TETRA Technologies, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
TETRA is a diversified oil and gas services company providing completion fluids and related products, water management, production testing, compression services and equipment, and offshore services. The company also has a limited oil and gas production business. Results cover the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The statements are unaudited.
Operations are reported through Fluids, Production Testing, Compression, and Offshore divisions. TETRA consolidates CSI Compressco LP (CCLP), with the portion not owned by TETRA presented as noncontrolling interest.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $216.4 million | $176.6 million | $592.7 million | $521.5 million |
| Gross profit | $43.5 million | $28.8 million | $84.7 million | $49.6 million |
| Gross margin | 20.1% | 16.3% | 14.3% | 9.5% |
| Net income (loss) | $(1.3) million | $(24.0) million | $(27.2) million | $(201.0) million |
| Net income (loss) attributable to TETRA stockholders | $3.1 million | $(15.0) million | $(10.3) million | $(129.9) million |
| EPS attributable to TETRA stockholders | $0.03 | $(0.16) | $(0.09) | $(1.53) |
| Operating cash flow | Not separately provided | Not separately provided | $36.8 million | $27.2 million |
Q3 revenue increased 22.5% year over year, while nine-month revenue increased 13.7%. Gross profit increased 51.3% in Q3 and 70.6% for the first nine months. General and administrative expense was $31.2 million in Q3 and $90.9 million for nine months.
At September 30, 2017, cash and cash equivalents were $20.9 million, including approximately $7.4 million held by CCLP and not accessible to TETRA. Trade receivables were $152.9 million and inventories were $122.0 million. Total assets were $1.30 billion and total equity was $382.5 million.
Consolidated long-term debt was $624.1 million, consisting of $117.4 million of TETRA debt and $506.8 million of CCLP debt. TETRA had no balance outstanding under its revolving facility at September 30, 2017, with $195.6 million of net availability. CCLP had $223.4 million outstanding under its credit facility and $89.7 million of availability, subject to borrowing-base and covenant limitations.
Material changes versus the prior comparable period
- Improved market activity, particularly in U.S. onshore operations, increased demand for Fluids, Production Testing, and certain Compression services.
- Fluids Division revenue increased 49.2% in Q3 and 39.9% for nine months; nine-month pretax income increased to $61.0 million from $8.9 million. Growth reflected clear brine fluid sales, a TETRA CS Neptune project, and water management activity.
- Production Testing revenue increased 25.6% in Q3 and 16.7% for nine months, with the pretax loss narrowing materially.
- Compression revenue was nearly flat in Q3 but declined 7.0% for nine months. Q3 gross margin declined to 15.4% from 17.5% because higher utilization increased operating costs and pricing remained pressured.
- Offshore Services revenue increased, but profitability declined because hurricanes and other weather disruptions reduced heavy-lift utilization and increased downtime. The segment recorded a $2.8 million arbitration-related charge during the first nine months.
- The prior-year period included $106.2 million of goodwill impairment and $10.9 million of long-lived asset impairments; no comparable impairment charges were recorded in 2017.
- Q3 and nine-month results benefited from non-operating items, including CCLP Preferred Unit fair-value gains of $1.1 million and $4.3 million, respectively, and a nine-month $11.6 million gain from the decrease in the warrants liability.
- G&A expense increased in Q3 and for nine months, partly reflecting reinstated wages and benefits and higher employee-related costs.
Cash flow, debt, liquidity, and outlook
- Operating cash flow rose 35.3% to $36.8 million for the first nine months, despite increased working-capital needs, including higher accounts receivable and inventory.
- Capital expenditures were $28.6 million versus $15.4 million in the prior-year period. Compression spending included $13.7 million for a software development project; the system was launched in August 2017.
- Investing activities used $25.2 million and financing activities used $21.2 million. Cash declined by $9.0 million from year-end 2016.
- CCLP reduced cash distributions to common unitholders by approximately 50% in April 2017. TETRA received $11.3 million of CCLP distributions during the first nine months, compared with $16.7 million in the prior-year period.
- Management stated that TETRA and CCLP expect sufficient liquidity, operating cash flow, and earnings to fund operations, service debt, and maintain covenant compliance through November 9, 2018, based on forecasts as of November 9, 2017.
- At September 30, TETRA's leverage ratio was 1.95x versus a 5.00x maximum and its fixed-charge coverage ratio was 2.77x versus a 1.25x minimum. CCLP's total leverage ratio was 6.33x versus a 6.75x maximum, secured leverage was 2.75x versus a 3.25x maximum, and interest coverage was 2.63x versus a 2.25x minimum.
- Management expected 2017 capital expenditures of approximately $20 million to $30 million outside Compression and approximately $25 million to $30 million for Compression, while continuing to defer or cancel projects where possible.
Risks, contingencies, and unusual items
- Results remain highly dependent on oil and natural gas prices, customer drilling and completion activity, pricing, competition, and availability of capital. Continued low commodity prices could reduce revenue and operating cash flow.
- Maritech had approximately $46.5 million of remaining decommissioning liabilities at September 30, 2017; approximately $0.5 million was expected to be performed during the following 12 months. Actual costs could materially exceed estimates because of offshore conditions, weather, damaged facilities, and wells that develop pressure after abandonment.
- Buyers of previously sold Maritech properties assumed related decommissioning obligations, but TETRA could become responsible if buyers fail to perform and available security is insufficient. Management did not consider such liability probable at September 30, 2017.
- CCLP Preferred Units had a $68.3 million fair value liability and an 11% paid-in-kind distribution rate. No Preferred Units converted during Q3 because CCLP deferred conversions; future conversions were scheduled to increase beginning in October 2017. Fair-value changes may cause earnings volatility and potential dilution.
- CCLP's debt is structurally separate from TETRA's debt, with no cross-default, cross-collateralization, or cross-guarantee provisions. However, reduced CCLP distributions may constrain TETRA's liquidity.
- An arbitration award generated $12.8 million of income for TETRA in January 2017. A separate arbitration resulted in a $3.0 million award against an Offshore Services subsidiary, with $2.8 million accrued in 2017; the company was considering an appeal.
- The company adopted inventory and share-based compensation accounting updates during 2017 with no material transition impact. It planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method, with a significant expected disclosure impact.
Most important facts for investors to verify
- Whether improving oilfield activity and Fluids growth persist after the one-time benefit from the Neptune project and the $12.8 million arbitration award.
- Whether CCLP can maintain covenant compliance and debt service as its leverage remains close to the permitted maximum and distributions to TETRA remain reduced.
- The accessibility of consolidated cash, given that approximately $7.4 million was held by CCLP.
- The amount and timing of future Maritech decommissioning expenditures and the potential for previously sold-property obligations to return to TETRA.
- The impact of CCLP Preferred Unit conversions, paid-in-kind distributions, fair-value adjustments, and potential dilution.
- Compression profitability, equipment utilization, customer pricing, backlog conversion, and required capital expenditures.
- The effect of commodity prices, offshore weather disruptions, customer credit quality, foreign exchange, litigation, and future accounting-standard adoption.