Tetra Technologies Inc (TTI) 2013 Q3 法說會逐字稿

Good morning and welcome to the TETRA Technologies Inc. third-quarter 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.

Now I'd like to turn the conference over to Mr. Brightman. Mr. Brightman, please go ahead.

Thank you, Keith and welcome to the TETRA Technologies third-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, as well. I'll provide a brief overview of our third-quarter results, then turn it over to Elijio for some more details 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 statement. In addition, in the course of the call, we may refer to net debt, free cash flow, revenues, gross profit, profit before tax earnings per share excluding the Maritech segment, special charges or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period.

Third quarter 2013 adjusted earnings of $0.28 per share excluding Maritech were within the range we expected for the quarter. The strong performance by our Fluids, Offshore Services, and Compressco operations offset the weakness in the North American production testing business.

In the Fluids division, we continue to be very pleased with the continued performance of all components of the business. Revenue for the quarter remained at the $100 million level. As you recall last quarter, we reported record revenues, and this quarter we were reporting record earnings and margins. Profit before tax of $20.9 million and PBT margins of 20.9% were both record highs for the Fluids Division, led by the continued strength of offshore completion fluids, water management and higher production levels from our manufacturing facilities.

Our demonstrative ability during the quarter to ramp up production in El Dorado was very evident. The strong third quarter performance was despite the typical seasonal decline in activity levels in Europe. We expect fourth quarter activity levels to be consistent with the last two quarters but margins may be slightly lower as we have benefited from some significant one-off sales.

In the Production Testing segment, our third-quarter results continued to be negatively impacted by reduced spending levels by certain of our customers in the US and Mexico. South Texas, in particular, has been harder than other areas due to pricing pressure, resulting from new market entrants and by the decision from our one of our major customers to curtail activities in the Eagle Ford Shale basin. We have taken a series of aggressive actions to consolidate offices and operations in South Texas and to redeploy equipment and staff to more robust areas such as West Texas.

Additionally, we are strengthening our sales organization with the addition of sales leadership with the recent hiring of two key individuals and are in the process of further expanding the sales team. We believe the North American Production Testing market will continue to be an attractive market. We will continue to work on streamlining the operations and more aggressively pursuing a broader customer base to add to our existing anchor accounts.

We are also launching a series of actions to give us a longer-term competitive advantage by working with our key clients on technical solutions that address the high-volume -- high liquid volumes and overall automation at the well site. This is similar -- the overall cost reduction efforts are similar to what we did with our Offshore Services when combined with upgrading and expanding our sales organization and focusing on longer-term differentiators are expected to bring this business to margins we believe to be acceptable.

On October 21, our Compressco Partner subsidiary announced an increase in the distribution to $0.43 per outstanding unit, up from $0.0425 per outstanding unit. On an annualized basis, this increase reflects an 11% increase in the quarterly distribution over the last five quarters. In addition, we continue to make progress towards the first IDR threshold of 15%.

As our Compressco management team reported earlier this week on their earnings conference call, Compressco's average compressor utilization of 84.2% increased from 82% as a result of increased demand for unconventional Compressco applications in the United States. Sequential quarterly net income improved by 70% compared to the second quarter of 2013 as a result of our success in pushing price increases, better utilization of the fleet and the sustained efforts from our ongoing cost reductions.

Mexico has seen some modest increases in activity. We believe this trend will continue and we'll see a further increase during 2014. For the Offshore Services segment, the third-quarter profits before taxes of $20.6 million was the second highest third-quarter earnings in the history of the segment, surpassed only by Q3 of 2009 which benefited from Hurricane Ike-related activities.

The cost reduction efforts launched last year contributes towards the earnings improvement in addition to the strong diving results as we have made progress in diversifying our revenue base by migrating into additional applications focused on Gulf of Mexico infrastructure related to deepwater. We encountered some challenging weather conditions in September but we were able to overcome the weather with solid execution from all of our vessels. Fourth quarter will reflect the normal seasonal reduction in activity.

For Maritech, our focus continues to be on completing the work on its remaining abandonment and decommissioning liabilities. We are down to a handful of platforms that need to be removed and a small number of wells that need to be permanently abandoned. We have plans and resources allocated to the remaining platforms and wells. And our primary challenge will be finding the appropriate working weather windows during the fourth quarter to complete this work.

