Dawson Geophysical Company (DWSN) Q1 2010 Earnings Report, Transcript and Summary

Good morning. My name is Cynthia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dawson Geophysical first quarter 2010 earnings release 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. It is now my pleasure to turn today’s call over to Steve Jumper, President and CEO. Please go ahead sir.

Thank you, Cynthia. Good morning and welcome to the Dawson Geophysical Company's first quarter 2010 earnings and operations conference call. As Cynthia said, my name is Steve Jumper, President and CEO of the company. Joining me on the call are Christina Hagan, Executive Vice President and Chief Financial Officer; and Decker Dawson, Chairman of the company; and Ray Tobias, Executive Vice President and Chief Operating Officer. Today's call will be presented in three segments. Following these opening remarks, Chris will discuss our financial results. I will then return for an operations update, then open the call for questions. As in the past, the call is scheduled for 30 minutes and we will not provide any guidance. At this point, I will turn control of the call over to Chris Hagan, our CFO, to discuss our financial results.

Thank you, Steve. Let’s start with our Safe Harbor provision. 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 the volatility of oil and natural gas prices, disruptions in the global economy, dependence upon energy industry spending, cancellations of service contracts, high fixed costs of operations, weather interruptions, inability to obtain land access rights of way, industry competition, limited number of customers, credit risk related to our customers, asset impairments, the availability of capital resources and operational disruptions. 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 ended September 30, 2009. Dawson Geophysical Company disclaims any intention or obligation to revise any forward-looking statements, whether as a result of new information, future events or otherwise. During this conference call, Dawson will make reference to EBITDA, which is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to the applicable GAAP measure can be found on Dawson's current earnings release, a copy of which is located on the Dawson Web site www.dawson3d.com. This morning, we reported revenues of $36,330,000 for the quarter ending December 31, 2009, our first quarter of fiscal 2010, compared to $80,216,000 for the same quarter in fiscal 2009, a decrease of 55%. Net loss for the first quarter of fiscal 2010 was $4,216,000, compared to net income of $7,734,000 in the same quarter of fiscal 2009. Loss per share for the first quarter of fiscal 2010 was $0.54, compared to income per share of $1.00 for the first quarter of fiscal 2009. EBITDA for the first quarter of fiscal 2010 was a loss of $211,000, compared to income of $19,162,000 in the same quarter of fiscal 2009. The revenue decrease in the quarter was primarily the result of previously announced reductions in active crew count during the second quarter of fiscal 2009, a reduction of four crews; during the third quarter of fiscal 2009, a reduction of two crews; and during the first quarter of fiscal 2010, a reduction of one crew. Revenues in the quarter continued to include relatively high third-party charges related to the use of helicopter support services, specialized survey technologies and dynamite energy sources. The sustained level of these charges is driven by our continued operations in areas with limited access. We are reimbursed for these expenses by its clients. I will now turn it over for Steve’s comments.

