Source: Dawson Geophysical.
Investors have beaten down just about every stock that has ties to the energy sector, and Dawson Geophysical (DWSN -5.23%), which provides seismic services for oil and gas exploration and production companies, has certainly taken its fair share of hits from the energy bust. Coming into the company's second-quarter financial report on Friday, Dawson investors expected further weakness in its core business, yet even they might have been surprised by the extent that the seismic specialist's results were affected. Nevertheless, Dawson management thinks that it's well positioned for an eventual turnaround in the industry. Let's take a closer look at how Dawson Geophysical did and why it's still optimistic about its future.
No relief in sight for Dawson Geophysical
Dawson Geophysical's second-quarter results were disappointing even in the eyes of investors who already expected a tough quarter, and they certainly reflected the tough conditions in the energy sector. Revenue fell to $43.3 million, down from $72.4 million if you use pro forma results that include the impact of the merger with TGC Industries. Moreover, the company's net loss of $11.9 million worked out to $0.55 per share, or a nickel worse than the loss investors expected.
A closer look at Dawson's results shows just how difficult it is to make money in the current environment. The company cited reduced client demand because of the uncertainty about falling oil prices, and Dawson's customers are also making hard decisions to delay projects in anticipation of better future conditions. Severe weather conditions again had a negative impact on activity, as we've seen in past quarters, and even though the company was able to collect standby charges on some of its crews, the amounts were substantially lower than what they would have received for actual work.
On a utilization basis, Dawson operated seven crews during the second quarter, below even the downgraded guidance of eight to 10 crews that it gave as a likely target. Flooding in Texas and bad weather elsewhere in the mid-continent region cut utilization rates for those seven crews and led to delays in having three more crews deployed for projects that were otherwise ready to go. Reductions of 30% of its combined workforce since the merger cost Dawson $690,000 in severance payments during the second quarter.
CEO Stephen Jumper nevertheless tried to put a positive spin on the harsh results. "Despite today's challenging environment," Jumper said, "Dawson Geophysical is strategically positioned to withstand the commodities cycle downturn." Moreover, with a solid balance sheet and relatively new equipment should allow Dawson to keep serving its clients well while conserving cash for the future.
Can Dawson Geophysical really make it through to the next oil boom?
Even with its optimistic view, Dawson Geophysical expects that demand will be low throughout 2015, with somewhere between eight and 10 crews likely to work in the U.S. for the rest of the year. Canadian activity will be limited in the third quarter, potentially putting further pressure on overall utilization rates. At the same time, Dawson is still limiting its spending, trying to stay below the $10 million approved in its 2015 budget. The company hopes that it can simply spend at maintenance levels until conditions improve, and thereby ensure that its cash lasts as long as possible.
Of course, the problem is that Dawson has only so much capital available. With losses at current rates, it would take just over a year for the company to eat through all of its $57 million hoard of cash and equivalents. Dawson does have a healthy balance sheet with minimal debt, giving it a competitive advantage over its peers, but sustained weakness in oil could change that without further efforts from the company.
Dawson investors reacted favorably to the news, sending shares up by more than 6% on the day following the announcement. With many investors hoping for better things from the energy sector, Dawson Geophysical looks like it could turn things around if oil were to recover even part of its lost ground.
