Earnings Call Transcript - DWSN Q1 2020

Operator, Operator

This call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and involve known and unknown risks, uncertainties, and other factors that could cause actual future results or performance to differ significantly from those projected. The risks and uncertainties include those disclosed by the company periodically in filings with the SEC, such as the annual report on Form 10-K filed on March 6, 2020. Additionally, please refer to the statement on forward-looking statements included in the press release issued this morning, and note that the content of this conference call is subject to those statements. Management will mention EBITDA during this call, which is a non-GAAP financial metric. A reconciliation of this non-GAAP measure to the relevant GAAP measure is available in the current earnings release on the company’s website at www.dawson3d.com. The call will last 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.

Steve Jumper, Chairman, President, and CEO

Thank you, John. Good morning, and welcome to Dawson Geophysical Company’s First Quarter 2020 Earnings and Operations Call. As John 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 get too far along, I want to cover a few items. 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 7, 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 first quarter financial results. For the quarter ended March 31, 2020, the company reported revenues of $39 million compared to $51.2 million for the quarter ended March 31, 2019. For the first quarter of 2020, the company reported net income of $993,000 or $0.04 per common share compared to a net loss of $137,000 or $0.01 loss per common share for the first quarter of 2019. The company reported EBITDA of $5.8 million for the quarter ended March 31, 2020 compared to EBITDA of $6 million for the quarter ended March 31, 2019. During the first quarter of 2020, the company operated three large channel count crews in the United States, primarily in the Permian Basin and a peak of three crews in Canada with varying utilization rates of the active crews during the quarter compared to a peak of five total crews, two of which were larger channel count in the US and a peak of four crews in Canada in the first quarter of 2019. The winter season in Canada concluded at the end of the first quarter of 2020 with limited seismic activities anticipated until the next winter season. Equipment stationed in Canada will be redeployed to the US to service the company’s clients as needed. As in recent quarters, the majority of the company’s projects are on behalf of multi-client companies in the US. 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 early part of the third quarter of 2020. Jim?

Jim Brata, Executive Vice President and CFO

Thank you, Steve, and good morning. Revenues for the first quarter of 2020 were $39 million compared to $51.2 million for the quarter ended March 31, 2019. As stated in our earnings release issued this morning, during the first quarter of 2020, the company operated three large channel count crews in the US, primarily in the Permian Basin and a peak of three crews in Canada with varying utilization rates of the active crews during the quarter compared to a peak of five total crews, two of which were large channel count crews in the US and a peak of four crews in Canada in the first quarter of 2019. The winter season in Canada concluded at the end of the first quarter of 2020 with limited seismic activities anticipated until the next winter season. The equipment stationed in Canada will be redeployed to the US to service the company’s clients as needed. As in recent quarters, the majority of the company’s projects are on behalf of multi-client companies in the US. Cost of services in the first quarter of 2020 were $29 million, a decrease of 29% compared to $40.9 million in the same quarter of 2019. General and administrative expenses were $3.7 million in the first quarter of 2020, a decrease of 19% compared to $4.5 million in the first quarter of 2019. Depreciation and amortization expense in the first quarter of 2020 was $4.9 million, a decrease of 19% compared to $6.1 million in the same quarter of 2019. Net income for the first quarter of 2020 was $993,000 or $0.04 per share compared to a net loss of $137,000 or $0.01 loss per share in the first quarter of 2019. EBITDA in the first quarter of 2020 was $5.8 million compared to EBITDA of $6 million in the same quarter 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 March 31, 2020, we had debt including obligations under financing leases of approximately $3.1 million, cash and short-term investments of $30.2 million. Our current ratio was 3.3 to 1 and working capital was approximately $50.7 million. And with that, I’ll turn the call back to Steve for some comments on our operations.

