Dawson Geophysical Company (DWSN) Q4 2011 Earnings Report, Transcript and Summary

Good morning. My name is Jenetta and I’ll be your conference operator today. At this time I would like to welcome everyone to the Dawson Geophysical fourth quarter 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. Mr. Jumper, you may begin your conference.

Thank you Jenetta. Well good morning and welcome to Dawson Geophysical Company’s fiscal fourth quarter and year end 2011 earnings and operations conference call. As Jenetta said, my name is Steve Jumper, President and CEO of the company and joining me on the call are Christina Hagan, Executive Vice President and Chief Financial Officer; and Ray Tobias, Executive Vice President and Chief Operating Officer. As in the past, today’s call will be presented in segments. Following these brief remarks, Chris will discuss our financial results. I will then return for an operations update and open the call for questions. The call is scheduled for half an hour and we will not provide any guidance as we have done in the past. At this point, I will turn control of the call over to Chris Hagan, our CFO to discuss our financial results.

Thank you Steve. First, I’ll share the Safe Harbor provision. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, Dawson Geophysical Company cautions it’s statements made today in this conference call, which are forward-looking and which may 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, dependants upon energy industry spending, disruptions in the global economy, industry competitions, delays, reductions or cancellations of service contracts, higher fixed costs of operations, external factors affecting our crude such as weather interruptions, the inability to obtain land access rights of way, whether we enter into turnkey or term contracts, proved productivity, limited number of customers, credit risk provided to our customers, the availability of capital resources and operational disruptions. A discussion of these and other factors including risks and uncertainties, except for what’s in the company’s Form 10-K for the fiscal year ended September 30, 2011. 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 Today we reported fourth quarter and year-end results for our fiscal year end 2011 which ended September 30, 2011. For the fourth quarter of fiscal 2011 revenues were $84,256,000 compared to $59,139,000 for the same quarter in fiscal 2010, an increase of 42%. Net income for the fourth quarter of fiscal 2011 was $2,944,000 compared to a net loss of $1,411,000 in the same quarter of fiscal 2010. Basic earnings per share for the fourth quarter of fiscal 2011 were $0.38 compared to a net loss of $0.18 per share in the same quarter of fiscal 2010. EBITDA for the fourth quarter of fiscal 2011 were $12,955,000 compared to $5,268,000 in the same quarter of fiscal 2010, an increase of 146%. For the fiscal year beginning September 30, 2011 we reported revenues of $333,279,000 compared to $205,272,000 for the year ended fiscal 2010, an increase of 62%. Net loss for fiscal 2011 decreased to $3,246,000 from $9,352,000 in fiscal 2010. Loss per share for fiscal 2011 was $0.42 compared to a loss per share of $1.20 for fiscal 2010. EBITDA for fiscal 2011 increased to $27,861,000 compared to $13,136,000 in the same period of fiscal 2010, an increase of 112%. Third party charges continue to be high for the year and contributed approximately half of the growth in revenues during the fiscal year ended September 30, 2011 as compared to the year ended September 30, 2010. The third party charges are related to our use of helicopters, port services, specialized survey technologies and dynamite energy sources and their use of limited access, such as the Appalachian basin, Oklahoma, East Texas and Arkansas. We are reimbursed for these expenses by our client. Our fiscal fourth quarter and year end results also include approximately $1,444,000 and $3,866,000 or $0.18 and $0.49 per share before taxes respectively of expenses related to the recently terminated merger agreement with TGC Industries, Inc. and depreciation charge increases of $831,000 and $3,410,000 respectively, related to the company's continued investment in new recording equipment and energy source units during fiscal 2011. With that, Steve, I’ll turn it to you. Stephen Jumper Well thank you Chris. Let me start by recapping our 2011 highlights, which include as Chris said a 62% increase in year-end revenues of $333,279,000 compared to $205,272,000 for the year ending fiscal 2010. A 112% increase in EBITDA for the fiscal year 2011 compared of $27,896,000 compared to $13,136,000 in the same period of fiscal 2010. The 2011 number does include $3.8 million of transaction cost related to the terminated merger with TGC Industries Inc. An increased order book capable of sustaining 14 crews well into fiscal 2012; the redeployment of two data acquisition crews leading to greater geographic diversity; the purchase of 25,850 single channel OYO GSR units, 2000 OYO GSR four channel units, along with three component Geophones and ten INOVA, a vibrator energy source units to better serve client needs. We have a balanced portfolio of oil and natural gas projects in the Eagle Ford Shale, Niobrara Shale, Avalon Shale, Bakken Shale, Marcellus Shale, Barnett Shale and along with the Permian Basin and Mid-Continent regions. We completed a 15,000 and 11,000-channel OYO GSR projects. We are currently operation on an 18,000-channel ARAM cable-based project. We have $74 million of working capital at September 30, 2011 and we had fiscal 2011 capital expenditures of $59,380,000. Strong oil prices combined with increasing seismic activity across the US fueled our fiscal fourth quarter and 2011 growth. Demand for services was particularly strong in the Eagle Ford, Bakken, Niobrara and Avalon liquid rich oil shale and from a natural gas perspective, expiration activity remains relatively strong in the Marcellus and Barnett Shale. The increase in activity and demand drove our decision to fully deploy two additional seismic data acquisition crews in the second fiscal quarter to better serve our clients needs and timing demand. Our added crews combined with improved efficiencies and expanded order book helped to further increase our short-term utilization rates. Contract terms are showing continued improvement throughout the lower 48 stage. With the continued increase in channel counter energy sources comes increased efficiency, which allows us to better serve our clients, while generating higher resolution images and generate improved financial results. Our September 30, 2011 results show significant improvement on a year-over-year quarterly comparison, year-over-year 12 month comparison and on a quarter-to-quarter basis. Although our contracts maybe cancelled on short notice, our order book is sufficient to fully sustain 14 crews well into fiscal 2012 and it’s presently at levels not seen since 2008. We will continue to work off some legacy contracts, which were contracted in the mid 2010 timeframe, with less than favorable contract terms through the end of Calendar 2011. I will note that while we feel very good about fiscal 2012, we will continue to be subject to quarterly fluctuations related to weather and permit issues in particular. Having said that, our first quarter is typically our most difficult with shorter days, holiday season, weather, agricultural and hiring issues. Throughout October the weather alone with seasonal agricultural issues had presented a challenging month for us. As previously reported, TGC Industries Inc terminated the definitive merger agreement pursuant to which Dawson would have acquired TGC in a tax free stock-for-stock transaction after Dawson and TGC failed to agree on an adjustment to the exchange ratio required. As a result of Dawson share price falling outside of the designated range specified in the merger agreement and TGC failed to received the 80% requisite shareholder vote to approve the transaction at a special shareholder meeting held for that purpose. Dawson shareholders overwhelmly approved the merger proposal at the company’s special shareholder meeting on October 27, 2011. And in closing, fiscal 2011 drove strong progress here at Dawson Geophysical. We expanded crew count, we improved short-term utilization rates and we helped our clients cost effectively identify and develop oil and natural gas reservoirs. As strong as fiscal 2011 was, however I had even greater expectations for fiscal 2012. Demand for services continues to grow, contract terms continue to improve and opportunities for growth throughout the lower 48 stage shows great promise. And with that, operator we are ready to take questions.

