Dawson Geophysical Company (DWSN) Q2 2008 Earnings Report, Transcript and Summary

Good morning. My name is Chastity, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dawson Geophysical Second Quarter 2008 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Steve Jumper, President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning and welcome to Dawson Geophysical Company’s second quarter 2008 earnings and operations conference call. Joining me this morning in the room are Christina Hagan, Executive Vice President and Chief Financial Officer; Ray Tobias, Executive Vice President and Chief Operating Officer; and Decker Dawson, Chairman. The call is scheduled for 30 minutes and will be divided into three segments. Following these remarks, Chris will discuss our financial overview. I will then return to an operations overview and then open the call up for questions. As in the past, I will remind you that throughout the call, we will not be providing guidance. At this point, I will turn control of the call over to Chris Hagan.

Thank you, Steve. I would like to provide our Safe Harbor provisions. In accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, Dawson Geophysical Company cautions that statements made today in this conference call, which are forward-looking and which provide other than historical information, involve risks and uncertainties that may materially affect the company’s actual results of operations. These risks include, but are not limited, to dependence upon energy industry spending, the volatility of oil and gas prices, weather interruptions, the ability to manage growth, the ability to obtain land access rights of way, and the availability of capital resources. A discussion of these and other factors including risks and uncertainties is set forth in the company’s Form 10-K for the fiscal year ending September 30, 2007. Dawson Geophysical Company disclaims any intention or obligations to revise any forward-looking statements whether as a result of new information, future events or otherwise. During this conference call, Dawson will make references to EBITDA, which is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to the applicable GAAP measure can be found in Dawson’s current earnings release, a copy of which is located on the Dawson’s website, www.dawson3d.com. I would now like to provide the financial overview. Today, we’ve reported revenues of $78,363,000 for the quarter ending March 31, 2008, our second fiscal quarter of 2008, as compared to $59,935,000 of the same quarter in fiscal 2007, an increase of 31%. Revenues in the second quarter of fiscal 2008 continue to include high third-party charges related to the use of helicopter support services, specialized survey technologies, and dynamite energy sources. Net income for the second quarter of fiscal 2008 was $8,292,000 compared to $5,368,000 in the same quarter of fiscal 2007, an increase of 54%. Earnings per share for the second quarter of fiscal 2008 were $1.08 per share compared to $0.71 per share in the same quarter of fiscal 2007. EBITDA for the second quarter of fiscal 2008 was $19,228,000 compared to $12,961,000 in the same quarter of fiscal 2007, an increase of 48%. Included in the second quarter results, the 41% increase in depreciation charges from the prior year period reflecting our continued capital investment and growth. For the six months ended March 31, 2008, revenues were $155,962,000 compared to a $113,589,000 for the same period in 2007, an increase of 37%. Net income for the first six months of fiscal 2008 increased 48% to $15,996,000 compared to $10,803,000 for the first six months of fiscal 2007. Earnings per share for the first six months of fiscal 2008 were $2.09 as compared to $1.43 for the first six months of fiscal 2007, an increase of 46%. EBITDA was $37,198,000 in the first six months of fiscal 2008 versus $25,629,000 in the same period of fiscal 2007, an increase of 45%. The company’s Board of Directors recently increased the company’s fiscal 2008 capital budget from 30 million to $55 million. The additional budget of $25 million will be used to add to the Vibrator Energy source fleet, increased channel count on existing crews, expand data process and capabilities, and to make technical improvements in all stages of the company’s operation. That concludes the financial overview, and now Steve will provide our operations overview.

