Dawson Geophysical's (DWSN) CEO Stephen Jumper on Q4 2017 Results - Earnings Call Transcript

Dawson Geophysical Company (NASDAQ:DWSN) Q4 2017 Earnings Conference Call March 1, 2018 10:00 AM ET

Executives

James Brata - CFO, Executive VP, Treasurer and Secretary

Stephen Jumper - Chairman, CEO and President

Analysts

Marshall Adkins - Raymond James

Operator

Good day, and welcome to the Dawson Geophysical Fourth Quarter and Year-End 2017 Results Conference Call. 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 13, 2017. Furthermore as we start this call, please also refer to the statement regarding forward-looking statements incorporated in the company's press release issued this morning. And please note that the content of the company's conference call this morning is covered by those statements.

During this conference call, management 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 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. As a reminder, this conference is being recorded.

I would now like to turn the call over to Steve Jumper, Chairman, President and CEO of Dawson Geophysical Company. Please go ahead, sir.

Stephen Jumper

Thank you, Don. And good morning, and welcome to Dawson Geophysical company's fourth quarter and year-end 2017 earnings and operations conference call. As Don 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 we start the call, just a few things to cover. If you 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, March 1, 2018, and therefore, you are advised the time sensitive information may no longer be accurate as of the time of any replay listening.

Turning to our preliminary fourth quarter financial results. We are encouraged by our second-half year-end results that we finished the year with positive full year EBITDA of $2.5 million. We overcame a negative EBITDA of $7.3 million for the first half of 2017 by generating positive EBITDA of $9.8 million during the second half of '17.

Operating revenues increased 30% to $39.1 million in the fourth quarter of '17 as compared to $30.1 million for the same period in '16. During the fourth quarter of 2017, as anticipated, we experienced a temporary decline in crew utilization, primarily due to project ready this issues. We begin the fourth quarter operating 7 crews in the U.S. and 2 in Canada and ended the quarter operating 6 crews in the U.S. and 3 in Canada.

The fourth quarter in the U.S. historically, has been challenging due to shorter workdays and holiday season. We are currently operating 7 crews in the U.S. based on currently available information, we anticipate operating up to 7 crews in the U.S. in the third quarter of 2018, completing 2 U.S micro seismic project during the first half of 2018 and operating in 4 crews in Canada through the end of the winter season, which conclude that the end of the first quarter of 2018.

Despite the improved operating environment, we've continue to maintain a conservative approach at Dawson Geophysical. We remain committed to maintaining a strong balance sheet and positioning ourselves, as the leader of onshore seismic data acquisitions services in North America.

I will now turn control of the call over to Jim Brata, who will review our financial results. Then I'll return for some final remarks and our outlook going in the fourth quarter of '18. Go ahead, Jim?

James Brata

Thank you, Steve, and good morning. Revenues from the fourth quarter for 2017 were $39.1 million, up 30% compared to $30.1 million for the quarter ended December 31, 2016. As stated in our earnings release issued this morning, the company begin the fourth quarter operating 7 crews in the U.S., and 2 in Canada and ended the quarter operating 6 crews in U.S. and 3 in Canada.

The fourth quarter in the U.S. has historically been challenging due to shorter workdays and the holiday season. The company is currently operating 7 crews in the U.S. based on currently available information the company anticipates operating up to 7 crews in the U.S. into the third quarter of 2018, and completing 2 U.S. seismic projects during the first half of 2018, and operating 4 crews in Canada through the end of the winter season, which concludes at the end of the first quarter of 2018.

Cost of services in the fourth quarter of 2017 was $31.5 million compared to $27.5 million in the same quarter of 2016. General and administrative expenses were $30.9 million in the fourth quarter of this year compared to $3.6 million in the same quarter of 2016. Depreciation and amortization expense in the fourth quarter of 2017 was $9.5 million compared to $10.3 million in the same quarter a year ago.

