Dawson Geophysical's Soundings Find Oil And Gas Beneath U.S.

With no breaks on the price of oil, plus energy companies' insatiable appetite for exploration, times seldom have been better for service companies that find drillers' bread and butter.

Couple current favorable conditions with efficient management and you have a company that has been returning good results all year and eyes further growth with confidence. Dawson Geophysical DWSN, which produces seismic data that help drillers find oil and natural gas, has been increasing its number of field crews and equipment throughout the year and says winds are blowing in its favor.

"We feel real good on the direction the industry is going," CEO Stephen Jumper said in an interview. "We are dependent on natural gas prices. Despite recent fluctuation in the natural gas prices, the demand has remained strong. We see no change in market conditions."

The Midland, Texas, company in its third quarter that ended June 30 delivered record revenue, which increased by 65% from a year ago to $68.64 million. Income, the highest it ever has had, rose 78% to $7.56 million. Earnings per share rose to 98 cents compared with 56 cents in the same period a year ago. Growth, improved pricing conditions and favorable contract terms helped Dawson achieve historic results.

Seismic companies grow the bottom line by expanding the number of crews and output per crew.

The crews determine where to drill for oil or natural gas by sending sound or blast waves deep underground and recording the returning echo.

The company last month added 15 crews, its third addition this year. Tom Ebbern, an energy analyst with Calgary-based Tristone Capital, says that adding a new crew means the company is operating at full capacity.

Jumper says he expects to increase the channel activity per crew, which would increase efficiency and pricing per team.

A channel is a listening device that records the sonic rebound from deep within the earth. The more channels, the more accurate the representation of what lies underground.

Since March, the company has increased its channels to 102,000 from 92,000.

Increased channels provide more details about seismic activities and improve exploration results. It also helps Dawson because the charge to clients increases with increased channels.

"We see continued growth well into the future in our industry for increased channel activities," Jumper said.

Seismic data acquisition has become more technology intensive. In the early 1980s, about 700 seismic land crews operated in the lower 48 states compared with 55 now.

Dawson, Jumper says, had eight crews and 800 channels in the early '80s.

Since, 2004, Dawson has tripled its channel accounts.

Dawson operates in west and south Texas, New Mexico, the Barnett Shale of the Fort Worth Basin, Arkansas, the Rocky Mountains of Utah and Wyoming, Oklahoma and the Appalachian Basin. It has limited its activities to the continental U.S.

Jumper says Dawson has no plans to venture offshore or into international markets. He pointedly said Dawson would remain in "pure play," as it has been for more than six decades, acquiring seismic data in the continental U.S.

Analyst Ebbern says getting onshore contracts is more competitive than for offshore seismic acquisition because "there are way more onshore" seismic firms than those that offer offshore seismic services.

He says offshore data acquisition is more specialized and technology intensive. A seismic company that has found a niche, Ebbern says, may do well to focus on less expensive land data acquisitions.

A fourth of all the seismic crews in the continental U.S. are Dawson's. The company's clients, which Jumper says include all publicly traded energy companies, have booked all its crews through the end of this year and into 2008.

Some of the company's competitors such as ION Geophysical IO offer land and marine seismic data service.

The company also has no long-term debt.

Equity analysts who follow Dawson are optimistic, but are waiting for this quarter's results to see if it can maintain the trend.

Daniel Scalzi of Matrix USA praises the company's healthy balance sheet and efficiency. Scalzi says Dawson's rate of return on capital at 20.5% is more than double its cost of capital, which is 9.4%.

However, he says the company has a negative $12 million cash flow, which increases its risk.

Colin Gerry, an analyst at Raymond James & Associates, also likes Dawson's results.

Still, he notes the cyclical nature of the business.

"The stock has performed remarkably this year, they had a bang-out quarter, and they're going to have another bang-out quarter, maybe a little digestion time," Gerry said. "That's just a hard trend to continue in the seismic business."

Bad weather slows down seismic activities.

Most land extractions in the U.S. are for natural gas.

Jumper says fluctuations in gas prices haven't hurt demand for or the price of his firm's services.

"The service we provide is somewhat disconnected from short-term commodity pricing because it takes such a large effort and a long time to get a seismic project ready to go," Jumper said. "What we're doing right now ... it's the stuff that will be drilled next year."