Thank you, Chris. We are very pleased of our second quarter results, which showed very favorable growth compared to the same quarter in the prior year. Our second quarter results point to continue strength here at Dawson Geophysical Company. All 15 crews were in operation during the quarter, weather conditions earlier in the quarter were less favorable with several interruptions, which had a slightly negative impact on revenues. Demand for our services remains robust and bid activity increased during the quarter. All of our clients may cancel their contracts on short notice, our order book is strong and actually has increased during the quarter over first quarter level with commitment through calendar 2008 and on a number of crews well ended calendar 2009. We do anticipate an expansion in crew count with the redeployment of an I/O MRX System II recording system on an additional crews, our 16th, in May. We are currently operating in excess of 115,000 channels companywide and 136 vibrator energy source unit. Indications from our client base of for continued steady demand for seismic services in the lower 48. Through today, we have replaced an I/O System II MRX recording system on an existing crew with an 8,000-channel ARAM ARIES recording system. We made plans to deploy our 16th crew which will do large 2D and smaller 3D projects as previously mentioned sometime later this month. We increased total channel count to in excess of 115,000. We took delivery of 13 Vibrator Energy source units, bringing the company’s total to a 136 units with seven more on order. We operated in West Texas, South Texas, Fort Worth Basin, New Mexico, Oklahoma, Arkansas, Colorado, Utah, Montana and West Virginia. Increased channel count has and will continue to positively impact results and we believe continue to add value to our clients with higher resolution 3D images, increased efficiency and shorter cycle time. The objective of our services is to reduce finding and development costs. The demand on our industry has and will be -- will continue to be cost effective, higher resolution images in a shorter cycle time. We believe increased channel count and the number of energy source units will meet that demand. We believe growth in channel count will continue into the foreseeable future. Pricing for our services remains firm. We believe future earnings -- future revenue and earnings growth will come primarily through increased channel counts, improved efficiencies in productivity, as well as the increase in crew counts. And, our second fiscal quarter ‘08 to second fiscal quarter ‘07 comparison, as Chris mentioned our revenue increased 31%, EBITDA 48%, and net income 54%, while our crew count increased by only 15%, or two new crews. Our contract mix continues to be evenly split between turnkey and term agreements. While turnkey contracts do have increases in risk related weather and operational downtime, they provide some more upside in revenue and profitability. We anticipate maintaining a mix of turnkey and term agreements. As Chris mentioned, we continue to have a high level of third party charges. However, the level of third party charges as a percentage of revenue has remained essentially flat over the last five quarters. It has trended slightly downward here in this quarter from previous levels. If the trend toward more Vibrator work continues, as we believe it will, we believe the level of third party charges as a percentage of revenue should decline. We will continue to do what we do best, and that help our clients find oil and gas that's the business we are in and we will do that by providing cost effective, high quality, high resolution 3D seismic images. And, with that, I will open the call up for questions. Operator, we are ready for questions when you are.

Thank you. (Operator Instructions). Your first question comes from the line of Marshall Adkins with Raymond James.

Good morning, Steve. Couple of questions. First on backlog, I’ve covered you long enough to know that you don’t have a backlog, but you do have what we call an order book. But keeping in the concept of backlog or keeping with that concept, tell me how the order activity is going out towards the end of ‘08, number one? And number two, where is that activity shaping up? I know you got a lot of stuff going in the Barnett today. Help me understand the trends going into ‘09 as to where people are shooting seismic in the areas where they are headed.

Okay. Marshall, to address the first part of your question, the overall order book, backlog, however we are going to say, we are going to refer to that as order book as you mentioned, has increased from the first quarter. Bid activity is very strong in multiple basins all across the lower 48. We’ve seen what I would consider a substantial increase in activity in the last few months. Although, I don’t know that we were ever particularly concerned about our order books level, we are certainly seeing some growth in that area, and that’s why we are putting out the additional crew. The small crew is going to be a lower channel count crew. As I have said, it’s going to be doing large 2D projects and some smaller 3D projects headed back to the Northeast. We’re still very active in the Barnett shale area. I think that’s going to continue to be an active place for us. We’ve actually picked up quite a bit of activity in West Texas here lately, and Eastern New Mexico throughout the Permian Basin. We have about six or seven crews currently operating within 250 miles of Midland, which is something that’s changed in recent quarters. I think that is probably a temporary thing. We’ll probably keep three to four crews active out here off and on for the next year or so. Still very active in Eastern Oklahoma, still very active in the Fayetteville Shale of Arkansas. Of course, as everybody knows the Northeast is heating up, it’s very active, the Marcellus Shale is a very active basin for us. We are hearing a lot of activity, bid activity certainly in the Rockies area and so, we have high hopes for that later on in the year. We have seen some increased activity, of course in Haynesville shale. I think that’s going to be an area that could heat up. Probably some of the most exciting things we are hearing, well, it’s all exciting. I mean there is a lot to be done in the lower 48 that marks very very strong. Two places that I think look promising are the oil shale plays and the Barnett going in the North Texas and certainly the Bakken play in North Dakota appear like it's going to be a hot item for quite some time. So, we’ve got quite a bit of spread. We have opportunities also the West, we’ve got some opportunities in California that we’re looking at and Northeast, the Appalachian Basin is strong and we’ll continue to play in the shale plays as well as some of these new oil finds.

