Tetra Technologies Inc (TTI) 2013 Q4 法說會逐字稿

Good morning everyone and welcome to the TETRA Technologies Incorporated fourth quarter 2013 results conference call. All participants will be in a listen-only mode.

(Operator Instructions)

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

(Operator Instructions)

Please also note today's event is being recorded. I would now like to turn the conference call over to Mr. Stu Brightman. Mr. Brightman, please go ahead.

Thank you Jamie, and welcome to the TETRA Technologies fourth quarter 2013 earnings conference call.

Elijio Serrano, our Chief Financial Officer, is also in attendance this morning and will be available to also address any of your questions. I will provide a brief overview of our fourth 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 statements.

In addition, in the course of the call, we may refer to net debt, free cash flow, revenues, gross profit, profit before tax, or earnings per share excluding the Maritech segment and 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.

Our adjusted fourth quarter 2013 earnings of $0.12 per share is at the high end of the range we noted in our estimates on our call of February 14. Overall, these results reflect continued strength in our Compressco business, and a strong fourth quarter performance by our Offshore Services segment.

In our fluids division, we saw both sequential and prior year reductions in earnings. This was driven by delays on certain offshore projects, as well as adverse weather that constrained demand from our customers in the US, onshore markets.

At the beginning of the first quarter of this year, we've seen evidence of a slight delay in timing of certain offshore projects. However, as we move through the quarter, we expect to see, and have seen a return to a more normal level of activity, consistent with our guidance, and expect this to continue through the rest of the first quarter and beyond. We are also confident that the investments in our water management business will yield results for this product line that are consistent with our guidance.

For the Production Testing segment, we believe that our fourth quarter results represent the low point of the cycle. We continue to be very aggressive in taking cost reductions, and have seen initial success from our expanded sales efforts. We expect a sequential improvement in the first quarter of 2014 results, and expect that to continue sequentially through the remainder of the year. The primary contributors to the segment's fourth quarter 2000 results were continued market challenges in the US, and very modest demand in Mexico associated with slower drilling, in related completion activity.

In the fourth quarter our Compressco segment achieved its highest quarterly profit since the IPO of the MLP in 2011. Compressco's fourth quarter results benefited from improved asset utilization and ongoing cost reductions, as well as a higher number of compressor package sales. We also recently introduced a super jack to our compressor fleet to support our gas-lift market strategy. We believe that utilizing these assets in areas in which we have a significant service and customer presence, will allow us to leverage our existing business. Compressco's fourth quarter results are particularly encouraging given the ongoing challenges in Mexico.

In the Offshore Services segment, excluding the $9.3 million asset impairment, adjusted earnings for the fourth quarter were $7.1 million. This compares favorably to adjusted pretax earnings of $6.1 million in the fourth quarter of 2012. This unusually strong fourth quarter is, in fact, our second highest fourth quarter ever, excluding hurricane years, in a year that was not impacted of that same nature. This predictability of this business and improvement in margins is attributable to the cumulative benefit of all the cost reductions we have implemented over the last year and-a-half, as well as the expansion of our diving business into the infrastructure support market in the Gulf of Mexico.

In the first quarter, our bid activity and preliminary contract awards for the balance of the year are encouraging and support our guidance estimates for 2014, which are predicated in part, on our ability to replace the internal Maritech work with third party contracts.

In Maritech, our objective continues to be the completion of work on the abandonment and decommissioning liabilities on our operated properties by early in the third quarter. We will do a portion of the work in the first quarter, but the majority will be executed in the second quarter where the weather conditions are more favorable. We are getting very close to finishing this, and despite the liability adjustments taken at year-end, we believe we have a clear line of sight to finishing on this schedule, and within the amounts of the existing liabilities. We have a finite number of wells and structures remaining and a solid work plan to address these projects.

Net debt at year-end was $329 million. As we look forward, we remain confident in our ability to generate $80 million of free cash flow excluding Maritech in 2014. We believe that the earnings range set forth in our guidance, combined with working capital efficiencies, and an ongoing focus and optimization of capital spending, positions us favorably to achieve this goal.

With our overall balance sheet, we're comfortable with existing leverage, and believe we have sufficient liquidity to continue to evaluate strategic growth opportunities. Our two recent acquisitions, the water transfer business in South Texas, and the interest in our Saudi Arabian joint venture, are indicative of the types of opportunities we continue to see we believe we're available, in which we have a high degree of execution confidence.

