Tetra Technologies Inc (TTI) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the TETRA Technologies, Inc. fourth quarter 2006 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Geoffrey Hertel, Chief Executive Officer of TETRA Technologies Inc.

Good morning and welcome to the TETRA Technologies year-end 2006 earnings conference call. Joe Abell, our CFO, is here with me this morning and will be available to help answer any of your questions. He and I will give a short review of our fourth quarter and full year financial results. We will also both be making short presentations that will be followed by your questions.

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 TETRA based on a number of factors. The statements are subject to a number of risks and uncertainties, many of which are beyond the control of the Company. You are cautioned that any such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements.

After that obligatory comment, Joe, will you begin with the financial review?

TETRA set record revenues and earnings in 2006 with revenues of $784.9 million and income before discontinued operations of $102.7 million or $1.37 per fully diluted share. Revenues were 49.4% higher than those of 2005, while income before discontinued operations were 175% higher. TETRA's revenues for the fourth quarter were $209.7 million, 45.3% above the fourth quarter of 2005. Gross profit was $64.3 million, 78.1% above the prior years fourth quarter. General and administrative expenses were up 28.6% quarter-over-quarter to $24.3 million as our businesses have grown, though as a percentage of revenue G&A expenses dropped to 11.6% from 13.1%.

Income before discontinued operations for the quarter was $24.4 million or $0.33 per fully diluted share compared to $11 million or $0.15 per fully diluted share in the same period last year, an increase of 123%. Net income including discontinued operations was $0.32 per share fully diluted. Looking at performance by division, revenues in the Fluids division for the quarter were up 3.6% compared to last years fourth quarter and profit before tax was $13.4 million, up 32.9%. Revenues in the Well Abandonment & Decommissioning services segment were up 138% quarter-over-quarter and profit before tax was $113.9 million, up 155% compared to last years fourth quarter. Revenues in Maritech Resources were up 141% quarter-over-quarter and profit before tax was $14.0 million versus $1.6 million in the fourth quarter of '05.

Revenues in Production Enhancement were up 46.2% quarter-over-quarter and profit before tax was $10.8 million, an increase of 58.3%. We had approximately $58.2 million of capital expenditures in the quarter. That increased by $39.8 million during the quarter to $336.4 million at year-end.

Debt to total capital increased over the quarter from 43.0% to 44.5%. With that, I'll turn the conference back to Geoff.

Thank you, Joe. 2006 was certainly a great year for TETRA. When your per-share earnings eclipse your previous record by 163%, the term great hardly seems sufficient; however, 2006 has an even more important legacy to the company. It set the base for growth for 2007, 2008, and 2009. Many of the investment we made in 2006 did not even impact operations last year. Consequently, the import of 2006 may [likely] more in how it positioned us for the future than in the record earnings that we reported.

I might point out by the way the discontinued ops that you see we have removed ourselves from Venezuela, and that is the reason that you see discontinued ops for reasons that should be abundantly clear to most people. In order to better understand the transition from 2006 to 2007, I'm going to discuss each of our business areas from the perspective of late 2006 to early 2007 to late 2007; and I'm going to start with Well Abandonment & Decommissioning services.

This business segment is highly seasonal with much of its activity in April through October. However much of our down platform work extends throughout the year. This means that second and third quarter profits are generally much greater than first and fourth quarter profits. This seasonality of earnings was exacerbated in the 2006 fourth quarter for a number of reasons, most of which we went through in our January press release; however, I will enumerate them again. First we worked on older turnkey or fixed fee contracts that did not protect us from weather downtime. Secondly, we completed some Maritech work for which we could not reflect the associated profits because we had not yet been paid by the insurer. Third, none of our three modified DSVs were working during the quarter. They were all in Dry-dock. Fourth, we were gearing up for expanded activity starting in 2007's second quarter, thus we were eating the costs of crude and infrastructure.

How will 2007's first quarter differ from the recently completed fourth quarter? Normally due to the seasonal factors, the first quarter in WA&D Services is lower than the fourth quarter. However a number of factors holding down our fourth quarter results are currently improving. We do not currently have an abundance of turnkey work. Neither are we shackled with new insurance payment issues. We still are eating the infrastructure costs associated with the buildup of activity and that will continue until such time as all of this equipment goes to work again generally in the April time period. However all three of our modified DSVs or dive support vessels are now available for work. This will impact March and certainly the remainder of the year.

We have recently been awarded additional sub sea work and we hope to secure one or more significant down platform contracts in the near future. Along those lines, I would like to digress at least for a moment to answer a question that is frequently asked and as opposed to doing it 50 times; maybe it's easier to say it once in the conference call. The question is why is the down platform work just beginning seventeen months after the storms?

