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Dawson Geophysical Company (NASDAQ:DWSN)

Q2 2012 Earnings Call

May 2, 2012 10:00 am ET

Executives

Steve Jumper – President, Chief Executive Officer

Christina Hagan – Executive Vice President, Chief Financial Officer

Analysts

Marshall Adkins – Raymond James

Georg Venturatos – Johnson Rice

Veny Aleksandrov – Pritchard Capital Partners

Operator

Good morning and welcome to the Dawson Geophysical Company’s Second Quarter 2012 Earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touchtone telephone. To withdraw your question, you may press star and then two. Please also note that today’s event is being recorded.

I would now like to turn the conference call over to Mr. Steve Jumper, President and CEO. Mr. Jumper, please go ahead.

Steve Jumper

Thank you, Jamie. Well good morning and welcome to Dawson Geophysical Company’s Fiscal Second Quarter 2012 Earnings and Operations Update conference call. As Jamie said, 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, and Ray Tobias, Executive Vice President and Chief Operating Officer.

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

At this point, I will 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 the Company’s actual results of operations. These risks include but are not limited to the volatility of oil and natural gas prices, dependence upon energy industry spending, disruptions in the global economy, industry competition, delays, reductions or cancellations of service contract, high fixed costs of operations, external factors affecting our crews 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, availability of capital resources, and operational disruptions. A discussion of these and other factors, including risks and uncertainties, is set forth in the Company’s Form 10-K for the fiscal year ended September 30, 2011. 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.

All right, let’s talk about our earnings. Dawson Geophysical today reported revenues of $85,546,000 for the quarter ended March 31, 2012 compared to $78,337,000 for the same quarter in fiscal 2011, an increase of 9%. Net income for the second quarter of fiscal 2012 was $5,589,000 compared to net loss of $4,857,000 in the same quarter ended March 31, 2011. Earnings per share for the second quarter of fiscal 2012 were $0.71 compared to a loss per share of $0.62 for the second quarter of fiscal 2011. EBITDA for the second quarter of fiscal 2012 was 17,520,000 compared to 1,219,000 for the quarter ending March 31, 2011.

Revenues for the six months ended March 31, 2012 were $177,928,000 compared to $150,990,000 for the same period ended March 31, 2011, an increase of 18%. Net income for the six months ended March 31, 2012 was $8,820,000 or $1.13 earnings per share as compared to a net loss of $6,524,000 or $0.84 loss per share for the same period of fiscal 2011. Included in the six months 2012 results is an $0.18 per share one-time tax benefit related to transaction costs.

Depreciation expenses for fiscal 2012 increased $897,000 compared to the same period of the prior year. Third party charges, which are included in revenues, declined as a percentage of revenues during the second fiscal quarter 2012 to a level more consistent with the Company’s historical average for such charges. These third party charges are related to the Company’s use of helicopter support services, specialized survey technologies, and dynamite energy sources in areas of limited access. The Company is reimbursed for these expenses by the client.

The Company’s Board of Directors has approved an increase of $30 million to the fiscal 2012 capital budget, bringing the fiscal 2012 budget total to $50 million.

Steve?

Steve Jumper

Well thank you, Chris. Let me start by recapping our fiscal second quarter and six month highlights. We increased second fiscal quarter 2012 revenues to 85.5 million from 78.3 million in the comparable fiscal 2011 quarter. We generated $17.5 million of EBITDA for the quarter ended March 31, 2012 compared to 1.2 million for the comparable quarter in fiscal 2011. Net income grew to $5.5 million or $0.71 earnings per share in the second fiscal quarter of 2012 compared to a net loss of 4.8 million or $0.62 loss per share in the second fiscal quarter of 2011.

