Tetra Technologies Inc (TTI) 2011 Q4 法說會逐字稿

Good morning and welcome to the TETRA Technology Inc. fourth quarter and full-year 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 Stuart Brightman, President and CEO. Please go ahead, sir.

Thank you, Denise, and welcome to the TETRA Technologies fourth quarter and full-year 2011 earnings conference call. Joe Abell, our Chief Official Officer, is also in attendance this morning and will be available to address any of your questions. Joe will give a brief overview of our fourth quarter results and I will follow with a brief presentation which in turn will be followed by your questions.

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 or diluted earnings per share, excluding oil and gas derivative in effectiveness in the Maritech segment, or the 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 I will refer to certain financial measures which exclude Maritech, our E&P business that is in the process of being wound down. A reconciliation of non-GAAP financial measures is provided in a table on page 6 of our Press Release. Revenue in the fourth quarter was $186.2 million, 12.7% lower than the fourth quarter of 2010. However, excluding Maritech, revenues increased 15.5% as shown in the table on page 6 of the Press Release. The US onshore revenues for our completion fluids and production testing businesses are at peak levels. We expect the gradual recovery of the Gulf of Mexico to contribute to revenue expansion over time.

The GAAP loss before tax was $40.1 million and the after-tax loss before discontinued operations for the quarter was negative $25.1 million or $0.33 per share fully diluted. Excluding Maritech, income before tax was a positive $4.6 million and after tax earnings per share was a positive $0.05 a share. We incurred pre-tax charges of $1.2 million or $0.01 a share after tax in the quarter preparing our new vessel, the Hedron, for work in the Gulf of Mexico and for asset impairments in offshore services. These charges together with the Maritech loss equaled approximately $0.39 per share and are included in the GAAP reported results. Our loss of $0.33 per share of GAAP earnings in the fourth quarter of 2011 compares to a loss of $0.83 a share fully diluted in the same period of the prior year that contained $0.93 a share of special charges.

For the year, revenue was $762.5 million and income before discontinued operations was $0.39 per share fully diluted excluding Maritech. Once again, see the table on page 6. These results include the negative impact of $0.03 per share of after-tax special charges. This compares to 2010 non-Maritech revenue of $672.1 million, income before discontinued operations of negative $0.01 a share fully diluted, and non-Maritech special charges of $0.25 per share after tax. Note that the effective tax rate in the fourth quarter was 38.9%, which being a loss for the quarter helped bring the annual effective tax rate down on positive earnings to 12%. The effective tax rate was a more normal 35.3% for the first nine months of the year. The reduced effective tax rate was primarily due to a decrease in deferred state tax expense as a result of restructuring a couple of our subsidiaries to take advantage of state deferred tax assets.

It is also the result of the fourth quarter tax benefit being applied to an annual GAAP earnings of $6.2 million. This relatively small number magnified the impact of the tax benefit received in the fourth quarter. We expect a more typical effective tax rate of 35% to 36% in 2012, as shown in our guidance.

Looking at quarterly performance by segment, profit before tax in the fluid segment was $8.2 million versus a loss of $2.1 million in the same period last year. Strong US onshore fluids demand offset slow Gulf of Mexico demand year-over-year. Also we had a $7.2 million asset impairment in the fourth quarter of 2010. Production testing profit before tax was a record $11.3 million versus $4 million in the prior year's comparable quarter due to increased domestic activity, principally in the shale plays and in Mexico. Compressco's profit before tax was $4.1 million, an increase of $0.8 million versus the prior year's comparable quarter. Last year, however, we experienced some special charges. As noted on Compressco Partners' earnings call yesterday, Compressco is focused on cost reductions and mitigating the risk of low natural gas prices in the US and Canadian markets by growing applications for the GasJack and VJack on oil wells and on international expansion.

