with operators of all sizes.

At Dawson Geophysical we believe that challenging times bring new opportunities and, as in past down cycles, we remain focused on maintaining financial strength and building capabilities for delivering value for our clients. The strength of our balance sheet, lack of long-term debt, our more than $63 million of working capital and $40 million available under our revolving line of credit provides us with the financial strength required to endure this period and capture future opportunities.

Our ability to help companies reduce dry-hole risk and lower and finding development costs allows us to further leverage our skill sets and assist our clients even during difficult times.

And with that operator I believe we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Pierre Conner with Capital One.

Pierre Conner - Capital One

Good morning everybody.

Steve Jumper

Good morning, Pierre. How are you?

Pierre Conner - Capital One

I am fine, how are you all?

Steve Jumper

Well, we are doing good. Thanks.

Pierre Conner - Capital One

Good. Couple of things. First a broad question, Steve and Decker, you didn't mention acquisitions, and these times, do you, and just a question of duration, what is your thought about that and strategy?

Steve Jumper

Well at this point, Pierre, I don't think we see an opportunity out there that fits our needs and our plans at this point. We always look at opportunities as they arise and we look at opportunities all across the board. At this point, we don't have anything in mind.

Pierre Conner - Capital One

Okay. I appreciate the thought on that. Let me ask you more specifically, as you move some people and equipment off of the crews which you expect to go down on to existing crew. I mean, should we expect that the average cost per day per crew is going to go up some as a result of that?

Steve Jumper

Where I think we are headed is we have been operating under 50-50 mix, approximately 50-50 mix term or day rate contracts versus turnkey. I am getting a sense that we will probably see a move more toward turnkey contracts, in other words contracts priced on a per square mile basis if it's 3D or per linear mile basis if it's a 2D. And so, I do not think it will see necessary an increase in underlying day rate per crew, but I think what we will begin to see is with the ability to leverage the expanded equipment and potential expanded crew personnel that we believe will allow us to increase productivity and increase efficiencies, in other words we'll be able to acquire we believe and we hope more units on a daily basis.

As in the past, your ability to increase revenue daily is certainly much higher with turnkey contract as opposed to day rates, but along with the turnkey contracts, it's going to become more risk involved. There is more, give more risk related to accessibility and down time to a certain extent weather. So we are going to build in more risk. I think we have a chance to at least hold if not increase revenue per day.

But I will caution that the market is competitive and pricing is more difficult than it has been in recent quarters and recent years certainly. But I think we have a suite of services and have some skill set I think will allow us to compete and do well on this, what is shaping up to be a very difficult time.

Pierre Conner - Capital One

With moving this equipment and be more efficient, you previously stated that the backlog extended well into '09. Are you effectively accelerating and has there been any additional bidding that would fill that in are we just kind of moving forward right now, waiting to see what comes up for additional activity?

Steve Jumper

We have always been hesitant to quantify our order book in any manner whether it would be months or crew months or dollar amount, because we have always said that our order book while we have felt good about it, our clients can cancel their contracts on very short order. And so what changes the schedule is we have talked in the past about the difficulty in acquiring land access permits and right away access agreements and things like that.

And so when you have a project that moves, that you have schedule and you have planned and it encounters some type of permit or access agreement issue, it can move the schedule around. Our schedules have always been very fluid and they are even more so today. And so we do have some holes in the schedule, we do have some issues, things have changed quite a bit since the last time we were on the line three months ago. There is bidding activity out there, there are projects that we see coming down the line, there are projects that we have recently been awarded, it's not a dead environment. But we do get a lot of comment such as we have got this project we are going to put it on hold, we will wait to see what happens to the first quarter. We are going to see what the capital budgets are like and so.

All I can tell you at this point is that the order book is very fluid and it's very dynamic and it changes on very short notice one way or the other. And so it's very difficult for us to quantify what that order book looks like at this point.

Pierre Conner - Capital One

Last one, could you share with us geographically where those crews are coming expected in the near term to come down?

Steve Jumper

They are widespread, we will probably lose one in the Appalachian Basin, we will lose one probably in the Barnett Shale region, we probably have one come down out of Arkansas and then one crew that's been floating region to region.

Pierre Conner - Capital One

Okay, I will let some other ones, thanks guys.

Steve Jumper

Thanks Peter.

Operator

Your next question comes from the line of Collin Gerry with Raymond James.

Collin Gerry - Raymond James

Hi good morning.

Steve Jumper

Hi Collin, how are you?

Collin Gerry - Raymond James

I am doing pretty good, how about yourself?

Steve Jumper

We are hanging in there.

Collin Gerry - Raymond James

Good to hear, want to dial in to the contract changes you mentioned, just could you give us a little bit more detail or color around that, is it part of overall CapEx cuts, would you say that seismic has been disproportionately smaller of the CapEx cuts or larger in some cases, and can you characterize, has it been more oil or gas price, is there a differentiation between the oil or gas components?

Steve Jumper

How we stack up in terms of percentage, the CapEx cuts, the E&P coverage you are putting out appear to be very wide spread and across the board, and so I really don’t know at this point if we are disproportional one way or the other. We have been driven predominantly in the last three, four, five years, by the natural gas market. And we were beginning to see sometime in '08 more work geared towards the oil side predominantly in some of these oil shale plays that we have been hearing a lot about. Obviously, those at $40 oil probably on economics. So we have seen a significant slowdown in the oil shale plays.

There is still quite a bit of work in the gas shale plays, there are still acreage positions that need to be evaluated, they are still least obligations that are in play. So, that's driving our level of activity, probably more than any thing else right now. It continues to be natural gas. But with natural gas prices down around $450, it's making those things pretty tough as well. I think our mix going more towards turnkey is probably several things, one is, it is putting more risk on us and seeing more companies that are wanting to more or less cap their exposure in a region. They want to make sure that they know what this particular project is going to cost. You are somewhat open ended on a day rate contract.

