Tetra Technologies Inc (TTI) 2010 Q4 法說會逐字稿

Good morning and welcome to the Tetra Technologies 4Q 2010 results conference call. All participants will be in listen-only mode. Should you need assistance please signal an operator by pressing star and then zero on your touch tone phone.

After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded. I now would like to turn the conference over to Stu Brightman. Mr. Brightman, please go ahead.

Thank you, Keith. Welcome to the Tetra Technologies conference call reviewing fourth quarter 2010 results. Joe Abell, 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 fourth quarter results, and I will follow with a brief presentation which in turn will be followed by your questions.

Before I begin my presentation 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.

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 adjusted per share income, net debt, or other non-GAAP financial measures. Please refer to this mornings 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.

Revenue in the fourth quarter was $213 million, slightly above the fourth quarter of 2009, and slightly above the previous quarter. We continue to be impacted by the absence of deep water Gulf of Mexico drilling permits, low natural gas prices, the debottle necking of our Eldorado calcium chloride plant, and continued slow activity in Mexico among other factors.

Though the overall outlook for most of our markets in 2011 is generally better than it has been since late 2008. On the positive side, we see the prospect of a slow trickle of deep water drilling permit issuances as early as the second quarter of this year. Oil prices are strong, hopefully not too strong. We are making progress at Eldorado. Production testing activity in the shales remains robust, and the idle iron initiative should yield benefits in 2011 and beyond.

Anticipating a question regarding the parts of the Middle East and North Africa that are or have been subject to revolution, or major unrest, our revenue exposure is less than a half a percent of consolidated annual revenues for this region.

Consistent with our February 11 press release and conference call, income before tax was negative $102.6 million, and after-tax income before discontinued operations for the quarter was negative $62.6 million, or negative $0.83 a share fully diluted. These results include approximately $109 million of pre tax asset impairments and other charges, or $0.93 per share after tax.

Excluding these special charges, adjusted earnings in the quarter were positive $0.10 a share. See the table at the end of the press release that reconciles adjusted earnings to GAAP income. This compares to adjusted $0.15 a share fully diluted in the same period of the prior year and to an adjusted $0.15 a share in the previous quarter as disclosed in our press releases for those quarters.

For the full year, revenue was $873 million, and income for discontinued option -- operations was negative $43.3 million, or negative $0.57 a share fully diluted, including $145 million of pre tax impairments and other charges. Excluding these special charges, adjusted earnings for the year were a positive $0.65 a share.

In 2009, we reported revenue of $879 million and income for discontinued operations of $68.8 million, or $0.91 a share. Adjusted annual earnings per share in 2009 were $0.85 a share.

Once again, see the table in the press release that reconciles adjusted earnings to GAAP income for 2009 and 2010.

Looking at quarterly performance by segment, profit before tax in the fluids segment was negative $2.1 million, versus a positive $1.6 million in the same period last year, due to costs associated with the early stage production at the Eldorado calcium chloride plant, the absence of deep water drilling permits in the Gulf of Mexico, and the $7 million pre tax impairment of the Lake Charles calcium chloride plant.

Profit before tax in the fourth quarter was down relative to a positive $1.7 million in the prior quarter. Profit before tax in the offshore services segment was negative $25.5 million, compared to positive $15.8 million in the same quarter last year, in which we participated in strong demand and higher service pricing for work resulting from hurricane Ike.

The currently reported quarter was also impacted by $17 million of vessel and equipment impairments. Profit before tax in our E&P unit, Maritech resources, was negative $64.5 million. We had approximately $80 million of pre tax asset impairments and other charges in the currently reported quarter, excluding these charges, Maritech had one of its best operational quarters ever, following the successful drilling of four wells in Timbalier Bay.

Current quarter results compare to $31.4 million of profit before tax in the same quarter of the previous year, which had a positive special credit of $24 million, and to a negative $14.3 million in the previous quarter, which had special charges of $16.7 million as discussed in the press releases for those quarters.

Consistent with our strategy of de-risking our E&P business, in the first quarter of this year, we closed on the sale of certain oil and gas properties representing approximately 11% of our proved reserves that reduced our footprint in the Gulf of Mexico and reduced our plug and abandonment liabilities.

Production testing profit before tax was $4 million, versus $1.6 million in prior year's comparable quarter due to increased domestic and eastern hemisphere activity offset by a reduction in activity in Mexico. Profit before tax in the current quarter was in line with the $4.2 million earned in the previous quarter.

