Tetra Technologies Inc (TTI) 2010 Q3 法說會逐字稿

Good morning and welcome to the TETRA three Q results conference call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Stuart Brightman, President and Chief Executive Officer. Mr. Brightman, please go ahead.

Thank you, Amy. Welcome to the Tetra Technologies' Third Quarter 2010 Earnings Conference Call. Joe Gibney, our Chief Financial Officer, is also 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 and 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 statements that may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by Tetra and 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.

In addition, in the course of the call we may refer to net debt, free cash flow, or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. With that, Joe, would you please start the financial overview.

Thank you, Stu.

Revenue in the third quarter was $211.9 million, 16.6% below the third quarter of 2009 and 12.3% below the previous quarter as the impact of the drilling moratorium, lower natural gas prices and other factors are being felt. Gross profit was $28.8 million compared to $62.8 million in the prior year's third quarter and compared to $47.8 million in the previous quarter. Gross profit was impacted by $14 million of noncash Maritech property impairments and $2.7 million Maritech cost for future ARO work.

Income before tax and discontinued operations was negative $200,000, down $33.9 million-- or down from $33.9 million in the third quarter of 2009 and $20.5 million in the previous quarter. Income before discontinued operations for the quarter was a positive $200,000, essentially breakeven for the quarter. These results include the $16.7 million of noncash charges previously mentioned or $0.15 a share after tax related to Maritech charges.

This compares to $0.30 a share fully diluted in the same period last year and to $0.18 a share in the previous quarter which had $0.08 a share of similar charges. Year-to-date revenue was $659 million and income before discontinued operations was $19.3 million or $0.25 a share fully diluted compared to revenue of $667 million and income before discontinued operations at $43.4 million or $0.58 a share last year.

Looking at quarterly performance by segment, revenue in the fluid segment was up 13.7% compared to the same period last year. Profit before tax was $1.7 million, down 70% versus the same period last year due to cost associated with the early stage production at the El Dorado calcium chloride plant and the Gulf of Mexico drilling moratorium. Profit before tax was down 83% compared to the prior quarter because of the drilling moratorium and the seasonal downswing in the European calcium fluoride business.

We had relatively little impact of the BP Macondo blowout resulting moratorium in the second quarter of the year. The greatest impact of the moratorium was felt this past quarter and will continue to be felt despite the lifting of the moratorium until the industry has greater regulatory clarity in the rate of permitting reaches its previous level. Our Delta Mexico fluids business is the only business that will feel this lingering effect.

Revenue in the offshore service segment was down 32% versus the bank quarter last year. You'll recall that last year was our year of record performance following Hurricane Ike. Profit before tax was $18.3 million, down 54.5% compared to the same quarter last year in which we participated in strong demand and higher service pricing for work resulting from Hurricane Ike once again. Profit before tax was up 28% in the current quarter compared to the previous quarter of this year. Revenue in our ENP unit, Maritech Resources, was up 12% compared to prior year's comparable period mainly due to higher realized oil prices from favorable hedges.

Profit before tax was negative $14.3 million, down compared to the prior year's quarter and the previous quarter due to $14 million of noncash property impairments and $2.7 million related to future P&A costs. Production and testing revenue was up 35% year over year and profit before tax was $4.2 million, an increase of 48.5% versus the prior year's comparable quarter due to increased domestic and eastern hemisphere activity, offset by a reduction in activity in Mexico which is experiencing serious security concerns that the government has yet to have been able to bring effectively under control and due to customer budget constraints.

Profit before tax was up 27% compared to the previous quarter as activity in pricing in the domestic market picks up. Compressco revenue was down 6.1% year-over-year and profit before tax was $3.8 million, a 27% decrease versus the prior year's comparable quarter due to slower activity in the US market mainly due to lower natural gas prices. The activity for Compressco bottomed in the fourth quarter of 2009, so year-over-year comparisons to 2009 up until the fourth quarter will be negative by comparison.

