Dawson Geophysical Company (DWSN) Q4 2013 Earnings Report, Transcript and Summary

Good morning and welcome to the Dawson Geophysical’s Fiscal Year-End and Fourth Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Now I will share the company’s Safe Harbor provision. 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 differ materially, 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 and 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, 2012. 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. Please note this even is being recorded. I would now like to turn the conference over to Steve Jumper, CEO. Please go ahead sir.

Thank you, Laura. Good morning and welcome to Dawson Geophysical Company’s fiscal fourth quarter and year-end 2013 earnings and operations conference call. As Laura said, my name is Steve Jumper, Chairman, President and CEO of the company. 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, the call is scheduled for 30 minutes and we will not provide any guidance as we’ve not done in the past. As we discussed in our September operations update press release, we experienced lower utilization rates during fourth fiscal quarter of 2013, as crews were affected by project readiness issues primarily due to agricultural operations in key regions, land access permit issues and a softness in bid activity during the third fiscal quarter of 2013. We want to provide a brief recap of the fiscal fourth quarter 2013 results before discussing our full year 2013 results, which we believe better represent the opportunities in the market going forward. In the fourth quarter, we reported revenues for the fiscal fourth quarter ended September 30, 2013, were $69,673,000, compared to $72,998,000 for the same quarter in fiscal 2012. Revenues net of third-party charges were down 10% from the same period of fiscal 2013. We reported a net loss for the fourth quarter of fiscal 2013 of $2.79 million or $0.35 per share attributable to common stock, compared to earnings of $1.1 million or $0.14 per share attributable to common stock in the same quarter of fiscal 2012. EBITDA for the fourth quarter of fiscal 2013 was $6.6 million, compared to $10.6 million in the same quarter of fiscal 2012. While increased efficiencies in the third fiscal quarter combined with lower utilization rates in the fourth fiscal…

At this time, we will begin the question-and-answer session. (Operator Instructions) And our first question comes from Veny Aleksandrov of FIG Partners. Veny Aleksandrov – FIG Partners LLC: Good morning, guys.

Good morning, Veny. Veny Aleksandrov – FIG Partners LLC: My first question is about efficiencies. so you have had this new equipment for three years now, I guess, and you have been getting more efficient and more efficient. Are you taking vision to account looking to 2014 and planning the project there. Can you depend [ph] on this efficiency by now?

That’s a good question, Veny and it honestly is something that I think not just our company, but our industry in the U.S. struggles with. We have said for quite sometime that the permitting process particularly in the lower 48 and I would assume the case is true for elsewhere in the world, but particularly in the lower 48 is getting more complicated, as we – particularly as these projects continue to get larger and larger. When we entered the Q3, Q4 timeframe of 2013, we had this very similar issue that was split based to the back half of 2013 in the – excuse me, the back half of Q3 and the front half of Q4, and we felt like that something that we were going to need to address and going forward and here it happened to us again in 2014, obviously we’re disappointed. This time around, it isolated all in Q4 and carried a little bit through October into Q1. We think those issues are resolving themselves and so we are not going to give up on improved efficiencies, particularly when we’re working under – well, it really doesn’t matter the type of contract we work under, our clients need their data in timely manner and obviously if we’re under a turnkey type contract, we have chance for enhanced margin improvement going forward. And so the question now becomes how do we manage that and I think we can manage what’s in our control. We can’t manage what’s out of our control and so what is in our control is being able to right size crew count and we’ve actually talked about this on this call and in presentations for last couple of years that crew count can be variable whether it’s 12, 14, 10, but the…

Well, I don’t know, but I would use the word strong. I think our order book for the – obviously us and the entire U.S. market would like it to be stronger, and we think it will be stronger going forward. I think the word that I would throw on it and that I believe I’ve used in the past is steady. I think we… Veny Aleksandrov – FIG Partners LLC: Okay.

