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Dawson Geophysical Company (NASDAQ:DWSN)

Q2 2014 Earnings Conference Call

May 7, 2014 10:00 AM ET

Executives

Stephen Jumper – Chairman, President and CEO

Christina Hagan – EVP and CFO

Analysts

Marshall Adkins – Raymond James

Rudy Hokanson – Barrington Research Associates, Inc.

Georg Venturatos – Johnson Rice & Co. LLC

Georg P. Venturatos – Johnson Rice & Co. LLC

Jason Wrangler – Wunderlich Securities, Inc.

Gary Lenhoff – Great Lakes Advisors

Veny Aleksandrov – FIG Partners LLC

Bruce Brown – Brown Capital Management Inc.

Operator

Good morning and welcome to the Dawson Geophysical’s Second Quarter 2014 Earnings Release Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

In accordance with the Safe Harbor provisions of 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, dependence upon energy industry spending, disruptions in the global economy, industry competition, delays, reductions or cancellations of service contracts, high fixed costs of operations, external factors affecting our crew such as weather interruptions, and inability to obtain land access rights of way, whether we enter into turnkey or term contracts, crew productivity, limited number of customers, credit risk related to our customers, 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 Form 10-K for the fiscal year ended September 30th, 2013. Dawson Geophysical Company disclaims any intention or obligation to revise any forward-looking statements whether as a result of new information, future events, or otherwise. During this conference call, we will make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of non-GAAP measures to the applicable GAAP measure can be found in our current earnings release, a copy of which is located on our website www.dawson3d.com.

I would now like to turn the conference over to Steve Jumper. Please go ahead sir.

Stephen Jumper

Thank you Dennis. Good morning and welcome to Dawson Geophysical Company’s fiscal second quarter 2014 earnings and operations conference call. As Dennis said, my name is Steve Jumper, Chairman, President, and CEO of the company. Joining me on the call are Christina Hagan, Executive Vice President and Chief Financial Officer and Ray Tobias, Executive Vice President and Chief Operating Officer.

As mentioned in the fiscal second quarter press release today we reported revenues of $76,766,000 for the quarter ended March 31, 2014 as compared to $83,350,000 for the same quarter fiscal ‘13. We recorded net income of $1,652,000 with the second quarter of fiscal ‘14 or $0.20 per share attributable to common stock as compared to a net income of $6,279,000 or $0.78 per share attributable to common stock in the same quarter of fiscal ‘13.

EBITDA for the second quarter of fiscal ‘14 was $12,656,000 compared to $20,314,000 for the same quarter of fiscal ‘13. We are pleased with our return to profitability during the fiscal second quarter, demand for our services remain steady. Our order book continues at level consistent with commitments carried over the past 12 months. We anticipate demand levels sufficient to sustain an average of 12 crews from the middle of this quarter to the third quarter of ‘14 through fiscal ‘14 pending timely land access permits and project readiness issues which we believe will clear themselves in the second half of the third fiscal quarter.

We are also pleased to announce that on May 5, 2014 our Board of Directors approved the payment of $0.08 per share quarterly cash dividend to shareholders. The Board of Directors has set the quarterly dividend to be payable on May 30th, 2014 to shareholders at record at the close of business on May 16, 2014 the record date. The declared amount represents an aggregate dividend of approximately $645,000 based on number of issued and outstanding shares of common stock at the deceleration date or approximately $2.58 million on annualized basis.

We are encouraged by our return to profitability as well as the completion of large multi-component project in the Bakken and the crews continuation on to the second large multi-component project we will start with short term utilization rates during the third fiscal quarter due to project readiness issues. Although these issues present themselves once again in the first half of third quarter we continue to explore ways to rightsize our operations to mitigate these issues and anticipate a return to full utilization of 12 crews during the second half of this quarter.

Despite severe cold weather conditions across the United States during the second fiscal quarter our U.S. operations grew and we are on track to complete several projects by the end of the quarter which added to our financial success and client satisfaction.

Operating expenses for the second fiscal quarter were essentially flat compared to the year ago period but higher than anticipated for the quarter. Part of the increase in operating expense relative to expectations can be attributed to a significant increase in cost on a project in Canada as previously disclosed.