We continue to have strong balance sheet with a net debt of $310 million at the end of the third quarter. Our ability to generate $70 million of free cash flow free year to date excluding Maritech gives us confidence in our forward projections and our ability to generate $80 million in free cash flow in 2014. That is based on the underlying cash generation capabilities of our businesses and the improvement in working capital we have achieved over the last several quarters.

In the short term, we continue to be very focused on cost optimization in our challenging markets while at the same time, continuing to look for growth opportunities in our existing core service businesses.

With that, Elijio, would you please start the financial overview?

Tetra revenue of $254 million increased 15% sequentially, reflecting the seasonally strong third quarter in Offshore Services. Sequentially, Production Testing was flat as stronger international activity offset weaker US activity. Compressco was up 6% on stronger US activity. And Fluids was flat sequentially as its seasonal industrial chemical in Europe Q2 to Q3 decline was offset by strong offshore completion fluids in the Gulf of Mexico. Compared to a year ago, consolidated revenue was up 9%, primarily as a result of strong fluids activity levels, including water management.

With respect to profitability, earnings per share excluding Maritech increased $0.10 from $0.18 to $0.28 compared to both the second quarter of this year and the third quarter of last year. The self-help measure we have been taking around our cost structure are clearly starting to impact the results despite the muted environment. Last year, we launched initiatives to reduce our cost structure in the Offshore Services Division and Compressco Divisions.

Earlier this year, we launched a series of actions to reduce our G&A cost across the entire organization. The result of those initiatives are positively impacting our profitability and are reflected in our earnings per share. G&A cost in the third quarter were lower than the second quarter by $2.2 million as a result of the headcount reductions we implemented early in the second quarter.

Fluids division revenue of $99.6 million was essentially flat versus the second quarter as the traditional seasonal decline in Europe Fluids activity was offset by strong US Gulf of Mexico completion fluid sales. Operating profits of $20.9 million for the Fluids division was a record high. Operating margins of 20.9% were up 310 basis points for the second quarter with the continued strong responsible water management, US Gulf of Mexico completion fluids sales and higher production levels from our chemical manufacturing plants.

Compared to a year ago, operating margins were 970 basis points better from those three contributors -- water management, US Gulf of Mexico completion fluids, and production levels from our chemical manufacturing plants. The strong performance from the Fluid segment, as we set revenue and earning records demonstrates a competitive advantage and our ability to take advantage of our unique vertically integrated fluids franchise.

Water management revenue and operating income were both up significantly compared to a year ago. We are seeing our Water Management Services expand from simply moving freshwater from a source that [cured] by our customers to the fracking operations, to now moving treated water from one well site to another as they use treated water. The leak free hoses and couplings that we have are nicely suited for this type of application.

Production Testing revenue of $47 million was flat from the second quarter and down 15% from a year ago, reflecting the slowdown in the US and Mexico markets. Stu mentioned earlier that the main contributor to the slowdown in the US has been the shift in drilling activity from a key customer in the Eagle Ford Shale basin in South Texas and pricing pressures from excess capacity, mainly in South Texas.

Production Testing operating margins declined from 9% in the second quarter to 6% in the third quarter due to the aforementioned items that impacted revenue. We expect this environment to remain in place for the next couple of quarters. To address this situation, we are implementing several self-help actions comparable to what we have done with Offshore Services, with Compressco and with our G&A functions.

We might not be big enough to control pricing in the US Production Testing market, but we can control how we invest and how we manage our costs. As we have demonstrated with Offshore Services and Compressco within a couple of quarters after we have initiated actions, we have seen the result of those actions reflected in our financial results, despite those divisions continuing to operate in less than optimal pricing environment.

We have already taken actions to reposition staff and equipment to the mobile bus markets, such as the Permian basin. We are in the process of consolidating districts in South Texas and are looking at expanding in the Permian basin to take advantage of increasing activity levels there. Our approach to the US Production Testing environment will be two-pronged; number one, we will rationalize our cost structure with some actions having an immediate impact over the next two quarters, and other actions Stu mentioned that will take a bit more time to gain traction.

