Tetra Technologies Inc (TTI) 2011 Q2 法說會逐字稿

Good morning and welcome to the TETRA Technologies Inc. Incorporated second-quarter 2011 results conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Stuart Brightman, President and CEO.

Thank you, Denise, and welcome to the TETRA Technologies Inc. second-quarter 2011 earnings conference call. 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 second-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 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?

I would first like to thank my outstanding accounting and tax departments for their extraordinary efforts and professionalism working 60-plus hour weeks for months helping to get the Compressco MLP and IPO successfully launched, for handling the accounting and tax aspects associated with the sale of the majority of Maritech, closing a complex quarter successfully and producing Compressco's first form 10-Q, in addition to doing their day jobs.

I would also like to thank Ernst & Young for the superb cooperation, dedication, thoroughness and constructive input throughout the process. Revenue in the second quarter was $235.1 million, 2.7% lower than the second quarter of 2010. Noting 2 things. First, that the second quarter of 2010 was largely unaffected by the Macondo incident, whereas subsequent quarters have been.

And secondly, noting that all of the decrease quarter-over-quarter was due to Maritech, as we wind this business down. Our non-Maritech revenues increased quarter over quarter by 5.5%. Reported revenue in the second quarter was 5.6% above the previous quarter. Non-Maritech revenue was up 13.0%.

Repeating some of the comments I made last quarter, while we continue to be impacted by the slow approval of deep water Gulf of Mexico drilling permits, US onshore revenues for our completion fluids and production testing businesses are at or near peak levels. The overall outlook for most of our markets in 2011 is generally better than it has been since the Macondo incident last April.

The pace of deep water drilling permit issuances is slowly accelerating, oil prices remain strong. We are making progress at our El Dorado calcium chloride plant. Production testing and fluids activity in the shale basins remains brisk. The idle iron initiative should yield future benefits to our offshore service segment.

We purchased an additional heavy lift barge to better serve this market and we have successfully executed 2 of our major strategic priorities with the sale of the majority of Maritech on May 31 and launching the Compressco MLP and IPO on June 20.

Income before tax was $47.6 million and after-tax income before discontinued operations for the quarter was $30.4 million or $0.39-a-share fully diluted. These results were boosted by special credits and charges that aggregated to a net credit of $18.3 million pretax or $0.15 a share after tax, which included the gain on the Maritech property sale, partially offset by asset impairments and other charges, most of which related to Maritech.

This compares to $0.18 a share fully diluted in the same period of the prior year that contained an $8.9 million pre-tax charge for special items or $0.08 a share after tax.

Looking at quarterly performance by segment, profit before tax in the fluids segment was $11.5 million versus $10.2 million in the same period last year. Strong US onshore fluids demand offset slower Gulf of Mexico demand year-over-year.

Profit before tax in the second quarter was about 59% as compared to the prior quarter. Profit before tax in offshore services was $13.6 million, compared to $14.3 million in the same quarter last year in which we participated in stronger demand prior to the Macondo incident.

While pricing levels for diving services remains relatively soft, activity levels are generally meeting expectations for diving, plug and abandonment, and decommissioning work. And we are confident in the Gulf of Mexico well abandonment and deep commissioning market over the longer term and have just purchased a heavy lift barge with a 1,600 metric ton crane for a price expected to reach approximately $71 million after transportation and final testing and rig-out costs.

Production testing profit before tax was $6.0 million versus $3.0 million in the prior year's comparable quarter, due to increased domestic activity, particularly in the shale plays.

Profit before tax in the current quarter was $3.1 million lower than in the previous quarter, due largely to favorable results on a South American technical management contract in the first quarter. Compressco's profit before tax was $3.8 million, a decrease of $1.2 million versus the prior year's comparable quarter.

In the second quarter of 2011, we experienced higher operating and G&A expenses. Profit before tax was $4.0 million in the previous quarter.

Post-IPO and beginning with the second quarter results, we are fully consolidating Compressco, as we always have, but reporting the 17.3% of the Compressco earnings owned by the public as a non-controlling interest.

