Tetra Technologies Inc (TTI) 2005 Q3 法說會逐字稿

Good morning and welcome to the TETRA third-quarter earnings (indiscernible). My name is Tasha and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the show over to Mr. Geoff Hertel, CEO and President. Please go ahead.

Good morning and welcome to the TETRA Technologies third-quarter conference call. With me today, as usual, is Joe Abell, our CFO. We will each be making a short presentation, which will then be followed by your questions.

As I'm obligated to do, I must first 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 us based on a number of factors. The statements are subject to a number of risks and uncertainties, many of which are beyond our control, as has been obvious visit this last quarter.

You are cautioned that any such statements are not guarantees of future performance and that the actual results may differ materially from those projected in the forward-looking statements.

I also want to make sure that you are aware that many of our statements today will refer to data that was included in today's press release. Therefore, we do not intend to reiterate all that data unless responses to your questions require it.

Right now I will turn part of this over to Joe, that will go over some of our financial results.

TETRA's revenues for the third quarter were 122.5 million, 36.2% above the third quarter of 2004. The Hurricanes Katrina and Rita significantly impacted the quarter; even so TETRA's results improved over the prior year's third quarter due to strong demand for the Company's products and services and the acquisitions the Company made in the third quarter of 2004.

Gross profit was $27.5 million, 23.7% above the prior year's third quarter. General and administrative expenses were up 27.9% year-over-year to $18.4 million, as our businesses have grown; though as a percentage of revenue, G&A expenses were down from 16% to 15%.

Income before taxes and discontinued operations was $8.8 million, up 19.8% compared to 3Q '04. Net income before discontinued operations for the quarter was $6.2 million, or $0.17 per share, fully diluted, compared to $5.1 million or $0.14 per share, fully diluted, in the same period last year, an increase of 21%.

Looking at performance by division, revenues in the Fluids Division for the quarter were up 36.5% compared to last year's third quarter and profit before tax was $6.2 million, up 95.6% for the quarter.

Revenues in the Well Abandonment & Decommissioning Division were up 30% year-over-year and profit before tax was $2.6 million, down 53.7% compared to last year's third quarter as a result of the hurricanes.

Revenues in that Production Enhancement Division were up 48.1% year-over-year and profit before tax was $7.1 million, an increase of 132% versus the prior year's quarter.

We had $49 million of net investment activity in the quarter, mainly for E&P acquisitions and other E&P expenditures, as well as Compressco activity.

Our net debt increased by $7.7 million over the quarter to $133 million. Debt to total capital increased slightly over the quarter, from 33.2% to 33.5%.

With that, I'll turn the discussion back to Geoff.

Thanks, Joe. As all of you are aware, Katrina and Rita significantly impacted our Domestic Fluids, Well Abandonment, Decommissioning and Maritech businesses for up to half of the third quarter. And because of that, it's extremely difficult for anyone, even inside the Company, to accurately determine what the earnings for the quarter would have looked like under normal conditions.

However, some indication of the strength of the businesses can be gleaned from what the businesses earned in income in the face of these unprecedented disruptions. When looking at the third-quarter earnings versus comparable quarters in 2004, Fluids earnings were up 95.6%. As Joe indicated, Production Enhancement earnings were up 132.3%; and very importantly, Well Abandonment & Decommissioning, excluding Maritech, which we will talk about, were up 78%.

These results were a reflection of a number of factors -- improving energy service markets, the acquisitions that Joe referred to that we did in 2004, higher pricing, and an internally growing TETRA. The Maritech loss primarily was caused by production downtime coupled with continuing and escalating lease operating costs, these increasing LOE costs related to costs associated with new properties which Maritech had recently acquired.

The Storms significantly damaged a number of our assets, and with that, third-party assets were also damaged that were used to transport and market Maritech's output. We incurred damage to three of our fluids blending plans. I'm happy to say that the Fourchon and Cameron plants have returned to operation. We've not begun intensive work on the Venice Plant, as the infrastructure for that area has not as yet been re-established. We believe we can efficiently service all of our Gulf Coast customers for fluids from our existing operational plants.

The derrick barge Southern Hercules was beached during Katrina. The vessel has now been refloated and is currently undergoing modifications and some repairs to allow it to more efficiently work on decommissioning projects, especially projects involving destroyed and/or toppled platforms. We anticipate the Southern Hercules could be working in December. And for those of you haven't followed us over an extended period, remember that that is a time of year that this vessel typically does not work.

