Tetra Technologies Inc (TTI) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Tetra Technologies, Inc, first-quarter 2011 results. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Stuart Brightman. Please go ahead, sir.

Thank you, Jill, and welcome to the Tetra Technologies first-quarter 2011 earnings conference call. Joe Abell, are 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 first-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 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 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?

Revenue in the first quarter was $222.5 million, 8.1% higher than the first quarter of 2010, and 4.4% above the previous quarter. While US onshore activity for fluids and production testing were robust, we continue to be impacted by the slow approval of deepwater Gulf of Mexico drilling permits, among other factors. However, the overall outlook for most of our markets in 2011 is generally better than it has been since the beginning of the industry-wide downturn in mid-2008, and since the Macondo incident last April. The pace of deepwater drilling permit issuances is slowly accelerating; oil prices are strong; we are making progress at our El Dorado calcium chloride plant; production testing and fluids activities in the shale basins remains brisk; the idle iron initiative should yield benefits to our offshore services segment in 2011 and beyond; and once we close on the pending sale of the majority of Maritech's oil and gas properties in a few weeks, we will have successfully executed one of our major strategic priorities. Finally, while we cannot speak to the progress on the compressed MLP and IPO, we filed an amended form S1 on April 12.

As stated on the last earnings call, our revenue exposure to the parts of the Middle East and North Africa that are or have been subject to revolution or major unrest is less than 0.5% of consolidated annual revenues. However, due to these events, we fully reserved our Lybian receivables, which were less than $1 million. Our fixed-asset exposure is less than $2 million.

Income before tax was negative $4.0 million, and after-tax income before discontinued operations for the quarter was negative $2.5 million, or negative $0.03 per share fully diluted. These results include $12.5 million of pre-tax asset impairments and other charges, or $0.10 a share after-tax, most of which related to Maritech. This compares to $0.07 a share fully diluted in the same period of the prior year.

Looking at quarterly performance by segment, profit before tax in the fluids segment was $7.2 million versus $6.2 million in the same period last year. Strong US onshore fluids demand offset lower Gulf of Mexico demand year over year. Profit before tax in the first quarter was up relative to negative $2.1 million in the prior quarter, which had a $7 million pre-tax impairment for our Lake Charles calcium chloride plant.

Profit before tax in the offshore services segment was negative $4.4 million, compared to $2.4 million negative in the same quarter last year, in which we participated in [demand] in higher service pricing for work resulting from Hurricane Ike. This quarterly loss in the seasonally slow first quarter was generally in line with expectations.

Production testing profit before tax was $9.1 million versus $4.0 million in the prior year's comparable quarter due to increased domestic activity, principally in the shale plays. Profit before tax was reduced by the write-off of Libyan receivables. Profit before tax in the current quarter was higher than the $4.0 million in the previous quarter. Compressco's profit before tax was $4.0 million, a decrease of $1.1 million versus the prior year's comparable quarter. In the first quarter of this year we experienced higher maintenance, fuel, and labor costs. Profit before tax was $3.3 million in the previous quarter.

Pre-tax profit in our E&P unit, Maritech Resources, was negative $4.5 million. We had approximately $12 million of pre-tax special charges related mainly to asset impairment and decommissioning liability adjustments in the quarter. Current-quarter results compare to a positive $8.6 million in the same quarter of the previous year.

As we announced on April 7, we have sold or have sales pending for oil and gas properties that represent 92% of our year-end proved reserves, and 44% of our year-end decommissioning liabilities. We intend to sell the remaining 8% of our proved reserves. We will have approximately $150 million to $160 million of remaining decommissioning liabilities after the pending sale closes on or around May 31. This estimate has been revised upward from the $145 million to $150 million range provided in the April 7 press release due to the decommissioning liability adjustment taken in the quarter.

The majority of this $150 million to $160 million is related to properties that have no reserves, in other words, properties in our backlog of abandonment and decommissioning work. As we announced in our guidance on February 11, we intend to perform $80 million of such work in 2011, and perhaps even more. The vast majority of the remaining decommissioning work should be completed in 2012, after which we will have essentially wound down our E&P business. We expect to have more than sufficient funds from sales proceeds to fund the remaining work.

We had $20.8 million of cash, capital expenditures, and acquisitions in the quarter. Free cash flow defined as cash from operating activities minus cash used in investment activities was a positive $2.3 million in the quarter. Cash increased over the period of the quarter by $7.1 million for a total of $72.5 million. We ended the quarter with net debt of $232.5 million. We had no borrowings on our $278 million line of credit.

