Dawson Geophysical Company — 2022 Second-Quarter Form 10-Q
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 and six months ended June 30, 2022; financial statements are unaudited.
- During the second quarter, the Company operated no U.S. crew and had limited Canadian activity, generating limited service revenue and some equipment-rental revenue.
- The Company deployed a small U.S. crew in early August and expected activity to increase in Canada beginning in the fourth quarter.
Financial performance and liquidity
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 | Comparable 2021 period |
|---|---|---|---|
| Operating revenue | $0.9 million | $19.3 million | $0.2 million; $11.9 million |
| Loss from operations | $(8.0) million | $(10.4) million | $(9.3) million; $(14.7) million |
| Net loss | $(7.7) million | $(10.1) million | $(9.0) million; $(14.2) million |
| Loss per share | $(0.32) | $(0.42) | $(0.38); $(0.61) |
| EBITDA | $(5.2) million | $(5.0) million | $(5.7) million; $(7.5) million |
- Second-quarter operating revenue increased 377.2% year over year, while six-month revenue increased 61.5%, primarily from slightly higher crew utilization.
- Operating margins remained deeply negative: approximately negative 864% in the quarter and negative 54% for the six months. Net margins were approximately negative 834% and negative 52%, respectively.
- Six-month operating cash flow was $0.1 million, compared with $(1.3) million in 2021. Investing cash flow was $0.05 million, and financing cash flow was $(0.7) million.
- Cash, cash equivalents and restricted cash totaled $29.7 million at June 30, 2022, including $5.0 million of restricted cash. Short-term investments totaled $0.3 million.
- Total assets were $62.0 million and stockholders’ equity was $52.1 million, compared with $74.0 million and $62.5 million, respectively, at December 31, 2021.
- Accounts receivable declined to $1.8 million from $8.9 million at year-end, supporting operating cash flow.
- The Company had no borrowings under its $15.0 million Dominion revolving credit facility. It had $0.5 million of short-term insurance-premium notes and $0.03 million of finance leases.
- Operating lease liabilities totaled $4.9 million. The Company also had a $0.3 million letter of credit secured by a certificate of deposit.
Material changes versus the prior comparable period
- Revenue improved materially because of increased crew utilization, although second-quarter activity remained minimal.
- Second-quarter operating costs decreased 6.3% despite higher operating expenses, primarily because depreciation and amortization declined following multiple years of reduced capital expenditures.
- Six-month general and administrative expense increased 43.1% to $7.9 million, principally due to $2.9 million of transaction costs related to the proposed merger with a Wilks Brothers subsidiary. Second-quarter general and administrative expense decreased 12.1% because of workforce reductions, salary reductions and cost-control efforts.
- Depreciation and amortization declined to $2.5 million in the quarter and $5.1 million for the six months, from $3.4 million and $6.8 million, respectively.
- Cash and restricted cash decreased $0.7 million during the first six months, compared with a $0.6 million decrease in 2021.
- Capital expenditures were only $0.1 million during the first six months against an initial 2022 maintenance-oriented capital budget of $5.0 million.
Outlook, risks and unusual items
- Management expected the U.S. crew to remain active through the first quarter of 2023 and anticipated potentially deploying a second U.S. crew in late fourth quarter 2022 or early first quarter 2023.
- Management expected Canadian activity to increase in the upcoming season and potentially build to three crews through the end of the first quarter of 2023. Visibility beyond the first quarter of 2023 was described as limited.
- Management cited higher 2022 E&P capital spending and expected modest growth into 2023, but noted continued customer capital discipline, buybacks and dividends.
- The Dominion credit facility matured September 30, 2022. The Company had full availability at June 30, but received a limited waiver for noncompliance with the $55.0 million tangible-net-worth covenant for the period ended June 30, 2022.
- Key risks include dependence on oil and gas spending, commodity-price volatility, customer concentration and credit risk, contract delays or cancellations, crew utilization, weather and permitting issues, high fixed costs, capital requirements, COVID-19 effects, foreign-exchange exposure and geopolitical disruptions related to Ukraine.
- The Company faces a groundwater-contamination lawsuit brought by Weatherford. Management disputes the allegations and believes the matter will not materially affect financial condition, results or liquidity, although the outcome cannot be predicted.
- The Company’s effective tax rate was approximately negative 0.2% because net operating loss carryforwards were offset by valuation allowances. A January 2022 Internal Revenue Code Section 382 event may limit future use of some net operating losses.
- Wilks Brothers beneficially owned approximately 75% of the Company’s common stock. The Company reported $0.3 million of related-party receivables from a Wilks subsidiary.
Investor verification items
- Verify the status, renewal or replacement of the Dominion credit facility after its September 30, 2022 maturity and the implications of the tangible-net-worth covenant waiver.
- Assess whether planned U.S. and Canadian crew deployments occurred and whether utilization, pricing and margins improved beyond the first quarter of 2023.
- Reconcile the proposed merger transaction costs and confirm whether the transaction was completed, terminated or remained pending.
- Monitor cash burn, operating cash flow, capital expenditures and available liquidity given continued net losses and lease obligations.
- Review customer concentration, accounts-receivable collections and any changes to the $250,000 allowance for doubtful accounts.
- Track the Weatherford litigation, related contractual disputes and potential exposure not reflected as a recorded liability.