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Executives

Richard F. Miles - President and Chief Executive Officer

Scott A. McCurdy - Vice President and Chief Financial Officer

Analysts

Pierre Conner - Capital One Southcoast, Inc.

Collin Gerry - Raymond James

Todd P. Scholl - RBC Capital Markets

Veny Aleksandrov - Pritchard Capital Partners

Timothy D. Chatard - Sterling Johnston Capital

Geokinetics Inc. (GOK) Q2 2009 Earnings Call August 7, 2009 11:00 AM ET

Operator

Good morning, my name is Latania and I will be your conference facilitator today. I would like to welcome everyone to the Geokinetics, Inc. second quarter 2009 earnings and operations conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer period. (Operator instructions). This conference is being recorded and will be available for replay approximately one hour after its completion on the company's website at www.geokinetics.com.

I will now turn the call over to Scott McCurdy, the company's Vice President and Chief Financial Officer.

Scott A. McCurdy

In accordance with the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, Geokinetics, Inc. cautions its 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.

All statements other than statements of historical facts made during this conference call that address activities, events, or developments that Geokinetics expects, believes, or anticipates will or may occur in the future are forward-looking statements. These statements include but are not limited to statements about the business outlook for the year, backlog in bid activity discussed during this conference call, related financial performance and statements with respect to future events.

These statements are based on certain assumptions made by Geokinetics based on managements' experience and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of Geokinetics, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include risks relating to financial performance and results, job delays, impact from severe weather conditions and other important factors that could cause actual results to differ materially from those projected or backlogs not to be completed as described during this conference call or in the company's press releases or reports filed with the Securities and Exchange Commission.

Backlog consists of written orders and estimates of Geokinetics services which it believes to be firm; however, in many instances the contracts are cancelable by customers that Geokinetics may never realize some or its entire backlog which may lead to lower than expected financial performance.

A discussion of these and other factors including risks and uncertainties is set forth in the company's Form 10-K for the year ended December 31, 2008, and the company’s Form 10-Q for the 3 and 6 months ended June 30, 2009. Any forward-looking statement speaks only as of the date on which such statement is made and Geokinetics undertakes no obligation to correct or update any forward-looking statements whether as a result of new information, future events, or otherwise.

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

I would now like to turn the call over to Dick Miles, the company's President and Chief Executive Officer.

Richard F. Miles

Good morning and welcome to Geokinetics’ second quarter 2009 conference call. This morning, I will begin by briefly recapping our second quarter and first half results and then update our outlook for 2009. We will answer questions following our presentation of financial results and discussion of operating activities. I’d also like to remind everybody that as usual we will not be giving guidance.

Over the past 3 years, we have built Geokinetics into a global provider of high quality seismic data acquisition, processing, and interpretation services. Our international strength and presence enables us to deploy crews to the markets operating the highest profit potential with characteristics that favor our competitive advantages.

Ongoing investment in new equipment, technology upgrades, and innovative techniques to acquire seismic data using bottom laid cables and transition zone environment as well as shallow water and now into deeper water going to depths of 500 feet and more are keeping us in the forefront in this market segment.

Our specialized capabilities in these high-value niches give our customers enhanced subsurface resolution previously unavailable at competitive rates. In turn, the enhanced subsurface resolution enables our customers to increase their drilling success, lower their finding and development cost, and to generate a higher overall return on investment, especially in these difficult-to-access areas.

The strengths of our global business strategy were evidenced by our second quarter and 6-month results. Despite a challenging commodity price environment, Geokinetics was able to post record second quarter and 6-month revenues and EBITDA.

Crew performance was a key driver of our success this past quarter and year-to-date. Our international crew performed their jobs efficiently and effectively, progressing faster than expected, quickly achieving milestones. As a result, we accelerated the pace of realizing our backlog in the short term which had the effect of both accelerating revenue and increasing profits.

In North America, demand for land seismic services continued to decline in response to weak natural gas prices. On June 30, 2009, it was 71% lower than the same date last year. With this deterioration of the economic returns for natural gas projects, operators have significantly reduced their exploration and development budgets targeting gas prospects. As a result, we reduced our crew count in the United States from 6 crews to 4. We have re-deployed equipment from the inactive crews among currently active ones as well as repositioning the assets into various international markets.