Oil and gas production. The combination of three property acquisitions by Maritech with development drilling on a number of its previously owned leases led us to estimate that year-end production could be triple mid-year levels; that's a 200% increase. We still believe that the timing of this level of production can be year-end. However, it will be primarily determined by repairs to lost platforms, pipeline infrastructure and third-party onshore processing facilities.

Following the Storms, we had virtually no production, remembering all of ours is in the Gulf of Mexico. As late as October 14th, we were at about 35% production levels versus mid-year levels. Ten days later on October 24th, we had reached production levels approximating 150% of mid-year levels. So while we are not at our goal yet, the situation is improving.

Now let's look ahead to 2006. First in fluids. We believe the market for drilling services, in our case primarily completion fluids and filtration, will grow in 2006. TETRA plans to overcome the effects from the reduction of Gulf of Mexico rigs with an increased marketshare domestically and continued participation in the growing international markets.

In Production Enhancement, the market for testing services continues to firm in the U.S. We are seeing increased demand and improving pricing. In 2006, we anticipate expanding geographically in the United States and continuing our international expansion as well.

Primary reason that we acquired Compressco was our belief that the U.S. market for this equipment and service was grossly underserved. The growth of Compressco in the last year is testament to that belief. However, the worldwide re-evaluation of natural gas reserves is serving as a further catalyst for Compressco's growth. This has manifested itself in a contract in Mexico and numerous other leads. We are very excited about Compressco's future.

Well Abandonment and Decommissioning. Until recently, we viewed the domestic well abandonment and decommissioning market as one of controlled growth. Many properties in the Gulf of Mexico that had been sold in 2002, 3 and 2004 were beginning to be abandoned. Our Maritech strategy augmented this general industry growth, especially after the three acquisitions that we made around mid-year.

Then Katrina and Rita arrived. In some respects, nothing has changed. The same properties that were going to be abandoned will be abandoned. Our baseload of Maritech properties still exists. Yet in other respects everything has changed. These two Storms destroyed 113 platforms and severely damaged 53 others. A large amount of these platforms and associated wells will be abandoned and decommissioned. The magnitude of this incremental business is staggering, even if it is spread out over 3 or 4 years. It's possible that it could exceed $1 billion.

When you consider that TETRA's estimate of the entire Gulf Coast well abandonment and decommissioning market -- that's onshore, inland waters and offshore -- was about 325 million for 2004 and that we expected it to reach 450 million in 2005, you begin to comprehend the enormity of the situation. Our 2006 estimate was that the market could be 550 to $600 million. After the Storms, that range is now much higher.

For Well Abandonment and Decommissioning, our primary objective for 2006 will be to offer our customers a packaged approach to their problems, giving them alternatives. Our constraint will be personnel and equipment, not opportunity. We will only be able to offer a finite amount of equipment and personnel. This will also be the case for our competitors. This leads me to believe that we will enjoy very high utilization next year and that the cleanup cannot be totally accomplished during 2006.

Finally, a word about Maritech. In the event that we are unable to acquire any additional properties in 2006, and that's a pretty conservative assumption, Maritech should still enjoy its highest profits in its history. The combination of recently acquired production volumes, new volumes in recently drilled development wells, and hedges already in place should generate significant profits next year.

A quarterly earnings conference call is by definition a communication regarding the most recent quarter's results, both operationally and financially. To this end, we dutifully reported the short-term impact on the Company of third-quarter hurricanes and other recent events.

However, I feel compelled to step back from this short-term view and reinforce the long-term implications that I've just discussed of the recent Storms on our Well Abandonment Division.

The well abandonment activities of producing companies as by definition a nonrevenue generating event; in other words, they are spending money when they do this. Budgets have historically been set annually in conjunction with other operating and financial budgets. Because of this, when TETRA entered this market, we sought ways to fix or at least estimate the well abandonment and decommissioning market beyond 12 months so as to try and optimize utilization of our personnel and other assets. This was a difficult task.

To try and control some of this certainty, we developed our Maritech strategy, which baseloaded a portion of our Well Abandonment and Decommissioning business. This strategy has been extremely successful, as evidenced by our recent acquisitions.

However, the remainder of the market continued to be determined annually. Katrina and Rita have changed this for years to come. We believe many companies will now attempt to manage their well abandonment and decommissioning activities over a multiple time period, generally a number of years -- a multiple year time period.

