Tetra Technologies Inc (TTI) 2013 Q1 法說會逐字稿

Good day and welcome to the TETRA Technologies Incorporated first quarter of 2013 results conference call. All participants will be in listen only mode.

(Operator Instructions)

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

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Mr. Stuart Brightman, President and CEO. Mr. Brightman the floor is yours are.

Thank you Mike, and welcome to the TETRA Technologies first quarter 2013 earnings conference call.

Elijio Serrano our Chief Financial Officer is also in attendance this morning and will be available to address any of your questions. I will do a brief presentation and overview, and then turn it over to Elijio to provide additional details and commentary on our first quarter results, then we will open it up for questions.

I must first remind you that this conference call may contain statements of that our 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, profit before tax, or earnings per share excluding the Maritech segment and special charges, or other non-GAAP financial measures are go 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.

First quarter 2013 earnings of $0.06 per share excluding Maritech were slightly below the range we noted in our guidance on February 1st. The primary contributor to the shortfall was slower than anticipated first quarter activity onshore US and Canada and a reduction in activity in Mexico as we exited the quarter. All of our other businesses met or exceeded our internal expectations for the first quarter.

In the Fluids Division we continue to be very pleased with the continued growth of the Business. Over the years, we have invested in our capability to service the offshore market and that is being rewarded in the Gulf of Mexico deepwater. In addition, investments over the past year in our Water Management Business continues to generate outstanding returns. Both of these areas we expect to continue to grow as we move through 2013 and beyond. In addition, our Chemicals business both in the US and Europe performed in line with expectations.

In the Productions Testing segment our first quarter results were negatively impacted by lower than anticipated activity in the US and Canada. In the US we noted in our previous call in February that we expected activity to pick up after a sluggish fourth quarter. In fact, this was not the case. However we anticipated improvement in the second quarter and continued improvement in the second half of the year.

Despite this positive intermediate-term outlook, we took aggressive cost cutting measures in our Production Testing segment during the first quarter in support of that with G&A cuts in this and other businesses across the Company across the first quarter and into the second quarter. We continue to be very confident over the intermediate-term and beyond that our 2012 acquisitions and continued investments in organic growth and production testing will be solidly rewarded. We have a long history of outstanding performance in the Production Testing business.

For the third consecutive quarter our Compressco partner subsidiary increase the distribution on its outstanding units. Overall, segment performed well in the first quarter. However, in early March, we saw the beginning of a decrease of activity in Mexico due to operations in certain areas being suspended by our customer for budget reassessment. As a result, we expect our assets to be idled for a certain period of time. We view this as short-term in nature and only a temporary suspension of activity. We will attempt to reallocate the assets within Mexico as appropriate. We have taken aggressive headcount reductions over the past month in Mexico, and we continue to respond to the situation as necessary.

TETRA has operated in Mexico for 15 to 20 years and over that time period we have demonstrated a record of outstanding performance and understand how to deal with the changing market environments. During the first quarter, we increased our fleet size in the US and Canada in response to positive market opportunities driven by the continued strength of our liquids and unconventional applications, as well as an improvement in our legacy natural gas applications. This latter area continues to be supported by improved natural gas prices that has had a positive demand for our services.

The Offshore Services segment, our first quarter results were consistent with internal expectations. A portion of our backlog was delayed to the second quarter as a result of challenging weather conditions. This postponement, in addition to our existing backlog, gives us a very good line of sight to strong activity over the next several quarters. Permitting for decommissioning continues to improve, and overall we view these conditions as favorable for the segment.

Despite this, the market continues to be very competitive and we have remained focused on optimizing our cost structure. In addition to the savings noted in the second half of 2012, we continue to find additional opportunities to streamline the operations and take cost out of the Business.

In Maritech, our primary objective continues to be to complete the work on our abandonment and decommissioning liabilities. We expect to execute this plan and have virtually all of these liabilities extinguished by the end of the third quarter related to operated properties.

