Tetra Technologies Inc (TTI) 2008 Q4 法說會逐字稿

Welcome to the Tetra Technologies Incorporated fourth quarter 2008 results. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal present. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Geoff Hertel, Chief Executive Officer for Tetra Technologies Incorporated. Thank you, Mr. Hertel, you may begin.

Welcome to the Tetra Technologies conference call reviewing 2008 results. Joe Abell, our Chief Financial Officer, and Stu Brightman, Chief Operating Officer are in attendance this morning and will assist ment with the conference all. Since today's press release only incorporates a couple of new pieces of versus our February 10 release, our formal presentation will be relatively short.

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 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. We caution that any such statements are not guarantees of future performance, and that the actual results may differ materially from those projected in the forward-looking statements. Additional information on some of the risk factors may be found in our annual report on Form 10-K. The only new information that you're getting today since our February 10 press release, is the impact of the SFAS 142 impairments. So, I've asked Joe to talk about that and to give you a brief review of 2008. So, Joe, from a financial perspective, would you please start?

Thank you, Geoff. I'll start by saying we have made some changes to our reporting segment beginning with this press release and our December 31, 2008 Form 10- K which you will see soon. We will now be breaking out the production enhancement division into two reporting segments, production testing, and compressco. All prior period segment information in this division will be restated to reflect this change. We will also change the name of our Well abandonment and decommissioning services segment to offshore services to better reflect the range of services we provide beyond abandonment and decommissioning though abandonment and decommissioning remains a core focus for us. Associated with this change, we will rename the division that houses our offshore services and Maritech segments to the offshore division.

Revenue in the fourth quarter was $230.4 million, 6.3% below the fourth quarter of 2007 and 7.5% below the previous quarter impacted by the hurricanes of the previous quarter. We reported a loss before discontinued operations for the quarter of $59.3 million, or $0.79 per share fully diluted, compared to a $44.3 million loss, or $0.60 a share fully diluted in the same period last year. And compared to $12.1 million of positive earnings or $0.16 a share, in the third quarter of '08. The fourth quarter earnings are consistent with February 10 press release in which we had indicated we would have a goodwill impairment but had not quantified it at that time. In addition to this impairment -- in that earnings release of February 10, we pre-announced a $45.7 million impairment, and this is pretax impairment in Maritech in the fourth quarter, related mainly to oil and gas reserve write-downs as a result mainly of low year-end oil and gas prices. In addition to this impairment, we had 40 -- $54.4 million of pretax charges as a result of our goodwill impairment review pursuant to FAS 142 that included the full write-off of goodwill associated with our fluids and offshore services segments and the write-down of some hard assets in the offshore services segment. These non-cash impairments totaled $100.1 million on a pretax basis, and $0.91 a share after tax over the quarter and $123 million or $1.10 a share for the year. These amounts can be added to reported earnings if you want to calculate an adjusted earnings amount.

For the year, revenue was $1.9 billion and the loss for the year before discontinued operations was $9.7 million, or $0.13 a share fully diluted. We had $57 million of cash capital expenditures in the quarter. Our debt increased by $26.3 million during the quarter to $407 million at year end. Debt to total capital was 44.1% at the end of the quarter. With that, I'll turn the conversation back to Geoff.

Thanks, Joe. Since much of the information in this press release today has previously been available to you, I'd like to step back and make a number of observations regarding Tetra. And if I hadn't lost so much money personally in Tetra, I would characterize the last five months as the most interesting financial environment that I've seen in my 41 years of involvement in the financial markets in general in the energy business in particular. During the last 18 months, I've watched our equity value drop from something in the order of $2.3 billion to $222 million today. Approximately $1.6 of that evaporated in the last 5 months, I know I'm not telling you anything you're not aware of if you've been a holder of the company and for those who follow us, you know, part of that was self inflicted issues, so it's not all the market. However, in this market, many energy service companies have watched their equity be decimated similarly. So, I'm not crying over our situation. Instead, I'm just interested in the process because as I see it, regardless of our current situation and the situation in the equity markets, we appear to be trading as if our existence were in question, so I'd like to review our current situation.

