Earnings Call Transcript - DWSN Q1 2021

Operator, Operator

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 of 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 filing with the SEC, including in the company's annual report on Form 10-K filed with the SEC on March 16, 2021. 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 www.dawson3d.com. The call is scheduled for 30 minutes and the company will not provide any guidance. I would like to turn the call over to Stephen Jumper, Chairman, President and CEO of Dawson Geophysical Company. Please go ahead, sir.

Stephen Jumper, Chairman, President and CEO

Well, thank you, Aunia. Good morning, and welcome to Dawson Geophysical Company's First Quarter 2021 Earnings and Operations Call. As Aunia 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 things 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 at www.dawson3d.com. Information reported on this call speaks only of today, Thursday, May 13, 2021, 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 first quarter ended March 31, 2021 financial results. For the first quarter ended March 31, 2021, the company reported revenues of $11.7 million, a decrease of approximately 70% compared to $39 million for the quarter ended March 31, 2020. For the first quarter of '21, the company reported a net loss of $5.2 million or $0.22 loss per share of common stock compared to net income of $1 million or $0.04 per share of common stock for the quarter ended March 31, 2020. The company reported negative EBITDA of $1.9 million for the quarter ended March 31, 2021, compared to EBITDA of $5.8 million for the quarter ended March 31, 2020. During the first quarter of '21, the company operated one seismic data acquisition crew in the United States with limited utilization in one crew in Canada. The near-term outlook for seismic data acquisition activity in the U.S. remains challenged with historically low levels of crew and bid activity. Based on currently available information, the company anticipates limited crew activity in the second quarter with up to one crew operating in the U.S. with periods of low utilization in the back half of 2021. Currently, the company does not have a crew deployed in the U.S. and the Canadian season concluded at the end of the first quarter. I will now turn control of the call over to Jim Brata, who will review the financial results, then I will return for some final remarks and our outlook into the second quarter of 2021.

James Brata, Executive Vice President and Chief Financial Officer

Thank you, Steve, and good morning. Revenues for the first quarter of 2021 were $11.7 million, a decrease of 70% compared to $39 million for the quarter ended March 31, 2020. As stated in our earnings release issued this morning, during the first quarter of 2021, the company operated one seismic data acquisition crew in the U.S. with limited utilization and one crew in Canada. Based on currently available information, the company anticipates limited crew activity in the second quarter, with up to one crew operating in the U.S. with periods of low utilization in the back half of 2021. Cost of services in the first quarter of 2021 were $10.9 million, a decrease of 62% compared to $29 million in the same quarter of 2020. General and administrative expenses were $2.8 million in the first quarter of 2021, a decrease of 24% compared to $3.7 million in the first quarter of 2020. Depreciation and amortization expense in the first quarter of 2021 was $3.4 million, a decrease of 30% compared to $4.9 million in the same quarter of 2020. Net loss of the first quarter of 2021 was $5.2 million or $0.22 loss per common share compared to net income of $1 million or $0.04 per common share in the first quarter of 2020. EBITDA in the first quarter of 2021 was a negative $1.9 million compared to EBITDA of $5.8 million in the same period of 2020. 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 March 31, 2021, we had debt, including obligations under financing leases of approximately $587,000. We had cash and short-term investments of $47 million. Our current ratio was 10.1:1, and working capital was approximately $49.7 million. And with that, I'll turn the call back to Steve for some comments on our operations.