And the answer lies in the unprecedented number of platforms lost, which was roughly 113, and the complexity of the problems associated with each of these. Immediately following the storms, companies began assessing the damage, however much of this work was done underwater and therefore required divers and ROVs, all of which were in short supply. With limited assets, companies first wanted to evaluate platforms that could return to production, generating cash flow. Then the limited assets were used to actually bring that production back online. Much of this work has now been done.

During this time, companies began to evaluate their options regarding down platforms. Once the assessments were made, a strategy for plugging, abandoning and remediation had to be hypothesized. However the magnitude of the damage far exceeded the labor pool of qualified and experienced engineers and project managers. This has meant that the preponderance of the down platform work has not even been awarded to contractors, much less begun. We continue to believe that the costs of plugging and abandonment of the 113 platforms will be between at least $4 billion and $8 billion and will take years to complete. We expect profitability in our Well Abandonment & Decommissioning service business to set records in 2007, in part because of this work.

Maritech, Maritech had an excellent 2006. It not only recovered from the impacts of the 2005 hurricanes, but it continued to find ways to exploit older, mature properties. It actually increased its proven reserves from about 90 Bcf equivalent at year-end 2005 to roughly 93 Bcf equivalent at the end of '06. This was after producing 16 Bcf equivalents, and after the fact that we essentially did not buy any reserves. In spite of much lower natural gas prices in 2007, which we anticipate will impact our earnings by about $20 million, the production from these new reserves should allow Maritech to actually increase total profits in 2007. Just as importantly, Maritech's properties should generate over $50 million of Well Abandonment & Decommissioning work for our Well Abandonment & Decommissioning services in 2007.

Additionally the company should generate free cash flow this year that can be reinvested in expanding our oil and gas service business as well as in Maritech. To help mitigate the risks that we incur with Maritech, we recently hedged 20,000 MMBTUs a day -- think 20 million cubic feet a day if you want to convert that -- of natural gas production from March 1st through December 31st of this year at $8.13 an MMBTU. This is approximately two-thirds of our anticipated natural gas production for the remainder of the year.

Previously we had hedged 3000 barrels a day of our oil production, which is about half of our production at $68.41. Coupled with the production increases we have projected, what does this mean basically for Maritech's profitability this year? It means that early in the year, first quarter versus fourth, since we had not put the hedges in place and because production is going to increase throughout the year, we probably will have lower profitability earlier in the year, however, as we go through the year this production will begin to again grow, as will the prices. And we should see profitability in 2007 above 2006.

And when I'm talking about production growth, we are already some 10 million cubic feet a day equivalent higher than the production that we averaged in 2006 as we sit. We gave some estimates I believe in the January time period and in our press release as to the actual volumes that we are anticipating. We have not changed that assumption.

In Fluids, as we've previously documented, we anticipate a significant drop in annual profits for Fluids. This is primarily the combined direct and indirect effects from the recently signed Chemtura agreements and the lack of inventory profits that occurred in 2006. However, the positive impacts from Chemtura will begin to escalate profits starting in 2008 through 2011. This is an example of our commitment regarding building for the future. The near-term impact should be reflected in earnings for the first quarter below the fourth quarter levels and all of 2007 below 2006. We have said that previously and the only mitigate to that would be if prices for our Fluids were to escalate throughout the year. We have seen no signs of that yet; however, we are obviously hopeful.

Production Enhancement. On a percentage basis the growth in profits for Production Enhancement 2007 over 2006 might even exceed the growth shown in the WA&D Services. We anticipate these profits to increase sequentially throughout the year. There's some reasons for that. In Compressco it is a relatively easy situation to understand as the lease fleet should continue to grow throughout the year, generating increasing profits as the fleet increases.

Testing is a little more complicated. Here a major portion of the expected profit improvement is from new international contracts in particular in South America and the Middle East. These contracts should begin during the second and third quarters, thus Testing profits may also increase sequentially during 2007. What does all this mean? It means that during this year we should see another record year for the company with base profitability growing throughout the year and quarterly profits being significantly impacted by seasonal factors.

I will now open up the conference call to your questions.

(OPERATOR INSTRUCTIONS) Jim Rollyson, Raymond James Associates.

Geoff, first question on the production side of things. You mentioned 44 million a day average for '06 and you are at 58 now. Can you give us kind of what the fourth quarter averaged and maybe how that 58 you are at today compares with what you've averaged so far this quarter?

I'm looking at Matt McCarroll, President of Maritech, right now for an answer to your question.

