Dawson Geophysical Company (DWSN) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is [Melissa] and I will be your conference operator today. At this time, I would like to welcome everyone to the Dawson Geophysical first quarter conference call. All lines have been placed on mute to prevent any background noise. (Operator instructions). I will now turn the conference over to Steve Jumper, President and CEO.

Thank you, [Melissa]. Good morning and welcome to Dawson Geophysical Company’s first quarter 2011 earnings and operations call. As [Melissa] said, my name is Steve Jumper, President and Chief Executive Officer of the company. Joining me on the call are Christina Hagan, Executive Vice President and Chief Financial Officer; Ray Tobias, Executive Vice President and Chief Operating Officer; and Decker Dawson, Founder and Chairman. As in our prior conference call, we’ll do this in three segments. Chris will come on here shortly and discuss our financial results, I will come back and give you an operations update and then we’ll open the call up for questions. The call is scheduled for 30 minutes as in the past. We’re having a little bit of weather issue here in Midland. Apparently when the temperature gets down to 10 degrees, we have a hard time keeping up with electricity, so there is a potential of rolling blackouts for Midland today. If we go dead, it’s a power outage here in Midland. As in the past, we will not be providing any guidance. At this point, I’ll turn control of the call over to Chris Hagan, our CFO, to discuss our financial results.

Thank you, Steve. First, let me share the safe harbor provisions. In accordance with the safe harbor provisions 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 mature the effect of company’s actual results of operations. This risks include but are not limited to the volatility of oil and natural gas prices, dependence upon energy industry spending, disruptions in the global economy, industry competition, delays, reductions or cancelation of service contracts, high fixed costs of operations, external factors affecting our crude such as weather interruptions and inability to obtain land access rights of way, whether we enter into turned key or term contacts, crude productivity, limited number of customers, credit risk related to our customers, the availability of capital resources and operational disruptions. A discussion of these and other factors including risks and uncertainties is set forth in our Form 10-K for the fiscal year ended September 30, 2010. 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, we 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 our current earnings release, a copy of which is located on our website www.dawson3d.com. Now turning to our reported revenues., today in our release we reported revenues of $72, 653,000 for the quarter ended December 31, 2010 which is our first quarter of fiscal 2011 compared to $36,330,000 for the same quarter of fiscal 2010, an increase of 100%. Net loss for the first quarter of fiscal 2011 was $1, 667,000 compared to net loss of $4, 216,000 for the same quarter of fiscal 2010. Loss per share for the first quarter of fiscal 2011 was $0.21 compared to a loss per share of $0.54 for the first quarter of fiscal 2010. EBITDA for the first quarter of fiscal 2011 was $4,899,000 compared to a loss of $211,000 in the same quarter of fiscal 2010. The revenue increase in the quarter was primarily as a result of previously announced redeployment of three data acquisition [crude] during 2010, increased channel count for crude and improved utilization rates on existing crudes. Revenues in the quarter continued to include unusually 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 such as the Appalachian Basin, east Texas and Arkansas. We are reimbursed for these expenses by our clients. As previously announced, the company’s Board of Directors has approved a $35 million capital budget for fiscal 2011, which has been used in part to purchase additional OYO GSR equipment that Steve will talk about and 10 vibrator energy source units. The remainder will used to meet necessary maintenance requirements during fiscal 2011. Steve?

