TETRA Technologies, Inc. 2019 Form 10-K Summary
Business context and reporting period
TETRA Technologies, Inc. is a geographically diversified oil and gas services company reporting for the fiscal year ended December 31, 2019. Its three reporting segments are Completion Fluids & Products, Water & Flowback Services, and Compression. The company consolidates CSI Compressco LP (CCLP), while approximately 66% of CCLP’s common units were publicly held at year-end.
The company provides clear brine fluids and calcium-based products, water management and flowback services, production testing and offshore rig cooling, and natural gas compression services and equipment. The former Offshore Division was disposed of in 2018 and is presented as discontinued operations.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1,037.9 million | $998.8 million | Up 3.9% |
| Gross profit | $91.8 million | $162.3 million | Down 43.4% |
| Gross margin | 8.8% | 16.2% | Down 7.4 percentage points |
| Loss before taxes and discontinued operations | $144.1 million | $36.4 million | Loss increased |
| Net loss | $160.5 million | $84.2 million | Loss increased |
| Net loss attributable to TETRA stockholders | $147.4 million | $61.6 million | Loss increased |
| Net loss per share | $1.17 | $0.50 | Loss increased |
| Adjusted EBITDA | $187.1 million | $160.9 million | Up 16.3% |
| Cash flow from operating activities | $90.2 million | $46.6 million | Up $43.6 million |
| Capital expenditures, net | $108.3 million | $141.9 million | Down $33.7 million |
Reported profitability was heavily affected by non-cash and unusual charges. Cost of revenues included $95.2 million of impairments and other charges, principally the $91.6 million impairment of the El Dorado, Arkansas calcium chloride plant. The company also recorded a $25.8 million impairment of all remaining goodwill in the Water Management reporting unit. Depreciation, amortization and accretion was $124.2 million, and net interest expense was $73.2 million.
At December 31, 2019, cash and cash equivalents were $17.7 million, working capital was $162.6 million, total assets were $1.272 billion, and total equity was $162.8 million. Consolidated long-term debt, net, was $842.9 million, consisting of $204.6 million of TETRA debt and $638.2 million of CCLP debt. TETRA had approximately $63.3 million of availability under its ABL facility, while CCLP had approximately $17.2 million of availability under its credit facility. Approximately $2.4 million of consolidated cash was held by CCLP and was not accessible to TETRA.
Segment performance and material changes
- Completion Fluids & Products: Revenue increased 8.5% to $279.3 million, driven by higher clear brine fluid sales in the U.S. Gulf of Mexico, including a TETRA CS Neptune project, stronger international sales, and increased domestic manufactured-product sales. Gross profit declined to a $15.0 million loss from $48.7 million of profit, primarily because of the El Dorado impairment.
- Water & Flowback Services: Revenue declined 7.0% to $282.0 million as water management activity, pricing, and customer spending weakened. Gross profit fell 50.3% to $27.5 million. The segment recorded the $25.8 million goodwill impairment and incurred costs to demobilize from one customer and mobilize for another, higher maintenance costs, and lower high-margin project activity.
- Compression: Revenue increased 8.7% to $476.7 million and gross profit increased 35.5% to $80.0 million. Higher service and equipment sales, improved pricing, labor efficiencies, and increased fleet utilization drove the improvement. Overall fleet utilization reached approximately 90.1%, and high-horsepower utilization was approximately 97.9% at year-end.
- Corporate overhead: Pretax loss increased to $73.0 million from $62.0 million, reflecting higher salary-related costs, including $1.8 million of executive transition costs, and higher interest expense.
Operating cash flow improved substantially due to better operating performance and working-capital management. Capital spending was concentrated in Compression, which spent approximately $82.3 million on capital expenditures, primarily for fleet growth. CCLP redeemed its remaining Series A Preferred Units during 2019 for approximately $31.9 million, including a $1.5 million redemption premium.
Guidance, outlook, risks and unusual items
Management did not provide a formal earnings or revenue guidance figure in the filing. It stated that 2020 customer spending plans were being reassessed following the sharp decline in oil and natural gas prices and the March 2020 stock-market decline. Planned 2020 capital expenditures were initially estimated at approximately $20 million to $30 million excluding Compression and $47 million to $56 million for Compression, but management indicated these estimates would be monitored and could change.
- The company expects lower oil and gas prices and reduced customer capital spending to pressure demand, pricing, utilization, revenues and cash flows, particularly in North American onshore markets and the Permian Basin.
- Management implemented cost-reduction actions in December 2019, including reductions in field staff and operating costs and restructuring of corporate and North American onshore support functions.
- CCLP’s debt is significant, with principal maturities of approximately $295.9 million in 2022 and $350.0 million in 2025. Debt service consumes a substantial portion of CCLP’s operating cash flow and may limit distributions, acquisitions and capital spending.
- The company and CCLP were in compliance with their debt covenants at December 31, 2019, but continued compliance depends on earnings and operating cash flow. Access to additional debt and equity financing may be limited, and future refinancing could be difficult.
- The company may be responsible for legacy offshore decommissioning obligations associated with formerly owned Maritech properties if current owners or operators fail to perform. Orinoco did not provide required replacement bonds or escrow payments; litigation was ongoing after a November 2019 order vacated an earlier summary judgment.
- Epic Companies filed for bankruptcy in August 2019 and failed to pay a $7.5 million promissory note and approximately $1.5 million of related receivables. TETRA recorded reserves and filed suit against the guarantors; the guarantors asserted counterclaims seeking more than $1 million plus punitive damages and attorneys’ fees.
- The company recorded $98.8 million of impairments and other charges for long-lived assets other than goodwill during the two years ended December 31, 2019, including the 2019 El Dorado impairment and other equipment charges.
- Additional risks include commodity-price volatility, customer credit losses, supplier concentration, environmental and health-and-safety liabilities, hydraulic-fracturing regulation, foreign exchange exposure, cybersecurity, weather disruptions, competition and possible NYSE listing noncompliance. The common stock closed at $0.37 on March 12, 2020, below the NYSE $1.00 minimum-price standard.
The company adopted the new lease standard in 2019, recognizing $68.1 million of operating lease right-of-use assets and $69.8 million of operating lease liabilities at year-end. It also early adopted the simplified goodwill impairment standard, resulting in the full write-off of remaining goodwill.
Most important facts for investors to verify
- Whether Compression’s high utilization and improved margins can offset weakness in Water & Flowback and Completion Fluids markets.
- The company’s ability to fund capital expenditures, service debt and refinance CCLP’s 2022 and 2025 maturities under sustained low commodity prices.
- The effect of further asset impairments, particularly in the calcium chloride, water management and compression businesses.
- The status and potential financial exposure of the Maritech decommissioning obligations and related litigation with Orinoco and the Clarkes.
- The outcome of the Epic promissory-note and guaranty litigation and recoverability of the reserved amounts.
- Whether the company can regain compliance with NYSE minimum-price and market-capitalization requirements.
- The amount and timing of future customer spending reductions, changes to 2020 capital expenditure plans and the effect of COVID-19 on operations and demand.