DWSN - Dawson Geophysical

[lathinker]

Dawson is one of the largest firms for onshore seismic data acquisition and processing in the US and Canada.

Due to low oil prices, demand for the industries services is low and declining, so DWSN and its competitors are struggling. However, DWSN seems to have the best balance in the industry.

Also, as it just merged in an all-stock-deal with Canadian competitor TGC, DWSN might be misunderstood as there is very little analyst coverage and the few analysts and blogs covering the company seem to confuse pre-merger and post-merger data.

So you basically have a small and underfollowed company in a hated industry which can easily be misunderstood.

DWSN post merger has around 21.7mm shares outstanding at a price of around 5.50 USD for a market cap of roughly 122mm USD.

Combining the balance sheet data of the pre-merger Dawson and TGC, they total assets of around 332mm USD, 251mm of which equity and 42mm in net cash. Most assets are in PPE - I am not an expert of estimating their value, but some analysts think they are worth at least book value (which I doubt). They are probably not completely worthless either.

 

Combined EBITDA of the companies is around 28mm USD last year and more like 60mm for the average of the last five years (3 of which admittedly were really good). I would assume maintenance capex around 15mm-20mm a year.

 

Q1 results will likely be poor and DWSN will show a net loss. Also, they have stated that the market will be challenging, at least into Q3. However, as and when things mean-revert, DWSN should be in a strong position to benefit, inparticular as they are debt free on a net basis while their competitors are already struggling.

 

Also worth reading this VIC thesis:

http://valueinvestorsclub.com/idea/DAWSON_GEOPHYSICAL_CO/133498

 

[jawn619]

thanks for the post. Looks very interesting.

[Guest Schwab711]

This used to be the hottest stock in 08. Amazing how far it's dropped.

 

The seismic brokerage business is not as attractive as it seems. At first glance, it seems like a great idea to take pictures of the ground, store/organize them, and sell them many times over. The problem is, there are few barriers to entry. Anyone can take pictures of most of the world and buy the remaining pieces they need (a lot of drilling done on public land). This competition will only show up once there are excess profits (ROIC > 10-12%?). Thus, there is a cap on profits. Also, most multi-national oil companies have the ability to take readings themselves for 100% owned property or through JVs. These costs were transferred to seismic companies prior to the oil run-up in the early 00's but will likely swing backs to producers again. The cost of taking seismic readings is declining each year on a rate basis (which is what I was trying to imply in my PLS.D comment), thus the industry will always have poor economics (bad position on value chain). There were many seismic companies pre-08 and there will likely be new ones if oil ever rises.

 

http://www.rigzone.com/news/oil_gas/a/5355/Tough_Times_for_the_Seismic_Data_Acquisition_Industry

http://www.valueinvestorsclub.com/idea/Polarcus/87238 (different industry; similar economics)

There are many more if you google the industry

 

The razor blade model only made Gillette rich because the razors sold for more than the blade (Gillette branding - "the best a man can get" is burned into my memory), razors are used everyday (ish), depreciate quickly, and the potential customer base is 50% of the population minus some children. Every company that sells razors for less than the blade creates expectations by investors during ramp-up that are nearly impossible to reach. It's even worse when beards grow extremely irregularly (oil prices) as it becomes extremely difficult to predict the long-term demand!

 

It seems like any player in the seismic industry (outside possible niche players) is extremely dependent on oil prices being high enough to warrant an influx of small E&P companies (likely the main customers). Niche players do face the risk of consolidation in their geographical locations which significantly decreases their potential customers.

 

With all that said, DWSN is cheap. I wonder what the cost of buying the data vs taking new readings is currently?

 

[SandU]

I think the best seismic investments are the asset light, multi-client companies. They got competetive advantages thrue their big data libraries they can use to identify new projects, debt free balance sheets, can keep higher investment levels thrue low oil price markets and use the decreased dayrates for wessels to aquire cheeper data. TGS Nopec is the market leader, Spectrum Geo - a smaller even cheaper competitor and MultiClient Geophysical - a micro competitor actually trading as a netnet atm.

 

All theses stocks trade in Oslo, Norway but they report in english.

[Guest Schwab711]

This may derail Dawson's thread but the asset-lite seismic companies also have nearly zero barriers to entry (other than competency to complete the survey). Cost/liabilities assumed from surveying may end up shifting pretty dramatically towards seismic companies (as opposed to the ~26% mentioned on PLSDF) from a lack of negotiating leverage a la early 2000's. It's a great business when the whole industry is making so much money they don't care about price gouging to change surveyors but over business cycles the low barriers to entry destroys profit. Same thing happened in 2008. If you can find the ones with strong probabilities to survive then you might end up alright, but I think it has to be a data library play more so than a BS play. Companies literally invest in specific areas that they expect to be popular enough to make a return on the survey. Geography of the library is the only thing that matters with these companies.