With that, I will turn the discussion back to Stu.

Thank you, Joe. I would like to briefly summarize some of the key trends and observations associated with the first-quarter results. First, our offshore services segment loss of $4.4 million was fairly typical of the normal seasonal challenges we experience in the first quarter. Having said that, in a very challenging market, we were able to achieve this result by aggressively optimizing our utilization, and keeping the major assets busy during this normally quiet time period. As we've moved into the second quarter, we have seen our backlog increase considerably, and have a very strong position for our major assets going forward. As we noted previously, this includes the Adams Challenge, the state-of-the-art dive support vessel which we have on long-term lease.

We have also continued to expand our capabilities in this business by purchasing the project management and engineering consulting business formerly known as Twachtman, Snyder and Byrd. These services focus on liability and risk assessment in domestic and international well abandonment and structure decommissioning projects. This acquisition is consistent with our long-established strategy of building out our capabilities in this segment, which we consider to be a very growth-oriented component of our overall portfolio.

The fluids business exhibited strength during the first quarter. A major contributor to this were several Gulf of Mexico projects that had been previously permitted, continued strength in our onshore fluids business, sequential improvements in production at our El Dorado calcium chloride plant, and other elements of our calcium chloride business both domestically and internationally continue to be strong. The progress in El Dorado was consistent with our previous statements regarding increased production in our drive plan. We anticipate making additional minor modifications to the equipment during the second quarter, which we believe will result in higher output rates. Furthermore, we expect to make an additional modification during the summer that hopefully will get us to the production rates required for this plant.

Another contributing aspect to first-quarter fluids division results was our international fluids business, where we saw improved activity, including Brazil. We are encouraged by the recent approvals of our permits in the Gulf of Mexico, and optimistic that we will see a favorable impact from this in the second half of this year and beyond. We continue to believe that our long-term supply agreements give us a very strong position as the deepwater Gulf of Mexico market recovers.

In Maritech, when we adjust for the impairments in the charge associated with revisions to estimated future well abandonment and decommissioning costs, we had a very strong quarter. This continues the favorable impact of the [Timberlay] Bay drilling program we successfully completed in 2010. As we announced on April 7, we have entered into agreement to sell for approximately $222 million Maritech's interest in oil and gas properties that collectively represent approximately 79% of its total proved reserves and approximately $72 million of associated asset retirement obligations as of December 31, 2010.

Proceeds from the sale will be reduced by purchase price adjustments, including adjustments associated with the January 1, 2011, effective date of the sale. This transaction continues our multi-year strategy of optimizing this business, and effectively exits Tetra from the E&P business. We will retain $150 million to $160 million of liabilities after the adjustments booked at the end of the first quarter, and we expect to have the vast majority of this completed by 2012. For our guidance in February, we still expect to spend about $80 million towards reducing these liabilities this year. The vast majority of this work will be done with Tetra assets.

Our testing business had another strong quarter in activity and earnings. We continue to benefit from the significant activity in the shales, and we are aggressively working on margin increases in this market. In addition, the international testing business is an area of focus, and contributed to the favorable results in the first quarter. Production testing segment is requiring additional capital investment, and we expect this to be a very solid business going forward for us.

Finally, Compressco had a pre-tax profit of $4 million in the first quarter, down sequentially from adjusted fourth-quarter 2010 results due to increases in fuel costs and higher maintenance and labor expenses related to existing units in the field, as well as units being deployed as our fleet utilization is increasing.

At the end of the first quarter, our net debt decreased by $6.9 million to $232.5 million, and our revolving bank line of credit remains essentially undrawn. Clearly with the net proceeds from the anticipated sale of Maritech's oil and gas properties, Tetra has unprecedented financial flexibility to pursue growth opportunities. As noted throughout my discussion, we continue to see improving markets, and we believe that we are well positioned to take advantage of these improvements in the short term, as well as use our financial flexibility to make significant reinvestments that will benefit us over the longer term.

Jill, at this time would you open the lines for Q&A? Thank you.

(Operator Instructions)

The first question is from Jim Rollyson of Raymond James.

