Q3 2021 Dawson Geophysical Co Earnings Call

November 4, 2021

Please standby we're about to begin.

Statements made by management during this call with respect to forecast estimates or other expectations regarding future events or which provide any information other than historical facts may constitute forward looking statements within the meaning of the private securities litigation.

And reform Act of 1995.

These forward looking statements are based on management's current expectations and include known and unknown risks and uncertainties and other factors many of which the company is unable to predict or control that may cause the company's actual future results or performance to material.

Yeah.

Materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the S. E C.

Including in the company's annual report on Form 10-K filed with the SEC on March 16th 2021 and in any subsequent quarterly reports on Form 10-Q filed with the SEC for.

Furthermore, as we start this call. Please also refer to the statement regarding forward looking statements incorporated in the company's press release issued this morning in the company's press release issued on October 25th 2021 regarding the merger agreement with Wilks Brothers LLC and please note that the contents of the company.

The conference call. This morning is covered by those statements. During this conference call management will make references to EBITDA, which is a non-GAAP financial measure a reconciliation of the non-GAAP measure to the applicable GAAP measure can be found in the company's current earnings release.

A copy of which is located on the company's website Www Dot Dawson three D dotcom.

Management will discuss the pending transaction with Wilks brothers LLC, including the tender offer during this conference call for further information regarding the tender offer and merger with Wilks brothers LLC. Please refer to the schedule T O filed by WB acquisitions, Inc.

A subsidiary of Wilks brothers LLC on November <unk> 2021 the company solicitation recommendation statement on schedule 14 benign filed on November 1st 2021 and the full text of the merger agreement, which was filed as an exhibit to the company's current report on form.

8-K on October 25th 2021.

This call is scheduled for 30 minutes and the company will not provide any guidance today's call is being recorded I would now like to turn the call over to Stephen jumper, Chairman President and C. E O of Dawson Geophysical Company. Please go ahead Sir.

Well. Thank you Paula good morning, and welcome to Dawson Geophysical Company's third quarter 2021 earnings and operations Conference call as Paula said My name is Steve jumper, Chairman President and CEO of the company joining me on the call is Jim <unk> Executive Vice President and Chief Financial Officer.

Later during this call I will touch on the originally announced tender offer for all shares of Dawson.

Its brothers LLC.

Www Dot Dawson three D not Paul.

Formation reported on this call speak only of today Thursday November four 2021, and therefore, you are advised the time sensitive information may no longer be accurate as of the time of any replay listening.

Turning to our preliminary third quarter ended September 32020 financial results.

For the third quarter ended September 32020, the company reported revenues of $1 9 million a decrease of approximately 78% compared to $8 7 million for the quarter ended September 32020 for the third quarter of 2021, the company reported a net loss of seven 9 million.

Or <unk> 33 loss per common share compared to a net loss of 7.8 million or <unk> 33 loss per common share for the quarter ended September 32020, the company reported EBITDA of negative $4 7 million for the quarter ended September 32020 compared to <unk>.

EBITDA of negative $3 8 million for the quarter ended September 30 2020.

Activity levels during the third quarter of 2021 remain depressed as the company had one seismic data acquisition crews operating in the lower 48 with extended periods of low utilization.

The company's one active crew was idled from early September to mid October the near term outlook for onshore seismic data acquisition activity in the U S remains challenged notwithstanding the currently elevated prices for oil and natural gas based on currently available information. The company has one active low rate.

Lower 48 crude resumed operation in mid October on a small few thousand channel project with a duration of approximately seven days and as further scheduled for early February of 2022 with current projects of various sizes and channel count requirements, the largest of which is 65000 Chan.

Those with a duration of approximately 45 days the.

The Canadian season began earlier than in recent years the company expects to operate two crews in Canada in the back half of the fourth quarter of 2021 through the end of the winter season, which concludes at the end of the first quarter of 2022, the company has or anticipated to be awarded several additional mid sized projects.

<unk> and lower 48, each of which will be pushed into late 2022, primarily due to land access issues.

Bid activity remains at historically low levels and visibility into 2022 is limit in lower 48 due to a lack of demand for onshore seismic data acquisition projects in both Canada and the lower 48 prices for our service has softened in the last quarter I will now turn to <unk>.

Troll of the call over to Jim Brad who will review the financial results then I will return with some final remarks, and our outlook into the fourth quarter of 2021, and first quarter 2022, and I will touch on the recently announced tender offer for all shares of Dawson made by Wilks Brothers LLC Jim.

Thank you, Steve and good morning revenues for the third quarter of 2021 were $1 9 million a decrease of approximately 78% compared to $8 7 million for the quarter ended September 32020.

As stated in our earnings release issued this morning, the company's one active crew was idled from early September to mid October.

Cost of services in the third quarter of 2021 was $4 million.

Kris a 58% compared to $9 4 million in the same quarter of 2020.

General and administrative expenses were $2 4 million in the third quarter of 2021, a decrease of 25% compared to $3 3 million in the third quarter of 2020.

Depreciation and amortization expense in the third quarter of 2021 was $3 2 million a decrease of 21% compared to $4 1 million in the same quarter of 2020.

Net loss for the third quarter of 2021 was seven 9 million were <unk> 33 loss per common share compared to a net loss of $7 8 million or 33 cents loss per common share in the third quarter.

Of 2020.

EBITDA in the third quarter of 2021 was a negative $4 7 million.

Compared to EBITDA of negative $3 8 million in the same period of 2020.

An EBITDA reconciliation was provided in our earnings release issued this morning.

Now I'll cover some results for the nine months ended September 32021.

Revenues for the nine months ended September 32021 were $13 9 million a decrease of approximately 82% compared to $77 2 million for the nine months ended September 32020.

Cost of services for the nine months ended September 32021.

$18 2 million, a decrease of 69% compared to $58 2 million in the same period of 2020.

General and administrative expenses were $8 million for the nine months ended September 32021, a decrease of 29% compared to $11 2 million in the same period a year ago.