We ended the first quarter with a strong balance sheet with net debt of $299 million. We also recently announced the refinancing of $35 million of senior notes at a very favorable 4% interest rate. Overall, we remain very comfortable with the health of our balance sheet and confident we will continue to have the ability to take an opportunistic approach to additional growth opportunities.

With those comments I will turn it over to Elijio to provide additional commentary.

Thank you Stu good morning everybody.

Total revenue of $209 million increased 15% over a year ago, reflecting the growth and water handling and fluids in our 2012 acquisitions. During the fourth quarter revenue was down 10% due to the traditional seasonal decline in offshore services. Excluding Maritech, earnings per share $0.06 were below our guidance due to the weaker than expected production testing activity in the US and Canada. All or other business units performed consistent with or above our expectations, with fluids significantly outperforming expectations.

Our shore post production testing was struggling in the United States and Canada for the issues previously mentioned by Stu. On the Fluids Division revenue of $94 million increased 4% over what was a very strong fourth quarter. Compared to a year ago revenue was up 18.5%, all from organic growth. The drivers of our continuing strong performance remain our North America Water Management and Gulf of Mexico Fluid Sales. Operating margins of 18.1% were only slightly below the fourth quarter of last year, which, you recall, included a significant one-off international product sales.

Compared to a year ago operating margins improved 360 basis points. Our fluids division continues to perform very strong, given our vertically integrated fluids business model and recent investment in, and high utilization from, our water handling assets. We have ordered more deployment units and expect to increase the number of deployment units between now and September. We expect to be on an annualized run rate of $100 million in revenue from water handling by the fourth quarter of this year representing approximately 10% of total TETRAs revenue. Production testing revenue of $55 million was down 14% from the fourth quarter due to previously mentioned lower activity levels in the US and Canada.

Our customers delays in releasing 2013 budget funding and the slower start to the year from their capital programs clearly had an impact on our activity level. Our International revenues were down 7% compared to the fourth quarter. Compared to a year ago, revenues were up 43% reflecting the ERS Optima and Great Wealth acquisitions completed during 2012.

Operating margins of 11% were down from both the fourth quarter and from a year ago, as we had a lag in reducing our cost structure with a rapid drop in North America production testing activity levels. The decline in activity levels is compounded by pricing pressures as customers continue to aggressively negotiate rates.

Recent activities pointing towards and improving environment. US and Canada production testing revenue and profitability have been sequentially stronger for the past two months, with March better than February, and April better than March. Nonetheless, we have taken steps to move assets to markets where activity remains robust, such as West Texas, while at the same time we have closed locations and reduced staff and geographic areas that have shown softness. Compressco revenue of $31 million was up 36% compared to a year ago, all from organic growth from capital investments we have been making, mainly in Latin America.

The US and Canada were also up from a year ago by 6%. Sequentially, revenue was down from the fourth quarter by 5%, as the fourth quarter included some significant product sales in the Eastern Hemisphere. EBT margins of 17% for Compressco were 150 basis points better than a year ago, but down 170 points from the fourth quarter as we invested in engine repair and maintenance cost in the US as we are transitioning to a more robust engine repair process that we believe will get us better compressor runtime and reduce our operating expenses over the longer term.

On the Compressco earnings conference call yesterday, our management team indicated the April activity in Mexico had reflected a slow down. I took the opportunity in April to visit with our client in Mexico to get direct feedback on their activity levels and inquire about their plans going forward. They indicated that they temporarily reduced activity levels while they assess their budgets. They expected activity levels in the coming months to resume but at significantly reduced levels on the exploration side.

They also communicated that they expect activity levels to return to levels near what we have been experiencing recently on the production side, where the vast majority of our activities centered around. They further indicated that when there new budget year resumes on October 1st, they should be back to normal levels of both Exploration and Production. We expect the impact of Compressco to be mainly in April and May without any long-term impact to our Business.

