TETRA Technologies, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
TETRA Technologies is an oil and gas services company operating through Completion Fluids & Products, Water & Flowback Services, and Compression. The filing covers the three and nine months ended September 30, 2020, and reflects the continuing effects of COVID-19, depressed oil and gas prices, reduced customer activity, and industry capital-spending cuts.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $152.6 million | $245.9 million | $568.0 million | $778.5 million |
| Gross profit | $20.0 million | $45.0 million | $79.7 million | $129.5 million |
| Gross margin | 13.1% | 18.3% | 14.0% | 16.6% |
| Loss before discontinued operations | $21.4 million | $9.1 million | $68.8 million | $36.0 million |
| Net loss attributable to TETRA stockholders | $13.3 million | $15.8 million | $36.1 million | $33.6 million |
| Loss per share | $0.10 | $0.13 | $0.29 | $0.27 |
| Adjusted EBITDA | $30.3 million | $46.2 million | Not clearly provided in filing text | Not clearly provided in filing text |
- Q3 revenue declined 38.0%, while nine-month revenue declined 27.0%, primarily because of lower Water & Flowback and Compression activity.
- Q3 general and administrative expense decreased 27.7% to $25.3 million; nine-month expense decreased 14.9% to $89.8 million. Savings reflected workforce, salary, professional-fee, and other cost reductions.
- Net interest expense was $17.6 million in Q3 and $53.1 million for the first nine months.
- Operating cash flow was $64.8 million for the first nine months, down from $83.6 million in the comparable period. Cash flow benefited from collections and inventory reductions but was affected by lower earnings and working-capital movements.
- Capital expenditures, net of proceeds and compressor costs, were $22.0 million for the first nine months, compared with $89.2 million in the prior-year period.
- Cash and cash equivalents were $75.2 million at September 30, 2020, including approximately $16.7 million held by CCLP and not accessible to TETRA.
- Consolidated long-term debt was $843.2 million, consisting of $206.3 million owed by TETRA and $636.9 million owed by CCLP. Total equity was $95.2 million; TETRA stockholders’ equity was negative $0.3 million.
- TETRA had $25.8 million of ABL availability at September 30, 2020; CCLP had $14.5 million of availability. Both entities reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Completion Fluids & Products: Q3 revenue declined 12.5% to $52.0 million, mainly because of Gulf of Mexico hurricane-related project delays, but gross margin improved to 31.2% from 27.3%. Nine-month revenue was nearly flat at $198.5 million, while pretax income increased 38.1% to $44.4 million.
- Water & Flowback Services: Q3 revenue fell 70.4% to $21.5 million and the division reported a $5.7 million gross loss versus $8.2 million of gross profit in Q3 2019. Nine-month revenue decreased 53.8% to $103.7 million, producing an $18.4 million pretax loss versus $7.3 million of pretax income.
- Compression: Q3 revenue declined 30.5% to $79.1 million and gross margin fell to 12.3% from 18.2%. Nine-month revenue decreased 24.8% to $265.7 million, while pretax loss widened to $47.1 million from $14.7 million.
- TETRA completed the $17.0 million sale of its Midland manufacturing facility on July 2, 2020. Following completion of the remaining backlog in October, TETRA stopped fabricating new compressor packages for third parties and its own fleet; the related activity is expected to be reported as discontinued operations in Q4 2020.
- The company recorded approximately $14.4 million of impairment and other charges during the first nine months, primarily involving the Midland facility, new-unit inventory, non-core used compressor equipment, low-horsepower fleet assets, and field inventory. No additional impairments were recorded in Q3.
- CCLP exchanged approximately $215.2 million of 7.25% senior notes for $50.0 million of first-lien notes and $155.5 million of second-lien notes. The transaction generated approximately $4.6 million of financing fees and increased the complexity and cost of CCLP’s debt structure.
Guidance, outlook, commentary, and risks
- Management reported some stabilization in activity by the end of Q3. Approximately 8% of the U.S. domestic compression fleet was on standby at quarter-end, compared with 15% in Q2.
- Management expects Water & Flowback activity to remain negatively affected in the near term unless customer activity meaningfully recovers. Low oil and gas prices, pricing pressure, reduced capital spending, and COVID-19 uncertainty remain significant risks.
- Expected 2020 capital expenditures were approximately $12 million to $15 million for Water & Flowback and approximately $31 million to $34 million for Compression, primarily for maintenance. The filing does not provide full-year revenue or earnings guidance.
- The company implemented workforce and salary reductions, suspended 401(k) matching, reduced SG&A, negotiated supplier savings, and curtailed capital spending. Further impairments or restructuring charges remain possible.
- Liquidity is exposed to declining customer receivables and borrowing bases, delayed payments, customer bankruptcies, higher borrowing costs, and restricted access to capital markets. TETRA and CCLP have separate capital structures without cross-default provisions or cross-guarantees.
- TETRA has potential exposure to legacy Maritech decommissioning liabilities if Orinoco or related parties fail to perform. Required replacement bonds and escrow payments were not delivered; the initial $46.8 million performance bonds remained in effect while litigation continued.
- TETRA obtained a September 2020 judgment for $7.9 million plus post-judgment interest against guarantors of an Epic Companies promissory note. The guarantors filed an appeal on October 21, 2020, and collectability remains uncertain.
- As of November 2, 2020, TETRA had $0.1 million outstanding under its ABL facility, $6.6 million of letters of credit, and $22.8 million of availability. TETRA’s term debt principal outstanding was $220.5 million.
Important facts for investors to verify
- Whether oil and gas activity and customer spending recover sufficiently to improve Water & Flowback and Compression utilization.
- The sustainability of positive operating cash flow relative to approximately $843.2 million of consolidated debt and substantial contractual interest obligations.
- Future impairment, restructuring, inventory write-down, and asset-sale charges, particularly for the Compression fleet and other non-core assets.
- The timing and financial impact of discontinuing new compressor-package fabrication and the related Q4 2020 discontinued-operations presentation.
- Actual accessibility of consolidated cash, since approximately $16.7 million was held by CCLP and was not available to TETRA.
- Outcome and collectability of the Orinoco/Maritech bonding litigation and the Epic promissory-note judgment appeal.
- Whether CCLP’s high-cost debt, including the 10.00%/10.75% second-lien notes and potential PIK interest, increases future cash requirements or leverage.