Net loss for the fourth quarter for 2017 was $4.5 million or $0.21 loss per share as compared to a net loss of $7.2 million or $0.33 loss per share in the same quarter last year. We recorded an income tax benefit of $680,000 in the fourth quarter of 2017 compared to an income tax benefit of $2.7 million in the same quarter a year ago.

EBITDA in the fourth quarter of 2017 was $4.3 million compared to EBITDA of $313,000 in the same period a year ago. An EBITDA reconciliation was provided in our earnings release issued this morning.

Now I will briefly highlight some full year results. Revenues for 2017 were $157.1 million, an increase of 18%, as compared to $133.3 million in 2016. As for services for 2017 were $139.2 million compared to $121.7 million last-year. As a percentage of revenues, cost of services were 88.6% in 2017 compared to 91.2% in 2016.

Gross Profit for 2017 was $18 million compared to $11.7 million in 2016. Gross margin in 2017 was 11.4% compared to 8.8% in 2016. General and administrative expenses were $16.2 million in 2017 compared to $16.8 million a year ago.

Depreciation and amortization expenses in 2017 was $39.2 million compared to $44.3 million in 2016. We reported a net loss of $31.3 million or $1.44 loss per share in 2017 compared to a net loss of $39.8 million or $1.84 loss per share in 2016.

EBITDA for the full year of 2017 was $2.5 million compared to a negative EBITDA of $2 million in 2016.

Now I will highlight some balance sheet items. Our balance sheet remains strong. As of the end of the fourth quarter of 2017, we had debt, including obligations under capital leases of approximately $7.9 million, cash and short-term investments of $38.6 million, our current ratio was 4.3 to 1 and finally, working capital was approximately $59.3 million.

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

Stephen Jumper

Well, thank you, Jim. As stated in our earnings release issued this morning, while we continue to experience lower than historical demand in the somewhat difficult environment. We in Canada moderate increase in demand for our services for the year 2017, when compared to 2016.

This resulted an improved productivity and crew utilization primarily during the second half of the year. The recent rise in oil prices combined with forecast in oil prices increase through '18 has resulted an increased demand for our services and brought a better return to positive EBITDA.

At the same time, the oil and gas industries the new focus on profitability, as well as production growth as further general increase and request for proposal. As more E&P operator seek to lower drilling and completion cost, as well as maximized production through the integrated use of seismic data into their development plan.

While still well of the demand levels and experienced in 2015 in prior years, the recent increase in bid activity is encouraging. As we experience in the third quarter of 2017, the majority of our projects continue to be driven by multi-client data library [ph] companies the model we do not actively participate in, but we do serve at the contractor for several and largest providers.

The competition between various multi-clients providers continues to remain strong and affects projects, timing and seismic programs that put together with multiple participants, a situation which is beyond our control. It is our belief that the seismic data acquisition activity will increase in producing basins outside of the Permian and the Delaware. The primary areas of activity in the U.S. as commodity prices improve in those basins become more economic.

As reported during the third quarter of 2017, the company's Board of Directors improved and increase in our capital budget from $10 million to $16 million in response to an attractive opportunity to acquire 19,000 units of multi-competent seismic data acquisition equipment, including 57,000 additional cable-less recording channels to better serve our valued clients in both the U.S. and Canada.

We believe that we feel the largest fleet of multi-tech component equipment in North America, which continues to be fully deployed. We now own and operate nearly 250,000 cable-less recording channels, which provides a competitive advantage enabling us to respond to client demand quickly and efficiently.

With nearly 250,000 cable-less recording channels, we believe, it is the largest fleet of cable-less channels in North America. As Jim said, our balance sheet remains strong with $35.6 million of cash and short-term investments, working capital of 52.3 - excuse me, $59.3 million. We have capital lease obligations totaling approximately $7.9 million as of December 31, 2017.

In closing, management has an optimistic outlook for 2018 provided the oil prices remain or maintain at current levels. As stated earlier, while the Permian and Delaware basins remain the primary areas of activity, we are beginning to see a modest uptake in bid activity and interest levels outside of those regions.

