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TGC Industries, Inc. (NASDAQ:TGE)

Q3 2009 Earnings Call

November 2, 2009 9:30 am ET

Executives

Jack Lascar – DRG&E

Wayne A. Whitener – President, Chief Executive Officer & Director

James Kevin Brata – Chief Financial Officer, Vice President, Treasurer & Secretary

Analysts

Terese Fabian – Sidoti & Company

[Neal Damon – Wonderless Securities]

[Benny Alexandria] – Pritchard Capital Partners

Operator

Welcome to the TGC Industries third quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, November 2, 2009. I would now like to turn the conference over to Jack Lascar of DRG&E.

Jack Lascar

Welcome to the TGC Industries third quarter 2009 conference call. We appreciate your joining us today. Your hosts are Wayne Whitener, President and Chief Executive Officer and Jim Brata, Chief Financial Officer. Before I turn the call over to management I have a few items to cover. If you would like to be added to the company’s email distribution list, please call our office at 713-529-6600 and relay that information to us. Or, you can send me an email with that information.

If you would like to listen to a replay of today’s call it is available via webcast by going to the investor relations section of the company’s website at www.TGCSeismic.com or via a recorded instant replay until November 16th. Information on how to access the replay was provided in this morning’s earning release. Information reported on this call speaks only as of today, Monday November 2, 2009 and therefore you are advised that time sensitive information may longer be accurate as of the time of any replay.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the company’s future performance are forward-looking statements. These forward-looking statements are based on management’s current expectation and include known and unknown risks, uncertainties and other factors many of which the company is unable to predict or control that may cause the company’s actual future results or performance to materially differ from any future results or performance expressed or implied by those statements.

These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filings with the SEC including its annual report on Form 10K for the year ended December 31, 2008. Furthermore, as we start this call please also refer to the statement regarding forward-looking statements incorporated in our press release issued this morning and please note that the contents of our conference call are covered by these statements.

Now, I’ll turn the call over to Wayne Whitener.

Wayne A. Whitener

I’d like to welcome you to our third quarter 2009 conference call. As far as the agenda is concerned, I’ll provide you with some highlights and Jim Brata will provide you with some financial details. Then, I will come back with some final comments. Let me begin by making some general comments, first regarding our recent disclosed acquisition. On October 19th we announced that we had acquired Eagle Canada a provider of seismic data acquisition services to the Canadian energy industry based in Calgary.

We are extremely pleased to have Eagle Canada as part of our company and it will play an important role in our strategic operations going forward. Also, while the seismic market continues to be challenging and difficult, we are beginning to see some signs of stability. I will have additional remarks on both of these points following Jim’s discussion of the financials.

After a good first half, we had a disappointing third quarter as the industry wide slowdown in the US had a severe impact on our third quarter results. The continued weak economic environment along with depressed natural gas pricing which remained low during most of the quarter resulted in lower demand for seismic services. We also saw pricing pressures which caused unusually weak margins.

We have responded to this by reducing our cost, reducing our crew count and we expect to keep crew count in line with revenues. We operated four crews for the entire third quarter as we continued to optimize our end utilization keeping our crew count aligned with demand. As a reminder, we have had a fairly significant reduction in our crew count this year down from a peak of nine crews in the first quarter of 2009 to five crews by the end of the second quarter and to four crews at the end of the third quarter. Our backlog is current $35 million, down slightly from $37 million in the previous quarter.

Now, I’ll turn the call over to Jim Brata who will give you some detailed review of financial results. Then, I will come back with some final remarks.

James Kevin Brata

Revenues for the 2009 third quarter declined 25.4% to $16.1 million compared to $21.6 million in the third quarter of 2008. Cost of services in the third quarter increased 5.6% to $14.1 million from $13.4 million in the third quarter a year ago. As a percentage of revenues, cost of services in the third quarter of ’09 was 87.8% compared to 62.0% in the ’08 third quarter resulting primarily from the decline in revenues due to the reduction in our crew count during the second quarter and the beginning of the third as we continued to respond quickly to the industry wide slowdown.