First observation over the last three or four years, we determined that we needed to spend up to $700 million of capital to grow and expand our businesses to make them aggressively competitive. The expenditures included a large expansion in diving, domestic and international growth and testing, deep water and international growth in fluids, property acquisitions and exploitation by Maritech, dramatic geographic expansion of compressco and fully integrating our fluids operation that's essentially spending over $100 million on a plant. And with the startup of that new plant in Arkansas in the third quarter, all of these expenditures will be behind us. We have room to grow all of our businesses without the need for incremental CapEx. That will be the first time in four years there is no driving need to spend money in our operations.

Second observation, in the fourth quarter of 2008, we had impairments as Joe pointed out to earnings of over $100 million. I guess I'd ask why? Well, obviously, the answer is that under accounting rules, you have to do that. We had a $45.7 million impairment to Maritech, primarily because low commodity prices caused impairments to certain of Maritech's properties. Under the accounting rules, we're not allowed to use our hedges to determine whether we have impairments. So, in the fourth quarter, we incurred a $45. 7 million impairment while instantaneously our hedges showed a $95.3 million pretax increase in value. $95.3 million is not reflected in the income statement, the $45.7 million is.

Third observation, while we're on the subject of impairments, the $54.4 million impairment related to SFAS 142 calculations, occurred in the fourth quarter. This calculation was necessitated not because our underlying assets don't have some value, but because our stock price fell below our book value. And I'm sorry that to me is an absurd rule, but obviously one that the accounting profession feels we must abide by and we will do so.

During 2008, fourth observation, Ike literally destroyed our operating earnings in the last third of the year. Three of our business segments in particular were hit hard. Yet, even with all of those problems, we generated $190 million of net cash provided by operating activities. Remember, our current stock price is about at that level.

Fifth, clearly given the items just mentioned, there has to be another reason for our anemic equity value. Can it be the $407 million of debt at year end? Possibly. We believe that our high water debt mark will be this June as we finish our plant and we still would have about $100 million of unused capacity under our bank lines. We don't believe we have any covenant issues and our last -- first bank debt doesn't come due until June of 2001and our first term debt isn't due until September of -- I said 2001 -- 2011. And term debt isn't due into September of 2011 and that's just the first chunk of it. With no large mandatory CapEx needed after June of '08, we expect to generate substantial free cash. So, it's somewhat hard for me to believe that where we are today is a function of our debt. However, many people suggest that may be the case.

Sixth, our management has done an excellent job of positioning Tetra by investing moneys over the last four years. This means we're well situated to take advantage of both good and poor markets. It behooves us to try to try to optimize our market position in each of our business segments. I intend to personally devote my time and efforts on a go forward basis, towards generating significant shareholder value from a number of these particular investments. Hopefully, by leveraging off of our investments utilizing our strong cash flow and keeping our debt load manageable, Tetra can once again generate substantial investment returns for "we", the shareholders. And with that, I'll open it up to your questions.

Thank you. (Operator Instructions) Our first question come from Jim Rollyson with Raymond James. Please proceed with your question.

Good morning Geoff. Guys.

Good morning, Jim.

I guess, Geoff, since you detailed a lot of the forward outlook a couple weeks ago, a couple questions just coming to mind. One, on the write-downs. Obviously, you kind of explained pretty detailed why the write-downs have happened at year end. As you look at things today, given that your stock is kind of trending -- at least at the moment a little lower and oil and gas prices have come down a bit since year end, do you run into any risk of having further, similar write-downs, non-cash charges going forward?

142 is a quarter-to-quarter essentially markdown to market more or less. So, yes, you would have that implication, I would think, from a Maritech side, I'm not sure that we have any properties that are susceptible to that at this point, so I would look for very little impact from the Maritech side. There certainly could be some throughout the year. There are enough properties that we own that things could change, but clearly, the 142 calculation is a quarter-by-quarter transaction.

Understood. As it relates to the Well testing -- production testing, excuse me, business, last business or last -- couple of weeks ago, last call you had a -- your comments were you know expecting that to slow down domestically, but I think you hadn't really seen much of that yet. Just wondering if that started to change, given that the Rig counts still falling and kind of what everybody else is seeing? Just kind of curious what the kind of, current temperature is on that business?

Okay, that's clearly a business that over the last period of time since we last had our call, we've seen that deterioration as you would expect. Again, in that business, we always thought that would be a question of timing. The timing has hit us. That's also a business where we've said we think we will be strong internationally, and we're still continuing to do well outside the US and expect that will continue.

And remind me, Stu, how much of thats international today?