Clearly, the 166 destroyed or severely damaged platforms will force this thinking, at least for the next year or two. TETRA is optimistic that domestic well abandonment and decommissioning activities will not only be a growth market, but will be somewhat more predictable in the next few years.

There has been one last effect on TETRA from Katrina and Rita. Normally, we are well into the budgeting process at this time of year. We have asked our managers to first return operations to normal and then worry about the 2006 budget. This has postponed our budget Board meeting from mid-December to late January. Therefore, the detailed divisional estimates that we provide annually to Wall Street will be available in late January, not late December. However, I do intend to give an overall earnings guidance sometime in early January.

With that I will open up this conference call to any questions.

(OPERATOR INSTRUCTIONS) Jim Rollyson of Raymond James.

Good morning Geoff, Joe. Geoff, you obviously laid out a pretty kind of bullish outlook going into next year, with all the work created, not only with just what you had going on to begin with, but post hurricanes. You talked about the market for well abandonment and decommissioning almost doubling in potential next year versus this year.

How do you feel set for equipment and people -- I mean, presumably you can't get to all that work, but do have enough equipment and people to see your Well Abandonment and Decommissioning revenues go up 50%? I mean how do feel situated for that right now?

First of all, our division as it exists today includes the Maritech component as well as the Well Abandonment component. When you include the Maritech component, which will be going up significantly, you are going to have a dramatic increase. Probably more to your question is what's going to happen to the Well Abandonment and Decommissioning component without Maritech.

That will be somewhat constrained in one area -- that is heavylift. We are going to have two heavylift operations that we own and hopefully some that we control through contract. We are continuing to look at whether it makes sense for us to add additional equipment there. Again, that has been historically a seasonal business. We are telling you with this conference call that that is probably not going to be the case to a great degree next year, which means you're going to be getting revenues in time periods that you did not historically get revenues. That is going to increase that portion of the business.

Additionally, we are adding equipment to our Well Abandonment, not the Decommissioning, but the Well Abandonment group, to try to augment what we had this year. All in all, I don't want to give you a percentage increase, obviously, until the budgeting is done, but there is a significant increase in our offshore abandonment opportunities.

However, also remember that we do onshore and inland water, and those areas may grow less rapidly than this offshore because they were not affected to the same degree by these Storms.

But all in all, there is a significant increase -- and no, I'm not going to give you a percentage yet; you will have to wait until we do our quarterly breakdown at the end of January.

You got an increase going in activity, obviously, at least in spreading it out more through the seasons. Maritech is going to be up obviously quite significantly because of the production of the recently closed transactions. How much of your increase -- and I know you're not going to give numbers yet -- but if you look out to your budget, what are you seeing in terms of potential increases in pricing for all this activity?

What we're trying to do, Jim, is go to our customers and give them the opportunity to lock up equipment over an extended time period. And we're foregoing large price increases for the ability to tie up this equipment, especially with the customers that have stood by us over the long haul. Are there price increases? Just by the nature of the costs associated with doing this, certainly. Are they moderate maybe in relationship to what you have seen with drilling rigs? I would say yes.

Again, it is an effort to try to partner with our customers over an extended time period to get rid of this problem. Our profit will come from the utilization of our equipment over 350 or 60 days instead of over 210.

Right. Switching to Compressco, you cautioned, I guess at one point in the not too distant past, about not getting too carried away with growth rates, because the Company has been growing quite substantially. And as the numbers get bigger, obviously the growth has to slow down, at least in percentage terms.

It seems like your opportunities, as you have talked about for the last six months, continue to move along the path of that growth; they are not slowing down, at least not in the near-term. What do you think there?

I think it's safe to say that we believe that the growth on a dollar basis in Compressco will continue to be at or above the levels it's been in the past. The only question, as you continue to compound at 30 or 40% growth rates, does that mean that that percentage is going to continue to stay up there. The longer you go out, the further you go out, it gets more difficult to do that. But the dollar amount is clearly compounding at those kind of rates.

Lastly, you mentioned in your press release, just talking about generating some significant free cash flow as you go into '06. What are your thoughts for potential uses of your free cash?

Well, it should seem somewhat obvious to anybody listening to this conference call that there are assets in the Well Abandonment side that we would look to add to our fleet. I think it's safe to say that we are evaluating how best to accommodate our customers, whether that is through owned assets or through contracted assets.

But I don't want to diminish the fact that there are opportunities in all of our business lines right now. We have found very attractive investment opportunities in Fluids and in Production Enhancement, as well as in the Well Abandonment side.

