TETRA Technologies, Inc. 2011 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2011, filed August 9, 2011. TETRA provides completion fluids and services, offshore abandonment and decommissioning, production testing, wellhead compression, and related oilfield services. Operations are reported through Fluids, Offshore Services, Maritech, Production Testing, and Compressco.
Maritech sold approximately 92% of its December 31, 2010 proved reserves during the first six months and approximately 95% during the first eight months of 2011. Its remaining activities are primarily well plugging, abandonment, and decommissioning.
Financial performance and key metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total revenues | $235.1 million | $241.6 million | $457.7 million | $447.5 million |
| Gross profit | $35.8 million | $47.8 million | $62.2 million | $82.9 million |
| Gross margin | 15.2% | 19.8% | 13.6% | 18.5% |
| Income before taxes | $47.6 million | $20.5 million | $43.5 million | $29.0 million |
| Net income attributable to TETRA stockholders | $30.4 million | $13.6 million | $27.9 million | $19.0 million |
| Diluted earnings per share | $0.39 | $0.18 | $0.36 | $0.25 |
- Second-quarter revenue declined 2.7%, while first-half revenue increased 2.3%.
- Second-quarter net income attributable to stockholders increased 124.0%; first-half net income increased 46.7%. Results benefited materially from asset-sale gains.
- Second-quarter general and administrative expense rose 16.2% to $29.0 million; first-half expense rose 18.9% to $56.8 million.
- Six-month operating cash flow was $59.9 million versus $90.5 million in the prior-year period.
- Six-month investing cash flow was $144.7 million, including $187.4 million of proceeds from property, plant, and equipment sales and $36.3 million of capital expenditures.
- Cash and cash equivalents were $323.8 million at June 30, 2011, compared with $65.4 million at December 31, 2010. Approximately $19.3 million was held by Compressco Partners for its operating and growth needs.
- Long-term debt was $305.0 million, unchanged from year-end. No balance was outstanding under the corporate revolving facility or Compressco Partners’ new $20.0 million revolving facility at June 30, 2011.
- Equity increased to $601.6 million from $516.3 million, including $43.0 million of noncontrolling interest created by the Compressco Partners initial public offering.
Material changes versus the prior comparable period
- Fluids revenue increased 12.0% in the quarter and 14.1% year to date, driven by chemicals, international clear-brine-fluid sales, and domestic frac-water services. Fluids quarterly gross margin improved to 21.1% from 19.4%.
- Production Testing revenue increased 30.4% in the quarter and 28.5% year to date, primarily from increased domestic onshore activity. Quarterly gross margin rose to 28.6% from 18.5%.
- Compressco revenue increased 9.2% in the quarter, but gross margin fell to 31.0% from 38.9% due to higher fuel, repair, maintenance, and field-labor costs. Income before taxes declined 24.4%.
- Offshore Services revenue increased 2.2%, but gross margin declined to 18.8% from 21.5% because of weaker diving-service profitability, softer pricing, and approximately $1.8 million of barge-related due-diligence and inspection costs.
- Maritech revenue declined 33.7%, and quarterly gross profit fell to a loss of $14.7 million, reflecting reduced production, impairments, and excess decommissioning costs. Results included a consolidated gain of approximately $58.2 million on the sale of oil and gas properties.
- Other expense included approximately $14.2 million of loss recognized when Maritech liquidated its remaining commodity hedge contracts. The company had no remaining Maritech oil or gas cash-flow hedge contracts at June 30, 2011.
- Compressco Partners completed an initial public offering on June 20, 2011, generating $53.4 million of gross proceeds and reducing TETRA’s ownership to 82.7% at June 30. Net proceeds were approximately $48.2 million, including $32.2 million distributed to TETRA to repay an intercompany balance.
Guidance, outlook, commentary, risks, and unusual items
- Management expected continued revenue and cash-flow growth in Fluids, Production Testing, and Compressco during the remainder of 2011, excluding the effect of Maritech’s asset sales. Planned activity was still expected to remain below 2008 levels.
- Management planned up to $175 million of 2011 capital expenditures, including the July 2011 purchase of the TETRA Hedron heavy-lift barge. The barge cost $62.8 million before transportation, outfitting, and inspection costs, with total investment expected to be approximately $71 million. It was expected to enter service in the fourth quarter of 2011.
- Offshore activity remained affected by regulatory uncertainty following the Macondo accident. Management expected the BOEMRE “Idle Iron Guidance” to increase demand for abandonment and decommissioning services, although 2011 Offshore Services activity was expected to remain below 2009 record levels.
- Maritech retained approximately $136.9 million of decommissioning liabilities at June 30, 2011. Approximately $89.4 million of related cash outflows were expected before June 30, 2012, but timing and ultimate costs remain subject to change.
- The company self-insured windstorm damage for Maritech’s remaining offshore assets during the 2011 hurricane season. Uninsured losses could be significant.
- Maritech’s remaining decommissioning estimates include approximately $33.9 million of work related to two hurricane-damaged platforms. Approximately $19.5 million of maximum remaining Hurricane Ike insurance coverage was available, although recovery was not assured.
- The company reported an agreement in principle to settle a derivative lawsuit, subject to court approval. The filing does not provide a clear settlement amount.
- The company paid a $487,000 EPA penalty related to a 2009 zinc bromide spill and expected the amount to be fully covered by insurance.
- Management stated that it was in compliance with the covenants under its corporate credit facilities and senior notes as of June 30, 2011. The corporate revolving facility had $270.0 million of net availability as of August 9, 2011, after $8.0 million of letters of credit and guarantees.
Important facts for investors to verify
- Whether Maritech completes planned sales of its remaining properties and how the resulting reduction in production revenue affects consolidated results.
- The timing, cost overruns, and cash requirements associated with Maritech’s approximately $136.9 million of remaining decommissioning liabilities.
- The operational start-up, utilization, and returns from the TETRA Hedron barge and the company’s planned $175 million 2011 capital program.
- Whether offshore permitting and regulatory conditions improve or continue to suppress Fluids and Offshore Services activity.
- Compressco Partners’ distributable cash flow, distributions, leverage, and the effect of potential future unit issuances on TETRA’s ownership.
- The impact of higher Compressco operating costs and future corporate cost allocations under the Omnibus Agreement.
- Exposure to uninsured hurricane damage, environmental liabilities, litigation, and the collectability and timing of insurance recoveries.
- The sustainability of reported earnings excluding the approximately $58.2 million Maritech asset-sale gain and the effect of the $14.2 million hedge-liquidation loss.