Tetra Technologies Inc (TTI) 2007 Q3 法說會逐字稿

Greetings, and welcome to the TETRA Technologies Incorporated third quarter financial results 2007 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. Geoff Hertel, Chief Executive Officer. Thank you. Mr. Hertel, you may begin.

Welcome to the TETRA Technologies third quarter 2007 earnings conference call. Joe Abel, our CFO and Stu Brightman, our Chief Operating Officer, are here in attendance this morning and will be able to help answer any of your questions. Joe's going to give a short review of our third quarter financial results. I'll follow with a short presentation, followed by your questions. I must first remind 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 and are 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're cautioned that any such statements are not guarantees of future performance and that the actual results may differ materially from those projected in the formal statements. Whether you're the Management of TETRA, a shareholder, or a casual observer, one fact's obvious. This Company is very complex, if not confusing. When we report quarterly results, as we did today, there are bound to be a number of questions regarding what is the Company trying to do and where is it going.

I'm going to try to answer these questions by addressing two main issues today. One, what were and what are TETRA's strategic goals for 2007 and how are we performing against these goals, and secondly, what problems did we encounter this year that led to our current reduction in profitability? It goes without saying that we had financial goals this year that we're not approaching. However, we also had seven strategic goals that we set for the Company for the year, and those, I'm going to go through individually. First, we were looking toward the international expansion, as I'm sure everyone else in the oil service industry has been. With the escalating worldwide growth in oil and gas activity, TETRA's been aggressively attempting to expand its international activities for a number of years. In particular, we expected international growth in testing, fluids and Compressco in 2007. We're also anticipating setting the groundwork for well abandonment services expansion outside of the U.S.

To date, our efforts to expand further internationally this year have been very successful. This is especially true in testing and Compressco and to a lesser extent, in fluids and well abandonment services. Some of this growth should begin to translate into income as early as the fourth quarter. This is particularly in testing. Secondly, additional Maritech property acquisitions, the purchase of Gulf of Mexico properties by Maritech has a dual purpose within TETRA. First, it helps to base load our well abandonment services business. This will be even more important sometime in the future, once the hurricane work begins to decline, and no, I'm not saying it's declining now, because I'm sure I'll get a question there. Secondly, Maritech produces profits by actively exploiting properties that it acquires. The last packages of perspective -- excuse me, of properties purchased by Maritech were pre Rita and Katrina. The inventory of exploitable operations on these older purchases has dwindled during the last 29 months.

Going into 2007, we determined that it was strategically important for Maritech to acquire a new inventory of properties no later than mid 2008 and hopefully earlier. This would be in an attempt to keep from having a major decline in production. Maritech has recently entered into nonbinding letters of intent to acquire two packages of properties. We hope to close on one or both of these prior to year end. Obviously if we do that, we will have performed on this strategic goal of ours. Three, reduce our complexity. As a publicly traded $300 million to $400 million revenue company, we needed to retain all our operations to attain critical mass size. However, to date, our current size retaining non-core assets is not an imperative. The sale of these type of assets has a number of benefits. First, they make us less complex and confusing to perspective shareholders. Secondly, they generate cash that we can use in our core businesses. And finally, they allow management to focus all of their energies on core businesses.

We began a review process relating to noncritical assets earlier this year. We've recently entered into a nonbinding LOI to sell assets under this strategic directive. We hope to conclude this first sale before year end. Four, position fluids for the future. We've always felt that the integration within our fluids business was an important factor that differentiated us within this market. The strategic decision in 2007 to fully integrate this business through the building of a facility in Arkansas and simultaneously entering into various agreements with Chemtura was an important step in preserving our position within this industry. We believed early in 2007 and we believe now that these investments will be returned manyfold over the next few decades. As we've explained many times before, these decisions necessitated a significant reduction in profits in the fluids division in 2007. We should begin to see some profit improvement in this division in 2008. The plant start-up is now scheduled a couple of months early, in late 2009, and the costs are currently slightly under budget.