Depreciation and amortization expenses.

Were $10 4 million for the nine months ended September 32021, a decrease of 25% compared to $13 4 million in the same period a year ago.

Net loss for the nine months ended September 32021 was $22 1 million were 94 cents loss per common share compared to a net loss of $5 3 million were 23 loss per common share for the nine months ended September 32020.

EBITDA for the nine months ended September 32021 was negative $12 2 million.

Compared to positive EBITDA of $7 8 million in the same period of 2020.

An EBITDA reconciliation was provided in our earnings release issued this morning.

And now I'll highlight some balance sheet items as of September 32021, our balance sheet includes debt, including obligations under financing leases of approximately 256000.

Cash and short term investments of $41 6 million. Our current ratio was eight eight to one and working capital was approximately $39 4 million.

And with that I'll turn the call back to Steve for some comments on our operations and the recently.

The announced tender offer for all shares of Dawson made by Wilks Brothers LLC.

Well thank you Jim.

As indicated in our third quarter earnings release issued this morning activity levels in the third quarter of 2021 remain depressed as the company had one seismic data acquisition crews operating in the lower 48 with extended periods of low utilization bid activity remains at historically low levels and visibility into 2022.

Is limited in the lower 48.

The lack of demand for onshore seismic data acquisition projects in both Canada, and the lower 48 prices for our services softened in the last quarter the.

The company's balance sheet includes $41 6 million of cash restricted cash and short term investments 325000 accounts receivable and 39.

Three.

It gives me $39 4 million of working capital as of September 30.

2021, compared to $46 five of cash restricted cash and short term investments.

Seven $3 billion of accounts receivable.

And $51 4 million of working capital as of December 31, 2020.

The company's balance sheet also reflects a negative 975000 of net working capital excluding the impact of cash restricted cash and short term investments and current maturities of notes payable and finance leases and operating lease liabilities as of September 32021. This compares to five.

$8 million of net working capital, excluding the impact of cash restricted cash and short term investments and current maturities of notes payable and finance leases and operating lease liabilities as of December 31 2020.

Our cash receivable have decreased from $7 3 million at December 31, 2020 to the current level of 325000 at September 32021.

Due to declining net working capital levels, resulting from the down trending North American onshore seismic services businesses and accelerating in 2019, the company significantly reduced its level of capital expenditures below typical historic levels to date in 2021. The company has made only 329000 of <unk>.

Capital expenditures against an initial 2021 capital budget of $1 million.

The continuing reduction in current assets and net working net working capital level. Since 12. Since December 31, 2020 is attributable to the inability of the company to maintain a cash neutral position because of declining revenue stream and its ongoing cash requirements to maintain staffing level necessary to service existing.

And anticipated client projects, even at the company's reduced head count levels until demand for North American onshore seismic services dramatically increases, which the company does not foresee at this time based on presently available information as noted above and below we believe that downward pressure on cash in net.

Working capital balances will continue and that we will face challenges in making the significant capital investments necessary to grow our revenue stream, if and when demand increases.

The current environment, which we operate is like none other experienced near 37 year career with the company.

Recent significant increases in oil and natural gas prices capital spending levels within our North American onshore client base has only slightly improved.

In 2021, it is not anticipated to increase meaningfully in 2022 and possibly thereafter.

Spending levels in 2022 are anticipated like 2021 to be well below.

2019, and prior year levels.

Further growth in capital spending allocated to exploration activities remain very limited as customers focus on lower risk production and drilling opportunities.

Exploration and production E&P companies are continuing on their path of capital discipline, focusing on shareholder returns and debt reduction, while maintaining spending levels well below cash flow as referenced in several recent wall Street journal articles and.

<unk> in our multi client customer customers are capital constrained as well as our ending underwriting levels are based upon capital commitments on behalf of the E&P companies. Therefore, the majority of our current bid activity remains contingent upon capital commitments from both client communities, which in turn leads to ongoing.

Levels of project uncertainty.

I will now provide an update on the pending transaction with Wilks brothers LLC.

As previously announced on October 25, 2021, the company has entered into a definitive merger agreement with Wilks brothers LLC pursuant to which a subsidiary of wells has commenced as of November one 2021, a tender offer to acquire all of the <unk>.

Company's outstanding common shares for $2 34 per share in cash the offer will remain open until November 32021 subject to potential extensions in certain circumstances.

The tender offer is subject to customary conditions, including the tender of a number of company shares pursuant to the offer that together with company shares then owned by <unk> and its affiliates represents at least 80% have been outstanding company shares as provided in the merger agreement Wilkes.

Has the option, but not the obligation and subject to company's consent to close the offer even if the 80% minimum condition has not been satisfied.

The transaction is not subject to a financing condition.

Subject to the closing of the offer the merger agreement also contemplates that Wilkes will acquire any shares of Dawson that are not tendered into the offer through a second step merger at the offer price, which will be completed as soon as practicable. Following the closing of the offer and require approval of it.

At least 80% of the outstanding shares of the company.

Subject to the closing of the offer the parties expect to complete the merger in the fourth quarter of 2021.

Wallace and company LLC is serving as exclusive financial advisor to the company and Baker Botts LLP is serving as company's legal adviser.

In evaluating the merger agreement and the transactions the board consulted with the company's management team Baker Botts is outside legal counsel molars and moelis as outside financial advisers.

The board has unanimously approved the merger agreement and determined that the terms of the merger agreement and the transaction, including the offer.

And the merger or advisable and in the best interest of the company's shareholders.

The board with the assistance of Moelis.

<unk>, an ongoing review and analysis of the company's potential strategic opportunities and alternatives and mid 2019 to enhance and preserve shareholder value.

In 2019, it became apparent that spending levels on behalf of exploration and production companies were changing as energy investors became focused on returns and not growth.

At that time demand for North American seismic services began to decline in the company reduced its own capex spending in response to market conditions during.