Our compressors and related equipment are essential to help maintain production levels, which they need to fund their budgets. In the meantime, our management team in Mexico has been adjusting costs accordingly. Offshore services revenue of $30 million prior to eliminations was down $7 million from a year ago, and down $24 million from the fourth quarter reflecting a traditional seasonal decline from the winter season. Compared to a year ago, and excluding the $4.1 million gain we had last year on the sale of an asset, the loss during the traditionally weak quarter was flat from a year ago, despite the significantly lower revenue levels. This reflects a cumulative effort of our team to reduce cost structure.

Operating expenses compared to the same period a year ago are down 7.4% or 15%. The offshore services team continues to aggressively reduce costs. The goal that we have set of $15 million, has been achieved. And they're now working on an incremental $2 million above that target.

With respect to Maritech, during the quarter we completed $9.4 million of work on the Maritech ARO with our own assets. Including work completed with assets other than our own, and work completed on nonoperated properties we reduced the ARO liability by $16 million net of incremental adjustments for work done above the reserves. Maritech's ARO liability at the end of March was $71 million.

The schedule we are working with remains on plan for us to complete the vast majority of the ARO work by the end of the third quarter. We believe we are within three to four months of completing the Maritech decommissioning obligations. Any amount that might carryover beyond the third quarter will be on nonoperated properties and will be in the single digit million dollar range. It is possible that we will continue to make adjustments to the reserve for work beyond the scope that has been identified.

On the balance sheet side, we reduced long-term debt in the first quarter by $34 million. And, as Stu mentioned, our net debt is under $300 million. Cash flow from operations in the quarter was $15 million, which includes $26 million of cash consumed by Maritech. And capital investments during the quarter were $26 million. We are calibrating to our run rate post-Maritech of generating strong, free cash flow. And if you look at the first quarter, cash flow from operations excluding Maritech would have been $41 million, less $26 million capital investments, giving us $15 million of free cash flow annualizing that and that will give you a sense as to the direction we're pointing towards post-Maritech.

The final item I would like to address before turning back to Stu, are the actions we have taken to streamline our cost structure and improve margins. We have identified several areas and methodically targeted those areas that we want to focus upon to improve TETRAs margins and liquidity. We are taking them one-by-one to ensure we execute on these targeted initiatives. We have previously launched and completed a cost-reduction effort within Offshore Services Division that has since yielded savings approaching $17 million annualized. We then launched an effort to generate $87 million of cash during the fourth quarter from asset sales and improvements in working capital to fund the Maritech work that is being done this year.

The next area we had on our radar screen was reducing our G&A and support costs. We accelerated our efforts this year when we saw that North America production testing was off to a slow start. We performed a comprehensive review of our G&A support cost to evaluate how they have moved over the recent periods relative to our revenue levels. Working with the management team, we identified a goal of reducing our G&A support costs by an annualized amount of $16.5 million, such that this would save us $33 million over a two-year period. We quickly identified where we could make an immediate impact, and between late Q1 and the end of April, we have taken actions by reducing 67 staff, all in support in G&A functions. No division was left untouched in this process. No corporate department was left untouched in this process.

The savings from actions are to completed our $11 million annually, and this included the flattening of the organization and eliminating levels of management throughout the organization. We have another $5.5 million to go between now and the end of the year with process improvements and changes to our business processes. Similar to what we did with the Ultra Services Division, we will attack this target and be relentless in our efforts to streamline and continue to reduce our cost structure.

These actions on the G&A support costs are in addition to actions taking by the division managers in adjusting their cost structure for activity levels and volumes fluctuate mainly in the US, Canada, and Mexico. So, the cumulative actions we've taken are not only at the G&A site that I mentioned have already yielded savings of $11 million with another $5.5 million to go, but on top of the actions that our division managers have taken in those areas where volumes have shifted.

In addition to the cost focus, we are carefully reviewing all requests for capital expenditures and applying a more critical review of those requests to ensure the areas being targeted are for the returns are being achieved. We expect that we will continue to deal with the moving of cyclical market conditions in the future, some up, some down. What we are committed to doing is proactively addressing those market changes by optimizing our cost structure.

