Dawson Geophysical Company (NASDAQ:DWSN)
Q4 2015 Earnings Conference Call
March 11, 2016 10:00 ET
Steve Jumper - Chairman, President and Chief Executive Officer
Jim Brata - Executive Vice President and Chief Financial Officer
John Woodiel - Raymond James
Georg Venturatos - Johnson Rice
John Deysher - Pinnacle
Welcome to the Dawson Geophysical Fourth Quarter and Year End 2015 Results Conference Call and Webcast. [Operator Instructions]
Statements made by management during this call that are forward looking and which provide other than historical information constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company’s actual future results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filings with the SEC, including in Exhibit 99.5 to its Form 8-K/A filed with the SEC. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in the company’s press release issued yesterday afternoon. And please note that the contents of the company’s conference call this morning, is covered by those statements.
During this conference call, management may make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of the non-GAAP measures to the applicable GAAP measure can be found in the company’s current earnings release, a copy of which is located on the company’s website, www.dawson3d.com. The call is scheduled for 30 minutes and the company will not provide any guidance. Please also note this event is being recorded.
I would now like to turn the conference over to Mr. Steve Jumper, President and CEO. Please go ahead.
Thank you, Amy. Good morning and welcome to Dawson Geophysical Company’s fourth quarter 2015 earnings and operations conference call. As Amy said, my name is Steve Jumper, Chairman, President and CEO of the company. Joining me on the call is Jim Brata, Executive Vice President and Chief Financial Officer.
Before I start the call, I have a few items to cover. If you would like to listen to a replay of today’s call, it will be available via webcast by going to the Investor Relations section of the company’s website at www.dawson3d.com. Information reported on this call speaks only of today Friday, March 11, 2016 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening.
Before commenting on our preliminary fourth quarter financial results, I would like to say a few words about the recently completed strategic business combination with TGC Industries. On February 11, 2015, Dawson Geophysical and TGC Industries announced the completion of the strategic business combination. The new Dawson Geophysical operates under the Dawson brand in the United States and the Eagle Canada brand in Canada, each well recognized and well respected in their markets.
We are confident that our expanded equipment base and support services will lead to improve crew efficiencies and reduced dependence on third-party providers, resulting in a stronger revenue stream and reduce cost as market conditions improve. We believe that the expanded client base will provide a foundation for a deeper, more geographically balanced order book resulting in increased crew and channel utilization rates when market conditions improve. And capital expenditure needs in the near-term will be significantly reduced as the strategic combination provides a robust, latest generation equipment base.
Turning to our preliminary fourth quarter financial results, the merger was – transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical Company being deemed the accounting acquirer. The combined companies adopted a calendar year ending December 31. Our results for the fourth quarter ended December 31, 2015 reflect a full quarter results of the combined company. Fourth quarter fiscal 2015 results are compared to the quarterly results for legacy Dawson for the period October 1 to December 31, 2014, which at the time was legacy Dawson Geophysical’s first fiscal quarter of its fiscal year ended September 30, 2015 and did not include the operations of legacy TGC. Due to this fact, the historical financial results for the quarter ended December 31, 2014 are not comparable to the company’s financial results for the quarter ended December 31, 2015.
Selected pro forma financial information showing on a pro forma basis the effect of the business combination as if it occurred on January 1, 2014 together with the assumptions thereto is presented in our press release issued this morning. And additional information regarding the business combination and its impact on the company’s financial position is set forth in the company’s Form 10-K for the year ended December 31, 2015. As mentioned in the fourth quarter 2015 press release, operating revenues increased slightly as compared to the same period in 2014. Operating expenses for the December quarter also increased in response to higher third-party charges. Demand for Dawson services is at reduced levels from recent years and is anticipated to remain at such levels in the near future in response to decreasing and uncertain commodity prices and reduced client expenditures.
The company operated 8 to 10 crews in the United States with limited activity during the fourth quarter of 2015. In November of ‘15 in our conference call, we anticipated operating 8 to 10 crews in the United States well into the first quarter of 2016. Based on currently available information, however, we anticipate operating 4 to 6 crews in the United States into the second quarter of 2016. Currently, visibility beyond the second quarter is limited given the continued fluctuations in oil prices. We are currently operating 2 crews in the seasonal Canadian market, which concludes in the March 2016 timeframe.
I will now turn control of the call over to Jim Brata, who will review the financial results, and I will return with some final remarks about the outlook for the rest of the year prior to taking questions. Jim?