The second area would be to enhance our sales organization, diversify our customer base to augment our anchor clients, and repositioning our districts, equipment and employees to those areas where customers are recognizing and pay for the value of our services at rates better than those operators that are willing to hire local and regional competitors, which have less emphasis on quality and safety than what we have.

As we have done with Offshore Services, we will report the progress of those initiatives because we're addressing this challenge with the same sense of urgency as we have recently demonstrated. Compressco revenue of $29.8 million was up 6% sequentially on improved US activity and better utilization levels. In the United States, utilization of our equipment is now above 87%, allowing us to secure modest price increases in the US and Canada. Mexico has continued to show slow and modest improvements and we don't expect any material change in Mexico until Q2 of next year at the earliest. Anything before that will be premature to anticipate.

Compressco operating margins increased from 11.3% in the second quarter to 18.3% in the third quarter as a result of the cost reduction efforts, improved utilization levels and price increases. These improved results affords us the opportunity to continue to increase our distributions.

Offshore Services revenue of $86 million prior to eliminations increased $22 million sequentially, reflective of seasonality of our business. Compared to a year ago, revenue was up 10%. Our Diving revenue and margins are up significantly from both the second quarter of this year and the third quarter of a year ago, reflecting the move we've made to be able to successfully transition into the new capital and maintenance markets versus decommissioning markets.

Third quarter Offshore Services operating margins of 23.8% are up 840 basis points from a year ago and are up 880 basis points sequentially. Our cost reduction efforts now annualized to almost $19 million and are reflected in our record high non-hurricane third-quarter profits. Our Offshore Services management team a year ago embraced aggressive and necessary cost reductions and we are now seeing the impact of those.

With respect to Maritech, during the quarter, we reduced the liability to $37 million. We are down to four properties and a handful of wells to address and are currently working on those four properties and all the wells that need to be addressed. Our challenge is finding the weather windows between now and the end of the year or getting a pipeline rerouted so we can go in and remove one of the platforms.

We are working with Bessey on the actions necessary to permanently plug and abandon the remaining handful of wells. If the weather doesn't cooperate with us between now and the end of the year, we might have one or two of the platforms and related wells spill over into next year. We continue to make progress in bringing to conclusion the Maritech decommission and obligations, but they are putting up a fight to the very end.

The final item I would like to address is free cash flow. We communicated a goal of $80 million free cash flow post-Maritech. Through the first six months of the year, we had generated free cash flow of $50 million with free cash flow being defined as cash flow from operations excluding Maritech; that's all capital expenditures.

During the third quarter, we generated free cash flow of $20 million, also excluding Maritech, putting us at $70 million after nine months. The strong third quarter free cash flow performance was despite a sequential quarterly revenue increase of $33 million that one would have expected would have increased working capital. We expect the fourth quarter free cash flow to be very strong as we collect the peak third-quarter revenues.

To summarize the third quarter, profitability was strong in Offshore Services and Compressco as a result of significant focus on cost reductions and good execution. Our G&A costs are coming down, consistent with our stated goals. Free cash flow is strong and continues to improve exceeding the goals we've laid out.

Completing the Maritech liabilities continues to be a challenge but we are actively working each of the remaining platforms and wells, and with the exception of weather we have our hands around what needs to be accomplished. Production Testing is in a challenging market right now, but we intend to address that challenges that seem bigger and urgency that we have demonstrated we are capable of doing. We expect the next couple of quarters to remain a challenge for Production Testing as our new sales initiatives, cost actions and equipment repositioning gains traction.

We believe that if this environment improves, we'll come out of this with a very low and effective cost structure and a strong cash generating Company, leveraging a strong vertically integrated fluids franchise. Once Maritech is completed, we intend to recommend to our Board the direction we want to go with free cash flow, be it a dividend, share repurchase or additional investments into some of our higher-margin businesses. Triggering actions before Maritech is completed, we believe, is premature. We will contain and manage our balance sheet very prudently.

