Tetra Technologies Inc (TTI) 2011 Q3 法說會逐字稿

Good morning and welcome to the TETRA Technologies Incorporated third 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. Mr. Brightman, please go ahead.

Thank you Amy, Welcome to the TETRA Technologies third 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 third quarter results and I will follow with a brief presentation which in turn will be followed by your questions. I must first remind you that this conference call may contain statements that 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, revenues, gross profit or profit before tax excluding the Maritech segment, profit before tax of diluted earnings per share excluding oil and gas derivatives in effectiveness in the Maritech segment, or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. With that, Joe, would you please start the financial overview?

Thank you, Stu. In my discussion this morning, I will refer to certain financial measures excluding Maritech which can be found on page 6 of our press release that provides a new non-GAAP table that reconciles key GAAP financial measures to our financials excluding Maritech which is our E&P business that is in the process of being wound down. Revenue in the third quarter was $201.4 million, 4.9% lower than the third quarter of 2010. However, our non-Maritech revenues increased 22.1% as shown in the table I mentioned on page 6. Non-Maritech revenue in the third quarter was essentially equal to that of the previous quarter.

While we continue to be impacted by the slow recovery of the Gulf of Mexico, US on shore revenues for our completion fluids and production testing businesses are at or near peak levels. Income before tax was $2.8 million and after tax income before discontinued operations for the quarter was $1.4 million or $0.02 a share fully diluted. Excluding Maritech, income before tax was $18.4 million and after tax earnings per share was $0.15. In addition, as was discussed on our call last quarter in anticipation of the third quarter results, we incurred pretax charges of $3.4 million in the quarter preparing our new vessel, the Hedron for work in the Gulf of Mexico. These charges together with the Maritech loss equaled approximately $0.16 per share.

Our $0.02 per share of GAAP earnings in the third quarter compares to $0.00 per share, fully diluted, in the same period of the prior year that contained $0.15 per share of special charges. Looking at quarterly performance by segment, profit before tax in the fluid segment was $5.1 million versus $1.7 million in the same period last year. Strong US on shore fluids demand offset slow Gulf of Mexico demand year-over-year. Profit before tax in the offshore services segment was $13.5 million compared to $18.3 million in the same quarter last year. Once again, we experienced $3.4 million of special charges for the Hedron prep costs in this business in the third quarter just completed. Pricing levels in this business are similar to the previous quarter which had been soft though our business remains profitable and we expect the Gulf of Mexico to continue slowly improving over the coming quarters.

Production testing profit before tax was $9.6 million versus $4 million in the prior year's comparable quarter due to increased domestic activity principally in the shale plays as well as increased activity in Mexico. Profit before tax in the current quarter was $3.6 million higher than the previous quarter. Both revenues and profit before tax were records as this business continues to grow. Compressco's profit before tax was $3.9 million, a decrease of $0.2 million versus the prior year's comparable quarter as we have experienced higher operating and G&A expenses. But profit before tax was slightly higher than the previous quarter.

As a reminder, after the IPO in June, we are fully consolidating Compressco in the TETRA consolidated financials as we always have, but are reporting the 16.8% of Compressco earnings owned by the public as a non-controlling interest. Profit before tax in our E&P Unit, Maritech Resources, was negative $15.6 million. We experienced $14.4 million of excess decommissioning costs that were charged to earnings. More than half of which were on properties operated by parties other than Maritech. Other than this, Maritech's earnings which mainly reflect insurance and G&A costs as we wind down this business were generally in line with expectations.

We reduced our decommissioning liabilities by $25.9 million as a result of decommissioning work performed in sales of decommissioning liabilities in the quarter, partially offset by the $14.4 million of excess decommissioning costs. So Maritech's decommissioning liabilities netted to a reduction over the quarter by $11.6 million or an ending balance of $125.9 million. The majority of the remaining decommissioning work should be completed by the end of next year. Cash decreased over the quarter by $99 million to a total of $225 million excluding restricted cash and $19.6 million of cash attributable to Compressco. We ended the quarter with net debt of just under $100 million. We had no borrowings on our $278 million credit facility. With that, I'll turn the discussion back to Stu.

