Dawson Geophysical Co (DWSN) 2016 Q3 法說會逐字稿

Good day, and welcome to today's Dawson Geophysical Third Quarter 2016 Results Conference Call. Today's call is being recorded.

Statements made by management during this call with respect to forecasts, estimates or other expectations regarding future events or which provide any information other than historical facts may 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 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 the company's annual report on Form 10-K filed with the SEC on March 16, 2016.

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'd now like to turn the conference over to Mr. Steve Jumper. Please go ahead, sir.

Thank you, Deanna. Good morning, and welcome to Dawson Geophysical Company's Third Quarter 2016 Earnings and Operation Update Conference Call.

As Deanna 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 really begin, I'd like to cover a few items. If you would 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 on this call speaks only of today, Thursday, November 3, 2016, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time that there's any replay listening.

Before commenting on third quarter financial results, I'd like you say a few words about the strategic business combination with TGC Industries.

On February 11, 2015, legacy Dawson Geophysical Company and legacy TGC Industries, Inc. consummated their previously announced strategic business combination. The merger transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical Company being deemed the accounting acquirer, with the results of legacy TGC Industries, Inc. being reflected in the company's reported consolidated financial periods -- results for periods from and after February 11, 2015. The combined companies adopted a calendar year ending December 31. Due to the foregoing, comparative financial results that include periods prior to February 11, 2015, are not comparable to financial results that include periods from and after February 11, 2015.

Turning to our third quarter financial results. Operating revenues decreased in the third quarter of 2016 as compared to the same period in 2015. Operating expenses for the September quarter decreased proportionally. Demand for Dawson services is at reduced levels from recent years and is anticipated to remain at such levels through the remainder of 2016 in response to decreased and uncertain commodity prices and reduced client expenditures.

The company operated four to five crews in the United States for most of the quarter. Utilization of several crews was unfavorably impacted by inclement weather conditions in several areas of operations late in the first quarter that continued in the early part of the second quarter and again during the later stages of the second quarter that continued into the beginning of the third quarter. In addition to the inclement weather conditions, we experienced several client-directive delays over the last several months.

Based on currently available information, seismic demand level and the anticipated winter season in Canada, we believe we will operate five to seven crews through the first quarter of 2017. Visibility beyond the first quarter of 2017 remains unclear.

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

Thank you, Steve, and good morning. Before we get started, I'd like to review what Steve said earlier. On February 11, 2015, legacy Dawson Geophysical Company and legacy TGC Industries, Inc. consummated their previously announced strategic business combination. The merger transaction was accounted for as a reverse acquisition with legacy Dawson Geophysical Company being deemed the accounting acquirer, with the results of legacy TGC Industries, Inc. being reflected in the company's reported consolidated financial results only for the periods from and after February 11, 2015. The combined companies adopted a calendar year ending December 31. Due to the foregoing, comparative financial results that include periods prior to February 11, 2015, are not comparable to financial results that include periods from and after February 11, 2015.

Revenues in the third quarter of 2016 were $28.1 million compared to $62.5 million in the same quarter of 2015. As Steve mentioned, we operated four to five crews in the United States for the most of the quarter.

Cost of services in the third quarter 2016 was $28.1 million compared to $50.2 million in the same quarter of 2015. Gross profit was flat in the third quarter of 2016 compared to $12.3 million in the same quarter of 2015.

Selling, general and administrative expenses decreased $3.7 million in the third quarter of this year compared to $5.0 million in the same quarter of 2015. Depreciation and amortization expense in the third quarter of 2016 was $10.6 million compared to $12.0 million in the same quarter a year ago.

Net loss for the third quarter of 2016 was $12.4 million compared to a net loss of $2.9 million in the same quarter last year. We recorded an income tax benefit of $1.6 million in the third quarter of 2016 compared to an income tax benefit of $1.4 million in the same quarter a year ago.

EBITDA on the third quarter of 2016 was negative $3.4 million compared to $7.8 million in the same period a year ago. An EBITDA reconciliation was provided in our earnings release issued this morning.

