Dawson Geophysical Company (DWSN) Q3 2012 Earnings Report, Transcript and Summary

Good morning and welcome to the Dawson Geophysical Third Quarter 2012 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Steve Jumper. Please go ahead. Steve Jumper – President and Chief Executive Officer: Well, thank you (Sue). Good morning and welcome to Dawson Geophysical Company’s third fiscal quarter 2012 earnings and operations call. As Sue said, my name is Steve Jumper, President and CEO of the Company. Joining me on the call is Christina Hagan, Executive Vice President and Chief Financial Officer. As in the past today’s call, we present in three segments. Following the openings remarks, Chris will discuss our financial results. I will then return for an operations update and open the call up for questions. The call is scheduled for 30 minutes, and as in the past, we will not provide any guidance during the course of the call. At this point, I will turn to control the call over to Chris Hagan, CFO to discuss our financial results. Christina Hagan – Executive Vice President and Chief Financial Officer: Thank you, Steve. First, I will share our 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 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, dependence upon energy industry spending, disruptions in the global economy, industry competition, delays, reductions or cancellations of service contracts, high fixed costs of operations, external factors affecting our crews such as weather interruptions and inability to obtain land access rights of way, whether we enter into turnkey or term contracts, crew 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 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 at www.dawson3d.com. Let’s look at the numbers. Dawson Geophysical today reported revenues of $68,348,000 for the quarter ended June 30, 2012 compared to $98,033,000 for the same quarter in fiscal 2011. Net income for the third quarter of fiscal 2012 increased 241% to $1,141,000 compared to $334,000 in the same quarter ended June 30, 2011. Earnings per share for the third quarter of fiscal 2012 were $0.15 compared to $0.04 for the same – for the third quarter of fiscal 2011. EBITDA for the third quarter of fiscal 2012 increased 18% to $10,437,000 compared to $8,821,000 for the quarter ending June 30, 2011. Revenues for the nine months ended June 30, 2012 were $246,276,000 compared to $249,023,000 for the same period ended June 30, 2011. Net income for the nine months ended June 30, 2012 was $9,960,000 or $1.27 earnings per share as compared to a net loss of $6,190,000 or $0.79 loss per share for the same period of fiscal 2011. Included in the third quarter of fiscal 2011 results were expenses of $1,465,000 related transaction costs. Reflected in the third fiscal quarter of 2012 results was an increase in depreciation expense of $428,000 from the same period of fiscal 2011. The increase in depreciation expenses related to the company’s investment and additional reporting equipment, including channels and additional energy source units during the past 18 months. Steve? Steve Jumper – President and Chief Executive Officer: Well, thank you, Chris. Let me begin by recapping our fiscal third quarter and nine months highlights. As Chris mentioned in the third quarter and first nine months, we generated a 241% increase in net income to $1.1 million or $0.15 earnings per share for the three months period ended June 30, 2012 compared to net income of $334,000 or $0.04 earnings per share for the corresponding 2011 period. We generated an 18% increase in EBITDA for the three months period ended June 30, 2012 to $10 million – $10.4 million compared to $8.8 million for the third quarter of June 30 – quarter ended June 30, 2011. We generated a 161% increase in EBITDA for the nine months period ending June 30, 2012 to $38.9 million compared to $14.9 million for the year ago nine-month period. We generated net income of $9.9 million or $1.27 earnings per share for the nine-month period ended June 30, 2012 compared to a net loss of $6.1 million or $0.79 loss per share for the comparable nine-month period of fiscal 2011. We’ve strengthened our order book, which is capable of sustaining 14 crews well in to fiscal 2013 with current projects in the Permian Basin, Eagle Ford, Mississippi Lime of Oklahoma and Kansas, Niobrara, and a project in the Marcellus Shale. We’re continuing our preparation to begin operations of 1 or 2 crews in Canada operating during the 2012/2013 winter season. And in addition, our balance sheet is strong with $59 million of working capital, $13 million of debt, and approximately $50 million of cash and we operate a very solid equipment base. And anticipated in our second quarter