Tetra Technologies Inc (TTI) 2017 Q4 法說會逐字稿

Good morning, and welcome to TETRA Technologies Fourth Quarter 2017 Results Conference Call. The speakers for today's call are Stuart M. Brightman, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer for TETRA Technologies Inc. Also in attendance is Brady Murphy, President and Chief Operating Officer. (Operator Instructions) Please note this event is being recorded.

I will now turn the conference over to Mr. Brightman. Please go ahead.

Thank you, Austin. Welcome to the TETRA Technologies Fourth Quarter 2017 Earnings Conference Call. Elijio Serrano, our Chief Financial Officer; and Brady Murphy, our President and Chief Operating Officer, are also in attendance this morning and will be available to address any of your questions. I will provide a brief overview of our fourth quarter results, then turn it over to Elijio for some additional details, which in turn will be followed by your questions.

I must first remind you that this conference call may contain certain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by TETRA and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statement.

In addition, in the course of the call, we may refer to net debt, free cash flow, adjusted EBITDA, adjusted profit before tax or adjusted earnings per share, backlog or other non-GAAP financial measures. Please refer to this morning's news 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.

During the call, I want to provide an update on several key areas. There's been a lot of positive developments since we spoke early in November. First topic I would like to address is the additions we've made to our senior leadership team. We've added 2 senior executives with significant industry experience and a proven track record to provide bandwidth and leadership as we go through this robust recovery that's occurring in the markets that we serve.

Brady Murphy joined us several weeks ago as President and Chief Operating Officer. He has more than 35 years of global operations, engineering, manufacturing and business development, sales experience in a variety of areas within the energy industry, which includes deepwater, mature fields and unconventional assets. Brady was recently CEO of a privately held European-based company focused on the upstream energy market. Before that, he served as part of the Halliburton executive management team in the position of Senior Vice President of Business Development and Marketing. His previous executive positions at Halliburton included Senior Vice President, Europe/Sub-Saharan Africa; Vice President, Sperry Drilling Services; Vice President of Supply Chain and Management Systems; Vice President of Global Manufacturing and Director of Product Sales.

Brady has a degree in Chemical Engineering, and is a graduate of the Harvard Business School's Advanced Management Program. Brady brings the global customer and growth-oriented background that I believe will help elevate us to the next level of growth and performance. I know I speak for the entire team in being very excited with Brady working with us.

The other addition to our management team is Owen Serjeant. Owen joined us in November as President of CSI Compressco. He was previously the Group Vice President of Global Operational Support of Cameron, a Schlumberger company. Owen spent 17 years at Cameron prior to the acquisition by Schlumberger in 2016. During his time at Cameron, he served in a series of operations, engineering, marketing and sales position, each with increasing levels of responsibility. One of his last positions at Cameron was as Group President of the Compression Systems Division. Owen also spent 18 years at Cooper Energy Services. Owen is a degreed mechanical engineer with an MBA.

Owen brings strong depth of knowledge of compression and the energy services industry, with a proven track record of executing at the operating level, a strong knowledge of manufacturing and engineering, solid customer relations and strong people skills. Owen is a strong addition to the team and a very timely addition that is focused on profitable growth, improved returns on capital as we move into the robust recovery in the compression space. Both of these gentlemen will be great additions to the team.

The second topic I'd like to talk about is the planned addition of SwiftWater. We announced the signature a couple of weeks ago. We've had the integration teams working very much hand in hand over the last couple of weeks. We've continued to look at the water management space over the last several years. We've continued to reinforce the growth of that business organically by deploying a significant portion of our growth capital in 2017 to this space. And we continue to want to focus on strengthening our abilities in the North American shale plays.