Profit before tax in our E&P unit, Maritech Resources, was $38.5 million. Maritech had $30.2 million of net special credits in the quarter consisting of a $56.6 million gain on the sale of 79% of Maritech's properties offset by $23.7 million of asset impairments increases through our residual decommissioning liability.

We also took a $14.2 million charge on the termination of Maritech's oil hedges, which is reflected as a corporate cost in other expense on the income statement. As we wind down this business, we will have some minor ongoing G&A expenses. Maritech's balance sheet will mainly consist of its residual decommissioning liability, which is currently $137 million, down by $86 million from $223 million at March 31.

The vast majority of the remaining decommissioning work should be completed by the end of 2012, after which we will have essentially completed the wind-down of the E&P business. We expect to have more than sufficient funds from sales proceeds and other sources to fund the remaining work.

Cash increased over the quarter by $251 million to a total of $324 million in cash. $19.3 million of this cash belongs to Compressco Partners, but it's fully consolidated on the TETRA balance sheet.

The $251 million increase in cash resulted from $178 million of Maritech and other sales proceeds, $50 million of IPO proceeds, $48 million of cash from operating activities offset by $25 million of capital expenditures and other activity. We ended the quarter with net debt, which is now defined as total debt minus cash excluding Compressco's debt and cash of $0.5 million, essentially zero net debt. We had no borrowings on our $278 million line of credit.

With that, I'll turn the conversation back to Stu.

I would like to briefly summarize some of the trends we continue to see in our operations and update you on several of the key initiatives. Our overall market environments continue to improve in many segments. This was evidenced by the sequential increase in revenue in the majority of our service businesses during the second quarter.

We continue to see strong activity in our onshore US markets, as evidenced by the continued strength of both our fluids and testing businesses in this area. During the second quarter and with the announcement of our acquisition of the TETRA Hedron last week, we accomplished 3 major objectives. First, with the May 31 sale of 79% of Maritech's assets we effectively exited that business. The Maritech asset sale was the culmination of a multi-year strategy to operationally position ourselves to realize this outcome.

Second, on June 20 we completed the Compressco Partners IPO in which we sold approximately 17% of Compressco's equity. We had worked on this project for an extended time period and we believe it will create shareholder value and allow for Compressco's accelerated growth. We will continue to be Compressco's general partner and remain heavily involved in the future success of this business.

Finally, we announced last week the acquisition of the TETRA Hedron, 1,600 metric ton capacity newly built derrick barge with a fully revolving crane and accommodations for 300 personnel for an expected total investment of approximately $71 million. With the acquisition of the Hedron, we have continued the expansion of our Gulf of Mexico plug and abandonment and decommissioning capabilities.

This follows the December 2010 acquisition of additional P&A spreads and the recent acquisition of an engineering consulting business focused on liability and risk assessment.

The TETRA Hedron acquisition gives us additional capability to deal with larger structures in the Gulf of Mexico shelf, which is the area where we anticipate increased demand going forward. It also continues our ongoing evaluation of our asset portfolio, determining which assets are critical for us to own or lease in this space.

Over the past year these determinations have resulted in changes to our asset configuration that will enable us to optimize our position in the Gulf of Mexico market. During the second quarter, we continued additional investment in growing our onshore fluids and testing businesses.

We view these as long-term core strong growth markets in which we'll continue to leverage our already significant market positions. It is very encouraging to see the continued sequential improvement in margins in both of these businesses.

Also during the second quarter we continue to make progress in improving the production rates at our El Dorado, Arkansas, calcium chloride production facility. The modifications completed during the second quarter have given us the desired improvement. We expect to see benefit of this in our results for the second half of this year and beyond.

Our offshore services segment improved sequentially in the second quarter. We continue to face challenges associated with permitting in the Gulf of Mexico, although the permitting situation is improving.

In a very competitive market, we are continuing to maintain our strong market position and look at acquisitions of additional assets with the expectation of continued increasing demand associated with this market segment. We believe this will continue to be a strategically important growth area for TETRA, as evidenced by our recent investments.

