Dawson Geophysical' (DWSN) CEO Steve Jumper on Q2 2016 Results - Earnings Call Transcript

| About: Dawson Geophysical (DWSN)

Dawson Geophysical Co (NASDAQ:DWSN)

Q2 2016 Earnings Conference Call

August 04, 2016, 10:00 ET

Executives

Jim Brata - CFO, EVP, Treasurer & Secretary

Steve Jumper - Chairman, CEO & President

Analysts

Praveen Narra - Raymond James

John T. Potratz - Researched Investments

Operator

Welcome to the Dawson Geophysical Second Quarter 2016 Earnings Conference Call and Webcast. [Operator Instructions].

Statements made by management during this call with respect to forecasts, estimates or other expectations regarding future events or which provide any information other than historical facts may 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 the company's annual report on Form 10-K filed with the SEC on March 16, 2016. 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 will make references 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 the company's current earnings release, a copy of which is located on the company's website, www.dawson3d.com.

This 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.

Steve Jumper

Well, thank you, Cleo. Good morning and welcome to Dawson Geophysical Company's Second Quarter 2016 Earnings and Operations Update Conference Call. As Cleo said, my name is Steve Jumper, Chairman, President and CEO of the company. Joining me on the call is Jim Brata, Executive Vice President, Chief Financial Officer.

Before I start the call, I just want to cover a couple of items. 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, Thursday, August 4, 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 second quarter financial results, I would like to say a few words about the strategic business combination with TGC Industries.

On February 11, 2015, legacy Dawson Geophysical and legacy TGC Industries, Inc. consummated their previously announced strategic business combination. The merger transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical company being deemed the accounting acquirer, with the results of legacy TGC Industries, Inc. being reflected in the company's reported consolidated financial results for periods from and after February 11, 2015. The combined companies adopted a calendar year ending December 31. Due to the foregoing, comparative financial results that include reports prior to February 11, 2015, are not comparable to financial results that include periods from and after February 11, 2015.

Turning to our second quarter financial results. Operating revenues decreased in the second quarter of 2016 as compared to the same period in 2015. Operating expenses for the June quarter decreased proportionally. Demand for our services is at reduced levels from recent years and is anticipated to remain at such levels through much of 2016 in response to decreasing and uncertain commodity prices and reduced client expenditures.

The company operated four to six crews in the United States for most of the quarter. Utilization of several crews was unfavorably impacted by inclement weather conditions in several areas of operation late in the first quarter that continued in the early part of the second quarter and again during the latter stages of the second quarter. The company also experienced a few client-driven delays which resulted in longer-than-anticipated crew moves. We anticipate operating four to six crews in the U.S. through the third quarter of 2016. Low and uncertain oil and gas prices, however, limit our visibility beyond the third quarter.

I will now turn control of the call over to Jim Brata, who will review the financial results. Then I will return for some final remarks about the outlook for the rest of the year. Jim?

Jim Brata

Thank you, Steve. And good morning. Before we get started, I'd like to review what Steve said earlier. On February 11, 2015, legacy Dawson Geophysical Company and legacy TGC Industries, Inc. consummated their previously announced strategic business combination. The merger transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical Company being deemed the accounting acquirer, with the results of legacy TGC Industries, Inc. being reflected in the company's reported consolidated financial results only for the periods from and after February 11, 2015.

The combined companies adopted a calendar year ending December 31. Due to the foregoing, comparative financial results that include periods prior to February 11, 2015, are not comparable to financial results that include periods from and after February 11, 2015. Revenues in the second quarter of 2016 were $28.1 million compared to $43.3 million in the same quarter of 2015. As Steve mentioned, we operated four to six crews in the United States for most of the quarter. Cost of services in the second quarter of 2016 was $26.0 million compared to $43.4 million in the same quarter of 2015.

Gross profit was $2.1 million in the second quarter of 2016 compared to a flat gross profit in the same quarter of 2015. Selling, general and administrative expenses decreased to $4.0 million in the second quarter of this year compared to $5.6 million in the same quarter of 2015. Depreciation and amortization expense in the second quarter of 2016 was $11.3 million compared to $12.4 million a year ago. Net loss for the second quarter of 2016 was $11.6 million compared to a net loss of $11.9 million in the same quarter last year.

We recorded an income tax benefit of $1.2 million compared to an income tax benefit of $6.4 million a year ago. EBITDA in the second quarter of 2016 was negative $1.5 million compared to negative $5.7 million in the same period a year ago. For the first six months of 2016, the company's EBITDA remained positive at $1.0 million. And an EBITDA reconciliation was provided in our earnings release issued this morning.

And now I'll highlight some balance sheet items. Our balance sheet remains strong. As of the end of the second quarter of 2016, we had debt, including obligations under capital leases, of $6.2 million; cash and short term investments of $67.2 million. Our current ratio was 4.5 to 1. And finally, working capital was approximately $67.6 million.