In 2010 we had noticed an escalation of security issues in Mexico and increased customer budget issues that are constraining our business there. Profit before tax was down 19% sequentially on relatively flat revenues due to some higher cost in the third quarter. We had $48.5 million dollars of cash capital expenditures in the quarter. We had free cash flow of negative $17.6 million in the current quarter and a positive $39.0 million year to date. Cash decreased over the quarter by $15.1 million to $74.5 million. We ended the quarter with net debt of $233.6 million. We had no borrowings on our $270 million credit facility.

In the third quarter we refinanced our credit facility on attractive terms. We downsized the facility from $300 million to $278 million, but have a $150 million accordion feature. We chose to use it. Pricing moved up because we had below market pricing on the maturing facility, but the new pricing remains highly competitive. It remains an unsecured five-year facility with similar or better covenants than the maturing facility. We have an outstanding bank group and appreciate the support they continue to provide.

We also placed $90 million of senior notes in the private market to replace the comparable amount of notes that mature in September 2011. The coupon is 5.09% on the new seven-year notes and 5.67% on the 10-year notes. Covenants are identical to the existing notes. We chose to delay the funding of these notes to December 15 of this year. With that, I'll turn the conference back to Stu and, Stu, please take over at that point.

Thank you, Joe. As we review the third quarter I want to highlight some of the key initiatives and trends that we are seeing in each of our businesses as well as comment on some of the balance sheet enhancements that Joe alluded to.

As expected during the third quarter, we saw a significant reduction in activity associated with our Gulf of Mexico deep water fluids business related to the impact of the Macondo oil spill and related regulatory requirements. With the lifting of the deep water drilling ban, we are closely monitoring the progress associated with the permits of these deep water wells. We expect to see this activity pick up as we move through 2011 recognizing there is a lag to the completion cycle associated with our fluids.

During the third quarter, we did not see the favorable impact on our El Dorado calcium chloride plant that we had hoped for. Although we continued to make incremental progress on some of the short-term challenges, we do not expect to see a significant improvement in plant performance during the next two quarters. We continue to evaluate a range of options focused on improving the plant's current performance and driving towards longer-term solutions. While the timing of this is somewhat uncertain, we remain very confident that long-term we will achieve our targeted results on this investment.

Internationally, our fluids business saw an improvement in Brazil but still at lower levels than we had originally planned. In addition, several other international markets for completion fluids were slightly less active than prior quarters. Our European chemical business continues to operate consistent with our expectations.

During the quarter, as we expected, our offshore services segment reported improved results. Despite a continued very challenging competitive landscape. This improvement was driven by higher utilization rates with most of our major assets. We continue to see a slight negative impact associated with permitting but as we went through the quarter, this has improved. We anticipate a normal slowdown in activity during the fourth quarter associated with the winter season.

During the third quarter NTL number 2010-G05 associated with the decommissioning with wells and platforms in the Gulf of Mexico was released. At this stage it is very difficult to predict the timing and impact. However, we believe that this will have a favorable impact in 2011 and beyond. Furthermore, we believe we are uniquely positioned to take advantage of this opportunity based on the challenging projects that we have successfully executed over the past two years and the suite of services that comprise this segment that are mostly focused on these late life activities.

Included in Maritech's third quarter pretax loss of $14.3 million was $14 million of noncash impairment charges in addition to a charge of $2.7 million to pretax income related to revisions of estimated future well abandonment and decommissioning costs. The impairment charges were as a result primarily from lower natural gas prices, lower than expected results from development efforts and a decreased fair value of probable and possible reserves. Excluding these items our ongoing production and associated margins in Maritech continued to be favorable. In addition, we are in the process of completing our fourth successful well at Timbalier Bay, this well will be on production by the middle of the month. And together the four wells will significantly increase production as well as profitability during the fourth quarter.

Another positive accomplishment during the quarter was the activity associated with Maritech's abandonment and decommissioning, on which we spent over $42 million on the plugging of wells and abandonment of platforms in pipelines. Included in this effort was a significant amount of work related to hurricane damaged structures. We expect by the end of this year we will have spent $80 million related to this activity. Overall, this continues to significantly reduce our risk profile and I recognize that it also gives us some short-term earnings volatility as we execute the work.

