Tetra Technologies Inc (TTI) 2009 Q3 法說會逐字稿

Greetings, and welcome to the TETRA Technologies third-quarter 2009 results. 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, Stuart Brightman, Chief Executive Officer for TETRA Technologies, Incorporated. Thank you, Mr. Brightman. You may begin.

Thank you, Rob, and welcome to the TETRA Technologies third-quarter 2009 earnings call. Joe Abell, our Chief Financial Officer, is in attendance this morning, and will be available to address any of your questions. Joe will give a brief overview of our third-quarter results. I will follow with a brief presentation, which in turn will be followed by your questions.

I must first remind you that this conference call may contain certain 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.

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

With that, Joe, would you start the financial overview, please?

Thank you, Stu. Revenue in the third quarter was $254 million, 2% above the third quarter of 2008 and 16.5% above the previous quarter. The favorable results and the favorable earnings results were due principally to the strength of our Offshore Services business.

Gross profit was $62.8 million, 43.6% above the prior year's third quarter and 55.4% above the previous quarter. Gross profit as a percentage of revenue was 24.7% for the quarter just ended compared to 17.5% for the prior year's period and 18.5% for the previous quarter.

Income before tax and discontinued operations was $33.9 million, up 76.8% compared to the third quarter of 2008 and up 149% sequentially. Income before tax was negatively impacted by a $5 million hurricane repair expense at Maritech.

Income before discontinued operations for the quarter was $22.8 million or $0.30 a share, fully-diluted, as reported. This includes $0.04 a share for the previously mentioned repair expense. The reported $0.34 (sic -- see press release) a share compares to $0.16 a share, fully diluted, in the same period last year and $0.12 a share in the previous quarter.

Year-to-date, revenues were $667 million, and income before discontinued operations was $43.4 million, or $0.58 per fully-diluted share.

Looking at quarterly performance by segment, revenues in the Fluids segment was down 22.2% compared to last year's third quarter. However, profit before tax was $5.8 million, up 206% over last year's third quarter, which was impacted by Hurricane Ike, and up 377% over the prior quarter, which was impacted by a $6.8 million impairment in our European calcium chloride business.

Revenue in Offshore Services was up 55.9% versus the same quarter last year. Profit before tax set a second consecutive record of $40.3 million, breaking last year's -- last quarter's record, $23 million, by 75%. Pretax profits were up 311% compared to last year's third quarter.

We continue to experience strong demand for heavy lift, diving, cutting and plug and abandonment services, driven by Hurricane Ike remediation work, and risk mitigation plug and abandonment activity for undamaged wells and structures. We will see a seasonal downturn in the fourth quarter and the first quarter in this business segment.

Revenue in our E&P unit, Maritech Resources, was down 16.5% compared to the third quarter of 2008 due to lower production and lower oil and gas prices. Profit before tax was negative $7.2 million, due largely to the $5 million hurricane repair charge. This compares to positive $1.8 million in the third quarter of 2008, but is higher than the previous quarter, which was impacted by excess decommissioning expenses, impairments and uninsured expenses associated with Hurricane Ike remediation.

Production Testing revenue was down 39% year over year, and profit before tax was $2.9 million, a decrease of 65% versus the prior year's comparable quarter, due to decreased domestic activity, as reflected by the US land rig count. Profit before tax was down 61.4% compared to the previous quarter, largely because this segment was benefited in the second quarter by a $5.8 million lawsuit settlement.

Compressco revenue was down 15.3% year-over-year, and profit before tax was $5.3 million, a decrease of 34.4% versus the prior year's comparable quarter, due to the slowing domestic activity. Profit before tax was down 10.6% sequentially.

Corporate overhead and interest expense was up 38.9% quarter-over-quarter to a total of $14.3 million and was up 16.2% sequentially. It was up versus last year principally because we had a gain on oil and gas hedges in the third quarter of 2008. We had $35.9 million of cash capital expenditures in the quarter. Our debt increased by $15 million during the quarter, and was up $7.3 million year-to-date to $414.2 million. Debt-to-total-capital was 42.7% at the end of the quarter. In addition, we decreased cash by $15.1 million in the quarter to $8.4 million.

