Tetra Technologies Inc (TTI) 2006 Q2 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Tetra Technologies second quarter results conference call.

[OPERATOR INSTRUCTIONS]

At this time I would like to turn the call over to Mr. Hertel, please go ahead, sir.

Thank you, good morning and welcome to the Tetra Technologies second quarter, 2006, earnings conference call.

Joe Abell, our CFO, is available to help answer any of your questions and he will also give a short review of our second quarter financial results. We may both be making short presentations. After that we will have a question and answer period which is typical.

I must first remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. The statements are based on certain assumptions and analysis 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 the control of the Company.

You are cautioned that any such statements are not guarantees of (technical difficulties) and their actual results may differ materially from those projected in the forward-looking statement. I also want you to be aware that many of the statements this morning will refer to data that was included in today's press release.

Therefore I don't intend to reiterate all of that data unless responses to your questions require it.

Joe, would you begin with the financial review, please?

The second quarter of 2006 marked the highest quarterly revenues, earnings and earnings per share in the Tetra's history. Tetra's revenues for the second quarter were $208 million, 44% above the second quarter of 2005, gross profit was $68.5 million, 61% above the prior year's second quarter.

General & Administrative expenses were up 28% quarter-over-quarter as our businesses have grown. There was a percentage of revenue, G&A expenses dropped to 11.3% from 12.8%.

Net income for the quarter was $29.2 million, or $0.39 per share fully diluted, compared to $15 million, or $0.21 per share fully diluted in the same period last year, an increase of 95.2%.

Looking at performance by division, revenues in the fluids division for the quarter were up 11.4%, compared to last year's second quarter, and profit before-tax was $18.1 million, up 49.1%.

Revenues in the well abandonment and decommissioning division were up 83% quarter-over-quarter and profit before-tax was $26.1 million, up 120% compared to last year's second quarter.

Revenues in the production enhancement division were up 43.5% quarter-over-quarter and profit before-tax was $11.9 million, an increase of 60.1% versus the prior year's quarter.

We had approximately $35 million of investing activity in the quarter. Our debt increased by $14.8 million during the quarter to $267.8 million. Debt to total capital decreased over the quarter from 43.8% to 43.1%.

With that I'll turn the conversation back to Jeff.

Over the last, roughly 60 days, we've had a number of shareholders ask two recurring questions. First, has the drop in natural gas prices caused any reduction in demand for our products and services.

And secondly, when do we expect to see a decline in well abandonment and decommissioning activity in the Gulf of Mexico, particularly the question is, is the hurricane work beginning to peak or even decline.

I would like to address both of these questions. The answer to the first is that we have seen no indication that activity slowed when natural gas prices broke below $6.00 in MCF.

Since futures prices remain well above that level I don't believe many operators were overly concerned. We have seen seasonality in certain activities.

This is especially true for us in things like our TCE operations where we seasonally have the strongest earnings in the second quarter. Therefore, the third and fourth quarter's are always weaker than the second.

We've also seen some operators opt out of drilling, more particularly probably completing wells, in the Gulf during the hurricane season this year due to the inactivity that they were forced to endure last year. This has affected demand modestly for some of our fluid services.

As for the second question, the storm related work in the Gulf of Mexico for well abandonment and decommissioning is barely starting, not peaking, much less declining. It is probable that without any future destruction from storms, which is an extremely conservative assumption, that work will continue for years to come.

Of our six spreads that should be working by the end of the third quarter, four maybe working down platforms, those four spreads might be able to do 10 to 12 platforms a year. There are 113 down platforms and 56 severely damaged platforms in the Gulf just from the two storms. We are the largest contractor doing this work. Do the math.

This is a long-term growth market not only for us but for others. Maybe another perspective on the market will shed some light on the situation. The entire Gulf Coast well abandonment decommissioning market was estimated to be about $450 million in 2005. We expected it to be about 600 million in 2006 before Rita and Katrina.

The general estimate of storm related work from the two hurricanes is $5 to $10 billion. Additionally we believe another 1,600 standing platforms are producing only marginal returns. With increased insurance costs and shrinking coverage, operators would like to eliminate catastrophic costs by removing these platforms sooner than later. The cost of this removal is estimated to be another $4 to $5 billion.

Finally, of the remaining 2,500 standing commercially attractive Gulf of Mexico platforms, operators can reduce the catastrophic liability exposure by plugging non-producing wells on these properties and many are beginning to try to do this. The total estimated cost of plugging those wells is another $1.5 billion. What this means is that the $450 million 2005 well abandonment and decommissioning market in the Gulf of Mexico now has a backlog of work of $10 billion or more.

Regardless of competitors, this is a growth market for an extended time. This is especially true due to the specialized engineering services, the services in general that are not tied just to engineering and the equipment that's necessary to function in this environment.

In today's press release we announced that Tetra is adding a sixth spread to work the Gulf of Mexico well abandonment marked. We've signed contracts for a vessel and signed contracts with a customer. We anticipate that we will be operable around the end of the third quarter.

