Tetra Technologies Inc (TTI) 2004 Q3 法說會逐字稿

(Operator Instructions). Thank you. Mr. Geoffrey Hertel, CEO, you may begin your conference.

Thank you Tina. Good morning. Welcome to the Tetra Technologies third quarter 2004 earnings conference call. With me today, as is usual, is our CFO, Joe Abell. As is our policy, both Joe and I will be making a short presentation which will then be followed by your questions.

I must remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain 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, and that actual results may differ materially from those projected in the forward-looking statements. Now that the formalities are out of the way, Joe, will you give a brief financial review of third quarter results?

Tetra's revenues for the third quarter just completed were $89.9 million, 3.1 percent below the third quarter of 2003. The quarter was negatively impacted by the effects of hurricane Ivan. Even so, gross profit was $22.2 million, 14.6 percent above the prior year's third quarter. Gross profit as a percentage of revenue was 24.7 percent for the quarter just ended, compared to 20.9 percent for the prior year's period. This was the second highest quarterly gross profit in Tetra's history, due mainly to the acquisition of Compressco in July.

General and administrative expenses, however, were up 49.5 percent to $14.4 million, due mainly to higher salaries; incentive compensation and benefits, as headcount has grown especially due to the Compressco acquisition; higher consulting expenses, including those related to Sarbanes-Oxley 404 compliance; and higher insurance and workers' compensation expenses.

Interest expense, net of other income, was approximately $400,000 in the current quarter compared to $65,000 in the prior year. Therefore, income before taxes was $7.4 million, down 23.6 percent compared to the third quarter of 2003.

Income before discontinued operations for the quarter was $5.1 million or 22 cents per share fully diluted, compared to $6.5 million or 28 cents per share fully diluted in the same period last year, a decrease of 20.7 percent year-over-year. Net income was also 22 cents per diluted share for the quarter compared to 46 cents per diluted share last year, which included 18 cents per share from discontinued operations and a net gain on the disposable of discontinued operations.

Year-to-date revenues for 2004 were $244 million, up 0.2 percent compared to 2003. Gross profit year-to-date was $56.0 million, down 1.1 percent compared to 2003. Year-to-date income before discontinued operations and the cumulative effect of the change in accounting principles was $12.1 million or 51 cents a share, compared to 15 million or 66 cents per share in 2003.

Looking at performance by division, revenues in the Fluids Division for the quarter were up 20.2 percent compared to last year's third quarter when (ph) profit before tax was $3.2 million, down 11.5 percent.

Revenues in the Well Abandonment and Decommissioning Division were down 29.8 percent. The profit before tax was $5.7 million, down 25.6 percent compared to last year's third quarter.

As discussed on the earnings conference call following the end of the first quarter, high oil and gas prices are extending the life of mature fields, equating to less near-term abandonment and decommissioning work. Hurricane Ivan also impacted the Fluids and Well Abandonment and Decommissioning Divisions in the quarter just ended.

Revenues in the Production Enhancement Division, previously called the Testing and Services Division, were up 55.7 percent in the current quarter. Profit before tax was up $3.0 million, an increase of 82.9 percent versus the prior year's quarter. These results reflect 2.5 months of Compressco's performance subsequent to the acquisition of the business in mid-July.

Year-to-date profit before tax in the Fluids Division was $11.2 million, up 1.3 percent versus the comparable period of 2003. Profit before tax in the Well Abandonment and Decommissioning Division was $11.7 million, down 39.3 percent over 2003. Profit before tax in Production Enhancement was $6.7 million, up 46.9 percent compared to 2003.

Within the quarter we acquired Compressco, a compression company that enhances production at the wellhead, for approximately $110 million. We acquired the calcium chloride business of a finished chemical company for about $40 million, and a heavy-lift barge for about $21 million.

We also negotiated a new $140 million unsecured 5-year credit agreement and privately placed approximately $89 million of senior unsecured notes with 7-year terms, and both maturities bearing interest at an average rate of just under 5 percent.

Our cash balance decreased by $33.4 million and debt increased by $136.2 million over the quarter due to the 3 acquisitions made during the quarter. With that, I will turn the discussion back to Jeff.

Since we've made numerous press releases during the last few months, I'm going to keep my prepared remarks relatively short today and hope that anything that you have in the way of questions comes out in the question period.

In our press release, I indicated that the third quarter of 2004 was our most memorable quarter. In it, as Joe just discussed, we closed the 3 largest acquisitions in our corporate history. We closed on 2 financings, aggregating the 230 million in borrowings -- or borrowing capacity, actually. And we survived three named storms, particularly Ivan.