Good morning guys. Stu, I guess I will start with Fluids. Pretty good quarter it looks like out of Fluids, certainly from a revenue standpoint. And given that you typically see second quarter as your seasonal strongest quarter, and you're still working on continually getting things a little bit better in the El Dorado plant. We are tracking way ahead of the guidance on the revenue side for the year, just curious what your thoughts are for the rest of the year, or just upside bias maybe to the revenue target?

I think if you look at Fluids overall, though we certainly had a very encouraging first quarter, and as noted, a lot of the components of that segment performed well activity-wise, onshore, international, and even a couple projects in the Gulf of Mexico. So I think you should look forward -- first, I agree the second quarter is usually strong quarter first based on our European calcium chloride business, and I would anticipate that. I would expect to see continued strength on the onshore with associated activity. And we are continuing to make improvements in El Dorado, we still have a long way to go to get both the volumes and the operating efficiencies where they ultimately need to be, but sequentially we are improving.

So I do feel good about that business overall, and we saw the international markets kick up also, which was good. So I think we probably -- I feel good about the assumptions we have and there may be some upside to that piece of the business.

Okay. Compressco, you mentioned in the press release and in your talk, the business is still getting better but margins got hit a little bit by, particularly by higher fuel costs. Anything in your contracts that allow for you to recoup fuel costs or do you see at some point in time the ability to raise price a little bit to help offset that in the margin line?

Again, as you know, I am a little bit constrained on looking out and talking about that business. But as you would expect, as we look at the trends in cost and the trends in activities, from an operational point of view, we are typically really proactive of making the necessary adjustments to mitigate that, so I think you can be confident we're looking at that.

Okay, and you mentioned accelerating CapEx a bit on the Production Testing side, as that business is turning around. Maybe a little bit of color on where is it mostly domestic, or is there some international? And then maybe some color on how the international business is playing out, and particularly where.

Yes, if you look at that business and go back over the last couple of years, I think we have discussed on these calls that as the US business came down a couple years ago, we were pretty aggressive in moving some of the assets outside the US to take advantage of opportunities and optimize the utilization. So as we start to see the activity continue, these areas where we were getting close to full utilization that we just need to expand into some of the high-activity areas in the US.

In Mexico, we have continued to say that all the assets are staying on down there, we haven't done anything different in Mexico, we move them around and optimize them. I think we have been very successful maintaining our activity and our fundamentals in Mexico. And then we continue to look at and put units in new growth areas internationally. So think it's going to be continued strength in the US and we're dealing with that , looking at our spots internationally and being very selective, as well as optimizing what we have in Mexico.

Helpful, and the last question for me, thoughts on where the proceeds of the sale of Maritech might end up?

Yes, you've certainly seen that we continue to look for opportunities in our Offshore Services, Gulf of Mexico fleet of services to expand our capabilities and we've announced several of those with the P&A additions in December, the engineering services addition on this call, extending the lease on some of our key dive assets. Those types of opportunities, we will continue to pursue. We've been very consistent in our theme that we do view that as a growth area, and as I stated on the call, I was pleased with our overall numbers in that segment for first quarter, and look forward to significant strength based on the backlog we have. We have testing, we've talked about putting more capital in there, that's been a historically high return business with Tetra. So that's something we can continue to look forward to.

And then I can't talk about Compressco going out, but we've always been very positive on that business. On the Fluids, a dual strategy, one is get you have running better and get the returns we need on the major investments in the facilities we've made over the last several years, and continue to look at opportunities to leverage our position on the completion Fluids themselves. As the bromine markets get tighter going forward, I think that plays into our strength and gives us that cost position advantage. So anything we can do to put peripheral services associated with that, will do.

Thanks for the color.

The next question is from Stephen Gengaro of Jefferies.

Thanks, good morning gentlemen. I guess two things. One, any change in how you are feeling about the well abandonment and decommissioning business, particularly as it pertains to the Idle Iron works and how that impacts work. I mean second and third quarters are always strong, but how that impacts the seasonality and does it potentially smooth it out going forward?

Yes, as we've said, we always expect that we would start to see the benefit of the Idle Iron guidance as we get to the middle of the year, and expect to see a full-year benefit in 2012. So as we look and differentiate the normal seasonality that you see in the second quarter for something incremental, it's challenging, but I do believe that certainly the backlog is strengthening, the opportunities are increasing. And I think it's just a combination of some of the trends we have seen previously where there is a real significant focus on mitigating risk by our customers by plugging wells. And that has started previously and continued this year, and continues to ramp up.

