Tetra Technologies Inc (TTI) 2014 Q2 法說會逐字稿

Good morning, and welcome to the TETRA Technology second quarter 2014 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 Stuart Brightman, President and CEO. Please go ahead.

Thank you, Emily, and welcome to the TETRA Technology second quarter 2014 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 provide a brief overview of our second quarter results, turn it over to Elijio for some additional details, come back with a recap and then we'll be open for 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 analysis made by TETRA and are based on a number of factors. The 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 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 second quarter 2014 adjusted earnings, excluding Maritech and unusual items, was a profit of $0.10 per share. Unusually challenging weather conditions in the Gulf of Mexico and lower than anticipated P&A activity impacted the quarter by approximately $0.07 per share relative to our typical historical second quarter and our internal expectations coming into the quarter. We incurred 40 days of weather downtime on our two heavy lift barges during the quarter, a rarity during this time of the year.

In our fluids division, earnings were down sequentially as two of our main Gulf of Mexico customers continued to push projects into the second half of the year. We believe activity in the Gulf has not changed materially, but our customers have indicated that they are being impacted by operational issues that delayed completion of their programs in addition to delays caused by drilling more complicated wells.

Water management remained strong as indicated by a record monthly revenue during May. Water management revenue was up during the quarter due to strong demand in West Texas, Appalachia and the Midcontinent areas in addition to expansion into the Rockies region based on the acquisition of TD that we completed during the first quarter.

On the chemical manufacturing side, production at our El Dorado calcium chloride plant reached a record monthly high during the second quarter as we continue to see the positive impact of equipment changes we made last year and continued productivity improvements aided by strong demand for onshore completion fluids.

For the production testing segment, we recorded a slight loss during the quarter. We continue to make progress with production testing. June operating margins and our expectations for July were positive in both months, indicating continued progress for the multiple initiatives we've taken to right size the business and expand the revenue base. Customer wins and growing activity levels, particularly in West Texas, give us confidence in our goal to exit the year in the low double-digit operating margin range.

Compressco revenue increased 8% sequentially on a significant increase in net sets deployed as we continue to benefit from the growth in the vapor recovery market. In addition, revenue in Latin America increased to the highest level since the first quarter of last year, reflecting slow continued improvements in Mexico in addition to growth in Argentina. Operating margins, excluding transaction costs related to the CSI acquisition, were 20% in the quarter, the highest we have achieved since the slowdown in Mexico started last year.

Offshore services was the challenge for us in the second quarter. In addition to having one of our three diving assets in dry dock during the quarter, we incurred 40 days of weather downtime that, in conjunction with the slower P&A activity, cost us about $0.07 per share relative to historical performance.

We also had a cable mechanical issue on the Hedron during the quarter that resulted in an incremental 12 days of downtime and impacted earnings by $0.02. I would highlight this is the first downtime we've had in the Hedron since the vessel came into the fleet three years ago and they we have been back to work on the Hedron since the end of the quarter.

Since then, we've seen a broader increase in recovery in diving and heavy lift activity. Both heavy lift barges are now a multi program campaign with customers where we are covered for weather. In addition, due to strong demand in growing backlog, we have temporarily charted and added a third heavy lift barge to deal with the backlog.

We have recently moved one of our diving assets to West Africa for a 90 day contract and certainly will evaluate the possibility of extending that as we get over there.

Our plugging and abandonment activity continues to be weaker than expected as a result of short-term decline in market demand, but we have seen a recent ramp up of permitting activity and a slight increase of activity of our asset base.

With Maritech, we completed the challenging property that required plugging two wells that had formation pressure and removed the platform that had been the majority of our fourth and first quarter challenges. Finalizing this work resulted in an incremental adjustment to the ARO that we booked during the second quarter. We are now down to three properties, two that require platform removals that are scheduled in September and the last being a property that we are addressing the well situation.

With the weak second quarter, offshore services results and Gulf of Mexico project delays, we are adjusting our full year earnings guidance to $0.50 to $0.60 per share. We continue to believe progress is being made in several fronts, but the slow start in the first and second quarters will be difficult to make up the second half of the year. Our view of the third and fourth quarter estimates are consistent with our overall expectations we talked about earlier this year in our original guidance.

Final topic I want to cover before I hand this over to Elijio is the completion of the CSI acquisition. All of us at TETRA and Compressco are extremely excited about this acquisition, certainly a transformational acquisition. I haven't been on the road raising capital, it was great to see the acquisition close on Monday, as we had expected. We were able to fund it by raising close to $360 million in gross proceeds and equity, $345 million in long-term publicly traded notes and by partially drawing down a revolver that adds up to $400 million of capacity.

We believe that this acquisition positions us to be one of the most significant global compression services providers in the world where we can leverage the capability of CSI, the breadth of services, our existing Compressco business, as well as our global infrastructure at TETRA. As a result, we are able to increase the public float of Compressco by a factor of 5, and we believe, based on some of the guidance we gave and discussions at point of acquisition, that we'll move into the splits more quickly as we go through the fourth quarter and into 2015.