The Canadian project initially scheduled for completion in the early December of ‘13 was extended into February ‘14 due to excessive snow fall and operational difficulties. Simultaneously start-up cost on several projects in the U.S. lead to an increase in operating expenses relative to expectations. While the Canadian marketplace has been more challenging than initially anticipated, I’m pleased to report that our Canadian crew completed a second project this winter ahead of schedule without any difficulties. Operations in Canada are not complete for the winter season and not anticipated to resume until the 2014-2015 winter season.

We intend to maintain our $35 million capital budget for fiscal 2014 with the unspent balance and any potential additions dedicated primarily to maintenance capital requirements including replacement of light vehicles and batteries for recording equipment. Our balance sheet remains strong with approximately $69.8 million of working capital and $17.5 million of debt of which $9.8 million will be repaid over the next 12 months. We continue to maintain a fully available $20 million revolving line of credit.

In closing, we anticipate the demand for services for the remainder of fiscal 2014 will remain steady. We believe that our order book is sufficient to sustain an average of 12 debt acquisition crews in the second half of the third fiscal quarter through the balance of fiscal ‘14. I’m pleased the conditions in the industry are sufficient for us to continue to reward our valued shareholders with a quarterly dividend. We have a presence in most major producing basins across the lower 48 and with our technology equipment base and personnel we’re poised to capture the upside the market anticipates in the second half of ‘14. And with that Dennis I believe we’re ready for questions.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. (Operator Instructions). We have the question from Marshall Adkins from Raymond James. Please go ahead.

Marshall Adkins – Raymond James

Good morning, Steve. How are you?

Stephen Jumper

Good Marshal, how are you?

Marshall Adkins – Raymond James

Just well. You mentioned I believe you’re still having issues with five crews the first of this current quarter and given us some color on what’s going on there number one. And I guess number two that is should we expect next quarter to be or the next reported quarter to be better or worse than the one you just reported?

Stephen Jumper

Well, to answer the first question Marshall or the first part of the question. It’s a very strange market conditions in the seismic industry right now and it’s a little difficult for myself and our group to kind of get their arms around what exactly is happening. Our bid activity is steady – I wouldn’t call it overly robust or even robust but it’s steady and we see upticks in bid request and then we see slight periods of slowdown which is typical for our business and historically.

And sometimes where there is a little bit of delay between a bid and a contract award and so we’ve got this pipeline of bid activity which seems steady. And we’ve got an order book that is sufficient in terms of square miles or timing issues, anticipated scheduling issues to be six to eight months out and so we’re maintaining this order book. But then the projects that are in-house continue from time to time to get tied up in things that we don’t fully understand at this point.

So that’s a bad way to say, we understand it what’s happening but we haven’t really been able to mitigate these things back in the Q3, Q4 time frame of ‘13 it was predominately related to agriculture issues. We’ve built our order book back up – we had some slowdown last summer – order book looks pretty good and then you get a project that gets a delay because E&P’s land department needs to do a little more work on something. And then there is another delay because their land department has to do something and there is maybe an agreement going on between two E&P companies that have working together and trying to join into a survey and expand it.

So, sometime these delays end up being expansion – sometimes we will get delayed, the project will get delayed, pending some type of drilling activity. And so while we have an order book that can maintain 12 we’re not in a position yet from the demand level where there are a lot of options to place those crews onto other projects as some these issues can crop up very, very suddenly.

Sometime there is budgetary delay they want to push it back, you’ll be schedule to go and have timing somewhat agreed upon and then there will be push back of a few weeks or three weeks or sometime the reasons that are not fully disclosed to us. And so we made the move last year to move to from 14 large down to 12 and we still operate the small crew from time to time.

And we don’t really have an order book that is as wide as it needs to be – it’s got some depths to it but it’s not quite as wide it needs to be in order for us to maintain that higher utilization, so we’ll go through periods.

Back in the Q3, Q4 timeframe we had really high efficiency ratings that kind of compounded the problem in addition to the agriculture issues primarily in the Permian basin. Well that wasn’t the case this time we didn’t have overly aggressive crew efficiency, they were solid and they were good but it wasn’t quite the same situation we were in last summer when we had longer days.

