TETRA Technologies, Inc. — Q3 2010 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. TETRA provides completion fluids and products, production testing, wellhead compression, offshore services, and operates a concentrated Gulf of Mexico oil and gas exploration and production business through Maritech. Operating segments are Fluids, Offshore Services, Maritech, Production Testing, and Compressco.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $211.9 million | $254.0 million | $659.4 million | $667.2 million |
| Gross profit | $28.8 million | $62.8 million | $111.7 million | $146.5 million |
| Gross margin | 13.6% | 24.7% | 16.9% | 22.0% |
| Operating income | $4.2 million | $38.5 million | $39.4 million | $75.3 million |
| Income before taxes | $(0.2) million | $33.9 million | $28.8 million | $65.7 million |
| Net income | $0.2 million | $22.7 million | $19.2 million | $43.0 million |
| Diluted EPS | $0.00 | $0.30 | $0.25 | $0.57 |
| Cash flow from operations | Not separately provided | Not separately provided | $119.4 million | $137.3 million |
At September 30, 2010, cash and cash equivalents were $74.2 million, total current assets were $416.1 million, and total assets were $1.334 billion. Debt was $308.1 million, including $93.1 million classified as current, compared with $310.1 million at December 31, 2009. Stockholders’ equity was $589.3 million.
Capital expenditures were approximately $82.2 million during the first nine months. Cash flow from operations exceeded capital expenditures, although approximately $75.0 million of operating cash flow was used for decommissioning and abandonment activity.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 16.6%, gross profit decreased 54.2%, and net income decreased 99.2% year over year.
- Nine-month revenue declined 1.2%, while gross profit declined 23.8% and net income declined 55.4%.
- Offshore Services revenue fell 32.4% in the quarter and 17.0% year to date as activity, fleet utilization, and pricing declined from record 2009 levels. Segment pretax income fell 54.5% in the quarter and 51.9% year to date.
- Fluids revenue increased 13.7% in the quarter and 15.1% year to date, driven by calcium chloride production at the new El Dorado plant, international clear-brine-fluid sales, and domestic frac-water and filtration services. Margins declined because of start-up inefficiencies and higher product costs.
- Maritech revenue increased 12.2% in the quarter and 12.0% year to date, supported by derivative-enhanced realized commodity prices, but the segment reported a $14.3 million pretax loss in the quarter. Oil and gas property impairments and excess decommissioning charges were significant contributors.
- Production Testing improved, with quarterly revenue up 35.0% and pretax income up 48.5%, reflecting stronger domestic onshore activity. Compressco revenue and pretax income declined because of lower natural gas prices, reduced demand, and disruption in Mexico.
- Interest expense increased 51.0% in the third quarter and 33.4% for the first nine months, primarily because less interest was capitalized after completion of major construction projects.
Guidance, outlook, risks, and unusual items
- Management did not provide formal earnings guidance. It planned less than $145 million of 2010 capital expenditures and other investing activities, with funding expected from operating cash flow.
- Management estimated that the Gulf of Mexico deepwater drilling moratorium and related regulatory issues reduced third-quarter consolidated revenue by approximately $18 million to $23 million. Although the moratorium was lifted in October 2010, permitting delays and additional regulation were expected to continue affecting offshore activity.
- Management expected Offshore Services activity and profitability to remain below 2009 record levels, although hurricane-related abandonment and decommissioning work could support demand over the next several years.
- Maritech’s remaining hurricane-related abandonment, decommissioning, debris removal, platform construction, and well-redrilling costs were estimated at $60 million to $75 million before insurance recoveries. Approximately $42 million was accrued, and approximately $29.5 million of maximum Ike-related insurance coverage remained available.
- A $14.0 million third-quarter impairment charge, primarily for Maritech oil and gas properties, was driven by higher estimated asset retirement obligations, weaker development results, lower expected natural gas prices, and lower reserve values. The filing states that the impairment was not expected to require future cash expenditures.
- Maritech collected $39.8 million of Hurricane Ike insurance proceeds in the first quarter, including an advance for future costs. The filing also reports $39.8 million of insurance settlements and claims proceeds in operating cash flow for the nine-month period.
- Maritech’s discounted decommissioning liability was approximately $196.3 million, with an undiscounted amount of approximately $208.8 million. The filing states that estimates are subject to significant uncertainty.
- Compressco goodwill was supported by an estimated fair-value cushion of approximately 6.5%; further declines in natural gas prices, slower growth, or continued Mexico disruption could result in a material future impairment.
- The company expected to issue $90 million of 2010 Senior Notes in December 2010 to help repay the $93.1 million of 2004 Senior Notes maturing in September 2011. The proposed notes carry fixed rates of 5.09% and 5.67% and mature in 2017 and 2020.
- In October 2010, the revolving credit facility was amended to $278 million and extended to October 2015, with potential expansion to $428 million subject to lender approval and conditions. As of November 9, 2010, there were no borrowings and $14.5 million of letters of credit and guarantees, leaving stated net availability of $263.5 million.
- The company remained in compliance with its debt covenants as of September 30, 2010. Debt agreements include financial-ratio, default, and cross-default provisions.
- The federal securities class action was settled for $8.25 million, expected to be paid by insurers, and terminated by court order on September 29, 2010. A related derivative lawsuit remained unresolved; management considered it without merit and did not expect a material adverse effect.
- An EPA settlement related to a 2009 zinc bromide spill required a $487,000 penalty, expected to be covered by insurance. Environmental remediation obligations and operating hazards remain potential sources of financial exposure.
- Commodity hedges supported realized third-quarter average prices of $96.58 per barrel for oil and $8.67 per MMBtu for natural gas. Most of the contracts with the largest favorable impact were scheduled to expire at year-end 2010, increasing future exposure to market prices.
Most important facts for investors to verify
- Whether the planned December 2010 issuance of $90 million of Senior Notes closed and whether the 2004 Senior Notes were subsequently refinanced or repaid.
- Actual post-moratorium Gulf of Mexico activity, permitting timelines, regulatory costs, and effects on Fluids and Offshore Services utilization and margins.
- Progress and final cost of Maritech’s hurricane remediation, East Cameron 328 redrilling, and other decommissioning obligations, including recoveries under remaining insurance coverage.
- Whether Compressco’s narrow goodwill valuation cushion deteriorated because of natural gas prices, Mexico disruptions, or delayed compressor-unit fabrication.
- The sustainability of operating cash flow after excluding the $39.8 million insurance settlement and considering approximately $75 million of decommissioning cash expenditures.
- The expiration and replacement of Maritech’s commodity hedges and the resulting sensitivity of revenue and cash flow to oil and natural gas prices.