Thank you, Joe. During the third quarter we continued to see several of the favorable trends we've experienced throughout 2011. Our on shore operations continued to grow and benefit from the shale activity. I'm particularly pleased with the sequential growth in our testing business that was driven primarily by activity in the US and Mexico. We will continue to be aggressive in investing in this segment based on our view of the growth opportunities and our current market position. Also during the third quarter, we saw a sequential improvement in adjusted earnings for the offshore services segment.

The challenge for this segment has been the competitive environment and the business continues to perform about what we expected given this environment. We continue to believe that our position in the space will benefit as we go forward and hopefully begin to see the positive impact of a stronger regulatory environment. We are in the final stages of finishing preparations on the TETRA Hedron and expect that our first job will start over the next several weeks. The response from our customer base has been very encouraging, and the TETRA Hedron has initial backlog that extends in to 2012.

Another positive trend during the quarter was the continued improvement in production and productivity at El Dorado. We have achieved our objectives with the modifications made to the plant and at this stage do not believe that any major capital is required for the dryer. Our main focus is to continually enhance operational efficiency in order to drive associated margin improvement. We saw continuing improvements in utilization in activity for Compressco in the third quarter. This was demonstrated by utilization reaching 77.2% by the end of the quarter. The Compressco management team has done an outstanding job of moving in to new applications, focused on unconventional resources as well as growing business in Mexico. In addition, Compressco's third quarter results reflect a benefit of cost focus and the ability to move some of our underutilized assets into Mexico.

During the third quarter, we continue to wind down our Maritech operations, including an additional property sold during the third quarter we have reduced Maritech's assets to about 5% of year end 2000 reserves. Maritech's abandonment and decommissioning liability at quarter end was approximately $126 million. We will continue to aggressively reduce this liability over the next year with the ultimate goal of getting as close to zero by the end of 2012. As stated previously, the majority of this work will be done with TETRA assets, including the TETRA Hedron. We ended the quarter with a strong balance sheet and a favorable cash position. With the cash we have available plus our undrawn revolver we are very pleased and well positioned to aggressively look at growth opportunities across our existing service businesses.

In summary, we continue to be encouraged by the strength of the domestic on shore impact. We have seen early signs of an increased trend in drilling activity in the Gulf of Mexico that should benefit our fluids business in 2012. We continue to improve the performance of our El Dorado plant. And we are pleased with Compressco's continuing improvements in utilization, cost reduction, and international growth. Amy, at this time, will you open the lines for Q&A. Thank you.

(Operator Instructions) At this time, we will pause momentarily to assemble our roster. Mr. Jim Rollyson with Raymond James.

Good morning, guys. Stu, in the press release you mentioned on the fluid side having some customer delays I guess during the quarter. Just kind of curious a little bit of color around that. Is this kind of some project specific things or is that something indicative of some regional slowdown? Or just kind of what's going on there and how do you think that proceeds going forward?

Thanks Jim. Yes that's very specific to a delay in one project in one region on shore that happened early in the quarter and as we went into the middle and end of the quarter, our run rate in that business was back where we expected. I expect that to continue through the fourth quarter in that positive light and carry on to next year.

Okay that's helpful. In the past you've talked about bromine prices at least from an industry standpoint having gone up and I'm curious if at this point you've seen any of your competitors actually start to take that input cost hike and try and push through pricing increases on the fluids which I would think given your cost position you guys would benefit.

Yes I don't think we've seen any major indications of that yet. I always think that will be more correlated to the increase in activity that we anticipate as we go into 2012.

Kind of waiting on the Gulf.

As we see that increase next year, we should see the benefit of that.

Okay. On the offshore services side, normally 4Q you know you have the seasonal dip which I would expect probably not a whole lot different. But when we think about this from a TETRA standpoint given that you've got the Hedron that sounds like will be starting up work in the fourth quarter, how much of an offset do you think that might provide to the seasonal dip that you normally see?

