Earnings Call Transcript - DWSN Q3 2020

Operator, Operator

Please stand by. We're about to begin. Statements made by management during this call regarding forecasts, estimates, or expectations for future events, or that provide information beyond historical facts may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include various risks and uncertainties, many of which are beyond the company's control and could lead to actual results differing significantly from those anticipated. These risks are detailed in the company's filings with the SEC, including the Annual Report on Form 10-K. Additionally, please refer to the forward-looking statement notice in the press release issued this morning, as the contents of this call are covered by that statement. Management will reference EBITDA during this call, which is a non-GAAP financial measure. Reconciliations of this non-GAAP measure to the appropriate GAAP measure can be found in the current earnings release available on the company's website. The call is set for 30 minutes, and the company will not provide any guidance. Today's conference is being recorded. I would now like to turn the call over to Stephen Jumper, Chairman, President and CEO of Dawson Geophysical Company. Please go ahead, sir.

Stephen C. Jumper, Chairman, President and CEO

Well, thank you. Good morning and welcome to Dawson Geophysical Company's third quarter 2020 earnings and operations conference call. As previously stated, my name is Steve Jumper, Chairman, President, and CEO of the company. Joining me on the call is Jim Brata, Executive Vice President and Chief Financial Officer. Before we begin the call, I have just a few items to cover. If you'd like to listen to a replay of today's call, it will be available via webcast by going to the Investor Relations section of the company's website. Information reported on this call is being provided today, Thursday, October 29, 2020, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. Turning to our preliminary third quarter and nine months ended September 30, 2020 financial results. For the third quarter ended September 30, 2020, the company reported revenues of $8.7 million compared to $37 million for the quarter ended September 30, 2019. For the third quarter of 2020, the company reported a net loss of $7.8 million, or $0.33 loss per common share, compared to net income of $2 million, or $0.09 per common share for the third quarter of 2019. The company reported negative EBITDA of $3.8 million for the quarter ended September 30, 2020, compared to positive EBITDA of $7.2 million for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, the company reported revenues of $77.2 million compared to $112.2 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, the company reported a net loss of $5.3 million or $0.23 loss per common share compared to a net loss of $9.4 million or $0.41 loss per common share for the nine months ended September 30, 2019. The company reported EBITDA of $7.8 million for the nine months ended September 30, 2020, compared to EBITDA of $7 million for the nine months ended September 30, 2019. During the third quarter of 2020, the company operated one data acquisition crew with periods of low utilization. The crew was active for the latter part of the third quarter and into the fourth quarter. Based on currently available information, the company anticipates operating one crew with periods of low utilization for the foreseeable future in the United States and up to two crews in Canada for the winter season and the late fourth quarter of 2020, and the first quarter of 2021. I will now turn control of the call over to Jim Brata who will review the financial results, and I will return with some final remarks and our outlook into the fourth quarter of 2020 and the third quarter of 2021. Go ahead, Jim.