Consequently cross profit in the ’09 third quarter decreased 76.0% to $2.0 million compared to $8.2 million a year ago. Gross profit margin was 12.2% compared to 38.0% in the third quarter of last year. Selling, general and administrative expenses declined 11.6% to $995,000 or 6.2% of revenue in the third quarter from $1.1 million or 5.2% of revenue in the third quarter a year ago. Depreciation and amortization expense was $3.4 million compared to $3.5 million a year ago. As a percentage of revenues depreciation and amortization expenses was 21.4% compared to 16.0% in the third quarter of 2008.

Interest expense in the third quarter was essentially flat with a year ago at approximately $246,000. We recorded a tax benefit for the third quarter of $993,000, an effective tax benefit rate of 36.4% compared to income tax expense of $1.5 million an effective tax expense rate of 34.5% a year ago.

We reported a net loss for the third quarter of $1.7 million compared to net income of $1.9 million in the third quarter of 2008. Loss per share was $0.09 versus earnings per diluted share of $0.10 in the third quarter of 2008. Per share amounts in all periods have been adjusted to reflect the 5% stock dividend paid May 12, 2009 to shareholders of records as of April 28, 2009.

Third quarter ’09 EBITDA was $968,000 and EBITDA margin 6.0% compared to $7.1 million and EBITDA margin of 33.7% in the third quarter of 2008. Our balance sheet remains strong and we continue to generate cash producing cash flow from operations of $5.8 million during the third quarter. As of September 30, 2009 we had long term debt of $7.6 million, cash and cash equivalents of approximately $34 million, a current ratio of approximate 3 to 1 and working capital of approximately $27.3 million.

With that, I’ll turn the call back to Wayne.

Wayne A. Whitener

Before we go to questions I would like to make some brief summaries about some of the operations that we have ongoing here. Despite the continued volatility of commodity prices and the uncertainty regarding future energy policy that have resulted in weak domestic seismic activity, we have become a little more optimistic because we believe we’ve reached through the trough of this downturn sometime this past summer.

While we expect the balance of this year to remain challenging, we are experiencing an increased level of inquiries and we are also seeing an increase in bidding for seismic work. We have also seen some new opportunities in the northeast Marcellus shale, however we are likely to continue operating in a very competitive pricing environment for some time. As you know, we have responded to these weak conditions by reducing our costs to keep them in line with anticipated revenues.

We intend to maintain a cost structure in line with projected demand while maintaining our ability to adjust and add crews quickly when conditions improve. Given our current backlog we expect to operate four crews during the fourth quarter in line with our third quarter level. I would like to say a few more words about the acquisition of Eagle Canada, Inc. which we believe is an excellent fit with TGC. This acquisition does several things for us, it strengthens our strategic position within the seismic industry giving us geographic diversification in to Canada and increases our exposure to oil markets while reducing our exposure to natural gas markets.

In addition, it provides us with operational exposure to new markets and new technology since Eagle Canada has extensive experience in 3C data acquisition in the Canada oil sands and their seismic acquisition services are also being used by potash mining industries in Canada. Eagle Canada has specialized expertise in acquisition seismic data in technically complex and logistically difficult environments and have had 3D heli-portable capabilities. Finally, assuming a typical seismic season in Canada, the acquisition should improve earnings in 2010.

Finally, we continue focusing on strengthening our balance sheet. During the quarter we reduced our long term obligations $1.4 million and increased cash by $3.5 million resulting in approximately $34.1 million of cash available at the end of third quarter. We a substantial amount of cash in the bank along with a unused line of credit of $5 million, we believe we remain very strongly positioned both financially and operationally to withstand the current industry down cycle which we believe is coming to an end.

We are currently not planning any significant capital expenditures for the next couple of quarters unless we see a substantial increase in our backlog. Despite the current downturn we expect an improved environment in 2010 with increased seismic activity compared to 2009 but with continued pricing competition. Our long term outlook remains positive as industry efforts to reducing finding and development costs combined with increasing complex reservoirs and the growing use of directional drilling should sustain a strong base of seismic demand as the energy sector market recovers.

This concludes my formal remarks and now I’ll take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Terese Fabian – Sidoti & Company.