Thank you, Chris. There is no doubt the first quarter of fiscal 2010 was challenging. While we operated nine seismic data acquisition crews during the quarter, down from 16 a year ago, as Chris mentioned, lower utilization rates one the nine crews, excessive downtime for weather on several crews in October and December, along with the typical first quarter seasonal issues negatively impacted our results. However, beginning in late calendar 2009, we began to experience an increase in demand for our services in numerous oil and natural gas producing basins, including the Marcellus Shale, Haynesville Shale, Eagle Ford Shale, Barnett Shale, Fayetteville Shale, Bakken Shale, and the Permian Basin and mid-continent region. In response to the increase in demand, we’ve redeployed two existing crews in January. As of today, we are operating two crews in the Appalachian Basin, two in North Dakota, four in West Texas, one in Arkansas, one in the Fort Worth Basin, and one in Utah are bringing our active crew count up to 11. While we remain in a competitive pricing environment and the overall state of our economic in industry remains somewhat uncertain, we believe our order book reflects commitments to maintain operations of the 11 crews through the middle of calendar 2010. We believe the diversity of current project sizes puts us in a position to mitigate the short-term utilization problems we’ve experienced in recent quarters, and the mixture of oil and natural gas projects coupled with our clients’ need to evaluate their lease-hold position in the large shall plays gives us reason to be more optimistic on the longer term visibility of our order book. In the original E&P spending survey published by Barclays Capital in December 2009, the 197 companies surveyed indicated that they expect, one, 2019 E&P expenditures to rise by 12% from $71 billion to $79 billion in the US market. Two, 45% of respondents anticipate spending a greater share of CapEx on exploration in 2010 versus 2009. A large portion of the incremental spending to be directed at shall plays with some capital shifted towards oil-related activity. These estimates were based on budget projections that are based on an average crude oil price of $70.16 per barrel of WTI and a natural gas price forecast of $5.21 per Mcf. This report and others like it highlight what we began to see at the end of calendar 2009, at the beginning of 2010. Exploration and production companies are increasing their CapEx budget. A greater percentage of these budgets are being allocated toward exploration work. Our ability to mitigate dry hole risk, lower F&D costs in identifying reservoirs is once again starting to play its more critical role in our clients’ initiatives. As mentioned in the press release, we have taken delivery of the OYO GSR reporting system and we will deploy the system this week in a multi-component function within a larger conventional seismic data acquisition project utilizing an ARAM recording system. The OYO system will further strengthen our technical and operational flexibility and hopefully improve efficiency, which in turn may lead to improved financial performance in the future. The previously-announced purchase of the OYO system accounts for approximately 65% of our current fiscal 2010 capital budget of $10 million; the balance of the budget will be used primarily for maintenance capital requirements. Overall, the lower 48 seismic data acquisition market is beginning to show signs of positive growth, certainly in comparison with the first of calendar 2009. There are still obstacles to overcome; weather and land access permits will continue to impact our results going forward, particularly with respect to our shift toward predominately turnkey contracts. Pricing remains competitive. The overall pace of the economic activity is uncertain; however, we believe the opportunity to overcome the competitive pricing environment and operational risk in our turnkey contracts exists with the potential for increased productivity and efficiencies at the crew level. In closing, our strong balance sheet with over $90 million of working capital and no debt, our asset base, the retention of key technical and operational staffs and our strong client relationships we believe puts us in a position to capture the upside of the business cycle. It is our intention to continue to operate with a conservative financial structure, remain loyal to our employees and shareholders while continuing to focus on helping our trusted clients find oil and natural gas. And with that, Cynthia, I believe we are ready for questions.

(Operator instructions) Your first question comes from the line of Collin Gerry with Raymond James. Collin Gerry – Raymond James: Hi, good morning Steve, good morning Chris.

Good morning.

Good morning, Collin. Collin Gerry – Raymond James: How are you doing?

I am doing good. How about you? Collin Gerry – Raymond James: I am doing okay. It sounds like you are doing better. We are adding some crews. I guess that’s the basis of my first question; the prior quarter, obviously results weren’t that awesome from an historical perspective, yet going – it sounds like it is getting better a lot pretty quick here, we are already adding crews. I mean maybe just give us a little bit more detail. It sounds like it's all the shale plays and the unconventional stuff, of what's going on on the demand front? Are people just giving their budgets in order and now they are ready to spend some money, is it very robust the order book, I mean talk to us in a little bit more detail.

Well, Collin, everything is relative. Collin Gerry – Raymond James: Right.