Before I turn this back over to Stu, a couple of housekeeping items for those of you that are updating your model. Other income was abnormally higher at $7.2 million. This includes a one-time gain of $5.3 million as we've sold one of our wells and transferred the associated liability and Maritech with it. This one-time gain is not included in our normalized EPS of $0.28, as we reflect that stat in the Maritech results, normalized other income should be in the $1.9 million range, consistent with prior quarters as you evolve your models. Also the effective tax rate to use for the quarter in going forward is 34%.

With that, let me turn it back over to Stu.

Thank you, Elijio, and at this stage, we'll now open the call to questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Marshall Adkins from Raymond James.

Can I get a little more color on the Fluid Management or the Fluid side of the business? It sounds to me and I'm saying this in the form of a question that your Water Management business and Gulf of Mexico drove pretty strong results. Is that accurate or is it other geographic regions or is it something else that I am missing?

It is a combination of several factors. Clearly the two items you mentioned were very strong during the quarter, Gulf of Mexico Fluids as well as our Water Transfer business. But in addition to that we had very good activity coming through our domestic chemicals operations. We had a couple of significant projects that we were able to execute real well and take advantage of the opportunity which resulted in us getting our El Dorado production to record levels. So that certainly is a contributor to the strength. So if you kind of look at this on a go forward basis, we continue to see the growth and the two primary Fluids businesses. We've talked about water transfer in Gulf of Mexico and we continue to be able to take opportunities where our chemicals business is able to ramp up to respond to project and short-term opportunities. So all of the trends are favorable.

So on the chemicals side, what -- was that selling into a different market?

No, it's oil and gas; again, we have a pretty sizable onshore calcium chloride business. We talk about all of the time on Gulf of Mexico and the high-end calcium bromide, zinc bromide, but in addition to that, and the shale-like activities and some other areas, we are a leading supplier of calcium chloride into those markets. So that also cycled in very strong, particularly on a couple of projects this quarter.

Is that going to be the end -- to E&P companies or the service companies, the calcium chloride?

It will be a combination. We have multiple rugs to market onshore.

Okay. All right, well, that sounds good. Let me turn to the other side; you gave a lot of good detail on the production testing, obviously, that was the weak element here. What I want to try to understand is how much of the weakness has been shale slowing down versus the shift from vertical to horizontal creates fewer wells or is pad drilling affecting this? And last part of that is you mentioned Mexico; I didn't realize you had that much of Mexico. How much of that would be Mexico in terms of the weakness?

Yes, if you talk about testing, the primary area that contributed to the weakness during the quarter was the US. And I don't see a structural change that we're worried about in terms of horizontals or pad drilling or any of the trends that are going on with our customers. I think if you look at the market overall, it's a combination of several factors. First and foremost, South Texas, which is very important region for us, is very, very tough at the moment in general. I think you've heard everybody, the last couple of weeks talk about that, that's in the onshore service business and we're no exception to that.

(multiple speakers) Competitive reasons or is it just last overall demand?

No, it's competitive reason; the activity level overall is still very good. Virtually all of the stuff -- all of the challenges and the testing is much more driven by the competitive landscape than it is the activity levels of the structures of the market. Now you've seen new market entrants come in to certain areas, including South Texas so that's contributed to the competitive market. In addition to that, we have a mix down there where one of our large customers is changing their investment profile. So we need to adjust so that, redeploy the people and equipment; in our case, we'll move a lot of that to West Texas. We'll some of the people with it. We've shut down certain operations to make certain we've got the smallest footprint to properly satisfy the customer base down there.

But it is all more on the micro and the competitive landscape than it is on a broader. Our assumptions on the domestic testing business are it's going to continue to be very good activity. There's going to be price pressure that we have to work through. That's going to be cost-driven from our side; it's going to be continuing to work with our major customers to look at better applications, better solutions to their flowback testing, redeploying of assets and a combination of all those factors. The second part of your question on Mexico. And Mexico is a bigger impact on our Compressco business than it is on testing but we've seen on testing that impact just like we've seen of Compressco of the budget pushing back, being cut earlier in the year. And similar to Compressco, we expect to see that trend move forward favorably, slowly but favorably as we go into next year.

Sean Meakim, Barclays.

So congrats on a good quarter.

Thank you.

