Dawson Geophysical Company: Q3 2018 Form 10-Q Summary
Business context and reporting period
Dawson Geophysical provides North American onshore 2-D, 3-D and multi-component seismic data acquisition services to major and independent oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the adjusted prior-year periods. The company operated up to five U.S. crews and one Canadian crew during the quarter.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $40.4 million | $45.1 million | $126.5 million | $119.1 million |
| Loss from operations | $(5.2) million | $(4.3) million | $(13.2) million | $(31.9) million |
| Net loss | $(5.2) million | $(2.9) million | $(12.6) million | $(27.0) million |
| Loss per share | $(0.23) | $(0.13) | $(0.55) | $(1.19) |
| EBITDA, non-GAAP | $1.7 million | $5.3 million | $10.2 million | $(2.1) million |
| Operating cash flow | Not separately disclosed | Not separately disclosed | $12.8 million | $(3.3) million |
- Q3 revenue declined 10.3% year over year because of lower crew utilization; nine-month revenue increased 6.2% because of higher utilization earlier in the year.
- Q3 operating expenses declined 5.0% to $34.4 million, while general and administrative expense increased 20.1% to $4.1 million, primarily due to legal and professional expenses.
- Approximate operating margin was negative 12.9% in Q3 2018 versus negative 9.5% in Q3 2017. For the first nine months, the operating margin improved to approximately negative 10.4% from negative 26.8%.
- Approximate net margin was negative 12.8% in Q3 2018 versus negative 6.5% in Q3 2017; the nine-month net margin improved to approximately negative 10.0% from negative 22.7%.
- Cash and cash equivalents were $28.2 million at September 30, 2018, compared with $22.0 million at December 31, 2017. Short-term investments were $17.6 million.
- Total current assets were $82.4 million and current liabilities were $23.8 million, implying a current ratio of approximately 3.5.
- Debt and capital lease obligations included $6.6 million of notes payable principal and $5.8 million of capital lease obligations. Balance-sheet notes payable and capital lease liabilities totaled $12.5 million, including current and long-term portions.
- The company had a $20.0 million revolving credit facility, subject to borrowing-base limits, and had not drawn on the line. It also had a $6.5 million equipment note issued in September 2018. The company reported compliance with all credit covenants.
- Capital expenditures were $10.8 million through nine months on a cash-flow statement basis. The 2018 capital budget was increased from $10.0 million to $17.0 million to support an equipment acquisition opportunity; $13.8 million had been utilized as of the filing.
Material changes versus the prior comparable period
- Quarterly revenue and EBITDA weakened because of lower utilization, while nine-month revenue and EBITDA improved substantially from the depressed 2017 comparable period.
- Depreciation and amortization declined to $7.1 million in Q3 and $23.2 million for nine months, versus $9.7 million and $29.8 million, respectively, reflecting several years of reduced capital spending.
- Operating cash flow improved by $16.1 million year over year to $12.8 million, primarily because the net loss narrowed and working-capital movements were more favorable.
- Investing cash flow shifted to a $10.7 million use from a $21.1 million source, largely because fewer short-term investments matured without reinvestment and capital expenditures increased.
- Financing cash flow was a $4.2 million source, mainly reflecting $6.5 million of equipment-note proceeds, partially offset by debt and capital-lease payments.
- The company adopted ASC Topic 606 using the full retrospective method. Prior periods were adjusted, and the adoption materially affected balance-sheet accounts including accounts receivable, deferred costs, deferred revenue and retained earnings.
- A 5% stock dividend paid in May 2018 was reflected retroactively in share and per-share information.
Guidance, outlook, risks and unusual items
- Management stated that expected demand growth in the second half of 2018 had not materialized to the expected degree. It described project visibility as constrained and remained cautiously optimistic because of a modest improvement in bid activity.
- Management expected to operate three to five U.S. crews and one to two Canadian crews in Q4 2018, plus one U.S. microseismic project. It anticipated three to five U.S. crews and up to four Canadian crews in Q1 2019. These are operating expectations, not formal financial guidance.
- Canadian opportunities were reduced by the wide differential between Canadian oil prices and WTI. Management expects additional takeaway capacity could ease Permian and Delaware pricing differentials in 2019 and 2020.
- Demand remains highly dependent on oil and natural gas prices, exploration and production spending, project timing, pricing, crew utilization, weather, permitting, land access and customer credit quality. Most contracts are turnkey, increasing exposure to productivity and downtime risk.
- Management believes cash, short-term investments, operating cash flow and available credit will fund current operations and 2018 capital expenditures, but future liquidity depends on operating performance and timely customer payments.
- Nearly all federal, state and foreign deferred tax assets were subject to valuation allowances; future losses may generate reduced or no tax benefits. The nine-month effective tax rate was 3.0%, compared with 14.7% in the prior-year period.
- Pending legal proceedings and ordinary-course customer disputes were not expected by management to have a material adverse effect, although outcomes cannot be predicted.
- The company planned to adopt the new lease standard using a cumulative-effect transition method and expected to recognize right-of-use assets and lease liabilities, primarily for office and shop leases. The financial impact had not been determined.
- Disclosure controls were evaluated as effective, and no material changes to internal control over financial reporting were reported.
Investor verification items
- Verify whether the improving nine-month results can be sustained despite the Q3 utilization decline and limited project visibility.
- Reconcile reported EBITDA to GAAP net loss and operating cash flow; EBITDA is non-GAAP and should not be treated as a substitute for cash flow.
- Assess the effect of the $17.0 million capital budget, equipment acquisition and related debt or lease financing on utilization, free cash flow and leverage.
- Review borrowing-base availability and covenant headroom under the Veritex facility, particularly if accounts receivable or equipment values decline.
- Evaluate customer concentration, collection risk and the adequacy of the $250,000 allowance for doubtful accounts.
- Track the effects of ASC 606 retrospective adjustments and the forthcoming lease-standard adoption on comparability, assets, liabilities and retained earnings.
- Monitor oil and gas prices, Canadian and Permian/Delaware market conditions, customer capital budgets, weather and permitting because these factors can materially affect crew deployment and revenue.