Increased revenues during the six month period ended March 31, 2012 to 177.9 million compared to 150.9 million for the comparable six month period in fiscal 2011. Generated EBITDA of 28.5 million for the six month period ended March 31, 2012 compared to 6.1 million for the comparable six month period in fiscal 2011. Generated net income of 8.8 million or $1.13 earnings per share for the six month period compared to a net loss of 6.5 million or a loss per share of $0.84 for the comparable six month period of fiscal 2011. We formed a Canadian entity in Calgary, Alberta and intend to establish operations in Canada during the 2012-2013 winter season.

As our highlights can attest, the second quarter of fiscal 2012 was a solid quarter. Revenue, net income and EBITDA all exceeded year-ago levels. Utilization rates improved and channel count increased from a year ago. Our order book commitments are at a multi-year high, capable of sustaining all 14 data acquisition crews well into fiscal 2013. I will caution, however, that utilization rates are expected to be temporarily impacted as we are experiencing difficulty on several current projects but expect to return to higher utilization rates in late fiscal third quarter. I would also add, as we have in the past, our contracts may be cancelled, delayed or modified in scope on short notice.

Not surprisingly, demand for services is driven primarily from oil and liquid-rich plays, including the Bakken oil shale, the Eagle Ford, the Niobrara, the Permian Basin and the Mississippi line of Oklahoma and Kansas. We presently have 13 data acquisition crews that are engaged in oil and liquid rich related projects. Companies of all sizes, from super-majors to large and medium independents to small oil and natural gas producers, as well as providers of multi-client data libraries, continue to drive the increase in demand.

As mentioned, to help support operations, our Board of Directors has approved a $30 million increase to the 2012 CAPEX budget primarily for the purpose of seven INOVA vibrator energy source units, 8,000 additional OYO GSR single-channel recording units, additional geophones, and 3,000 OYO GSR three-channel units complete with three component geophones, and to meet additional needs as they arise.

As many of you have noticed, the investment decisions we made in fiscal 2011 are beginning to pay dividends. We’re able to provide more clients with the up-to-date technology. We’re able to provide both large channel count crews as well as multiple smaller channel count crews for smaller sized projects; and equally important, we have the capacity and personnel required to provide seismic services to both the U.S. marketplace and our new entry into the Canadian marketplace this upcoming winter.

Access to the Canadian marketplace will allow us to deliver our services and apply our more than 60 years of experience and knowledge to oil and gas producers of all sizes north of the U.S. border. We initially plan to deploy one or two of our data acquisition crews in the upcoming winter season. Our Canadian office will be headed up by Mr. Doug Schmidt. Doug has more than 30 years of seismic experience worldwide, with the majority of his career in Canada. He was president-owner of Seisurv Exploration in Canada, he served as operations supervisor for Western Geophysical and Seiscom United both in Canada and worldwide, and most recently Doug served as geophysical operations supervisor worldwide for Devon Energy out of Houston, Texas. We’re exceptionally fortunate to have Doug on our team and I welcome him aboard.

As we look toward the second half of 2012 and beyond, we’re seeing good opportunities as demand remains robust. Visible growth prospects in the lower 48 states remain strong. Opportunities in Canada are just starting to emerge as we open our new office in Alberta, and we are seeing improved operating efficiencies, contract terms, and productivity across the board. Fiscal 2012 is shaping up to be a solid year, and I’m confident that our commitment to our employees, our clients and our shareholders will bring new opportunities for expansion and growth here at Dawson.

And with that, Jamie, I believe we are ready to start taking some questions.

Question and Answer Session

Operator

At this time, we’ll begin the question and answer session. To ask a question, you may press star and then one using a touchtone telephone. If using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure good sound quality. To withdraw your question, you may press star then two. Once again, in order to ask a question, please press star then one.

Our first question comes from Marshall Adkins from Raymond James. Please go ahead with your question.

Marshall Adkins – Raymond James

Well, good morning. Could you give us a little more color on Canada – why now, what’s the timing of it, and are you going to have to buy new equipment to get it done?