The fifth strategic goal to expand our onshore fluids services business, to expand our onshore services business. In order to grow our fluids business, we determined that we should expand our onshore fluids services component. Profits from this area should help to offset the temporary loss of fluids profits from our full integration process. During 2006 and 2007, we aggressively expanded our onshore offerings. Hopefully in 2008, we'll see a more meaningful earnings impact from this diversification. The sixth strategic goal was to unlock shareholder value by creating an MLP with Compressco Since we are at least in technical registration, I'm unable to address any particulars regarding Compressco. However, it is our assumption that if Compressco had been an MLP during the last few years, we would have already unlocked shareholder value for TETRA holders.

Seven, attempt to collect all insurance receivables from the 2005 storms by year end 2007. Although we have collected a significant portion of our insurance receivables from Rita and Katrina, we still have a large amount of monies that are owed to us. We could certainly use these monies for growth CapEx. During the last six months, our reported earnings have begun to be effected by these unresolved insurance claims. It's possible that the nonpayment of these claims could continue into 2008 and beyond. Therefore, it is important for TETRA to determine whether any of these unresolved claims will actually become issues. We anticipate having meetings with our insurance syndicate this quarter. Hopefully we will be assured of collection of all of our claims. In the event that we cannot obtain assurances of payment, we will pursue other courses of action. It is our intent to try and force this issue regarding payment so that any negative accounting effects from the actions that we take occurs in 2007 and not in future years. During 2007, we've worked successfully on all seven of the aforementioned strategic goals. We believe these actions will generate value for our shareholders for years to come.

Now I'm going to address major issues that have created what I'll call operational earnings shortfalls this year, obviously from accounting perspective, the term operational's a term that you have to be a little careful with. But I think we can talk about that in this meeting in maybe a little different fashion. I'm not going to delve into the accounting issues related to insurance receivable recovery or old fixed price contracts, as I believe we've discussed these things many times and I believe the press release goes into that in a lot of length.

There are four basic issues that have hurt us in 2007. First, we were not quick enough to see that our business model for down platform work was flawed. Also, when we figured it out, we were slow to make needed changes and we were forced to improve management oversite in this area. I believe the correct changes have now essentially been made. While it's very difficult for you to ferret out the actual operational results from the noise for well abandonment services during the third quarter, it actually was a great improvement, and I think if you take the items that we enumerated and the dollar amount of that and add it back, I think you can see that.

Secondly, we thought that growing our onshore and international fluids business areas would combine with flat Gulf of Mexico demand to help offset a large portion of the fluids earnings decline caused by our self-imposed high cost inventory situation in 2007. Unfortunately, two of our assumptions proved incorrect. First, our onshore profits were less than anticipated, as flooding in the second and third quarters slowed that business area materially. Secondly, we expected the Gulf of Mexico demand for fluids products to be static, with a slightly reduced shelf demand offset by increased deep water demand. While the deep water market did improve, the shelf market has been very weak, especially during the third quarter. While we're seeing some improvement in the rig count in the fourth quarter, it is not improving to the levels that we initially anticipated. Three, the start-up of work under a number of our international contracts was later than anticipated. This was especially true in testing and fluids. While our testing work has finally begun, we are still awaiting the finalization of a major fluids contract award. The international demand for Compressco units has been greater than expected, but the actual instructing of the associated service contracts has taken longer than we first thought.

Finally, the last earnings shortfall in 2007 that I'm going to talk about involved the timing of production from a number of Maritech platforms. Some of this shortfall involved construction delays, while others occurred because some of the associated wells were actually better than expected and they took more time to complete. In any event, all of this production is now onstream. But the later timing of this production did hurt our results in 2007 in the aggregate. I'll now open up this conference call for your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Jim Rollyson from Raymond James. Please state your question.