So I think it will be a very interesting 6 months. I think we will continue to grow internally. We continue to look at other things external, although at this point in time I can't tell you that we have anything teed up. Externally meaning in another business line, and that is mainly because we've got so many opportunities in the existing area, we have not taken the time to really flush a lot of these external opportunities out.

Great. Thank you.

Ray Kramer of First Analysis.

Good morning, Geoff and Joe. Question for you. Looking out into the fourth quarter, what do you see right now as sort of the biggest swing factors there?

There is no question what the fourth-quarter swing factor is, and that is what we get in the form of production out of Maritech. And the only reason that is so relevant, go back to the third-quarter analysis we just made for you, and all three of our other businesses, meaning the three divisions are doing well. We lost money because we had more than doubled the size of the Company and Maritech and had no production and had continuing LOE costs.

So the level and timing of this production increase is extraordinarily important to our fourth quarter. I've given you the most recent update just a moment ago as to where that was.

Also, obviously, the Fluids business had to recover. However, it has recovered quite nicely during the last month or month and a half, and should be respectable in the fourth quarter. And of course the Production Enhancement Division was virtually unaffected by the Storms and those continue to grow.

Well Abandonment in and of itself will probably do better than it did in the preceding year's fourth quarter, (indiscernible) the real swing factor, but the magnitude of the increase versus the third quarter will, in some respects, relate to Maritech.

On the topic of Maritech, did you have any updates in terms of the pipeline and downstream assets that you sort of depend on in terms of the likely timing of getting those up. Could it be before the end of the year?

As I said earlier, we're still on the position that we think we will have tripled, in other words a 200% increase, from the time of June-July, when we were looking at acquisitions, and year-end, what are production should be. So we are still with that timing. Obviously, though, the earnings in the quarter will be dependent on when those production gains come.

We have four primary properties that are not now producing. We would hope to see a couple of those up in the relatively near term and the other two by the end of the year. However, again, they are not really a function of anything we can do; it's the timing of these pipelines. They give us various times a couple of times a week, and we stick that into our estimates, and whether they actually perform on that timing or not is kind of a hodgepodge, at least as we've seen it so far.

And then lastly, on that Lake Charles plant you were talking about, is that -- with your main feedstock customer or supplier down, is that producing anything now or are you getting alternate sources, and is there any long-term profitability effect from having to switch suppliers there?

I think there is three questions. A., is it operating? The last I looked at it, we were running our acid and liquid calcium chloride through it to build up product inventory. I can't tell you whether it operating today, because as soon as it's done with that, we will shut it down until we have adequate other feedstock sources. Are there other feedstock sources? Yes, there are.

Are they as economical as the feedstock source we were running? I doubt it. So is there a longer-term impact financially? Probably so. Is it material? I can't tell you than until I can tell you which feedstock we ultimately run through the plant.

Do you have other calcium chloride plants in the area that can sort of supply the Gulf in the meantime or maybe even indefinitely? Can you shut down the Lake Charles plant or do you need that to be running?

That plant makes both dry and liquid. The liquid capabilities are available through all of our domestic plants. So that isn't a big issue. Dry can be produced from the TCE acquisition that we acquired. We can also get dry product from our arrangement with the Chinese producers that we've had historically.

So, yes, we have other sources for our markets. That isn't the issue. The issue long-term is that we like to make as much money out of our assets as possible and we'd like to bring that plant back up. But being the largest marketer worldwide of this product and manufacturer and joint venture partner throughout the rest of the world, we have a lot of opportunities to offset that negative.

Thanks a lot, Geoff.

Lewis Kreps of Aperion Group.

Good morning, Geoff and Joe. Geoff, with the hurricane in the third quarter, have all the expenses gone through -- I mean we're not going to have any more expenses in the fourth quarter except being down, is that correct?

You're only allowed to take deductibles to the extent that you've actually incurred and spent the monies. We did take a good chunk of those costs in the third quarter. There may be some in the fourth. I can't tell you if it's less or more. But because of the magnitude of the rest of the earnings, the Company probably won't see it.

Okay, okay. Price increases across the board in all three segments. Can you kind of run through that a little bit? I know you touched on it in Well Abandonment, but in Fluids and Production Enhancement.

