Dawson Gets Dirty

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If you're going to extrapolate meaning from a single quarter, energy services firm Dawson Geophysical's (Nasdaq: DWSN) fiscal Q1 is possibly the worst. While retailers that blame the weather are somewhat suspect, Dawson does face a legitimate seasonal demand pattern. Even with state-of-the-art technology from Schlumberger (NYSE: SLB) and ION Geophysical, it's tough to shoot seismic data in the dead of winter. For this reason, a year-over-year financial comparison is equally, if not more important than, a sequential one.

Compared to last year's wintry seismic season, revenues rose 45%, EBITDA lifted 42%, and per-share earnings came in 40% higher. The lack of operating leverage may partially explain why investors seem less than pleased with these results. Shares dropped 15% on Wednesday on the news.

A look at margins helps to further clarify the picture. Cash margins came in at 25.1%, nearly a full point lower than last year. EBITDA margins compressed as well, though to a lesser degree. The more significant deterioration in margins shows up in the sequential comparison, but again, that's not a particularly fair one, given the weather- and holiday-related downtime.

Slowing growth has to be another concern here. Dawson's 45% top-line surge looks impressive, until you compare it to the 47%, 65%, and 50% year-over-year revenue gains achieved in the last three quarters.

The company identified higher depreciation charges as a culprit in its earnings figure, but as a percentage of revenue, this is no outlier. What appears to be more significant is the firm's heightened level of reimbursables as a percentage of sales. Dawson incurs extra expenses in areas with difficult terrain, clients reimburse the company, and those payments are booked as revenues. Now that the Rockies and Appalachians are shaping up to be some of the hottest areas for natural gas explorers like XTO Energy (NYSE: XTO), EnCana (NYSE: ECA), and Range Resources (NYSE: RRC), I don't see these charges easing any time soon, and that means margins may remain muted.