Thank you. (Operator Instructions). Your first audio question comes from the line of Collin Gerry with Raymond James.

Hey, good morning, Steve. Good morning Chris.

Good morning.

Good morning Collin.

Well, another solid quarter. I think it’s indicative of kind of the growing market or the strengthening market that you all have talked about. I guess my first question, I am going to lead with pricing, knowing that I usually get very little color from your guys on this. But I mean, you mentioned better terms in your press release. Is that both indicative of net pricing, is it indicative of sort of better terms in the contract as it relates to turn key versus day rate. May be give us a little bit more color to the extent you can on where those are going.

Collin we are predominantly on turnkey contracts. I believe from time-to-time we will operate two or three crews on some day rate type agreements, but for the most part we are turnkey. We are seeing improvement in overall contract terms. We are certainly seeing some level of weather protection that we’ve talked about in the past, the weather down time is never full margin coverage. Its right at fixed cost, but none the less that seems to be something that is helping. I would say pricing generally is trending upwards. Demand is certainly out there to dictate some level of pricing increase. As always, channel count continues to increase and when you get higher channel count operations you get some pricing improvement related to the size of the crew, but you get help from the backside with improved efficiencies. Most of our work now tends to be west of the Mississippi rive, so we are out in the mid contentment, the Rockies, West Texas where we are not using as much dynamite for energy sources. We are still using some in Oklahoma and parts of the Rockies and we are still going to have some use of helicopters, but these areas tend to be easier to permit larger land track ownership positions. We’ll have – the crew in West Virginia will be moving out mid November. So they will have some more time coming back west, they will move back probably in the early spring and so as we get farther west, we are going to continue to be more and more turn key and we are seeing quite a bit of improvement in our margin based in these turn keys contracts that we got, predominantly vibratory contracts. Now we are having weather issues as I mentioned, a little bit of down time protection with that. So in general I think pricing is up. It certainly isn’t moving at a high rate, but it is trending upward.