As we look towards 2014, I had a couple of questions kind of beyond. So first I guess I'll start on Maritech. How would you frame the probability of completing the work, sliding into 1Q? I know there's obviously, weather is kind of the big variable, but if things were to slide into 1Q, I mean can you kind of frame for us what the impact could be to some degree?

Yes, I mean I think, as we stated on the call, right now, we're down to a handful of platforms, the majority of those scheduled to be executed this quarter; one of them dependent on third-party pipeline getting done, that's outside of our control. We've done a lot of the tough wells. We feel good with that. There's certain discussions going on with Bessey that need to be finished that will take place during the quarter. And then we have non-operated properties where it's clearly a portion of -- that's all out of our control, but our sense is a lot of that work will end up getting pushed into next year. So the part we control, I suspect we may have one or two structures and we may have two or three wells that go to the first quarter. And as we go through the balance of the fourth quarter, we continue to look at it as some of those open items get resolved, the economics of finishing the work in more challenging weather versus deferring it til the end of the first quarter when the weather improves.

Okay so given the $70 million of free cash generated this year and then kind of the clarity you're getting on Maritech, it sounds like the confidence is improving as far as free cash flow in '14, kind of getting to that $80 million --?

Yes. Absolutely, for both of those reasons. I mean, I think, clearly, as Elijio articulated, the drivers of that year-to-date free cash flow was sustainable. We believe it sustainable, the working capital. We still think there's some improvements to be had there. And just fundamental cash generation of our service business gives us our confidence in looking at that $80 million-plus. And the Maritech, even with the challenges, we're down to a handful of structures, a few wells. They're all planned. We know what we -- know when we want to execute them and the worst case is a little bit of that swaps over to next year.

So then it would be a good time, I think, to refresh where you guys sit in terms of uses of cash in '14 so a lot of cash coming in the door, whether it's M&A, returning cash to shareholders, how you guys are feeling about that today?

So again, we've got the envious position of having a range of options and there's certainly organic growth that we could accelerate for the right opportunities, very similar to what we've done on the water transfer side during 2013. There's still a very robust M&A environment out there. The businesses that we would look at that make sense, both organically and M&A, probably center around the Fluids, the water side. Clearly, we need to get the testing margins moving in the positive direction as we look at reinvesting in that business. I think long term, that's clearly something we will continue to do but being conservative and prudent, we want to see the demonstrated improvement in that business as we look at those opportunities.

And then the return to shareholders, as Elijio said, there's a couple of different options there, whether it's in the form of a dividend and/or the form of a share repurchase. That's something we evaluate as we go into the year being the conservative people that we are. We don't trigger those decisions until we see the Maritech number just above that zero. Certainly, we evaluate and plan for it, but in terms of disclosing and discussing, we'll wait til we get to the end of the Maritech liabilities.

And just one more to follow on to that. Compressco had a good quarter. Where do we stand in terms of M&A opportunities for that business to really kind of get the growth going there?

Yes, I -- first of all, I totally agree with your assessment that Maritech had an outstanding quarter and other than Mexico, which improved sequentially, all of the other components of Compressco are cycling up very nicely. We've said this before, but we talk about it internally with the management teams across the Company, their great example of their core business being late-life natural gas and production enhancement being challenged the last several years and despite that, the management team has found new opportunities in the unconventional to liquids internationally to grow. So we're particularly proud of that.

We see, other than Mexico, all of our international businesses growing, our domestic business growing despite the natural gas prices and layered on with some of the cost actions, both organizational redesign as well as supply chain; that is the contributor to it. So all that heightens our desire to grow that business faster. We're spending a lot of time at the corporate level of Tetra working with the Compressco management team, looking at opportunities. We're looking at accelerating some organic investment as well. There's a lot of stuff out there and we've been very disciplined in looking and evaluating but we haven't found that right opportunity yet but we'll continue to focus on that.

Bill Dezellem, Tieton Capital Management.

We have a couple of questions. First of all, relative to Offshore Services, are you seeing an increase in the decommissioning interest or discussion activity level from your customers or the big threats from the regulatory environment -- is that not impacting their mindset?