I think we’ve come back despite the Q3 issue that we had with the slowdown on activity. Obviously with the lack of activity in Q4, I think our order book is probably flat to where it was in the early part of the summer, the spring time of 2013. And so right now, I’ve got for when the – all the things that are beyond our control, but right now we believe our order book is capable of sustaining the 12 large channel count crews in the U.S. through the – somewhere around the end of Q2 calendar 2014 along with the small crew and we’ve got some conversations going on with some folks that obviously could improve that. We could split crews and go to 2013 for a while to get something down and then recombine back like we’ve talked about in the past, but I think through the end of calendar Q2, I think, we feel pretty good given where we sit today. Veny Aleksandrov – FIG Partners LLC: Thank you so much. I appreciate it.

Thank you.

Our next question is from Georg Venturatos of Johnson Rice. Georg P. Venturatos – Johnson Rice & Co. LLC: Good morning, guys.

Hi, Georg. Hey, your Saints didn’t treat the cowboys very well when we came to town last week. Georg P. Venturatos – Johnson Rice & Co. LLC: Well, that’s what happens when you come into Superdome?

Yes, yes. Georg P. Venturatos – Johnson Rice & Co. LLC: So I guess on that crew efficiency issue we just discussed, are you a little concerned just maybe of a structural change in the industry where the trend towards larger project sizes, more complex jobs that you’re not necessarily going to see the mix of some of those smaller projects that you have in the past to fill those gaps or do you think that’s kind of a pause that we’re seeing here right now in the marketplace?

And so you would have six of those projects as opposed to one large project and obviously that is a little different management issue when you’re out here. I think we’ll continue to see projects that are going to stay in the 100, 200 square model range. I think there will be a resurgence of some smaller project particularly in isolated basins around the U.S. I think what’s really hit us the last couple of years, has not so much been the project size issue, but it’s been the concentration of those projects. Particularly when you are in areas of West Texas, the mid continent and those types to places, where there is extensive agricultural activities. Theoretically, we’ve kind of solved the problem of getting into some of those places with cable-less equipment, but we haven’t been able to solve the issue of sourcing, getting energy sources in those areas. And so I think we’ll continue to – I’m hoping we’ll see changes in project sizes going forward. Obviously, we like anywhere we can get and we’ll take whatever work we can get where we could get it, but I would like to think that going into 2014, we’ll see less of a concentration in certain areas. I’ll just give you an example, the Eagle Ford, for example, is a place that you generally have to be out of first part of November for hunting operations in South Texas. And that would be an ideal place if we get some increased activity there or some other basins, I’m just using that as an example, where you moved from there back into the Permian Basin right after a crop harvest, which typically occurs in September was a little bit later this year with some late season rains. And so I think the crop window was extended a little bit in West Texas with some late rains, but I think you asked a good question, I wish I had a crystal ball answer for you, but I do believe that we’ll see more diversification in 2014 in both geographic concentration and project size concentration. Georg P. Venturatos – Johnson Rice & Co. LLC: Okay, great. That’s helpful. On the microseismic side, I know it sounds like you at least have that one small crew dedicated to some work there; it sounds like or maybe give an update on the two projects you had 4Q of 2013. Just looking after 2014, do you expect traction to gain there, you think activity levels kind of maintain where they are, how do you kind of see that business evolving next year?

Well, I think that we’re having more and more discussions with a wider client base and – on the microseismic side and our client base includes a wide variety of people that includes folks that are in the E&P, the E&P operators, it includes folks who process microseismic data both bore-hole and surface microseismic and we’re in – we have conversations with folks who must merely provide bore-hole recording, would like to have some access to surface. I think certainly in certain regions of the country, we’re starting to see, at least, I believe as an industry, some promising results from surface recorded microseismic activity. Obviously, there’s – based on geology and surface conditions, there’s – it’s not a one size fit all everywhere in the U.S., but I think in certain regions, I think we’re starting to have more and more conversations. We do utilize two different recording systems. Sometimes we utilize GSR or GSX systems particularly if it’s three component type recording and we oftentimes use the wireless system particularly when they want to do a real-time stuff. So it’s lower revenue stuff than a full crew, but certainly has promising looking margins and returns tied to it. So our microseismic manager that joined us in the spring is certainly helping us to get more exposure. The more projects we did, has given us more exposure and I think our technical folks and particularly in Oklahoma City, have helped us gain some exposure. So I don’t think it’s ever going to be a situation, Georg, where we become a microseismic company first and a geophysical contractor second, but I certainly think it has some real potential to particularly fill in some of the small crew operations. So I guess cautiously optimistic is the work that we’re on right…

