Tetra Technologies Inc (TTI) 2012 Q3 法說會逐字稿

Good morning and welcome to the TETRA Technologies Inc. third-quarter 2012 results conference call. All participants will be in a 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. And I would now like to turn the conference over to Stu Brightman, President and CEO, please go ahead.

Thank you, Emily, and welcome to the TETRA Technologies third-quarter 2012 earnings conference call. Elijio Serrano, our Chief Financial Officer, is also in attendance this morning. I will provide a brief presentation of our third-quarter operating results, after which Elijio will address certain cost-reduction measures we have taken and then I will address our consolidated outlook. Following that, we will take any of 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 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 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 with the context of our complete financial results for the period. As I stated earlier, I will provide a business overview of the divisions and then turn the call over to Elijio to address a couple of specific areas.

Overall in the third quarter of 2012, despite several challenging markets, we were able to increase our revenue, even excluding acquisitions, compared to 2011. We continue to see trends overall similar to what we experienced in the first half of the year. In a very challenging North American market segment, we continue to generate strong earnings in our Production Testing segment and our Fluids division, although not at the peak levels we reported earlier this year for testing.

In the third quarter, the benefits we received from our three acquisitions in our international expansion offset some of the weakness in the North American markets for Production Testing. Despite a slower ramp-up in activity in Canada associated with the Greywolf acquisition, in the aggregate our earnings to date from the three acquisitions are consistent with our expectations and we remain confident that these results will meet or exceed our expectations on a go-forward basis.

In our domestic markets, we continue to take advantage of strong demand in liquids-driven shale plays, and we have been very aggressive in moving equipment and taking cost reductions in those areas impacted by slower demand due to low natural gas prices.

Compressco had a very good strong quarter and we are very pleased with the ongoing growth and profitability in this business. Compressco's revenue and profitability both improved sequentially, driven primarily by our investment of growth capital in Latin America and other Eastern Hemisphere markets, continued strength in unconventional liquid applications, and our ongoing cost reduction efforts.

In all the geographies in which we invested growth capital, those investments have matched up against specific customer opportunities with very strong outlook going forward. Compressco's strong third-quarter performance coupled with this favorable forecast enabled us to increase Compressco Partners' third-quarter distribution by $0.01 per outstanding unit.

We continue to face market challenges in our Offshore Services segment. Results for the third quarter were slightly lower than the prior quarter adjusted for the impact of the Tropical Storm Debby in the second quarter and Hurricane Isaac in the third quarter.

Activity levels have been negatively impacted by delays in decommissioning permits, although we have seen an increase in the number of permits received by our major customers in Maritech over the last 60 days. We are hopeful that this trend will continue and give us positive momentum as we move through the fourth quarter and into 2013.

Currently our two major heavy lift barges have backlog and permitted projects to work through the seasonally weak fourth quarter. As of the beginning of November, we've seen favorable weather conditions in the Gulf. As a result, we are confident to keep both barges working through the fourth quarter, which we have not been able to do in a recent years.

We will continue to carefully monitor the performance of Offshore Services segment while our EBIT margins of 15.4% in the third quarter have shown sequential and year-over-year improvement. We also believe these are very strong compared to others in our industry and with the cost reductions, we feel we're very well-positioned as we move into next year. At this stage, Elijio will address some of the actions that we have taken to improve profitability for this segment.

Thank you, Stu. You mentioned during the last conference call that my initial focus will be to work with the Management team to improve our cost structure and to address margin opportunities. Given the difficult Offshore Services market segment, we performed a detailed review of our Offshore Services segment cost structure, asset base, and portfolio of service offerings.

As a result of those reviews, we have taken the following actions to reduce our cost structure and to align our business model with the current and projected activity levels. Number one, a series of headcount and staff reductions have been completed, resulting in the reduction of 42 positions. These actions were completed this past Friday and were done mainly in staff and support functions. The annualized benefit from these reductions is $2.9 million and this included the first step in consolidating and streamlining certain support functions.

Number two, we are negotiating the sale of our electric wireline business that was part of our Offshore Services segment. While not significant in revenue, this business line was not generating acceptable margins and returns. Number three, we are also looking at rationalizing and scaling back on a number of heavy lift barges, with the potential of selling of one of the barges, in addition to other equipment that has not been fully utilized this year as we continue to rationalize our asset base.