Thank you, Chris. While inclement weather and shorter days associated with seasonality negatively impacted first quarter results, results which were greatly improved when compared to the first quarter of fiscal 2010, activity on behalf of our clients across the lower 48 states is on the right. Demand for our services continues to grow as the [in peak] companies seek higher resolution sub-surface images in their effort to cost effectively identify, develop and produce hydrocarbon. As mentioned in the earnings release, our order book continues to strengthen. Current orders are sufficient to maintain 12 crudes through the first half calendar year 2010. In addition, many of our projects are requiring higher channel counts to further enhance sub-surface resolution and improve operational deficiencies. In summary, our first quarter highlights include increased activity in many producing oil and liquid rich basins. We currently have activity in the Bakken, Niobrara, Marcellus, Haynesville , Barnett, Eagle Ford shales along with several conventional projects. We are experiencing expanding order book. We are seeing increase in channel count demand. We’re seeing higher than normal requests for proposals particularly in December during the holiday season. We have added the 10 new vibrator energy source units we took delivery on in the first quarter. We purchased and deployed 10,000 OYO GSR single channel units. We added additional 2000 OYO four channel GSR units complete with three-component geophones and a growing a percentage of our turn key contracts -- we’re currently about 70% on turn key contract basis. These accomplishments are in stark contrast to the year ago period where we operating nine crudes and demand was soft. We’ve been forced to navigate through challenging financial conditions in a difficult operating environment. However, the decisions we’ve made are beginning to pay dividends. Our decision to retain all of key personnel was critical toward serving our clients and being able to rebound back to full strength. Our decision to develop a more balanced portfolio of oil and natural gas projects has resulted in more projects, more opportunities and more geographical expansion and our decision to maintain a debt free balance sheet provided us with the ability to grow and expand to meet our clients’ increasing demands. Today, we remain the largest provider of seismic services in the lower 48 as measured by crude count. We continue to operate in every major basin throughout the lower 48. Our order book is strong and request for proposals are on the rise. It is important to note that our confidence is not measured only by our words but in our actions. As we mentioned, we did take delivery of the 10 vibrator units. We ordered the 10,000 GSR units and took delivery in fielding those in January and further purchased and deployed the 2000 OYO four channel units. The operational flexibilities of the OYO equipment should lead to improved operational opportunities and efficiencies which in turn may lead to improved financial performance. All these actions reflect our continuing commitment toward serving our clients and our beliefs and new growth opportunities. Despite our continued confidence and success, we remain vigilant of industry challenges. We know that our clients can cancel contracts on short notice or can change the scope of a contract on short notice. We’re still subject to weather and permitting delays which can negatively impact short-term utilization rates and have adverse effects on financial results. We understand that we continue to operate in a highly volatile environment. Fortunately, our 58-year history combined with our debt free balance and $75 million in working capital puts us in a strong competitive position. In closing, with a stronger order book and continued demand for our services, it appears as though the seismic data acquisition market in the lower 48 is steadily improving on a year-over-year basis. On a quarter-to-quarter basis, we remain subjected to issues I have already outlined. Calendar year to date, we have experienced difficult weather conditions in many regions of the country as we continue to work off commitments made as far as back as a year ago. Going forward into calendar 2011, improvement in pricing utilization rates improved [technical difficulty]. [Melissa], are we back?

Yes, sir. You are.

Well, that was one of the rolling blackouts that we warned you about early on. Apparently, we’re not equipped for 10 degree weather in Midland, Texas. Anyway, we’re going to try it again and if we lose you again we will call back in. Lastly, just going forward into calendar 2011, improvement in pricing utilization rates and crude efficiency will be the key to our success. 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. With that, [Melissa], we will enter into a question-and-answer session for as long as we can stay active.

Thank you. (Operator instructions). Your first question comes from Veny Aleksandrov -- Pritchard Capital.

My first question is on pricing. You mentioned in the press release competitive pricing but increase in a request for proposals. Doesn’t that have to lead to better pricing down the road? If we start seeing better pricing based on your order book specifics, how long until this better pricing works its way into the financial results?

Well, I think we are beginning to see an improvement in pricing in the lower 48. I think it’s gradual and modest at this point. I think capacity in the lower 48 is beginning to fill up either in various models that are being used in the lower 48. So I think we’re reaching a point where capacity is getting full. Veny, without venturing into any form of guidance, I would tell you that historically we’ve had a three, six, nine-month lead time -- and we’ve talked about this in prior years -- from the time you actually get a proposal to the time you get the project bid out and awarded and actually completed. It can be as long as a year in many cases. So I think that we’re certainly not seeing the impact of improved pricing today. Going forward, that schedule can change rapidly. You may have some things that may be priced a little better that move forward. You may have some things that aren’t priced quite as well move back in the schedule because of weather or permitting delays or whatever the case may be. So I think you’re reading it right that it stands to reason that we’re going to see pricing improvement going forward when that actually comes into financials. I think it’s going to be a mix here for some period of time. One thing I think does help from a margin standpoint is the farther west you go more into the Niobrara and Bakken and those types of places, the more you’re using vibrator energy sources. You don’t have nearly as many third party reimbursables. I think you’ll start to see some changes in margin, which may or may not be directly related to a pricing model. So we still got some things to work out here in the short term. The interesting thing about pricing -- and I think where we’re having to settle -- is the channel count for crude continuing to grow. So we’re still working on this pricing versus channel count increase issue and how that’s going to play into operational efficiencies and execution. I for one am very optimistic about our opportunities going forward. I'm just hesitant to tell you any timing of when I think that's going to actually flow through. We've still got some things to work out.