Well, I – Georg, we really haven’t gained any market share in Canada. We had the one crew that worked on a project last year. We’re going to have the one crew that as of today’s contract, on two crews and I think they’re deploying soon, if not already deployed on the first project in Canada. And our desire or our long range plans in Canada was to get in and establish some things from operational, from the safety standpoint, from reputation standpoint and get some projects to get some exposure and get established in that market. Yes. I think we’ve been successful with that. I don’t know that we’re actually in Canada to gain market share. we wanted to be good margin work and stuff that we can build on long-term. So I think we’ve been able to do that. That was going to be a tough market to enter into, as I’ve said in the past, we’ve got a great management team on the ground, I think we’re doing all the right things in Canada. But when you’re still the new kid on the block, I mean I guess our intention is that going up there was not close to gain market share, but to catch some of the “overflow” demand that would happen in a short season. We’ve been up there two seasons and that hasn’t happened, but we continued to believe that, that market will right size and from a demand standpoint over time and we’ll continue to look at opportunities to expand our services in the Canadian market. Georg P. Venturatos – Johnson Rice & Co. LLC: Okay, great. Appreciate the answer, Steve.

Thanks, Georg.

And the next question comes from Joel Luton of Westlake Securities.

Yes. Steve, just kind of a clarification issue. In terms of you’re having less third party sales in the fourth quarter, compared to a fourth quarter a year ago. that helps margin, right? D. Luton – Westlake Securities LLC: Yes. Steve, just kind of a clarification issue. In terms of you’re having less third party sales in the fourth quarter, compared to a fourth quarter a year ago. that helps margin, right?

Well, let’s – for the fiscal year-end, Joel, for fiscal 2013 compared to 2012, we had a reduced level of third-party charges as a percentage of revenue, that’s actually been a little bit below our historical average. I think we probably got back into the historical average in Q4.

Okay. D. Luton – Westlake Securities LLC: Okay.

And I believe – I believe our Q4-to-Q4 revenue comparison and net of third-party charges was actually down a little bit.

Okay. D. Luton – Westlake Securities LLC: Okay.

Less than 2014, so yes, you got – yes you are exactly right on what should happen, but I think with the reduced activity level in Q4 and a little bit of increase in third-party. I think revenues net of third-party charges year-over-year were up roughly 10% or so, but in Q4-to-Q4, they were actually down.

Okay. D. Luton – Westlake Securities LLC: Okay.

Okay?

Yes. Okay, got it. Thanks. D. Luton – Westlake Securities LLC: Yes. Okay, got it. Thanks.

oralated:

Okay, that’s fine. thanks. D. Luton – Westlake Securities LLC: Okay, that’s fine. thanks.

And our next question is from Rudy Hokanson of Barrington Research. Rudy A. Hokanson – Barrington Research Associates, Inc.: Thank you. A little bit more clarification on the larger picture of third-party. I know that it depends upon where you are geographically like in the Marcellus you probably need more than if you are in the Permian, but do you have any feel as far as looking at 2014, Steve, if your percentage of third-party total revenue is going to stay sort of equal to what it was last year now or if you think it will still continue to decline?

