Dawson Geophysical Company — Q1 2017 Form 10-Q Summary
Business context and reporting period
Dawson provides North American onshore seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. The filing covers the three months ended March 31, 2017, compared with the first quarter of 2016. Operations span the continental United States and Canada, and demand is highly dependent on oil and natural gas prices and customer exploration and development spending.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $41.9 million | $47.1 million | Down 10.9% |
| Loss from operations | $(12.1) million | $(10.6) million | Loss increased |
| Net loss | $(9.2) million | $(8.6) million | Loss increased |
| Loss per diluted share | $(0.42) | $(0.40) | Worsened |
| EBITDA | $(1.9) million | $2.5 million | Down $4.4 million |
| Net cash from operating activities | $(6.7) million | $8.8 million | Down $15.5 million |
- Operating expenses were $39.5 million, down from $40.1 million; general and administrative expense declined 21.7% to $4.4 million.
- Depreciation and amortization declined to $10.2 million from $12.0 million. The company expects depreciation to remain broadly flat during 2017.
- Approximate operating margin was negative 29.0%, compared with negative 22.6% in Q1 2016. Approximate net margin was negative 21.8%, compared with negative 18.3%.
- Cash and cash equivalents were $27.8 million at March 31, 2017, compared with $14.6 million at December 31, 2016. Short-term investments were $16.0 million, down from $40.3 million.
- Total current assets were $73.6 million versus current liabilities of $17.7 million. The company reported compliance with its credit agreement covenants.
- Outstanding principal included $1.016 million of commercial-bank notes, $221,000 of insurance financing, and $267,000 of capital lease obligations. Notes payable and capital lease obligations due during the following 12 months totaled $1.237 million and $267,000, respectively.
- The company had access to a revolving credit facility of up to $20.0 million, subject to borrowing-base and covenant limitations, but had not used the line of credit.
- Capital expenditures were $3.4 million in reported investing cash flows; management stated that $4.0 million had been spent to date against an approved 2017 capital-expenditure budget of $10.0 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of low U.S. crew utilization early in the quarter, weaker seismic demand, uncertain commodity prices, and reduced customer spending.
- Total operating costs declined 6.3%, but the reduction was insufficient to offset the revenue decline, resulting in a larger operating loss.
- General and administrative expense improved through cost-reduction measures and lower employee counts; employee count was below 700.
- Operating cash flow shifted from a $8.8 million inflow to a $6.7 million outflow, largely reflecting lower revenue and unfavorable working-capital changes, including an $8.0 million increase in accounts receivable.
- Investing cash flow improved to a $21.1 million inflow, primarily because $24.25 million of short-term investments matured without being reinvested.
- The company sold its dynamite energy-source drilling operation in March 2017, recognizing an approximately $1.45 million gain and recording related notes receivable of $1.6 million at March 31, 2017.
- The income tax benefit increased to $2.8 million from $1.0 million, primarily due to reversal of accrued uncertain tax-position liabilities associated with accepted amended returns. Valuation allowances were also recorded against certain deferred tax assets.
Guidance, outlook, risks, contingencies, and unusual items
- U.S. activity was weaker than anticipated, while Canadian activity was stronger during the quarter but was slowing as winter ended. Management expected to operate four to six U.S. crews during Q2 2017, with variable utilization.
- Management expected demand to remain at reduced levels through much of 2017. Improved oil prices had increased activity primarily in the Permian and Delaware Basins, which management believed could support two to four crews in Q2. Visibility beyond Q2 was described as unclear.
- Approximately three-quarters of Q1 revenue came from turnkey contracts. These contracts can benefit from higher productivity but expose the company to weather, downtime, permitting, access, and productivity risks.
- Principal risks include dependence on oil and gas industry spending, commodity-price volatility, contract delays or cancellations, customer concentration and credit risk, reduced utilization, high fixed costs, capital requirements, weather and land-access disruptions, competition, and operational disruptions.
- Management stated that available cash, short-term investments, credit availability, and anticipated operating cash flow should meet current needs and support the 2017 capital program, but future liquidity depends substantially on operating performance and customer collections.
- Future impairment charges could arise if oil and natural gas prices remain depressed or decline materially. The company also cautioned that future losses may generate reduced or no tax benefits because of valuation allowances.
- The company reported no material change in previously disclosed risk factors, no material adverse legal proceedings, no subsequent events, and effective disclosure controls as of March 31, 2017.
- The company was evaluating the then-new lease and revenue-recognition standards. It had not identified material revenue-recognition differences but had not completed its evaluation.
Important facts for investors to verify
- Whether U.S. crew utilization, pricing, and customer demand improved after Q1 2017, particularly in the Permian and Delaware Basins.
- Whether operating cash flow recovered and whether the company continued drawing down short-term investments to fund operations and capital expenditures.
- The status and renewal or replacement of the $20.0 million credit facility, whose revolving availability was scheduled to run through June 30, 2017.
- Customer concentration, accounts-receivable collectability, and adequacy of the $250,000 allowance for doubtful accounts.
- The sustainability of cost reductions and the effect of the dynamite-operation sale on future revenue, margins, and equipment capacity.
- Potential deferred-tax-asset valuation adjustments and the extent to which future losses may not produce tax benefits.
- The eventual balance-sheet effect of adopting the new lease standard and any impact from adopting the new revenue-recognition standard.