From an integration point to view, management teams have been put in place, and we've already started looking at how we put together the companies consisting of Compressco, CSI and TETRA. With that, I will turn it over to Elijio for his comments.

Good morning. TETRA revenue of $241 million increased 14% sequentially, reflecting the traditional ramp up in activity from offshore services in the Gulf of Mexico and fluids in northern Europe, plus continued growth in our water management business. As a comparison, this 14% sequential improvement compares to the Q2 last year increase over Q1 of 6%. The better sequential change we are seeing reflects the bottoming out of activity in Mexico and with the US production testing business, in addition to continued strong growth from water management.

Earnings per share excluding Maritech and unusual items was $0.10. The unusual items amount to $4.6 million, or approximately $0.05 per share. These include $2.1 million of expenses related to the acquisition of CSI, $2.1 million related to the cable mechanical issue on the Hedron that Stu mentioned earlier, and $400,000 of severance and employee related expenses.

To assist those of you building and updating your model, the $2.1 million of transaction related expenses are all G&A, of which $855,000 is embedded in Compressco and $1.2 million is embedded in TETRA's G&A. The $2.1 million from the Hedron is all impacting gross margins for offshore services, and the $400,000 is mainly TETRA corporate G&A. We did not count as unusual, and we did not normalize for the much weaker than expected offshore services results, primarily due to the 40 days of weather that impacted our second quarter by about $0.07 per share.

Production testing was down 3% sequentially on the seasonal slowdown of activity in Canada; however, was very encouraging that the US was up 3% sequentially, our first sequential increase in revenue after three consecutive quarters of declines in the United States. For the quarter, we approached breakeven in production testing. The US saw material improvement in profitably compared to the first quarter of this year and the fourth quarter of last year.

The continued cost reduction actions and revenue improvement initiatives have gained traction and have resulted in both June and July operating margins being in the 4% to 6% range. We continue to focus equally on cost reductions and revenue enhancements as we target low double-digit operating margins by year end.

We are seeing strong growth and continue to move resources and equipment to West Texas to service our expanding customer base. The Permian basin now represents our largest area for production testing revenue. Compressco revenue increased 8% sequentially as all regions reported improvements compared to the first quarter. Latin America was up 19% sequentially as we continue to see steady improvements in Mexico, in addition to growth in Argentina.

We have moderated our investments into Argentina given the financial situation in that country, but the existing assets are generating above-average margins. We continue to repatriate cash of Argentina back to the United States.

The US increases on the growth of the vapor recovery units and from the introduction of the 100 to 200 horsepower gas lift units we introduced in the first quarter. The acquisition of the CSI will allow us to further accelerate our growth in this very attractive market. Excluding the $885,000 of transaction related expenses, Compressco's operating margins were 19.9%, the highest in the last six quarters and since the slowdown in Mexico. Compressco continues to benefit from the cost reductions we have implemented throughout the last quarters.

Fluids revenue increased sequentially by 11% to another record high, reaching $117 million despite the lower activity levels in the Gulf of Mexico as we continue to see customers delay projects due to operational issues and step-out wells. Reports by some of the other manufacturers of calcium and zinc bromide have also reported lower revenue levels due to the same challenges. In talking to customers, we do not see a fundamental change in the Gulf of Mexico, only what appears to be a convergence of operational projects [delays] from complex ultra deep-water major projects.

Water handling also achieved a record quarterly level and exceeded $100 million annualized run rate on revenue. This is one of the areas that we have continued to invest capital by slowing down capital everywhere else other than Compressco.

The second quarter saw stronger than normal seasonal increase in northern Europe. Operating margins of 14.6% have been impacted by the lower Gulf of Mexico activity levels due to the project delays.

Our manufacturing plants also continue to improve their performance. Last year, we made significant investments in West Memphis to drive more volumes through the plant and have also changed out equipment in El Dorado. We are seeing the benefit of those and with El Dorado's calcium chloride production, we've been able to meet the growing demand from the onshore shale plays.

Offshore services was our biggest challenge in the quarter. Earnings per share were impacted by approximately $0.02 on the Hedron cable mechanical issue, our first since the Hedron was put into service in 2011. And the 40 days of weather and weaker plugging and abandonment activity cost us approximately $0.07 per share compared to our expectations coming into the quarter on top of the $0.02 from the Hedron mechanical issue.

Do mention that we are seeing a ramp up in activity, have added two assets on a short-term basis and are expanding our geographic revenue base to lessen the impact of being concentrated in the Gulf of Mexico. Do also mention that during the third quarter, we have rolled into a multi program project for client activity provides us weather production.

Maritech incurred an operating loss of $10.7 million during the quarter. We previously had four operated properties to address, one that had wells with formation pressure that needed to be replugged before we could remove the platforms. Those wells were plugged in the second quarter and the platform was removed in July. We are down to two operated properties with platforms requiring removal at this time. If you recall, one of them is a platform that was toppled by a hurricane. We have that one scheduled to be removed in September.

