Dawson Geophysical Company — Form 10-Q Summary
Business context and reporting period
Dawson Geophysical provides North American onshore seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial performance and liquidity
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|---|---|
| Operating revenues | $8.7 million | $37.0 million | $77.2 million | $112.2 million |
| Operating loss | $(8.1) million | $1.9 million | $(5.6) million | $(10.0) million |
| Net loss | $(7.8) million | $2.0 million net income | $(5.3) million | $(9.4) million |
| EBITDA | $(3.8) million | $7.2 million | $7.8 million | $7.0 million |
| Net cash provided by operating activities | Not separately presented in the financial statements | Not separately presented in the financial statements | $24.4 million | $1.2 million |
Third-quarter revenue declined 76.4% year over year, while nine-month revenue declined 31.2%, primarily because of low crew utilization. The third-quarter operating margin was approximately -92.7%, versus 5.2% in the prior-year quarter. The nine-month operating margin was approximately -7.2%, versus -8.9% in 2019. Net margins were approximately -89.7% and -6.9% for the quarter and nine months, respectively.
Operating expenses decreased 63.7% in the quarter and 36.9% year to date, reflecting a reduced crew count and workforce reductions. General and administrative expense decreased 13.9% in the quarter and 16.3% year to date, but increased as a percentage of revenue because of the sharp revenue decline. Depreciation and amortization decreased to $4.1 million in the quarter and $13.4 million year to date.
Cash, restricted cash and short-term investments totaled $51.0 million at September 30, 2020, including $45.4 million of cash and cash equivalents and $5.0 million of restricted cash. Accounts receivable declined to $5.0 million from $24.4 million at December 31, 2019. Total assets were $109.5 million, compared with $127.6 million at year-end 2019.
The company generated $24.4 million of operating cash flow during the first nine months, principally from reductions in accounts receivable and other operating assets. Investing cash outflow was $0.8 million, including $2.8 million of capital expenditures. Financing cash outflow was $4.4 million, including $8.4 million of note-principal payments and $2.3 million of finance-lease payments. The company reported $2.8 million of maintenance and equipment capital expenditures through September 30 against an initial 2020 capital budget of $5.0 million.
Debt, liquidity and capital resources
- The Dominion revolving credit facility was amended and extended to September 30, 2021. Availability is capped at the lesser of $15.0 million or a borrowing-base formula based on eligible receivables and a $5.0 million restricted deposit.
- No amounts were drawn under the Dominion revolving facility at September 30, 2020. The facility carries interest at the lesser of 6.0% and the greater of the prime rate or 3.5%, plus a 0.10% commitment fee on undrawn availability after specified adjustments.
- The company had $160,000 of notes payable and $106,000 of finance-lease liabilities at September 30, 2020. Operating-lease liabilities totaled $6.3 million.
- The Dominion agreement requires, among other conditions, tangible net worth of at least $75.0 million and specified liquidity and leverage ratios. Stockholders’ equity was $98.1 million at September 30, 2020.
- Management stated that cash, short-term investments, operating cash flow and available revolver capacity are expected to be adequate for current operational needs, although future sufficiency depends on operating performance and customer payment patterns.
Material changes, outlook and management commentary
- COVID-19, the resulting economic disruption, low oil and gas prices and reduced customer capital spending materially depressed demand for seismic services.
- The company operated one data-acquisition crew during the third quarter with periods of low utilization. That crew was inactive during the latter part of the quarter and into the fourth quarter.
- Management anticipated one U.S. crew with periods of low utilization for the foreseeable future and up to two Canadian crews for the late fourth quarter 2020 and first quarter 2021 winter season.
- Requests for proposals remained slow in the U.S., Canada and internationally, and management described project uncertainty and demand reductions as substantial. Management noted oil prices around $40 per barrel and possible industry improvement in 2021, but stated that seismic recovery may lag any recovery in drilling and completion activity.
- Cost-saving actions included workforce and salary reductions, outsourcing permitting and surveying, and other operating efficiencies. Management expects approximately $4.3 million of annual savings from previously enacted measures.
- Effective tax rates were approximately -0.2% for the quarter and -0.3% year to date. Valuation allowances were maintained against substantially all federal, state and foreign deferred tax assets, so future losses may produce reduced or no tax benefits.
- The company reported no material subsequent events through the filing and no off-balance-sheet arrangements.
Risks, contingencies and unusual items
- Results are highly dependent on oil and natural gas prices, exploration and production spending, customer financial condition, contract awards, crew utilization and pricing.
- COVID-19-related operational, logistical and workforce disruptions could further reduce productivity or delay, reduce or cancel contracts.
- The company has customer concentration and credit risk; its $250,000 allowance for doubtful accounts may not cover a default by a large or multiple smaller customers.
- A Weatherford-related environmental lawsuit alleges groundwater contamination and seeks recovery and contribution for past and future remediation costs. The company disputes the allegations and believes the matter will not materially affect its financial condition, results or liquidity, but the outcome cannot be predicted with certainty.
- Client disputes over invoices or other contractual matters may affect revenue and results in individual periods.
- Cash and short-term investments exceed federally insured limits, creating exposure to financial-institution credit risk. The company has no commodity hedges or other derivative instruments.
Investor verification points
- Verify whether crew utilization and seismic-service demand improved after September 30, 2020, particularly in the U.S. and Canada.
- Assess whether the Dominion facility’s financial covenants remain satisfied and whether the company needs to draw on its unused borrowing capacity.
- Reconcile the significant operating cash flow improvement with the sharp revenue decline, including the effects of receivable collections and reduced working capital.
- Monitor customer concentration, receivable collectability and contract cancellations in the oil and gas customer base.
- Track the Weatherford environmental litigation and any changes in management’s assessment of potential exposure.
- Evaluate whether the projected $4.3 million of annual cost savings offsets the effects of low utilization and fixed operating costs.