TETRA Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 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 on March 1, 2018 and is reported as discontinued operations.
On February 28, 2018, TETRA acquired SwiftWater Energy Services for $42.0 million of cash and 7.8 million common shares valued at $28.2 million. SwiftWater provides water-management services in the Permian Basin.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $260.1 million | $179.9 million | $459.5 million | $339.3 million |
| Gross profit | $47.8 million | $29.5 million | $75.8 million | $49.2 million |
| Gross margin | 18.4% | 16.4% | 16.5% | 14.5% |
| Loss before discontinued operations | $12.1 million | $8.0 million | $33.2 million | $12.2 million |
| Net loss attributable to TETRA stockholders | $6.0 million | $11.0 million | $59.6 million | $13.5 million |
| Net loss per diluted share | $0.05 | $0.10 | $0.47 | $0.12 |
| Cash used in operating activities | Not separately provided | Not separately provided | $12.1 million | $0.6 million |
Q2 revenue increased 44.5%, while gross profit increased 61.8%. Six-month revenue increased 35.4%, and gross profit increased 54.1%. General and administrative expense increased 14.1% in Q2 and 14.6% for the first six months, but declined as a percentage of revenue to 12.9% and 14.0%, respectively.
- Water & Flowback Services: Q2 revenue increased 169.1% to $83.6 million, including approximately $28.6 million from SwiftWater. Pretax income was $8.3 million versus a $3.9 million loss in the prior-year quarter.
- Compression: Q2 revenue increased 32.7% to $99.9 million, and gross margin improved to 14.9% from 10.0%. The division remained loss-making before taxes, with an $8.7 million loss, primarily because of higher interest expense and preferred-unit valuation effects.
- Completion Fluids & Products: Q2 revenue increased 3.5% to $76.6 million, but gross profit declined 35.6% to $14.4 million due partly to the absence of the prior-year TETRA CS Neptune project.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $70.2 million at June 30, 2018, plus $4.3 million of restricted cash.
- Total long-term debt was $810.7 million, compared with $629.9 million at December 31, 2017. Approximately $632.5 million was owed by CCLP and is serviced from CCLP cash and operating cash flow; TETRA and CCLP have separate capital structures without cross-default, cross-collateralization, or cross-guarantee provisions.
- TETRA had $61.0 million outstanding and $6.8 million of letters of credit under its revolving facility, leaving $132.2 million of net availability at June 30, 2018. As of August 9, 2018, outstanding borrowings had increased to $90.1 million and net availability was $103.1 million.
- CCLP issued $350.0 million of 7.50% senior secured notes due 2025, using part of the proceeds to repay and terminate its prior credit facility. CCLP also established a new $50.0 million revolving credit facility; no balance was outstanding at June 30, 2018.
- Capital expenditures were $67.4 million in the first six months, including $47.4 million for Compression and $16.0 million for Water & Flowback. Investing cash use totaled $106.3 million, including the $42.0 million SwiftWater cash purchase price.
- Management reported compliance with applicable debt covenants. TETRA’s consolidated leverage ratio was 2.18x versus a 4.75x maximum, and its fixed-charge coverage ratio was 2.87x versus a 1.25x minimum.
Material changes, outlook, and unusual items
- The March 2018 sale of the Offshore Division produced a $33.8 million after-tax loss on disposal and materially reduced discontinued-operation assets and liabilities. Replacement performance bonds required from the buyer had not been delivered, although the original bonds remained in effect and TETRA was seeking enforcement.
- SwiftWater contributed $36.6 million of revenue and $7.0 million of pretax earnings after acquisition through June 30. The estimated contingent purchase-price liability increased to $11.9 million, producing $4.3 million of other expense in Q2; the liability could ultimately range from zero to $15.0 million.
- Interest expense increased due to the higher-cost CCLP senior secured notes and increased borrowings. Fair-value adjustments also affected earnings: the warrant liability generated a $2.2 million Q2 expense, while CCLP preferred units generated a $0.5 million credit.
- Management expects improved revenue and increasing operating cash flow during the remainder of 2018, supported by domestic onshore activity, SwiftWater synergies, stronger compression demand, higher fleet utilization, and equipment backlog. Management also expects higher capital expenditures and continued interest expense.
- Expected 2018 capital expenditures were approximately $45 million to $55 million for businesses excluding Compression and $110 million to $120 million for Compression, subject to demand and cash-conservation decisions.
- In July 2018, TETRA announced a global joint marketing and development agreement with Halliburton for TETRA CS Neptune completion fluids.
- Key risks include oil and gas price volatility, customer activity levels, pricing pressure and excess equipment availability, acquisition integration, substantial debt and refinancing requirements, covenant compliance, foreign-exchange exposure, litigation and environmental obligations, and access to capital.
Important facts for investors to verify
- Whether SwiftWater achieves the expected operating synergies and whether contingent consideration approaches the $15.0 million maximum.
- The sustainability of Water & Flowback growth and Compression backlog, utilization, pricing, and cash generation.
- Liquidity available to TETRA separately from CCLP, given that approximately $51.4 million of consolidated cash was held by CCLP and was not accessible to TETRA.
- Debt maturities, refinancing plans, interest costs, and continued compliance with TETRA and CCLP covenants.
- The status of the buyer’s required replacement performance bonds related to the divested Offshore Division.
- The impact of warrant and CCLP preferred-unit fair-value changes, which may create material earnings volatility without corresponding cash effects.
- Completion of SwiftWater internal-control integration, which management expected to continue through fiscal 2019.