And we are starting to see on the decommissioning and the structure removal an increased demand, which again, I've always said I thought that activity had lagged, plug and abandonment is I think potentially influenced by the Idle Iron. But I think we will see that as we had always hoped, we will see and expect some of that to continue into the fourth quarter, maybe a little bit further duration than a typical year. But we've got good visibility going out, and hopefully we will start to feel better about enhanced fourth quarter activity versus historical rates.

That's helpful. And then my follow-up or second question would really be, when you look at your Fluids operations, and we have been hearing about material increases in bromine prices, and my sense is, and I know we are not going to get back to the extremely high levels we saw several years back, but my sense is the last time we saw bromine prices increase significantly, your competitors pushed selling prices on Fluids. You had a locked-in supply agreement and you saw huge margin improvement then. Are we seeing that for at least helping act as a real good tailwind for fluid margin improvement as we get into the second half of this year and next? And if you could frame that relative to your guidance, that would even be helpful.

Again, the driver in all that is going to be the demand curve, and that's obviously always the toughest challenge to predict. But we said we think that will start to increase the second half of the year, and get much stronger next year. So as that activity increases and inventories are consumed, and you get into a replenishment mode, clearly we like the position we are in, and we think we will benefit from that. Trying to model that is always challenging, that's all a trend that's very favorable to us, Stephen.

Stephen, remember, most of those heavier Fluids, in other words the bromide compounds, were consumed in the Gulf of Mexico, or offshore, let's say. And the Gulf of Mexico is slow, we have not seen the pace of activity pick-up too pre-Macondo levels yet. So it's a function of that pickup.

That's helpful, Joe, thank you.

The next question is from Michael Harrison of First Analysis.

Hi and good morning. Just wanted to dig in a little bit further on the Gulf of Mexico. We've heard from some other sources that the pace of permitting in the Gulf continues to be very slow. You guys seem to be a little bit more positive, and I was just wondering if you could help us understand, does that have to do with any particular part of the Gulf? Or shallow water, deep water that you are exposed to? Or is it maybe just where your expectations were relative to others and we're just seeing that any activity is better than no activity on the permitting side?

I wouldn't say that our geographic distribution influences our response versus others. Clearly for us, the permitting is primary influence is in the Deepwater. And I certainly am not looking at an acceleration or something fundamentally different than what we talked about in February on our guidance. I think it's going to be slow, hard to predict, and again hopefully we will start to see the benefit as we get through the second half of the year.

In the meantime, the activity we have is stuff that had been permitted previously, and it's certainly at a reduced level from where we were pre-Macondo significantly, and any permitting that leads to activity in the second half of the year and beyond will be favorable. I'm not certain, Mike, that we view it more optimistically than others. Maybe we did set the bar a little bit low to begin with.

Mike, let me repeat what I said in my comments, that we continue to be impacted by the slow approval of deep water Gulf of Mexico drilling permits, among other factors. And then on the positive side, I made the comment that the pace of Deepwater drilling permit issuances is slowly accelerating. So if I sounded overly optimistic there, relative to other comments that you said, I hope I set the record straight now.

I appreciate the -- ?

Mike, we always try to, on the Fluids, really emphasize the long-term view of where we see our position in the macro market, and some of the supply agreement advantages that we have. Predicting the timing, we are hopeful the second half of the year we will see it, but it's awful difficult given the permitting variable out there.

I appreciate the additional color. Was wondering also if you could give us some additional details on the TSB Offshore acquisition. What was the ballpark price of that acquisition? What sort of top-line increase should we expect on an annual basis? And also does it have the same seasonality as the rest of the well abandonment business, or is there a bigger off-season component to that consulting-oriented work?

Let's start from the first piece of the announcement relative to the Offshore P&A part that we acquired back in December, then walk through the current piece. In December we had an opportunity to immediately expand our Offshore P&A capability that was a market that we are very, very optimistic would have high demand immediately and continue to grow. It just gave us an ability to plug-and-play and we've done a great job here in the first quarter integrating those assets and people into our existing operations, pretty much as expected. We got that behind us and that's running real well.

And we had the opportunity as we went through the first quarter to look at the consulting business, and what it does is that brand and those folks are very well recognized within the industry as having tremendous experience on the consultative side for risk and liability assessment. And we think that capability is something that it's not seasonal per se, and it's hard to quantify it to a revenue line, we just like having that extra capability. We think it just gives us a much higher view of the market, and that group also has pretty good network outside the US, which we said we've said previously, it's something that high in our strategic priorities.