And now I'll highlights some balance sheet items.

Our balance sheet remains strong. As of the end of the third quarter of 2016, we had debt, including obligations under capital lease, of $4.0 million; cash and short-term investments of $62.5 million. Our current ratio was 5.2:1. And finally, working capital was approximately $63.9 million.

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

Well, thank you, Jim. As mentioned in our press release, 2016 will likely, in fact, has been the most difficult year in my over 30 years of experience with the company and in the industry. Oil and gas prices remain low and uncertain. Exploration and production companies continue to maintain a cautious approach towards spending. Despite today's very challenging environment, Dawson Geophysical is strategically positioned to withstand the commodity cycle downturn. Our strong balance sheet, diverse client base and a management team with more than 100 years of combined industry experience provide us with the tools and resources required to successfully navigate today's difficult market. Equipment purchases made during recent years further enable us to successfully serve our valued clients while simultaneously operating below previously established CapEx levels.

During the quarter ended September 30, 2016, oil prices averaged approximately $45 a barrel, starting the quarter of just over $49 per barrel dropping to a quarterly low below $40 per barrel in August and ending the quarter at just under $48 per barrel for West Texas Intermediate.

While the recent increases are certainly encouraging, it remains difficult to be -- it remains to be determined if the recent strengthening in oil prices can be sustained and the price increases have yet to result in a meaningful increase in demand for our services.

As we experienced uncertainty in oil and natural gas prices during our first two quarters of 2016, our client base continues to take a cautious approach to their capital spending. Based on currently available information, seismic demand level in the anticipated winter season in Canada, as previously mentioned, we believe we will operate five to seven crews through the first quarter of 2017. Visibility beyond the first quarter of 2017 remains unclear. In response to these factors, we will continue our ongoing efforts to control costs and maintain a strong balance sheet, our experienced personnel and our position as a leading onshore seismic data acquisition company in North America.

The company anticipates the capital budget for 2016 to be at maintenance level below the $10 million capital budget approved by our Board of Directors. Our balance sheet remained strong with approximately $62.5 million (sic - see press release, "$62,513,000") in cash and short-term investments, $63.9 million (sic - see press release, "$63,884,000") of working capital and $4 million (sic - see press release, "$3,993,000") of debt and capital lease obligations as of November 30, 2016.

In closing, while market conditions remain difficult, we believe we are well positioned to continue to withstand the commodity cycle downturn. Our 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 when market conditions improve.

And with that, Deanna, I believe we are ready to open the call up for questions.

(Operator Instructions) We'll go ahead and take the first one from Marshall Adkins of Raymond James.

The five or seven crews next quarter, is that all incremental Canada or you're seeing any pick up, a semi-weather uses in the U.S?

Marshall, we're more or less in a four to five, six range in the U.S. I think that number is going to be up and down as it has been. And so we're anticipating through the first quarter of '17 to operating one to three in Canada.

And just looking at timing and anticipating how this is going to work, we could have four in U.S., three in Canada then five in the U.S. and two in Canada. And so, overall, it's five to seven. I don't think there's been anything that had been any material change in the U.S., so most of that increase is going to be Canadian add-on. But that's going to be -- that situation, I believe, is very similar to what we are in the U.S., and that keeping a set number busy all season is going to be difficult. But most of it is Canadian.

U.S. market, we see some proposals. Proposals are still coming out, some that are quite encouraging, some are being rewarded, some are looking at early part of '17, springtime of '17 type work. And so there is some activity in the market. It's not at a level that needs to be where you can actually continue to build where we struggle the most, and that's on utilization issue. So most of it is Canada.

Did you see any increase in the inquiries when we bounced kind of above 50 for a little while or this has just been status quo?