Good morning. First question, you talked about your business model in well abandonment decommissioning. You started off with kind of more of the one-stop shop approach, making sure you had all the assets to take on the whole business model, and then kind of now you've seen it more still piece mealing the way it used to be. Does that leave you with any of the different segments that you've acquired or specific business lines that you've gotten into under your old approach that today on an individual basis you wish you didn't have?

Well, I'm going to address that and then I'm going to let Stu do that. The only thing that bothered me in that area, if we were owning all of the business pieces that we had nine months ago, would have been the large vessels and fortunately for us, we at least -- a number of those vessels, all of those vessels that are not working we have been able to turn back and therefore I'm very happy with what we have remaining, but I'm going to let Stu address that question for you.

Yeah, I think if you look at the assets we have today between the barges and the diving assets, we're very happy with all of them and they fit into the current future model. And as Geoff said, we've shed the third party assets and we've got what we need right now.

Perfect, and, Geoff, it looks like if you backed out the amount of writedown related, kind of unusual stuff from WA&D this quarter, the $13 million, your margins are close to 23% in the quarter. Is that about right?

I haven't run them, but I think they are over 20, so, yeah, yes.

Okay. It also seems like with all the kind of financial writedown stuff going on this quarter and maybe you're trying to bring insurance to a head before the end of the year, you're trying to get rid of all the, let's call it noise going into what you think will be a lot better year in 2008. Am I reading that accurately?

Obviously there are things from an accounting perspective that we can't manipulate just in the quarters that we want to. They come as they come. However, I think a lot of the issues that you've seen this year and that could hurt us on a go-forward basis would be involved with the insurance situation, and there we do have some control over that from the perspective of when we address or bright line some of these issues, and we are going to bright line them this quarter and bring them to a head. At least that's our intent. And consequently, yes, we ought to be able to eliminate those at least to a great degree from future issues, meaning future beyond 2007.

Some of these other factors really are kind of self-correcting, and those would relate to the items that you looked at in the third quarter. There were some issues related to our diver that needed to be resolved. There were issues related to AROs that we addressed in the quarter. So to the degree that we can get things cleaned up, I believe was the term somebody used the other day, we will do that. But do recognize that it's not like the old days. You can't just set up reserves against something you have an issue with. You've got to make sure that there are actual things that happen in the quarters to force this. And obviously the insurance is the biggest one and we can force that issue. That's the long answer to your question.

Right, going back to insurance, you're trying to force the issue by end of the year. What's the possible, I guess the negative side, if things don't go as you're expecting or hope to -- how much more kind of writedowns, magnitude wise could you expect from a negative outcome there?

I'm not going to speculate on that other than what we put in our press release about a month ago. We gave you the receivables that are on the books, which were -- Joe?

$28 million.

$28 million. We're not suggesting that we're not going to get paid those. We are just suggesting that if we have to do what we -- experience what we did in the second quarter, where we had a $7.8 million write-off to operating earnings because we had a letter from the insurer that had some type of issue with a payment, didn't mean we weren't going to ultimately get paid, it meant that they had an issue with it and correctly the accounting profession needs to take that off of your balance sheet. We're not really wanting to live with that on a go-forward basis. I don't think you want to see 2008 earnings affected by insurance receivables from 2005. So we will do what's necessary, hopefully collect these monies in the next couple of months, but in the event we don't, we're going to try to make sure that they don't affect us from at least accounting earnings position on a go-forward basis.

Thanks, and last question, property acquisitions, you hope to close, can you maybe characterize amount of -- you get to pay cash out of pocket for these, or is it more traditional what you've seen in the past, where you're actually pretty close to neutral between the value of the properties and your abandonment liabilities?

I think what we've seen, and I think what we'll probably see in the future is a change. Originally go back five or six years ago. People were putting together packages of old dead properties. You were able to go in and buy these properties for really a negative basis. They ended paying you. Today there are a lot of smaller companies that are actually getting out of the gulf and that is a huge benefit for us because there are a lot of properties there that are fairly attractive. The negative is that because they have properties that go all the way from very new to the very old, you tend to have a positive value, so I would be very surprised that anything that we buy in the way of packages on a go-forward basis, except in rare occasions, we'll be paying cash to buy the properties. And that would be the case with both of these.

