DAWSON GEOPHYSICAL CO quarterly report, Q2 FY2019

Dawson Geophysical Company — 2019 Q2 Form 10-Q Summary

Business context and reporting period

Dawson provides North American onshore 2-D, 3-D and multicomponent 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 six months ended June 30, 2019, compared with the corresponding 2018 periods.

Financial performance and condition

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Operating revenue	$24.1 million	$36.2 million	$75.2 million	$86.0 million
Loss from operations	$(11.6) million	$(6.3) million	$(11.9) million	$(7.9) million
Net loss	$(11.2) million	$(5.7) million	$(11.4) million	$(7.4) million
Loss per share	$(0.49)	$(0.25)	$(0.49)	$(0.32)
EBITDA	$(6.1) million	$1.6 million	$(0.1) million	$8.6 million
Net cash from operations	Not separately presented in the financial statements	Not separately presented	$12.1 million	$12.8 million

Calculated operating margins were approximately negative 48.3% in Q2 2019 and negative 15.9% for the first six months, compared with approximately negative 17.4% and negative 9.2%, respectively, in the comparable 2018 periods. Net margins were approximately negative 46.7% and negative 15.1%, compared with negative 15.8% and negative 8.6%.

Operating expenses declined 18.9% in Q2 and 5.4% year to date, but the reductions did not offset the revenue decline.
General and administrative expense increased 31.4% in Q2 and 21.0% year to date, primarily because of severance and executive-retirement costs.
Depreciation and amortization declined to $5.3 million in Q2 and $11.4 million year to date, reflecting reduced capital expenditures in prior years.
Cash and cash equivalents were $34.3 million at June 30, 2019, versus $28.7 million at December 31, 2018. Cash plus short-term investments totaled $44.9 million.
Total current assets were $70.4 million versus current liabilities of $25.5 million, implying a current ratio of approximately 2.8.
Capital expenditures were $2.2 million through June 30 against an initial 2019 capital budget of $10.0 million.

Debt, leases and liquidity

Notes payable totaled $5.7 million of principal, including $4.9 million owed to a commercial bank and $0.8 million for insurance premiums. Finance lease liabilities were $3.8 million.
Operating lease liabilities of $7.7 million were recorded following adoption of ASC 842 on January 1, 2019; the related right-of-use asset was $7.2 million.
The company had not drawn on its $20.0 million revolving line of credit. The line was scheduled to mature September 30, 2019, and the company and Veritex Bank intended to pursue a two-year extension.
The company was in compliance with all credit agreement covenants at June 30, 2019. The facility requires, among other items, a current ratio of at least 1.50 and tangible net worth of at least $75 million.
Two letters of credit totaled $2.4 million and did not count as borrowings under the revolving line.

Material changes versus the prior comparable period

Q2 revenue fell 33.4%, and first-half revenue fell 12.6%, principally due to fewer crews and lower equipment utilization.
The company operated a peak of five U.S. crews and one short-duration small Canadian crew in Q2, compared with four large U.S. crews and four large Canadian crews in Q1 2019.
Q2 utilization was affected by crew moves, a transition from large- to smaller-channel projects and severe wet weather, particularly in Oklahoma.
U.S. revenue declined to $22.0 million from $35.3 million in Q2, while Canadian revenue increased to $2.0 million from $0.9 million.
Stockholders’ equity declined to $106.4 million from $117.0 million at year-end 2018, largely reflecting the $11.4 million first-half net loss.
ASC 842 adoption added operating lease assets and liabilities but did not materially affect reported earnings or cash flows.

Outlook, commentary, risks and unusual items

Management expected four to six U.S. crews in Q3 and early Q4, declining to two to four U.S. crews later in Q4, with limited Canadian activity in Q4. At the filing date, three U.S. crews were operating and two additional crews were expected to deploy shortly.
Management anticipated improved crew and channel utilization in Q3 and into Q4 versus Q2, although bid activity remained intermittent and visibility was challenging.
A large West Texas multicomponent project began in June using 44,000 three-component units, or 132,000 total channels, and was expected to run through mid-Q4.
Two larger-channel projects in Louisiana and Wyoming were projected to begin in late Q3 or early Q4.
The company accrued $1.45 million in Q2 for severance and retirement packages associated with headcount reductions and executive retirements.
Key risks include dependence on oil and gas spending, commodity-price volatility, contract delays or cancellations, customer concentration and credit risk, weather and land-access disruptions, crew utilization, high fixed costs and capital needs, competition, and limited liquidity if operating performance weakens.
Weatherford filed a lawsuit alleging groundwater contamination involving the company and other defendants. Management disputed the allegations and believed the matter would not have a material adverse effect, but stated that the outcome could not be predicted with certainty.
The company maintained valuation allowances against substantially all federal, state and foreign deferred tax assets; future losses may therefore generate reduced or no tax benefits.

Facts investors should verify

Whether the revolving credit facility was extended before its September 30, 2019 maturity and on what terms.
Whether expected Q3 and Q4 crew deployment and utilization improvements materialized.
Project timing, margins and customer concentration for the West Texas, Louisiana and Wyoming programs.
The cash impact and recurrence of severance, retirement and other restructuring costs.
Compliance with debt covenants and the company’s ability to fund required debt, finance-lease and operating-lease payments.
Developments and potential exposure in the Weatherford contamination litigation and other customer disputes.
The realizability of deferred tax assets and the continuing effect of oil and gas capital-spending levels on demand.