TETRA Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018; filed November 8, 2018. TETRA is an oil and gas services company operating through Completion Fluids & Products, Water & Flowback Services, and Compression. The former Offshore Division was sold in March 2018 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $256.9 million | $183.7 million | $716.3 million | $523.0 million |
| Gross profit | $41.3 million | $42.7 million | $117.1 million | $91.8 million |
| Gross margin | 16.1% | 23.2% | 16.3% | 17.6% |
| Net loss | $12.1 million | $1.3 million | $87.0 million | $27.2 million |
| Loss attributable to TETRA stockholders | $6.9 million | Income of $3.1 million | $66.5 million | $10.3 million |
| Diluted loss per share | $0.06 | Income of $0.03 | $0.54 | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $1.6 million | $36.8 million |
Q3 revenue increased 39.8% year over year, led by Compression and Water & Flowback Services. Gross profit declined slightly in Q3 despite higher revenue, and gross margin fell 710 basis points, reflecting business mix, pricing pressure, and a $2.9 million long-lived asset impairment. General and administrative expense rose 16.0% to $34.4 million, while net interest expense increased 28.9% to $18.9 million.
At September 30, 2018, cash and cash equivalents were $53.9 million, including approximately $26.2 million held by CCLP and not accessible to TETRA. Trade receivables were $188.8 million and inventories were $150.6 million. Consolidated long-term debt was $822.9 million, including $632.5 million owed by CCLP. TETRA had $47.4 million of availability under its ABL facility, and CCLP had $23.3 million of availability under its revolving credit agreement. Management reported compliance with debt covenants.
Material changes versus the prior comparable period
- Water & Flowback Services revenue increased 91.4% in Q3 and 102.4% for the nine-month period, benefiting from stronger onshore completion activity and the SwiftWater acquisition.
- Compression revenue increased 61.0% in Q3 and 41.5% for the nine-month period. The equipment backlog reached $140.2 million at quarter-end; nine-month equipment orders added approximately $169 million.
- Completion Fluids & Products revenue declined 11.6% in Q3 and 4.4% for the nine-month period, primarily because the prior-year period benefited from a TETRA CS Neptune completion-fluid project and offshore activity remained weak.
- Nine-month operating cash flow fell $35.2 million year over year because of working-capital usage, particularly increased inventories and the timing of accounts-payable payments.
- Capital expenditures increased substantially to $107.1 million for the first nine months, including $77.0 million in Compression and $23.6 million in Water & Flowback Services, compared with $28.6 million in the prior-year period.
- Losses were affected by nonrecurring and valuation items, including a $33.8 million after-tax loss on the Offshore Division disposal, $3.7 million of SwiftWater contingent-consideration expense, debt refinancing costs, and changes in the fair value of warrants and CCLP preferred units.
Strategic transactions, debt, outlook, and risks
On February 28, 2018, TETRA acquired SwiftWater for $42.0 million in cash, approximately $28.2 million of TETRA stock, and potential contingent consideration of up to $15.0 million. Management estimates that SwiftWater contributed approximately $65.0 million of nine-month revenue, although the earnings contribution could not be separately quantified because the operations were integrated.
On March 1, 2018, TETRA sold its Offshore Services and Maritech businesses. The transaction generated $3.1 million of cash, a $7.5 million promissory note, and other consideration, including performance bonds covering approximately $46.8 million of asset-retirement obligations. Orinoco had not delivered required replacement bonds by the filing date, and TETRA was seeking to enforce the bonding agreement; the original bonds remained in effect.
On September 10, 2018, TETRA entered into a $200 million term loan, with capacity for up to $75 million of additional loans, and a $100 million ABL facility. The refinancing repaid the former bank credit agreement and 11% senior notes, including a $7.0 million make-whole payment. The term loan matures in 2025 and bears interest at LIBOR plus 6.25% or a base rate plus 5.25%. CCLP issued $350 million of 7.50% senior secured notes due 2025 and retained $295.9 million of 7.25% senior notes due 2022.
Management expects improved revenue and increasing operating cash flow during the remainder of 2018, supported by stronger oil and gas activity, SwiftWater integration, higher compression utilization, customer pricing improvements, and the equipment backlog. Capital spending remains elevated but may be deferred or reduced to conserve cash. The filing provides no formal earnings guidance.
Key risks include volatility in oil and natural gas prices, customer activity and credit risk, pricing pressure and excess equipment capacity, high leverage and variable interest rates, covenant compliance, the ability to refinance maturing debt, integration and execution risks from acquisitions, potential impairments, foreign currency exposure, litigation and environmental matters, cyber risks, and limited access to certain CCLP cash flows. The company reported variable-rate borrowing costs of approximately 8.2% at September 30, 2018.
Important facts for investors to verify
- Whether revenue growth converts into sustainable operating cash flow after the significant working-capital investment and capital expenditures.
- The cash accessibility and distribution capacity of CCLP, given that approximately $26.2 million of consolidated cash was held by CCLP and consolidated debt includes $632.5 million of CCLP obligations.
- Debt-service capacity under TETRA’s high-cost term loan, CCLP’s senior notes, and applicable interest-coverage and other covenants.
- The sustainability of the $140.2 million compression equipment backlog, customer demand, pricing, and fleet utilization.
- The realized synergies and profitability of SwiftWater, including potential contingent consideration of up to $15.0 million.
- The enforceability and replacement status of the $47.0 million performance-bond requirement associated with the Offshore Division disposal.
- Potential future earnings volatility from CCLP preferred-unit and warrant fair-value adjustments, foreign exchange, impairments, and other noncash items.
- The impact of adopting the new lease standard on January 1, 2019; management expected significant right-of-use assets and lease liabilities.