The potential to monetize some of our non-core assets could generate cash proceeds of between $15 million to $20 million and will result in annualized cost savings in excess of $4 million. We are targeting these actions for early 2013. These actions are in addition to other supply chain initiatives and cost reduction initiatives that were triggered earlier this year.

The annualized savings from these and the previously implemented actions are expected to reduce our cost structure by over $15 million per year and generate cash proceeds of approximately $20 million.

The next area that I will work with the Management team will be to focus on working capital management. Cash flow from operations due in the third quarter as a use of cash was $9.4 million, including $23.5 million toward Maritech ARO projects. Capital expenditures in the third quarter were $24.7 million. And also during the quarter we completed the purchase of Greywolf with cash outlays of $55.8 million. Net debt exclusive of restricted cash was $353 million.

During the quarter, we experienced an increase in day sales outstanding. We are focusing our efforts on making a significant improvement in our cash position by addressing the increase in DSO, including process changes to maintain a sustainably lower DSO. In addition, we are exploring a sale-leaseback on our corporate office to better deploy our capital.

We are targeting by the end of Q1 2013 to generate in excess of $80 million of cash from the potential sale-leaseback on our building, the sale of the previously mentioned Offshore assets, and an improvement in DSO. The DSO improvements will be through a series of process changes that I have successfully implemented elsewhere. With that, let me turn it back to Stu.

Thank you Elijio. In our August announcement, we revised our 2012 earning guidance to $0.60 to $0.70 per fully diluted share, excluding the impact of Maritech. I want to speak briefly about Maritech as we continue to be very focused in reducing and eliminating our abandonment and decommissioning liabilities. As noted during the quarter, we spent approximately $23 million in these activities and overall we expect to spend close to $90 million for the full year.

Having said that, we note that during the third quarter we increased our estimate of these liabilities by about $9 million, of which a significant portion was associated with Hurricane Isaac, as well as challenges on specific wells. One key event was during the quarter we completed the work on Maritech's wells associated with downed structures, which has typically been one of our higher-risk activities.

As we look forward, we have a larger portion of the remaining liability associated with platform removals and we also have approximately $29 million of the remaining liability associated with non-operated properties. We will continue to analyze our ability to accelerate this work that we control the operated properties during the first part -- through the fourth quarter of this year and through the middle of next year.

As I noted earlier, the guidance was $0.60 to $0.70. We still feel comfortable with that range based on our third-quarter results as well as our outlook for the fourth quarter. As noted previously, the majority of that miss versus our original guidance relates to the challenges of the Offshore Services segment which Elijio delineated the very aggressive cost posture we are taking in those business. Overall, the quarter was consistent with our expectations across the businesses.

As we look forward, we will continue to invest in opportunities for Compressco. We've demonstrated our ability to grow that business both domestically in our historical markets, as well as moving into new liquid applications and continued growth in Latin America as well as the Eastern Hemisphere. We expect to see growth in the Gulf of Mexico Fluids business. We expect to see growth in our international businesses in Fluids and Testing. And the common theme is in all of our businesses, we will continue to remain very focused on cost reduction and cash generation.

The actions taken earlier in cost in Compressco, our ongoing efforts in our North American markets to move equipment into areas of higher activity, and the reductions in our Offshore Services segment continue to be examples of that cost leadership. With these actions, we believe we've positioned the Company to benefit when the markets begin to improve as well as building on our solid performance for the third quarter. Emily, at this time, will you open the lines for Q&A? Thank you.

(Operator Instructions)

Stephen Gengaro, Sterne Agee

Two things, Stu. What I'd start is, when I think about your guidance range for the year, I am assuming we are looking off of this operating earnings of about $0.43 year-to-date. When we think about the fourth quarter, should we think about normal seasonality in Offshore? I know you mentioned the barges look like they're going to work -- or hopefully work -- most of the quarter. How do you bridge the gap or what are you looking for in the fourth quarter from a positive to negative standpoint by area?