Compressco results for the second quarter were down slightly sequentially. We are encouraged by Compressco's continued improvement in fleet utilization and the additional capacity that we've added is focused on oil applications. We continue to deal with rising costs of fuel, repair and maintenance and labor and we are aggressively pursuing improvements in this area.

At the end of the quarter with the sale of the Maritech assets and proceeds from Compressco's IPO, we sit in a very strong cash position. Our net debt as of June 30, excluding the cash associated with Compressco, was approximately $500,000.

As we go forward, we are encouraged by the continued strength of our onshore US markets, our expansion in the offshore services segment, and our continued belief that we are well-positioned to benefit from the slow improvement in permitting in the deep water Gulf of Mexico due to our strong presence in the fluids market.

I would close with echoing Joe's comments earlier. This was a very transformational quarter for TETRA. We achieved 3 very significant objectives and all 3 of those were being done at the same time in many of the working weeks and months that we had. This effort cut across the entire corporation and we're well-positioned to take advantage of that going forward. In addition to that, I feel we had a very strong operating quarter.

All in all, we feel good about the business and look forward to moving forward. At this time, Denise, will you open up the lines for Q&A? Thank you.

(Operator Instructions) James Rollyson of Raymond James.

Stu, I guess first on the new derrick barge acquisition, can you give us some sense of maybe what the opportunity is as you see in terms of when it gets into the market and depending on activity levels, what kind of revenue and earnings power that vessel might have?

Yes. And as we stated in the press release, we expect we're going to be working during the fourth quarter and we've got a pretty significant starting backlog, which consists of both some Maritech work, as well as some third-party work. The discussions we've had with our key customers beyond that have been very encouraging. Now, I think the attraction to us in looking at that investment is first, we thought we got a very good deal. We liked the cost of that relative to typical new builds. So that was certainly great. But, more importantly, we view as the activity continues to move forward, there's going to be a growing trend to some of the larger structures being in slightly larger depths than we currently see.

And this gives us that capability to get out 500, 600-foot water depths, deal with the larger structures and it gives us the capability to look at some of these projects for our customers where we can do both some of the shallower water and some of those deeper, 500, 600 foot water depth. So it gives us some bundling capability, some focus on a trend that's going towards deeper Gulf of Mexico. And also helps us in taking care of the remaining $137 million of liabilities associated with Maritech.

Any sense or guidance on maybe what kind of an implied day rate that that vessel might be able to generate?

Yes, we typically try to stay away from the day rates, but I would say on average we view this as probably a margin business asset that should be better than what our typical average run rate is for that division.

You guys have built up with the sales and everything going on a fair amount of cash, although you just spent a little bit of it. Just curious kind of what your current thoughts are on where you might deploy the cash. Are you generally thinking of continuing to focus on enhancing the businesses you still hold or looking at other niche businesses or kind of where do you see that going?

Yes, I'd say we look at it kind of in three broad categories, Jim. First is we've got some existing businesses and existing markets that are in pretty good market positions and market demand at the moment. Specifically, we've been putting a lot capital and plan to put additional capital into some of our existing testing businesses and areas. And whether it's the US, Mexico or both, that's areas we think have short-intermediate growth, so we're certainly using that approach in existing businesses. Beyond that, we think there's some additional geographic, as well as product [bret] capabilities on our existing service businesses. Clearly we view with the IPO of Compressco that we've got strategy in place for Compressco to move forward and execute that type of growth strategy as well. And then we'll continue to look at other gaps where we can stretch a little bit our existing portfolio and look at some synergistic services that make sense with what we are doing. So we're spending quite a bit of time on all three of those elements.

And lastly, first, I guess, congrats on completing the IPO for Compressco, but just a question on that. Do you more or less plan to maintain your ownership position that you have today or do you ever see that coming down some?