We have leased the vessels as the main Floatel component for this spread. This means that we will have three owned and three leased centerpiece vessels working hopefully by the end of the quarter. I do have to caution you regarding the timing of the profits from these spreads.

As we plan ahead for these spreads we need to continue to build infrastructure, add personnel and add associated equipment prior to the actual operations. This means that for portions of the third quarter we've incurred some of the cost associated with the three non-revenue generating spreads as well as downtime on three major dive support vessels.

Therefore, the well abandonment services business is incurring some extra cost in the quarter that will tend to depress their earnings. When I say depress, I don't mean below second quarter. Because of this we see that the profit improvement quarter-over-quarter will be less than what you might assume if everything was working today.

What that will probably reflect in is the fourth quarter when all of this should be working. So we expect to see improvement in the third but the real improvement should come in the fourth quarter.

We also announced today that Maritech had hedged an additional 1,000 barrels a day of oil production for 2007 at $77.30. As most of you know we produce these oil and gas volumes as well as certain other things with our Maritech subsidiary. It also helps to base load our well abandonment operations.

By hedging we mitigate our commodity price risk to some extent. And this has become possible recently because of profitable production from new wells that have been drilled, are currently being drilled or are to be drilled by the end of the year.

During the quarter our Compressco subsidiary was awarded additional work in Mexico. This is further confirmation of the growing market for these services in that country. As you may remember, we entered Mexico about a year ago and have been growing that market for Compressco as we have already done in the U.S. and in Canada.

The earnings per share guidance range which we announced today incorporates a normal, whatever that means, hurricane season, with some downtime for our fluids, well abandonment and Maritech businesses. It's possible that earnings could exceed or be below the range if we have an exceptional hurricane season either way.

Fortunately for our well abandonment services business, we can partially offset the negative impacts from downtime that we experienced last year because we have entered into more favorable weather clauses in most of our contracts this year.

Finally, we will continue to look for smaller, bolt on, synergistic acquisitions as well as larger, more strategic purchases for Tetra as we look toward the future.

With that I will open the conference to your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Jim Rollyson with Raymond James.

Enjoying the heat up north?

Yes, Jim.

A question for you, Jeff.

You talk about the profitability for well abandonment decommissioning as you are ramping up people, maybe not going up so much in the third quarter and picking up in the fourth.

And you also mentioned kind of fluids just some of the timing with, I guess, maybe some reduction in activity seasonally in Europe but in the Gulf with the hurricane stuff. And I guess the production enhancement business continues to ramp-up throughout the year.

As you look at the way things are shaking out right now, do you expect third or fourth quarter bottom line to be-- where do you see that going? Which one is going to be higher, would you guess?

That's a good question because historically the way our business is lined up, our second and third quarter's were generally our highest profit quarters. Because of the nature of the abandonment business, the fact that many of these contracts have weather on our customers and that we will be working through the fourth and first quarters and so forth on them, I would expect that we are going to change up what we've normally done and it would not surprise me at all if our fourth quarter is higher than our third quarter.

Again, going back to the press release, we have six major pieces of equipment or spreads that will be coming on September through early November. Those six spreads, I gave you an indication of the magnitude of the revenues associated with them. They are very significant.

As all of those pieces come on and recognizing that we are eating costs in front of some of those pieces coming on today, you ought to get a fairly significant swing. And I would guess that it would probably offset the typical seasonality that we experience and therefore the answer to your question is the fourth quarter may be somewhat better than the third.

If I just do the math on your comments on the six spreads through--relating back to '02 revenues, that's coming in somewhere close to $700,000 per day.

That's pretty close.

Okay. Maritech, could you give us production for the quarter and also you also mentioned in the press release that you expected profit contribution in the third and fourth quarter to approximate the second quarter.

Can you kind of talk about the mix, is that going to be higher production or higher revenues, but maybe costs offset by the insurance costs or similar production levels and similar costs or just kind of how you see that?

We ought to have better production in the third and fourth quarter than we did in the second because we shut down one of our major producing properties during the month of May to hook up some new production. So production may be up some. Lease operating expenses may be up some.

All in all prices are blocked into a great degree this year because of our hedging strategy. So profits are probably going to be similar.

The reason you have difficulty in looking at it externally is you had a month in the second quarter where you benefited from lower insurance costs. Your insurance costs kicked in and affected you all quarter but not maybe to the same degree that they would in the third and fourth quarter's.

The net effect is that if production remains where it is and if we add some production from these new wells we may be modestly better again in the third and fourth quarter. But I think kind of directionally I was trying to give people an idea this isn't declining as would normally be the case with older properties with a steep decline curve.

And until you bring on some of this new production you won't have it increasing, but we will be bringing new production on throughout the remainder of the year. It just depends on the timing.

Right. And your second quarter production level?