While debt increased during the quarter, debt is still below where we thought we would be at quarter-end. Debt currently stands at just under $400 million. We have received as of last Wednesday $26.8 million of the $40 million insurance settlement proceeds, and expect to receive the remainder this week. Once we receive the full $40 million, debt will decrease to about $360 million, once this full $40 million is applied to debt repayment.

We remain focused on cash flow, cost reduction and deleveraging. With that, I will turn the discussion back to Stu.

Thank you, Joe. Clearly, the highlight of the third quarter was another record-setting performance by our Offshore Services segment. This was a major factor in our reported earnings of $0.30 per share.

As we review the quarter, I will expand on the Offshore Services performance and review the status of our key strategic initiatives.

During the quarter, our Fluids division reported a seasonal quarterly decline in revenue and gross margins. This is associated with the normal seasonal decline in our European calcium chloride business.

On a positive note, we are beginning to see signs of activity in our Gulf of Mexico deepwater increasing, and we delivered fluids to Brazil under our previously announced Petrobras contract during the third quarter. We expect this to continue in the fourth quarter, and the main impact of this contract should begin in early 2010.

Our onshore Fluids declined in activity and also had weaker pricing, but we believe we have seen the bottom of this market for this business. Our El Dorado calcium chloride plant is expected to start commercial production during the fourth quarter.

As previously stated, our Offshore Services segment achieved another record-setting quarter. We saw several factors come together to enable this level of performance. The demand in the market for structures that suffered damage during Hurricane Ike was very robust. Continued demand by our customers on their risk mitigation strategy added to the demand. The combination of our suite of services and continued excellent execution allowed us to participate in both integrated projects and discrete services.

The strategy of being able to offer plug and abandonment, diving, cutting services continues to be very successful. Our internal integration of these services and associated project management capability continues to be demonstrated in the execution of our backlog. We will see a fourth-quarter activity slowdown, but it should be more active than the segment's typical fourth-quarter operating performance.

Maritech reported a pretax operating loss of $7.2 million during the third quarter. This loss was caused primarily by $5 million of repair-related expenses associated with the 2008 hurricanes. Excluding this item, Maritech was close to breakeven, as we had guided during the February guidance session.

Production during the quarter declined due to several fields being shut in due to downstream pipeline problems. During the fourth quarter, we expect to commence production on a portion of our East Cameron 328 property, which was damaged during Hurricane Ike.

Our ongoing strategy continues to be managing Maritech within its free cash flow, with a continued emphasis on risk mitigations through aggressive plug and abandonment.

During October, we entered into a settlement with respect to Maritech insurance litigation, under which we will receive $40 million in cash during the fourth quarter. As Joe noted, to date, we've received $26.8 million and expect the balance shortly. The proceeds will be reflected as a credit to earnings in the fourth quarter.

In the Production Testing segment, we believe the market has stabilized domestically, as evidenced by our exit rate of the third quarter. We remain cautiously optimistic that domestic activity will increase modestly, tied to improved natural gas prices and rig counts. We continue to invest internationally, utilizing domestic assets whenever possible.

Compressco had a slight decrease in activity during the third quarter due to the domestic market. We are encouraged about recent trends in the market and have maintained strong margins due to cost reduction activities and international growth.

The increase in our net debt position was due to the timing of our capital expenditures and the magnitude of Maritech's decommissioning activities. Due to the timing of these items, which was expected, it is significantly below our long-term debt level, as noted in our February guidance. We expect a reduction in debt during the fourth quarter and anticipate ending the year below the $400 million target debt level, even without the benefit of the insurance proceeds noted previously.

In summary, [the] very strong quarter due to TETRA Offshore Services. I feel very pleased that the cumulative strategy that we've embarked over several years is paying tremendous benefits for TETRA. We continue to generate profits in our other service businesses in a very tough market.

We believe we are seeing the beginning of the signs of improvement in our domestic market. Our El Dorado plant will commence commercial production during the fourth quarter, and we will see these benefits during 2010.

We are seeing evidence of growth in our long-term deepwater Gulf of Mexico strategy in the beginning of our contract with Petrobras. We will continue to focus on debt reduction and expect the fourth quarter to be favorable compared to our earlier guidance on debt.

