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Dawson Geophysical Company (NASDAQ:DWSN)

F2Q2011 Earnings Call Transcript

May 3, 2011 10:00 am ET

Executives

Steve Jumper – President, CEO and Director

Christina Hagan – EVP, Secretary, Treasurer and CFO

Analysts

Collin Gerry – Raymond James

Veny Aleksandrov – Pritchard Capital

Operator

Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the Dawson Geophysical second quarter conference 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. (Operator instructions) I would now like to hand the program over to Mr. Steve Jumper. Please go ahead.

Steve Jumper

Thank you, operator. Good morning and welcome to Dawson Geophysical Company’s second quarter fiscal 2011 earnings and operations call. As you heard, my name is Steve Jumper, President and CEO of the company. Joining me on the call are Christina Hagan, Executive Vice President and Chief Financial Officer; Decker Dawson, Chairman; and Ray Tobias, President and Chief Operating Officer.

Following these brief opening remarks, Chris will join the discussion to discuss our financial results. I will then return for an operations update and then open the call up for questions. The call is scheduled for 30 minutes, and as in the past, we will not provide guidance. At this point, I’ll turn control of the call over to Chris Hagan, our CFO, to discuss our financial results.

Christina Hagan

Thank you, Steve. First, I’ll share our Safe Harbor provisions. In accordance with the Safe Harbor provisions 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 of 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 cancellation 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 10-K for the fiscal year ended September 30, 2010.

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 reference to EBITDA, which is a non-GAAP financial measure. A reconciliation of the non-GAAP measure 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.

As you know, Dawson and TGC Industries have entered into a definitive merger agreement in which subject to the terms and conditions set forth in the merger agreement, Dawson will acquire TGC in a tax-free, stock-for-stock transaction. Dawson and TGC will file materials related to the proposed transaction with the Securities and Exchange Commission, including one or more registration statements that contained in proxy statement prospectus.

Investors and security holders are urged to read those materials once they are available, which can be obtained free from the SEC’s website, www.sec.gov and from the company’s website. Dawson-TGC, their directors, executive officers and certain members of management and their employees may be considered participants in the solicitation proxies from the shareholders in connection with the proposed transaction. This will be described further in the proxy statement prospectus when it is filed.

Today, we reported revenues of $78,337,000 for the quarter ending March 31, 2011, our second quarter of fiscal 2011, compared to $48,585,000 at the same quarter in fiscal 2010, an increase of 61%. Net loss for the second quarter of fiscal 2011 was $4,857,000 compared to a net loss of $2,706,000 in the same quarter of fiscal 2010. Loss per share for the second quarter of fiscal 2011 was $0.62 compared to loss per share of $0.35 for the second quarter of fiscal 2010.

EBITDA for the second quarter of fiscal 2011 was $1,219,000 compared to $2,488,000 in the same quarter of fiscal 2010. Our second quarter results, including the reported loss, were exacerbated by adverse weather conditions as well as expenses necessary to fund our investments in additional OYO channels and our previously announced merger transaction with TGC Industries, Inc.

Revenues in the quarter continued to include unusually high third-party charges related to the use of helicopter support services, specialized survey technologies, and dynamite energy sources. The higher level of these charges is driven by our continued operations in areas with limited access such as the Appalachian Basin, East Texas and Arkansas. We are reimbursed for these expenses by our clients. Steve?

Steve Jumper

Thank you, Chris. There is no doubt our second quarter was difficult. Our second quarter highlights include deployment of 20,200 OYO GSR single channel units on two large in-process projects in East and South Texas. In order book, it has reached its highest level since 2008. Pricing and contract terms have showed modest improvements as activity levels in lower 48 states continued to increase and the signing of a definitive merger agreement with TGC Industries.

While our second quarter highlights are impressive and show that demand within the seismic sector is strong, we faced significant challenges predominantly from weather-related issues in the second quarter. Severe weather conditions during much of the second quarter negatively impacted crew activity, productivity and caused higher than normal equipment damage, which resulted in higher repair expenses. The loss in productivity in crew downtime had an adverse affect on our revenue.

In addition, productivity in revenue was further impacted when we’ve transitioned two of our large crews in East and South Texas from cable-based systems to our new OYO GSR systems. In early January, as previously reported, we took delivery and deployed 10,000 OYO GSR single channel units in East Texas. And in early March, we deployed an additional 10,200 leased OYO channels on a large in-process project in South Texas.