The other has a third party pipeline that had to be rerouted before decommissioning of the platforms can begin. That pipeline is being rerouted as we speak. We plan on removing those platforms also in September. That will leave us with one operating property that was previously plugged and abandoned that might require re-intervention. These wells are scheduled to have temporary wellheads installed using a dive vessel in September, after which diagnostics will be performed to determine the next steps.

Our ARO at the end of June was $35 million, of which non-operated properties represent $10 million out of the $35 million. Those non-operated properties will be completed on a schedule managed by the operators. We continue to make progress, but it remains painful and expensive.

On the G&A side, early last year we committed to a goal of cutting G&A across the entire organization and target $15 million in annual savings. As you recall, during the second half of 2012, we were averaging $35 million of G&A per quarter after the acquisitions that we made for production testing.

In the first half of last year, we averaged $33.6 million of the G&A per quarter. In this recently completed second quarter, when excluding the CSI transaction costs and severance, our total G&A has been reduced to $29.8 million, up $20.7 million annualized savings compared to the average from the second half of 2012 and up $15 million in annualized savings from the first half of last year. We still have savings to be achieved from a system implementation in Compressco, so we expect those savings to increase.

On free cash flow, free cash flow during the quarter was a use of $2 million in the -- during the quarter due to the lower cash earnings and offer services and weaker fluids Gulf of Mexico activity. This was despite a 6 day improvement in DSO as revenue increased sequentially by $30 million, but receivables only increased by 7. As a reminder, we define pre-cash flow from working toward our $80 million goal as cash flow from operations excluding Maritech, less capital expenditures. Our 2014 free cash flow target of $80 million will be a challenge to meet given the weak second quarter results.

The CSI will help us get closer to the $80 million goal, but practically speaking, being between $60 million to $70 million this year is more realistic. The cost in working capital improvement that we have been focused upon by reducing G&A and operating cost and by improving DSO have benefited us to date, but this needs to be coupled with continued improvement in production testing where we are seeing some progress and with more normal offshore services profit levels on top of traditional Gulf of Mexico fluid sales. The combination of these will get us towards our free cash flow goals we have committed towards obtaining.

With the progress made to date on G&A and improving DSO, my attention will next be turning to reducing our effective tax rate. I'll be addressing goals and expectations on the next earnings call.

Final topic I will address before opening this up to questions is the shareholder value creation we expect from the CSI acquisition. TETRA communicated a key strategic goal of growing Compressco. The IPO in 2011 was the first step.

With the CSI acquisition, now we have an MLP with a public flow of over $350 million. We mentioned in an earlier press release that once we combine the two companies and reflect the cost of debt in newly issued shares before realizing any synergies, we expect distributions per unit to grow from their current annualized run rate by 12% to 14% from the $1.81 rate that we recently announced. By the fourth quarter of this year, that would put us at between $2.02 and $2.06 per unit, getting up to the 25% incentive distribution rights, or IDRs. With the 7% yield, that implies Compressco share price should be much higher than where it is today.

We also mentioned that we expect 2015 capital expenditures to be between $90 million of $100 million, of which only $10 million is expected to be maintenance capital. That amount of growth capital can add over 90,000 incremental horsepower. We believe that the incremental horsepower allow us to reach the 50% split before the end of the next year.

Therefore, we believe that the CSI acquisition will create TETRA shareholder value from the following. Number one, TETRA now owns 47% of the outstanding units of a much larger market cap and more liquid MLP. Number two, as move from the 15% IDR split, past the 25% IDR split in fourth quarter and towards the 50% IDR split, TETRA, as a general partner, will receive significant incremental free cash flow that is valued on multiples of 20 to 30 times on the GP cash flow. And third, the acquisition of CSI will represent a significant increase in the total amount of cash coming to TETRA from Compressco, both via the GP and LP route.

When doing some of the parts valuation on TETRA, you now add to the EBITDA multiples of our offshore, fluids and production testing divisions, the 47% ownership we have of a much larger Compressco, the GP value based on distributions on a multiple of between 20 and 30 times and the incremental cash from Compressco that TETRA will be receiving. These financial drivers were the basis of us pursuing this transformational acquisition. Over the coming weeks, we plan on reaching out to our shareholder base in the research community that covers us to ensure there is a good understanding of how this transaction is expected to create significant shareholder value.

Now, I'll turn it back to Stu for some closing comments.

Thanks, Elijio. Just a few items of want to make sure we close with. First of all, we announced during June that we've had a significant addition to the management team with Joseph Elkhoury starting as our Chief Operating Officer, and Joseph is coming up on his 60 days. And his main focus is to get us to the guidance that we referenced, which includes a strong third and fourth quarter, with particular emphasis on the areas we've highlighted as ongoing improvements, particularly production testing. In addition, Joseph will take the lead on putting together the CSI and Compressco combination. A lot of work for Joseph, but he's got broad shoulders and will do great.