With SwiftWater, we have over 300 employees, a marquee client base, strong support from the customers. And we believe this will add $16 million to $20 million of incremental EBITDA on an annual basis. SwiftWater is focused entirely in the Permian Basin, the strongest market in our industry. They bring a very strong management team of execution and delivering results. This acquisition is expected to be immediately accretive on a cash flow and EBITDA basis to TETRA. We will be combining SwiftWater's operations with TETRA's water management and production testing operations in the Permian Basin. The group will be managed by Hunter Morris, SwiftWater's CEO.

We believe this acquisition will make us one of the largest and strongest water management and flowback testing service companies in the Permian Basin. We continue to invest heavily to expand that market and will continue to do so. We expect significant revenue synergies to add to the previously noted earnings projections. We expect to close this transaction within the next week. The team is very energized, engaged and ready to hit the ground running. Reception from our customers has been tremendous.

The third topic I would like to discuss is our fourth quarter results. Revenue increased by 5% sequentially on the back of stronger compression and production testing results. Adjusted EBITDA of $30 million was 13.2% of revenue. Cash provided by operating activities on a consolidated basis was $27.8 million or 12.1% of revenue. Cash from operating activities of $27.8 million was 92% of adjusted EBITDA, an indicator of the quality of the earnings in the quarter. I'll go through a few other items and let Elijio go through the more granular details.

Some highlights that I would like to talk about is we completed the CS Neptune project during the fourth quarter that we started in the third quarter. As previously noted, the vast majority of that project would be in the fourth -- the third quarter and a small portion in the fourth quarter. We continue to advance negotiations and expand the network with customers on several international opportunities for additional work. Technical acceptance has been received by certain customers, and we are now working on timing of when those projects might be in the completion stage for us to deploy our technology. As previously discussed, we expect this revenue to be generated in the second half of 2018. I would say, despite not having that on the backlog as we speak, we continue to be very optimistic that, that will happen in the late -- and result in second half revenue for this business.

Our water management business in North America prior to the addition of SwiftWater reached a revenue level that was the highest since the third quarter of 2014. We have added significant amounts of incremental lay-flat hose, including more miles for our proprietary TETRA STEEL 1200. We are also pushing across significant price increases, given the strong demand coming from the fracking activity. An area that Elijio will comment on in more detail is in the fourth quarter with the revenue increase, we had certain regions where, at the end of the year, showed a slowdown that will be picking up as we get through the second half of the first quarter. That mix element contributed to a slight erosion of the margin. We view that as a fourth quarter, early first quarter event that will play itself out positively as we advance through the year.

This increase in fracking activity is also having an impact on our Production Testing and flowback testing business. As we've commented previously, the testing recovery in the U.S. for our business lagged the water management. We expected that. We had always been confident as we went through the second half of the year we'd see that progression on domestic testing. We have seen that in both revenue and margin. We've now moved that business domestically into a double-digit EBITDA position compared to where we were in the first half of the year, which was below breakeven. A lot of hard work in terms of asset deployment, pricing, cost, customer expansion has contributed to that. We also benefited from the sale of early production facilities internationally. The combination of these 2 results resulted in revenue doubling from the third quarter to the fourth and adjusted EBITDA improving to 17.5% of revenue. As I noted, we're beginning to see price increases and activity domestically and expect that to continue to evolve as we go through the year.

On the compression services side, the demands for incremental horsepower has pushed utilization of our largest-sized equipment to over 92%, effectively full utilization. As a result, we are now starting to realize aggressive price increases. We are also initiating orders for new equipment to meet this demand. We are planning to add between $55 million to $75 million of CapEx this year on the back of stronger pricing and firm contracts from our existing customers. Additionally, the demand for equipment sales is increasing. In the second half of last year, we secured orders to fabricate and sell $53 million of equipment. In January, we received an order for $67 million to fabricate and sell 45 large horsepower compressors to a midstream operator in the Permian Basin. This is the largest order in CSI Compressco's history. This equipment will be delivered during the second half of 2018 and the first half of next year.