call, third quarter utilization rates were negatively impacted by project preparation, permit and client delays. Most of which were beyond our control. In addition, we were subjected to weather and agricultural issues in several regions of the country. Approximately, one half of our crews were impacted. At the end of July, we began to realize improvements in utilization rates and expect further improvement during the remainder of the fourth fiscal quarter. Despite recent weakness in oil and gas prices, demand for our services remained strong. Our order book level is at multi-year high incapable of sustaining 14 crews well into the first half of fiscal 2013. As we have stated in the past, our contracts can be cancelled, delayed or modified on short notice, and our results can vary due to weather, permit and/or client delays among other factors. Number of projects, project size and client mix, all continue to show increasing strength. In short, future growth opportunities remains strong, despite recent dips in commodity prices. While revenue was down on a quarterly basis, so to our third-party chargers, third-party charges, which are included in the revenue declined as a percentage of revenue during the third fiscal quarter of 2012 to a level more consistent with our historical average. Third-party charges include services such as helicopter support services, specialized survey technologies, and dynamite energy sources. All third-party charges are reimbursed by our clients. The decline in third-party charges is primarily the result of our increasing geographic diversity and movement of operations toward the more open trying to the Western United States. It is also worth noting as Chris previously mentioned that both net income and EBITDA for the third quarter show significant improvement from year ago levels up 241% and 18% respectively. And for the nine-month period ended June 30, 2012, we generated nearly $10 million in net income compared to approximately a $6 million loss a year ago. EBITDA for the nine-month period increased 161% or roughly $39 million, compared to $15 million in EBITDA on the year ago period. These numbers clearly reflect growing demand for our services and continued improvement in crew productivity and efficiencies. Not surprisingly, demand for our services is being driven primarily from oil and liquid-rich plays, including the Bakken oil shale, the Eagle Ford, Mississippi Line of Kansas and Oklahoma, the Niobrara, and the Permian Basin. The increase in demand has further prompted our Board of Directors to set the company’s CapEx budget – at a robust $50 million. At the end of the third quarter, we had spent or committed $42.5 million of the $50 million, primarily on energy sources and equipment, including 19 INOVA vibrator energy source units, 10,500 additional OYO single-channel recording units, 3,000 stations of OYO GSR three-channel units with three-component geophones, additional conventional geophones and to meet additional needs as they arise. As of June 30, 2012, we own over 36,000 OYO GSR single-channel recording units, 4,000 OYO GSR four-channel recording units, 3,000 OYO GSR three-channel recording units, and 7,000 three-component geophones. Our total cable-less channel count is in excess of 61,000 and overall channel count is approximately 167,000. We own 168 vibrator energy source units. As many of you know, in response to increasing demand we are seeing in Canada, we opened an office in Calgary, Alberta earlier this year. I am happy to announce that we recently appointed Jason Nelson as General Manager of our Calgary office. Jason will work in conjunction with Doug Schmidt, the President of our Canadian operation. Jason’s overall expertise and knowledge of the Canadian seismic market will help us maintain the strong Dawson brand and build our operations in the Canadian seismic market. In closing, as you round up fiscal 2012 and look forward to the start of fiscal 2013, we are seeing increased opportunities. Needless to say, we are glad to have this quarter behind us, but we are proud of the way our employees manage the difficult situations and are looking forward with great optimism. Future visible growth remains solid. Exploration activity in oil and liquids-rich region of the US is strong. Improved efficiencies in gains and productivity combined with stronger contract terms is driving higher returns. And our balance sheet remained strong was $69 million of working capital, $13 million of debt, and approximately $15 million in cash. I am confident that our commitment to our employees, our clients, and our shareholders will bring new opportunities for expansion in growth here at Dawson. And with that operator, we are ready for questions.