The Fluids had the biggest price increases, especially on the brominated side. As you may remember over the last three and a half quarters, of the world three-company group that essentially are the bromine producers have raised prices dramatically because completion fluids are at the lower level of the use of bromine. Because of that all of us have incurred substantial, very substantial increase in costs.

TETRA, because it produces some of its own, is shielded to some extent, but all of us have incurred these cost increases, which we, as we've explained, passed along. Obviously, from our perspective, we would like to find ways to minimize that cost and we are reviewing our alternatives as they relate to that cost.

I guess that is a way of saying that price increases from fluids have been significant already. Unfortunately, the people selling these fluids haven't been able to get all of the benefit out of that price hike because they have been giving away to the manufacturers a large portion of that revenue increase.

So I would doubt that you will see huge increases. You will probably see one more increase in the fourth quarter, and then it will be a question of what we see going into it next year. But I think most of that price hike has already taken place.

Production Enhancement, we have been concentrating on the testing side and getting our prices up and getting activity in our units -- utilization up.

Pricing has been going up in that area and we would continue to expect that it will as we go into 2006. It's not back at the levels that it was three or four years ago.

In the case of Compressco, we have been much more interested in expanding our market than particularly worrying about price hikes. However, there have been some modest increases in Compressco as well this year. I would expect that we would see some hikes next year, if for no other reason than to offset steel and energy costs associated with service component and the manufacturing of these units.

In the case of Well Abandonment, I think I have been pretty clear. Yes, there have been price hikes. No, they aren't of the order of magnitude that you've seen in a lot of other services, again, because the profitability here can come from utilization much more so than from price hikes. The effect of that is that if we can get much higher utilization, it will drop a lot to the bottom line and that is what we are trying to do first.

Geoff, can you quantify the Mexican contract that you have?

No, but I can tell you that it will be significant to the operations of Compressco.

Thanks, Geoff.

Will Foley of Sidoti & Company.

Good morning, guys. I got cut off, so sorry if I'm asking questions that have already been asked. Just first of all, on your SG&A, it was lower in the quarter. Could you just tell me why and give me a sense of what the outlook is for SG&A going forward?

One of the reasons it's been higher all year has been the fact that we been putting bonuses in our operations in relationship to how those operations have done. Obviously in the third quarter, even though it was beyond our control, we have not accrued at the same level we have previously because we didn't earn at the same level, trying to keep the management aligned with our shareholders. That is one of the primary reasons.

And then the second question -- the tax rate again, it was lower. What was the reason for the lower tax rate?

As we looked at the year, we estimated a tax rate based on what we thought the earnings were going to be. We've increased that over the year modestly. Now with the earnings in the third quarter as they were, that would kick you to a slightly lower level and that's what we accommodated. I would expect the fourth-quarter level would be about at the third-quarter rate or maybe modestly higher, depending on what our profitability levels actually turn out to be.

Fluids Division in the fourth quarter -- how do you expect the Fluids Division to look and I guess the revenue and profitability in fourth quarter versus third quarter?

I don't know that I am comfortable giving you a number, other than to say that -- well, I don't know that I'm comfortable giving you a number. The fourth quarter is a real difficult time. You have a lot of dry sales in there that you don't have in the remainder of the year, at least not at that level. How that breaks down during the fourth quarter will determine on whether the fourth quarter is better or worse than the third.

Again, I don't think the increase that we expect quarter-over-quarter is going to be driven by the Fluids Division. I think it's going to be driven by the Well Abandonment Division.

Okay. Maybe also if you could just talk about in Well Abandonment the steps you are taking to expand capacity and how significant do you think you'll be able to expand capacity just to accommodate the extra demand there?

Well, there are a couple of things in there that we are doing. First of all, in the Well Abandonment side, remember that we have a pool of employees that are educated in this business, not only in the offshore, but in inland waters and onshore. We are trying to utilize that advantage to augment our personnel to allow us to have more people and more crews offshore, as well as obviously hiring.

We are also building additional packages for the offshore. These are rigless well abandonment packages that will allow us to do more work not only in the fourth quarter but going into next year. I'm not going to give you the number because that is a competitive number that we don't give out. But we are increasing the quantity of those packages and some of that will be available in the fourth quarter, with the remainder being available into 2006.

On the Decommissioning side, obviously the need is to tie up, one way or the other, equipment, especially equipment that can work with some of these destroyed platforms. When we looked at the opportunities we had, we looked at the Southern Hercules and saw that with some modification it would be perfect for a portion of this work. We have determined that we needed to do that and have taken it into a drydock to accommodate that, hopefully bringing it out by the end of this month, early next month for work.