Profit before tax in the offshore services segment was negative $4.2 million compared to a loss of $25.5 million in the same quarter last year. We experienced $1.2 million of special charges for the Hedron preparation cost and asset impairments in this business in the fourth quarter of 2011 compared to $17 million of asset impairments in the fourth quarter of 2010. We expect the Gulf of Mexico to continue slowly improving over the coming quarters. Profit before tax in our E&P unit, Maritech Resources, was negative $44.7 million. We experienced $44.3 million of excess decommissioning costs and asset impairments that were charged to earnings. We reduced our decommissioning liabilities by $33.5 million as a result of decommissioning work performed and sales of decommissioning liabilities. On the other hand, we had $40.1 million of upward revisions to decommissioning costs. So Maritech decommissioning liabilities were increased over the quarter by $7 million, to a total of $132.9 million as an ending balance.

Cash decreased over the quarter by $20.5 million to a total of $204.4 million excluding restricted cash and cash attributable to Compressco. We ended the quarter with net debt of $118.1 million. We had no borrowings on our $278 million line of credit.

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

Thank you, Joe. Our fourth quarter results are based on several favorable trends that we noted during our 2012 guidance call on January 4. The highlights of these trends relate to continued strength in our onshore US businesses driven by shale activity and continued strength in Latin America. These favorable trends have had particular benefit in our fluids division and our production testing segment. During the fourth quarter, our fluids division also benefited from an increase in activity in the Gulf of Mexico. We continue to see encouraging signs of increased activity in that area as we start the new year. We also continue to see a strengthening in certain of our Eastern Hemisphere fluids markets that bodes well for 2012.

Over the past year we have seen significant improvement in El Dorado, particularly as it relates to our plate production. We expect to see improving profitability in our chemicals businesses during the year. In the fourth quarter production testing reported another sequential improvement in earnings and in fact, the fourth quarter results represent a record earnings level for this segment. This record performance was driven primarily by the continued strength of the US markets, as well as the benefit of capital deployed during 2011. Also in the fourth quarter the segment did benefit from an international project. We continue to invest heavily in this business and look to grow the segment by expanding our footprint both domestically and internationally, as well as by adding additional services to our portfolio of capabilities.

Compressco's profitability improved sequentially in the fourth quarter due to increased utilization in our US operations and continued growth in international markets. We continue to be very focused on applications for non-conventional markets and expect to see the impact of applications for associated gas from liquids production, vapor recovery and electrically driven services continue to be a growth area in 2012. The combination of this focus and our continued growth internationally should offset some of the challenges we face from the current low natural gas prices in the US. In addition, we have taken steps to mitigate the market challenges and have addressed the cost increases through recent organization changes and a continued focus on supply chain management. As previously noted on our guidance call, our offshore services segment was negatively impacted by adverse seasonal weather conditions during the fourth quarter in the Gulf of Mexico.

The principal impact was below utilization of our heavy lift assets. In addition, this segment was negatively impacted by $1.2 million of charges related to preparation activities for the TETRA Hedron earlier in the quarter and asset impairments. We continued to work the Hedron through the winter and are pleased with our operational execution and the response from our customer base. Our backlog for the TETRA Hedron continues to improve and we are optimistic we will see high utilization through the third quarter and beyond. Our focus for Maritech continues to be reducing our well abandonment and decommissioning liabilities. We had a very busy fourth quarter in this regard and anticipate this to continue throughout 2012. Our fourth quarter was negatively impacted by $40.1 million of cost increases for current and estimated future well abandonment and decommissioning costs that relate primarily to two non-operated properties.

We ended the year with a very strong balance sheet. We've been very focused on opportunities for deploying our available cash. To date the acquisition of the TETRA Hedron and an increase in growth capital for our existing service businesses have been the main focus of our investments. We expect to continue this increased allocation to growth capital and we also continue to be optimistic regarding our prospects for finding other strategic acquisitions that fit with our existing businesses. In summary, as we start 2012 we continue to see the favorable trends onshore and internationally that we've experienced over the last several quarters. We will continue to closely monitor natural gas price and related activities and take the required steps to redeploy existing assets and continue to make appropriate cost reductions as those actions are needed. In addition to redeployment of our available capital and growth of our service businesses, both geographically and the breadth of service offerings, will be a continued focus as we move through the year.

