Dawson Geophysical Company (NASDAQ:DWSN) (“Dawson” or the “Company”) today released the following letter to shareholders concerning the pending tender offer by Wilks Brothers, LLC issued by Stephen C. Jumper, President and Chief Executive Officer on behalf of the Dawson Board of Directors.
November 16, 2021
Fellow Dawson Shareholders:
As previously disclosed, the Company announced a transaction with Wilks Brothers, LLC (“Wilks”) on October 25, 2021. The transaction involves a tender offer by a Wilks subsidiary to purchase outstanding Dawson common shares at $2.34 per share and a follow-on merger. The tender offer commenced on November 1, 2021 and is open until November 30, 2021 (subject to extensions under certain circumstances). The transaction is well described and documented in the Schedule 14D-9 and Schedule TO-T filed with the SEC by Dawson Geophysical Company (“Dawson” or the “Company”) and WB Acquisitions Inc., respectively, on November 1, 2021, which can be obtained at the website maintained by the SEC at www.sec.gov.
Beginning in September of 2019, Dawson and its Board of Directors, with the assistance of financial advisor Moelis & Company LLC, commenced an on-going review and analysis of the Company’s potential strategic alternatives, transactions or actions in an effort to preserve and enhance shareholder value. From July 9, 2018, to September 2, 2019, the Company’s share price declined from $8.09 to $2.11. The PHLX Oil Service Index also declined materially over the same time frame as the energy sector fell out of favor in the public equity markets; however, the decline in the Dawson share price exceeded the decline in the index. In response to shifting public investor sentiment, publicly traded North American based Exploration and Production (E&P) companies began to alter their capital spending plans with a focus on generating free cash flow and returning capital to shareholders. This change in capital allocation priorities by E&P companies, which accelerated further in 2020 and 2021, has resulted in less demand for North American onshore seismic data acquisition services, thus significantly affecting Dawson’s revenue stream.
In parallel to evaluating potential strategic alternatives, we began a process to resize the Company as our model shifted to fewer, larger channel count crews, and to reduce capital expenditures to protect the balance sheet and cash balances. This was done with the goal of maintaining our ability to compete and execute large scale projects as they materialized. Since early 2020, we have undergone further efforts to right-size, reduce salaries for most employees, including all of management, and reduce fixed costs in an effort to protect the balance sheet and cash balances.
During this time frame, we remained optimistic about a recovery in the onshore U.S. seismic market and experienced intermittent quarters of success with reasonable utilization of our equipment. When projects have been available, the Company has executed very efficiently and continues to do so. Despite our optimism, improved oil and gas prices and a slight uptick in bid activity in the middle of this year, sufficient revenue producing opportunities have yet to materialize in any meaningful way. Recent earnings reports by the E&P companies continue to project flat production levels in 2022, only slight increases in spending and continued focus on returning capital to shareholders, debt reduction and capital discipline. Our conversations with our customers and ongoing marketing efforts confirm this sentiment.
In 2021, our cash burn has accelerated despite our efforts to right-size and curtail expenses. Our accounts receivable balance became depleted as we collected cash. This action resulted in a negative net working capital (defined as current assets less current liabilities excluding the impact of cash, restricted cash and short-term investments and current maturities of notes payable and finance leases and operating lease liabilities) position at September 30, 2021, and opportunities to further reduce costs or cut capital expenditures are minimal. Activity levels in 2022 are expected to be well below levels we anticipated a few quarters ago. While other sub-sectors in the oil & gas and oilfield services sectors are beginning to experience modest activity level improvements, those improvements are focused around completion and production related services opportunities, not exploration or seismic data related exploration-focused activities which impact Dawson. Even so, overall activity levels will likely be well below 2019 levels across the vast majority of the sub-sectors mentioned.
We expect that our activity levels from February to mid-fall of 2022 will be similar to levels experienced in the second and third quarters of 2021, and then expected to only slightly improve in late 2022. Visibility beyond 2022 is unclear, but given the expected state of capital spending on oilfield services, we do not anticipate meaningful increases. Therefore, with reduced activity levels, we expect our cash balances to continue to decline during this period. Additionally, our ability to fund future maintenance capital requirements will be challenging and further impact cash flow. As of November 12, 2021, our cash, restricted cash and short term investments were approximately $36,500,000, representing an expected further decline from our previously announced September 30, 2021 balance while our accounts receivable balance increased related to the previously disclosed recent redeployment of a small crew.
We always strive to communicate as accurately as possible with our shareholders based on the best available information at any given time, and to act in the best interest of all of our shareholders. We believe we have done so to-date and are continuing to do so today with the recent unanimous decision by the Board to enter into the transaction with Wilks. This has been a well thought out decision following an expansive strategic review and evaluation process over the last two years that was focused on maximizing value for all shareholders.
We believe there is an ongoing fundamental shift in how E&P companies allocate capital which, unlike previous cycles, will result in further delays in any potential recovery in the North American onshore seismic data acquisition market, thus impacting Dawson’s opportunities to materially increase revenue streams and maintain a cash neutral position.
It is a privilege to serve and work on the behalf of all of our shareholders. There is always the possibility we are not correct in our assumptions on timing of a recovery. However, we see no evidence to suggest any meaningful improvement in Dawson’s activity levels for some time to come.
While the Company’s Board and management continue to diligently serve the interest of the shareholders, we reiterate our recommendation for Dawson shareholders to tender their shares. We believe this transaction provides shareholders a liquidity event and compelling value for their shares in a very difficult and challenging market.
We are grateful for our loyal shareholders, valued customers and dedicated employees. We wish all a healthy and prosperous Holiday Season.
On behalf of the Dawson Board of Directors,
Stephen C. Jumper
Chairman, Chief Executive Officer and President