I would look at the most recent announcement as just indicative of additional capability, not a big investment, very modest, and gives us that extra service and technical capability. Again, as you look at our strategy in this business, we're always trying to delineate, we are focused on the late-life side, that strategy where we see high demand, we're not trying to be all things to all people as a contractor in the Gulf of Mexico, and that's the types of acquisitions and expertise we're building out.

All right, and then on the El Dorado facility, can you give us a little bit of a sense of where that facility was in terms of nameplate capacity utilization at the end of the quarter? And also where that utilization rate -- how it's improved over the course of the year so far?

Again, we've always been hesitant to try to tie specific numbers back to nameplate and design capacity, et cetera. The more relevant part is getting the production to the rates that tie up with the market opportunities in the intermediate and short-term. And we certainly sequentially improved the production on the dry plant, the liquid, we've been producing at the rates the market demands pretty consistently from the beginning. And sequentially, first quarter was better than fourth quarter, and I expect the second quarter to be better than the first quarter.

And as we get into the middle of the year, my hope and expectation is those run rates at that time are going to be consistent with the market demand we have over the next 12 to 24 months. And if it doesn't meet that first threshold, we will look at a bigger capital solution, which we are, on a parallel basis, doing the engineering, and longer-term if there's demand that exceeds that, we will also evaluate whether we need larger capital. But as we've said, we've made progress and we are encouraged.

Last question, I wanted to ask you is, not sure that you saw the announcement from Albemarle that they are planning to start to produce lithium carbonate from the brine source that they have an Arkansas. I was just wondering if you could comment whether the brines that you guys are processing, whether you have looked at the lithium content, what the lithium content is, and whether that's an area that you could potentially exploit longer-term?

We haven't spent a lot of time looking or talking about that. And that's something we probably need to delve into more detail and get back to on. But in the meantime, I think our primary focus is, Mike, is optimizing what we have and I would think that's probably an area that's not going to have a lot of impact on our business.

That's fair enough Stu, thanks very much.

The next question is from Joe Gibney of Southcoast Capital.

A couple quick ones for me. Just to follow-up on the Maritech side a little bit here. Joe, you indicated your intent to sell the remaining 8% of your reserve tail versus simply letting it run-off. Prior to that transaction happening, just curious if you could help a little bit with what the production profile is going to be on that remaining 8% within Maritech going forward.

I don't think it should be substantially different from other late-life properties, Joe. I think I that would be typical of what you've seen in the past from us.

Okay, fair enough. And then one less one for me, circling back on the Production Testing side, reference the previous question on international traction. I understand we are getting some stabilized Mexico now, but if you could it would be helpful, just what is your international mix now as it stands today within Production Testing? As a percentage of your revenue base there?

Within testing, in round numbers, we are probably 60% to 70% domestic, call it two-thirds, one-third, and obviously that number changes as the numerator and denominator change. So that number has a larger domestic content than it would have a year ago.

Okay. Fair enough. Covered most of the other ground, I appreciate it. I'll turn it back.

The next question is from Victor Marchon, RBC Capital Markets.

First question I had was just on oil and gas services, and you guys had talked about seeing pretty nice improvement in backlog. And just wanted to see if you could compare that to where you guys were last year heading into the summer season, and also if there is a way that you guys could delineate how much of the increase in backlog is attributed to the Idle Iron initiative to try to help us book-end what the incremental activity will be from that initiative?

The first part of the backlog versus same time last year, I'd say, Victor, that it's a little further extended into the year than we had 12 months ago. I'd say, versus 12 months we have better visibility through the third quarter, which is very good.

And second part of it on the Idle Iron, how much of that is attributed to that? Really hard to say, you don't get a direct statistic of how much of the activity is driven by specific requirements responding to the Idle Iron. Again, my sense is a continued focus and increase on the plug and abandonment and that you are seeing some of the decommissioning activity catch up to that where it's always lagged, and certainly I think the Idle Iron is influencing some. But it's very difficult to get that incremental piece nailed down, but given that some of the 2 is growing and is extended through the third quarter, we are pleased with the outcome.