With that Elijio, would you please start the financial review.

Thank you Stu, I'll take the next couple of minutes and walk through each of the divisions in more detail, and then provide color on some of the internal initiatives we have working.

TETRA revenue of $225 million decreased 11% sequentially, reflecting the traditional seasonal decline from the third quarter in Offshore Services. Sequentially, Production Testing was down 2% as the fourth quarter results reflect a full quarter of activity without Shell in South Texas, and continued weakness in Mexico, compounded by the challenging weather conditions that Stu mentioned earlier.

Compressco was up 9% sequentially on continued growth in the United States. Fluids was down 11% sequentially, as the fourth quarter was without any significant one-off sales, and also due to shipments to some Gulf of Mexico projects being delayed to this year, as clients experienced delays in completing some wells.

With respect to profitability, earnings per share excluding Maritech, and unusual charges of $9.8 million, were $0.12 per share, at the high end of the range we announced on February 10. The $9.8 million of unusual charges were predominantly non-cash charges, and were almost entirely attributable to our write-down of the DB-1 derrick barge that had been stacked as we tried to sell it. We sold this asset for $3 million in January of this year.

Fluids division revenue of $89 million was down 11% from the third quarter. Several significant shipments that we expected to occur in the fourth quarter were delayed into the first half of this year, as operators experienced delays in completing some of the wells in the Gulf of Mexico. We expect a first quarter to rebound to prior quarterly run rates.

Water management also declined sequentially as they were also impacted by the difficult weather conditions during December. We are seeing a growing trend by many operators to transfer treated water. Previously, the majority of our water transfer business was moving fresh water from a source to the well site. Many customers are seeing the strength of our leak-free hose and connectors, and are increasingly using our services to transfer treated water from one frac operation to another to reuse treated water. In some areas of the country, operators are paying as much as $1 per barrel for fresh water, adding to the cost of completing a well.

The continued opportunities for our water management business was a catalyst for the acquisition that we recently announced in South Texas. We expect to leverage the customer base of this acquisition to expand our South Texas business, and also penetrate further the progress that we've made in the Permian Basin, and the Rockies market. We have placed orders for additional deployment units and more miles of hose to address a growing market in the Permian Basin.

Production Testing operating profit was $13.7 million. I'm sorry, Production Testing for the for the Fluids division was $13.7 million. While operating margins of 15.5% were down from our recent run rates reflecting the delayed Gulf of Mexico shipments, and impact from the cold weather on our water handling business.

Production Testing revenue was $47 million, was down 2% sequentially, as the full impact of Shell exiting South Texas was felt, in addition to continued weakness in Mexico. As we expected, Production Testing operating margins declined from 6% in the third quarter, to 1% in the fourth quarter, as we finalized the redeployment of assets previously servicing Shell in South Texas to the Rockies, and the Permian Basin where activity levels have been more robust.

We initiated several actions during the quarter, where we are starting to see the result of those actions. We added senior sales leadership to help us expand our customer base. Two of the recent senior hires bring significant relationships and industry experience that we can attribute to recent win of accounts that we had not previously worked for.

We are also implementing salesforce.com as our CRM tool to better monitor client activity, opportunities, proposals, wins and losses, pricing trends, and to better monitor the performance of our expanding sales force. We have also made the decision that some of the savings that we have been seeing from our recent G&A cost reductions, are being redirected into additional sales staff to address growing market opportunities as we build a broader customer base. While we have benefited from our relationships with handful of large customers such as Shell in South Texas, we also realize that a more diverse customer base is required to avoid significant changes in our business when some of them change direction.

Our rig cooling business, Optima, that we acquired in early 2012, reported the strongest revenue quarter since the acquisition, due to strong activity in the Eastern Hemisphere. We have also been aggressively attacking our cost structure, and undertook initiatives to identify areas where costs could be further reduced. Efforts can been concentrated, and assets redeployed to markets where pricing is more attractive. As a result, some of the smaller, international countries that we are targeting as startups, will be delayed, so we can instead focus on our current areas of strength.

Our cost focus and initiatives are continuing. As a result of the previously noted revenue and cost actions, we believe the fourth quarter represents the low point of our Production Testing trend as mentioned earlier by Stu. We expect first quarter revenue to grow sequentially after four consecutive quarters of declines due to Mexico and South Texas. We also expect our Q4 operating margins to be the low point, with first quarter margins expected to be at or better than the 6% we reported in the third quarter of 2013.