Okay. Follow-up question here. You mentioned weather kind of affect you early in the quarter. Give me some sense of relative to an average quarter if there is such a thing, how much the weather hurts you?

Early in the quarter, it was little tough. I think it was tough on most of -- Marshall that weather number -- the weather impact is hard to define, it’s hard to quantify. We are always impacted by weather. We are impacted by weather. We are impacted by permits. We are impacted by the time -- the length of time it takes the crew to move before they get to the next project. We are impacted by operational interruptions that come and go and that are part of our business. And I wouldn’t quantify the weather impact as real negative. I think it was there. It’s probably a little more difficult than normal, but it was in the catastrophic event, it wasn’t something that just killed us so to speak, but it did have a negative impact. I know I didn’t answer that, but that’s about as well as I can quantify for you.

Well, translating it sounds like it was just modestly worse than average quarter?

Yeah. It wasn't anything that I was terribly concerned about.

Okay. I’ll turn it over to someone else and re-queue. I’ve got a few more questions if someone else doesn’t ask them.

Okay.

Your next question comes from the line of Pierre Conner with Capital One South.

Coast. Good morning everybody.

Good morning, Pierre.

Steve, just maybe make sure I’ve got the right mix of crews now, so I’m assuming we are at eight of ARAM, down to one on the MRX, and then you plan to deploy that MRX in the second crew. Is that accurate?

We are operating seven ARAM crews today, six RSR crews, two MRX crews, and one crew continues to operate as a Q-Land crew for WesternGeco.

Okay. And that’s the other crew.

Correct.

Got it.

And, during any downtime with the Q system, which we don’t anticipate anytime soon, that crew would be equipped with an existing MRX crew as well.

On this additional crew?

Yes sir.

You've mentioned that small 3D to large 2D, can you give us a range of the channels on that crew? I mean, it will be below average your channel size. Is that right?

Yeah, it’s going to be 1,500 channels below.

Got it. Okay.

I wanted to make a comment there; it is deployed or will be deployed later this month configure that way. It has quite a bit of back order book, backlog in front of it quite a few things to go do, but this will be the second crew that we operate that way. We operate crew in the Barnett shale of the Fort Worth basin that stays around 2,000 channels, but it too just like the ones in the Forth basin, this crew will have the ability to scale up channel count if a project requires 3,000 channels then we can certainly scale that crew out to 3,000 channels to go to work and so, I don’t know that it will stay that way but that’s the way it's configured on its initial deployment.

Okay. Steve, maybe a little more on your CapEx increase in terms of where it’s going, so some of that was this additional ARAM but, is there -- where does this take or where, I know you are not guiding us per se, but project out your channels or your Vibrator Sources. Is that where this additional CapEx is going?

Yes, it was the -- we had some channel count expansion in the last quarter that was part of that, the original CapEx number. This additional CapEx that’s been approved covered the 8,000 channels of ARAM system that replaced an existing I/O System II MRX recording system, the 20 Vibrator Energy source units, some other equipments like helicopter support equipment, rolling stock, other technical capabilities, but the majority of it has been channel count increases on existing crews as well as the switch over in additional vibrators.

Okay. But going forward, there is continued growth in channel count on existing crews, sequentially then, can you give us maybe an exit rate of channels if they come in delivered as you've ordered them?

Well, we have everything in-house that’s been ordered, I believe, except for the seven vibrators, but we anticipate that number to go up, Pierre. I don’t know where the numbers are going to actually end up by the end of the year, it’s hard to tell. I can easily see, for example 500 channels being added fairly quickly going forward. But if we get a job that comes in and it needs 10,000 channels and has some life to it and has some length to the contract then we would adjust that accordingly and some of that we’ve built in there anticipating, but I really can’t comment other than the 500 that I think are going to come pretty quickly.

Okay. One last one, and then I’ll do like Marshall and toggle back. But I know, we are trying to get you to quantify. I know, it's difficult, but in the weather impact, I mean is this -- are we talking about with this five or six days worth of downtime on a…?

Well, we had a stretch there where we were down two, three, four days on a majority of the crews and then they'd come back and they would get hit again. What its total impact to revenue is going to be is it would be really hard to quantify. But, we -- Pierre, I wouldn’t say that there was any major impact from any one item during the quarter that was devastating. I think it wasn’t far off the things that we could be hit with on a revenue basis.

Okay, I understand. Okay, thanks. Let me jump out, let someone in.

Okay.

Your next question comes from the line of Byron Pope with Tudor Pickering.

