Dawson

Geophysical
2016 2Q Review

Dawson (DWSN) is by far my largest holding. Some of that is a result of my position sizing
when I initiated the holding, but a large part of it is from the jump the stock price has made
from around $3.00 to over $7.00. Coming into 2Q earnings the stock price was north of
$8.00 as a result of a bullish analyst report that came out a couple months ago. I felt the
stock price had outrun the current performance of the underlying business and that the
2016 2Q results would disappoint. Unfortunately this proved to be the case as earnings and
revenue both came in under analysts estimates. Fortunately for my portfolio, the market
didnt seem to care much as the stock performance in the couple days since Dawsons
earnings release has been positive.

Revenue for 2Q 2016 was about $28 million, and, given the projected 4-6 crews for the next
quarter, Id expect the company to post about the same revenue in Q3. Earnings was of
course horrible, but operating expenses as a percentage of revenue was down and general
and administrative expense, which may still be too high given level of work, continues to
decrease. One of the first areas I look at for my companies earnings report is the cash from
the ongoing business; basically earnings but adding back depreciation and subtracting
maintenance cap ex. Dawson, like most of my oil company holdings, is reporting a cash
burn. For Dawson this was a couple million. A concern, but they have a very solid balance
sheet that can sustain this level of burn, which should improve with the right sizing of the
business, for years to come.

Even though revenue and earnings missed analysts expectations, and that of my own, there
were some positives in the report. For a company in a cyclical industry cash is king.
Dawson has been able to increase cash to $67mill at the end of Q2 from $58mill at the end
of December and $62mill at the end of March; all the while decreasing debt to $6.2mill from
$10.7mill at the end of December. In essence, net cash has gone from $47mill at the end of
last year to $59mill today. This is mostly a result of a decrease in accounts receivable, but
an impressive feat in this industry nonetheless.

Current Valuation
I find valuing Dawson in the current environment tough. With the recent business
combination, utilizing historical earnings for their earning power is irrelevant. Theoretical
liquidation value, which I calculate about $5/share, can provide somewhat of an
Armageddon worst-case scenario. Replacement value approach appears to be the best
course of action. Depending on the value I give to intangibles (customer relations,
knowhow, training) and the value to replace the PP&E, I get a replacement value of between
$8 and $12 a share.

So roughly $10/share is the value that I can assign to the company based on the info
available today. This is not the value I think its worth today, but rather the value I think itll

be worth once the industry starts to improve. However, once the oil industry does start to
improve, I think the earnings power valuation approach may be more appropriate and I can
easily envision a valuation north of $12/share.

What to Look for in 2016 Q3 Earnings Report
- Cash burn decreasing, or turning positive. Cash burn defined as operating earnings
plus depreciation & amortization minus cap ex.
- Net Cash. Total cash could continue to grow with further reduction in working capital,
but this should start to slow. Without pickup in revenue, Id expect net cash to fall a bit.
- Operating and General and Administrative expense decreasing as a percentage of
revenue.
- Debt continuing to decrease.
- Capital expenditure level below the forecasted $10mill annual.
- The CEO hinted that the $50 oil level was the point of increased capital expenditures for
their customers. If oil prices do rise above this level, see if this is the case.
- CEO hinted that they could be in market for a contrarian acquisition. See if theres
anymore talk of this.

Summing it up
Overall nothing stood out as shocking. Balance sheet makes me happy. Income statement
makes me sad. I have just as much confidence in management as when I initiated the
position, if not more. As current oil reserves dry up, eventually oil E&P companies will need
to explore for new resources to provide for the worlds crude oil thirsts. I still have the
upmost conviction Dawson Geophysical will be there to provide services to those
companies when they do. I will hold the stock as long as I maintain this confidence or until
the market value reaches my estimate of intrinsic value. Should the balance sheet weaken
to a questionable state or the stock price rise above $10, I will review my position and
perhaps look to sell. Until then I maintain a strong hold position for Dawson Geophysical.