Great, thank you.

Our next question comes from James West with Lehman Brothers. Please state your question.

Hey, good morning, guys. Geoff, I had a question, a question on the decommissioning business. I wanted to follow up on that. I get to the same kind of profit levels that I think Jim mentioned of 23% on gross profits if we back out the noise of the charges from the quarter. And my question is, how did the margin tracked throughout the quarter, I guess my understanding that you exited the second quarter still having operational difficulties. Those got better. At this point as you exit the third quarter, were the margins above the kind of average level for the quarter?

Do you want to take that?

Yeah, I think as we went through the third quarter and you look at the jobs that were done with our own assets on a current basis, we saw improving margins during the third quarter. When you add back the adjustments we noted, we certainly had much better margins we've been running and we feel good about that. You know, that kind of cuts across the major pieces of that WA&D business.

Okay, and then revenue for that business has been flat for three quarters straight here. I know you have downsized the amount of activity you're willing to take on because of the issues in the second quarter. But as we look out into next year, what kind of revenue capacity do you think this business has with the current assets that are in place?

Well, first of all, let me make sure that we're still both on the same page, and that is that we have internally said that we are not going to expand this area until we are -- we, meaning the three people you're talking to, are comfortable that we're getting margins out of that area that are more typical of what we expect. Now, I think at that time we told you that that was about 25%. So given the numbers you're running, we're approaching that. Right now we have nothing in terms of expansion, at least domestically, that we are looking at doing until we can get up to that margin level that we're talking about. However, there's certainly a lot of business still out there in the form of down platform work, as well as standing platform work, and one of the things that you really haven't been able to see is, as we debundle these projects, we do have capacity in a number of our areas. I would -- I don't know what a good number would be, but I would bet that there's at least 30% more capacity in our businesses and that's during the, the fairly good part of the year. Obviously there's some weather capacity, but I'm not sure how much people are willing to go out in parts of the wintertime and do work regardless of whether we have the capacity.

Okay. Understood. That's very helpful. Geoff, I had heard from some of the more marine construction companies recently that there was a willingness of operators to continue doing some of this decommissioning work as we went into the fourth quarter and actually bids out there for later in the fourth quarter. I know typically that's a very seasonally slow period. Have you seen the same type of trend or do you expect the same seasonality you've seen in past years.

I think we're actually seeing both. We're certainly we're going to see the seasonality that we typically see, but there are some opportunities we're looking at that we're talking about working through the fourth quarter that we've been pleasantly surprised about. We'll certainly see the seasonality, but there are are some indications, there's several jobs that will continue through the fourth quarter.

Okay. Excellent. Very helpful. Thanks, guys.

Our next question comes from Joe Gibney with Capital One Southcoast. Please state your question.

Good morning, guys. How are you? Wanted to follow up on the fluids side. I know in your release you indicated that, obviously, you had some weather impact in the quarter. You also mentioned some pricing impacts in the quarter as well. I kind of wanted to get some additional color there. What kind pricing degradation you're seeing out there in the market and basically on the sequential impact within fluids and how much of it was weather, how much of it was pricing? Just trying to get some additional color. Thanks.

Well, first of all, when we normally talk about weather, if we have significant weather events in fluids, it normally relates to the Gulf of Mexico. And we clearly had some weather events in the Gulf this year, but we also budget for weather events and, as I said in the press release, while the gulf was slightly worse than what we budgeted it, it was not abnormally a bad year. Where our weather hit us was in the onshore arena, particularly Texas-Oklahoma, both in fluids, services, and in our testing business. This is not an area that we normally budget weather downtime, and as those of you in the Southwest know, that was an extraordinarily rare type of occurrence with the flooding that occurred in June, July and parts of August in, all the way from Mexico to Oklahoma. So that's the weather that we're talking about and it did not impact our offshore fluids business but did impact the onshore.