Steve Jumper, Chairman, President, and CEO

Well, thank you, Jim. While the company reported a decrease in revenue for the three months ended March 31, 2020, we reported net income of $993,000 compared to a net loss of $137,000 for the quarter ended March 31, 2019. Gross margin for the quarter ended March 31 improved 5.5% to 25.6% as a result of improved crew efficiencies, increased utilization of reporting channels, energy sources as well as continuing success with our cost control initiative. Capital expenditures for the quarter of 2020 totaled $2.3 million, primarily for maintenance capital items and purchases of additional recording channels as opposed to leasing such channels on less favorable terms. The company’s Board of Directors has approved an initial capital budget of $5 million for 2020. Capital expenditure for the balance of the year are anticipated to be for maintenance requirements only. As Jim said, the company’s balance sheet remains strong with $30.2 million of cash, restricted cash and short-term investments and $50.7 million of working capital as of March 31, 2020. The company had notes payable and finance leases of $3.1 million as of March 31, 2020. First quarter results were favorably impacted by the continued operation of three large channel count crews in the United States and a better than anticipated Canadian season. While we are pleased with our first quarter results, there have been numerous changes to the oil and gas industry and the overall market since we reported December 31, 2019 results in late February. The combination of the dissolution of OPEC oil production quotas, primarily by Saudi Arabia and Russia in early March and the economic impact and resulting reductions in demand for oil caused by the COVID-19 pandemic, resulted in an oversupply of oil worldwide, which caused oil prices to plummet from approximately $52 per barrel on February 1, 2020, to well below $15 per barrel in March. Oil futures went negative for a brief period in April. The drop in oil prices, despite the subsequent agreement between Saudi Arabia and Russia to withhold approximately 9.7 million barrels of oil from the world markets has forced exploration companies to cut capital budgets ranging from 30% to 50%, resulting in rapid reductions in the number of wells being drilled and completed. As in prior periods of capital expenditure reductions by our clients, demand for our services has declined accordingly. Since the onset of these unforeseen circumstances, we experienced a reduction in requests for proposals, and several large projects have been postponed. We continue to maintain close communication with our client base, who are experiencing the same level of uncertainty as our company. Based on current, but rapidly changing information, we anticipate continued operation of the two large channel count crews through the second quarter and into the third quarter of 2020. The second quarter will be somewhat negatively impacted as we redeploy a third smaller channel count crew on a previously completed project, which experienced limited data dropout from an undetected operational issue. In the current market environment, our visibility beyond the early part of the third quarter is limited. In response to this uncertainty, we reduced our non-field level support staff in April, which after severance costs of $1.4 million in the second quarter ultimately should result in annual savings of approximately $4.3 million. In addition, we reduced the base salaries of each of our senior executives by approximately 20% effective March 30, 2020 until February 11, 2023 unless otherwise determined by the Board. Many other employees have taken temporary salary deductions at varying levels which we currently expect should result in an annual savings of approximately $0.9 million. In response to the COVID-19 pandemic and its impact on our people, we instituted recommended CDC guidelines in early March, including, but not limited to, social distancing, hygiene recommendations, small group limits, enhanced work-from-home guidelines, minimized office hours and weekly town hall telephone conferences to update employees and their families on the company’s practices and protocols. We continue to observe applicable shelter-in-place directives, and now that we are seeing certain areas in Texas and other locations begin to open up, we are reopening business locations, provided that proper CDC guidelines are rigorously followed. We continue to provide additional flexibility to work from home for those with pre-existing health conditions, childcare issues, elderly in-home residents or other general concerns. At the crew level, we have implemented policies to eliminate large group gatherings, provide additional vehicles to reduce the number of people in a single vehicle traveling to and from project locations, increased utilization of radio communication, secured ample safe daily water supply, offered increased housing flexibility, and relaxed field schedules to allow for individual needs. Most of our day-to-day operations consist of small, often isolated workgroups. While we face difficult challenges, perhaps some of the most difficult the oil and gas industry has ever faced, we are confident that the steps we’ve taken, both today and throughout the year, such as our commitment to a strong balance sheet, a scalable business structure that allows us to quickly adjust our operations and expenses up or down depending on market conditions, and an unremitting commitment to our employees, clients and shareholders, favorably positions us during these challenging times. Although there are significant near-term headwinds, we continue to believe that over the long term, seismic data will continue to add value to exploration and production companies’ drilling and development programs by helping identify optimum well locations. I would personally like to thank all of our hardworking employees, our valued clients and our shareholders for their continued commitment and support during these challenging times. And with that, John, I believe we are ready to open the call for questions.

Operator, Operator

We will move on to our first question from Amar Sheth of Bellwood Partners. Please go ahead. Your line is now open.

Amar Sheth, Analyst

I appreciate you guys coming into this with such a good balance sheet. I guess my question really relates to that. Given your experience in prior down cycles, can you give us a little color on how you’ve been able to navigate it in the past? And what aspects of your business could help you navigate this down cycle?

