Generation Essentials Group

Welcome to our second quarter 2009 conference call. We appreciate your joining us today.

Your host will be Wayne Whitener, President and Chief Executive Officer along with Chief Financial Officer Jim Brata. Before I turn the call over to management I have a few items to cover.

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If you would like to listen to a replay of today’s call it is available via webcast by going to the investor relations section of the company’s website at www.TGCSeismic.com or via a recorded instant replay until August 10th. Information on how to access the replay was provided in this morning’s earning release.

Information reported on this call speaks only as of today, Monday July 27, 2009 and therefore you are advised that time sensitive information may longer be accurate as of the time of any replay. Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements regarding the company’s future performance are forward-looking statements. These forward-looking statements are based on management’s current expectation and include known and unknown risks, uncertainties and other factors many of which the company is unable to predict or control that may cause the company’s actual future results or performance to materially differ from any future results or performance expressed or implied by those statements.

These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filings with the SEC including the annual report on Form 10K for the year ended December 31, 2008. Furthermore, as we start this call please also refer to the statement regarding forward-looking statements incorporated in our press release issued this morning and please note that the contents of our conference call are covered by these statements.

Now, I’ll turn the call over to Wayne Whitener.

I would like to welcome you to our second quarter 2009 conference call. As far as the agenda is concerned, I will provide you with some highlights and Jim Brata will provide you with the financial details.

Then, I will come back with some final comments. Let me begin by making some comments.

We had a fairly good second quarter given the continued weak economic environment, low oil and gas prices, a decline for seismic services and a lower domestic rig count. This comes atop of a strong first quarter so overall we had a very good first half of the year.

However, as we mentioned in the first quarter conference call we have been experiencing weaker demand for our services. We are also see continued price pressure and therefore our margins have deteriorated and are off from the normal levels.

From my perspective this is the most severe downturn occurring in the shortest period of time in all my years of being in the business. The US land rig count dropped to 932 in the second quarter of 2009, that is down approximately 50% from the second quarter of 2008.

We have responded to this lower level of demand by reducing costs, trying to keep them in line with expected revenues. Regarding our crew count, we began the second quarter with eight crews operating in the field.

As a reminder, that was down from the peak of nine crews operating during the first quarter of 2009. In response to the weakening demand we reduced our crew count to five by the end of the second quarter.

We further reduced our number of field crews to four at the beginning of the third quarter as we continued to optimize our utilization and keep our crew count aligned with projected demand. Our backlog is currently $37 million, down from approximately $50 million in the previous quarter.

Finally, we continue to stay in close contact with our customers which will enable us to respond quickly when conditions improve. Now, I’ll turn the call over to Jim Brata who will give you a detailed view of our financial results.

Then, I will come back with some final remarks.

Revenues for the 2009 second quarter rose 21% to $22.6 million compared to $18.6 million in the second quarter 2008. Cost of services in the second quarter increased 24% to $15.6 million from $12.6 million in the second quarter a year ago.

As a percentage of revenues cost of services in the second quarter of ’09 was 68.9% compared to 67.4% in the ’08 second quarter. Gross profit in the ’09 second quarter rose 16% to [$7] million compared to $16.1 million a year ago.

Gross profit margin was 31.1% compared to 32.6% in the second quarter of last year. Selling, general and administrative expenses decreased to $968,000 or 4.3% of revenues compared to $986,000 or 5.3% of revenues a year ago.

Depreciation and amortization expense was $3.6 million compared to $3.4 million a year ago. As a percentage of revenues depreciation and amortization was 16.1% compared to 18.3% in the second quarter of 2008.

Second quarter ’09 income from operations increased 44% to $2.4 million compared to $1.7 million in the second quarter a year ago. Income from operations as a percentage of revenues was 10.7% compared to 9% in the second quarter of 2008.

Interest expense in the second quarter was $268,000 versus $209,000 a year ago. The effective tax rate for the second quarter was 42% compared to 41% in the second quarter of ’08.

Net income for the second quarter increased 43% to $1.2 million compared to $868,000 in the second quarter of ’08. As a percentage of revenues net income was 5.5% for this year’s second quarter versus 4.7% from last year’s second quarter.

Earnings per diluted share were $0.07 versus $0.05 in the second quarter of ’08 and per share amounts in all periods have been adjusted to reflect the 5% stock dividend paid May 12, 2009 to shareholders of record as of April 28, 2009. Second quarter ’09 EBITDA increased 19% to $6.1 million, an EBITDA margin of 26.8% from $5.1 million an EBTIDA margin of 27.3% in the second quarter of 2008.

