Dawson Geophysical Co (DWSN) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TGC Industries' second-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. And following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Monday, July 27 of 2009 and I would now like to turn the conference over to Jack Lascar of DRG&E Please go ahead.

Thank you and good morning and welcome to our second-quarter 2009 conference call. We appreciate your joining us today. Your host will be Wayne Whitener, President and Chief Executive Officer, along with Chief Financial Officer, Jim Brata.

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 our office at 713-529-6600 and relay that information to us or you can send me an e-mail with that information to 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 website at www.dgcseismic.com or via a recorded instant replay until August 10. Information on how to access the replay was provided in this morning's earnings release.

Information reported on this call speaks only as of today Monday, July 27, 2009 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 performance 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 filings with the SEC, including in its annual report on Form 10-K for the year ended December 31, 2008.

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 are covered by these statements. Now I will turn the call over to Wayne Whitener.

Thank you, Jack and good morning to everyone. I would like to welcome you to our second-quarter 2009 conference call. As far as the agenda is concerned, I will provide you with some highlights and Jim Brata will provide you with the financial details. Then I will come back with some final comments.

Let me begin by making some comments. We had a fairly good second quarter given the continued weak economic environment, low oil and gas prices, a decline for seismic services and a lower domestic rig count. This comes on top of a strong first quarter. So overall, we had a very good first half of the year.

However, as we mentioned in the first-quarter conference call, we have been experiencing weakening demand for our services. We are also seeing continued price pressure and therefore, our margins have deteriorated and are off from the normal levels.

From my perspective, this is the most severe downturn occurring in the shortest period of time in all my years of being in the business. The US land rig count dropped to 932 in the second quarter of 2009. That is down approximately 50% from the second quarter of 2008. We have responded to this lower level of demand by reducing costs, trying to keep them in line with expected revenues.

Regarding our crew count, we began the second quarter with eight crews operating in the field. As a reminder, that was down from the peak of nine crews operating during the first quarter of 2009. In response to the weakening demand, we reduced our crew count to five by the end of the second quarter. We further reduced our number of field crews to four at the beginning of the third quarter as we continued to optimize our utilization and keep our crew count aligned with projected demand.

Our backlog is currently $37 million, down from approximately $50 million in the previous quarter. Finally, we continue to stay in close contact with our customers, which will enable us to respond quickly when conditions improve.

Now I will turn the call over to Jim Brata who will give you a detailed review of our financial results. Then I will come back with some final remarks.

Good morning. Revenues for the 2009 second quarter rose 21% to $22.6 million compared to $18.6 million in the second quarter of 2008. Cost of services in the second quarter increased 24% to $15.6 million from $12.6 million in the second quarter a year ago. As a percentage of revenues, cost of services in the second quarter of '09 was 68.9% compared to 67.4% in the '08 second quarter.

Gross profit in the '09 second quarter rose 16% to $7 million compared to $16.1 million a year ago. Gross profit margin was 31.1% compared to 32.6% in the second quarter of last year. Selling, general and administrative expenses decreased to $968,000, or 4.3% of revenues, compared to $986,000, or 5.3% of revenues a year ago.

Depreciation and amortization expense was $3.6 million compared to $3.4 million a year ago. As a percentage of revenues, depreciation and amortization was 16.1% compared to 18.3% in the second quarter of 2008. Second-quarter '09 income from operations increased 44% to $2.4 million compared to $1.7 million in the second quarter a year ago. Income from operations as a percentage of revenues was 10.7% compared to 9% in the second quarter of 2008.

Interest expense in the second quarter was $268,000 versus $209,000 a year ago. The effective tax rate for the second quarter was 42% compared to 41% in the second quarter of '08. Net income for the second quarter increased 43% to $1.2 million compared to $868,000 in the second quarter of '08. As a percentage of revenues, net income was 5.5% for this year's second quarter versus 4.7% for last year's second quarter.

Earnings per diluted share were $0.07 versus $0.05 in the second quarter of '08 and per-share amounts in all periods have been adjusted to reflect the 5% stacked dividend paid May 12, 2009 to shareholders of record as of April 28, 2009. Second-quarter '09 EBITDA increased 19% to $6.1 million, an EBITDA margin of 26.8% from $5.1 million and EBITDA margin of 27.3% in the second quarter of 2008.

Our balance sheet remains strong and we continue to generate cash, producing cash flow from operations of $8.3 million during the second quarter. As of June 30, 2009, we had long-term debt of $9 million, representing 15.7% of our capital, cash and cash equivalents of approximately $30.6 million, a current ratio of 2.7 to 1, working capital of approximately $26.8 million and a book value per share of $3.12. With that, I will turn the call back to Wayne.

Thank you, Jim. Before we go to your questions, I will briefly summarize where we are today. Given the current conditions of significantly lower demand for oil and gas, the continued volatility of commodity prices, uncertainty regarding future energy policies and weak domestic seismic activities, we remain cautious and expect the remainder of this year to be difficult.

