Tetra Technologies Inc (TTI) 2003 Q4 法說會逐字稿

Good morning. My name is Lawana (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the TETRA fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. Mr. Hertel, you may begin your conference.

Thank you. Good morning and welcome to the TETRA Technologies fourth-quarter 2003 earnings conference call. With me today is Joe Abell, TETRA's CFO. As is our policy, both Joe and I will be making a short presentation, which will then follow with your questions. I am requested to remind you that this conference call may contain certain statements that are deemed to be forward-looking. These statements are based on assumptions and analyses made by TETRA based on a number of factors. The statements are subject to a number of risks and uncertainties, many of which are beyond the control of the Company. You are cautioned that any such statements are not guarantees of future performance, that actual results may differ materially from those projected in the forward-looking statements.

Joe, would you now give a brief financial review of the fourth quarter and the year?

Net income in the fourth quarter 2003 was $4.2 million or 18 cents a share fully diluted compared to net income in the fourth quarter of 2002 of $545,000 or two cents a share. Net income increased 677 percent year-over-year. Income before the loss from discontinued ops in the fourth quarter of 2002 was seven cents a share fully diluted.

TETRA's revenues for the fourth quarter were up 18.2 percent to $75.2 million compared to the fourth quarter of 2002. In accordance with the EITF 00-10, we have reclassified into the cost of goods sold certain shipping and handling costs which had previously been deducted from product sales revenues. This reclassification increased revenues and cost of goods sales in the fourth quarter and 12 months of 2003 by $1.9 million and $7.7 million respectively. And in 2002, by $2.2 million and $7.7 million respectively. Gross profits and income were unaffected by this reclassification.

For the 12 months of 2003, net income was $21.7 million or 94 cents a share fully diluted, up 143 percent over 2002. Income before discontinued operations and the cumulative effect of change in accounting principle was 19.4 million or 84 cents a share compared to 9.4 million in 2002 or 42 cents a share for a 106 percent increase.

In 2003 the Company adopted FAS-143 regarding asset retirement obligations and recorded a cumulative effect adjustment of $1.5 million at the beginning of the year. In September the Company sold it's Damp Rid subsidiary for a substantial gain and discontinued operations at its Norwegian process service facility. For the year we recorded after-tax income from discontinued operations and net gain on disposal of discontinued operations of $3.7 million.

Revenues for 2003 were $318.7 million, up 33.4 percent compared to 2002. Profit before tax in the Fluids Division for the quarter was $2.9 million, down 47 percent versus last year's comparable period. On the other hand, Well Abandonment & Decommissioning Division reported profit before tax of $4.2 million, compared to a $968,000 loss in the fourth quarter of last year, of '02. And the Testing & Services division reported profit before tax of 1.9 million, an increase of 175 percent versus the comparable period in '02.

For the 12 months of 2003, profit before tax in the Fluids division was $14.0 million, down 22 percent versus '02. Profit before tax in the Well Abandonment & Decommissioning division was a record $23.5 million, up 629 percent over 2002; and profit before tax in Testing & Services was $6.4 million, down 10 percent compared to '02. We reduced debt by $37.4 million over the year, ending 2003 with essentially no debt. At the same time we added $14.3 million of unrestricted cash to the balance sheet. Our E&P Operations were significant enough in 2003 to require FAS-69 disclosure. Geoff will elaborate on this and other results.

On January 13, we reviewed with you our estimates for the fourth quarter including an earnings range of 16 to 19 cents per share. After closing our books and having our result audited, I am very happy to report that our expectations on that date were met. Each of the divisional results were pretty much as advertised at that point in time. Our Fluids Division continued to experience weakness primarily due to the lack of drilling in the Gulf of Mexico. Our Testing & Services improved modestly as the effects of increasing natural gas drilling activity has begun to enhance results.

Our Well Abandonment & Decommissioning Division reported dramatically improved results, as Joe indicated, over especially the fourth quarter of 2002. This was even though our Inland Water business segment lost money. As we outlined in January, we have taken steps to reduce the costs and structure this business unit so that it can better optimize profits even in relatively weak business environments. The benefits of this program should begin to be felt early this year to mid this year.