Stephen Jumper, Chairman, President and CEO

Well, thank you, Jim. As we all know, since the onset of the COVID-19 pandemic over a year ago, the seismic data acquisition market, not just in the U.S. but worldwide, along with other oilfield services remain challenged, particularly in the U.S. and Canada. While there are encouraging signs of recovery in certain oilfield services, such as drilling and completion services, current demand for seismic related services remains at very low levels. In recent months, oil prices have improved to over $60 per barrel as oil demand has increased with states beginning to further open businesses, air travel increasing and the rollout of the COVID-19 vaccines. The U.S. rig count, currently at 448, is steadily improving as is the number of hydraulic fracturing crews. Based on currently available information, we anticipate seismic data acquisition activity in the lower 48 to reach a low in the second quarter and end in the third quarter of 2021, with slight improvement anticipated later in 2021. As we have stated in prior earnings releases, demand for seismic data acquisition in recent cycles lags behind the recovery in drilling and completion activity as exploration and production companies initially deployed capital into set services and work through their inventory of drillable projects. The same is true on the front side of a downturn as drilling and completion services are scaled back, while currently active seismic-related projects continue as seen in 2020, where our activity levels remained relatively high through the second quarter and into the third quarter after the onset of the COVID-19 pandemic. The timing of a return to an increase in demand for seismic services in 2021 is further delayed due to the depth of the most recent downturn, slow recovery of capital budget increases as oil prices remained depressed into '21, a larger-than-typical post-downturn inventory of drilling prospects and a slower recovery of rig count to work through the inventory backlog. During the latter part of 2018 and continuing into the first half of 2020, we successfully acquired multiple high-density large channel count projects in certain areas of the Permian Basin. These fully processed data sets first became available to the industry in late '19 and continue coming to the industry in 2021. Early results of these data sets indicate substantially improved subsurface image quality compared to prior seismic data sets, examples of which are just beginning to become public. The increases in data quality and imagery are currently being utilized for improved well planning, geo-steering of long lateral well bores, geo-hazard identifications and avoidance, enhanced reservoir definition and rock property description between well data samples and strategic placement of disposal well locations. As the industry begins to recognize and appreciate the value of these high-density, large channel count surveys, we believe demand for such surveys will improve. The company's state-of-the-art equipment base allows us to deploy multiple large channel crews when demand does improve. And our continuing response to these difficult times, we have significantly limited capital budget spending, reduced fixed and variable operating expenses, implemented a comprehensive equipment program in preparation for a rapid response to increased activity levels. In addition, we continue our commitment to our robust health, safety and environmental program, ongoing relationships, product quality and key personnel. The company made no capital expenditures during the first quarter of '21. As stated in our December 31, 2020 earnings release, the company's Board of Directors has approved an initial capital budget of $1 million for 2021. The company's balance sheet, as Jim stated, remained strong with $47 million of cash, restricted cash and short-term investments, and $49.7 million of working capital as of March 31, 2021. In conclusion, while today's conditions in the seismic data acquisition market remain challenged and are likely to remain so in the coming months, we are encouraged by the overall improvement in both the economy and the oilfield service sector. Improvement in drilling and completion activities helped set the stage for a successful recovery in the seismic data acquisition sector. I thank our hard-working employees, valued customers, and trusted shareholders as we work our way through these difficult conditions toward better times ahead. And with that, I believe we are ready to take questions.

Operator, Operator

We will now begin the question and answer session with our first question from Bruce Berger at Turnaround Capital.

Bruce Berger, Analyst

I have two questions. Maybe you can explain to us why, with so much rich seismic data already in place and in the hands of the oil companies, they want to reshoot for images again? And the second question is how much surface area has not been shot in the United States with this new seismic imaging that you spoke about in the press release that has not been reshot?

Stephen Jumper, Chairman, President and CEO

Those are great questions. Let me address those the best I can, Bruce. I'm going to jump to the second one first. Ever since the industry has moved towards 3D data acquisition techniques, we have continued to answer these questions for nearly 30 years about how much has been shot today and how much is left to be acquired. The answer is, there continues to be a large pieces of acreage and land all through the country that is prospective that has not had, in many cases, a first round of 3D exploration, but even more so has not had some of the newer techniques applied to it. Over the last 30 years, we've seen channel counts on a crew move from 2,000 to 4,000 to 10,000 to 20,000, and now we're talking crew sizes of up to 50,000, which does two things: it enhances aerial coverage capacity as well as density at the same time. We believe that over time, and historically, there are many basins that are prospective across the lower 48 into Canada that either need a first or potentially second round. Over that time frame, we have gone back into multiple areas several times and acquired new data sets with newer techniques, many of which we've talked about here. Every time we've done that in the past, as a general rule, we have seen image quality and detail improve. In the past, we have also talked about in our conference calls over the years about concentration of activity. If you go back 10 years ago, the activity level was more robust in other basins around the lower 48, and we began to see a contraction back into the Permian specifically several years ago and Southern Midland Basin, then we moved into the Delaware. Now some of our focus tends to be more in the Northern Midland Basin and in the Central Basin platform. In the last 3 years, we have acquired some very large surveys through the multi-client model that have been very intense with this new shooting geometry and techniques. Those data sets have taken some time. One of the issues our industry deals with is lag time on delivery of processed data. It's something that is being worked on and continues to improve, but it takes a while for these data sets to reach the market. We are just starting to see some of those data sets reach the market, which caught up with where the most recent concentration of activity and rig count and improvement occurred. It is a difficult environment right now, but we're seeing improvement and movement in activity. Discussing the movement of activity to the northern part of the Midland Basin, of the Central Basin platform. We've done quite a bit of work over the years in the Delaware Basin, for example, and it's a prime candidate for imagery improvement. To answer your question, we believe there's running room all across the lower 48 that is dependent upon E&P activity. It is fair to say right now that we have some very active areas that have this new data set. We're not seeing the rig count coming back as quickly as we typically have in a downturn. I think we're dealing with, in my opinion, a timing issue here as opposed to a value of the product issue.