While this transition didn’t initially impact our operations, we are beginning to see the benefits of the conversion. Productivity in the two projects in South Texas and East Texas has improved through April. Overall crew expense was down, and we are very optimistic that these measures will result in long-term operational efficiencies that will allow us become more productive and to better serve our clients.

The cost of the OYO lease is estimated to be approximately 6-inch per share per month beginning in March and will be a recurring task until the lease is terminated or converted to a purchase, is converted to a purchase of significant portion of the lease cost will be a slide to the purchase price. We believe we will convert to a purchase at some point of future depending on demand levels for our services and clients’ needs.

Since March, we have leased an additional 3,650 channels of the OYO single channel units. In the second quarter, we announced a merger with TGC Industries, in which the terms and conditions set forth in the merger agreement, we agreed to acquire TGC in a tax-free, stock-for-stock transaction. Additional details of the proposed transaction are outlined in a press release issued on March 21, 2011 and at a conference call held in the same day.

In the second fiscal quarter, we booked approximately $0.12 of expense related to the proposed TGC merger. We believe the combination of the resources and equipment of the two companies, the expanded client base entering into the Canadian market and improvement to operational logistics will add value to our clients, employees and shareholders.

As outlined in the press release announcing the proposed merger, it is our intention to operate both TGC and Eagle as wholly-owned subsidiaries. We welcome the addition of the employees, shareholders and clients of TGC to the Dawson family. On March 20, 2011, the Board of Directors approved a $5 million increase to the 2011 capital budget, bringing the total amount of the 2011 capital budget to $40 million.

The budget has primarily been used to purchase the 10,000 channels of OYO GSR single-channel units, ten INOVA vibrators, energy source units, geophones and vehicles. The balance will be used for maintenance capital purposes. To date, we have spent approximately $36 million. We continue to operate in every major basin throughout the lower 48. We have high level activity in the Eagle Ford, sustained activity in the Marcellus and the Barnett projects and the Niobrara, very activity in Western Oklahoma, finishing up some operations in the Fayetteville, and we have a crew active in Eastern New Mexico.

Our order book is strong and is at its highest level since 2008 and request for proposals are steady. We look forward to closing the merger with TGC Industries as we continue to provide value for our clients. In closing, it is our intention to continue to operate with the conservative financial structure, remain loyal to our employees and shareholders while continuing to focus on helping our trusted clients to find oil and natural gas.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Collin Gerry with Raymond James.

Collin Gerry – Raymond James

Good morning.

Steve Jumper

Good morning, Collin.

Collin Gerry – Raymond James

So, my first question is more on the outlook. It seems your commentary on the order book and just kind of what customer activity levels are seeing, it seems to be a little bit different than maybe what this last quarter would have indicated. And I want to maybe dive into what’s driving that demand. I mean, clearly it’s the shale plays and oils versus gas, which is a lot of stuff we know. But is it customers wanting – do they buy them first and then they want to go and understand their drilling programs better? Is it understanding each incremental well? Is it different customers? Is it giant swaths of land? I mean, just help us understand a little bit what’s driving this demand now.

Steve Jumper

Well, Collin, I think you answered it in your question. We’re obviously seeing a large increase in activity in the liquids rich and the oil rich shale basins. And so I would comment that the majority of our growth in demand has been what we saw from 2005 to 2008 in the natural gas shale plays. We are seeing the same thing occur and move towards these oil and liquid-rich shale plays. In most cases, our clients have the acreage position in these resource plays, and they are using seismic information to delineate hazards, getting as much information as they can about fractures and aid and development and completion of these wells. I think the client mix is – obviously we’re seeing more of the natural gas guys, historical natural gas guys moving to the oil basins.

I think that’s pretty well common knowledge out there. But there is an awful lot of activity with some of the smaller independence that are really starting to do some conventional oil stuff. And particularly back in the Permian Basin, we are seeing some activity level starting to increase in the Permian Basin, which is just conventional oil type driven project. But certainly, the majority of the work that we are getting is oil-driven shale play in the Western US. We are still seeing sustained level of activity in the Marcellus natural gas play, still got a large crew that’s very active in East Texas on the Haynesville project. We have quite a bit of opportunity and work to do in the Barnett. So while the demand level in the natural gas channels I wouldn’t call it increasing, it’s steady. But on the oil side, we’re seeing steady demand going west. Is that –?