Beyond that, we are always looking for and have been looking for additional equipment to either tie up under contract or to acquire. And I'm not going to be specific at this point in time, except to tell you that we are continuing actively looking for additional equipment to either tie up under contract or to acquire.

That is all I had. Thank you.

Stephen Gengaro of Jefferies & Company.

Thank you. Good morning, gentlemen. You've done a good job answering a lot of questions. I was wondering if you could you -- you've talked about the Well Abandonment and Decommissioning business and the strength you likely will see next year. Could you give us evidence to that? And I know it makes certainly common sense, but are you hearing that from your customers -- you talked about tying up equipment. Are you in negotiations with customers? I mean, is this pretty concrete in your mind?

I'd rather talk about it in general sense and not talk about it in specific customers. The MMS is not going to allow the industry to have 113 platforms that are bent over or toppled over sitting there with wells that are crimped without going in and essentially cleaning that up.

The cost of those, I'd really hesitate to give you a number, but I would venture the average platform could be anywhere from 5 million to $20 million, and you can do your own math as to what that says that is -- and that is including the wells, obviously.

Having said that and knowing that there is a time constraint and wanting to get out and be active, knowing the level of interest in our existing equipment that has occurred in the last month, meaning people coming in and asking us to please come over and help them, I would strongly suggest that this isn't an assumption on my part; this is a fact. The dollar amount of what that is, I'm not sure that I'm willing to give a hard number on.

But the facts are that anything that can operate out there efficiently is going to be utilized by the industry in a timely fashion to clean up what has occurred from these two hurricanes. Couple that with the fact that you have a lot of well abandonment business that you wanted to get done anyway.

We had made an estimate two years ago, I believe, that over the 4200 platforms that were out there, something in excess of one-third of them weren't particularly economic and that had been pushed-out work over the last decade. If you assume that that is 15, 16, 1700 platforms, I don't know that I'd be real comfortable sitting on platforms that were modestly economic or breakeven in this environment, knowing that you have hurricane seasons every year. I'm going to presume that there's going to be a lot more interest in getting rid of some of that older equipment and platforms in addition to the storm work.

In our case, we couple with what the fact that we've added, potentially, as we outlined in our press releases, a quarter of a billion dollars of work just in the Maritech acquisitions that we acquired. I think it's safe to say that a fact for TETRA is that there is a lot more demand, yes, but I'm not about to get into which customers.

Can you give us a sense, when you look at a normal job versus a job where things have been bent and knocked over, what the incremental costs are for the customer?

Really it's a function of whether you can get into the wells. If you can get into the wells, they can be bent over and you can still get circulation to the bottom and set your plugs. The costs are going to be higher than normal, but not outlandishly higher.

If, on the other hand, the wells are covered by mud, which is not the case with a lot of these storms, although it was the case last year, if they are cork screwed, if they are crimped and you have to try to find a way to get into the wells, it depends if the wells are vertical above the mudline or whether they have bent over below the mudline.

The worst possible instance is where the wells have bent over and the conductors are bent over below the mudline and you can't get circulation in. That would be a lot higher cost per well than a well where you could get circulation in from the surface, even though it is under the water. So what's the differential? It might be multiples of cost differential.

Okay, thank you. And then one final, and it gets to sort of your pricing/utilization strategy. Can you comment -- I guess on two things. One, are your competitors sort of engaged in a similar type approach to the business? I am sort of having a little trouble grasping -- and I understand the long-term customer relations side of things, but why not, in an environment like this, try to get -- it sounds like you can get utilization and pricing. I'm just trying to get a sense for how that is working out, both internally and based on what your competitors out there are doing.

First of all, I'm not going to talk about my competitors. I will let them speak for themselves. As for what we are trying to do, again, this is a business, as I said earlier, that historically has been a year by year by year, and you really didn't know what your customers were going to do until you got into the January through March time period. And those of you have followed us for the last few years know that.

We believe that by raising prices modestly and by giving our customers the most efficient work that we can, that we can both win in this and that we are hopeful that we would get work on a multiyear basis that would allow us to plan a lot more efficiently how to go forward.

So we've looked at the short-term benefits of taking hurricane rates, if you will, and cramming them into our Abandonment operations at the highest level that we could, knowing that some customers are absolutely panicked to get this out, and yes, you could do that, and yes, it what impact you to some degree in the first year.