Okay, so we are not looking at 2007 and 2008-type demand in order book strength. What we began to see late in Q1 of fiscal 2010, which is the end of calendar ’09, was increases – and I think we’ve talked about this maybe in last conference call we were beginning to have people talk about things going forward. Well, some of those things are beginning to move forward at a faster pace than we have probably anticipated in the beginning of the first quarter back in October timeframe. So we are seeing some strength certainly in the Marcellus Shale play, that’s obviously a place that I think you will hear several people talk about growth in demand in that area. As we’ve talked in the past, certainly the oil related stuff in West Texas, for us to have four crews working in West Texas is something that we haven’t had in many, many years. We would run one or two crews through the areas from time to time, but we have had four pretty steady. The other thing that’s somewhat encouraging is that we are seeing some activity come back in places that quite honestly we weren’t anticipating; the Barnett Shale for example and the Fayetteville. We still got quite a bit of activity in the Hayneville. So to use the word robust maybe a little strong, Collin, but it’s certainly better than where we were a year ago from a demand standpoint. I don’t know, we are in pretty good shape. The encouraging thing is that from a visibility standpoint we are in pretty good shape going out through the middle of the calendar 2010. But what’s even more encouraging is that we have managed to built an order book that’s got enough diversity in project sizes and mixtures and those kinds of things, things that are acceptable to either any of the reporting systems that we use, it should fill some of those holes. The biggest issue we have faced in the last three quarters, and it is still there to certain extent, is the low utilization rate to the ones that are working and weather. We had absolutely horrible October from a weather and utilization standpoint. We had a pretty good November. November was pretty good, pretty solid month. December backed off a little bit because of weather. January has been a little bit of tough go because of weather. But we are starting to see some of those things that were ideas three, four months ago turn into real life projects that are now turning into projects that are getting permitted and ready. So, yes, we feel a whole lot better about where we are than a year ago, but it is all relative. Collin Gerry – Raymond James: Right. And I guess just going back to what you were saying about this past quarter. Maybe in last couple of quarters, it sounds like utilization was low to begin with, just with the state of the market, but weather and permits compounded that to kind of be a little bit of a perfect storm on the downside. So maybe over the next couple of quarters we get back to a more normalized run rate in terms of utilization, is that a fair way to think about it?

I think so. Pricing is still competitive and we recognize that. We are probably, I don’t know 70%, 80% from time to time on turnkey versus day rate stuff, and so as we’ve talked in the past we have got that additional risk that the turnkey contracts bring. But on the flip side of that we got the potential for increased margin provided that we – if we get a perfect storm on the upside we can have a pretty big swing. So we’ve still got some things to work at, Collin. I think one of the biggest issues is if you go back last quarter and then prior quarters, the problem you dealt with was you had a crew that was sitting idle and finding a place to get it to work, finding a place to put it out there. We changed some of the approaches of how we were handling that. Whereas now, we have a little of a problem – not a problem, we are in a position where we have projects we need to get to which is a lot different position to be in, and if you can string those together and get a little bit of help with weather and some operational things, we have got some upside here. We are not out of the woods yet, and it is still like I said, January has been a fairly tough month, we have got rain in West Texas again today, we have had pretty good snowfalls through the mid-continent, north and back east. And so we are still dealing with some issues, but from a demand standpoint we certainly feel a lot better. Collin Gerry – Raymond James: You mentioned, it sounds to me like, and you mentioned this in the past that makes sense, with the more turnkey work, is that the efficiency of the crews is really going to be the principal driver of margins? How does your confidence in that efficiency, I mean I would think that your cost structure has been brought down a little bit, more the company is not running off at full bores, so is there something that’s same versus four or five years ago that the efficiency in terms of getting things done is better to Dawson?

