TETRA TECHNOLOGIES INC quarterly report, Q2 FY2017

TETRA Technologies, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2017; filed August 9, 2017. TETRA is a geographically diversified oil and gas services company operating through Fluids, Production Testing, Compression, and Offshore divisions. The statements are unaudited and include consolidated CSI Compressco LP (CCLP), with noncontrolling interests presented separately.

Financial Performance and Position

Metric	Three months ended June 30, 2017	Three months ended June 30, 2016	Six months ended June 30, 2017	Six months ended June 30, 2016
Total revenue	$208.4 million	$175.7 million	$376.4 million	$345.0 million
Gross profit	$26.9 million	$16.3 million	$41.2 million	$20.9 million
Gross margin	12.9%	9.3%	10.9%	6.1%
Net loss attributable to TETRA stockholders	$11.0 million	$26.6 million	$13.5 million	$114.9 million
Loss per diluted share	$0.10	$0.32	$0.12	$1.42
Cash from operating activities	Not separately provided	Not separately provided	$(0.6) million	$35.1 million

Balance sheet at June 30, 2017: Cash and cash equivalents were $23.1 million, plus $6.9 million of restricted cash. Total assets were $1.318 billion. Consolidated long-term debt was $647.4 million, including $137.7 million owed by TETRA and $509.8 million owed by CCLP. Total equity was $383.7 million, including $155.1 million of noncontrolling interests.

Liquidity: TETRA had $172.5 million of net availability under its revolving credit facility at June 30, 2017; CCLP had $85.9 million of availability, subject to borrowing-base and covenant limitations. Approximately $5.0 million of consolidated cash was held by CCLP and was not accessible to TETRA. TETRA’s 11% Senior Note had a $125.0 million principal balance and matures in November 2022. CCLP’s debt included $295.9 million of 7.25% Senior Notes, maturing in August 2022.

Capital expenditures: Net capital expenditures were $16.6 million during the first six months, compared with $9.0 million in the prior-year period. Compression accounted for approximately $12.1 million, primarily for a system software development project. Management expected 2017 capital expenditures of approximately $20–$30 million excluding Compression and $25–$30 million for Compression.

Material Changes Versus the Prior Comparable Period

Second-quarter revenue increased 18.6%, while six-month revenue increased 9.1%, principally because of stronger Fluids activity and improved Production Testing and Offshore Services activity.
Gross margin improved to 12.9% in the second quarter and 10.9% for the first six months, but customer pricing remained challenging.
Fluids revenue increased 46.5% in the second quarter and 35.1% for the six months, driven by clear brine fluids, offshore completion-fluid projects, and onshore water management. Six-month Fluids pretax income included a $12.8 million arbitration award collected in January 2017.
Compression revenue declined 1.0% in the second quarter and 10.7% for the six months. Gross margin declined to 10.0% in the quarter and 9.7% for the six months because of lower service pricing and demand, despite improved fleet utilization and a better equipment backlog.
Production Testing reduced its pretax loss as activity and pricing improved, but remained unprofitable.
Offshore Services revenue increased 8.2% in the quarter, but the segment recorded a gross loss because of weather-related heavy-lift downtime, project delays, and higher equipment costs.
The six-month 2016 results included $106.2 million of goodwill impairment and $10.9 million of long-lived asset impairments; no comparable impairments were recorded in 2017.
Operating cash flow declined to a $0.6 million use from $35.1 million of cash provided in the prior year, primarily because of the timing of accounts-receivable collections and higher working capital investment.
General and administrative expense increased 14.9% in the second quarter, partly due to reinstatement of prior salary and workweek reductions. For the six months, G&A declined 1.8% because of lower professional-services costs.

Outlook, Risks, Contingencies, and Unusual Items

Management reported signs of improving demand, particularly in U.S. onshore markets, but noted continued volatility in oil and natural gas prices, weak offshore and international activity, excess equipment availability, and persistent pricing pressure.
Management and CCLP forecast adequate liquidity, operating cash flow, and covenant compliance through August 9, 2018, based on forecasts prepared as of that date. This outlook assumes current CCLP distribution levels and reasonable operating conditions.
CCLP reduced common-unit cash distributions by approximately 50% and amended its credit agreement in May 2017 to provide greater covenant flexibility. At June 30, CCLP’s total leverage ratio was 6.12x versus a 6.75x maximum, and its interest coverage ratio was 2.72x versus a 2.25x minimum.
CCLP Preferred Units had a $67.6 million fair value liability at June 30, 2017 and accrue 11% paid-in-kind distributions. Related fair-value gains reduced pretax loss by $3.2 million for the six months. Warrants fair-value gains reduced pretax loss by $11.5 million. These non-cash adjustments may create future earnings volatility.
CCLP deferred scheduled Preferred Unit conversions for the three-month period beginning July 8, 2017. Conversion or cash-settlement requirements could affect dilution, liquidity, and leverage.
An arbitration award generated $12.8 million of income in the first quarter. Separately, a July 2017 arbitration ruling against EPIC resulted in a $2.7 million accrued net exposure charged in the second quarter; the company intends to challenge the ruling.
Maritech retained approximately $45.4 million of decommissioning liabilities at June 30, 2017, with approximately $0.8 million expected to be performed during the following twelve months. Costs could exceed estimates because of offshore conditions, weather, damaged platforms, and pressurized previously abandoned wells.
Buyers of previously sold Maritech properties assumed decommissioning obligations, but TETRA could have residual exposure if those buyers fail to perform and available security is insufficient. Management did not consider such liability probable at June 30, 2017.
TETRA plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Management expected significant disclosure changes and possible effects on the timing or amount of revenue for certain arrangements.

Most Important Facts for Investors to Verify

Whether improving oilfield activity and Fluids growth continue to offset Compression pricing pressure and weak Offshore profitability.
Accounts-receivable collections, working-capital requirements, and the company’s ability to generate positive operating cash flow.
CCLP’s reduced distributions, borrowing-base availability, leverage trajectory, and compliance with its amended financial covenants.
The potential dilution or cash requirement associated with CCLP Preferred Unit conversions and the sensitivity of related fair-value liabilities.
The outcome and ultimate cost of the EPIC arbitration challenge and any other litigation or regulatory matters.
Actual Maritech abandonment and decommissioning costs, including possible liabilities relating to properties sold to financially distressed buyers.
Whether planned capital expenditures and the Compression software project produce the anticipated operating efficiencies without constraining liquidity.
Future non-cash fair-value changes in the warrants and CCLP Preferred Units, which may materially affect reported earnings without corresponding cash flows.