And so the bid activity is pretty good, there is a lot of things that can change in a short period of time Marshal I mean, so you’re kind of asking me to give a little bit of guidance which I’m probably not going to be able to say too much about it. We’re going to have a rough April, May is going to shape up a little bit better, June feels like it can be pretty good and we can make up a lot of ground in a short period of time. And there are some other projects that are kind and we just go to call before we came in about a project that has a very short time span and can maybe fill the spot for us and so it’s really kind of difficult for me to say.

The bid activity is actually pretty good I mean we’ve been awarded a few jobs here in the last couple of days and we think we’re about to get a few more here in the next couple of days. And we just got to continue to find some of these projects – more and more of these projects I think particularly these oil shales are becoming very large – couple of hundred square miles. And they’re involving sometimes more than one operator in a joint type project which is – which can slow things down.

Marshall Adkins – Raymond James

So I know you don’t like giving guidance – I am not asking for specifics because there is a lot of moving parts to this but it feels with longer daylight hours and the issues you had in fiscal Q2 that fiscal Q3 should be better but the magnitude is suspect. Am I thinking about that the right way?

Stephen Jumper

Yeah, we can make up a lot of time with daylight, you’re right. One thing that really impacted this Marshal in Q2 was the hangover of the Canadian issue which we won’t have – we will be back to just our normal carrying cost of the Canadian operation which is quite low. But the impact of those extra days into January and early part of February on that project, the cost related to the crew and some other costs that we had to incur to complete that project really was a significant hit to margin this quarter.

And so when you factor that in – I’m hopeful for a stronger back half for the quarter in terms of crew utilization. I’m not worried at all about our crew productivity, what’s going on the ground in terms of moving equipment and recording data is really – it’s hard to say an all-time high but it’s really good.

And so I’m hopeful for a strong back half – I’m hopeful we can strengthen things together and get some completion but also hope that we get some help on expense side. We’re doing everything we can do to control the expenses when these crews go down and I think our group has done a really good job of that with exception of this Q2 hangover out of Canada.

Marshall Adkins – Raymond James

Last question from me, the competitive landscape seems to have changed over the last couple of years with few of your competitors fading away. Describe the competitive landscape today versus maybe a few years ago and does that allow you to get any traction on pricing?

Stephen Jumper

The competitive landscape has changed a little but I wouldn’t say that we have had any competitors actually go away. I think the same name, the same brand names that we compete with six months ago or a year ago are still out there. There, I don’t know if we’re in a situation where there is any potential to as you put it to capitalize on any upside in pricing – we have not felt like the pricing has been – the same type of situation we got into in ‘08-’09 where we had a significant collapse of pricing. It is very competitive out there and there is a lot of capacity in the industry particularly in the lower 48.

But the pricing for us right now is in a position where we can do well I think we are continuing to show that we can bring value to the table – to the E&P company’s and we bring value in some of the other services that we bring. So I think it’s a tough question of where pricing is going to go or certainly I wouldn’t say that we have had a pricing collapse but we certainly haven’t had any strengthening either.

Marshall Adkins – Raymond James

Thanks, Steve.

Stephen Jumper

Thanks, Marshall.

Operator

Our next question is from Rudy Hokanson from Barrington Research. Please go ahead.

Rudy Hokanson – Barrington Research Associates, Inc.

Thank you. A couple of questions and maybe I’ll just give you [inaudible] for your work order you want [inaudible] and deal with them. One, I’d like to understand a little bit more about what you are seeing in terms of utilization of small crew and what kind of jobs you are doing right now? Second, you are targeting that the crew that’s dedicated to multi-component work and we talked a little bit about this in the last quarter and I was wondering if you could maybe lay out demand that you’re seeing for your multi-component offering.

And third, and this is small sort of an accounting question because I didn’t see your Q being posted yet so, maybe Chris could hand this. I was just wondering what the other expense was. It wasn’t that in fact that significant but it looked like a jump in terms of size and what’s indicative of that effect – this should be under other in the quarter? So, those were my three questions right now.

Stephen Jumper

Rudy, thank you for the questions. The small crew has actually stayed quite active they are primarily right now working on small 2D projects here in the Permian Basin very, very small you know three, four , mile 2D projects that are very specific target objective oriented. And that crew obviously has the ability to as well as a GSR to move and do some micro-seismic work which we’re staring the micro-seismic business for us has been a little bit slow almost dormant for the last couple of quarters but we think we [inaudible] have one or two this quarter and we think there are some opportunities in the fall.

