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Dawson Geophysical Company (NASDAQ:DWSN)

Q4 2010 Earnings Call

November 10, 2010 10:00 am ET

Executives

Decker Dawson – Founder, Chairman

Stephen Jumper – President, Chief Executive Officer

Christina Hagan – Executive Vice President, Chief Financial Officer

Analysts

Christopher Boucek (phon) – Raymond James

Veny Aleksandrov – Pritchard Capital Partners

Operator

Good morning. My name is Cynthia and I’ll be your conference operator today. At this time I would like to welcome everyone to the Dawson Geophysical Fourth Quarter Earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

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

Stephen Jumper

Thank you, Cynthia. Good morning and welcome to Dawson Geophysical Company’s Fourth Quarter and Year-End 2010 Earnings and Operations conference call. As Cynthia said, my name is Steve Jumper, President and Chief Executive Officer of the Company. Joining me on the call are Christina Hagan, Executive Vice President and Chief Financial Officer; and Decker Dawson, Founder and Chairman of the Company.

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

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

Christina Hagan

Thank you, Steve. First I will share our Safe Harbor provisions. In accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, Dawson Geophysical Company cautions that statements made today in this conference call which are forward-looking and which provide other than historical information involve risks and uncertainties that may materially affect the Company’s actual results of operations. These risks include but are not limited to the volatility of oil and natural gas prices, disruptions in the global economy, dependence upon energy industry spending, cancellation of service contracts, high fixed costs of operations, weather interruptions, inability to obtain land access rights of way, industry competition, 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 ending September 30, 2009. 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, Dawson will make reference to EBITDA which is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to the applicable GAAP measure can be found in Dawson’s current earnings release, a copy of which is located on the Dawson website, www.dawson3d.com.

Turning to our financial results for the fourth quarter of fiscal 2010 ending September 30, 2010, our revenues were $59,179,000 compared to $46,835,000 for the same quarter in fiscal 2009, an increase of 26%. We reported a net loss for the fourth quarter of fiscal 2010 of 1,411,000 compared to a net loss of $2,056,000 in the same quarter of fiscal 2009. Basic loss per share for the fourth quarter of fiscal 2010 was $0.18 compared to $0.26 in the same quarter of fiscal 2009.

EBITDA for the fourth quarter of fiscal 2010 was $5,268,000 compared to $3,654,000 in the same quarter of fiscal 2009, an increase of 44%. Revenue increases for the fourth quarter compared to the same quarter of fiscal 2009 were primarily the result of redeployment of three data acquisition crews during the second and third quarters of fiscal 2010. This increase was partially offset by lower utilization rates and weather down times, particularly wet conditions in July; several long crew moves and startup delays on several projects due to equipment change-out; and timing of a few land access permits.

For the fiscal year ending September 30, 2010 our revenues were $205,272,000 compared to $243,995,000 for the same period in fiscal 2009, a decrease of 16%. We reported a net loss for fiscal 2010 of $9,352,000 compared to net income of $10,222,000 for fiscal 2009. Basic loss per share for fiscal 2010 was $1.22 as compared to earnings per share of $1.31 for fiscal 2009. EBITDA was $13,136,000 in fiscal 2010 compared to $43,875,000 during fiscal 2009, a decrease of 70%.

The revenue decrease in fiscal 2010 was primarily the result of previously announced reductions in active crew count during the second quarter of fiscal 2009 of four crews, third quarter of fiscal 2009 of two crews, and first quarter of fiscal 2010 of one crew; a more competitive pricing environment and substantially lower utilization rates of the remaining crews.

Revenues in fiscal 2010 continue to include high third party charges related to the use of helicopter support services, specialized survey technologies, and dynamite energy sources as the same level of these charges is driven by the Company’s continued operations in areas with limited access in the Appalachian Basin in east Texas and Arkansas. We are reimbursed for these expenses by our clients.

We increased our capital expenditures during 2010 to $19,962,000 from $4,448,000 during the previous year. The capital expenditures for fiscal 2010 include the purchase of 2,000 OYO GSR, four channel boxes with three component geophones, increases in channel count for both the ARAM and RSR recording systems, and maintenance capital items.

Steve?

