Executives
Diane Anderson – Corporate Counsel and Secretary
Richard F. Miles – Chief Executive Officer and President
Scott A. McCurdy – Chief Financial Officer and Vice President
Analysts
Pierre Conner - Capital One Southcoast
Neal Dingmann - Dahlman Rose
Collin Gerry - Raymond James
Geokinetics, Inc. (GOK) Q1 2008 Earnings Call May 8, 2008 11:00 AM ET
Operator
Good morning, my name is Christian, and I will be your conference facilitator today. I would like to welcome everyone to the Geokinetics, Inc.'s First Quarter 2008 Earnings and Operations 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 period. (Operator Instructions). This conference is being recorded and will be available for replay approximately one hour after its completion on the Company's web site, www.Geokinetics.com.
I would now like to turn the call over to Ms. Diane Anderson, the Company's Corporate Counsel. Thank you, Ms. Anderson, you may now begin.
Diane Anderson
Thank you, Chris. In accordance with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, Geokinetics Inc. cautions that statements made today in this conference call which are forward-looking and which provide other than historical information involve risk and uncertainties that may materially affect the company's actual results of operations.
All statements other than statements of historical fact made during this conference call that address activities, events or developments that Geokinetics expects, believes or anticipates will or may occur in the future, are forward-looking statements.
These statements include but are not limited to statements about the business outlook for the year, backlog and bid activities discussed during this conference call, related financial performance and statements with respect to future benefits. These statements are based on certain assumptions made by Geokinetics based on management’s experience and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate.
Such statements are subject to a number of assumptions, risks and uncertainties many of which are beyond the control of Geokinetics, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements.
These include risks related to financial performance and results, job delays, impact from severe weather conditions and other important factors that could cause actual results to differ materially from those projected, our backlog not to be completed as described in this conference call or in the company's reports filed with the Securities and Exchange Commission.
Backlog consists of written orders and estimates of Geokinetics services which it believes to be firm. However, in many instances a contractor cancelable by customers so Geokinetics may never realize some or all of its backlog, which may lead to lower than expected financial performance.
A discussion of these and other factors including risks and uncertainties are set forth in the company's Form 10-Q for the three months ended March 31, 2008. Any forward-looking statement speaks only as of the date on which such statement is made and Geokinetics undertakes no obligation to correct or update any forward-looking statement whether as a result of new information, future events, or otherwise.
During this conference call Geokinetics will make references to EBITDA, which is a non-GAAP financial measure. A definition and reconciliation of this non-GAAP measure to the applicable GAAP measure can be found in Geokinetics' current earnings release, a copy of which is located on our website at www.Geokinetics.com.
I would now like to turn the call over to Dick Miles, the company’s President and Chief Executive Officer.
Richard Miles
Thank you, Diane. Good morning and welcome to Geokinetics first quarter 2008 conference call. With me on the call this morning in addition to Diane is Scott McCurdy, our Vice President and Chief Financial Officer.
This morning I will begin by briefly recapping our first quarter, provide an outlook on certain second quarter activity and highlight some of that growth opportunities in 2008. I will then answer questions following our presentation of financial results and discussion of operating activities. I'd also like to remind everyone at this time that we will not be giving guidance.
I mentioned in our last call that I convinced Geokinetics was well positioned for strong growth in 2008. We began to see evidence of this in the first quarter. Highlights for the quarter include total revenue in the first quarter increase to 8% to $120.2 million over last years first quarter, achieving a new company record. In Canada, we operated five crews throughout the quarter in Alberta and Northwest territories, 80% of those on term contracts. This represents a 20% increase in crews over the last year with significant increase in margin. In the United States we operated 8 crews in Central Texas, North Dakota and the Texas Louisiana Gulf Coast region. Again we had an increasing amount of our work coming from term contracts.
In Latin America we operated between 4 to 6 crews each month, primarily in Columbia and Brazil and we also mobilized a crew to Bolivia. Our transition zone crew in Egypt restarted in January and were successfully deployed for the remainder of the quarter. We successfully completed our first project with our ocean ball and cable crew in Australia, the equipment was then redeployed to another client for prequalification trials before we began substantial upgrades in mid-March. We mobilized crews in Bangladesh and Tanzania, and they have now commenced operations. We have commenced crew mobilizations to Mozambique and equipped a new transition zone crew that is currently at work in Australia and is scheduled to be redeployed to New Zealand. We achieved our revenue target and beat our EBITDA projections in our Processing and Interpretation group, resulting in that segment showing a modest profit for the quarter. Demand from E&P companies for better sub-surface images in frontier and harsh environments is strong, and our order book continues to grow. Our backlog at March 31, 2008 was $417 million up from $411 million at December 31, 2007 and $283 million March 31, 2007.