 

Unfortunately the theoretical has not worked in real life. Since a lot of that multi-client style data is speculative in nature, the returns are pushed into the future. Those returns are not accruing to seismic contractors for a variety of reasons. There are copyright issues. A seismic company will shoot data for a client who then repackages the data with its own proprietary information and markets the product as a new package. Internationally, host governments have a tendency to release data from multi-client basin surveys to the public domain before contractors have the opportunity to amortize their investment. The host government benefits because the oil and gas cycle is sped up. The E&P firms benefit as barriers to entry fall. But the seismic industry loses money.

 

http://www.rigzone.com/news/oil_gas/a/5355/Tough_Times_for_the_Seismic_Data_Acquisition_Industry

 

[portfolio14]

I researched a couple of seismic services companies. It appears there is a significant difference in the amortisation treatments between marine seismic data and on-shore seismic data. It seems to imply on-shore seismic data have much longer economic lives.

 

Does anyone know why?

[SandU]

This may derail Dawson's thread but the asset-lite seismic companies also have nearly zero barriers to entry (other than competency to complete the survey). Cost/liabilities assumed from surveying may end up shifting pretty dramatically towards seismic companies (as opposed to the ~26% mentioned on PLSDF) from a lack of negotiating leverage a la early 2000's. It's a great business when the whole industry is making so much money they don't care about price gouging to change surveyors but over business cycles the low barriers to entry destroys profit. Same thing happened in 2008. If you can find the ones with strong probabilities to survive then you might end up alright, but I think it has to be a data library play more so than a BS play. Companies literally invest in specific areas that they expect to be popular enough to make a return on the survey. Geography of the library is the only thing that matters with these companies.

 

Unfortunately the theoretical has not worked in real life. Since a lot of that multi-client style data is speculative in nature, the returns are pushed into the future. Those returns are not accruing to seismic contractors for a variety of reasons. There are copyright issues. A seismic company will shoot data for a client who then repackages the data with its own proprietary information and markets the product as a new package. Internationally, host governments have a tendency to release data from multi-client basin surveys to the public domain before contractors have the opportunity to amortize their investment. The host government benefits because the oil and gas cycle is sped up. The E&P firms benefit as barriers to entry fall. But the seismic industry loses money.

 

http://www.rigzone.com/news/oil_gas/a/5355/Tough_Times_for_the_Seismic_Data_Acquisition_Industry

 

Yes, sorry if this destroys the Dawson topic.

Schwab711, have you looked at TGS Nopec? They have out performed the market huge since 1998. It takes alot of time to grow youre library organic as a multi-client operator. It takes years, loads of money and competence to create a succesful mc-business. No library - no income. If it was so easy - why are there only two pure mc-players in the world with a turnover over $100m? These two - TGS and Spectrum don´t own any ships or equipment, they rent it on a project to project basis, they got no debt and their business model is prefered in the low oil price market. I would say these are the last two players standing in the business. TGS have never had a lower ROCE than 20%, even in earlier low oil price markets. Spectrum does´t have that long track record but looks great after they turned pure asset-light and multi-client focused.

 

 

From what i have understod, goverments can make old data pblic after the exclusive period for the company is over, normaly after 10-30 years, (MC-biz write down their library in only 5 max, often faster) but if the area is still of intrest for the mc-company they are often able to reprocess it with new technology and make it a new product - which gives it a new exclusive period. I have not heard of copyright issues for the mc-business, E&P-companies pre-fund and might get an opinion how the finnished product should look like but the data belongs to the mc-business who sell´s it again as late sales after. Maybe it exist somehow, but it cant be that bad with the track record they have shown.

 

If you look at their competitors, they all have an asset heavey business beside their mc-segment. CGG, Petrolium Geo, ION Geo and Fuegro who now is trying to sell the mc-library

 

For a pure libray play theres MCG, a netnet, and you get the library and busness for free, trades around 0,37 x TB. Their business havn´t performed so bad on avrage, just high variation from their small library. Its also a great company to look at showing how long it takes to build up a library from scratch.

[SandU]

I researched a couple of seismic services companies. It appears there is a significant difference in the amortisation treatments between marine seismic data and on-shore seismic data. It seems to imply on-shore seismic data have much longer economic lives.

