Dawson Geophysical Company — Q1 2016 Form 10-Q Summary
Business context and reporting period
Filed May 10, 2016, for the three months ended March 31, 2016. Dawson provides 2-D, 3-D and multi-component seismic data acquisition services to oil and gas companies and multi-client data-library providers in the United States and Canada. Demand is highly dependent on oil and natural gas prices and client exploration and production spending.
Comparisons with Q1 2015 are not directly comparable because the February 11, 2015 merger was accounted for as a reverse acquisition. Q1 2015 includes Legacy Dawson for January 1–February 11 and the merged company thereafter, while Q1 2016 represents the full combined company quarter.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $47.055 million | $73.722 million | Down 36.2% |
| Operating expenses | $40.081 million | $64.791 million | Down 38.1% |
| General and administrative expense | $5.560 million | $7.522 million | Down 26.1% |
| Depreciation and amortization | $12.045 million | $11.223 million | Up 7.3% |
| Loss from operations | $(10.631) million | $(9.814) million | Worsened $0.817 million |
| Net loss | $(8.600) million | $(6.592) million | Worsened $2.008 million |
| Loss per diluted share | $(0.40) | $(0.37) | Worsened $0.03 |
| EBITDA, non-GAAP | $2.509 million | $1.441 million | Up $1.068 million |
Revenue declined primarily because of reduced crew utilization, low and uncertain commodity prices, lower client spending, weather-related delays, crew moves and a weaker Canadian season. Operating margin was approximately (22.6%) versus (13.3%) in Q1 2015; net margin was approximately (18.3%) versus (8.9%). G&A represented 11.8% of revenue versus 10.2% in the prior period. The company reported a $968,000 income tax benefit, reflecting a 10.1% effective tax rate versus a $3.313 million benefit and 33.4% rate in Q1 2015.
Net cash provided by operating activities was $8.763 million, compared with $3.262 million of cash used in Q1 2015. Investing activities used $13.372 million, including $11.250 million of net reinvestment in short-term investments and $4.232 million of capital expenditures. Financing activities used $2.255 million for debt and capital-lease payments. Cash and cash equivalents declined from $37.009 million at December 31, 2015 to $30.378 million at March 31, 2016.
At March 31, 2016, short-term investments were $32.250 million, accounts receivable were $26.720 million and total current assets were $94.953 million. Total debt and capital-lease obligations reported on the balance sheet were approximately $8.436 million, consisting of $7.141 million current and $1.295 million long-term obligations. Total stockholders’ equity was $202.034 million.
Material changes and operating developments
- The company operated four to six U.S. crews for most of the quarter, with a peak of eight early in the quarter, and averaged two Canadian crews before becoming inactive in Canada after the winter season.
- Management reported client-directed delays, reduced utilization in the lower 48 states, severe weather impacts continuing into Q2, and a weaker-than-expected Canadian season.
- Approximately three-quarters of revenue came from turnkey contracts. These contracts can benefit productivity but expose the company to weather and crew-downtime risk.
- Operating costs fell less rapidly than revenue on a total basis, and depreciation increased because of merger-related asset additions. Management expects depreciation to remain fairly flat in 2016.
- The company spent $4.232 million of its board-approved $10 million 2016 capital-expenditure budget, primarily for maintenance and recording-channel replacement or additions.
- Debt declined from December 31, 2015: commercial-bank notes fell to $6.904 million from $8.654 million, and the insurance-finance note fell to $526,000 from $838,000.
Guidance, outlook, risks and unusual items
Management expects seismic-service demand to remain reduced through much of 2016 because of low and uncertain commodity prices and lower client expenditures. Based on available information, it expected to operate four to six crews through Q2 2016. No formal revenue or earnings guidance was provided.
Management believes cash, short-term investments, operating cash flow and available revolving-credit capacity will be adequate for current needs and planned 2016 capital expenditures. The company had not drawn on its revolving line, which permits borrowing up to the lesser of $20 million or 80% of eligible receivables less the term loan, subject to the agreement. It was in compliance with all credit covenants at March 31, 2016.
Key risks include continued oil and gas price weakness, lower exploration spending, contract delays or cancellations, customer concentration and credit risk, reduced crew utilization, weather and access disruptions, high fixed costs, capital requirements, competition, foreign-currency exposure and potential asset impairment. Management did not anticipate impairment at quarter-end, but stated that prolonged or worsening commodity-price weakness could produce material future impairment charges.
The company recorded federal and state valuation allowances of $2.360 million and $61,000, respectively, against deferred tax assets. Future losses may generate reduced or no tax benefits. A $909,000 flood-insurance settlement was recognized in other income and operating cash flow. The filing states that pending ordinary-course legal proceedings are not expected to have a material adverse effect. No subsequent events were reported.
Important facts for investors to verify
- Assess the comparability of Q1 2015 results because of the reverse-acquisition accounting and merger-related costs included in that period.
- Track U.S. crew count, utilization, pricing and turnkey-versus-term contract mix as indicators of revenue and margin recovery.
- Monitor oil and gas prices, customer capital spending, project delays, weather disruptions and the pace of the Canadian restart.
- Verify liquidity against approximately $30.378 million of cash, $32.250 million of short-term investments, scheduled debt and lease maturities, and receivables-based borrowing capacity.
- Evaluate the effect of tax valuation allowances and the possibility of future asset impairment charges.
- Review the company’s $10 million 2016 capital-expenditure plan and whether operating cash flow is sufficient to fund it while meeting debt obligations.