In addition to the strong focus on our Production Testing management team, Stu and I have been devoting a significant amount of our time and efforts toward getting Production Testing moving back towards the direction of our historical operating margins. In recent weeks we have visited operations and customers in South Texas, the Mid-Con area, Permian Basin, and have upcoming trips to Marcellus, Rockies, and Canada. Production Testing improvements is our priority.

Compressco revenue of $33 million, increased 9% sequentially, despite the lack of a rebound of activity in Mexico, reflecting the growth we are seeing in the United States for both the conventional gas market, and from our vapor recovery technology. We continue to manufacture additional units for the United States, as our utilization in the US is above 85%. We have also been able to secure modest price increases in the US and Canada. We don't expect any material change in Mexico until the second half of 2014 at the earliest.

Compressco operating margins increased from 18.2% in the third quarter, to 19.6% in the fourth quarter, as a result of the revenue growth, price increases, and cumulative impact from cost reductions that have been ongoing during the year. Our fourth quarter operating margins are the highest in 2013, and the second highest in the past two years, surpassed only in the third quarter of 2012, when operating income in Mexico was very strong. As a result, we increased earlier this year, our distribution to $0.4375 per unit, our fifth increase in the last six quarters.

We have further cost reduction initiatives ongoing for Compressco, targeting G&A cost reductions as we leverage TETRA support structure. Additional benefits are expected beginning in the third quarter.

We also remain focused on expanding our product and service offering and announced in early January that we acquired 18 mid-sized horsepower units. We continue to aggressively look at acquisition opportunities to further expand our US footprint, and move into the mid-range size compressors. Compressco's balance sheet affords us the capacity to make small to mid-sized acquisitions.

Offshore Services revenue of $67 million prior to eliminations, decreased $19 million reflecting the sequential seasonality of our business. Compared to a year ago, revenue was up 10%, reflecting the strong growth of our diving business, as we expanded into the installation, repair and maintenance markets. Excluding work done for Maritech, our E&P -- de-commissioning work revenue was up 25%.

Fourth quarter Offshore Services operating margins were 10.5%, excluding the write-off we took on the sale of the DB-1 derrick barge, generated an operating margin above 10%, as we entered the difficult weather conditions we normally see in the fourth quarter, we believe as a result of the very aggressive cost focus we have instilled on this division, in addition to the focused sales efforts in diversifying our customer base, expanding our market, and adding sales leadership. We believe the approach we have taken with Offshore Services are indicative of how we can accomplish with Production Testing.

We currently have both of our heavy lift derrick barges at the dock, one going through a mid-cycle, dry dock and class inspection, and the other going through a normal, full cycle dry docking class inspection. During the first quarter, we'll also be bringing one of our three diving support vessels for our dry docking class inspection. As a result, we expect Offshore Services first quarter revenue and profit to be lower than normal, as we prepare these vessels for another strong spring and summer.

Our diving and heavy lift backlog looks very encouraging as we approach the spring season, having secured significant projects, and no indications that permitting, and the time to get permits issued is an issue.

With respect to Maritech, during the quarter, we increased our ARO liability by $243 million. We are down to four properties, three that have platforms, and two that have wells that need to be addressed. We did not make the progress we wanted to make in the fourth quarter, as the challenging weather conditions would have been very costly to have our assets idled waiting on appropriate weather window.

In addition to the return of Production Testing profitability and top line growth, this is the other area where Stu and I spend significant amount of time and effort advancing this as quickly as we can, without taking undue operational or safety risks. The nature and unpredictability of wells previously abandoned, and subsequent buildup of formation pressure, has continued to represent a challenge for us. By using a fluid body analogy, we believe we are now in the red zone with four remaining properties that we operate. We do have other properties that we don't operate, whereby we contribute our proportionate share of the cost and those operators have indicated they're progressing on completing this work. We continue to believe during early Q3, we should be complete with this work, pending no new well issues.

The final two items I would like to address are, free cash flow, and G&A reductions. Our stated goal is to generate $80 million of free cash flow once we are done with the Maritech decommissioning obligations. In 2011, we generated $22 million of free cash flow. In 2012, we generated $4.6 million of free cash flow. With a definition of free cash flow being cash flow from operations, less capital expenditures, and excluding the cash burn from Maritech.

Comparing the $4.6 million from 2012, in 2013, we ended the year generating $62 million under the same computation. This $62 million is despite the significant decline in activity in Mexico that impacted both Compressco and Production Testing, and also the downturn in Production Testing that we saw in the second half of the year.

