Dawson Geophysical Co (DWSN) 2015 Q3 法說會逐字稿

Ladies and gentlemen, please stand by. We're about to begin.

Good day and welcome to Dawson Geophysical's Third Quarter 2015 Conference Call. Today's conference is being recorded.

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 material -- materially differ from any future results of performance expressed or implied by these 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 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 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.

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

Well, thank you.

Good morning and welcome to Dawson Geophysical Company's third quarter 2015 earnings and operations call. As previously said, my name is Steve Jumper, Chairman, President and CEO of the company.

Joining me on the call is Jim Brata, Executive Vice President, Chief Financial Officer. Before we start the call, I'd like to cover a few items. 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 of today, Thursday, November 5, 2015, and therefore you are advised the time-sensitive information may long -- may no longer be accurate at the time of it and you're listening -- excuse me -- of any listening of the replay.

Before commenting on the third quarter financial 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 name 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 efficiencies and reduced dependence on third-party service providers resulting in a stronger revenue stream and reduced cost.

We believe that the expanded client base will provide a foundation for 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 the strategic combination provides a robust latest generation equipment base.

Turning to our third quarter results. The merger transaction was accounted for as a reverse acquisition with Legacy Dawson Geophysical being deemed the accounting acquirer. The company -- the combined companies adopted it calendar yearend -- calendar year ending December 31. Our results for the third quarter ended September 30, 2015 reflects the full-quarter results for the combined companies.

Third quarter fiscal 2015 results are compared to the quarterly results for Legacy Dawson for the period July 1 through September 30, 2014, which at that time was legacy Dawson Geophysical's fourth fiscal quarter of its fiscal year ended September 30, 2014, and did not include the operations of Legacy TGC. Due to this fact, the historical financial results for the quarter ended September 30, 2014, are not directly comparable to the combined Company's financial results for the quarter ended September 30, 2015.

Selected pro forma financial information giving effect to the merger as if it had occurred on January 1, 2014, together with the assumptions thereto is presented in our press release issued this morning and additional information regarding the merger and its impact on the Company's financial position is set forth in the Company's 10-K for the quarterly period ended September 30, 2015.

As mentioned in the third quarter 2015 press release, operating revenues were essentially unchanged as compared to the same period in 2014. Operating expenses for the September quarter were down slightly in response to the decrease in third party charge reflected in the current quarter is a $164,000 severance cost related to approximately 30% reduction of workforce since the closing of our merger. Demand for Dawson services at that reduced level to recent years is anticipated to remain at those levels through 2015 in response to decreasing in uncertain commodity prices and reduced client expenditures. The Company anticipates operating eight to 10 crews in the United States with limited activity in Canada through the balance of 2015.

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

Thank you, Steve and good morning.

Before we get started, I'd like to review what Steve said earlier. Our results for the third quarter ended September 30, 2015 reflect the full quarter results for the combined companies.

Third quarter fiscal 2015 results are compared to the quarterly results for Legacy Dawson for the period July, 1 through September, 30, 2014, which at the time is Legacy Dawson's fourth fiscal quarter of its fiscal year ended September, 30, 2014 and did not include the operations of Legacy TGC.

Due to the foregoing, the historical financial results for the quarter ended September 30, 2014, are not directly comparable to the combined Company's financial results for the quarter ended September 30, 2015. Revenues in the third quarter of 2015 were e$62.5 million compared to $62.6 million in the same quarter of 2014.

As Steve mentioned, we operated approximately ten crews in the United States with limited activity in Canada during the third quarter of 2015. Cost of services in the third quarter of 2015 was $50.2 million compared to $54.5 million in the same quarter of 2014.

Gross profit improved to $12.3 million in the third quarter of 2015 compared to $8.0 million in the same quarter of 2014. Selling, general and administrative expenses were $5.0 million in the third quarter of this year, compared to $4.7 million in the same quarter of 2014.

Depreciation and amortization expense in the third quarter of 2015 was $12.0 million, compared to $9.9 million a year ago. As a percentage of revenues, depreciation and amortization expense was $19.1 in this year's third quarter compared to 15.8% in the same quarter last year.

Net loss for the third quarter of 2015 was $2.9 million, compared to net loss of $3.9 million in the same quarter last year. We've recorded an income tax benefit of $1.4 million and an effective tax benefit rate of 32.9% and this compare to an income tax benefit of $2.3 million, an income tax benefit rate of 37.4% a year ago.