Our average was about 48 million a day.

About 48 million a day is approximately the fourth quarter average.

And how are we tracking average so far year-to-date, quarter to date?

We're at 58 that we gave you.

That is today's number or like actual average so far?

That was the average through about two days ago for the quarter.

Okay, it wasn't clear but that helps. On the Production Enhancement side, that has been kind of a growing trend between the two divisions on both accounts and that came off a little bit sequentially. Was that related to the Venezuela discontinued ops that you mentioned or is that something else going on?

No, in Testing for the quarter we had a number of various things going on including the expansion that we mentioned. Internationally there are substantial costs that you incur to go into some of these countries and we've been eating some infrastructure costs in these areas for the last two quarters particularly in the fourth quarter. We will eat some more in the first quarter in our ability to expand into there. You will see the impact of that; however I doubt that you'll be able to see it directly in the quarter to any great degree. Because I think there are other things going on in the first quarter in that area that's more positive.

Right, which that helps explain kind of the profit side of that business or the two businesses together, but even revenues came off just a little bit -- they were close to flat, but it has been kind of picking up every single quarter. And then it was -- you went from almost $40 million down to $39 million sequentially. I didn't know what necessarily was going on there.

There was one contract that was in Mexico that we were not working in the fourth quarter due to the fact that that contract was no longer in effect. They rebid the contract and at some point in time here hopefully we will get it again. That may be the number you're looking at.

Got you. You talked about finally starting to see some bidding to work on these down platforms. Could you refresh again how long you suspect it takes to actually do the full-scale workup on one of these down platforms at least for what you have to do?

I don't know what's typical. In our Maritech situation we probably worked 4 to 5 months before we actually went to work on some of these looking at them, however in the Pioneer case which they announced I believe in November or December of '05, that they were going to have that worked on. We started working on that on the first or second of January of this year, meaning roughly 14 months of time had elapsed where we were doing engineering, safety reviews and a number of other items. So there is a distinct lag once you have been awarded the contract, and remember what I've been saying is a lot of these have not even been awarded, much less get into the engineering stage that we are talking about. So that is part of the reason this thing has lagged as much as it has. I might point out if you missed that that Pioneer did announce that that platform work on 322 East Cameron, which we're doing, was originally estimated by them to be about $84 million job. They have now increased that to $119 million job.

Good for you. Last question kind of in the press release talk about all the things, the CapEx you're spending today and have been laying this platform for growth for '08, '09, '10 kind of time frame. You obviously gave us guidance for '07, but just rough -- I am not looking for actual numbers. But what kind of earnings growth do you think you generate over the next two or three years with what is going on today, assuming everything holds up like you think?

Well, the most significant piece of earnings growth that is impacting us negatively right now that will impact you positively is in our Fluids side. And while we have not quantified that, we have indicated that the lower profitability that we expect this year would be order of magnitude $10 million to $12 million. That having been said, your international and your onshore domestic are going up, so you can presume that the impact of that inventory and/or Chemtura was $15 million to $20 million year-to-year.

If that were the case and given the fact that we're investing $80 million to $100 and you can presume that we would be making money on that as well, there is a significant swing between '07 and '10 or '11 from the $40 odd million that we're expecting in Fluids. I'm not going to be real specific, but knowing how we invest historically I think you could come up with the types of returns. And it is clearly not a $10 million or $15 million or $20 million improvement or we would not have gone through all the headache that we've gone through.

So there is one very significant item that carries you through 2010 or 2011 in terms of the impact of all of it and thereafter. I just mean the growth would be from here to 2010 or '11. Clearly in the case of Maritech, year-to-year hopefully in '08 we don't have the same issue we have in '07, and that is eating $2 plus per mcf differential in gas prices. Right now if we wanted to hedge 2008 we could get a price equal to what we were now getting in 2007. So if we are able to continue to grow that entity, you've got growth there that is not going to be impacted by negative commodity pricing. We have already hedged some of our 2008 and 2009 oil production.

In the case of Well Abandonment, it would seem obvious just looking at it intuitively that since we're just beginning the process growth offshore and since we did not even have part of our assets, in particular some of our dive assets available to us for part of this year, that you've got built-in growth for next year. And again, given the fact that Compressco is a leasing operation, you can get a real good clue as to the profitability for 2008 when you look at the lease fleet at the end of 2007, because obviously there is a carryover average there.

So when you put all those together we are real comfortable in growth looking forward. How much of that is there is going to depend on where we are in the cycle relative to all of these other services and exactly where the energy companies are. We do not see much in the way of any weakness in our services at this point in time, but you're asking me to guess on 2008 and 2009 and I'm not willing to do that yet.