Stephen Jumper

Thank you, Chris. Well, despite inclement weather conditions during the month of July and intermittent crew delays, fourth quarter 2010 was a particularly successful quarter. Demand for seismic services strengthened, particularly in the oil-producing basin as many exploration and production companies increased their activities. While the seismic data acquisition market remains competitive, our order book commitments reflect a balanced portfolio of oil and natural gas projects sufficient to maintain 12 active crews well into fiscal 2011. Our contract mix at this point in time remains predominantly turnkey-type contracts which bear more risk but more upside potential.

In particular, fourth quarter highlights include a 26% increase in revenues to 59,179,000 compared to the same quarter last year, a 44% increase in EBITDA to 5,269,000 compared to same quarter last year, the purchase of 2,000 additional OYO GSR four channel boxes complete with three component geophones to add to the 2,000 boxes purchased earlier in the year, increased channel count per crew, a more balanced portfolio of oil and natural gas projects in the Eagle Ford, Haynesville, Marcellus, Niobrara, Bakken, Barnett and Fayetteville shales, as well as the Granite Wash and conventional oil plays.

We maintained a debt-free balance sheet and we’ve seen a significant increase in project visibility as we enter fiscal 2011. While all these factors contributed to our fourth quarter success and accomplishments, one factor that is particularly important is the increase in project visibility. In terms of project visibility, fiscal 2010 and fiscal 2009 are almost mirror images. During fiscal 2009, we were operating in a particularly difficult environment following the financial crisis of 2008. Exploration and production companies reduced CAPEX budgets in response to weakening commodity prices. In turn, we were forced to reduce our active crew count from 16 in early fiscal 2009 to 9 in early fiscal 2010. Project visibility, a key factor in our operation, was at multi-year lows.

In the past six months and continuing into this quarter, much of that has changed as demand began to increase. We have redeployed three data acquisition crews, and we are seeing increased opportunities throughout much of the lower 48.

It is the increase in project visibility that is the differentiating factor between our 2009 and 2010 year-end results. While we delivered stellar financial results in the first half of ’09, the second half was particularly challenging from an operations perspective, as mentioned before, as demand levels dropped significantly. Utilization rates were trending lower with each successive quarter and the outlook was challenged. Conversely, while 2010 was not as financially successful as ’09, the second half of fiscal 2010 operationally proved far more successful.

So what does project visibility look like for ’11? Well as we have said earlier, we don’t give financial guidance. We operate in a highly volatile environment. Seismic operations can be significantly impacted by weather issues, permitting delays, and other foreseen factors. I would caution our first quarter has historically been our most difficult due to weather, short days, holiday season, and regional hunting issues, particularly in south Texas.

That said, our order book is strong. We have commitments to maintain 12 active crews well into fiscal 2011. Many projects are requiring channel counts in excess of 10,000 channels per crew, and increased efficiencies resulting from our continued investment in new technologies and equipment, including the recent purchases of the 4,000 OYO GSR four-channel boxes complete with three component geophones, are generating improved results both operationally and financially.

From a balance sheet perspective, we are as strong as ever. We continue to maintain our debt-free balance sheet. We have more than $90 million of working capital and we continue our fiscally conservative approach overall towards our operations.

Our Board of Directors has approved a $30 million capital budget for fiscal 2011 to be used to purchase the additional 2,000 OYO GSR channel boxes, 10 vibrator energy units, additional geophones and recording channels for all crews, and to meet maintenance capital requirements. Our CAPEX budget and investment in new equipment clearly reflects our belief in growth opportunities in the seismic data acquisition market in the lower 48, as well as our commitment to technology by expanding our multi-component recording capabilities and providing higher resolution three dimensional images, while at the same time improving operational efficiencies with greater increases in channel count and active energy sources.

And with that, Cynthia, we are ready for questions.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, as a reminder, to ask a question please press star then the number one on your telephone keypad.

Your first question comes from the line of Christopher Boucek with Raymond James.

Christopher Boucek – Raymond James

Hey, guys. I want to first apologize. We have a fire drill going off in the background, so it may be a little hard to hear me. But looking to your quarter, the wet weather, was it particularly bad in July more so than in August and September?

Stephen Jumper

I think that’s a fair statement, yes.

Christopher Boucek – Raymond James

And was it predominantly in south Texas?

Stephen Jumper

We had a lot of it in south Texas, yes. That was impacted. Had some in Oklahoma and the mid-continent region as well, and a little bit back east.