Well, we have had an increase in channel count. We’ve learned how to handle the channel count a lot better. We have got six, seven ARAM crews out working, and the RSR crews would certainly allow themselves a whole lot more operational flexibility. I think we are a little bit linear in terms of how we staff a crew. Collin, if we go back to last year when we dropped from 16 to 12 – getting down from 12 to 9 was a difficult place for us to be, because we made a decision then and we still have this same thought going forward that we kept the key people both operationally and technically within our organization that would allow us to move back fairly quickly. So I guess we probably reduced expenses back then but we have been running at a pretty high expense rate, higher than what we would have, let’s say, in comparison to few years ago. So it has got to take some revenue to get us back over the top of it. I do believe that we are more efficient when you take the amount of equipments that we were operating and you spread that over 11 crew versus 16 or take out the MRXs at times, 13, you’ve got a chance to be more efficient not just in the field but in the moves between jobs. I think we have got a project mix. We also hit a period there in this down cycle and we are not out of a down cycle. I want to emphasize that. But we had periods where getting from job to job was a long move, you may have to move two or three states to get to the next project. But we kind of got an order book in place now that the moves are short. And so you are eliminating those – any day we eliminate that we are not actually acquiring data is going to be a positive. I think we are in a position to reduce the number of days. We are not acquiring data as well as be more productive when we are out there. It is going to take a little bit of luck to get there but I think we are certainly in a position to do that. I said luck, luck is when a preparation meets opportunity and I think we are prepared, we have the opportunity, and so I am cautiously optimistic going forward. Collin Gerry – Raymond James: I think we all are. The last question I had was one other things we are hearing with these big shale plays is there seems to be a trend with large acreage positions and so forth moving towards multi-client to reduce costs and a way from the proprietary. Is that something you're seeing, is it something that bothers you, or is multi-client in the cards for you guys in the future?

No, multi-client work in the sense in which you are talking is not in the work for us. We have never been in the position that we have been in the data ownership position, it a model that we don’t subscribe to. That model depends on all kinds of things, like level of prefunding, how the accounting of the projects handled, all those things come into play. We are seeing an increase of the multi-client activity. I think that’s not a great surprise to us. We have been through this cycle before. We have seen things move this way. The multi-client model is just like the proprietary model, and given the right set of circumstances they work very well, if you don’t have the right set of circumstances they don’t work as well. We don’t understand it as well as our some of the folks we compete with. So we are just going to stick to what we do best and that’s continue to cultivate those relationships with our clients, operate with a financially conservative structure and keep helping them oil and gas. So we are not foreseeing it, but it’s not anything just keep me up in that. Collin Gerry – Raymond James: All right, sounds good. Thanks a bunch for the time. I'll turn it back.

Thanks, Collin. Appreciate it.

Your next question comes from the line of Veny Aleksandrov with Pritchard Capital. Veny Aleksandrov – Pritchard Capital Partner: Good morning.

Good morning, Veny, how are you? Veny Aleksandrov – Pritchard Capital Partner: Good, how are you?

How is the weather in Atlanta? Veny Aleksandrov – Pritchard Capital Partner: It is beautiful today, but only today.

Yes, it is not here. Veny Aleksandrov – Pritchard Capital Partner: I am sorry. I hope it gets better. I have a couple of questions. You said that you have deployed the additional two crews in January, when exactly in January was that?

They have been ramping up since about the first week of January. If you are going to ask me a modeling question, I don't know that I would factor it too much into January. Veny Aleksandrov – Pritchard Capital Partner: Okay. Then can you tell me where those are working, or they are all just in the same mix?

They are in the mix. I think probably the – if I had to target where they are went, one of them probably stayed in West Texas and one of them probably went to the Barnett. We moved one out of West Texas to go somewhere else and put another one together to handle some stuff locally and then put one on the Ford basin. Veny Aleksandrov – Pritchard Capital Partner: Okay thank you. Then in the press release you mentioned that if order book continues to be building, you’re expecting increased crew efficiency and productivity, how is this going to affect margins? Can we see margins going back up to the double digits or something?

Now, Veny, we're getting awful close to guidance here, which I think you know that and you are trying to trick me here. But given weather and permit issues if we get a nice stretch of weather and the permit continue to fall together, if the land access agreements continue to fall together, I think we have got a chance to increase margins significantly. Those are two wild cards. I will tell you this. On days we are working, when we are not moving and we are not sitting for weather, when we are not in layout ticket mode, the days we were working, our crews are performing very, very well. And if we can eliminate those down days either moves or permits or weather, we have the potential to do very well. Very well is relative. I don’t want to talk about ‘07 and ‘08 type stuff. Certainly better than what we have seen in certainly this last quarter and in the prior quarters. We are not quite there yet, but I can see it – there is a light at the end of the tunnel. Veny Aleksandrov – Pritchard Capital Partner: Okay thank you. Then my last question, OYO Geospace equipment, if things continue to improve, would you be reconsidering your CapEx project for 2010; and can you go and buy some more equipments like that?

