TETRA Technologies, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
TETRA is an oil and gas services company operating through Completion Fluids & Products, Water & Flowback Services, and Compression. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Results include consolidated CSI Compressco LP (CCLP), with CCLP debt and cash flows presented within the consolidated statements.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $288.8 million | $260.1 million | $532.5 million | $459.5 million |
| Gross profit | $48.4 million | $47.8 million | $84.6 million | $75.8 million |
| Gross margin | 16.7% | 18.4% | 15.9% | 16.5% |
| Net loss | $8.5 million | $12.2 million | $27.6 million | $74.9 million |
| Net loss attributable to TETRA stockholders | $6.9 million | $6.0 million | $17.8 million | $59.6 million |
| Loss per share | $0.06 | $0.05 | $0.14 | $0.47 |
| Cash flow from operations | Not separately provided | Not separately provided | $38.4 million | $(12.1) million |
| Capital expenditures | Not separately provided | Not separately provided | $60.6 million | $67.4 million |
At June 30, 2019, cash and cash equivalents were $26.0 million, including approximately $4.3 million held by CCLP and not accessible to TETRA. Consolidated long-term debt was $856.5 million, consisting of $222.1 million of TETRA debt and $634.4 million of CCLP debt. TETRA had $40.6 million of availability under its ABL facility, while CCLP had $22.2 million of availability under its credit agreement. Both entities were in compliance with their debt covenants.
Material changes versus the prior comparable period
- Q2 revenue increased 11.0%, driven principally by a $36.0 million, or 36.0%, increase in Compression revenue. Compression benefited from higher compressor equipment sales and greater fleet utilization.
- Six-month revenue increased 15.9%. Compression revenue rose 29.1%, and Completion Fluids & Products revenue rose 9.0%.
- Water & Flowback Services revenue declined 12.6% in Q2 and its gross margin fell to 10.2% from 22.3%, reflecting lower domestic onshore demand, pricing pressure, lost high-margin projects, equipment availability, and demobilization and maintenance costs.
- Completion Fluids & Products Q2 gross margin improved to 24.8% from 18.8%, primarily from a more favorable mix of completion fluid products and services.
- Compression Q2 gross margin improved to 15.6% from 14.9%, despite a $2.3 million impairment of low-horsepower compression units and related charges.
- Consolidated gross margin declined despite higher gross profit, reflecting business mix and Water & Flowback weakness. Q2 general and administrative expense increased 8.0%, including $1.8 million of executive transition costs.
- Six-month operating cash flow improved by $50.5 million, primarily due to improved profitability and working-capital management.
- Net loss improved substantially year to date because 2018 included a $31.5 million loss on disposal of the discontinued Offshore Division. The discontinued operations loss in the first six months of 2019 was $0.8 million versus $41.7 million in 2018.
Guidance, outlook, risks and unusual items
- Management expects continued strong demand for compression equipment and services. Planned 2019 capital expenditures were approximately $30 million to $35 million excluding Compression and $80 million to $85 million for Compression.
- Domestic onshore demand outside Compression was expected to remain uncertain for the remainder of 2019 because of oil-price volatility, customer activity levels, and pricing pressure.
- CCLP’s remaining Series A Preferred Units were redeemed on August 8, 2019 for an aggregate $5.0 million cash payment, including $0.6 million paid to TETRA.
- The company adopted the new lease standard on January 1, 2019, recognizing $57.9 million of operating lease right-of-use assets and $60.1 million of operating lease liabilities at June 30, 2019.
- TETRA has a contingent exposure related to the discontinued Maritech operations. Orinoco did not provide required replacement performance bonds or escrow payments; a court granted summary judgment dismissing TETRA’s current claims, and TETRA planned to seek reconsideration or appeal. The original performance bonds remained in effect.
- Epic Companies, a counterparty to a $7.5 million promissory note due December 31, 2019, became subject to an involuntary Chapter 7 bankruptcy petition in August 2019. TETRA also reported approximately $1.4 million of additional amounts receivable from Epic Companies and stated that collection could be adversely affected.
- Key risks include oil and natural gas demand and pricing, customer activity, competition, access to capital, high leverage, variable-rate debt, debt covenant restrictions, acquisition execution, litigation, foreign currency exposure, and cybersecurity.
Important facts for investors to verify
- Verify the sustainability of Compression’s equipment sales, fleet utilization, backlog, and planned capital spending.
- Assess whether Water & Flowback pricing pressure, equipment oversupply, and maintenance costs continue to reduce margins.
- Review TETRA and CCLP debt maturities, covenant requirements, refinancing needs, and the limited amount of unrestricted cash available to TETRA.
- Monitor collection of the Epic promissory note and other receivables following the bankruptcy petition.
- Track the appeal or reconsideration of the Maritech performance-bond and escrow litigation.
- Separate recurring operating performance from unusual items, including the compression impairment, executive transition costs, fair-value adjustments, preferred-unit redemption costs, and discontinued operations.