My second question is based on your comments about capacity filling up. Short-term utilization in the quarter that you just reported -- I know you don't give numbers and you don't give guidance -- but can you give us at least an idea what was the improvement you saw over Q4? Are we in the 80% utilization or 70% or moving close to 90%?

Oh, I don't think we've gotten to 80% or 90%. The utilization issue varies so much from crew to crew and day to day, depending on weather and depending on the permit status. I think when you compare to where we were a year ago, we had a pretty soft nine crews operating in Q1 of fiscal 2009. We have 12 operating now. We did have some issues late in the quarter with some permit delays that did take a crew out of commission for several weeks. We did have some issues, certainly, in South Texas that impacted utilization rates. Of course, we had some weather issues in the Bakken and in the Appalachian Basin and in East Texas that really continued on into the second quarter here of 2011. So putting a number on it, Veny, I think would be tough. But I don't think we were anywhere near the 80% range.

Your next question comes from the line of Luke Lemoine - Capital One Southcoast.

Steve, a couple questions on the reimbursables; I know these typically range anywhere from 25% to 35% of revenues.

They're very high, Luke.

Yes, that's what I was asking.

Yes, they're very high.

Then second question -- this might be jumping to the world of guidance a little too much -- but for fiscal 2Q, is it fair to assume the weather impact to be greater than fiscal 1Q?

Well that's going to be a tough one to make a call on because we had some other issues in Q1 related to permitting and land exit issues and holiday season and shorter days and those kind of things. But I think my gut feeling is that certainly December and January look very similar in terms of weather impact and utilization rates. I would even go back on the reimbursable question, Luke, and tell you that it's probably on a historical high for Q1 reporting period.

(Operator Instructions). Your next question comes from the line of Collin Gerry - Raymond James & Associates.

So I've heard you reference kind of this growing, I guess, channel count per crew. I guess I have two questions related to that. One, can you quantify it? What would the average job require in terms of channel count today versus, say, 2007 or 2008? I think of a job as a 4000 or 5000-channel issue. Now we're hearing sometimes you need 10,000 or 12,000. Is that the right magnitude? Really, what's driving this? Is it the customers asking for it? Is it a richer data set that's necessary in the shale plays? A lot of issue there, but I guess if you can -- maybe just some more color.

Well we continue to operate crews that have a low channel count that are doing some 2D work, particularly back east. So you could have a 2D crew that has 1000, 1500, 2000 channels on it, you can move into the Barnett Shale region, for example, and you may continue to operate with 4000 or 5000 channels. As you get into some of the Haynesville stuff and some of the Eagle Ford and the Niobrara, you can get into some crew sizes that'll be 8000, 10,000, 11,000 channels. I think the largest one we're going to have operating will be about 11,000. So part of it is the desire to get the wide-azimuth, richer-azimuth, richer offset, distributed surveys for more analytical work on the shale plays. I think that certainly has an impact in it. The other thing that impacts channel count, Collin, can be just the size of the survey. You may not necessarily utilize more active channels from a technical imaging standpoint, but you may require more channels to efficiently acquire the survey and to actually operate in a cost-effective, efficient manner. So you've got several things driving that. Certainly, the geophysical imaging standpoint is certainly a driver, particularly in some of these shale plays that we discussed. But you've also got operational issues that are related to just the vast size of the survey itself. It has a lot to do with the shape and size of the survey. From an average standpoint, there's really not an average. But if you just pulled a number out of the air, it's like asking what's the average size of a survey. That's a tough question. But if you were using 110,000 channels in 2008 over 16 crews, you're using now 130,000 channels over 12 crews, let's say. So from a channel-count standpoint, I think the industry's using more capacity from a channel-count standpoint than we are from a crew-count standpoint. So if you just draw some numbers out, I don't know if the average is 4000 or 5000, 6000 up to 7000, 8000, 9000. But it's somewhere, 50% increase, something like that on an average basis.