We are also focused on the goal of improving free cash flow past Maritech to the $80 million per year target in 2014. The combination of extinguishing the Maritech liability, investing in the growth areas of fluids, water handling, and compression, while focusing on the 2012 acquisitions to perform consistent with expectations, should lead us toward our goal. The management team remains strongly committed towards this goal and to take the actions appropriate towards getting us there. We believe that the headcount reductions that we have just completed in the G&A support functions are the most significant the Company has made in its history and demonstrate our commitment towards those goals.

With that, let me turn it over to Stu for some closing comments.

Thanks Elijio.

In summary, our first quarter's results were slightly below our prior guidance with primary areas of shortfall being an onshore North American production testing market. I would highlight despite the challenging North American market, and some of our customers capital coming out slower than anticipated, we have been able to grow in that market our water management, our onshore fluids, as well as our Compressco businesses during the first quarter. We expect this market to improve, and as Elijio mentioned, we have seen evidence of that the last 60 days. Despite that, we have taken very aggressive organizational reductions and other cost reduction measures.

In Mexico we're expensing a short-term reduction in activity, but we view this as temporary in nature. In the meantime we have taken aggressive measures to offset that activity decline. We remain confident in our ability to deliver the full-year guidance, outlined in our February 1st conference call, due to the continued strength of our Fluids business, expected improvement in production testing, the improvement as we go through the year and go into our strong quarters in offshore services, as well as the go forward impact on the cost actions delineated by Elijio. We clearly recognize that over the past two years we have made significant investment in production testing, and continue to focus in growing this business and realizing those returns that we expect.

With that, I will turn it back for questions and Elijio and I would be happy to take all.

Thank you Sir. We will now begin the question-and-answer session. (Operator Instructions)

Mike Harrison of First Analysis.

Hello good morning.

Good morning Mike.

Just looking at the offshore business, as you pointed out you guys showed a similar pre-tax loss compared to last year despite the fact that you had $78 million of lower revenues. Clearly, we are seeing some benefit there from the lower cost structure. Was the weakness on the revenue side there -- was a primarily having assets deployed and having bad luck with the weather? Did you have things --more assets in drydocks than usual?

I would say, Mike, that on the top line for that segment, the major impact was some of the weather we experienced as we went through the quarter. We didn't have an overly significant drydock program during the quarter. And some of that work that didn't get executed in the first quarter moves to the second and forms the basis of that starting backlog. Again, even though we were similar to last year, lower revenue we didn't work as much as we had thought we would when we started the quarter.

I guess now that we've got five weeks or so of the second quarter under our belt, and getting into the busier season in offshore, can you give us an update on how things are progressing in that business?

I would say the progress of backlog is going strong for our major assets in the heavy lift and diving. We have very strong backlog through the third quarter. Market, competitive nature continues to be challenging. I think the utilization will be good. The market environment will be challenging. We will continue to look for opportunities to find incremental areas where we can add value and continue to grind away on the cost, which we have demonstrated over the last several quarters that, that management group has done a great job of exceeding our internal target and continuing to carry forward with that.

And then switching over to the Testing side. Can you remind us how big is the international piece of the business now and what did the growth look like on international as compared to domestic? If you could strip out the impact of acquisitions.

Mike, in the first quarter the Production Testing, the United States represented about 63%, 64% of our total revenue. And that includes ERS and the Gray Wolf part in the Bakken. I would say excluding the acquisitions for total Production Testing, we're slightly less than 50% of being US legacy Production Testing revenue.

I was thinking more in terms of the underlying organic growth rate if we excluded the acquisitions. Presumably the US was down in international was up, is that fair?

The US was definitely down and international was also down, but by a single-digit factor versus domestic being down way more.