Our balance sheet remains strong and we continue to generate cash producing cash flow from operations of $8.3 million during the second quarter. As of June 30, 2009 we had long term debt of $9 million representing 15.7% of our capital, cash and cash equivalents of approximately $30.6 million, a current ratio of 2.7 to 1, working capital of approximately $26.8 million and a book value per share of $3.12.

With that, I’ll turn the call back to Wayne.

We have responded to these conditions by reducing our costs including our seismic crew count to keep them in line with anticipated revenues. We are not planning any capital expenditures for the next several quarters unless we see a significant increase in our backlog.

We continue to focus on reducing our debt, we have reduced it by $1.9 million in the quarter before financing our insurance premiums. Our insurance is renewed annually during the second quarter and because of the current recession and to conserve cash, management financed the $2 million premium.

The insurance note increased the current portion of debt and contributed to $1.3 million net reduction in debt so far this year. We continue to generate cash and have approximately $31 million of cash in the bank.

With our low debt level and our record amount of cash in the bank along with an unused line of credit, we believe we are well positioned both financially and operationally to withstand this current industry down cycle. Despite the current downturn, our long term outlook remains positive as continued efforts to increase funding and development costs combined with increasingly complex reservoir and the growing use of directional drilling should maintain a strong base of seismic demand as energy markets recover.

This concludes my formal remarks and at this time I’ll take any questions.

I have a couple of questions on your backlog and your field crews. Can you talk about the composition of your backlog, where the new order bookings are coming from?

I estimate you have about $9 million of new orders, is that correct?

That’s correct.

Where is that coming from?

It’s coming from our core base of midsize E&P companies all through Midcontinent Gulf Coast.

Do you think that’s a sustainable level of new orders from what you are seeing?

Well, that is our hope. We’re seeing some pick up in the industry from where we saw in the first quarter.

Like I said, price pressuring is very intense right now so we’re going to have to kind of see how that plays out.

Are you seeing any contract cancellations?

No, not at this time, no.

Where are your crews working? Are they basically in the Midcontinent?

Yes, Midcontinent, Gulf Coast, some West Texas, pretty much a lot of our core area.

Are they working more on turnkey contracts or what percentage would that be?

100% turnkey.

Are you seeing the same level of credit pressure on your clients now, or has that abated?

I think money available to the E&P companies is still very, very tight. Hopefully, we’ll see later on this year maybe some of that money free up.

But, things are still relatively tight for money investment in the oil and gas business at this time.

Did you see any rise on inquiries following the rise of oil prices in the first half of the year?

We have seen a rise in inquiry in oil plays, I will say that.

Do you expect once drilling activity for natural gas picks up in North America, are you going to be trailing that in terms of the work you’ll be doing or will you be preceding a pickup in drilling activities, any ideas?

We should be leading drilling activity, our pickup should start seeing a pickup in land drilling if our business does pickup.

Then just a last housekeeping question, short term debt number, do you have that?

That’s $7.2 million.

Obviously I think the way you reduced is definitely appropriate given the activity out there. What are you seeing, obviously we are continuing to hear more about the [inaudible] in activity on the shale plays, particularly Haynesville, Marcellus, the new Horn River up in Canada, are you getting any calls from those areas?

I know in the past you haven’t done a whole lot in those areas, are those areas that you’re in talks or that you could do anything to start focusing more on those regions?

Sure, we are pursuing those regions at this time to expand our area of work. At this moment in time we have no contracts pending, we do have bid proposals in some of the areas that you named and we’re of course continually pursuing those areas with our marketing effort and hopefully end up with putting a crew in one of those areas.

How long I guess do you see as far as if you throw a bid on something like that, are we seeing stuff pretty active as far as if bids are thrown out you think something would be accepted or rejected rather soon or could this take to year end? What are you seeing as sort of activity?

Well, most of the time once we receive a bid request normally we would have a answer back on the success of that bid within 30 days or less. Probably in the first quarter we saw a lot of tire kicking as far as people looking to see what type of pricing they could get in the seismic and land drilling and doing new pro formas in relation to what the economics look like but I think we’re seeing a little bit past that now and basically the bids we are receiving are getting done.

So, if we’re successful in some of these new areas, it’s very possible we could have a crew on there well before the end of the year but it just depends on how successful we are in the bidding phase.

Then I was wondering, international obviously has seemed to have held up a bit better or at least in this cycle than domestic, are there areas like Latin America or other international areas that you would consider or are considering?

We are looking at all options available to the company as far as putting our equipment to work. So, we’re looking at the possibility of international, we’re looking at any where we feel like the economics make sense and that it’s a safe place for our personnel to work.