Compressco's profit before tax was $3.3 million, a decrease of $2.5 million versus the prior year's comparable quarter. In 2010 we experienced an escalation of security issues in Mexico and increased customer budget issues there, constraining our business there. Profit before tax was $3.8 million in the previous quarter.

We had $32.3 million of cash capital expenditures in the fourth quarter 2010, including $6.3 million for the acquisition of a strategic Gulf of Mexico plug and abandonment company.

Free cash flow was negative $4.4 million in the current quarter, and a positive $35 million for the entire year of 2010. Cash decreased over the quarter by $9 million, but we remain with a positive cash balance of $65 million at year end. We ended the quarter with net debt of $240 million. We had no borrowings on our $278 million credit facility. With that I will turn the discussion back to Stu.

Thank you, Joe.

In our previous call, we discussed preliminary estimates of our fourth quarter 2010 results, and Joe has gone into significant detail today on the final results. These results are consistent with the estimates we discussed on February 11. However, I will briefly cover again a few of the summary comments we made on that call.

First, we continue to have confidence in the long-term strength of our late-life offshore services business. This confidence is reinforced by our recent acquisition of ProServ's plug and abandonment assets as well as by our extension of a long-term lease on the state of the art diving support vessel the Adams Challenge.

We have filed an amended S-1 registration statement for Compressco, and we have also successful closed on the sale of certain of Maritech's non core assets and associated liabilities.

As we previously discussed regarding our 2011 guidance, we are assuming a very slow recovery in the deep-water Gulf of Mexico this year, and we believe that over the long term, our fluids business is well positioned to take advantage of the deep-water market. We anticipate Gulf of Mexico abandonment and de-commissioning activity increasing mid-year for offshore services and staying at strong demand levels into 2012 and beyond.

We see continued strength in shale activities in the US that will benefit both our fluids and production testing segments. We also remain very consistent with the strategy that we have communicated over the past two years for Maritech of selective reinvestment in core properties, the divestment of non core assets and continued reduction of our abandonment liabilities.

Finally, we believe that the overall strength of our balance sheet positions us to take advantage of growth opportunities that present themselves as we move forward. At this time, Joe and I will be happy to take your questions. Thank you.

Thank you. At this time, if you would like to ask a question, you may do so by pressing star, then one on your touch-tone phone. Star, then two withdraws your question from the list. Once again, pressing star then one allows you to ask a question.

Please hold while we poll for questions.

And the first question comes from Jim Rollyson of Raymond James.

Morning Stu and Joe.

Stu I guess, question on fluids. Fourth quarter, obviously things generally seasonally weak and certainly the deep-water has been slow, but your revenue base was pretty strong. Is that somehow in part related to the winter season, or -- and I guess if you look forward to your guidance, the high end of revenue guidance for 2011 is $275 million, which would be you know less than $69 million a quarter, and you just did almost $73 million. So I'm trying to just kind of reconcile how you see that going forward or what the big uptick was there?

I think the biggest favorable impact on revenue and associated earnings in the fourth quarter is we just had some pretty good activity in the Gulf of Mexico deep-water that -- that just came into that quarter. As I said on February 11, that's -- that's a pretty lumpy business, and we think in aggregate, 2011 is going to look similar to the last half of this year.

So that was the biggest factor. We had -- we have a little bit of seasonality in our European chemicals business that comes in the fourth quarter, you know continued strength on the onshore fluids, and but overall, the biggest sequential improvement we saw were those projects that we execute in the fourth quarter in the Gulf of Mexico. I don't think that changes our view of where we -- where we see the fluids business in 2011.

Okay. Helpful.

And relative to the offshore services business, your guidance for next year, obviously we've got, what, $290 million to $320 million in revenues. Pretty soft fourth quarter. Just kind of seasonally, first quarter is usually pretty soft as well. Are you thinking first quarter is going to be along the lines of where fourth quarter was, or do you think things might actually improve a little bit sequentially?

It may improve a little bit. It's going to be a slow quarter, Jim. The fourth quarter that we just reported for this business was unusually slow, even on a seasonal basis, just not a lot of activity, and the activity that took place, very competitive in the marketplace, and I think that trend will continue. It is continuing through the first quarter, and we expect that we'll start to see the normal second quarter pickup as well as we get to the middle of the year, some of the benefits of some of the new idle iron guidance that's out there. But you know again, we've seen the continuation of a tough market in the fourth and first quarter and expect it's going to transition next quarter.