Another key message I wanted to highlight is, we do view the third and fourth quarter as being significantly better than the first half of the year. If you look at the support, the logic that we have is we've already started to see improvement margins in testing as we exited the second quarter and moved to the third quarter. We've said on our call in May that we expected to be at the mid single-digits as we get to the middle of the year with an exit rate of low double-digits, and we still believe that's appropriate for that business.

Fluids continues to be strong, a little slower on some of the projects, but we have got line of sight in the second half of the year. Offshore services caught us by surprise, in particularly in May and June with the weather and some of the P&A activity. As we talked about, we've got a good backlog, we've brought on extra assets, we feel good about where we are during the third quarter and beyond.

And we continue to see strong performance with Compressco, and we'll see the first portion of the CSI benefit as we get to the fourth quarter, the first full quarter of that acquisition as we referenced in some of our prior comments of distribution expectations of 12% to 14% increase as we get through the fourth quarter.

I think when I take a step back, haven't spent a lot of time on the road the last couple of weeks raising capital with our team, I would want to highlight that the great work our Compressco team's done over the last three or four years since we went public in June of 2011. The actual results, distribution increase really allowed us to use that as a platform to buy a much larger capability. So, my thanks to that group, and I look forward to their ongoing contributions to the combined companies, as well as welcoming the group from CSI.

We're impressed with the management, we put the teams together, that's a great blend of leadership from both CSI and Compressco. And as always, TETRA will be in the middle of helping out overseeing and leveraging our platform. We're pleased with that, and we expect that is going to be a huge shareholder creation and consistent with some of the big changes we've made the past several years.

With that, I'll open the lines for questions.

(Operator Instructions)

Jonathan Sisto, Credit Suisse.

Elijio, as it relates to production testing, something we've been keened in on here, low double-digit exit rate infers some pretty, pretty healthy incremental margins in Q3, Q4. Obviously, Canada comes back, you mentioned the profitability in US, could you help us bridge the gap? Will it me a material step up in Q3, or will it be a ramp? Just a little bit more color on that would be helpful, I think.

I think that it's going to be a gradual improvement from the levels that we've at. You saw from the numbers we reported we were in a loss situation in the first quarter. We were essentially breakeven in the second quarter. I mentioned on the call that June and July look in the mid single-digit operating margins. I think that if we continue that decent slope, it should put us in the high single digits, low double digits exiting the year. And I think that reflects the combination of further cost reductions that we've made and traction on revenue with certain accounts that we've been making progress with late last year, early this year. There's not one catalyst that is going to get us there, it's a series of many actions. And I think adding Joseph to the team, where his focus is this area, has given us incremental confidence of getting there.

Sticking in the same vein,, the rig cooling business you acquired a couple years ago, an update on that, if you could.

I would say, going back to Elijio's comments on testing, it's not one single area that will contribute to that sequential improvement, it's many, and that includes the rig cooling business. We have certainly seen that business activity increase as we went through the second quarter and as we go though the third quarter, we've got pretty good backlog there. And that is certainly part of the expectation that we see as we go through the third and fourth quarters contributing to that margin improvement.

Jim Rollyson, Raymond James.

Stu, it looks to me like your second half earnings guidance isn't really far off the mark you were thinking a quarter or so ago, which obviously we've discussed so far implies a pretty big ramp in second half. On -- I think you walked through the general regions and why you think you get there. Maybe a little thought on how you see the weighting between 3Q and 4Q, because it sounds like production testing is going to be gradually ramping, so abetter 4Q than 3Q. Obviously, in Compressco you'll get the CSI benefits fully in 4Q. The offshore is probably the only place where it may be down seasonably in 4Q, but if you had to attribute your guess as to weightings?

Great question, and first part of your statement I agree with, that the third and fourth quarters combined are fairly similar to what we had modeled earlier in the year for that time period. If you walk through the landscape of the business, Compressco, more at the same of what we've seen. Two good quarters behind us, expect to continue to see strong quarters in the third and fourth order on the Compressco business. And then when we layer on CSI, certainly that won't be a major impact on EPS, but it will help us on the EBITDA and position us for distribution increase. I think Elijio did a nice job of walking through where that value creation is as a result of some of those results. But Mexico is picking up a little bit, slowly but positive trends. Just a little bit of -- more of the same on Compressco sequentially.

Fluids, I think we continue to see the strength of water, the strength of, particularly the onshore oil and gas for the chemical side. And we see a lumpier second half on Gulf of Mexico that gives us sequential improvement going forward. And I would think the third and fourth quarters are reasonably similar on fluids, I don't think it's a big staircase from the third to the fourth. Testing, I think Elijio answered that question. We go up linear from the mid single-digits we're kind of running at in June and July towards low double-digits exit rate based on the five or six things that contribute to that, which we've covered.