Okay. Well, first of all, the starting point as we enter the fourth quarter of the $0.43 is the number we are using, which is $0.20 for the third quarter. As we look at the fourth quarter, we will definitely see the normal seasonality on our Offshore Services business. One of the reasons we were very aggressive on the cost side in our Offshore Services segment is recognizing there's going to be lower activity by definition the next two quarters. We were very aggressive in taking those types of cuts. When we look at our backlog, we are encouraged by some of the permits that we've received, both for our external customers, as well as Maritech, over the last 60 days. So we -- through October, which is behind us, and looking out for the balance of the quarter, we are looking at very good utilization on our barges. As always, we will need to share some weather risk with our customers to facilitate that work taking place. So I'd say, yes, we have got some positives as we go through the quarter in that business but clearly it is going to be down from the third quarter because of the normal seasonality.

Other things that will benefit, we will have a full quarter of Greywolf. We acquired that July 31. We will have the full three months. We saw a little bit of slower than expected demand during the third quarter up in Canada. We are seeing that improve so we will get a double benefit -- the full quarter as well as increased activity up there. Overall, our legacy businesses in North America continues to perform pretty well. Fluids has held up strong, a lot of it due to some new applications we have introduced with our water handling business, that we are very pleased with. Testing, I think the guys have done a great job moving equipment and people to where the activity is. And as I said on the call, our overall results in our acquisitions have been fairly consistent with what we expected to date. Fluids, Gulf of Mexico continues to be strong. We expect that to continue. Internationally, we have got some projects, we've got line of sight on that we think will carry on through the fourth quarter. And Compressco, as our guy stated on their call yesterday, and we have reiterated today, had a very, very strong quarter and it cut across all elements -- domestic, Latin America, Eastern Hemisphere. So with that as color, that is the background and backdrop of how we look at the fourth quarter and how we move from our year-to-date results into that revised guidance range.

Stu, that's very helpful. Thank you. And then just as a follow up, on the Fluids side, the equipment repair issue in the quarter that you [touched], can you just elaborate a bit on that and the impact it has maybe on the quarter?

Yes, we had talked in August on our second quarter call that we had a repair of equipment issue that we needed to deal with over in Europe and our calcium chloride business that we would have it fixed, contained in the third quarter. That the impact would be about $3 million of EBIT during the quarter compared to what we would normally run and I think on a full year basis, that is about what it will be. We finished the work at or above schedule and expect that the full impact for the year of that will be about that number.

Very good. Thank you.

Jim Rollyson, Raymond James.

Just circling back to the Gulf of Mexico, your Offshore Services business and the cost measures you are taking there, when you look at the market and how things have turned out this year, X the hurricanes, versus what you thought going into the year and you break it down between what is driving it, how much do you think is permitting-related issues versus just customers not spending the level or completing the level of work that you were anticipating and what do think it takes to get the market up to what you originally hoped for?

Yes, when I assessed that business this year, clearly the market has been more challenging and I think a lot of it is driven by some of our customers just not being able to pursue the activity that they had planned earlier in the year, as a result of some of the permitting delays that we have seen. So I think that is a big part of it. We certainly have talked to our customers and followed the permitting process and that has had an impact. As I said on the call earlier, I do see some positive signs the last 60 days that a lot of those major projects we have seen permitted, a few of them are going to fall into the fourth quarter execution plan, both for the third party as well as the Maritech. And that gives me a little bit more confidence as we look to next year. The thing that I really wanted to make sure we reiterated and I think Elijio did a great job talking about it, is we are running that business on the assumption that we can't count on that rebound and we've taken actions to take cost out both on the organizational size, as well as really manage the supply chain very aggressively. If we are fortunate that some of the permitting and the demand goes up we will get the benefit of that next year. That slight uptick overlaid with the cost actions would start to get us towards the area we talked about earlier, but clearly we have a big gap, Jim, from what we've delivered this year to what we had guided on that business, so there is a big range to make up and we've taken a big piece of that gap in the cost reduction.

Yes. That's really helpful. On the Testing business, you mentioned earlier the slide you've seen somewhat there year-to-date just because of the weak gas market and completions being down. Can you maybe give us some color on how that's playing out more recently just given the rig count is still going the wrong direction in that regard but the natural gas prices have obviously recovered some. Are you seeing that start to flatten out or how you think about that domestically?