I think it's safe to say that we saw some increase very -- I don't think it's enough of an increase to be encouraging. Now the question is, in my mind, Marshall, is was that directly related to a bounce to 50 that triggered some increase or is that anticipation of the client base feeling like we're going to have stronger prices in '17. Don't lose sight of the fact that we still have a three- to six-month lead time on getting the project ready. And so I don't know that -- while that certainly makes everybody feel better, I don't know if that was specific to the bounce or more forward-looking or is it just getting towards the end of the year and there's been some unspent budgeted that they're looking at. So I think it's -- we got all those factors in play, but I don't think that we saw a tremendous increase in activity on the recent bump.

Okay. So you guys have been much better positioned certainly from a balance sheet than any of the other competitors out there. Fill us in on the competitive landscape. I mean, we all know it's been horrible over the last couple of years, particularly in seismic, but this has to hurt your competitors more than you. So just update us on what you're seeing on the competitive side.

Yes, it is still competitive out there. I think, as you've said, we've had -- as an industry, as a sector, we've had some difficulties over the last two, three years obviously. Some of those competitors have reemerged as private companies and are still very formidable and are still out there competing. We've had -- I guess, the word is consolidation over the last few years. You've had -- I don't think that's the right word, but you've had some things with our -- with some of our peers where they put some groups together. And of course, we had our --

I think they call it bankruptcies.

Yes, well, there's been some of those and then there's been some other combinations and some have certainly have reemerged, of course, our combination with TGC. The crew count nationwide is probably down over the last three years, probably 60% overall. And so I think when you look at, at where we are market share, I think our market share is still about where it was three, four years ago. We've had the same thing happen in the Canadian market. We've had some consolidations, and we've had some bankruptcies.

So the landscape has changed, but we're fortunate in that we've been able to maintain a strong balance sheet. We've been able to maintain a strong equipment base. I think what's been the real key for us going forward is we're continuing to maintain our very valuable and important key personnel from the operations side, the technical side. So it's a dogfight out there every day for a variety of reasons.

Last question for me. In the last year, a year and a half, the Delaware there in the Permian and the SCOOP, STACK in Oklahoma has really, really surged. Are you doing much there? Do you think that's going to need a lot more seismic shot over the next few years? Tell us how the emergence of those two areas affects your business longer term?

The majority of our activity has been in those areas, the Delaware, the Permian and the SCOOP. And I think we've been very fortunate to be a part of those projects that have been going on in recent years. And currently, several areas in the Permian, for example, have been, I guess, the word is reshot from where they were 20 years ago. It's really been 20 years since -- or so since we've been really active in the Permian.

The Delaware has a -- does not have as much coverage from the seismic data standpoint as the Permian does. So there's still a lot of running room in the Delaware, certainly in the SCOOP. So I think there's a lot of activity there.

And I think our science, our technology is getting to where it needs to be, slowly but surely. Number one, I think we're getting more recognition as the value we bring to table inside the E&Ps. And number two, I think we're progressing as an industry and as a technology beyond geo-hazard mapping and avoid [default-type] work into getting a little deeper into the reservoir with these higher resolution images, kind of seeing a little more about the rock matrix and rock fabric. And so, I think, we're getting a little better position, the seat at the table so to speak, with actually deciding where these folks are actually going to place these horizontals. So I think it's going to be exciting. I think there's a lot of things to do. It's just going to -- we're just not quite there yet in terms of the amount of programs being released.

We'll go next to John Deysher of Pinnacle Investment Management.

We're seeing an uptick in horizontal drilling or fracking, that's clear with the rebound in oil prices. And I'm just wondering at what point in the oil price cycle you see vertical drilling, which my understanding requires more 3D seismic than horizontal? Is there an oil price WTI price at which you would expect vertical drilling to rise and, therefore, the demand for your 3D seismic to rise?

Interesting question, and that we continue to do work for vertical drilling projects. There is a little bit difference in the application of the tool and as well as the client base. The majority of the vertical drilling opportunities that are presented throughout the -- primarily in the Permian right now, tend to be smaller operators. They're not the mid-tier independently traded public companies, and those surveys tend to be smaller in nature and more target-oriented and for a valuable, but smaller client base.

