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About a month ago, I wondered if a turnaround was on the way at Dawson Geophysical (NASDAQ:DWSN). I even noted that:

Adding just two crews in a rising market could bring $55 million in revenues and $12 million in owner earnings per quarter (excludes depreciation). Even at 10 times $48 million in annual cash flow, shares could rise to $60 per share.

When Dawson announced earnings a few weeks ago, they indeed noted that demand has turned and that they added two crews. [Read Dawson's F1Q10 earnings call transcript here]

While I may have been accurate regarding the turnaround and the potential to redeploy two crews, I am likely overestimating what this could mean for their bottom line because their first quarter numbers were truly terrible.

At nine crews, the company produced revenues of $36.3 million, or about $4 million per crew. At their peak, Dawson was producing $5.1-$5.4 million per crew. If the market is turning, it may be appropriate to estimate about $4.5 million per crew in revenue.

Operating expenses for the quarter came in at $34.7 million, or about $3.9 million per crew. A year ago, operating expenses were running at about $3.7 million. Looking ahead, I would guess some efficiencies will be gained by a higher crew count. I’ll model $3.8 million.

General and administrative expenses for the quarter were about $1.9 million. This should remain pretty consistent. A year ago with six more crews general and administrative costs were only $2.2 million. Depreciation for the quarter was $6.5 million. This looks like a good estimate going forward. Taxes at 38% are realistic on a normalized basis once Dawson returns to profitability.

Based on the revenue and expenses noted above, however, earnings profitability may be a little ways off still. At 11 crews, I’m estimating a loss of about $0.7 million a quarter. Cash flow, however, would be positive at $5.8 million.

(in millions) Quarter Annualized
Revenue $49.5 $198.0
Operating Expenses $41.8 $167.2
General & Administrative $1.9 $7.6
Depreciation $6.5 $26.0
Net Income -$0.7 -$2.8
Cash Flow $5.8 $23.2

Eleven crews looks to be about the breakeven point for Dawson on a net income basis. Yet the company could easily have $23 million in cash flow on an annual basis. At the end of the quarter, the company had almost $70 million in cash and short-term investments and enough equipment for at least fifteen crews. They can rapidly ramp up if demand surges without significant outlays of capital. All this from a company with a book value of $194 million and a market cap of $195 million. Management and liquidity combine to limit downside risk while the addition of a couple of more crews could provide quite a bit of upside.

Disclosure: I currently hold shares of Dawson Geophysical.

Source: Dawson Adds Crews and Upside