Dawson Geophysical Co (DWSN) 2015 Q1 法說會逐字稿

Good day and welcome to the Dawson Geophysical first-quarter 2015 earnings conference call and webcast.

(Operator Instructions)

Statements made by management during this call that are forward-looking and which provide other than historical information 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 these statements.

These risks and uncertainties includes the Risk Factors disclosed by the Company from time to time in its filings with the SEC including Exhibit 99.5 to its Form 8-KA filed with the SEC on April 30, 2015. Furthermore as we start this call please also refer to the statement regarding forward-looking statements incorporated in the Company's press release issued yesterday afternoon and please note that the contents of the Company's conference call this morning are covered by those statements.

During the 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.

The call is scheduled for 30 minutes and the Company will not provide any guidance. Please also note this event is being recorded.

I would now like to turn the conference over to Mr. Steve Jumper, President and CEO. Please go ahead, sir.

Thank you, Rocco. And good morning and welcome to Dawson Geophysical Company's first-quarter 2015 earnings and operations conference call, our first call since the completion of our recent transaction with TGC Industries. Details of the transaction can be found in prior Company releases and SEC filings.

As Rocco said my name is Steve Jumper, Chairman, President and CEO of the Company. Joining me on the call today is Jim Brata, Executive Vice President and Chief Financial Officer, and Wayne Whitener, Executive Vice Chairman.

I would just like to take a minute to thank the diligent effort on behalf of our finance and accounting group to navigate through all the recent required filings since the completion of the transaction.

If you'd 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 as of today, Tuesday, May 19, 2015 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening.

Before commenting on the first-quarter results I would like to say a few words about the recently completed strategic business combination with TGC Industries. On February 11, 2015 Dawson Geophysical and TGC Industries announced the completion of the strategic business combination.

The new Dawson Geophysical operates under the Dawson brand in the United States and the Eagle Canada brand in Canada, each well recognized and well respected in their markets. We are confident that our expanded equipment base and support services will lead to improved crew efficiency and reduce dependence on third-party service providers resulting in a stronger revenue stream at reduced cost.

The expanded client base will provide a foundation for a deeper, more geographically balanced order book resulting in increased crew and channel utilization rates when market conditions improve. And capital expenditure needs in the near-term will be significantly reduced as this strategic combination provides a robust, latest-generation equipment base.

Turning to our first-quarter results, the merger transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical Company being deemed the accounting acquirer. The combined companies adopted a calendar year ending December 31. Our results for the first quarter ended March 31, 2015 reflect the full-quarter result from legacy Dawson Geophysical and results from legacy TGC Industries from February 12, 2015 through March 31, 2015.

The first-quarter results compare back to the legacy Dawson Geophysical quarter ended March 31, 2014 which at the time was legacy Dawson Geophysical's second fiscal quarter of its fiscal year ended September 30, 2014. The second quarter of 2015 ending June 30, 2015 results will reflect a full quarter of combined entity operating results.

As mentioned in the first-quarter 2015 press release our first-quarter results were negatively impacted by reduced client demand due to decreasing commodity prices, client delay, severe weather conditions in many areas of operation, a weaker than anticipated Canada season and reduced utilization rates of the deployed a data acquisition crews in the lower 48 United States. During the first quarter the post-transaction Company operated a peak of 14 seismic data acquisition crews in the United States and a peak of 4 crews in Canada.

We are currently operating 8 to 10 data acquisition crews in the United States and based on currently available information we anticipate operating 8 to 10 in the United States with limited activity in Canada into the third quarter. Utilization rates on the Company's active data acquisition crews have been severely impacted through the middle of the second quarter primarily due to excessive wet conditions.

I will now turn control of the call over to Jim Brata who will review the financial results. Then I will return with some final remarks about the outlook for the rest of the year.

Thank you, Steve, and good morning. Before I get started I'd like to review what Steve said earlier.

The results for the first quarter of 2015 reflect the full-quarter results of legacy Dawson Geophysical and results of legacy TGC Industries from February 12, 2015 through March 31, 2015. The first-quarter results compare back to the second quarter of 2014 legacy Dawson Geophysical ended March 31, 2014. The second quarter of 2015 ended June 30, 2015 results will reflect a full quarter of combined entity operating results.