As we looked toward 2004, we're optimistic regarding our business in the aggregate. We anticipate an improvement in our Fluids Division as certain key international markets increase activity. These could include Mexico, Brazil, Venezuela, West Africa, and the North Sea. Additionally we anticipate the Gulf of Mexico market to modestly improve as we go throughout the year.

Our testing business has already begun to see improvement, as I mentioned. This is from the increased domestic natural gas drilling activity that we have already seen. We expect to see more business from the Latin American markets as well. In addition to that, we should begin to experience some growth from the Eastern Hemisphere activities. We're currently building equipment in the expectation that we will deploy some of it under anticipated new Eastern Hemisphere contracts during this year.

Our Well Abandonment & Decommissioning Division has budgeted growth for 2004. As can be seen from the press release, some of 2004's activities is already secured through our Maritech subsidiary. How much of the roughly $131 million of possible base load work gets accomplished this year is dependent on many items; including whether it is more economic to continue to produce some of these properties than to immediately plug them.

We continue to believe that a number of offshore property sales will occur in the near future. If this occurs, we expect to secure at least a portion of the associated Abandonment and Decommissioning activity. Usually significant contracts for abandonment work occur between early to mid-January and early April. We have no reason to believe that this won't be the case this year.

We do want you to remember that with our decommissioning business comes seasonality. Our second and third quarters should produce greater profitability than the first and fourth quarters due to this seasonality.

As we have historically discussed, our integrated Well Abandonment & Decommissioning strategy to Wall Street, two questions seem to always be asked. Until today, we had to give you very general answers, but with our press release today, we can be more specific. The first question related to whether the addition of our Maritech subsidiary really assisted in baseloading our Abandonment and Decommissioning activity. With the $131 million of possible work generated from Maritech properties, that should leave no doubt in anyone's mind that the exploitation and production entity is integral to our well abandonment strategy.

Second question related to the profitability of Maritech, and again I think the answer is fairly evident after this press release. Since much of our Well Abandonment & Decommissioning project profits are skewed toward the abandonment and decommissioning activities, the issue is whether we would give back part of these profits with losses at Maritech. In 2003 approximately 15 percent of our divisional operating profits exclusive of corporate overhead was generated by Maritech.

Is that likely to continue? Obviously it is difficult to predict all of the various facets of that, however, at year-end we reported the cost of our oil and gas reserves on our balance sheet of $23.7 million. At the same time, Ryder Scott estimated our undiscounted future net cash flow before income taxes from the proven reserves on these very same properties at $86.2 million. I think you are beginning to see to why we believe the integrated Well Abandonment & Decommissioning strategy is so important TETRA. If there is a negative in all of this it is that we have been so successful optimizing production profits from the properties that we have sometimes postponed the time when we can initiate the abandonment, and if that is the worst problem we have, we are in pretty good shape.

We have recently announced two new initiatives. First, our Board of Directors has authorized a stock repurchase program of up to $20 million. We believe one of our best investment opportunities lies in our own stock.

Secondly, the Directors have authorized the Company to file a universal shelf registration statement on Form S4 to register $400 million of securities. The securities registered will include common stock, preferred stock, warrants, and debt. Unlike an S3 filing, which is generally used to raise cash, an S4 filing is almost always used for acquisitions. This should be further evidence of our commitment to attempt to grow this company both internally and then externally through acquisitions.

Around those lines, it should be noted that between our existing cash and our unused bank line, we could acquire assets for $100 million or more and never touch the universal shelf. With that, it is probably an appropriate time to discuss the balance sheet.

As most of you know, we consciously directed our efforts the last three years toward cash generation, sometimes even to the detriment of reported earnings. However this dedication to cash flow has born fruits, as we have eliminated all of our long-term debt at the end of 2003. And please forgive me this modest overstatement in that we continue to have $12,000 of capital leases that we cannot get rid of.