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Marshall Adkins of Raymond James. Please go ahead. Marshall Adkins – Raymond James: Good morning.

Good morning, Marshall. Marshall Adkins – Raymond James: So, Mr. Jumper, the utilization issues that you kind of highlight could you give us more color on that. I know you mentioned the weather in the agricultural and other stuff, but help me to understand more specifically what was going on and I guess more importantly the tone seemed to suggest it’s going to get better next quarter. Why do those issues get better?

We had several projects that were scheduled in the beginning part of, I would say, the middle part of the third quarter that were subjected to some very difficult permit conditions. And part of that was Marshall was a rollover of the improved efficiency, we had in Q2, if you recall we had a pretty strong Q2. We talked about crew efficiency and crew productivity. So, we had a couple of things come together, I think in the third quarter timeframe. One was we were quite a bit more efficient and productive in the second quarter which is a very good thing. That’s a positive thing. But that coupled with the few client delays that weren’t related to anything other than land and/or partnership agreements and some other permit delays put some holds in our schedule. What we have learned is that our productivity and efficiency has improved to the point that we probably believe we have more capacity within our operations and we probably even originally thought. Going forward we probably got somewhere around 10 crews back working. As I’ve mentioned in the call we had an impact on about half of the crews at some point during the quarter particularly starting at about mid-May. And we believe we’ll have another couple of crews going back here in the next week to ten days and some time middle-August, we expect – we anticipate to have 14 of them back up in running. We – the permits have cleared up in a lot of areas. The client delays have are not in play at this point. We still got a couple of places we’re clearing up a few things. Our order book continues to improve not just in terms of dollar amount which we don’t disclose or square miles which we don’t disclose but its real important that we continue to have projects in the small to mid-size range that you can use a stock gap fillers and you have these situations that we just went through. And we believe that the order book is strengthened, there are some increased activity particularly in the Permian Basin, that’s smaller operators. Sometimes as cost of services and other parts of the sector go down, smaller operators begin to see different opportunities and begin to look at getting seismic work ahead of the drilling commitments. And we’re seeing some smaller projects in the 25, 40, 50 square mile range that are much easier to get ready and much easier to be in a position to fill that haul. We’ve always talked about a backlog having not just being deep, but wide in terms of project size and we think that’s improving. And we’re always going to be subjected to permit issues, weather issues those types of things as we’ve always talked about. But I really feel like it’s clearing up very positively. And as I’ve said we expect to be back to full utilization. We’ve moved out of – a couple of things have happened, we’ve moved out of couple of areas that have significant agricultural activity, but we are also the time of the year with some of that to agricultural activity work fast planting and harvesting and all that kind of stuff. And so those things seem to have eased and we have some weather downtime protection. We have some standby protection as we’ve talked about in the past, but those are never full margin type protections. So, we were very optimistic, we see a lot of requests or proposals as we kind of begin to take a little bit of toss I think and maybe some other local service areas we are a very small the seismic budget is very small part of an overall capital budget. And we are beginning to see more of our clients think well. We probably need to get good quality high resolution seismic data. We got the land position and maybe drilling slows down maybe it don’t but we really need to understand what we are drilling, so we drill more effectively and more wisely. So, I think we’re starting to see some of that coming into play Marshall. Marshall Adkins – Raymond James: Alright, you mentioned that your capacity maybe higher than you were thinking before, is that because of this new OYO equipment and or is that OYO equipment giving you better visualization of the sub-surface so I guess I’m asking is, is it more efficiency oriented or is it more visualization oriented?

It is overall crew efficiency levels have increased quite dramatically here in the last nine months to a year. There is no question that the cable-less system – the cable-less equipment allows you to operate in live variety of terrains and permit restricted areas that are very difficult on a cable group, we are seeing great improvement in true productivity because of the OYO’s equipment. That’s not the only thing that’s in play. We talked at length in years past Marshall that there are no two 3D surveys that look alike and we’ve always try to add someone pin us down on pricing questions and pin us down on what is one square mile of 3D cost and we always said well it depends. We’ve also talked about on a go forward basis about the need for higher resolution images, increased channel count, different ways that we’re utilizing energy sources. And so what we’ve had happen in conjunction with OYO equipment as we’ve seen increased channel counts. We’ve seen tighter grids where we have less source effort but more sources in particular area, more channel count. All those things built together for gained efficiencies. Your ability to shoot not just X number of VPs in a day that’s not the measure how square miles can we do in a day. And so there are some technological changes that are in play and we are certainly a big believer in the OYO system will continue on that platform going forward. But there is some operational and technical issues related to how we’re actually acquiring data particularly as you get in the Permian Basin in the Mississippi line, at a certain degree the Bakken. So, I think there are – we’re learning how to handle channel count better. We’ve talked about that in the past. It’s not uncommon to come out of a downturn and have a growth in channel count. We saw it in the ‘90s, we saw it in early 2000. There is a process of understanding the number of people involved, the cost structure. We’re always kind of running behind the cost structure. And I think our people had a much better handle and idea on how to handle some of these stuffs, I think there are several factors in there. Marshall Adkins – Raymond James: Alright, thanks, Steve.

Thanks Marshall.

The next question comes from Georg Venturatos of Johnson Rice. Please go ahead. Georg Venturatos – Johnson Rice: Good morning guys.

Good morning, Georg. Georg Venturatos – Johnson Rice: Hi Steve, I appreciate that color on kind of the outlook over the next year and into ’13. I was wondering if you can may be just give us a little more detail on current pricing and contract terms over the last quarter and what you kind of see looking out to?