Yes. Again, one of the things I don't know that we highlighted sufficiently, so I will take your question as the opportunity to do it. We have actually had a very good performance in our domestic Testing business this year despite some of the challenges on rig counts and having to move people and equipment around. And if you look at it in domestic Testing, it has held up pretty good. The pricing -- the utilization has been strong, the pricing has been the bigger challenge, but some of the advantages we have by being a larger player in that, both from an equipment people supply chain has allowed us to have those margins. They are off the peak but they are certainly very, very strong margins and that is, excluding the acquisitions, and having done the first acquisition in March and then April, and the end of July.

Everything we have seen out in the markets, as those acquisitions are in the right geographies with great people that we've acquired and a lot of pull through opportunity. So it has been a tough market but I'd say overall I'd be remiss if I didn't reiterate that I think our Organization is performing very, very well in North America across all segments -- Fluids, Testing and Compressco. And with the utilization that we've seen improve in Compressco, I see our manufacturing production requirements starting to look like we will be in that mode a little bit earlier than we may have thought in that business. So again it is a good leading indicator of some positive things.

Great. The $3 million special charge for the quarter, charges, where should we back those out of?

Jim, the $3 million that we mentioned in the press release, $850,000 related to the acquisitions that we've made this year are in the Production Testing business segment. $1.26 million that we mentioned related to severance, 50% of which is cash, 50% of which is non-cash equity related, is all in corporate. And then the rest of it, which is about $840,000, is weather impact on our Offshore Services segment. Almost $3 million

Okay. Thank you.

Mike Harrison, First Analysis.

First question is for Elijio. Maybe -- could you just -- the three buckets that you mentioned for cost savings in the Offshore business, it sounded like your total debt at $15 million plus per year, but can you just walk through each of those pieces again and the timing, the amount and timing?

Okay. So the first group was headcount reductions and the team started making reductions late part of third quarter and completed it last Friday and that is a savings of $2.9 million. Those savings are essentially underway as those reductions have been completed.

Yes.

The other one we talked about disposing of our small wireline business that, while the business is not significant in terms of revenue, the margins were not at the level that we've expected so that will result in a benefit of about $0.5 million a year of improved profit. Then we're looking at rationalizing and scaling back on some assets that utilization levels have not been at the range that we targeted and we will be selling those or disposing of some of those assets and those annualized savings are about $4 million to $4.5 million with potential cash proceeds of $15 million to $20 million. Then those are the actions that are recent actions. In addition to those recent actions, we had already triggered a series of other initiatives, a lot of them supply chain led, that will be the balance between the $2.9 million from headcount reductions, the $0.5 million from the wireline, the $4 million to $4.5 million from the disposal of assets, the rest of it is coming from supply chain initiatives and other actions that the Organization had taken beginning early in Q3.

So that's like $7 million or $8 million from previous actions that are already -- we are already starting to see those savings?

That is correct. So the sum of all of those is the $15 million plus that we believe that we are going to benefit from.

All right. Great. And then, Stu, you mentioned keeping a couple of assets in the Offshore business working through Q4. I just wanted to understand -- that sounded like it was a little bit unusual -- if you could give us some details on what is different about the work that you are doing that it make sense to run those? Does it boost earnings in Q4? And then are you going to continue to run them in Q1 as well?

Yes. We have got very good line of sight through the quarter on two primary heavy lift barges as well as one of our key diving assets. And that is probably a little bit unusual in a positive in terms of having that -- some of that has to do with a couple of factors, Mike. One, as I mentioned, we have seen a couple -- the permitting pick up and some of that work, we've talked to customers about how we execute that in the fourth quarter and some of the Maritech permitting that -- where we've seen that come in. We made a conscious decision to try to get some of that Maritech work done during the fourth quarter, recognizing it's not the perfect weather time to do it, but overall we think that the pluses of working it from an earnings and from a cash point of view make sense. And as we go to the first quarter, we're going to just carry on the same process. We have got a clear understanding of what the organizational impact is if we don't work those assets, we have got that obviously pull that lever as necessary so we have got a very good understanding of the economics of when to work, not to work on what we consider the weather risks associated with that. And as we will through the quarter and finalize our plans, we will make that evaluation. If the circumstances are similar to what we're seeing now we may choose to work that in the first quarter. If it isn't then we will back off with appropriate seasonal cost actions.

All right and then the last question I had is on the Fluids business, particularly on pricing dynamics. Can you talk a little bit about what you are seeing in terms of the competitive environment pricing dynamics Onshore, North America, in the Gulf of Mexico and then in maybe some international markets?