Revenues in the first quarter of 2015 were $73.7 million compared to $76.8 million in the same quarter of 2014. As Steve mentioned we operated a peak of 14 crews in the US and 4 crews in Canada during the quarter.

Dawson Services in the first quarter of 2015 was $64.8 million compared to $60.1 million in the same quarter of 2014. Dawson Services as a percentage of revenues in the 2015 first quarter was 87.9% compared to 78.3% in the same period last year.

Gross profit was $8.9 million compared to $16.7 million in the same quarter of 2014. Gross profit margin was 12.1% compared to 21.7% in the same quarter last year.

Selling, general and administrative expenses were $7.5 million in the first quarter of this year compared to $3.7 million in the same quarter of 2014. SG&A expenses increased due to transaction cost of approximately $2.6 million of severance expenses of $530,000 associated with the merger.

Depreciation and amortization expense in the first quarter of 2015 was $11.2 million compared to $10.2 million a year ago. As a percentage of revenues, depreciation and amortization expense was 15.2% in this year's first quarter compared to 13.3% in the same quarter last year.

Net loss for the first quarter of 2015 was $6.6 million compared to net income of $1.7 million in the same quarter last year. We recorded an income tax benefit of $3.3 million and an effective tax benefit rate of 33.4%. This compares to an income tax expense of $687,000 and an effective tax expense rate of 29.4% a year ago.

EBITDA in the first quarter of 2015 was $1.4 million compared to $12.7 million in the same period a year ago. An EBITDA reconciliation was provided in our earnings release issued yesterday afternoon.

And now I will highlight some balance sheet items, our balance sheet remains strong. As of the end of the first-quarter 2015 we had long-term debt including obligations under cap leases of $7.9 million, cash and short-term investments of $48.1 million. Our current ratio was 2.9 to 1 and finally working capital was approximately $77.3 million.

With that I will turn the call back to Steve for some comments on our operations.

Thank you, Jim. 2014 was a challenging year as the significant drop of oil prices negatively impacted demand for services.

During the first quarter of 2015 ended March 31 the Company operated a peak of 14 crews in the lower 48 United States and 4 crews in Canada. We believe our current order book is sufficient to sustain 8 to 10 crews predominantly in the oil- and liquid-rich basin regions of the continental US.

Revenues for the quarter were negatively impacted by severe weather conditions in many area of operations, a weaker than anticipated Canadian season and reduced utilization rates to deploy crews in the United States. Expenses for the quarter reflect transaction-related cost of $2.6 million related to the recently completed business combination with TGC along with an increase, an additional increase in organizational integration cost. Operational results will continue to be challenging for the remainder of 2015.

Commencement of a multi-component surface recorded microseismic project is scheduled to begin late in the June quarter. Based on currently available information demand for the Company's multi-component crew is anticipated to remain steady for the balance of 2015.

We continue to work through integration processes. Although we anticipate fiscal 2015 to be very challenging we believe the combination of Dawson and TGC will provide long-term growth opportunities and market conditions improve.

We will continue our focus on rightsizing our operations to fit current demand levels while (technical difficulty) in a position to react to market conditions quickly, maintaining a strong balance sheet and commitment to our expanded client base by providing higher resolution subsurface images in the shorter cycle time. We anticipate a capital budget for fiscal 2015 at maintenance levels below the approved budget -- below the capital budget approved by the Board of Directors. Our balance sheet remains strong as Jim said with approximately $48.1 million of cash and short-term investments and $77.3 million working capital.

In closing we appreciate your patience through these challenging quarters. Your Company has experienced down cycles in the past and each time we have successfully emerged stronger and better positioned.

And with that, Rocco, we are ready to take questions.

(Operator Instructions) Marshall Adkins, Raymond James.

Good morning, guys. Steve, the integration of TGC, could you update us on the timing and the progress of when you think you're going to be satisfied that is fully integrated and all the cost savings have been wrung out of the system?

I think we're getting close, Marshall. I think from an operational level I think the integration process has gone very well. We are just as a few examples of some areas where we're getting a little bit of help because we have brought a significant level of the cable and geophone repair in-house to the legacy TGC facility.

