Tetra Technologies Inc (TTI) 2012 Q1 法說會逐字稿

Good morning, and welcome to the TETRA Technologies, Inc. first quarter 2012 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 that this event is being recorded. I would now like to turn the conference over to Stuart Brightman. Mr. Brightman, please go ahead.

Thank you, Keith, and welcome to the TETRA Technologies first quarter 2012 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 first-quarter results, and I will follow with a brief presentation, which, in turn, will be followed by your questions.

I must first remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by TETRA and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the Company. You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to net debt, revenues, gross profit or profit before tax excluding the Maritech segment, profit before tax or diluted earnings per share excluding oil and gas derivative ineffectiveness 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 over 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. We believe this view assists in understanding the service businesses of the Company. A reconciliation of non-GAAP financial measures is provided in a table on page 6 of our press release.

Revenue in the first quarter just ended was $180.8 million, 18.8% lower than the first quarter of 2011. However, our non-Maritech revenues were essentially flat quarter over quarter at just over $178 million, as shown in the table on page 6 I just referenced. Compared to the fourth quarter of 2011, the immediately prior quarter, the US Onshore revenues for our completion Fluids and Production Testing businesses have dropped from their peak levels of the fourth quarter of 2011. It is no surprise to the market that gas prices in the low $2 per million Btu range are affecting our gas-directed businesses. On the positive side, we are seeing a gradual recovery of our Gulf of Mexico Fluids business. Income before tax was $1.8 million, and after-tax income for the quarter was $0.7 million or $0.01 a share fully diluted.

Excluding Maritech, income before tax was $3.8 million, and after-tax earnings per share was $0.03 a share for the first quarter of 2012, compared to a breakeven in the first quarter of 2011. Included in the $0.03 a share I just mentioned for the first quarter of 2012 that excludes Maritech was a net pretax credit of $2.8 million or also $0.03 a share after tax related to a gain on the sale of several inland water workover vessels, partially offset by transaction costs for the Optima acquisition we just concluded. We had no non-Maritech special items in the first quarter of 2011. Note that the effective tax rate for the first quarter was 34.5%. We believe the annual effective tax rate will remain around the 35% range.

Looking at quarterly performance by segment, profit before tax in the Fluids segment was $11.5 million, versus $7.2 million in the same period last year. Weaker US onshore fluids demand was more than offset by higher Gulf of Mexico and Eastern Hemisphere activity. Production testing profit before tax was $5.7 million, versus $9.1 million in the prior year's comparable quarter, due to the Optima transaction costs in the first quarter of this year and the contribution from a South American technical management contract in the first quarter of 2011 that did not repeat itself in the first quarter of this year. The Optima acquisition contributed 22 days of earnings in the first quarter of 2012.

Compressco's profit before tax was $3.5 million, a decrease of $0.5 million versus the prior year's comparable quarter, though revenue and gross profit were both up for Compressco, indicating the difference was due mainly to G&A, where Compressco has included or incurred significant public company costs in the first quarter of 2012 versus the first quarter of '11, some of which is non-recurring. As noted in Compressco Partners' earnings call on Monday, 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 units on oil wells and, in addition, focusing on international expansion.

Profit before tax in the Offshore Services segment was a loss of $1 million, compared to a loss of $4.4 million in the same quarter of last year. We had a $4.1 million gain on the sale of assets in the first quarter of 2012. The weather was a bit worse than normal in the quarter just concluded, and we had three vessels at the dock for scheduled maintenance in this quarter. And in addition, we have a fourth -- all three of those vessels, by the way, are now, as of the end of the quarter, working once again. A fourth vessel has entered dry dock in the second quarter of the year.

Profit before tax in our E&P unit, Maritech Resources, was negative $2.1 million. We experienced $2.2 million of excess decommissioning costs that were charged to earnings. We reduced our decommissioning liabilities by $15.7 million in the quarter, as a result of decommissioning work performed. So, Maritech's decommissioning liabilities reduced over the quarter to about $120 million as an ending balance. We had $7.1 million of asset retirement obligations associated with our non-Maritech businesses, which has remained unchanged over the last several quarters.

