DAWSON GEOPHYSICAL CO annual report, FY2019

Dawson Geophysical Company — Fiscal 2019 Form 10-K Summary

Business Context and Reporting Period

Dawson Geophysical provides onshore 2-D, 3-D, multi-component and microseismic data acquisition services in the United States and Canada. Its customers include oil and gas companies and multi-client data-library providers. The filing covers the fiscal year ended December 31, 2019; fourth-quarter results are included in the annual filing but this is not a standalone quarterly filing.

At December 31, 2019, Dawson operated 117 vibrator energy source units and approximately 268,000 recording channels. The company had 455 full-time employees and generated 89% of revenue in the United States and 11% in Canada.

Financial Performance and Key Metrics

Metric	2019	2018	Change
Operating revenue	$145.8 million	$154.2 million	Down 5.4%
Operating costs	$162.0 million	$179.2 million	Down 9.6%
Loss from operations	$(16.2) million	$(25.0) million	Improved by $8.8 million
Net loss	$(15.2) million	$(24.4) million	Improved by $9.2 million
Basic loss per share	$(0.66)	$(1.07)	Improved
EBITDA	$6.3 million	$4.8 million	Up 31.5%
Cash flow from operations	$9.5 million	$12.9 million	Down $3.4 million

Operating loss margin was approximately 11.1% of revenue, compared with 16.2% in 2018. Net loss margin was approximately 10.4%, compared with 15.8% in 2018. EBITDA margin was approximately 4.3%, compared with 3.1% in 2018. EBITDA is a non-GAAP measure and should not be viewed as a substitute for operating income or operating cash flow.

Operating expenses declined primarily because of lower crew production and utilization. Depreciation and amortization declined to $21.8 million from $30.0 million due to limited capital spending. General and administrative expense increased to $17.2 million from $16.3 million, primarily due to severance and retirement costs associated with headcount reductions and executive retirements.

Cash Flow, Liquidity and Capital Structure

Cash, cash equivalents and restricted cash totaled $31.3 million at year-end, including $26.3 million of unrestricted cash and $5.0 million of restricted cash.
Short-term investments totaled $2.4 million, down from $10.6 million.
Net cash provided by operating activities was $9.5 million. Investing activities provided $4.2 million, including $8.2 million of short-term investment maturities, while capital expenditures were $4.4 million.
Financing activities used $11.3 million, including $8.2 million of note repayments and $2.9 million of finance-lease principal payments.
Outstanding notes payable and finance leases totaled approximately $2.5 million at year-end, excluding operating lease liabilities. The company also reported $7.1 million of operating lease liabilities.
The Dominion revolving credit facility provides borrowing capacity of up to $15.0 million, subject to eligible accounts receivable and collateral requirements. No amounts were drawn at December 31, 2019. The facility matures September 30, 2020 and requires, among other conditions, tangible net worth of at least $75.0 million.
Total contractual obligations were $11.3 million, including $5.3 million due within one year.
Stockholders’ equity was $103.2 million, compared with $117.0 million in 2018. No cash dividend was paid in 2019, and management does not expect cash dividends for the foreseeable future.

Material Changes Versus the Prior Comparable Period

Revenue declined $8.4 million because of lower equipment and crew utilization and delays starting larger projects.
Despite lower revenue, the operating loss and net loss narrowed materially because operating costs and depreciation decreased.
Fourth-quarter revenue was $33.6 million versus $27.7 million in the fourth quarter of 2018. Fourth-quarter net loss improved to $5.8 million from $11.8 million, but remained negative.
Quarterly performance was volatile: the company reported net income of $2.0 million in the third quarter, compared with losses in the other three quarters.
The company shifted toward larger channel-and-energy-source deployments rather than a traditional crew-count model, which management believes improved crew efficiency and reduced crew-level operating costs.
On January 1, 2019, the company adopted the new lease accounting standard, recording operating lease right-of-use assets of $6.6 million and operating lease liabilities of $7.1 million at year-end. Management stated that adoption did not materially affect results or cash flows.
The prior Veritex term loan of approximately $4.4 million was paid off in September 2019, and the prior Veritex line of credit matured without borrowings.

Guidance, Outlook, Commentary and Risks

Management described the seismic market as challenging because exploration and production capital spending remained constrained and unpredictable. At the filing date, management expected three large U.S. crews to operate into the second quarter of 2020 and expected similar activity through the end of the first quarter. Management reported positive customer discussions regarding activity through 2020, but stated that utilization visibility for the second half of 2020 remained unclear.

The initial 2020 maintenance capital expenditure budget was $5.0 million, compared with a $10.0 million budget for 2019, of which $3.6 million was utilized. Depreciation was expected to remain approximately flat in 2020 because of limited capital expenditures. The filing provides no formal revenue or earnings guidance.

Demand is highly dependent on oil and natural gas prices and exploration and production spending.
The four largest customers represented approximately 60% of 2019 revenue, creating customer concentration and credit risk.
Most projects are performed under turnkey contracts, which provide greater profit potential but expose the company to weather, permitting, productivity, downtime and cost-overrun risks.
High fixed operating costs, variable crew utilization, project delays, cancellations, weather and Canadian seasonality can produce significant fluctuations in revenue, margins and cash flow.
The Dominion credit facility is secured by a $5.0 million restricted deposit and eligible receivables; declining receivables could limit borrowing capacity.
The company had a pending Weatherford groundwater-contamination lawsuit and various ordinary-course contractual disputes. Management believed these matters would not materially affect financial condition, results of operations or liquidity, but outcomes cannot be predicted with certainty.
The company had approximately $123.4 million of U.S. federal net operating loss carryforwards, but maintained substantial valuation allowances because realization of deferred tax assets was not considered more likely than not.
Other risks include competition and pricing pressure, equipment obsolescence, access and permitting delays, operational safety, cyber threats, foreign currency exposure, climate-related regulation and potential restrictions on hydraulic fracturing.

Investor Verification Checklist

Verify current utilization, backlog and project starts after the reported early-2020 period, particularly for the second half of 2020.
Assess whether operating cash flow and unrestricted cash are sufficient to fund contractual obligations, maintenance capital spending and potential downturns.
Review compliance with the Dominion facility’s tangible-net-worth and other financial covenants before its September 2020 maturity.
Monitor revenue concentration, receivables aging and payment performance of the four largest customers.
Evaluate whether improved EBITDA reflects sustainable utilization and pricing improvements or primarily lower depreciation and temporary cost reductions.
Follow the Weatherford litigation, contractual disputes and any changes in insurance or environmental liabilities.
Confirm the company’s ability to utilize federal, state and Canadian tax loss carryforwards given the recorded valuation allowances.