But we don't think that is the long-term best thing for us to do as the premier abandonment company in the Gulf. That is what we want to be and that is what we want our customers to look at us as.

Have we raised prices? Certainly. Have we raised prices as much as we could? No.

Very good. Thank you.

Byron Pope of Pickering Energy.

Within the Fluids business, I know that TCE operations tend to peak seasonally in the second quarter. I'm just wondering if, given the fact you've got more rigs working in the North Sea potentially this winter season as opposed to a year ago, what are you seeing from a Fluids perspective in terms of North Sea demand heading into the fourth quarter or in the fourth quarter.

Actually, for reasons that I'm not going to get into, our North Sea demand will be up in the coming year, and conceivably as early as the fourth quarter. Since I'm not going to discuss contractual obligations and contractual transactions that we haven't released, we can kind of go from there. But we think that business is getting much better and, since we have had and continue to have a presence in that market, a significant presence, we would get our fair share at least and we expect to do that next year.

And then, Joe, I think I heard you say that for the Well Abandonment and Decommissioning segment, 2.6 million of operating income?

That is right.

In the quarter. So if I take a look at the revenue delta less the operating income delta, revenues declined roughly 6 million; operating income declined roughly 9 million. Is it fair to think about that delta, that extra 3 million, as kind of the onetime costs that were in the third quarter that you might get back in Q4?

Byron, that is a sequential second quarter to third quarter differential for year-over-year.

Sequential.

And your question is, is that reflective of the incremental cost that we've incurred relative to the E&P acquisitions?

Just wondering what's in there, because the decrementals --when I do the math, kind of looks like it is 150% decremental. So I'm just wondering if the onetime costs that are referred to in the press release, is that kind of that extra 3 million that potentially goes away Q4 versus Q3?

I will answer that. The vast preponderance of what you are really looking at is Maritech having a profit in the second quarter of a material amount and having a significant loss in the third quarter, because we acquired all of those properties at the beginning of the quarter and had all of that continuing LOE without any production.

So it is an aggregate. It was down though. The profitability of the rest of the business in that division was less than it was in the second quarter. But the largest component of that shift was nothing more than Maritech.

Last question, you talk about expanding Compressco into international markets; you mentioned the Mexico contract. For this international expansion, are you kind of bumping up the CapEx allocated to Compressco or basically are you taking units that are kind of already in the Q and just reallocating some of those from the U.S. to international markets?

No, actually, we are building units for the international expansion, not because we couldn't use ones that were in the United States, but factually, our utilization in the U.S. is quite high as well. It swings month-to-month, but we have to continue to build at the same rate as what we're releasing or selling -- we actually sell a few of these. So no, there is no efficiencies left in utilizing the fleet to any great degree; these are all new builds.

Thanks, guys.

Thad Vayda of First Albany Capital.

Good morning, gentlemen. A few questions. On the Fluids side, you indicated that you were gaining market share. Can you kind of walk me through on what dimension-- is it pricing, services, product quality. And at whose expense and where geographically or otherwise you're able to do this to sort of offset the decline or potential decline we see over the next couple of quarters in the Gulf?

We have acquired in the last nine months some contracts from customers in the Gulf of Mexico that are not short-term contracts, that will give us the ability to increase our domestic market share, and it has increased and will continue to increase it. And no, I'm not going to say who we took it from. There are obviously three competitors out there that have the rest of this market, and obviously we had to take it from one of them or two of them, depending on which contracts.

But that is a fluctuating deal. If you go back and look at it, most of these larger Gulf of Mexico producers will swing between fluids companies over a period of time. However, we think with the service that we perform and some of the other things that we bring to the party, that we should continue to do this, and hopefully we can demonstrate that to you over the next few months. But we are very confident that our market share in the Gulf of Mexico has been enhanced in the last few months and you will see that as you go forward.

Also we have obtained some contracts in international markets that will help enhance our international Fluids business, probably in the fourth quarter but most certainly into 2006.

Okay, thanks. That is helpful. On the Compressco side of the business, I mean I don't think there's any question that the value proposition of these units is compelling. And while there are some differentiating factors, the units themselves, the technology itself isn't particularly high falutin'.

Given the effect that these can have in production, have you seen other competitors enter or just the environment becoming more competitive overall?

I don't think we've seen a major new competitor enter this market since we acquired the company about mid-year last year. There are a number of other competitors in it and I would expect that they are seeing growth the same way we are seeing growth. The difference would be we're looking at it on a more cosmopolitan basis and a lot of these smaller competitors are looking on it regionally.