Cash decreased over the quarter by $83 million to a total of $121 million, mainly due to the Optima acquisition and capital expenditures. Subsequent to the quarter end, we spent $42.5 million for the acquisition of Eastern Reservoir Services. Excluding restricted cash and cash attributable to Compressco, we ended the quarter with net debt of just under $190 million. We had no borrowings on our $278 million line of credit. With that, I will turn the call back to Stu.

Thank you, Joe. What I'd like to do is talk briefly on the two recent acquisitions and then in more detail on some of the market trends we've seen during the first quarter and our view of some of these trends going forward. During the first quarter and continuing through April, we've taken additional steps to transform the growth of the Company. These actions include the two strategic acquisitions of Optima Solutions and Eastern Reservoir Services. As we previously announced, the acquisition of Optima allows us to enter the rig cooling business with a strong presence in many of the key international oil and gas producing regions. We also believe the Optima acquisition will accelerate our strategic goal of offering customers a broader range of well completion and Production Testing services.

In addition, during April we announced the acquisition of ERS, a leading provider of frac flowback services to oil and gas operators in the Appalachian and US Rocky Mountain regions. We believe this acquisition strengthens our positions in Marcellus and the liquids-rich Utica shale plays, as well as opening up a new territory for us in the Rockies. We expect ERS to integrate smoothly with our existing onshore US businesses, and we should begin to see pull-through revenues, as well as cost reduction opportunities, fairly shortly. I'm pleased to report that the reaction of both customers and employees to these acquisitions have been very positive, and our management group remains confident in our ability to execute this strategy successfully.

Results for the first quarter continue the trend of improvement in several of our markets but also reinforce the short-term volatility of several of our onshore US markets. And that's where I will focus my comments. The first quarter continued to show strength in Gulf of Mexico Fluids, where we continued to see improvements in activity that corresponded to improved earnings in the Fluids segment. In addition, some of our international operations, particularly in the Eastern Hemisphere, continue to show improvement, and the overall profitability of our chemicals business continues to track along as expectations. Overall, I would categorize the performance of the Fluids segment as very positive in the first quarter, indicative of our thoughts going forward.

The Production Testing segment was impacted in the first quarter by a decreased rig count onshore in the US associated with the low natural gas prices. We are very focused and continue to redeploy assets to the liquid-rich shale plays, but the first quarter was certainly impacted by some of these transition costs. As we go forward in second quarter and beyond, we expect to see improved results for this segment, driven by the redeployment of these assets, as well as the ongoing capital investment in this business. As you recall in our guidance, this was the segment that had the largest component of capital for 2012.

We also expect to continue growth from Production Testing internationally. We were also impacted in the first quarter by certain international contracts being delayed slightly. We remain optimistic of receiving these awards as we move through the second quarter and into early the third quarter. Overall, we continue to be optimistic about this area, and this has been a segment where we have historically performed very well over the years as TETRA. The acquisition of Optima, combined with the significant growth capital spending for this -- for 2012 continues to reinforce our long-term commitment to the growth of this segment.

Compressco also continues to address the low natural gas pricing environment. During the first quarter, our overall fleet utilization declined as a result of the impact of these low gas prices in the US. Our focus for the domestic business continues to be expanding utilization in unconventional liquid-driven applications in reducing cost. We were successful in making progress on the these strategies in the first quarter. In addition, we have action headcount reductions, both in the field and at the facility location, to coincide with the reductions in activity. We continue to look at the ongoing cost opportunities, both within the field and the supply chain in this business. Significant capital expenditure during the first quarter was related to expansion in Latin America, and we expect to see the benefit of this investment as we roll through the second half of the year. Overall, we continue to focus on the applications where we have vapor recovery in non-conventional and continue to manage the cost of the districts where we've seen the reduction in activity.

