Dawson Geophysical Co (DWSN) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the TGC Industries third-quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Monday, October 23, 2006. I would now like to turn the conference over to Karen Roan of DRG&E.

Thank you, Eric. Good morning and welcome to the TGC Industries third-quarter 2006 conference call. We appreciate you joining us today. Your host today will be Wayne Whitener, President and CEO, along with Chief Financial Officer Ken Uselton. Before I turn the call over to management, I have a few items to cover. If you would like to listen to a replay of today's call, it is available via webcast by going to the investor relations section of the Company's website at www.tgcseismic.com or via a recorded instant replay until October 30, 2006. The information was provided in this morning's press release.

Information reported on this call speaks only as of today October 23, 2006, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the Company's future including without limitation the Company's expected future financial positions, results of operations, cash flows, funds from operations, financing plans, gross margins, business strategy, budgets, projected costs and expenses, capital expenditures, competitive position, product offerings, access to capital and growth opportunities are forward-looking statements. 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 filing with the SEC including in its annual report on Form 10-KSB for the year ended December 31, 2005 and on Form 10-QSB for the first and second quarters of 2006.

Furthermore as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued this morning. And please note that the contents of our conference call this morning are covered by these statements. Now I will turn the call over to Wayne Whitener.

Thank you, Karen, and good morning to everyone. I would like to welcome you to our 2006 third-quarter earnings conference call. As far as agenda is concerned, I will provide you with highlights for the quarter and Ken Uselton will provide you with the financial details. Then I will come back with some final comments.

We reported a strong year-over-year increase in terms of revenue growth, with third-quarter revenues more than doubling to $18 million. Sequential revenue growth was also strong increasing 21% from the second quarter. However, 43% of our third-quarter revenues were derived from shot hole drilling contracts which carry a lower gross margin (technical difficulty) vibroseis contracts. Diluted earnings per share increased 50% to $0.09 per share.

Our third quarter results were negatively affected by startup costs for our eighth crew, a one-time maintenance repair cost incurred in bringing up TGC standards to the recently acquired shot hole drilling operation and adverse weather conditions which affected one of our crews in South Texas, forcing it to use alternative energy source, thereby requiring additional time to complete a substantial turnkey contract. As a result, we estimate the third-quarter diluted earnings per share were negatively impacted by approximately $0.05 per diluted share with approximately $0.04 from the additional time spent by the crew and $0.01 for the startup cost in additional drilling operational expense. Excluding these cost, our diluted earnings per share would have been approximately $0.14 for the quarter.

Our gross margins came in at 30% lower than last year's third quarter gross margins at 35%, and the second quarter's 43.7% as a cost of services as a percent of revenues rose due to the factors that I have mentioned.

Having said that, we continue to see rising demand for our services, and earlier this month we announced that our eighth seismic field acquisition crew initially announced on August 7, 2006 was in the field and fully operational, using our recently acquired new ARAM ARIES seismic recording system. This is our sixth new ARAM ARIES seismic recording system. A new survey crew using Global Positioning System equipment has also been deployed with the crew. The eighth acquisition crew is expected to be fully engaged in the entire fourth quarter.

Keep in mind for comparison purposes that the third quarter of last year, we had three field crews operating supported by one ARAM ARIES and two Opseis Eagle System seismic recording systems with a full crew added in late July of late 2005. Looking at the third quarter of this year, we have seven field crews operating supported by five ARAM ARIES and two Opseis Eagle Seismic recording systems. In addition during the quarter, we received seven new vibration vehicles and expect to have a total of 42 vibration vehicles by the year-end.

During the second quarter of this year we also had seven field crews operating, although the seventh crew operated for only two months of the quarter, supported by five ARAM ARIES and two Opseis Eagle Seismic recording systems. We continue to see strong interest from both our customers and new potential customers for continued seismic activity onshore U.S.

I will now turn the call over to Ken Uselton, our Chief Financial Officer, who will give you a detailed review of our financial results and then I will return with some final remarks.