Another favorable trend during the quarter was the continuing improvement in activity and associated profitability in our domestic testing business. The majority of this improvement relates to shale activities, although some improvement also occurred in conventional basins. During the quarter our operations in Mexico were negatively impacted by budgetary issues with our major customers, security disruptions and unfavorable weather caused by recent hurricanes. We continue to optimize this business by moving people and equipment to areas where there is the most activity.

In addition, we continue to focus on other international markets as we have for the past several years. Compressco's third quarter results showed a continuing increase in activity, although margins were negatively affected by several unusual high cost items. I do not expect this cost trend to continue. We expect this business to continue to generate high profit margins and we will continue to focus growing our international business.

Overall, our third quarter results contained the $0.15 per share unusual charge associated with Maritech. As I review the quarter, our onshore US businesses continue to improve with increased activity. Our Gulf of Mexico fluid business had the major reduction in activity associated with the drilling moratorium, and we continue to perform very well on a difficult market for offshore services. We are aggressively attacking the challenges at El Dorado, recognizing that we have not accomplished this at the rate we had hoped, but still convinced that, long term, we will generate the profits we expected.

On a macro basis during the quarter, we received the positive long-term news with the lifting of the drilling moratorium as well as the NTL associated with idle iron that will benefit our offshore services in 2011 and beyond. As Joe mentioned during the third quarter, we entered into a new master note purchase agreement. In addition, we amended our bank revolver credit facility, extending its scheduled maturity to October 2005.

We continue to maintain a strong balance sheet. These enhancements to our long-term debt position will continue to give us the financial capability to pursue the growth opportunities we see in front of us for our businesses. Amy, at this time will you open the lines to Q&A? Thank you.

Certainly. We will now begin the question and answer session.

(Operator instructions)

Our first question is from Mike Harrison with First Analysis. Go ahead, sir.

Hi, good morning.

Good morning, Mike.

Looking at the higher El Dorado costs, you had previously seemed to think that you would have those problems resolved by year-end. Now sounds like they drag into Q1. Can you give us a better sense of what's going on there and how confident are you that Q1 is a pretty good end point?

Yes. We certainly are delayed in getting the production rates to the levels we expected and you're right, we had thought we would be further down that path by year-end. And as we have said in previous calls, you know, majority of the problem relates to dry production and getting the yields that we need there. It is interactive process. We have made multiple modifications and cumulative impact of that has not gotten us to where we need to be.

So, as we go forward, we have got a short-term plan to continue to look at and have other efforts going on as well as we are looking at larger modifications to get higher confidence levels that we will have to solve. We are really looking at multiple paths. Hence why we kind of pushed out that comment for the next two quarters. We do not anticipate seeing that production change materially. I think as we get out towards the end of this year, we continue to track both the short-term and longer-term solutions. I'll have a much better time line but at the moment, you know, the best we think, Mike, is we have got another two quarters of working through the issues.

Understood.

Mike that if I could expand on that, Mike, as you understand, understanding the chemical business well, when you bring up a plant, there are always issues that need to be worked out.

The problem is to make the modification to the plant you have to shut the whole plant down, make the modification, and then bring it back up so that can be a multi-week or a month or two month process, so that's the issue. It's bringing the plant down, making a modification and bringing it back up multiple times and then not having the luxury of being able to just take something out of service while keeping the rest of the plant operating.

The problems are really isolated to one portion of the plant, the drier, which is just affecting the dry plant and it has nothing to do with the liquid plant, but once again, we have to bring the whole plant down to make that modification to the drier affecting just the dry plant.

Is that going to require additional CAPEX in order to make some of the changes that you're considering?

If you look at the way we have been under process as we have gone through some of the short-term iterations, that's required some capital associated with it. And if we look at something that is an alternative to what we are currently doing, that also would require some capital.

All right. Shifting gears over to Maritech, the four new wells that you're bringing on, do I understand correctly then, that you should be closer to the 60 Mcf a day production rate or are you taking any production down at some of your other wells?

Well, you'll have the natural process, some of the wells coming off, so I wouldn't add the two together but I would certainly expect that we will see our exit rate in December higher than we saw at the end of the third quarter and the new production has a good oil mix, so that will have a favorable impact on us as well. And again, I feel very good about that -- the set of results at Timbalier Bay.