We continue to be well positioned to meet the needs of our shareholders and clients, as we deliver the best-in-class, high-resolution, subsurface images that enable our clients to reduce costs and improve operating efficiency.

And with that, Don, I believe, we are concluded with formal remarks and are ready for questions, sir.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] And we'll take our first question from Marshall Adkins with Raymond James.

Marshall Adkins

Good morning, Steve. Before I get started with questions, I just want to note the passing of Mr. Dawson, we sure will miss him and he was the industry icon who build the hell of a company. So I guess

Stephen Jumper

Thank you. Go ahead.

Marshall Adkins

I guess, I don't get to pick on him on this call, so I'm going to pick on you, with a few extra questions here.

Stephen Jumper

He is certainly handled it better than I do. But that is a - thank you, Marshall for that. He did pass February 6, and he was as most people listening now just a wonderful individual, great industry leader and a tremendous man in the community and family man, so thank you for that, Marshall.

Marshall Adkins

You bet. All right, So we've heard a lot of companies that are reported talk about weather particularly in taxes, you mentioned your project readiness, kind of, slow things down little bit. How big of a deal is weather this quarter for you?

Stephen Jumper

I don't think weather was a huge impact, Marshall. The most of the areas where we were operating, we're primarily in West Texas and certainly in the areas that we were operating I don't think the weather was any more than impacted normal for us.

Marshall Adkins

All right. So you have the problems of project readiness, but you put up better margins than we've been seeing. So what's going on there, was it a mix issue or have you - was it just better utilization with better throughput? Or you streamlined cost? Help me understand what happened? Why margins are so much better? And I guess more importantly, how sustainable do you think those are going forward?

Stephen Jumper

Okay. Now are you asking me to look forward.

Marshall Adkins

Yes.

Stephen Jumper

Nice move. First of all, I would remind in regards to margins, certainly, our gross margins on the back half of the year significantly improved with from single-digits or negative up to upper teens, close to 20. That - the back half improvement was clearly, utilization crew deployment those types of things.

I would comment that something we probably haven't talked about enough here in recent quarters is that, we carry a third-party reimbursable charge in both our revenue and expense line. Historically, that reimbursable level as a percentage of revenue has been 25% to roughly 35% of our total revenue line.

I think we've been in that range certainly for a while, but I think here in the last half of the year, we were probably the lower end of that range and so that can affect, the margin level at some point.

With regards to the drop in utilization in the fourth quarter, these projects that we've talked about are very large in the scale these days. They are typically hundreds of square miles in scope. We have one in particular that's roughly a 1,000 square miles in scope.

And so when we're working for a multi-client provider and they are putting together several operators to get that project going, sometimes that can just put a hiccup in the schedule. And so, I think we experienced a little bit of that in the fourth quarter, just projects from permit standpoint weren't ready and so we had to pull-off.

In regards to the efficiency question, I think we're certainly better at that as a company. We've talked about this for several years, this channel count expansion just continues to grow. It's not uncommon for us to have 15, 20, 25,000 channel per crew today, whereas 2 years ago they would be in the 10 to 15 range. And before that, they were in 5 to 10 range.

And So I think, logistically we're doing a much better job of keeping equipment assets moving, where we're maximizing actual recording time. I think we're doing some things with the fewer people on a per crew basis. So I do think there are some efficiency in throughput that will - that's in the system. Just overall logistics improvement.

Going forward, I am very optimistic. I still don't think that we have hit what I would consider full stride. We still have with our channel count level the way it is. Our ability to get out of ahead of next project and have equipment on the ground and ready to go as a prior project is finished. That's where there really can be some difference made in that.

While we have done a much better job through circumstances and operationally we've improving that, we still haven't hit that stride where we're really not just maintaining crew utilization, but real strong crew efficiency.