The pricing is a function of the reduced level of activity, at least in my opinion, on the shelf. The shelf drilling dropped precipitously in the end of the second quarter, into the third. I mean I don't know that I've ever seen a rig count in two decades that's 49 or 45 or whatever we had there, in terms of the entire Gulf for a period of time. So that, that is something we hadn't budgeted for, the weakness in price, coupled with where we are with high cost inventory was the reason that we really got scalped in the quarter and what's the order of magnitude? It just depended on what the jobs were. There was pricing weakness, however, in the market. I wouldn't characterize it as a disaster, but it clearly was more than we had assumed, because we had assumed prices were going to be static.

Okay. And on the international expansion front, specifically relative to testing, you mentioned things are progressing pretty nicely there. Curious what percentage of your testing business is international and really what is the differential there between what you're seeing in some of your North American testing from a margin perspective?

I'll answer the second part because it's the easiest to answer. I'm unaware of any oil service business that has lesser margins internationally than domestically, meaning that normally because of the risks and the logistical problems and so forth, you normally have better margins and we clearly have that in our testing business versus our domestic areas. Percentage, percentage of profits may grow to 20, 25%. But on a revenue basis it's a little less. Stu's pumping his hand a little higher.

I think it's still a smaller percentage of the total revenue, but the mix of profit coming from internationals increased, as we've gotten some of these contracts and that will continue. It will probably be north of 20%, but it's clearly still going to be less than domestic, but it's kicking in at about the rate we expected.

Okay. Joe, just one last housekeeping question relative to the cash balance of moving down to about $1.9 million for the quarter. Just kind of curious, if you could give me an update on what CapEx was on the quarter and just kind of walk me through the sequential change in cash there from 2Q to 3Q.

The CapEx and acquisition activity was about $72 million for the quarter. Debt increased just under $3 million for the quarter, so you can assume the rest was generated by cash from operating activities.

Okay. Thanks, guys. One last more, if I may. Just, Geoff, if you could comment relative to the WA&D side, any change in the mass mentality out there in terms of more stringent requirements on the decommissioning side?

Not really. There's been an evolution over the last maybe nine months, but not really a dramatic change. Early in the process, when you dropped 113 platforms in the history, said that four was the most that had ever dropped before. The MMS gave wide latitude for companies to go out and try to determine what it was that was going on. However, in the last nine months, they have made sure that every operator out there comes into the MMS on a periodic basis and goes through their planning cycle of where they are, what they are going to be doing during the next quarter and you had better be doing what you had suggested you were going to be doing. Now, does it mean that you're going to get all your damage controlled and out? No. It means that you have to have a schedule of what you will be doing in the future, who's going to be doing it for you, what type of vessels are you going to be utilizing, and you have to stick with that so that they are essentially keeping everybody's feet to the fire. But they are cognizant that there isn't enough equipment to do all of this simultaneously. So they are working with the industry, but there is a little more time pressure on the companies than maybe there was a year ago.

Okay. Thanks, guys. I'll turn it back.

(OPERATOR INSTRUCTIONS) Our next question comes from Mike Harrison with First Analysis. Please state your questions.

Hi, good morning.

Good morning.

Geoff, you gave profit before tax guidance for the WA&D services business, with your Q2 earnings. Do you think those are still the numbers that we should use for 2008, or do you think you'll need to modify those one way or the other any time soon?

Actually, I think in the press release we just gave you, that's the best estimate we can give you. What we said was that the numbers which we indicated in the second quarter press release should be -- the ranges, should be the ranges you use in 2008 and that we should approach that range in the fourth quarter of 2007. So if you look at the first and fourth quarter range that we gave, we should approach that number, which should mean to you we probably aren't going to be in it, but closer to it in the fourth quarter and then by the time they get into next year, we ought to be in a position where we're within those ranges.