Yes I think the fourth quarter for that business you'll see both factors. I think you'll see kind of the normal decline in activity associated with the fourth quarter in the winter that typically carries in through the first quarter and that will be partially offset to -- by the Hedron starting. So I would expect we would get some benefit from that. But clearly the fourth quarter is still going to be down from what we've seen in the second and third quarter for that business purely because of the seasonality.

Helpful. And lastly, Joe, on depreciation, which obviously went down substantially in the quarter. Is this kind of the new rough run rate we should use going forward?

I think so Jim. I've used this until you see next quarter it -- I can't think of anything that would change it. Oh, yes, Stu is reminding me that we'll have increased depreciation due to the TETRA Hedron but then there could be some minor offset to that. So other than the Hedron, that probably is the major quarter to quarter change. As Stu also alluded we're putting additional capital into the production testing business that's growing at a record level. So depreciation could edge up as we increase CapEx.

Okay. Helpful. Thank you guys.

Mr. James West with Barclays Capital.

Morning, Stu. Morning, Joe. Stu as we think about the Gulf of Mexico, we've got as you mentioned over 20 rigs drilling now. You haven't yet seen the pickup in your fluids business but presumably that's coming as we go into some development and completion type work. What's the typical lag that you would see from I guess the drilling we're doing now to when you would be having your first conversations about supplying completion fluids and then second when the actual fluid sales would start to hit your P&L?

Yes, I mean typically we'd start to see the P&L impact in about 4 to 6 months and we'd start to have the discussions obviously a lot earlier than that in the first couple of months. So I think we certainly are encouraged by some of the discussions we're beginning to have and I would expect to see the financial impact of that as we go into 2012.

Any reason to believe there'd be any difference in market share this cycle compared to kind of prima condo levels? I mean, you do have some additional cost advantage with the El Dorado facility. But any major change you are anticipating?

I would not expect a major change. It's going to be driven as it always is. Given the lumpiness, particularly by the deep water by the specific customers that are doing the activity. But as a general statement, I wouldn't anticipate any major share changes.

And you weren't disproportionately exposed to kind of smaller operators that may not be active this time versus the majors. Right? I remember you're a big customer. Some of your biggest customers are the majors.

Yes. We're well represented across the full spectrum on the customer base.

Okay. Great. And then production testing, where do we stand in terms of kind of revenue capacity for that business? It's been growing rapidly. You're putting capital into that business. Can this growth continue with the CapEx? Or is there going to be some moderation of growth here?

I expect with the capital that we've put in and are committing to put in, there's still run room for growth in that business. If you kind of go back from an overall capital strategy point of view and look to what we guide at the beginning of the year, I think our non-Maritech capital about $85 million and I think it's safe to say we're growing the capital piece associated with testing faster than that. We're probably not spending as much on the ElDo plant as we had anticipated based on some of the successes we've had. But I anticipate our testing business will continue to grow.

And last question from me, you're still sitting on a big pile of cash here. What are we going to do with this cash?

We're going to continue to -- as we have been aggressively look at first and foremost organic growth opportunities which again expanding the testing is certainly the best example of that. Looking international is another area of organic growth. And then at the same time we'll be looking at opportunities from an acquisition point of view which Joe and myself and others are spending a lot of time on. And overlaying that with looking at other alternatives as well.

Don't want to have the cash around for an extended period of time and recognize that we've got the first priority to grow but there are other alternatives if that doesn't come to fruition. We're spending a lot of time looking at opportunities.

Would things like -- let's say we're 6 months out form here and the acquisition market is just not there or you're not willing to pay the multiples. So do things like dividends and share buybacks make sense at that point?

We certainly would look at both of those options if at that period of time we haven't been successful spending a good portion of what's available, yes.

Okay. That's it for me. Thanks, guys.

Chris Enright with Weeden and Company.

Good morning, guys. A few quick questions. I think if we follow-up on the last question. With the recent kind of volatility in the equity markets, are you seeing more acquisition opportunities pop onto your radar screen?