EBITDA in the third quarter of 2015 was $7.8 million, compared to $3.7 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 remains strong. As of the end of the third quarter of 2015, we had debt including obligations under capital leases of $12.2 million. Cash and short-term investments of $58.3 million. Our current ratio was 3.3 to 1. And finally, working capital was approximately $72.6 million.

And with that, I'll turn the call back to Steve for some comments on our operations.

Thank you, James.

Despite today's challenging environment Dawson Geophysical is strategically positioned to withstand the commodity cycle downturn. Our strong balance sheet, diverse client base and the management team with more than a 100 years of combined industry experience provide us with the tools and resources equipped to successfully navigate today's market.

The equipment purchases made during recent years further enable us to successfully serve our valid clients while simultaneously operating below previously established CapEx levels. Improved weather conditions, operational discipline and strong financial management in the company's areas of operations led to increased crew utilization in the third quarter of 2015 as compared to the second quarter of 2015 and resulted in a 100% increase in EBITDA from the same period in 2014.

Despite the year-over-year improvement in EBITDA demand for services is at reduced levels from recent years and is anticipated to remain so into 2016 in response to the decrease and uncertain commodity prices and reduced buying expenditures.

The company anticipates operating eight to ten crews in the United States with limited activity in Canada during the fourth quarter ending December 31 and into the middle or latter part of the first quarter of 2016. We continue to work through the integration process. Although we anticipate the balance of 2015 to continue to be challenging, we believe the combination of Dawson and TGC industry will provide long term growth opportunities when market conditions improve. We will continue our focus on right sizing our operations at current demand levels while remaining in a position to react to market conditions quickly maintaining a strong balance sheet and commitment to our expanded client base by providing higher resolutions sub service images and a shorter cycle time.

We anticipate a capital budget for fiscal 2015 at maintenance level below the $10 million capital budget approved by the Board of Directors. Our balance sheet remains strong with approximately $58.3 million of cash, cash equivalent in short-term investments, $72.6 million in working capital and $12.2 million of debt and capital lease obligations.

In closing while market conditions remain difficult, we believe we are well positioned to withstand the commodity cycle downturn. Strong balance sheet, diverse client base and the business combination with TGC industries provides us with the tools and resources to successfully navigate today's market and quickly respond and market conditions improve.

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

Yes, sir. Thank you. (Operator Instructions). And we'll go ahead and take our first question from Marshall Atkins with Raymond James.

Good morning, Mr. Jumper, question on --

That's formal.

Question on cost here. You had a pretty substantial reduction quarter-over-quarter in cost. Was that due to greater utilization or is that more structural in nature in terms of things you are doing to reduce cost? Give us some color on the margin improvement sequentially.

Marshall, I would say that a good bit of the margin improvement and the reduction in cost or reduction on the expense side is a reduction in the third party charges that we put out, that we recognize on the income statement as both the revenue and offsetting expense. And so we had a as a percentage of revenue, I think the third party totals went down for the quarter on a comparative basis.

I think that is a couple of factors, one of which is the areas that we are working, primarily Western U.S. And wide open spaces where you have a natural reduction of charges. I think some of it is some timing issue, we had some things that, if you recall, we were had some significant rain and weather in Q2 and so we delayed getting to some of those projects in Q3, so I think there is some factor there.

I think another contributing factor that is the result of the transaction. I think with the additional resources that the two companies bring together, one of the things, we've talked about is reduction in third party providers. And so, if we can reduce dependence on third party providers and provide those resources in half, that is -- that's, in of itself, is the reduced cost, plus its captured on the revenue stream. And so I know that we surveyed, for example, a good bit of the large portion of projects that we acquired.

We did a lot of the permitting with our in-house services and we utilized the shot-hole dynamite drilling capacity that TGC brought to the table; and some of it is structural in nature. I mean, some of it just been reduction in workforce and streamlined more space and operation all the way through to -- it's a combination of seeing things that I would point to significant portion being related to third parties on various aspects.

Okay. Helpful. We have a bunch of rain, as you mentioned in Q2, you were able to jump from seven crews to ten, in October we've had much rain as well -- at least we have down Southern part of Texas. Can you help us on Q4, should we be looking more towards ten crews or seven crews active and then give us some insight into what customers are talking about for next year if you could?

Sure. We do have some weather issues in the October early November timeframe back in the very same area down in, I guess, it would be South Central Texas, College Station down through I-10 just West of Houston got impacted quite a bit. And so that is obviously hampering some operation down there. But our exposure in that area is not as concentrated as it was in Q2.