It's -- again, the majority is still in the US, but the margins are significantly stronger internationally, so again, you know, on a revenue basis, we probably have 0.6, 70% in the US, but margins disproportionately -- a much stronger outside the US.

Understood. And then last one for me Geoff.

Yes, Jim, to your question, I think we mentioned in the February 10 conference call that the two areas we expected to see some weakness in with the drilling, more than our other businesses, not that you wouldn't have some weakness conceivably in all. But the one that would be most susceptible is the testing, which you just asked about and our onshore fluids business. And interestingly, the onshore fluids business, we still have not seen a tremendous dropoff in that business, but that would be the other area we would have expected to see something happen to us, given the Rig count.

And the last one for me, any other major changes -- up, down, I mean you reiterated the overall underlying guidance, just kind of curious if anything else has changed in your thought process from a couple weeks ago?

No, not really, I think everything else is playing out as we expected. And as Geoff said, we're pleased our onshore fluids business is holding up to the extent it is, given everything else that's happening out in the US onshore, but other than the testing starting to come down, the rest of the businesses in aggregate are performing very similar to what we would expect.

The one area that you would think exceptionally would have weakened because of pricing would have been Maritech, but because Maritech has the vast amount of its production hedged this year, it's really not varying much from what we had anticipated seeing in the first quarter.

Great. Thanks, guys.

Our next question comes from Mike Harrison with First Analysis. Proceed with your question

Hello, good morning, guys.

Good morning.

Just in terms, Geoff, of your expectations of generating substantial free cash flow over the next couple of years, you've talked about some of the changes you've made in Maritech to generate more cash and also talked about the capital investments -- excuse me, being largely complete by the middle of 2009. But can you maybe give us some more details on other plans that you have over the next several quarters to improve your free cash flow and maybe some other sources of cash?

I'm not sure that we want to get into some of the things that we're contemplating doing, because they would be of a competitive nature. Obviously, we have a S-1out there, that if you look at that, would have an impact on your cash flow positively. Again, we can't get into that discussion. I guess the only way I can quantify for you beyond what you just talked about is to say that in the February 10 press release, we indicated that we would see positive cash of roughly $80 million in the second half of this year, because we told you our debt would peak out about 480 and be back around 400 by the end of the year. So, all of those items that would get you there are essentially in place. With maybe one exception. And we feel very comfortable about generating that type of cash flow, but anything beyond what we've talked about, we're a little reluctant to get into in this environment.

To add to what Geoff has said, we have been aggressive about cutting OpEx where we can, particularly G&A costs and managing working capitol, bringing inventories down. Managing accounts receivable, AP, et cetera.

A couple of things that we have available to us and that we have chosen not to do, I guess I could tell you those. At this point in time. We have hedges in place as we've discussed. The value of those hedges are somewhere between $70 million and $100 million in terms of being able to just take them and sell them or unwind is probably a better term. We could generate cash that way if we had to. We're reluctant to do so. Similarly, we are in a corporate office building that would allow -- that we own that we could sell and generate substantial capital if we found the right opportunities. Right now, we've chosen not to do that. So, there's some -- out of the operating side issues that we could deal with, if we had to have the capital, but we don't feel at this point in time that we need to go to those lengths.

In terms of the office building, I mean, during the first half, you're going to be building -- completing construction of a new building. What are the plans for the old building? Are you going to be leasing it then?

The office building -- we've moved. We moved last weekend. We are out of the old one, which we had leased. Originally we owned that building, we sold it, and did a lease back. We would intend, eventually, to do the same thing in the current building we're in, we currently own it and in a better environment, you'd see us sell it and lease it back. Until we feel that it's attractive do so, we will retain ownership.

The lease expires in a couple weeks on the old building, so that is no longer our obligation.

Okay, and in terms of the debt as you approach those maturities in 2011, should we expect to see you guys do some delevering, or would you -- as you see it right now, just expect to refinance it and still maintain a capital structure similar to what we see with Tetra today.

Well, I'll answer it one way and let Joe answer it another way if he chooses. Our ability to grow over the next few years is going to be a function of being able to take advantage of opportunities. And I'd love to be in a position of having enough debt paid down to be able to utilize leverage to acquire some things. Not in this time period, because of our debt, but as you go forward, so I would love to see the delevering so that we have opportunities to grow Tetra. On the other hand, and Joe can collaborate this, I think our EBITDA calculation which is what really triggers our debt is something like 155, is that the right number?

