Dawson Geophysical Company — Q2 2021 Form 10-Q Summary
Business context and reporting period
Dawson Geophysical provides onshore seismic data acquisition and processing services in the United States and Canada for oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $0.2 million | $29.5 million | $11.9 million | $68.5 million |
| Operating loss | $(9.3) million | $1.1 million | $(14.7) million | $2.5 million income |
| Net loss/income | $(9.0) million | $1.5 million | $(14.2) million | $2.5 million income |
| EBITDA | $(5.7) million | $5.8 million | $(7.5) million | $11.6 million |
| Cash flow from operations | Not separately provided in the filing text | Not separately provided in the filing text | $(1.3) million | $9.0 million |
Revenue declined 99.3% in the second quarter and 82.6% for the first six months. The reported operating margin was approximately negative 4,800% in Q2 and negative 123% for the first six months, reflecting extremely low revenue relative to the company’s fixed cost base. General and administrative expense fell 35.6% in Q2 and 30.0% year to date, while depreciation and amortization declined 22.4% and 26.4%, respectively.
- Cash and cash equivalents were $40.3 million at June 30, 2021, compared with $41.0 million at December 31, 2020.
- Restricted cash was $5.0 million, and short-term investments were $0.6 million. Cash, restricted cash and short-term investments totaled $45.9 million.
- Total current assets were $49.0 million versus current liabilities of $4.6 million.
- Total assets were $86.4 million and stockholders’ equity was $77.3 million, down from $91.0 million at year-end, primarily due to the year-to-date net loss.
- The company had $0.4 million of current notes payable and finance lease maturities and $0.03 million of long-term notes payable and finance leases. Operating lease liabilities totaled $5.5 million.
- The company had no borrowings under its $15.0 million Dominion revolving credit facility as of June 30, 2021.
- Capital expenditures were zero during the first six months of 2021, compared with $2.8 million in the 2020 period.
Material changes versus the prior comparable period
- Q2 revenue fell from $29.5 million to $0.2 million because the company had no seismic acquisition crew operating in the United States or Canada during the quarter.
- For the first six months, revenue fell from $68.5 million to $11.9 million, and the company shifted from $2.5 million of net income to a $14.2 million net loss.
- Operating expenses decreased substantially with lower crew utilization, workforce reductions, salary reductions and other cost-control measures, but the reductions were insufficient to offset the revenue decline.
- Operating cash flow declined from $9.0 million provided in the first half of 2020 to $1.3 million used in the first half of 2021.
- The decline in accounts receivable provided $7.0 million of operating cash flow, while deferred revenue, accrued liabilities and accounts payable reductions used cash.
- Debt repayments were substantially lower than in the prior year; financing activities provided $0.2 million in the first half of 2021 compared with $3.0 million of cash used in the first half of 2020.
Guidance, outlook, risks and unusual items
Management did not provide formal quantitative revenue or earnings guidance. Management expects to operate one U.S. crew during the second half of 2021, with periods of low utilization, and potentially one Canadian crew during the fourth quarter. The company reported a slight increase in U.S. bid activity and inquiries for the upcoming Canadian season, including potential carbon-capture projects, but stated that the near-term outlook remains challenging.
- The company limited capital spending, reduced fixed and variable costs and implemented an equipment-maintenance program to prepare for a potential recovery in activity.
- The Dominion credit facility matures September 30, 2021. The facility contains financial covenants, including a $75.0 million tangible net worth requirement. The company received a limited waiver for noncompliance with the tangible net worth covenant for the period ended June 30, 2021.
- The company stated that cash on hand, short-term investments, operating cash flow and available credit should meet current operational needs, but future liquidity depends heavily on operating performance and customers’ ability to pay.
- Demand is highly dependent on oil and natural gas exploration and production spending, commodity prices, customer financial condition and the broader energy cycle.
- Other risks include contract delays or cancellations, low crew utilization, customer concentration and credit risk, permitting and land-access delays, weather, equipment availability, competition, COVID-19 effects and foreign-exchange exposure from Canadian operations.
- The company is defending a groundwater-contamination lawsuit brought by Weatherford. The case was stayed pending an appeal, and management believes it will not have a material adverse effect, although the outcome cannot be predicted.
- The company maintains substantial valuation allowances against deferred tax assets; therefore, future losses may produce reduced or no tax benefits. The effective tax rate was 0.0% for both the quarter and six-month period.
- No material impairment losses or subsequent events were reported, and management stated that there were no material changes in previously disclosed risk factors.
Important facts for investors to verify
- Whether U.S. and Canadian crew activity actually increases during the second half of 2021 and whether utilization improves.
- Renewal, amendment or replacement of the Dominion credit facility before its September 30, 2021 maturity.
- Compliance with the facility’s tangible net worth and other financial covenants after the temporary waiver period.
- Customer contract awards, cancellations, collection trends and the adequacy of the $250,000 allowance for doubtful accounts.
- The company’s ability to sustain cash liquidity while operating cash flow remains negative and revenue remains highly depressed.
- The timing and economics of potential carbon-capture and other nontraditional seismic projects.
- Developments in the Weatherford litigation and any effect on liquidity, insurance coverage or contingencies.