There is some activity. However, we are operating in a competitive pricing environment with deteriorating operating margins. We have responded to these conditions by reducing our costs, including our seismic crew count, to keep them in line with anticipated revenues. We are not planning any capital expenditures for the next several quarters unless we see a significant increase in our backlog.

We continue to focus on reducing our debt. We have reduced it by $1.9 million during the quarter before financing our insurance premiums. Our insurance is renewed annually during the second quarter and because of the current recession and to conserve cash, management financed a $2 million premium. The insurance note increased a current portion of debt and contributed to $1.3 million net reduction in debt so far this year.

We continue to generate cash and have approximately $31 million in cash in the bank. With our low debt level and our record amount of cash in the bank along with an unused line of credit, we believe we are well-positioned both financially and operationally to withstand this current industry downcycle.

Despite the current downturn, our long-term outlook remains positive as continued efforts to reduce finding and developing costs, combined with increasingly complex reservoir and the growing use of directional drilling, should maintain a strong base of seismic demand as energy markets recover. This concludes my formal remarks. At this time, I'll take any questions.

(Operator Instructions). Terese Fabian, Sidoti & Co.

Thank you, good morning. I have a couple of questions on your backlog and your field crews. Can you talk about the composition of your backlog, where the new order bookings are coming from? I estimate you have about $9 million of new orders. Is that correct?

That is approximately correct. That is correct.

And where is that coming from?

Well, it is coming from the -- our core base of midsize E&P companies all through Mid-Continent, Gulf Coast.

Do you think that is a sustainable level of new orders from what you are seeing?

Well, that is our hope. We are seeing some things -- some pickup in the industry from where we saw in the first quarter. Like I say, price pressuring is very intense right now, so we are going to have to kind of see how that plays out.

Are you seeing any contract cancellations?

Oh no, no. Not at this time, no.

And where are your crews working? Are they basically now in Mid-Continent, is that right?

Yes, Mid-Continent, Gulf Coast, some West Texas. So pretty much a lot of our core area.

Are they working more on turnkey contracts or what percentage would that be?

100% turnkey.

Are you seeing the same level of credit pressure on your clients now or has that abated?

I think -- money available to the E&P companies is still very tight. Hopefully that will -- we'll see later on this year maybe some of that money free up. But things are still relatively tight for money investment in the oil and gas business at this time.

Could I ask just a couple of other questions or should I queue up?

Go ahead.

Did you see any rise in inquiries following the rise in oil prices in the first half of the year?

We have seen a rise inquiry in oil plays, I will say that.

And do you expect, once drilling activity for gas, natural gas picks up in North America, are you going to be trailing that in terms of the work you are doing or will you be preceding a pickup in drilling activity, any ideas?

We should be leading drilling activity. We should precede -- our pickup should start seeing a pickup in land drilling if our business does pick up.

Okay. And then just a last housekeeping question, short-term debt number, do you have that?

Yes, that is $7.2 million.

Okay, thank you.

(Operator Instructions). Neal Dingmann, Wunderlich Securities.

Good morning, Wayne. Obviously I think the way you reduce is definitely appropriate given the activity out there. What are you seeing? Obviously we continue to hear more about abandoned activity on the shale plays, particularly Haynesville, Marcellus, the new Horn River up in Canada. Are you getting any calls from those areas? Would you happen to have your crews -- I know in the past, you haven't done a whole lot in those areas. Are those areas that you are in talks or you can do anything to start focusing more on those regions?

Sure, we are. We are pursuing those regions at this time to expand our areas of work. At this moment in time, we have no contracts pending. We do have bid proposals in some of the areas that you named. And we are, of course, continually pursuing those areas with our marketing effort and hopefully effort with putting a crew in one of those areas.

Okay. So it's a matter of -- how long, I guess, do you see as far as if you throw a bid on something like that, I mean are we seeing stuff pretty active I mean as far as if bids are thrown out, you think something would be accepted or rejected rather soon or could this take until year-end or what are you seeing in these sort of activities?

Well, most of the time, once we receive a bid request, normally we would have an answer back on the success of that bid within 30 days or less. Probably in the first quarter, we saw a lot of tire kicking as far as people looking to see what type of pricing they could get in the seismic and land drilling in doing new pro formas in relation to what the economics look like. But I think we are seeing a little bit past that now and basically the bids that we are receiving are getting done. So if we are successful in some of these new areas, very possible we could have a crew on there well before the end of the year. But it just depends on how successful we are in the bidding phase.

Got it. And then wondering international -- obviously it seems has held up a bit better, at least in this cycle than domestic. Are there areas like Latin America or, I don't know, other international areas that you would consider or are considering?

We are looking at all options available to the Company as far as putting our equipment to work. So we are looking at the possibility of international. We are looking at anywhere we feel like that the economics make sense and it is a safe place for our personnel to work.

Got you. And then lastly, obviously reducing the crew count, (inaudible) you are down to four crews, is there still then some, I guess, some costs that would carry over into this current quarter as far as -- obviously you're running less crews, but as far as personnel, I mean do you let all that same personnel go appropriate with the crews or do you keep some of them on. I am just kind of wondering on a cost basis what we should expect in the current quarter versus the prior given it sounds -- I think in the past, there has been a bit of a fixed cost associated with some of these crews.