Yes, I'd say if you go across those three geographies, the most price sensitive we have seen this year would be the Onshore US. The pricing is holding up reasonably well in the Gulf of Mexico and internationally in the key geographies we operate. In Latin America and the Eastern Hemisphere they have held up pretty good.

Got it. Thanks very much.

Kurt Hallead, RBC Capital Markets.

Hello Stu, I was wondering if you might be able to give us some insights on some of the international opportunities that you're looking at, at 2013 and whether or not that would be specific to Testing or Fluids or maybe both?

I will tell you what. I will give you a little color on all four pieces of the business. Testing, clearly, we are continue to expand that, the acquisition of Optima is indication of that. Moving into Western Canada with Greywolf is indication of that, our continued investment in Mexico and other parts of Latin America. So we continue to believe that testing has both international footprint expansion, as well as product breadth expansion and we've taken on some projects where we have been able to have a little bit larger scale Testing project that fits in with what we are doing. So we have got a pretty good growth strategy in that business. Compressco, as we highlighted, has done really well in that Latin America. And again, I always want to emphasize, the investment in that business is usually very, very tightly correlated with customer activity.

We are not investing on a speculative basis. That is something that is very important to understand when we talk about Compressco, whether it is domestic investment, liquids penetration, international, that's the model. The team that Ron has also done a very nice job finding growth opportunities in the Eastern Hemisphere. We have moved into parts of Europe, we've moved into parts of Asia Pacific, that have been incremental and we will continue to expand that. Fluids, we are still looking at opportunities in Brazil. We have had some recent increases in activity that we are pleased with. Not certain if that's a precursor for bigger things going forward but that is certainly helping us as we close out this year. We continue to be pleased with some of the existing operations we have in the North Sea and West Africa. And our guys have continued to find incremental geographies there.

And the Offshore Services is the one, it was still virtually all Gulf of Mexico shelf, we continue to look at on a fairly modest low overhead basis, certain areas that some of our products make sense and again that there are some markets where we see evidence that there is some opportunities but we are taking a very pragmatic approach to that. As I've said before, we are not going to be asset heavy, we are not going to be OpEx heavy, we're going to be very specific on where some of our products work. But international is clearly part of our long-term strategy as evidenced by some of the investment we've done this year.

All right. Thank you.

Blake Hutchinson, Howard Weil.

Understanding you guys are probably more anxious even than investment community in terms of finally getting Maritech fully off the books, can we talk a little bit about your thoughts on timeline? You outlined some push-pull here for us where if we accelerate a little bit of the retirement in 4Q -- I want to do a number check here, too, and see -- it seems like there would be about $75 million still left for abandonment and decommissioning in 2013, more non-operated properties, more downed structures, how does that impact the timing and what would be your thoughts in terms of timing of officially getting it off the books?

Yes. So let me cover a few of the comments there. I'd say first your assumption that we are more focused and interested in getting that behind us than anybody else is very accurate. I look forward to the day when that is complete and we are very, very focused on getting there as fast as we can in a commercially sensible manner. So your assumption of where we end the year -- we may be up a little bit less than you talked, maybe closer to $70 million than mid-$70 millions. Overall, if you look at the evolution of that, we have got a small number of wells that are left that have been challenging that we continue to work through. It is very important to note that our wells associated with downed structures are behind us. We finished that last piece during the quarter and that was always a very challenging part of the mix. The part that we control, $60 million-plus of the remaining $90 million-plus at the end of third quarter, we are going to try to move a little bit faster through the fourth quarter based on the permitting and if the circumstances make sense we will probably try to continue that approach in the first quarter. I would like to finish it earlier than later and I would prefer the operated properties to get the work done, to finish in the second, third quarter than trail it to the end of next year. I just think it is very important we get it behind us but in a very managed cost basis.

And just thinking about the tail of that process, Stu, is there anything else that needs to be done outside of zeroing out the liabilities? Are there still small amount of properties that need to be sold or anything else or is -- the end of the game?

Yes, the end of the game is, we take it pretty close to 100% when the last liability is out there. We have still got a very, very small interest in a non-operated property but that number is very, very small and you won't hear us talking about it even if we don't monetize it once the liabilities are done.

Great.