During this same period company management commenced efforts to scale the company to match the declining demand for seismic services.

In reaching its decision to enter into the transaction with Wilkes. The board has thoroughly considered the potential strategic options available to the company, which are well chronicled in our recent SEC <unk> nine filing the current long the current and long term prospects for the.

Any in the sector at which it operates.

Including the lack of meaningful and sustainable demand for North American onshore seismic services as well as an ongoing skilled labor shortage required to meet any potential increase in demand.

Further the company management team, including myself.

As advised the board that until demand for North American seismic services dramatically increases.

Which the company does not foresee at this time based on presently available information.

Believes that downward pressure on cash and working capital balances will continue even if the company undertakes further right sizing efforts relative to demand and the company will face challenges in making significant capital investments necessary to grow its revenue stream, if and when demand <unk>.

Creases.

The board believes that this transaction presents all of the company's shareholders with a compelling value for their shares in.

An opportunity to achieve liquidity for their shares at the offer price without putting pressure on the share price.

And it's most optimal path forward and is in the best interest of the shareholders.

And unanimously recommending that shareholders accept the offer and tender their shares pursuant to the offer.

The board considered numerous factors, including the following in among others and not necessarily in order of relative importance.

Beginning in early 2019.

I began regularly reporting to the lead director of our board regarding strategic outlook.

Consideration of actions the company could take to preserve and enhance shareholder value and industry headwinds.

At regularly scheduled board meeting the board discuss potential strategies to return capital to shareholders, such as share buyback programs, our cash dividend.

The board also discuss the outlook and potential strategic options and the potential engagement of a financial adviser to assist with assessing the market and potentially potential strategic options for the company.

On July 22019 at the direction of the board.

The company engaged moelis as its exclusive financial advisor to assist it and evaluating the potential strategic opportunities available to the company.

The company engaged most after interviewing other potential advisors due to their extensive industry experience and they are independent from the company.

The board further determined that Baker botts, the company's principal outside counsel should continue in such role, including representing the company in evaluating potential strategic opportunities.

On September 24, 2019, the board held a meeting in Dallas, Texas at.

At which representatives for Moelis and Baker Botts were present as well as certain members of senior management of the company.

Let's review the company's market performance and outlook financial considerations relating to multiple potential transaction structures, including a bolt on acquisition of transformational transaction strategic venture our merger candidates and the potential sale of the company.

Following this meeting at the instruction of the board most engaged in preliminary and informal conversations with multiple potential transaction partners.

Yes.

After considering the actions events and processes described under background of offer in merger and our <unk> nine filing and taking into consideration. The factors described under reasons for recommendation and the <unk> nine filing the board unanimously.

Retirement and declared the tender offer and the merger with the Wilks, where advisable in the best interest of the company and its shareholders approved and declared it advisable that the company enter into the merger agreement with Wilks brothers, LLC and consummate the transaction contemplated thereby.

Recommended the shareholders of the company other than Wilks brothers, LLC and its subsidiaries tender their shares in the offer and if applicable approved the merger each action taken by the board as described under.

Background of offer and merger and the <unk> nine filing was made on a unanimous basis.

The company considered the all cash nature of the consideration in the offer would provide shareholders a certainty of value allow them the ability to invest the proceeds as they choose and it allows shareholders such opportunity in light of the low trading volume and liquidity in the common stock.

The board considered the liquidity that common the companys common stock.

It's historically load average daily trading volume, which over the last 30 day period was 56986 shares.

<unk> determined that in order for the shareholders to monetize or sell their shares there is a meaningful period of time that would have to occur prior to such sale and could result in negative pressure on the company stock price.

In making its recommendation the board considered the outlook for the North American seismic sector.

During periods of commodity price decline as well as commodity price volatility demand for on North American onshore seismic data acquisition services typically decline as oil and gas operators forego.

Cost of new seismic data acquisition and focus Alternatively on reprocessing existing seismic datasets utilizing new computer algorithms.

The global oil and mass Mark gas markets have remained challenged following the commodity price collapse in late 2014, resulting in reduced capital spending by the company's North American onshore customer base the.

The volatile nature of the industry has resulted in the client base being very conservative on capital spending despite.

Despite the recent increase in oil and gas prices the demand for North American onshore seismic.

Acquisition services remains depressed for a variety of factors, including <unk>.

<unk> broad investor preference for the E&P operators to return capital to shareholders, rather than investment of capital to increase drilling and production to E&P operator focused on the.

On to deploy development capital to a relatively low risk reserves with attractive with attractive drilling economics, rather than exploration spending.

Three robust commodity hedging programs implemented implemented by E&P operators prior to the recent increase in commodity prices prices, which has limited E&P E&P operators ability to realize the financial benefit of increased commodity prices and lastly, the ability or prep.

<unk> operators to reprocess existing seismic data rather than acquire new or updated seismic data. Moreover, capital spending levels within E&P companies has only slightly improved in 2021 and is not anticipated to increase significantly in 2022.

Or thereafter spending levels in 2021, and 2022 are anticipated to be well below 2019 and prior year levels.

More specifically spending on new data acquisition projects in 'twenty, one and 'twenty two are anticipated to be a fraction of overall E&P spending and at historically low levels.

Recent seismic data related spending appears to be focused on reprocessing of existing seismic data set, particularly with those E&P companies involved in merger and acquisition activity recent merger and acquisition activity. Among E&P company has resulted in increased drilling low located.

<unk> and access to complementary existing seismic datasets, while reducing the number of overall E&P company.

The company spends meaningful cost and management time on being a publicly listed company.

The company estimates that these costs totaled approximately $1 $5 million per year and are comprised of legal accounting audit director fees public company listing fees and annual meeting and proxy costs. Additionally, meaningful time and effort is spent on these functions by our management team. These costs will continue to burden the company in <unk>.

<unk> cash balances as long as the company remains public.

