Earnings Call Transcript - DWSN Q2 2020

Operator, Operator

Good day, and welcome to the Dawson Geophysical Second Quarter 2020 Results Conference Call. As a reminder, today's conference is being recorded. Statements made by management during this call with respect to forecasts, estimates or other expectations regarding future events or which provide any information other than historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company's actual future results or performance to materially differ from any future results or the performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including in the company's annual report on Form 10-K filed with the SEC on March 6, 2020 and any subsequent quarterly reports on Form 10-Q filed with the SEC. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in the company's press release issued this morning, and please note that the contents of the company's conference call this morning is covered by those statements. During this conference call, management 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 the company's current earnings release, a copy of which is located on the company's website. This call is scheduled for 30 minutes, and the company will not provide any guidance. I would now like to turn the call over to Stephen Jumper, Chairman, President and CEO of Dawson Geophysical Company. Please go ahead, sir.

Steve Jumper, Chairman, President and CEO

Well, thank you, Cecilia. Good morning, and welcome to Dawson Geophysical Company's Second Quarter 2020 Earnings and Operations Conference Call. As Cecilia said, 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 start the call, just a few items to cover. If you would 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 speaks only of today, Thursday, July 30, 2020. 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 second quarter and 6 months ended June 30, 2020 financial results. For the second quarter ended June 30, 2020, the company reported revenues of $29.5 million compared to $24.1 million for the quarter ended June 30, 2019. For the second quarter of 2020, the company reported net income of $1.5 million or $0.06 per common share compared to a net loss of $11.2 million or $0.49 loss per common share for the second quarter of 2019. The company reported positive EBITDA of $5.8 million for the quarter ended June 30, 2020 compared to negative EBITDA of $6.1 million for the quarter ended June 30, 2019. For the 6 months ended June 30, 2020, the company reported revenues of $68.5 million compared to $75.2 million for the 6 months ended June 30, 2019. For the 6 months ended June 30, 2020, the company reported net income of $2.5 million or $0.11 per common share compared to a net loss of $11.4 million or $0.49 loss per common share for the 6 months ended June 30, 2019. The company reported positive EBITDA of $11.6 million for the 6 months ended June 30, 2020 compared to negative EBITDA of $111,000 for 6 months ended June 30, 2019. Our second quarter results were favorably impacted by the continued operation of two large channel count crews in the United States that were partially offset by the redeployment of a small channel count crew on a previously completed project, as described in our first quarter earnings release, and severance costs of approximately $1.4 million associated with staff reductions that were announced in April. The company anticipates annual savings of approximately $4.3 million from such reductions. I will now turn the control of the call to Jim Brata, who will review the financial results. I will then return with some final remarks and our outlook into the third and fourth quarters of 2020. Jim?

Jim Brata, Executive Vice President and CFO

Thank you, Steve, and good morning. Revenues for the second quarter of 2020 were $29.5 million, an increase of approximately 23% compared to $24.1 million for the quarter ended June 30, 2019. As stated in our earnings release issued this morning, our second quarter results were favorably impacted by the continued operation of two large channel count crews in the U.S. and were partially offset by the redeployment of a small channel count crew on a previously completed project, as described in our first quarter earnings release, and severance costs of approximately $1.4 million associated with staff reductions that were announced in April. The company anticipates annual savings of approximately $4.3 million from such reductions. Cost of services in the second quarter of 2020 were $19.7 million, a decrease of 23% compared to $25.3 million in the same quarter of 2019. General and administrative expenses were $4.3 million in the second quarter of 2020, a decrease of 15.6% compared to $5 million in the second quarter of 2019. Depreciation and amortization expense in the second quarter of 2020 was $4.4 million, a decrease of 17.7% compared to $5.3 million in the same quarter of 2019. Net income for the second quarter of 2020 was $1.5 million or $0.06 per share compared to a net loss of $11.2 million or $0.49 loss per share in the second quarter of 2019. Income tax expense was negligible during the second quarter of 2020 compared to an income tax benefit of $121,000 during the second quarter of 2019. EBITDA in the second quarter of 2020 was $5.8 million compared to negative EBITDA of $6.1 million in the same period of 2019. An EBITDA reconciliation was provided in our earnings release issued this morning. Now I will highlight some results for the 6 months ended June 30, 2020. Revenues for the 6 months ended June 30, 2020 were $68.5 million, a decrease of approximately 9% compared to $75.2 million for the 6 months ended June 30, 2019. Cost of services for the first half of 2020 was $48.7 million, a decrease of approximately 26% compared to $66.2 million during the same period of 2019. General and administrative expenses were $7.9 million in the first half of 2020, a decrease of 17.3% compared to $9.6 million for the 6 months ended June 30, 2019. Depreciation and amortization expense for the 6 months ended June 30, 2020 was $9.3 million, a decrease of 18.6% compared to $11.4 million in the same period a year ago. Net income for the 6 months ended June 30, 2020 was $2.5 million or $0.11 per common share compared to a net loss of $11.4 million or $0.49 loss per common share in the 6 months ended June 30, 2019. EBITDA for the first 6 months of 2020 was $11.6 million compared to negative EBITDA of $111,000 in the same period of 2019. An EBITDA reconciliation was provided in our earnings release issued this morning. And now for some balance sheet items. Our balance sheet continues to remain strong. As of June 30, 2020, we had debt, including obligations under financing leases of approximately $1.6 million, cash and short-term investments of $36.8 million, our current ratio was 6.2:1, and working capital was approximately $58.3 million. And with that, I'll turn the call back to Steve for some comments on our operations.