Steve Jumper

Well Marshall, we’ve had inquiries from several clients that have operations in Canada for quite some time about moving into the Canadian market, and it’s not an easy process. It’s not just something that we can jump north of the border and begin operations. We felt that we needed to find the right individual to help us get that entity started, and we believe we have found that person in Doug Schmidt. So from a personnel standpoint, the timing is good for us.

We think the Canadian market has been strong for a couple of years. It is a short season – we recognize that. It is a cyclical, seasonal business and we recognize that that’s going to be an impact to our Q2 and Q3 next year, and that would probably be about the extent of it.

On the equipment side, we have a strong inventory of GSR equipment. Some of the work that’s done in Canada is the three component work, and we’re going to have about 7,000 stations of three-component OYO capability after this purchase of the additional 3,000 units. We’ll have somewhere in the neighborhood of 36,000 OYO channels and so at this point, I don’t see us making a big investment. Of course, that could change depending on what happens both here in the States and in Canada.

We think it fits well for us. We think our brand name is well recognized. We’ve had inquiries about Canada for quite some time. We think we have some relationships that will help us get started. Personnel is obviously going to be an issue getting started, and the first season will definitely be something that will have its challenges. We think that we can meet those challenges.

The other thing that we think works well for us is typically our Q1—typically the winter months, November through February, are the toughest here in the States, and you get oftentimes utilization rates drop just because of weather conditions, and that happens to be the strong time of year in Canada so we think moving assets across the border will work very well for us on a timing basis.

Marshall Adkins – Raymond James

So there’s a plan to just kind of move back and forth seasonally?

Steve Jumper

Yes.

Marshall Adkins – Raymond James

Okay. Great quarter, awesome job. You mentioned in the press release part of it was pricing or new contract terms, part utilization, part more channels, more crews, et cetera. Can you give me some sense of what was most relevant, number one; and number two, how repeatable is this situation? I mean, phenomenal job, but is it repeatable or was it just great weather, easy permitting, whatever? So a lot of questions there, but--

Steve Jumper

Yeah, I got it. Good questions. Questions I, obviously, have asked myself and we’ve discussed internally. Most relevant – that’s always a very difficult thing to pinpoint, but I think one of the things that comes to mind first and foremost is the efficiency level of our crews has increased dramatically. You know, we have talked for the last four or five quarters or so about increase in channel count and what is not really a step change but there has been a change in the average number of channels a crew is handling. We’ve always talked about when we went to turnkey contracts, as we become more efficient in handling larger channel count projects, obviously the cable systems have played into that as well, that we would start to see some benefit, and I think we’re starting to see that. I think we’re starting to understand the pricing model with the higher channel count crews, the efficiency models with higher channel count crews. I think we’ve got a little more history behind us where all those things start to add up. I’ve been really proud of our people company-wide on implementing measures to increase productivity, crew efficiency and quality, and I think that’s paying off, and we’ve worked off some of the legacy contracts that we talked about in Q3, Q4 and a little bit of Q1 last year. So I think going forward, we’re still primarily turnkey. I think we’ve still got a lot of efficiencies that we can gain, and I think execution has been pretty solid.

Now on the repeatability question, that has created a little bit of a unforeseen circumstance for us, Marshall, as we move into Q3. Generally speaking, I think the quarter is repeatable. Is it going to repeat in Q3? I think that’s a tough call. Our efficiency levels have—you know, we’ve actually completed some projects ahead of schedule, which has caused some gaps in our schedule moving into mid-Q3 timing. We do have some issues in the third quarter we’re dealing with. We’ve had some projects that have been difficult in the permitting phase. We’ve had some projects where weather has impacted job preparation, whether it be line clearing or drilling operations for shot hole surveys. We’ve had some of those things occur to us. We’ve had some projects that have been delayed that were scheduled. They’ve been delayed for various reasons. They’ve been land issues, they’ve been partnership addition and has caused some I’s to be dotted and T’s to be crossed on the client side. And we’ve had some of them delayed because they’ve grown in scope and the ability to get them ready on a change, which is a good thing—I mean, the programs increase. The bad thing is it’s hurt our timing. So I don’t think this is a won and done deal, but I would be hesitant to make a claim that it’s repeatable in the next quarter. We obviously have some issues that could impact anywhere from two to four crews on a temporary basis sometime in the upcoming quarter.

