Dawson Geophysical Company: Q2 2023 Form 10-Q Summary
Business context and reporting period
Dawson Geophysical provides onshore seismic data acquisition services in the United States and Canada for major and independent oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with prior periods presented as adjusted for the common-control combination with Breckenridge Geophysical.
- The company operated one mid-sized crew during much of the second quarter after beginning the quarter with two crews.
- Adverse weather and job-readiness delays reduced utilization. Management expected to deploy a second crew in the mid-to-late third quarter and reach full utilization of two large-channel-count crews in the fourth quarter and into the first quarter of 2024.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $20.219 million | $4.765 million | $49.627 million | $26.699 million |
| Operating loss | $(4.777) million | $(7.858) million | $(5.350) million | $(9.296) million |
| Net loss | $(4.430) million | $(7.579) million | $(4.843) million | $(8.964) million |
| Loss per share | $(0.18) | $(0.30) | $(0.19) | $(0.36) |
| EBITDA | $(2.521) million | $(4.575) million | $(0.342) million | $(2.873) million |
| Cash flow from operations | $7.571 million | $10.883 million | $5.751 million | $1.734 million |
- Q2 revenue increased 324.3%; six-month revenue increased 85.9%, primarily because of higher crew utilization.
- Q2 operating margin was approximately negative 23.6%, versus negative 164.9% in the prior-year quarter. Six-month operating margin was approximately negative 10.8%, versus negative 34.8%.
- Q2 net margin was approximately negative 21.9%, versus negative 159.1%. Six-month net margin was approximately negative 9.8%, versus negative 33.6%.
- Operating expenses increased with higher utilization, while depreciation and amortization declined to $2.113 million in Q2 and $4.813 million for the six months.
- General and administrative expense was $2.977 million in Q2 and $6.476 million for the six months. Q2 expense included Breckenridge transaction costs; the prior-year six-month period included $2.872 million of costs related to a proposed merger.
- Cash flow from operations for the six months benefited from a $3.035 million employee retention credit receipt and favorable working-capital changes. Q2 cash flow from operations was affected by working-capital movements and was not separately reported in the cash-flow statement.
Balance sheet, debt and liquidity
- At June 30, 2023, cash and cash equivalents were $18.087 million, restricted cash was $5.000 million and short-term investments were $0.265 million, totaling $23.352 million.
- Total current assets were $39.510 million and total current liabilities were $28.384 million. The company reported total assets of $61.080 million and stockholders’ equity of $28.940 million.
- The company had approximately $5.000 million available under its Dominion revolving credit facility and had no borrowings outstanding under that facility. The facility matures September 30, 2023 and is subject to financial covenants, including tangible net worth of at least $38.000 million and unencumbered liquid assets of at least $5.000 million.
- The company recorded a $9.880 million current convertible note payable to Wilks Brothers. Subject to shareholder approval, the note is convertible into 5,811,765 shares at $1.70 per share. Management stated it does not expect settlement to require a cash outlay.
- Other debt included $0.313 million of insurance-premium notes and $1.014 million of finance-lease obligations. Operating lease liabilities totaled $4.184 million.
- Six-month investing cash outflow was $2.990 million, including $2.021 million of capital expenditures and $1.000 million invested in short-term investments. Six-month financing cash outflow was $3.454 million.
- The board approved an initial 2023 capital budget of $5.000 million; management reported $2.216 million spent through June 30, 2023.
Material changes versus the prior comparable period
- Revenue and utilization improved substantially from the unusually weak 2022 comparable period, although the company remained unprofitable and EBITDA remained negative.
- The March 24, 2023 Breckenridge asset acquisition added seismic assets and operations under common control. Dawson issued 1,188,235 common shares and a $9.880 million convertible note for total consideration of $11.900 million, compared with acquired net assets recorded at $1.335 million.
- The transaction resulted in a $10.565 million charge to additional paid-in capital and retrospective adjustment of prior-period financial statements.
- The Dominion revolving facility was reduced from a $10.000 million commitment to a maximum of $5.000 million, with related covenant waivers and consents obtained.
- Cash, restricted cash and short-term investments declined from $23.868 million at December 31, 2022 to $23.352 million at June 30, 2023. Stockholders’ equity declined from $48.804 million to $28.940 million, principally reflecting transaction-related equity accounting and continued net losses.
Guidance, outlook, commentary and risks
- Management expects a second crew to be deployed in the mid-to-late third quarter, with significantly higher channel-count utilization in the fourth quarter and continued utilization into the first quarter of 2024.
- The order book was described as improved and included large projects in West Texas and Eastern New Mexico. Management also reported increased bid inquiries and improving interest from public independent and major exploration and production companies.
- Management expects carbon-capture-related seismic activity to increase significantly in 2024, although 2023 activity had been limited.
- Management believes cash on hand, investments, operating cash flow and available credit will fund current operations and 2023 capital expenditures, but liquidity depends on future operating performance and customer payment behavior.
- Key risks include dependence on oil and gas exploration spending, commodity-price volatility, customer concentration and credit risk, project delays or cancellations, weather and permitting interruptions, high fixed costs, capital requirements, crew utilization, competition and limited access to capital.
- The company is a defendant in a Weatherford groundwater-contamination proceeding and disputes the allegations. Management believes the matter will not materially affect financial condition, results or liquidity, but the outcome cannot be predicted with certainty.
- The company reported effective disclosure controls as of June 30, 2023 and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether shareholders approve conversion of the $9.880 million Wilks convertible note into 5,811,765 shares and the resulting dilution.
- Whether the Dominion credit facility is renewed or replaced before its September 30, 2023 maturity and whether all financial covenants are satisfied.
- Actual timing and utilization of the second crew, including the impact of weather, permitting and job-readiness delays.
- Conversion of the improved order book into revenue, positive EBITDA and sustained operating cash flow.
- The sustainability of cash flow after excluding the nonrecurring $3.035 million employee retention credit receipt.
- Customer concentration, accounts-receivable collectability and exposure to lower oil and gas exploration spending.
- Progress and economics of anticipated carbon-capture seismic projects and other 2024 opportunities.