And so given steady all price and given steady demand as we're currently experiencing, I will remind you that it's not record-setting, it's not like it was in '13, '14 but it's certainly improved, I think there is certainly upside in what we can do.

Marshall Adkins

So when we get into the summer months, you're going to have more daylight hours that helps you, may be some of these projects readiness things fades, so it sounds like that helps your margins modestly.

How big of a deal is the Canadian fall of in the second quarter? I'm trying to think how we should model and think about that sounds like it keeps getting stronger as we go into the second quarter, but we all need to make sure the model a falloff in the second quarter from Canada, is that the right way to think about it?

Stephen Jumper

Historically, Marshall, we don't have as Dawson Geophysical a long history in Canada. Now we had a small Canadian operation for about 2012 until the merger with TGC in 2015. And our Canadian operation never - honestly never was much of an impact on our on Dawson's financial.

Now on the TGC side with their brand Eagle Canada up in the Canadian market, you would see if you go back and looked at TGC standalone financials prior to the merger in 2015, you would see a significant impact of both revenue and EBITDA in their Q1.

The Canadian market post-merger for us is still well behind I would say any improvement as opposed to what little bit of improvement we're seeing in the U.S. So I would say, where we are today that the Canadian market for a variety of metrics is not as strong as it has been in the past and has not recovered even to the level that U.S. has. So I would not expect that drop of after Q1 to be as impactful as it would have been in prior years for little bit legacy TGC financials, if that make sense.

Marshall Adkins

Okay, all right. So you had this move up in oil prices, normally the rig count lags in moving oil the prices by 4, 5 parts, is that similar in your business, because I certainly sense more optimism from you in terms of the outlook increase et cetera. And wondering that across 4 rigs and everything else, but is that the same kind of lag that we should think about between an oil price move and when your customer actually gets your crews active?

Stephen Jumper

Two points there, Marshall. And I hope I can articulate it the right way. I think in the last several years, we've probably been as an industry somewhat disconnected from the rig count movement. The seismic activity has been so scattered that I don't necessarily think there has been a very strong correlation with rig count and certainly not like it was back, let's say, 15 years ago. Our lead time on its own, within our industry is 3 to 6 months, anyway.

And so if the project hits the door today, it is very rare that a project hits the door that is ready, and if you are a drilling contractor or pressure pumper, you typically have plenty of locations to go to in an up and moving market. We typically have a lead time of 3 to 6 months, just to get the job permitted and ready and so. We don't really know what that lead-time change is going to be going forward. We have better visibility in the U.S. right now, that we had last year. We have visibility of up to 7 through well into the third quarter.

There are some projects out there that feels like there are making some progress. Particularly, in may be some areas outside the basin, the Permian and Delaware basins. And so we are optimistic. We're certainly feel like we are in a better position than we've been in. But there is still some lions and tigers and bears out there that we are watching closely.

Marshall Adkins

Last question for me. I asked on most calls, but I'm going to keep asking. Update us on the competitive landscape, number 1, and number 2, you mentioned micro seismic in kind of increasing activity relate to that. Is that a trend that we should expect to continue. So competitive landscape and give us some commentary on micro seismic in your outlook for that is, in terms of its relevance going forward?

Stephen Jumper

Sure. The market continues to be a very competitive market. Unfortunately, years ago, [indiscernible] geophysical moves and some other entities would actually tracked the best of their ability, some level of crew count activity and so there's not a something like to Baker Hughes for rig count, that has that.

So we do have to based out on what we know. And I think our market share is still stays in North America somewhere around 50% range, something like that based on active crews. There is no question that the geophysical industry has gone through some real serious shakedowns and issues in the last 3, 4 years, and we're fortunate enough to be in the position that we are in. But they are continues to be very competitive market even with the fact that you have to consider that even now things are improving all across the oil patch E&P companies are still very cost sensitive and still working on spending dollars is still an important thing for them.