I don't have that in front of me but it was between 21 and 22 million a day to maybe 24 million of gas and something of the order of magnitude of maybe 3,700 barrels a day of oil and gas.

That's close, that's not an exact number. We could probably get you that, that's not a number that we have a problem with, however it's not one that we put in the press release.

Last one for me, when you bring on all these new spreads can you kind of talk about where you see, how that impacts your margins for overall well abandonment decommissioning services?

You are learning probably the way we are learning. One of the reasons we've been relatively conservative this year from the start to here was that we wanted to see how this all fit together. We've never had six full spreads of equipment.

We never had three full spreads of equipment out there. So we wanted to see what kind of synergistic effects we had operationally. And really until we get them all out and operating it's going to be difficult for us to give you any better number than what we are currently doing.

Meaning that we don't because the rate of the reduction in the margins, nor necessarily an increase although one would hope that maybe we would begin to see some impact there. The only real factor that swings the margins in that, typically when we own the vessel we have somewhat better margins than when we lease the vessel.

Remembering we have to pay a third party for the vessel. The profits may be somewhat similar for the spread but the margins because you are paying out a large amount and then collecting it from the customer may go down somewhat.

So the last two of these are coming at a time when we are leasing the vessels. That would tend to bring down the margins modestly. On the other hand the three dive support vessels ought to get pretty good margins. So until we really put it together, assume that the margins are comparable to what they are right now and leave it at that.

Okay. Very good quarter.

Your next question comes from Ray Kramer with First Analysis.

Hey, good morning Jeff and Joe.

Good morning, Ray.

A couple questions for you. On the fluids side could you sort of give us an update on what's going on in terms of market prices and the like there? I know I used to think the two big bromine guys have been pushing up CBF prices.

There have been price hikes across the board over the last six months in the bromine side of that business. The calcium chloride has probably peaked and might even have come off modestly only because it has been moving up for about a three year time period.

We obviously will price somewhat in relationship to what is going on with the bromine producers as they increase cost to us and to our competitors we've had the ability to over the last year to pass that on should they decide to increase prices again then we would move them up.

Frankly, we are waiting to see what happens from the third party side of this before we do anything else to pricing.

Are prices pretty good where they are right now or is there still some recovery to be had from let's say the most recent round of price increases from the buyer side?

It really depends. If you've got somebody under the contract you can improve because the contract when they roll you can increase prices. If you've got people that are on a current basis you probably pushed the prices in relationship to the cost about where they need to be.

Okay. Turning for a second to the well side, two questions there, one with obviously a very tight supply and demand situation, have you been able to make much head way in price there?

Well, as we explained I think in the last two conference calls, what we have been attempting to do is to balance the risk with our customers somewhat.

In the well abandonment business we have not enjoyed the same benefits that the drillers have had for the last few years. The drillers basically have pushed weather on to their customers. That had never been the case in well abandonment. And therefore we have been doing that to some extent over the last year, especially since the hurricanes.

So one of the things that you see is that the customers are now sharing with us some of the risks of weather which is a benefit obviously to us and in a sense an increase, at least in margins, because we are not eating costs on days when we are not getting paid. So that has happened.

Secondarily there have been price hikes but nothing like the 200% increases you've seen with drilling rigs. Are there future prices that will go up?

Possibly. Each one of these deals that we do are negotiated separately and really aren't similar to anything else.

Each of these is a new operation and it's almost impossible to go back and say customer A's deal has now been improved with customer B, because customer B is going to be using completely different spread of equipment. We will be getting it from different locales. It may require saturated diving versus air diving.

And consequently it's very difficult to set your increasing prices. What I will say is we believe we have a very fair return to Tetra for the risks that we are incurring and the expertise that we are bringing to the party.

Okay. And I know on the first quarter call you had said that there was some potential to add more spreads as the year went on that clearly happened with number five and six being announced this quarter. Is there still capacity for more to come on this year, or given timing and contracts and all that, are we probably pretty set with six spreads--the end of Q4?

It's probably going to be very difficult to get additional equipment completely set and spreads set and have them in this year. What we are doing right now is predominantly working on getting a base load for '07 and '08.

Obviously then as you get that base load done you can start then looking for which of these spreads will you continue to utilize? I mean it's not inconceivable that one or two of these spreads that we have that we could give back over the next six months to a year and then we would bring on something that would more fit what we are trying to accomplish with a new customer.

So the answer is we are more working on '07 and '08 right now than we are worrying about additional '06. Is it possible? Certainly it's possible that we could put another spread out but I believe the indication I gave you at the beginning of the year was that we would be very happy with five and felt we would be pretty full with six. And we are already at six.

And just one last P&L question, I know other income was up a bit this quarter. Remind me what's in that line item and why it was up?

Well, for one thing we have joint deal with TCE that falls in there but basically what that is, is if we have a loss of a write-off of a property in Maritech it goes through the normal operations.

If we have a sale of any portion of it where we are getting rid of a property after it's produced then it goes into that line, and we had a couple of properties that we sold this year in this quarter.

