Saturday, November 7, 2015

Dawson Geophysical -- Seismic Exploration Services

This is an idea that has little to commend it other than price. It is a "cigar butt" but not a bad one at that.

The company provides seismic exploration services to the oil and gas industry and accounts for about half of the supply in the onshore North America market. Revenues are transactional rather than recurring and visibility is low. Nevertheless, the company expects that it is able to put to work 8 to 10 crews in this oil price environment and over the next few quarters.


The adjusted EBITDA reconciliation for the quarter just reported is as follows

 
and the company has guided that will invest less than an annualized rate of $10 million in equipment over the next few quarters.
 
Beyond the immediate period the possibilities are framed by the following scenarios:


4 working crews per year represents long term oil and gas prices low enough that even"high grading" activity comes to a virtual standstill. 

The high end scenario corresponds to the trailing 10 year average operating performance of the combined company -- that is, of the legacy Dawson and TGC Industries businesses adjusted for the synergies that, as seen from the Q3 results, one can reasonably expect.

In the low end scenario, one loses one's investment although the implied oil and gas price scenario is such that one can hedge it out buying puts on the securities of some other, more richly priced company.

In the high end scenario, the stock is likely to appreciate to the $15 to $17 range.


 Diclosure: I own some shares in Dawson Geophysical

20 comments:

  1. This is interesting. Some quick questions:
    Why are they not bought out by e.g. TGS Nopec?
    Why is Revenue/Crew constant and not falling?

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  2. Well both TGC Industries and Legacy Dawson have been around for decades and this is not the first time that they have been through a down cycle so it is notsurprising to me that they have not been bought out. Second, the Revenue/Crew relationship and the merget between the two companies are related: the legacy businesses have complementary services so that whereas they had relied on third party contractors for some services -- shot hole boring in legacy Dawson's case for example -- that is no longer the case. So net revenues go up as fo gross margins. Legacy Dawsons gross margin, for example, was in the 13% range in Q3 2014 and is now ~20% mostly due this this effect.

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  3. "one can hedge it out buying puts on the securities of some other, more richly priced company."

    So any suggestions regarding which company you'd short to hedge the risk here?

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    1. This is tail risk we're talking about so, on balance, stocks with long-dated, liquid options that are priced relatively inexpensively should do the trick, Exxon & Chevron, eg., need crude > $70 over the LT to justify the multiples at which they are trading. (Last I checked Chevron needed >$70 crude in 2017 to cover capex and dividends). Another way is to go long somthing like Carnival Cruise Lines. It depends on what scenarios one thinks are worth hedging against, what premium one's willing to pay etc , and every investor's profile is likely to be idiosyncratic when it come to such preferences

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  4. How do you know the revenues / crew will remain stable? Wouldn't there be price pressure in an environment like this? (All neg op leverage) The above poster asked this as well but I noticed you dodged the question.


    The crux of this thesis = "even in the worst case, we will make a positive EBITDA". Further implying that 4 crews is employed, controlling SGA costs, and flat pricing & gross margins...


    Seems like a cigar butt to be sure with a strong BS. Not a bad spec.

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    Replies
    1. Well I don'tknow that it will remain stable -- I don't even know how many crews will be employed beyong 2Q 2016 -- but I tried to answer the question as best I could rather than dodge it.

      Let's try it again. Legacy Dawson's average traling Revenue/Crew is roughly $22/Crew. The synergies upon which the merger with TGC was premised have indeed shown up as an increase in Revenue/Crew to 25/team in an environment when other oil service companies have experienced 25% to 40% cuts in pricing.

      Additional assumptions: (1) The period immediately after a sudden oil price fall is when capex budgets are most likely to be shut off; and (2) new Dawson controls 50% of the market and are therefore likely to be price setters.

      Want proof? There are no proofs in investing and if there were you wouldn't find Dawson trading at sub 1x trailing EBITDA.

      You are asked to judge whether the market's assumptions are reasonable. if you think they are this idea's not for you, obviously. If you think the market's overly pessimistic this idea may not be ranked high among the other sub1x EBITDA ideas that you have collected. And anyway, oil could fall to $20, just like Goldman says it will, and stay there and presto -- you've lost your stake.

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  6. Andre,

    http://www.sec.gov/Archives/edgar/data/799165/000110465915075936/a15-22323_1ex99d1.htm

    3rd paragraph

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    1. Extraordinary flooding just when crews were bunched together etc. Listen to the calls and read the last few filings and you'll get a feel for what happened.

      Also look back at the financials in the time beore the golden age of shale and you'll have a sense of what the various marginsought to be. Very simple idea. requires very little in the way of explanation or discussion but is nevertheless hostage to crude prices. It doesn't need $100/barrel to work well; $65 will do just as well. $65 may even be better than $100..

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  8. Back again!
    Do you happen to have a sense of how important they are to E&Ps?
    By that I mean the following: Before (during the boom) it seems there was a new of exploration work being done on completely new land. Now it seems a lot of what they are doing is more maintenance type of work, as in finding the best drilling locations on land for which the E&Ps already have claims. This may be subtle, but understanding how important this service is to E&Ps to continue exploiting wells on their existing land could be important for revenue visibility in 2016 (imho)

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    1. The narrative that management is selling is that as wells decline new ones have to be drilled and finding the optimal place to dig is important especially when prices are low and margins are thin. You can see, though, none of the Canadian crews are working so there's a limit to that logic, at least in the short term

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  9. Red, where did you see that DWSN has half of the onshore domestic market share post-merger? They seem to have a lot of competitors...Geokinetics, Ion, SAEX, Global Geophysical Services. But I haven't located market share data so far on DWSN.

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    1. One of the two -- pre-merger Dawson or pre-merger TGC, I don't remember which -- provides an overview of the market in its 10-Ks. They count the number of land-based seismic crews in North America. So (Dawson crews + TGC crews)/(Total crews) = market share.

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  10. Guidance for 1st half of the year is not great. Implies breakeven at the EBITDA level and ~12M in FCF from working capital reductions. At current share price --> forward EV of ~28M. If crude recovers to ~50/B then it's a home run. If it doesn't, the outcome will be poor.

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    1. Hi, when you mention those two outcomes, are you thinking about 2016 or another time frame?
      Thanks a lot.

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    2. Good outcome at crude oil prices above ~$45 and poor outcome at crude oil prices below ~$35. I don't know when crude oil will stabilize at or above $45 although I think it shouldn't take more than 12 months.

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    3. Thanks, in that case you preferred to avoid that short term underperformance (2016) and you sold out?

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  11. That's right. I suspect I'll be back in when they provide forward guidance at >8 teams for the following quarter. I lack patience in these Ben Graham type situations.

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