Thank you, Wayne. Revenues for the third quarter were $18 million compared to $8 million in the third quarter a year ago and compared to $14.9 million in this year's second quarter. The year-over-year increase in revenue was due to more crews operating during the third quarter of '06 versus the third quarter of '05, as well as improved productivity of our crews.

The cost of services in the '06 third quarter rose to 69.8% of revenues versus 64.3% of revenues in the '05 third quarter and 56.3% of revenues in the second quarter, which resulted, as Wayne said, in lower gross margins compared to a year ago in the second quarter. Depreciation expense was $2.5 million compared to $913,000 a year ago, primarily due to the addition of approximately $25 million in new equipment in the past year. Third-quarter income from operations was $2.5 million, or 13.7% of revenues compared to $1.4 million, or 18% of revenues in the third quarter a year ago and compared to $3.6 million, or 24.3% of revenues in the second quarter.

Interest expense in the third quarter rose to $199,000 from $111,000 last year primarily due to the increased debt levels associated with the financing of one new ARAM ARIES recording system, three new vibrators and trucks for the additional field crews. Income before income taxes rose by 70.8% to $2.3 million, or 12.6% of revenues in the third quarter compared to $1.3 million, or 16.6% of revenues in the '05 third quarter and declined from $3.4 million, or 22.9% of revenues in the second quarter of '06.

Net income for the third quarter of '06 increased to 64.1% to $1.3 million from $821,000 in the third quarter a year ago. In '05, our convertible exchange of preferred stock was redeemed and the senior preferred stock was converted into common stock. As a result, we no longer have any preferred dividend requirements. We recorded income tax expense of $915,000 in the third quarter of '06 for an effective tax rate of 40.5%. This compares to tax expense of $504,000 and an effective tax rate of 38% in the '05 third quarter. The third-quarter tax rate is consistent with our second quarter.

EBITDA in the third quarter of '06 was $5 million compared to $2.3 million in the '05 third quarter and compares to $5.8 million in the second quarter of '06. The EBITDA margin was 28% in the '06 third quarter compared to 29% in last year's third quarter and 39% in this year's second quarter. Our capital expenditures in the quarter were approximately $5 million.

Now turning to the balance sheet at the end of the third quarter we had long-term debt of approximately $3.7 million, cash and cash equivalents of approximately $8.2 million, a current ratio of 1.24 and working capital of approximately $3.6 million. With that, I will turn the call back to Wayne.

Thank you, Ken. We expect to see continued strong capital expenditures from oil and gas companies for 2007. UBS, for example, is projecting that oil and gas companies will spend over $275 billion worldwide in 2006, a 20% increase over 2005. And they are expected to spend another $312 billion in 2007, a double-digit increase. A substantial portion of that increase is being spent for exploration and hydrocarbons in the midcontinent, Gulf Coast, Permian Basin and Fayetteville Shale, and the Rocky Mountains, all the areas which we are presently working or have worked in recently.

Also in the US, a number of active land seismic crews have increased from 54 a year ago to 71 currently. We have our own survey crews equipped with the latest GPS equipment. And with eight seismic acquisition crews operating in the field, we now have over 29,000 available recording channels. We currently have 34 vibration vehicles, with another eight to be delivered in the fourth quarter.

Based on what we are seeing so far this year, we know we have significant commitment work for all eight crews for the rest of 2006 and we are booking business well into 2007. Demand for our services remains strong and our backlog at the end of the third quarter was approximately $65 million. And we believe that we were very well-positioned for the continued growth ahead. This concludes my formal remarks, and we will now take any questions.

(OPERATOR INSTRUCTIONS). Karen Green, Oppenheimer and Company.

Good morning, Wayne. I just had a couple of questions for you. One is have you seen any kind of change in the customer behavior at all in terms of bookings going into '07? Clearly, just by looking at your backlog number, the $65 million has remained at very, very stable, but just wondering if you are hearing any nervousness on behalf of your customer base.