Geophone and cable repair is a fairly large expense and has been outsourced for legacy Dawson, so we began that process moving that over on a significant level in April. We are in the position of utilizing some of the legacy TGC dynamite drilling operations on some projects that we had and so we've realized some level of less dependence on third-party providers in that area. We've been able to move a little bit of equipment between the two companies and cross-border to reduce to a certain level the need for any rental equipment, particularly related to the multi-component care gear.

And so we've still got some things to do. We'll continue to consolidate entities through the summer, clean up the corporate structure. We've really been running a dual track in finance and accounting up to this point and so will be able to streamline that operation here.

I believe during this quarter we'll get some things moved over on payroll this quarter so I think we're in good shape. It's unfortunate given the market conditions that we're not going to realize some of the benefits that we felt like were in place back in August and September when we entered into this transaction and even back in 2011.

So the weakened demand levels are certainly going to reduce quite a few of the benefits that we've talked about. When the market conditions improve and we get back to a more consistent deployment level where we can continue to move channels back-and-forth and focus on more of a regional deployment strategy I think we'll start to realize more. But we should be pretty well through the integration process by the end of this quarter I would hope.

Is there anything surprising in the acquisition either positive or negative that you've seen?

I'm very pleased with the expanded client base. I think that's a real positive. I'm really pleased with the integration and level of support services that each side brings to the table.

I had envisioned that those combinations were there and would be beneficial. I don't know that I see any real negative.

Market conditions have been tough, obviously, and so we're not in a position to realize in the short term all the benefits that we think we have. So I don't know that anything has really jumped out at me one way or the other, Marshall.

All right. The rig count seems to be bottoming. Activity overall on that side of the business seems to be exhausted at least in terms of its downward move.

How does your side look? Are you starting to see more inquiries? Do you think we're near a bottom in terms of ex- the weather I know that's been terrible and it's probably seems like it's raining up there today, too.

We had a storm here last night. It rains about every five days.

Yes, it sounds like Houston. So anyway are you seeing any firming in the bidding like it seems we're doing on the rig side?

You know, Marshall, we saw a little flurry of activity that was encouraging about a month ago. I think that's probably flattened out here recently.

Having some conversations with several E&P companies about plans they have for the back half of the year. Some of them are significant opportunities. Those bids have not formally arrived and I think companies are continuing to work through their strategy.

I sense that there is with the reduction in drilling activity I sense that some of our clients are beginning to look long-term at better ways to reduce their cost, reduce their finding and development costs, obviously service cost are adjusting to commodity prices but looking for ways to derisk locations. And so oftentimes when you get in these kind of slowdowns and you get in this reset people will begin to look forward more from a strategic standpoint and an asset evaluation standpoint as opposed to pushing rig count really high.

So I think that could be a positive. I think we're seeing some signs of that. It hasn't come to fruition as of today.

So hopefully this quarter is going to be extremely difficult. Utilization rates are impacted in many areas of operation. We've not seen a significant increase in our backlog in recent weeks.

Like I said we've got some projects that are out there. The phones aren't dead. People are talking to us.

And so I'm anticipating we're also in that type of year where we're getting into summertime and we typically have a little bit of a lull in bid activity. But I would anticipate that given commodity prices that continue to move up a little bit and get into a stable environment that people could look for I would anticipate seeing an improvement hopefully in the back half of the year in terms of bidding activity, realizing that backlog might take a little bit longer than has been a quarter or two just on the amount of time it takes to get a project ready. So if we're not at a bottom I anticipate that we're close to it given what we're seeing today and given if we don't get another collapse in commodity prices from where they are.

Along those lines, when did you book that project you're going to start in June, when was that actually booked?

Say that again.

The big project to have coming up in June, when did you actually booked that? Was it recently or was it a long time ago?

Well, it's a project that we're on right now and it's going to roll into a microseismic recording here probably the end of this month, early part of next month. But our lag time with some of our projects are actually decreasing.

I think some of the projects that we're about to move on and hopefully we will get an uptick in utilization here in June later this month or in June. But West Texas stuff can probably turn in less than a month and get it ready.

If it's South Texas or East Texas or some other parts it can take two to three months to get that or maybe longer depending on where you are. But I think the cycle times from what we're seeing right now from bid award to actually commencement is improving somewhat.