Approximately 56% of our backlog is related to international business, excluding Canada, demonstrating strong market acceptance of our crews operating outside North America. The international marketplace offers substantial opportunities that will continue to support our growth. We have continued to upgrade and expand our data acquisition capability by investing $25.7 million during the first quarter to increase channel count, primarily in international operations. As of March 31, 2008 we have a total channel count of 118,000, an increase 10,000 channels from year-end 2007. Increased channels improve our job productivity, ultimately increasing profitability. I will go into greater detail later on how these factors and further position Geokinetics for growth and strength in the quarters ahead. First however, I would like to turn the call over to Scott McCurdy, our Chief Financial Officer, who will recap our first quarter 2008 financial results.
Scott McCurdy
Thank you, Dick and good morning. Today we will report revenues of $120.2 million for the first quarter ended March 31, 2008, an 8% increase over the $111 million for the same quarter last year. For the three months ended March 31st, 2008, revenue consisted of $61.7 million from North American data acquisition, $55.6 million for international data acquisition, and $2.9 million from data processing.
Direct operating costs of $92.4 million consisted of $47.8 million from North American data acquisition, $42.4 million from international data acquisition and $2.2 million from data processing, resulting in gross margins which exclude non-cash depreciation charges of 23% for North America data acquisitions, 24% for International Data Acquisitions and 24% for data processing during the first quarter of 2008. Overall gross margin declined slightly to 23% in the first quarter of 2008 compared to 25% in the same quarter last year. EBITDA for the first quarter ended March 31st, 2008 was $18.4 million, which was slightly lower than the $18.6 million we reported in the first quarter last year. EBITDA was up over last year and data processing in North American operations, both in the U.S. and Canada. EBITDA from international operations was down compared to the same quarter last year, primarily as the result of a very large data acquisition project that we completed well ahead of schedule last year, resulting in a acceleration of revenue into the first quarter of 2007.
Although this performance was very positive overall, given the jobs of that size and thus revenue generating potential are infrequent, it resulted in it being difficult to duplicate those tremendous results in the current quarter. Excluding the effect of that project, the first quarter of 2008 experienced higher activity levels internationally than the same quarter last year, for the first quarter ending March 31st 2008 we reported net income of $2.6 million or $0.24 per fully diluted share compared to $5.1 million or $0.75 per fully diluted share for the same quarter last year.
Net income was down primarily as a result of higher non-cash depreciation expense associated with the company’s extensive capital investment program to upgrade and expand revenue generating capacity. Capital expenditures for the first quarter were $25.7 million, total debt including our revolving credit line and capital lease obligations at March 31st 2008 was approximately $92 million, which was a decrease of $34.9 million from the same quarter of last year and up sequentially from $79.9 million as of December 31st 2007. At March 31st 2008 our debt made up 31.9% of total capital, marginally higher than the 29.4% of the previous quarter. The sequential increase in debt is primarily a result of investments made in the first quarter as part of our capital investment program. I will now return the call to Dick.
Richard Miles
Thank you Scott and we continue to be optimistic about our growth prospects in 2008 and I should point out however that we do expect to experience a typical seasonal decline in activity in Canada as the winter season winds down. During the winter months we typically operate four to five cruises in Canada when the winter ends. Pro-activity in the revenues from the region typically decline and repair and maintenance costs accelerate. To somewhat mitigate the impact of those cost increases, we have already shift two crews approximately 4,000 channels to Latin America, to support our operations there. In the US, we expect to operate all eight crews during the second quarter although two of our US crews have experienced some weather delays. We expect strong utilization for the remainder of the quarter bearing any further unexpected severe weather.
International demand for our services is high. We currently have 10 crews operating in seven countries and have recently secured contracts to work in three more; Angola, Mozambique and New Zealand.
We continue to invest in equipment and to increase our channel counts during the first quarter we increased our channel count to a 118, 000 channels, up 9% from year-end 2007.