Again, the international I would attribute that Mike anticipating your follow-up question is a little bit related to the Mexico piece that we talked about as we exited the quarter. And a little bit related to just the timing of some of the lumpier projects out there. I don't see that as a trend. I think Mexico, we bracketed it short-term and we should see that improve as we go through the second half of the year from where we are at the moment. And the timing of the international projects will improve as we go forward based on the backlog we have.

And then last couple questions just on Compressco. You talked about some changes in how you approach the engine repair side of that business. Can you give us some more details on that and what the returns on that project reflect?

Yes. We've -- in the Compressco world a big part of the cost structure is always the field service and maintenance side of the business. One of the real strengths we have is we have a very large deployed field service organization and we continue to focus on our cost efforts at improving that. One of the areas the management team has teed up over the last year, is looking at an insourcing versus outsourcing engine repair, and then moving down the outsourcing path to tie it up with a strategic vendor that everybody is very comfortable with. And we are transitioning that. And as we transition it, you need to move inventory and get everything leveled out.

So there is a normal start up period associated with that, that is what was referenced in Elijio's comments for the first quarter. I think as we go into the second quarter and beyond, you start to see that transition period move over to a positive force. And the net result is attributed to that, we think the long-term lifecycle of those engines will get extended and we will be able to, over a longer period of time, drive down that cost element.

And just looking at the benefit that you guys are seeing from slightly higher natural gas prices, can you give us some order of magnitude of how much of a tailwind that has been. Do think it has run its course already? And is it sustainable, or do we fall off if we see significantly higher gas production and the pricing comes off a little bit?

I think it's been a positive. I don't think it has been the driver of the overall performance, but we have always talked about several trends in the Compressco business. First, over the last several years, the team has done a great job moving into liquid and non-conventional applications. And moving the mix for that represents an excess of 25% of the revenue. And that trend has continued, and I see that as an area we will build in, and we are making additional investment in that area.

Internationally, particularly Mexico and also other areas in Latin America and the Eastern Hemisphere, we have grown and we will continue to invest in that. We will work through the short-term issues in Mexico, again as I said in my talks, I will remind everybody, we have been in Mexico since the mid '90s and have had a long history of success down there. The legacy natural gas business was seeing positives, I believe it has grown slightly. It's not a major catalyst but it's a nice positive trend that we have seen. Sensitivity analysis to that, I think if natural gas stays in that $4 environment we will continue to see that business continue to grow, that subset of the overall business in Compressco.

All right, thanks very much.

You are welcome.

Blake Hutchinson of Howard Weil.

Good morning guys.

Good morning Blake.

Some good data so far on both Production Testing and Compressco, and taking what you said about sequential progression and Production Testing in the US, the fact that Canada probably works against you in that business and Mexico works against Compressco in the second quarter. Would it be right to say that, at least for Q2, the top line progression -- you're feeling would be that it is about flattish?

I would say that is directionally accurate because of some of those seasonal trends. I think if you look at the individual pieces -- I would expect seasonality of Canada to work against us. I would expect the short-term impact in Mexico to be a negative for the second quarter. I would expect the other international activity to pick up as the timing of the projects -- and we have seen, as Elijio referenced, over the last couple of months the top line pickup in our domestic Testing business. You net all that together it is probably going to be flattish.

And in terms of timing of both your cost rightsizing in the US and in Mexico with Compressco, could the same be said for the profit line or is Canada a big enough of a whack that we have to take a step back in [PVT] before we get better in the second half?

In the second quarter Blake, we will be incurring some amount of severance costs. If you exclude that, the benefit of all the actions that we have taken will give us a stronger profitability Q2 versus Q1 for Production Testing in the US and Canada.

Okay, great. And just to be perfectly clear on the segment, as a final follow-up, the Production Testing business itself separate from Compressco. Did I hear you that there has also been a little bit of a pullback in activity and that? Or has that been unaffected and what is the feedback from the customer in Mexico at this point?

We have seen a similar trend in Mexico for the Testing business. And I think as we referenced over a period of time, within Mexico, even prior to the short-term pullback, the majority of our business has migrated to the Production Enhancement Compressco side there. But during the end of the first quarter we definitely saw Testing come down and I would expect to see the trend similar to what I described in Compressco, it would pick up as we go into the second half of the year.

