TETRA Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with the same period in 2018. TETRA provides completion fluids and products, water management and flowback services, production well testing, and compression services and equipment through three divisions: Completion Fluids & Products, Water & Flowback Services, and Compression. The company consolidates CSI Compressco LP (CCLP), with the portion not owned by TETRA reported as noncontrolling interest.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $243.7 million | $199.4 million | Up 22.2% |
| Gross profit | $36.2 million | $28.0 million | Up 29.4% |
| Gross margin | 14.9% | 14.0% | Up 0.9 percentage points |
| General and administrative expense | $34.3 million | $30.8 million | Up 11.3% |
| Interest expense, net | $18.4 million | $15.0 million | Up 22.7% |
| Loss before taxes and discontinued operations | $(17.1) million | $(19.9) million | Improved by $2.9 million |
| Net loss attributable to TETRA stockholders | $(10.8) million | $(53.6) million | Improved by $42.8 million |
| Basic and diluted loss per share | $(0.09) | $(0.46) | Improved |
| Operating cash flow | $7.4 million | $(31.3) million | Improved by $38.7 million |
| Capital expenditures | $32.4 million | $28.9 million | Up $3.5 million |
Revenue growth was broad-based: Completion Fluids & Products revenue increased 16.0% to $61.6 million; Water & Flowback Services increased 28.8% to $78.7 million; and Compression increased 21.1% to $103.5 million. Division pretax income was $6.2 million, $2.2 million, and a loss of $7.8 million, respectively.
At March 31, 2019, cash and cash equivalents were $36.9 million, including approximately $16.9 million held by CCLP and not accessible to TETRA. Total current assets were $410.3 million against current liabilities of $219.2 million. Consolidated long-term debt was $845.8 million, comprising $212.2 million of TETRA debt and $633.7 million of CCLP debt. TETRA reported $27.3 million of availability under its ABL facility; CCLP reported $18.4 million of availability under its credit agreement. Both entities were in compliance with their debt covenants.
Material changes versus the prior comparable period
- Revenue and gross profit increased substantially, led by higher compression equipment sales and utilization, acquisition-related growth in Water & Flowback Services, and stronger international completion-fluid sales.
- Water & Flowback gross margin declined to 11.2% from 18.7% because of customer-mix changes, mobilization and demobilization costs, and elevated maintenance costs.
- Compression gross margin improved to 16.3% from 11.8%, although the division remained pretax unprofitable because of higher interest and administrative costs.
- Interest expense increased because of higher debt balances and the interest rate on CCLP’s senior secured notes.
- The prior-year period included a $41.7 million after-tax loss from discontinued operations, including a $31.5 million loss on disposal. Q1 2019 included only a $0.4 million loss from discontinued operations.
- Effective January 1, 2019, the company adopted the new lease standard, recognizing $60.6 million of operating lease right-of-use assets and $50.7 million of operating lease liabilities at adoption, with a $2.8 million cumulative increase to retained earnings.
Guidance, outlook, risks, contingencies, and unusual items
Management described demand as strong despite volatility in oil prices. Planned 2019 capital expenditures were approximately $25 million to $35 million excluding Compression and $75 million to $80 million for Compression. Management expects CCLP to fund its growth capital needs through cash, operating cash flow, and up to $15 million of equipment purchased by TETRA and leased to CCLP, without relying on additional CCLP debt or equity-market access.
The company’s principal risks include oil and natural gas price and activity volatility, customer credit risk, competitive pricing, availability and cost of capital, debt covenant restrictions, acquisition execution, foreign currency exposure, litigation and regulatory matters, and cybersecurity. TETRA does not hedge its indirect commodity-price exposure. Variable-rate TETRA borrowings create interest-rate risk.
- TETRA filed a universal shelf registration statement that became effective May 1, 2019, permitting potential offerings of up to $464.1 million of debt or equity securities, including common stock issuable upon warrant conversion.
- CCLP’s Series A Preferred Units had a $18.3 million carrying value at March 31, 2019. CCLP elected cash redemptions beginning in January 2019; 783,046 units were redeemed during the quarter.
- The company has a contingent consideration liability of approximately $12.1 million related to acquisitions; approximately $11.5 million was paid in April 2019.
- Orinoco assumed Maritech abandonment and decommissioning obligations but had not delivered the required replacement $47.0 million performance bonds. TETRA is seeking to enforce the bonding agreement.
- Management does not expect ordinary-course litigation to result in a material adverse impact, but the filing states that outcomes cannot be predicted with certainty.
- The filing reports no material changes to previously disclosed risk factors and states that disclosure controls were effective as of March 31, 2019.
Most important facts for investors to verify
- Whether revenue growth, compression utilization, and equipment backlog remain strong enough to offset Water & Flowback pricing and maintenance pressures.
- Cash accessibility and liquidity at TETRA versus CCLP, given that approximately $16.9 million of consolidated cash was held by CCLP.
- Debt maturities, interest burden, covenant compliance, and the ability to refinance or repay CCLP’s 2022 and 2025 maturities.
- The funding of planned 2019 capital expenditures and whether growth spending can be supported by operating cash flow.
- The timing and cash impact of CCLP Preferred Unit redemptions and acquisition-related contingent consideration.
- The status of Orinoco’s required performance bonds and any continuing exposure to Maritech abandonment and decommissioning obligations.