During the first quarter, our Offshore Services segment was impacted, as we stated in February on our prior call, by adverse seasonal weather conditions in the Gulf of Mexico, the most dramatic impact on our heavy lift assets. Although the overall activity was reasonably high for that time period, the workability of these assets was hampered by the weather conditions. As we look forward and we see where we are in May, we have strong backlog for the second and third quarters and expect to see a normal seasonal uptick in activity for this segment. We continue to be pleased with the demand for the Hedron, and to date, the new asset has met or exceeded all of our expectation. During the quarter, Offshore Services also benefited from a $4.1 million gain on the sale of non-core assets.

The Maritech segment continues to focus on reducing its abandonment and decommissioning liabilities during the first quarter. We spent approximately $15.7 million on these activities, and we expect to spend in the range of $70 million to $80 million over the course of the full year. Our objective continues to be to substantially extinguish these liabilities in 2013. We also sold an additional Maritech property during the first quarter. In the aggregate, we've sold now virtually the entire asset base of Maritech through the transactions last year and through the first quarter. With our net debt position of $189.7 million at the end of the quarter and our undrawn $270 million revolving credit facility, we still have significant liquidity with which to pursue additional growth opportunities in the form of acquisitions, as well as executing our 2012 capital spending plan. At the same time, we are very focused on short-term market volatility and assess the organization size on a district- by-district basis to make certain both resources of people and assets are correctly matched.

In summary, the first quarter showed the continuation of several favorable trends, as well as certain challenges in our onshore markets. As we go forward, we remain optimistic that the positive trends internationally in the Gulf of Mexico and that the transition associated with redeploying some of our onshore assets will have a favorable impact as we go through the second quarter and beyond. We continue to be pleased with our ability to reinvest cash in strategic acquisitions. As we look back over the past several quarters, these acquisitions, plus some of the previous items we've actioned in the form of the TETRA Hedron and the completion of the Compressco IPO, position us well for the future. And we expect to see the improvement in some of our domestic markets as we go through the balance of the year and some of the actions I've talked about on the call. Keith, at this time, will you open the lines for Q&A? Thank you.

Yes. Thank you. At this time, we will now open the floor for questions. (Operator Instructions). And the first question comes from Marshall Adkins from Raymond James.

Morning, Stu.

Good morning, Marshall.

First question, so it sounds like you're still comfortable with that $0.70 to $0.90 estimate you guys threw out not too long ago?

Yes. I think if you look at our businesses overall, we certainly have the benefit of the two acquisitions that wasn't in the original $0.70 to $0.90 that will help us. And, as I said on the call, Fluids, we continue to feel very confident on that. And we see improvement on some of our testing markets in the US and internationally. So, I think we still see the opportunity to get net $0.70 to $0.90 with what we have and what we have bought over the first quarter and in April.

So, the first thing that jumped out at me on this was Fluids margins were meaningfully better than we thought. Is this trend sustainable? Tell me what's going on there.

I'd say the two biggest impacts on the margin improvement to that business would be the higher level of activity we saw in the Gulf of Mexico and the higher level of activity that we saw internationally for those businesses. So, I think the margins did go up a good bit. I think we will be in that range going forward. We had some unusually good project mix in the quarter. So, I'm not sure we will continue to run at that or above, but I do think we will be in that direction. And I think Fluids overall will be in very good shape for the full year.

And remind us, just how important are the shale plays in that business? And where is -- where do you see your geographic breakdown at the end of the year?

If you look at the Fluids business, we've kind of got a couple of components in the shale activity. We've got product sales of our fluids that go in there, as well as we've got the frac water services business to go with it. If you put those two together, we've typically said that's probably about 25% of the segment revenue. The predominant regions we operate in that business would be down in South Texas. Marcellus would be the two largest, a growing presence in Niobrara and some of the other regions. And I would say overall, the product sales, we continue to see good activity there. And then, similar to Testing, we've had some noise in the first quarter on some of the frac water services within that segment on moving between some of the applications, probably not to the magnitude we saw in Testing, but even within the excellent results with Fluids, we did have a little bit of impact in the first quarter as a result of that.