If you take a step back, we've been very open about our strategy of looking at reduced capital targeted to our higher-return wells with the greater emphasis on oil as well as working down the liability side so as we continue to go quarter by quarter, I think you begin to see the consistency in terms of the strategy. And as I noted in the press release in my comments, at times that gives us a little bit of volatility associated with doing, as we did this quarter, $42 million of decommissioning work. Again, we continue to take the footprint down which is the most important and focus on the high yield assets.

All right. And you had spoken previously that you thought you might get some better clarity on what the regulatory environment would look like related to the NTL once Maritech got their details of what they would be required to do in terms of WA&D and the idle iron. Have you gotten those details yet from the government?

Like others, we have received our information over the past few weeks and, you know, the good news is there are no surprises there. We have done a very good job of being current, so I feel good about that. And we have got the 120 days to respond, which we will. And there's certainly the tone of an expectation that we will have an aggressive time line on those areas where we need to do the plug and abandonment work.

Kind of the broader question of what have we learned in that that makes us with a higher level of clarity? Look at next year and beyond. I'm not certain that higher level of clarity is there, although I do believe as we talk with customers and we talk to others in the industry that there will be as we get into 2011, you know, a certain compression of demand that accelerates things and will be in good position as far as that goes.

Don't expect we will see that next year. As I noted in my press release, we expect the fourth quarter to be kind of a typical fourth quarter with the winter causes our customers to slow down their activity.

Thanks very much, Stu.

Thank you, Mike.

Our next question is from [Aaron Bartow] with Raymond James. Please go ahead, sir.

Good morning, fellas.

Good morning.

I just had one more follow-up on Maritech. You mentioned that you had the $80 million guided for the full-year spending to finish all the P&A work. With that, will that bring you fully into compliance with the NTL or do you still have any remaining wells that you'll look into 2011-ish?

We still have wells that we will do next year that's in line with what the NTL asks for and is consistent with our strategy of any marginal production of not going forward and taking care of the liability. Our plan next year, as we have said before, will be similar levels of activities internally on Maritech and probably have a pretty big focus on platform removal given that we have been very aggressive on the plugging of the wells this year. Next step is to go in and get those structures out next year. So, be a little bit different mix but we will be very compliant.

Do you have any clue on just a broad number of how many are left that are eligible?

How many Maritech that are eligible?

Yes, wells or platforms.

We do and it's pretty -- it's a small number of both. The work that we are doing just so I make certain I'm clear, the amount of that $80 million that we did this year and next year is not catching up on delinquency. It's getting ahead of the curve and being proactive.

Okay. That's very clear. Thank you. Shifting quickly to onshore fluids. I just had a few mentions of some your bigger competitors are starting to bundle some of their services with higher demand of other product lines out there just to try and gain some market share. I was just wondering if you heard any of that or if this has affected pricing in any way or any real color you could provide on that?

Yes, I've seen some of the commentary over the last few weeks, as well. And I think fortunately for us with the main services and the testing and the fluids that we have onshore, we haven't seen a negative impact on our business. You know, again in fact, where possible, we try to do some of the bundling with our testing and fluids in areas of high activity in the shale area, so I would say we have not seen a negative impact. We are watching it and that onshore fluids and testing continues to be a source of strength for us.

Okay. Very good. Then last one, Joe, forgive me if I missed it but could you just give me what was CAPEX for quarter?

Yes. Let me find that note. $48.5 million.

Perfect. All right. Thank you, gentlemen. I'll turn it back.

And a comment on that is that number was always going to be a big quarter for us given that we did a lot of the Maritech capital and Timbalier bay during that time period.

Very helpful. Thank you.

Your next question is from [Steve Wishnow] with Madison Williams. Please go ahead, sir.

Good morning, guys.

Good morning.

Just want to touch base on--if you look at the fluids business offshore obviously Gulf of Mexico not too much going on there. I would imagine and correct me if I'm wrong, but I would imagine pricing is down fairly significantly in that business. And if so, are you seeing any of the players kind of betting on, you know, permitting moving forward and trying to lock in lower pricing into 2011?