Steve Jumper, Chairman, President and CEO

Thank you, Jim. While our second quarter and six-month results were positive, we still face significant challenges in the oil and gas industry and the broader energy market. On July 16, OPEC+ announced it would reduce production cuts from 9.7 million barrels per day to 8.3 million barrels per day, which could increase pressure on oil prices. Additionally, a recent rise in COVID-19 cases in both the U.S. and worldwide might further limit economic activity and restrict global travel. These factors could lead to a decrease in demand for oil and gas production, impacting client spending levels. Many exploration and production companies have already cut their capital budgets by 30% to 50%, which has led to a reduction in the number of wells being drilled. This decrease can negatively affect the demand for our services. Despite these challenges, there are signs of improvement. Oil prices have recovered from their lows in April and are currently around $40 per barrel. In June, 1,238 permits to drill wells in the U.S. were approved, marking a 15% increase from the previous month. Several independent oil and gas producers have also expressed intentions to expand their presence in the Permian Basin and Bakken oil shale. Given the rapidly changing landscape, we expect to operate one moderately sized channel count crew in the U.S. through the end of 2020, with potential periods of low utilization and limited activity in Canada. Our visibility beyond the fourth quarter is limited. Proposal requests remain slow, but we have several project requests for late 2020 that may need a second crew in the fourth quarter, as well as requests for projects in 2021. Capital expenditures for the second quarter and the first six months of 2020 were $359,000 and $2.7 million, respectively, primarily for maintenance. Our balance sheet remains strong with $58.3 million in working capital as of June 30, 2020. We have notes payable and lease obligations totaling $1.6 million as of the same date. In response to the COVID-19 pandemic, we are adhering to CDC guidelines, which include social distancing, hygiene practices, limited group sizes, and enhanced remote work policies. We are providing additional flexibility for those with health concerns, childcare needs, or other issues. At the crew level, we've implemented policies to minimize large gatherings, provided additional transportation options, increased radio communication usage, ensured a safe water supply, and offered flexible housing and work schedules. Most of our operations involve small, often isolated work groups. In conclusion, while today’s challenges are significant, they are not new to us at Dawson Geophysical. Over our 60-plus year history, we have faced downturns that required us to reduce crew counts and manage costs effectively. Even in a low-price environment, there is a strong case for seismic exploration and production companies to work diligently to identify optimal well locations efficiently. Seismic data and the solutions we offer are uniquely positioned to assist E&P companies in reaching their goals. I want to thank our hardworking employees, valued clients, and shareholders for their ongoing commitment and support during these challenging times. With that, Cecilia, we are ready to take questions.

Operator, Operator

And we'll start with John Potratz of Research Investments, Inc.

John Potratz, Analyst

Congratulations on an outstanding quarter in managing costs. It’s truly impressive. Congratulations to both Brata and Jumper. I was very pleased to see the results you've achieved. You mentioned that you regularly reach out to your clients. Are you sensing that they will be taking action in the third and fourth quarters? There is often a distinction between discussing intentions and actually signing contracts. It seems like there is a positive shift in what your clients are saying about their business plans.