Rob, at this time, will you please open the lines for Q&A? Thank you.

(Operator Instructions) Stephen Gengaro, Jefferies & Company.

I guess a couple things, if you don't mind. The first is can you help us understand the -- obviously, Offshore Services had a tremendous quarter. Can you help us understand -- how do we -- how we got to such a high revenue number? Is it utilization? Is it pricing? Is it all of the above? And sort of how we should sort of think about the revenue progression going forward, obviously with the realization that you do have seasonality here in the next couple quarters, but you generated extremely high revenue. I am just trying to understand how you got there and if you could add some color around that.

Yes. Well, it is nice to be able to take that question. I guess first of all, as I said on the call, we certainly will see the seasonal aspect of that in the fourth quarter and would expect that to continue in the first quarter.

If you look at the third quarter that just ended, we benefited from a lot of things coming together at once. We've said in the past that utilization is the driver for this business, and all of our major assets were pretty much fully utilized during the entire third quarter. We clearly benefited from a lack of hurricane season. So that negative variable didn't impact us.

But all the major assets worked. We've done a very good job of taking some cost out of this business over the last year. We continue to operate, even at these revenue levels, with lower overhead and lower headcount than we did last year. So we benefited from the integration savings.

We had a nice mix of discrete services and integrated business. We've had one third-party asset that we've used during the third quarter that will continue for a while. And we've done back-to-back contracts, so there is no exposure for TETRA -- again, lessons learned from the previous cycles.

Pricing has been strong, but it hasn't changed dramatically. I think a lot of it is just driven by the utilization and the mix of the business, the good weather, taking overhead out, and some very, very good project management.

The tougher question, as I'm sure you are alluding to, is we go forward, we still think there is going to be a lot of activity over the next year on Ike-related down structures and customers continued spend on risk mitigation to get to a quarter like we just experienced. Clearly, everything needs to line up perfectly, and we had the benefit in the third quarter, and hopefully the future of those events will come together again.

So if we strip out the seasonal impact and we sort of look at the middle two quarters of next year, is that -- is $131 million, is that an achievable expectation, or is it -- is there some things which are just things went too well to expect that? I'm just trying to get a sense for --

We haven't put out any info on 2010 yet. We will early next year. But that is a big number, and without predicting the future, to get to that number again you're going to have to have all those events come together. I mean, I do feel good about the market we operate in next year and our ability to execute. But that is a big number, and it will always be a challenge to get back to that. We had a lot of things line up for us.

Stephen, remember also, we had no hurricane or tropical storm activity this year, so that plays a big part. You need to take that into consideration as well next year.

I understand. Thank you, Joe.

And then the other just follow-up here is can you -- if you look at the seasonality in Fluids, and you broke that down, can you give us a rough estimate of how big the seasonality in the European calcium chloride business played there?

That was the major impact of the sequential move from the second to the third quarter, and that happens every year. As I said in the press release, you've got that seasonal aspect in our European chemicals business. In addition, in our third quarter, we continued to have a very tough market onshore for that business. We are starting to see some positive signs on the Gulf of Mexico deepwater. We started supplying product under our contract in Brazil that we've talked about for a while.

So I think the third quarter was probably above what we expected in aggregate for that business. The margins were about in aggregate what we had guided for the year. And there were no major surprises.

Hopefully, as I stated, we've seen the bottoming of that US market and we will start to see a slow recovery in that, get the benefit of the contract in Brazil ramping up the beginning of next year, and hopefully the continued increase in the deep and ultra deepwater Gulf of Mexico.

Okay, great. Thank you. That is very helpful.

Jim Rollyson, Raymond James.

Stu, maybe to follow up on Stephen's question just on Offshore, obviously a lot of things came together that worked for you. The weather worked for you, etc. But if you think about just the bigger picture, the market opportunity for the Offshore Services work, how do you think the 2010 year looks for opportunity relative to 2009?

If you look at opportunity, clearly, there is still going to be a large part of the Ike work that goes on next year. If you go back over the last year, as you recall, we benefited pretty early on on the diving and the cutting, which was the first stages of evaluation and getting some understanding of the extent of the damage. As we rolled into this year, the first quarter was relatively quiet, as we had expected. It ramped in the second quarter and clearly ramped up for full third quarter.