Thank you, Steve and good morning. Before we get started, I would like to review what Steve said earlier. Our preliminary results for the fourth quarter ended December 31, 2015 reflect a full quarter results for the combined companies. Fourth quarter fiscal 2015 results are compared to the quarterly results for legacy Dawson for the period October 1 through December 31, 2014, which at the time was legacy Dawson Geophysical’s first fiscal quarter of its fiscal year ended September 30, 2015 and did not include the operations of legacy TGC. Due to the foregoing, the historical results for the quarter ended December 31, 2014 are not comparable to the combined company’s financial results for the quarter ended December 31, 2015.
Revenues in the fourth quarter of 2015 were $55.1 million compared to $50.8 million in the same quarter of 2014. As Steve mentioned, we operated 8 to 10 crews in the United States with limited activity in Canada during the fourth quarter of 2015. Cost of services in the fourth quarter of 2015 was $47.2 million compared to $43.0 million in the same quarter of 2014. Gross profit improved to $7.9 million in the fourth quarter of 2015 compared to $7.8 million in the same quarter of 2014. Selling, general and administrative expenses were $4.6 million in the fourth quarter of this year compared to $5.1 million in the same quarter of 2014.
Depreciation and amortization expense in the fourth quarter of 2015 was $11.5 million compared to $9.7 million a year ago. As a percentage of revenues, depreciation and amortization expense was 20.9% in this year’s fourth quarter compared to 19.2% in the same quarter last year. Net loss for the fourth quarter of 2015 was $4.9 million compared to a net loss of $5.0 million in the same quarter last year. We recorded an income tax benefit of $2.7 million and effective income tax benefit rate of 35.0%. This compares to an income tax benefit of $1.9 million, an effective tax benefit rate of 27.7% a year ago. EBITDA in the fourth quarter of 2015 was $3.9 million compared to $2.9 million in the same period a year ago. And EBITDA reconciliation was provided in our earnings release issued this morning.
Now, I will briefly highlight our full year results. For 2015, revenues were $234.7 million compared to $244.3 million in 2014. Cost of services was $205.6 million compared to $207.2 million last year. As a percentage of revenues, cost of services was 87.6% in 2015 compared to 84.8% in 2014. Gross profit for 2015 was $29.1 million compared to $37.1 million in 2014. Gross margin in 2015 was 12.4% compared to 15.2% in 2014.
General and administrative expense was $23.7 million in 2015 compared to $17.0 million a year ago. Included in the yearly amounts for 2015 and 2014 were $3.3 million and $3.1 million respectively of transaction costs related to the completed business combination with TGC Industries, Inc. Depreciation and amortization expense in 2015 was $47.1 million compared to $40.0 million in 2014. As a percentage of revenues, depreciation and amortization expense was 20.1% in 2015 compared to 16.4% in 2014. We reported a net loss of $26.3 million or $1.27 per share in 2015 compared to a net loss of $14.7 million or $1.05 a share in 2014. EBITDA for the full year of 2015 was $7.5 million compared to $20.8 million in 2014.
And now, I will highlight some balance sheet items. Our balance sheet remains strong. As of the end of the fourth quarter of 2015, we had debt, including obligations under capital leases of $10.7 million, cash and short-term investments of $58.0 million. Our current ratio was 3.5:1. And finally, working capital was approximately $71.0 million.
And with that, I will turn the call back to Steve for some comments on our operations.
Well, thank you, Jim. Despite today’s challenging environment, Dawson Geophysical is strategically positioned to withstand the commodity cycle downturn. Our strong balance sheet, diverse client base and a management team with more than 100 years of combined industry experience provides us with the tools and resources required to successfully navigate today’s market. Equipment purchases made during recent years further enable us to successfully serve our valued clients while simultaneously operating well below established CapEx levels.
As mentioned earlier, the company operated approximately 8 to 10 crews in the United States with limited activity in Canada during the fourth quarter of 2015. During the fourth quarter, WTI oil prices continued their slide ending the year at $38 per barrel and reaching as low as near $27 per barrel during the first quarter of 2016. Since that time, oil prices have increased to the current levels of near or at $38 per barrel. As a result of this downturn in oil price, demand for services has continued to decline. Several near-term projects were delayed for a variety of reasons including final approval of project funding, project partnership agreements among our clients and delays in securing land permit agreements. Economic uncertainty continues to delay the final approval of projects.
