TETRA Technologies, Inc. — 2017 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016. TETRA is an oil and gas services company operating through Fluids, Production Testing, Compression, and Offshore divisions, including its consolidated investment in CSI Compressco LP (CCLP).
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $168.0 million | $169.3 million | Down 0.8% |
| Gross profit | $14.3 million | $4.6 million | Up $9.7 million |
| Gross margin | 8.5% | 2.7% | Up 5.8 percentage points |
| Net loss | $11.3 million | $147.7 million | Improved $136.5 million |
| Net loss attributable to TETRA stockholders | $2.5 million | $88.3 million | Improved $85.9 million |
| Loss per share | $0.02 | $1.11 | Improved |
| Operating cash flow | $(20.5) million | $25.3 million | Down $45.8 million |
| Capital expenditures, net | $5.1 million | $3.2 million | Up $1.8 million |
Cash and cash equivalents were $12.8 million at March 31, 2017, compared with $29.8 million at December 31, 2016. Restricted cash was $6.7 million. Total assets were $1.30 billion and total equity was $388.9 million.
Consolidated long-term debt was $640.4 million, including $132.6 million attributable to TETRA and $507.8 million attributable to CCLP. TETRA reported $177.0 million of net availability under its revolving facility; CCLP reported $88.1 million of availability at March 31, 2017. As of May 10, 2017, TETRA availability was $166.7 million and CCLP availability was $83.1 million.
Material changes versus the prior comparable period
- Revenue was broadly flat, as higher Fluids and Production Testing revenue offset a $16.1 million decline in Compression revenue and lower Offshore Services revenue.
- Fluids revenue increased 23.3% to $72.9 million, supported by completion fluids and water management activity. Fluids pretax income was $20.3 million, including the $12.8 million arbitration award.
- Production Testing revenue increased 8.3% to $21.5 million, and its pretax loss narrowed to $2.1 million from $19.4 million, primarily because the prior-year period included $13.9 million of goodwill impairment and $2.8 million of long-lived asset impairment.
- Compression revenue declined 19.8% to $65.6 million. Its pretax loss narrowed to $14.3 million from $104.7 million, primarily because Q1 2016 included $92.3 million of goodwill impairment. Current-period results included $1.6 million of expense from the fair-value adjustment of CCLP Series A Preferred Units.
- General and administrative expense declined 15.3% to $28.5 million, reflecting lower professional services, insurance, and other costs.
- The prior-year period included $106.2 million of goodwill impairment and $10.7 million of long-lived asset impairments; no such impairments were recorded in Q1 2017.
- Q1 2017 earnings benefited from a $6.0 million noncash credit from the change in fair value of warrants and a $12.8 million arbitration award. These items are not indicative of recurring operating performance.
Cash flow, debt, liquidity, and outlook
Operating cash flow was negative $20.5 million, primarily because of the timing of receivable collections and payments to suppliers, increased inventories, and continuing pricing pressure. Financing activities provided $8.0 million, while investing activities used $4.6 million. CCLP contributed $1.8 million of consolidated operating cash flow, and TETRA received $5.6 million of CCLP cash distributions during the quarter.
CCLP announced in April 2017 an approximately 50% reduction in cash distributions to common unitholders, including TETRA. On May 5, 2017, CCLP amended its credit agreement, including more flexible leverage covenants. Management stated that TETRA and CCLP expect adequate liquidity, operating cash flow, and covenant compliance through May 10, 2018, based on forecasts prepared as of May 10, 2017.
TETRA's March 31, 2017 leverage ratio was 2.58 to 1 versus a 5.00 to 1 maximum, and its fixed-charge coverage ratio was 2.40 to 1 versus a 1.25 to 1 minimum. CCLP's total leverage ratio was 5.67 to 1 versus a 5.95 to 1 limit, secured leverage was 2.45 to 1 versus a 3.25 to 1 limit, and interest coverage was 2.95 to 1 versus a 2.25 to 1 minimum.
Management observed improving demand and rig activity, particularly in U.S. onshore markets, but customer pricing remained challenging. Offshore and international activity remained comparatively weak. Planned 2017 capital expenditures were approximately $20 million to $30 million excluding Compression and $15 million to $30 million for Compression, subject to market conditions.
Risks, contingencies, and unusual items
- Results remain highly dependent on oil and natural gas prices, customer activity, rig counts, utilization, and pricing.
- CCLP's reduced distributions may constrain TETRA's liquidity and debt-service resources. TETRA and CCLP have separate capital structures without cross-defaults, cross-collateralization, or cross-guarantees.
- Maritech had approximately $45.9 million of remaining decommissioning liabilities at March 31, 2017, with approximately $0.9 million expected to be performed during the following twelve months. Actual costs may materially exceed estimates because of difficult offshore conditions, damaged infrastructure, and wells that may become pressurized.
- Purchasers of previously sold Maritech properties assumed related abandonment obligations, but buyer financial distress or inadequate security could potentially result in liabilities returning to Maritech. Management did not consider such liability probable at March 31, 2017.
- CCLP Preferred Units had a $78.3 million fair value liability and accrue 11% paid-in-kind distributions. Their variable conversion terms could create future dilution and earnings volatility.
- Warrant and preferred-unit fair-value changes may produce significant noncash earnings volatility.
- The company faces interest-rate, foreign-currency, customer-credit, litigation, environmental, cybersecurity, and covenant-compliance risks.
- Management stated that no material changes occurred in previously disclosed risk factors, internal controls, or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether improving activity levels translate into sustainable pricing and operating-margin expansion.
- The effect of CCLP's distribution reduction on TETRA's standalone liquidity and debt repayment capacity.
- CCLP's leverage, borrowing-base availability, and compliance with amended covenant thresholds.
- Actual operating cash flow trends, receivable collections, inventory levels, and capital expenditure discipline.
- The potential dilution and valuation impact of CCLP Preferred Units and outstanding warrants.
- Future Maritech decommissioning expenditures and any deterioration in the financial condition of former property purchasers.
- The recurrence, or absence, of one-time items such as arbitration proceeds, impairment charges, and fair-value adjustments when assessing underlying earnings.