And just on the margin growth that we saw this quarter versus last quarter, is that kind of – is part of that what you just spoke to in terms of seeing a little bit less pass through charges, you know as more of your crews are west Mississippi.

You know, in think the third party charges are trending down more towards the historical range of 25% to 35%. We think that trend will continue. The order book has certainly strengthened with projects or various sizes and so our utilization rates are trending upwards. I think the turnkey projects where as I said in the past, we are taking on more operational risk and more weather risk, but at the same time we are getting more upside on the margin side. I think we had a good run with weather in the fourth quarter and so I think you put all those things together and I think we’ll continue to see throughout the course of fiscal 2012 margins improve.

And then last one on that front from, you know its impressive you guys are spending quite a bit of capital this year into the strengthening market and you went through you know the new oil crews and kind of stuff like that. Would you say that the newer equipment is accretive to the margin, and to those better margin crews as we get more efficiently into the system?

Our experience today has been yes. The answer to that is yes. You know we’ve had in two very large high channel count projects, we’ve now split some other oil equipment up, which allow us to – you know we can run anywhere from two very large crews to three 8000 channel crews in addition to the three component capability. We have 4000 stations of the three-component capability and that equipment tends to stay fully utilized. We are doing more and more multi component testing type work and at various projects. But yes, I think we are seeing the crew efficiencies and productivity increase with the use of that particular system. On the back side of that, you know as I’ve always said, you got the data handling issue which takes a little bit of delay and its overall data delivery, but from a crew standpoint we are seeing improvement; I’m pleased with it so far.

All right, very nice. That’s it from me. I’ll turn it back and may be re-queue.

Thanks Collin.

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

Good morning.

Good morning, Veny.

Congratulations on a solid quarter.

Thank you.

My first question is your margins were great in the quarter, but revenues were sequentially down. Can you give us a little bit more detail on that, was it the wheatear or…

Veny, I missed a part of that question, can you try again there please.

Yes, I’m sorry. The margins were very impressive, but at the same time revenues were sequentially down. Can you give us a little bit of more details what caused that and was it quarter specific or was it weather.

I think most of that is related to the third part charges Veny. You know we went though a stretch there where the third part charges were you know trending up very, very high. We’ve seen that reverse in the fourth quarter. Some of those third party charges are actually pass through in advance of crew revenue and so I think there’s a little bit of disconnect on the third party charges as a relate from second third and the fourth quarter. I think going forward we’ll see those third part charges start to level out in the historical 25% to 35% range of overall revenue.

Thank you. So my second question is also related to the weather and the Marcellus. How many crews do you currently have in the Marcellus? There were heavy rains in Q3 and continued in Q4, are you going to be effected?

Well, we have one crew in the Marcellus that will finish up. It’s the project that we talked about in the past, that we had been a difficult project. We will finish that hopefully in the next week and that crew will move back west and we will be out of the Marcellus for probably until the early part of the spring, in which time we’ll go back. We had some permit issues on the next project that we were going to do, so that kind of forces to have some more time on that crew. Yes, we had some weather impact in October as well as in early November in that region. We have a crew in North Dakota that will have move probably in mid December. They will move back south and then they’ll go back up there to finish that project. We will not be there during the harsh winter month like we were last year, but that’s going to be some moving down time. And during this quarter from a weather standpoint, we didn’t have too much of a weather impact. In Q4 we have had some weather impact here staring Q1, particularly in the Oklahoma region, we have a couple if crews up in Oklahoma, we got a couple of crews in the Barnett. And we’ve had some, we had three crews working in Wyoming and all those have been subject to weather here in the early part of quarter. So I don’t think the weather impact was huge in Q4, but certainly that is rolled over into some impact in Q1 along with the other issues that we’ve talked about related to hunting, agricultural and shorter days.

All right, thank you, and my last question is again on the equipment side. Now with the merger of TGS behind you and the new year has stared, with demand picking up, do you need to acquire more equipment; do you need more equipment as of today.

Well I think that the shale account is going to continue to grow and I think we’ve always talked about that. We did have substantial capital expenditure of $59 million in 2011. That was well above the initial capital budget that was approved in September of 2010. Most of that was driven by the rapid expansion into the OYO equipment. I don’t believe we’ll see that level of expansion in 2012, but we will have to wait and see what demand says or dictates. Going into ’12, we’ve approved an initial budge of $20 million. We are going to purchase more vibrator energy source units, so we will be purchasing some channel count expansion early on and some expanded geophones and then we’ll just wait and see what the market looks like. We are still operating several, I think four or five RSR crews, all of which are very productive and doing well, but at some point you know we’ll continue to transition in from the RSR into other type of equipment over the next couple of years. But as in the past Veny, we have an initial budget and then we move based on what the market and what the demand looks like and what specific project types come available.