Got you. And then the last question from me, just the small sale of Maritech assets, maybe impact on 2011. A, on the gain what kind of gain or loss do expect to post in 1Q? And B, how that might affect your Maritech guidance for 2011?

If you go back to the guidance on the 11th, when we talked about the production range for the year, and we kind of highlighted at that time, that was kind of the net impact of the normal decline, plus some of the benefits of the Timbalier Bay wells we drilled out the end of last year. As well as some anticipated sales of some non core properties. So we've already included the production and associated financial impact in our guidance for the year in terms of a gain or loss on that transaction, it's going to be pretty minor.

Very helpful.

We've already got that covered, Jim.

Great.

Thanks.

Thank you. The next question comes from Joe Gibney from Capital One Southcoast.

Thanks. Good morning guys.

Good morning, Joe.

You covered most of the ground in the last couple weeks with your pre-release and some of the questions today already but just curious, on production enhancement margin progression, where we stand in Mexico?

The gross margin a little bit lower than I had thought for the fourth quarter, but are the security issues kind of behind us as you guys shift out of Burgos, and you know can we expect maybe a little bit more of a pickup in 1Q, 2Q, or is it really more back half '11 weighted?

I know you still got a lot of domestic onshore tail wind. And some potential pricing tail wind there. Just trying to calibrate a little bit with Mexico and where we are in progression of the first half on that -- ?

I'll talk about that in relation to the testing business and given -- given the S-1 that's out there. Won't comment relative to Compressco. I think if you look at the overall pieces of testing, you know we continue to think we'll see a strong and -- and improving market environment in the US, and you know that's certainly had a favorable impact in the third and fourth quarter for testing.

And I think in Mexico you know we still have pretty good exposure to Burgos. We still have a lot of activity there, although we've moved some equipment elsewhere, and our assumptions for the year are that it's going to be relatively you know consistent with what we saw the second half of 2010. So our view it's not going to be significantly different, and we'll continue to focus on optimizing the assets that we have down there.

Okay. Helpful. And one for you, Joe, just curious, you guys have done a great job on working down your net debt position, and pretty comfortable cash position now. ¶ You've referenced you've done some small P&A acquisitions. Should we expect any more debt reduction at all in 2011, or are you guys focused on trying to be you know well poised for potential acquisitions as they arise?

Jim, I think we're focused for growth now. We feel very comfortable with the balance sheet, and not compelled to bring debt down any further. We don't want to just chase something that we don't think is economic for the sake of growing the business, but presuming there are good opportunities out there, I think you will see us aggressively grow the business.

And Joe, one comment to add to that, you know that kind of is -- as we've talked about, is based on the fact that where we are at the moment plus the anticipated free cash flow we'll generate from normal ops this year gives us that flexibility. So it's a good position to be in.

Absolutely. I appreciate it, guys. Thank you.

Thank you. And the next question comes from Mike Harrison from First Analysis.

Hi, good morning.

Good morning, Mike.

Just one other question on the Maritech properties that you sold. Can you disclose what the expected after-tax proceeds of that sale will be, or even ballpark?

At this stage, we're probably not going to disclose that, but it's not a big impact in terms of cash impact or anything else. We've modeled all that, but when you see the transaction, we disclose it at the end of the Q, it's not going to be material in that respect, Mike.

Is it less than $10 million?

It will be less than $10 million.

Okay. And then on the one-times this quarter, I think am pretty clear on where all of those go. I did have a question on the small insurance settlement gain. Is that something that benefited Maritech?

Yes.

And then the make whole payment on senior debt, that $5 million one-time, does that go in corporate, PBT, and then if I look at the P&L, it would be in other income, other expense?

Yes. Remember, that's related to the September 2011 debt that we prepaid in December, and with that prepayment, there was the make whole payment on that. We rolled that debt early, and feeling that -- taking advantage of the interest rate environment at the time and getting that issue behind us was advantageous financially.

Alright. And then wanted to ask also, on the PBT margin for Compressco and testing, if I look at the combined margin in Q4, you were at about 15%. If I look at 2011 guidance for production enhancement, at the midpoint you're looking at about 24% margin.

Obviously looking historically, those businesses consistently did high 20s PBT. But I just wanted to kind of go back at you on the idea of margin and production enhancement and kind of what gives you confidence that you can get from the mid teens range where you are currently, to mid-20s by next year?