Veny, our history has been to have a very flexible CapEx budget. We have the balance sheet starting to move very, very quickly. Any technology or growth in the market, whether it be oil equipment, whether it be increased channel count on ARAM system, whether it be something else that comes along. So I would say that we will continue to operate as we have over our history is that we will be in a position to move on whatever growth opportunities or technical improvement opportunities that presents themselves. We don’t see it today, but it is something we could move on in very short order given the right dynamics. Veny Aleksandrov – Pritchard Capital Partner: Thank you so much. That answers all my questions. Thank you.

Thank you, Veny.

Your next question comes from the line of Pierre Conner with Capital One Southcoast. Pierre Conner – Capital One Southcoast: Hello, everyone.

Good morning, Pierre. Pierre Conner – Capital One Southcoast: Good morning. Steve, let me just double check with you on the crews that you were explaining them. So we are currently at 11 and the OYO equipment will be deployed into an existing crew?

That is correct, Pierre. It is going to be an embedded three component patch within a larger ARAM system, which is one of the things we outlined in the press release last quarter about the potential users. So it is not a stand-alone unit at this point. Pierre Conner – Capital One Southcoast: Okay, where would be the impact within just that crew on this system, strictly in efficiency or is this a turnkey job that you will be driving efficiency or is there any potential revenue increase as a result of expanding by collecting the multi-component data?

It’s got a revenue increase because the equipment being out there. It is not a substantial increase at this point. It is really more of a technical application of the system and efficiency application. We are going to use it in three component mode and within a larger survey and see what the multi-component data looks like. So I think from an efficiency standpoint, it will be the first time we have really had a chance to use it and so we are going to have some learning issues with it on how to deploy it, how to operate it, and how to collect the data out of it. So it is really an ideal play both from a technical and operational. It is an ideal situation for us to get familiar with the system itself. Pierre Conner – Capital One Southcoast: Okay. Looking back and I know rather than ask about guidance, maybe just some more specifics on the quarter and how it shook out. Steve, did you carry or can you quantify for us sort of costs that were carried through the quarter in anticipation of a recovery in labor, etcetera. Was there some impact there, and can you tell us, kind of quantify that?

Well, on the – I don't know if I can specifically quantify it, Pierre, but couple things I would say is our reimbursable items are still as a percentage are probably flat from where they’ve been in the last quarter or so. So we had a – that’s going to attribute quite a bit to the drop in revenue. From a pure expense point, we've been running with maintaining all of our key operational and technical people since, Q3, all way through Q4 and into Q1. So from an expense line, I think we’ve been relatively flat for last three quarters anticipating some level of return. I’ve never said that we were anticipating getting back to 16. I didn't know if the number was going to be 10, 11, 12, and I still don’t know beyond middle of the year where it is going to be, but that's been our strategy forever, is to maintain certain level of expense that I’ve commented on the past. The real issue, particularly in Q1 was more of just a revenue issue. The weather and the downtime and the permits just killed particularly early and late in the quarter. Pierre Conner – Capital One Southcoast: All right. Well, the follow-on then is so to that impact, what about a crew days impact of weather, I know you’ve mentioned a couple times it is being pretty significant.

I don’t have a crew day deal, and I'm really not trying to be evasive here, Pierre, because a crew day on one crew may be a totally different revenue project mix that a day somewhere else. But I think if you looked at actual time, we were probably at any given time we had seven of the nine working at any given time, 7.5 of the 9.0, something like that. And we had a pretty serious hit particularly in October. Pierre Conner – Capital One Southcoast: Okay. The two crews that rolled out here early, are they in the high reimbursable areas, or they’re more standard?