Denise, at this time will you open the lines for Q&A? Thank you.

(Operator Instructions) Jim Rollyson of Raymond James.

Stu, on offshore services to start out with, obviously you had the seasonal slowness that you normally have. You had weather conditions on top of that plus the startup issues cost with the Hedron and the write-offs. I would expect the seasonal side of that continues in 1Q, curious how you are seeing the weather so far in 1Q versus 4Q? And maybe net/net with the charges you've lost money slightly, do you expect to be profitable in 1Q in the offshore services?

Yes, two, three questions embedded in that. One is we certainly had the impact in the fourth quarter, the adverse seasonal. That is continuing in the first quarter and will have a similar effect. I do think we will be challenged to be profitable in that segment in the first quarter based on that factor. Having said that, we still believe our guidance for the full year is appropriate and we've always believed that the second and third quarters for offshore services would be where we make the vast majority of our profit for that business.

As I indicated on my commentary, we are seeing a pretty good backlog developing and increasing on the Hedron, so I think that asset looks very encouraging for us. And we also have, as we said in the guidance, the impact in the first quarter of two of our assets are in for service and we fully expect both of those will be finished within March and out working.

Just trying to make sure we nailed down the timing. Also noticed you mentioned in the press release a little bit of a bump up in decommissioning and abandonment costs that happened in 4Q that was attributable to some non-operated properties. What is the risk of that happening in the future? Do you think there's much more room that could inflate or just pretty minor stuff?

If you look at our overall Maritech commentary over the last few quarters, we've clearly been very focused on doing the work and where it is operated properties where we control the assets, we've done a very good job of execution, getting the work done, having some variances but within a reasonable range. The real challenges we've had is working interest partnered ownership in some of those non-op.

We certainly believe we've trued them up accurately at year-end. They've been a couple properties where there's been ongoing challenges that we've taken several charges during the year. So to the best of our knowledge at year-end they're properly reflected on the balance sheet. We continue to closely monitor those and feel they're appropriately noted at year-end.

On the fluids side to the extent you guys have exposure on the North American land side of the business, can you maybe talk about if you are seeing any short-term softness just related to the dry gas rig count slowing down before it gets redeployed into the oily side or is it held up fairly well? Just maybe what you are seeing there.

Yes, it continues to hold up reasonably well in all of our shale-related activities. Again, one of the common threads you hear in our segment discussion is we benefited and continue to in the fluids. And we've moved assets as appropriate to the areas where the rig count continues to be strong and is expected to on the liquid plays. We're not seeing a big transition impact of that movement and I don't anticipate we will.

We also benefit in testing from that and even within Compressco, as you listen to some of the comments we make, we've got a growing share of the Compressco business that's allocated to the oil and liquid plays as well. So that continues to be a very important part of our portfolio across all three of those businesses.

Appreciate the color. I will turn it back. Thanks.

Joe Gibney of Capital One.

Just had a quick question on the Hedron. Your reference to being close to full utilization of that asset during 2Q and 3Q, is that full utilization on third party work or is there still some embedded internal work in that expectation for utilization?

It is a combination of both. We've got a good mix of internal work as well as third-party and we've got pretty good line of sight into the summertime on that and still have some ongoing quotation activity to supplement that. Caveat with that is there still are some permits required that we're optimistic about. And if they get turned around within the time period we've experienced over the last six to nine months then we will be in good shape. But the actual customer commitments that go with that statement are in very good standing.

And then, Joe, just one quick one for me. Just on the $1.2 million in pretax charges within offshore, how much of that was attributable -- was the split between asset impairment and Hedron prep charges?

It was close to 50/50, I don't recall the exact amounts, Joe.

Okay, I appreciated it, thank you.

Mike Harrison of First Analysis.

Was hoping that you could talk in a little bit more detail on the nature of the improvement in offshore Gulf of Mexico activity in the fluids business. Is that something that you think is going to be sustainable or is it just a project or two that got going here in the fourth quarter and maybe we are still waiting until the second half to see sustained improvements?