And we continue to do some of that. It's interesting, some of the vertical stuff, I would guess -- I'm not an expert in this area, John, but I would guess it has a lower price threshold than the horizontal wells do, while the horizontal wells have much larger IP production rates and those sorts of things. The wells are very costly to drill and complete.

The difficulty with the vertical, as I understand it and from my position, the difficulty with the vertical model is not as much the price-driven on the oil side as it is people being able get a land position. The opportunity to drill these wells, the horizontal plays, the shale unconventional, whatever you want to call them, still command a pretty high lease price, for example. And so I think there is a lot of opportunity based on geology and based on price points, but I think there's a difficulty in these guys getting land position. The production level of those projects just aren't what they are on the horizontal side.

So I think as oil prices increase than lease prices will continue to increase and so I think the vertical gain has got some difficulty.

To go back to the original part of your question, I believe we continue to grow as an industry and as a technology in our value-add to the horizontal drilling programs. I think, particularly in the $50 to $60 price range or -- commodity price range, I think that these E&Ps are needing to be more strategic on where those wells are located, and I think we bring a lot of value not just in avoiding faults and geo-hazards. But as I mentioned earlier, I think we're being able to show the E&P companies. We're getting more statistics behind us. We're getting more well results. We're getting more information. The more information you have, the better models you can build. And I think we're moving in the direction to where -- we're going to be able to help to guide these horizontal wells.

It's a little different technique or use. Verticals, you're looking for places that would be conducive to the accumulation of hydrocarbon. On the horizontal side, you're drilling basically into what was -- is a tight rock that you know that there's hydrocarbons there. It's just strategically locating the wellbore to efficiently extract the hydrocarbons. So I think we've got activity level in both going forward, and I think our role in the horizontal world will continue to grow.

Okay, that's helpful. Year-to-date, Steve, on a revenue basis, what percentage would you say is vertical-oriented versus horizontal-oriented?

Oh, John, at the risk of sounding evasive, I don't know but I have that number. I don't know that we've calculated that. We're not always privileged to full intent. I think, what's interesting in the Permian, for example, is while the horizontal play is the one that draws the attention, the Permian is the STACK play basin. So there's productive zone all up and down, and so I'm confident that there are partners involved in some of these surveys that we do, that are driven by a horizontal player, that have a subset player within them that's playing a vertical role in another zone, for example.

And so I don't know, but it's one or the other. And just a straight out, this is all vertical. I would guess that, that numbers are pretty low percentage, John, but I don't have it calculated here.

What is the low percentage, the horizontal?

Vertical, vertical, vertical.

Okay. So historically, most of your business recently has been on the horizontal side?

Yes, sir. Going back to the early part of 2003, 2004 when we were doing this type of work, but it was driven in the natural gas plays.

Okay. So your strength is in both vertical and horizontal?

Yes, sir. I do believe that we went through a cycle in '13, '14, where commodity prices were so high that there is such a pressure to grow production that it was drill, drill, drill. I think it's $60 -- $50 to $60, $70 range. I think you need to be more risk-adverse on where these wells are located. And so, I think, as we move upwards in the commodity cycle and there's better development of these oil assets, I think we'll continue to have a real opportunity there going forward. But I think we've been involved in helping these folks with her horizontal plays for quite sometime.

(Operator Instructions) We'll go next to John Potratz of Researched Investments.

The reason for my call, first of all, for keeping your CapEx fairly low around $1 million, that's incredible for you. Thank you.

There's a couple of -- we're looking at is what is the prospects for new business, and particularly in the Permian basin, there have been several articles that the land leases there have raised several hundred million or a couple billion dollars. What is -- one side is in place, what is the potential for new business? And what is the sort of the lag time on that business?

Well, as we've talked about here, I think there is a lot of potential. When you look at the Permian, in particular, there's been seismic activity in the Permian basin for 80 years or plus. Our company has been involved in activity out here for 64 years, and so there's been a lot of activity. But as the technology has evolved, the channel counts increase, resolution improves. There has been quite a bit of quote reshooting. It was 2D, then it was 3D and then it's a higher resolution 3D.