Okay that is great. I will turn it back. Thanks guys.

Thanks.

Stephen Gengaro of Sterne Agee.

Thanks, good morning. The two questions -- one is when you look at the European business, the impact on the fluids side in the second quarter, can you remind us of the magnitude we should be thinking about?

Yes. We normally see a huge increase in our European calcium chloride business due to the customer mix and base. And typically we would expect to see sequentially at least a $10 million to $15 million revenue uplift from the first to second quarter with the associated margin on that. So it is material. And as you are bridging the quarters and you look at the moving pieces, you should certainly expect to see that benefit in our second quarter results.

Thank you, and then as a follow-up, when you look at your full year, is there anything that we should be really keyed on that changes the quarterly proportion of earnings in each quarter versus your history. I know Canada a little bit from one of the acquisitions, but anything that significantly changes that?

I would say if you look at prior years versus '13, you've got the full-year impact of having a much larger Canadian business, which we have talked about. And I think what's somewhat unique to 2013 is you've got the timing of the anticipated recovery down in Mexico. That is not a normal seasonal business down there. But I think as we outlined, we will see that second half of the year better than the first half in Mexico for the reasons Elijio mentioned.

Okay, thank you. I think that's all from me.

Thanks Stephen.

Joe Gibney from Capital One.

Thanks, good morning. Just a couple quick ones for me. [Simplistically] apologize if this was addressed earlier. Is there any change to your full-year guidance of earnings $0.75 to $0.85 or is that still in tact?

That is still intact. And the reason, as I summarized, that we view it that way is we have seen improvement last couple of months on the top line on our domestic Testing. Despite the challenging market, we're doing very well on our other onshore US businesses in water management, Compressco, and onshore fluids. Overall, fluids as a segment continues to be at or above for we had the guidance. We have a nice backlog in our offshore services business and we expect Mexico to get better the second half of the year.

And then you overlay that with the G&A cost that we have taken -- again I would highlight, Elijio went into a lot of detail. I want to make sure everybody understands in addition to the volume related areas and districts where we have had reduced activity. There is material G&A that came out that is independent of volumes and revenue. That is permanent and we will see that benefit as we go forward.

Okay understood. And just to clarify, Elijio, on your cost reduction effort beyond offshore, certainly targeting the entire organization has been something you talked about and certainly it was teed up in Production Testing at some point. I know you are accelerating these efforts now as North America off to a slower start. Trying to ascertain timing of this. Your expectations to move forward with cost reduction efforts on Testing was probably going to happen this year? Or it was going to happen in '14, and now with the slower start your moving this forward sooner rather than later? Is trying to ascertain your thought process there. What changed so much structurally 4Q to 1Q that is exacerbated this effort a little bit?

Two areas, Joe. The first one is the division team took actions to reduce their local operating cost and activity shifted around. We had a couple of soft areas. They reduced cost in those areas and moved assets around. We expect that, that occurs week to week, month to month as business fluctuates. The area that we accelerated, the work that we wanted to do was just overall G&A cost within the organization. When we saw that the Production Testing numbers were going to come and softer, we worked with the management team to get more aggressive in terms of moving up the target to address overhead support cost, and then begin taking action much quicker.

What we completed during the last part of the first quarter and into April, was basically an assessment of all G&A costs, whether it be corporate G&A or division G&A. And we started pulling triggers in terms of reducing cost including a significant layoff that we had last Monday that cumulative reductions were 67 people in corporate and division G&A cost. That is something that I think that we were going to be addressing more methodically over a longer period of time but we accelerated those actions. The remaining $5.5 million that we have to go will be the benefit of changes in the business processes and the streamlining of some of the actions -- some of the actions that we have within the organization.