Capital expenditures of $101 million in 2013, were the lowest in the last three years, despite the significant investments we made for water handling, the upgrades we made in West Memphis to support the growth in the Gulf of Mexico, and our larger Production Testing footprint in Marcellus, Utica, Rockies, Bakken and Canadian markets with the acquisitions of Gray Wolf, and ERS that were completed in 2011 -- in 2012.

This discipline reflects our capital discipline and focus on the proper investments into the existing product lines. This discipline and prioritization will continue into 2014. The trend that I just outlined gives us the confidence that in 2014, we can attain our $80 million goal of free cash flow after Maritech and before acquisitions. The recent investments into Saudi Arabia, and the small water management acquisition indicates how we plan to deploy some of the free cash flow.

Once we are done with Maritech, we will evaluate further uses of cash, which could include a combination of a dividend, share repurchases, repayment of debt, or additional tuck-in a acquisitions for those business, with the proper risk returns profile.

As an update on the G&A cost reductions, we initiated an action plan early in 2013 to reduce our total G&A by $16.5 million. Our benchmark was against a G&A expenditure levels that we were running at in the second half of 2012, after completing the three acquisitions that brought a certain amount of G&A with those acquisitions. The third and fourth quarters of 2012 G&A was averaging $35 million per quarter. Our goal was to reduce that to $30.9 million, with a quarterly reduction being one-fourth of the $16.5 million goal. Fourth quarter G&A was $32.4 million, putting us close to our target run rate of $30.9 million.

I would like to note that in the fourth quarter, we incurred slightly over $700,000 of costs for legal fees to do our joint venture in Saudi Arabia, recruiting fees to add some of our senior sales staff, employee relocation expenses as we shifted the management around, and other operational fees. We also made the decision to invest some of the G&A savings into the sales staff to improve our Production Testing revenue.

The work still to be done is about $3 million of reductions in the support functions, mainly in the accounting area. We have a plan in place to consolidate our accounting staff, and reduce redundant functions found within each division, which we plan to achieve by consolidating functions using systems. The first phase is ongoing as we speak. That second phase will be completed in third quarter of this year.

By Q4 of this year the full impact of the $16.5 million should be anchored and in place. And as I previously mentioned, we will use some of those savings to add to our sales organization to expand our Production Testing and water management business.

And before I turn this back over to Stu, a couple of housekeeping items for those of you that are updating your models. The tax rate for the year ended at 30%, reflecting the mix of lower US profits, with a high tax rate, versus higher international profits, with a lower tax rate. As our Production Testing business improves in 2014, we believe the 2014 tax rate will be somewhere between 32% and 33%.

Also, the Saudi Arabia joint venture buyout for 2014 will add approximately $30 million of revenue to Production Testing, and approximately $15 million of revenue to Fluids. We're already reflecting in 2013 in other income expense below the line, the earnings from Saudi Arabia. Those earnings included our 50% of the Fluids profit, and 100% of the Production Testing profits, less the commission we were paying on Production Testing.

Our purchase is essentially buying out the commission previously paid on Production Testing and the 50% of the Fluids that we did not previously own. We will consolidate the full P&L of Saudi effective Q1 of this year. The unusual items of $9.8 million in the fourth quarter, were primarily the write-down of the DB-1 barge in Offshore Services. The only other item of note was $300,000 asset write-down in Compressco.

To summarize, the fourth quarter, we believe Production Testing's fourth quarter performance was the valley of the recent trend, and we expect revenue margin improvements in the first quarter. The Fluids business saw some delays in the first half of this year, some delays into the first half of this year, plus the impact of challenging cold weather conditions on the water handling side. Compressco continues to perform very strong despite weak activity levels in Mexico. And Offshore Services is benefiting from the movement into the installation, repair, and maintenance market, and the benefit of the aggressive cost actions we have taken.

We believe our Q1 earnings will therefore be in the $0.03 to $0.06 range, consistent with our internal forecast we previously compiled as the basis for the total year guidance that we issued on February 10. The main contributor to this will be the key assets for Offshore Services being at dock for the majority of the quarter, undergoing dry dock operations.

The total year guidance of $0.80 to $0.90 per share, and free cash flow target of $80 million, with completion of Maritech in the third quarter, are targets deeply ingrained in the minds of each of our managers, and our message as, Stu and I are constantly delivering as we visit our operations.