And so that crew could move from 2D into that kind of work. And they did do a fairly decent size 3D so, back in the early part of the quarter – so, that crew is doing pretty good. The multi-component crew of course the work that we did in Canada was multi-component and that seems to be more of a standard in Canada to get a three channel boxes on the ground. But the multi-component crew that we referenced in the press release is the crew that we equipped in the fall of last year with the first quarter high level capital expenditure. And that crew worked continuously in the Bakken on a three component project – they have since moved to the midcontinent and they are on a steady three component – a multi-component project there. And from there they will probably be moving back to the east to do a project there.

So, the outlook for keeping about 13,000 to 15,000 stations of 3C equipment in the near future is a very positive. And those are projects that – that’s very crew – those are very crew specific projects. So, you have to stack those one behind another as opposed to the other crews which are in a [inaudible] single component can move in and out and pick up projects as they need to. And the third question I am going to.

Christina Hagan

Sure. That is basically in the other category where we had kind of an uptick to the [323] in the quarter. We saw some disposal of assets that had some impact, we don’t think that’s ongoing spending or anything inductive it’s just a house keeping matter – taking care of some assets that have been lost on the job as well as some just has come through regular inventory.

Rudy Hokanson – Barrington Research Associates, Inc.

Okay. Thank you very much.

Stephen Jumper

Thanks Rudy.

Operator

Our next question is from Georg Venturatos from Johnson Rice. Please go ahead.

Georg Venturatos – Johnson Rice & Co. LLC

Hey. Good morning, Steve.

Stephen Jumper

Hey, Georg. How are you?

Georg Venturatos – Johnson Rice & Co. LLC

Doing well. Wanted to touch on – on a comment you made a little earlier on an earlier question. Wanted to see if you can maybe give us a little more detail on what you guys are doing in terms of trying to control expenses when those crews ideal. And what, maybe in that kind of process I mean are you still working on a few things that you can become more efficient with – I just wanted to kind of get a little more detail on what you are doing on that side?

Stephen Jumper

Well, we – I will answer what I feel comfortable answering Georg and then some of it we of course kind of keep in-house somewhat. But we will shorten – shorten up some hours and shorten up on the personnel temporarily, we may we may have a project where we are maybe doubling up and going extended shifts and going two eight hours instead of one 12 hour shift where we certainly watch some maintenance issues in terms of vehicles and some of the equipment repair – we don’t want to put ourselves in a position where we get behind and can’t compete when things come up.

I think it’s more of an ongoing process, so where we are in the game I think is a little difficult. These things move very, very quickly. We do have a very high turnover rate in our labor pool and we have for a long time and so just many times just attrition alone will take care of some personnel issues. And then we are really looking at every phase of our operation not just to handle a particular downturn but we are doing things routinely to look at ways to do things more efficiently.

I think that we probably are learning more and more about the [cable less] equipment. How to properly configure those crews from a personnel standpoint and what your expectations would be from those crews as just do all you can do with the same amount of people or maybe slowdown a little with fewer people. So, we look at a lot different angles here, Georg.

Georg Venturatos – Johnson Rice & Co. LLC

Okay, that’s helpful. And then just on some of the short-term utilization issues you are seeing. Help me understand I mean the way I kind of gather what you were saying here I mean. When you look at delays and timing of the projects and it seems like those issues aren’t likely to go away at least in the near-term looking out over the next few quarters.

Do you see this and this is under the assumption we keep 12 crews operating, do you see this as more of – those issues aren’t going away – what could solve some of the short-term utilization problems is just an increased breadth of demand in terms of just some of these smaller projects coming up and opportunities to kind of fill in those gaps. Do you see that as the opportunity to kind of have the short-term utilization issues subside a little bit?

Stephen Jumper

Yes, I think that we are continuing as I assume others are to evaluate what is the right size and what is the capacity that you need to be operating. And there is a tremendous level of support function, technical, operational, marketing, sales, those types of things that go behind supporting 10, 12, 14 crews.

And so you are faced with these decisions of how far back do you go to in terms of core crew count capacity to rightsize. And the right size for the short term answer we don’t believe is right for the rightsizing for the longer term, so we kind of have to work our way through this.