Marshall Adkins – Raymond James

All right, great. You and your crew did a great job. Thanks.

Steve Jumper

Thanks, Marshall.

Operator

Our next question comes from Georg Venturatos from Johnson Rice. Please go ahead with your question.

Georg Venturatos – Johnson Rice

Hey guys, good morning. Just wanted to echo – great execution on the quarter as well.

Steve Jumper

Thank you.

Georg Venturatos – Johnson Rice

Just in terms of the underlying margin trend, certainly it sounds like crew efficiency was a big driver this quarter. Can you talk a little bit more about the pricing side? I know that’s been a little more stagnant recently, and just kind of where that was in relation to last quarter and maybe where we still stand versus peak levels previous cycle.

Steve Jumper

Well, from a pricing standpoint, I think we’re still working through—I think we, as a company, for sure have done a much better job of understanding the underlying cost structure and operational efficiencies with these larger channel count crews. I think from a pricing standpoint, I think it’s a very difficult question, Georg, to answer as to whether or not we’re back to peak level pricing, which I assume is in the 2007 to 2008 time frame. In my career, our peak level pricing was actually probably in the late 90s, from a pure pricing standpoint. I think the burden on our industry has always been more cost effective, improved efficiency, shorter cycle time, higher quality data, and channel count certainly plays into all of that, crew efficiencies play into all of that. And so I think pricing certainly has improved from where it was a year ago. Is it robust pricing, particularly in the lower 48 market? I think that would be a stretch. We’re still in a price competitive environment here in the lower 48. I think capacity utilization is certainly increasing. I don’t think we have an overcapacity problem in the lower 48; but having said that, we’re going into this quarter with some scheduling issues, very strong order book, a lot of visibility long-term but yet we’ve got the short-term weakness that hits us from time to time that we’ve talked about before. You know, I think from a pure pricing standpoint, though, obviously it’s better but I don’t know that it’s back to what I would consider peak level, because I think the comparison metric is a tough one to make because the channel count is changing, the size of the jobs are changing. Some of the parameters that you are utilizing have changed quite a bit in the last four years, so that’s a tough question to answer.

Georg Venturatos – Johnson Rice

Understood. No, I appreciate it. On the CAPEX side, just curious when you would plan on making those orders and also receiving mainly that OYO equipment?

Steve Jumper

I’m not sure what the deliver on the OYO. I would anticipate sometime late—you know, latter part of this quarter on the OYO stuff and the vibrators both.

Georg Venturatos – Johnson Rice

Okay, and then lastly can you just remind us—you had mentioned some numbers about historical levels on third party charges last quarter. Just kind of wondering where we shook out this quarter. Obviously it decreased, and I know it’s tough to gauge, but just maybe a sense of your outlook over the next few quarters where that might end up, and that’s it. Thanks.

Steve Jumper

Well I certainly appreciate the question. I’ve been wrong so many times on forecasting this in the last couple quarters, but if we go back even to the middle part of fiscal 2011, I began to indicate that as we move farther west and we got reduced level of activity in the eastern part of Texas through Arkansas, up into the eastern part of the U.S., I thought those levels would reduce and they finally have – they’ve been a little bit lumpy - reduced as a percentage of revenue. We’ve also had increased revenue from efficiencies and the number of crews that are operating, so it’s a two-sided move. I’m on record as saying that our historical range has been 25 to 35% reimbursables as a percentage of revenue. We’re somewhere in the upper end of that range right now. We’ve been as high as in the 40, 45, 50 range in the past, so I think from a year-ago comparison we’ve seen a significant improvement in reimbursable revenue as a percentage of overall revenue, but that’s a two-sided coin. That’s one where we’re working where there’s less third party charges into increased revenue generated at the crew level.

