Dawson Geophysical Company: Q1 2023 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 unaudited three months ended March 31, 2023, compared with March 31, 2022 results presented on an adjusted basis for the common-control combination with Breckenridge Geophysical.
- Revenue was generated in the United States and Canada; the company operates as one reportable segment.
- Management reported two lower-48 crews operating during the quarter, with up to four smaller Canadian crews operating during the winter season.
- On March 24, 2023, Dawson acquired substantially all of Breckenridge’s seismic data acquisition assets, excluding its multi-client data library, from controlling shareholder Wilks Brothers.
Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $29.4 million | $21.9 million | Up 34.1% |
| Operating expenses | $23.8 million | $14.4 million | Up 65.1% |
| General and administrative expense | $3.5 million | $5.9 million | Down 40.4% |
| Loss from operations | $(0.6) million | $(1.4) million | Improved |
| Net loss | $(0.4) million | $(1.4) million | Improved |
| Loss per diluted share | $(0.02) | $(0.06) | Improved |
| EBITDA | $2.2 million | $1.7 million | Up 28.0% |
| Net cash used in operating activities | $(1.8) million | $(9.1) million | Improved |
- Operating margin improved to approximately negative 1.9% from negative 6.6%; net margin improved to approximately negative 1.4% from negative 6.3%.
- United States revenue increased to $18.8 million from $10.8 million, while Canadian revenue decreased slightly to $10.6 million from $11.2 million.
- Cash, restricted cash and short-term investments totaled $16.2 million at March 31, 2023, including $10.9 million of unrestricted cash and $5.0 million of restricted cash.
- Total current assets were $42.9 million versus $43.8 million at December 31, 2022. Accounts receivable increased to $14.4 million from $8.0 million, while the employee retention credit receivable was collected during the quarter.
- Total liabilities were $32.5 million, including $10.2 million of notes payable and finance leases and a $9.9 million convertible note payable to Wilks.
- Stockholders’ equity declined to $33.1 million from $48.8 million, primarily reflecting the transaction accounting and related equity adjustments.
- Capital expenditures were $1.6 million in the cash flow statement; management separately reported $1.1 million of 2023 capital spending through March 31 against an initial full-year budget of $5.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of higher crew utilization and improved market conditions.
- Operating costs increased faster than revenue because of increased crew utilization, limiting the improvement in operating profitability.
- G&A expense fell primarily because Q1 2022 included $2.9 million of costs related to a proposed merger, while Q1 2023 included $0.7 million of transaction costs related to the Breckenridge purchase.
- Depreciation and amortization declined to $2.7 million from $3.1 million after several years of reduced capital expenditures.
- Operating cash use improved substantially, aided by collection of a $3.0 million employee retention credit receivable and working-capital changes, although accounts receivable increased by $7.5 million.
- Investing cash use increased to $2.6 million from $0.02 million because of higher capital expenditures and the purchase of short-term investments.
- Financing cash use was $3.2 million, including $3.1 million of Breckenridge cash distributions before the acquisition and scheduled debt and finance-lease payments.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects to operate two lower-48 crews through the third quarter, but anticipates downtime for a Utica Basin crew during the middle of the second quarter because of project-readiness delays.
- Management expects possible low utilization for one crew near the end of the third quarter and into the fourth quarter, while lower-48 activity is expected to be high in the fourth quarter and into the first quarter of 2024.
- Seismic demand remains below pre-pandemic levels and bid activity is intermittent. Demand depends heavily on oil and natural gas prices and exploration and production spending.
- The Dominion revolving credit facility was reduced from $10.0 million to a maximum of $5.0 million, subject to borrowing-base limitations. No amounts were drawn at March 31, 2023, and approximately $5.0 million was available.
- The facility matures September 30, 2023 and includes financial covenants, including minimum tangible net worth of $38.0 million and minimum unencumbered liquid assets of $5.0 million. The bank granted limited waivers and consent related to the Breckenridge transaction.
- The $9.9 million convertible note payable to Wilks is payable on or after June 30, 2024 upon written demand. Subject to shareholder approval, it may convert into 5,811,765 shares at $1.70 per share, creating potential dilution.
- The Breckenridge transaction was accounted for as a common-control combination. Dawson issued 1,188,235 shares and recorded a $9.9 million convertible note; the $10.6 million excess of purchase price over historical net assets was charged to additional paid-in capital.
- Key risks include customer concentration, credit exposure to oil and gas companies, commodity-price volatility, contract delays or cancellations, crew downtime, permitting and land-access issues, high fixed costs, capital requirements, foreign-exchange exposure and potential Nasdaq delisting.
- The company is defending a Weatherford groundwater-contamination lawsuit and has periodic contractual billing disputes with clients. Management does not expect these matters to have a material adverse effect, but outcomes cannot be predicted with certainty.
- Management stated that current cash, short-term investments, operating cash flow and available credit are expected to fund current operations and 2023 capital requirements; actual capacity depends on operating performance and customer collections.
- Disclosure controls and procedures were assessed as effective as of March 31, 2023, with no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Whether the two-crew operating plan and expected fourth-quarter activity materialize, particularly given the Utica Basin project delay.
- Whether revenue growth converts into positive operating and free cash flow after crew costs, capital expenditures and working-capital investment.
- The company’s compliance with the Dominion facility’s $38.0 million tangible-net-worth and $5.0 million liquid-asset covenants before the September 30, 2023 maturity.
- Shareholder approval, conversion terms and potential dilution associated with the Wilks convertible note.
- Collection of accounts receivable and the adequacy of the $250,000 allowance for doubtful accounts amid customer concentration and energy-sector credit risk.
- The financial contribution, integration effects and ongoing economics of the Breckenridge assets, recognizing that prior-period results were retrospectively adjusted for common control.