We feel like this market should be able to handle 12. Of course as we have talked about in the past, our assets really aren’t always in a crew, they are in channels and so you can take those channels and go from 10 to 14, crews pretty quickly. So I think we are doing a better job in scheduling and understanding that our capacity is really in channels more than the crew count.

In order to keep the crew count, I think that you understand it George that we have these projects and we seem to be stacking these projects that are 100, 200, 300 square miles, and you have got 14 of them and you need 12 of them ready to go at any one time, well if 10 of them are ready and four of them aren’t, then you need some fillers in there to take care of some of these other short-term issues and we’ve not seen that market really develop firmly.

We will see signs of it and you will get a few of them that come out and then it doesn’t really gain any momentum. And so like everybody and all of our shareholders and our employees are and frustrated by this, it is somewhat of a relatively new issue for us as a company, this up and down utilization issue that we have dealt with. And so we are just going to continue to battle our way through it and fight through these issues.

We as a company and I believe our industry believes that we hold a very valuable technology that does bring a high value level to the E&P industry. And how they develop and drill not just the conventional reservoirs but these unconventional also. And we see more and more that while there seems to be more dedication right now, more not dedication but more emphasis on drilling, not so much on land acquisitioning more but drilling, we believe that there will continue to be a shift of emphasis into these E&P companies understanding the assets that they have and getting focused on these assets.

And we think that there are derivative products from the work that we do down the line from a processing analytical standpoint, they are going to be valuable and key to E&P companies in basins all over the U.S. and so we are in a tough cycle right now.

We continue to say short-term, the short-term quarter is it three weeks or is it a couple of quarters, I don’t know but our industry as a whole has been through a little bit of a tough go in the last two to three quarter in the lower 48. But we just firmly believe that we have a very valuable technology and we want to be right sized to capitalize on that when we think this demand for geophysical services increases over the next 12 to 18 months and in the future.

Georg Venturatos – Johnson Rice & Co. LLC

Got it.

Stephen Jumper

The answer is Georg, we are making decisions that are long-term, as well as trying to handle short term issues to the best of our ability.

Georg Venturatos – Johnson Rice & Co. LLC

No, I understood. I appreciate the detail.

Stephen Jumper

It is frustrating – it is frustrating but we will learn how to handle it.

Georg P. Venturatos – Johnson Rice & Co. LLC

Got it. Thanks.

Stephen Jumper

Thanks George.

Operator

Our next question is from Jason [inaudible] from Westlake Securities. Please go ahead.

Unidentified Analyst

Hey Steve. What was your CapEx for the quarter?

Stephen Jumper

It was right at seven….

Unidentified Analyst

$7 million and so you should, you spent the bulk of your CapEx for the year in the first quarter so?

Stephen Jumper

No, no I am reading that wrong. It was about $4.7 million.

Unidentified Analyst

Okay.

Stephen Jumper

And about 32 on, we are right at 32 through March 31.

Unidentified Analyst

Okay and you spent like 24 in the first quarter. And Steve, so for the remainder of the year, you should have not too much in CapEx and…?

Stephen Jumper

No, we are going to try really hard to stay on that $35 million CapEx. We make the best estimates we can early in the year and we think $35 million works. We are basically on a maintenance capital level through the rest of the year and so while we are hopeful to stay at $35 million, there has to be some slight adjustments to that, we are certainly going to invest in items that keep us going. But right now we are going to do our level best to stay at $35 million.

Unidentified Analyst

Okay. Is there anything on the horizon, I know TGC, they said on their last conference call that they potentially saw some large contracts out there on the horizon, they weren’t, didn’t give any certainty about it but they acknowledged that it was a possibility. Do you see that also or any comments on that?

Stephen Jumper

Yeah. As we have said in the – earlier in the call Jason, the bid activity really is steadying and it flurries for a little bit and there are projects of various sizes and then it will slow down for a little bit but it will flurry again. So we are classifying bid activity or characterizing bid activity as steady. And I think others are seeing the same thing.