Terese Fabian – Sidoti & Company

I have a question on the third quarter and sort of shedding some light on the fourth quarter. You have a relatively high revenue per crew, if I do a straight division of revenue divided by four crews it comes to about $4 million. What is going on there? Are you seeing greater efficiencies or are you having a higher proportion of jobs using dynamite? And, going in to the fourth quarter is this going to remain relatively the same?

Wayne A. Whitener

Yes, we had an increase of dynamite jobs. In the third quarter of ’09 we had 66% of revenue was dynamite work versus 22% in the third quarter of ’08. Going in to the fourth quarter we expect to have the same amount of dynamite versus vibroseis.

Terese Fabian – Sidoti & Company

Did you have any weather effect in the third quarter?

Wayne A. Whitener

Nothing real significantly no.

Terese Fabian – Sidoti & Company

I think at one time you had said that 65% or so of revenue is gas oriented leverage. Is that going to be more oil now with the Eagle Canada acquisition?

Wayne A. Whitener

Well, we’ll have to see how the contracts play out. We expect to see probably more oil plays going forward but as far as percentage, we don’t really have a handle on that yet.

Terese Fabian – Sidoti & Company

The fourth quarter generally has some holiday effect and maybe some slowdown per work with hunting season going on, do you think that’s going to be the same this year?

Wayne A. Whitener

Yes. Normally in the fourth quarter we see some additional weather, holidays and also the hunting effects so yes, there will be some of that effect which will be in the fourth quarter.

Terese Fabian – Sidoti & Company

My last question for right now, where are your crews working and where are the inquiries coming from that you are getting?

Wayne A. Whitener

Well, right now we’ve got of course crews working in Texas and Kansas. As I mentioned, we’ve got some new work we expect to do hopefully in the fourth quarter in the Marcellus which is central Pennsylvania. We also will have some additional work along the coast in south Texas.

Terese Fabian – Sidoti & Company

The current work in Texas, is that east or west?

Wayne A. Whitener

East Texas.

Operator

Your next question comes from [Neal Damon – Wonderless Securities].

[Neal Damon – Wonderless Securities]

Just two quick questions, first you mentioned going in to the Marcellus. I was wondering sort of the intensity of those sort of shoots, I’m just wondering what sort of an average, as far as channels per shoot using Kansas versus Texas and I’m just kind of curious what that would be on some of these unconventional plays?

Wayne A. Whitener

Well, it’s pretty much the parameters are the same more or less that we’re using in the Haynesville shale type play, also in the Barnett shale so channel demand is not extremely high. There is some additional 2D there because there still is some areas that are considered frontier work at the moment. We’re also going to be doing some 2D work up there as well.

[Neal Damon – Wonderless Securities]

So really on reason to add any channels at this point as I think you said in the press release.

Wayne A. Whitener

No, there’s no need to add channels at this point.

[Neal Damon – Wonderless Securities]

Then just lastly, would you consider, I know you mentioned nothing on the near term to look for acquisition but would you consider going international such as Latin America if an opportunity arose?

Wayne A. Whitener

Sure. We continue to look at all opportunities that will increase shareholder value.

Operator

Your next question comes from [Benny Alexandria] – Pritchard Capital Partners.

[Benny Alexandria] – Pritchard Capital Partners

I have a question about the slightly improving bidding activity. What do you see in terms of jobs, the size of the jobs, the duration of the jobs, are those dynamics improving?

Wayne A. Whitener

Well, I think we’re seeing an increase in inquiries as far as the amount of bids that we’re seeing. I don’t think we’re seeing really any huge increase in sizes. It pretty much varies anywhere from the small 3Ds up to 50 to 60 square. We expect to see maybe some larger 3Ds come out next year but right now it seems to be pretty well in line with what we’ve seen in the past as far as size of the 3Ds.

[Benny Alexandria] – Pritchard Capital Partners

My next question, this quarter you are going to have a little bit of the Eagle Canada contribution. What can we expect in terms of gross margins?

Wayne A. Whitener

Well, we just finished the acquisition here a little over a week ago so we’re working through the numbers and working through the combined financials so we don’t feel like we have a real good handle on that yet but we are working through that at this time.