We--primary impact for the quarter was obviously the activity as I mentioned and with that amount of lower activity, as you would expect, you see pricing becoming more challenging. I haven't seen any indications that there's any reaction in anticipation of future business that folks are behaving differently on.

Okay.

And again, some of the contracts are already secure and the ones that come up we will deal with that as they come through but nothing dramatic. I would certainly focus on the main element of that business in the third quarter being volume and activity driven.

Okay. Very nice. And look, obviously everyone knows what's going on down in Mexico. Have you guys given thought or is it possible to potentially move some of the assets you guys currently have in Mexico back up to domestic market or are you guys just going to -- or what are you guys thinking along those lines?

It's possible to do it, but we haven't given it any thought. I mean, we still have a very solid business in Mexico and we like our position and have given zero thought of moving assets out of Mexico. We have been down there a long time. We have got a great management team and they -- I'm very confident that they are optimizing what we are capable of in that market and it's off its peak but still a very important profit generation for the company both in testing and Compressco.

Okay. Great. And look at the domestic market. Are there any specific geographic areas you guys are seeing exceptional strength in versus weakness in some others or is it kind of across the board just higher activity, kind of in line with what we are seeing with other players?

I would say the areas we have grown are consistent in the shale, the main areas--Marcellus, Haynesville, Eagle Ford--and that's where most of the growth has come from.

Follow-up to that, obviously you've seen a shift towards the more oil liquid rich plays. Is there any increased service intensity associated with those versus a dry gas shale for you guys?

It's not that big a mix impact in terms of the type of equipment duration margin, all those drivers.

Okay. Great. Thanks a lot, guys. I'll turn it back.

Your next question is from Thad Vayda with Stifel Nicolaus.

Good morning, guys. Couple questions on El Dorado. First, he problems you're experiencing now are there any sort of repercussions regarding your contract with [Cantora], any penalties associated with lack of production or anything like that?

No exposure there at all.

Okay. Then can you kind of break out to the best you can, at least order of magnitude, the impact on margins in fluids associated with the cost issues with the plant and then sort of the seasonal impact of your European calcium chloride business?

Yes, I'll start with the second one because it's easier. The European business always spikes in the second quarter and always gives us that margin and revenue impact. We haven't split out that number but it's always, you know, the majority of the earnings for that business takes place in Europe during the second quarter. And this year it's been typical pattern, in a quarter by quarter basis that business has been very consistent with what's included in our overall plan for the year.

The more difficult question on the magnitude of the cost in El Dorado, as you would imagine, we haven't broken that out. But given the magnitude of the investment of over $100 million and the fact that we are not anywhere close to planned production levels on that level of investment overlaid with, as Joe described, you know, when you take the plant up and down and are making those adjustments, you've got the inherent disruption--inefficiency and yield in some of those other items that you work out as you go up the production ladder. It's a very significant number that's contained in there and again it's much more so on the margin than it is on the revenue side.

Okay. Is the problem equipment specific? Joe mentioned a drier. Or is it design, design at the plant or a combination of the two. And if it's equipment, is there any recourse to the manufacture of that equipment?

I certainly do not want to get into responding to culpability or any commercial issues and getting into the first part of your question of the technical versus the equipment. It's certainly multiple variables that are contributing to it.

Okay.

And we--as you would expect in addition to the internal expertise that TETRA has from being in this business over these years, we are utilizing our European colleagues, as well. And we are certainly expanding the external network to make certain there's more technical resources getting thrown at the issue.

Okay.

Just a little more clarity there. It's a technical issue that's certainly solvable. And I think Stu is right for legal reasons, let's not discuss culpability at this point. And then answering a further question that somebody asked previously, any problem can be solved relatively quickly with enough capital thrown at it.

We are trying to look at the inexpensive quick fixes first, but the problem is definitely solvable. Let's just be clear about that and we will solve the problem. In the meantime, we will exhaust the inexpensive fixes, so just trust that it's moving at the appropriate pace, though a much slower pace than we would have hoped.

Okay. And then if I could ask on Compressco sort of ambiguous costs, if you could be more specific that would be great. If not, could you at least tell us what the impact on the margins were associated with these unusual costs in the period?