Highlights for the second quarter include; revenues in the second quarter ending June 30, 2009, rose from $113.6 million to $144.8 million, an increase of 28% over the same period last year and first 6-month revenue rose from $233.7 million to $291.8 million, an increase of 25%. EBITDA in the second quarter and 6 months ended June 30, 2009, rose to $29.8 million and $55.1 million, increases over the same period last year of 140% and 78% respectively.

For the 3 months ended June 30, 2009, the income applicable to common shareholders increased to $1.3 million or $0.12 per diluted share as compared to a loss of $1.8 million or negative $0.18 per share for the same period last year. For the 6 months ended June 30, 2009, income applicable to common shareholders increased 612% to $5.3 million or $0.50 per diluted share as compared to $700,000 or $0.07 per share for the same period last year.

The company invested $20.6 million during the first half of 2009 primarily to increased international surveying and drilling capacity for crews relocating from North America. In addition, the company is purchasing used specialized vessels which will increase the productivity and profitability of our high-value shallow water crews and help maintain our leadership position in this important market.

As of June 30, 2009, we had a total channel count of 122,500, an increase of 1% over the same date last year and unchanged sequentially from the previous quarter.

Over the past year we have invested in assets and technologies that allow us to more effectively and profitably utilize our recording channels. For example, we are now operating the crew in South Texas utilizing our own version of vibrator slip sweep which allows us to continuously run up to 20 vibrators simultaneously that has the potential to more than double our productivity on that project.

The company’s backlog on June 30, 2009, was approximately $319 million as compared to $430 million on June 30, 2008, and $416 million at March 31, 2009. As we discussed last quarter, we expected our backlog to full this quarter as our order book was largely composed of multiple large long-term international contracts which have strong potential for additional follow-on work.

Approximately 84% of our international backlog is with national oil companies or partnerships including national oil companies. These customers generally have more strategic investment rationales and are more focused on oil driven prospects. Also approximately 89 million of the international backlog or 30% is related to transition zone and ocean-bottom cable projects.

Now, I would like to turn the call over to Scott McCurdy our Chief Financial Officer who will recap financial results for the second quarter and first half of 2009.

Scott A. McCurdy

Today we reported revenues of $144.8 million for the quarter ended June 30, 2009, 28% increase over the $113.6 million for the same quarter last year. Broken out by market, revenue consisted of approximately 13% from North America data acquisition, 85% from international data acquisition, and 2% from data processing.

Although direct operating costs increased by 12% to $102.5 million, costs increased less than revenues on a percentage basis. By market, direct cost consisted of $14.7 million from North America data acquisition, $85.6 million from international data acquisition, and $2.2 million from data processing.

Gross margins by market were 19% for North America data acquisition, down from 23% in the same quarter last year; 31% for international data acquisition, up 16% from the same period last year and 12% for data processing which was down from 26% in the same period last year. Our total overall gross margin for the second quarter was 29%, up from 19% in the second quarter of 2008.

Margins in North America declined due to significantly reduced demand and activity levels. International margins improved due to greater operating efficiencies resulting in revenues being pulled forward from future quarters and improved margins as well as increased utilization of the company’s shallow water crews.

EBITDA for the second quarter of 2009 was $29.8 million representing a 140% increase over the same quarter last year. Increased activity and higher margins in international markets resulted in the increase. In the second quarter of 2009, we earned $1.3 million or $0.12 a share compared to a loss of $1.8 million or $0.18 a share in the same quarter last year.

Higher depreciation and amortization expense were offset by higher profitability in international operations as well as in addition we had increased foreign income taxes and higher dividends resulting from our sale of preferred stock in July 2008, which offset some of the benefits.

Turning to the first half results, we reported revenues of $291.8 million for the 6 months ended June 30, 2009, a 25% increase over the $233.7 million for the first half last year. Broken out by market, revenue consisted of approximately 18% from North America data acquisition, 80% internationally; however, costs increased less than revenues on a percentage basis. Market direct costs consisted of $43.1 million from North America data acquisition, $163.2 million from international data acquisition, and $4.4 million from data processing.