Not at this time we haven't seen really any pullbacks. I think there is a little bit of concern about natural gas prices, but I feel like most of our customers at this time feel like in the long run that natural gas prices will remain at a level that makes sense for them to continue at this exploration level.

Also, in terms of the migration of crews from Canada to the U.S. and eventually back to Canada, have you seen any crews leaving to Canada as they have in prior years due to seasonality, or do you think this year is going to be different and they are just going to continue to remain in the domestic market?

I do think we'll see -- I can't say exactly how many crews we are going to see going back to Canada. But I understand that the Canadian market this year is going to be quite good. So I think that we will see a number of crews go back to Canada to secure that market that they have built up there. So I would think not all the crews will go back, but I would think a significant amount of crews will go back to Canada.

And then just one more question. In terms of the number of crews you had working on dynamite work in the third quarter, was that two crews?

Two to three. Two crews full time and another crew partial.

And how many are you going to have in the fourth quarter?

About the same.

I'll turn it over to someone else. Thank you.

Bo MacKenzie, Century Capital.

It's actually supposed to be Pritchard Capital, but maybe I don't say that right. Good morning, Wayne. Where are your crews now, and where do you see those demands coming from as you look out into $65 million worth of backlog? Is there much of the difference in mix between where the crews are located now?

Not a lot. Pretty much where they have been here in the last third quarter, we have crews in Kansas and Colorado, two crews in the Barnett Shale. We have two crews in South Texas, and we have a crew in the Fayetteville Shale, and we also have a crew in Louisiana.

And if you look at a $65 million of backlog with the revenues you reported, that is almost a year's worth of backlog. What is the mix of contracts in there in terms of time duration? Are there are a couple of really long ones in there?

No, we have some contracts that are, say, around $6.5 million for one contract. Basically, this backlog will take us out into the first quarter of '07 with most of our crews.

And in terms of the market out there, have you seen any noticeable improvement in pricing other than the ones that you put through earlier this year or any plans for further price increases?

We have been able to -- most of the work that we have been able to book for '07 has seen price increases. Our clients are accepting that at this time. We hope to continue to monitor that and see if we can improve on that anymore later on in '07.

I know I am violating the two question rule here, but how big of price increases are you pushing through?

You know we are looking around 3% to 4%.

So it is just covering costs?

It is a little bit more than covering the cost. We are getting a little bit better on our term contracts and a little bit better on turnkey but we are seeing a more significant increase in our term contracts than what we saw in '06.

I am going to turn it over to somebody else now. Thanks.

(OPERATOR INSTRUCTIONS). Karen Green.

Wayne, just another question for you. I was wondering if you could just add a little bit more color as to the one-time maintenance and repair cost that you were talking about with regards to the shot hole drilling operation. And just give us a little bit more color on what exactly that was.

Well, as you know, we bought Highland drilling earlier in the year. We needed this acquisition to be able to ensure that our dynamite contracts were within the control of TGC. We also felt like that as the margins for shot hole drilling went up on the drilling side that it would allow us much better margins going forward.

A lot of the stuff that we actually drilled with our drilling operation were jobs that were bid back in July of '05. So we really didn't get the benefit of the new shot hole drill price for our drilling operation. Also, we put some additional funds in that operation to upgrade some of the equipment, some of the pickups, as well as some of the safety features of the drilling rigs themselves. So we feel like that we are positioned now to better operate the drilling operation, and we feel like next year we will see some definite benefits from the increased pricing of the shot hole drilling side of the business.

Right. That is if you are going to have a couple of crews working on dynamite work in the fourth quarter, is it fair to say that those contracts were bid as well a year ago and that you may see some of the same issues we had this quarter?

Well, I think we will see that some of the jobs were bid mainly in the first quarter of this year. I don't expect to see hopefully as a negative impact that we saw in the third quarter. As we said, we were able to -- we are already in the fourth quarter here and have able to increase our term contracts. Our new pricing on it has been put into effect and with the drilling operation, it just depends on how our operation goes forward in the fourth quarter and how productivity we are. As far as the pricing for the shot hole drilling, we are in a lot better shape than what we had a year ago in July of '05 versus first quarter of '06.

