Dawson Geophysical Company (ticker: DWSN) provides onshore seismic data acquisition services in the lower 48 states of the United States and Canada. The company was founded more than 60 years ago and today acquires and processes 2-D, 3-D and multi-component seismic data solely for its clients ranging from major oil and gas companies to independent oil and gas operators, as well as providers of multi-client data libraries.
Positive Black Sheep Type-of Quarter
Traditionally, the company’s fiscal first quarter (fourth quarter calendar year) presents weather problems and project delays due to the holiday season. However, this fiscal first quarter was anything but ordinary. OAG360 notes DWSN’s EBITDA margin during fiscal Q1’13 was 18.7%, up from 11.9% in fiscal Q1’12, and up from 14.4% in fiscal Q4’12.
Shares of DWSN were up 11.8% the day of the announcement on four times the average daily volume. DWSN reported fiscal Q1’13 net income of $2,928,000, or $0.36 per share, and generated $14,338,000 in EBITDA. Income from operations during fiscal Q1’13 increased 61% from fiscal Q1’12 to $5,194,000. DWSN’s sequential net income and EBITDA for fiscal Q1’13 increased 154% and 35%, respectively, from fiscal Q4’12 levels.
Outlook Strong for DWSN
The company believes its order book is capable of sustaining fourteen crews well into 2013 largely driven by exploration activity in the Eagle Ford Shale, Bakken Shale, Marcellus Shale, Mississippi Lime of Kansas and Oklahoma, and the Permian Basin. In late January 2013, DWSN mobilized its first crew in Canada. The company entered the Canadian market mid-2012.
Continued increases in utilization rates and contract terms, coupled with sustained demand in the oil and liquids rich plays here in the U.S. and Canada, positions DWSN for long-term growing opportunities. DWN’s revenue net of third-party reimbursable charges increased 11% from the first quarter of 2012, and the company saw a significant reduction in third-party charges as a percentage of revenue. Combine this with the fact that unfavorable contract terms are starting to roll off from the 2009/2010 time frame, and we believe DWSN is off to a quick start in fiscal 2013.
Upgrading Technology – Maintaining Balance Sheet
DWSN continues to upgrade its acquisition technology to enhance sub surface images for its clients with cash on hand. During fiscal Q1’13, the company replaced an I/O RSR recording system on an existing crew with the purchase of 12,000 Geospace GSX single-channel cable-less units, and replaced a set of vibrator energy source units on an existing crew with the purchase of ten INOVA AHV IV vibrator energy source units. Shortly after the quarter DWNS, purchased 2,500 channels of the Wireless Seismic RT System 2 recording system.
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DWSN increased its capital budget, to $50 million from $40 million, as it has done in years past to purchase new equipment. As mentioned, the new equipment provides DWSN an advantage over other seismic operators in the U.S. by capturing clearer, more advanced sub surface images for its clients. Due to the company’s strong financial position, the company is able to make purchase decision such as these to high grade its fleets at a moment’s notice. DWSN has working capital of $52 million, only $19.4 million in debt, and $39 million in cash and equivalents. All of that aside, the company has an undrawn $20 million revolving credit line. Given the varied outlook on commodity prices for 2013, we believe DWSN’s strong balance sheet provides them ample opportunities to weather the storms, or capture the upside in an expanding seismic market.
All else being equal, we are ready to see if DWSN’s continued shift to cable-less equipment will have a measurable effect on productivity and efficiencies in quarters ahead.
EnerCom’s The Oil & Services Conference™ 11
Dawson Geophysical will present at EnerCom’s The Oil & Services Conference™ 11 at 9:40am Pacific Time on Tuesday, February 19, 2013. You can listen to the live webcast here.
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Dawson following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
*Johnson Rice & Co. (2.11.13)
Key Takeaway:
Dawson reported strong fiscal 1Q13 results ahead of our expectations as earnings rebounded nicely from recent quarterly results plagued by utilization issues. 1Q13 performance was even more impressive (gross margins +460bp q/q) given this is traditionally a seasonally weak period for DWSN. Looking forward, we expect further sequential improvement as the order book remains strong with work for 14 crews well into ’13 (primarily in oil/liquids basins), crew efficiencies are improving and pricing/contract terms appear steady.
Updating estimates. We are adjusting our ’13 EPS estimate higher to $1.96 from $1.85 previously and introducing our ’14 EPS estimate of $2.14. Our ’13 EPS estimate moves higher reflecting the 1Q13 beat and higher gross margins than previously anticipated partially offset by modestly higher G&A and depreciation expectations.