Until demand for North American onshore seismic services dramatically increases, which the company does not foresee at this time based on currently available information. It believes the downward pressure on cash and net working capital balances will continue even if the company undertakes further right sizing efforts.

Relative to demand and the company will face challenges in making the significant capital investments necessary to grow its revenue stream.

If and when demand increases.

In reaching its decision.

To enter into the transaction with <unk>. The board has thoroughly considered the potential strategic options available to Dawson. The current long term prospects of the company and the sector in which it operates including the lack of meaningful and sustainable demand for seismic services as well as ongoing skill labor shortage required.

To meet any potential increase in demand further management has advised the board that until demand for North American onshore seismic services dramatically increases.

The company does not foresee at this time based on presently available information it.

Believes a downward pressure on cash and net working capital balances will continue.

Even at the company undertakes further right sizing efforts.

And the company will face challenges in making significant capital investments necessary to grow its revenue stream.

If and when demand increases.

The board believes the top.

This transaction presents all dolphin shareholders with an opportunity to achieve liquidity for the shares to the offer price.

Is the most optimal path forward and isn't the best interests of shareholders.

Additional information concerning the offer.

And the Dawson board of Directors' recommendation relating there too including the reasons towards recommendation is contained in the following filings with the Securities and Exchange Commission.

One issued by Wilkes offer to purchase for cash all outstanding shares of common stock of Dawson Geophysical company at $2 34 per share.

$2 34 per share by <unk> acquisitions, Inc. A subsidiary of Wilks Brothers LLC dated November one 2021, and two issued by Dawson solicitation and recommendation statement on schedule <unk> nine of Dawson Geophysical cut.

<unk> dated November one 2021.

I noticed that we have.

<unk> reached to 930 Mark.

With the call was scheduled for 30 minutes, but Paula I am open to take maybe a question or two.

Here briefly so.

I'll turn it back to you Paula.

Thank you to signal for a question. Please press star one on your telephone keypad also with you are using a speaker phone. Please make sure that your mute button is turned off to allow your signal to reach our equipment.

You may remove yourself from the queue at any time by pressing star two.

Once again it is star one for questions and we will pause to give everyone the opportunity to signal.

And we will take our first question from Bruce merger with turnaround capital.

Steve I was wondering if you can discuss because the other alternative for shareholders. Because many of US are long term, we've been involved for years and anticipated the company losing cash.

What was the alternative you're saying that you couldnt right size the company to diminish the cash losses, and I think we deserve for the year.

Were those planned.

Given that.

Is that you will be at 66000 channel count which is breakeven.

Why you're giving up now.

You could be a breakeven, but I want you to specifically discuss why you think of right sizing plan would sale to stop casual losses.

Okay Bruce.

For the question.

We have been.

Attempting to right size the company for an extended period of time.

Yeah.

We have taken on the.

Position that we are attempting to.

Reduce costs all across the board in.

And continue to maintain.

A level.

Okay.

And employee level necessary to operate.

Crew or two as they become available so our employee count over the last few years has gone down from 1000 or so.

All the way down to about 100 people and that includes the base core of a.

Of a crew and we were down for a long time as we discussed in Q2, and Q3 and we've had a difficult time getting getting labor back and we've had a difficult time getting people back and so we've had a difficult and we are continue.

Continuing to have.

Staffing level concerns going forward and so.

We have looked all across the board on all of our costs, we have redone as many leases as we can we've taken pay cuts at all levels of the company.

We have.

Increased healthcare cost on our employees.

We have.

<unk>.

Renegotiated.

Sure I mean, we've been all across the board.

Looking at ways to downsize and reduce fixed costs and we've done a great job of that you can look in the.

And in our filings you can see that our G&A and our overall costs have gone down significantly.

To cut further.

Would further.

Uh huh.

Impact our ability to respond to demand.

And I'm, not saying it can't be done, but it would it would be difficult.

And quite frankly, I don't believe there is enough there to make a meaningful impact.

The current cash burn thats going on relative to the receivable level that has come down so low we.

We do have a 65000 channel crew that is going to go to work.

That typically is good if you look back over the last few years.

And when we've had large channel count crews working.

Pretty consistently.

We have done fairly well financially from a bottom line standpoint.

Breakeven so to speak when we've had more than one working we've done well.

But I would say that.

I would clarify that with this.

We have a 65000 channel crew, which is large capacity crude but its only going to be out for 45 days.

From now until February.

All the other projects, we have in house or smaller than that much smaller than that now we're ramping that crew size up as we go starting small and moving to the next one.

And moving crew size up.

To be where we need to be when that crew goes and this goes back to the field.

Having said that there is very little if any visibility currently past February of 2022.

That's in the lower 48.

So right now we are a little.

Pressed to maintain a high utilization level of one large group.

Canada started a little bit earlier than anticipated.

And we'll have two crews through the back half of the year and into the front half of next or into the first quarter of next year.

In both situations.

Pricing on these project has softened.

I would say considerably from where they were lets say a year ago. So we've got a pricing issue as well.

So I would just Lee leave you with this Bruce and I appreciate your question.

We're not throwing in the town.

Oh, we have an opportunity here.

We believe as a compelling value, giving given where the market is.

For our shareholders.

As well as an opportunity.

Two two.

<unk>.

Basically.

Our liquidity event.

Behind all of this.

Is the fact that we have had very little capital expenditures into this business and in the last three years. We've done everything we can do to preserve the cash balance. Unfortunately, we're now running out of receivables and so when our cash burn.

And so even with some level of pickup in 'twenty, two which I don't believe.

Is coming.

We will be hard pressed over time to make any necessary capital investments over the next three or four years, unless there's a dramatic change.

So that's where we are we had some bid activity that we talked about in the Q2 release.

<unk>.

Canada was out there in late summer early part of <unk>.

Q3, but quite frankly, it just has not materialized.

We believe that when we look at the market.

And the situation in the offer we believe that this is a.

Compelling opportunity for our shareholders as well as the company and its employees.

Steve It sounds to me like you are.