All right. Okay. And just as it relates to the pricing side, given where backlog, how do you see the total market from a supply/demand standpoint? Is a looking tight enough in the summer for some price improvement, or is that looking out more of a 2012 event?

I would say a little bit of both. I think the overall environment improving, and certainly we are hoping to see a little bit better market environment during this year, and I would definitely expect it to be even better next year.

And the last question I have is on Mexico. I know you guys had touched on it, and just wanted to see, indications suggest Pemex is ramping up spending a bit there, and wanted to see if you guys had seen any of that, if there's an expectation that you are at the lows now, but you could start to see some improvement in the latter part of the year?

I would say we are probably somewhat optimistic that we're going to see some improvement in the market down there versus where we've been. For the reasons you've mentioned, and our guys continue to do a great job of optimizing what we have and moving assets around. But this seems to be a little bit more optimism as you look at that market.

Okay. Great, thank you guys, that's all I had.

Our next question comes from Blake Hutchinson of Howard Weil.

Good morning guys. Just on El Dorado, as you make these tweaks, are you still recognizing a significant expense with regard to these more minor tweaks that's impacting margins during the period?

Until we get up to the targeted volume, we are still going to have some negative operating efficiencies associated with it. We are spending some capital, which is always been part of our guidance, so that's fluid segment this year. And as we go through, until we get it to the optimum level, there's going to be variances that still need to get squeezed out. So we still have a tremendous amount of opportunity there beyond our current profitability.

But the tweaks -- just more of a point of clarification, the tweaks that you are making are showing as CapEx items, they are not showing up as OpEx?

Correct. What I refer to as a minor modification during the second quarter, that will show up as capital, that tweak.

Okay, so therefore as we get to higher revenue run rates, we should probably see changes in the margin profile along with the revenue run rate, because it's not being burdened by OpEx. And so by back half of the year, we should see a margin run rate that's reflective of the debottlenecking on the volume side as well

Right, I would say as we continue to increase the rates and we have less disruptions and making modifications -- when you go and do a modification, you're going to interrupt your production flow for a period of time that has a negative operating impact. But as you get forward and get the rates up and have the predictability, you'll have an associated improvement in both revenue and margin.

Great, thanks for the clarification there. Just touching completion Fluids top line again, I know you mentioned that Brazil was a bit more active in the quarter. Was there any Deep Gulf activity with regard to the retail business during Q1 that's reflected in the results?

In the Gulf of Mexico or Brazil?

Deep Gulf. I Guess you did mention that you did see some activity in Brazil.

As we said, we had a couple of small projects in the Deep Gulf that benefited the top line as well as the margins business.

Okay, great. And then just probing that again, what is onshore in terms of percentage overall net business?

We think the number we've consistently used for that is somewhere in the 15%, 20% percentage of revenue.

Okay, great. And then finally, the last couple quarters, you have seen a nice acceleration in testing top line. I know I've touched on it here, but should we think of that, the last couple quarters, as mainly US completion-based and that acceleration remains intact here for the foreseeable future? Or was that more international bias?

It was a combination. I'd they the US business has continued to ramp-up and we expect it will stay at those higher levels, and then internationally we've got some areas where we had a little lumpiness on some projects during the first quarter, the probably will come off a little bit as we go forward on 1 or 2 specific projects. But most of our international business in Mexico and the Eastern hemisphere should continue to roll along. As Joe mentioned, any of the business in Libya is on hold at the moment, but other than that, we should continue to see benefit both domestically and internationally.

Great, thanks for the color. I will turn it back.

The next question is from Bill Dezellem of Titan Capital Management.

I have a couple of questions. First of all, I'd like to just hit the Fluids issue head-on. You reported 17.6% gross margin. When you get the plant back to appropriate utilizations where you're comfortable, and you have decent volumes coming out of the Gulf of Mexico, where do believe is a reasonable range for margins to be for that business?

When you get to the combination of both of those of those, we've thought in the mid-20s would be down the road where we see that business. Once the Gulf is back in pre-Macondo activity, and we're at our run rates we need up in El Dorado.

And to help us understand, back to previous run rates, maybe because we have short-term memory, only that business in the quarter had roughly $77 million of revenues. If you were back to what you would consider to be a normal level of revenue run-rate, what would that be?