With that let me turn it back to Stu.

Thank you, at this time we'll open up the lines for questions.

Ladies and gentlemen, at this time we'll begin the question-and-answer session.

(Operator Instructions)

And our first question comes from Jonathan Sisto from Credit Suisse. Please go ahead with your question.

Good morning, Stu. Good morning, Elijio.

Good morning, Jonathan.

So Stu, obviously Q4 in 2013 were pretty challenging for Production Testing, but Barry and Dean seem to be making some new sales progress in the early part of this year, given some of your prepared comments. Could you maybe discuss geographically where some of those successes have been? And maybe how the competitive landscape to a pricing standpoint looks right now?

Again, if you look at the guidance compared to the fourth quarter, and you look at some of the trends that we need to improve on to get to the guidance, clearly, testing is the one that stands out. I'd argue all the other three segments, when you factor in timing of some projects on Fluids, the other ones are pretty easy to see the line of sight to the numbers we had.

If you look at the sales effort, which is a big part of our focus on testing, we've seen in most of the districts, we've just taken -- not just with the two gentlemen you mentioned, but even we've added in other areas, we've expanded both at the city sales, as well as the field service roles. We're just getting a broader penetration with customers in just about all of the regions. It's hard to highlight one that stands out.

One I'd probably also add a little bit of color to is, we were very encouraged in the first few weeks at just the expanded customer base we get with the acquisition we announced in South Texas. We think with some of the customer base down there, the sales force that comes with that, as well as some of the contacts they have in places like the Bakken, that's going to help not just the water side of the business, but also get some leverage with flowback testing as well.

So again, the nice thing is it's spread, it's in multiple areas, we're seeing progress. Elijio's team's implementing and delivering some system enhancements to support and facilitate that. And we're early into the effort, but we're encouraged with what we've seen to date.

Okay, so it's a little bit of TETRA initiatives and then the market that will lead to that 450-basis point improvement?

From a market assumption, I think we're of the view, like most folks, you'll see slight uptick in activity, on-shore US this year, 3%, 4%, 5%, 6% probably; assumption is pricing stays pretty flat. We're not assuming we're going to not get a lot of help there.

We're adding a small amount of capital to areas we need to supplement the equipment, repositioning what we had in certain areas where customers have changed. So again, it's an effort that's not two or three things, it's five or six key elements that drive that bridge from a current run rate to what's in the guidance.

And Jonathan, also remember, Q4 is the first full quarter without any of the Shell revenue in South Texas, when a lot of assets were in the process of getting redeployed. They were all pretty much in place and anchored in terms of their new markets -- Permian Basin and Rockies -- in a revenue generation mode.

Right, and then you mentioned at the closing of your remarks, that $15 million from the Saudi JV that layers in this year, too?

Correct.

One last one guys.

One of your competitors earlier this week hinted at, pretty publicly, about exiting the Gulf of Mexico decommissioning business. Does that kind of announcement in any way change your outlook for offshore services?

No. We've been pretty steadfast in our approach to that business in terms of looking at the cost structure, taking action, expanding some of the applications. We've over the last two years liquidated some non-core assets, taken cost, improved the margins, positioned ourselves for life after Maritech, so that comment that's out there won't affect what we're doing short and long term.

Thanks, guys. I'll turn it back.

Our next question comes from Jim Rollyson from Raymond James. Please go ahead with your question.

Good morning, Stu and Elijio.

Good morning.

Stu, I guess first one, just on Maritech and the abandonment decommissioning liabilities. What's the risk going through the rest of this year? Obviously you're going to get to hopefully getting all this work completed in the second and third quarters. What's the risk of any further upward adjustments to that number, do you think?

You've got two or three components of it that I'll reiterate again. Out of that $43 million, about two thirds of it is operated properties that we control. The other third, we expect the majority of that to be done this year. There will probably be $4 million or $5 million of that, just pure timing of the sequencing by the operators, goes to the following year.

So, of the operated piece, the two thirds that we control, you've got couple of wells that we're still working through that we've got challenges on, that, again, we believe what we have at the end of December is our best estimate. And then we have couple of structures, one of which I would say is pretty straightforward, just more a function of timing, and getting a third party pipeline approved, than it is of complexity.

And then the other big structure we have has a little bit more size and scale and complexity to it. But we've done all the engineering work and think we've got a very good execution plan. Those platforms will wait until the second quarter to execute. The wells, we'll probably get one of them done during the remainder of the first quarter.