Well, in the short term, we certainly -- when we did the deal, we were very keen to maintain by far the vast majority of that business, as evidenced by the 83% ownership that we've maintained. So that was a clear objective going into the transaction. As we stated yesterday on the Compressco call, Compressco has $19 million of cash, zero debt starting out at the end of the second quarter, so they're in a good position to move forward in the short term. And I think there's plenty of run rate for them to grow with that capital structure. As we look at bigger opportunities for Compressco and we see where those are and what the amount of equity at that stage that would be required, we'll [eval] that across the range of options that we have as Tetra, decide what we want to do. We don't go into this with the intention of selling down our position in the short term just to take cash out or anything else. So it would only be in the situation where we're adding additional equity, growing the business that we would really face that choice.

Okay. Thank you.

Thanks, Jim.

Mike Harrison of First Analysis.

In the fluids segment was trying to get a sense of how much cost associated with some of the modifications at El Dorado was baked into Q2. Really just trying to get a better sense of what the normalized PBT margin could look like going forward in fluids?

I would say, Mike, in the second quarter, given that we made the modifications, but in the process of doing that, you're going to incur some downtime as you make them. The impact was very immaterial to the second quarter results. So I think that's a positive that's in front of us and I think in the second quarter, as we normally do, we benefited from the very strong seasonality of our European calcium chloride business. So that's a typical second quarter event. And then on the macro trends, (inaudible) pieces of fluids. We continue to have a very strong onshore US business in the second quarter and we had a fairly modest Gulf of Mexico activity level in the second quarter. So when you look at the overall margins moving up from the first quarter for that business, I would say, very minor impact from El Do, not a major contributor from the Gulf of Mexico and the real pluses to that increment were the onshore US, as well as the European calcium chloride business.

And you talked a little bit about the competitive environment that you're seeing in onshore or offshore, the well abandonment business, and talked a little bit about seeing some pricing pressure, it sounded like, in some of your diving services. But can you just maybe give us a little better sense of kind of how that competitive pressure is being reflected in the margin rates you're seeing in offshore right now?

Yes, I think it's very accurate to state that it's a very competitive market. I think it's driven by several factors. One is there is a delay on the construction side. There is a low level of activity on the construction side. And, therefore, those assets, as they have the opportunity to work in some of the later life, influence the overall market landscape. So I think that's a very key determinant during the second quarter. I think we've seen improvement on the permitting associated with plug and abandonment and decommissioning, but still not at the level it was pre-Macondo.

So you take the intersection point of the construction demand being down significantly, still some gaps associated with the permitting being slower than we'd like and it makes the competitive landscape pretty difficult. And, I think, as we always try to assess how well we performed in the market environment, I think the group did a very solid job during the second quarter getting to those levels and I expect we'll continue to demonstrate that kind of capability as we go forward. And clearly, with the investment we made in the Tetra Hedron, we continue to be bullish in that market segment in short, intermediate and long-term and taking the efforts to try to differentiate our capabilities.

In terms of that acquisition, Stu, were there any costs in Q2 results associated with the purchase of the Hedron and just thinking in terms of the 300 new hires. I ballpark that that was probably $2 million a month in expenses that for now are not being covered until the barge starts operating. Is that the right way to think about things?

I think it's the right concept in terms of that we did incur a cost during the second quarter associated with a portion of that -- those resources that were in place, as well as the due diligence associated with that acquisition. As you would expect, we had a lot of Tetra, as well as third party participants over at the ship yard as we were going through that process. So, yes, there are expenses. If you look at the quarter, we also sold a few of our non-core assets in that business and the cost of the -- getting the Hedron up and running, doing the due diligence, the personnel, it's pretty close to an offset with some of the non-core assets we sold in the business.

So net-net it didn't have a big affect in that business. As you look forward, as we bring the vessel over here, we will have some expenses during the third quarter and expectation is those will be more than offset as we put the vessel to work in the fourth quarter. So you will have some impact the balance of the year associated with that acquisition, will be an unusual charge in terms of nonrecurring in the third quarter, getting it up and running, then we should start to see the benefit of the run rate in the fourth quarter as it goes to work.

All right. Thanks very much.

You're welcome.

Joe Gibney of Capital One.