I think it is consistent, Mike, with what we've talked about is the gradual increase in activity as the permitting has gotten better and the activity starts to pickup, I think we'll sequentially improve during the year slowly and we still have, as we said on our guidance, probably towards the end of 2013 before we are back towards those run rates that we were prima condo, but it is encouraging to see in the fourth quarter and as we start the new year that we have seen a little bit of uptick in activity.

And in terms of the El Dorado facility, it sounds like that did improve quarter on quarter. Just sort of in terms of where you are now versus say the end of December, are you continuing to see improvement? Is the magnitude of improvement decreasing as we get toward where you would expect a normal or nameplate type of capacity on that --?

Yes, I think we were pleased with the progress during the fourth quarter and as we start the new year and look forward we are at the stage where we've pretty much gotten production and market demand pretty close to alignment, so we feel good about that.

And now it is more focused on how do you continue to squeeze cost out, operating efficiency, the normal startup year two of a major plant like that, but I think, as I said before, the production increase I think will not need to be nearly the magnitude that we saw last year. But we still expect significant earnings uplift as we go forward just on getting better at running it day after day. And not disrupting it the way we had to in the past.

And you commented that at least in the testing business you see benefits from the shift away from dry gas drilling into liquids. Can you maybe just give us some other high level commentary on how you guys are positioned to weather that shift if it does take place longer-term away from gas --.

I think one of the advantages that we have is we consider ourselves certainly one of the larger players in that space in the US. So with that I think we have a greater opportunity to move people and assets and leverage relationships across multiple districts and as I've said before, we've spent a lot of time over the last year to -- as we've added capital, standardizing the equipment, making it more robust so we're able to have better flexibility both within the US and moving it internationally and keeping utilization going.

So we've moved people and assets over the last couple of quarters as necessary and haven't seen any transitional deterioration on the business. We certainly watch closely the mix of activity by basin and think we have a pretty good handle on that. We will continue to move accordingly. And we think we have opportunities to continue to grow the business based on our overall market presence.

Then last question I have is just on Compressco. I guess a couple of questions. One, there was a comment that sales of units were unusually high in the quarter. How much did that hurt the margins in terms of the mix impact to that? And then you also seem to be encouraged by the cost controls that you are putting in place, could you maybe give some more examples of some of the organizational changes you've made and the supply chain changes. And what gives you confidence that's going to help on the cost front?

Yes. A couple of questions there. We did have a unusually high amount of unit sales in Compressco in the fourth quarter. As we've noted in some of the Compressco commentary, very much driven by international projects. And as we've said consistently that business is lumpy in terms of unit sales.

That's not our main focus in general, but we do have some lumpiness to it. So I think, obviously, the top line and the associated earnings benefited from that in the fourth quarter. On a margin basis, at the margins on the service side will typically be higher than the margins on the sales and we saw that. So, it was a definite positive in the quarter or probably a dilution to the margin, as you define the calculation.

As we said on the Compressco call yesterday, something that was probably atypically high in the fourth quarter and wouldn't expect to see that over the next couple of quarters in that business. On the cost side, again, we're going through similar to what we discussed on the testing side, a little bit of a mix change where we have gotten a larger liquids component.

So we've taken the opportunities to assess the organization across where the activity is, redeploy some folks, look at opportunities to take some headcount down in areas that aren't quite as robust as they've been in the past. We continue to have Compressco integrally involved in our overall supply chain initiatives across the Corporation. So, we've had benefits that we've seen both in the operating materials and supplies as a result of that initiative.

We've also had benefits on the cost of the product as we've looked at the supply chain, as well as the lean aspect of it and continue to expect that to go forward. We recognize that $2.50 gas at the time does put some pressures on that business and we've reacted aggressively. I think equally important in that business is our demonstrated ability to find new markets and applications at a time when our historically core business is being challenged.

All right, thanks very much.

(Operator Instructions). Bill Dezellem of Tieton Capital Management.

