Dawson Geophysical Co (DWSN) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TGC Industries fourth quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Monday, February 25, 2008. I would now like to turn the conference over to Mr. Jack Lascar.

Thank you. Good morning and welcome to the TGC Industries fourth-quarter and year-end 2007 conference call. We appreciate your joining us today. Your hosts today will be Wayne Whitener, President and Chief Executive Officer, and Ken Uselton, Chief Financial Officer.

Before I turn the call over to management, I have a few items to cover. If you would like to be added to the Company's e-mail distribution list, please call DRG&E's office at 713-529-6600, and relay that information to us, or you can send me an e-mail at are at jlascar@DRG-E.com. 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 Web site, at www.TGCseismic.com, or via a recorded instant replay until March 3rd. That information was provided in this morning's earnings release. Information reported on this call speaks only as of today, February 25, 2008, 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 strategies, projected costs and expenses, capital expenditures, competitive position, product offerings, access to capital, and growth in each opportunity, 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, 2006, and on Form 10-QSB for the first, second and third quarter of 2007. 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 this statement.

I'll turn the call over now to Wayne Whitener.

Thank you, Jack. Good morning to everyone. I would like to welcome you to our 2007 fourth-quarter and year-end conference call. As far as the agenda is concerned, I will provide you with the highlights of the quarter and the year, and Ken Uselton will provide you with the financial details. Then I will come back with some final comments.

We are pleased with 2007 results, a year in which we saw a steady level of demand from our customers. I would like to briefly review some of the highlights of the year.

In spite of some weather challenges that occurred in each of the first three quarters of the year, we had a very good year in terms of revenue growth, with annual revenues up 33% to over 90 million. We operated eight seismic acquisition crews for the entire year. We reported 2007 diluted earnings per share of $0.46. We generated 14.8 million in operating cash flow during the year.

2007 EBITDA rose by 2 million, or 9%, primarily due to depreciation expense as we invested over 18 million in new equipment during the year. During 2007 we purchased six new vibration vehicles, one new ARAM ARIES recording system, along with other equipment for our new crews. We continue to provide our crews with new state-of-the-art equipment to optimize the productivity of our crews and equipment and meet our customers' growing needs. Currently we have seven ARAM ARIES systems operating, along with one Opseis Eagle system. At the end of 2007 we had 47 vibration vehicles and 11 shot-hole drilling rigs operating. As we announced in late September, we have ordered eight more vibration vehicles, and we are in the process of taking delivery of these units during the first quarter of this year.

In 2007 we added 10,000 new channels and are planning to add another 3000 channels this year during the first quarter, which will bring our channel count to 43,000 channels. We also expect to purchase additional channels along with shot-hole drilling equipment during this year. And as previously announced, in August we opened an office in Denver to gain more exposure in that area, as well as other regions managed out of Denver, and therefore, expand our area of operations. Our other branch offices are Houston and Oklahoma City.

Now we'll turn the call over to Ken Uselton, our Chief Financial Officer, who will give you details and a review of our financial results. Then I will return with some final remarks.

Thank you, Wayne. I'll start with the fourth-quarter results. Revenues for 2007 fourth quarter were 25.9 million, compared to 20.1 million in the fourth quarter of '06, an increase of 28.5%. Cost of services in the '07 fourth quarter were 17.8 million, compared to 12.2 million in the '06 fourth quarter, an increase of 46.6%. This increase was due primarily to a higher percentage of dynamite work, 36% of revenues in the '07 fourth quarter compared to 21% of revenues in the '06 fourth quarter. Cost of services as a percentage of revenues was 69% in the '07 fourth quarter, versus 60.5% in the fourth quarter a year ago.

Gross margins for the '07 fourth quarter were 31%, compared to 39.5% a year ago. Depreciation expense was 3 million, compared to 3.1 million a year ago. Fourth-quarter income from operations was 4 million, compared to 3.6 million in the fourth quarter a year ago. Income from operations as a percentage of revenues was 15.3%, compared to 18.1% a year ago. Interest expense in the fourth quarter was 111,000 versus 173,000 a year ago.

Our income before income taxes in the fourth quarter was 3.8 million, compared to 3.5 million the fourth quarter a year ago. As a percent of revenues, income before income taxes was 14.9% in the '07 fourth quarter, compared with 17.3% a year ago. The effective tax rate for the '07 fourth quarter was 38.5%, compared to 44.3% in the fourth quarter a year ago.