Sometimes there are contracts that are out there maybe certainly it’s a competitive market and those maybe head to head stuff or they may not be. But there is a broad client base out there that I don’t think anybody is always a 100% tapped into everything but I would agree with their – with those comments as you have described them that while contract awards have been a little bit slow, I think that across the lower 48, we certainly think from the indications we get from talking to the client base we interact with that there is going to be an uptick in activity or a potential uptick in activity in the back half of the year into ‘15. And from the Canadian market standpoint it’s May 7th it’s a little early to characterize what is going to happen up there.

Unidentified Analyst

Okay. But it does sound like, you had kind of a weak fourth quarter and it looks like going into the third quarter it’s somewhat mixed, but you are seeing improvements in the second half of the quarter or believe there will be improvements. So that does set you up for probably a pretty strong fourth quarter and I know you don’t give any guidance [inaudible] but?

Stephen Jumper

Yeah. We hope so but I have been somewhat, I am very optimistic about the need for our services and other services in lower 48 and we see signs of that and we have an order book that supports that. And so from where we sit today, it feels like from the middle of this month on, through the end of the fiscal year, it feels pretty good.

Beyond that, I think that as more and more of these E&P companies need to really evaluate and really get their arms around these core assets that they have, I think that we have been in a very difficult – you called it a weak Q4 or Q1, I think that was kind but I just think our industry is dealing with some issues now that I am confident we are going to work our way through. It’s little different than other downturn than a core downturn. We have been through downturns before in our industry as have our competitors where you know the crew count is going to go down, demand level says that crew count is going down and you brace for that and you understand that and that’s part of the cycle of this industry.

What we are going through right now from our company standpoint is a little bit different, you see bid activity, you see levels of interest, you see a lot of talk, you have some contracts awards some little slower than others, you see these things filling in the order book now and it’s not really an execution issue on our part as much as it is just trying to get all the bits and pieces and everything put together to make it flow well and we are going to continue to look at that and look at ways to right size internally to address those but we are also looking at how do we – the strength of our company has been able to look at the market over the next two, three, five years and see what you think you are going to need.

So while there are some short terms issues here we are very optimistic about this thing going forward.

Unidentified Analyst

Okay, thank you.

Stephen Jumper

Thanks Jason.

Operator

(Operator Instructions). Our next question is from Jason Wrangler from Wunderlich Securities. Please go ahead.

Jason Wrangler – Wunderlich Securities, Inc.

Morning Steve.

Stephen Jumper

We just had him, right?

Jason Wrangler – Wunderlich Securities, Inc.

No, I am new.

Stephen Jumper

Okay, here we go.

Jason Wrangler – Wunderlich Securities, Inc.

I just had one more for you, Steve, I was just curious on the micro seismic side, are you seeing anything pick up I mean I appreciate your comment on the more drilling then maybe land acquisition just thought maybe that market maybe would at least being early would start to pick up?

Stephen Jumper

Yeah, we have been optimistic about that market for some time. It’s been a little slow here last couple of quarter but we have got two or three different opportunities before us and we are hearing more and more clients, E&P companies talk about utilizing micro seismic services now. That’s split into two different things. That’s split into borehole micro seismic works which is that maybe standards not the right word but it’s the most common application of micro seismic reporting.

We are more on the surface side and I think for basin to basin the result of how micro seismic surface recording works is a variable and so we continue to have people talk about either using surface standalone or surface in conjunction with borehole and we are optimistic about that business. We think that, that is a certainly a growth opportunity for us going forward.

Jason Wrangler – Wunderlich Securities, Inc.

Appreciate it.

Stephen Jumper

Thanks Jason.

Operator

Our next question is from Gary Lenhoff from Great Lakes Advisors. Please go ahead sir.

Gary Lenhoff – Great Lakes Advisors

Thanks, good morning Steve and Chris.

Stephen Jumper

Hey Gary, how did we get beat 4:0 last night?

Gary Lenhoff – Great Lakes Advisors

How did we get beat? Well I think we gave up more goals than…

Stephen Jumper

I was around here last night.

Gary Lenhoff – Great Lakes Advisors

Yeah, the third period was a little ugly.