So, I just want to make sure I understand it. The 25%, roughly, of the Fluids business is US land. The strong part of the business, of course, is offshore Gulf of Mexico, international. So, it sounds like, just reading through here, that you're in pretty good position to continue --since offshore international is such a big component already, to continue those higher margins. Is that realistic?

Yes. I think the Fluids business showed strength in the first quarter that was above the range we had and the guidance. And I think that will continue to be a strong segment throughout the year. And again, if you look at the three or four pieces, Gulf of Mexico, we said would be stronger than we had thought. Eastern Hemisphere, particularly international, has increased activity. Our chemicals business overall continues to do better. And our onshore piece, the only part that had any weakness at all on a sequential basis would be the frac water. And we think we've moved some equipment and people around to improve that as we go forward.

Great. Last question for me. The margins in the well testing or production enhancement business were meaningfully worse than we thought. Is that partially because of the acquisitions? Do we think that's going to recover as the rig count stabilizes? Help us with the direction in well testing.

Yes. Two components. First, in the well testing, we had the transaction cost associated with the Optima acquisition of $1.3 million. So, that's non-recurring, and we won't see that impact going forward by definition. If you look at the overall business in what drove the other margin degradation, because again, the revenue numbers were pretty flat with the fourth quarter overall. So, when you peel out the transaction costs, what we saw is in the first quarter a pretty significant impact associated with a couple of districts where the activity ran down even faster than we had modeled at $2 gas, where we have taken action on people and equipment to relocate, redeploy. And we will see the benefit of that partially in the second quarter and then the full benefit of in the third quarter and beyond. So, we've got those, I will call them one-time costs, transitional costs, associated with that. And then, we think we will see those margins come up thereafter as we exit the second quarter and beyond.

The other part of it is, Mexico is a very important market for us. We've got a couple of projects we're chasing that we're optimistic about that are coming a little bit later than we thought. And not having the benefit of that is, we exited the first quarter, had an overall impact on the margin mix. And also, recognize that in the fourth quarter, as well as the first quarter of last year, when you are comparing, we've noted we've got some lumpiness with one of the projects we have in South America that we benefited from the fourth quarter. We didn't have a lot revenue on that in the first quarter. We anticipate some of that coming in the second quarter and beyond. So, that would be another contributor to the margin degradation.

And Marshall, a huge contribution from that contract in the first quarter of 2011, that was the point I was making in my comments. Really, the bridge from first quarter '11 to first quarter '12 is more than 100% explained by the Optima transaction costs and the Latin American technical management agreement. So, quarter -- year-over-year, the domestic business was up the degradation Stu was speaking of was -- in the first quarter of '12, we are off the pace of our record performance in the domestic Production Testing business. So, that's a sequential comment, not a year-over-year comment.

Got it. Thanks, guys.

Thank you.

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

Hi, good morning.

Morning, Mike.

I was hoping that maybe you could provide a little bit more color on what you are seeing in terms of demand trends in the Gulf of Mexico, for both the onshore and the Fluids business. And particularly for Fluids, what are you seeing in terms of deep-water activity?

Yes, I think on our Fluids business, we saw very favorable trends in the first quarter. And we are expecting to see similar trends in the second quarter and activity that just is associated with some of the improvement utilization and permitting out there. So, as we entered the year, we thought that business, in particular, might have some upside versus the guidance. And so far, through the beginning of the year, we've seen that. I'm not certain if you're asking specifically about our Offshore Services business, but I will comment on that in the assumption that, that was part of the question. I would say that business overall, the activity continues to be good. We certainly had the challenge in the first quarter of abnormally poor seasonal weather. We've seen that in the first part of April.