And then the one that's probably a little bit atypical is offshore services. I do believe we will work later into the fourth quarter, we will have a bigger backlog during the fourth quarter. I think part of that is the natural knock-on the impact of some of the delays we saw in the backlog because of the weather in the second quarter. Some of that is recent wins that have led us to bring additional assets. I think we won't have as big a drop-off in the fourth quarter in that business as you would typically expect. You put all that together, my sense is the third and fourth quarters will be similar in that there won't be a big change up or down between the quarters.

On the Compressco side, what Jonathan said, congrats on getting the deal done. Obviously, this provides a huge step up as you go through fourth order and next year in the cash flow you guys received from the distributions as you get hopefully into the 50% splits. A, what are your plans with the cash, B, as it relates to the GP, if we go through Elijio's math on 20 or 30 times, this could be something in the $1 billion value type range or so. Thoughts on what you do with that eventually. And now that you own less than 50%, are you going to keep consolidating results?

I will let Elijio handles the first and last part then maybe I will help handle the middle part.

On the consolidating of the results, because we remain the general partner and we control the business, we will be consolidating, even if the ownership percentage drops even further from the 47% in the future if we were to do any capital raise or anything else to fund the business.

Makes sense.

And remind me of the first question again, Jim?

Just plans for the uptick in cash, which obviously goes to help your $80 million plus target of free cash flow, any updates on that.

We've mentioned that our objective in the targets that we had was to invest in those businesses that were producing strong results, invest organically. And earlier in the year, we did a small acquisition on the water handling aide. And we also bought out our partner in Saudi Arabia as that business is performing quite well. We will continue to evaluate small acquisitions in those areas that are performing well, such as the water. We've also indicated that once Maritech is behind us and we're at the $80 million run rate, that we would look at a dividend or share repurchase program. We have not formalized anything, we have not proposed anything to the board, but that is clearly one of the targets.

And then also look at that debt reduction in pay down our revolver or address the $90 million of long-term notes that are coming to maturity in April. We want to be cautious and not commit to spend any of it until we see the last platform removed and the last well being plugged. Then at that point, we will lay out a suggestion for the board to approve.

On the broader response to one of the sub questions on long term, the value of the business and trying to coordinate that with your cash question, again, capital allocation, we spent a lot of time and it's really, really a key part of the business. And it's an area that having Joseph with Elijio and I adds another very capable element of that debate with our strategy guys, our business guys, et cetera. But if you look at what we've done, testing, we've got to fix the margin, improve the margin program, which means we are capital light in that business in the short term by design. It's all about optimizing assets, moving assets to the highest return basins in very tactical approach in the short term for the business to get those margins to the levels that we talked about exiting this year.

Water, we continue to invest in and get very good returns, and we will continue to find opportunities in the right basins with the right customers that give us those types of returns. On the remainder of the fluids, we -- there will be opportunities, but we're well invested in our manufacturing. We continue to improve the productivity of the plants we've invested, we're well invested in our deep water capabilities, we're well invested -- that's not a huge source of investment. And then you look at Compressco, I think we've just written the business case of how you grow that business multiples with that type of structure and we will continue to look at that structure for growth because we have the access to the capital markets. Even offshore services where we haven't invested at the same rate, and we've talked about that, again, I think the team is doing a great job of looking at incremental opportunities without major investments.

The fact that we were able to go out and get additional assets, match them to contract durations is indicative of how we want to run the business. And then you overlay that, we want to continue to move up the value chain and look at opportunities there, just like we've done in water, like we've done in some of the other areas. And that's a big focus of Joseph's, how do we move up the value chain across these businesses, just like we just did on the compression side with the acquisition where we're getting into richer margins and some of that.

And James, I would add that with Joseph's background to where his former employer has demonstrated consistently that they find a way to move up the value chain, that is one of the big benefits that attracted his skills and background to our business, and that's where the focus, I think, is going to help us evolve that part of the offering that we do to date

Kurt Hallead, RBC.

A lot of good color there provided on the a lot of the near-term dynamics and so on. Curious, Stu, as you look at the very important portfolio of businesses and what you're trying to do with Compressco and build that out, get some critical mass, how do you view -- what's the strategy in terms of building out critical mass for completion fluids or production testing? And then when you think about that in a broader context, is that more of a US-driven opportunity set or and international-driven opportunity set?

I think on fluids, we continue to -- like our position on the completion fluids, the deep water, the water transfer, we will continue to look, just like we did in Saudi, just like we did earlier this year in the water transfer acquisition where we had -- gave us a better footprint South Texas in the Bakken. Those bolt-on areas domestically, internationally, that leverage some of that water transfer technology that we have plus the manufacturing vertical integration, technology piece of completion fluids. I think it's a combo of domestic and international. And I think if you look at where we've invested in fluids the last several years, it's more of the same. Additional geographies, international markets that we may already be at, bolt-on capabilities that all leverage that completion fluids competency we have.