Good morning.

Good morning.

Steve, I wanted to see if you could give us a frame of reference on an normalized basis kind of where the highest concentration of your crews will likely be working. You mentioned kind of West Texas area a little bit high now, probably goes back to a normalized three to four crews, and then I realize you have crews mobilizing in different regions all the time. But again, I’m just trying to set a baseline so that it eliminate some of the quarter to quarter noise, how should we be thinking about where the critical math of your crews will likely be working over the next 12 months kind of by region?

I believe we are going to be fairly well spread out. Right now we’ve got two in West Texas or two in South Texas, we’ve got two in Oklahoma, one in Northeast, one in Arkansas. I think the majority of the crews in the next quarter or so will be in Texas, Eastern New Mexico, the Barnett Shale region. I think we will probably have four or five crews out of state over the next quarter or so, but Byron, that’s a very difficult thing to predict. We had commitments in our order book that reflect solid activity through the end of the calendar '08 and well into '09.

Right.

And, I don’t which jobs are going to get ready at which time. And if I knew, if I could look down the schedule and predict with great comfort and great accuracy, which jobs will be ready, how long exactly it will take us to do that and do that job, barring any weather or operational interruptions and where we’re going, then I could give you a month-by-month detail of where it’s going to be, but that’s not the way our system works. We have an idea of what it’s going to look like in the next month or so, but as we’ve talked about in the past, getting access permits from surface and mineral owners or lessees is difficult at times. And so, our schedule becomes very very fluid, and that’s why we don’t quantify our backlog in terms of dollars or accurate crew months because the schedule and the middle of summer may look somewhat different than what it is now. We may have things not ready for crew and we will have to look for another place and we have things that, a project may get hot and may need to move into the schedule and we’ll accommodate that. We are going to let permits and our clients needs dictate where we are going to be as opposed to just predicting from here. I do think the highest concentration through the summer time will more than likely be spread from West Texas, South Texas, and in the Barnett Shale area of the Fort Worth Basin. We’re talking about this weather issue. What we have seen from the weather issue is that the storms that move through here in the last quarter or so are a big line of thunderstorms that move in a -- sometimes you can draw a line right down the storm front and cover all 15 of our crews at one time. Sometimes we get spotted weather. So although I think the geographic expansion and diversity is a good thing and helps us with weather as it helps everybody, it still tends to be somewhat clumped together. If we were spread from the Rockies right now to the Southeast, it will be a little bit different story, but these fronts have been moving Southeast in a straight line right across us and that is certainly an issue in prior quarters. Going back to this weather thing, I don’t think second quarter weather was a disaster compared to previous second quarter weather. I think first quarter, later in a quarter have always been a little bit difficult for us and for everybody, we've talked about it. The shorter days and the colder temperatures and the lack of drying time and all of those things don’t end at the end of the first quarter, they continue into the second. And so I think what we have just seen is a normal continuance, but we have experienced throughout the quarter all of the things that seismic companies and seismic operations encounter; permit delays, longer moves, weather interruptions here and there, different issues, operational issues that you weren’t anticipating. And so those things can bounce back and forth and make a difference on a small scale in terms of revenue and expenses, but I certainly feel very good about where our quarter is. I think we’ve shown great growth from where we were last quarter and in the same quarter prior year we’ve shown growth compared to the first quarter of this year, and bid activity is strong. And where we’re going to be working in the next couple of months, I can’t tell you for sure, but we are going to go where the clients need us and where we have things permitted.

Fair enough. And then really, just trying to gauge, I mean I didn’t -- basically I haven’t heard anything that suggest that third party charges are necessarily going to be a step function higher going forward because of the region. So there is no reason why your operating margins couldn’t and probably shouldn’t continue to expand as we step forward. Fair way to think about it?

Yes. We are certainly headed that way that we are very conscious and very aware of margin growth. We keep saying that we are going to have the possibility, capability, the chance to increase margins and we are doing that. We’re still going to be subject to all of these things we’ve talked about; weather interruptions, permits, all of those things, but there is a couple of other issues that we’re addressing and they are not major but they are out there. The price of fuel is up. When you look at our commitments going forward, when we say that we have commitments through the end of the year well, what’s the price of fuel going to do? Labor costs, direct labor costs already increasing, but the activity in the oil patch all through particularly West Texas areas, when you move a crew and there is an increase to a housing cost that affects us and all through the Rockies. So, I don’t know the direct labor costs are a big deal, but costs are increasing, and we are working that into efficiencies, we are working that into pricing and we will get there, but we do have some places where they are not catastrophic things we can overcome but they are things we’re having to watch pretty closely as is everybody in the oil service patch.