So we continue working regardless of the number of competitors. But there is still solid competition out there, most of its private from a public standpoint, there's is 1 or 2 better out there, but Slumbered [indiscernible] asked a few weeks back for example the Dave gotten out of the seismic bar or seismic operation worldwide and so we'll see how that's not could be an impact in the states, we'll see what happens in the Marine world and the international world.

We are clearly in a great position financially from an equipment standpoint and from a people standpoint, client relationships, but we still going to have continue to provide high-quality services our client base stay in the game and we are well aware of that. Micro seismic recording is interesting. We deal strictly in the surface micro seismic recording world, and so we are putting sensors on the ground and listing to hydraulic fracturing.

That as opposed to others that are doing it from well bore-to-well bore. There is a host, whole host to companies that do whole micro seismic. I think it's an improving technology. I think it's something that more and more operators are beginning to utilize, helps them understand where energy may be going from the frac and if they are losing with seismic example, if you are losing fluid or something then we can generally in some areas, kind of, tell you okay, you are in a false here, and it's going up its false plan.

And so whether or not people are actually adjusting fracturing plans as they frac well is still yet to be determined. We're start to do some of those in real time, where we are giving information to the opt [ph] to the pressure pumping company within 10 to 15 minutes after recycle. It's primarily Eagle Ford for us and SCOOP's STACK [ph] unfortunately, as an industry we have a little bit difficult time having a whole a lot of success with micro seismic activity in the Permian and Delaware.

The signals, the noise ratio and geology just makes it difficult. I tell people single noise ratio is like talking on your cell phone, if you're in a very quiet environment, you can hear the conversation well, but you are outside in the wind, you have a hard time picking-up on the conversation, even though the phone is transmitting strong signals.

Well if you think about - if you take that very crew [indiscernible] and apply to micro seismic of the Permian, Delaware scanner talking in the wind and Eagle Ford's group STACK or talking in a quiet room. So I think there's some upside there and there is some potential. And we're going to have a find a way that the industry of the side, side improved that product in the Permian.

Marshall Adkins

Well there is a lot more wind in West Texas. Steve, thank you for your insights.

Stephen Jumper

It blows every day here. So I appreciate it. Thank you. Thanks, Marshall.

Operator

We'll take over next question from William [indiscernible]

Unidentified Analyst

Great. Hi, Steve. How are you doing?

Stephen Jumper

Good. How are you Bill?

Unidentified Analyst

I am doing, okay. You answered my question with uncompetitive landscape and you pretty much covered that with Marshall Q&A part there. But a few years ago, talking about your end customer base used to they have about 50-50 split between independents and super independents in the majors. What does that look like today? Is that any change in - does it vary by basin or could you give me a little bit color on that split?

Stephen Jumper

Sure. I would say that the majority of our work today is with the multi-client data library providers. Now the companies that are behind those projects that are very large in scope are companies of all sizes. You've got some majors that are participating in those surveys. You have got the large public [indiscernible] independence that are participating in those surveys, and then you have some of the smaller private independent operators. And so when you look through the lands, the multi-client library Bill, I think it is fair to say that makes continues to be in play.

When you think about the Permian and the Delaware and what happened in the last 5 years or so, is the individual operators have taken very large lease positions. And the lease position typically not contiguous. They are typically interlocked with another operator and so in order for them to get an image over their area that the colonists image to help them with your geo hazards as well as Geo steering, that got our acquire survey that they may only own 30% of the acreage.

And so they have got to cover offset operators. And so the multi-client guys are do a good job of company and putting together those multiple operators into one shoe that hopefully, gives the whole group the data that they need and so we still do proprietary work for whole host of companies. But I would say them majority of our work for the multi-client guys and behind them are operators of all sizes including up to measures.

Unidentified Analyst

I would think the margins associated with your participation in a multi-plant data library area is less than the old days when you used to have just proprietary deals with the end of dark patches or the majors? Is that a fact?