Our long-term debt, as Joe pointed out at tithe end December 2002 was 37.4 million. In particular our Well Abandonment & Decommissioning and Fluids Division generates substantial cash flow. In addition to retiring our long-term debt, our year-end cash, as Joe indicated, had increased to a little over $16.9 million. This cash generation did not stop at year-end.

On February 20, which was the last date we pulled for this announcement, our cash balance had risen to approximately $27.3 million. Over the next two to three years, we hope to significantly grow TETRA both internally and through acquisitions. Our record reflects our conservatism, our ability to be innovative, and our desire to run a tight ship. Count on us to keep those attributes in mind as we go about the job of both growing TETRA and growing its associated shareholder value.

I want to thank all of you for your continued support in 2003, and I would be happy to open up the conference call to any of your questions.

(OPERATOR INSTRUCTIONS) Jim Rollyson of Raymond James.

You talked about your balance sheet, the large amount of dry powder you have in addition to the S4 leaves you a lot powder to do something with -- what do you see that is out there that will be consuming your capital here as you go forward?

Internally we are going to continue to invest in our businesses. We have some investable areas in our Fluids business. We clearly have investable areas in our testing business, and that could either be through acquisitions or through increases in equipment to put in some of these other markets that we're talking about. And we will continue to expand our well abandonment business both in acquiring properties and acquiring additional equipment.

However I don't think the aggregate of all of those things are probably going to exceed our ability to do it through our own bank line and existing cash flow. Obviously the need to go and put a large -- at least large for us -- shelf registration in place would be for larger acquisitions, and I think it is apparent that the high cost of being a public company the we are experiencing makes smaller companies much more vulnerable to those costs, and it would seem to me that there is going to be opportunities over the next couple of years to acquire companies that can no longer efficiently operate within the public markets. And there are a lot of those within the oil service arena. Most of what we would look at would be oil service oriented niche markets hopefully being dominant players and those companies can be very small and some of them can be significantly larger than very small. That is why this shelf registration is in place or will be in place shortly.

Right and I us presume that given that you've got some mix shelf, you've got that there as well as a buyback program in place. You are probably not looking to do anything at least at these levels through equity?

No, we wouldn't do anything through equity unless there were an opportunity to acquire a company that wanted our equity and we could get it at a price that we thought gave the same upside as TETRA has. But that would probably be the only exception. Obviously if somebody wants to discount the value of their company enough, you would consider it. There are tax reasons especially private companies might want to take stock as opposed to cash, so I would not rule that out. But as you have seen over the last few years, we have been very reluctant to give equity.

You mentioned on your last outlook call that one of the things that was going to drive your '04 earnings at least from one end of the range to the other was the timing of potential property acquisition deals, if they happen sooner in the year -- you probably had more of a chance of hitting the upside of your target, and if they did not come in until later in the year, then it probably wasn't going to show up till '05. Can you give us an update of what you are seeing and where you stand on property acquisitions?

There are a large amount of properties that are currently in the mix that we are reviewing. We have indicated to you a number of times -- not just you, I mean Wall Street that we need to have those in place by early April, so that we efficiently go about the engineering and getting the equipment set up, so I would presume that we have got about two more months of time to bring most of these in house or we will then have a question when we get them and we anticipate getting them one way or the other, whether we want to do that work this year or next year.

And the same by the way is evident, as I explained, with the Ameritech backlog. We have been very successful in producing those. If we continue to do that, some of those properties are not going to be done this year, but that is already in our budget thinking.

Sure. The Fluids business had a noticeable increase in the fourth quarter at least on the top line. Is that kind of a mix issue? I also noticed your margins came down a bit. And kind of what are you looking at going forward?

We would hope -- and I guess I would underline hope, that the Gulf would begin to pick up especially as some of these property sales occur, people evaluate the properties and then begin to drill. If that occurs, you're going to get a fairly significant pickup because that is still the largest market in the world. We are a little less optimistic than some. We think we're going to see an improvement. But we don't think it is going to be any kind of a hockey stick improvement out there.