All right. Thanks a lot, Jeff.

Your next question comes from Martin Malloy with Southcoast Capital.

Good morning. On the diving side, when you talked about a budgeted level of 60 million for this year for Epic earlier, did that include any dive support vessels?

It did. It did not include the level of dive support vessels that we will have by the end of the year. In particular we had one very substantial piece of equipment which we acquired from a company who had been consolidating this industry and under the justice department was required to get rid of a couple of vessels, and we acquired it. It's in dry dock and should be out working by November.

Maybe a different way to answer your question is the numbers that we utilize when we acquired the Company were what we believed we could attain with what we saw at the time and we are pleasantly surprised not only with the activity of Epic, not only with what they are doing with their customers but the fact that we are able to base load as much as we are of Maritech and our other work through our abandonment business has allowed us to increase the revenue and the profitability that we anticipated when we acquired the Company.

Okay. And yesterday on Oceaneering's call they talked about some pretty substantial awards, potentially in the (inaudible) and decommissioning market coming out and they were bidding on I gather sub-components of that--those awards.

Is there a different methodology to how this work is being bid out now? Are there larger programs that are being bid by the oil and gas companies?

There is every combination out there. I mean we use Oceaneering equipment RODs ourselves. There are companies that are trying to put together a group to be able to do what we try to do individually.

In other words, they may have one person bring the vessel, another bring the dive team, another bring the well abandonment spread. That whole process is being reviewed by everyone.

Again, the problem that you have is that this market is so different than anything you've ever experienced that there just aren't enough spreads and companies available to go do this work. And so everyone is trying everything plausible and clearly Oceaneering with its expertise is going to be brought in by a lot of people as I said including us. We do not own our own RODs and are using some of theirs.

Thank you.

Your next question comes from Stephen Gengaro with Jefferies & Co.

Thanks, good morning, gentlemen. I guess two things, just to start with, can you talk a little bit about the fluids operations?

I mean the revenues there were well above what we had projected. Can you give us sort of what drove the strong sequential improvement and what you are looking at going forward here?

We indicated early in the year that we thought our market share might have been increasing. That may or may not have been the case early on. Clearly for parts of this year we felt that was the case.

However, I think the general improvement that you have seen recently has been a function of the market improvement, not so much in the number of rigs but the volume of business that was being done predominantly because you were doing some deep water work that utilizes a lot more fluids per well than what you see when you do shallower work.

In general then, I think the market is somewhat better than we thought it was going to be early in the year or at least predicted, when we made our estimates. I think at certain times during the year we've been able to get market share. At other times we've lost market share. But in general I think that we are very happy with the position we are in.

And I also believe that you are beginning to see some activity out of certain companies that had essentially been in a position of either evaluating what they are going to do or drilling actually as you may know, offshore you may drill three or four wells before you get into a completion cycle and we've been fortunate enough to get some of the Company's back into a completion cycle.

So all of those have affected that business this year and we are obviously very happy with the level of activity. But again, when you look at revenues alone, remember that pricing has caused a large portion of the revenue gain above where we have made our original estimates.

There is nothing in the quarter which is sort of anomalist that is should--is unlikely to repeat?

No, we have obviously had some inventories that we have held at lower prices and at the costs to everyone and prices have gone up. Those that have held inventories have been fortunate to do own them so there's been some inventory gain in there.

But in general what you are seeing in the second quarter you saw in the first and you ought to see in the third and fourth. Again, the only caveat that I suggest is that there are a couple of operators out there who at least if they are drilling are not completing until they get through the worst of the hurricane season because they don't want to have rigs out there that they are paying for that they can't utilize.

As a follow-on, I guess a two-part question on the well abandonment side. One, just to clarify the loose revenue estimate you gave for the six spreads and the three DSVs. That includes all associated revenue with a spread, correct?

That's correct, but it wasn't the six spreads. What we said was the three spreads that will be coming on during the quarter and the three dive support vessels were that revenue number, not the full six spreads. Those three are already in our numbers.

Okay. Okay, and then follow-on, when we look at this, and I know you have three of the--three of the assets being used on these spreads are leased in, should we assume--I mean if you were mulling it out and weren't sitting in your offices would you assume you would you have at least six next year and going forward, is that a fair assumption you think on our part?

Again, if you asked me this a year ago would we have six I would have been flabbergasted that we had three. It would seem illogical that we would have much less than six spreads working. The real question is not so much the hurricane work.

We have at least two vessels working standing platforms. The real question in my mind is going to be how many operators are going to simultaneously want to take out some of these existing relatively non-commercial platforms next year.

If they getting aggressive with that we may very well have more than seven. If they decide to hold back on that because they are spending so much on their down platforms we could have five.

I don't know the answer but the general market itself would dictate that we would probably be at or above the levels that we are at right now next summer. Which would mean six or more I would expect.

Thank you. Just the final question is you made a timely acquisition of Epic Divers and my understanding was at least part of that was to sort of debottleneck the process.