Lastly, obviously on reducing the crew count you now have to four crews, is there still then some costs that would carry over in to this current quarter as far as obviously you’re running lest crews but as far as personnel, do you let all that same personnel appropriate with the crews or do you keep some of them on? I’m just wondering on a cost basis what we should expect the current quarter versus the prior given I think in the past there’s been a bit of fixed cost associated with some of these crews?

There is some fixed cost associated with the crews. Basically, we’ve kept the key personnel but they’ve taken the place of some of the hourly personnel so we’re not going to see a impact as far as the existing crews that are working.

We do have of course, a high depreciation because of the amount of equipment that we purchased in the last three and a half to four years. The main thing is that we’ve reduced costs just as soon as possible in order to keep the costs as much in line with the revenues that we feel like we can produce.

Obviously financially you seem to be in a stronger position than some of your public peers and definitely much stronger than a lot of private folks that you compete against. I think in this market it’s probably fair to say that you’re probably seeing some potentially I guess activity, you could go in and maybe buy some things out there.

Would that be something that you would entertain if the price was right or given the activity just really under no circumstances would you look in this market of adding any sort of equipment, etc.?

Well, I think you have to look at the opportunities that are available to you at all times and even in a down market there could be some very positive opportunities for us. So, we continue to have an open door policy as far as reviewing anything that looks like may make sense to better grow the company.

I was wondering whether in view of your very, very strong cash position and your low debt levels whether you’ve given any thought of adopting a policy of having any stock buybacks?

I know our board has reviewed that, there’s nothing at this time that we’re reviewing as far as any stock buybacks. I’m sure as you can understand, cash is king in this type of environment so we feel like it is very important to have the cash availability to take possibly advantage of opportunities that come to us in this type of environment.

Are you seeing any activity out there or any signs of bottoming in these markets and is oil a different world than gas for purposes of 3D seismic?

Well, I think we’re hopefully seeing a bottom out there. There’s oil plays and there’s gas plays, right now we’re still involved in some of the larger gas plays, we’re doing a lot of work in the Haynesville shale and that area.

But, we definitely have seen since the beginning of the year more inquires in oil plays so that is probably something that we’ll probably see a greater amount of interest between now and the end of the year or the oil plays versus the gas plays.

Are you seeing any pickup in queries for work in oil?

Yes, there’s no doubt that the oil plays are probably more in demand than they have been previously.

A question on sort of a broader overview of what you’re seeing in the North American market because one hears that the oil majors and the large E&P companies continue to spin through a down cycle to a greater extent. Now, your clients are smaller E&P companies but, what are you seeing in terms of the seismic environment in North America at the present time?

Well, we’re seeing a very, very soft market. We’re seeing that pricing margins are being squeezed by what players are out there.

There is some expenditures by some of the majors but very limited. I think right now everybody is very cautious on what the future holds as far as commodity prices, as far as what new energy policies may kick in.

There still is leasing going on out there but it has slowed down considerably and I think we’re seeing a very cautious view by all the E&P companies. So, until a lot of the uncertainty is removed I think things will remain slow.

Hopefully, we’ll see a lot of the uncertainty in the next 60 to 90 days be removed and we start seeing a pickup back in exploration in the US.

A number of the oil field service companies that have reported to date are saying that they’re less pessimistic than they were at the end of the first quarter. Do you have a personal view on that one for yourself?

Well, I think things are – our business of course we were living off previous backlog from ’08 going in to ’09. As you know, we had a great first quarter, a pretty decent second quarter, a great first half so we’re of course lagging behind a lot of the other oil field service companies as far as basically they don’t have the backlog that we encounter in the seismic business.

We’re of hopes that we might see some pickups in the fourth quarter as far as demand for our services and hopefully going in to ’10 should hopefully be an improvement.

A question on your customers and 3D surveys, you said that there was some tire kicking going on over pricing and all but are you seeing more channel intense surveys being attractive to your customers? Is this one of the items of negotiation that you have, sort of same price more work?

Oh sure, our clients want more for their money and they want to pay less and they want to get more. But, we’re seeing that they’re demanding more channels for less money.

That’s just basically what happens within our industry when things soften up so when things turn and the demands hopefully will turn back where we get more for our services for the amount of equipment that we’re supplying.

And because your equipment is interchangeable for the most part, are you seeing your surveys with a larger channel count now, are you able to transfer equipment around between the crews or is that something that’s going to be happening in the future?

No, we’re seeing that right now. We have eight crews with the same type of equipment so we’re able to move the equipment around as demands require so that’s been very good for us.

We expect that to continue on for the rest of this year as far as being able to move equipment around to needed locations.

I’d like to thank everybody for being on our second quarter 2009 conference call. We appreciate your interest in the company.

Thank you.