As of the end of January, our backlog in the equipment sales business was $114 million, the highest since the third quarter of 2014. All these trends are very positive for us and represent long-term commitments from our customers to handle the higher volumes of associated gas and to enhance production with surface gas lift being done in a centralized manner for the multipad drilling programs. We are proactively adding labor in our fabrication shop and increasing the use of outsourcing to meet the large backlog referenced earlier.

So in summary, we're very pleased with the trends. I think Elijio will give more commentary on fourth quarter fluid margins, but we remain confident in the progression as we go through this year. Very excited to close on SwiftWater. We'll hit the ground running. Elijio will also talk about some of our thoughts on our ability to finance the growth capital for CSI Compressco. I think the fluids margin progression, Neptune and the balance sheet for the growth of CSI Compressco are 3 items we want to make sure the audience is fully up to speed on throughout this discussion.

One last comment before I hand it over to Elijio. We will be producing some guidance over the next several weeks. I want to take the opportunity to close on SwiftWater, refine our numbers, and then we'll update guidance for the full year as we've previously done.

With that, I'll turn the call over to Elijio to provide some financial details.

Thank you, Stu, and good morning, everybody. TETRA's revenue of $227 million increased sequentially by 5% from much stronger activity levels in Production Testing, Compression services and water management. Fluids was down from the third quarter as the third quarter included revenue from the Gulf of Mexico Neptune project that started in the third quarter and was completed early in the fourth quarter. Additionally, offshore services was also down reflecting the seasonality of this business.

On a consolidated basis, adjusted EBITDA, excluding Maritech and unusual charges, was $30 million, with adjusted EBITDA margins of 13.3%. Cash flow from operating activities on a consolidated basis was $27.8 million or 12.2% of revenue. Loss per share was $0.25 for the quarter compared to $0.03 profit in the third quarter. Adjusting for the unusual items and special charges, the loss per share was $0.04 in the fourth quarter compared to a profit of $0.04 in the third quarter, also adjusting for special items.

TETRA solid balance sheet remains very solid. At the end of December, there were no amounts drawn on TETRA's $200 million revolver. Cash on hand for TETRA was $18.5 million, up from $13.5 million at the end of the third quarter.

Going into a bit in some of the divisions. Fluids revenue decreased sequentially in the third -- as the third quarter included the bulk of a large CS Neptune project that we completed early in the fourth quarter. Water management, Gulf of Mexico, non-Neptune, Fluids and onshore fluids were all up sequentially, consistent with the market trends the industry is experiencing. Water management revenue in the fourth quarter was the highest since the third quarter of 2014 and is benefiting from the additional growth CapEx that we have been investing and from price increases that have been implemented. The revenue increase in water management was despite the fact that many of our customers slowed down activity levels at the end of the year and resumed those activity levels early this year. In addition to the acquisition of SwiftWater, we are planning to continue to add growth capital to take advantage of the strong returns we are experiencing in the shale play markets.

Fluids adjusted EBITDA margin in the fourth quarter was 17.1% and included the benefit of the tail end of the CS Neptune project, but were also below our internal expectations as the activity in some of the shale plays for water transfer slowed down right at the end of the year. Production testing revenue doubled from the third to the fourth quarter, increasing from $18.9 million at the end of third quarter to $37.8 million in the fourth quarter. The North America onshore production and flowback testing revenue increased by a very solid 77% sequentially, reflecting our strong position in the most active shale plays. Our North America margins were in the mid-teens and are the strongest we've seen in a while. Incremental margins were also very strong, reflecting better utilization of equipment and price increases that we have been able to secure.

Production Testing international revenue was also up slightly on the back of the sale of a large early production facility. We are expecting another large early production facility sale to occur in the first quarter of 2018. Production Testing adjusted EBITDA was 17.5% from the revenue as a result of better pricing and utilization in North America and the early production facility sale overseas.

Compression fourth quarter revenue increased 16% sequentially due to the higher revenue from equipment sales, aftermarket services, parts sales and compression services. Utilization increased by 180 basis points to 82.3%. Our large horsepower fleet is over 92% utilized as of the end of December. We are pushing significant price increases to our customers, but those increases that are just now being implemented are only now beginning to impact EBITDA.