Christopher Boucek – Raymond James

Okay, so I understand that fiscal year 1Q is historically a weaker quarter given the holidays and all that stuff, but so far the weather in south Texas has been pretty mild, wouldn’t you agree?

Stephen Jumper

So far to date, weather does not appear to be a huge issue as compared to the start of the last quarter.

Christopher Boucek – Raymond James

Right, and knock on wood, hopefully that’ll continue. I’m trying to think more big picture. If I compare the weather from last quarter versus the holidays and all the hunting leases you all probably can’t work on in south Texas during this next quarter, would it be safe to say, or fair to say even, that revenues could be in the same ballpark sequentially, or is that just too close to guidance?

Stephen Jumper

That’s just too close to guidance.

Christopher Boucek – Raymond James

Fair enough.

Stephen Jumper

One comment I would make is that we are in the time period of the year where the days are shorter and we do have the holiday season. We do have more weather exposure, and the hunting issue in regards to having to move crews out does affect operations in more places than in south Texas. Having said that, the effect we’re going to get out of south Texas and other places will be more related to crew moves. Our order book is sufficient enough that we’ll be able to move crews out of certain areas and into other areas around the country, but it will involve crew moves and then redeploying back into the area. So that will be the major impact. It’s not that we’re going to have lose crew count anywhere in the first quarter. Its just going to be a matter of redeploying crews for certain periods of time.

Christopher Boucek – Raymond James

Okay, thanks. Thanks for that clarity. Stepping back a minute and looking at the lower 48, it sounds like the visibility is a lot higher; and I know some of your peers are in the multi-client business and increased activity is probably tightening up the market overall. Would you say price-wise we’re as competitive as we were two or three quarters ago, or are we starting to see a little movement on that front as well?

Stephen Jumper

You know, I think we’re starting to see a little bit of movement. I don’t think it’s dramatically moving the needle at this point. I think the pricing increases that we are experiencing are probably more related to crew size and capacity more so than market strength. I think there’s a little bit of market strength pricing out there but I don’t think it’s anything that we’re ready to openly talk about. With the increased channel count and the increased crew sizes, I think the upside that we see going forward is that further enhances your ability to improve operational efficiencies given these expanded crews and larger projects.

Christopher Boucek – Raymond James

Okay, perfect. I’ll return it to you guys and get back in the queue.

Stephen Jumper

Chris, I’d make one other comment, too, is that you asked about pricing from two and three quarters ago. Certainly from where we were a year ago, I think we’ve seen some strength; but I would remind you and everybody else that the time lag from the time a project is put out for request for proposal until the time it actually is completed can be anywhere from a month to six months, maybe longer. And so we’re going to be working off of lower priced work as we continue throughout the year, so I think if we start to see some pricing increases, without giving any guidance, I would expect that to be not seen in Q1 – maybe in late Q2 or early Q3. So don’t forget that time lag situation in there.

Christopher Boucek – Raymond James

All right. Perfect, guys. I’ll turn it back to you.

Stephen Jumper

Thank you, Christopher.

Operator

Again, to ask a question, press star, one. Your next question comes from the line of Veny Aleksandrov with Pritchard Capital.

Veny Aleksandrov – Pritchard Capital Partners

Good morning.

Stephen Jumper

Good morning, Veny.

Veny Aleksandrov – Pritchard Capital Partners

My first question on the order book – I know you don’t want to give guidance, but just as close as we can get. How much visibility do you have in terms of months? Is it six months into 2011? Is it increasing since last quarter?

Stephen Jumper

I think, yes, it has increased since last quarter, which was an increase from the quarter before. Whether that’s going to be three months, four months, six months at this point today, Veny, is going to be more related to how well land access permits come into play, what the weather is going to do, and how efficient that we are. But what’s important, I think, on top of just the order book strength is it appears like the market, based on the requests for proposals that we’re seeing and that we think are out there, I think there appears to be sufficient work going forward to match whatever burn rate we get into. And so I guess where I would leave it is that we see the market has strengthened. We’re seeing steady activity in the natural gas resource shale play, and we’re seeing increased activity in the oil producing basins as well as the conventional—not just the shale basins, but the conventional oil basins are appearing to show signs of increased activity.