That asset that you acquired, the Epic Diving business, how many spreads does that give you sort of the flexibility to run?

That is an internal debate daily. The reason for that is that we could utilize the vast preponderance of the spreads they have for our own use. However, they have had a customer base for years and years that we do not want to disturb.

So we are fighting back and forth between utilizing these divers spreads for our well abandonment business or allowing them to be utilized by their existing customers much in the same way I might point out our abandonment spreads that are out there, well abandonment, Maritech would like to use a lot more than they are using as do some of our major customers. They would like to double the amount of spreads.

We just don't have them made available to us. Currently we are using a little over a third of the spreads, I believe, that Epic has in the water for our own internal purposes.

And yes, it did debottleneck and made it plausible for us to go to the type of six spreads that we have. Would we go take 60% or 70% of their spreads and use them internally? Probably not. Because we want to keep the good relationships with their existing customers that they have built over the years.

Final question along those lines and maybe this is for Joe, is there a good way to sort of estimate the inner segment eliminations, maybe percentage of total, anything along those lines that we can use as a rule of thumb going forward?

Joe, you want to make a comment and then I will.

It really depends on how much work we do internally and we do want to, as Jeff was saying, balance the internal and the external work.

I certainly think it's reasonable to grow the internal work in proportion to the overall growth of the business. But maybe as a percentage, keep it about the same.

Jeff, what do you say?

Well, there's two parts to that.

There is the internal work that you don't get to show because it is a joint operation. And then it's the internal work that you do, for instance, between Maritech and well abandonment on insurance related matters. We are currently working a down platform for Maritech with one of these spreads.

The profits on that are only shown when we have had insurance proceeds. And since the insurance companies are historically very slow and have been in our case, very slow, those profits get shown as an elimination until such time as we are able to bring them back through.

So it does show up and it doesn't show up, I guess, in terms of the way that you would see it. But part of that is going to come back to us as we get paid.

That's very helpful. Thank you, gentlemen.

Your next question comes from Shawn Boyd with Westcliff Capital Management.

Good morning, gentlemen, congratulations once again.

Thank you.

Just a couple things here I want to clarify. On the well abandonment and decommissioning, you mentioned in the press release that we can look at about a 1.4 spread in the first quarter, and call it 3 spreads here in the second.

You can make some assumptions on the days in the quarter and kind of back into a rough day rate. Given this expansion going from three to six now, is there anything that we should be thinking about that takes this sort of average day rate significantly up or down?

Well, first of all, if you have a small spread, meaning one of our--let's say, one of our owned spreads and one of our smaller pieces of equipment, you might have rates in the $110 or $120,000 a day.

If you have leased third party dynamically positioned vessels it's conceivable that that rate might be $180, $190, $200,000 a day. It may or may not mean that your margins are any better, back to the question I think that was addressed earlier.

We might end up making the same profit on both of those vessels, obviously the margin percentage is better on the first than the latter one, however the profits are more or less normal.

The other issue is that if you have saturated diving spread versus an air diving spread you may very well have a difference in profitability. So all of those things go in there.

For you to look at kind of backing it up and saying what is a typical day rate, I'm not sure whether it's $120 or $200,000 that it would make a lot of difference to what I think you are really interested in is the bottom line.

All right. Okay.

And when you made the comment earlier and the--the equivalent of '02 revenues, $238 million a year, that's strictly on the incremental spreads coming on, the three new spreads and the three dive vessels.

Yes.

So that's above and beyond the current base that we are seeing?

Yeah, I believe Jim's estimate, Jim Rollyson a little while ago, was that that would aggregate as much as $700,000 a day and that's in the ballpark.

Got you, now the other thing is when you answered an earlier question about '07 and thinking about potentially giving up one of the--or one or more of the spreads that you have and doing something a little bit more permanent I'm assuming that might mean giving up a leased spread and owning something, can you talk a little bit about what is the all in CapEx cost of a new spread might be?

Well, we've bought vessels that we've utilized for that purpose. We've bought two here in the last, I believe, two years, and they've been 20 to 22 or 23 million after we put everything in them a piece. If you were to buy a DP vessel as opposed to a typical lift barge, derrick barge, it might be 30 or 35 million.

Okay. And on that debt to cap, what is your tolerance for pushing that up?

I assume given what's going on out there, the pay back is going to be pretty tight and economics are going to be pretty strong. How high would you lever the Company to take on these additional vessels?

In the realm of what we have been spending, a $20 million vessel is not particularly significant. We have been spending a lot more money on acquisitions of companies.

This year we are spending $60 to $70 million on Maritech. We are spending maybe $40 million on expansion to Compressco. We are spending potentially $100 million on our expansion to our fluids business over a number of year period, obviously.

So buying one or two vessels is not going to be particularly relevant to us. However, we obviously don't want to expand our debt too great. Although if you look at our EBITDA and what we are running and what we will be running, we have tremendous ability to expand our debt if we wanted to. However, a lot of us like to stay within certain bounds.

