Dawson Geophysical's (DWSN) CEO Stephen Jumper on Q1 2018 Results - Earnings Call Transcript

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About: Dawson Geophysical Company (DWSN)
by: SA Transcripts

Dawson Geophysical Company (NASDAQ:DWSN) Q1 2018 Earnings Conference Call May 3, 2018 10:00 AM ET

Executives

Stephen Jumper - Chairman, President and CEO

James Brata - Executive Vice President and Chief Financial Officer

Analysts

Marshall Adkins - Raymond James

John Potratz - Researched Investments

Garrett King - Truffle Hound Capital

Operator

Good day, and welcome to the Dawson Geophysical First Quarter 2018 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 of 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 9, 2018.

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 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. Today's call is being recorded.

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

Stephen Jumper

Well, thank you, Paula. Good morning, and welcome to Dawson Geophysical Company's first quarter 2018 earnings and operations call. As Paula 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 begin the call, we have a few items to cover. 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, March 3, 2018. And therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay listening.

Now turning to our preliminary first quarter results. We are encouraged by the results of our last 3 quarters, as we generated strong EBITDA results during that time. The company reported EBITDA of $7 million for the quarter ended March 31, 2018, as compared to a negative EBITDA of $1.9 million for the quarter ended March 31, 2017. Operating revenues increased 18% to $49.9 million in the first quarter of '18, as compared to $42.4 million for the same period in 2017. The company began the first quarter operating 6 crews in United States and 4 in Canada. And ended the quarter operating 8 crews in the U.S. and 4 in Canada. The company experienced a stronger-than-anticipated Canadian winter season, which is now concluded, after encountering temporary weather delays earlier in the quarter. The company is currently operating 6 crews in the U.S. Based on currently available information, the company anticipates operating up to 7 crews into the third quarter of 2018. Despite the improved environment, market conditions remain challenging and we continue to maintain a conservative approach at Dawson Geophysical. We remain committed to maintaining a strong balance sheet and positioning ourselves as a leader of onshore seismic data acquisition services in North America.

I will now turn control of the call over to Jim Brata, who will review the financial results. Then I will return to some final remarks and our outlook into the second quarter of '18. Jim?

James Brata

Thank you, Steve, and good morning. Revenues in the first quarter of 2018 were $49.9 million, an increase of approximately 18% as compared to $42.4 million for the quarter ended March 31, 2017.

As stated in our earnings release issued this morning, the company began the first quarter operating 6 crews in the U.S. and 4 in Canada. And ended the quarter, operating 8 crews in the U.S. and 4 in Canada. The company is currently operating 6 crews in the U.S. Based on currently available information, the company anticipates operating up to 7 crews into the U.S. -- in the U.S. into the third quarter of 2018.

Cost of services in the first quarter of 2018 was $38.8 million compared to $40 million in the same quarter of 2017. General and administrative expenses were $4.1 million in the first quarter of this year compared to $4.4 million in the same quarter of 2017. Depreciation and amortization expense in the first quarter of 2018 was $8.7 million compared to $10.2 million in the same quarter a year ago.

Net loss for the first quarter of 2018 was $1.7 million or $0.07 loss per share as compared to a net loss of $9.2 million or $0.40 loss per share in the same quarter last year. We recorded an income tax benefit of $31,000 in the first quarter of 2018, compared to an income tax benefit of $2.8 million in the same quarter a year ago. EBITDA in the first quarter of 2018 was $7 million compared to negative EBITDA of $1.9 million in the same period a year ago. An EBITDA reconciliation was provided in our earnings release issued this morning.

And now, I'll highlight some balance sheet items. Our balance sheet remained strong and at the end of the first quarter of 2018, we had debt, including obligations under capital leases of approximately $7.5 million. Cash and short-term investments of $35.2 million, our current ratio was 3.4 to 1. And finally, working capital was approximately $60.7 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, we encountered a moderate increase in demand in our services for the year 2017 and through the first quarter of 2018, as compared to 2016 demand level. This resulted in improved productivity and crew utilization, primarily during the second half of '17 into the first quarter of '18. The recent rise in oil prices, combined with forecasted oil price increases through '18 has resulted in increased demand for our services.

At the same time, the oil and gas industry's renewed focus on profitability as well as production growth has further drawn an increase in requests for proposals as more E&P operators seek to lower drilling and completion costs as well as maximize production through the integrated use of seismic data into the development plans. While still lower than demand levels experienced in 2015, recent increase in bid activity is encouraging. As we experienced during the second half of 2017, the majority of our projects continue to be driven by multi-client data library companies, a model we do not actively participate in, but do serve as a contract for several of the largest providers.