James Brata, Executive Vice President and Chief Financial Officer

Thank you, Steve, and good morning. Revenues for the third quarter of 2020 were $8.7 million, a decrease of approximately 76% compared to $37 million for the quarter ended September 30, 2019. As stated in our earnings release issued this morning, during the third quarter of 2020, the company operated one data acquisition crew with periods of low utilization. The one crew was active for the latter part of the third quarter and into the fourth quarter. Based on currently available information, the company anticipates operating one crew with periods of low utilization for the foreseeable future in the U.S. and up to two crews in Canada for the winter season in the late fourth quarter of 2020 and the first quarter of 2021. Cost of services in the third quarter of 2020 were $9.4 million, a decrease of 63.7% compared to $26 million in the same quarter of 2019. General and administrative expenses were $3.3 million in the third quarter of 2020, a decrease of 13.9% compared to $3.8 million in the third quarter of 2019. Depreciation and amortization expense in the third quarter of 2020 was $4.1 million, a decrease of 21.2% compared to $5.2 million in the same quarter of 2019. Net loss for the third quarter of 2020 was $7.8 million, or $0.33 loss per share compared to net income of $2 million, or $0.09 per share in the third quarter of 2019. EBITDA in the third quarter of 2020 was negative $3.8 million compared to positive EBITDA of $7.2 million in the same period of 2019. An EBITDA reconciliation was provided in our earnings release issued this morning. Now, I'll highlight some results for the nine months ended September 30, 2020. Revenues for the nine months ended September 30, 2020 was $77.2 million, a decrease of approximately 31% compared to $112.2 million for the nine months ended September 30, 2019. Revenue for the first nine months of 2020 was $58.2 million, a decrease of approximately 37% compared to $92.2 million during the same period of 2019. General and administrative expenses were $11.2 million for the first nine months of 2020, a decrease of 60.3% compared to $13.4 million for the nine months ended September 30, 2019. Depreciation and amortization expense for the nine months ended September 30, 2020 was $13.4 million, a decrease of 19.4% compared to $16.6 million in the same period a year ago. Net loss for the nine months ended September 30, 2020 was $5.3 million, or $0.23 loss per share compared to a net loss of $9.4 million, or $0.41 loss per share for the nine months ended September 30, 2019. EBITDA for the first nine months of 2020 was $7.8 million compared to EBITDA of $7 million in the same period of 2019. An EBITDA reconciliation was provided in our earnings release issued this morning, and now I'll highlight some balance sheet items. Our balance sheet continues to remain strong. As of September 30, 2020, we had debt including obligations on the financing leases of approximately $266,000, cash and cash equivalents of $45.4 million. Our current ratio was 9.9 to 1, and working capital was approximately $54.8 million. With that, I'll turn the call back to Steve for some comments on our operations.

Stephen C. Jumper, Chairman, President and CEO

Well, thank you, Jim. Reduced demand for oil and gas, resulting primarily from the worldwide COVID-19 pandemic and economic shutdown, negatively impacted our third quarter operations. Project uncertainties remain high and have led to a substantial reduction in demand for our services going forward. The companies we serve have significantly reduced their capital spending plans for the remainder of 2020 and into 2021. Requests for proposals for seismic services continue to flow in both the United States and Canada as well as worldwide. While oil prices remain in the $40 per barrel range, I would note that it's down to below $36 today, with a strong likelihood of remaining there through the remainder of 2020, although energy analysts are forecasting meaningful improvements in both oil and natural gas prices in 2021. Despite current challenges, the oil service industry is beginning to experience slight improvements in some areas, such as an increase in the number of active rigs and hydraulic fracturing crews deployed in the U.S. In addition, there has been a recent surge in merger and acquisition activity within the oil and gas exploration and production sector, the impact of which upon oil service activities is yet to be determined. This recent activity does indicate that exploration and production companies will continue their focus on shareholder return and disciplined capital spending as they seek to develop and increase efficiencies by drilling more robust locations. As in the most recent down cycles, we anticipate recovery in seismic data acquisition to somewhat lag behind increases in drilling and completion activities. Despite these difficult conditions, we are maintaining our focus on cost-saving measures while balancing the ability to respond rapidly when market conditions improve. As reported in our previous press releases this year, we have taken steps to outsource several ancillary services. These steps include permitting and surveying as examples and have resulted in reduced salary costs and lower general and administrative expenses. Moreover, as previously indicated in our second quarter of 2020 earnings press release, the company anticipates approximately $4.3 million in annual cost savings as a result of previously enacted cost-saving measures. Expenditures for the third quarter and the first nine months of 2020 were $58,000 and $2.8 million respectively, primarily for maintenance capital items. As James pointed out earlier, the company's balance sheet remained strong with $45.4 million of cash and cash equivalents and $54.8 million of working capital as of September 30, 2020. The company is nearly debt-free having notes payable and finance leases totaling $266,000 as of September 30, 2020. The current downturn in the oil and gas industry is one of the most difficult periods I've experienced in my 35 years in the industry. Reduced commodity prices triggered by the COVID-19 pandemic and an oversupplied oil market continue to weigh on our operations and will likely remain so through the end of the year and into 2021. That said, we are well situated at this current downturn. Our cost-cutting measures, strong balance sheet, and investment in state-of-the-art equipment in years past have positioned us for a strong recovery once the market turns. We continue to believe that as exploration and production companies focus on returns, the use of high-resolution seismic data should play an important role in achieving that goal. I want to thank all of our hard-working employees, our valued clients, and shareholders during these challenging times, and with that, I believe we are ready to open the call up for questions.

