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Dawson Geophysical (NASD: DWSN) has been pleasantly surprising all year. Their fourth quarter was no different. If you look at each quarter in succession, it is quickly obvious that each quarter was amazing. When I glanced at Dawson’s fourth quarter earnings, I assumed that they achieved their results due to the deployment of their 15th crew. However, this crew was not deployed until early September, giving them only three weeks worth of revenue!

No, Dawson achieved their record earnings from the labor of their 14 crews that were up and running. The market wasn’t so enthused about Dawson’s results. I think this is because they have been reluctant to start discussing crew number 16. Much of their growth in the past couple of years is the result of them going from 9 crews in early 2005 to fifteen by year-end 2007. Still, look at the numbers below. The 14th crew was added in early April, so both the 3rd and 4th quarters represent earnings from 14 crews.

There was some third party revenue in the fourth quarter that may not be recurring, but still, revenues per crew were approximately $5.4 million. This compares to $4.9 million in the third quarter. The market expressed it’s disappointment over the lack of additional crews after this earnings report, but I wonder if the channel count and revenue per crew metric doesn’t deserve more attention. Demand for oil and natural gas should remain strong in the foreseeable future, but there is a limit to how many crews can be up and running in this country. Dawson has invested heavily in channel count as well as fielding additional crews since this latest boom began. Dawson’s customers appear to be paying more for additional data. The investment thesis for Dawson may now depend on this trend.

Estimated Full Year Earnings

In the table below, I’ve estimated Dawson’s earnings on a proforma basis. Here, I’m annualizing their current earnings status. I’ve backed off their revenue per crew to just below $5.29 million. I’ve used gross margins of 26%, though they’ve been over 27% the past two quarters. Net margins are 10.6% in this estimate, which is within the quarterly range for 2007. I’m using $24 million for maintenance capital expenditures. Some have suggested this is too much and that I may be understating owner earnings. I’d rather be conservative, though, as the equipment is upgraded whenever it is replaced, it seems.

One other item of note is that I have not included the 15th crew in this analysis. I will handle this with a one-year earnings growth number below.

Valuation

I’m starting with the $29.36 million in owner earnings or $3.81 per share. This works out to slightly less than their net earnings number of $4.07 per share. From here, I grow the first year of earnings at 15%. This takes into account one additional crew in 2008 adding about 9% to earnings. The remainder of earnings growth will come from increased channel count. The table below uses 15% growth in year one, a 10% discount rate applied to future earnings, and a reversionary PEG ratio of 1.5.

This is the same table I compiled at the end of the third quarter using a higher starting owner earnings number. The values are much higher. However, I would give a lot more weight to the 9-12% growth number than the 15-18% growth rate. The market is definitely viewing the company as if they will grow at a 15% rate in 2008 followed by 9-10% over the next four years.

Trading Range

Just looking at bigcharts.com, Dawson looks to have traded at a P/E of 14-28 over the past year or so. This equates to a price range of $57-$114 per share.

Conclusion

About the only way I’d sell all of my Dawson holdings would be for it to exceed $150 per share. They have solid management in place and a significant trend of higher energy prices on their side. Given the slowing growth, however, I may trim some holdings back if the price were to reach the $90 per share target. At $90 per share, I feel Dawson would be at the upper range of what could reasonably be expected of this company. In the mid 50s, I may add a few shares as I feel it is a pretty safe bet that they can grow at a 7-8% rate.

Disclosure: Author has a long position in DWSN

Source: Dawson Geophysical 4Q Valuation: Plenty of Upside Left