 

Does anyone know why?

 

The economic and real lifespan of the librarys are very different and variating in the seismic business. But they probably in general generate sales longer onshore? Try to email TGS ir contact Will Ashby, great guy to ask questions

[rishig]

This may derail Dawson's thread but the asset-lite seismic companies also have nearly zero barriers to entry (other than competency to complete the survey). Cost/liabilities assumed from surveying may end up shifting pretty dramatically towards seismic companies (as opposed to the ~26% mentioned on PLSDF) from a lack of negotiating leverage a la early 2000's. It's a great business when the whole industry is making so much money they don't care about price gouging to change surveyors but over business cycles the low barriers to entry destroys profit. Same thing happened in 2008. If you can find the ones with strong probabilities to survive then you might end up alright, but I think it has to be a data library play more so than a BS play. Companies literally invest in specific areas that they expect to be popular enough to make a return on the survey. Geography of the library is the only thing that matters with these companies.

 

Unfortunately the theoretical has not worked in real life. Since a lot of that multi-client style data is speculative in nature, the returns are pushed into the future. Those returns are not accruing to seismic contractors for a variety of reasons. There are copyright issues. A seismic company will shoot data for a client who then repackages the data with its own proprietary information and markets the product as a new package. Internationally, host governments have a tendency to release data from multi-client basin surveys to the public domain before contractors have the opportunity to amortize their investment. The host government benefits because the oil and gas cycle is sped up. The E&P firms benefit as barriers to entry fall. But the seismic industry loses money.

 

http://www.rigzone.com/news/oil_gas/a/5355/Tough_Times_for_the_Seismic_Data_Acquisition_Industry

 

Yes, sorry if this destroys the Dawson topic.

Schwab711, have you looked at TGS Nopec? They have out performed the market huge since 1998. It takes alot of time to grow youre library organic as a multi-client operator. It takes years, loads of money and competence to create a succesful mc-business. No library - no income. If it was so easy - why are there only two pure mc-players in the world with a turnover over $100m? These two - TGS and Spectrum don´t own any ships or equipment, they rent it on a project to project basis, they got no debt and their business model is prefered in the low oil price market. I would say these are the last two players standing in the business. TGS have never had a lower ROCE than 20%, even in earlier low oil price markets. Spectrum does´t have that long track record but looks great after they turned pure asset-light and multi-client focused.

 

 

From what i have understod, goverments can make old data pblic after the exclusive period for the company is over, normaly after 10-30 years, (MC-biz write down their library in only 5 max, often faster) but if the area is still of intrest for the mc-company they are often able to reprocess it with new technology and make it a new product - which gives it a new exclusive period. I have not heard of copyright issues for the mc-business, E&P-companies pre-fund and might get an opinion how the finnished product should look like but the data belongs to the mc-business who sell´s it again as late sales after. Maybe it exist somehow, but it cant be that bad with the track record they have shown.

 

If you look at their competitors, they all have an asset heavey business beside their mc-segment. CGG, Petrolium Geo, ION Geo and Fuegro who now is trying to sell the mc-library

 

For a pure libray play theres MCG, a netnet, and you get the library and busness for free, trades around 0,37 x TB. Their business havn´t performed so bad on avrage, just high variation from their small library. Its also a great company to look at showing how long it takes to build up a library from scratch.

 

I own PetroGeo (PGSVY). I bought it when it was in the $4.50 - $4.95 range. I wrote about it on CoBF but no one responded on the thread.

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/petroleum-geo-services/

 

I don't think these businesses are great. They are okay but the industry is much more rational than the rig operator industry. I purchased PGSVY purely based on discount to asset value (much of the asset value is the library and the library is quite recent and converting into cash nicely). The recent run-up has been based on cash earnings reported from library sales. My philosophy on these kinds of businesses is buy on asset value and sell on earnings.

[SandU]

Ok, but PGS is not an asset-light, pure multi-client player. They got a MC-segment - but own vessels and equipment to.

Very low profitability compeared to the other once i mentioned.

I would only buy PGS as an asset play if P/TB is low in combo with a high f-score.