You said that you were going to give guidance for.

For the first quarter, but based on what you just told me it sounds like this company is going to be cash breakeven.

Don't know.

Donald.

Hold on.

Listen Liberty group.

Bruce listened.

I apologize for interrupting.

I am not going to get into third into fourth quarter and first quarter guidance.

I never have.

What I will tell you.

Is that the.

65000 channel crew has limited.

Ltd.

Visibility.

And it is not there. So we are at small crew working through October getting up to a little bit bigger in November.

Maybe a little bit larger at the end of the year into Q1, and so keep in mind prices as we mentioned have softened.

And so I'm not giving guidance, yes, there is some short term positives here.

Not denying that and we're going to have a little creep a little bit of increased activity in Q4.

In Q1 in Canada, and we have a little bit of visibility in the lower 48.

But we do not it is November 4th and we do not have.

Projects in hand currently.

That will.

We have some projects, we think we're going to be awarded as we said in the press release, but theyre being pushed back to later in the year and so.

We are certainly focused our our thought process here.

On the long term outlook of the business the cash burn that we anticipate the capital spending requirements that we think will be necessary over time and we believe.

This is the.

This is a compelling value.

For our shareholders and provides a nice liquidity event option and so that's where we are I. Appreciate your your question and your comment Bruce always do.

We're going to move forward here, and it's $9 45, and we're going to.

I'll close this thing down and.

And.

In conclusion, the North American seismic data acquisition market is currently challenged and anticipated to remain so in the near future E&P Capex spending levels in North America are expected to remain well below 2019 and prior year levels in 2022 with eggs.

With exploration spending to be a small fraction of overall spending.

Due to the anticipated demand levels for the company's services. The board of directors of the company recommends shareholders tender their shares and vote in favor of the merger with Wilkes.

As detailed in our 2000 14D-9, all directors intend to tender their shares and vote in favor of the merger the board of directors as well as management believe given market condition. The offer price provides compelling value with a liquidity opportunity in the company's thinly traded stock is the best interest of the company its shareholders.

<unk> employees. The transaction provides the transactions provide the company with financial flexibility to meet possible future capex requirements, not otherwise available to the company.

I wish to thank our hard working employees, our valued customers and most of all our trusted long term and short term shareholders.

Shareholders, who have additional questions are encouraged to contact the company contact information is provided in the earnings release shareholders May also contact Anthony <unk> at edge consulting solutions.

At Anthony at edge consulting solutions Dot com.

Anthony at edge consulting solutions Dot com.

Thank you for listening in this morning and have a good holiday season. Thank you.

Thank you and that does conclude today's conference we'd like to thank everyone for their participation you may now disconnect.

[music].

Litigation Reform Act of 1995.

Yeah.

Clothing in the company's annual report on Form 10-K filed with the SEC on March 16th 2021, and in any subsequent quarterly reports on Form 10-Q filed with the SEC.

Furthermore, as we start this call. Please also refer to the statement regarding forward looking statements incorporated in the company's press release issued this morning, and the company's press release issued on October 25th 2021 regarding the merger agreement with Wilks Brothers LLC and please note that the contents of the call.

<unk> Conference call. This morning is covered by those statements. During this conference call management will make references to EBITDA, which is a non-GAAP financial measure a reconciliation of the non-GAAP measure to the applicable GAAP measure can be found in the company's current earnings release, a copy of which is.

Located on the company's website www dot dolphin three D dotcom.

It's a dairy of Wilks brothers LLC on November one 2021, the company solicitation recommendation statement on schedule 14 benign filed on November one 2021, and the full text of the merger agreement, which was filed as an exhibit to the company's current report on form.

8-K on October 25th 2021.

Well. Thank you Paula good morning, and welcome to Dawson Geophysical Company's third quarter 2021 earnings and operations Conference call as Paula said My name is Steve jumper, Chairman President and CEO of a company joining me on the call are Jim <unk> Executive Vice President and Chief Financial Officer.

Later during this call I will touch on the recently announced tender offer for all shares of Dolphin made by Wilks Brothers LLC.

Before we start the call just a few things to cover if you would like to listen to a replay of today's call. It will be available via webcast by going to the Investor Relations section of the company's website at Www Dot Dawson three D. Dot Com information reported on this call speak only of today Thursday November.

Remember for <unk> 2021 and therefore, you are advised the time sensitive information may no longer be accurate as of the time of any replay listening.

Turning to our preliminary third quarter ended September 32020 financial results.

Or <unk> 33 loss per common share compared to a net loss of seven 8 million or <unk> 33 loss per common share for the quarter ended September 32020, the company reported EBITDA of negative $4 7 million for the quarter ended September 32020 compared to <unk>.

EBITDA of negative $3 8 million for the quarter ended September 32020.

Activity levels during the third quarter of 2021 remain depressed as the company had one seismic data acquisition crews operating in the lower 48 with extended periods of low utilization.

Lower 48 crude resumed operation in mid October on a small few thousand channel count projects with a duration of approximately seven days and as further scheduled for early February of 2022 with current projects of various sizes and channel count requirements, the largest of which is 65000 channel.

With a duration of approximately 45 days the.

Next in lower 48, each of which will be pushed into late 2022, primarily due to land access issues.

Bid activity remains at historically low levels and visibility into 'twenty 'twenty. Two is limited in lower 48 due to a lack of demand for onshore seismic day data acquisition projects in both Canada and the lower 48 prices for our service has softened in the last quarter I will now turn to <unk>.

Thank you, Steve and good morning revenues for the third quarter of 2021 were $1 9 million a decrease of approximately 78% compared to $8 7 million for the quarter ended September 32020.

As stated in our earnings release issued this morning, the company's weren't active crew was idled from early September to mid October.

Cost of services in the third quarter of 2021 was $4 million, a decrease of 58% compared to $9 4 million in the same quarter of 2020.

General and administrative expenses were $2 4 million in the third quarter of 2021, a decrease of 25% compared to $3 3 million in the third quarter of 2020.