So again, we've taken the approach when the weather came through during the fourth quarter to shut down where we were, defer until the weather got better, take a portion of that, take that weather hit in the fourth quarter, the work we did do, and revise up the estimates, particularly on the wells where we knew we had some additional news that led us to a longer execution plan.

So again, as Elijio said, we're getting near the end. We're just like everybody else, looking forward to not talking about it, but we think we've got a good game plan to get it finished.

Perfect. Looking forward to that myself.

Going back to production testing, you've described a lot of good things as to what the issues were last year in the fourth quarter and how you were getting better. Can we talk about the weather for a minute?

If I recall correctly, on the guidance call a couple weeks ago, weather was part of this equation in the fourth quarter, and for most of the folks we talked to on the service side, weather hadn't been all that great from a winter weather standpoint in the first quarter. Any lingering weather effects that you think show up in 1Q that then hopefully go away as we go through the rest of the year as well?

I think the numbers that Elijio referenced, the $0.03 to $0.06 for the first quarter, are based on some challenging weather the first half of the quarter onshore; been a pretty consistent theme with everybody that's talked about first quarter outlook to date.

So again in our testing, in our fluids business, that's embedded in the numbers we talked about for the first quarter. And it has been a very challenging quarter in some of the cold weather areas in the Rockies and the Bakkens, up in the Northeast. Kind of believe that will get back to more normal weather mode the balance of the quarter.

And then the other variable that's probably a little bit unusual -- but again it's included in our guidance, it hasn't changed from what we said several weeks ago -- we do have a couple of our heavy lift assets in for the majority of the first quarter, but when they come out by the end -- they'll be out by the end of the first quarter, they'll go to work, they have backlog. And we're confident that the utilization and price points that are out there are consistent with the guidance.

So again, those two variables are probably why we're a little bit lighter than folks might have assumed in sequencing how we get to the full year guidance.

Helpful.

Last one. Elijio, the fourth quarter DD&A, a little over $30 million, which is a bit above the run rate, implied for 2014, just curious how that transitions?

So make sure that when you look at the fourth quarter that you adjust for the $9.8 million that we took the write-off on the [derek] barge.

Perfect.

When you look at that number.

Okay, thanks, guys.

Thanks, Jim.

Our next question comes from Sean Meakim from Barclays. Please go ahead with your question.

Good morning, guys.

Good morning, Sean.

On the fluids business, can you give us a little more color on what drove the delays in the Gulf of Mexico? Just trying to get a better sense for, is it rig deliveries? What's driving the change there? And as we look forward, the potential for more hiccups in the Gulf?

I think it's very tactical sequencing of the project with the customers, very specific well conditions, and project specifics, as opposed to rig delays or macro changes. We looked at it; we have probably a portion of the fourth quarter, the first part of the first quarter, the sequencing of some of that's a little bit slower than we expected.

But as we moved into mid-February and beyond, through the balance of this quarter, and what we see going forward, those activity levels are pretty consistent with what we expected. But I would not look at it as anything other than some short-term, customer-specific sequencing that drove the timing.

Okay, that's helpful.

And then, we talked a bit about big projects having some impact on sequential changes, or year-over-year changes. For the Gulf of Mexico business, would you view big projects as the exception or the rule for that business?

I'd say, for the fluids segment, as we've said, the deepwater portion -- by definition, it's lumpier. So I think it's going to be more the norm than the exception.

I think there will be -- if you go back over the last five or six quarters, it seems, off the top of my head, that the majority of those quarters we benefited from some lumpiness, and a couple of those quarters we've seen things slide a little bit and catch up later on. So, I think you need to look at it, more than just on a quarter-by-quarter basis, and look at the overall trend that, in our mind, continues to be very robust for what we're doing out there.

Right, that makes sense.

Over the recent quarters you've seen significant one-off sales. We had one in the Gulf of Mexico, we had one internationally, and we had one US on-shore. So, three out of the last four quarters we saw a significant one-off, completely different areas.

Right, right, that's helpful.

And just one more question on the fluids side. It seems like water handling and Optima are probably the two fastest-growing businesses, can you give us a sense of a little bit where they stand today in terms of materiality, maybe from a revenue standpoint? And then what the growth rate assumptions are for this year?

I'd say water certainly has been at the top of the list of growth over the last year or two. And embedded in the ramp-up in revenue in 2014 guidance is another pretty sizable increase in that. A lot of it's driven by CapEx we invested the second half of last year, and planned CapEx for this year.