We are starting to see more normal weather as we get into the beginning of May and look out. So, I think that's going the way we expected. We've got a very healthy backlog of our major assets, and I would expect to have a strong second quarter uplift in that business. And we've got very good visibility of most of the major assets through the third quarter. And again, that would be a combination of both third-party work that we are gaining, as well as continuing to do the work for Maritech associated with that $70 million to $80 million spend this year.

And in terms of just kind of the decommissioning market overall, how would you categorize pricing? It sounds like on the demand side, activity is pretty good. Are you seeing still a lot of competition, a lot of assets competing for work? Or is pricing kind of firming up for you?

I'd say the market is still very competitive. I wouldn't characterize the competitive environment as significantly different than we've seen the last several quarters. I think as we see the construction side pick up, I would hope we'll get some benefit of that in terms of the competitive landscape. But as we are bidding on the big projects for the second and third quarter execution. We continue to see a competitive environment.

And what we try to do, Mike, is leverage the breadth of what we offer service-wise in that space to kind of attract those customers where we can add more value. Our whole business proposition there is to try to use the combination of the heavy lift, the diving, the cutting, the P&A, the project management, to give us that capability. And with certain customers, that works very well. But overall, it's still a very competitive market.

And then, in terms of the costs associated with the three vessels in dry dock and the timing, was that all in line with your expectations in the first quarter? And if you could maybe give us a sense of how long that fourth vessel is going to be in dry dock and how that's going to impact the wet season. And again, was that in your expectations?

Yes.

Was it different?

Well, I think if we look at both the cost and the duration of those assets in dry dock, it was consistent with what we expected. I think our guys did an excellent job getting in, getting out, and hitting budgets and positioning ourselves to have the assets available for the strong demand season. One of the assets that we don't own that we lease is in for some small work, but that is just about finished, that we had anticipated. And we've got alternative assets to deal with some of that work. So, overall, I would characterize the dry dock process as very much consistent with what we've modeled.

And the last question I had was just on the Testing business. Looking at the international side, what geographies would you say you are seeing the best growth? Were there maybe any markets internationally where you weren't seeing growth as quickly as you maybe had anticipated at the beginning of the year?

Yes. I would say, the last part, I noted in my comments, that Mexico continues to be a very good market for us. We've got some projects we're chasing that are a little bit slower in coming to a decision point than we might have expected. But clearly, that continues to be a very strong market for us. We have other opportunities that we are pursuing in South America, as well as in the Eastern Hemisphere. In the Middle East, we have a strong Testing business and continue to grow that grow that as well. And that will continue to be the focus as we go forward.

All right. Thanks very much.

Thanks, Mike.

Thank you. And the next question comes from Joe Gibney with Capital One.

Thanks. Good morning.

Morning, Joe.

Just want to drill down a little bit on the question of guidance, specifically on revenues within Production Enhancements, exclusive of Optima and the Eastern Reservoir contribution. I think your original guidance was $2.60 to $2.90 on revenues in Production Enhancement. As you think about some of the gas headwinds that are out there, basin shifting and some of the frac water impact that you referenced, are we still in that bandwidth for Production Enhancement revenue still within your expectation ranges coming out of first quarter?

Yes, I think we are going to be challenged to get to the bottom part of that, based on the first quarter, per se, Joe. If you look at the Compressco exit numbers, that was below what we had expected. And I think as we look overall, excluding the acquisitions we did, we expect the activity in Testing to pick up as we go forward. We had talked about on the Compressco call on Monday, that we've had a very limited unit sales at the beginning of the year. Those tend to be lumpy. We expect to see that improve as we go forward.

And the other part of the revenue growth for both Compressco and Testing as we sequence through the year is, we do have a lot of capital that we've put in, both in Mexico and for both product lines and Testing in the US where we expect to see the benefit of that going on. So, I still think we will get towards the bottom of that revenue, even when you exclude the acquisitions that we did.

