This writeup is a recommendation to buy the combined Dawson/TGE entity and valuation work will focus on the 'newco.' Depending on the day, it can be cheaper to create the company through one or the other but for the purposes of this writeup we will assume that Dawson is the easier-to-buy security.

 

 

 

Dawson Geophysical Company (the “Company”), a Texas corporation, is a leading provider of onshore seismic data acquisition and processing services in the lower 48 states of the United States. Founded in 1952, we acquire and process 2-D, 3-D and multi-component seismic data for our clients, ranging from major oil and gas companies to independent oil and gas operators, as well as providers of multi-client data libraries. During 2012, we entered the Canadian market by forming a new Canadian subsidiary that began operations during the 2012-2013 winter season. Over the past few years, the focus of our efforts has shifted between natural gas and oil-based exploration projects. As a result, we have experienced a gradual shift in activity to oil exploration, which has accelerated as oil prices have remained at relatively high levels. The majority of our crews are currently working in oil and liquids-rich producing basins. Our clients rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of hydrocarbons and to optimize the development and production of hydrocarbon reservoirs. During fiscal 2013, substantially all of our revenues were derived from 3-D seismic data acquisition operations.

 

 

There has been a robust discussion of offshore marine seismic on this site which has, in formidable detail, described the challenges facing the industry: decreased e&p capex budgets-->high operating leverage-->high financial leverage-->stock prices under pressure. Onshore seismic is a slightly different animal although it certainly is exposed to some of the same trends at this point. We have been involved with Dawson to varying degrees for over a decade and think the company has conservative DNA in its blood (witness the balance sheet and aversion to multi-client seismic) and should benefit from the bloodletting that has occured amongst its peers. The cannons are roaring, there's scarcely a trumpet to be heard, and we believe this to be an opportune time for the patient, long term investor to invest in a situation where the math is in ones favor.

 

• Seismic is an industry under cylical pressure that some investors deem to be secular (at this valuation we feel we're largely compensated for being agnostic)
• Due to the high degree of operating leverage, recent under-utilization of crews has led to some horrendous quarters, giving the impression the business is broken and shaking the stock out of the hands of people with shorter investment horizons.
• Of the five companies they mention as competitors in their most recent 10k two have filed for ch 11, one is private, and the two public companies are both down greather than 60% ytd
• Dawson controls 45% of the domestic onshore seismic market
• The company possesses a debt free balance sheet to weather the downturn and has committed to ratcheting down capex to maintenance levels at this point in the cycle

The recently announced deal with TGC Industries

• On October 9th, Dawson and TGC Industries (TGE) agreed to a no-premium merger (they attempted to merge back in '11 but due to the lack of a collar, and DWSN's subsequent price decline, the deal was scuttled)
• Dawson gets a foothold in Canada
• The combined entity will enjoy some operational synergies
• Terms of the deal: TGE enacts a 1:3 reverse split resulting in 7.33mm shares and issues 14.2mm shares to Dawson holders
• Dawson should trade at 5.28*TGC with some discount for the time value of money--due to the small size of both companies, the relationship has bounced around a bit as professional arbs don't seem to be involved

 

A look back at how the combined companies have performed (revenue, ebit, ebitda, proforma ebit*)

2005  147.5, 20.8, 32.2, 28.9

2006   236.3, 38.9, 61.7, 51.3

2007   348.2, 56.7, 87.5, 75.4

2008    411.7, 67.9, 106.0, 89.8

2009   334.4, 21.0, 61.7, 40.3

2010    313.6, (14.4), 28.0, 5.9

2011    484.3, 14.8, 64.5, 44.5

2012   515.6, 43.4, 101.3, 72.7

2013    439.8, 12.8, 74.5, 38.4

YTD      292.2, (16.5), 28.1, 5.9

 

 *The company has guided to a range of 5-10% savings through the opex line and little through sg&a. We're using the midpoint of 7.5%

 

 Valuation for Dawson/TGC Newco

Market Cap (TGE share price *3*21.5mm shares): 146mm

Net cash:47mm

EV: 99mm

Neither company has historically offered guidance and our crystal ball is decidely murky. We're using the recently filed merger doc as a starting point and making some tweaks to that based on recent comments and performance. From the proxy:

2015

Revenue: 421.5

EBITDA: 54.2

Net Income: (2.1)

Capex: 22.4

 Our guess is that revenue is too high as is capex. On recent calls DWSN alludes to a 10-13mm # for them as a standalone entity and another 2-3mm for TGE so we think there could be a 10mm fcf cushion somewhere in the numbers. We think that d&a should outstrip capex by 40mmish. Perhaps 25-30mm of that fcf tailwind will fund an ebit loss in a lousy year leaving 10-15mm of fcf or .46-70/share to build on the balance sheet. Looking forward a year that would mean we'd have a $6.85 stock price (Current TGE *3) with $2.65-2.90 of cash on the books. 

We don't engender to estimate how high is up, but in looking at the historical operating metrics, should the company's performance even remotely rhyme, we think there's meaningful upside.

The Sizzle

Interestingly, two of the firms that cover Dawson are making rather conspicuous math errors in deriving their price targets. We're not quite sure how to explain it but would assume that in times of severe market dislocation it's easier to overlook mistakes. There's probably also something to be said for being anchored to a stock price despite the contrary result of ones own analysis.

The first firm attempts to calculate an NAV for the newco preferring a market-based approach over cashflow metrics.

They calculate an NAV for the combined entity of $24/share by using $1,000/channel and $600,000/veisotruck and add in the roughly $2.50/share of net cash (the report is from mid October, before both companies reported their latest quarters showing a slight burn).

 Due to the tough environment for seismic, their target of $21 is 80% of what they deem to be replacement value (we would call that 87% of NAV). We agree that the 519mm of NAV value is correct, and does equate to $24/share. However, Dawson, as it's currently trading is not the same as the newco. That kind of goes without saying. NAV for DWSN is actually $42/share and their target of 80% of NAV should be $33.60 which is nearly a triple from here. Given that the combined market cap for both companies is a tad under 150mm that foots better instinctively with the 519mm figure.

The other firm uses estimates that are higher than ours but, regardless, their math is incorrect, and again, equates the new company with DWSN's current trading level. Their approach is:

2015E EBITDA: 65.2 *4= 262+65mm of cash (again, not sure where this number comes from)=327mm/18.1 (we think the number should be 21.5mm)=$18

Setting aside the imputs, the $18 figure represents what the new company should be trading for---NOT what Dawson currently represents. They needed to take the $18 figure and multiply by 1.78 to get $32/share as their price target.

Conclusion

Indiscriminate selling in the seismic space, without regard for differences in balance sheets or business models, allows one to invest in a debt free-market leader at undemanding multiples at a depressed point of the cycle at a time where they're gaining share. While the near, and perhaps medium, term is likely to be challenging, it is our contention that the combined company will have the liquidity to make it to the other side and prosper.