Dawson Geophysical Company — 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, independent operators, and multi-client data-library providers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Operating revenue | $45.6 million | $28.1 million | $118.0 million | $103.3 million |
| Operating loss | $(4.1) million | $(14.3) million | $(31.7) million | $(38.2) million |
| Net loss | $(2.8) million | $(12.4) million | $(26.7) million | $(32.6) million |
| Loss per diluted share | $(0.13) | $(0.57) | $(1.23) | $(1.51) |
| EBITDA | $5.5 million | $(3.4) million | $(1.8) million | $(2.4) million |
Operating revenue increased 62.2% year over year in the third quarter and 14.3% for the first nine months, primarily from increased crew count and utilization. Operating loss margins improved to approximately 9.1% in Q3 2017 from 50.7% in Q3 2016, and to 26.8% for the first nine months from 36.9% in the prior-year period. EBITDA margin was approximately 12.0% in Q3 2017 versus negative 12.1% in Q3 2016; year-to-date EBITDA remained negative at approximately 1.5% of revenue.
- Q3 operating expenses rose 30.1% to $36.6 million, reflecting higher crew count and utilization. Nine-month operating expenses increased 14.3% to $107.6 million.
- General and administrative expense declined 5.8% in Q3 and 7.2% year to date, reflecting cost-reduction measures.
- Depreciation and amortization declined to $9.7 million in Q3 and $29.8 million year to date, compared with $10.6 million and $34.0 million, respectively, in 2016.
- Cash and cash equivalents were $30.5 million at September 30, 2017, compared with $14.6 million at December 31, 2016. Short-term investments were $12.0 million, down from $40.3 million.
- Accounts receivable increased to $25.6 million from $16.0 million at year-end 2016, while total current assets were $74.9 million and current liabilities were $18.7 million.
- Net cash used in operating activities was $3.3 million for the first nine months of 2017, compared with $14.4 million provided in the prior-year period.
- Net cash provided by investing activities was $21.1 million, primarily reflecting maturities of short-term investments exceeding purchases. Capital expenditures were $15.3 million through September 30, including $9.1 million in the third quarter.
- Total debt and capital lease obligations were $8.6 million at September 30, 2017, including $8.0 million of recording-equipment capital leases entered into during the third quarter. The company had no notes payable under its bank credit agreement and $56,000 payable under an insurance-financing note.
Material Changes Versus the Prior Comparable Period
- Higher crew utilization and an early Canadian winter season drove substantial revenue improvement and reduced quarterly losses.
- The company continued cost reductions, lowering general and administrative expense despite increased operations.
- Operating cash flow deteriorated from positive $14.4 million to negative $3.3 million year to date, primarily because of working-capital changes, including a $9.6 million increase in accounts receivable.
- The company sold its dynamite energy-source drilling operation in March 2017, generating an approximately $1.45 million gain and notes receivable secured by the related equipment.
- The 2017 capital budget was increased from $10 million to $16 million to pursue an attractive seismic-equipment acquisition opportunity, including a strategic $8.0 million capital lease.
- The final remaining equipment note payable was repaid during the third quarter. Bank notes payable declined from $1.9 million at December 31, 2016 to zero.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal revenue or earnings guidance. It reported six to eight U.S. crews and two Canadian crews operating at the time of filing, with expectations for a temporary U.S. utilization decline in mid-fourth quarter because of project-readiness issues and seasonal conditions. Management expected six to seven U.S. crews by quarter-end, six to eight through the first quarter of 2018, and three to five Canadian crews through the first quarter of 2018.
Management characterized the market as challenging but stated that demand had improved recently. Oil prices, customer exploration and production spending, rig counts, contract timing, pricing, weather, permitting, crew productivity, equipment availability, and holiday-related downtime remain key operating variables. Approximately three-quarters of revenue came from turnkey contracts, which provide productivity upside but expose the company to weather and crew-downtime risk.
- The $20 million revolving credit facility was unused, but availability depends on eligible accounts receivable and the value of pledged equipment. The facility expires June 30, 2018.
- The company was in compliance with all credit-agreement covenants at September 30, 2017. Two letters of credit totaling $1.842 million were outstanding and did not count as borrowings.
- Management believed cash, investments, available credit, and operating cash flow would be adequate for current needs and planned 2017 capital expenditures, but future liquidity depends on operating performance and customer payment behavior.
- Substantially all customers operate in the oil and gas industry, creating concentration and credit risk. The allowance for doubtful accounts was $250,000.
- Prolonged or materially lower oil and natural gas prices could reduce demand, pressure pricing, lower equipment utilization, and trigger impairment charges for long-lived assets.
- The company recorded valuation allowances against substantially all federal, state, and foreign deferred tax assets; future losses may generate reduced or no tax benefits.
- The company anticipated adopting the new revenue standard using the full retrospective method and expected some miscellaneous revenue recognition to be delayed, but not materially changed.
- Pending ordinary-course legal proceedings were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether improved crew utilization and the stated fourth-quarter and first-quarter 2018 crew outlook translate into sustained positive EBITDA and operating cash flow.
- The collectability and aging of the $25.6 million accounts receivable balance and the adequacy of the $250,000 doubtful-account allowance.
- The impact of the $8.0 million recording-equipment capital lease and total lease maturities of $8.6 million on future cash requirements.
- Availability under the revolving credit facility after applying receivable, equipment, and letter-of-credit limitations, particularly if demand or receivables weaken.
- The effect of oil and gas prices, rig counts, customer capital spending, turnkey-contract exposure, weather, permitting, and project delays on utilization and pricing.
- The realizability of deferred tax assets and the potential for future impairment charges if commodity prices or operating conditions deteriorate.