Based on currently available information, we anticipate operating 4 to 6 crews in the United States into the second quarter of 2016. Visibility beyond the second quarter is limited given the continued fluctuation of oil prices. In response to further deterioration of current market conditions, we have reduced headcount an additional 25% since beginning of 2016 and upper management have taken salary reduction of 5% to 25% for 2016. Short-term incentive plans are suspended and we continue to explore other appropriate cost reduction options.
We continue to work through the integration process. Although we anticipate the next several months to continue to be challenging, we believe the combination of Dawson and TGC Industries will provide long-term growth opportunities when market conditions improve. We will continue our focus on rightsizing our operations to fit current demand levels while remaining in a strong position to react to market conditions quickly, maintaining a strong balance sheet and commitment to our expanded client base by providing higher resolution subsurface images in a shorter cycle time.
We anticipate a capital budget for 2016 – for fiscal 2016 at maintenance levels below the $10 million capital budget approved by our Board of Directors. Our balance sheet, as Jim said, remains strong with approximately $58 million of cash and short-term investments, $71 million of working capital and $10.7 million of short-term debt and capital lease obligations.
In closing, while market conditions remain difficult, we believe we are well-positioned to withstand the commodity cycle downturn. A strong balance sheet, diverse client base and a business combination with TGC Industries provides us with the tools and resources to successfully navigate today’s market and quickly respond when market conditions improve.
And with that, Amy, I am finished and we are ready to take questions.
[Operator Instructions] And our first question is from John Woodiel at Raymond James.
Hi, good morning guys.
Good morning, John.
I was just – given the outlook for crew count going down a little bit in the first, second quarter. I was just curious, what have discussions with E&Ps, have those really changed over the past few months, particularly as oil prices kind of fell? And then more recently, as we have seen this kind of bump, well, how do you expect those to change?
John, back in November, when we did the conference call, if you recall, we had seen a dip over the summer and we have seen a little bit of upward trajectory of oil prices back then. And so we felt pretty good about the crew count anticipation into the first quarter. Shortly after we did that conference call in early November, oil prices began to slide. And obviously, we know the story. They slid deep, deep, deep into pretty low levels there in – as late as February. I probably, in my career, which spans 32 years – and there are some other folks in our company whose careers in this industry are longer than mine. My assessment is that period from November to where we are today was that there was pretty drastic responses on behalf of our client base. They have undergone a tremendous number of headcount reductions. They have gone through significant CapEx reductions and the reaction from November to where we are today is something I had not experienced. And so that caused a delay in some of the projects, most of which have remained. They have just been slid back a little bit. They could have been slid back, because our clients had a partnership agreement with somebody and maybe that needed to be reevaluated or maybe the project needed to go a secondary funding approval process.
If you think about the way we typically have operated in the past, an E&P company will have a capital budget and they will have certain percentage of that budget dedicated to seismic data recording activity and there will be a host of projects that are in the pipeline, and the question is which one will get approved and which ones will move forward. Little different now in that each individual project needs to stand on its own approval process. And it’s highly scrutinized as all of our clients are doing. And so that’s led to a little bit of uncertainty. I don’t think we have seen a whole lot of responses here in the short time when the prices have moved back up into the upper 30s. Not a whole lot of responses there in terms of conversation with our client base. I do believe our client base is looking for some sustainability of an upward movement before things really move.
And so there are some projects out there that we are talking about. It’s pretty quiet but there are still some things that we know of that are out there. And there are some things we are having conversations about that I think if people see some confidence level that we are going to get back to a higher price later in the year – we have heard varying numbers of what oil prices could be exit ‘16. We hear varying prices of what the number needs to be for projects to become economic. And so we can’t control any of that. And so all we can control is what we can control on our side and that’s rightsizing, that’s keeping a company intact – from a balance sheet standpoint and a personnel standpoint that can move quickly when things improve. And I believe things will improve, the timing of which I think is we have all been sitting here for a year or more talking about when things will improve. And so my crystal ball is not any better now than it ever has been, but we are focusing on bringing technology that we think we provide that adds value to the E&P company. If we are headed down a path, we are high-grading and reducing drilling risk and reducing findings and development cost, become meaningful in a rate of return calculation for our clients, we think we are going to be well positioned. We are well positioned to bring other sciences to the table in terms of developing oil and gas reservoir. So, we are going to continue to bring our technology to the table in a value-added sense. We have got a great equipment base. And so I don’t know if that answered your question, but that’s about as much as I can tell you, John.