Testing, we still continue to view that, that's intermediate and long term a very good platform to be in. We think the market activity is going to be strong, building out our sales force in North America has been part of that strategy. We're starting to see the benefits. I think testing is short term fairly tactical in terms of ongoing cost, optimization, moving assets, continuing to look at the size of the organization, leveraging Saudi and Brazil and Mexico where we have significant capabilities, looking at the optimum type opportunities where there's incremental technology and niches. I think it's more of the same of what you've seen, we just need to demonstrate in the short term on the testing that we're getting to those margin targets that we laid out earlier this year. As we do that, we'll certainly feel more comfortable reinvesting in some of those areas. But in the short term, we're very focused in that business of getting -- squeezing out better margins on returns on the assets that we have.

And then I know you mentioned this in your prepared commentary and some in the Q&A, but again, just to test the conviction level, on the Maritech, what is the conviction that this is definitely going to get done before the end of the year, let alone before the end of the third quarter?

Yes, so going back to the granularity, during the second quarter we got two of the big -- we got one of the big projects behind us, which was wonderful. We have execution plans for one of the platforms over the next four to five weeks. We've done a lot of engineering work, we're comfortable with what we're going to do there. We're still making progress on the permitting of one of the other structures, that's the gating item on that. As soon as that happens, that gets done. And then on the operated properties, we've got a few of those wells that we are evaluating. That's the wild card if something goes beyond the third quarter. If we need to do a broader intervention on those, then that's going to push us out a little bit of time potentially. And that you've got the $10 million of non-op that the majority of it we think will be done this year, early next year that again, we don't drive the timing, but we're certainly part of the process in reviewing the AFEs and discussing it. I think we made progress, we're going to make a lot of progress in the third quarter. I think we're going to be pretty close to our target of having the operated properties done by the end of the third quarter.

Martin Malloy, Johnson Rice.

The offshore services side, it was wondering, could you talk a little bit more about what gives you the confidence that we're going to see a pickup second half of this year, the contract support? I think you've got three derrick barges and three diving vessels now that -- with the short-term charters

I think you've got several things, one is you look at the actual backlog we have, you look at the weather terms on that where most of that weather risk is on the customer. As we went through the second quarter, there was a bigger mix where we took on some of that exposure, which is fairly typical. So, the combination of the dollar amount of the backlog, the number of incremental assets that we have under contract matched against that and the specific terms related to weather are what gives us that confidence as we look through the third quarter and fourth quarter. And going back to my prior comment, we do see a pretty good backlog that gets us very deep into the fourth quarter.

And how has the weather been thus far in the third quarter?

So far in the third quarter, the weather has been good. The July activity and weather was consistent with what we've been talking about.

My next question is on Compressco and the cash flows coming up to you all, both through the LP in the GP interest that you have. I just want to double check the math I am doing. But at the current distribution rate, you all are getting about -- something in the mid 20s in terms of millions of dollars a year in distributions up.

Correct, last year was $21 million.

Okay, and at the $2.05 annual rate, it goes to about $33 million roughly?

Right, so let me, for your benefit, and this is part of the education process that we are going to go through over the next month or so with everybody that follows us. At a 15% IDR, we get about $200,000 as a GP, and from being now a 47% shareholder, we would get $25 million as an LP for a combined $25 million. At a 25% IDR, we would get $900,000 from the GP and about $27 million for a combined $28 million. And at a 50% IDR, which is $2.33 a share, we would get $4 million as a GP and $33 million as an LP for a total of $37 million. And then if you throw out even a big number, just for the sake of argument, say that it is up in the 260 range type, you would get $9 million as a GP. And I mentioned earlier that a lot of the GP valuations are 25 to 30 times, so you start putting a multiple of 25 to 30, or $9 million, you can see with the future forward potential could be. That -- those are the cash that would be attained should those split be achieved.

That is a great question, and is certainly reinforces the fact that Elijio and I need to be very communicative in the valuation, how we see that, being very precise going forward to make sure everybody understands it. But the math is fairly compelling as we go forward, and it shows that just looking at pure EPS relative to the acquisition is not the way to look at this acquisition. We need to educate everybody on the cash flows, the EBITDA, those metrics that come with it as opposed to the EPS per se. Very clear at the TTI level, the EPS impact is de minimus.

Mike Harrison, First Analysis.

Just as you're talking about the linear progression of the testing margin, any thoughts on how that progresses as we get into 2015 and maybe where it levels out? I know that in the past you had a year where you did 25%, 26% margin, and you've communicated that the world's changed and that's probably not obtainable. But where do you think we start to level out once you guys make the progress you want to make?

Yes, I think as we go out into next year, and we will certainly have the occasion to be more precise about it as we get to the end of this year, going next year, that with the various initiatives we have, and again, it's not one element, it's the five or six things of cost and revenue enhancement and repositioning of assets in the higher margin basins, et cetera. I think getting into the low to mid teens during next year is an appropriate target. I think as we get to that 20% operating margin next year is probably going to be a big challenge, and I wouldn't be modeling that. I think going into the low to mid teens at an operating margin is probably the appropriate way to look at that business for 2015. I don't think we will get to the plateau at the end of this year. There will be opportunities beyond that as we continue the progress of what we're doing.