CSI Compressco's concentration of assets and resources are in West and South Texas, Oklahoma and Southeastern New Mexico. This is where the industry is seeing the strongest levels of activity. Our new -- our backlog for new equipment sales had been increasing consistently since the third quarter of last year. We added $53 million in the second half of last year. And in January alone, we added an additional $67 million from 1 order. Our backlog is now approximately $114 million for equipment that will be sold during the second half of this year and first half of next year. Demand for Compression services and equipment is the strongest our team has seen in a long time.

Adjusted EBITDA for the fourth quarter was $19.2 million or 23% of revenue. Our capital expenditures plan for CSI Compressco for 2018 calls for investing between $55 million and $75 million, inclusive of between $15 million to $20 million of maintenance capital expenditures. With higher utilization levels and better pricing, our returns are becoming more attractive. We'll also be working on either renewing or replacing our current credit facility at CSI Compressco, which matures in August of 2019. We believe that debt markets are currently offering attractive cost of capital with less restrictive covenants.

The business segment that I just covered are the segments that we are focused upon and the areas that we are willing to invest to generate attractive returns. In a quarter with a small impact from CS Neptune and with increasing activity from water management, Fluids generated EBITDA margins over 17%, Production Testing generated margins also over 17% and Compression generated EBITDA margins of 23%. These segments are all in the early stages of benefiting from an imbalance in supply versus demand and have not yet fully realized the benefit of price increases. Offshore Services revenue decreased due to the seasonality inherent in the Gulf of Mexico. Adjusted EBITDA was modestly profitable.

On the SwiftWater acquisition, we will fund this acquisition by drawing $40 million on our undrawn revolver. We have significant liquidity available for TETRA to continue to invest opportunistically on targets like SwiftWater or with the organic capital opportunities.

With that, we'll go ahead and open the call for questions.

(Operator Instructions) And our first question comes from Sean Meakim with JPMorgan.

So just following on that last comment that Elijio made about you being at the -- your business being at the early stage of benefiting from pricing power. Could you maybe just drill a little bit on how you see that across different product lines? I mean, is it fair to say that perhaps water management would be an area where you could see the most rate of change in 2018? Or could you rank the product categories a little bit? Just to give us a little more granularity of how you see that playing out in '18.

Yes. I mean, maybe if I'd just rank them individual, I'd kind of give you kind of, what I think of -- the suite of businesses that are in that first tier of pricing opportunities. I would say, as we look at the exit rate in '17 and the start of this year, water management clearly is a business that has a lot of demand and the services that we provide currently as well as the services that will be expanded with SwiftWater we expect to benefit from that. Flow back testing domestically. We've seen the timing of that STACK to show that inflection as we added the year. We expect that it's going to continue. As I stated earlier, that lagged water management of showing those trends. Our large horsepower compression with a 92% utilization certainly seeing the benefit there, the fourth quarter, that's continuing and I would say accelerating in the first quarter. To kind of put that in perspective, the capital we referenced -- every capital dollar that we approve between the 3 of us on the phone, we have the targeted customer, the pricing levels and the returns clearly articulated. We're not speculating, and it's very hardwired. So those 3 we feel really good about. I'd say the chemical piece of the business has been steady. It didn't come down, it's been relatively steady and will be more modest. But it's coming off a better base to start. And I'd say the offshore fluids business, similar to chemicals, been fairly steady and is coming off a more steady starting point. And our Offshore Services business, it's going to probably be similar pricing, still challenged and we think there'll be a little bit more activity this year in our abandonment decommissioning, given the start of the year. So a little bit more optimistic, but clearly, those first 3 services are where we're seeing the inflection point.