[Benny Alexandria] – Pritchard Capital Partners

In terms of Eagle Canada what are your internal projections? How many crews do you expect Eagle to operate in the heart of winter in Canada?

Wayne A. Whitener

Well, they have the capabilities of operating five crews. At present, they’re operating two crews and they expect to build on that towards the end of the fourth quarter and in to the first quarter.

Operator

Your next question comes from Terese Fabian – Sidoti & Company.

Terese Fabian – Sidoti & Company

I have a follow up on the Eagle questions also. I know it’s hard to get since you just did the acquisition to get a whole sense of it but does Eagle Canada operate with a backlog and is there revenue per crew in terms of modeling, higher or lower than yours, do they do less dynamite work? If you can just talk about that a little bit.

Wayne A. Whitener

Well, like I said they’re operating two crews at the moment. Their revenue should be pretty much in line with our crews that we have down here. The dynamite mix has been more towards the dynamite than the vibroseis up there so we expect the revenues to be more in line with the dynamite crews.

Terese Fabian – Sidoti & Company

Do they generally operating with a backlog? Is that included in your number now?

Wayne A. Whitener

It is not. There’s nothing in Eagle in the financials or in the backlog that reflects anything with Eagle Canada and they do operate with a backlog August/September and start awarding the jobs and of course that is when they start building their backlogs. We build our backlog throughout the year so they kind of have a flat backlog during the summer and then it builds up starting the August/September time frame.

Terese Fabian – Sidoti & Company

The management of Eagle is going to be staying, the team there?

Wayne A. Whitener

Yes, all the management will be remaining in place in Eagle Canada.

Terese Fabian – Sidoti & Company

In terms of their channel count, they have 16,000 ARAM channels? Are those relatively new also because I think that your equipment base is fairly new?

Wayne A. Whitener

Yes. They have 10,000 of new ARAM Aries channels which directly match up with our new ARAM Aries channels so during the off season that will give us an opportunity to utilize those channels possibly in areas in the US.

Terese Fabian – Sidoti & Company

There’s no problem in terms of border crossings, bringing them down?

Wayne A. Whitener

No, none whatsoever.

Terese Fabian – Sidoti & Company

Then just a quick question, on the short term debt number do you have one?

James Kevin Brata

The current portion is $6.5 million.

Terese Fabian – Sidoti & Company

Then just the last question, mostly I think your work is with independents, are you seeing them come back, is that where the inquiries are coming from?

Wayne A. Whitener

Pretty much so, pretty much all of our work in bidding is with spec companies and mid to smaller size E&P companies.

Operator

Your next question comes from Terese Fabian – Sidoti & Company.

Terese Fabian – Sidoti & Company

A remaining question, on 3C data acquisition, can you describe how that differs from other work that you’re doing?

Wayne A. Whitener

Well, three component, basically they have access as well as we do to three component equipment and three component has been very popular in the oil sands up there and in previous years they’ve leased the equipment and done three component work in the oil sands.

Terese Fabian – Sidoti & Company

What does it give you that 2D or 3D?

Wayne A. Whitener

Well it’s additional information, it has P-wave and [share]-wave information. Normally in the 3D world or 2D world we’re dealing with P-wave so it gives you additional information for the subsurface mapping. It’s normally used in very complex areas to help define certain information.

Terese Fabian – Sidoti & Company

Who are the other players in that market in terms of comparable data acquisition surveying?

Wayne A. Whitener

[Pheratos CCG] is in that market, another company by the name of [Tesla] is a Canadian company up there. Their problem is the two other players of size in that Canadian market.

Terese Fabian – Sidoti & Company

Contracts there generally work on relationship and pricing?

Wayne A. Whitener

Yes, that is correct.

Operator

At this time there are no further questions. I’d like to turn the call back over to management for any closing remarks.

Wayne A. Whitener

We thank you for joining us for the third quarter conference call and we look forward to talking to you again.

Operator

Ladies and gentlemen this concludes the TGC Industries third quarter 2009 earnings conference call. You may now disconnect. Thank you for using ACT Teleconferencing.

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