I'd say in general, there's probably a little bit more activity over the last period of time than we saw previously. And I think the volatility certainly is a driver on that. So yes we've been a little bit busier looking at stuff.

Okay. If we turn to -- turning to the offshore services, the Hedron in 4Q, is that going to be working for third parties or is that mostly going to be working on Maritech decommissioning?

I think it's going to be a combination. I believe we'll start out with Maritech work and we've got some other third party work lined out. So it will be a combination.

Okay, great. And in terms of I guess turning to the fluids business. You've made it pretty clear about your outlook for deep-water fluids. Can you relate your current level of Gulf of Mexico fluids to maybe your historical high? Kind of what the -- looking for an order of magnitude at what we could see as things return to normalcy in the gulf and maybe even better than that.

I think we've said that our kind of current run rate in the Gulf of Mexico fluids contrasted to the prima condo run rates. It is below 50%. So we would expect as we go into next year, we start to see the improvement from that low point and clearly we don't anticipate during next year getting to those prima condo rates. But I think we'll start to see ourselves sequence up in that direction as we enter the first half of 2012. The point I've highlighted is that from an operational point of view, as that happens, we're very well positioned in terms of inventory and people to move forward immediately.

And when you mentioned the further operational efficiency at El Dorado, is that really what your targeting? As we move up in the gulf, is that's what is going to drive further improvement in El Dorado?

Yes I think what I'm looking for as we go into next year in the plant, is that as we continue to have more predictable, higher level production rates, you get the associated benefit of the revenue and associated margin with that. In addition you get the -- on a big manufacturing plant you get the favorable impact of the absorption and you just have lower operating costs purely because you're not having to stop and break into things. So I think the aggregate of all that and part of the demand side of it is going to be driven by the recovery in the Gulf of Mexico.

Great. Thank you very much. I'll turn it over.

Mike Harrison with First Analysis.

Hello. Good morning. Just wanted to continue a little bit on El Dorado. Were there any sort of unusual expenses associated with optimizing that plant during Q3? And did you take any down time on that plant during Q3?

Yes. There were some costs that I think will not carry on going forward associated with some of that activity in terms of some outside assistance. And then from a down time, we certainly during a portion of the quarter had the plant down to do some of the modifications. Not huge financial impacts in aggregate between those 2, but areas we'll improve as we go forward and don't have that activity. I kind of look at it as you look at El Dorado going forward is -- I think it's going to continue to be incremental, steady progress. I don't look at it as a step function going forward from where we are at the moment. But I do think you continue to see all the positives of incremental volume, associated margin, more volume gives you better absorption, and the operating costs will come down as you don't have as many outside resources supporting some of the modifications. And you continue to get the productivity. So it's going to continue to be -- what I would characterize as normal improvements in a large chemical plant that we're very good at shaking out those costs over a period of time.

All right. And can you comment a little bit about what kind of activity you're seeing in Brazil in the fluids business, particularly any deep-water projects you're working on?

Yes. In the third quarter we still had a very modest activity level down in Brazil. So it was probably similar to what we had in the first half of the year. Nothing significantly different. And as I typically answer when the question is raised, how do I look at it going forward? I still expect we'll see increased activity. But we haven't been seeing the bump that we want up until now. We've sold quite a bit of calcium chloride down in Brazil this year. But we haven't had the volumes or some of the higher density clear burning fluids that we expected. And again similar to my comment on the deep-water Gulf of Mexico as that bump comes, we've got inventory and people to turn it around and get the realization very quickly.

And is it a situation down there where you have your hands tied waiting for that biggest customer to move forward with activity? Or are you in a position where you can go ahead and pursue business with other customers in the meantime?

Yes. I'd say there's some opportunities for both our fluids and our testing businesses in Brazil with other customers that we're pursuing. But again, the major driver down there is going to be the large customer.

All right. And just looking at the testing business, I was hoping to get a little bit more sense of exactly how much of the improvement we've seen in that business is being driven by North American shale. How much of your business is shale related? How fast has it been growing over the last couple of quarters?

