Dawson Geophysical Company — FY2017 Form 10-K Summary
Business context and reporting period
Dawson Geophysical provides onshore seismic data acquisition and processing services in the United States and Canada, primarily to oil and natural gas exploration and development companies and multi-client data-library providers. The filing covers the fiscal year ended December 31, 2017, including unaudited fourth-quarter data. The company operated nine crews at year-end, six in the U.S. and three in Canada, and employed 851 full-time personnel.
Demand improved moderately during 2017 from the 2016 downturn, but remained below historical levels. Activity is strongly dependent on oil and natural gas prices, client exploration budgets, crew utilization, weather, permitting and project timing.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $157.1 million | $133.3 million | Up 17.9% |
| Loss from operations | $(37.4) million | $(49.4) million | Improved |
| Net loss | $(31.3) million | $(39.8) million | Improved |
| Loss per diluted share | $(1.44) | $(1.84) | Improved |
| EBITDA, non-GAAP | $2.5 million | $(2.0) million | Turned positive |
| Net cash from operating activities | $(6.7) million | $8.7 million | Declined |
| Cash and cash equivalents | $22.0 million | $14.6 million | Up $7.4 million |
| Short-term investments | $16.6 million | $40.3 million | Down $23.7 million |
| Total assets | $165.2 million | $187.7 million | Down 12.0% |
| Stockholders’ equity | $141.3 million | $170.9 million | Down 17.3% |
U.S. revenue was $135.1 million and Canadian revenue was $22.1 million. Two customers represented approximately 27% of annual revenue; no other customer represented at least 10%.
Operating costs totaled $194.6 million, including $139.2 million of operating expenses, $16.2 million of general and administrative expense and $39.2 million of depreciation and amortization. General and administrative expense declined to 10.3% of revenue from 12.6% in 2016. No impairment charges were recorded.
Fourth-quarter 2017 revenue was $39.1 million, compared with $30.1 million in the fourth quarter of 2016. Fourth-quarter net loss was $4.5 million, or $0.21 per diluted share, compared with a $7.2 million loss, or $0.33 per diluted share, in the prior-year quarter.
Liquidity, debt and capital expenditures
- Operating cash flow was negative $6.7 million, primarily because accounts receivable increased by $16.7 million as operating activity rose.
- Capital expenditures were $16.3 million, including an expanded 2017 budget used partly to acquire multi-component equipment and additional cable-less recording channels.
- The company had no outstanding borrowings under its $20.0 million revolving credit facility and no notes payable under the facility at December 31, 2017.
- Capital lease obligations totaled $7.9 million, including $2.7 million due within one year. Total notes payable and capital lease obligations were $7.9 million at year-end.
- The credit facility expires on June 30, 2018, is secured by accounts receivable and certain equipment, and is subject to borrowing-base and financial covenants. The company reported compliance with all covenants at year-end.
- Three letters of credit totaled $2.4 million and were not treated as borrowings under the revolving facility.
- Management expected an initial 2018 capital expenditure budget of $10.0 million, primarily for maintenance and recording-channel replacement or expansion.
Material changes versus the prior comparable period
- Revenue increased 17.9% as utilization and demand improved, particularly during the second half of the year. Severe weather and project-readiness issues nevertheless caused delays, and crew count fell as low as two in April.
- EBITDA improved from a negative $2.0 million to positive $2.5 million, but GAAP operating and net losses remained substantial.
- Operating cash flow reversed from positive $8.7 million to negative $6.7 million because of higher accounts receivable.
- General and administrative costs declined by $0.6 million, while depreciation declined by $5.0 million because capital spending had been limited in prior years.
- The company sold its dynamite energy-source drilling operation in March 2017, recognizing an approximately $1.45 million gain, and continued broader cost-reduction and restructuring efforts.
- The remaining equipment note payable was repaid during the third quarter, while capital lease obligations increased materially to $7.9 million, compared with $0.4 million at the end of 2016.
- Property and equipment, net, declined to $86.6 million from $110.9 million, reflecting depreciation and disposals.
- The company adopted ASU 2016-09 for share-based compensation with no material financial statement impact. It planned to adopt the new revenue standard using the full retrospective method in 2018; the filing estimated that the standard would not materially affect overall operating results but would change the timing of certain revenue and fulfillment-cost recognition.
Outlook, commentary, risks and unusual items
Management cited recent oil-price improvement, anticipated 2018 price increases, increased proposal activity and a return to positive EBITDA as encouraging signs. It expected to operate up to seven U.S. crews through the third quarter of 2018, complete two U.S. microseismic projects during the first half of 2018, and operate four Canadian crews through the end of the Canadian winter season.
Most projects were performed under turnkey contracts, representing approximately three-quarters of revenue. These contracts provide greater profit potential but expose the company to weather, permitting, productivity, equipment and downtime risks. Management expected turnkey work to remain prevalent.
- Revenue and cash flow remain highly sensitive to oil and natural gas prices, energy-industry capital spending and customer cancellations or delays.
- High fixed costs and capital requirements create significant operating leverage; lower utilization can produce rapid deterioration in margins and cash flow.
- Two customers accounted for approximately 27% of revenue, and customer credit is generally unsecured.
- Operations face weather, land-access, permitting, safety, environmental, equipment, labor, cybersecurity and foreign-currency risks.
- The company had a U.S. federal net operating loss carryforward of approximately $100.1 million and recorded valuation allowances against most deferred tax assets, limiting the expected benefit of future losses.
- The company did not pay dividends in 2017 or 2016 and did not expect to pay dividends in the foreseeable future.
- Management stated that pending ordinary-course legal proceedings were not expected to have a material adverse effect, but contractual disputes with customers may affect revenue and results in individual periods.
Facts investors should verify
- Whether improved oil prices and proposal activity translate into sustained crew utilization, pricing and positive operating cash flow.
- The renewal or replacement of the revolving credit facility before its June 30, 2018 expiration.
- Accounts receivable collection, customer concentration and the adequacy of the $250,000 doubtful-accounts allowance.
- The cash-flow impact and balance-sheet presentation of capital leases and the planned 2018 capital program.
- The full-retrospective adoption effects of the new revenue-recognition standard on 2016 and 2017 comparatives.
- Whether the return to positive EBITDA can be sustained despite continuing GAAP losses and substantial depreciation.
- Exposure to weather, permitting, turnkey-contract execution, commodity-price volatility and Canadian seasonality.