Steve Jumper, Chairman, President and CEO

Jay, we're having a little bit of a difficult time hearing you, but I will attempt to answer the question as I think I understood it. I appreciate your comments early on, by the way. I believe your question revolves around our conversation with our clients and what we believe their activity levels to be at the end of the year, and whether or not these conversations are leading to contracts. There's a lot packed into that question. There's quite a bit of speculation packed into it, but I'll try to answer the question the best we can. We are continuing to have contact with our client base in today's world. We're not unique in our company or our industry; I think this is typical of things going on all around the country and the economy. Communication is a little bit difficult externally and internally with some of our clients with a lot of work at home policies, with furloughs being used for personnel, with cutbacks, there's a moving target sometimes as to how and when you can communicate with folks. I think our folks are doing a fantastic job of staying on top of things. I think if there are seismic projects as a general rule out there that are being talked about certainly in Lower 48 in Canada, I believe we're getting the chance to look at and have conversation on those projects. There's always a few out there with peer group or peer competitors that have long-standing relationships with certain companies that we may not see, and we certainly have some of those ourselves. But I think we get a solid look at anything that might be happening. Here again, we're just a little bit past midway through the year. There's been a tremendous amount of budget cut back on the E&P side. What we don't know, and I think what leads into some of this discussion as to whether or not conversation of projects turns into reality, we don't know what's going to happen on the back half of the year with our E&P clients' budgets. We don't know if there's going to be a budget exhaustion scenario at the end of the year or if there will be a budget surplus. I think the E&P companies are being very cautious on their spending levels and keeping some of those things close to the vest, so to speak. But we are seeing some proposals. As we mentioned in the press release, requests are certainly slow. They're not robust by any stretch of the imagination. But there is some conversation. We have limited visibility beyond Q4. As we said in the release, we anticipate one crew working through the end of the year. There is a scenario where there could be periods of low utilization for that one crew. There could be some timing issues that might require a second crew. It's really very difficult to speculate on a go-forward basis what the actual demand levels will look like. With regard to the multi-client groups, there are certainly some projects being talked about on the multi-client side. The multi-client base has been a big part of our operation here, particularly in the last couple of years. They have historically, but as a percentage, they've been a much higher percentage of our work, certainly in the last couple of years. They have a little bit of a compounded issue in that they are working within their own capital budget constraints with regards to how much risk they're willing to take on a project in conjunction with having to rely on budget levels within their underwriting client base, which would go to E&Ps. It appears as though the multi-client group is watching their dollars closely, just like the E&P, which is kind of a compounded issue for us. I will close this answer here, and I'm sure everybody's well aware, I answer questions in a lengthy manner, and I try to be as accurate and transparent as I can. We've seen recently some proposals and conversations that are more direct with E&P. Some projects have been pushed back until next year that were scheduled for 2020. Early this year, we got some new outlines that we're taking a look at direct for E&Ps. We're beginning to see a very slight, not meaningful, I would say, but a slight increase in direct requests from E&Ps. I hope that answered your question, Jay. If it didn't answer that one, it answered some question, I think.

John Potratz, Analyst

What stood out to me in my research on equities and fixed income is that it's much harder to get things done and communicate with people. A conversation that used to be straightforward can now be quite complicated due to factors like someone working from home or traveling. However, it seems there is an interest in pursuing additional projects, although there is no firm commitment yet, which is part of the communication delays we’re experiencing.

Steve Jumper, Chairman, President and CEO

Correct. There's nothing better than face-to-face communication, and that's the challenge we are all facing worldwide. We have mentioned before that our company is built on personal relationships and interaction. We are finding ways to work around this, and we are still maintaining strong communication with our client base. Hopefully, we can resolve this situation in the next couple of months.

John Potratz, Analyst

It seems like you're putting in a lot of effort and not expecting any problems. Additionally, I want to highlight that there has been substantial discussion over the last couple of years, and as you pointed out in today's news, there is a compelling reason for seismic and exploration and production companies to put in more effort to find the best drilling locations in the most cost-efficient way. This indicates that the data you offer is significantly more detailed and valuable, and clients are willing to pay for this because they want to avoid the costs of drilling unproductive wells or aim for more effective drilling practices than in the past. There is clearly a growing demand for more of your data; does that reflect what people are seeking from you?