You know, a year, 18 months ago we were 90%-plus natural gas driven. I think last year we reported that we were 30% or so anticipated oil-driven. I think we’re starting to see numbers that are probably 50/50, maybe shifting a little bit higher to the oil side. And this is all a somewhat clouded look forward. We’re not looking into a crystal clear ball here, but that’s certainly the way the market feels.

So I’m hesitant to give a number of months. I would just say that the visibility looks stronger than it has in a while—in several quarters certainly going back into early 2010. And there appears to be sufficient opportunities out there to continue that deeper into the year. Of course, we’ll have to wait and see how things shake out.

Veny Aleksandrov – Pritchard Capital Partners

Thank you. That helps. And then my second question on the channel count, you briefly touched on it but with the number of crews that you have right now and the crews getting bigger and using more equipment, are you close to full utilization of that equipment or you still have place to grow?

Stephen Jumper

You know, I think that’s an excellent question, what we have in-house. I think our channel count is somewhere around about 117, 118, something like that. I don’t know the exact number here off the top of my head.

Veny Aleksandrov – Pritchard Capital Partners

Right, so if we imply the 10,000 channels per crew—

Stephen Jumper

Yeah, and so we’ve got a couple that are working that are quite a bit smaller than that. I still think we have some room with some of the RSR equipment that we purchased last year to expand channel count; but yes, as I think you’re hinting towards—and we’ve talked about this for several years now, that crew count may not be the best metric to measure seismic operations. It may in fact end up being channel count. And so I think in certain types of equipment, yes, I think we’re pretty close or getting close to fully utilized. We have a little bit of remaining room but not what we had based on the current inventory that we would have had, say, a year ago, Veny.

Veny Aleksandrov – Pritchard Capital Partners

Okay, thank you. And that leads me to my last question – new GSR system, is it delivered already or are you still waiting for it, and where is it going?

Stephen Jumper

Well, boy you packed three questions into one, Veny! It is being delivered. We are taking delivery of it. We have—everything we have in-house is fully deployed. We’re still anticipating final delivery of the last group here in the near term, but we have 2,000 channels of it—or 2,000 boxes of equipment operating in a multi-component mode in the Rockies area, and then we have the balance of it being used in some difficult access areas in east Texas. And so all of it is deployed and on the ground at this time--all that we have in place and we’re still waiting on some of it.

Veny Aleksandrov – Pritchard Capital Partners

Thank you so much.

Stephen Jumper

Thank you, Veny.

Operator

Your next question is a follow-up from the line of Christopher Boucek with Raymond James.

Christopher Boucek – Raymond James

Hey guys. I thought I’d be a little lower in the queue. I just had a couple of housekeeping questions. When I look at the reimbursables you guys had versus—you know, this quarter versus the last couple quarters, would you quantify that as similar to prior quarters, higher or lower?

Stephen Jumper

It’s relatively flat—it’s slightly down from Q3, relatively flat to Q4 of last year. You know, we’ve always said that that is 25 to 35% of the revenue and we’re still in the high end of that.

Christopher Boucek – Raymond James

Perfect. That’s what I wanted to know. And then one last question – your tax rate came in quite a bit lower than the last couple quarters. Is that just a reversion to the mean for the full year to get to 29%, and going forward is it more like 15 or more like 29?

Christina Hagan

Well, going forward—you know, I’d like to address the other part of your question there, is just we’re looking at some issues where we increased our capital expenditures in 2010 over 2009. We’re picking up some of that. And just for the year-over-year, in 2009 our (inaudible) 48 state taxes and permanent items increased our effective tax rate, and we just had the reverse situation in 2009.

So going forward, we’re looking at the election of bonus depreciation and we’ll be following that; and so not exactly sure where that’s going to take us into the future.

Christopher Boucek – Raymond James

Okay. I think that’s everything for me. I’ll turn it back once more.

Operator

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

Stephen Jumper

Yes, Cynthia. In closing, I would like once again to thank all of our valued clients, our hard-working employees, and our loyal shareholders for their continued interest, support and investment in Dawson Geophysical. We look forward to fiscal 2011 with great enthusiasm and renewed confidence, and we want to wish each of you a safe and happy holiday season. We will be at the Pritchard conference in early January in San Francisco, so we’ll have a webcast at that point; and then we’ll be back to visit with you sometime in February to discus our Q1 2011 results.

Thank you, and everybody have a wonderful day.

Operator

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

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