And again, it is very significant that we got those last wells of the downed structures done during the third quarter. And our Maritech team and our Offshore Services team are very, very focused on getting the work done at the ARO levels. Please don't confuse the $9 million and some of the elements of that with lack of focus and execution. The guys understand what the objective is.

Now I hate to belabor the point but I'd like to get the update. And then just lastly, in the Fluids business, would it be safe to assume that sequentially both the Gulf and the Onshore US Fluids business were both up? Top line at least?

I would say that is an accurate statement.

Okay, and then maybe just talk a little bit about how the -- given the activity trends -- is the underlying demand for the US Fluids business just good enough that we should have a higher conviction in terms of the visibility or are you just building out the franchise to offset declines in overall activity?

No, if you look at our Fluids business, and again the sequential decline, the third quarter was all driven by the combination of the normal seasonality of our European Chemicals business overlaid with some of the earnings impact of doing the repairs on the equipment. But at a macro level, I would expect both our Onshore and our Gulf of Mexico Fluids business to continue to grow. We're putting a lot of effort into the organization Onshore and focusing both on the calcium chloride as well as the water-related in Offshore. I just think the activity in the rig count and some of the metrics that drive that, we continue to be encouraged on.

Great. Thanks a lot for the help.

Joe Gibney, Capital One.

Stu, just a question on vessel strategy Offshore -- understand the reductions are more support staff oriented and certainly understand the barge discussions, particularly given Hedron's traction. But where do we stand on the DSVs, are you going to approach a more chartered DSV strategy in your own four-point boats potentially up for sale? Help me a little bit with strategically how you're looking at your fleet now Offshore? I understand you are streamlining costs but it would be helpful to consider that a little bit?

Yes. Good question. If you look at what we have done in our diving business, which again a very challenging market environment at the moment -- we have kept our owned assets steady, we have over the last few years added a little bit of saturation capacity but the four-points we've held. And my sense is we will continue to own those, Joe. They are part of a strategy to have a full-service diving company so I think it is important as we have divers that get trained and go through the process that we continue to have that capability. That is part of what the overall competency of the group is. We have one dive vessel the we have kept very, very busy over the last couple of years. I anticipate that will continue. And we continue to look at opportunities that make sense to bring in additional leased assets. So it's what we have we like. We know that there is a move to more state-of-the-art equipment and our way to deal with that is we will probably do it on matching demand with short and intermediate leases.

Okay. That's helpful. And then, Elijio, just one for you. I understand it is early days in planning, but just thoughts of moving parts as we're flat to down US Onshore trends and then lifting trends internationally in some other aspects of your business, is capital spend directionally higher or lower in '13 now as you take your initial look at it?

You are correct. We are initial stages -- are going through our 2013 budgeting process and the focus as we've given and the target that we have given to our Management group is that the investment should be coming from those projects that can have an immediate and significant impact on revenue and profitability. So as we complete the budgeting process this week and next, that is a key criteria we are going to focus upon and we will evaluate how much capital by business segment in terms of the ability to quickly impact earnings and top line growth. I would say that early in the process, we expected it to be modestly higher on the Production Testing side and very controlled -- Production Testing including Compressco. Everything else will be tightly controlled.

Fair enough. Thank you, gentlemen. I'll turn it back.

Bill Dezellem, Tieton Capital Management.

A couple of different questions. First of all, relative to the Offshore Services business, versus Q3 of a year ago, your revenues are down about $10 million. And yet you held gross margin essentially flat and operating income was only down $1 million or so. And that is all -- it sounds like prior to the cost initiatives that you've highlighted that will be on a go-forward basis from after the end of the third quarter so my question is, what did you do or what was different in the Q3 of this year that allowed you to hold your profitability so firm in that business with revenues down $10 million?

Yes. Great question. The primary contributor to that is the fact that we have got the Hedron out there that we didn't a year ago. And if you go back to the third quarter last year, we were going through the due diligence and getting the Hedron ready to come to the Gulf. This year it was fully utilized, held up well, and one of the themes that we reiterated on the calls is even in this really tough market that we are in the Gulf of Mexico with our Offshore Services segment we continue to be very, very pleased with the market reception, utilization, execution capability, and fundamental economics of the Hedron. So that is the main reason Bill.