Depreciation and amortization expense in the third quarter of 2021 was $3 2 million a decrease of 21% compared to $4 1 million in the same quarter of 2020.

Net loss for the third quarter of 2021 was seven 9 million or 33 cents loss per common share compared to a net loss of $7 8 million or 33 cents loss per common share in the third quarter.

Of 2020.

EBITDA in the third quarter of 2021 was a negative $4 7 million compared to EBITDA of negative $3 8 million in the same period of 2020.

An EBITDA reconciliation was provided in our earnings release issued this morning.

Now I'll cover some results for the nine months ended September 32021.

Revenues for the nine months ended September 32021 were $13 9 million a decrease of approximately 82% compared to $77 2 million for the nine months ended September 32020.

Cost of services for the nine months ended September 32021 was $18 2 million a decrease of 69% compared to $58 2 million in the same period of 2020.

General and administrative expenses were $8 million for the nine months ended September 32021, a decrease of 29% compared to $11 2 million in the same period a year ago.

Depreciation and amortization expenses.

Were $10 4 million for the nine months ended September 32021, a decrease of 25% compared to $13 4 million in the same period a year ago.

Net loss for the nine months ended September 32021 was $22 1 million were 94 cents loss per common share compared to a net loss of $5 3 million were <unk> 23 loss per common share for the nine months ended September 32020.

EBITDA for the nine months ended September 32021 was negative $12 2 million <unk>.

Compared to positive EBITDA of $7 8 million in the same period of 2020.

An EBITDA reconciliation was provided in our earnings release issued this morning.

And now I'll highlight some balance sheet items as of September 32021, our balance sheet includes debt, including obligations under financing leases of approximately 256000.

Cash and short term investments of $41 6 million. Our current ratio was eight eight to one and working capital was approximately $39 4 million.

And with that I'll turn the call back to Steve for some comments on our operations and the recently.

Announced tender offer for all shares of Dawson made by Wilks Brothers LLC.

Well thank you Jim.

<unk> is limited in the lower 48.

Due to a lack of demand for onshore seismic data acquisition projects in both Canada and the lower 48 prices for our services softened in the last quarter the.

The company's balance sheet includes $41 6 million of cash restricted cash and short term investments 325000 accounts receivable and 39.3.

<unk> three <unk>.

$39 4 million of working capital as of September 30.

2021, compared to $46 five of cash restricted cash and short term investments.

Seven 3 million in accounts receivable.

$51 4 million of working capital as of December 31, 2020.

One 8 million of net working capital excluding the impact of cash restricted cash and short term investments and current maturities of notes payable and finance leases and operating lease liabilities as of December 31 2020.

Accounts receivable have decreased from $7 3 million at December 31, 2020 to the current level of 325000 at September 32021.

Capital expenditures against an initial 2021 capital budget of $1 million.

The continuing reduction in current assets net working net working capital level. Since 12. Since December 31, 2020 is attributable to the inability of the company to maintain a cash neutral position because of declining revenue stream and its ongoing cash requirements to maintain staffing level necessary to service existing.

And anticipated client projects, even at the company's reduced head count level until demand for North American onshore seismic services dramatically increases, which the company does not foresee at this time based on presently available information as noted above and below we believe that downward pressure on cash in net.

Working capital balances will continue and that we will face challenges in making the significant capital investments necessary to grow our revenue stream, if and when demand increases.

The current environment, which we operate is like none other experienced near 37 year career with the company.

Recent significant increases in oil and natural gas prices capital spending levels within our North American onshore client base has only slightly improved.

In 2021, it is not anticipated to increase meaningfully in 2022 and possibly thereafter.

Spending levels in 2022 are anticipated like 2021 to be well below.

2019, and prior year levels.

Further growth in capital spending allocated to exploration activities remains very limited as customers focus on lower risk production and drilling opportunities.

Constrained as well as our ending around underwriting levels are based upon capital commitments on behalf of the E&P companies. Therefore, the majority of our current bid activity remains contingent upon capital commitments from both client community, which in turn leads to ongoing levels of project uncertainty.

I will now provide an update on the pending transaction with <unk>.

<unk> LLC.

As previously announced on October 25, 2021, the company has entered into a definitive merger agreement with Wilks brothers LLC pursuant to which a subsidiary of Wilks has commenced as of November one 2021, a tender offer to acquire all of the <unk>.

Company's outstanding common shares for $2 34 per share in cash the offer will remain open until November 32021 subject to potential extensions in certain circumstances.

The tender offer is subject to customary conditions, including the tender of a number of company shares pursuant to the offer that together with company shares then owned by <unk> and its affiliates represent at least 80% have been outstanding company shares as provided in the merger agreement Wilkes.

Has the option, but not the obligation and subject to company's consent to close the offer even if the 80% minimum condition has not been satisfied.

The transaction is not subject to a financing condition.

At least 80% of the outstanding shares of the company.

Subject to the closing of the offer the parties expect to complete the merger in the fourth quarter of 2021.

<unk> and company LLC is serving as exclusive financial advisor to the company and Baker Botts LLP is serving as company's legal adviser.

In evaluating the merger agreement and the transactions the board consulted with the company's management team banker boxes outside legal counsel molars and Moelis as outside financial advisers. The board has unanimously approved the merger agreement and determined that the terms of the.

Merger agreement and the transaction, including the offer.

And the merger or advisable and in the best interest of the company's shareholders.

The board with the assistance of Moelis.

<unk>, an ongoing review and analysis of the company's potential strategic opportunities and alternatives and mid 2019 to enhance and preserve shareholder value.

In 2019, it became apparent that spending levels on behalf of exploration and production companies were changing as energy investors became focused on returns and not growth.

About that time demand for North American seismic services began to decline and the company reduced its own capex spending in response to market conditions.

During the same period company management commenced efforts to scale the company to match the declining demand for seismic services.