There is some fixed costs associated with the crews. Basically, we have kept key personnel, but they have taken the place of some hourly personnel. So we are not going to see an impact as far as the existing crews that are working. We do have, of course, a high depreciation because of the amount of equipment that we have purchased in the last 3.5, 4 years. So the main thing is is that we have reduced costs just as soon as possible in order to keep the costs as much in line with the revenues that we feel like that we can produce.

Okay. The last -- if I can sneak one last one in. Obviously, financially, you seem to be in a stronger position than some of your public peers and definitely much stronger than a lot of the private folks that you compete against. I think in this market it is probably fair to say that you are probably seeing some potential, I guess, activity. You could go in and maybe buy some things out there. Would that be something you would entertain if the price is right or given the activity just really under no circumstance would you look in this market of adding any sort of equipment, etc.?

Well, I think you have to look at the opportunities that are available to you at all times and even in a downmarket, there could be some very positive opportunities for us. So we continue to have an open door policy as far as reviewing anything that looks like may make sense to better grow the Company.

Good to hear. Thanks, Wayne.

Andrew Halperin, Beaver Capital.

Good morning. I was wondering whether, in view of your very, very strong cash position and your low debt levels, whether you have given any thought to adopting a policy of having any stock buybacks?

I know our Board has reviewed that. There is no -- there is nothing at this time that we are reviewing as far as any stock buybacks. I am sure you can understand that cash is king in this type of environment. So we feel like it is very important to have the cash availability to take possibly advantage of opportunities that come to us in this type of environment.

Are you seeing anything -- any activity out there or any signs of a bottoming in these markets and is oil a different world than gas for purposes of 3D seismic?

Well, I think we are hopefully seeing a bottom out there. There is oil plays and there is gas plays. Right now, we are still involved in some of the larger gas plays. We are doing a lot of work in the Haynesville Shale and that area, but we definitely have seen, since the beginning of the year, more inquiries in oil plays. So that is probably something that we will probably see a greater amount of interest in between now and the end of the year are the oil plays versus gas plays.

Are you seeing any pickup in queries for work in oil?

Yes, yes. There is no doubt that the oil plays are probably more in demand than they have been previously.

Thank you.

(Operator Instructions). Terese Fabian, Sidoti & Co.

Thank you. A question on sort of a broader overview of what you are seeing in the North American market because one hears that the oil majors and the larger E&P companies continue to spend through a downcycle to a greater extent. Now your clients are smaller E&P companies, but what are you seeing in terms of the seismic environment in North America at the present time?

Well, we are seeing a very soft market. We are seeing that pricing margins are being squeezed by what players are out there. There is some expenditures by some of the majors, but very limited. I think, right now, everybody is very cautious on what the future holds as far as commodity prices, as far as what new energy policies may kick in. There still is leasing going on out there, but it has slowed down considerably. And I think that we are seeing a very cautious view by all the E&P companies. So until a lot of the uncertainty is removed, I think things will remain slow. Hopefully we will see a lot of the uncertainty in the next 60 to 90 days be removed and we start seeing a pickup back in exploration in the US.

Okay. A number of the oilfield service companies that have reported to date are saying they are less pessimistic than they were at the end of the first quarter. Do you have personal view on that one for yourself?

Well, I think that things are -- our business, of course, we were living off a previous backlog from '08 going into '09. As you know, we had a great first quarter, a pretty decent second quarter, a great first half. So we are, of course, lagging behind a lot of the other oilfield service companies as far as -- basically they don't have the backlog that we encounter in the seismic business. So we are of hopes that we might see some pickups in the fourth quarter as far as demand for our services and hopefully going into '10 should be hopefully an improvement.

Okay, I appreciate that reply. A question on your customers and 3D surveys. You said that there was some tire kicking going on over pricing and all, but are you seeing more channel intense surveys being attractive to your customers? Is this one of the items of negotiation that you have, sort of same price more work?

Oh sure. Our clients want more for their money and they want to pay less and they want to get more. But we are seeing that they are demanding more channels for less money. So that is just basically what happens within our industry when things soften up, so when things turn and the demands hopefully will turn back where we get more for our services for the amount of equipment that we are supplying.

And because your equipment is interchangeable for the most part, are you seeing your surveys with a larger channel count now? Are you able to transfer equipment around between the crews or is that something that is going to be happening in the future?

No, we are seeing that right now. We have eight crews with the same type of equipment, so we are able to move the equipment around as demands require. So that has been very good for us. So we expect that to continue on for the rest of this year as far as being able to move equipment around to needed locations.

All right. Thank you.

There are no further questions. At this time, I would like to turn the call back to management for any closing comments.

I would like to thank everybody for being on our second-quarter 2009 conference call and we appreciate your interest in the Company. Thank you.

Ladies and gentlemen, this concludes the TGC Industries' second-quarter earnings conference call. Thank you for your participation. You may now disconnect.