Fair enough. Thanks for the detailed answer.

Ray Kramer, First Analysis.

A couple questions. I guess I will start first on the gas since you sort of peaked my interest, the gas hedging with your last comment there. One for this year by my math hedging at $8.13 versus $7.00 is call it $0.05 or $0.06, was that possibility included within your guidance range for Maritech? I think I remember that it was not, but I just want to make sure I understand that correctly.

Our Maritech guidance range used $7.00 in terms of Mcf price on a BTU adjusted basis a little more, but you're correct. It was not there, however, before you get real excited about the differential, remember we did not have it hedged in January and February and we may or may not have had higher prices. In fact I know in January we had lower prices than the $7 that was in our budget, so you can't necessarily just take that and carry it through. But your direction is certainly correct. And no, it was not in our guidance, which means yes, that would be a positive to us as we go throughout the year.

And then your comment that you got some oil hedged in '08 and '09 and that you probably could hedge gas for at least '08 where it is today. At what point are you going to consider doing hedges for '08 and at what price level would get you excited about doing that?

I don't know that a price is something that we're ready to even look at. I think all of us recognize what everybody else is looking at, and that is do we do not have the surplus of gas that we had just a month and a half ago going into the year. We know what is going on in Canada where there is maybe a Bcf differential coming into this country this year. And I think given that we're probably in no hurry to go out and have to hedge in the near term. We would like to be hedged by the end of the third quarter. Typically we like to not be in the position we've been in this year and that is not to have things hedged. Go back historically and look at us. We've always tried to hedge in advance, so I guess what I would say to you its going to be the circumstance is going to depend the timing not necessarily the price.

From an oil perspective I would suggest that we would probably hedge out further than we would in gas just given what we generally see in the two markets. I don't know if that is a good answer for you. It certainly was not as specific as you would like but it is factually what we do.

No, that's fair. Turning to WA&D Services, these potential new deals that you talk about, were those as well sort of not factored into the former guidance range? And I mean can you start seeing real profits as soon as Q2? You talked about a lag sometimes a year between getting the contract and the planning time, safety, all that stuff. If you sign one of those in Q2, when can we actually see a meaningful impact on WA&D profit?

Let's go back to what we talked about in January. In January we told you that the changes in WA&D service profitability would come about if we were able to utilize our vessels more efficiently particularly in the first and fourth quarters. That we had a lot of our work already lined up during the year from, say, April through October. The sub sea work that we are talking about that we have just got is part of the work that we would've assumed that we would've been able to do and it fills out some of what we have during the better part of the year.

However the two contracts or one or two contracts that we're looking at very closely right now would be for down platform work which would go throughout much of the year. Therefore that would enhance the utilization and would significantly change some of the profitability that we talked to you about. So what we have to date is more of what we anticipated these contracts would be in addition to what we anticipated and would be an enhancement, but they're not signed as of yet and therefore I am not willing to suggest that it is a done deal. I thought it was important though for you to recognize that we continue to work on these and will obviously work on similar things as we go forward.

Okay, just lastly on the Ameritech side, when do you currently expect to get that insurance payment in and that will flow through as I assume a positive on the eliminations line?

I think we were originally looking at a second quarter time period. It could be earlier than that. I am not willing to guess where it is, but you saw the impact because it is a negative elimination. You saw in our estimate for 2007 in the January press release there was a positive elimination. That was the impact of getting that payment. Right now I would not anticipate getting all of that in the first quarter in your estimates, but it could come in the first quarter.

All right. Thanks a lot, Geoff.

Art Gray, Raymond James Associates.

My question has been answered. Thank you.

Thomas [Escot] Pritchard Capital.

Two things and really these are follow-ons from things that have been asked already, but on the WA&D business, the spreads you've been very candid in indicating that weather and timing of jobs gives a lot of seasonality, but can you help us tweak it a little bit? Of your six spreads, what kind of activity rate or utilization rate if you will, would be likely to this first quarter? Are we operating at half speed and then we go to 90% utilization in the second quarter? Any way to sort of help us gauge that?

Well, we've told you that we had two that we're not going to be utilizing unless we had standing work that the customer would take the weather on. We told you that in January. I will tell you that again in February. They are not working although we're actually working on some contracts that might allow us to utilize those in the fourth quarter, but I doubt that they will get done in enough time to help in the first quarter.

Also in the press release I think you saw we have had the Arapaho, which is another vessel in Dry-dock for its Coast Guard inspection and some modifications. It was scheduled to be out at the end of February. It is actually out a couple of days in advance. It is back to work. But that obviously will cut down your utilization in the first quarter, so if you are looking at six of these working in the quarter, you probably had 2.5 working or something of that order of magnitude. One would hope that you would have five or six of them working in the second quarter.