Operator, Operator

We will now take a question from John Potratz with Researched Investments.

John Potratz, President, Researched Investments

I was wondering with this downturn, the key thing I think is keeping the crews available for future work. You mentioned some cost-cutting techniques to give, and working on having that cost getting worked out may have resulted in the ability to keep two important crews as well as maybe finding new ways to be more efficient during the operations of seismic work.

Stephen C. Jumper, Chairman, President and CEO

John, thank you for the question, and as always, thank you for your support. I believe your question basically revolves around our ability to deploy crews as needed if and when an uptick in activity occurs, and are we doing some things to improve the efficiency part of the operation?

John Potratz, President, Researched Investments

The key thing is to improve efficiency because as you're cutting back, you can often get together and identify what needs to be done more efficiently so when change does come and we get new contracts, you'll be able to go out there and be much more efficient in the field.

Stephen C. Jumper, Chairman, President and CEO

Let me address that with a couple of comments. First of all, it has been a very difficult year. We're not the only company in this industry sector that has had a difficult year due to the impact of this COVID-19 shutdown. It's been painful, and we've lost a lot of good people and good friends who have been with our company and others that we work with. This has been very painful, and I appreciate your comments about that. I think our people have responded very well; the morale remains surprisingly high, which is a tribute to the history of our company and the type of people that we have employed here at Dawson. I just want to give a shout-out to those folks that we are very proud of and who have worked very hard not just to put us in this position but help us work through this difficult time. We are maintaining key personnel. We have talked about what the seismic industry looks like going forward, which has been a trend of fewer crews and higher channel counts for a crew. We believe that trend will continue. Although in times like this, we will continue to get some projects that are smaller in nature, and that’s okay; we know how to handle those. But generally speaking, the projects that we're seeing are higher channel count and lower crew count going forward. When the channel count moves upwards, the number of personnel needed to operate that crew does not move linearly with channel count. I think we have structured the company anticipating this capacity, and we have done that very well. From a key personnel standpoint and the relationships we have within the industry, we believe we will be able to respond very quickly and adequately. We have shown and discussed some improvements in operational efficiency regarding getting a project started sooner, but the biggest delay we continue to have revolves around permitting processes and getting the necessary access agreements in place. With higher channel counts and better surveys, we are poised to do well from both productivity and financial efficiency standpoints.

John Potratz, President, Researched Investments

It does give me a sense that you've readjusted the organization to be much more cost-effective and efficient, which is very good. I also want to acknowledge the fact that in terms of trying to get people motivated and working, you're willing to take a salary cut as part of that to make the organization survive and do well. Have you done the same thing with other higher-level managers at the corporate headquarters?

Stephen C. Jumper, Chairman, President and CEO

We have. There were some salary reductions that were announced back in about the April time frame that were corporate-wide at a certain level of compensation and above. People in our organization and our industry understand the cyclical nature of our business. They recognize that sometimes in difficult times, sacrifices need to be made by individuals, families, and the corporation. The response corporately has been very positive, albeit painful. I appreciate your comments about the sacrifices being made. It's certainly a difficult time, but it gives me an opportunity to thank all those within our operation who are sacrificing and trying to do all they can from an operational cost savings measure to see us through this difficult time and return value to our shareholders over the long run.