Stephen Jumper

Yeah, I know it, I’ve got some – around here that –

Gary Lenhoff – Great Lakes Advisors

They can’t be too happy either. Two questions, kind of ironically I think given some of the discussion you had with the difficulties in the last six months or so, one of the issues you have also talked about in the past is, on the table side your efficiencies when you are able to work and working your efficiencies have been pretty good and you have struggled a bit to schedule crews to make better use of time when you finish up early et cetera, is that exacerbating the problems at all some cases and what we are doing to – you said you were thinking hard about how to address that going forward, we are already in that process.

Stephen Jumper

Gary, I think that probably was a more of a contributing factor back in the entrance into Q3 or Q4 last year. I think we have done a better job of understanding what that schedule can look like? And so back then we probably weren’t as aggressive as taking on new contracts as we might be now because of those timing issues but I really don’t think that, that had a big contributing factor to where we are today.

This situation is a little bit different but as we have talked about in the past efficiency gain is a good thing and it’s good for us and it’s good for the E&P companies. They get their data more timely, they with the number of channels we can use it’s a higher resolution image and have more value to them and so it’s more cost effective but it has created issues for us and I’m sure for others in terms of scheduling and I think we have done a few things to kind of help with that, the drop from 14 to 12 has certainly helped.

How we are utilizing those channels internally certainly is going to help but I don’t feel like this is a situation where we are right now where we more or less out ran ourselves.

Gary Lenhoff – Great Lakes Advisors

Good.

Stephen Jumper

This is issues that I feel like you can’t pinpoint exactly what it is but I think they are more external to this than they have been in the past.

Gary Lenhoff – Great Lakes Advisors

Okay, second question, I’m not sure if you want to get this detail. I would be curious for your characterization, was the Canadian business profitable on an operating basis in the past, the past couple of contracts?

Stephen Jumper

The first one was very difficult, and it was a significant impact. The second project we bid I feel like it was, they finished their job ahead of schedule, their production levels were very high and the data quality was very good and we were very pleased and our client base was very pleased.

We are still in the entry in that market, we recognize that and so building a clientele, a client base has been a little more difficult than we anticipated just because the overall market condition. There was an uptick in the Canadian crew count late in the winter season I think it went up five or six crews they are very late so there were some late awards that we weren’t a part of but I think from an operating basis I think had we not had some of the issues on the first project that some were weather and some were self-induced that those would have been profitable as well.

It’s our goal to go back up there next year and operate one, hopefully two and hopefully we will have a stronger season and we will evaluate after that.

Gary Lenhoff – Great Lakes Advisors

Okay, to your thinking in terms of the investment you might make and the entry into Canada has changed much as a result of the last couple, last six months?

Stephen Jumper

Say it again Gary, I’m sorry.

Gary Lenhoff – Great Lakes Advisors

How are you thinking about your longer term from a return on investment standpoint the opportunity in the Western Canada?

Stephen Jumper

The Canadian market when it’s strong is a good market to be in and we felt like two years ago it was a growth opportunity for us and now from a capital standpoint we have put in a few vehicles and some other ancillary items but we haven’t had a big 4000 channels I think or 4000 stations of 3C gear goes back and forth to Canada but the rest of it we have been doing off on a rental basis and we think it’s got good margin potential going forward certainly it has historically and we will just have to just need to have a good season come up this year to see how to really make a strong evaluation of what our next step up there would be.

Gary Lenhoff – Great Lakes Advisors

Okay, great. Thanks so much.

Operator

Our next question is from the Veny Aleksandrov from FIG Partners. Please go ahead.

Veny Aleksandrov – FIG Partners LLC

Good morning.

Stephen Jumper

Hi Veny, how are you?

Veny Aleksandrov – FIG Partners LLC

I’m good, a lot of my questions have been answered but now I am on. So my first question and you answered a lot of these but on the operating expenses side you had issues in Canada and the weather in the U.S. but what did the majority of that trend, my question how much this is going forward do you hear anything on pricing projects with low pricing and lower margins – which was primarily Canada?

Stephen Jumper

The bulk of the unanticipated increase in operating expense was from the Canadian project and it was just the very unfortunate set of circumstances but that’s where the primary expense increase would be, that small levels of increase related to some start-up cost in few projects in U.S. a little bit impact of weather but Canada was certainly the big issue. The reimbursable item, the third party reimbursables continue to run at a fairly low rate they’re below our historical averages and as we talked about from a pricing standpoint we haven’t seen the total collapse in pricing in the lower 48.