Okay, helpful. And just one last one for me. Joe, you referenced sort of the delta between -- on a year-over-year basis within Production Enhancement and particularly Testing related to the delays in the Latin America contractors, along with Optima deal costs. But what was -- for the revenue impact in the first quarter from some of these delays that you've referenced on the Latin America international sort of Production Testing side?

Okay, what the South American technical management contract is an ongoing contract but has lumpy contribution of revenue and earnings. We only recognize earnings when we actually receive cash.

Right.

And that is on a periodic basis, so it will hit one quarter and then not another. And you asked a question about Production Enhancement, but then, your question was really geared to Production Testing, so should I focus my response on Production Testing?

Yes.

Okay. On Production Testing, the revenues in the first quarter of 2011 were, let's see, $33.2 million, versus $38.3 million in the first quarter of 2012. So, revenue is up, and then earnings, what -- looking at earnings, what my comments were was the entire degradation of earnings that you saw quarter -- year-over-year quarter comparisons was the $1.3 million associated with the Optima transaction costs, and then, secondly, the technical management agreement in South America that contributed substantially to earnings and revenues in the first quarter of '11 but not '12.

Okay, helpful. And then this last one for me. The transaction costs in Q2, do we expect something sort of similar to what we saw with Optima for Eastern Reservoir re-occurring in the second quarter, roughly $1 million?

Stu, do you want to --

Yes, it's going to be a lot more modest than that, Joe.

Okay. Thanks, guys. I'll turn it back.

Thank you. And the next question comes from Stephen Gengaro from Sterne, Agee.

Thanks. Good morning, guys. Two things. I will start with on the Offshore Services side. Should we think about the seasonal pattern being similar to the last couple of years? Is there anything that we should take into account that would shift that at all?

I would say, in general, I would anticipate the seasonality to be fairly typical of what a prior year would be, again a excluding when there is a hurricane event, we're dealing with that, when we typically have a different pattern. But there is nothing I've seen that would say would dramatically change from the concept where the vast majority of the work is getting done in the second, third, and the early part of fourth quarter.

And then, along those same lines, have you seen any traction from these iron regulations? I mean, has anything changed?

We certainly haven't seen the bump that we may have thought associated with that. But we also recently have seen a couple of examples where part of the negotiation on the contracts with our customers involved discussions on a little bit tighter timeline to execute in more specific windows geared to the need to get work done in a specific time that, my opinion, had a little bit more requirements associated from the regulatory side. So, we're seeing some small signs of that. And as I've said previously, certainly, with our major customers, it continues to be an ongoing dialogue of how do you do this most strategically and look at some of the commercialization of that. So, I think there's some minor trends, but I certainly wouldn't characterize it, Stephen, as we've seen a significant shift on the overall activity as a result of it.

Thank you. And then, one final one. When you look at these two acquisitions, have you -- or I probably should say, are you willing to give us a sense for the contribution on the revenue line and the relative margins, versus the other parts of the segment?

I am willing to give you some parameters, which hopefully you'll interpret as a yes, although we've said on both of those that we are very comfortable that they are going to both -- obviously, by definition, given that we use cash to be accretive immediately, that's a given. Number two, that their returns are going to be consistent with a minimum, that 15% after tax we look at on acquisitions like this. And both of them I would think on the average would average up the margins for that segment as we go through the cycle. And both of them, as I said in my comments, very -- we've done a very good job to date, in my opinion, getting people engaged, the transition teams working, getting the task force accomplished, getting positive reception from the customer. So, I think they're both going to be good contributors this year.

Great. That's very helpful. Thank you.

You're welcome.

Thank you. The next question comes from Martin Malloy from Johnson Rice.

Good morning. In terms of the Fluids business in the Gulf of Mexico, when do you think that you'll be back to pre-Macondo levels top line?