They are more standard. Pierre Conner – Capital One Southcoast: So they shouldn’t affect the absolute levels of that?

That’s right. Pierre Conner – Capital One Southcoast: Okay. All right. See what else, start-up costs on those at all, or maybe that goes back to the other point, if you’ve carried the costs so far there is nothing incremental?

Yes. Fairly minimal. There's some maintenance costs in getting some of the equipment to put back together, but we’ve really maintained a pretty high level of maintenance costs anyway. So there's a little bit there. There's a little bit of higher – there's some hiring of the labor level, but from a key technical standpoint – or a key and technical standpoint, certainly not like it was, we are putting out new crews. Pierre Conner – Capital One Southcoast: Okay. All right. Two last ones, just a clarification comment that you made to Collin. I think you said, we’d feel a lot better than a year ago, and I just wanted to verify that. Obviously sequentially I know that that's the case, you're better but even – 12 months ago, you feel that the outlook or the backlog is better than it was 12 months ago?

Yes. Pierre Conner – Capital One Southcoast: Okay.

A year ago, increases were slow. We were working into Q1 and Q2. We were working off backlog that we had pre-existing. We’ve always talked about us being a lagging indicator of activity. We’ve talked about the delay time of 3 months, 6 months, 9 months, sometimes, a year to get a project ready. And so we were really working our way out of the backlog last year when we were going from 16 to 12, 12 to 10, and we were 10 to 9, we were trying to figure out where that level was going to be that could still maintain a short-term utilization, a very high short-term utilization rate. I don't know that we were efficient in doing that. I don’t know that we ever got there. But from a demand standpoint, we saw some steadying and some – maybe some growth and strengthening late in calendar 2009, and we are seeing more of that going forward in 2010. So from a demand standpoint, I feel like we as a company bottomed a year ago. From a financial standpoint, we are seeing the effects of that, 6 months, 9 months later. Is it 6 months, 9 months, 12 months, I don’t know. I think we still got some work to do. We’ve got some things we need to improve on; pricing, certainly going to have to improve. And I think the deployment of these two crews, I don’t think are going to impact the pricing issues going forward. I don’t think we are dealing with an overcapacity issue because we're really working on stuff that we began to build late in ’09 and into early ’10 that are things that we needed to get shot for our clients. Pierre Conner – Capital One Southcoast: Okay.

But I can see some strength in that going forward. Pierre Conner – Capital One Southcoast: One of the issues has been in the past is that you've mentioned diversity, too, Steve, so when the issue has been diversity of customer mix, you've mentioned diversity of oil, gas, regional, etcetera. So without quantification, what can you say about customer mix now versus a year ago.

I think it’s a lot better. The folks that we’ve been busy working for are long-term clients that we’ve had strong relationships with are still there. But we are seeing some new clients come in and so I feel real good, not just about our geographically diversity, but about our projects size, we’ve got some that are in the 20 square mile, 25 square mile range, somewhere in the couple hundred. I feel good about the mix between oil and natural gas, and I feel real good about our client mix. So I think all those things from the chair I am sitting in certainly feel positive. But once again, Pierre, it’s all relative. Pierre Conner – Capital One Southcoast: Okay. I understand. All right, well, last thing is just watch that seismic instruments there on Sunday evening just in case we get a wind. You can probably get some data recorded on it.

All right, very good. Pierre Conner – Capital One Southcoast: All right, thank you.

(Operator instructions) At this time, there are no further questions. I would like to turn the call back over to Mr. Jumper for closing remarks.

Well, thank you Cynthia. I want to thank everybody for listening in to our first quarter fiscal 2010 conference call. Particularly like to thank our employees for their continued effort, our clients for their continued trust and our shareholders for their continued support. We will be presenting at the EnerCom Oil and Service Conference in San Francisco on February 17. That information will be available on our Web site, and look forward to talking to you at the end of the next quarter.