Gross margins by market were 20% for North America data acquisition, down from 24% in the first half of last year; 30% for international data acquisition, up from 19% in the first half of last year and 17% for data processing, down from 23% in the first half of last year. Total gross margins for the first half of the year was 28%, up from 21% in the first half of 2008.

Margins in North America declined significantly due to the aforementioned reduced demand and activity levels while international margins improved due to greater operating efficiencies and increased utilization of the company’s shallow water crews.

EBITDA for the first half of 2009 was $55.1 million representing a 78% increase over the first half of last year. The increase in EBITDA was primarily the result of increased efficiencies and productivity of the company’s shallow water crews operating in international markets. EBITDA was negatively impacted by severances of approximately $1.1 million or $0.11 per share during the first half of 2009. These severances were incurred primarily to reduce the company’s overhead structure as a result of reduced activity levels in North America and as part of our ongoing cost-cutting initiatives.

In the first half of 2009, we earned $5.3 million or $0.50 per share compared to $0.7 million or $0.07 a share in the first half of last year. Improvements in international operation drove the increase but were partially offset by higher depreciation and amortization expenses as well as significantly increased foreign income taxes and higher dividends resulting from our sale of preferred stock in July of ’08.

We invested $20.6 million in the first half of 2009 including $10.7 million in the second quarter. These investments were targeted to increase international surveying and drilling capacity for crews relocating from North America to international markets. To the first half of this year, we have spent 55% of our $37.3 million 2009 capital budget which has been funded from cash flow.

Greater profitability and improved collections enabled us to reduce debt. At June 30, 2009, our total debt was approximately $77.7 million or 24.9% of total book capital, down from 34.5% at June 30, 2008, and 30% at March 31, 2009. We reduced our total net debt by $28.5 million from March 31, 2009 to June 30, 2009.

At the end of the quarter, we are in compliance with all of our debt covenants. Our $70 million revolving credit facility does not come due until May 2012, and at quarter end, we had outstanding borrowings of $36.9 million. Our goal is to keep debt to capital at 30% or less during the remainder of 2009.

I’ll now return the call to Dick.

Richard F. Miles

Geokinetics’ focus on international operations and the niche markets of transition zone, shallow water, and ocean-bottom cable have given the company strength and flexibility even as exploration activity in North America has declined in response to the weak natural gas prices. We are not, however, exiting the US marketplace. In conjunction with GPI, we are working on our first multi-client data library project, acquiring a comprehensive survey in Northern Pennsylvania which is part of the Marcellus Shale play.

Our out-of-pocket cash expenses on this project are covered by our customers and we anticipate that license revenues from the data will begin being recognized late in 2009. We have planned to complete the acquisition phase by the fourth quarter of this year; however, we now expect to continue acquisition into 2010 as the scope and size of this project has increased and now has the potential to more than double the original program.

Oil prices continue to be at levels that generate very attractive economic returns, and our international crews are focused more on oil driven projects. In June 2009, 83% of world seismic crews were operating outside of the United States and Canada, up from 76% to the same month last year as crews in North America were laid down in response to lower demand.

Total crew count outside the US and Canada increased 15% from June 2008 to June 2009, with some of the largest increases occurring in Africa and the Middle East. Demand for our services internationally is consistent with this trend and remains strong.

Our international crews work hard to achieve progress on key jobs leading to an acceleration of our backlog decline. In the short-term, we expect to experience a temporary reduction in activity levels as a result of this acceleration; however, we also expect follow-on awards for our crews coming off these long-term contracts. The majority of our international business comes from national and international oil companies which typically have larger jobs and longer term investment time horizons.

We have submitted tenders for several large programs, some of which have the potential to run for multiple years. As a result, I am very optimistic about our growth prospects for 2010 and beyond.

Our purpose-built state of the art equipment and expertise in frontier environments makes our seismic data acquisition capabilities high value and difficult to duplicate. We are expanding the application of our bottom laid cable business from transition zones and shallow water into deeper waters, now going past 500 feet in depth, increasing the potential of this profitable business line.