Our capital investments will provide additional revenue generating capacity and greater operational efficiency in the field which we expect will improve margins over the long term. In the first quarter we invested nearly 40% our plans to $65 million capital budget for 2008. We expect that the bulk of our investments will be for international markets and will serve to strengthen our presence in the high value niche of transition zones and shallow water data acquisition. Our order book continues to grow to record levels. At quarter end our backlog totaled $417 million, 47% higher than the $283 million recorded at the end of the first quarter of 2007 but only marginally up from the year-end.
The current backlog does not include a $59 million project in Argentina which was previously included in backlog as starting back in July of 2007. This project has been excluded from the current backlog due to continued delays and uncertainty regarding the timing.
We are however, still in negotiations with that customer. Overall, we're very pleased with our backlog and the quality of opportunities, which provides greater visibility in the future quarters. The long-term business fundamentals for our seismic data acquisition and processing services remain robust as exploration and production companies continue to look to replace their production with meaningful finds, as oil and gas companies increasingly take their search for large oil and gas reserves into even more difficult to operate environments, our expertise operating in frontier and environmentally sensitive areas, transition zones and shallow water, gives us a competitive advantage.
Our international experience and that customer acceptance working in countries outside of North America exposes us to significant growth opportunities unavailable to other companies. We continue to maintain a strong balance sheet to support our growth strategy. We believe we have sufficient cash on hand, cash flow and borrowing capacity to fund our capital investments. Today we have the people, the equipment, and the financial capacity, to fulfill our rising order book.
Operator, that's the end of our prepared remarks. So, I will turn the call back to you.
Question & Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions).
Our first question comes from the line of Pierre Conner with Capital One Southcoast. Please proceed with your question.
Pierre Conner - Capital One Southcoast
Good morning gentlemen.
Richard Miles
Good morning Pierre.
Pierre Conner - Capital One Southcoast
First question is an easy one, on the current backlog now, could you give us international domestics split? And I realize that some of that’s driven by the removal of that one particular job, but currently as it sits, what’s that split?
Richard Miles
Pierre, the split at 331 is $235 million from international operations, which is about 56% and $182 million from North American operations, which is the other 44%. Obviously, the bulk of that North American backlog is the US which is $176 million of the $182 million.
Pierre Conner - Capital One Southcoast
Alright. So that the increase was essentially added in the quarter, all international to offset that the one job coming out?
Richard Miles
Yeah, and that job has not gone away, we are negotiating on it. It's just that the client has got issues with getting his licenses in place and approvals to start. And that has been going on for so long, and we see other opportunities for that equipment that we may not be able to address it. So we just took the conservative approach of taking it out.
Pierre Conner - Capital One Southcoast
No, I understand, that's fine. And this is a clarification question just to make sure I understand the timing because I think this transition grew in Australia is a fairly good swing. Can you just walk through again, when it started working last quarter, how much is it off now, while it's transitioning to New Zealand, if I've got that crew set correctly?
Richard Miles
Well, it just started in New Zealand and we’ll work probably about a month and then transition -- then, move to New Zealand.
Pierre Conner - Capital One Southcoast
Okay, I am sorry, You're saying, it just --
Richard Miles
It got into operatation in the second quarter.
Pierre Conner - Capital One Southcoast
Right okay. So here’s a question on a summing up, and I do appreciate the additional color that you have given us on the crew activity. Yes, it is helpful so you try to get an angle on that, in net net if we add this together we’re down, down to four in Canada but we potentially have the two Latin America. What’s this net crew reduction look like in the second quarter, is there a number to that, guys?
Richard Miles
That’s.
Pierre Conner - Capital One Southcoast
Yeah.
Richard Miles
That really it might be down a crew or two.
Pierre Conner - Capital One Southcoast
Okay.
Richard Miles
But Canada did contribute very strongly to the first quarter.
Pierre Conner - Capital One Southcoast
Sure.
Richard Miles
Though it’s not apples to apples with what has popped out.
Pierre Conner - Capital One Southcoast
Okay.
Richard Miles
And really you didn’t ask this question, but for me the second quarter is going to hinge on good performance in Bolivia, which got started it right at the end of the first quarter but isn’t going quite as fast as we’ve liked. And the big swinger will really be when the OBC crew gets back to work. It’s scheduled, we’ve been rebuilding equipment and putting bigger vessels together which are all due to arrive in Australia this week and should be out in the field in production within the next ten days. If that happens and may do as we do expect, it will be positive. If we had experience delays for any reason that could hurt us a little bit.
