Dawson Geophysical Company — Q1 2020 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. The filing covers the three months ended March 31, 2020; financial statements are unaudited and amounts are in thousands except per-share and share data.
During the quarter, the Company operated three large channel-count crews in the United States and up to three crews in Canada. Demand is highly dependent on oil and natural gas prices and customer exploration and production spending.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenues | $38,979 | $51,164 | (23.8%) |
| Operating expenses | $29,016 | $40,856 | (29.0%) |
| General and administrative expense | $3,674 | $4,544 | (19.1%) |
| Depreciation and amortization | $4,904 | $6,081 | (19.4%) |
| Income (loss) from operations | $1,385 | $(317) | Improved |
| Operating margin | 3.6% | (0.6%) | Improved |
| Net income (loss) | $993 | $(137) | Improved |
| Basic and diluted EPS | $0.04 | $(0.01) | Improved |
| EBITDA | $5,831 | $5,960 | (2.2%) |
| EBITDA margin | 15.0% | 11.6% | Improved |
| Net cash used in operating activities | $(173) | $(1,567) | Improved by $1,394 |
| Capital expenditures | $1,777 cash basis; $2,344 utilized per MD&A | $1,944 cash basis | Lower cash spending |
Revenue declined in both the United States, to $27,188 from $37,636, and Canada, to $11,791 from $13,528. Management attributed the revenue decline primarily to lower crew and equipment utilization. Lower operating costs, reduced G&A, cost reductions and operating efficiencies more than offset the revenue decline.
Cash, restricted cash and short-term investments totaled $30,202 at March 31, 2020, including cash and cash equivalents of $22,852, restricted cash of $5,000 and short-term investments of $2,350. Cash and restricted cash decreased by $3,419 during the quarter to $27,852. Accounts receivable increased to $32,518 from $24,356.
Total debt and finance lease liabilities were approximately $3,126 at March 31, 2020, excluding operating lease liabilities. The Company had $1,472 of insurance-premium notes payable and $1,654 of finance lease liabilities. It had no borrowings under its $15,000 revolving credit facility, which matures September 30, 2020. Operating lease liabilities totaled $6,781.
Current assets were $72,526 and current liabilities were $21,782, implying substantial reported current-asset coverage. The Dominion facility requires, among other conditions, maintenance of tangible net worth of at least $75,000 and specified liquidity and leverage ratios.
Material changes versus the prior comparable period
- Revenue fell 23.8%, principally because of lower crew and equipment utilization, while operating costs fell 27.0%.
- The Company moved from an operating loss of $317 to operating income of $1,385 and from a net loss of $137 to net income of $993.
- Operating cash use improved to $173 from $1,567, but remained negative, primarily reflecting increased accounts receivable and prepaid assets.
- Depreciation declined because of multiple years of reduced capital expenditures; management expected depreciation to remain below 2019 levels.
- Deferred revenue increased to $5,168 from $3,481 at December 31, 2019, primarily from new projects with significant third-party reimbursables for which data had not yet been recorded.
- Accumulated other comprehensive loss increased to $2,771 from $1,572, primarily from a $1,199 foreign-exchange translation loss.
- The Company adopted the current expected credit loss standard on January 1, 2020; the impact was immaterial. Adoption of the revised fair-value disclosure standard also had no material impact.
Guidance, outlook, management commentary, risks and unusual items
Management stated that the COVID-19 pandemic, oil-demand deterioration, the oil supply surplus and sharply lower oil prices had caused customers to cut capital budgets by approximately 30% to 50%. The Company experienced fewer requests for proposals and postponement of several large projects. Visibility beyond early Q3 2020 was limited.
- Management anticipated operating two large channel-count crews through Q2 and into Q3 2020.
- A third, smaller channel crew was expected to be redeployed to a previously completed project after limited data drops caused by an undetected operational issue, negatively affecting Q2.
- Non-field support staff were reduced in April. After approximately $1,400 of Q2 severance costs, the reductions were expected to generate annual savings of approximately $4,300.
- Senior executive base salaries were reduced approximately 20% effective March 30, 2020, and other employees took temporary salary reductions expected to produce approximately $900 of annual savings.
- The initial 2020 capital budget was $5,000, limited primarily to maintenance and incremental channel replacement or expansion. Management reported $2,344 utilized through March 31.
- The Company received a $6,374 PPP loan on April 15, 2020, but determined to repay it because of uncertainty regarding qualification requirements and intended to repay it by May 14, 2020.
- Principal risks include dependence on oil and gas spending, commodity-price volatility, COVID-19-related operating disruptions, customer credit risk, contract delays or cancellations, reduced utilization, high fixed costs, equipment or weather disruptions, and limited visibility into future demand.
- Weatherford litigation alleges groundwater contamination involving the Company and other defendants. Management disputed the allegations and believed the matter would not have a material adverse effect, although the outcome could not be predicted with certainty.
- The Company reported no off-balance-sheet arrangements and stated that its disclosure controls were effective as of March 31, 2020.
Important facts for investors to verify
- Whether oil and gas capital-budget reductions and COVID-19 conditions caused further declines in crew utilization, revenue and operating cash flow after March 31.
- The timing and financial effect of repaying the $6,374 PPP loan, including any forgiveness or related accounting treatment.
- Compliance with Dominion Bank’s financial covenants and the September 30, 2020 credit-facility maturity.
- Collection of the $32,518 accounts receivable balance and adequacy of the $250 allowance for doubtful accounts given customer concentration and industry stress.
- Whether the planned staffing and salary reductions produce the stated annual savings and whether severance or other restructuring costs increase.
- The financial effect of the previously completed project affected by limited data drops and the redeployment of the third crew.
- Developments in the Weatherford groundwater litigation and any contractual disputes with customers.
- Actual 2020 capital expenditures, liquidity needs and the Company’s ability to fund operations if operating cash flow remains negative.