Dawson Geophysical Company — Q1 2022 Form 10-Q Summary
Business context and reporting period
For the three months ended March 31, 2022, Dawson Geophysical provided North American onshore seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. The company operated one large and one small U.S. crew during portions of the quarter and up to three Canadian crews. The Canadian season ended during the quarter; no crews were operating at the filing date.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $18.359 million | $11.748 million | +56.3% |
| Operating loss | $(2.444) million | $(5.435) million | Improved $2.991 million |
| Net loss | $(2.391) million | $(5.228) million | Improved $2.837 million |
| EBITDA | $0.229 million | $(1.858) million | Improved $2.087 million |
| Operating cash flow | $(10.660) million | $(0.172) million | Declined $10.488 million |
| Capital expenditures | $0.028 million | $0 | Increase |
| Loss per share | $(0.10) | $(0.22) | Improved |
Operating margin improved to approximately (13.3%) from (46.3%); net margin improved to approximately (13.0%) from (44.5%). The company reported no income tax expense or benefit, reflecting net operating loss carryforwards and valuation allowances.
Revenue growth was primarily generated in Canada: Canadian revenue increased to $11.176 million from $2.964 million, while U.S. revenue declined to $7.183 million from $8.784 million. General and administrative expense rose 97.0% to $5.531 million, primarily due to $2.872 million of transaction costs related to the proposed merger with a Wilks Brothers subsidiary.
Cash and cash equivalents were $14.395 million at March 31, 2022, with $5.000 million of restricted cash and $0.265 million of short-term investments. Total cash, restricted cash and short-term investments were $19.660 million. Accounts receivable increased to $18.495 million from $8.905 million at December 31, 2021, driving most of the operating cash outflow.
The company had no borrowings under its $15.0 million Dominion revolving credit facility and stated that the full facility was available, subject to borrowing-base limitations. The facility matures September 30, 2022 and requires, among other covenants, tangible net worth of at least $55.0 million. Other debt included $0.881 million of insurance-premium notes at 4.99% and $0.036 million of finance leases. Operating lease liabilities totaled $5.188 million.
Material changes versus the prior comparable period
- Revenue increased 56.3%, principally from increased Canadian activity.
- Operating and net losses narrowed materially, and EBITDA turned positive.
- Operating cash flow deteriorated to $(10.660) million, primarily because of the $9.851 million increase in accounts receivable and a reduction in deferred revenue.
- General and administrative expense increased $2.724 million, largely from merger-related transaction costs.
- Depreciation and amortization decreased to $2.634 million from $3.434 million after several years of reduced capital spending.
- Insurance-premium notes increased to $0.881 million from $0.265 million at year-end 2021.
- Stockholders’ equity declined to $60.166 million from $62.477 million, primarily due to the quarterly loss and foreign-exchange translation loss.
Guidance, outlook, risks and unusual items
Management reported limited visibility beyond the first quarter. It did not anticipate operating a crew in the second quarter and expected limited activity in the third quarter. The company stated that demand remained weak despite slight increased interest in future projects, as U.S. exploration and production companies remained focused on shareholder returns and modest production increases.
Management limited capital spending, reduced fixed and variable operating expenses, and implemented an equipment-maintenance program to prepare for a potential recovery. The initial 2022 capital budget was $5.0 million, limited primarily to maintenance and incremental recording-channel needs; only $0.028 million had been spent through March 31.
Key risks include dependence on oil and natural gas exploration spending, commodity-price volatility, customer concentration and credit risk, contract delays or cancellations, crew utilization and productivity, weather and land-access interruptions, high fixed costs, limited capital resources, COVID-19 effects, foreign-exchange exposure, and disruptions related to Ukraine and associated sanctions. The company also faces a Weatherford groundwater-contamination proceeding and periodic client payment disputes; management did not expect these matters to have a material adverse effect, although outcomes cannot be predicted with certainty.
A related-party accounts receivable balance of $1.331 million was due from Breckenridge Geophysical, a subsidiary of Wilks Brothers, which owned approximately 75% of the company’s outstanding common stock. The filing also disclosed a January 2022 Internal Revenue Code Section 382 ownership event that will limit some future net operating loss utilization.
Important facts for investors to verify
- Whether the proposed Wilks Brothers merger proceeded, was amended, or generated additional transaction costs after the quarter.
- Collection timing and credit quality of the $18.495 million accounts receivable balance, including the $1.331 million related-party receivable.
- Whether the company maintained the Dominion facility’s financial covenants and renewed or replaced the facility before its September 30, 2022 maturity.
- Actual crew deployments, utilization, contract awards and revenue in the second and third quarters of 2022.
- Cash burn and liquidity adequacy if operating cash flow remains negative while activity is limited.
- Resolution and potential financial exposure from the Weatherford litigation and customer disputes.
- Progress of the merger-related process and the effect of the Section 382 limitation on future tax attributes.