I think -- we've said, when we put our guidance out in January, that we thought by the end of 2013, we'd be at that level. And I think, based on what we've seen in the first three or four months of this year, we may see that get there a little bit earlier than that, because it is trending a little bit better than we expected.

Okay. And then, with regards to the Production Testing segment, with you moving equipment from gas plays to more liquids plays, deploying additional capital there into that segment, can you talk about what you're seeing in terms of pricing when you move that equipment?

Yes, to date, in the areas we've moved to, we've been able to not have any significant negative impact associated with pricing in those areas where we are deploying. I think the real thing we've seen in the short term is just the ability to get that equipment, utilize the cost of moving it, the crews associated with it moving away from their home base. So there's a kind of a process we're going through very quickly and with a very high sense of urgency to get the asses moved, to kind of have them at the final destination and with the organization size and distribution matching it so we get that behind us. I think that's probably the primary factor we saw in some of that margin impact in the first quarter. But the pricing side of it is holding up reasonably well.

And are your competitors in the different regions that you operate in, are they continuing to deploy capital into providing this type of equipment?

Yes, I think overall, you see the competitive landscape, viewing the shale opportunities as a very fundamental, strong, long-term strategy in making the investment associated with the type of session. So, I think it will be an area where there continues to be investment opportunity competition. And we've strategically made a determination we want to get bigger in that space, and that's where a lot of our investments are going.

Thank you.

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

Thank you. We have a couple of questions. The first one is, relative to the Hedron, should we anticipate any remaining negative drag from that vessel? Or will it be fully operational for all of the second quarter?

We expect it to be fully operational for all of the second quarter.

And beyond, presumably, now that we are to this point?

Yes, and beyond. Our backlog is solid, the demand is good, the economic assumptions we made when we purchased this are consistent, and we've executed the contracts very well. The only challenge we've had is the weather, which is beyond our control. But when we're working in executing, it's going very well and very, very safe.

And I believe somewhere in the Press Release or otherwise, there's a reference to the Hedron performing at least as well as your expectations, which maybe implies that it has performed a bit better than expectations. Is that something that you can discuss further, please?

I would say just -- and that's just operationally, I think we got it working in November. And the size and complexity of that asset, I think the management team in that group has worked through any short-term challenges, kept it operational. And we are continuing to learn more and more, and I just think we've kind of reinforced in my mind that, that's a great competency we have, and we are seeing the benefits of it. Long term, that will be a very valuable asset to us.

Thank you. And then, additionally, in the release you referenced that you have had some or expect pull-through revenues from the ERS transaction. Would you please discuss what it is that you're specifically referring to there and when you believe that we can capture those pull-through revenues?

Yes. I think that what we would like is with that acquisition, we get people that are very, very knowledgeable of the testing business. They've got great customer relations in the region. They operate in the Rockies, where we don't have a big footprint. So, my expectation is when we look at the basket of services that we offer specifically as it relates to the flow-back testing and the fluids and the water handling, that we leverage those customer relationships and we start to see some of the benefit of that. We've got -- we've set very clear expectations internally that, that's part of what the rationalization and the strategy was. And I think we'll start seeing that as we go through the middle of the year and beyond.

Thank you.

Thank you. And the next question comes from Blake Hutchinson from Howard Weil.

Morning, guys.

Blake.

Just, Joe, or excuse me, Stu, I was hoping you could expand a little bit on the commentary in the Press Release about the Eastern Hemisphere off Fluids business. I'm assuming it's not just an early start to some of the seasonality in Scandinavia, that there's some other areas, perhaps in North sea or elsewhere, where you're seeing some traction. And maybe call that out and then talk a little bit about the sustainability of the trends you see in the Eastern Hemisphere in the Fluids business.

I would say the positive trends in Fluids that we've seen in the Eastern Hemisphere and expect to continue much more around our offshore businesses and our oil and gas customer base, more so than the chemical side. So, it's not a acceleration of demand in our chemicals. That business is performing about what we expected. The area we are actually seeing increase is in -- are in places like the North Sea and West Africa, where we've got good relations and the activity is picking up and we were able to leverage that.