Collin Gerry – Raymond James

Yes, yes. No, that’s exactly kind of what I was looking for. And then kind of just if we think about comparing the demand you are seeing today versus kind of back in the ’07, ’08 timeframe in one of – more of a natural gas market, are you seeing pricing levels get closer to what we were seeing in ’07, ’08, or do we still have quite a bit of ways to go on the pricing side?

Steve Jumper

Well, that is an extremely difficult question to answer. And I’m going to answer that’s a risk of sounding almost evasive on it. Pricing is improving based on demand levels in the lower 48. I wouldn’t call it a huge dip, but we are starting to see modest improvements. I think the biggest area – the biggest difference that we’re beginning to see, Collin, is channel counts just continue to increase. And so you’re seeing some price increasing. On a project basis, it’s more related to channel count increase. The good news is that the projects we’re getting out west tend to be larger projects. So we’re having a little bit of difficulty out west. That’s similar to what we had back east in the shale plays.

In the back east, we had smaller projects, we have a lot of third-party charges, and we’re still seeing a lot of third-party charges. And everything east, I’m going to say 35. They’re going to carry very high third-party reimbursable with it. And we had delayed issues back east historically because we were in small land track ownership position. So while the survey was relatively small compared to what we’re seeing now, you got a whole lot more landowner issues to permit, get access, play (inaudible). As you move west, the projects in west and particularly South Texas, the projects tend to get larger, there tend to be larger land track owners, but because of the size of the project, you still got this delay issue in getting a project ready.

I don’t know that the delay time, the prep time in the west is significantly different from the prep time in the east. But nonetheless, we’re still carrying these permit issues. And so we’re pricing things – we're working off things now that were priced in mid-to-late 2010. We’ve got some projects going forward that were priced in earlier in ’10 that were delayed. So, yes, we’re seeing pricing improvements. It’s modest. We’ve still got some work to do to work out some of these contracts.

The good news is – for us, I believe the good news is as we come west, our contract mix is turning as we’ve talked about more turnkey. And as we’re beginning to see some of these operational improvements that we’re seeing, the ability to increase revenue and increase margin is probably better in west than it was in east. But because we’re turnkey, we’re carrying little more risk. And so getting an apples-to-apples comparison of pricing to ’06 and ’07 is got to be difficult. But because the contract mix is different, the project size is different, what we’re doing is different.

Collin Gerry – Raymond James

Okay. And then I’d be remiss if I didn’t ask. It seems like weather which is too surprising, just given what we know about the weather in Q1. It was a big deal for you guys. We’re obviously seeing a lot of weather on the news these days in the Midwest, and I don’t think you have a lot of crews there.

Steve Jumper

No. April was pretty good. We started to get some weather help in middle March. And we’ve had a much more optimistic April than we had when we were sitting here 90 days ago and talking. We had big weather issues and – we really had a combination of several things. We had severe weather issues in all parts of the country, heavy snowfall, extreme cold, icing conditions, which always causes operational difficulties and equipment damage. We had some contracts that were priced a while back that we were committed to go finish for our clients. And they had less than favorable contract terms in them.

The weather really kind of played havoc with our crew schedule and that we had to move crews out of the east, for example, to keep them operating. We just got so much snowfall in the Appalachian Basin and some places that you just couldn’t – you couldn’t get it proven that it really started. And so you couple that with the operational changes we had in down South and East Texas, and we had a lot of things pile up on it. So I think we’re working through most of that. We’ve got some contracts we’re still working through. Our crews are doing a fantastic job. Our productivity level is getting higher on all these jobs. And so we are cautiously optimistic moving forward.

Collin Gerry – Raymond James

Okay. Well, that’s it for me. Thanks again.

Steve Jumper

Thanks, Collin.

Operator

Your next question comes from the line of Veny Aleksandrov from Pritchard Capital.

Veny Aleksandrov – Pritchard Capital

Good morning.

Steve Jumper

Good morning, Veny. How are you?

Veny Aleksandrov – Pritchard Capital

Good. Thank you. I have a couple of questions. The first one is on the expenses level, the $0.06 that you are paying for renting the equipment is going to be recurring. But other than that, has most of the transition done? I heard you talk about that some of the transitional (inaudible) for you? Are we going to see any of the other costs recurring in Q3?

Steve Jumper

Well, I think we’re going to continue to have transaction costs. We don’t know what those are going to be as we move forward. And so I think we’ll continue to see cost of the transaction impact. We will see the OYO lease continue until we terminate or convert. Third-party charges, Veny, are extremely high. They are the highest level in this quarter than they have ever been. That is related to some prep work that we’ve been doing back east. I keep thinking at some point that percentage is going to get back in line with our historicals. And that’s going to be related to two things from a percentage basis; increase revenue from crew activity and decrease prep time on stuff that’s back east. And so we’ve got some combination of things that are going to work for us going forward. But at this point, the recurring OYO lease and transactional cost will be recurring.