Geokinetics is the leader in this segment and we are not resting on our success. In fact, we are continuously upgrading our equipment, improving our techniques and methodologies to strengthen our market position and make it harder for competitors to duplicate our services. We are dedicated to helping our customers increase drilling success rates and improve their returns on investment. Although the size of our capital budget in 2009 is significantly less than our 2008 capital expenditures, we’re targeting strategic investments to support the redeployment of crews from North America to international operations where there is stronger demand. In addition, we are investing in new specialized transportable vessels that’ll enable us to perform the same jobs more efficiently resulting in substantial increase in productivity. These investments are paying off in the form of increased profitability both during the job and by reducing unproductive time between jobs. This further improves our competitive advantage in the markets we choose to compete.

We’re strengthening our balancing sheet by paying debt. This makes Geokinetics a stronger company and partner able to serve the needs of our customers over the long term. As Scott mentioned earlier, we’re in compliance with old debt covenants and our revolving credit facility does not mature until May 2012, nearly three years from now. We have reduced our debt substantially during the second quarter. Based on the visibility provided by our current backlog of $318 million, there continues to be significant demand for our seismic data acquisition services worldwide. While overall backlog has decreased our international backlog has actually increased 7% from the same period last year. Oil prices remain healthier around $70 per barrel supporting attractive economics for oil project. I would remind investors that much of our backlog is related to projects funded by national oil companies or partnerships including national oil companies who typically have strategic investment considerations with longer-term time horizons.

Looking ahead to our prospects in 2010, the strength of our balance sheet along with continued strong margin performance from the strategic positioning of our crews and markets with opportunities for long-term consistent work has and should continue to enable us to successfully weather this downturn even as it continues into 2010.

Operator, that’s the end of our prepared remarks. So, I’ll turn the call back over to you for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Pierre Conner - Capital One Southcoast, Inc.

Pierre Conner - Capital One Southcoast, Inc.

Dick, on this question about when to add backlog, I wanted to know your feelings about what information are clients looking for, at what stage will they be able to extend these contracts; are you delivering any early data where they will be able to assess or is this a question that they’ll actually have to test some of the structures they see which requires a drilling in between before the come back to shoot more seismic?

Richard F. Miles

Well, there are different contracts. The ones that we have in Latin America basically you sign up for a year and then you get a year’s extension. So, they happen towards the end of the year. There are jobs in that region where we already have two crews working, in Brazil for Petrobras. So, those continue; it’s just that they dwindle, the backlog goes down and down and down until you get to the end of the year and then they agree to exercise their right to extend it and then it jumps up another $60 million to $80 million and you repeat the process. So, those contracts we’re comfortable with and they’ll continue. We can’t report backlog yet. Some of the other jobs that are on the horizon, there is just a lot of opportunities in the Middle East and a lot of big jobs have been bid and we’re back and forward clarifying exactly what we meant by the statements we’ve got in our tenders, and we would expect those jobs to start being announced in the next one to two months, and they’re so large, some of these jobs, that it’s hard to say; if we got two of those we would have pretty explosive growth in the next couple of years. If we just got one we would be comfortable, and there are several of them. So, we’re confident that some of those will come our way.

Pierre Conner - Capital One Southcoast, Inc.

So, it sounds like on Latin America it’s just your performance; how well you performance plus the stable commodities and then the others are active bids. On moving equipment out of the US into these other markets to continue to accelerate or add efficiency, what’s left here in terms of the type of equipment, I believe, you have some RSR crews; are they suitable for international work at all and if you have got transition in OBC; is that equipment stuck here or can you move more?

Richard F. Miles

I wouldn’t use the word ‘stuck.’ Our plan is to stay with a strong presence in the US market. The equipment you referenced, the RSR is a radio system and you can’t get licenses for that to operate outside of the US. So, that equipment will continue to be deployed here. We have 12,500 channels on the crew in Pennsylvania that’s going very well. The other things we’ve done is increase the channel count on the crews that are operating in the US that makes them a lot more efficient, and as the prices become more competitive you can increase your efficiency and somewhat maintain your margin, of course there is a limit to that, and we had seen some pretty dramatic price reductions in certain areas, but our strategy was to keep bidding pretty much as we were and maintain our margins, and if we didn’t get the work, we would move crews overseas. We’re sort of at the point where we see enough work in the US, the US market hasn’t gone away, it’s just declined somewhat. If we go back to 2003/2004 and the companies then that were separate that now make up Geokinetics; Grant had two crews, Quantum had one, and Trace had one. So, we’re at the level we were at in 2003/2004, and I think, there is enough work to keep those crews busy. People haven’t stopped drilling, they just slowed it down somewhat, but we’re still working for one of those better customers in the Barnett Shale and we’re still working opportunities in the Haynesville Shale and other areas. So, life goes on.

