TETRA Technologies, Inc. 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017, with quarterly information for the fourth quarter. TETRA is an oil and gas services company operating through Fluids, Production Testing, Compression and Offshore divisions. Its products and services include completion fluids, water management, production testing, frac flowback, offshore rig cooling, natural gas compression and related equipment.
After year-end, TETRA acquired SwiftWater Energy Services on February 28, 2018, expanding Permian Basin water-management operations, and sold its Offshore Services and Maritech businesses on March 1, 2018. The Offshore businesses will be reported as discontinued operations in future filings.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $820.4 million | $694.8 million | 18.1% increase |
| Gross profit | $99.8 million | $51.4 million | 94.1% increase |
| Gross margin | 12.2% | 7.4% | Up 4.8 percentage points |
| General and administrative expense | $121.9 million | $116.0 million | 5.1% increase |
| Net loss | $62.2 million | $239.4 million | Loss narrowed |
| Net loss attributable to TETRA stockholders | $39.0 million | $161.5 million | Loss narrowed |
| Loss per share | $0.34 | $1.85 | Improved |
| Operating cash flow | $64.6 million | $55.7 million | 16.1% increase |
| Capital expenditures | $51.9 million | $21.1 million | Increase |
Fourth-quarter revenue was $227.6 million, gross profit was $15.2 million, net loss was $35.0 million and net loss attributable to TETRA stockholders was $28.7 million, or $0.25 per share. Fourth-quarter gross profit included approximately $14.9 million of long-lived asset impairment charges.
Segment revenue and pretax results were:
| Segment | 2017 Revenue | 2017 Pretax income/(loss) | Key change versus 2016 |
|---|---|---|---|
| Fluids | $335.3 million | $68.5 million | Revenue increased 36.0%; gross margin rose to 24.4% from 15.0% |
| Production Testing | $94.1 million | $(17.5) million | Revenue increased 48.0%; losses narrowed, but profitability remained negative |
| Compression | $295.6 million | $(37.2) million | Revenue declined 5.1%; pricing pressure continued |
| Offshore Services | $96.7 million | $(14.8) million | Revenue increased, but weather and litigation costs increased losses |
| Maritech | $0.5 million | $(2.2) million | Minimal production; primarily abandonment and decommissioning activity |
At December 31, 2017, cash and cash equivalents were $26.1 million, restricted cash was $0.3 million and working capital was $164.6 million. Trade receivables increased to $173.0 million from $114.3 million, and inventories increased to $120.1 million from $106.5 million.
Consolidated long-term debt was $629.9 million, consisting of $117.7 million of TETRA debt and $512.2 million of CCLP debt. TETRA had no revolver borrowings and approximately $194.9 million of availability under its credit facility. CCLP had approximately $228.0 million outstanding under its asset-based revolver and approximately $79.8 million of availability, subject to borrowing-base and covenant restrictions.
TETRA's 11% Senior Note matures in 2022. CCLP's 7.25% Senior Notes mature in 2022, while its revolving credit facility matures in 2019. CCLP represents approximately 60% of consolidated debt and its debt is serviced separately from TETRA's debt. TETRA received $14.2 million of cash distributions from CCLP in 2017, down from $22.3 million in 2016.
Material changes versus the prior comparable period
- Revenue growth reflected higher Fluids product sales and water-management activity, stronger Production Testing activity and higher Offshore Services revenue.
- Fluids revenue increased $88.7 million, primarily from offshore completion fluids and domestic water management. Fluids pretax income increased substantially, aided by a $12.8 million arbitration award collected in January 2017.
- Production Testing revenue increased $30.5 million, including $12.1 million of international equipment sales, but the division recorded $14.9 million of long-lived asset impairments and remained loss-making.
- Compression revenue declined $15.8 million due to lower equipment sales and service pricing, although fleet utilization improved sequentially during five quarters.