Well, I think, not wanting to talk about Compressco going out. I'll focus a lot of my comments on the testing side. You know given the fourth quarter, we continue to see the improvements in the US for testing, which is the most significant part of that. So we've seen that margin improvement come through, and we're confident that will continue to be similar next year.

Mexico, we're looking at relatively similar year-on year, and if you look -- if you take some of the unusual items out of the -- out of the quarter as well, it's not as large a sequential improvement. So there really is not as big a ramp-up on that margin year on year as it may indicate. And you know based on what we've seen predominant in the US, we're pretty confident we'll get there on that margin.

Were there some unusual items that just didn't meet your threshold for disclosure that impacted margin in either of those segments in Q4?

We had some stuff in both Compressco and testing that were part of that $5 million of -- you know a subset of that other. So that $5 million consists of both the make whole payment as well as some of the small items that are in the production enhancement division.

So when you -- when you factor those in the sequential margins that we're looking at, I'm not nearly as significant. In our normalized run rates, we're pretty -- we're very comfortable with the margins we've guided for 2011 for those businesses.

Alright, got it. And then last question, was just hoping you could remind us what portion of the fluids and testing revenues, if you could think of those overall, or separately, are coming from shales, and which specific shale plays are most important for both of those businesses right now?

If you look at the fluids division, I think we've said in the past that somewhere around 15% of the overall division revenue relates to shale, and on testing, you know we've said by far the vast majority in the US relates to the shale activity, if you try to break it out as overall testing, you know we've always said that domestic is about 60%, 70%, and of that we probably have you know upwards of 70% to 80% of that that's shale related.

So, you probably have the cross product, somewhere around half of that revenue, in round numbers, is shale. Both of those divisions have, from a shale activity strong positions in EagleFord and Marcellus, and to a certain extent Haynesville. Those would be the three most important for those businesses.

Alright, thanks very much.

You're welcome.

Thank you. And the next question comes from Bill Dezellem with Tieton Capital Management.

Thank you. One additional question relative to Maritech. Do you have additional properties that are for sale, and if so what's the magnitude of those in total that you have for sale?

Bill, we always continue to look at some of our non core, so you know that's a -- that's a fluid number, and it's moving, but you know I think a better way of looking at it is kind of the strategy we've articulated where our $40 million of capital that's in our guidance this year is you know very specific to the Timbalier Bay and East Cameron 328 which kind of shows you where our focus is and once you get past those properties we're just not reinvesting to the same extent.

So, we don't have a specific number, but it's an ongoing process that we continue to spend a lot of time optimizing the asset allocation and portfolio within that group, and then overlaying that with just very, very aggressive focus on reducing the plug and abandonment de-commissioning liabilities.

And actually as a follow-on, what percentage of your production comes from Timbalier Bay and East Cameron combined, please?

Yes, I don't have the exact number in front of me. But it's a very significant number. We break it out in some of the -- on some of the footnotes that we do in the K, but it's a significant number. Joe is digging through his notes, and we'll have the exact range for you, but those by far the two most important.

Thank you.

Thank you. And the next question comes from Adam France from 1492 Capital.

Yes, good morning, guys. Thanks for taking my call.

Joe, I'm trying to get an EBITDA number for the quarter. Do you have a clean DD&A figure you can share with us?

Let's see, I thought we had reported that. Let me check the press release.

You've got $102.1 million, but a footnote that says that includes some asset impairments, and I can't imagine that you've got an $80 million Maritech impairment. I don't think DD&A, you know if you back that out, it's all the way down to $20 million, but I may be wrong. So I had to ask.

Okay. We did announce an $80 million impairment in Maritech, and typically -- what you will see on our cash flow statement, when we filed the K, line item for the impairments, but typically, even though it's line itemed separately, DD&A picks up both the straight DD&A, plus the impairments, and that's what we're reporting here. So, let's see, your question then would be without impairments, what would the DD&A be?

Okay. Probably the -- it would be comparable to what we reported in the prior quarter, in about the $55 million range.

Okay. That's helpful, thank you.

Thank you. And, once again, please press star then one if you would like to ask a question. Once more, pressing star then one will allow to you ask a question or offer a comment.

Alright, we don't have anything else at the present time. Do you have any closing comments?

Yes, thank you very much, and Joe and I will look forward to updating the results after the first quarter in early May. So thank you.

Thank you. And that concludes today's teleconference. You may now disconnect your phone lines.