Dawson Geophysical Company — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2016. Dawson provides 2-D, 3-D and multi-component seismic data acquisition and processing services to oil and gas companies and multi-client data library providers in the United States and Canada. Demand is highly dependent on oil and natural gas prices and exploration and production spending.
The February 2015 merger was accounted for as a reverse acquisition. Quarterly comparisons for the three months ended September 30 are generally comparable, but the nine-month 2015 period includes Legacy Dawson results before February 11, 2015 and combined-company results thereafter; therefore, nine-month comparisons are not directly comparable.
Financial performance and key metrics
| Metric | Three months ended September 30, 2016 | Three months ended September 30, 2015 | Nine months ended September 30, 2016 | Nine months ended September 30, 2015 |
|---|---|---|---|---|
| Operating revenue | $28.1 million | $62.5 million | $103.3 million | $179.6 million |
| Loss from operations | $(14.3) million | $(4.7) million | $(38.2) million | $(32.5) million |
| Net loss | $(12.4) million | $(2.9) million | $(32.6) million | $(21.3) million |
| Loss per diluted share | $(0.57) | $(0.13) | $(1.51) | $(1.05) |
| EBITDA | $(3.4) million | $7.8 million | $(2.4) million | $3.5 million |
Third-quarter revenue declined 55.0% year over year, while nine-month revenue declined 42.5%. Third-quarter operating costs decreased 36.9% to $42.4 million, and nine-month operating costs decreased 33.3% to $141.4 million. The third-quarter operating margin was approximately negative 50.7%, compared with negative 7.5% in the prior-year quarter; net margin was approximately negative 44.2%, compared with negative 4.6%.
General and administrative expense decreased 26.9% in the third quarter and 27.0% for the nine-month period, partly because 2015 included approximately $2.9 million of merger-related costs. Depreciation and amortization was $10.6 million in the quarter and $34.0 million for nine months.
At September 30, 2016, cash and cash equivalents were $18.3 million, short-term investments were $44.3 million, and total current assets were $79.3 million. Total assets were $197.6 million and stockholders’ equity was $178.2 million.
Net cash provided by operating activities for the nine months was $14.4 million, compared with $17.9 million in the prior-year period. Capital expenditures were $6.2 million, against an initial 2016 budget of $10.0 million. Investing activities used $26.6 million, primarily because $23.3 million of short-term investments were reinvested in excess of maturities. Financing activities used $6.7 million, including $6.1 million of debt principal payments and $0.6 million of capital lease payments.
Debt and liquidity
Commercial bank notes totaled $3.4 million at September 30, 2016, down from $8.7 million at December 31, 2015. Capital lease obligations were $0.6 million. The Company repaid an insurance finance note during August 2016.
The Sovereign Bank credit agreement provides borrowing capacity of up to $20.0 million, subject to borrowing-base limitations. The revolving line had not been used during 2016 and expires June 30, 2017. A $1.8 million letter of credit supports insurance obligations and is collateralized by core equipment. The Company was in compliance with all credit agreement covenants at September 30, 2016.
Management stated that cash, short-term investments, available credit and operating cash flow were expected to fund current operations and 2016 capital expenditures. However, future liquidity depends materially on operating performance, customer payments, demand and access to borrowing capacity.
Material changes, outlook and risks
- Management attributed the revenue decline primarily to reduced crew utilization caused by low and uncertain commodity prices, lower client spending, client-directed project delays, inclement weather, a weaker-than-expected Canadian season, crew relocations and reduced utilization in the lower 48 states.
- During the third quarter, the Company operated four to five U.S. crews, with two to three crews adversely affected by client-directed delays. Management expected to operate five to seven crews through the first quarter of 2017, but stated that visibility beyond that period was unclear.
- Management expected demand to remain reduced through the remainder of 2016. Approximately three-quarters of revenue came from turnkey contracts during the first nine months of 2016; these contracts can benefit from productivity improvements but expose the Company to weather and downtime risk.
- The Company continues to monitor its equipment for impairment. No impairment was anticipated, but prolonged or materially lower oil and natural gas prices could result in future impairment charges and additional pressure on results.
- Income tax benefits decreased substantially because the Company recorded valuation allowances against portions of its federal and state net operating loss deferred tax assets. Future losses may generate reduced or no tax benefits.
- Principal risks include dependence on energy-industry spending, commodity-price volatility, contract delays or cancellations, customer concentration and credit risk, high fixed operating costs, capital requirements, weather and permitting disruptions, competition, equipment utilization and limited borrowing capacity if receivables or collateral values decline.
- The Company reported no material changes to the risk factors in its 2015 Form 10-K, no material off-balance-sheet arrangements and no subsequent events.
Important facts for investors to verify
- Whether seismic demand, commodity prices and customer capital spending support the projected five-to-seven-crew operating level through the first quarter of 2017.
- The effect of client-directed delays, weather, permitting and Canadian operations on crew utilization, pricing and cash generation.
- Whether cash, short-term investments and available credit remain sufficient as accounts receivable and revenue levels fluctuate.
- Compliance with the Sovereign Bank facility, including the $20.0 million borrowing limit, borrowing-base restrictions, covenant requirements and June 30, 2017 maturity of the revolving line.
- The potential for impairment charges on seismic equipment and further valuation allowances that could reduce future tax benefits.
- The comparability of nine-month 2016 results with nine-month 2015 results because of the reverse-acquisition accounting and different periods of combined-company operations.