- No goodwill impairment was recorded in 2017, compared with $106.2 million in 2016. Cumulative goodwill impairments over 2016 and 2017 reduced consolidated goodwill to $6.6 million, all attributed to Fluids.
- Long-lived asset impairments totaled $14.9 million in 2017, primarily related to a Production Testing intangible asset and reduced expected cash flows from a customer contract.
- CCLP's cash distributions to common unitholders were reduced by approximately 50% during 2017. CCLP Preferred Units generated $7.3 million of paid-in-kind distributions and had a $61.4 million fair value liability at year-end.
- Net loss attributable to TETRA stockholders improved by $122.4 million, helped by the absence of 2016 goodwill impairments, favorable warrant and CCLP Preferred Unit fair-value adjustments, and the net arbitration benefit.
Outlook, commentary, risks and unusual items
Management reported improving oil and natural gas pricing, higher U.S. onshore rig activity and stronger demand, particularly in the Permian Basin. Management expected pricing pressure to ease, Compression utilization and equipment sales to improve, and 2018 revenue and profitability to benefit from the SwiftWater acquisition and a substantially higher Compression equipment backlog. No formal consolidated earnings or revenue guidance was provided.
At December 31, 2017, Compression equipment backlog was $47.5 million, expected to be recognized in 2018. A record $66.7 million customer order received in early 2018 further increased backlog.
Expected 2018 capital expenditures were approximately $35 million to $55 million excluding Compression and approximately $55 million to $75 million for Compression. Management stated that it expected sufficient liquidity and operating cash flow to fund operations, debt obligations and covenant compliance through March 2, 2019, based on its forecasts and assumptions.
- Oil and natural gas prices, drilling activity, customer capital spending and competitive pricing remain the primary operating risks.
- CCLP was close to its total leverage covenant: 6.48 to 1 versus a maximum of 6.50 to 1 at December 31, 2017. Its interest coverage ratio was 2.55 to 1 versus a 2.25 minimum.
- Additional impairments remain possible if commodity prices, utilization or expected cash flows deteriorate.
- Variable-rate borrowings expose TETRA and CCLP to interest-rate risk; neither had an interest-rate swap outstanding at year-end.
- The company relies on certain suppliers, including Lanxess for bromine and tail brine, and on limited-source equipment components.
- Environmental, health and safety regulation, hydraulic-fracturing restrictions, offshore regulation, weather, litigation, cyberattacks and foreign-currency volatility could adversely affect results.
- The March 2018 Offshore disposition transferred Maritech's identified abandonment and decommissioning obligations to the buyer, supported by approximately $47 million of performance bonds; residual exposure to legacy obligations and buyer performance remains a risk.
- The SwiftWater transaction involved $40.0 million of cash, 7.8 million TETRA shares and potential contingent consideration of up to $15.0 million.
- The 2017 tax provision included a provisional $54.1 million expense related to the Tax Cuts and Jobs Act, fully offset by a reduction in the valuation allowance, resulting in no net tax expense from the legislation.
Most important facts for investors to verify
- Whether improving oilfield activity and the SwiftWater acquisition produce sustained revenue and margin growth after the Offshore disposition.
- CCLP's ability to remain within its leverage, interest-coverage and borrowing-base requirements, particularly as distributions to TETRA remain reduced.
- The timing and refinancing risk associated with the 2019 revolving-credit maturities and the 2022 senior-note maturities.
- Production Testing's ability to return to profitability after the $14.9 million impairment and continued customer pricing pressure.
- The quality and conversion economics of CCLP's Preferred Units, including potential issuance of approximately 34.1 million CCLP common units based on year-end terms.
- The final accounting and contingent consideration for SwiftWater and the estimated $33 million to $35 million loss expected from the Offshore Division disposal.
- Potential additional impairments, environmental costs, litigation exposure and residual Maritech legacy decommissioning obligations.
- Whether the reported operating cash flow improvement is sustained after considering working-capital requirements, capital expenditures and reduced CCLP distributions.