It is in the context of the 3 storms that I want to make a number of points. The recent storms cost us most of September's profits. However, a few years ago, a very few years ago, these storms, especially storms of these magnitudes, could have devastated our annual earnings, not our September earnings. It's in the context of this and the changes associated with this that I want to really look at how Tetra has changed over the last 5 to 10-year period.

5 to 10 years ago, we were neither significantly geographically diversified nor product line diversified. During that time, we had approximately 65 percent of our continuing revenues tied to the Gulf of Mexico. And 60 percent of our continuing revenues were generated from activities associated with drilling and workovers. The storms like we recently experienced would have devastated us during that time period.

Prior to the recent acquisitions, we had reduced our geographic Gulf of Mexico exposure to about 60 percent of revenues. And 40 percent of our revenues were associated with drilling and workover activities. While a precise calculation of diversification after our recent acquisitions is difficult and somewhat imprecise, an estimate of forward-looking revenues might show 45 percent coming from the Gulf of Mexico and one-third of revenues generated from drilling and workover activities.

The geographic balance has been recently accomplished with the Kemira European Fluids purchase and the acquisition of the Compressco mid-continent operations. Our early well life completion fluids business was offset with our late well life Abandonment and Decommissioning business a couple of years ago. Our recent Compressco purchase adds a mid well life Production Enhancement business to this portfolio.

We believe this geographic and product line diversification affords us a balanced portfolio of products and services with which to grow Tetra. And we believe it will diminish the future impact of regional weather conditions.

Now I will turn to our current business conditions. In Fluids, the Gulf of Mexico rig count has stabilized and may actually be slightly increasing after months and months of significant decline. This, coupled with our Kemira purchase should begin to positively impact Tetra’s Fluids business by no later than the first quarter of 2005.

Our testing businesses also began to improve after a slow start to 2004. This improvement, along with the Compressco purchase, should significantly impact earnings in the Production Enhancement division.

Finally, our Well Abandonment and Decommissioning business has recently added backlog to Miratech acquisitions and turnkey contracts.

Our long-term goal is to create a $750 million to $1.25 billion revenue niche-oriented oil and gas service Company. We cannot do this exclusively internally. We believe this size is optimal to spread growing infrastructure costs, and yet it is small enough to allow for significant growth from acquisitions of, say, $100 million or in that vicinity, many of which we believe may be possible in the current regulations environment, especially from small public companies.

We believe the cumulative effect of Tetra’s material cash-flow, increasing earnings, low cost debt, and geographic and product cycle diversification should create long-term shareholder appreciation, and also keep us out of the regional impacts from weather. As shareholders, that is what we're all striving for. I will now open the conference call up to questions.

(Operator Instructions). Jim Rollyson, Raymond James.

Geoff, if you look through -- I guess the first thing that stood out to me today on (ph) your numbers was the Testing or Production Enhancement business. If you look back in the last couple of quarters at what you had been doing Testing-wise, and you add in what Compressco was doing on a run rate before you acquired it, the revenues come up to something a little bit north of what you did in the quarter.

And if I remember right, last quarter you had some kind of issues between weather and the timing of contract rollovers in Testing, such that you thought that by at least the second half of the third quarter you would be back on track to be basically full out on Testing. What is going on there? Where do you see that combined business going as we move forward?

Well, I will take that in two parts. First of all, in the Testing site of our business, we continued to have some difficulty with, in particular, international contracts through parts of the third quarter. In fact, that business is just now hitting its stride again. And I mean just now, meaning the fourth quarter.

Domestically, we have also put a lot of equipment back to work over the last couple of months. So what you should see on a go-forward basis out of the Testing component of our Production Enhancement is improving profitability as we go into next year, vis-à-vis where we've been for the last couple of quarters, basically because of a couple of our primary customers having difficulties that were not associated with this drilling cycle.

Secondly, on the Compressco side, Compressco, again, is a little more stable in terms of our ability to estimate profitability, remembering that this is a leasing type of business to a great degree. If you look at Tetra, we have historically been driven by situations that relate to drilling and or plugging and abandoning of wells. They are event-driven, if you will.

Compressco, our Miratech production subsidiary, and our TPS, Tetra Process Services, all are not event driven at any singular point in time. So one would presume that we're going to see a continuing growth out of the Compressco side of our business -- not tremendous increases on a month-to-month basis, but consistent increases.