Pierre Conner - Capital One Southcoast, Inc.

Understand that. I guess what I was trying to get to is sort of on a US-based channel count utilization; you went from six to four and we had a 60% utilization on channels in the US, you have that much available channels in the US; you moved enough and you’re effectively fully utilized?

Richard F. Miles

We’re fully utilized, with the crews. Now, the crews, because this market is not as good, it used to be easy to keep all of the crews 100% utilized, and now you find yourself in West Texas and the next job is in Oklahoma, that’s a long move. So, we’re picking up jobs with lower margin to keep the crew utilized.

Pierre Conner - Capital One Southcoast, Inc.

At the end of the reporting cycle, so to speak, you get to answer about what others have said. CGV alluded to increased inquiries for, sort of your niche work, I believe, they might have said specifically transition zone work even though there seemed some weakness on land, and wanted your thoughts on whether that’s good or that’s bad in that you’ve got a large competitor in your current niche area.

Richard F. Miles

I think success will always bring competition and you listen to other people telling the world that they’re not spending any money and that they’re keeping all their money, we’re still spending money wisely we believe in areas to keep us ahead of their competition. We’re going to have people come and try and do it and we already have several people trying to do it. We think we do it more efficiently than anyone else and we will continue to upgrade our techniques to stay ahead of them.

Pierre Conner - Capital One Southcoast, Inc.

The other one was a comment about which you may have alluded to the answers; Dawson indicated a shifting to oil work and certainly we’re seeing a decline in the gas side, but you mentioned a West Texas shoot; you said all four of yours really currently on shale, but is there some oil work that you feel is going to bridge some of the little gaps here?

Richard F. Miles

Yes, the bid activity this quarter versus last quarter is up. The actual number of bids received is up 17%, second quarter against first, and the gross value of that is up about 40%. Now, whether they’re oil or gas, doesn’t bother me too much as long as they’re asking us to bid and we’re winning our share of them; the technique is the same. That’s what I say, there is still a lot of work in the US, it’s just down a lot from the highs it was on a year ago.

Pierre Conner - Capital One Southcoast, Inc.

I’ll turn it back and re-queue if I have some followups.

Operator

Our next question comes from Collin Gerry - Raymond James.

Collin Gerry - Raymond James

Going back to North America, we’ve heard some talk about the pricing pressure there; can you maybe give us a little bit of what you all are seeing in terms of pricing in North America.

Richard F. Miles

We have two of ours there, one of the crews that are working on a multi-client program; obviously it’s not affected by that. We have another crew that’s pretty much been working for the same customer on the term and that hasn’t changed too much. The other two crews are bidding competitively and it depends on the environment and where you are. The one where we’ve got 20 vibrators and I think we have 12,000 channels on that crew as well, that makes us very productive and doesn’t actually reduce the margin level at all, but there are others, as I say when we’ve got a gap for a crew for a month and fill-in work, you’ll take it at a much lesser margin. So, the prices are down. That’s the reality of the world here at the moment; they’re probably 15% to 20% down on average.

Collin Gerry - Raymond James

I think that’s consistent with what we’ve head from the other guys. My other question, unrelated; you seem to so far have had pretty good success with this Marcellus JV that you’re doing, is there an opportunity to maybe take that model and apply to some of the other shale plays or newly discovered basins in the US to keep some of those crews more utilized?

Richard F. Miles

Well, there are a lot of multi-client companies, that’s all they do, that have big sales forces that are looking forward to good areas to do those shoots, and we often work for those companies. We’re not geared to be looking at opportunities around the US. We did this one in partnership with GPI and there were a couple of key customers that drove that to get it started, but as you can see there is a lot of interest in the Marcellus and in that area, and once you establish yourself and a good-sized program, it’s easy to get followon work and enlarge that area which is what we’re doing, which should keep that crew busy for quite a while.

