Dawson Geophysical Company — FY2018 Form 10-K Summary
Business context and reporting period
Dawson Geophysical provides onshore 2-D, 3-D, multi-component and microseismic data acquisition and processing services in the United States and Canada, primarily for oil and gas exploration and development companies and multi-client data providers. The filing covers the fiscal year ended December 31, 2018; fourth-quarter results are included in the annual filing.
During the fourth quarter, the Company operated up to four U.S. crews and three Canadian crews, with varying utilization. The business is highly sensitive to oil and natural gas prices, exploration spending, weather, permitting, land access and crew productivity.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $154.2 million | $156.5 million | Down 1.5% |
| Loss from operations | $(25.0) million | $(38.0) million | Improved $12.9 million |
| Net loss | $(24.4) million | $(31.8) million | Improved $7.4 million |
| Basic and diluted loss per share | $(1.07) | $(1.40) | Improved $0.33 |
| EBITDA | $4.8 million | $2.0 million | Up approximately 140% |
| Net cash provided by operating activities | $12.9 million | $(6.7) million | Improved $19.6 million |
Operating margin was approximately negative 16.2% and net margin was approximately negative 15.8%. EBITDA margin was approximately 3.1%; EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings or operating cash flow.
U.S. revenue increased to $137.1 million from $134.4 million, while Canadian revenue declined to $17.1 million from $22.1 million. Two customers represented approximately 32% of 2018 revenue, including one customer at 22% and another at 10%.
Cash and cash equivalents were $28.7 million at December 31, 2018, compared with $22.0 million at December 31, 2017. Short-term investments were $10.6 million, and accounts receivable were $25.3 million. Total assets were $150.7 million and stockholders’ equity was $117.0 million.
Debt and lease obligations included $5.975 million outstanding under an equipment note, $1.680 million of insurance-premium financing and $5.125 million of capital lease obligations. The Company had no borrowings under its $20.0 million revolving line of credit and was in compliance with all credit agreement covenants. Three letters of credit totaled $2.425 million. Contractual obligations totaled $22.5 million, including $9.8 million of operating leases.
Material changes versus the prior comparable period
- Revenue was broadly stable, but operating costs declined 7.9% to $179.2 million, primarily because of lower reimbursable charges and reduced depreciation.
- Depreciation and amortization fell to $30.0 million from $39.2 million as the Company limited capital expenditures largely to maintenance needs.
- Operating loss and net loss improved substantially, although the Company remained unprofitable.
- Operating cash flow turned positive, primarily reflecting the lower net loss and a $6.7 million decrease in accounts receivable.
- Capital expenditures increased to $15.7 million from $8.7 million after the Company raised its 2018 capital budget to $17.0 million to acquire seismic recording equipment.
- Canadian revenue declined materially because of seasonal restrictions and the wide differential between Canadian oil prices and WTI. Permian and Delaware Basin takeaway constraints also reduced effective oil prices.
- The Company adopted ASC Topic 606 using the full retrospective method. Prior-period financial statements were adjusted, and deferred revenue and deferred contract-fulfillment costs increased as a result of timing differences under the new standard.
- The Company issued a 5% stock dividend in May 2018; comparative share and per-share data were retroactively adjusted.
Fourth-quarter results
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Operating revenue | $27.7 million | $37.4 million |
| Loss from operations | $(11.9) million | $(6.0) million |
| Net loss | $(11.8) million | $(4.8) million |
| Basic and diluted loss per share | $(0.51) | $(0.21) |
Fourth-quarter performance deteriorated year over year. Management cited challenging seasonal conditions, shorter U.S. workdays and the holiday season, along with weaker-than-expected demand and oil-price softness.
Guidance, outlook, commentary and risks
Management expected to operate up to five U.S. crews and four Canadian crews in the first quarter of 2019, plus one U.S. microseismic project, and up to four U.S. crews in the second quarter. Canadian winter activity was expected to end after the first quarter. The Company adopted a $10.0 million maintenance capital expenditure program for 2019 and expected depreciation to remain broadly flat.
Management was encouraged by increased interest in projects outside the Permian and Delaware basins, including the Niobrara, Powder River, SCOOP/STACK, Eagle Ford and Austin Chalk basins. It also expected additional takeaway capacity in 2019 and 2020 to potentially ease regional pricing differentials. No formal revenue or earnings guidance was provided.
- Demand depends substantially on oil and gas prices and client exploration and development budgets.
- Customers may delay, reduce or cancel generally short-term, cancelable contracts, and two customers account for a significant portion of revenue.
- High fixed operating costs, turnkey contract risk, weather, permitting, land access, equipment failures and crew productivity can cause significant quarterly volatility.
- The Company extends unsecured credit to clients and could suffer losses from customer defaults or delayed payments.
- Debt is secured by accounts receivable and certain equipment; borrowing availability depends on eligible receivables and collateral values.
- Operations are capital intensive and require continued investment in recording channels, equipment and technology. The Company owned approximately 334,000 recording channels at year-end.
- Canadian operations create foreign-currency risk, and the Company does not use derivative instruments to hedge this exposure.
- Environmental, climate-change and hydraulic-fracturing regulation could reduce industry activity or increase operating costs.
- The Company reported no material impairment charges in 2018, but future declines in demand, commodity prices or asset values could result in significant noncash impairments.
- The Company does not expect to pay cash dividends for the foreseeable future.
The Company expected adoption of the new lease standard in 2019 to add approximately $7.8 million of operating lease right-of-use assets and $8.3 million of operating lease liabilities, with no material effect on earnings or cash flow.
Most important facts for investors to verify
- Whether crew utilization, project awards and pricing improve sufficiently to support sustained profitability rather than only improved EBITDA and operating cash flow.
- The renewal or replacement of the revolving credit facility, which was scheduled to mature on June 30, 2019, and the Company’s continuing compliance with its financial covenants.
- Customer concentration, collection experience and the adequacy of the $250,000 allowance for doubtful accounts.
- The timing and economic benefit of new takeaway capacity and whether activity broadens beyond the Permian and Delaware basins.
- Canadian activity levels, seasonal utilization and foreign-currency effects.
- Actual 2019 maintenance capital expenditures, equipment utilization and future impairment indicators.
- The effect of ASC Topic 606 and the new lease standard on revenue timing, deferred revenue, working capital and reported leverage.
- Pending contractual disputes, legal proceedings, insurance coverage and the $22.5 million of disclosed contractual obligations.