Thanks, Steve.

Veny Aleksandrov, FIG Partners.

I think that's me. It's Veny Aleksandrov.

Hey Veny you came in under an alias.

I heard FIG Partners so I guess it's me.

Yes, I think it's you. That's who I was anticipating.

So my first question and Marshall touched a little bit on it, the depth of your order book you expect 8 to 10 crews but based on the order book that you have right now and if we exclude weather are these crews going to have utilization?

You know, I think we're in a unique position right now and it's a position that we get in from time to time. Due to the weather issues we've got several crews in the Eagle Ford and in West Texas that have been severely impacted in their day-to-day operations by the weather. It's probably as difficult a weather condition as I've seen in quite some time.

We also have several crews that have projects in those areas that we can't get to. And so we've got some crews that are deployed and having difficulty and we've got some crews that have backlog or projects ahead of them that we just can't get to them just because of conditions in various areas. I think once the weather, if the weather gets off of it in some of these areas and we get an opening here in March or excuse me into May or early part of June I think the utilization in those 8 to 10 crews are going to get very high.

We've got some projects that have been delayed because of weather, some projects that have been delayed earlier in the year based on clients. And so we've got a midsummer, early summer focus where we're going to be we're going to go from a famine to a feast-type environment for utilization. So my feel at this point and indications I'm getting based on the outlook that we have is that once we can get to the field here in the next week to 10 days with the deployment of the balance of the 8 to 10 crews get up to 10 I think those will remain steady through the summer.

We have some projects that could continue to fill those voids or that backlog later into the fall, things that are in discussion that we've talked about that haven't been sent to bid. We do have a little bit of Canadian work this summer which is encouraging. We don't quite yet know how many days or how long that's going to be.

But I feel like we're going to be operating at a pretty good utilization rate for the 8 to 10 over the summer time and into the third quarter if we can get some break in the weather. Now that's well below the combined 14 that we operated in the first quarter but given the ones that are deployed and we're structuring right now and continuing to structure our operations to be 8 to 10 near term with the ability to move back up to 14 in the US if and when market conditions improve.

Thank you. And actually Canada was my second question. The little bit of work that you have up there in the summer, is it legacy Canada work that they usually do in the summer or it's new clients and new interest?

You know, I think it's new work. I do not think it is the traditional work that legacy TGC has done in the summer, is that correct, Wayne?

Yes.

Great, thank you. And my last question, the last downturn you kept all of your key people and you had some reduction in terms of people but not a lot. Is that the same philosophy this time?

That's where we are today. This is a cyclical industry and we recognize that. We feel like that we are in our current position where we are now we have a little more work to do in some areas and we recognize that but we feel like that we're in good shape to respond to the market when it turns by maintaining the operational and technical and professional expertise that we've spent many, many years cultivating and developing.

As we move into the summer obviously weather has been a huge impact. And so the income statement's going to be rough over the next quarter or so.

But we're looking down the road. Balance sheet's in strong shape. We're in a position to be able to capture growth opportunities as they present themselves.

But that is always whether we're in an up cycle or a down cycle those are things that we're always take under consideration and do continued evaluations. And so our strategy will be to maintain the personnel and the equipment base and the balance sheet to move quickly. But at the same time we're going to make every effort to be rightsized as we move through it as well.

Thank you so much.

Georg Venturatos, Johnson Rice.

Good morning, guys. Steve, I was hoping maybe you could just talk about some of the trends you're seeing in today's environment I guess related to average project size and I guess also channel count. Just trying to get a sense for where you stand from a channel count utilization on the combined basis now?

You know, Georg, good question. We don't seem to have as many of the smaller projects out to bid as I would have anticipated. I think those could continue to arise, particularly when you start looking at some of the smaller operators that are focused on more conventional type stuff. And so I think the average size of the project remains fairly large and I'm hesitant to give a number because our backlog and our bidding level is not deep enough to really get a full trend given where we are today.

I think we're in great shape from a channel count standpoint. I think from an actual number of channels recording on the ground I think we've probably hit a little bit of a plateau. When you look at the thing dictating channel count more than anything right now is probably project size and configuration and I think we're in really good shape there.