Pierre Conner - Capital One Southcoast
Okay, I understand. A few more, the cost associated with demobilizing Canada maintenance on the equipment et cetera. Basically your cost continue or are you seeing there’s some incremental transportation costs that you are paying for plus incremental maintenance cost. So will cost actually sequentially increase like on a per crew day basis?
Richard Miles
No it’s really shutting down the crew, so you have lost the revenue stream. But since those crews only work for three months, we do very little repair on maintenance during that quarter because we’re just running all that equipment as hard as we can. So there are costs associated with that in the second quarter. So we have the cost of the repair and maintenance but we have no income to offset it.
Pierre Conner - Capital One Southcoast
Okay. Right, the last one and a little more general. I think from just this morning with Dawson’s call, we’d start with the premise in North America there’s not a pricing trend. And I understand it’s hard and difficult to separate that from any other bid parameters, but internationally in can you tell us is there a pricing trend with the demand either way?
Richard Miles
It’s more matter of that we are able to get better contract terms internationally, so we’re better protected and the margins, the pricing is good. In the US the market is strong and the pricing is good here too.
Pierre Conner - Capital One Southcoast
The margin expansion is possible without pricing really in both markets.
Richard Miles
Yes for us that’s definitely the case.
Pierre Conner - Capital One Southcoast
Yeah, okay. Alright let me see if there’s someone else in the queue and some other questions. Thanks gentlemen.
Richard Miles
Thank you.
Operator: Our next question comes from the line of Neal Dingmann with Dahlman Rose. Please proceed with your question.
Neal Dingmann - Dahlman Rose
Good morning guys.
Richard Miles
Good morning.
Neal Dingmann - Dahlman Rose
Say Dick, as you were laying out a lot of your plans especially it sounds like the activity in Latin American and some of your other international areas sure sound like you are going to pick up. Is your way to sort of generalize for the average job, will the channels per crew and just the size of the jobs, do you see those as becoming larger? Or what are you envisioning there versus what you have had currently or what you see domestically?
Richard Miles
I would say, outside of Colombia that is quite true because the jobs that we go after outside of Colombia typically are in the 4000 to 6000 channel range. And having said that, the one in Bolivia has got 8,500 channels on it. But the crew size, the job sizes are probably in the $12 million to $20 million range that make it worth that while to go to some of these other countries, such as Bolivia. In Colombia, because we're so established and well-organized, we do jobs anywhere from $2 million to $20 million, and the channel count there goes from 1000 to typically 6000. But again, internationally we do everything ourselves, so we get surveying and drilling as well as recording. We've got over 50 man-portable drills in Columbia that we apply to jobs as needed to keep them running efficiently.
Neal Dingmann - Dahlman Rose
What about the new Australian job? Do you see more of those coming, or is this more at least a one-time off for the time being?
Richard Miles
No, that's as far as the transition zone crew that we've got in Australia, that is one specific job that we were direct awarded by a company there. And really, we are just doing a test to prove the concept for a much larger job next year. But we only set that crew up because we see continued opportunities for it. So we have a lot of opportunities in New Zealand, and then there are several things in the pipeline which will determine whether that crew ends up in Latin America or somewhere in the Far East.
Neal Dingmann - Dahlman Rose
Okay. And then, Dick, how aggressively will you go after some of the new -- I know maybe Pierre alluded to it on the Dawson call; they were talking about a lot of the new plays domestically, obviously with the Haynesville Shale, the different things, the Appalachian, Rockies, etcetera. How actively in the domestic front will you go after some of these newer plays?
Richard Miles
Well, as you notice, in the domestic market, our backlog continues to increase. We are seeing very strong activity. We're bidding all of these jobs, obviously to improve our operations in the U.S. And our backlog continues to grow, so we're very interested in that market as well. Probably the only reason we have not added another crew is because we see a lot more potential internationally than in the U.S. As our backlog grows and we tell our customers that we can't get to that job until this date, at the time we start losing jobs because of our inability to get to a job in a timely manner, we would probably consider adding another crew. But that hasn't happened yet.
Neal Dingmann - Dahlman Rose
Okay Looking forward to all the growth].
Richard Miles
Thank you.
Operator
Our next question comes from the line of Collin Gerry with Raymond James. Please proceed with your question.