Certainly, a very detailed response and certainly answered the questions I had. Then moving more to the cost side, obviously, activity has been falling. You have been scaling extremely well to the reduced activity levels. Can we just – is there a good way to get a sense of the magnitude of the synergies from the TGC merger have really had within those costs. How much is this?
Sure. The synergies are there. I think we have reaped the benefits of those synergies. I can point to a couple of instances in particular. We have completed a couple of projects, whereby the drilling, dynamite energy source drilling capacity that TGC Industries had and brought to the table, I think we have utilized those when and where we can, which has improved the revenue stream and has at the same time reduced cost, particularly dependence on third-parties. We are still going to have dependence on third-party providers, but whatever we can do in-house is a double positive and then it captured revenue and it reduces expense. And so we have had some success there. I think we have had a real success in utilizing channel count, particularly on the three component equipment, the multi-component. I think we see more demand for multi-component recording. That’s where we either by sourcing or by natural occurrence, we are recording other components of the seismic wave, which adds to further analysis of rock properties. Canada has this for several years, has been driven by multi-component recording. And we have been able to keep a crew or two busy. And so, utilization and bringing that equipment together certainly helped the equipment base, has certainly helped – so yes, we have realized benefits of this transaction. If you ask me to go back, it’s been about a year ago. Would I do it again? The answer is definitely. The question, John, or the issue is the scale of which the synergies are there. Obviously, they are not where we want them to be when we first announced the transaction back in October ‘14, but they are still in place. Everything that we talked about with that transaction is still in place. It still counts. And so we are squeezing the most that we can out of the system right now, but there is certainly some room for improvement when conditions improve.
Thank you. I really appreciate it and thanks for your time on the conference call.
I would add one comment there as we close the – probably one of the biggest things that’s helped us is the combined equipment base, which was very complementary all the way across the board, has greatly reduced the needs for capital expenditures. So Amy, I will turn that back to you and we can move on to the next question.
Thank you. The next question is from Georg Venturatos at Johnson Rice.
Good morning, Steve.
I certainly got the crew count numbers for the quarter and expectations heading into the second quarter. Just wanted to clarify how we should think about first quarter levels on average? I mean obviously, we worked through 8 to 10 in the fourth quarter, I know you talked about 4 to 6 heading into 2Q. Just kind of wanted to get a sense of how that progressed through the first quarter thus far. And then also, I know it’s limited in terms of your outlook, but do you think that 4 to 6 could potentially be a trough level here with your expectations going forward?
Okay. Thanks, Georg. We did enter the quarter with the 8 to 10 level. And then we, probably mid-January, we started to see – mid to late January, we started to see drop-off in projects being available. And so, we made the decision earlier in the quarter to try to get ahead of that and adjusted – downsized accordingly. We probably trailed it a little bit. So, we are going to be probably in that 4 to 6 range exit the quarter, probably in the 8 to 10 range entering the quarter. So, the math is going to end up somewhere 6, 7, something like that, 8 maybe for the quarter, but it’s just still really kind of difficult for me to say that, because we have had some utilization impacts on some of those crews as well related to weather. And that’s one thing we are really struggling with and that’s why we continue to move the crew count and adjust it accordingly. We have talked about this for years. It’s the projects that are in place while our efficiency levels are really good and we actually, on a project-by-project basis, do pretty well. The key is getting that cost covered over anticipated utilization. And so going forward, the utilization numbers are really tough to get a handle on. I believe we are going to be at a trough of 4 to 6, particularly if we have seen this uptick of moving from the upper 20s to the upper 30s. If that continues to move, I think we will see some activity in anticipation of drilling activity later in the year, early part of ‘17, but it’s really just hard – I am not trying to avoid the question, Georg, it’s just really difficult for, I think any service company now to be able to have a real clear handle on what the next 6 to 9 months are going to look like.
Absolutely. Understood. That’s helpful on the first quarter progression, Steve. On the cost reduction side, I had a question. You talked about the 25% reduction year-to-date, is that largely I would imagine crew related? And then secondarily, where do we kind of stand in terms of the headcount in terms of how many crews we could deploy today based on those recent reductions?