At the same time remember last year we had some extraordinary things going on politically, some of which are still lingering; Venezuela and Nigeria to mention two, where that activity wasn't driven at all by the economics of the oil and gas business, so we thank between improvement in the Gulf and improvement in some of these foreign areas and then just the general improvement you're seeing in areas like Mexico and the North Sea, where that activities isn't declining as rapidly as it did last year, that we ought to see some improvement throughout the year, but we have not been real aggressive in suggesting that that number is going to be anything back to the levels that we saw three or four years ago.

All right and just lastly your depreciation and amortization for the quarter dropped and what is going on there? Are you still expecting your run rate you suggested here a couple of months ago for '04?

Jim, I'm not sure that there is any drop you see in D&A is reflective of any trend.

One of the things in DD&A remember the third quarter you had a write-off of $1.7 million and that tended to skew because it goes into DD&A, the level. That number is going to be somewhat contingent on production. It will actually go up if we continue to produce properties as opposed plugging them. So I think the kind of levels we talked about previously are realistic. I would not look at any one quarter as being indicative of a trend. I would use the year as a whole and kind of play with it at that level.

Sure, all right. Thank you.

Tracy Marshbanks of First Analysis.

Good morning. A question on the Fluids Division in the margins again. First it looks like the shipping and handling of about 2 million a quarter, that is primarily in the Fluids Division. Is that correct?

Yes, that is all in the Fluids division.

If I correct for that -- maybe taking the sequential comparison is the easiest one. Revenue up maybe $2 million and your gross profit even down a little bit. Was there something else going on there besides just the activity level that would impact the gross margin or gross profit?

There was the blend of products that you had in there during the quarter tended toward areas that are not as profitable, tended toward fluid markets that utilize different types of products, and when you looked at it, it was not as attractive. We noticed that in two of the three months. One of the three months was actually somewhat better, so it's the typical mix issue. I wouldn't look at it as a trend one way or the other, other than it will continue to be less now than it has been because we're now adding back those revenues at the top line, subtracting the number out

The percent margin will be affected by that?

Not the gross margin at all. It will affect only the percentage the way it is looked at.

Right. And when you say mix, it was product mix in geographies, not a change in the mix of geographies and what they demand?

There was some mix geographically, but I am really talking about products, the difference between selling calcium chloride or calcium bromide or zinc bromide, the difference between having a substantial amount of higher margin filtration. Those issues, a lot more than I am talking about geographic mix.

And a question on the cash flow, particularly in '04 -- I think it was 10 million at least to your cash balance. What was driving that? Was it really just recovering some of your working capital items or were operations really that healthy on the cash flow in the less than two months?

We did get back some receivables that flowed in after the end of the year, however, I think it is more characterized by the fact that at the end of the year everybody is very active in getting their budgets together. Everybody is very active in trying to make sure the year starts well. I don't think you saw much in the way of CAPEX during the first 1.5 months. The effect of that is to generate a lot more net-net cash to our balance sheet. I would expect to see CAPEX start to pick up in the March to June time period as people try to get some of this activity moving forward. And you are seeing that for instance as I mentioned in the testing area, where we are very actively building equipment.

And then remind me again on your hedging strategy with respect to your Maritech properties. And if you will, how -- the external economics so that you may stretch out the production lifetime on those sort of plays there -- and do you have some duration on the expected useful life on those properties? What is that 130 million at least as for the duration or useful life look like at the current economics?

The 130 million relates to the Well Abandonment & Decommissioning, not the reserve value, the (multiple speakers)

I mean the reserves value.

The reserve value is something that we try to go out and hedge as soon as we lock in a transaction. Because these are late life (ph) properties, you can't hedge all of the production because if the production would happen to decline or stop because of some issue, we would be unhedged in the other direction. So we typically try to go out and hedge a fairly significant amount of both oil and gas. That locks in essentially those prices so that we're not commodity risk oriented to any great degree. We do have swings in commodity prices clearly because part of it is unhedged, but if you looked at the numbers, when you get to see our 10-K in terms of the reserve, you'll find that we added a substantial amount of volume. This was not price driven entirely. In fact it was volume driven to a great extent. And because of that, we have had to go out and hedge in certain properties longer than we initially thought we were going to, if that is your question.