[lathinker]

 

The seismic brokerage business is not as attractive as it seems. At first glance, it seems like a great idea to take pictures of the ground, store/organize them, and sell them many times over. The problem is, there are few barriers to entry. Anyone can take pictures of most of the world and buy the remaining pieces they need (a lot of drilling done on public land). This competition will only show up once there are excess profits (ROIC > 10-12%?). Thus, there is a cap on profits. Also, most multi-national oil companies have the ability to take readings themselves for 100% owned property or through JVs. These costs were transferred to seismic companies prior to the oil run-up in the early 00's but will likely swing backs to producers again. The cost of taking seismic readings is declining each year on a rate basis (which is what I was trying to imply in my PLS.D comment), thus the industry will always have poor economics (bad position on value chain). There were many seismic companies pre-08 and there will likely be new ones if oil ever rises.

 

It seems like any player in the seismic industry (outside possible niche players) is extremely dependent on oil prices being high enough to warrant an influx of small E&P companies (likely the main customers). Niche players do face the risk of consolidation in their geographical locations which significantly decreases their potential customers.

 

 

 

Thanks for your view and the articles. I would not argue that DWSN or any of the other seismic players look like a great business. I would though argue that DWSN looks cheap on an asset basis,that they are likely to survive the current slump and that at some point better days may come for DWSN and the industry.

 

Also, I would not argue that DWSN is predominantely a library company. In fact they have not got any intangible library assets (as opposed to, say TGS). DWSN is more like a special servicer which owns and employs its equipment for its clients (not dissimilar to, say Emeco).

 

I have looked at TGS and think it is a great business, but it comes at a much higher price. For anyone interested, the "Value and Opportunity" blog has covered this company very well.

[portfolio14]

I researched a couple of seismic services companies. It appears there is a significant difference in the amortisation treatments between marine seismic data and on-shore seismic data. It seems to imply on-shore seismic data have much longer economic lives.

 

Does anyone know why?

 

The economic and real lifespan of the librarys are very different and variating in the seismic business. But they probably in general generate sales longer onshore? Try to email TGS ir contact Will Ashby, great guy to ask questions

 

What factors contribute to the difference in economic and real lifespan between marine seismic libraries and on-shore seismic libraries?

 

Thanks for the TGS lead. I'll contact Will Ashby.

[SandU]

I researched a couple of seismic services companies. It appears there is a significant difference in the amortisation treatments between marine seismic data and on-shore seismic data. It seems to imply on-shore seismic data have much longer economic lives.

 

Does anyone know why?

 

The economic and real lifespan of the librarys are very different and variating in the seismic business. But they probably in general generate sales longer onshore? Try to email TGS ir contact Will Ashby, great guy to ask questions

 

What factors contribute to the difference in economic and real lifespan between marine seismic libraries and on-shore seismic libraries?

 

Thanks for the TGS lead. I'll contact Will Ashby.

 

I haven´t focused on the onshore companies since i don´t find them as attractive. So i´m not shure what the differences are between them. TGS only have a small onshore segment after aquireing Arcis. Im sure Will will sort it out for you.

 

In offshore:

 

"The economic lifespan that we use from an accounting sense (the period during which we need to fully amortize the cost of data from our balance sheet) is based on industry best-practice and a general common sense view that it is very difficult to forecast sales for a project much more than 5 years from the date that we approve the project.  The real lifespan is typically much longer than the “accounting economic life”.  Data continues to sell for many years (often decades).

 

Sometimes there will be relevant laws or other restrictions on how long we can sell data (or exclusively sell data).  For example in some countries the Governments are allowed to make data publically available after a certain time period (e.g. 10 to 30 years later).  This would impact our ability to sell the data unless we reprocess it to create a new product."

 

"In offshore the real lifespan is related to the prospectivety for hydrocarbons (gas and oil) in the area, regular licensing rounds by the governments, drilling activity and successful drilling (especially measure of recoverable reserves), distance to existing infrastructure offshore or onshore (existing producing platforms and pipelines) (how expensive is it to build out the reserves, highly focused these days with low oil price, focus on break-even lifting cost per bbls) "

 

[yadayada]

What are ebitda estimates on this thing? It seems they will save about 20-30m with the merger? So when everything turns up again they could do 20-30m in earnings, with almost half the market cap in cash by that time? That seems aweful cheap.

[yadayada]

Got a starter position. It seems cheap with half its market cap in cash. I got about 40-50m of ebitda this year. Capex of 10-15m? That means cash will build. They seem conservative. If business would be dead, it could go in run off mode and generate another 100m or so in the next few years. Only risk here is that management wastes money on capex. But that seems low, since they seem pretty conservative.

 

If it turns up, stock can go up several 100%. 80-90m of ebitda possible in a good year. Thoughts?

 

Only risk is they will not get those synergies, then ebitda will be lower. But still, seems like they will generate cash either way, and there is no leverage.