Strong operational performance, expect further sequential improvement. After two consecutive quarters were plagued by utilization issues (i.e. weather, permit delays, etc.), Dawson posted impressive operational results in 1Q13 highlighted by significant sequential gross margin improvement (+460bp). Benefiting from a backlog that remains strong, pricing/contract terms that are steady, and improving crew efficiencies, we see potential for continued margin improvement throughout the remainder of ’13. We note the backlog remains largely oil/liquids focused in the Bakken, MS Lime, Eagle Ford, and Permian.
Increasing capital budget for ’13. Dawson announced it has raised its capital spending budget for ’13 to $50 million (from $40 million previously). Management’s spending focus remains on increasing its cableless acquisition systems, additional energy source units and funding of its Canadian operations.
Canadian crew begins work on first project. Dawson noted it began work on a multi-component project for its first crew in Canada during 1Q13. Management still expects to operate only one crew in the region this upcoming winter season. Despite a more difficult winter season than initially anticipated, DWSN continues to see Canada as a long term growth opportunity for the company.
*Johnson Rice & Co. (2.8.13)
Dawson reported fiscal 1Q13 EPS of $0.36, ahead of our estimate of $0.27 and consensus of $0.28. DWSN reported EBITDA of $14.3mm vs. our estimate of $12mm. The beat vs. our estimate was driven primarily by lower-than-expected costs while revenue was roughly in-line with our forecast. Looking ahead, DWSN’s oil/liquids focused order book remains capable of sustaining 14 crews well into ‘13 while management has increased its annual capital budget to $50mm (from $40mm) for add’l cableless equipment and to support its Canadian operations.
Dawson reported revenue of $76.6 million, compared to our estimate of $77 million, which increased 5% sequentially vs. 4Q12 revenue of $73 million. Gross margin was 23.4% vs. our estimate of 19.1%, increasing 460 bps sequentially compared to 4Q12 gross margins of 18.8%.
DWSN noted the order book reflects commitments capable of sustaining 14 fully operational crews well into calendar ‘13. DWSN remains largely oil/liquids driven in the Permian, Eagle Ford, Niobrara and Bakken. Management noted it began its first multi-component project in Canada in January and continues to expect to operate one crew in Canada this winter season.
DWSN now anticipates a capex budget in fiscal ’13 of ~$50mm (from $40mm previously). We note DWSN spent $47.6mm in fiscal ’12. Management remains focused on purchasing additional cable-less recording equipment coupled with further equipment requirements for the Canadian operations.
*Raymond James Equity Research (2.8.13)
Recommendation: Dawson reported stronger than expected F1Q13 earnings as the company benefited from improved utilization driving the 10% increase in the stock price. While the company’s improved efficiencies are notable, we maintain our Market Perform rating given our bearish outlook for oil and thus seismic activity. However, the company’s strong balance sheet and limited debt balance should serve the company well during the downturn.
Sustainable cable-less efficiencies? Dawson’s strong F1Q13 results were surprising as seasonally this quarter is usually plagued by challenging weather, shorter days, and the holiday season. A significant driver of the seasonally strong results was Dawson’s continued shift from cabled to cable-less equipment. Cable-less equipment offers advantages with image quality, terrain versatility, as well as increased productivity. While we expect that the equipment will continue to improve the company’s operations and efficiencies, we anticipate margin compression in our bearish oil environment, due to lower pricing as well as reduced industry activity.
Movin’ on up … to Canada: During January, Dawson activated a crew in Canada to work during the winter season. While the crew will only work for ~60 days in F2Q13, management expects to operate crews in and out of the country through the winter seasons going forward. It is important to note that since the U.S. winter weakness coincides with strength in Canada, this should be beneficial to the company’s winter operations.
Balanced order book: Dawson’s order book has been getting increasingly more balanced. While the company has increased its operations in the western U.S. (partially because of gas to oil demand shift), the company’s orders are spread across the major oil/liquids plays. Additionally, although the portfolio remains primarily turnkey contracts, the company is getting more weather downtime protection and continues to layer on term contracts as well. While the turnkey contracts offer more upside, we view a more balanced mix as positive in our declining activity forecast.
F1Q13 recap: Dawson posted clean EPS of $0.36 vs. our estimate at $0.22 and the Street at $0.28. The beat was driven by lower than expected costs as the company was able to realize increased utilization rates and improved contract terms, with operating margins coming in ~280 basis points (bp) above our expectations.
Estimates: On the heels of a F1Q13 earnings beat and further guidance from management, we are revising F2013 estimates up from $0.65 to $1.00 while we are initiating F2014 estimates of $0.75.
Valuation: We remain on the sidelines with a Market Perform as we continue to expect consensus estimate cuts on a North American activity slowdown in 2013.
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