Got you. Okay. Relative to--what are we looking at, 65, 70 million EBITDA in the quarter, you have a lot of head room.

And as we bring these other pieces of equipment on as well.

Understood. Last question, and I will jump back in the queue, on the production enhancement, this business I know we've got the acquisitions pushing this up, but 40+%growth year-over-year in the first half, how much of that, if you took out the acquisitions, how much of that is organic growth, Jeff?

Well, Compressco, when we bought it was growing about 30%, 35% a year and we had indicated that even though it was growing in size therefore you would assume that that growth rate would come off, we've indicated that the 30% type rates since we've owned it are applicable. So you can presume that you've got something like that probably in Compressco.

Our domestic testing business is a little difficult to ferret out because now that we've put Beacon in with it it's kind of homogenous and it's difficult to determine when you add a unit and put in a group that's managing it out of, say, the new Beacon acquisition, is it a Beacon piece of equipment or is it the other piece of equipment? But that business is growing also at rates 15% to 25% excluding the acquisition.

So when you roll all that in obviously you have a percentage this year that's greater than what it would be if you did not have the acquisition, but the growth itself is still very, very strong and in the case of Compressco, you have a market in front of you that ought to allow you to do that for years to come.

Right. And what percentage of, just roughly what percentage of production enhancement revenues would be Compressco business?

Joe, do you have in front of you? I don't.

I would just say about half of it and it's been a growing percentage based on the trajectories, Jeff has just mentioned.

Thank you, okay, great.

I have one more question, on the margins, given the ramp-up--this is back on the well abandonment and decommissioning--given the ramp-up and everything if I understood you correctly your tone is what we should think about is keeping the kind of pre-tax margins constant this quarter and that we'd see--we should probably see a ramp then into the fourth quarter once you've really got everything humming.

What I trying to caution you against if you looked at our first quarter in abandonment and our second quarter it was an over tenfold or whatever increase in profits.

I don't want people assuming just because the spreads are coming on that they are there for the quarter and I also don't want them to assume that there isn't an overhead and infrastructure cost that's applicable to those.

So I'm just really--I'm telling you what's coming into the future with these six pieces of equipment or spreads but I'm trying to caution you not to put much of that into the third quarter because it's not going to be applicable in the third quarter.

Okay. Understood. Maybe the other way to look at it would just be a year down the road, two years which I guess that's a dynamically different situation, but if everything held constant once you get these things really up and running at that six spread level what kind of a pre-tax margin would you expect on the WA&D without Maritech?

I would expect the percentage might not be a whole lot different than it is right now.

Okay.

The question is, what's the revenues. And since you have what, 33 million--all of our abandonment operations in the first quarter and I think 72 in the second and you've got these other things in front of you, it's just very difficult for us to come out here and give you any kind of a standard answer because we are kind of with you, we are watching it unfold as it's coming forward and we are giving you the best information that we can on the direction but we are a little hesitant to step out there and give you a real hard number until we develop it.

All right. Understood. Thanks a lot, Jeff.

Your next question comes from [Steve Pound] with [Pool Capital].

Thanks, great quarter, guys.

As you go forward all the equipment that's utilized out here, you've gotten better stand-by rates, all that kind of stuff, as you look into '07 and '08 the games really more about pricing and execution and stuff like that.

What's going to happen to pricing '07 and '08? Can the market keep sustaining these huge increases in rates, Jeff?

In which area are you

-- well abandonment.

Well, in well abandonment I think what you are going to see in '07 and '08, this has been a learning experience for us. I mean we've been in the business but we have never experienced the kind of activity level and demand that we have out there.

And we have been gearing up as fast as possible and I think we've done an admirable job of running as fast as we could. However, in doing that you obviously do not create the most optimal profit scenario that you'd ever see.

Our margins early on this year and even to date in some of these jobs are not what they should be on a go-forward basis in '07 and '08. Not particularly because we did anything wrong but because we've been learning.

There's a lot of very sophisticated engineering and other things that go on in these projects that once you understand how to do it it is very useful for your customer and for us because we are able to do it more efficiently which helps the customer in their total cost but really helps us in the margins.

So as you look at '07 and '08, yes, we ought to have some more activity but it wouldn't surprise me that the learning curve for us allows us to see improved margins, not particularly through pricing, although that's plausible, but maybe because we are more efficient than what we were when we started doing this.

It's perfect. And I guess that's the next thing I was going to ask you--you've got 1,600 platforms out here that are marginal producers and the price has gone from 25 to 75 and they kept a lot of those platforms producing because with higher energy prices it made them--they could push that out, but certainly a lot of these things are getting to the end of their life.

The next two, three, four years, would you expect the pricing to stay firm in the off season, too, and just all this work to just continue? You are going to get better and more efficient and all that kind of stuff so that you've really got a lot more downside protection now than you've ever had before.