Stephen Jumper

It's all market-driven, Bill. The - we're still in a very tough market. Pricing is, although we don't talk a lot about pricing, there is no doubt that there continues to be pressure on pricing. All across this phase. I mean, particularly seismic size. There is still a competition for dollars. More companies are utilizing seismic data to aide in their plans.

However, there is still continues to be a lot of drilling activity. And so I think from a margin perspective, I don't think given the market where it is today. I don't think there is a whole lot of difference. I think that certainly from the user side there getting more data for the same dollar on the E&P side. And the advantage to the multi-client project is there a scope, and there's a good news is there big project, the bad news is there a big project.

The good project and that are big enough that usually get on and you got running room for several months of a crew [indiscernible] with a hit of stride, the bad news is, because of their size, sometimes they flip in the schedule which [indiscernible] just some utilization standpoint. The thing it is really missing in the market right now, is that mid of size 3D survey that are great to have when the fill-in gas on large projects, that market has not reemerged. That market probably has a better chance to reemerging it today out size of the Permian and Delaware, which tends to be driven by very large land position.

And so I would say at the end of the day, the thing that would probably need to - that would really help as a reemerging of the small- to mid-size 3D survey, which is not there at this point of time.

Unidentified Analyst

Thank you.

Stephen Jumper

Thanks, Bill.

Operator

We'll take over next question from Richard [indiscernible] Partners.

Unidentified Analyst

Good morning. There has been a rediscovery in P-sector about a parent-child interference in wells, sort of, down other child has degrading relative to the parent you are. Is that having an effect on micro seismic use? Or any other effect on seismic?

Stephen Jumper

I can't answer that question. I am certainly not an expert in that area. So I am really don't have a good answer for you. I guess, I really don't understand.

Unidentified Analyst

I don't either. But it occurred when everyone was talking about the micro seismic that might seem to apply if you want to measure the link of the frac and weather it's getting over into the next child grow or into the parent well or what ever

Stephen Jumper

Yes, yes, yes. Now I'm with you. Yes, I think that's particularly when you are looking at the, first of all, let me apologize for not understanding the question.

Unidentified Analyst

I don't understand it either. I am ...

Stephen Jumper

And let me apologize for answering the question I probably should understand the wrong way. But here what I think you're asking is, you have got a complex lateral that is let's say either STACK or staggered or both or just same client and you want to frac those wells. As I understand it, I am buying no means an expert, you don't want communication between the 2 wellbores.

So well, I think there is a whole lot of engineering that goes into that. I do think that micro seismic particularly some of the basins we have been in. I believe you can see to a certain level the extent of a how far they frac in. Did you get them far enough over - and had a greater reach but not so far that you communicated an adjacent well bore.

And we have actually been involved with some realtime examples where people have actually may be changed the not the frac parameters within the well bore, but maybe change the order in which the frac to maximize energy movement. So yes, I think that's part of the intent for both whole and service micro seismic. But I am by no means an expert in that area and so I don't know if I put a whole a lot of stock in my comments.

Unidentified Analyst

Okay. Thank you

Stephen Jumper

Thank you, sir.

Operator

That concludes today's question-and-answer session. At this time, I will turn the conference back to Mr. Steve Jumper, for any final remarks.

Stephen Jumper

Well, Thank you, Don. I appreciate everyone taking the time and listening to over fourth quarter year and conference and operations update call. Earnings and operations update call. Obviously, we're very pleased with our second half of '17 results, we overcame that we stated very large deficit in the EBITDA range. We will just conclude with we are optimistic.

We feel better about the market and we would remind everybody that the market remains challenging. And that things can change very rapidly. I want to express my appreciation for our great employee base, there continues to improve our product and work hard every-day for our shareholders and our clients. Certainly want to thank our shareholders for they're continued support and I want to thank our clients for their trust and our services. And we look forward to talking to you again, probably sometime in May, with our first quarter results. Thank you for your time.

Operator

This does conclude today's conference. Thank you for your participation. You may now disconnect.