The leverage ratio debt to trailing EBITDA, yes.

And we can go to 3 under our existing. So, we're nowhere near worrying about that, and consequently, I would assume if we were to go back, we could refinance, but you certainly wouldn't want to do that in this market, given the rates and all of the things that are out there. We feel very comfortable and fortunate that we have over two years before we have to discuss that. Joe, you want to make any comments?

I have nothing to add to that. I do think we will delever over the latter half of the year and position ourselves to be opportunistic in 2010.

Alright. And Geoff, any thoughts, I don't know how much time you've had to look over the proposed budget from the Obama administration, but the changes in taxation, any thoughts on how that might effect Tetra? I'm specifically thinking of this proposed excise tax on Gulf of Mexico oil production.

Yes, I don't think there's any real big impact of any of that to us. I'd love to say there's a stimulus to our businesses, but I don't see that either. The excise tax that's being talked about, they're going to have to look at that very carefully. Because, factually, the shelf production, which is where we are, is very high cost. The deep water is a real high cost, but not maybe per barrel or MCF, and therefore, before they try to enact something that they're going to choke off activity, they're going to have to look at that a lot closer. I don't think its going to have much of an impact frankly to us, and I don't really think it's going to come out in the form thats been proposed, but we'll wait and see.

Alright, thanks very much.

Our next question comes from Bill Desmond with Titan Capital Management.

Thank you we have a group of questions. First of all, accounts receivable grew in the fourth quarter relative to the third quarter, and that was on lower sequential revenues. Would you please discuss what was taking place there?

That is mainly insurance receivables related to hurricane repair work for which we have not received hurricane claims.

That's a great segway into the insurance side. You had some challenges with the Katrina/Rita hurricanes and I think you're still in litigation there. Are you feeling better about actually collecting in a normal sense, meaning out of the courtroom with hurricane Ike?

Yes, much better, we have much greater contract clarity in our insurance policy language as a result of our experience with Rita and Katrina, and without getting into the vagaries of the policy, we've tightened up the language where it becomes very clear what is owed to us under what conditions. So, I dont see the same issuers at all this time. Its just simply a matter of a massive amount of hurricane work that is swamping adjusters, all at the same time and we don't think it will be a collection problem.

I'd say a little differently, just from my perspective. I agree with Joe, I don't think we have any issues at all relative to collection, but you have to recognize that this is a lagging event that you'd love to think is 60 days from the time you do work and get it turned in. But it might be 150 days, so you will see receivables on our balance sheet going forward until we've cleaned this up, and they probably will have a longer tail to them than 60 days, but its not because of not payment -- not getting payment, it's just because of the process.

Yes, I'd say overall, our collection period and our trade receivables are holding pretty strong, we're doing a good job as Joe mentioned earlier staying on top of that.

Great. Thank you. And then secondarily, the Arkansas plant, you noted in the release that it's a bit ahead of schedule, and this is a nitpicky question, but what's behind it being ahead of schedule?

Most of it is we said since the beginning that we've allocated a very strong group of project managers. They've done a great job staying on top of the vendors, and I think it's just internal execution. You know we still have a lot of key activities to get done, but we're cautiously optimistic we'll get to that time period that Geoff talked about, but we've really done a good job on the project execution.

And you had mentioned on this call that the onshore fluids business was holding up better than you had expected. What do you think is the reasoning for that?

Without getting into too much detail, we've got a couple of specific areas that are doing very well and that's more than offset some of the areas that have been soft, so that's about the level of detail I wanted to get into, but so far, so good.

And as a result of that, would you anticipate working through your higher cost fluids inventories sooner than what you otherwise would have been anticipating? Or how does that affect -- (inaudible) that issue?

No, our consumption of inventory that affects the average cost is very much driven by our offshore business. And that's going to be the key driver on that.

I'd say it a little different, and that is that our offshore business, when you look at it, is predominantly volume fluid driven. Our onshore business is predominantly service driven so when you look at a typical job offshore, most of the revenues are associated with the products sale or, and very little relative to service. That's flip flopped onshore, so there's a distinction difference, you're not going to get as much volume out of our system on the onshore business as you're going to get on the offshore.

Great thanks to all of you.

(Operator Instructions) One moment Mr. Hertel, there are no further questions in queue at this time, do you have any closing comments?

I just wants to thank everybody for being on the call, and we'll talk to you at the end of the first quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.