Georg Venturatos – Johnson Rice

Got you. Thanks a lot, Steve.

Steve Jumper

Thanks, Georg.

Operator

Once again, if you would like to ask a question, please press star and then one using a touchtone telephone. Our next question comes from Veny Aleksandrov from Pritchard Capital Partners. Please go ahead with your question.

Veny Aleksandrov – Pritchard Capital Partners

Good morning Steve, Chris, Ray.

Steve Jumper

Good morning, Veny.

Veny Aleksandrov – Pritchard Capital Partners

My first question is on Canada. I guess I’m a little bit confused. It’s going to be 14 crews going forward, but two of them are going to work in Canada during the winter?

Steve Jumper

Well, we anticipate having one or two crews for the short season in Canada, and we think we can make that work from a scheduling standpoint. Of course, we’ve always talked about the ability to downsize certain crews and move channel count around, and so we’re increasing our channel count here again. So from an actual crew level standpoint, is it 12 and 2, or 13 and 1, or are we going to split crew sizes and levels? I think that’s to be determined. There’s also the ability to operate equipment on a leased basis if needed, or make additional purchases on a go-forward, but we’ll just have to wait and see what our winter schedule looks like here and what we’re fortunate enough to put together in Canada. We certainly understand and we’re certainly aware that being a new entry, demand is solid up there. We think the brand name is solid. We think we’ve got a good start on personnel, but we certainly recognize there are challenges and I don’t think our expectation level for the first season—we plan to be there over the long term, but I don’t think our expectation for the first season is real high, Veny, going into it.

Veny Aleksandrov – Pritchard Capital Partners

You can move equipment but you cannot move people, right? You have to—

Steve Jumper

Well, there are some other issues in that area that I certainly am not in a position to discuss at this time.

Veny Aleksandrov – Pritchard Capital Partners

Okay. But where I’m going is that you’re probably going to carry some expense related to Canada when your crews are down over there. Is this correct?

Steve Jumper

I don’t think the expense level moving up with the size of the entity that we’re creating is going to be of huge impact. Certainly once we get into the Canadian season, if there’s equipment moved across the border, I just don’t think we’re going to have a huge carry expense based on the size of the entity that we’re going to have in the off seasons.

Veny Aleksandrov – Pritchard Capital Partners

Okay, I understand. And my second question is on pricing, and you just talked about pricing. But with the natural gas prices where they are, are you seeing any indications or any pressure from clients on pricing? Anybody deciding we are not going to shoot any more seismic – it doesn’t look good? I mean, it doesn’t seem like from your comments, but just want to make sure.

Steve Jumper

We have not experienced any direct cancellations or delays related to natural gas pricing. Obviously most of the capacity in the seismic sector has been moved out of that area anyway. There’s still some capacity working on projects—like, we’re going back to work on some projects, and so I don’t think from a capacity standpoint there’s an industry issue. Obviously there is cash flow issues and some other things that it’s impacting on the client side, but I don’t think we’ve had anything that’s been directly impacted as of today on natural gas. We’ve had one or two smaller projects in scope that have been delayed or moved into next year, but really nothing of any significance.

Veny Aleksandrov – Pritchard Capital Partners

Okay, thank you so much.

Steve Jumper

Thank you, Veny.

Operator

And Mr. Jumper, at this time I’m showing no additional questions.

Steve Jumper

Well thank you, Jamie. I would like to thank all of you for participating in our call. I’d like to thank our clients and shareholders for their value, trust and support. I’d especially like to thank our employee base on the execution side of the quarter. I think it’s been well recognized here on the call that we’ve got some people throughout our company that have done an outstanding job, and we’re proud of them and glad to have them, as always.

We’ll be back to talk to you here at the end of Q3, and I had mentioned that we’ll be presenting at the Global Hunter conference June 26 in San Francisco, and we’ll be at the oil and gas conference in Denver in August.

Thank you for listening in. We’ll talk to you again. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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