We had several issues in Q2. One, was the concentration of activity in that area, followed by the inability to deploy. And so, you know, we stated seven and we never could get deployed in some other areas. Those crews are deployed we are going to have an impact down there for couple of crews. We'll see how the weather pattern develops through the end of year. I think that we've got, you know, we'll maintain 10 crews. I think short-term we'll be in the eight, nine range, but I think 10 will be the number.

You know, the crew count, the way we deploy channels and move equipment around, crew count can be eight, it can nine, it may jump to 10 to 11 for a short period. One of the things we've had quite a bit of success with in this quarter has been with the additional equipment capacity that we've had is the ability to close the gap between projects; the pickup and layout type of equipment. We've closed that gap with the additional resources that we brought at the table.

So, we're going to have some impact. We've got a long way to go to the end of the year with both in weather. We're on the shorter day period. We're in Holiday Season. You know, we've got a lot of things. It's still a dicey market out there. We feel pretty good on eight to 10 into the first quarter of next year. And so, you know, we'll have to see where it plays out. Looking into 2016, we have had some interesting discussions with several companies about projects going into 2016. Certainly, you know, when we talk back in May we felt like we had some leads and those things are moving forward. When we got around to middle of summer and we had the drop in oil prices, those obviously slowed down, but we're starting to get some conversion with people.

I think there's a glimmer of hope out there for the back half of 2016. I think it's going to continue to be interesting to see if 2017 is a recovery time for any. If we start to commodity prices improve somewhat, they don't have to go, you know, really high number. If we see improvement through 2016 and looks like 2017 is going to be there - be better than I would anticipate that our clients are -- in some of the feel we're getting is they may want to go ahead and acquire their data and get in front of some drilling plans in later part of 2016 and early part of 2017, and approach the unconventional a little bit differently, more strategically, maybe the right word to say it.

So, we're optimistic, but there's going to be some opportunities in 2016. It is going to be -- I'm not trying to paint a rosy picture here. It's going to be difficult. Demand is going to be down and we'll adjust it accordingly.

Thank you, Steve.

Thanks, Marshal.

Next question comes from Georg Venturatos with Johnson Rice.

Hey, good morning, Steve.

Hey, Georg. How are you?

I'm doing well. Thank you.

Following up upon on these previous questions; I just wanted to get a little better feel for where demand is coming from right now from a basin specific standpoint. And then second question, you know, just some rough commentary on where we stand right now from a channel count per project and how that eight to 10 crew range, kind of implies in terms of your channel count utilization today?

So, on the basin perspective, Georg, it's kind of interesting -- I don't know that we're concentrated right now. We're in Wyoming. We're in down working gas projects in the Southeastern part of the U.S. We're down in the Eagle Ford. We're in and out of the Permian. We're out in the Delaware. We've got some opportunities in Oklahoma.

So we've got some mid-continent stuff. You know, we went through a time period back in last year or 18 months where we were really concentrated at a high level in the Permian. If you recall we had some quarters where we got tied up with some agricultural activity and we had some issues that was hampering the utilization of deployed crews at a fairly high level. I'm going back, you know, three, four, five quarters ago.

And then, in Q2 we were pretty well concentrated on the deployed crew basis in the Eagle Ford and we go hit by rain. And what's interesting where we are right now is we're little more spread out. And I don't sense that we've got some activity in the Delaware. I don't sense that there is a concentration as much as we probably seen in last few years.

I do think that, you know, what it -- the thing that might be driving that in my mind is the clients that we're working with both now and talking with, you know, maybe we've talked, they've divested themselves of assets, and they're concentrating in certain asset basis. And maybe we're seeing some of that. And so, that leads to believe that we're not throwing blankets out there to large areas that we're going to go do, but E&Ps are starting to concentrate on well, let's really evaluate the study this assay and attack it strategically.

So, I think there is some of that. But it is kind of interesting where we sit today that we're probably have more geographically diversity right now than we've had in quite some time, which has been obviously a benefit. It's what we've always try to do and wanted to do. We're going to go where demand takes it, right? But, you know, we're positioned to work all across the lower 48, so we're in good shape.

Our channel count deployment, I would say that, you know, we've got some cable crews out working and we'll continue to see cable crew activity in particularly in West Texas where that equipment base works fine. From the cable-less equipment both GSR and from the INOVA Hawk Gear, it's pretty well all deployed. Now, it's being - I would say that the channel count, the actual channel count per job has probably stayed pretty level for the last year or so. What has increased is the number of channels required to shoot a job based on its overall aerial extent. And so, this break that down, the concentration on a per square mile basis is about the same.