Well, I don’t think it will decline, Rudy. I think honestly, historically, we’ve been in the 25% to 35% range of reimbursables, as a percentage of overall revenue. And that was somewhat inclusive of a broad operating basin historically. You get into the eastern part of the U.S. and those numbers got higher and then when we had the downturn in 2009 and 2010, and fee revenue actually went down the net percentage – relative percentage actually went up. I think in 2013, particularly in the first three quarters and trailing out of 2012, I think we’ve been somewhat as below that historical average as a percentage of revenue. and so I don’t think they’ll go down – they could stay flat, but my guess is that over the long haul and long haul being over 2014, let’s say, I would anticipate third-party charges to be back in the historical range. So they might actually have a – it could potentially have a slight uptick. Most of the work we’re doing is the western part of the U.S., even the work we’ve been doing in the eastern part of the U.S., we’ve been on projects, we will record only. and so we haven’t been doing any of the prep work related to surveying and permitting and those types of things. And so that has certainly made an impact to us. We are increasing our capacity in the Western U.S. to provide more of these in-house services, that whether it’d be permitting or surveying or line clearing. And so we’re doing more of that in-house, which I think will continue. And by in-house, I mean we’re doing it with our own people as opposed to third-party contractors. and so as we continue to develop that, I think the fact we’re doing more of an in-house should be able to keep that that third-party charge as a percentage of revenue somewhere on the lower end of that historical range. Rudy A. Hokanson – Barrington Research Associates, Inc.: Okay, thank you. And then in this question is – well I’ll just ask it, is that as you have found increased efficiencies with the technology that you’re using. and in fact, the industry is finding that and yet from the complexity of the jobs that are out there to other issues. The efficiencies are sort of a two-edged sword.

Correct. Rudy A. Hokanson –Barrington Research Associates, Inc.: And I was wondering, if you Dawson or if you’re aware of others at all? Looking at what that means in terms of how you work your turnkey contracts and how you account for it, since the – I imagine the contract method was built off of an older technology and if that could influence or if it is beginning to influence the way that things are negotiated and where the give-and-take is, not that the oil and gas companies want to give you more, but if there’s a way to somehow do that tradeoff and capture that added value rather than somehow letting that flip through given the dynamics of the industry right now?

Yes, there is a lot in that question, Rudy and it’s a well thought out question. And I will answer what I can – sometimes I can’t answer things just based on either a lack of knowledge or some things from a competitive standpoint that we look at internally. there is no question that we, as a company have viewed what we do is, as a valued proposition to our E&P clients rather than a pricing issue. And so to answer part of the question is yes, we have been able do some things on the contract side that relate to added value completions and we’ve – early completions and safety issues and HSE records and a lot of different things that go into that. And so I think we’ve had the ability to capitalize on some of that, we had total capitalization of it today, probably not. but I think we’ve got some nice relationships where that works well. The efficiency question is, something I think not just the seismic industry is struggling with, but obviously other folks in the oil field service business are struggling with improved efficiencies, and I think we’ve got a chance certainly in our industry and particularly, our company. and then we still can get right size based on not just demand, but based on our readiness issues. And there is not a tremendous amount of overbuild capacity let’s say in the seismic industry in the lower 48. I think it’s an industry we’re going to have to figure out how to most efficiently utilize that capacity. and I think now we’re down to some things I believe. from a company standpoint, we’ll have some strengths and that we’re in all the right places from an office standpoint. so we’re in close contact with…

Well, Rudy, there is a couple of comments, I would make there that I’m not sure that I would classify them as the answers I’m not sure I’m smart enough to do answer them the right way. But if you just take what’s going on in the Permian basin for example right now, the type of projects that E&P companies are asking for and that our industry as a whole are providing our higher channel count surveys. we’re getting a nice full range of attributes that our clients can utilize to maybe get down, induce not just to geo-hazard mapping but maybe they’ll do a little bit more rock property evaluation kind of stuff and these are all in areas that we’ve been in Midland now, 62 years and we’re working in areas that we’ve been in multiple times over the years with 2D, 3D higher density 3D now we’re back with even higher density 3D. And so, yes, we are back in areas whether it’s the same operator or different operator, it’s probably more difficult and time consuming question. but yes, our industry as a whole is applying new technologies over existing fields and we believe for increasing purposes and increasing value. We couple that with the fact that we have some projects in two basins, one of which here is in the Permian Basin where we’re doing some three component work. and so our industry is beginning to understand how to utilize three component seismic data more efficiently and as more of a predictor of things that may happen both in a conventional and an unconventional reservoir. And so we’ve got a couple of 3C projects going on, one of which, I would unconventional, but I would assume that we’re trying to utilize some expanded part of the seismic way to give us a little more definition of unconventional rock properties, at the same time, we’ve got one going on that’s more of a conventional reservoir is doing a little bit more of a completion and development type conventional reservoir characterization. So I don’t know, if that answers your question, Rudy. It might have been a naïve question, it might have been naïve answer, but I hope I’ve answered it. Rudy A. Hokanson –Barrington Research Associates, Inc.: Thank you very much. I appreciate it. That’s all for me.