Then just as I think about a contract structure, you mentioned that later '09 and most of '10 was a turnkey world. Maybe bids are getting more day rate right now. So I would imagine that 70% turnkey that you quoted, that would be sliding in terms of percentage of contracts, going more towards the day rate side.

Well I don't think we're going to see a great move more towards day rate contracts, certainly not an early part of '11. What happens on the back side of '11 it's a little hard to tell at this point. But I would anticipate that we'll be in the 70% range on a turnkey basis for certainly the first half of, maybe deeper, into '11. Certain areas lend themselves more towards day rate contracts, and certain areas lend themselves more towards turnkey contracts. I think, certainly, some of these bases we're moving into I feel like would probably tend to be more turnkey than day rate. So I'm not sure we're anywhere close to being a 50%/50% mix like we were in '07 or '08.

I'm trying to figure out if that's a good thing or a bad thing. I would think if the efficiency on your channel count [is] you do have more channels per crew. It seems like with the larger crews that turnkey might not be such a bad thing if you have that more -- .

Well, Collin, the thing with turnkey is, as we've talked about in the past, it carries more upside, but it carries more risk as well. So you've got downtime issues. You've got crew efficiency issues and you've got weather issues that are certainly more of an impact on a turnkey job than they are on a day rate job. So do you ask is it a good thing or a bad thing? If you look back over the course of three or four years in the projects that you've done, we've had turnkey contracts that we wish would have been day rate. We've had day rate contracts that we wish we would have been turnkey. Going forward, I think with a turnkey mix with crew efficiency and operational improvement and execution, good execution, and a little more mitigation of some of the risks that we've taken on in the last year or so, I think the opportunities ahead of us are really strong and really bright. So I'm not terribly concerned at this point about our contract mix as being a huge factor for us.

Your next question comes from the line of Veny Aleksandrov - Pritchard Capital.

Actually, it's a follow-up on the team for the crews operating. So, right now, you have 12 crews, increased size of crews and more equipment per crew. If because of strong bidding activity you have the need to operate sourcing crews running simultaneously, let's say, in the long term, do you have to stop [the] equipment ready for an additional crew or two additional crews?

I think any expansion in crew count going forward, Veny, will be driven by what the long-term prospects are of that crew staying up and running and what the short-term utilization impact is going to have on the other crews. I think, at this point, the order book looks pretty -- it looks very strong for '12. I think there's going to be times where you're -- just timing issues may dictate where the channel counts go and how they're operated. For example, if you roll off of a very large channel count job and you've got the personnel in place and the channels available, with increased channel count, you bring in a flexibility issue that you could be operating at any given time. You could split that crew into two, go take care of a couple of smaller projects that you need to fix or finish and then put those channels back out as a large-account crew, depending on what the order book looks. I think that's where we're starting to see some real improvement going forward is our ability to move channels and equipment around and have the order book strong enough to keep those channels and people working in various configurations. So it's possible that just based on timing alone that you're moving equipment around and you may have 13 units or you may drop down to 11, for example, if you need channel counts. Just depending on where the job is and what's available, what's permitted and what's ready to go, we've got a lot of flexibility on how we move those channels and those energy sources around. Now if the market were to get very strong and you were needing to put out another crew for some reason, that's by no means anything we're considering right now and you had to increase channel count, I think then, yes, you would have to look at, certainly, a purchase or a lease of additional equipment. But I think what we're going to see over the next few quarters is channel count moving around from crew to crew. Like I said, you may have one crew that's working in the particular area that's a 10,000-channel-count job. You may redeploy those channels and people to others that need an increase in channel count in a different part of the country, and this one downsizes and works on a smaller project. So the order book from a crew-count standpoint and a channel-count standpoint continues to be very fluid. Both channel-count capacity and crew-count capacity, I believe, in the lower 48 are both starting to -- we're starting to use up that capacity. There doesn't seem to be a lot of excess capacity in terms of channel count or crew count. But I think that's going to be very fluid, if that makes any sense at all.

At this time, there are no further questions.

Well, thank you, [Melissa]. Thank you all for listening in to our first quarter 2011 conference call. I'd particularly like to thank our employees for their continued effort, our clients for their continued trust and our shareholders for their continued support. I would point out that we will be presenting at the Intercom oil service conference in San Francisco on February 22 and it will be webcast. Everybody have a great day, stay warm and we'll talk to you in 90 days. Thank you.

Thank you for participating in today's conference. You may now disconnect.