I would expect that the down platform market would continue to have pricing that is affected by contractual obligations on the part of our customers to pay us on weather days or at least material weather days.

The standing platforms, those 1,600, that's a little different. While it is a problem for the customer they want to get rid of that liability, they may not want to work in the fourth and first quarters which historically they haven't worked much because you do have a lot of weather days.

So I would expect what you are going to find on a go forward basis is that there will be a sheering to some degree of the weather on standing platforms and on down platforms your customer is going to take most of that risk. But whether you see the activity in the first and fourth quarter, as aggressively as you would see under normal circumstances would depend on how panicky a customer is.

And by the way, the only reason the fourth quarter this year is almost assuredly going to be better than the third quarter is because we are bringing all of this stuff on, not because the demand in the fourth and first quarter necessarily is better than the second and the third.

Fine, I would ask some more questions but I can't think of any more to ask so I will get out of the queue here.

Your next question comes from Byron Pope with Pickering Energy Partners.

Good morning, guys. For the well abandonment and decommissioning segment, pretty impressive sequential revenue growth.

Just wondering, I know you had a full quarter of Epic Divers in there, could you help quantify how much Epic contributed to that sequential top line growth? My sense is that it wasn't a big number but just wondering if you could help quantify that?

In the mid to high teen dollar amount, millions.

Okay. And then staying with that segment, could you quantify kind of the impact of the dollar impact of the three dry docks, or maybe stated differently, how much better would margins in that segment have been had it not been for those dry dock expenses? And it sounds like some of those will trickle over to the third quarter as well.

There are dry dock expenses but a lot of the expenses that I'm talking about are keeping the crews and paying them as opposed to the cost of the dry dock of the vessel.

The margins that you are going to get there will be improved because you're, one, putting the vessels to work and, two, you are not eating incremental costs that we are holding on to right now because you can't afford to let crews go.

The dry dock expense in the manner of say a drilling rig where you are looking at somebody writing off millions of dollars in dry dock, I don't think that's going to be applicable. We have some of those costs burned in but nothing at the magnitude that you would see in say a drilling rig.

Then next question, the offshore drillers, ones active in the Gulf, talk about another potentially--another ten, maybe even 15 jack ups leaving the Gulf.

As you look to '07 is the mix issue that you refer to earlier in this call in terms of deep water versus shelf work, is that mix shift one where you could potentially sustain your total revenues in an environment where you have a fewer number of total rigs working in the Gulf?

Your answer is absolutely yes. And you can go back to the last couple of years and look at the same phenomena dropping from 160 to 130 to 90 and so forth.

As that's occurred part of the offset has been the fact that you are getting higher prices for your product, number one, and number two you get a lot more volume typically in deep water wells than you are on the shelf unless you happen to have a very, very deep shelf.

So the answer is, yes, you'll tend to offset that. Now if you lose 15 is it an offset 100%, is it 90%, is it 110%, I don't know that answer because we would have to look at the mix that we would look at.

But clearly the direction of deep water wells that are being drilled, the amount of fluid that's being utilized there has been a big boom to offset the fact that you have lost rigs to international waters.

Now that's not all bad for us. Remember that we have facilities around the world and we have active markets in West Africa and in Brazil and in the North Sea and places like that for our fluids.

So if we lose rigs to places that we are active in and where they utilize large amounts of fluids, net/net for Tetra we might be even better off. So it really depends on where the rigs are going.

Last question, Joe, on CapEx $35 million this quarter, I think on top of the maybe 47 million in the first quarter, what do you think in terms of full year CapEx?

Well, we announced at the beginning of the year a CapEx program of about $160 million.

We told you that we would maintain that program in addition to the acquisitions that we did. And in fact we probably are expanding that program somewhat. So the CapEx numbers, the direction we gave you earlier is still, is still indicative.

Okay. Thanks, guys.

Which probably means we spent more in the second half than we did in the first, Joe, right?

In terms of CapEx excluding the acquisitions, that's right.

Okay. Great. Thanks, guys.

[OPERATOR INSTRUCTIONS] Your next question comes from Matt McGeary with Centennial Asset Management.

Good morning.

Going back to when you were talking about the well abandonment opportunity in the Gulf, this is not the first time I heard you talk about that. Your numbers are quite compelling talking about the potential $10 billion plus backlog.

Despite the fact that your stock has done well to put it modestly, I would venture to guess that if people really believed all that, your stock and that of those of your competitors would probably be even higher.

So I wonder if you could maybe step back and maybe think out of the box a little bit and talk about what might change that, in the environment that might cause that to not come to fruition, if there was some change in the environment, operator behavior, what have you, that might cause that $10 billion number to be meaningfully lower.

First of all I don't think that the operators have much choice and I say that as an operator of Maritech. The MMS the Federal Government has required that these platforms and wells be brought under control.

The problem is not so much the platforms. In many cases they may allow to you actually reef those platforms in place. You take them off the wells and put them in a specific place. So you are doing what you can to mitigate the costs to start with.