Just wanted to circle back on the Gulf of Mexico in terms of your expectations here sequentially into 3Q, how we're shaping up on the seasonality angle. Are we still targeting this 290 to 320 in terms of revenue guidance for offshore services? Just kind of curious how 3Q is shaping up year-over-year in terms of activity levels on what you are seeing from your customers spend buttressed against the BOEM that continues to crawl a little bit.

I think that we're shaping up for pretty strong top line in the third quarter based on where we are during the quarter and what we have in the backlog. And I think it should be at the normal levels that we have and I think the bigger challenge is going to be just the price levels associated with it, Joe. I think our activity and utilization will be good, but it's going to be a very competitive market. So I think you'll see that kind of outcome as we go through the third quarter. But utilization of key assets, we're in good shape.

Was curious if you could quantify what the impact was within production testing. You referenced a international project that didn't recur, how much that hit the quarter and some expectations on for margin and ramp looking forward within testing?

Joe, this is Joe Abell. We've mentioned that the quarter over quarter change was $3.1 million and revenue went up in the quarter, so if you just imagine margins were about the same, that gives you an idea of the project impact. And we had alluded to this in the first quarter on the call, that we had an especially good quarter due to the activity on this special project, more or less a consulting and engineering project that we have under way.

Last one for me, just curious as is it stands today, what's the expectations on timing for the Hedron's arrival in the Gulf of Mexico in the fourth quarter? Would you expect it to work very late in the quarter or are you anticipating this early in the fourth quarter. Just some help on timing there would be helpful. Just indicated it will arrive and be ready to work in the quarter without specifying a time because it does have to go through a certain amount of rig-out and testing once it arrives, so we don't want to pin ourselves down with a specific date.

We just indicated it will arrive and be ready to work in the quarter without specifying a time, because it does have to go through a certain amount of rig-out and testing once it arrives. So, we don't want to pin ourselves down with a specific date

Okay. Fair enough, gentlemen. I appreciate it. I'll turn it back.

Blake Hutchinson of Howard Weil.

Just a couple questions to focus in on the margins for the fluids segment. I wanted to clarify your comment in terms of modest contribution from El Dorado. Were you commenting about modest contribution in 2Q at the operating line, Stu?

Yes, I'm comparing it kind of sequentially to the first quarter that we didn't have a huge change in the impact either from that because the downtime we had with the modifications would offset kind of the higher run rates afterwards.

But that comment is specific to the operating line?

Yes.

And then sounds like the fixes are in place. You'd expect a volume led recovery in the dry calcium volumes, but you're not necessarily fully healthy until the Gulf of Mexico comes back and that's kind of the way we should think about the progression for the back half?

Yes. I think you've got two pieces of the fluids group that we still have improvements to see in front of us. One is the calcium chloride plant in El Do, as we get the rates up, and I said I think we'll see the benefit of that as we continue to go through the year. And the second one, which is also very significant, is just the activity in the deep water. And if you look at it at this stage, we have got a very modest activity level for us during the second quarter, so we're looking forward to that improving, albeit I think it's going to be at a somewhat modest rate through the rest of this year. Then hopefully we'll start to see some of that significant improvement as we go into 2012.

And then just as we think about the competing mix constituencies for the quarter, is it safe to assume that the European volumes are a step function higher in terms of realized margins versus what you saw in the Gulf and their land-based business for the quarter?

I would say, clearly revenue-wise we had the big step up in the European business in the second quarter as we always have. If you look at the margins of the pieces of the business, I'm not certain there's a material difference between the fundamental margins and the components of the mix, whether it be the European calcium chloride or the onshore fluids or the Gulf of Mexico kind of on a volume adjusted basis as it goes up and down.

And then, Joe, I didn't know if you rounded out the commentary with regard to -- I mean, clearly you've been going through massive amount of accounting overtime, legal, et cetera expenses, is there some relief that you can call out for the back half on the G&A line that's significant?