Steve Jumper, Chairman, President, and CEO

I appreciate the question. I have personally been in this business, with this company for 35 years. And the company has been around as an entity since 1952, having gone public in 1981, so I have personal experience with the company through several of these cycles that we go through. We have always known as a company that the oil and gas industry is cyclical, and we’ve always understood that we’re in a line of service within the oil and gas industry that can be even cyclical within the overall macro cyclicality. I was early in my career during the early ‘80s when the big crash hit in ‘85, then we navigated through the issues in 1998, ‘99 and the 2008 issue, and again in 2015. To be honest, this is something that is different than anything I believe any of us have ever seen. If you look back at historical cycles within the overall oil and gas industry, our business has dealt with either an oversupply issue that occurred in the early ‘80s and again in 2014 when OPEC decided to not abide by their production quotas. We’ve had demand issues, which were related to the same thing in ‘98 on the supply side when we hit demand issues somewhat around 2001 and again in 2008 relating to the banking crisis. This has been the first time I believe our industry has been hit with a double whammy on supply right in front of COVID-19. It’s a little different to navigate through this, and there’s certainly more uncertainty around this cycle. It’s important to note that this cycle deals with unconventional development and production, which is tricky and more expensive to operate. You’re dealing with wells that come on with very high initial production rates and then taper off. Just by virtue of lack of drilling completion, there will be some reduction in overall supply. From our company’s perspective, we’ve managed this historically by maintaining a commitment to our balance sheet, which ensures we have the working capital to operate through all cycles. We also have the ability to scale operations quickly depending on market conditions, always understanding that things can change rapidly. Our role remains vital as we believe there is still no better tool available to aid exploration and production companies in optimizing their drilling and development programs. Our science and imagery is improving, helping E&P companies decide both where not to drill and where to optimally place well locations. This remains a tough situation for everyone, but we believe we are well positioned to manage the upcoming challenges.

Amar Sheth, Analyst

Yes, thank you for that color. I guess my other question relates to the potential for an up cycle in oil prices in the future following these stay-at-home orders. Do you foresee Dawson being able to participate in that matter? Or do you believe there might be a delay in terms of how Dawson would engage or when clients might start reengaging?

Steve Jumper, Chairman, President, and CEO

That’s a very good question, and it’s difficult to answer. The honest answer is, I’m not totally sure at this point where in the cycle we would come into play. Early in my career when 3D seismic data first came to market, we were early in the cycle, meaning we were among the first to identify prospects. Historically, if seismic crew counts increased, it was a good indication that rig counts would follow. However, through the movement to unconventional plays, we became more of a late cycle entry. Our technology was mainly used as a tool to identify geohazards rather than guiding optimal drilling locations. Recently, our technology has improved, allowing us to better understand rock properties and make more informed decisions about where to drill. I think moving forward, we won’t be late to the cycle as we have been in the past; while rig counts increase, we will also want to be there. A potential improvement in natural gas prices could also allow us to be early cycle in some natural gas basins. However, every situation is fluid, and it’s hard to have a clear cut answer.

Amar Sheth, Analyst

That’s helpful, particularly regarding the natural gas prices. My last question is more of a housekeeping inquiry. I noticed the accounts receivable balance has increased a bit over the last year. Is this just typical clients seeking better terms, or is there something concerning with that?

Steve Jumper, Chairman, President, and CEO

No, we’re not worried about accounts receivable at this point. They are merely snapshots in time, and those numbers can change dramatically over just a few days. Our days outstanding have remained fairly consistent. There might be fluctuations related to third-party pass-through charges, but overall, we’re in good shape with our receivables.

Operator, Operator

We will take our next question from Bruce Berger of Turnaround Capital.

Bruce Berger, Analyst

I was wondering if given the large number of shutdowns we’re seeing, whether that could ironically spur more demand for your multi-client customers’ data? With resumed drilling, there could be new problems with shut wells. What are your thoughts on this?

Steve Jumper, Chairman, President, and CEO

I’m sorry, I lost you there for a moment. Could you please repeat your question?

Bruce Berger, Analyst

Sure. I was asking whether, given all the shut-ins, when wells start up again, there might be demand for data from your multi-clients, potentially leading to more seismic shooting.

Steve Jumper, Chairman, President, and CEO

Let me break that down a bit. We acquire data on behalf of our multi-client data library companies who license that data to E&P companies. I don’t believe shut-ins and restarts would directly impact us. It might affect some of the multi-client data companies that have existing shelf data in the area. Our engagement is likely to be involved in new drills and complete projects rather than the restart of existing wells. The concept of re-opening horizontal wells is risky, so I wouldn’t expect direct impacts from shut-ins, but new drilling could certainly impact us.

Bruce Berger, Analyst

Well, anything that drives more money into the hands of multi-clients is good for you, so they're likely to order new measures. One more question: Are you comfortable that if crew utilization continues to decline, you can cut more costs if necessary to reach cash breakeven?