Our patented equipment, we believe, is more efficient than the competitors', but if ours is giving you 20 to 1 return your money and theirs is giving 15, I'm not sure it matters. Because today, people ought to be using this equipment regardless.

When we bought this, we thought the market was at least 6 times bigger than what was being serviced by all competitors. And therefore, what we haven't been doing is rubbing shoulders with the other competitors for their market share; it's not been worth the effort to really go out and try to take market share from somebody else. The real issue is just going out into the market and trying to expand the market.

So it's a little difficult for us to tell you how the competitors are doing, because we're just not seeing them in certain areas. Regionally, we bump shoulders, but we have not seen any large competitor determined that they want to be in this market as of yet. I find that somewhat interesting. I would have almost bet you a year ago that by this point in time we would have seen somebody come after this market. But in the interim, we are going to run as fast as we can run and that is what we are doing.

Okay. And then finally, again -- not to beat a dead horse -- but on the Well Abandonment and Decommissioning side, could you just remind me, in addition to the two heavylift assets that you have, do you control others? You alluded to assets we control -- or do you -- ?

Actually, what we do is we lease other heavylift assets. As an example, the Arapaho that we own that we bought two years ago, we had leased for the entire season the preceding season. So the answer is, yes, we look for the efficient abandonment assets and then try to tie them up under a lease. Generally, though, not more than a year -- again, the problem that you've historically had is you want to be able to do the work that you have in-house, so you have enough equipment to do that and maybe a little bit more. Then you lease equipment when you've determined what that market looks like -- again, that is typically annually, because you don't get these longer-term situations.

Now that has changed, and you may be able to go out and might want to lease something for a longer-term than, say, for 180 days or maybe 250 days, which is historically what people have done.

Okay. So at this point, the only assets you control are the Arapaho and the Hercules and you are --.

That is an incorrect statement.

I'm sorry.

We're currently working with other assets as we speak. But I'm not about to get into the terms or what they are.

Okay, fair enough.

The answer is yes, we have equipment under lease.

Okay. And then finally on the Hercules, what is the nature of the upgrade you're going to do? You indicated that I think there was some damage that needed to be addressed and then you just suggested that you were actually making a few modifications. And what do you anticipate the cost of that -- not the repair portion -- but just any upgrades to be?

I'm not going to get real specific because we think we've got a very unique piece of equipment. But I will say that one of the things that needed to be done to work on the down platforms in particular, as we needed a lot more space for crew. So we been adding crew quarters or will be adding crew quarters to what we already have on that vessel.

You also will need more space on the deck, so we are clearing off part of what we have on the deck there to accommodate that work. So it's not so much a big capital item; it's more making it as efficient as we can for doing the work that we think is going to have to be done. There is no big capital expenditure involved.

Great. Thanks very much.

(OPERATOR INSTRUCTIONS) Bob Fontana (ph) of Morgan Crossroads.

Thank you. Just a couple financial questions, I think for you Joe. One, did you guys buy back any stock in the quarter? I know you did in Q2.

Secondly, Joe, I don't know if you have any cash flow specific data on the quarter, whether it be free cash flow or whatnot.

And third, your debt to cap ratio is about 33, 34%. Is that a level that you are comfortable with as you are potentially going out and making acquisitions and whatnot, is that kind of a target level that we should expect as dust settles with acquisitions and whatnot?

To answer your questions, Bob, we did not purchase any stock in the quarter. Cash flow wise, I did mention that our investing activity was $49 million, and we increased debt by only $7.7 million, so you can presume that we had very good cash flow from operating activities despite the hurricanes. And then what was your final question, Bob?

On the debt to cap ratios, you guys are around 33, 34% now. Is that a good target level, given the potential acquisition activity you guys are --?

We are certainly comfortable with that level, and our financial ratios were well under our financial covenant ratios. So there is no discomfort with that level. Being conservative, we don't necessarily want to substantially grow it, but actually there it is quite a bit of room to increase that debt level if we so chose.

I might just add one thing. We've already told you a number of times of the significant increase we expect out of Maritech on the earnings side. But all of that production is going to carry some very significant DB&A (ph) as well. So you can presume that the Maritech portion of this Company is going to have a large cash generation during 2006.

Thank you.

At this time, there are no questions.

Thank you very much. Look forward to speaking with you after the fourth quarter.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.