What's interesting is we're doing quite a bit of work in the Permian now with multi-component recording, which is recording alternate waveforms of the seismic method. And so that's something that we have talked about over the years for last 15 years. That is a technology that has potential as we begin to understand the information we glean from those surveys. It's been very active in Canadian market. So we're starting to see implementation of some new -- not new, but recent add-on technology in the basin. So I think there's -- a lot of basin that needs to be recovered. There's a lot of basin going out in Delaware that's going to need some higher-end technology. There has been some land movement here. There's been some real -- some recent well-publicized discoveries, of which we've been fortunate to be part of those.

And so the lag time, we're probably -- if a project comes in, we're probably three to six months before we can really get some movement on it. I think in -- going back to the prior question about vertical versus horizontal, I think one of the big differences is when you're in the horizontal world, we tend to be a lagging indicator. When you're in the vertical world, we tend to be a leading indicator. And so we're going to lag the land work. We're going to lag the -- some of the early drilling work. We're going to lag a little bit on some of these drilled uncompleted. I'm not real sure what the inventory of drilled uncompleted is. But I think there will be some things to work through before -- in addition to pricing of the commodity cycle, before we see a real meaningful increase in activities.

So while it's encouraging and while we think looking later into '17, we see some encouraging things. I still think our company, our industry sector and oil service in general is probably in for a little -- for a tough goal here over the short term.

So it's going to take, you think, a little while before we're going to see much new business resulting from all the billions of dollars being spent in Permian Basin because of the uncompleted wells and existing and for the new owners to sort of get in line and saying, "Okay, I want to do some geo -- this is what I need to do, this is the geophysical work I need to do, so there's going to be a lag of three to six months."

Well, the lag of three to six months is if we get a project awarded, it takes us three to six months to get the land position, get everything cleared, to get it ready to go where it's ready for a crew. And so we're always going to have that lag, that's always going to be in our business.

The lag on uptick in the Permian, while we are seeing some activity levels and we're seeing some things that are encouraging, I still believe that for the reasons that we've mentioned that it's going to be -- continue to be tough in -- all across the space for the near term.

I think it's coming. We had hopes that we would see a bigger improvement in commodity prices in the back half of '16, and I think everybody felt that was the case and that didn't materialize. And now, I think you look at where we are today, we're at $45. I think we've got to see some meaningful improvement for the end of the year in oil prices, and then I think we've got to see some sustainability of pricing. And then I think we'll see some uptick, but I don't know if that's going to be the first quarter of '17 or mid '17, I just don't know.

I've been -- this cycle has been quite a bit different from things I've been through in the past. But we're going to continue to operate our company, ready to move on these opportunities as they present themselves. We're going to work really hard to maintain our balance sheet. You mentioned our CapEx in the quarter. Our equipment base is in great shape. We're right where we need to be to respond, financially, equipment-wise and personnel-wise. And so we're going to continue to manage the company that way and we're going to have some hiccups along the way, but we're going to be ready when that day comes.

Good. Now I look forward to being a shareholder at that time. Thank you very much.

Thank you for being a shareholder now. Thank you.

Thank you. And with no further questions, I'd like the turn the conference back over for any additional or closing remarks.

Well, thank you, Deanna. I want to thank everybody for listening in and taking the time to talk with us, enjoyed the conversation. As I have mentioned in the press release, for a couple of quarters, it's very tough out there, that's no secret, probably the toughest in my 32-plus years. But we've got a great company. We've got good equipment. We've got a great balance sheet. We've got good relationships with our client base. Most importantly, we have tremendous employees who are working very hard everyday, keeping very high morale level. They're very diligent in what they do. They're looking at cutting costs and being as efficient as they possibly can, and I just want to thank them for their dedication, their hard work. I want to thank our shareholders for their continued support and trust and look forward to talking to you again here in 90 days or so. I want to wish everybody a great holiday season and look forward to talking to you in February. Thank you.

Thank you for your participation. That does conclude today's conference. You may now disconnect.