But I think in aggregate, we should see pretty good opportunities on Ike. We will continue to market the integrated projects as well as the discrete services. I do believe we will continue to see demand in general for normal plug and abandonment that takes place to do the risk mitigation.

So I think it is going to be a good market next year. The question is can we line up all of the pieces that we did this year to get to that same level. That will be the challenge, but I think overall, the market should be strong for that business next year.

That's very helpful. And on the Fluids side, a couple questions here. Can you talk out the status of your longer-term bromine contract, just with respect to your suppliers' financial situation? And then maybe refresh us on the incremental revenue impact that you think Brazil is going to have as you go into next year.

The first question on the status of our agreements with our partner, kind of will continue to proceed in discussing that. Supply continues to not be disrupted, so that has been very positive. We've had good discussions with our partner and remain cautiously optimistic that we will get the new agreements in place shortly and that we will continue to get supply as has taken place to date.

The second part of the equation in Brazil, we've been pretty consistent in not stating the magnitude of that contract, other than to say when it starts, it will be a nice pop, but it won't -- it will be significant, but it won't be a game changer on the Fluids. We still feel that way, that we've seen the beginning of it and we are optimistic that the majority of it will start early next year and have an impact. But we haven't disclosed the magnitude of it.

Understood. And last thing on Maritech, your hurricane repair costs have been kind of in and out over the last few quarters. Do you have many more of those left, and kind of what do you see production doing as far as trending going into next year, once East Cameron 328 gets back up and running?

We kind of believe and hope that we are through the majority, if not all, of the major items that pop up on the hurricane repair side. We've been at it over a year now, so you would expect that. There are some that come up that we deal with. But I think we are at the end of that or towards the end of it.

And as you look at production, I noted we had a couple fields where some downstream pipelines constrained production; that's going to carry over through the fourth quarter. It should be offset by East CAM 328 production coming on. And again, our guys did a real good job of getting that on a little bit earlier than we had even envisioned. So that is positive news.

And as we start into January, I think as those other fields come back, we should see definitely a ramp-up from where we were in the third quarter, and it should be similar to what we saw in the second quarter and maybe a little bit above that.

Back in the mid 50s or so?

Yes.

Perfect. Excellent job on the quarter, guys. Thanks.

James West, Barclays Capital.

Good morning, Stu. Good morning, Joe. A question for both you guys. If we think about how well you've done with cash flow in the last couple of quarters, you had the debt coming down, you had the insurance proceeds. And Joe gave some --what the new probably debt numbers will be at the end of the year.

How do you think about additional deleveraging as we go into 2010? Have we done enough? Do you want to delever further? I mean, we're kind of trough of the cycle here. Do you need to delever further?

James, I don't think we need to delever further. I think that as we approach this market, what we are balancing is opportunities to redeploy cash, either as markets recover and we organically grow our businesses or buying discrete acquisition opportunities. So I do think that those opportunities will present themselves.

I feel very comfortable with the debt level where we are right now. I do think that there is some additional scope to further reduce debt. Clearly, if we believe the markets improve next year, which we do, then we will generate even more cash from operating activities than we have this year, so we will have the opportunity to bring that debt down.

Yes, I think I agree totally with what Joe said. A couple of other additional comments. As we look at 2010 and that delevering strategy and what we want to continue to look at, I do feel good that we've put some very good discipline in this year on a lot of these processes. We've really got some real good supply chain initiatives at Compressco, that as that market comes back and we look at the production side, we will benefit from that.

I feel we will benefit, obviously, next year with some of these long-term projects on the capital side behind us. So I do like the flexibility we are going to have and as we roll into next year, we will evaluate some of the opportunities out there in conjunction with how the market is behaving.

Okay. That's helpful. With the Arkansas plant coming online in the fourth quarter, when do you expect that plant to be running at full capacity? I'm assuming there is some kind of startup processes that we will go through.

Yes. We've already started the startup processes and we are proceeding pretty much on target as we cycle through the various elements of the plant. So as we get to January, we should be operating at a pretty good percentage of capacity, and it will increase as we go through the year. But we will get a significant benefit from the production level as we get into the first quarter.

Okay. That's all for me. Great quarter, guys. Thank you.