That's an interesting question. I think definitely, yes, on legal costs and the accounting costs associated with the MLP. That's behind us and not repeatable, but a lot of those costs did not get reflected in operating costs. They would have been IPO costs. In answering the question on the Tetra Hedron, Stu mentioned that we incurred some noticeable due diligence costs in the second quarter and we'll have additional costs getting the vessel ready in the third, so that doesn't go away in the third quarter associated with that vessel. In Stu's answer to El Dorado, we certainly are incurring significant engineering costs and then the inefficiency of bringing the plant down and back up as we make modifications, so that not only G&A but operating cost improves over time. So I would say, yes, generally operating costs should improve, G&A should improve a bit over time, but given the Hedron cost next quarter, I think we'll have some additional cost as we grow the business.

So maybe a cleaner look by the time we get to 4Q than 3Q it sounds like.

Probably.

Yes, I think on that theme, Blake, it's very clear to me as we go forward the simplicity and the clarity of this discussion and the quarterly results continues to get easier and easier. We have very little production left on Maritech. We've got $137 million of ROs, which by definition is going to significantly reduce quarter by quarter. It makes it a lot easier to follow the trail as we go forward. And I agree with Joe, we will probably have a slight reduction on corporate G&A as we level this off. And the fact of the matter is a lot of that work that we referred to there was some pretty extended hours by a lot of people and hopefully we'll then get home occasionally as we go to the third quarter and beyond.

Blake, in thinking about your question, do want to remind you and the audience again that we do have some relatively minor but lingering G&A cost associated with Maritech. I think what we will do for our investors going forward is reporting Maritech on a, at least on a pro forma basis separate from the service businesses, so you have a clear idea of anything associated with Maritech as distinct from the service businesses going forward. I would say historically 95%, 99% of the noise has been generated by Maritech, so that clearly disappears going forward.

And just so we're calibrating the model correctly for 3Q, can you give us an approximate production range for that Maritech is seeing, I'm sorry if you gave this, at present?

I think you should assume we're on the path of monetizing the remaining 8% production and that should not be a significant item in your forecast going forward. We're winding the business down. I think that's the message that we want to convey and we look at it as -- even if we can't classify it or we're not classifying it for the moment as a discontinued operation, think of it for modeling purposes that way.

Great. I appreciate that, guys. Thank you so much for your time.

Victor Marchon of RBC Capital Markets.

First question just to sort of bigger picture and stepping back to the guidance that you guys put out early this year and obviously there's been some changes, particularly on Maritech, but want to just get your sense, Stu, as to how things are tracking relative to earlier expectations for each of the businesses. The sense is that it's at least coming in line to how you guys were thinking. But, I wanted to see if you can maybe walk through briefly each of the businesses and how things are tracking relative to what you had thought earlier this year?

Good question, because it does help to calibrate some of the changes, et cetera. I think, as Joe said, we kind of view Maritech operationally as a discontinued op and there will be a small G&A cost going forward that will wind down as we finish up the liability work over the next 18 to 24 months. So taking that aside on the service side, I think if you look at it overall, our fluids and testing is probably running above where we had guided based on the run rates for the first half and where we see the business the next two quarters. Offshore services is down kind of on a run rate basis from where the guidance was and I think given where we are in the cycle, we still think we're going to have a very strong third quarter. But overall, (inaudible) below the guidance level and Compressco and the results that contained in the Tetra results we show today, that's probably close to down a little bit from where we were. So when you put them all together, I would say, the testing and the fluids is pretty close to offsetting where the shortfall is on offshore services. That make sense?

I'm sorry, thank you. That was great, Stu. Second one I just had was on production testing and specifically Mexico. Wanted to see if there was -- how that business was going. Are you guys seeing some improvement in that business and what your outlook is there?

Yes, we are. Overall in Mexico we're probably a little more bullish on that than we were at the beginning of the year. We are seeing some increased activity and opportunities and expect that's going to continue. So we're very focused on making certain we can take advantage of that opportunity, but we do feel better about Mexico.

If I could just hit on the margins on production testing. There was, as you guys talked about, some wide swings in both the first quarter and second quarter and is it fair to assume that the run rate going forward looks more like a second quarter than the first quarter?