Yes, if you look at that business, by far the largest driver in that business in terms of the revenue growth sequentially and the margin improvements sequentially have been associated with the US and I think we believe probably 75%, 80% of that is shale driven activity. And the other big part is we've had a very good increase in activity down in Mexico which has certainly been a major contributor. So when you look at that business and the major drivers of the sequential improvement in profitability, those are the 2 main, US shale and Mexico.

And it does seem like in that business you are a little bit more confident now that you can sustain this level of PBT margin. We did see this PBT margin sort of in the high 20's range earlier this year. And it was a little bit more of a 1-time type anomaly, I guess. So can you just help us understand what's driving the confidence there?

Yes, I think your point is well taken. If you recall in the first quarter, well we probably had actually better operating margins for the segment. That was driven and influenced partially by one major international project we talked about. So when you take that out and look at kind of the base business in the 2 areas I've talked about, we've just been able to get great utilization on the equipment we have and just continue to add additional capital and get the utilization on that. So it's just watching the district by district activity over the first 3 quarters and feeling comfortable with the trends we've seen.

And the last question I had is on Compressco. We saw here that the strongest quarter in terms of sales at least, that we've seen in about 2.5 years. Utilization sounds like it's improving, but we're -- obviously, you're still pretty disappointed in the margin performance. Can you talk a little bit about what costs are hurting you the most now? And also where pricing is or how you think about pricing in the Compressco business. How does it compare to where we maybe were a year ago and the maybe the pricing that you were getting back in the 2007, 2008 time frame?

Yes, I would say a key point that I would highlight for the third quarter is, we do believe we've seen a positive trend in the quarter from our overall margins in that business. Which is driven by the improved utilization, a little bit of -- a little greater production in our manufacturing plant associated with some of the international activity. Kind of the continued focus on costs, both from the supply chain as well as some of the off backs that led to that. And you also recognize when you look at the Compressco numbers currently, there's certain costs that relate to Compressco being a public company that are now included in the numbers, that if you go back to a -- would in the TETRA segment reporting you didn't see before. So the sum of those have been layered in. So you have got to be careful when you look at that and the Compressco's Q and commentary is very detailed on that.

But overall, the cost that we've really tried to work with are some of the fuel, some of the commodity driven, some of the field expenses associated with bringing assets back into service and those are the ones we've focused on primarily. On the price side, I would say we're making some inroads there. It's certainly challenging in that market and the guys are looking at that. And if you compare it to where we were at the peak several years ago, we're still down from the peak on an effective pricing basis, Mike.

All right.

I do think the third quarter we have definitely seen some favorable trends in some of the key metrics of that business.

All right. Sounds good. Thanks very much, Stu.

Martin Malloy with Johnson Wright.

Good morning. On the fluids business I think previously that you had stated that the Gulf of Mexico run rate was about prima condo was about $100 million. And you stated earlier in the call that you're currently running at less than 50% of that prima condo level. Can you talk about the timing of when we'll start to see improvement and maybe some idea of the magnitude of the potential improvement in 2012.

Yes. I think from a timing point of view we should start to see some of the improvement the first half of the year. And I'd prefer not to get too far ahead of myself in projecting that magnitude next year. We're certainly in the midst of our planning process and we'll have much better insight. But I do believe the first half of the year we'll see some changes in the activity level and the associated profitability of that geography.

Okay. And have you noticed any change in recent months in the permitting of decommissioning projects in the Gulf of Mexico? Has it improved?

I think it's marginally improved. I think it's better -- we track that every month in our internal metrics. That's one of our key things we look at. And it's improved still certainly not at the level it was prima condo, and we still get the occasional job that we've been awarded that gets delayed because of a permit not being there. But there's a ways to go but it's gotten better. And I would say the trend is slightly better as we've gone through the busy season.

Okay. And your water --you on shore water handling and treatment services business, can you talk about opportunities there? And is there the ability to expand into shale basins and geographic regions?

Yes, we're in most of the basins. There's some areas we are not in that we still need to look at. And there's services that we'd like to look at to expand our offering. It's a very natural business for TETRA to focus in given our fluids filtration and chemical expertise that we have internal. So we'll continue to try to build that out into more geographies as well as more services.