Operator

Our next question comes from Todd P. Scholl - RBC Capital Markets.

Todd P. Scholl - RBC Capital Markets

My question is primarily relating to some of the opportunities that you see internationally; I know there’s chatter out there about some opportunities in the Middle East. Could you maybe go into a little more detail about some of the projects that you’re seeing and what the timeline as to some of these projects could be book would be?

Richard F. Miles

There are several, a lot of them rather, in the Middle East region, and most of them are for a start very end of this year or all the way out to starting end of the first quarter or beginning of second quarter next year. We’re waiting; probably the announcement of those rewards could be as much as 60 days from now, but the scope and range of some of them, there’s one that comes to mind that has got a large land portion, a large transition zone portion, and a large ocean portion, which sort of suits us down to the ground, but they’re never quite clear when you bid these things whether they’re going to just do $30 million of it or if they did they entire scope, you’re looking as much as in excess of $300 million, which then would be probably a three-year project, but we would love to get our teeth into something like that. That’s not the only one, there are other big projects in the shallow water Red Sea and other areas where there are these opportunities, but I don’t like to talk about them when to me they’re still fiction until someone sends us the email and says we’ve been awarded the job.

Todd P. Scholl - RBC Capital Markets

What type of competition are you facing in those areas; is it mainly from local providers or you seeing it from some of the other large seismic players like CGV and some other guys?

Richard F. Miles

Those jobs would not be local companies at all. It would just be the large players bidding on those jobs.

Todd P. Scholl - RBC Capital Markets

I know you talked earlier, you said that 83% of the seismic crews are now outside of North America; can you put a number around the number of crews that are working internationally now and also in North America?

Richard F. Miles

I’ve got that information somewhere, but I don’t know exactly where it is. Do you know it, Scott?

Scott A. McCurdy

I had that number and I just took the percentages. So, I’ll have to go back and look.

Todd P. Scholl - RBC Capital Markets

Also, I was going to ask, and if you don’t that you probably don’t have the total number of OBC crews or transitions on crews worldwide, do you?

Richard F. Miles

No, the OBC crews, we think, there are probably a total of eight, and we’ve just got one of those. Transition zone crews can come and go. One of the nice things about a transition zone crew to me as opposed to a deep marine vessel; if you don’t have work for it, you can pack it all up and put it in a warehouse and the standby cost is next to nothing compared to if you get into the ocean bottom cables and the marine crews, then you’ve got vessels standing by at the dock which are costly. So, I think probably there are eight to ten transition zone crews around, off the top of my head, and we’ve got up to five that we deploy.

Todd P. Scholl - RBC Capital Markets

Then a clarification; you have four crews working in the US, one is doing your multi-client, so you actually have three crews that are generating revenue, and you said one of those is in South Texas, I am assuming that’s in the Eagle Ford; where are the other two crews working in the US?

Richard F. Miles

We’ve got one in the Louisiana and one in the Barnett, and we’ve got just outside Fort Worth. It’s either moved to Mississippi from Louisiana or rather now it’s in Mississippi, and then it’s going to Texas. The jobs are small and they move around pretty quickly.

Operator

Our next question comes from Veny Aleksandrov - Pritchard Capital Partners.

Veny Aleksandrov - Pritchard Capital Partners

I have a question about your international work. You gave us an outlook for the rest of this year.

Scott A. McCurdy

Where we are in Latin America, we expect that to stay the same. I think there’s a lot of activity in Mexico, but we don’t play in Mexico. We left there a while ago and we’ve got our hands full in Latin America where we are. We moved into West Africa where there is a lot of activity, and in North Africa, Egypt, it will be busy next year, and I think there will be increased activity in the Middle East that we’re moving into, but really we don’t plan to move into any other areas. We think we can keep all of our equipment busy in those regions.

Veny Aleksandrov - Pritchard Capital Partners

My other question; we’ve talked about this a couple of times before, but do you think that your risk associated with accounts receivables has changed lately; more risk, less risk?