Collin Gerry - Raymond James
Yeah, thanks. Good morning, guys. I had a quick question on the North American performance this quarter. How much of the jump in revenue and profitability, for that matter was U.S. driven versus Canada?
Scott McCurdy
Collin the jump was majority from Canada. We ran about one to two, just for a short number of crews in Canada in the fourth quarter, and we pretty much ran five all of the first quarter. So everybody was up but the majority of the increase is in Canada.
Collin Gerry - Raymond James
And then I guess on the increase in activity in Canada probably be at a much higher profitability just as you kind of leverage the fixed cost in the region and so forth.
Scott McCurdy
That’s right you did get a premium in the first quarter and the much more competitive landscape from work in Canada the other quarters of the year.
Collin Gerry - Raymond James
Okay so the implication would be that the next quarter the seasonality you might take a preferred ding on the North American revenues, much like we’ve seen in the past and especially if you go back to the last quarter. The last second quarter for you guys last year net revenues were around $32 million or so, maybe up a little bit with the increase in US. But maybe not meaningfully higher than that level, not to pin you on a guidance but just kind of directionally?
Richard Miles
I think you know the comment on Canada, we’ll go from 5 crews to hopefully keeping one busy for as much as we can in the second quarter. But the flip side of that is basically one and half crews worth of equipment that operated in Canada in the first quarter is in route to Bolivia to help start up our operations there. The next job that we’re doing there requires more channels, so that will mitigate it some, but certainly within North America we’ll see the drop of because of the Canadian crews. And depending how quick that equipment can get into Bolivia and up in running will determine how much of it, if any, we can mitigate that internationally.
Collin Gerry - Raymond James
Okay that is helpful. I guess second point, a little bit of the house keeping. On the depreciation line, that came in quite a bit higher than my model and I think my mistake there is I might have underestimated how much you were going to spend of that CapEx in the first quarter. But it’s kind of tough and there is a little bit of variability in the numbers there. Could you give us kind of a quarterly run rate as to what we see on the depreciation side? Should it be around the $11 million range? Should we see it rise meaningfully as we complete the CapEx planned through the end of the year?
Scott McCurdy
Well I think let me answer that in two pieces. The first question of it rising versus last quarter, if you look at our last three quarters, including 1Q ’08, we have added about $90 million of equipment and $6 million of that obviously here in the first quarter of 08. Sometimes when that actually gets delivered, it takes a month or two to actually get in service. And so a lot of that, $90 million, or say I would say that roughly $62 million or so that happened in the last two quarters of 2007. A lot of that wasn’t depreciating yet in the fourth quarter and either kicked in either late fourth quarter or y this quarter, as it actually got placed in service.
Collin Gerry - Raymond James
Okay
Scott McCurdy
That’s kind of driving it up sequentially, looking forward obviously 40% of our plan we spend in the first quarter and fairly evenly throughout. You are going to see some additional depreciation from that going forward. We do plans to another $40 million or so for the rest of the year or so, not quite at the levels that we have spend probably the last three quarters so probably not as big of increases. But we are still investing in new capital.
Collin Gerry - Raymond James
Okay, also on the house keeping front and I apologize if I missed this, what was your cash balance at the end of the quarter.
Scott McCurdy
Cash balance was $23.2 million.
Collin Gerry - Raymond James
Okay. And then last question, I will turn it over --
Scott McCurdy
$23.8 million.
Collin Gerry - Raymond James
$23.8, okay. Thanks. On the channel count, you give us the total. Could you break apart that internationally in North America for us? Sorry, to make you go digging through all your notes there.
Scott McCurdy
Collin, we've got about, at the end of March, we had about 73,000 channels in North America and the remainder internationally.
Collin Gerry - Raymond James
Okay, that wraps up for me, thanks guys.
Richard Miles
Okay, thank you.
Operator:
Mr. Miles and Mr. McCurdy, there are no further questions at this time. I’d like to turn the floor back over to you for any closing comments or remarks that you may have.
Richard Miles
Okay, I would like to take this opportunity to thank our employees for their continued commitment to safety, quality, and support, of our growth plans. And our customers and shareholders for their continued support. If anyone has any additional questions or comments, please feel free to contact either Scott or me, and we'll be happy to try and assist you. Thank you.
Operator
This concludes today's teleconference. You may disconnect your line at this time. And thank you for your participation. May you all have a great day.
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