Dawson Geophysical Company — Q1 2019 Form 10-Q Summary
Business context and reporting period
Dawson Geophysical provides onshore seismic data acquisition and processing services in the United States and Canada for oil and gas companies, independent operators, and multi-client data-library providers. The filing covers the three months ended March 31, 2019, and was filed May 7, 2019.
Demand is highly dependent on oil and natural gas prices and customer exploration, production, and development spending. The company operated a peak of five U.S. crews and four Canadian crews during the quarter, compared with nine U.S. and four Canadian crews in the prior-year quarter.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $51.2 million | $49.9 million |
| Loss from operations | $(0.3) million | $(1.6) million |
| Net loss | $(0.1) million | $(1.7) million |
| Loss per diluted share | $(0.01) | $(0.07) |
| EBITDA | $6.0 million | $7.0 million |
| Net cash from operating activities | $(1.6) million | $0.8 million |
| Capital expenditures | $1.9 million cash outflow | $4.1 million cash outflow |
Revenue increased 2.6%, primarily from higher reimbursable revenues. Operating expenses increased 5.4% because of higher reimbursable project charges, while general and administrative expense rose 11.3% to $4.5 million. Depreciation and amortization declined 30.0% to $6.1 million because of reduced capital expenditures in prior years. Operating costs totaled $51.5 million, slightly below the prior-year amount, and the operating margin improved to approximately negative 0.6% from negative 3.3%.
Cash and cash equivalents were $23.4 million at March 31, 2019, compared with $28.7 million at year-end 2018. Cash and short-term investments totaled $34.0 million. Accounts receivable increased to $35.7 million from $25.3 million at year-end, contributing to negative operating cash flow. The current ratio was approximately 3.0:1, above the credit agreement minimum of 1.50:1.
Total notes payable and finance leases were approximately $11.3 million at March 31, 2019, excluding operating lease liabilities. The company had $5.4 million outstanding under an equipment note, $1.4 million of insurance-premium financing, and $4.5 million of finance lease liabilities. The $20.0 million revolving credit facility had not been drawn, and the company was in compliance with all credit covenants.
Material changes versus the prior comparable period
- Revenue increased modestly despite materially fewer U.S. crews, reflecting higher channel utilization and large, complex projects.
- Net loss narrowed by $1.6 million, primarily because depreciation and amortization declined by $2.6 million and other income improved.
- EBITDA declined by $1.0 million, indicating that the improvement in net loss was driven substantially by lower noncash depreciation rather than stronger underlying EBITDA.
- Operating cash flow deteriorated by $2.3 million, primarily because of increases in accounts receivable and reductions in deferred revenue.
- Capital expenditures declined from $4.1 million to $1.9 million. Management stated that $1.0 million of the 2019 capital budget had been utilized through March 31.
- The company adopted the new lease accounting standard, Topic 842, on January 1, 2019. This added $7.5 million of operating lease right-of-use assets and $8.1 million of operating lease liabilities at quarter-end, with no material effect on results of operations or cash flows.
- Revenue from the United States was $37.6 million, down slightly from $37.8 million, while Canadian revenue increased to $13.5 million from $12.1 million.
Guidance, outlook, risks, contingencies, and unusual items
Management anticipated operating two to four U.S. crews in the second quarter and up to five crews in the third quarter. The Canadian winter season ended during the quarter, and management expected limited Canadian seismic activity until the next winter season. The company reduced its workforce approximately 23% from year-end 2018 and nearly 47% from year-end 2017 in response to lower expected crew counts, higher channel-count requirements, and operational improvements.
Management highlighted unusually large projects, including a West Texas project using up to 48,000 channels and a Canadian project requiring 96,000 channels. The company expects continued demand for larger and more complex projects, but stated that market conditions remained difficult and that U.S. utilization could decline in the second quarter.
The initial 2019 capital budget was $10.0 million, focused on maintenance capital, recording-channel replacement, and incremental capacity. Management expected to fund capital expenditures and operating needs through operating cash flow, cash reserves, commercial borrowings, and available credit capacity, but emphasized dependence on future operating performance and customer payment behavior.
Key risks include dependence on energy-industry spending, commodity-price volatility, contract delays or cancellations, customer concentration and credit risk, crew utilization, weather, land-access restrictions, high fixed costs, capital requirements, competition, and operational disruptions. The company had no material changes to the risk factors disclosed in its 2018 Form 10-K.
On April 1, 2019, Weatherford International and Weatherford U.S. sued Dawson and eighteen other parties concerning alleged groundwater contamination in Midland County, Texas. Dawson disputes the allegations and intends to defend the matter. Management believes the proceeding will not have a material adverse effect, although the outcome cannot be predicted with certainty. Management also disclosed that contractual disputes with clients may affect revenue and results in some periods.
The company had no off-balance-sheet arrangements and disclosed no subsequent events. Income tax benefits were limited by valuation allowances against substantially all deferred tax assets; the effective tax rate was 0.0% for the quarter.
Important facts for investors to verify
- Whether declining crew counts and expected lower second-quarter utilization will pressure revenue and margins.
- Whether the increase in accounts receivable and negative operating cash flow reverses through collections and project billings.
- The sustainability of the near-break-even result, given that EBITDA declined despite the improvement in net loss.
- Availability under the revolving credit facility, which expires on June 30, 2019 and is constrained by eligible receivables and equipment values.
- Compliance with the credit agreement’s leverage, liquidity, and tangible-net-worth covenants.
- Customer concentration, collection risk, and the adequacy of the $250,000 allowance for doubtful accounts.
- The potential financial and operational effect of the Weatherford groundwater-contamination litigation.
- Whether large high-channel-count projects become recurring enough to offset lower conventional crew activity.