That would be, again, if you're looking at the first quarter specifically, you'd see that number up well up into the 80s when you factored in those other 2 variables we talked about. And you have to look at specific quarters, obviously the second quarter's the seasonally higher one, but if we're talking specifically the first quarter, will see significant benefit when we see the activities in the Gulf, as well as El Do, at a higher rate that will take us into the 80s.

All right. That's helpful. Thank you. And then relative to Brazil, is our understanding correct that there is a backlog of wells that have been drilled in Brazil, but have not been completed? And as a result, in essence there is a backlog of business waiting for you when they decide to pull the trigger? And if that is a correct assumption, would you please quantify that backlog?

There's been some wells drilled backlog, but I wouldn't say there's a large backlog that we can look at, that we can count on in the short, intermediate-term. Most of the wells that we had anticipated with our contract haven't been drilled per se, we still think they will be down the road, but that's anticipating the drilling and the completion. We've in the meantime, given the inventory position we have, been very focused on other areas of applications, and that's one of the reasons why we are beginning to see some of our activity in Brazil increase from where we were last year. But a lot of what we talked about is still anticipated, and we don't have a specific line of sight on that at the moment.

And with the higher oil prices, are you getting a sense that they are looking to start drilling again in some of these deeper, more complicated wells? Or has there been any change?

We continue to be optimistic, but as you look at our track record on this over the last year or so, we haven't been great predictors of the timing of that. But we still think it's going to happen, but we're taking the conservative approach of not trying to pick the time, but we are in there pursuing it, and in the meantime utilizing the people and inventory we have to get some other work.

Thank you, Stu.

The next question is from A.J. Strasser of Cooper Creek Partners.

Congratulations on a solid quarter, that's very encouraging. I actually had a couple of questions. First on the Offshore Services side, could you elaborate on whether you feel better-positioned than some of your peers given some of the upgrades and add-ons that you have made to that business? Are you seeing a specific demand for your services? I'm just trying to understand your near-term confidence and whether or not the changes you have made to that business are actually bearing fruit as we speak?

I will probably deflect the first part of your question on comparison to the competitors, but come at it from a different angle. We are very comfortable with the way we've built the organization, the way we've built the suite of services. We've demonstrated our ability to execute very effectively and safely, and I think we get a lot of credit for that, and deservedly so.

And all of the small moves you've seen us make over the last several months of just building out that strategy to have as much capability in that late-life service as we can. And we'd like the ability to pursue individual services, if that makes sense, as well as bundle as much of it if we can, if that's the customer, and there's not a significant cost associated with that. So we've got great flexibility, capability, demonstrated execution, and we think the market drivers are very strong going forward.

Okay. And then on the Fluids side, actually my question was answered, but I want to know if you guys could talk a little bit about some of the impact on that business from the onshore shale plays. Do you think that could be a significant driver going forward? I'm trying to understand where we are in terms of -- what inning we are in terms of the impact of the shale plays on that business, and whether or not there could be incremental demand from levels that we've seen in 2010 and even at current levels?

Well that business has certainly continued to improve with the areas that we operate on, we're focused on expanding it, and I don't think it going to ever be the central dominant aspect of that division. Clearly the Deepwater on a global basis is the big target there, but in the meantime, continuing to grow and participate in the shale in the US is something we are focused on, benefiting from, and expect to continue to.

Is there something different based on the well complexity on the onshore side from the shale plays that's enhancing the demand of your business?

Most of our services in that area is driven off of the water handling and water treatment side. So it really has to do with the fracking and how you deal with the water. Much more so than offshore, where you have the emphasis on the high-density Fluids, and the cost-competitive position that we are in.

Okay. And then lastly quick question here, can you talk about the proceeds from Maritech sales? Is it safe to assume that any acquisition that you make the would be accretive? And also if you are unable to find an appropriate acquisition within a given timeframe, would you guys be open to a special dividend or share repurchase, especially given the state of the balance sheet and the financial health of the Company here?

We would hope that any acquisitions we pursue would be accretive, and that's the target that we have, as would be expected. And we are all fully aware of the need and the desire to reinvest prudently and intelligently with the proceeds that will come from Maritech, as well is the cash we currently have and the debt capacity. And optimistic, based on the discussions on the different service lines we have and the opportunities that we will find a home for, if we weren't able to get that done as fast as we'd like, we certainly would need to consider the whole spectrum of alternatives. But our main focus is to find places to put that to work that fits in with our existing strategy.

Okay, thanks again, and encouraging quarter and congratulations.