I would say that that's probably a fair assumption given the inclusion in the first quarter that Joe talked about, about that one specific project. I think you've seen the trend in activity in margin in the US improve and other than the one project we referenced that took place in the first quarter and I think we've held up pretty steady internationally and expect that to continue to be strong. So I think the second quarter is indicative of the base we're at, but we expect to grow that business as some of the new capital that's coming online takes place the second half of the year.

Thank you for that. That's all I had.

Okay.

A.J. Strasser of Cooper Creek Partners.

My question was on the guidance, but I think it was effectively asked but maybe you could be a little bit more specific. Is the contribution from the new acquisition that you made in offshore services enough to sort of offset any kind of the weakness that may be existing in that business? Maybe you can just give us a little color on that. Thanks.

A.J., it would not fully offset it this year, since it's arriving in the fourth quarter and then the fourth quarter is a seasonally slow quarter. So we're entering the seasonal low period. It will have a full year of contribution next year. It certainly will be a positive contribution that goes partially to getting us back to where we wanted to be. And we are -- activity, we're seeing good activity levels in well abandonment and the decommissioning business, but it's the pricing and the slow rate of permitting that is slowing us down where activity could be even higher than we're seeing and pricing, therefore, could be more robust. And then as Stu mentioned, since the construction side of the business is very slow, then our competitors tend to participate in our traditional well abandonment and decommissioning market more so than they typically do, so that affects pricing.

And I had a follow-up question if that's okay. Can you talk a little bit about the margin enhancement opportunities in the fluids business going forward? Specifically, how should we think about the contribution from El Dorado? When do you think we could actually see kind of a, that full sort of 25% to 30% potential gross margin in that business? And then to the extent that you can talk a little bit about what the margin opportunity is in light of some of the commentary we're hearing from another one of the participants in the bromine market, who has been talking about bromine pricing being exceptionally strong. Any color on that would be helpful.

Just to -- well, go ahead, Stu.

I think to get to those margin ranges, you're going to have to have both the deep water Gulf of Mexico substantially recovered from the low run rates, as well as El Dorado pretty far up the production curve. So I think you are going to start to see the sequential improvement in El Do as we go through the second half to the year. And then you, hopefully, will start to see the sequential improvement in the Gulf of Mexico deep water, as you go toward the end, beginning of next year and the permitting comes back. And I think those are the two -- we've seen the margin go up pretty well year-to-date and those are the two additional factors that need to be going concurrently with everything else we've been able to implement that gets us into that type of range, A.J.

Okay. Thanks.

Mike Harrison of First Analysis.

Yes, kind of a housekeeping question for Joe. I was hoping maybe you could walk through all the different special items, where they hit the P&L, and where they hit each segment, because if I add the specials up, I'm not getting to the $18.3 million number that you cite in the press release.

Okay. Mike, if you start with the -- with Maritech -- essentially, all of the gains and or credits and charges are in Maritech. A $56.6 million gain offset -- let me go back to what I was just repeating on the call earlier. $56.6 million minus $23.7 million amount related to asset impairments and increases in the residual decommissioning liability gets you to a net $30.2 million and then we took -- that's at the Maritech level.

Joe, can I -- that gets me to $32.9 million. How am I different from $30.2 million versus $32.9 million? 56.6 minus 23.7.

You've got, if I'm not mistaken, some other costs embedded in Maritech associated with some employee-related costs associated with the transaction that technically doesn't go into the gain computation.

So there's another $2.7 million in there?

Yes. And that's -- you need to think of that as transaction-related. Okay. Yes, that's what gets you to the $30.2 million. That's exactly right. So other transaction-related costs gets you to the $30.2 million and then net from that the $14.2 million, which is associated with the termination of Maritech's oil hedges, that is reflected in other expense. Not in Maritech, but in corporate as other expense on the income statement. And now you should be close to the $18.3 million. Then there were some minor costs that we reversed at the corporate level associated with the MLP that the MLP reversed Tetra for and that makes up the difference.