Yes, I would say that the--if you look at sequentially the impact on margins for the quarter were a combination of -- and I'll come back to you on those one-time costs as well as the mix associated with probably lower contribution for Mexico than we would typically expect. And the piece where we had those unusual costs to really kind of the type of costs that come in and out of the quarter in terms of timing that, over the course of a year, kind of get smoothed out. It is not, hence, why I phrased it the way I did, a trend on any of the [cost] of the product or any of the associated field service costs, which is typically one of the larger expense items we have in that business. Because we look at it from a bottom-up point of view and look at it line item by line item, the items we have identified we don't expect to see those coming up again.

Okay. And if you could, just a production volume in Maritech in the quarter.

The production volume averaged just under 43 million equivalent to date and clearly we expect that number to go up in the fourth quarter with the impact of the four Timbalier bay wells.

You said to date so that's the three quarter average?

That's the third quarter average.

Third quarter average. All right. Thank you very much.

You're welcome.

(Operator Instructions)

Our next question is from [John Donnell] with Howard Weil. Please go ahead. Mr. Donnell, are you there?

I am. Sorry. Good morning, guys. I was wondering if you had any updates on your hedging positions in Maritech in 2011 and 2012.

Right now, we have 2000 barrels of oil at about 87.68 for next year, nothing in 2012 and beyond and our gas hedges end the end of 2010.

Okay. So there's no changes then from last quarter, I guess there.

Previous.

Okay. Once we get this new production online, what do you expect that the oil to gas mix is going to be once you factor in the new production combined with the existing declines?

I would say that I would estimate, I don't have the number in front of me, that we will have a slight mix towards oil overall. You know, I would probably think that's going to be about 55% oil.

Okay. And then in terms of the fluids business, you mentioned that Brazil again maybe isn't coming in quite as high as you would have hoped when you signed up with the original contract. What are your expectations there for that market here as you look into the next couple of quarters and to what extent might that be able to counteract some of the declines we are seeing in the Gulf of Mexico deep water?

Yes, two parts of the question. Clearly we have saw a little bit of improvement in the third quarter, but overall your assessment is correct that we haven't delivered the activity we expected when we put the investment on the ground and secured the contract.

Our guys in Brazil--cautiously optimistic and again, I use that given what we have said on previous calls that we will see some increase in activity and it is my hope that will partially offset some of the Gulf of Mexico volume that we are going to be faced with over the intermediate period.

Okay. Then finally for me on the production testing side, can you help us out with what the -- just sort of a ballpark total percentage of revenues come from Mexico in that business?

Overall on the testing business, we probably have about 30% of our business that is outside the US, 30% to 40% depending on the quarter. And Mexico is clearly the largest piece of that. We haven't split the Mexican testing business but it's the largest piece of that 30% to 40%.

Okay. And then directionally, you talked about both the contract issues with your customer but also the security and weather issues. Is one of those a bigger factor than the other? And I guess along with that just you know, what sort of progress have you been making with your customer there in terms of getting new contracts and what are your expectations for that side of the activity pickup maybe in 2011?

Yes, if you look at the three factors in Mexico that we talked about--two of them have been kind of on going challenges both the budget as well as the security. The third one on the weather was unique to the third quarter and that's probably was the smallest of the three. I would say overall it's a pretty healthy mix between the budget as well as the security and I do think with the pipeline of activity we see in Mexico and our thoughts on the budget next year we are expecting that we have seen the low point of that market and we expect to see that hopefully coming back.

In the short-term, the utilization of the equipment there is pretty strong given those challenges we have. And again a lot of that is the proactive response we have taken in Mexico to move equipment. So, as I said in response to the earlier question, clearly this is not a market we have any intention of taking equipment out of. And we look at this as long-term market and very comfortable with our position and very pleased how we are performing given the circumstances.

Great. Thanks a lot. I appreciate your time, guys.

Thank you.

And again, if you would like to ask a question, please press star then one on your touch tone phone. Gentlemen, at this time I am showing no further questioners in the queue. I would like to turn the conference back to Mr. Brightman for any closing remarks.

Thank you very much and we will look forward to getting back together at the end of the year and talking about 2011. Thank you.