Veny Aleksandrov – Pritchard Capital

Okay. Thank you. And how many you are renting right now? Leasing almost 14,000 channels?

Steve Jumper

Yes, that is correct. We’re right at 13,650, something like that. We continue to have situations where we’re using this OYO equipment in various ways. And the demand for the cable systems is increasing. The one we did in January, that switchover was related to some issues we’re having with the cable-based system because of cultural issues in East Texas, just access issues. We had some issues in South Texas, and so we think some improvement in the East Texas project. We moved it to the south.

We’ve been able to redeploy those ARAM channels on the other projects, all around the ARAM systems. We’ve got one ARAM crew that’s carrying 15,000 or 16,000 channels right now; another carrying 14,000 and 15,000. So we’re in about four projects – four or five projects that are excess of 10,000 channels. But behind that, what we’re seeing is continued use of embedded patches, for example, multi-component OYO equipment, the free [ph] component equipment. So we’re seeing – we've done some of that.

We’re also seeing desires for people to increase the density level of their survey in certain parts of their survey. They may have a very large two minutes per mile survey, but there may be a portion of it that they would really like to get a high resolution image. And so we redeployed OYO equipment onto those projects to be more or less an infill of conventional seismic data within the ARAM system. And we’re going to continue to see going forward that we are operating about in excess of 140,000 channels, and I think those will be deployed over variable number of crews.

There will be mix and match of ARAM-OYO, RSR-OYO. We’ve had a mix and match with RSR and ARAM on some special needs. We’re about to mix and match OYO and ARAM again in East Texas as we get into a little bit of water work. And so our crew count is going to be variable going forward. Our channel count is going to continue to increase in my opinion. And these projects that we’re getting awarded are becoming more and more difficult from an operational standpoint. And it’s good work being done. It’s stuff that is adding tremendous value to our clients in providing images that the industry – all across the industry, we’re providing images to our clients that we haven’t been able to provide in the past because of these increased channel counts and survey design issues.

Veny Aleksandrov – Pritchard Capital

So it seems like we cannot say so many crews are working with GSR and the rest are working with OYO line. But can you at least give us a feel if pricing better for the projects where the wireless equipment is at all?

Steve Jumper

Obviously we’re pricing in these projects based on equipment investment, and in some cases, able pass along some lease costs. But in the specialized projects, I don’t know many that you can actually say that you’re pricing any one system any different than the other. It’s still a channel count issue. But what we are seeing in these two instances is that the increased productivity level of the OYO system. In these two particular cases, we’re seeing great benefits from the increased efficiencies and productivity that we believe we’re going to lead a lot higher margins and better revenues without necessarily affecting the pricing level. We operate with a little bit less crew expense on some of those. And so there are some offsetting things to leasing and those kind of things that happen. But I wouldn’t directly comment that pricing is better.

Our results could, at the end of the day, be a little bit better. However, I will tell you that in the right situation we’re seeing great productivity levels and activity levels on the cable-based systems. And so I think what we’re headed towards, Veny, is kind of what we went through with the RSR, MRA stuff 10, 15 years ago is the system – the ability to deploy various types of systems in various regions is going to be an advantage to us and our clients. There are areas where the cable-based systems are performing very, very well. And there are just some places that they don’t and there are some places that we’ll continue to use RSR and, to a great extent, GSR.

Veny Aleksandrov – Pritchard Capital

Thank you. That’s all for me.

Steve Jumper

High channel count projects are where we are headed. A learning process for everybody. And every system comes with its pros and every system comes with its issues. And we’re learning about all of that as we’re getting more involved in these systems, and we’re getting better at knowing how to operate and which systems to deploy in high channel count project squares. So I think that’s the advantage we’ve got going forward.

Operator

That concludes our question-and-answer session. I’ll hand the program back over to management for any further comments or closing remarks.

Steve Jumper

Well, thank you. And I would like to thank all of you for listening in and joining our conference call today. I’d particularly like to thank our employees for their continued effort, our clients for their continued trust, and our shareholders for their continued support. Thank you very much. And we will talk to you again in 90 days.

Operator

This concludes today’s conference call. You may now disconnect.

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