Our net income for the fourth quarter of '07 was 2.4 million, or $0.14 per diluted share, compared to net income of 1.9 million, or $0.12 per diluted share in the fourth quarter a year ago. EBITDA in the fourth quarter of '07 was 7 million, an EBITDA margin of 27% compared to 6.8 million, and EBITDA margin of 33.8% in the '06 fourth quarter.

Now looking at the full-year results, our 2007 revenues were 90.4 million, a 33.4% increase over '06 revenues of 67.8 million. Our cost of services for '07 was 60.4 million, compared to 40.8 million in '06, an increase of 48%. The large increase is primarily due to higher percentage of dynamite work of 34% in '07, compared to 25% in '06. Cost of services as a percent of revenue in '07 was 66.9% compared to 60.3% in '06.

Gross profit for the year was 30 million, a gross profit margin of 33.1%, compared to gross profit of 26.9 million, a gross profit percentage of 39.7% a year ago. Our depreciation expense for '07 rose by 33.6% to 12.7 million from 9.5 million in '06, due to our investment in new equipment.

2007 income from operations was 13.3 million compared to 14.4 million last year. Income from operations as a percentage of revenue was 14.8% compared to 21.3% in '06. Interest expense in '07 was 605,000 versus 781,000 a year ago. Our income before income taxes in '07 was 12.7 million, compared to 13.6 million in '06. As a percent of revenues, income before income taxes was 14.1% in '07, compared to 20.1% a year ago. The effective tax rate was approximately 40% in both years. Net income in '07 was 7.6 million, or $0.46 per diluted share, compared to net income of 8.1 million, or $0.49 per diluted share in '06. 2007 EBITDA increased 9% to 26.1 million, an EBITDA margin of 28.9%, from 23.9 million, an EBITDA margin of 35.3%, in '06.

Now turning to the balance sheet, at the end of 2007, long-term debt was approximately 3.8 million, cash and cash equivalents was approximately 4.5 million, current ratio was 1.4, and working capital was approximately 5.5 million.

With that, I'll now turn the call back over to Wayne.

Thank you, Ken. Before we move to your questions, I would like to make a few additional comments.

As we have stated previously, we continue to expect strong capital expenditures from the oil and gas industry in 2008. Furthermore, Lehman Brothers is projecting that the seismic spending will continue to grow at a compound annual growth rate of 15% over the next couple of years.

Operationally, we are very well positioned. We currently have an approximate backlog of 43 million, and order book is looking very strong with commitments well into 2008. As a result of the capital investments we made in 2007 for new vibration vehicles and ARAM ARIES recording systems, and the recent announcement [of] planned capital investments for the first quarter of 2008, our depreciation expense for 2008 is likely to increase over 2007. We will continue to monitor our channel count as a result of securing larger jobs. Based on what we're hearing from our customers, we remain optimistic about the outlook for 2008.

This concludes my formal remarks and we'll now take questions.

(OPERATOR INSTRUCTIONS). Neal Dingmann, Dahlman Rose.

Good quarter. Wayne, on the additional channels, do you already have earmarked what crews those particular are going to be working for, or are you just going to split those when that 3000 comes online?

What we do on the additional channels that we're adding in the first quarter, the 3000 channels, we have seven ARAM ARIES systems that are all configured the same. So those channels will go wherever the contracts demand.

Just my follow-up -- as far as now the crew that -- the eight crews, are those still working -- it seemed like the last time I looked, you had one or two less in Kansas, and those had relocated. What do you have in Kansas, or where is the bulk of the crews working right now?

We have two crews in South Texas. We have a crew in North Texas, West Texas. We have three crews in Kansas. So we're still pretty well spread out Midcontinent, Gulf Coast.

I'll get back in queue. Thanks.

Karen Green, Oppenheimer.

Wayne, I was wondering if you could just give us a little bit more color on your bidding activity. Backlog stands -- I think you mentioned 43 million. Can you give us some indication of how much of that actually is dynamite work? I know last time on the call you mentioned that you're seeing a greater preponderance of larger jobs. Are you currently seeing that in your bidding activity?

The 43 million in backlog, of course, is a moment in time, which is signed contracts that we have here in house. We do have some larger contracts that have been signed and are basically in the mail back to us, which is not in that number.

As far as the dynamite work, of course, as you know, we don't have a lot of control over that because that depends on the clients that we're presently working for. And they pick the energy source, and we don't have a lot of control over that. But we expect the dynamite probably anywhere between 25 to 30% of the business this year, kind of from what we're seeing. It may be more toward the 25% more than the 30%, depending on what happens a little bit later in the year.

And then, you are planning to add additional shot-hole drilling equipment during the year, as you mentioned in your press release. Do you have any idea how much new equipment you may be adding?