Got it. That's very helpful. I guess, thinking about the water business, the growth capital that you're planning to deploy, could you just talk a little bit about the human economics on expansion? or just, I guess, return of capital, how you think about that, how it looks today? Any restrictions you have on the pace of that growth?

Yes. So last year, in our existing water management business, the vast majority of the TETRA growth capital was allocated to our water management. The vast majority of that was allocated to TETRA STEEL, and the vast majority of that was allocated to the most robust regions that we operate, which typically have been West Texas, Mid-Con and Appalachia. Those are probably our 3 strongest water management markets for legacy TETRA. And we'll expect to continue to invest into that market this year. With the combination of SwiftWater, clearly, the Permian area becomes our #1 market, our most important market and an area we're most focused on. So I would say we're very, very developed in our integration plan in terms of organizational design. The 2 organizations will come together on day 1. The leaders have been identified internally. Everybody knows the organization. The branding has been determined. The target customers have been determined. The customer base is complementary. There's no cannibalization that will take place. The product offering rationalization of lay-flat between SwiftWater and TETRA has been articulated. The team is looking at some of the additional services of SwiftWater and how do we pull that through. The team is looking at some of the customer base of SwiftWater and how do we pull through flowback testing in product sales on fluids. So we expect we're going to be very growth-oriented. We're very confident in that. One of the reasons we haven't given the guidance yet is we want a little bit more calibration on the growth CapEx opportunity set before we report that out. But in the next 30 days, we'll do that and let everybody be aware of that. So that's kind of the way we look at it. And from a return on capital, these are very short return investments. When we've looked at SwiftWater, their return on new investment has been very strong, similar to our business. And we expect to continue that trend. I mean, we clearly have our target on being a very, very strong #2 water solutions company immediately. That's the target.

Got it. One more just related to that, if I could. Just -- at some point now, what will be the pluses and minuses as you think about potentially re-segmenting and giving water management or making its own segment? At some point, does it scale enough? And given the emphasis on it, does that make sense for you medium or longer term?

Yes. I think that's a great question and very insightful. I think, as we look at our existing businesses and how we run them, we will be taking a fresh look at the way we kind of talk through that and report it. Not going to say it will change, but we recognize we are beginning to create a very large water solutions business that creates a ton of shareholder value.

And our next question comes from Praveen Narra with Raymond James.

So just thinking through kind of that margin profile you're talking about for the Fluids business, it just -- to make sure I'm kind of calibrating this correctly, it doesn't sound like we had a lot of EBITDA generation from the Neptune project in 4Q. So as we think about how that progresses in the first half of 2018, you're getting pricing, should we see those margins kind of step up from the 17% level still? Or do we have a little bit more to go until we get the Neptune projects hitting into the second half?

I think -- yes. I mean, I'll give you kind of an overview then maybe ask Elijio to give a little bit more detail. I think you get 2 variables. We've been very clear that we expect Neptune will be a second half revenue generator. And so the impact of that, and we think we have a couple of projects as we've said back in November, that will tie to second half revenue. We continue to be very confident on that. So when that hits, you'll certainly see the margin impact as we've seen in previous quarters when that hits. I said, the second comment is we did have Neptune revenue in the fourth quarter, but it was much more modest than we had in the third quarter as we had kind indicated on our November call. And then if I look at the water business, I think I made a comment earlier that a couple of the regions that -- usually the largest contributors, probably are ramping up as we finish February, a little bit slower the first half of the quarter, but we're very confident when they ramp up, as they're doing right now, they will stay at that level for the balance of the year. And you'll see that margin progression on water management as those regions progress up. And then we will see, in my opinion, very quickly, immediately, the impact of SwiftWater which, as I said, we expect to close over the next week. So you'll see most of the month in the first quarter, or full 3 months in the second quarter, and I think that impact will be very visible. So those are kind of the moving pieces that -- as we look at the progression of fluid margins through the year.