Optima -- I think we said last year, part of the challenge we had, we had an unusually -- usual number of North Sea projects that didn't happen because of wells just not working out. A lot of work that we had been awarded that never took place. And I think as we went through the fourth quarter, and we look at the backlog going forward, that's coming back to a more normal scenario. And you overlay that with moving into some new countries -- that's benefited that business as well.

So again, part of the testing sequence this year, as I said earlier, five, six, seven things that drive that improvement is certainly the expectation that we see that business continue to cycle up.

All right, makes sense. Thanks a lot, guys.

Our next question comes from Kurt Hallead from RBC Capital. Please go ahead with your question.

Good morning.

Good morning, Kurt.

Great.

So, covered a lot of different territory. I guess let me start out with this: the point in time when Maritech gets put behind TETRA, I think last year at some point, there was some discussion, or at least some consideration being given, to potentially a dividend.

Just like to get an update on what your mindset might be at this juncture? And whether or not the thought process may have changed?

I'll answer that one, Kurt.

So the first thing is that we want to make sure that we're not premature and trigger actions until Maritech is done. In preparation and anticipation of that to occur, we work with outside parties and looked at the pros and cons, the financial consequences of all the options that we've listed, whether they be a share repurchase, big or small; whether they be a dividend program, small or large; whether it be a debt paydown on some of our existing obligations.

And we've got the analytics done, but we have not yet taken anything to the Board until we know that the last platform on Maritech is under way. So we've got the work done. It's a matter of making a recommendation to the Board, and we're still considering all those options.

And there's definitely a lot of time spent on the call here this morning talking through some elements of Maritech. And I've been doing this business a while, and these offshore projects -- I think if I recall last year this time, the thought process, it was going to be done by the third quarter of 2013.

Now we're thinking about 2014. And now by the time we get to the third quarter 2014, are we going to be thinking second quarter of 2015? I know what you outlined, but you can't help but be a little bit skeptical, given some of the nature of what goes on in the offshore market.

What kind of assurances -- are you guys pretty darn confident this thing is going to definitely get done here, or what?

Valid comments. Valid question.

A year ago we were still dealing with excess of 10 to 15 properties. Many of them with wells that had been temporarily abandoned years before. And at the time that they were temporarily abandoned, we made our best estimate what the cost was going to be to go in and do a permanent abandonment. In that meantime, formation pressure had built up, that required us to re-enter the well, and instead of being a $300,000 investment, having to re-enter the well is now a $3 million to $5 million investment.

So, the only confidence we can give you, is that today, we're down to four properties, two of them have wells with formation pressure. We've touched all the wells on the remaining properties. We've engaged with Bessey; we've got a work program agreed upon with Bessey on how to address those wells.

If the program that we've outlined with them will address a formation pressure, we're off and running to the races. If that program indicates that there is formation pressure coming from another zone, then we have to continue to do some additional work with it.

So at this point, we're down to four properties; one of them is a platform that's submerged, that all we need is a good weather window; it's fairly predictable. The other one is a platform that's still upright, with no formation pressure on any wells. All we have to do is remove the platform -- that one's just a weather window.

Then the other two are platforms with wells that we're working through. So, we're really down to two items that could introduce variability, but we're touching those wells right now.

Okay, great, thanks. That's great color, appreciate that.

Let me get on the other topic, which is always the land of hope and optimism; and then always things get pushed down, and that's Mexico. You guys gave some color around that. What's your assessment of the energy reform down there, in the context of it potentially pushing any incremental work out another year, into 2015? And how have you thought about that in terms of risk-adjusting your outlook on Mexico?

So over the recent weeks and months we've had an opportunity to visit with senior leadership of PEMEX. We've had an opportunity to visit with the regional management of PEMEX; and we've also had an opportunity to calibrate historically what they thought was eminent, and when it actually occurs.

Our assumption is that the [Joserica Chicantopec] area is going to be very flat this year, to no increase in activity. Our assumption is that the [Burgles] region will increase, due to the gas market, and that we'll participate in that increase, but primarily from the Compressco side. We are not assuming any meaningful increase in Mexico this year, versus 2013.

We are also assuming that by the time all the reforms, and all the regulations, and all the practices in terms of how to execute upon them, come to fruition, that it's going to be the back end of 2015 before that is benefiting any operators, or any service companies such as us. So, no significant benefit in our opinion until late 2015. And from just ongoing regular activity, we think Chicantopec will be flat, we think Burgles will show upside for Compressco this year.