Thank you. That’s it from me.

Thank you Veny.

(Operator Instructions) Your next audio question comes form the line of Georg Venturatos with Johnson Rice.

Good morning.

Good morning George.

How are you Steve. Just wanted to talk a little bit more about your CapEx budget plans for ’12. Just in terms of trying to get a sense of the absolute channels we could see next year, do you intend to potentially retire any of those existing channels in ’12?

I don’t think so. I think what we’ll see is a redeployment of channels, of like equipment on to like crews and as channel count continues to increase and so, you know I can make a case that we may drop as we have in the past the number of oil crews when you have 20 or close to 40,000 something channels of oil geared; that can be four crews, that can be three crews. I think when you look at the ARAM equipment, you know we currently have a project we have been working on for quite some time, we will finish up in the spring that’s required about 18,000 channels of ARAM. We’ve got central recording units that we could expand the ARAM crew count or we could reduce it just depending on what the ARAM channel count requirements would be and I think we can do the same thing with the RSRs. So I don’t think we will see anything actually go into retirement, but we could see the crew count move to 13 to 15 – it can move around depending on how we have to more equipment. Now in terms of buying equipment, right now we are in pretty good shape, but you know we are pretty tight based on channel count, particularly in the GSR and ARAM area and so I can make a case that we can see incremental increases, a small increase of channel count throughout the year as project grow and we see improved efficiencies, but as of today, I don’t see a large retirement and a large increase of any particular type of equipment, but having said that, you know we are very early in the fiscal year and the market looks very strong going forward; bids are strong, request for bids are strong, our order book is strong. Projects are getting bigger, even though we try to keep a well-balanced portfolio of projects and in terms of size you need that to keep your short-term utilization rates high. We are seeing some large projects that are out there and if some of those come to fruition then you know you may need a few thousand channels or something here you know, of this figure equipment type to complete a project and so, I think we will see some incremental increases during the year and if something big comes along that could obviously change. Our first investment will be into more vibrator energy source units. I think those are on OYO and taking deliver here very shortly.

Okay great, and then just real briefly. I mean just in terms of your initial preference, I know its preliminary, but just in terms of potential incremental purchases on the channel side, would prefer cable-lists as opposed to cable-based systems considering it seems like you are coming up to speed on the learning curve with ESR pretty quickly here.

I think I would put our personal preference aside and answer the question with the fact that we are very pleased with our equipment base overall. We think it’s well balanced; we think it’s got a great mixture. We do mix and match the cable-lists and the cable systems together depending on what type of project we are on and I think we will just have to wait and see what the market dictates and what our clients are demanding. The oil equipment is certainly getting acceptance. The efficiencies are higher in certain areas; on the other hand we are having some very nice projects and with the ARAM cable base, so I think it won’t be as much our personal preference as to what particular projects and what our client demands dictate from time-to-time that will guide our decision making going forward. You know we are not really pushing any technology, we are just providing a suite of services and a suite of technology here that best fits the project mixes that we are looking at going to into 2012 and so, at this point we are pretty happy with our mix, but that could change about the time we get off the phone, so it’s the best I can answer that one George.

Right, understood. And then lastly, I just assumed you are, but do you continue to see pretty strong demand for multi component data by customers.

Its not large in terms of the revenue mix, in terms of project size, but we’ve got the 4000 stations of the – four channel units, which allow us to do pre component work and we’ve been able to keep that equipment fairly well utilized here for the last nine, 12 months. For the most part they are smaller projects, they are what we would call embedded projects George, where we may have a large cable based system operating and someone would like to do a three component test within a very large cable project or even a large GSR project and so I think we’ll continue to see that move forward. At what point it becomes a significant player in our overall revenue mix, time will tell. We’ve don’t quite a few projects with the three component equipment where we have done some frac monitoring and some micro size type of recording and so I think that multi component equipment has a wide range of uses and it is being fully utilized and we’ll just have to see where the market goes. We are excited about it. It’s a pretty good-sized project that is planned for next year and utilizing that three figure. So I think it’s – here again it’s just another suite of – another tool in our suite of services that we offer that seems to be growing.

Great, I appreciate the answer Steve. That’s it from me.

All right, thanks George.

At this time we have no further audio questions.

Okay, well I want to thank everybody for listening in. I’m very proud of our people for the hard work in fiscal 2011. I feel like we’ve made a great progress as a company, not just as a company, but as an industry as a whole. I think 2012 looks very promising for us and our industry. We look forward to continue to deliver value for both our value clients and our shareholders of fiscal 2012. We wish everyone a happy holiday season and look forward to talking to you again in February. Thank you very much.

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