Okay. Fair enough. Thanks a lot.

Thank you. (Operator Instructions). Your next question comes from Neal Dingmann with Dahlman Rose.

Yes.

Hey Neal. How are you?

Good. Don’t worry, Steve, I won’t have you quantify weather or backlog for me.

Well, you’ll probably get the same answer.

A couple of things here. On the Q system, you didn’t talked on that crew. What’s going on with that and is that going well enough to think about converting over a second crew to that? Or what’s going on over there?

Well, I don’t think we are going to have a second Q crew in the lower 48 anytime in the near future. We’re still active with the system. We’ve been working with the system in Eastern New Mexico, I think the WesternGeco people and their client, we are all working on a four WesternGeco as a multi-client project and I think their subscribers clients on the other side are happy with what they are seeing and our crew is gaining efficiency. We are learning how to handle that Q system much better. 30,000 channels is a lot of channels and there is a lot of things that are a little bit different from I/O MRX, RSR type stuff. And so, I think they are performing better. I think their results are very positive, very encouraging, and I think they’ve got some opportunities in front of them to keep that crew active and busy. We’re certainly helping them as much as we can in that regard. I think the relationship is good between us and WesternGeco and I think both company see the upside of the technology and see the opportunity. Here again, I think it’s -- I won’t say it’s limited in use, but it certainly got areas of difficult signal-noise areas, places where we’ve had trouble getting images before, it’s got some places where it’s going to perform very very well. And I think it’s like anything else we do whether it be Q-Land or multi-component or whatever technology. Are we going to find more oil and gas with it? We are obviously, I think we are creating better images. But the name of the game is finding oil and gas and when we prove out that it can do that, I think it will stay busy, but I don’t anticipate a second one coming either it’s long range plan that's certainly a base goal but I don’t it’s going to impact anytime soon.

Okay. And then on some of those new areas you were speaking of, the Haynesville, et cetera, what are your thoughts as far as channels per crew or what will be needed on those sort of versus what I’d call sort of typical sort of Permian stuff? I just wonder if the crew size will be much different?

I don’t think so. I think the largest channel count crews we are operating are in Southwestern Texas. That’s where we have the 9,500 and 11,000 channel crews. I think most of what we can do, right now the projects we have in Haynesville are going to be in the 6,000 to 7,000 channel range. Those numbers change, can change as we’ve talked about in the past depending on the job size. You can have 100 square mile job that you can do with 5,000 channels efficiently and the same 100 square mile job designed in a different way and configure different way may need 8,000 channels. And so, just like we have in the Barnett shale, the Fort Worth Basin, just like we have in Appalachian basin and we’ve seen in Arkansas, and Eastern Oklahoma, our channel count becomes very fluid. And we operate 15 crews, we are going to operate 16. I think the important number is we are going to keep 115,000 channels working and whether our crew is 5,000 this month and 8,000 in the next and 4,000 after that is not going to relieve the fact that somewhere else, someone is going to be working on a job that needs more channels. So, right now 6,000, 7,000 and we will see where it goes from there.

Okay. And then last question if I could ask Decker one, as far as what he sees in the market today, the big difference or anything that jumps out to him today versus what he saw the big jump and the big boom of activity maybe in the early 80s or prior?

Well, we’re obviously seeing a much greater demand than we’ve ever seen before and we clearly don’t -- at this point, don’t see any end to it.

All right, guys. Thanks a lot. I appreciate it.

There are no further questions at this time.

Okay. Well, thank you, operator. As I said, we’re very excited, very pleased with our second quarter results. As I have mentioned, we’ve shown tremendous growth compared to the same quarter prior year. We think we’re well positioned to have continued growth, strong growth going forward. Demand is up. Bid activity is up. We are adding additional crew. We feel very good about where the market is going. We feel very good about pricing and our improved efficiency and the productivity. And in closing, obviously I would like to thank everyone for listening into the call. I’d like to thank our employees for their hard work and our shareholders and particularly our client base for their trust in our services. We look forward to the second half of 2008 and into 2009 with great enthusiasm. A replay of this call will be available on our website at www.dawson3d.com. Once again, thank everybody for listening in and have a great day. We’ll talk to you in about 90 days. Thank you.

Thank you for joining today’s Dawson Geophysical conference call. You may now disconnect.