Business Context and Reporting Period
Dawson Geophysical Company provides 2-D, 3-D and multi-component seismic data acquisition and processing services to oil and gas companies and multi-client data-library providers in the United States and Canada. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, filed August 9, 2016.
The 2015 merger with Legacy Dawson was accounted for as a reverse acquisition. Three-month comparisons reflect full-quarter combined-company results, but the six-month 2015 comparison is not directly comparable because it includes Legacy Dawson through February 11, 2015 and the combined company thereafter.
Key Financial Metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Operating revenue | $28.1 million | $75.1 million |
| Loss from operations | $(13.3) million | $(23.9) million |
| Operating margin | (47.2%) | (31.8%) |
| Net loss | $(11.6) million | $(20.2) million |
| Net margin | (41.3%) | (26.9%) |
| Loss per diluted share | $(0.54) | $(0.93) |
| EBITDA, non-GAAP | $(1.5) million | $1.0 million |
| Net cash provided by operating activities | Not separately provided in the financial statements | $16.2 million |
For the six months, depreciation and amortization was $23.4 million, interest expense was $168,000, and the income tax benefit was $2.2 million. The effective tax rate was 9.7%, reduced by valuation allowances against portions of federal and state net operating loss deferred tax assets.
Liquidity, Capital Spending and Debt
- Cash and cash equivalents were $25.7 million at June 30, 2016, compared with $37.0 million at December 31, 2015.
- Short-term investments were $41.5 million, bringing cash and short-term investments to approximately $67.2 million.
- Current assets were $86.8 million and current liabilities were $19.2 million, implying a current ratio of approximately 4.5x.
- Commercial-bank notes had principal outstanding of $5.2 million; the insurance finance note had principal outstanding of $211,000. Capital lease obligations were $813,000.
- The company had a $20.0 million credit agreement, subject to borrowing-base and other limitations, and had not drawn on the revolving line during 2016. A $1.8 million letter of credit counts against the line.
- The company was in compliance with all credit agreement covenants at June 30, 2016.
- Capital expenditures were $5.3 million through June 30 against an initial 2016 budget of $10.0 million, primarily for maintenance and channel replacement or expansion.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 35.2% to $28.1 million from $43.3 million. Six-month revenue declined 35.8% to $75.1 million from $117.1 million, subject to the six-month comparability limitation described above.
- Revenue was pressured by lower crew utilization, low and uncertain oil and natural gas prices, reduced customer spending, weather-related delays, crew moves, and a weaker-than-expected Canadian season.
- Second-quarter operating expenses fell 40.1% to $26.0 million, while total operating costs declined 32.7% to $41.4 million. Cost reductions did not offset the revenue decline.
- Second-quarter net loss improved modestly from $(11.9) million to $(11.6) million, but six-month net loss increased from $(18.5) million to $(20.2) million. The 2015 period included a substantially larger tax benefit and approximately $2.6 million of merger-related costs.
- Operating cash flow increased to $16.2 million from $12.7 million, primarily reflecting changes in deferred tax benefits and working capital.
- Investing activities used $23.3 million, mainly because $20.5 million more was invested in short-term investments than matured, along with $5.3 million of capital expenditures.
- Debt and lease principal payments totaled approximately $4.5 million during the six months.
Guidance, Outlook, Commentary and Risks
- Management stated that demand was expected to remain reduced through much of 2016 because of low and uncertain commodity prices and reduced client expenditures.
- Based on available demand information, management expected to operate four to six crews through the third quarter of 2016. The company operated four to six U.S. crews during the second quarter and was inactive in Canada after the winter season.
- Approximately three-quarters of revenue was generated from turnkey contracts. These contracts can benefit from higher productivity but expose the company to greater weather and crew-downtime risk.
- Management expected depreciation expense to remain approximately flat during 2016 because capital spending was limited primarily to maintenance.
- Management believed cash, short-term investments, operating cash flow and available credit would be adequate for current operations and 2016 capital expenditures, but noted dependence on future operating performance and customers’ ability to pay.
- On June 15, 2016, flooding in Oklahoma destroyed equipment used by two crews. The company received $909,000 of insurance proceeds and stated that coverage was adequate, although the total damage could not yet be estimated.
- Principal risks include dependence on oil and gas industry spending, commodity-price volatility, customer delays or cancellations, customer concentration and credit risk, lower utilization, high fixed costs, weather and access disruptions, competition, equipment impairment, foreign exchange exposure and availability of capital.
- Management did not anticipate an impairment charge but warned that prolonged or materially lower oil and natural gas prices could trigger impairment charges and further reduce tax benefits.
- Pending ordinary-course legal proceedings were not expected by management to have a material adverse effect. The filing reported no material changes to the risk factors in the 2015 Form 10-K and no subsequent events.
Investor Verification Checklist
- Verify the sustainability of cash generation, given the substantial operating losses and reliance on working-capital reductions and tax-related adjustments.
- Monitor crew utilization, the planned four-to-six-crew operating level, contract pricing and customer spending as indicators of revenue recovery.
- Assess whether cash and short-term investments remain sufficient after debt maturities, capital expenditures and potential flood-related costs.
- Review the recoverability of seismic equipment and the potential for impairment if commodity prices or customer demand remain weak.
- Evaluate the realizability of deferred tax assets, since valuation allowances may limit future tax benefits from additional losses.
- Confirm the final insurance recovery and operational impact from the Oklahoma flooding.
- Consider the limited comparability of the six-month 2015 results because of the reverse-acquisition accounting and merger timing.