The problem is that a well that costs you $200,000 when it's standing straight up costs you $5 million conceivably spaghetti'd on the bottom and if you don't do something with it it could start leaking in the future. Right now you've got various valves holding back all of those wells or most all of those wells.

That may not be the case in the future and you don't want environmental problems. So I don't believe in the first category, meaning the down platforms, that there's any choice. The problem has been it's so complicated, it's so much different, I believe historically the most platforms lost in a season was seven. You had 113 and 56 others severely damaged.

It's so unprecedented that it's just slowly being analyzed and engineered so that people can get in and do the work. So I don't believe any of that is going to go away. I think more to the point, how are you going to convince, say, the investment community this is going to take place, what evidence do you have.

Last quarter you saw Pioneer in their 10Q announce I believe it was $84 or $86 million project for one platform. Which was [east cam] at 322, that happens to be our spread number five.

As our customers begin announcing the magnitude of what is out there and the costs associated with it, I believe you will begin to see a better understanding and a more convincing set of data for the investment community to be able to look at the 5 to 10 billion of down platform work in particular and get comforted by it.

I agree. How do you think about, how would you assess the--given that, given that the opportunity is certainly good, how would you characterize the barriers to entry in that business?

The barrier to entry on well abandonment, that's just taking a standing platform and going out and doing the abandonment, are not tremendous in terms of equipment. The problem is getting experienced crews. It is very important to have experienced crews.

So what has happened, continues to happen, is that companies will try to steal crews. So can you get into business by stealing a few crews and then essentially putting equipment to work? Surely, you could.

The problem, though, on the down platforms is that you need to have a complete engineering group, very few companies have that. You've got to be able to put all of the pieces together. Somebody earlier asked a question about Oceaneering being involved with other companies.

You've got to be able to put the Floatel, heavy lift, whatever it may be component together, along with the abandonment, along with the diving, along with the subsea work, along with the well head. You've got to be able to put that package together or you can't do it. And right now there are very few companies that can do that individually.

There are going to be a growing amount that are going to try to go together to do that. It just gets very complicated when you bring in four and five companies and they all have to have their equipment working at the same time to make this efficient.

It's just very, very complicated. So the barrier to entry in the historic well abandonment offshore is not great. The barrier to entry to do the emergency work is very, very large.

And that's why you don't have more announced projects going today because you just don't have the people out there to be able to accommodate it. I can guarantee you the six spreads we have probably are by a factor of 200%, maybe 300%, meaning we are either double or triple the next largest competitor and I don't even know who that would be right now.

Just lastly, do you think--do you feel like you have the appropriate level of management in place that you want to have to run these six spreads, maybe going into even a higher number in 2007 and beyond?

I am going to answer that question--I am going to bifurcate it, do we have enough management to run the six spreads? Yes. Do we have it to do more? No.

We have been growing our management expertise in this area over the last year just dramatically. If you could see internally the amount of people that we have brought on from various companies that have experience in these areas, it would probably flabbergast you.

Again you may have as many as 120 people on one of these spreads. So to be able to do all of this work and to get it done efficiently you need to increase your infrastructure, your safety group, you need to increase things that are not directly related to that spread and the management of it.

So project managers, we brought on a tremendous amount of project managers. It is an area that we could not today go do eight or nine spreads, to answer your question, because we have got to continue to bring on good people. Could you get the equipment over time? Yes. But if you don't have additional people you can't do that.

We could probably adequately do two, maybe three a year ago. We can do six obviously now. We are growing as rapidly as humanly possible. But we could not go do eight tomorrow. But we might be able to do eight theoretically, say, in 2007.

Great. Thanks a lot. Good work.

Your next question is a follow up from Shawn Boyd.

One last thing, Jeff, on that hypothetical $35 million DP vessel, your pay back could be as low as 1.5, 2.5 years, is that in the ballpark?

I don't know if it would be that much because you'd have maintenance but let's just say that you depreciated that over 20 years. You would be looking at what, about 1.8 million a year, take that over even 300 days and what is that, I think that's 6,000 per day, is that right, somebody help me with my math but I think that's--

Yeah, that's right, six.

So I mean your depreciation isn't a huge factor when you are talking about getting 120,000 up a day rate. But the insurance and the cost of your personnel and all of the rest you take into that.

But clearly the rate of return we would expect to get working these as many days as we will be working them is quite high. But I think expecting to get a return on your investment in terms of the vessel itself in a year, year and a half is probably not plausible.

I'm sorry, probably what.

Not plausible.

Okay. And I guess what I'm looking at is even if you, even after depreciation, figure your current margins on a vessel working 330, 340 days a year which I guess maybe that's high, anyway, okay, I will break that up elsewhere. Thank you very much.

Okay.

At this time there are no further questions.

Thank you, and thanks to all of you for the quarter and we look forward to speaking to you at the end of the third quarter. Thank you.

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