And then in terms of the Delta between the gain on sale on your P&L, which was $59.6 million, and the $56.6 million in Maritech, that was related to some assets you sold in offshore services?

The gain is $58.1 million, as I recall, at the corporate level. Where are you getting that?

I think the missing element, Mike, is you've got three components. You've got the number we referenced in Maritech with the gain. You've got the non-core items in offshore services, which pretty much offset the cost associated with the Hedron acquisition that was expensed, and then the third element that goes into that gain is -- and I'm going to really bore you with minutia, but you asked the question, is when we sold the assets of Maritech and the associated liabilities, we were able -- we released into Company profit that gets recognized as a gain that's about $1.5 million that's included in that number. And that, if you really look at the detail, not only does that show up on the top side gain, it shows up on the segment reporting under inter-segment eliminations as well. You kind of see it laid out there.

I appreciate your help in sorting that out. Speaking of the MLP and Compressco, are you guys at liberty now to discuss Compressco in greater detail?

Sure.

Than you have been in the recent past? I was just hoping to get a better understanding if -- PBT margin there used to be in the 30% plus range. We seem to be stuck in the mid-teens here. Obviously, you address some of the costs that you're dealing with currently, but is there something structurally different with respect to changes that you had to make in that business in order to qualify it as an MLP that sort of means that compared to a few years ago, we're not really ever going to see those types of margin levels again. And, I guess, maybe second piece of the question, do you guys have a long-term PBT margin target for Compressco and what is it?

Yes, now I'll answer portions of the question. I may not answer all elements of it. If you kind of look at where Compressco is today versus the peak of a couple years ago in terms of margin, yes, you got about two or three variables that have changed that I think we'll see positive movement as we go forward in the future. One is our utilization is in the 76% of the fleet and it peaked out in high 80%, so you certainly have a component of asset utilization that drives margin degradation. Part of it shows up as you don't have the manufacturing throughput you had previously. So it shows up in manufacturing under-absorption, if you will. And if you kind of fast forward and you read through the S1, the prospectus, we kind of talk about that and the fact that in the future when we're getting our utilization back into the 80%s, we'll start to see that production come up and the associated under-absorption disappears. So that's one item.

Secondly, we certainly have seen, as you've indicated, in the first and second quarters some cost associated with fuel, the lubrication and other field elements that have gone up and I think if you listened to the call yesterday, Ron did a good job outlining his view that there's some actions in place to mitigate that and I think we'll see some favorable elements from that and that's it. The third part of it is just like on our testing business, we come off the peak in Mexico, as well, and that's an important market. Still a very significant important market today, but it's off its peak and as I said on one of the earlier calls, we are seeing indications of activity coming back there. And that's a key part of it. So when you put all those together, I would expect we're going to see some positive trends as we go forward.

And if all those came together and we had our utilization back in the high 80%s, we had Mexico back to the levels we're at previously, we are going to have, as we said in the S1 prospectus, some MLP-related costs that would be a public Company going forward. But overall it's not unreasonable to push the guys internally to start moving back towards those margin levels over the longer term. It is going to take a while.

Mike, also the Company has public Company costs now and has to just bear a portion of allocated Tetra overhead that is required. We can't give those services away free, that would be unfair to Tetra shareholders, so that corporate allocation you will --will be there and will be actually a slight reduction in the remaining Tetra G&A, corporate G&A, that you see at the Tetra level.

Going back to an earlier question that was raised, Mike, just to kind of reemphasize my view, is as the general partner, the 83% shareholder, we chose to keep 83%. We wanted to keep that higher percentage. We view the business very favorably going forward and it's one of the key elements of our long-term strategy.

All right. Thanks very much, gentlemen.

And showing no further questions in the queue, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Stuart Brightman for any closing remarks.

Thanks, Denise, and as always, I thank those that pose the questions and helps us explain the story. A lot of moving pieces in the second quarter, but overall a great quarter, a lot of successes and we'll look forward to update everybody on the third quarter early in November. Thanks.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.