Mike Harrison, First Analysis Securities.

Good morning, guys. On Maritech, I was wondering if you could give us some more details about what it is exactly that caused the shut-in of production and how long you expect those downstream pipeline problems to persist. It sounds like they are still going on, at least right now.

Yes, it was some flowline and pipeline problems downstream that were outside of our control that are getting worked very aggressively. And we think that we'll get resolution of those probably as we get into the beginning of next year. I would not anticipate a significant change in that situation during the fourth quarter.

And as I said, that will be -- should be offset by the production that has come on in East Cameron 328. Most of that is gas production associated with those two fields, and should not have a significant impact on earnings. As we've said before, with the hedges we have in place and the pricing in the market, the change in the short term on production this year is not material in terms of earnings.

All right. And you've got a tropical storm heading into the Gulf right now, or heading through the Gulf, I guess. How are you and your customers operating right now? And I'm speaking both on Maritech and Offshore Services.

We've -- as we always do, when a storm like Ida comes through, we are very conservative. We've evacuated a lot of the Maritech, some of the Maritech and our major assets on the Offshore Services. We will see if it progresses on the track it is currently at, and hopefully get back out there. But we certainly have demobilized the appropriate places for both of those segments.

On the Fluids segment, your sales were down about 22% year-over-year. Can you break out how much of that was volume and how much was pricing?

I don't have the exact split, and typically wouldn't get into that level of detail on this call. But we've seen both of those variables, pricing and activity, influence those markets. Probably the area where we've seen significant impact on that would actually be our domestic onshore businesses, as I stated previously. So that whole gas-driven rig count part of our business has suffered year on year. But as I said in the call, I do believe we've stabilized and I'm optimistic we will start to see that activity pick up.

And have you begun to see stabilization in pricing in the Onshore Fluids business?

I think we're starting to get there. We certainly continue to see a lot of pressure out there, but there are signs that is starting to stabilize.

All right. And a similar question on the onshore side of the testing business. Have you started to see prices stabilize or start to improve, since you seem to suggest you've seen a bottom in terms of demand on the onshore testing side.

I think it is stabilized and I wouldn't characterize it as improving. But it is stabilized and I think our exit rate in the third quarter gives us a little bit of confidence in making that statement.

All right. Thanks very much, Stu.

Thank you, Mike.

Joe Gibney, Capital One Southcoast.

Good morning, Stu and Joe. Just wanted to follow around on the Deepwater Fluids side. As we get Petrobras ramped up a little bit next year, and you alluded to sort of the deepwater side of things picking up, relative to your mix, if I'm thinking about Offshore Fluids, is it going to weight more than 50% on the heavier deepwater side next year as these projects come online? Is that a fair characterization?

I think as you look at our Gulf of Mexico business, that is a fair assumption.

Okay.

Then when you certainly add Brazil to that mix and you kind of look at that offshore characteristic of that business, I think that is definitely a fair characterization.

Okay. That's helpful. And I just wanted to circle around a little bit on the international growth on Production Enhancement. You guys have discussed ramping up a little bit on the Compressco side, and maybe piggybacking on Testing a little bit in certain international markets, or in Mexico in particular. Could you talk a little bit about the international growth prospects within this segment and your hopes for it next year?

As you said, we've done a very good job leveraging our infrastructure outside the US. Our best examples of that have been Mexico and Brazil. And as we continue to look out, we are seeing new markets for both Testing and Compressco. And where the two services can work together, we are certainly taking advantage of that, and that is typically the situation.

There are instances where one business has taken the lead in starting up, and we are getting a steady increase in the number of areas beyond historical areas that we are expanding into. So we are very encouraged with the growth, and we are going to continue to spend a lot of time and effort trying to grow out those markets.

Okay. And then one last one, just circling around on Maritech and the reference in Jim's question on where production is heading into next year. Understand we're in sort of restoration mode on East Cam and elsewhere coming off of Ike, Gustav.

In your production profile and your thoughts on next years, is there still some allocation to proving out a handful of other prospects that are out there in your portfolio, obviously, with the caveat of restraining some discretionary capital, but focus that on the Services side? But is there some other incremental wealth that you guys are looking out to prove out here? And then just some updates on hedging here for thoughts next year.