So when I put all that together, what you ought to be seeing going into 2005 is an improved Production Enhancement Division from both parts of our business. That is a long answer to your question, but it probably needed to be done.

Sure. And just looking back at the Fluids business, you obviously didn't have Kemira in this quarter, but you will going forward. With what you know since you closed the deal, what you think your incremental annual run rate of revenues would be from Kemira?

I think we stated either in the last press release or our first press release that the revenues of a Kemira were about $60 million. And I would use that as a starting place. How we enhance that and change it will be something that occurs over time, but something in the, say, $55 to $65 million run rate. That's probably a good approximation for next year.

And would you supposed margins with the combined Fluids business would be pretty much -- approximate what you have had so far this year? Because I think, if I'm not mistaken, you were expecting margins to kind of improve throughout the year just on your base Fluids business, with volumes picking up. And it has really been pretty stable. So what's kind of the thought there?

Well, we haven't done our budgeting for 2005. So I'm a little reluctant to give you exact numbers. I would expect to see exactly what we told you, and that is improvement of margins over time in that business.

Okay. And then the last one for me, just G&A -- Joe mentioned was up this quarter, I presume from Compressco and a few other things. Now you've got Kemira in there going forward. What is the go forward run rate for that, as well as DD&A?

I would not expect the G&A to go down. In fact, while some aspects of it, like consulting costs, could go down -- then we don't have the effects of Kemira in there yet. So I would, Jim, hold it flat to slightly increasing.

And your DD&A?

DD&A would also slightly increase with the Kemira acquisition. That's not going to be dramatic increase.

You also were impacted in DD&A in the third quarter with production shut-ins because of the storm. So you should have an improvement with more DD&A as you go forward.

Lewis Kreps, Aperion Group, LLC.

Geoff, are you all looking at more properties right now than you were from last conference call for Miratech? Is there more stuff out there that you all are looking at?

I might characterize it a little more differently. Typically, the operators are looking at their abandonment liabilities in terms of determining what they're going to do with it at the time they are doing their budgeting. So, to say that we're looking at more things right now than we might have been 3 or 4 or 5 months ago probably is not a good view in terms of what the market is.

I think there are a lot of potential transactions as we look forward. What we're seeing now is we're actually seeing deals that can get done, which is a change in what the environment has been over the last 12 months.

Okay. On Compressco strategy-wise, I know that when you were talking about Compressco, you all were talking about how you want to expand that. Do you all have firm plans yet? Or are you all still looking at that?

We're in the process of expanding the facilities to increase our capability in that business. The business was growing at between 30 and 45 percent a year, depending on which year it was, prior to the time we acquired it. And obviously, we would anticipate growth in that business on a go forward basis. So the answers are yes and yes.

Okay. Backlog-wise, you mentioned backlog was building. Can you put some numbers around that?

No, we do that once year and are required to do that in our 10-K. And until I know what all components of that are going to be, it's difficult for me to give you that.

Okay. Pricing wise, in the Fluids business, are you all raising prices, holding steady, or where are we?

I don't think prices have done much in the Fluids business over the last 6 to 9 months, because it's been relatively weak, especially in the Gulf. I look at some of the comments our competitors have made relative to pricing for fluids, and whether that means drilling fluids and completion fluids I don't know. But some of them are talking about price hikes of 10 percent or so. I would expect that we would certainly fall in line with wherever the market goes.

And the last question -- pricing on the Testing business. Are you seeing demand enough to raise prices in that area, too?

No. Actually, you are not seeing -- demand is growing in Testing. That's not the problem. The problem is one in which, at least for us, a couple of our major customers had hiccups -- one domestically and one internationally. Again, that didn't relate to the drilling cycle or anything else. We've been repositioning our equipment to some degree and restructuring and getting new contracts. So I think the pricing issue there is not as material as getting your equipment back fully working.

Okay. Well, thanks. And good luck in the fourth quarter.

Will Foley, Sidoti & Company.

First question. On your tax rate, it looked like this was -- came down somewhat in the September quarter. Can you just give us a sense of the outlook for the tax rate?

The tax rate is a function of our earnings levels, in that there is some ratcheting up as you get higher levels. We had expected to earn more in the third quarter than we actually did, due to the September problems that we have enumerated. With that in mind, the average rate will be probably comparable with where we were in the third quarter, if not a little above that when we get all said and done. It's a very difficult trade-off within a percent one way or the other. But the situation in the third quarter was we just didn't earn what we thought we were going to earn.