Great. Are you still having to go back out for dynamite work to third parties, or are you able to do all the work that you have in the third quarter and also the fourth quarter internally?

We still have to use subcontractors on some of the dynamite work.

Even with all your shot hole drilling operations?

With our shot hole drilling operation, basically that is enough equipment to keep one of the dynamite crews operating with that equipment. So basically we are outsourcing one and a half crews to third party.

Sherwin Prior, Northpointe Capital.

Great quarter, guys. Here's a question. Getting back to this issue with a shot hole drilling. So gross margins from our calculation were down about 5.5%, but I guess the question is what kind of an improvement if you were getting this Highland Industry and the pricing was coming through the way you want it to, would we have only seen a 2.5%, or can you give me some idea of how favorable this acquisition can be going forward?

Sure, but let me give you a quick background on the shot hole work. As mentioned before, the shot hole on a per square mile basis is higher revenues versus our vibroseis operations. So we will have less percentage of gross margins than what we will have on our vibroseis work. But as we get more online with our shot hole operation, we will see increased margins of 4% to 5%, which gets a little bit closer back in line with our vibroseis operation.

Also if you'd look at the overall picture between all of our eight crews, last year we ran about 17% dynamite work versus so far nine months ending we are at 27% dynamite work. For last quarter, it was 43% was dynamite work. That is dictated by our clients and the jobs that we are awarded. So that part of it kind of remains a moving target. I guess in a perfect world you would say we've put our shot hole drilling operation on one -- one of our crews doing shot hole work and the rest of our crews doing vibroseis would be the best of all worlds for us.

Last question for me is to try to understand again the pricing environment. You have been successful it seems at getting some price increase. Give me an idea of the scenario which would deteriorate your ability to actually get price increases?

Well, of course a lot of price increases depend on demand of our services. One thing that we feel like that is going to help us going forward is most of our equipment is brand-new geophysical equipment, whether you're talking about the new vibrators or the new ARAM ARIES Systems. So we feel like we can command a little bit more revenue for our services by having this new equipment because it allows us to work faster with less downtime, which actually will end up saving our clients money. So on our turnkey work, the faster that we are able to acquire the data and turn that over to our client, the better our margins are. So that is kind of what we're looking at right now is to maximize the use of the new equipment.

But across the industry you indicated about a 30% jump in the number of crews operating in the U.S. At what point does the number of crews added -- the incremental crew begin to impact pricing for everybody?

Well, so far we haven't seen that impact affect our market share at this time. As far as the saturation of crews, I guess it depends on how much demand for crews in the U.S. market remains at. Right now we are still booked well into '07, and demand for our services are high. So we haven't seen any downward pricing on our crews at this time.

Thanks, Wayne, and a great quarter again, guys, thanks.

Bo McKenzie.

One more. At what point do you need to go in and replace the Opseis equipment? How much more life do you think you have got in it and on a corollary -- I know this may be premature because you just added the eighth crew. At what point do you see the opportunity to add a ninth?

Well, to answer your first question on the Opseis, at this present time we are still having good success and it is generating good revenue for us. We are able to still support the system. We feel like it's to maximize the field operations so right now I would say during '07, we have no plans on replacing any of the Opseis.

As far as the ninth crew is concerned, it just depends on the demand for our services and what clients come to us and expect us to add additional capacity for their demands. I am sure, as you know, we have added three seismic crews this year. So that has been a bit push on us and we are getting our arms around all that and we are very optimistic going into '07 that we can get all these crews hitting on all cylinders and then at that point we'll determine what other opportunities are available for us.

At this time I am showing no additional questions in the queue. Please continue with your presentation.

Thank you and hopefully look forward to the fourth quarter conference at the end of the year.

Ladies and gentlemen, this does conclude the TGC Industries third-quarter earnings conference call. You may now disconnect. Thank you for using AT&T Teleconferencing.