Okay, and then can you walk me through your hedging activity with these new, the new activities you have done in the quarter here, and roughly what portion of your production is going to be hedged for 2008?

Joe, do you want to give him that?

Right now, we're about 57% hedged in oil, 72% hedged in gas and what happens in '08 is going to be a function of the acquisitions Geoff talked about. If they close, then we will need to reassess our hedge position.

And that hedge was for '07.

Right, right. That's fair.

We added '08, '09 and '10 hedges in oil. We had no '10 hedges previously. We added no gas hedges beyond what we've been doing. Off the top of my head, I think we're about 60% hedged in oil for '08, as a guess, and we're currently hedged only 7.5 million cubic feet a day for next year at about 849 I believe an Mcf and we are currently producing somewhere between 30 and 35 or 6 million cubic feet a day of gas. So obviously that's an area we're underhedged, and the reason for that is when you've got 12 to 15 or 16 times BTU basis, we didn't think it was probably a propitious time to add hedges in gas.

Okay, and the last question I had, I was just wondering if I could get some details on your rational for using the successful efforts accounting method, assuming that other similar sized companies are using full cost accounting, and going forward, is it possible we see you switch to the I guess if you want to call it less conservative method.

Well, factually it is much easier to be under full cost as a small growing oil and gas company. The problem that we had when we first got into this business related to the fact that we were doing business as TETRA for Maritech, and if you look at the rules, the accounting rules associated with that, what we would have had to have done under full cost was take all the profits of the work that we did between well abandonment and our Maritech subsidiary, and use those profits to reduce the basis in the properties for the oil and gas group. And as long as you're continuing to buy properties, you would be continuing to reduce your basis for decades and you would never show a profit on that work, or wouldn't for a long period of time. We thought that was not plausible, and if you look at the two people that do the same kind of thing we do, the two other companies, I believe you'll find they're also successful efforts for the exact same reason. But we didn't have a choice.

Okay. That makes sense. Thanks very much.

Our next question comes from Thad Vayda with Stifel Nicolaus. These state your question.

Good morning. So with respect to your comments about the MMS's stance or lack thereof on kind of getting this work done sooner, can you sort of give us an idea of how you view the overall size of the well abandonment market now, and the amount of time it's going take in your view for this to sort of be fully addressed, and then in that context, given that the one-stop shop, if you will, strategy didn't work as well as you had hoped, how are you different relative to your competitors? I mean what do you bring to this that gives you comfort that you can, at the end of the day, really be the leader in the space?

I'm going address that in two parts. I'll address it first and let Stu address it as well. First of all, we have most of the services that are required, so one of the differences you're going to have versus your competitors is that if they have diving needs or whatever, we can do that. There are aren't a lot of companies that have diving. If you want to do well abandonment, there may be five or six competitors that can do the abandonment, we're of one of those. If you're in a position where you need to do heavy lift on standing platforms, we're one of five or six companies there that can do that. The differentiator is that if you have any of these needs, you can essentially come to us and hopefully we will be able to source that service or equipment for you, whereas you can't do that with a lot of other companies.

Secondarily, we still have work on the horizon that is oriented toward us being more of a general contractor, and we would hope to get some of that work as we go forward. We haven't told you that that work doesn't exist. We're just telling you that it's a lesser percentage of the total than we thought. As for the market, I don't think it's any different than we told you before. I think it's something in the order of probably $6 billion to $10 billion for the down platform work, and if you look at some of the majors and what they are experiencing, I think that's probably a legitimate number. I think the standing platforms that we gave you, which were some 1,600 over time, at $3 million a piece in terms of the platforms and the associated wells, which is a $4.8 billion number is pretty accurate. So I don't see any change whatsoever in the numbers we gave you, and as far as I can see, you've got work out into the future in both the standing and the down platform arena.