And Mike, I would also add that in addition to focusing on the operating margins, expect that we'll be very aggressively managing capital and equipment utilization so that even if the margins don't hit historical height, teens, that the cash that we extract from this business is going to be better that what we have, given the focus that we have got on capital here.

Would you need -- would you really need Mexico to come back in order to get closer to the 20% level?

I think to get to that level, you're going to need a significantly healthier Mexico for testing. Again, I emphasize testing because we are seeing improvement and decent results on Compressco in Mexico/ Not at its peak, but certainly still very attractive. Yes, to get to that level, Mike, I think you need to see a healthier Mexico. I think to get to that level, I think a continued growth in Saudi, which we are very comfortable with our position there and the acquisition of our partner's interest we did earlier this year. Again, there's five or six things that get you there, and certainly the inherent profitability of North America is our biggest short-term focus and where we're starting to see some pretty good progress.

All right, and then looking at the fluids margin, it looked maybe a little bit weaker than we would normally expect in Q2. Are we seeing any pricing pressure or any competitive issues in the water handling business? Or maybe you can give a little more color on what's going on with margin.

I think part -- there's a couple elements that have contributed to that. I think first and foremost is the timing of some of the Gulf of Mexico projects, as well as not having the amount of international lumpiness that we've had in some of the prior quarters as well on the offshore fluid. On the water, the margins have held up really well. I think the returns we're getting in our new capital deployed are fairly consistent with what we though, and there's pricing pressure in certain areas. And part of what the water management team is very focused on is making certain they understand the different price points and we deploy the capital to the areas we're going to get the best return. We've always said we're not going to be the solution for everybody, and we're going to be very targeted in the applications we go after and the customers that understand the value creation that we articulate, and that is part of the strategy. But we continue to do well there.

Right, and then last question is on the offshore business. Did I understand you, that you did move an asset to West Africa, or that you're going to? And if you did, did you incur costs in the second quarter?

We are moving an asset that will be a third quarter activity, and those mode -- demode cost and reimbursements are all part of the updated guidance that we just delivered. Those are all third quarter and beyond impacts.

Marc Bianchi, Cowen.

Apologies for another question on production testing margins, but I think it's important for us to understand the underlying assumptions to hit the road map here. When you talk about low double-digits exiting the year, is that a fourth quarter average, or is that where you see coming out of December with those margins?

Marc, if we continue to see the progress that we're making, we think that the fourth quarter will be in the high single-digit, low double-digit range, call it 10% type.

And the -- what is the underlying assumption for pricing to get to that level (multiple speakers), or is it not needed?

I would say that there is not any assumption that the overall pricing changes up or down. It's continuing to do the things we're doing and not getting any significant help from the market in terms of that element.

And then just a unrelated follow up on the fluids division. You mentioned some delays related to more complicated wells. I was hoping you could expand on that a little bit and maybe how much that might have impacted in this quarter and whether or not that's going to be something that continues.

I think in general, my observation is some of the deep-water wells are just taking longer to go through the cycle to get to production, and I think that has impact on the timing of some of the work for us. We've seen some of that first quarter, second quarter, and we certainly expect as we're almost halfway to the third quarter, greater activity in the third and fourth quarter based on just the pure timing of those activities. I do think it's something we've seen on an ongoing basis that people are starting to get geared up, it just takes -- it takes longer to get through that cycle.

[Kim Jan Lucas] Bersot Capital Management.

You provided a lot of data on the IDR accretion and the different -- at the different levels. Can you walk us through on the EBITDA or cash flow contribution from Compressco, what it is today what we should expect pro forma?

Last year we received a total of $21 million at the TETRA level, being both the GP and 82% unit holders of Compressco. This year, based on the guidance that we have provided, we think that was going to be in the mid to high $20 million range. I'm not comfortable that we want to provide 2015 guidance yet on Compressco, given that we still have and over allotment out there. And we've been guided by our legal team to be very careful about talking about anything related to 2015 guidance. But as you have read on the guidance on the press release that we said that we think that we can already move up to between $2.03 and $2.06 expense on a per-distribution basis in Q4. We've also indicated how much we think we can grow revenue through the capital. I think that if you do a little bit of math, it will point you directionally how significant we think that can be.

Can you remind us what you had said on the road show, was it $125 million on EBITDA?

On the road show, we never did provide total year guidance. What we said is that after we move up on distribution from $1.81 to somewhere between $2.02 and $2.06, then we also said that in terms of incremental revenue, from the $80 million to $90 million of the growth capital, that we thought that that would add over 90,000 incremental horsepower. And the revenue for horsepower is about 100 -- about $281 per horsepower. And with 55% gross profits, and even after taking the cost of money into account, we indicated during the road show that we think that that incremental distributions per unit can be somewhere in the $2.30 per unit range.

If I'm doing my math right, Compressco is now something like 60%, 70% of your markets cap. Is my math right? Am I missing something?