And Bill, I'd also like to add that while I'll mentioned some specific actions that we have taken on headcount and maybe disposing of some of the assets, the Organization has triggered other actions that were part of the $7 million that were supply chain driven and we have been seeing the benefit of some of those in the third quarter. While not significant, they were already gaining traction on some of those initiatives.

That is helpful, but it does bring up then a follow on relative to the Hedron. To what degree would you say it was fully profit generating? I intentionally remove the word utilization, but just thinking about it in terms of money, did -- how close was it to fully--?

Very, very close. Overall when you look at the utilization, the pricing assumption, the cost structure of what we have achieved year-to-date, what we anticipate in the fourth quarter, the Hedron is very, very close to what our economics were in that acquisition.

Thank you and then a completely different question. In the press release, there was a reference to new services that you introduced in the Fluids business this year. Would you please discuss those?

Yes. We've talked about briefly in the past that as we focus on the water segment, we are introducing new technology in that Fluids segment and what I was alluding to was some initial product introduction on water transfer where we've rolled out a few units and had very good success, customer acceptance, and it is just a very nice process improvement that saves time, is safer, less leak paths, that our guys have rolled out and had very good reception to date.

And how fully penetrated would you say you are with that the business relative to your existing customers? Is there lots of runway still remaining or have you pretty much captured your current market and it is now a matter of moving beyond that?

I'd say we've still got some opportunities in existing runway with -- based on what we've seen to date. So that is an area we will continue to look at from a capital allocation point of view.

Thank you both.

Jason Wangler, Wunderlich Securities.

Just curious as far as obviously having a couple of nice acquisitions so far this year and rolling them in, are you still actively looking to expand anywhere specifically, either on a segment or even on a region basis and if so just maybe a little color around that?

Yes, I'd say overall, we are real pleased with the three acquisitions we have done. We will always continue to look at opportunities, stay abreast, but I would say in our Offshore Services, Testing and Fluids, in those segments in the short term we are very, very focused on getting the earnings out of our existing businesses, integrating the acquisitions, being very, very cost focused in some of the markets that are challenging and investing organically in those geographies and services across those that we see opportunity. So whether that is international, whether it's the water market, whether it is expanding the breadth of testing, those are the types of organic investments we will continue to make. On the Compressco side, we've done a really good job as you look at the results over the last several quarters of investing organically, expanding into new areas and that is something that the team will continue to do and we will also -- like we've done on testing in some of our other business -- continue to have a macro overview of how we expand that business. We certainly think there is scope to grow the size of that business in various degrees as we go forward but one message I clearly want to leave the audience with is we are very, very focused both on the optimization of what we have, as well as working through some of the working capital improvements that Elijio referenced in his discussion.

Appreciate in guys. Thank you.

(Operator Instructions)

Jonathan Raleigh, Clean Value Partners

You guys have had success this year with the acquisitions -- high return on capital, your results have held up well. Despite that the shares are down 35% or so. Looking forward with Maritech rolling off, thinking about free cash flow, if the stock is $5 to $6 a year from now, what type of flexibility in the interest level do you have at defending the stock price?

Good questions. Clearly when we are out talking with shareholders, what we are emphasizing in our discussions is some of the strategic additions we've made that we feel very good about the acquisitions -- the Hedron, the accomplishment of the Compressco MLP, the progress that Compressco has made, the divestiture of Maritech, the desire to get that liability extinguished sooner than later. I certainly think that's something we will all be better off when it is behind us and we are not talking about it. As we look at use of cash, clearly if we felt that our stock was in the future going to be at these levels. We obviously will look at alternatives to buy back the stock or look at that. We certainly all have confidence going forward. We've had a lot of insider buying the last several months both from the Executives and the Directors so we continue to remain very, very confident in the future but if we're not able to move the stock to the levels we anticipate then certainly buyback is something we need to seriously consider.

Jonathan, one of the reasons that we are focusing on aggressive working capital management ends up getting redeploying some of the capital tied up, for example, in the building is to afford this kind of an opportunity so that we can have a discussion with the Board if we want to go down that path.

That's great. Thank you.

(Operator Instructions)

And at this time I'm showing no questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Brightman for any closing remarks.

Yes. Thank you Emily. Again, I thank everybody for their interest and the great questions. And Elijio and I will look forward in the new year of updating the fourth quarter as well as talking about the 2013 outlook. So thank you very much.

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