Steve Jumper, Chairman, President, and CEO

Yes, we monitor that closely. While we have visibility only into the early part of the third quarter, we’ve had discussions about how to manage costs in the face of ongoing uncertainty. More positive indicators might emerge later in the year, but we anticipate staying at or below current levels. A large portion of our costs are variable, and as crews shut down or fuel prices decrease, those costs could be lowered. We continuously evaluate our costs and make decisions accordingly.

Bruce Berger, Analyst

Thanks, Steve. Great job in the first quarter.

Operator, Operator

We will now move on to our next question from John Potratz of Research Investments.

John Potratz, Analyst

It’s John Potratz. First of all, I want to complement you that the Board of Directors approved maintenance capital budget of $10 million in 2019, but you only spent $3.6 million. I think it’s important to recognize some great work on your part to be able to do that and keep that capital for the company for the long term. But I think it’s just fantastic. Thank you very much for a good job there.

Steve Jumper, Chairman, President, and CEO

Thank you.

John Potratz, Analyst

I notice that you mentioned a decrease in pricing proposals and that several large projects have been postponed. Do you anticipate having some potential projects that could advance if prices recover, offering a better outlook for the third quarter?

Steve Jumper, Chairman, President, and CEO

Yes. There’s been a significant reduction in capital expenditure on behalf of E&P companies, and those numbers continue to trigger updates sometimes weekly. We did have projects slated for summer, but they have been postponed, though not technically canceled. There are other projects that are also expected to occur later in the year, pending circumstances between now and the third quarter. There remains a lot of uncertainty, and capital spending is under significant pressure. While we have had discussions and active requests for proposals prior to the OPEC decision and COVID-19, those projects are also likely to be postponed.

John Potratz, Analyst

So at least you have prospects of something happening rather than having nothing to work with, which is a positive outlook for future business?

Steve Jumper, Chairman, President, and CEO

Yes, sir.

John Potratz, Analyst

Is there any issues with collecting receivables? Are you concerned about the quality of getting paid for your work?

Steve Jumper, Chairman, President, and CEO

As of today, we have not had any significant issues nor do we have any great concern where we sit today, but that’s as of today. Our receivables are in good shape.

John Potratz, Analyst

How has COVID-19 affected crew costs and your ability to operate? Have you been able to manage that financial impact?

Steve Jumper, Chairman, President, and CEO

It has not had a significant financial impact directly related to crew costs. We implemented minor adjustments to ensure safety regarding access and supply for crews, but our operations have continued with no major disruption. I commend our teams for executing safety protocols effectively.

John Potratz, Analyst

It sounds like you’ve put a lot of thought and effort into navigating these challenges. Thank you very much.

Steve Jumper, Chairman, President, and CEO

Thank you.

John Potratz, Analyst

I noticed that since the merger the employee count is now down to about 450 in the first quarter. You are focused on keeping costs low while meeting client needs?

Steve Jumper, Chairman, President, and CEO

Yes. We’ve significantly altered our crew makeup over the past five years, transitioning from numerous smaller channel count crews to fewer crews with higher channel counts. This shift has improved utilization, efficiency, and our overall cost structure. We remain dedicated to being responsive to client needs while also reducing operating expenses.

John Potratz, Analyst

The technology has changed significantly; it sounds like you are able to conduct more effective reshoots due to the new data. Is that generating additional business?

Steve Jumper, Chairman, President, and CEO

Yes, it certainly has. Although the market remains challenging now, advancements in technology continue to create new opportunities for us, as we have gone back to reshoot notable areas, particularly in the Permian Basin, based on improved data quality. However, the current circumstances are distinctly different from those of the past.

John Potratz, Analyst

Thank you very much for that insight.

Steve Jumper, Chairman, President, and CEO

Thank you, sir.

Operator, Operator

It appears we have no further questions at this time. I’d like to turn the conference back for any additional remarks.

Steve Jumper, Chairman, President, and CEO

Okay. Thank you, John. I want to thank everybody for taking the time to listen in. As we have said, we’re very pleased with our first quarter results. We are facing, not just our company, but our industry and the overall oil and gas industry is certainly facing some unprecedented headwinds here over the next whatever period of time we want to consider that. I believe we have the technology and equipment base to compete and provide our clients with quality service. I think we’re well positioned. We will continue to monitor things and communicate with our employees about our status. We are beginning to open up cautiously, but continuing to follow CDC guidelines. Again, I want to thank our employees for their commitment to safety and operations during this challenging time. We truly value our clients and appreciate our shareholders’ support, and we look forward to speaking with you again in 90 days. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.