The next question is from Thad Vayda of Stifel Nicolaus.

Morning, two quick ones please. You alluded to increased costs in Compressco, is there any other segment of your business where you're seeing increase cost increases that you can't yet pass on to customers?

We in general have been able to manage the cost side and the other businesses within the cycle, and take the necessary steps to deal with them. I'd say in general, we are doing a reasonable job of dealing with some of the cost pressures that we are seeing.

Okay, and they would be the same flavor as in Compressco fuel and labor to some extent, or are there others?

I would say most of the businesses would be dealing with those 2 cost elements, which are fairly consistent across our businesses. And then depending on the business and the geography, there's specific vendors and commodities that we are having to deal with. But, again, I think we've done a pretty good job on the cost management and minimizing it, and then dealing with it on a proactive basis as we see it. But those are the 2 main elements that we see across the Company.

Okay. And I'm sorry to bring you back to Fluids, but I just want to make sure I follow. You indicated an uptick in international volume, can you, using percentages perhaps, indicate the genesis of that; is it predominately Brazil, where else might we have seen an uptick?

Yes, I think what we looked at the increase in activity for the Fluids in the first quarter, Brazil was one we mentioned, and we also saw certain countries in the Eastern hemisphere some increase as well.

But predominately Brazil as a percentage of international uptick?

I would say Brazil and again, certain elements, both within the Eastern hemisphere contributed. It was more than just Brazil.

Okay. And lastly, on the incremental capital spending to address the drying facility issues, the drying plant issues. If I understand you correctly, you're spending incrementally just to maintain capacity to accommodate demand. And then at some point, there's a decision where you will decide to complete the job. Is that a fair characterization?

Yes.

And, I guess, I can't remember if you've told us in absolute terms what the ultimate investment might be, but as a percentage of the total remaining that you potentially may have to spend, how much does he the incremental portion versus the final solution portion comprise?

I think what we've said is the amount in the capital that was put in the Fluids guidance in February included the incremental capital items, as well as a significant portion of the larger investment, if we were forced to do it. If you look at the Fluids CapEx that we had in our guidance in February, it was $32 million for the year, and the vast majority of that has to do with some of these issues in El Do, and the vast majority of that has to do with the longer-term solution that if we are forced to do that. My opinion is when we finish the year, we will be significantly below that CapEx for Fluids that we had in the guidance back in February.

Okay, great, thank you very much, Stu.

And finally we have a followup question from Mike Harrison of First Analysis.

Hi, just one last one relative to your guidance. The results here in Q1 were clearly better than at least with the street was looking for. You guys categorized them in the press release at least as consistent with your expectations, but given the Q1 results and given the upcoming sale of the Maritech properties, was just hoping you could comment on how we should think of those two issues in the context of your $0.55 to $0.75 EPS guidance for 2011?

I think if you look at it overall, Mike, and you listen to the comments and the results from the first quarter, we feel that Fluids and testing is walking along pretty good, consistent with the guidance, that the first quarter and the Offshore Services was about what we expected. And we are seeing backlog in evidence of the ramp-up that we are hoping for and expected in the second quarter beyond. So feeling directionally comfortable with that. And Maritech, as we close Maritech and report that, and split out those details, some of that revenue and associated margin will not be with us from the end of the month when we anticipate close and beyond. But when you take it all together, I think in aggregate, the numbers that we put out in February for the guidance still makes sense. I think that the businesses are all performing about what we expected.

Would be fair to say that you think you could be in the upper-half of guidance? Or you're not going to go that far at this point?

I'm going to not go that far at this moment. We still have a lot of moving pieces, and it's early, and again as we go through the second quarter and continue to build up the backlog on Offshore Services, hopefully we will feel better and better about that, but for now I think we are still going to leave it with the range we put out there.

Mike, remember we are losing 7 months of the Maritech earnings, so subtract that from your guidance, and then to the extent we may over-perform in the other areas, we don't want to speculate at that point, but at a minimum, you need to subtract 7 months of Maritech earnings.

Understood. Thanks very much.

(Operator Instructions)

I'm showing no further questions. This concludes the question-and-answer session. I would like turn the conference back to Stuart Brightman and Joe Abell for closing remarks.

Thanks, Jill. Joe and I will look forward to updating the group in early August on the second-quarter results. Thank you very much.

Thank you for your time. The conference has now concluded. Thank you for attending. You may now disconnect.