So, probably a good trend of sustainability, then, I would assume.

Yes, I'd think -- our guys seem to believe that's going to continue throughout the year. So again, kind of going back to some of my opening comments and stuff, I think overall, there's a lot of positive trends in the Fluids that we're looking to help us offset any of this first quarter impact we've had on the onshore US Testing side.

Blake, echoing what Stu said, the European calcium chloride business actually has been down, so that did not contribute to -- in fact detracted from the year-over-year performance due to the weather, which has been very mild in Europe. Remember that a lot of that business is weather-related.

So, probably some less pronounced seasonality from that from 1Q to 2Q as well?

I still think you'll see a very significant seasonality, but it may be a little bit different. But directionally, it will be similar to what we expected, Blake.

Okay.

The seasonality in the winter is weather-related. In the summer, it's related to the use of calcium chloride for road aggregate material. So it would be weather-related in that sense, but it's an entirely different market.

Got you, got you. Okay, and then, a point of clarification, Joe. With the vessel downtime, what percent, if any, of that cost -- of shipyard costs are you expensing?

Essentially all of it.

Okay. So, we get the snap-back, not just in utilization, but you're expensing most, if not all, of the shipyard costs as well.

That's correct.

Okay, great. Just wanted to clarify that.

So, that would -- not only the vessels being out of utilization and losing that revenue in earnings, then there is a cost. So, that accounts for a lot of the year-over-year or any kind of quarterly comparison.

That's helpful. I just wanted to make sure that I had that right. And then, Stu, I was hoping maybe you could talk -- just a quick question on Compressco. Is there a typical average contract duration? And so what we saw from the first quarter was the first opportunity that clients had to kind of put back equipment and maybe we saw the brunt of that in 1Q and it levels out from here. Is there any thought process to that --

Yes, there is. I mean, we've discussed that extensively. And I think the view is that the first part of your question, the average duration of deployment probably is two to three years, on average. We saw in the first quarter, the area where the utilization went down was very specific to a couple of customers. It was not a broad impact, and it was very specific to a couple of customers that had very specific assets in dry gas applications where they shut in their wells. And I would contrast that to what we saw three or four years ago when the prices came down, that it was, at least at this stage, it was a much broader impact than we are seeing at the moment.

And so when we kind of look at the details behind the first quarter, you had that impact and somewhat masked the strength we've had in moving into some of our non-conventional vapor recovery-type market segments. And so I think we've done well there. I would not anticipate a -- as we look forward a large influx of broader reduction in utilization. And that's kind of what we're seeing and what the guys believe and what we communicated on the Compressco call the other day. Meantime, we are very aggressive in matching cost with the areas we see that are dry gas and showing symptoms of lower utilization. Again, the focus is go out and get the market opportunities on the liquid-rich plays to mitigate that. And that's exactly where the sales effort is going.

Good to hear. And then, finally, with regard to the kind of extra costs you are bearing here before we get -- before we get some promising contract activity going in Mexico with regard to the Testing business, I mean, are we -- would you handicap that as something we start to see some revenue, relief for that cost burden in 3Q, most likely?

I'd say our internal thoughts is, we will see that early 3Q.

Okay, great. Thanks. I will turn it back.

Thank you. (Operator Instructions). All right. There is nothing else at the present time, so I'd like to turn the floor back to management for any closing remarks.

Yes. Thanks, Keith. And again, I appreciate everybody's questions and believe we answered them succinctly and wanted to really emphasize some of the questions on the Testing side, that's where we've focused our attention primarily in responding to some of those results. And obviously, we feel very comfortable continuing to invest in that business and expect that to improve as we go through the second quarter and beyond. With that, we'll look forward to updating that and the rest of our business in early August.

Thank you. This concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating, and have a nice day.