And with that, I'll turn the call back to Steve for some comments on our operations.

Steve Jumper

Thank you, Jim. As mentioned in our press release and as I stated in our last conference call, 2016 will likely be the most difficult year in my roughly 30 years with the company and in the industry. Oil and gas prices remain uncertain. Exploration and production companies have maintained a cautious approach towards spending. Despite today's challenging environment, Dawson Geophysical is strategically positioned to withstand the commodity cycle's downturn.

Our strong balance sheet, diverse client base and a management team with more than 100 years of combined industry experience provide 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 below previously established CapEx levels. During the quarter ended June 30, 2016, oil prices averaged approximately $45 per barrel after reaching a decade-low price of $26 on February 11, 2016 and ending the quarter at approximately $48 per barrel for West Texas Intermediate. Since the end of the quarter, oil prices once again declined below $40 a barrel, during the first week of August.

Given the fluctuations in oil prices, it remains to be determined when the strengthening oil prices will be sustained. As we experienced during our first quarter of 2016, due to uncertainty in oil and natural gas prices, our client base continues to take a cautious approach to their capital spending budgets. Based on currently available information and anticipated seismic data acquisition service demand levels, we believe we will continue to operate four to six crews through the third quarter of 2016.

We're currently not active in Canada, but we anticipate the upcoming Canadian season to be on par with what we experienced in the 2015, 2016 season. However, visibility in the U.S. beyond the third quarter, as I've said, remains limited. In response to these factors, we will continue our ongoing efforts to control costs, maintain a strong balance sheet, retain our key personnel and expand our position as the leading onshore seismic data acquisition company in North America. The company anticipates the capital budget for fiscal 2016 to be at maintenance level below the $10 million capital budget approved by our Board of Directors. As Jim has stated, our balance sheet remained strong with approximately $67.2 million of cash, cash equivalents and short term investments; $67.6 million of working capital; and $6.2 million of debt and capital lease obligations as of June 30, 2016.

In closing, while market conditions remain difficult, we believe we will be well positioned to withstand the commodity cycle downturn. Our strong balance sheet, diverse client base and the 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, Cleo, we're finished and ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from the line of Praveen Narra with Raymond James. Please go ahead.

Praveen Narra

So with regards to kind of conversations with your customers, can you give us an idea of how they've evolved over the past couple of months? It's obviously been a pretty fluid commodity environment you've seen. If they're looking towards 2017 and talking about it or if it's still too early.

Steve Jumper

Praveen, I would say that, during the second quarter, as we saw that movement up to $48 approaching $50, I got the sense from my conversations and in speaking with our group about their conversations that there was a little bit of movement. We have secured a few projects here in the last few months. There are a few projects that are being discussed. There's been a -- some proposals sent out. I think we heard of some companies out there announcing slight increases to their back-half '16 CapEx budgets.

We've seen a few companies increase rig count, but those levels, while encouraging, still I -- in my estimation in the Lower 48 fit in the four-, five- or six-crew range going toward the back half of the year and early part of '17. I think this recent pullback obviously has taken everybody a little bit by surprise and has caused them to take another cautionary step, but my feel is that there is optimism throughout -- at some level throughout E&Ps and through oil field service in general that we will see a recovery sometime in '17. I know that's the position that you folks at Raymond James have taken yourselves. And so I think we're still seeing that.

The issue we deal with is the prep time for us to get a project ready, depending on where it is, is on the average three to six months. Some, you can get ready in 30 days. Some will take nine months, but in general it's three to six months. And so things that are coming to light now or entering the pipeline potentially are still late '16, early '17. So that's what we're basing our anticipation of four to six. That's why we say visibility beyond the third quarter is limited. It is for those reasons. I don't know if that answered your question or not, but--

Praveen Narra

Yes. No, that's very helpful. In terms of kind of preparing for that recovery, from a capital standpoint, it doesn't look like you guys need a whole lot of incremental capital from here or even for the market to recover. Tell me -- if you can tell me that's the right way to think. And then also, could you give me an idea of kind of what it would take from a cost standpoint to re-crew for if you needed to add additional crews above the four to six?

Steve Jumper

Well, our capital budget, I believe, in our release, we're somewhere around $5 million for the front half of the year, slightly over $5 million. I think it's --

Jim Brata

Yes, $5.3 million.

Steve Jumper

Yes, $5.3 million. And a good chunk of that was replacement channels we lost just quite a bit of equipment in all those floods back in '15 in the College Station, Houston areas when we were operating there. And so a big chunk of that CapEx was replacement channels and primarily funded by insurance proceeds. And so our CapEx budget's really well below that $5 million probably for '16. Don't anticipate much going to the back half, probably some rolling stock. We wear out trucks and mules and four-wheelers and those types of things.