Thanks Rudy.

(Operator Instructions) And we do have a question from Ed Beddow of Beddow Capital. Edward G. Beddow – Beddow Capital Management, Inc.: Good morning, Steve.

Good morning, Ed. Edward G. Beddow – Beddow Capital Management, Inc.: You and your team have done a terrific job of managing through a year and you’ve delivered some very nice results. as a result of that, you’ve built up what I think of is a word chest of $76 million on your balance sheet.

Yes, sir. Edward G. Beddow – Beddow Capital Management, Inc.: That’s a result of the last five years and you’ve dedicated virtually, all of your EBITDA to capital expenditures and yet over that same period, the shareholders have seen zero return on their investment, stock is essentially where it was five years ago. My question is, isn’t it time to do something for the shareholders?

Ed, I appreciate the question. I think that there are some things that I believe that term our shareholder friendly events that we have discussed internally and we have discussed at great length, and you are correct in that while we’ve had a significant increase, I believe in last five years and things such as book value that we’ve had some – our stock price has been flat over that period. So it’s really three things we can do, Ed and that we take a hard look at. First of all, we are proud of the balance sheet, it has – we are a high fixed cost cyclical capital intensive business. they had the large working capital of requirement. And I don’t think that’s going to change. and so we take a look at the balance sheet, we have had a significant increase in capital expenditures in last couple of years, in fact, we’ve outspent EBITDA on a few years, I believe in 2013, we actually had positive free cash flow in 2013 and we anticipate that again, in 2014. we think most of the capital expenditures are behind us from where we sit today. And we did make the capital expenditure in the first quarter of this year, the timing of which was not preferred, but based on contract requirements that we’ve done that. So I think we spent the last several years trying – coming out of a very deep recession in 2009, 2010, and the early part of 2011 of our industry. And we’ve gotten the cash position down pretty low, but I think we’ve – I think our team has put in a position to be an industry leader from technology and capacity in the lower 48 to put us where we want to be. And…

Yes. Edward G. Beddow – Beddow Capital Management, Inc.: And part of that is that we see you as being overcapitalized. You’ve got all this cash on the balance sheet. It’s not being put to good use, you made all of these capital expenditures to stay competitive, we understand that, but you have more cash on the balance sheet than I’ve seen in at least seven or eight years. And what that tells us is that you’ve got way too much equity. As a cyclical business, your stock is always going to swing from a highs to lows with the cycle and from time to time your going to find yourself with the stock trading below book value and we feel very strongly that that’s the nature of the beast, we accept that, but when the stock gets down to book or under book, the best use of your cash in our view is to make repurchases, notwithstanding the small number of shares you have outstanding. I think it’s the only way that shareholders are going to make any money and over a five-year period, where the S&P has delivered phenomenal returns to investors, your stock has absolutely languished, it’s had its ups and downs, but through those downs, there were no stock repurchases, no cash returned to shareholders, so we just – yet this is an old theme, we’ve had this conversation many times, Steven. I think from an operational standpoint, as I started off, by saying you and your team, have done a terrific job, so we’d like to see you take a real hard look at the financial side of this and to see what you can do to reward the shareholders who have been with you for so long.

Thank you and I appreciate that and I appreciate your comments, and as I said, we will continue to take a hard look at the situation that you described. Your comments are duly noted and certainly understood. Edward G. Beddow – Beddow Capital Management, Inc.: Thanks very much, Steve.

Thank you, Ed. I appreciate it.

And this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Jumper for any closing remarks.

So thank you, Laura. I would certainly like to thank all of you for participating in our call. I thought the questions were superb and the discussion lively and useful and we always appreciate hearing from all of you. Certainly I want to thank our clients and our employees for their continued trust and dedication and certainly want to thank our shareholders for their continued support and trust and certainly their comments. We will be back with you in 90 days to give you another update and want to wish everyone a very joyous and safe and prosperous holiday season. Thank you so much for your time and look forward to talking to you again. Thank you.

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