Okay fair enough, that is helpful. And my last question associated with CapEx and potential asset sales. The water handling side of things ramping a lot higher, $100 million run rate here and it had been $60 million potential expectation [if I was wrong]. Obviously a lot of customer traction utilization of pricing on this front. How do we think about your CapEx for the year, Elijio, and how much of that allocation is to water handling? And secondarily I was curious on the DB-1 barge potential sale. Is that still on the dock and potentially happening later this year?

Water handling we have accelerated investment into water handling given the utilization and the returns that we're getting. So, we are already spending above what we had budgeted. Knowing that we are getting above budget returns and financial results from the water handling. We're doing this, not to the point that it would be incremental to the amount that we guided, we will take funds from other areas that are underperforming and redirect capital toward water handling. And we will continue to invest given the returns that we are seeing even beyond what we are doing today.

Then with respect to the barge that, we have targeted to sell. We are still are marketing it, working through a couple of brokers. The offers that we have seen have not been attractive enough for us to pull the trigger on those. We're not in a fire sale mode. We are not in a situation where we need to sell it because of liquidity purpose. We'll cautiously keep working on this one until what we've get what we believe to be a fair price. In the meantime it is at the dock incurring virtually no cost to maintain.

Okay, fair enough. Thank you, I appreciated gentlemen. I will turn it back.

Thanks.

(Operator Instructions)

Martin Malloy of Johnson Rice.

Good morning.

Good morning.

Just on the cost savings -- just to be clear were the $11 million or $5.5 million, were they included in the initial 2013 guidance that you gave?

No, they were not and Stu mentioned while we feel comfortable with the total year guidance, because we are seeing three factors in play here. Number one, we believe that Production Testing -- the slow start that we are seeing to the year we have to make up that gap. That gap will be made up partially through the recovery of the business into Q2, Q3 and Q4. But also very strong performance we're seeing from water handling and also the completion fluid. In addition to that, the incremental savings that we are getting of the $11 million are ready done and in place, plus the incremental $5.5 million well help us overcome what we believe the gap in Production Testing off to a slow start.

Okay. And bigger picture as you look out three to five years, can you talk about how the Company might look with respect to the role that offshore services would play in the Company longer-term? It seems like you are not allocating additional capital and you are actually selling at least one of your three derrick barges there

I think offshore services, we continue to evolve that business as we went forward. Two years ago we made a major investment, $70 million in the Hedron, looking at long-term growth and opportunities and matching that asset capability to where we see that decommissioning market involving. So we have been successful on that. We have brought that in and had great customer response.

Obviously we are transitioning our overall business there as Maritech finishes up the internal work, hopefully by the end of the third quarter, we are on target to do that. We have been very focused the last year of filling that gap, if you look at the amount of internal work we have done this year, the $30 million-round number that we are going to do internally is less than 50% of where was a couple of years ago. So, the team continues to evolve new customers, new market opportunities. So we are very focused on that.

We have been very focused on asset rationalization -- buying the Hedron, exiting some non-core businesses, we have been very focused on cost reduction. The number -- $17 million-ish number that was referenced by Elijio. All that is focused on a very competitive market optimizing what we have, and we'll continue to look at what areas we are in that make sense to expand and what areas we need to continue to refine. I don't know that there is a more fully baked answer to that long-term other than I think we're going to have a good year this year -- better than last year for the reasons we mentioned. And just like all of our businesses, the more success the management demonstrates, the more we will continue to look at opportunities to grow it.

Okay, thank you.

Bill Dezellem of Tieton Capital Management.

Relative to the Testing business, you mentioned you had the sequential improvement the last two months. Is that a result of your actions, or the last two months improvement is that more a function of the overall market?

I would say it is more the latter. Again, clearly the top line for that business in the first quarter was less than we modeled. And a lot of that had to do with -- we, like everybody else, read all the material, we talked our customers, we have gone through this from the bottom up across the organization, district by district. And it just seemed in the first quarter the capital spend programs got rolled out a little lighter than we thought and we had a couple of our major customers that were particularly light on rolling that out. As we have seen the first quarter end and migrate towards the middle of the second quarter, we have seen some of those customers begin to spend in-line with what we expected. So, I would say overall it is more the overall market that has driven that.