It’s not all at the crew level, Georg. It’s been throughout the entire organization, very, very painful. Lot of really, really solid folks that work hard everyday. And I just want to comment here on behalf of our employee base, I couldn’t be more pleased and proud of our folks. We have had salary adjustments. We have lost friends. We are working long hours. And their dedication to what we do and their dedication to our company and providing a service to our clients has been just remarkable. And so, it’s not all at the crew level. I would say, majority of it certainly is. In terms of response time, we have been through this before. Both companies have been through it before. And now that we are combined, we are experiencing this again. And probably one of the most difficult ones I have certainly been through going back to the ‘80s, certainly. But we have been able to move some people around. We will take crew level management. And they have had experience coming up the chain in different roles along the way. And so they have been able to move down and perform other functions that are necessary. And so we have been able to keep key personnel all across the board. It wouldn’t take us long to react back certainly to an 8, probably 10, maybe even a 12 level pretty quickly. We have got the equipment for it. One of the issues you deal with on the server side is when you cold stack equipment, there is a big debate whether you keep working or cold stack and either way it’s expensive, because there are some startup capital that’s required. And so our balance sheet and our equipment base is such that we can respond to that uptick pretty quickly. And I think our personnel base is in place too. And obviously, the labor market in the oilfield service business is quite different from where it was 2 years ago.
Got it. And then last one from me, Steve, just thought it was kind of noteworthy, within your prepared remarks, talked about these projects being delayed, didn’t highlight any notable cancellations. Is that the right way to think about it? I mean, has there been largely pushed to the right at this point without any significant projects that you are looking at that have been at least officially delayed – canceled rather in this environment?
I think that’s fair. I think things have been pushed to the right. I don’t know of anything that was – speaking off the top of my head, I can’t come up with the one that I know was awarded that has been canceled. Nothing that of significance contracted, but there have been some projects that were in the bidding process – in the informal process in Q4. I think – I don’t know that you can count those as a cancellation, but they have certainly been – some of those projects have been delayed without a definite time of return.
Appreciate the answer, Steve.
Our next question is from John Deysher at Pinnacle.
Hi, good morning. Just a follow-up to the prior question, with the 25% headcount reduction since the start of the year, any idea of what the actual cost savings in dollars are going to be?
I don’t think we have got any numbers on that at this point, because that cost savings when you are downsizing is going to flow through quite a few areas, payroll and fuel usage and all kinds of things. So, I don’t think we have a definite forward-looking estimate at this point, John.
Okay. So no estimate at all in terms of what the cost savings might be?
Okay. Unrelated question, has the Annual Meeting date and place been set yet?
It has not. We anticipated to move forward in the – from where it was historically. I think we are on the December 31 year end. And I think historically, TGC had their Annual Meeting in New York in first week of June. I do not anticipate us being in New York and I anticipate the meeting date to be moved up, probably a month or so from where it has been in the past, but we should have that information out here very shortly in the next week or so.
Got it. Thanks very much.
This concludes our question-and-answer session. I would like to turn the conference back over to Steve Jumper for closing remarks.
Well, thank you, Amy. I appreciate everybody taking time to listen in to our call. I wish we had better news, but I think everybody knows these are difficult and challenging times, not just for our company, but our industry in oilfield service and the E&P sector as a whole. I want to really thank our shareholders for their continued support. I want shareholders to know that we are working extremely hard everyday on your behalf. I want to thank our client base for their continued support. They are struggling too. They are going through some tough times as well as we are. And so we have always felt like our client base is a – that we were in essence partners with them to a certain level. And so we are feeling their pain as well. I have mentioned our employee base. I really want to thank all of our employees for extreme efforts and all through the operations, particularly on the accounting and finance side, it’s been a tough year with this transaction, some other things that have gone on. I really want to thank them for their hard work.
I think summing up, it’s difficult. We all know that. We have been through this before, every time we have been through it, our company has emerged a little bit stronger, whether it be equipment or people or whatever the case maybe. I think in this environment, we are in a unique position in where we have been in prior downturns, but our equipment base is in better shape right now in – when we exit a downturn than it ever has been. I think we have got the right equipment. We are delivering the right technology. We are talking to our clients about what they need, what’s going to help them solve their issues going forward. So, I think we are ahead of the game in technology and equipment base. We have talked extensively about the balance sheet. I think we will continue to focus on that. I think the management team, on a consolidated basis, has a history of conservative fiscal management and will continue to do so. We will continue to look at proper allocation of capital. And we will continue to focus on our people. Our people truly are the greatest asset we have. We can’t do it without them and we are going to continue to maintain a personnel base that will allow us to capture the upside. Thank you for joining in and we are approaching end of quarter here at the end of March. And so I am sure we will be back to talk to you sometime in the early May timeframe. Thank you and have a good day.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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