The competition between various multi-client providers continues to remain strong and affects project timing, as seismic projects are put together with multiple participants, a situation which is beyond our control. It is our belief that seismic data acquisition activity will increase in producing basins outside of the Permian and Delaware basins, their primary areas of activity in the U.S., if commodity prices continue to improve and those basins become more economic. The company Board of Directors approved a 2018 capital budget in the amount of $10 million. Capital expenditures for the first 3 months of 2018 were $4.4 million, primarily for replacement vehicle and seismic data acquisition equipment. The company's balance sheet remained strong with $35.2 million of cash and short-term investments and working capital of $60.7 million. The company has notes payable and capital lease obligations of $7.5 million as of March 31, 2018.

In closing, while market conditions remain challenging management has an optimistic outlook for the remainder of 2018, provided the oil prices maintain or improve on current levels. As stated earlier, while the Permian and Delaware basins remain the primary areas of activity, we are beginning to see a modest uptick in bid activity and interest levels outside of those regions. Dawson continues to be well positioned to meet the demands of our clients and our shareholders, as we deliver the best-in-class, high-resolution subsurface images that enabled our clients to reduce cost and improve their operating efficiencies.

And with that, Paula, we are ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Marshall Adkins with Raymond James.

James Adkins

Mr. Jumper, a lot of companies have been talking about weather impact from the quarter, particularly Permian Basin guys and whatnot. I didn't hear a lot from you or didn't read a lot on the impact of weather here, on your operations. And obviously, given what you do weather can be a big factor. Tell me what's going on there? Or maybe there was weather, and you just didn't mention it?

Stephen Jumper

We, I don't recall, Marshall, weather being a big huge impact on our operation in the U.S. The, we did have some weather impact early in the quarter with some of the storms that moved in on the East Coast. And particularly, the Northeast up by Canada. We had a little bit of trouble with getting some people back from the East Coast, which is where a lot of our workforce comes from, but, as I recall, having quite a bit of cold weather that could affect other types of operations, but I really don't recall having a huge weather impact related to rain or anything like that for us. Nothing that we would've considered in the quarter outside of normal.

James Adkins

Right. So, you've had -- seems like a lot -- with the rising oil prices, a lot more inquiries, your tone was a little more upbeat than I've heard you in quite a while. Give me a little bit more color on what's going on there, kind of, geographically and help me to understand what your sales guys are telling you on inquiries?

Stephen Jumper

You know it's been -- we had certainly improved bid activity through the back half of '17 and into the early part of '18, as you're aware. And we've talked about it in the past, it takes several months, if not greater to get a project ready. So, there's some lead time involved. The project flow has primarily been multi-client companies, primarily located in the Permian and Delaware. We are beginning to see some movement outside of the core areas, little bit farther north in the Delaware and Permian, for example, and maybe pushing a little bit farther west. Bid activity is improved from, I would say, '16 certainly well below what we've seen in prior years to '15, let's say. Some SCOOP stacked things show up a little bit; there is some stuff East Texas and over; some Eagle Ford things are flowing -- are starting to come in, but those are modest. I think we'll begin to see more activity in those areas. So, we are encouraged by the slow progression outside of the core areas that we've been working in. We still have some projects in those core areas, of course. Seismic bids tend to come in waves, they'll come for a little bit and then they'll, kind of, slow down and then they'll come back in. So, we are not seeing the steady onslaught of demand that some of the other service companies may be experiencing. So, we see the market as optimistic. We feel good about our last 3 quarters and with our results, feel certainly better about them we have the prior years. But it's -- I would say, it's still a challenging market. It's still a tough market for us, but we're optimistic.

James Adkins

If you get to your 7 crews, kind of, that we're all thinking for the rest of the year. What kind of utilization would you have on your existing channel count?

Stephen Jumper

With the slowdown and coming off the Canadian season, I don't have a number ahead.

James Adkins

Well, not so much say the quarter, I'm kind of thinking longer -- out to third quarter when Canada normalizes?