Georg, I don’t think we’ve seen any significant changes one way or the other in pricing and/or contract terms. I think we’re pretty comfortable with the current pricing environment, activity level is high, bid activity is high. We’ll probably have a better understanding of as I’ve told Marshall actual operating cost on high channel count crews and efficiency ratings. The most of what we are doing right now is a turnkey and we’ve said before that in the turnkey world, there is a greater upside in terms of margin. But there is greater risk. Once permits clear out and we believe they are clearing and getting better, that’s probably not a fair statement. Permitting is always going to be difficult in the environment that we’re working in today. But we think the projects we’re on currently are moving on to the permitting situations getting better. And we think the way – the width of the backlog in terms of project size is getting better. And so we are in areas where turnkey projects can work very, very nicely. And I think pricing is flat over the last quarter, contract terms are still good. We haven’t seen a whole lot of movement, certainly no weakness in that. But I think the value that we are adding were actually the cost per unit of data to our clients and the image we’re providing, cost is actually coming down the per unit of data measurement. And the images are improving and we – I believe that we are in areas of operation where turnkey works nicely. We have weather risk, not like we do back east. We have more operational eases. So, I’m pretty optimistic going forward. I think this has been a tough to go. I’m real proud of our folks and the way they handled it, the way they managed their way through and the way they rescheduled and moved equipment around to maybe increase the size of – there are some crews on some turnkey projects. But I think at some point you think about was Q2 our perfect storm I don’t think so. I think Q3 not a bit of perfect storm on a negative side. I think we could given continued strength in the market in the areas we’re operating and what we’re seeing currently as of today I think we can – Q2 kind of stuff not have the question going forward. But I certainly don’t think it’s in this quarter. Georg Venturatos – Johnson Rice: Okay great. And then just getting back to your equipment base obviously we’ve seen the benefits of cable-less with the crew efficiency looking forward and taking into our account what’s your order book lies in terms of where projects maybe placed. What makes sense in terms of potential target as a percentage of cable-less to your overall channel count?

Yeah we’ve actually increased the cable-less count to I’m not a mathematician, but we’re a little bit north of 30% or some under 40% range of the overall base. Now, about another 30% of that is the or maybe 25% of that is the RSR reporting equipment, which is somewhere in between a cable system and a cable-less system don’t have quite a flexibility that the OYO GSR has but its an added flexibility point in addition to cable. Cable equipment is still going to have its use. We’re keeping it fully deployed and it’s doing quite well on its own. I think what you will see is continue to do Georg on a go forward basis is continue to increase as we purchase additional OYO equipment either as expansion of channel count on existing GSR crews or as a replacement on a cable or RSR crew you will see that RSR and cable equipment move to other like equipment type crews and increase their channel count. So, there is no question I think there will be more investment in the future on cables equipment, increase in overall channel count and redeployment of those existing assets to the crews. I would add that in Canada I think we’ve got a great opportunity to use some cable-less equipment. But we also have extended possibilities with be multi-channel boxes doing some more multi-component type recording. We’ve got two or three very – actually three fairly large channel count – station count multi-component jobs coming up. And so I think we’ll continue to see hopefully as we continue to improve this image and work towards the greater understanding of these reservoirs I think we’re going to continue to see greater use of multi-component type work. And I think the investment could be parallel to single-channel and multi-channel boxes with the majority of it going single channel. We’re coming up on the end of our 2012 budget, where fiscal year in September 30, my guess is that we’ll come back that we have in years past and we’ll look at our age and come up with $20 million-$30 million of initial CapEx expanded during the course of fiscal 2013 as names present themselves. Georg Venturatos – Johnson Rice: Great, I appreciate the answers Steve.

Thanks Georg.

The next question comes from A.J. Strasser of Cooper Creek Partners. Please go ahead. A.J. Strasser – Cooper Creek Partners: Hi Steve, how are you?

Good A.J., how are you? A.J. Strasser – Cooper Creek Partners: Good thanks for taking my question. So, let me just start by asking how we should think about what normal margins are in your business. Had things been working, are we looking at kind of EBITDA margins in the low-20s?

A.J. as you know it’s always very difficult for us to give any guidance on a go-forward basis of whether it’s gross margin or EBITDA margin. I think on a gross margin basis, we’ve been this one comes in somewhere around 19 or so we were at 24 last quarter. I think our historical is – has been in upper 20s. And what I guess people call up cycle, I think that’s certainly achievable. We are still working through some Q4 as we mentioned utilization issues were slowly getting back to work therein towards latter part of July or the end of July and we’ll see utilization improved during the quarter. It’s all going to be a matter of utilization and third-party charges, I think are going to be big factors in calculating the overall growth and EBITDA margins. We think third-party numbers are back to historical ranges of 25% to 35%, down from the 40%, 45% range, almost 50% range that we got into in 2010, early part of 2011. And so, I think given the conditions we see today, I would certainly think gross margins back in the historical area of 25%, upper 20s is possible. We still got a little bit of work to do in Q4. A.J. Strasser – Cooper Creek Partners: Is that possibility premise on as you said an up cycle, where the market continues to get stronger or from where we stand today, is that what you are seeing?