Yeah, I think in summary, the size, duration assumption hasn't changed, and the one major change, as we've said several times, is integrated versus discreet services. And we have, as Geoff said, with several of our business units, been very successful in selling those services. And many times we're selling two or three of those services onto one project. So we're not integrating the full work platform as we did in the past, but we still have multiple services that we've been very well received and we've got a lot of experience gained over the last year-and-a-half in this area, so we're optimistic we'll continue to get our fair share of that.

So I guess in that regard, is there any particular service that you are providing that you feel that you have actually done better at vis-a-vis your competitors so far? And I guess also if I could ask, how much business do you actually think that you didn't get that you should have gotten early on when you were pursuing the integrated strategy?

I think if you look at the individual services, I don't want to highlight any one and say we're better or different, but the ones that we offer on the well intervention, the P&A, the heavy lift, the diving, the cutting services, I think we're certainly recognized as having very strong technical and operational capabilities and, as we look forward, we'll get our fair share of that. If you look back historically and say the jobs we should have gotten, and I think there's always, if you look at it we might have done it a little differently, but we've gotten our fair share. And I think we did a reasonable job over the last six months regrouping as some of this changed and attacking the market and putting the resources to work where we could get the returns.

By the way, during the quarter we actually acquired the cutting technologies that we had been utilizing out there. We acquired the entity through an acquisition so that we can control that a little better than we had in the past. I also want to ask Joe to do one thing. I cut him off today. I apologize to him. Some of you had asked historically where we were under our bank line and what kind of monies we still had available to us to do various things and I think Joe probably can give you that idea in case that would save a number of phone calls in the next couple of hours.

Okay. At the end of the quarter, we had roughly $125 million, $123 million of credit available under the line of credit. As I mentioned, we increased debt by just under $3 million in the quarter. We actually didn't borrow during the quarter that $2.9 some-odd million is an FX change in the valuation of the debt. We spent roughly $72 million on the acquisition Geoff mentioned and the CapEx, the acquisition being quite small. I don't mean to put it in that order. The cash flow covered that acquisition and then we decreased the cash balance somewhat in the quarter and that's how we funded that CapEx and acquisition program. Any other questions?

Thank you. Our next question comes from Victor Marchon with RBC Capital Markets. Please state your question.

Thank you, good morning. First question I had was just on the production testing side. Just wanted to see if you guys could characterize activity levels and pricing onshore U.S.?

The activity levels for the production testing on shore U.S. continues to be solid and pricing continues to be firm. As Geoff said, we were slightly effected slightly by some of the rains in the third quarter. When you take that out, we're still very comfortable with the activity and price levels.

There's been no degradation on pricing in that business outside of anything on the weather side?

No, it's firmed up in several areas. We've seen some improvements. We haven't seen any degradation in that segment.

Victor, in that segment, we actually had record revenues and earnings.

I guess the same pricing question on the fluid side, you guys talked about shelf, just wondered if you could walk through onshore U.S. as well as the international side, again, on the pricing side.

I think on the fluids, we talked about some of the pricing offshore. Onshore, the pricing has been holding up. It hasn't been increasing. We're still seeing increasing activity levels as we go into the fourth quarter. We think that business will continue to build in international. In the areas that we've operated, we've seen that activity level reasonable through the third quarter and the pricing continued to be attractive.

Yeah, the big thing on the onshore is not pricing. It was just the activity level, which was a function of being able to get to the locations and internationally the markets are strong. What we're trying to do is take specific contracts, the same thing we've been doing in testing and what we're indicating to you is that some of those contract awards have lagged for whatever reason and they haven't been awarded, or if they have been awarded, they haven't started doing work. So it's not a function of pricing in either of those.

Great. That's all I had.

Your next question comes from [Michael Furmook] with Wolverine Asset Management. Please state your question.