Steve Jumper, Chairman, President and CEO

Jay, I'm going to attack that from a couple of angles. The same that we have always tried to provide from our company standpoint is value to our client base. And value has to be recognized on the other side. I think we certainly went through a period when the unconventionals first, particularly on the oil side, came into play. There were folks that didn't feel like there was value in the data. I don't think that was widespread, but there were certainly some of that, and that oil prices would overcome mistakes, so to speak. We have always said that, when you get into a commodity price constrained environment, and certainly, $40 is way too constrained. I don't know what that number needs to be, but it needs to loosen up some first string, so to speak. But as prices stabilize at some level and people begin to understand their cost structure, I'm of the opinion and believe, and I think we're starting to see this, that companies need to evaluate drilling locations, whether they're being conventional or unconventional, and place that wellbore as strategically and as optimally as they possibly can. The data and the information we're providing the industry today certainly lend themselves more to that, particularly in the unconventional than it did several years ago. We are confident and believe that the majority, if not higher, of the E&P companies are utilizing seismic information as part of their drilling and production and completion plan. We have talked in the past that we've been working in concentrated areas of the Permian and Delaware. That's certainly opening up a little bit. We've kind of extended where we work outside the core areas, so to speak, than you would have thought about a year or two ago. We do have large areas of core acreage covered where there's current seismic data information. When you listen to some of these companies that have pulled back into their core area, there's a tremendous number of drillable uncompleted wells that need to be finished. There's some drilling locations that these guys can go to. So yes, seismic data is a big part of what they do. Yes, it's being utilized currently. We think it will be in the future. But at the same time, with the drastic slowdown in drilling and completions, there probably could be a lag time between our pickup and rig count and frac fleet count going up. So the answer to your question is yes. We think it's a value-add to the process. We think there will be demand. Certainly, the demand is slow, as we've said right now, but we've probably got to work through some drillable locations and some drill uncompleted completions to begin moving forward.

John Potratz, Analyst

It seems you recognize the challenges with maintaining your crews, and it appears you've implemented significant cost-cutting measures to manage Dawson while you wait for further developments. This isn't just a passive approach; you've made strategic decisions such as layoffs and salary reductions. I commend you for taking steps to ensure Dawson remains in a viable position.

Steve Jumper, Chairman, President and CEO

Thank you, Jay. Regarding that, I believe our team and every department have done an excellent job managing costs, although it has been challenging. The environment has been tough for everyone and for our company. However, as we have done in the past, we are trying to be proactive and stay ahead of the situation. We want to focus on proactive approaches rather than reactive ones in our business strategy.

Operator, Operator

And we'll go next to Michael Melby of Gate City Capital Management.

Michael Melby, Analyst

Congrats on the very good results. Could you expand on your openness or willingness or ability for industry consolidation during this difficult period for the seismic market?

Steve Jumper, Chairman, President and CEO

Good question. I don't see anything at this point that would be meaningful or beneficial for us. We continuously look to see what's out there, but I don't see anything imminent or really meaningful for us right now.

Michael Melby, Analyst

Got it. The cash balance is a significant asset for the company, especially during these challenging times. Can you share your views and perhaps those of the Board regarding the allocation of that cash, including the possibility of stock repurchases or even issuing a dividend, considering the company currently has a zero valuation after factoring in the available cash?

Steve Jumper, Chairman, President and CEO

Certainly, Mike. The board regularly discusses the balance sheet, cash position, and overall capital structure. I can't say much more except that our Board consists of members with diverse experiences and backgrounds, including industry experience and significant shareholder ownership, as well as knowledgeable financial experts. They consistently evaluate the business, the capital structure, and the cash position. We've always maintained a conservative approach. Regarding your previous question about consolidation, we completed a beneficial transaction with TGC in 2015. We have paid dividends in the past and will consider that again, along with other factors at the Board level. Our goal is to make decisions that are in the best interest of both the shareholders and the company. I appreciate your comments, and though we've had this discussion before, I hope I've addressed your question.

Michael Melby, Analyst

Yes. My question reflects a commitment to prudent cash management. Initiating a share repurchase program wouldn't obligate us to anything, but it could offer some options or flexibility if shares become available at favorable prices in the future. I just wanted to mention that as well.

Steve Jumper, Chairman, President and CEO

Understood.

Operator, Operator

And our next question comes from Bill Kim, private investor.

Unidentified Analyst, Analyst

I’m trying to gain a clearer understanding of the economics of your business and the investments you're making. I've observed that your capital expenditures have generally been lower than your depreciation expenses. Could you explain the relationship between the two? What constitutes your maintenance capital expenditures? Additionally, how are you sustaining EBITDA despite the ongoing depreciation?

Steve Jumper, Chairman, President and CEO

Okay. Bill, I apologize here. Again, we're having a little bit of phone issues, I think. But I think your question is regarding our CapEx being well below our depreciation level. I think your question was how are we doing that? Do I understand the question correctly? Sir, I'm sorry.

Unidentified Analyst, Analyst

Yes. So I'm trying to understand kind of, I guess, to put it simply, what is maintenance CapEx versus growth CapEx? And if you're at a maintenance CapEx level now, how is that sustainable versus your much larger depreciation expense?