I think if everything comes together as anticipated in the summer we could have a little bit of stress on some of the equipment platforms, particularly the single channel cableless equipment. I'm very encouraged that we have continued to see increased interest in the multi-component recording equipment which I think we own about 25,000 stations between the two companies, a cross-border of 3C equipment at 75,000 channels.

And if there is a trend I've seen it's that there seems to be an increase in interest level. And so if we have a stress level on equipment anywhere it is on the 3C side. But I think our equipment base is in great shape to handle the market considering where we are.

Okay, I appreciate that, Steve. And then I guess with the assumption that we're kind trough now here with the 8 to 10 crews and hopefully we get to a situation where if we tick up or if some of those delays kick in, on the cost side, can you maybe talk about what else you have to potentially take out of the cost structure going forward and maybe where we should expect that G&A line to be on a go-forward basis post that 1Q level?

You know, I think G&A this quarter was what Jim --

Well it was $7.5 million this quarter but there was $2.6 million of transaction in there. There's $530,000 of severance. I believe that the normalized G&A will be in a 4.2 to 4.4 range and we should see a little bit of tapering that as we go through the rest of the year.

And I think we've had the headcount reduction and so we will continue to see some cost savings there. As I mentioned earlier I think we'll see some cost savings that will be realized through some of the repair facilities. We've consolidated the repair facilities, the larger equipment is being done in Midland and geophones and tables are being done in Denison.

So I think that's going to be an improvement. And we're continuing to run off insurance costs for example on one side versus insurance cost on the other side. So we've still got some work to do and I'm a little hesitant right now, Georg, to go much deeper than that.

Understood. Thanks a lot for the answers, Steve.

Rudy Hokanson, Barrington Research.

Thank you. Good morning.

What are you finding as you are going out and submitting bids in terms of what pricing looks like from the seismic side? We hear of everyone pushing back on a lot of their suppliers right now but in your bidding process and your capacity utilization can you give us a flavor of what's going on in terms of pricing?

The seismic sector in the last up cycle never really moved to the levels that some of the other oilfield service companies did. So I don't sense that there's a tremendous amount at the 30%, 40% stuff that you read about some other services.

Pricing is competitive. It is a competitive market out there obviously. And I think pricing is such that if we continue to do okay with -- if we can get the utilization issues resolved and the weather off of us I think pricing is in an area that we can do okay.

But there's certainly very competitive out there. I'm not in a position to tell you where pricing is upward or downward from a percentage standpoint. But it is -- demand is not robust, it is difficult, and so we're responding accordingly.

Thank you. Then on demand right now, the issue of demand, can you maybe flesh out what your various regional activity levels are?

You were talking about Texas and the weather and with the Eagle Ford and West Texas. But for instance are you seeing some areas continuing to have demand like the Niobrara or areas where you just don't know when demand is going to come back, let's say the Bakken?

I'm just throwing these out. Could you maybe give us a feel for what it is in some of the regions and if that would imply anything in terms of allocation of your resources?

We've got activity levels in the Permian, the Delaware Basin regions of West Texas and Southeastern New Mexico. We've got I guess it would be Niobrara stuff, Niobrara DJ Basin programs that are out there to be done in the not-too-distant future.

We've got quite a bit of activity level in the far eastern, northeastern edge of the Eagle Ford, right where we've had significant levels of rainfall obviously that's been one real area of concern. We have a little bit of conversation about some opportunities back in maybe the Utica and western part of the Marcellus. Still have things in and out of the Miss Lime but for the most part it's Permian and Eagle Ford activity.

Okay, thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Jumper for any closing remarks.

Well, thank you Rocco. I want to thank everybody for participating in the call. It's been a while since we've had a call due to all of the activity related to the transaction.

We're very excited about the transaction. We think it's a significant long-term opportunity for our shareholders. We think it's a long-term opportunity for our employees and will bring benefits to our valued clients.

We're owing to continue to navigate our way through these challenging times. We'll continue to maintain our conservative financial management schedule plan. And I want to thank our employees and our shareholders and our clients for their continued trust in our services.

And with that I'm going to sign off and we'll talk to you in 90 days. Thank you.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a great day.