Bruce Berger, Analyst

Great. So you're thinking that, of course, we're seeing completions increase much more than the actual amount of drilling rigs. What do you think is a good correlation will be, as drilling rig activity increases? What's the time lag between that increase and the demand for shooting, do you think?

Stephen Jumper, Chairman, President and CEO

It is very difficult for me to put a timeline on these things, Bruce. I don't want to get ahead of myself. But I think a couple of important points need to be discussed here, which we have alluded to in the press release. First, I'm not sure anyone really knows what the drilled but uncompleted number really is. How many actual DUCs are out there that have been drilled and just sitting on completion? So in today's world, it is not uncommon for completion activity to move at a little bit more rapid pace than drilling activity. The second thing is, while we're seeing some recovery in rig count, let me add that there's been continued pressure on all oilfield services, not just us, but all oilfield services are under pressure these days. We're seeing a slower ramp-up in rig count coming out of a down cycle than we've seen in the past. That further complicates issues for us. I don't see that changing in the near-term, honestly, to a great degree. E&P companies are reporting pretty strong free cash flow numbers. We're seeing more and more companies issuing one-time special dividends. There is a focus on shareholder return that's out there. I would anticipate that to move through for the next few quarters. The indicators we would look for would be continued improvement in rig count, movement into new basins. For example, it's encouraging that we're seeing some activity in the Central Basin platform along the shelf edge. We will continue to see some movement back into the Delaware Basin and we're beginning to see discussions down in the Eagle Ford. A variety of things will continue to be monitored, and we will communicate with our shareholders as they materialize. There is no one specific thing that I can point to and say that's the thing we need to watch because I think it is a combination. We haven't seen much adjustment in capital budgets on behalf of the E&Ps. We'll see what happens when we get to midyear and later. We're not seeing a dramatic increase in rig count. We've seen improvement, but I'm encouraged. I think we will see some things begin to materialize in the back half of the year.

Bruce Berger, Analyst

It's interesting your comments about DUCs because I often liken it to a retail or manufacturer. You go through your inventory, and eventually, you have to replenish it, right? They don't have to drill, but they're basically running through their inventories. So I guess what you're saying is it's not a question of if, but when for your services?

Stephen Jumper, Chairman, President and CEO

That's what I believe. History has been on our side in that regard. Describing the depth of the last downturn we've gone through is quite difficult. It has not only been a supply issue or a demand issue, it has been a complete shutdown. The downturn we faced in 2020 bled into 2021. For other oilfield service companies, it really began in late Q1 of 2020. We went from a greatly reduced activity to almost zero. Groups that were operating multiple rigs in the teens went to zero. We’ve experienced a full year of very, very limited activity. Additionally, we have seen quite a bit of M&A activity on the E&P side that has consumed resources for those transactions. This has been a very difficult situation, unlike anything we have ever experienced before. Historically, seismic data adds value, particularly if you're looking to optimize drilling and completion results. As technology improves and we integrate more with well data, this value should only enhance. I am confident that seismic will play a crucial role in optimizing E&P operations and this will continue to strengthen over time.

Bruce Berger, Analyst

Just one other question. Could you just explain why you enacted the poison pill for one year?

Stephen Jumper, Chairman, President and CEO

Well, a couple of things there, Bruce. I appreciate the question. I would preface this by saying Dawson Geophysical has had a shareholders' Rights Plan in the past. We had one in 1999, which was a 10-year plan that we renewed in 2009, and it was discontinued with the merger with TGC. So a shareholders' Rights Plan is something we have had in our history. We contemplated the plan for quite some time going back to the early part of last year. We began seeing some improvement in the stock price through late 2020 and early 2021, then we observed a slight reversal. We revisited the shareholders' Rights Plan concept and, after receiving advice from professional services providers, adopted a basic plan with standard terms and conditions to protect all our shareholders. It's something we will revisit over time, but that is the impetus for implementing the plan.

Operator, Operator

And we go with our next question from Scott Bundy Moors & Cabot.

Scott Bundy, Analyst

Steve, in your 30 years in this very cyclical industry, where do you place this cycle compared to prior cycles?

Stephen Jumper, Chairman, President and CEO

It's by far the deepest. I came into this industry at a downturn that I was unaware of. In the past, we have dealt with oversupply issues related to OPEC movements or demand issues related to economic conditions. This situation is multi-faceted. Not only did we have a supply issue with global supply levels, we experienced COVID-related complete demand destruction that, at the end of the day, probably wasn't as deep as anticipated, but indeed was extensive. Additionally, we've had an overhang for several years of energy investor apathy, demanding returns, particularly on the E&P side, which appears to be correcting with recent results. The supply issue seems poised to correct itself, but I can't predict when U.S. supply will return to pre-pandemic levels. The current rig count suggests it won't happen soon. Demand appears to be increasing for oil. It’s encouraging to see signs of improvement in the international markets regarding seismic data activity and marine world. While there are positive signs, we are still coming out of a very deep hole.