Current long the current and long term prospects for the company in the sector, which it operates.

Including the lack of meaningful and sustainable demand for North American onshore seismic services as well as an ongoing skilled labor shortage required to meet any potential increase in demand.

Further the company management team, including myself.

As advised the board that until demand for North American seismic services dramatically increases.

Which the company does not foresee at this time based on presently available information.

<unk>.

The board believes that this transaction presents all of the company's shareholders with a compelling value for their shares.

An opportunity to achieve liquidity further shares at the offer price without putting pressure on the share price.

At its most optimal path forward and it is in the best interest of the shareholders.

And unanimously recommending that shareholders accept the offer and tender their shares pursuant to the offer.

The board considered numerous factors, including the following in among others and not necessarily in order of relative importance.

Beginning in early 2019, I began regularly according to the lead director of our board regarding strategic outlook.

Consideration of actions the company could take to preserve and enhance shareholder value and industry headwinds.

At regularly scheduled board meeting the board discuss potential strategies to return capital to shareholders, such as share buyback programs, our cash dividend.

On July 20, <unk> 2019 at the direction of the board.

The company engaged moelis as its exclusive financial advisor to assist in evaluating the potential strategic opportunities available to the company.

The company engaged moelis after interviewing other potential advisors due to their extensive industry experience and they are independent from the company.

On September 24, 2019, the board held a meeting in Dallas, Texas at.

At which representatives for Moelis and Baker Botts were present as well as certain members of senior management of the company.

Now, let's review the company's market performance and outlook financial considerations relating to multiple potential transaction structures, including a bolt on acquisition of transformational transaction strategic venture our merger candidates in a potential sale of the company. Following this meeting at the instruction.

The board most engaged in preliminary and informal conversations with multiple potential transaction partners.

The board unanimously determined and declared the tender offer and the merger with the Wilks, where advisable in the best interest of the company and its shareholders approved and declared it advisable that the company enter into the merger agreement with Wilks brothers, LLC and consummate the transaction.

<unk> contemplated thereby.

Recommended the shareholders of the company other than Wilks brothers, LLC and its subsidiaries tender their shares in the offer and if the <unk>.

Applicable approved the merger each action taken by the board as described under.

Background of offer and merger and the 14 <unk> nine filing was made on a unanimous basis.

The company considered the all cash nature of the consideration the offer would provide shareholders a certainty of value allow them the ability to invest the proceeds as they choose and it allows shareholders such opportunity in light of the low trading volume and liquidity in the common stock.

The board considered the liquidity that common the company's common stock.

Historically load average daily trading volume, which over the last 30 day period was 56986 shares.

The board determined that in order for the shareholders to monetize or sell their shares there is a meaningful period of time that would have to occur prior to such sale and could result in negative pressure on the company stock price.

In making its recommendation the board considered the outlook for the North American seismic sector.

Cost of new seismic data acquisition and focus Alternatively on reprocessing exist existing seismic datasets utilizing new computer algorithms.

The volatile nature of the industry has resulted in the client base being very conservative on capital spending despite.

Despite the recent increase in oil and gas prices the demand for North American onshore seismic.

Acquisition services remains depressed for a variety of factors, including.

One broad investor preference for the E&P operators to return capital to shareholders, rather than investment of capital to increase drilling and production.

To E&P operator focused on the.

Deploying development capital to a relatively low risk reserves with attractive with attractive drilling economics, rather than exploration spending.

Or thereafter spending levels in 2021, and 2022 are anticipated to be well below 2019 and prior year levels.

More specifically spending on new data acquisition projects in 'twenty, one and 'twenty two are anticipated to be a fraction of overall E&P spending and at historically low levels.

Recent seismic data related spending appear to be focused on reprocessing of existing seismic data set, particularly with those E&P companies involved in merger and acquisition activity recent merger and acquisition activity. Among E&P company has resulted in an increased drilling low locate.

<unk> and access to complementary existing seismic datasets while.

Reducing the number of overall E&P company.

The company spends meaningful cost and management time on being a publicly listed company.

<unk> cash balances as long as the company remains public.

Relative to demand and the company will face challenges in making the significant capital investments necessary to grow its revenue stream.

If and when demand increases.

In reaching its decision.

To answer your into the transaction with <unk>. The board has thoroughly considered the potential strategic options available to Dawson. The current long term prospects of the company and the sector in which it operates including the lack of meaningful and sustainable demand for seismic services as well as ongoing skilled labor shortage required.

To meet any potential increase in demand further management has advised the board that until demand for North American onshore seismic services dramatically increases.

The company does not foresee at this time based on presently available information it.

Believe that downward pressure on cash and net working capital balances will continue even if the company undertakes further right sizing efforts.

And the company will face challenges in making significant capital investments necessary to grow its revenue stream, if and when demand increases.

The board believes the top.

This transaction presents all of <unk> shareholders with an opportunity to achieve liquidity for the shares with the offer price is.

As the most alcohol path forward and is in the best interest of shareholders.

Additional information concerning the offer.

In the Das and board of Directors' recommendation relating there too including the reason for its recommendation is contained in the following filings with the Securities and Exchange Commission.

One issued by Wilkes offer to purchase for cash all outstanding shares of common stock of Dawson Geophysical company at $2 34 per share.

$2 34 per share by <unk> acquisitions, Inc. A subsidiary of Wilks Brothers LLC dated November one 2021, and two issued by Dawson solicitation recommendation statement on schedule <unk> nine of Dawson Geophysical cut.

<unk> dated November one 2021.

I noticed that we have.

<unk> reached the 930 Mark.

With the call was scheduled for 30 minutes, but Paula I am open to take maybe a question or two.

Here briefly.

I'll turn it back to you Paula.

You may remove yourself from the queue at any time by pressing star two.

Once again it is star one for questions and we will pause to give everyone the opportunity to signal.

And we will take our first question from Bruce merger with turnaround capital.