Thank you. And then relative to the water handling business, what was the revenue number for 2012 well in that business?

I will let Elijio pull that number, but clearly we have put a lot of investment -- and I think when we talked last quarter, we have described that business as being about 20% of the overall fluids segment. So we probably -- the number Elijio referenced, our exit rate this year is obviously higher than we thought at the beginning of the year. $70 million would have been about the number for the full year, we will exit higher than that and that's a pretty big increase over what we had last year.

If you look at the trend, knowing that a lot of the capital that has been deployed here in 2012 and 2013 is gaining traction, a year ago we were analyzing to about a $40 million annualized run rate. Versus us thinking by Q4 this year we will be at $100 million annualized run rate. And it's been a gradual step up from that $40 million run rate to $100 million as equipment is arriving.

And the $40 million -- you did not actually do $40 million of revenue in 2012, but that was the run rate in 2012?

That was our run rate in Q1 of '12 and it has been gradually stepping up.

That is helpful. And as we think about the significant ramp that you have experienced, is there something happening in the industry that has changed, that has created this opportunity for you? Or, has something happened with the competitive landscape that has led to your success? Or, is there anything specific that you can point to that would help us understand how this opportunity -- I guess I will speak for myself, has crept up on us.

I would say over a period of time, we had done a pretty good job introducing some new capabilities that a been incremental to our legacy business. And the team has been very focused on finding those opportunities in the market where that value is recognized. So it's being a very focused effort on bringing new capabilities and matching it to where we can create value with the customer. I wouldn't say it's a revolution in the market. I would deem it more as it has been a very good execution by the team.

Thank you both.

Ted Crawford of Rommel Asset Management.

Hi, Stu, this is Jim Rommel.

Hey Jim how are you?

Good. Two questions. In terms of your confidence going forward for the rest of the year, how much is tied to -- I apologize if this was already covered, I just recently joined. How much is tied to your increasing confidence that work in the Gulf is picking up, and in particular Anadarko indicated a giant find a month or two ago. And wondering if you can comment on whether TTI will participate with that. And just secondly, any more color on any potential full spinout of Compressco?

Just, the first part of the question on how much of the Gulf of Mexico projections influence my comment. I think we continue to believe that business will grow as we continue through the year. It has run well over the last several quarters. We get pretty good visibility on our customer base activity over the next couple of quarters. We have expanded our manufacturing capacity. We make our high-end products and that has gone well. So overall, that is a good part of it, Jim. That we think what we have demonstrated the last couple of quarters will continue to grow. I am probably not going to comment on any specific customer projection, I will probably stay away from that one. And the third part of that question, remind me again so I get that one right.

Any color on your thinking in terms of a future potential spinout of Compressco?

I think we continue to -- as we have always said, we like our ownership position. We have intentionally retained that 83%. We started the business with zero debt, we have levered up modestly. We still have a ways to go. We are very focused on growing the business. And I think, as we grow the business and hopefully that necessitates us putting more equity the business. We will make those investment options as we go forward.

But taking down our position is not an objective of mine. We will let that evolve over a period of time based on the relative economics. That would be much more focused on -- we have been able to increase distribution, we are growing the business for Compressco domestically and internationally. We've got a short-term challenge in Mexico, which I'd categorize as temporary. As Elijio said he was down there a few weeks ago getting details on that. And we want to invest in that business and grow it and make it much larger than it's current run rate.

Okay, thanks Stu.

All right Jim.

It appears we have no further questions at this time. We will conclude the question-and-answer session I would now like to the conference back over to management pretty closing remarks. Gentlemen?

Thank you, Mike, and I appreciate all the good questions. And Elijio and I will look at updating the group in early August on the second quarter results. Thank you.

We thank you sir for your time. The conference call is now concluded. With thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you, and take care everyone.