I think we've seen a steady discussion. I wouldn't describe it as materially different than 6 or 12 months ago. I would describe the market activity demand and the abandonment and decommissioning as steady, up from where it was a couple of years ago as a result of certainly influenced by the idle iron guidance, certainly improved with the permitting cycle time, getting back to a normal time period. I think where we've done a really good job, obviously the cost side has been a big contributor. And the team should be commended and we continue to reinforce -- they're the leaders of it, they've taken the actions and we've seen the benefit.

I think another area that we're particularly pleased with is kind of the diversification of opportunities on our diving side. The team has done a very good job supplementing our abandonment and decommissioning markets with some pretty nice wins on the project side, on some of the pipeline infrastructure coming in from the deepwater. And I think the combination of the cost in some of those new markets has resulted in that diving business having a really good second half of the year to date.

Thank you. Taking the -- staying with that business, you had mentioned, I believe it was in the release, that some poor weather in September negatively impacted the results. How big a number does that -- did that turn out to be?

It wasn't large enough to note but we did have -- we had really good working conditions through the first two months of the quarter, and then in September, we had probably 7 to 10 days of inclement whether that affected our ability to work. But it wasn't a big enough number to stand out and note. But despite that, the guys achieved that set of results we mentioned.

Thank you and then finally, I believe in your comments today you had mentioned expanding services at the well site, a pretty broad comment. Would you dive into more detail and discuss what you're thinking there?

Yes, I think in the context, I intended to say Testing is certainly the most challenging business we have during the third quarter and part of it is the tactical side of cost and asset redeployment and some of the things we're doing. But there's -- in all of these businesses, whether it is Compressco last year, Offshore Services last year, testing at the moment, there's the tactical side and then there's the strategic side and you have to do both simultaneously. On the strategic side, I think there's opportunities out there as we look at the impact of pad drilling, the duration of the workforce, the equipment used at the well site as the market has evolved for us to work with, with our customers in terms of solutions that are win-win.

Examples of that maybe we have got a very strong presence in developing with Compressco on the vapor recovery. In certain areas, we're able to tie that in with our testing business and find opportunities. Potentially looking at automating some of the services at the well site associated with the flowback testing is another area. In another area, we've done well, particularly internationally, which I think there's some opportunity in the US is early production systems where we kind of have an expanded testing footprint for longer duration as the customer looks to their permanent infrastructure. So again, we tasked the testing management team with the dual possibility of hitting the tactical targets aggressively and coming on with a comprehensive strategic plan that leverages the fact we are the big player in that space in North America.

Mike Harrison, First Analysis.

Congratulations to your Red Sox, Stu.

Thank you. I appreciate you noting that.

I wanted to ask you a couple of questions on Offshore. First of all, you said that you expect key assets to show good utilization in Q4. Is that all in the Gulf of Mexico or are we starting to see further deployment into other geographies, particularly on the diving side?

We -- my comment relates to the Gulf of Mexico but in addition to that, we're starting to see what I would describe as a richer set of opportunities outside the Gulf of Mexico. So I think it's very likely during the fourth quarter and beyond that we start to see some of that activity. It may be in the form of assets being deployed. It may be in the form of personnel being deployed.

And as I think about the weather impact on Offshore, is it fair to say that some of your bigger assets like the TETRA Hedron and as well as some of the diving assets are maybe less susceptible to weather impact than you have been in the past?

I would say that if you look at the Hedron and you look at some of the leased diving assets that we have, that's an accurate statement. Certainly, they'll be subject to it but probably to a lesser degree than some of our legacy assets.

Okay, in the testing business, I was wondering if Elijio could talk about the magnitude of the expected cost savings relative to the $19 million run rate that you're at in the Offshore business. Is it a similar number?

Mike, I would say that we've got a two-step approach. The division management and the district managers automatically adjust our cost structure by reducing people when activity levels decline in their individual districts. That happens on a day-to-day, week-to-week basis. The actions that Stu and I mentioned are more structural to the organization in terms of repositioning some of the districts, repositioning people and equipment above and beyond activity-related type items. We are in the process of formalizing and addressing the magnitude of those items and we'll be able to talk about it more, I think in some of the future calls. But today, the -- this team is taking actions at a district level and adjusting to those volumes that are moving around on a day-to-day basis.