Let me answer both of those questions. First of all, our Maritech group has done a wonderful job living within the capital constraints that we've laid out this year on high-grading opportunities. Certainly been more -- greater emphasis than some of the oil-related opportunities. And we've got some prospects in front of us that we definitely want to look at and see the magnitude of those opportunities.

So there is a continued emphasis on high-grading, and within our budget next year, which we will continue to operate within free cash flow from Maritech, I expect those to go to the top and we will do that.

When you look at hedging, I believe we've got $20 million on gas next year and 2000 barrels on oil. Probably both of those -- probably oil in particular we need to top up a little bit, and we will continue to look at that. But we are close to where we need to be, but we need to do a little bit more on both of those.

Okay. Very helpful. I appreciate it, guys. Very nice quarter.

Victor Marchon, RBC Capital Markets.

Thank you. Good morning. First question was on Compressco. I wanted to see if you can give us a sense as into conversations with customers. Are you getting the sense that some of the units that maybe were returned this year because of shut-ins may be going back to work at some point the beginning of next year?

I've always got to be a little bit cautious on forward-looking on Compressco. But as I said, we are starting to see some signs of encouragement on that business, and that usually comes from both the opportunity to add new sets out in the field, as well as what the return rate is. So I think we are starting to see positives, and what you describe would be part of that.

Great. And the second one I have was just on Production Testing. Looking at the margin progression from the second quarter to the third quarter, up a little bit. And from your commentary, it seems that the US was basically flat. So suggesting that international margins were higher quarter over quarter.

And just wanted to see, one, if that was true; and two, was that -- from a pricing standpoint, was that from a mix standpoint? Maybe just some color behind that.

Again, I don't want to get into too much geographic detail, but I think I said that domestically, we were relatively flat sequentially. And I think that's an accurate statement. And our ability to increase the margin, given that, would be driven by international. So we did see some improvement there.

And it's kind of a combination of mix and just some of our stronger markets growing as part of that mix equation internationally.

Great. The rest of the questions I had were answered. Thank you and congratulations on the quarter.

Stephen Gengaro, Jefferies & Company.

Just one follow-up. Joe, would you be able to give us a sense for the margin progression in Fluids as you -- or being maybe if not specifically, kind of how we should think about the raw material (technical difficulty) playing in here?

Okay, I'll take a stab at that. We were -- just referring to gross margins here at about 27% in the first quarter, dropping to 21% in the second quarter. Remember, on our first-quarter call, we said that we had an unusually strong first quarter; don't expect those kind of margins to hold up. And I think the 21% that we had in the second quarter was more indicative of the activity level we are seeing this year in the pricing we are seeing this year.

We were at about 20% or slightly over 20% in the third quarter. So relatively flat second quarter to third quarter. As Stu said, the activity seems to have bottomed and is trending upward. The rig count bottomed, as you know, in June, and has been trending upward almost week by week. Oil prices are not an issue at this point, having bottomed at $32-ish in December last year. And gas prices bottomed in early September. I think there is less clarity on gas prices, but certainly up strongly from their lows in September.

So those are indications to us that maybe we have seen a bottom and that the worst is behind us. I think many analysts, if you look at next year, are optimistic, but not going wild with their recovery. So it is a U-shaped, not a V-shaped recovery. I think that is probably consistent with our own view. Does that help, Stephen?

It does. If we assumed the market conditions were very similar to what you saw in the second and third quarters, would we expect, because of the raw materials, a 200 or 300 basis point improvement at the same activity levels, or is that --?

I think you have some improvement as the Arkansas plant comes online. I think you've seen what you are going to see out of the bromine supply contract if activity stays at this level. Obviously, the greater the activity level, the more benefit we receive from buying and then processing bromine and converting it to bromide compounds. I think we are going to have to see a turnaround in that market to see the full benefit of the supply leverage that we have there, Stephen.

Okay. No, that's very helpful. Thank you, Joe.

There are no further questions at this time. I would now like to turn the floor back to management for closing comments.

Yes, well, thank you very much, and appreciate all the questions. And Joe and I will look forward to updating the audience on the closure of the year and our views on 2010 after the first of the year. So thank you very much.

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