Steve I was wondering if you can discuss because the other alternative for shareholders. Because many of US are long term had been involved for years and anticipated the company losing cash.

What was the alternative you are saying that you couldnt right size the company to diminish the cash losses, and I think we deserve the here.

Were those.

And given that.

Is that you will be at 66000 channel count which is breakeven.

Why youre, giving up now.

You could be a breakeven, but I want you to specifically discuss why you think of right sizing plan would fail to stop casual losses.

Okay Bruce.

For the question.

We have been.

Tempting to rightsize the company for an extended period of time.

We have taken on the.

Physician that we are attempting to.

Reduce cogs.

<unk> all across the board in.

And continue to maintain.

A level.

Okay.

And employee level necessary to operate.

Crew or two as they become available so our employee count over the last few years has gone down from 1000 or so.

All the way down to about 100 people and that includes the base core of a.

Of a crew and we were down for a long time as we discussed in Q2 and in Q3, and we've had a difficult time getting getting labor back and we've had a difficult time getting people back and so we had a dip and we are continue.

Continuing to have.

Staffing level concerns going forward and so.

We have looked all across the board on all of our costs, we have redone as many leases as we can we've taken pay cuts at all levels of the company.

We have <unk>.

Kris healthcare cost on our employees.

We have.

Renegotiated insurance I mean, we've been all across the board.

Looking at ways to downsize and reduce fixed costs and we've done a great job of that you can look in the.

In our filings you can see that our G&A and our overall costs have gone down significantly.

Cut further.

Would further.

No.

Impact on our ability to respond to demand.

And I'm, not saying it can't be done, but it would it would be difficult.

And quite frankly, I don't believe there is enough there to make a meaningful impact.

The current cash burn thats going on relative to the receivable level that has come down so low.

We do have a 65000 channel crew that is going to go to work.

That typically is good if you look back over the last few years.

And when we've had large channel count crews working.

Pretty consistently.

Have done fairly well financially from a bottom line standpoint.

Breakeven so to speak when we've had more than one working we've done well.

But I would say that.

I would clarify that with this.

We have a 65000 channel crew, which is large capacity crude but its only going to be out for 45 days.

We went out to February.

All the other projects, we have in house or smaller than that much smaller than that now we're ramping that crew size up as we go.

Starting small and moving to the next one.

And moving crew size that up.

To be where we need to be when that crew goes and this goes back to the field.

Having said that there is very little if any visibility currently past February of 2022.

In the lower 48.

So right now we are.

Sure.

A little.

Pressed to maintain a high utilization level of one large group.

Canada started a little bit earlier than anticipated.

And we'll have two crews through the back half of the year and into the front half of next or into the first quarter of next year.

In both situations.

Pricing on these project has softened.

I would say considerably from where they were lets say a year ago. So we've got a pricing issue.

As well.

So I would just Lee leave you with this Bruce and I appreciate your question.

We're not throwing in the town.

We have an opportunity here.

We believe as a compelling value, giving given where the market is.

For our shareholders.

As well as an opportunity.

Two two.

<unk>.

Basically.

Our liquidity event.

Behind all of this.

And so even with some level of pickup in 'twenty, two which I don't believe.

No.

Is coming.

We will be hard pressed over time to make any necessary capital investments over the next three or four years, unless there's a dramatic change.

So that that's where we are we had some bid activity that we talked about in the Q2 release.

<unk>.

Canada was out there in late summer early part of <unk>.

Q3, but quite frankly, it just has not materialized and so we believe that when we look at the market.

And the situation in the offer we believe that this is a.

Compelling opportunity for our shareholders as well as the company and its employees.

But Steve it sounds to me like you are.

You said that you were going to give guidance for.

For the first quarter, but based on what you could call. It sounds like this company is going to be cash breakeven I apologize for interrupting.

Okay, I am not going to get into third into fourth quarter and first quarter guidance.

I never have one.

I will tell you.

Is that the.

65000 channel crew has limited.

Ltd.

Visibility.

And it is not there. So we are at small crew working through October getting up to a little bit bigger in November.

Maybe a little bit.

Larger at the end of the year into Q1, and so keep in mind.

Rice's as we mentioned have softened.

And so I'm not giving guidance, yes. There is some short term positives here I'm not denying that and we're going to have a little creep a little bit of increased activity in Q4 and in Q1 in Canada, and we have a little bit of visibility in the lower 48.

But we do not it is November 4th and we do not have <unk>.

Projects in hand currently.

It will.

We have some projects, we think we're going to be awarded as we said in the press release, but theyre being pushed back to later in the year and so.

We are certainly focused our our thought process here.

On the long term outlook of the business.

The cash burn that we anticipate the capital spending requirements that we think will be necessary over time and we believe.

That this is.

This is a compelling value.

For our shareholders and provides a nice liquidity event option and so that's where we are I. Appreciate your your question and your comment Bruce always do.

We're going to move forward here, and it's $9 45, and we're going to.

Ill close this thing down and.

And.

With exploration spending to be a small fraction of overall spending.

Due to the anticipated demand levels for the company's services. The board of directors of the company recommends shareholders tender their shares and vote in favor of the merger with Wilkes.

As detailed in the <unk> nine all directors intend to tender their shares and vote in favor of the merger the board of directors as well as management believe given market condition. The offer price provides compelling value with a liquidity opportunity in the company's thinly traded stock is the best interest of the company its shareholders.

And employees the transaction provided the transactions provide the company with financial flexibility to meet possible future capex requirements, not otherwise available to the company.

I wish to thank our hard working employees, our valued customers and most of all our trusted long term and short term shareholders.

And Anthony at edge consulting solutions dotcom.

Anthony at edge consulting solutions Dot com. Thank you for listening in this morning and have a good holiday season. Thank you.

Thank you and that does conclude today's conference we'd like to thank everyone for their participation you may now disconnect.

Q3 2021 Dawson Geophysical Co Earnings Call

Request a DemoDemo

DWSN

Dawson Geophysical Co

Earnings