Stephen Jumper

You know it's -- during the first quarter we had -- late fourth, first quarter we had very high utilization rates on the channel count because of the Canadian operation. We've moved some of those channels back to the states, like we typically do. And we are not a 100% utilized right now. We are doing 1 project with another type of equipment, as a special request from a customer. But there -- right now we've got some channel capacity in-house; channel count capacity is very hard to predict for us, because if we get a very big job that comes in, for example, like, there's some jobs out there, that are out to tender early stages that could require an excess of 20 on 1 job and 25,000 on another. So that channel capacity can soak up real quickly with the award of 1 project or 2.

James Adkins

All right. You did mention that some of the projects outside of the Permian are getting a little more competitive. It seems like you're the only real quality seismic guys still left in the U.S. Tell me what's going on, on the competitive landscape?

Stephen Jumper

There's several players out there that certainly provide the same services that we provide. They may not have the ability or the scale that we would have, let's say, in channel count, for example, but there are options available. And when I say that these projects are competitive, I'm stepping that 2 levels, right? It's not just competitive from the contracting standpoint, but it's also competitive as we've talked about with the multi-client companies that are pursuing some of those projects.

James Adkins

Okay, last one for me. The logic behind the stock dividend, what's going on there?

Stephen Jumper

You know we, Legacy Dawson for a time paid a quarterly dividend. We, faced that right about the time of the merger in '15 when conditions turned. Legacy TGC has historically onetime, did a onetime dividend and they had a history from time to time doing a 5% stock dividend. So, there's some history behind it within the combined company. We think, it's a reward for our shareholders that have hung with us through a very difficult period. And we believe that it will improve, there may be some liquidity in our stock. So that's the basic logic behind it, Marshall.

James Adkins

Okay, I lied; that wasn't my last one. If you hold your CapEx to $10 million and obviously, your run rates ahead of that so far, but if you hold it to $10 million, I've got you all generating a pretty good chunk of free cash flow. So, 2 questions on that number one, is that how you all see it as well? Number 2, assuming you're generating cash flow of maybe $10 million or whatever this year. What do you spend that on?

Stephen Jumper

Well, first of all, I hope you're right. Second of all, with regards to the run rate, we had a pretty early expenditure that was fairly significant to space, I would really put it in maintenance level type stuff; that was basically a large-scale battery replacement. And so, didn't involve much of a channel count increase. Now the market is going to continue to require channel count growth over time. And so, I think we'll stay within $10 million. And we'll hope for a continued positive trend in the back half. I'll continue to say this, it remains challenging. There are still some choppy waters ahead, I think, for the geophysical industry, but behind all that, we're more optimistic and encouraged than we were let's say in the early part of '17.

James Adkins

Thank you, Steve.

Stephen Jumper

Thanks Marshall.

Operator

And moving on, we'll go to John Potratz with Researched Investments.

John Potratz

Good morning, Stephen. Very complimentary for what you've accomplished here. I was just wondering, when you talked about the multicomponent, and my sense is that the potential work -- for work out there sort of lags and when you used to be have smaller companies you get the business right away. This takes a while for this to really come through. There is a sense that there is a lot more potential business sitting out there than what you can really say is there because it takes them so long to take and put the contracts out for bid and you to win it. So -- and my sense is, there's a lot more potential work out there than you normally has reflected in the past.

Stephen Jumper

Now you're saying that there is or is not more potential work?

John Potratz

There is probably more potential work out there because it takes so long for them to come to you.

Stephen Jumper

Yes, I'm with you. I want to back up and early in your question. And if you'll pardon me, I would like to correct a part of your statement there. You said multi-component and we are talking about multi-client. Those are 2 different issues that are.

John Potratz

I meant multi-client. Thank you for correcting me.

Stephen Jumper

Yes, but I'm going back to that just to help with the question because they're both important. The multi-client model certainly takes more time for -- they tend to be larger in scale, they tend to be more difficult to put together from a participant standpoint as well as job preparation. And so, you are correct. Those are the projects that get a lot attention and they do take some time to put together. On the multicomponent side that you did not ask, but you referenced, we have -- we made some investments in multi-component gear in the fourth quarter of '17. And that equipment was immediately put to work in the Canadian market for the winter, season, and so that additional multicomponent equipment was certainly additive to what was a better-than-anticipated Canadian season, and we are continuing to operate multicomponent equipment in the U.S. We have a multicomponent crew that's working on a very large job in the Western Permian, Eastern Delaware area. We believe there is visibility and will continue to be visibility for multicomponent work. So, I appreciate -- I'm glad that you asked that question. Now, stepping down into the meat of your question, I do think there is a potential for more demand, not -- I wouldn't call it robust or record setting, but I do sense that there are some smaller E&P companies, maybe some smaller E&P companies driven by private equity backed financing, that we could begin to see and we are having some level of conversation about project that they would like to do, that would be smaller in scale than the multi-client jobs and potentially easier to get ready.