Hi, thanks for taking the call. I have a question. Is it correct to take a look at the, I will call it age of the backlog and suggest the probability of conversion -- and this is in the decommissioning and abandonment space -- the age of the backlog and assume that the probability of conversion to revenue increases as the age of the backlog grows, because the customers are under more pressure by the MMS to complete the decommissioning, or is there a risk that the backlog dissipates because maybe competitors come in and bid for the project or it just gets deferred so long that the probability of you being able to convert just diffuses some.

Okay. The -- I think the issue that you're addressing here is related to what this market is sized at, really. You had a market that before the storms was some $400 million, $500 million in well abandonment in the Gulf Coast. And this year's, I would guess between at least $1.5 billion and $2 billion would be just a guess on my part, which says that obviously that backlog is beginning to be worked on fairly aggressively. The reason it didn't go up immediately was not because the MMS didn't want it done and not -- actually because the old companies didn't want it done, because there is some risk out there in these platforms if they don't get them up that you could have pollution events in the future. The companies aren't dragging their feet in general.

The problem was you just didn't have service providers that were capable of doing the work, had the right equipment, had the engineering know-how to do this, and what's occurred as opposed to a central figure doing this work is the companies have decided that they wanted to be that general contractor in the sense of being able to control these billion dollar liabilities that a number of them have, and they have worked into a position of today being able to allocate this work out. You've brought in additional vessels, you've brought in and expanded diving, you've expanded your abandonment, you've brought in new cutting technology and you finally have available to you in the market service providers that can do the work. And that's really what's driving this, the backlog itself is being eaten up, but it's being eaten up at a very reasonable rate. Obviously, if you have a $6 billion to $10 billion market and you're doing an incremental $1.5 billion a year, you still have a lot of that to go.

Okay. Just to expand on that a little bit, what risks are there to you that your backlog would not convert to revenue? How binding are the contracts, et cetera?

Well, first of all, and I'll let Stu address this, too. Recognize that a lot of this work is not being done on the basis that an operator comes to TETRA and says I have seven platforms that are down. You've got the work. They generally have been coming one at a time because they are the ones driving this. They have limited people capacity, so they are attacking these one at a time in most instances. So we get the backlog of being able to do the one platform, but you don't get the backlog of the six of them. So to that extent, that backlog exists generically, but it doesn't maybe exist for any particular service provider. The other part of that is that we're not allowed to count backlog for work that we control internally. The term backlog is not allowed to be used for what Maritech has as base load. You'll notice we always use the term "base load." So part of our base load of work comes from Maritech, which is something we control through, up through the ownership of these properties.

Yeah, I think it's important to comment that the original question on the predictability, we feel very good at what the visibility of what we have over, over the next quarter plus. But a lot of this stuff we're chasing week to week, it's changing, and the earlier question of what do we see in the fourth quarter in some of the jobs going forward that people may not have thought, that's something that's been a positive development over the last short period of time. So the risk of the backlog not converging isn't there. It's more what's the activity level over a several quarter outlook. And we feel good that the down structure, individual services that we're pursuing plus the traditional business, we see reasonable strong activity levels over the time period we're commenting on.

Thank you.

Our next question comes from Joe Gibb knee with capital one south coast. Please state your question.

Hi, guys, just a quick follow-up, I was just curious what the third quarter production split was, oil versus gas. Thanks.

If you ask -- somebody ask another question and I'll look it up and give you that number.

All right, thanks.

(OPERATOR INSTRUCTIONS) We will pause for a moment to poll for questions.

I'll answer that question while you're polling. It was about 62, 3% oil because we picked up oil for part of the quarter, and then it flattened back out to about 54% oil and about 46% gas. And then at the end of the quarter, it actually was back about 55% gas, 45% oil. So it changed materially as we added these various platforms on, as it went from the $60 million average to that number that we gave you in October of 71, it got back to a level of about 50/50.

Mr. Hertel, there are no further questions at this time.

Thank you all for participating, and we will speak with you when we come with our 2008 earnings estimate, which we anticipate having sometime in December or early January at the latest. Thank you.

Thank you. This concludes today's conference. All parties may disconnect NOW. Thank you.