First of all, relative to the Hedron, would you please discuss the net income or earnings per share contribution that you're anticipating in the second and third quarters given the level of backlog that you have for that business? And if you would please incorporate into that answer any retired assets that are going to be an offset, a negative offset, so it is more of a net number, if you would please?

Yes, I think, Bill, we've been pretty consistent in our responses that we tend not to break out the underlying profitability in revenue by individual asset. I think what we have said is given that we have a $70 million investment in that asset that the returns are consistent with our internal objectives and we certainly feel strong that we're going to meet and exceed those. And in the second and third quarters would be the primary beneficiary of that return on that investment. But I really don't want to go down the path of splitting that out separately.

The second part of your question is the assets that we -- I think if you look at 2011 and 2012, other than the Hedron, the diving assets will be consistent and we'll continue to have our other two heavy lift barges. And we've sold a couple of non-core assets in other parts that really don't have a material impact on results. So I think you should view the business as the same set of assets we had last year plus the full-year impact of the Hedron.

Okay, thank you for being consistent with your answer. We were hoping it might -- that might shift out this quarter. Next question is the first quarter, given that you do have the weather impact phenomenon there, it sounds like it is similar to the fourth quarter. Would you please provide your general overall perspective of Q1 total Company results relative to the Q4 total Company results? It sounds like they will be relatively similar, but are we missing something and there's some swing factors there?

I would say if you look at the main components of the business by segment, I think I've described the first quarter on offshore services similar to the fourth quarter. I think the fluids business we view fairly similar to what we just had and have encouraging signs.

The testing business I noted we did have one international project in the fourth quarter. Absent that the rest of the elements of that should continue to go strong as we go through the first quarter. At Compressco, we noted that in the fourth quarter we had the benefit of a very high mix of sales, that we don't see that continuing so that impact would probably be appropriate for Compressco.

But in general, we've said for our businesses, given the normal seasonality we have of offshore services, as well as the second quarter being our seasonal quarter of strength in our European chemicals, that we would see the first quarter being challenging, directionally similar to the fourth quarter before we start to see the real strong parts of the year in the second and third quarter. So I think your assessments are pretty accurate, Bill.

And then specific to the offshore services business, would you please discuss the backlog that you have in that business versus one year ago? And customer discussions, just your general feeling at the robustness of that business now with permitting sounding like it is improving slightly versus a year ago, please?

Yes. Let's split that into the two elements kind of consistent with your question on the assets in place versus a year ago. Clearly the Hedron is incremental and I think we've been pretty transparent on our view that's going to be very well utilized and we've got a strong backlog at the moment on that. So, we feel good about that.

The other assets that we have I would say in general the backlog as we sit here at the end of February is similar to what we had last year; some up, some similar, some down a little bit, but in aggregate I'd say on the major assets we have, other than the Hedron and the heavy lift and on the diving side, similar.

I'd say the P&A activity where they are not as large scale assets, not as heavy investment. Our view is we'd probably see a little bit better activity level as we look through the first half of the year in that business. So overall, similar, I would say, plus the positive impact of the Hedron. Discussions with customers, there's a lot of projects being discussed at the moment.

We continue to be very consistent in our risk tolerance on how we contract. So, in a market that's somewhat choppy, we have chosen to be on the conservative side of taking on some risk as we go out, which I think is still the appropriate thing for TETRA. And we think we will start to see the non-Hedron assets continuing to grow backlog as we move into the second quarter.

Thank you.

Joe Gibney from Capital One.

Just one quick follow-up. Joe, I was just wondering if you could give what DD&A was ex-Maritech for the quarter in 4Q?

Let me see if I can put my finger on that, Joe. The DD&A is $20 million, and that should be primarily non-Maritech. We just have so few Maritech assets left. I'm going to speculate the vast majority of the $20 million is non-Maritech. And that's pretty consistent, $80 million for the year, that's what we are guiding. I think that's a good number to run with.

Okay. Thank you.

(Operator Instructions). I'm showing no 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 comments.

Thank you, Denise. We will look forward to updating the group on our first-quarter results in early May. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.