Richard F. Miles

I guess the risk is the same, but the risk isn’t so much that you’re not going to get paid, it’s when you’re going to get paid. The national oil companies don’t always remember to pay you exactly on 30 days as the contract says; so there is a little bit of risk in delay. The actual risk of not getting paid, I think, is very low. We’ve got a very high-quality national oil companies mostly that we work for.

Veny Aleksandrov - Pritchard Capital Partners

Are the investments in new vessels that you announced for the shallow water operations should impact favorably your gross margins, right?

Richard F. Miles

Yes. Actually the job that we designed them for didn’t materialize because that was in North America, but the way they’re designed, we can move them anywhere in the world reasonably efficiently, so we will deploy those on one of our crews that are working, but will improve its productivity. One of the issues we’ve got though is that we’ve got some of our crews so efficient that they burned up their backlog faster than we thought, and we had anticipated picking up some more work in the Far East, in Australia, but the budget cuts for some of those people caused that work to slip into 2010.

Operator

Our next question comes from Timothy D. Chatard - Sterling Johnston Capital.

Timothy D. Chatard - Sterling Johnston Capital

Did I understand you to say that your investment in the Marcellus shoot is zero?

Richard F. Miles

No, we’ve got our cash cost covered; so it doesn’t show as a negative to us.

Timothy D. Chatard - Sterling Johnston Capital

So, help me understand where that shows up in your income statement.

Scott A. McCurdy

The way it will work is the cost to acquire that data, our share of the cost to acquire that data because we’re doing it with a partner, will go onto the balance sheet as an investment and then once we start having licensed sales which the trigger, the way this contract is written, the trigger for those licensed sales will be when start delivering the process data. So, when we start delivering the process data you’ll see revenue recognized for those licensed sales and a corresponding charge to amortization to take the balance down that’s accumulated on our balance sheet. Through June, that number is about $5 million that’s on the balance sheet, and I think what we’re saying is the cash that we’ve already received in the total cash commitments to us which are somewhat separate from the profit and loss that will actually come through, that the cash that we’ll actually receive is more than enough to cover our cash investment in the project.

Timothy D. Chatard - Sterling Johnston Capital

The margins of that will flow through and when they get recognized it would be similar to data processing margins?

Scott A. McCurdy

It really depends. You go through an exercise where you look out at all the potential future sales, apply a risk factor to them, and determine what you think the present value of those is going to be, and you compare that to what remains on your book. It’s hard for us to say right now what that margin is going to be because we still have to finish that process, and we don’t know what the final cost on our balance sheet is going to be. At this stage, the shoot is actually ahead of schedule and so that’s going to lower the ultimate costs that end up on our balance sheet and improve the margins, but until we get that actually completed, we won’t actually know what the margins will be.

Timothy D. Chatard - Sterling Johnston Capital

Then how do you determine whether it’s a good deal for you or not?

Scott A. McCurdy

Well, it’s definitely; just having your cash cost covered means that there is really no downside to it especially in this environment where that crew right now is utilizing about, the way our crews had been structured, it’s using about 2-1/2 crews worth of equipment. So, in this environment, those 2-1/2 crews may not have been able to be kept busy, so we’re keeping those crews busy and all of the cash cost to keep them busy are covered, and then we retain the right to sell that data multiple times. The initial licenses that we’ve already sold, we just haven’t been able to recognize the revenue yet, cover our portion of the cost. So, we’re already ahead from a cash standpoint and then any future sales will just determine what the ultimate return on that is. Obviously, we think it’s going to be attractive or we hadn’t gone into it. I just can’t tell you today what that exact margin is going to look like.

Timothy D. Chatard - Sterling Johnston Capital

In North America, back on the crews that are out there competing in the market, one or two crews, I’m just kind of curious what direction margins are likely to take in North America. They held up relatively better than I probably would have expected them to be, 19% this quarter, gross margin; what could be a downside gross margin in North America for the next couple of quarters?

Richard F. Miles

You could maybe see it get down to 15%, but again I think with the increased bid activity, I think it’s not going to change too much going forward. It depends on crew utilization and where the jobs are, and if when you get to the job, the permitting is in place and you can get started. The thing that gets us is when we can’t work, we’re committed to a job, when we get there, and we suddenly get permit issues, and it just delays everything, and what we have seen in this market is more if you’ve got a job to go to and you get delayed on the previous one, the client has the ability to get someone else to come in and do it, so you see that, which again then effects the utilization on the next job.