The number of first quarter miles that are active when we recorded, are staying relatively flat, but the size of the surveys are very large. I think we've got at least two crews, for example, -- in excess of 20,000 channels on the crew at any one time that gives them the chance to be efficient to layout ahead. Here again, even though we're in a tough market and we haven't fully realized the benefits of the transaction that we contemplated and began a year ago.

We are seeing benefit. We're seeing benefit in services. We're seeing benefit in expanding find base and we're seeing benefit of the shared equipment base. I mean, honestly I don't believe either company could have attack some of these jobs we've got right now without the other ones equipment coming into play.

So, we've got most of the cable-less equipment deployed at this point on projects and some of them are pretty large. We still have some running around in the smaller channel count range, but we've got some big ones out there.

Okay. Good to hear. And then the last one from me, just probably more clarification or anything, but you talked about a few large projects in 2016 that you're in discussions with and it safe to think now that's probably a second half 2016 at the earliest type event?

We've got some things out there. Our programs come in stages, right, I mean, we have some under - you have some you're working on. Then you have some that are contracted, that you haven't started on completely and you have some that are contracted that you're in early phases. And then you have some programs where the clients actually started some of the prep work. And so, you know those are going to come to fruition at some point or you feel like they are. And, you know, some of those things would be early, could come together for early 2016 once they're awarded.

And then, some of the others that we've got out here are some things in some areas that can together very, you know, fairly quickly. And so, you know, we could get an extension into, you know, maybe the middle of the year. I don't think we're looking at -- specific at this point that is true back half. Now, we do have some projects that are in discussion, but I don't know they're going to do all of it in one year and split it into two years and so, it's encouraging.

I want to remind you and everybody else that when we start talking about utilization that there's a lot of things that effect those things, they can be changed in size, and scope, and timing delay, it can close at any given time, I think we'll always talk about that. But I think we're seeing certainly some visibility on potential projects into the middle of the next year that we feel pretty good about. But in the world we're in today, you know, my -- I've never had a great crystal ball and it's still the same old crystal ball for me.

Got it. Perfect, Steve. I appreciate the answers.

I appreciate it. George, hey, the Tiger is going to win this weekend?

Yes. Yes. I think they take care them, and break that streak. So we'll see if the weather let's some play a real game, but I think it will be a good one to watch.

Good. I'm just helping boys score this weekend.

All right, Steve. Have a good one.

Thanks, George, appreciate it. Thank you.

(Operator Instructions).

And we move next to John Deysher with Pinnacle.

Hi. Good morning. Nice progress on the expense front. Just curious what's left to do there in terms of cost reduction efforts?

Well, I think, we - as we talked about in our last quarter call, we will continue to right-size our operation based on demand. So, that's always going to be in play. We are going to maintain a resource base that allows to respond very quickly as we have in the past when market conditions improve. I think we're making some headway and still have some work to do in the areas of professional services, you know, things like insurance cost. I think we're going to realize some improvement there as the combined entities rolled together.

I think there's going to be -- obviously we're going to be -- continue to be one company, and so we'll get more efficient all through the system.

I think we'll continue to see improvement. One of the things that we had talked in the transaction is the fact that TGC brought with them a geophone and a cable repair facility. I think we'll continue to build that where it gets to the point we can handle more of our in-house capacity which will reduce those costs. So, I think there is still some room to go and things to do and mainly we'll adjust the size of this operation to the demand as we see it.

Got it. Do you expect any additional charges in the fourth quarter for transaction, I think you had 325,000 in the third quarter, do you expect more in fourth quarter?

If there are any, we anticipate them to be very small. I think we have worked our way through the better part of that.

Okay. So, where you want to be in terms of headcount and so forth right now?

Based on where we working today and the level of activity, yes.

Okay. Thank you.

Okay.

And with no further questions in queue, I would like to turn the conference back over to management for closing remarks.

Well, I want to appreciate -- express our appreciation to everybody who's called in and participated in our call. We want to, obviously, thank our employees for just a fantastic effort particularly in this last quarter in a -- in a very difficult environment. I want to thank our long-standing clients for their continued dedication and support of our services and I certainly want to thank our shareholders for your support and dedication to our company. And we'll look forward to talking to you again, probably sometime in the early March time frame. Thank you.

Ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.