Dawson Geophysical Company (DWSN) Q3 2015 Earnings Report, Transcript and Summary

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 materially differ from any future results or 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 the 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. 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 Percy [ph] 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 no longer be accurate as the time of -- when you are listening to 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 combined companies adopted a 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-Q 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 the dramatic reduction of the Company's overall utilization rates had a significant negative impact on revenue for the second quarter 2015, which was partially offset by weather stand-by charges on several of the Company's crews but at significantly reduced rates. Operating expenses for the June quarter were at reduced levels although not in direct proportion to the negative impact on revenue. Reflected in the current quarter is $690,000 of severance costs related to an approximately 30% reduction in work force since the closing of our merger. Demand for Dawson's services is at reduced levels from recent years and is anticipated to remain at such levels through 2015 in response to decreasing and 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 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 was $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 comapred 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 recorded an income tax benefit of $1.4 million and an effective tax benefit rate of 32.9% and this compares 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 required 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 still into 2016 in response to the decrease and uncertain commodity prices and reduced buying expenditures. The company anticipated 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 level 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 ready to take questions.

[Operator Instructions] And we’ll go ahead and take our first question from Marshall Atkins with Raymond James.

Good morning, Mr. Jumper, question on cost here. You had a pretty substancial 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 is 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 space is where you have a natural reduction of charges. I think some of it is some timing issue, we had some things that if 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 and how that 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 inhouse services and we utilized the shot-hole dynamite drilling capacity that TGC brought to the table. And some of its structural and [Indiscernible] so it’s just been reduction in workforce and streamline 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 [ph] as you mentioned in Q2, you were able to jump from seven crews to ten, in October we’ve had much rain as well [Indiscernible] 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, 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 we've got – 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. The crew count, the way we deploy channels and move equipment around, crew count can be eight, it can be not. It might jump to 10 to 11 for a short period. One of the things we've had quite a bit of success within this quarter has been with the additional equipment capacity that we've had is the ability to close the gap between project, 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. We've got a lot of things. It's still a dizzy market out there. We feel pretty good on eight to 10 into the first quarter of next year. And so, 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, when we talk back in May we felt like we had some lease and those 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 to 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 is 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 where 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 upon on these previous questions. I just wanted to get a little better feel for where demand is coming from right now from basin's specific standpoint. And then second question, 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 project 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-continents. 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 deploy crew at a fairly high level. I'm going back three, four, five quarters ago. And then, in Q2 we were pretty well concentrated on the deployed crew basis in Eagle Ford and we go hit by a rain. And what's interesting where we are right now is we're little more spread out. And I don't think that we've got some activity in the Delaware. I don't think that there is a concentration as much as we probably seen in last few years. I do think that the thing that might be driving that in my mind is the clients that we're working with both now and talking with 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 they 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 wanting to do. We're going to go where demand takes it, right. But we're positioned to work all across the lower 48, so we're in good shape. Our channel count deployment, I would say that 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 INOVA Hawk gear is pretty well all deployed. Now, its 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 shot a job based on its overall aerial extend. 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 record is staying relatively flat, but the size of the surveys are very large. I think we've got at least two crews for example, that are operating with 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 have slowly realize the benefits of the transaction that we contemplated and began a year ago. We are seeing benefit. We're seeing benefit in servicing. We're seeing benefit in expanding find base and we're seeing benefit of the shared equipment based. 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 cablel-ess equipment deployed at this point on project and some them are pretty large. We still have some running around in the small 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 there are 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 some of those things would be early, could come together for early 2016 once they are awarded. And then, some of the others that we've got up here are some things in some areas that can together very fairly quickly. And so, we could get an extension into maybe the middle of the year. I don't think we're looking at anything 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 project into the middle of the next year that we feel pretty good about. But in the world we're in today, 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. I think they take care them, break that streaks [ph] 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.

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 based that allows to respond very quickly as we have in the past when market condition improve. I think we're making some headway. We still have some work to do in the areas of professional services, all 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 within a geophone and cable repair facility. I think we'll continue build that and get to the – work and 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 so forth right now?

Based on where we working today at the leveled 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 called in and participate in our call. We want to obviously thank our employee for just a fantastic effort particularly in this last quarter in a very difficult environment. I want to thank our long-standing clients for their continued dedication in support of our services and 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 some time in the early March time frame. Thank you.