Okay, perfect. And then I guess, when we think about the ability on the compression to gain pricing and the attractive returns you're seeing in that business, obviously, we're seeing growth CapEx from the CCLP side. Is there any chance just that we see TETRA help finance any of the growth opportunities that are out there for compression? Or should we see that mostly is financed just for the CCLP arm?

Couple of things, Praveen. The first one is that the revenue and profit coming across from non-fleet additions is quite impressive. You heard from the addition of the new order that we received that there's some significant profit coming. We talked about part sales increasing materially. We talked about aftermarket services increasing materially. And then now we're starting to see some benefit of pricing. So I expect that very rapidly, on a quarterly EBITDA basis, those trends are going to be much stronger to support the ability to draw on the revolver. However, at the same time, we're seeing the debt markets to be very attractive. And whether we extend our revolver with the existing groups that we have or whether we go out and refinance that facility, we believe that there's enough capacity in the market given the trend for CSI Compressco, that they fund all their growth opportunities without any support from TETRA.

Okay, that's great. On the production services side, obviously, the margins were pretty impressive. And you talked about how that wasn't just the sale. Can you talk about kind of how the competitive dynamics of that business are different than they were back in the prior up-cycle in 2013 -- 2012, 2013, 2014?

Yes. I think, at a high level, there's clearly more capacity that's entered the market as typically happens through the growth cycle that we saw in that earlier time period. So I think that's out there. I think that's why that profit recovery has lagged a little bit. But I think similar to last time, we're seeing the areas where we're being favorably impacted, being the tactical execution of specific customers in regions that are willing to work with us because of the size of their opportunity and the quality and safety that we bring to the process. If you go to the customer detail that correlates to this growth, it's very high-grade customers that are very active and we've performed well. In some cases, we've performed both on water management and testing, and that's helped us. That's a strategy we will continue to work and accelerate with SwiftWater, where we can combine the 2. So I think the customer mix with the activity has allowed us to move pricing and do that. It's been very tactical, but it's clearly visible over the last couple of quarters.

And Praveen, I would like to add a couple of items on the Production Testing. We clearly had 2 very strong trends occur in the fourth quarter. One of them is we had a large early production facility sale that occurred in the fourth quarter. And by the way, that's the second one of this year. We had one in the first quarter. We had one in the fourth quarter. And I also mentioned it in my remarks that we're going to -- that we're expecting to have one in the first quarter. So in the last 5 quarters, we've had 3 quarters that had benefited from those. So the impression that these are one-offs are starting to be more common-type events. The fortunate or unfortunate thing is that the strong revenue and profit coming from that sale might have overshadowed the improvement of what we're seeing in North America, a strong rebound in U.S. activity levels, the increasing amounts of water and sand being injected that have to be dealt with after the well is brought online is driving up demand from the production and flowback testing side in the United States. I would suggest that the U.S. numbers are much stronger than the impression one might have that are overshadowed by the EPS sale that occurred in the fourth quarter.

The next question is from Martin Malloy with Johnson Rice.

Just following up on the last question. On the Production Testing side, can you help us a little bit more in trying to get a sense of what the underlying business is doing if you take out the sale on -- and the impact on the revenue and EBITDA side? It was -- the results were better for that segment than I had anticipated during the quarter.

Right. Marty, in my comments, I mentioned that revenue was up significantly and that the EBITDA margins were the strongest that we have seen in a while. And those were driven, if you were to move the EPS to the side, I think the numbers would still have been surprisingly strong versus what the most believe that was achieved. And again, I think it's all driven by volumes, utilization of resources, but probably more important is our customer base. The customer base that we have is not the customer base that is using every local competitor out there. The customer base is a large independent, the super majors, that put a significant value on quality, safety. And those are customers that are willing to engage us and reward us for the equipment and the resources we bring to the wellsite.

Okay. And just a question here on the onshore water. Approximately what percent of the Fluids revenue do you expect that to get through this year? Is it could end up being like 1/3 of the Fluids segment revenue?