Okay and last question I had is on Fluids. What are you seeing in terms of supply and demand dynamics for some of the higher value fluids in the Gulf of Mexico? Are prices up and would you expect them to trend higher or lower over the next few quarters as we presumably are seeing good visibility on continued deepwater demand?

Yes, I'd say overall, the markets -- the activity is great and the pricing level is stable. And as we go forward and evaluate the opportunities out there, we always look for those -- the ability to do some of that positive stuff, but I would expect it's going to be a good environment to be operating on. I think from our perspective, the key thing I always continue to emphasize is we've made a lot of investment to be able to service that market. We're beyond the obvious at El Dorado; we've expanded our West Memphis production over the last year so we're able to operate at a much higher level. We've made the investment in our blending facilities along the Gulf of Mexico, so I think our cycle time to respond to opportunities is very, very good. And I might add, if you look at it, we don't talk about it enough, it's also at a time when we've taken our inventory down $9 million to $10 million. So not only are we -- have capacity service in the market with lower cycle time, the team has been able to go out and do it in a more effective and efficient manner.

(Operator Instructions)

Blake Hutchison, Howard Weil.

Elijio, first for you, in response to production testing Q1 results, you had outlined some actual initial kind of cost cutting and rationalization, the moves at that point. And maybe take us back there, was that primarily at that point limited to cost reductions kind of at the corporate support level? And understanding you don't want to get into -- numbers are preliminary. As we delve into more of these field level rationalization, would you typically expect some magnitude compared to that, that initial cut, to be reflected eventually or how should we think about the relationship between the two of those?

Right, in the first and second quarter of this year, the production testing management team triggered their own actions when they saw a slowdown in some markets and they did reposition equipment. They did reduce headcount at the district level to address those volumes. In the second quarter, we launched G&A headcount reduction initiative to try to streamline the organization. The production testing organization contributed significantly towards that goal that we set of $16.5 million dollars, so part of the G&A that -- cuts that we're making came from that division.

The next round of cuts that we're making is, Stu mentioned earlier, that one of our key accounts in South Texas announced a significant write-down of their properties and stopped their drilling program and are in the process of selling those properties. That was a significant anchor client for us that further reduced activity levels and we saw that impact in the third quarter. And as a result of that action by that client, our management team started consolidating districts and making further headcount reductions in moving staff to other areas such as the Permian Basin.

So in Q1 and Q3, the management team has adjusted downward as those volumes have moved around. In Q2, with their G&A cost down, now we're looking at repositioning some districts and in addition to that, Stu mentioned that we're taking some longer term perspectives as to how do we become more efficient at the well sites, how do we reduce our dependence on the number of laborers on a per job basis so that we can have a more differentiator versus our competition and not be competing against the mom and pops and the regional players that have the comparable type of equipment out there. So it's a combination of the district cuts that they're making on an ongoing basis, G&A reductions and now we're looking at more structural-type reductions that will give us a lower cost structure.

Thanks for that and I understand we covered some ground that we are already covered on that so sorry for the redundancy a bit. And then just talking about the Onshore Fluids business, you mentioned kind of in the preamble that you're starting to see an improvement in the moving treated water business between sites. Does that have the potential to rival in size the business to date that's been more source to site business?

Yes, I think we're seeing a pretty interesting trend there where we're probably able to demonstrate a higher level of value with some of those opportunities. So again, I don't know that it's going to be the same magnitude but I do think there will be a mix shift over a period of time where that becomes a bigger percentage of the total.

Okay, great. And then a lot of conversation around the Offshore business. I just wanted to maybe give you guys a chance to -- given the wide swing between results, quarterly results in general in 2Q and 3Q. As we look into 4Q, you mentioned steady asset utilization, obviously, some detrimental effects due to weather so we get later in the quarter. But should we be thinking that 4Q looks like something between 2Q and 3Q or dialing in something that settles back into more of a 2Q type of PBT contribution?

Yes, I think it's going to be closer to a traditional fourth quarter than between a 2Q and 3Q.

Actually, there are no more questions at the present time so I'd like to turn the call back over to management for any closing remarks.

Great. Thank you very much. We appreciate all of the questions and we'll look forward to operating -- updating everybody early in the year on the results of the fourth quarter.

Thank you. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.