Yes that was it. So as things sort of roll forward, you just take a look at your position and will rehedge at the current market if need be?

Yes. That issue is addressed weekly within Maritech to see what is coming off hedge, what is the production, what has been added to production or reduced for production so that they can try to keep a realistic value. And that is an important issue by the way because what it says to you is that we can go after properties when there is a $2.50 gas price or a $5.50 gas price. As long as we can hedge the value that we are paying for those properties and get out of a commodity risk oriented type of a business model, then we are willing to go and do it in whatever those placing parameters are. The idea that you are not getting some of these properties sold is not because we're unwilling to take the higher price. It's because a lot of the companies are looking to the cash flow they are generating and don't want to give them up yet.

I agree with that. Thanks a lot.

Larry Hollingsworth (ph) with Aperion Group.

I think you mentioned at the outset looking at some cost reduction in the well abandonment side of the business. Could you talk a little bit about that, Jeff, and just what we might be looking at as far as margin enhancement going forward over the next 12 or 18 months?

A couple of years ago our Inland Water component of our well abandonment was the largest by far within the entire division. Remembering that you now have Abandonment Onshore, Inland Water, Offshore, and Maritech so you really have four parts to it, and there is actually some other smaller components as well.

The Inland Water part of this business is tied to the shallow waters, I think the marshes of Louisiana. That business is much different than it is in the Federal waters. It is generally controlled by the State and not the MMS. The rules on abandonment are somewhat changed. One of the biggest players out there, in fact the biggest player was Texaco, which is now Chevron obviously. They are selling those properties, already sold parts of them. So the turnover of those properties is occurring. The people that are buying them have not yet been in a position to start doing that work. You have got a very substantial amount of properties that are left to turnover, and until all of that happens, that's a worst market actually than the Gulf of Mexico market because you are not as restricted on your environmental covenants by the states as you are by the Federal Government.

So when you look at it, that is kind of a poor market in relation to where it was two or three years ago. We think it will improve significantly as these properties turn over. What did we do? We went into our division. We had been keeping almost all of our personnel on staff. We determined in the early parts of the fourth quarter that if it continued at that rate that we would modify how we crewed things, what kind of equipment we kept available for work, what types of arrangements we made with other companies. There are a litany of things that we did to try to make sure that division -- that that segment of well abandonment division would not be a detriment to the total. It lost money. It was budgeted to be much better than that. I think we pointed out the budget in the fourth quarter originally and what they did meant a difference of I believe nine cents a share to TETRA. So it's a tremendous difference in profitability versus plan.

We don't anticipate getting back to that planned level for a good long time, but we do anticipate being able to moderate the losses and hopefully make a modest gain until these properties turn over.

Fair enough. Thanks a lot.

At this time there are no further questions. We now have a question from Blake Hutchison of Howard Weil.

Good morning. Just following numbers that you put out here with regard to the abandonment and decommissioning business. Looking at this, would it be accurate to say that until your book costs of reserves versus the Ryder Scott number are a lot closer -- that you would not necessarily be working through the abandonment backlog very aggressively so you become a little bit more spot and turnkey oriented with regard to the straight abandonment and decommissioning business?

In general that would be an accurate statement. As I pointed out, you would be much more likely to produce things longer if you can enhance the volumes, however, if you could see that reserve report by property, you would see that a large amount of those reserves are on a relatively small amount of properties, thus you have a pretty good chunk of that 130 million that you would get to, say, within the next two years.

Now is it going to come this year or next year? That is more difficult to say, but there is a significant let's say amount of that business that would be done relatively soon, and I will use two years as relatively soon -- on the basis that it is not that economic and that most of those reserves are locked in a few properties not all of the properties.