If you do TETRA plus if you imply 47% ownership of the publicly traded market cap of Compressco and then even assume something for the GP, you're right, the sum of the parts doesn't, in our opinion, properly get reflected in the share price of TETRA today. I think that's where Stu and I have a job to do in making sure that everybody understands how the components of the EBITDA multiple from offshore services from fluids and production testing plus our 47% ownership of a much larger MLP market cap plus a multiple in the GP indicates that the TETRA share price does not reflect that right now.

I also want to reemphasize again, because I don't want it lost within the valuation discussion, which we need to continue to detail, is we've got a heck of a business we bought, we have a heck of a business we already had at Compressco. We're going to -- the combined business is going to be very attractive, it's going to be a world-class business, lots of opportunities. And within the MLP structure and within the impact on TTI, there's going to be a lot of value creation. And as Elijio said, once we're allowed to talk a little bit more on forward-looking data beyond what we've already talked about, we will be very precise on how we map over the cash flow impacts back to TETRA and the LP valuation within the TETRA framework, as well as the GP valuation.

And one of the things that I think we also have to do is that TETRA is a bit unique in that we have an MLP whose growth strategy is not dropped down. Most of the MLPs out there, the parent companies in the exact same line of business, are almost exclusively in the same line of business as the MLP. Here, our MLP on the compression side is, management team, district offices to benefit both the TETRA businesses and the MLP business. Given that we have got a slightly different business model versus a traditional MLPs, I think that's where we have to make sure that the investment and shareholder community understands what we have.

Joe Gibney, Capital One.

Just a quick clarification on testing. I was just curious what the US onshore testing portion of your revenue stream was, is it up sequentially quarter over quarter, and how much was it up?

We've never really provided that granularity in terms of the split between US, international or the optimal. But I think that it's fair to assume that somewhere in the 50% range is not far off.

Okay, and Stu, just quantitatively speaking, thinking about testing and the issue of customer diversification, I think you guys have kind of identified that in past one is issues is maybe getting a little bit over you skis on too much clustering on a few concentrated customers. Your prepared comments here certainly indicative of adding new customers within your US base. Could you provide a little bit more color about the importance of that in writing, testing and what you go from here in terms of better diversification, better breadth of your customer base in the US?

I think that is a great question, I think you are accurate in saying that part of the success we've endured in the past is a very strong position with certain customers that we've worked with for a while and have done a great job and it was a win/win for both parties. And as that mix has changed, we need to aggressively replace it. What we've done is added pretty significant additions to the sales force in just about all the basins.

I think the point I would make is that effort has been in almost all the basins, not in one or two, and we're seeing the benefit in that in many basins. If I go across the geography, I would say we are feeling, I think the Canadian market is healthier this year, I think we're seeing some new wins up there. West Texas is certainly a strong market, and we're seeing some nice wins there. South Texas continues to be a tough market, but we're picking up some wins there but certainly a tough market for us and others, not just TETRA. Appalachia is getting busier, we've picked up some nice expansion there. It's in multiple fronts, and it's part of one of those five or six assumptions embedded in that continued sequencing going forward.

The combination of having anchor accounts you can count on, new accounts and bidding into the full market and understanding those opportunities is huge. The whole ongoing focus on customer segmentation and those customers that truly will be prepared to have a shorter vendor list, appreciate some of the things we do uniquely from a safety and equipment point of view. That's where we need to continue to drive that business to fill the backfill.

(Operator Instructions)

James Bookout, Simmons & Company.

Can you remind us about how we should think about basically when CSI contracts become MLP qualified going forward and how that will affect the cash distribution to TETRA?

I'll give you an overview and then I may let Elijio speak to some of the more technical elements. But we've already put together a team looking at how we do that. We've got the benefit of having gone through that process several years ago with Compressco. I think we also have the benefit of there being a lot more MLP compression-related companies out there than we did that three or four years ago. I think some of that ground work has been done by us and others, and we also have the benefit of the way the asset -- the acquisition was constructed we were able to get favorable tax treatment and write up the assets and get some tax shelters that would offset if that were to slip from the current schedule that we have. We've got that protection, but we also think we will get to the vast majority of it in the next 12 to 18 months.

James, I think one of the -- as you read through some of our public filings on the acquisition, one of the things that might not be yet understood and really appreciated is that we were able to take a 338H tax election and are able to step up the tax basis of the assets that we've acquired such that we can book accelerated depreciation for tax deduction purposes so that any taxes that might be paid before we convert them to being MLP complaint are pretty much neutralized with the accelerated depreciation we're taking for tax purposes. We believe we've got a significant runway ahead of us to get them converted without seeing cash costs associated with taxes.

I'm showing no further questions. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Brightman for any closing remarks.

Thank you very much and obviously lots of good questions, and hopefully we provided greater clarity to both second quarter results and our expectations for the balance of this year, as well as on the CSI acquisition. We'll look forward to updating the group early November on the results of the third quarter. Thank you very much.

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