Timothy D. Chatard - Sterling Johnston Capital

You talked about some accelerated activity, pulling out of backlog in the current quarter. I’m trying to get a feel for what 3Q and 4Q are going to look like on a revenue basis versus last year; do you expect to down year on year versus last year and the second half of this year?

Richard F. Miles

We’ve certainly got less crews forecast working in the third quarter; the crew worldwide is down somewhat from the second quarter. How that compares to last year, it’s probably similar or down maybe a little bit, but we’re still hopeful of this. We have crew availability in the third quarter that we are still trying to find a couple of jobs to fill out, it’s hard to see.

Scott A. McCurdy

I think another thing that factors into that is that the crews look a lot different today than they did last year. The OBC crew is now very experienced and performing better, and we’ve got more of a focus on the shallow water; the crew count, there is definitely a correlation with revenues. You don’t know how those crews are going to perform, and they are such a big part of our revenues, if they overperform or underperform they can have such a big swing that even if the crew count is similar, the revenues could still vary positive or negative quite a bit.

Timothy D. Chatard - Sterling Johnston Capital

You’d talked, I forget exactly what the wording was, in the press release specialized vessels that were easy to move boats for international work, I think, for OBC deployment. You talked about the investment you have been making in those vessels; what are those, specifically, what kind of vessels are they and how big are they and how much do they cost. I’m just trying to get a picture.

Richard F. Miles

They’re designed by us. Basically, the ease of movement from one job to the next, one of the big hurdles is always setting up shallow water transition crew that run well for a couple of months, but then the next job may be one or two thousand miles away, and there is no easy way to get the crew from point A to point B. So, we’ve designed vessels that are now up to about 75 feet in length that fold up and fit into 40-foot containers for ease of movement.

Timothy D. Chatard - Sterling Johnston Capital

I was envisioning some sort of collapsible vessel and these are low-tech people and equipment transport thing. These are not high-dollar items.

Richard F. Miles

They are not high-dollar items, but I might be offended if you said low tech.

Timothy D. Chatard - Sterling Johnston Capital

Okay, just trying to form a picture in my head here; per copy, what do these run?

Richard F. Miles

I don’t know if I like to declare that sort of thing out, they are not overly expensive.

Operator

Our next question comes from Pierre Conner - Capital One Southcoast, Inc.

Pierre Conner - Capital One Southcoast, Inc.

Actually gentlemen, it was a question you answered for Tim about the treatment of the revenues and expenses on the JV at Marcellus, I think it’s said, but you did say I thought revenues will start coming in before year in, and then also that the project has been extended; so I wanted to just reconcile that, I guess you’re getting some revenues before you complete the shoot, is that correct?

Richard F. Miles

Yes, there are the people that signed up that got the project off the ground, we deliver data to them and recognize the revenue when it’s processed, and there are other people interested in adjacent areas and it makes sense to just continue to mat the area that we’re in. The license sales, we’re very confident that they’re going to show good returns for the next several years; this is not a breakeven project or something to keep the crew busy, this is a sensible business decision with a lot of upside potential.

Pierre Conner - Capital One Southcoast, Inc.

I understand, just a little different, we’re just trying to get a feel for how it’s going to play out; and is it effectively going to double the size of this project now, Dick?

Richard F. Miles

With all of the things that are happenings in that area and the different people we’re talking to, that’s a very likely scenario and outcome. We’re waiting on a couple of people to make decisions in the next few weeks.

Operator

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Richard F. Miles

Thank you operator and thank you all again for joining us today and your interest in Geokinetics. More information can be found on our website. In addition, we will be presenting at Anacomp’s 2009 Oil and Gas Conference in Denver, Colorado on Tuesday, August 11th at 12:30 pm Eastern time. We hope to see you there, and if you can’t make it, the presentation will be webcast from the conference web at www.theoilandgasconference.com.

Operator

This concludes today’s teleconference. You may disconnect your line at this time. Thank you for your participation.

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Source: Geokinetics Inc., Q2 2009 Earnings Call Transcript

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