And on Well Abandonment and Decommissioning, typically the fourth quarter things slow down seasonally. Now, obviously, you are impacted in the third quarter by storms. What is your feeling about, sequentially, fourth quarter versus third in terms of Well Abandonment and Decommissioning?

Well, you are exactly right. By all standards historically, you have your inland, but more importantly your offshore and your decommissioning portion of that division that has a slower fourth and first quarter. The wild card this year is the situation that has now occurred with the storm damages and the fact that we have another large piece of equipment utilized, the Arapaho. And how that will work out during the quarter is still somewhat in -- well, it hasn't been clarified. Let's just put it that way.

There are a number of people who have problems. And the Arapaho is an excellent piece of equipment to utilize. We may very well have that piece of equipment out for parts of this quarter and parts of the first quarter (ph) (technical difficulty), both of which are not typically not time periods when we would be looking at that piece of equipment.

So I guess what I would say is your statement is accurate, except for the fact that there has been storm damage and people are trying to get back to work. And they are looking to utilize pieces of equipment in particular like our Arapaho. So we may be better off than what we would normally have.

And just more generally in Well Abandonment, I guess this year it would appear that the high commodity prices have maybe held that market back a bit; do you -- and also properties changing hands. What is your feeling for 2005 at this point, just based on what you're seeing out there in terms of demand?

I think you are right. There are two major components to the slowdown that you saw this year. I have put them in a different order. I think that the activity that was related to properties that were for sale that were not available for abandonment this year because they were for sale was probably the number 1 reason that we were short of doing business in 2004.

Most of those properties have sold. We think that there's going to be a general pickup in 2005 and very large pickups thereafter, because these properties have been sold, they will be evaluated. And then the ones that are not attractive will be abandoned.

Pricing itself -- it's the absolute level to some degree. But it's really the relative level of prices that are important, because you have a decline on most of these properties -- the older properties. If your price ratchets up, it tends to allow you to produce them longer. If your price stays stable, your decline rates sometimes overcome that pricing, even if it's at $50 a barrel oil, and these properties come (ph) (technical difficulty) ready for abandonment.

So, I guess in general, what I would say to you is we expect a better year next year for a couple of reasons. One, we believe that a lot of these properties have traded hands and they will be available for us. Number two, we're not particularly looking for higher prices than we saw this year.

Then, the other two reasons directly relate to what we do internally. And that is, Miratech has acquired additional properties, some of which will be abandoned. And then the fourth reason is that some of the Miratech properties this year were also held back from abandonment, because we had been successful in exploiting additional reserves as was evidenced in our annual report in showing you the valuation that we had of some $86 million versus the 24 million on our balance sheet.

So, I think there were a number of things that happened last year. While I would hope that our Miratech people will be a successful this year on a go forward basis, I would bet, because of the new contracts and because of the older properties that we have, that the amount of Miratech business done by our abandonment division will go up next year as well.

Okay. Last question, the 80 to 90 cent EPS range you talked about in the press release, what is the -- what are the factors that get you to the high end versus the low end? Is it kind of the storm repair work that you talked about? Or can you give us a sense there?

Yes, if we're doing storm repair work and we've got a month or a month and a half of storm repair work in there, I would hope that we would tend toward the upper end of that range. If we don't have any of it, we would probably tend toward the lower end of the range, just in general. There are obviously other factors associated with the quarter that will also fluctuate significantly. But I think that storm repair will be the factor that will trigger you toward the upper end or above that range.

Very good. Thank you.

(Operator Instructions). Byron Pope, Pickering Energy Partners.

I realize that Miratech is a small percentage of the overall puzzle. But of the 350 barrels a day that shut in, is that a function of not being able to get the oil out, or damage to the structure, or production that was shut in and having to get back up to pre-hurricane levels? I was just wondering if you could comment on that.

It's actually -- the 350 barrels a day that we are talking about here is off one platform. That platform's production actually goes to a host platform. The host platform is damaged. And then that host platform production goes through a pipeline, which was also damaged. So we are looking at our own operations and determining when to get them back on and what kind of work we have to do. But we're not doing them until we're sure that the pipeline and the host platform are both going to be repaired first.

(Operator Instructions). At this time, there are no further questions. Are there any closing remarks?

I want to thank everybody for your participation today, and we will talk to you at our fourth quarter conference call. Thank you.

This concludes today's Tetra Technologies conference call. You may now disconnect.