Dawson Geophysical Company — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Dawson Geophysical provides North American onshore seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the same periods of 2020.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Operating revenue | $1.914 million | $8.738 million | $13.855 million | $77.216 million |
| Loss from operations | $(7.753) million | $(8.098) million | $(22.471) million | $(5.590) million |
| Net loss | $(7.865) million | $(7.840) million | $(22.110) million | $(5.347) million |
| Loss per diluted share | $(0.33) | $(0.33) | $(0.94) | $(0.23) |
| EBITDA | $(4.662) million | $(3.796) million | $(12.187) million | $7.834 million |
| Cash flow from operations | Not separately provided | Not separately provided | $(5.373) million | $24.448 million |
Q3 operating margin was approximately negative 405%, net margin approximately negative 411%, and EBITDA margin approximately negative 244%. Nine-month operating margin was approximately negative 162%, net margin approximately negative 160%, and EBITDA margin approximately negative 88%.
- At September 30, 2021, cash and cash equivalents were $36.018 million, restricted cash was $5.000 million, and short-term investments were $0.583 million, for total cash, restricted cash and short-term investments of $41.601 million.
- Total assets were $78.480 million versus $103.377 million at December 31, 2020. Stockholders’ equity was $69.206 million versus $90.974 million.
- Debt was limited: $0.203 million of short-term insurance-premium notes and $0.053 million of finance-lease obligations. The company had no borrowings under its $15 million Dominion revolving credit facility.
- Operating lease liabilities totaled $5.183 million, including $1.006 million classified as current.
- Capital expenditures were $0.329 million for the first nine months, against an initial 2021 capital budget of $1.0 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 78.1% and nine-month revenue declined 82.1%, primarily because of lower demand, extended periods of low crew utilization, and depressed seismic activity.
- Operating expenses declined 57.9% in Q3 and 68.6% for the nine-month period, reflecting lower crew utilization. General and administrative expense declined 25.3% in Q3 and 28.6% year to date due to workforce and salary reductions and other cost controls.
- Despite substantial cost reductions, the nine-month operating loss increased to $22.471 million from $5.590 million, and EBITDA declined from positive $7.834 million to negative $12.187 million.
- Operating cash flow shifted from $24.448 million provided in the first nine months of 2020 to $5.373 million used in the first nine months of 2021. Working-capital collections, including a $7.037 million decrease in accounts receivable, partially offset the net loss.
- Cash and restricted cash declined by $4.937 million during the first nine months, ending at $41.018 million, compared with $50.422 million at September 30, 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that third-quarter activity remained depressed, with one lower-48 crew operating at low utilization and idle from early September to mid-October. The near-term U.S. seismic outlook remained challenged despite higher oil and natural gas prices.
- The lower-48 crew resumed a small project in mid-October and was scheduled through early February 2022. Management expected two Canadian crews to operate from the latter part of the fourth quarter through the end of the winter season.
- Bid activity was at historically low levels and visibility into 2022 was limited. Several additional lower-48 projects were expected to be delayed until late 2022 because of land-access issues. Service pricing softened during the quarter.
- Management limited capital spending, reduced fixed and variable costs, and implemented equipment maintenance programs. No formal revenue or earnings guidance was provided.
- The business remains highly dependent on oil and gas exploration and production spending, commodity prices, customer creditworthiness, crew utilization, project timing, land access, weather, contract cancellations, competition, and COVID-19-related disruptions.
- The Dominion credit facility was extended to September 30, 2022. It includes a $55 million minimum tangible-net-worth covenant and other financial covenants; the company reported no borrowings under the facility at September 30, 2021.
- A $0.265 million letter of credit supported workers’ compensation insurance and was secured by a certificate of deposit.
- The company is defending a Weatherford groundwater-contamination lawsuit. The case was stayed pending an appeal, and management believed it would not materially affect financial condition, results, or liquidity, although the outcome cannot be predicted.
- On October 25, 2021, the company announced a proposed acquisition by Wilks Brothers, LLC. A tender offer commenced November 1, 2021 at $2.34 per share in cash, subject to conditions including tender of at least 80% of outstanding shares. Failure to complete the transaction could adversely affect the stock price, business, and results.
- Disclosure controls and procedures were deemed effective as of September 30, 2021, with no reported material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the Wilks tender offer and subsequent merger closed, including satisfaction of the 80% ownership and approval thresholds.
- Whether seismic crew utilization, pricing, Canadian operations, and delayed lower-48 projects improved after the reporting date.
- The company’s ability to maintain the Dominion facility’s tangible-net-worth and other financial covenants while continuing to incur operating losses.
- The pace of cash consumption and whether available cash, restricted funds, operating cash flow, and borrowing capacity remain sufficient.
- Potential exposure from customer concentration, contract disputes, receivable collectability, and the Weatherford litigation.
- Whether continued minimal capital spending affects equipment readiness and the company’s ability to respond to any recovery in demand.