Yes. I mean, again, historically, we've said, on the legacy business, it's 20% to 25%. When we update the guidance, we'll probably give a little bit of a better answer to your question. I don't want to start projecting the impact of the acquisition. But clearly, it's going to be on the other side of 25% on a go-forward basis once we get the acquisition and we get some of the synergies.

Your next question is from Stephen Gengaro with Loop Capital.

Two things, if you don't mind -- actually, maybe 3. But I'll start with Production Testing, just to try to organize it a little bit. The early production facility sale, I mean, generally, we kind of think about it as maybe as high as $6 million, $7 million. I mean, is underlying Production Testing -- did it do $30 million in fourth quarter revenue?

I prefer not to break out Production Testing between the different segments, but the early production facility was in excess of $5 million.

Okay. And is the margin materially different than the underlying business?

No.

Okay. And then just as we sort of think about this going forward, I mean, the -- and I know you said you'd give some more specific guidance in the next several weeks. I think, currently, the consensus for '18 EBITDA is like in the $170 million range. Is that at least in the ballpark of where you guys are thinking, excluding SwiftWater?

I would say it's in the ballpark. We'll add some more color on that. But I think the takeaway from this call, I hope, is that we're very bullish on the trends on our fluids in 2018 on the legacy business with the trends in water management, the additional organic investment in water management, the expectation on Neptune in the second half of the year. We're seeing several international fluids markets show more activity. So I think part of the fourth quarter margin also was a very quiet, muted international fluids. And I think some of that was timing. We'll see that benefit as we go through the first half of the year. So that's positive. The chemicals business will always -- will be steady. We've got a couple of specific growth items in there that will contribute to that. Testing, as Elijio mentioned, we've seeing both -- I mean, the most important thing on testing is the progression domestically and our confidence going forward. Compression, all the pieces of Compression are going up. We think we have a line of sight, a financing plan that enables us to participate at the rate that our operating team is demanding. The team is very aggressive on securing new business with existing customers with known contract. And Elijio and I will have the financing plan to support that, that is not restrictive. And then Offshore Services, we think, the market's a little bit better, but that's a modest EBITDA. That's not a big contributor to the numbers. So the big pieces that contribute to the number, we're confident on, Stephen.

Great. And then just one quick one. Maybe it's quick, maybe not these days. Elijio, where should we be modeling the tax rate for '18?

We believe that, on a pro forma basis, the tax rate is 21%. But -- and that's a very good point, Stephen. And I would also like to remind everybody that on a cash basis, both TETRA and CSI Compressco have tax loss carryforwards that will allow us to shield any income generated in the United States from cash taxes. Therefore, I think, as earnings improve, we're going to see a fall through from profit before tax to cash flow, probably quite strong. But to show it on a pro forma basis normalized, we're going to use 21%.

(Operator Instructions) And it looks like we do have one follow-up from Praveen Narra with Raymond James.

Just one quick follow-up. In terms of the working capital, I guess, we didn't seen the normal drawdown in AR and inventories that we normally see in 4Q. Can you talk about that? And then kind of how you expect that to progress, at least first blush, on 2018?

Good point, Praveen. So historically, we've seen Q3 and Q4 to be the strongest working capital generators as we monetize a lot of the revenue from the offshore decommissioning business that hit the peak in Q3 and then begins to tail off in Q4. That was more balanced. If you look at the revenue for Offshore Services, Q3 to Q4, it didn't move significantly. I think that the cash draw in Q1 from working capital will be slightly higher than what we normally have seen. But then we think that the trend of collections in Q2, Q3 and Q4 will be slightly better than what we have historically seen.

And at this time, I am showing no further questions. I would like to turn the call back to Mr. Brightman for any closing remarks.

Thank you. And again, I appreciate all the good questions. And as you can hear, we're very confident in the business outlook for this year across our major businesses and look forward to updating the guidance as we've absorbed SwiftWater and then reporting out the first quarter early in May. So thank you very much.

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