Scott Bundy, Analyst

From your point of view, we all know OPEC capacity will eventually get absorbed, but the significant lack of investment: have you noticed this severe lack of investment in the past, perhaps going back to the '80s?

Stephen Jumper, Chairman, President and CEO

You're talking about in the U.S. or worldwide?

Scott Bundy, Analyst

Well, U.S. in particular, but maybe even worldwide. I'm just trying to get your sense of whether there appears to be a cost associated with this lack of investment and with the focus on free cash flow, does that ultimately pose a risk assuming a world that returns to normal?

Stephen Jumper, Chairman, President and CEO

I appreciate the question, Scott. I'm no broad energy expert—just a seismic guy. Our company, shareholders, and employees work closely with our E&P customers, and we follow their actions closely. There has been serious underinvestment in the international marine sector over the last 10 to 15 years. In the lower 48, we have argued for some time that we may be headed towards improved investment, which would be done more prudently, utilizing better science and technology. I think overall, there is an investment gap worldwide, not just in E&P but in services and midstream sectors. Increased investments will be needed, and our hope is that they will be executed prudently. If done correctly, using sound technology and science, this could benefit the seismic sector, not just for us, but across the globe.

Operator, Operator

And we have one last question from John Potratz from Researched Investments.

John Potratz, Analyst

First of all, I've noticed your revenues for the quarter were up compared to the last quarter. I think you've done very well there. I've noticed that you have to deal with the downsizing of your staff, but then still be able to come and respond as your clients come back and ask for work. How has that been going? My sense is that you really have a feeling for your people and make them adjust to the changes, so when business recovers, you'll still have a good crew available. How is that going for you?

Stephen Jumper, Chairman, President and CEO

Great question, Jay. I appreciate it. This has been a very difficult challenge, not just for our company but for the seismic sector as a whole, and oilfield services in general. We have undergone tremendous cutbacks in the last year plus. We have diligently worked to reduce our cost structure. At the same time, we have tried our best to maintain the right resources in personnel, equipment, and capital to respond quickly and efficiently. In my opinion, the recovery will not be like in prior years where you might need 8 to 10 crews to succeed. If we can manage to get to 2 large channel count crews as we did in the first half of 2020, we can perform well and much improved. The crew count bar is not as high as it once was. We have worked hard over the last couple of years to understand what a large crew looks like, how it operates, and how to improve efficiency. Even in the last 6 to 9 months, we have fluctuated, but our staff, even with COVID protocols in place, has done a tremendous job responding quickly and efficiently, both operationally and financially. We monitor this closely. Yes, we have lost some talented individuals, but we’re managing this well, understanding that we need to minimize cash burn while being responsive to our E&P customers’ needs. I want to take this opportunity to express how proud I am of our team for their hard work and resilience during this challenging time. Their attitudes are strong and positive, and we are striving to maintain the ability to respond across various areas in multiple ways.

John Potratz, Analyst

That's important to recognize those people. How are you getting a sense from your customers? Are they starting to reallocate money towards seismic? Are they communicating with you? Do you sense they want to sit down and discuss how they could use your seismic crews for better data? Are they open to sharing ideas?

Stephen Jumper, Chairman, President and CEO

That's a great question. There are multiple ways for us to assess the market: contracts in hand, bid activity, and industry conversation. Contracts in hand are currently very lean based on our Q2 estimates. Bid activity is also slow, as outlined in the press release, but it is present. There are ongoing conversations, particularly among E&P companies regarding geology and geophysics. They have concepts and ideas and are determining how to allocate their budgets for 2021 and into 2022. The discussion points revolve around potential needs and what they would like to accomplish depending on budget conditions in the latter half of the year. So, while things appear challenging for Q2 and possibly Q3, there is some positive dialogue. We remain optimistic about the long-term prospects.

Operator, Operator

And it appears there are no further questions at this time.

Stephen Jumper, Chairman, President and CEO

I would first like to thank everyone for joining us on this call. Clearly, we’re in tough times here. I appreciate the thoughtful questions and commentary we received today. As mentioned in our press release, we anticipate Q2 to be very, very difficult. However, we see positive signs on the horizon with rig counts improving, free cash flow generation increasing, completion crews returning to work, and several conversations suggesting seismic activity is picking up in other parts of the world and within the marine world. We are encouraged. We thank our shareholders for their continued trust. I want to acknowledge our employees for their hard work and the challenging circumstances they are managing. Of course, I want to thank and appreciate our valuable client base. We will work tirelessly through these difficult times, making prudent decisions for our shareholders and employees alike. We look forward to having another conversation after our Q2 report. Thank you very much.

Operator, Operator

And this concludes today's call. Thank you for your participation. You may now disconnect.