So I think our equipment base going into an anticipated uptick -- and we don't know what uptick means. We don't know if that's 8, 10, 12 crews. We don't know, but the rig count being where it is, if you double the rig count, we're still well below the '14 levels, as everybody is aware. So I think we're well equipped. Now there are opportunities out there to further enhance your equipment base going forward, with some recent occurrences in our industry. And so as always, if we see a right opportunity, we have the balance sheet and the cash position to move on that and make a contrarian investment and so while that's always a possibility, our anticipated CapEx will stay below the preapproved $10 million. In terms of redeployment, we've had significant cutbacks, painful for our company and painful for the families that we employ and going back to the time of the merger forward when things really started to get tough, but we have maintained key personnel.

All of our personnel are key personnel. If they're on the payroll, they're key people. But we've maintained the technical folks, the folks with experience of running crews and operating. And so we've got an infrastructure in place to redeploy on very short order, would involve rehiring some labor. I think we've been cycling our equipment through on a pretty good basis, through maintenance and so I don't think we're looking at a whole lot of maintenance startup costs. I think there's always some things relative to geophones and a few others.

So I think we're in pretty good position to respond quickly. I say quickly, in 30 to 60 days, on two, maybe four, crews. And I think you would just see that buildup to be just basically in incremental crew cost. And so I don't think we're looking at anything real major if we were to get two or three phone calls today that were very encouraging.

Operator

[Operator Instructions]. The next question comes from John T. Potratz with Researched Investments. Please go ahead.

John T. Potratz

The reason for my question here is what are pricing pressure from your customers? Are they continuing to push you down? Or have they more or less stabilized at this time?

Steve Jumper

Well, John, first of all, good to talk to you. Second is we'd been under quite a bit of pricing pressure in our industry long before we had the dramatic turn down in oil prices. If you look at the up cycle that we went through, the '11, '12, '13 cycle, geophysical services did not experience the same level of pricing improvement that other oil field services did.

So we didn't have as far to fall, but relative to where we're now, there remains pricing pressure. But I think the pricing pressure that we deal with primarily is just being able to work within the capital budgets that our clients have within their spending levels. And so we're doing everything we can do on our side to look at costs, look at efficiencies. Most of our contracts are turnkey contracts. And while we take on a little bit more risk, we have a little more upside with increased efficiencies and increased productions. And we're changing the way that we do some things in the field, the way we operate and the parameters that we're using. And so the pricing question is a difficult one for us to answer.

And I never mean to be evasive, but -- on this issue, but it is difficult to get an apples-to-apples comparison. I think prices have pretty well stabilized. I think pricing is such, for us, that on a project-by-project basis we're not doing too bad. I think we're -- if you look at where we're today, I think generating positive EBITDA is certainly the position that we're in and where we've been for the last few quarters, maybe last five or six quarters. I think net pricing is there.

I think the bigger issue that we're dealing with is utilization and project continuity. It's been hard for us to adjust our scale for what we need to meet our client needs, but I think pricing is probably where it has been for the last few quarters. And I think it's just, until we see some improvement in commodity prices and improvement in budgets and activity, I think this is the world that we're going to be living in for a while.

John T. Potratz

So the prices are relatively firm in a way, not being pushed down. And really what you're focusing on is how can Dawson do its work most efficiently so that you can have a profit if -- when you are going out with the crews.

Steve Jumper

Correct. And we're striving really hard in this down cycle to maintain a balance sheet and an equipment base and a core client base that we're going to service and have a product that is evolving and improved and adding value that will sustain us through this down cycle. And I think that, given where we're and given the current environment that we're all working in and as an oil field service provider, I think our group is doing an outstanding job.

Operator

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Steve Jumper for any closing statements.

Steve Jumper

Cleo, thank you for hosting us. I want to thank everybody for listening in to our call. Obviously, we're in a difficult market. We're in difficult times. We've been here before. We don't like where we're, but we understand where we're. We have -- as we've said several times in this call, we have a very strong balance sheet. We've got good equipment.

The business combination with TGC Industries has strengthened our position both in terms of technology and client base. We have a very nice presence in the Canadian market, so I think we're well positioned to improve our product, add value to the cycle and capture the upside when the upside occurs. I want to particularly thank our employees and their families that work very hard for you as a shareholder and our client base. They're working very hard. They're working hard at increasing the value of our product, increasing efficiency and containing costs. I want to thank our valued clients for their continued trust in our services and our continued opportunities and certainly want to thank our shareholders for your continued trust and your continued support.

We're very grateful to all parties. That will conclude our remarks. And we're facing some tough times, but we will be here in 90 days to talk to you again. Thank you for listening in.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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