So it safe to say that it is still that first number, the 131 million, is fairly representative of a good backlog number right now?

Yes, I hate to use the word backlog --

Understood.

Its different things from SEC purposes. It's a number that we either control as operator or feel very positive toward being able to work because we are a participant in a property. Recognize that there are other participants we have not acquired their working interest, and therefore we have to negotiate with them if we're going to do the work as well. So look at that number as something other than backlog, but it is indicative of the backlog that is either partially owned or wholly-owned by Maritech.

I guess the follow up question would be the remainder of the business at least offshore is either spot or turnkey related. At the same time, and again maybe not to use the backlog but is there another wholly different book of business that is built up on a turnkey basis that is also of substantial size?

If you looked -- which we are not going to break down for you -- if you looked at 2003, the largest component of the offshore abandonment was turnkey work, not Maritech work.

Great.

In fact, Maritech work was -- I would bet less than one-third.

Great, that answers that sufficiently. I guess just going back to a couple of comments in some other areas that you made, you had said that it looks like there's some improvements coming and perhaps in the completion Fluids market from some international regions. Is this backed up? It this a general feel you have for the market or have there been some recent tenders or is it just activity improvements that you're looking at in those markets?

Actually the latter two. There are number of tenders in some of these markets are ripe in the market as we speak and there is also increased drilling activity by looking at the rig count in some of these markets. Mexico would be a great example in both of those obviously, so yes, it is activity-driven not hoped-for activity. What is hoped-for is that we get the business.

Understood, good. And I guess also kind of in the same vein with regard to the equipment buildout or a little bit of equipment buildout for the Eastern Hemisphere Testing & Service market, is this again something where do you need to build out the equipment to even play in some of the tender activity or is it something where you can be reasonably assured that you are already in the mix? And having the equipment is somewhat of a bet at this point but you have some reasonable assumption that you might have some business to do in the Eastern Hemisphere coming forward here.

Much of what TETRA does is flow back after wells are drilled. There are what would more typically be called testing, which is looking at reservoirs and trying to determine volumes and pressures and so forth of new wells. That business utilizes a little bit different equipment than what we have, not the don't have some. But it uses a lot more higher volume equipment, especially if you are offshore somewhere like West Africa. What we have determined that we want to be able to do is to service all of that market, and so we are expanding our horizons in terms of the type of equipment that we're making.

So the answer is it's in many cases different equipment or at least the amount of equipment we need is more than we have available at this point in time. There are a number of those type of contracts that are currently being tendered and/or will be tendered over the next three or four months, and the answer is yes, you will need to have that equipment to be able to play in the game. So if you want to think of this instant a lot of this buildout is based on what we anticipate we will be able to utilize; and no, it is not for a specific contract, but it could go in one of three or four areas where we would hope to win at least part of each of those type of contracts.

Thanks a lot. That's good stuff. That was exactly what I was looking for.

(OPERATOR INSTRUCTIONS) A follow-up from Tracy Marshbanks with First Analysis.

Joe, a quick follow-up. Do you have your free cash flow -- or your cash flow from operations handy and the CAPEX in the quarter?

We can get that. We have not provided that in the press release. Cash from -- net cash provided by operating activities, 34.9 million and net cash used in investing activities, 11 million. So the difference is 23.9 million. And as we have mentioned, most of that was applied essentially all of it was applied to the pay down of debt.

Right and the actual CAPEX number, do you have that?

CAPEX, 11.4 million -- Tracy, let me correct that. I said net cash used in operating activities was $11 million. I mean that is positive because we had the proceeds from the sale of Damp Rid and other asset sales of $17.9 million. So I am incorrect by subtracting the 34.9 or the 11 from the 34.9. Those are added together, and that would be $45.9 million of free cash flow.

Okay, thanks.

At this time there are no further questions.

Thank you very much, and we will hopefully talk to you again at our first-quarter conference call, which will be in the late part of April. Thank you.

Thank you. This concludes today's TETRA fourth-quarter earnings conference call. You may now disconnect.