Dawson Geophysical (DWSN) engages in the provision of onshore seismic data acquisition services. Its services include planning and design; project management; permitting; surveying; field operations; support services; processing; and gravity and magnetic data.
Dawson Geophysical (DWSN): A dying industry
It’s no secret that, of late, the Oil and Gas sector has been performing terribly. $XLE, an O&G ETF, has halved since January—and been on the decline for years:
However, this downward trend in O&G, combined with significant declines in sentiment around the space, has led to significantly incorrect prices and huge sell offs.
Dawson Geophysical is “an O&G” company that’s been thrown out with the bathwater—because it’s really a data company. The company “acquires and processes three-dimensional seismic data used by third-party clients to analyze subsurface geological conditions for potential oil and natural gas accumulation.” Essentially, O&G operators—be they small, mid-size, or large—rely on seismic data to figure out where to drill, to estimate the value of potential drill sites, etc. Of course, the demand for data has diminished with the sector. However, DWSN has remained profitable, and is even cash-flow positive.
Liquid gold
Revenue over Q2’20 was $5.5 million, and annualizing this number gives a yearly multiple of $22 million. The market cap of DWSN is $40 million—and the company has $29 million in cash, and total liabilities of $16.8 million. This gives an EV/EBITDA multiple of (22 / (40 – 29 + 16.8)) = ~.69.
Please note, this is a conservative multiple which isn’t even really EBITDA: I calculated it just using cash without accounting for receivables, short term investments, etc. If you include those, the ratio is more like 0.5. Now, the company generated Unlevered Free Cash Flow of ~$4.7m. So I don’t believe the company will go out of business like many O&G peers— it’s actually making cold hard cash.
Note: a large part of the reason it’s a net-net is due to the structure of the depreciation calculation employed by the company. If people want me to discuss that in the comments, please let me know.
Now, consider that $XLE (an energy ETF), which I’m using as a rough proxy for O&G data demand, is at its lowest point in 20 years. This means that, assuming some return to normalcy (these things are cyclical, although with the advent of clean energy, we may see a muted recovery), we are looking at what’s basically a positive net-income and FCF producing net-net which could very well see even greater improvement in margins and profitability.
If you liquidated the company today, you could probably get ~5% more than the share price. And allowing any sort of expectation on continued profitability, share buybacks, etc. puts this into potential bagger territory.
Institutions know this, that’s why in March 2020, Gateway Capital purchased around $2.5 million of shares and became an insider Of course, this doesn’t necessarily mean all that much. But, given that Gateway Capital is focused on deep value investing, I’d say that serves as validation of this thesis.
Dawson Geophysical (DWSN) risk factors
- No one is saying that Dawson is a good business. Honestly, it seems like it’s in a dying space long-term. Similar companies (which didn’t have good balance sheets) have gone bankrupt. But for whatever reasons, DWSN is chugging along.
- While the efficient market theory is largely games theory, it’s entirely possible that the current price reflects something that hasn’t been accounted for—and that I’m totally mistaken. After all, when buying a home that seems like an amazing deal, your instinct should be “what’s wrong with it?”
- Just because something’s a net-net doesn’t mean the share price will go up. After all, you’re not actually buying the cash, you’re buying the stock. And stocks fluctuate for a ton of reasons.
- There has been some recent insider selling (~$16,000 yesterday), which isn’t necessarily a red-flag, but is never a green flag.
- The reason I’m fine with this is that it’s small enough that I think it’s probably for college tuition payments or something like that, and not cashing-out. But who knows.
- The very reason this play exists—that the stock is relatively unknown / inefficiently priced—can cause liquidity issues. This isn’t AAPL; it’s fairly thinly traded. If you accumulate massively, it could be hard to get out quickly. This is for investors, not traders (how’s that trading going, anyway?)
