Oil Market Weakness Keeps Hurting Dawson Geophysical

By Markets Fool.com

Conditions in the energy markets have hurt hundreds of companies that rely on healthy crude prices for their success, and not all of them are in the oil production business themselves. Dawson Geophysical (NASDAQ: DWSN) has also felt the pain from crude's plunge because of falling demand for its seismic services, and coming into Thursday's third-quarter financial report, Dawson investors had little hope that the slide in the company's financials would slow. Dawson didn't even manage to live up to those lowered expectations, however, and its views on the future could well raise concerns throughout the oil patch.

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Let's take a closer look at how Dawson Geophysical did and what it sees ahead.


Image source: Dawson Geophysical.

Dawson Geophysical keeps sliding lower

Dawson Geophysical's third-quarter results showed just how bad things are in the energy services industry right now. Revenue plunged by more than half to $28.1 million, and that was even worse than the consensus forecast for $32 million in sales. Dawson once again saw its net loss for the quarter widen from year-ago levels, with the company losing $12.4 million. That worked out to $0.57 per share in losses, far worse than the $0.36 per share that most investors thought Dawson would lose during the period.

Taking a closer look at Dawson's financials, it's clear that the company took steps to try to stop the bleeding on its bottom line, but there's only so much that it can do under conditions like these. The seismic specialist cut its operating expenses by more than 40% and managed to reduce its general and administrative costs by about a quarter, but even those savings weren't enough to offset the impact of falling revenue. Moreover, depreciation and amortization were relatively stable, and given that those costs make up about a quarter of Dawson's total cost structure, they prevented Dawson from being able to reduce overall expenses enough to stop the bottom line from deteriorating.

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Moreover, the steps that Dawson Geophysical has taken to adjust to poorer industry conditions have left it at a fraction of its former capacity from an operational standpoint. During the quarter, Dawson operated between four and five crews in the U.S. market, which is down by about half compared to levels from early last year. In addition to low oil prices, bad weather in many of its areas of operation lingered into the third quarter. Moreover, several of Dawson's clients directed the seismic specialist to delay providing services that they had already asked for, further exacerbating the problem.

CEO Stephen Jumper explained how oil prices have kept Dawson constrained even despite an increase from their worst levels of the year. "Oil prices averaged approximately $45 per barrel," Jumper said, "starting the quarter at just over $49 per barrel, dropping to a quarterly low below $40 per barrel on August 2, and ending the quarter at just under $48 per barrel." Although he sees prices in the high $40s as "encouraging," the CEO nevertheless worries that the increase might not be sustained, and Dawson's clients appear to be extremely conservative with respect to their response to the situation.

When will Dawson Geophysical bounce back?

Dawson is hoping for a very small pick-up in business coming into the winter season. As Jumper explained, Dawson expects to run five to seven crews through the first quarter of 2017, based on the information it has on seismic services demand and the expected levels of activity in the Canadian oil fields. Meanwhile, Dawson has little choice but to keep trying to contain costs and make sure that it can hold onto its key personnel throughout the downward part of the business cycle. That way, when things recover, Dawson will be in a position to ramp its services back up without facing potential disruptions.

Yet the problem that Dawson faces is that predicting things beyond the immediate future is difficult. The company once again said that business visibility after the first quarter of 2017 is still unclear, and the many challenges both within the energy sector and for the broader macroeconomic picture globally could conspire to keep conditions poor well into next year.

Dawson Geophysical shareholders won't be happy about the latest news, although given how hard the stock has already been hit, it's unclear whether there will be marked selling pressure when the market opens following the announcement. What matters more for long-term investors is that Dawson is doing its best to keep its head above water through tough times, and it hopes it can do enough to make it to the next uptick in energy prices in the future.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Dawson Geophysical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.