So, our marketing group and I'm going to go back to Marshall's question, the prior question is that is one thing that I think we are hearing from our marketing group is they are knocking on doors, not just the multi-client guys, and not just the E&P names that you would know, but some smaller ones as well. And so, I think there's potential there. I hope you're right; it still continues to be a multi-client driven model right now, but I've been doing this a long time, and that always shifts. It, multi-client tends to lead to smaller projects coming. So, we're, in the past, so we're hoping that's the case now.

John Potratz

And in the case, you'd be, given your equipment right now, that, you'd be using equipment that otherwise is not being utilized for the smaller...

Stephen Jumper

Yes, that's another place, we're going back to Marshall's question about channel count capacity. It's always so hard to really predict that. It's quite different than the capacity levels that you might hear about in terms of, let's say, on the pressure pumping side in terms of horsepower capacity. Don't think there's a lot of channel count capacity coming into the market. So that's a positive. But channel count is, I think, tightening somewhat in the North American market. And very large projects or a flurry of small ones both can handle that channel count demand. And we're in a great position. I mean, we talk about our balance sheet a lot, but from a personnel standpoint and from a channel count and energy store standpoint, I believe we are well positioned for those days we hope will come.

John Potratz

So, you have the excess capacity to, when that business comes along...

Stephen Jumper

I wouldn't call it excess. I mean, I don't know that, like I said, with channel count, it's very fluid, just depending on a lot of times on job, project parameter, project size. So, I think our operations group and some of the results that I think that we've had in the last 3 quarters have been somewhat attributable to the operations group maximizing the channel count efficiency.

Operator

And next, we'll go to Garrett King with Truffle Hound Capital.

Garrett King

Q2 of last year was a rough quarter for the energy patch in general; oil was at $43. And now we're close to $68. Is there anything that you think, and I guess you mentioned that the effective utilization of your crews, at least in April last year, was maybe 2 crews?

Stephen Jumper

Correct.

Garrett King

So, is there anything that makes you think that we shouldn't yet have another big year-over-year quarter compared to where you were last year in Q2?

Stephen Jumper

Well, I'm going to be careful, because we're, we are not a company that provides even low-level guidance, because we are so difficult to predict quarter-to-quarter, because we are subject to so many things beyond our control, project timing, weather and those types of things. So, in Q2 of last year, we had, in addition to the oil price situation, we had some real project delay issues. And project readiness. And we did get down to 2 crews. We're currently operating 6. And so that's the -- those are the things that we have already said. And we see visibility of up to 7 into the third quarter. And so, given -- in the seismic world, you always have things that can pop up. And we certainly have those things pop up from time to time that can be operational related, weather related, readiness related, various types of things.

So, I certainly feel better right now than I did when we had this call a year ago. I hope you're right, we'll see where this thing goes, but I'll just come back and remind everybody that we -- our visibility, while improved from recent years, is still somewhat uncertain. And it's still challenging. And I think we're in a position balance sheet wise, equipment wise and personnel wise to capitalize on something that may come forward. And whether what could be potentially short-term issues as they arrive. So, I realize I didn't answer the question, but I think just looking at the crew count is where I would point you.

Garrett King

Alright. Thanks so much. And best of luck.

Stephen Jumper

Thank you.

Operator

And with that, I'll turn it back to our presenters for any additional or closing comments.

Stephen Jumper

Well, I want to thank everybody for listening in. We, obviously, are pleased with the first quarter results relatively speaking. We're pleased with where we've been in the last 9 months. We appreciate everybody's support in our company. We appreciate our clients and our employees. I believe we're trying to do all the right things. And I would just like to mention 2 things. We had a passing here this week of Mr. Howell W Pardue, who joined the company in 1976. He's been retired a few years. He served this company as VP of data processing -- Executive VP of data processing and served this company as a Director from about '76 to about 2003. He was instrumental in bringing our company into the 3D world. And so, wanted to mention him. And I wanted to express on behalf of our board and our shareholders, our thanks to Dr. Allen McInnes, who retired from the Board of Directors this year, did not run for reelection. And thank him for his service and wish him the best. And we look forward to talking to you and not in and what, here about 2 months. Thank you.

Operator

And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.