That is exactly what I was trying to get to and you have articulated it exactly the way I had hoped. I guess the is the conclusion that I do draw or should draw I guess from the three dive support vessels are back on line, the Arapaho is back in service, you've got the gas hedges in there; can we draw the conclusion that significantly raises our confidence factor for a pretty dramatic seasonal recovery here going into this second quarter?

I would probably say it even more emphatically. I would be flabbergasted if our March earnings are not by far the best earnings we have in the first quarter.

Okay, then just a corollary to the hedging question. You have now hedged out two-thirds of the production here at this level.

Tom, make sure it's two-thirds of our gas and half of our oil.

You are right, I was just thinking of gas here. Two-thirds of this gas. Is there any risk or any significant risk that as we go into hurricane season is there enough gas production at risk in any one or two locations, if you get shut down you could be upside down in the hedge by August/September?

Obviously if you had Rita and Katrina go through again, it shut down virtually all of our production for a period of time, so if you have another duplicate of that anybody that is hedged at all probably has a problem. The prices would go up, true, but the issue really becomes one of looking at where you are. We think two-thirds of our gas with the spread of production that we have throughout a number of areas, is about as much hedging as we feel comfortable doing. Because of the exact issue that you address, and that is what happens if you lose some of this.

On the other hand, our oil is in two or three fields to a great degree. And consequently we have historically felt a little better about hedging a little less, meaning the 50%. We are actually a little below 50% where we sit. We would not be comfortable sitting with 75% of our oil hedged, if that is an answer to your question. So we have looked at the distribution of production. We've looked at where it is and what our risks are. We have tried to set our hedges appropriately. We would love to have all of it hedged because then as a service company we eliminate then the issue of the commodity risk to us and that is not an issue, but the problem with that is just what you bring up. So two-thirds and a half are probably where our comfort levels are right now.

(OPERATOR INSTRUCTIONS) Thad Vayda, Stifel Nicolaus.

You had talked about these additional well abandonment contracts. Would that necessitate conversion of any of the spreads from any platforms, down platforms?

A good question, Thad. Again, one of the things we have tried to do is to increase our utilization. And I think we mentioned in the January conference call that there were a number of ways of doing that. First of all you could convert one of your standing platform vessels to a down platform work. Again, though, it is going to depend on what are the characteristics of that? If it is too deep, you're probably going to have to bring in a dynamically positioned vessel as opposed to maybe a barge to do it, so it will depend on exactly where the work is.

Also what we have found is we have become smarter at doing this is that there is every indication that the early part of the work on some of these can be done off a dive support vessel, especially the assessment and some of the early cutting. It may very well be that what we do is increase our utilization, but it may be we are increasing the utilization of our dive support vessels in conjunction with some of our other equipment. Plus increasing our total utilization but it may not be for the heavy-lift part of it. And that is a distinct possibility as well. Again this is so new to everybody that as you begin to go through the process you become a lot more intelligent as to how to do the work. And it may very well turn out that our access to EPIC is even more important to us in being able to do some of this down platform work.

That's helpful and actually maybe you have already sort of answered this, but what is your appetite for incremental assets either to address standing or down platform work at this point in time?

That is an easy answer. If we have contractual commitments to do work and if we need to increase our fleet to access vessels to do that work, we would certainly consider it. However I can almost guarantee you at this point in time that we are probably not going to buy a vessel to do this incremental work. Right now we have three of these barge spreads that we own in terms of the major vessels and three that we lease. On a go forward basis, we probably would not invest in a lot more owned vessels, maybe one if you were running, say, nine spreads. We are not at nine spreads. The next one or two would probably be leased, to answer your question.

Okay, and last question, from a contracting perspective and I know you've addressed this before, has there been any progress made in having customers take weather-related downtime on standing platform work or is it pretty much status quo?

I'm sitting trying to think how to answer that question. We are having continuing discussions with some people that we were not having discussions with before that conceivably would give us additional work probably in the fourth quarter. However we have signed no contracts with anyone other than the people we've signed to date and we have some that are taking and sharing weather. That is probably a better way to describe it. If we find that these other people are amenable to this, then conceivably by the fourth quarter we can have some of that additional work. But I doubt very much you would see it in the first quarter.

Thank you very much.

There are no further questions at this time.

Very good. Thank you. We will talk to you after our first quarter. And thank you, Jackie.

You're welcome. This concludes today's conference. Thank you for your participation.