Collin Gerry - Raymond James

Right.

Steve Jumper

But on a turnkey, they have a pretty good idea of what their fixed costs are going to be. What we are not seeing are the large blanket contracts that would come and say we are going to keep our crew busy for six months or a year, and that's where you had allowed the day rate contract come into play, you could actually see value over a long period of time. And what we are seeing now are more commitments from E&P operators of all sizes, small all the way to majors that are becoming more project-oriented as opposed to more regionally oriented if that makes any sense?

Collin Gerry - Raymond James

No, it does. And you mentioned on the turnkey contract I guess them wanting to have a better idea what their cost exposure are going to be. In your case, have you seen the third party cost that may put you in a risk category? How are you seeing those trends and how are you able to kind of price that and keep your margins and so forth? Are you seeing your third party cost come down a little bit, I mean obviously fuels come down, and what about the other cost labor and some of the helicopters services and so forth?

Steve Jumper

Well, fuel is down obviously as you said labor has not come down yet. We are going to look at cost cutting measures all the way across the board, Collin. We have been through this before. We have just an outstanding group of people that are not just committed to their seismic work, but they have tremendous loyalty to us. And so labor cost will be looked at. Third-party charges are certainly coming down, drilling costs for dynamite surveys are down, third-party survey costs are down, helicopter costs are down and so I think everybody is working together.

I think we all recognize the pressure that’s on the E&P companies. I think we all recognize that we have got to add value to what we are providing and that our challenge is to continue to provide cost effective high resolution surveys. And we have always taken that approach to the business and I don’t think this downturn has changed the way we look at it. It’s going to be tougher. It’s going to be more difficult to do that but we are certainly having conversations with all of our vendors about the capital budget cuts and how we are going to utilize those dollars. So I think we are being very proactive not just internally but externally as well.

Collin Gerry - Raymond James

Okay. And then just final question. You spoke about Dawson's longevity and so forth and we are looking into a downturn here. How do you see, and I've asked this a couple of times before but how do you see your business being different in '09 versus say the past the '01, '02 or '98, '99 downturns. What’s changed this time and how do you see the business this time around?

Steve Jumper

That’s a tough question Collin, because every time I think you and I talk about it, something else changes. Go back to '98, oil fell to $10 and we were predominantly oil-driven, we did little at any natural gas work.

And so I still think we have got exposure to these large shale plays, I think being exposed to both oil and natural gas makes it quite a bit different from what it was in '98. I think we are a different company than we were in '98. When you look at our market share in '98 we were operating six crews and there were probably, I don’t know there might have been 80 or 90 crews working in the lower 48. We have got 16 and roughly 58 to 60 crews operating. We are the largest provider of services in terms of crew count to lower 48. So we have a different market position than we had.

We have a greater exposure geographically, we have offices in Denver, Oklahoma City, Houston, Michigan. We have a broader base of contacts within the industry than we had 10 years ago. From a crew operational standpoint, we have certainly wider geographic exposure than we did in '98. '98 we were predominantly in west of the Mississippi and east of the Rockies and were working from Pennsylvania to California, and from Texas to North Dakota. So we have a wide geographic exposure.

I think our equipment base is better than it was in '98. We were certainly state-of-the-art at the time with the MRX and RSR equipment. We have invested into new vibrators and we have invested into eight of these ARAM systems, we operate about 54,000 channels of ARAM system or channels.

And so our ability to increase channel count and be more competitive, provide better images, field multiple 10,000 channels crews is certainly a strength. And our balance sheet just outstanding as it has been in the past. And I think, Pierre mentioned some opportunities earlier and we will certainly take a look at all opportunities across the Board, but I don’t know if, I will put you this way. I feel better right now than I did in '98, we are seeing continued work and we are seeing bids coming in, we have clients talking about things in '98, things shutdown and bids were hard to come by. There is still some bidding activity. I think there is opportunity for us to continue to work in various parts of the country. And I like our position in this downturn very well. I can't think of anywhere else I would rather be in right here.

Collin Gerry - Raymond James

Okay, well I appreciate the color. Thanks guys.

Operator

Your next question comes from the line of Gary Linhoff with Ironworks Capital.

Gary Linhoff - Ironworks Capital

Good morning. Steve, I am hoping you might quantify for us a little more detail what’s the level of maintenance in CapEx you expect to be for the balance of this fiscal year.

Steve Jumper

Gary, I honestly don’t have an answer for that right now. We are watching cost and expenditures very-very closely. We are really not even at a maintenance capital requirement level. We are strictly at a necessary maintenance requirement, we will obviously take some things out of service short-term and we are getting in good shape and ready to go when demand picks back up, but I am not attempting in anyway to be a basis, but I would suspect barring any changes in market conditions that our capital expenditures will be very-very minimal moving forward.

Gary Linhoff - Ironworks Capital

Okay, thanks.

Operator

At this time there are no further questions. Mr. Jumper, are there any closing remarks?

Steve Jumper

Well, thank you, Cynthia, thanks for your help. I just want to thank everybody for listening in to the conference call. I particularly want to thank our employees for their continued effort, our clients for their continued trust and our shareholders for their continued support. We have enjoyed time with you. We will speak to you again at the end of the next quarter. And we will be in San Francisco in two weeks for the Intercom World Service Conference. And that presentation will be a webcast you will be able to access it also on our website www.dawson3d.com.

Thank you for your time we will talk to you soon.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Source: Dawson Geophysical Company, F1Q09 (Qtr End 12/31/08) Earnings Call Transcript
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