And then lastly, just on production testing, I think one of the major service companies are looking to sell their production testing business. Not quite sure what your thoughts are on that, in terms of impacting the competitive framework, or having near-term impact on pricing, or business, or are you getting business because of that? Any thoughts on that?

I don't think that's going to have a major impact in the overall market dynamics.

Okay. That's great.

There's sufficient capacity out there still that we've got to work through that. But we're counting on self-help, and actions we take that we can control to improve that margin.

Okay. Great, thanks. Appreciate that. Take care.

Thanks, Kurt.

Our next question comes from Mike Harrison from First Analysis. Please go ahead with your question.

Good morning.

Good morning, Mike.

Just wondering if we can go back to fluids, and looking at the gross margins there were relatively weak. Is that mostly volume- and mix-related? Or are you seeing any cost or pricing issues that affected you in Q4?

Yes, I'd say it's predominantly volume and mix; there's not a cost creep, there's not any cost issues; don't see any overall changes in the structure of the competitive landscape. I think combination of some of the Gulf of Mexico projects pushing out, and some of the weather impact on our onshore fluids, was what drove that.

Okay. And how many deployment vehicles did you have working in the water handling business during the fourth quarter? And where are we expected to be as we progress through 2014? Just trying to get a sense of your capability to roll out the hose.

Mike, to protect our pricing, our margin, and our revenue per unit, we have not disclosed and prefer not to get into that granular level, in terms of number of deployment units or miles of hose that we have out there.

All right. Fair enough.

And just looking at the offshore business, you mentioned the additional diving work for some infrastructure support is something that helped a lot in the fourth quarter. Is that something that's more one-time in nature? Or is that something that's going to continue next year, expand next year?

It's lumpy but we expect it to continue. I think we've executed very well. We've gotten good response from our customers. I would expect it would be both lumpy, and expect it to continue throughout this year. And in fact we have some backlog already in that area.

All right.

And last one I have is on Compressco. Is there any way to break out how much benefit you're getting from higher natural gas prices and growth in conventional gas applications? And I guess the real question is, is the growth there sustainable? Or is that something that goes away if and when gas prices come off their seasonal highs?

I would say we've gotten a little bit, but not a very big uplift associated with the higher natural gas prices. I think if you look at the sequential growth the last few quarters in Compressco, as well as our guidance for 2014, it doesn't build in a big impact on natural gas-related activities.

So, I think the drivers we've seen in the US, in the liquids and the vapor recovery, and some of the other non-Mexico international markets, will continue to be the catalyst for that business. If we're fortunate enough and natural gas stays where it is for a sustained period of time, I think there's upside.

All right. Thanks very much.

Thanks, Mike.

(Operator Instructions)

Our next question comes from Stephen Gengaro from Sterne Agee. Please go ahead with your question.

Good morning, gentlemen.

Good morning, Stephen.

Two things on Compressco. The first is, I think you're closing in on the 15% IDR threshold. How does that impact the cash flow? How should we think about that?

We are closing in. I think our annualized distribution's at 175 now, and the first IDR kicks in on an annualized distribution of 178. Given that we've increased distributions five of the last six quarters, I think, characterize it as closing in is very accurate.

And when we close in, once we get to that annualized distribution rate, TETRA's the general partner; will get 15% of the distribution above that.

Okay.

Just that tranche above it. Then once we get to, down the road to the next tranche, it kicks in to 25%, and ultimately the high tranche will be 50% down the road.

I think that's like 233, if I remember correctly?

Right. Yes, we have that number tattooed on our forehead.

And then the second question as it pertains to Compressco is -- you made the acquisition of these medium horsepower units recently. How should we think about potential for growth there, either organically or via acquisition?

I would treat that as an indication of us wanting to expand into that market segment. This is the first step; by no means is it large enough for what we think we want to do. The team at Compressco, as well as the corporate team at TETRA, are spending a lot of time looking at growth opportunities for that business.

One of the primary reasons we set that up as an MLP, was to facilitate that type of growth, and we like it because it's in the same space, same customers that we're at; it's just a little bit larger compressor that leverages our sales and service organizations, and our existing customer base. So it's a natural evolution for us.

Okay, very good. Thank you, guys.

And gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

Thank you. Again, appreciate all the questions, and we'll look forward to updating the group on the first quarter results in early May. Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.