We're going to be adding some specialized drills to do -- to possibly look at some new opportunities for us in some areas. And it's not going to be a huge capital expenditure for us, but it will be something that we feel like will help the business in specific areas that we're presently working. Also, we've added some Envirovibes, which are smaller vibes with higher output. So we expect to see some kicks from that as well.

Can you comment a little bit on pricing?

Pricing seems to be pretty steady. We're pretty much seeing, so far, prices in '08 pretty much the same as they were in '07.

One last housekeeping question. Short-term debt at the end of the quarter?

Ken is looking that up.

4.7.

Thanks.

(OPERATOR INSTRUCTIONS). Terese Fabian, Sidoti.

The number of channels you have per crew has been going up over the past couple of years. I think it averaged about 3200 in '05, 4000 in '06, and around 5000 now. Is there an optimal number that you would have, channel count per crew? And does, say, 8000 channels gain you anything over 5000?

The channels that we use depends on the areas that we're working in. If we're working in South Texas, the channels demand are greater down there because we're looking at, basically, deeper gas and larger spreads. In the Kansas market, of course, we're looking at shallower areas which have less channel demand. So each individual crew is tailored to the channel demands required for the job and the contract. So we might have 10,000 channels on a crew in South Texas and 2000 channels on a crew in Kansas. So, that is one advantage we feel like we have, that we have seven ARAM crews configured the same, where we can move these channels to the location that's best suited for the operations that we're involved in.

That's helpful. Just going one step further, does the unconventional, the horizontal drilling, is that generally done deeper? Is that more channel-intensive?

Normally not. That kind of depends on where it is. We're doing work, of course, in the Barnett Shale, which has a lot of horizontal drilling. But you're looking at, relatively, a shallow play, anywhere from 4 to 6000 feet. So it's not a huge channel demand there, no.

Thank you.

Michael Christodolou, Inwood Capital.

You mentioned 18 million of CapEx in '07 added about 2 million to your depreciation rate. I was curious what the depreciable life is for the ARAM equipment you have and for the [Vibram] trucks. Practically speaking, what's the practical life of that equipment?

We have depreciation set up on the vibrators and the ARAM ARIES systems over seven years. Of course, we're using, one of our crews right now, the Opseis Eagle. That equipment was purchased in '95, '96. So it's well into the 12-year mode. So probably realistically, you're looking at 10 years plus on this equipment.

Are there any benefits to the Company from this -- potential benefits from the stimulus package that's out there? Supposedly there may be some accelerated depreciation or bonus depreciation terms. I don't know if oil and gas seismic would qualify.

We're still reviewing that, but we really haven't seen anything that's directly going to affect our P&L. I will say that some of the spec companies that we work for, I believe, are going to see a benefit from the accelerated depreciation for '08, which means that they're going to want to try and get as much work done in this year as possible. So we may very well see an increase in work with some of the spec companies that we work with, due to the benefits they're seeing from, possibly, that new stimulus plan.

Thank you very much.

(OPERATOR INSTRUCTIONS). Terese Fabian, Sidoti & Co.

Can you talk a little bit about your customers, large, small, independents? Do you have a whole range of them?

Pretty much I would say that we have large to small independents, as well as some spec companies. At this time we're not really working for any majors. So it's pretty much the larger independents and, depending on exactly which market we're working in, smaller independents as well.

Do you have an impression of what their time horizon is for actually doing drilling, based on the information that they're getting? Are they looking at later this year or next year to begin work?

Right now I would say that all of our clients are looking, as far as drilling, just as close behind us as possible. Just as soon as they get the interpretation from our data, they're wanting to take advantage of these commodity prices, of course. So just as quick as we can acquire the data, they can get it interpreted, basically, they're putting drilling locations in place.

Any idea of how long it would take to get interpreted? Is it a question of weeks or months?

You're looking at, from the time we complete a job, anywhere from two weeks to a month to do an interpretation, and then do the financial evaluation of the prospect.

One last question if I may. Any work on oil plays in the US? Is most of your work natural gas-based?

A lot of our work, of course, is natural gas. But we are in some oil plays in Kansas, and also there are some byproducts where it's oil and gas in some additional plays as well.

Terrific. Thank you.

At this time there are no additional questions. I'll turn it back to management for any closing remarks.

We'd like to thank you for joining us today, and look forward to next quarter and our conference call then.

Ladies and gentlemen, this concludes the TGC Industries fourth quarter 2007 earnings conference call. We'd like to thank you for your participation and for using ACT Teleconferencing. You may now disconnect.