Pricing got tough I think in Canada but we haven’t seen the total collapse in pricing the lower 48 we haven’t seen any serious uptick there either.

Veny Aleksandrov – FIG Partners LLC

Thank you. So we should consider these – okay. My next question and I’m not asking you to give guidance but we already have – and you’re talking about fab growth and utilization where these factories completely out on standby for first half of the quarter or they did somewhat….

Stephen Jumper

No, they have been up and down, right now I think we’ve got probably four down we had as many as five and probably started the quarter with less than four down. We had a couple kind of roll off into the quarter and we’ll start to come back in the next week or two weeks somewhere in that timeframe. So I don’t think we can say it was five flat for the first half of the quarter. It maybe something I don’t what that number would be from an equivalent standpoint, but it has an impact up to five crews is maybe the way I should have worded it.

Veny Aleksandrov – FIG Partners LLC

Okay. They were not down to 45 days or 500, that’s the best conclusion.

Stephen Jumper

Not all five, no.

Veny Aleksandrov – FIG Partners LLC

Okay. Thank so much.

Stephen Jumper

Thank you.

Operator

And our final question is Bruce Brown from Brown Capital Management Incorporated. Please go ahead.

Bruce Brown – Brown Capital Management Inc.

Yes, good morning.

Stephen Jumper

Good morning Bruce.

Bruce Brown – Brown Capital Management Inc.

Thanks Steve. I had a couple of quick questions, what if any impact will agricultural activity have on your crew activity in the current quarter. And secondly given the scarcity of labor in all country in certain segments of it, are you experiencing – what is your assessment of the quality of people that are available for you to bring on board when you need to in terms of their experience and their ability to do what you need them to do?

Stephen Jumper

Very good question Bruce and I appreciate it. I don’t think that agriculture is going to have a huge impact in this quarter. I think it will be an average impact at least that’s the indication I’m getting. Most of the agriculture that we deal within the Permian is cotton and they will start agriculture activities somewhere around mid-March to early April and so they want you out of those regions and then they’ll have the full harvest on some of these areas in the August, September, October timeframe and so we’re in that agricultural window where things are occurring but it doesn’t seem to have the impact that it has right at the beginning of the season and right at the end, and a lot of it will depend on what projects we have in agriculture area and I don’t think we have as many as we had in last fall in heavy agriculture.

We’ll have isolated spotty agricultural issues and how we can work in those areas will depend upon access whether it’s arrogated or non-arrogated or whether how much rain they have but I don’t think at this point today that’s our biggest issue.

Our labor pool is pretty good, seismic industry operates probably little different labor pool than the other oil field services because they move so much, you may be in Texas for a few months and your next job in Oklahoma then you may be in North Dakota so it’s a high turnover trend labor pull at a certain level and sometimes those guys just won’t make the move but so far we haven’t had a tremendous issue in our business with the labor issues that you hear some of the other oil field service companies have I think the biggest issues we face and it’s not just us it’s everybody the combinations in certain areas in the country particularly right here in Permian.

Finding a place to house 50, 60, 70 folks at a time is difficult at best and very difficult to do it cost effectively. So you’re constantly looking at way to put people in main camp which realistically has increased our expense load over the last 12 months. We probably as an industry haven’t done a great job of pricing that like we need to, but I don’t have a lot of concern about the labor pull from a technical and operational management, mid-level management, field level management I feel pretty good about that where we are. We have a tremendous amount of experience and the depth of talented abilities in our company.

I feel today that’s what probably I feel the best about is, is our personnel issues and our equipment base and I’m confident the other issues we’re dealing with will clear themselves overtime.

Bruce Brown – Brown Capital Management Inc.

Thanks a lot Steve.

Stephen Jumper

Thank you Bruce.

Operator

This will conclude our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

Stephen Jumper

Thank you Denise I appreciate everybody listening into the call and participating. Thank you for your questions and your interest in our company. Our employees and management team are working diligently, on behalf of our shareholders and our client base as well particularly I want thank our employees and shareholders for their continued support in our company and I want to thank our clients for their continued support in our services. And we look forward to talking to you again in 90 days. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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Source: Dawson Geophysical's (DWSN) CEO Stephen Jumper on Q2 2014 Results - Earnings Call Transcript
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