Steve Jumper, Chairman, President and CEO

I'll try to answer the question. We have been in a maintenance capital level probably for the last 18 months or so, so to speak. I think the last non-maintenance capital expenditure we made would probably have been in late '18. We purchased some legacy equipment off the used market that was complementary and supplementary to our equipment base. Through this process in the last 18 months, we have reduced CapEx spending to strictly maintenance capital items, which would be things like rolling stock, batteries, for example, for recording equipment, and things that basically just suffer some wear and tear during routine usage. Having said that, our equipment base is in really good shape. If you look at the recording equipment that we have in terms of current capacity and technology, we are in a really strong position. There are some recording equipment out there that is being developed, which is basically repackaging of the same technology. From an asset standpoint, both on the recording side and on the sourcing side, we feel really good about our equipment base. We think that we don't see anything on the horizon that would require us to have a large replacement type CapEx spend or upgrade type CapEx spend. If you look back at the two legacy companies, Dawson and TGC prior to the merger of 2015, from a time period of about 2011 to probably late '13, '14, both companies combined had spent close to $200 million in energy sources and the conversion from cable to cableless recording equipment. Our recording equipment is in the 6-, 7-, 8-year range in terms of age; it's what we would call an unbundled system. In other words, there's a listening device, there's a recording device and a battery; all three work together to create a channel. We've been able to maintain, through maintenance capital, both the battery power and the sensor side. We've been able to do the same thing on the vibrator side, the energy source side. We are spending well below the CapEx of the depreciation level that is not uncommon in our industry. If you look back at our company, the combined companies have gone through periods of CapEx spend on new equipment. Then we've had a pretty long run with equipment bases. We're very comfortable with our equipment base as it stands and believe that maintenance capital requirements will meet what we need in the near future.

Unidentified Analyst, Analyst

I appreciate that. Is it fair to say that the recording equipment in the industry in general has longer life than perhaps the company will be depreciating for? And if that's the case, what kind of test?

Steve Jumper, Chairman, President and CEO

What kind of what? I'm sorry?

Unidentified Analyst, Analyst

What kind of technology are you seeing coming on the horizon in this industry that would perhaps decrease the value of the existing equipment?

Steve Jumper, Chairman, President and CEO

That's a very good question. Looking back, there's been significant progress, particularly in recording systems. Over the years, energy sources have improved with better hydraulics, better electronics, and larger sizes. However, we've likely reached the maximum capacity for energy sources that can be utilized in the United States. While there are larger options available in the Middle East, from a sourcing standpoint in trucking and movement, we are comfortable with where we stand. On the recording side, we have transitioned over the years from analog to digital, from telemetry-based systems to distributed systems, and increased channel counts, moving towards cableless solutions. We chose a cableless platform in 2011 that offers expandability and scalability for channel counts, allowing channels to be moved between crews. Historically, downturns have brought new technologies, but we are not experiencing that currently. There are some developments in recording systems, but they mainly involve repackaging existing technology with slight variations in size and data management. In terms of actual data quality, there hasn't been a significant change. Although there are discussions around digital sensors, we do not see any immediate concerns that would render our equipment obsolete. The lifespan of an asset depends on its utilization and maintenance, and we place a strong emphasis on maintenance and equipment rotation for various projects. Our equipment is in good condition, and considering the current circumstances, we might extend the life of this equipment beyond the original schedule. We are very comfortable with our depreciation rates and asset base.

Operator, Operator

There are no further questions in queue. I'd like to turn the call back over to Mr. Stephen Jumper for any additional or closing remarks.

Steve Jumper, Chairman, President and CEO

Well, thank you, Cecilia. I want to thank everybody for taking the time to listen in to our second quarter and 6 months 2020 call. We always appreciate the questions and the interest and the support. Just to sum up, this is a very difficult time in our space as well as overall energy markets. There are, obviously, we're facing some headwinds that we probably haven't seen in the past with regards to demand breakdown related to a slowdown in economic activity as well as a supply issue, but it is a tough time all across the energy space. The company will continue to respond proactively and continue to look at ways to cut costs, improve efficiencies and productivity going forward. We'll continue to protect and maintain the balance sheet as we have over our 60-plus year history. Once again, I want to thank all of our shareholders. I want to thank our client base; in particular, I want to thank our employee base for their diligent effort and continued hard work in a very difficult time. Thank you very much, and we'll talk to you again in about 90 days. Thank you.

Operator, Operator

And this does conclude today's call. Thank you for your participation, and you may now disconnect.