I think we certainly see that as a potential of where we are today. The – we are in a turnkey world right now. We’ve got a few day rate possibilities, but for the most part, we are turnkey. I think I am not worried at all about our crew’s productivity and efficiency. I don’t have a whole lot of worry about pricing. I think it’s strong. You’d always like it to see better, but our industry has always been built on faster, better, and more cost effective and I think we are getting all that. These projects get larger. Good thing about large projects is you can build in lot of efficiency. The bad issue is they are hard to get ready. So, we are going to deal with permits and we are going to deal with weather and we are going to deal with all those other types of things, but given normal conditions, I feel like what we did on a margin basis in the Q2 in the past is certainly achievable, but I would hesitate to pick a time when we think that could happen. A.J. Strasser – Cooper Creek Partners: Can you elaborate a little bit on the client delays that you mentioned? Were any of those client delays related to the volatility that we saw in commodity prices over the last six months?

I do not believe so. Those projects have come back around. They are still in the queue. Some of them were related to bringing in on a partner, expanding the project, acquiring land position, there were whole of factors. They were not related to any one particular client and nor were they related to any concern about recent commodity prices in my opinion. A.J. Strasser – Cooper Creek Partners: Okay. And then lastly, can you elaborate on some of the traction that you are making as you entered the Canadian markets. How do you see margins in the kind of Canadian side grants if there is more seasonality there versus the U.S.? And then maybe you can talk a little bit about some of the challenges and opportunities you are seeing in entering that market, as I think it operates a little bit differently than the U.S.?

A very fair question. We are moving into the Canadian market slowly. It’s – we understand and we believe that margins in the peak seasons are pretty strong in the Canadian market. We think we have a very solid, well-recognized brand name. We’ve been around a long time. It’s a new step for us. Moving into that market very excited about the people we have on board. We think Doug and Jason will do – have very good reputations and will do well. It’s not an easy market – there is never easy market to move into. We are not going to go in and trying to do a whole lot, our goal and ambition would be to get one or two crews working at there this season, get our feet wet. We are obviously very interested in the financial performance of that market. We understand the seasonality. We think we can move resource back into the states and on a 14 crew basis absorb those resources. We understand the seasonality and work solid about it. But we are probably more interested in doing it right and getting the right project in the right time and performing very well and build that over time. And so, we are not going to put any guidance on that in any way shape or form, A.J. but I think over time it will be a positive for our company. A.J. Strasser – Cooper Creek Partners: You talked about this season, when do you expect it to – what quarters will you start to see revenues from the Canadian operation?

I’m by no means an expert in that market, A.J., but my understanding is someone around of the November timeframe, you’ll start to see activity in sometime around March – late March timeframe, you will be out. And so, we think there are some opportunities for us to get accrued to working and what size and scale of those crews will be, and what type of crews they will be, yet to be determined. We are getting some request and some for proposals and we are talking to a variety of potential clients up there. But we are just moving slowly, we are getting stepped up on a key personnel our position quite well we think and we’ll just have to wait and see. A.J. Strasser – Cooper Creek Partners: Alright, thank you for taking my questions.

Thanks A.J.

(Operator Instructions) Our next question comes from Gary Lenhoff of Great Lakes Advisors. Please go ahead. Gary Lenhoff – Great Lakes Advisors: Thank you, Steve and good morning. You actually just answered the question I had so, thanks.

Well, thank you. That was an easy one. Gary Lenhoff – Great Lakes Advisors: Yeah.

Add those anytime. Gary Lenhoff – Great Lakes Advisors: I will be back next quarter.

This concludes our question and answer session. I would like to turn the conference back over to Steve Jumper for any closing remarks. Steve Jumper – President and Chief Executive Officer: Well, thank you. We’d like to thank all of you for participating in our call. We’d like to thank our clients, employees, and shareholders for their continued support and trust as always. And we want to mention that we will be presenting at the Intercom Oil and Gas Conference on August 13, in Denver and there will be a webcast available on that presentation on our website. Thank you and we’ll talk to you next quarter.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.