John Potratz, President, Researched Investments

I worked in some lowered operations in the Commonwealth of Massachusetts years ago, where we had to reduce costs materially to keep operations going. When we all worked together, you can achieve efficiencies you didn't realize before, and I think you are on the path to achieving similar results. Thank you very much, Stephen. The other thing you mentioned was TGS worldwide. I've signed a contract to do some business in the Powder River Basin, where you've done work in the past. Were you able to talk to them and secure their contract to do some physical work for them?

Stephen C. Jumper, Chairman, President and CEO

John, I appreciate that, but I can't publicly talk about contract situations or any type of negotiations that may be ongoing. We have done work for TGS in the past, and they are a large company; they do a lot of work in the Lower 48. They are one of the many high-quality, multi-client companies that we work with. It's always positive when projects start to get legs and get initiated; we see that as a positive for the Lower 48.

John Potratz, President, Researched Investments

You mentioned the use of high-resolution data. Has there been enough significant improvement in the seismic data that resulted in new contracts for your seismic activity? Are you planning to work out there in the field?

Stephen C. Jumper, Chairman, President and CEO

We certainly think so, and we can point to a few examples, particularly in the Permian Basin, where we have gone back in recent times for higher channel and more advanced surveys over legacy data that has provided much more clarity in terms of rock properties and rock fabric. If you look at the amount of data recorded today compared to what we were doing the last time the Permian Basin was really active, which was in the mid-'90s, it's probably 100 times more sampling and energy being collected. We believe that new vintage seismic data is advantageous and that higher resolution will play a role. Yes, we are optimistic. While we are certainly in a difficult capital spending situation currently, we think over time, this transition will occur.

John Potratz, President, Researched Investments

With this new data, you add a lot of value to your clients by going out again, but they're not really spending the money. If they do, they can find a lot more data out there about the oil and gas, particularly in the Permian Basin. Is that correct?

Stephen C. Jumper, Chairman, President and CEO

Yes.

Operator, Operator

There are no further questions at this time. We'll take a question from Michael Melby with Gate City Capital Management.

Michael Melby, Gate City Capital Management

I was hoping you could expand on the conversations you're having with either multi-client or E&P companies and how those might be progressing with those two separate groups of customers?

Stephen C. Jumper, Chairman, President and CEO

Thank you, Mike. We continue to have conversations with both multi-client and E&P companies. We do have some projects in the works here in the US as well as in Canada that are primarily for direct E&P companies. However, I must emphasize that requests continue to be slow. We have some ongoing conversations with a couple of E&P companies regarding significant projects, and we continue to engage with multi-client groups.

Michael Melby, Gate City Capital Management

Got it. You mentioned consolidation within the energy services space. Can you share your thoughts on potential consolidation within the seismic space and those possibilities going forward?

Stephen C. Jumper, Chairman, President and CEO

The M&A activity we are referencing is more on the E&P side with a couple of recent announcements made by companies like WPX, Conoco, Concho, and Chevron. We had Pioneer, Parker partially, and the Oxy-Anadarko combination last year. It will be interesting to see what happens with those combinations and how they affect seismic services. It could lead to some positive changes in terms of multi-client groups, their license agreements, and the need for data moving forward.

Operator, Operator

It appears there are no further questions at this time. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Stephen C. Jumper, Chairman, President and CEO

Well, thank you, and I want to thank everybody for taking the time to join our third-quarter 2020 earnings and operations update call. I think we laid out a very clear understanding of where we are in terms of activity level and the headwinds we face in the near future. I want to thank our valued clients for their continued support and our shareholders for their patience as we navigate these challenges. I also want to take this opportunity to thank our employees for their extreme dedication to the company, our clients, and our shareholders. I wish everybody a wonderful holiday season—stay safe and COVID-free—and we'll talk to you again in about 90 days. Thank you.

Operator, Operator

And once again, that does conclude today's conference. We thank you all for your participation; you may now disconnect.