Thank you.

Joe Gibney with Capital One.

Thanks. Good morning. Just a few quick ones for me. Joe, I was just curious on the Hedron, any remaining kind of vessel prepositioning or prep charges in the fourth quarter at all? Or are we good to go here with what occurred in 3Q?

There could be, Joe. We had not anticipated anything, but there could be. We'll know as we get deeper into the quarter and put the vessel to work.

Okay.

Hopefully, a lot of those -- any additional costs, hopefully, some or all of those costs would be covered under warranty. So it's hard to project.

Okay. Fair enough. And just in terms of sequentially how things are trending within offshore services. As we head in to the fourth quarter here, I mean Joe you referenced pricing levels still being soft as to the challenging [dow] support market. Should we seasonally expect maybe a little bit more of a down tick than we usually do in the fourth quarter as a result of that? Or is pricing holding? Just trying to get some color on how things are trending in the fourth quarter for what you're seeing offshore.

I don't see that it's going to tick down in terms of pricing. And remember that we do have some TETRA Hedron work that we anticipate in the fourth quarter. It could be a bit better than the normal fourth quarter for that reason.

Okay. And on the delays here in the third quarter on the fluids, I know Stu you sort of referenced sort of getting back to your normal run rate by the middle of the quarter. Can you take a stab at sort of calibrating what those delays cost you in terms of revenues or margins within fluids in the quarter?

Oh, I would say, in aggregate -- the first the point I'd make is what I said earlier. As we got through into the middle and second half of the quarter, we're at our expected run rate plus so it really was a one off type of thing. It's probably from an earnings point of view in the magnitude of $1 million $1.5 million for the quarter.

Okay. All right that's helpful. And last one for me, I'll turn it back. Joe you referenced the growth capital plans in testing. Could your just refresh us a little bit on CapEx spend here in 2011 and then are there any initial thoughts at this time relative to 2012?

At the beginning of the year in our guidance we had indicated $120ish million issue of CapEx, $40 million of which was Maritech, so $80 million non-Maritech. We have had the opportunity to accelerate the CapEx in our testing business. As Stu mentioned, spending less in our fluids business on the El Dorado plant which is a positive. And then the TETRA Hedron purchase which was as we had indicated, an approximate $71 million expenditure. So we will -- just adding all of that up, be saying in excess of $150 million this year. We won't have a Hedron like purchase next year, though there could be other things that come along that are of a random nature that we can't forecast, an acquisition for example. I would say the CapEx will be higher than that $80 million starting point that would be the adjusted non-Maritech CapEx that we gave you at the beginning of this year.

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

(Operator Instructions) Mr. Chris Enright.

Thanks, guys. Just one quick follow-up. On the US portion of the production testing business. Can you break that out between oil and liquids and then gas? Just the percentage of revenue what your leverage is to say dry gas.

Yes, I'd say we've got strong positions in both the oil and gas basins if I was going to estimate, it's probably -- we've got a good presence in Marcellus which is obviously going to be gas, a good presence in Haynesville which is going to be predominantly gas. And a very good position down in Eagle Ford which is going to be predominantly liquids. So overall I'm not certain. It's pretty well balanced and has probably changed a little bit over the years as the activity levels have moved around towards more of a balance away from being gas over weighted.

Is there any concern about a potential pull back in gas related drilling in particular?

Well clearly Haynesville the activity is down from where it was and I think that's been more than offset by the increases in some of the other shale plays that I referenced.

Okay. And you would expect future decreases to be offset again I would assume?

Yes, I would expect based on our view of the market that we continue to see positive growth in that business.

Okay, great. Thank you.

(Operator Instructions) This does conclude our question and answer session. I would like to turn the conference back over to Mr. Brightman for any closing remarks.

Yes, again, I appreciate all the good questions and Joe and I will look forward to updating the fourth quarter early next year. Thank you.

The conference is now concluded. Thank you for attending today's presentation and please disconnect your lines.