TETRA Technologies, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
TETRA Technologies is a diversified oil and gas services company providing completion fluids, water management, production testing, compression services and equipment, offshore services, and limited oil and gas production. The filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Results were materially affected by sustained low oil and natural gas prices, reduced customer drilling and capital expenditure activity, competitive pricing pressure, and lower demand across all operating segments. TETRA consolidates CSI Compressco LP (CCLP), with CCLP debt and cash flows legally separate from TETRA’s capital structure.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $169.3 million | $251.1 million | Down 32.6% |
| Gross profit | $4.6 million | $46.1 million | Down 90.0% |
| Gross margin | 2.7% | 18.4% | Down 15.7 percentage points |
| Income before taxes | $(149.1) million | $(2.1) million | Loss increased |
| Net loss attributable to TETRA stockholders | $(88.3) million | $(4.4) million | EPS: $(1.11) vs. $(0.06) |
| Cash flow from operations | $25.3 million | $27.8 million | Down 9.2% |
| Capital expenditures | $3.2 million | $49.0 million | Down 93.4% |
Q1 2016 included $106.2 million of goodwill impairment and $10.7 million of long-lived asset impairments, primarily affecting the Compression and Production Testing divisions. Excluding these charges, operating results still deteriorated substantially because of lower activity, utilization, pricing, and margins.
Cash and cash equivalents were $25.8 million at March 31, 2016, including approximately $10.3 million held by CCLP and not accessible to TETRA. Restricted cash was $6.7 million. Consolidated total long-term debt was $841.4 million, consisting of approximately $274.9 million of TETRA debt and $566.5 million of CCLP debt. TETRA had approximately $196.9 million of net availability under its revolving facility; CCLP had approximately $163.9 million of availability, subject to covenant compliance.
Operating cash flow benefited from aggressive working-capital management, including a $74.3 million reduction in accounts receivable. Cash flow also reflected approximately $3.4 million of Maritech decommissioning expenditures. Financing activities used $20.5 million, principally because debt repayments exceeded new borrowings.
Material changes versus the prior comparable period
- Revenue declined across every operating division. Fluids revenue fell 40.5%, Production Testing revenue fell 46.4%, Compression revenue fell 20.6%, and Offshore Division revenue fell 24.6%.
- Fluids gross margin decreased to 12.7% from 25.5%, and the division moved from pretax income of $17.7 million to a pretax loss of $0.4 million.
- Production Testing generated a gross loss of $3.4 million versus gross profit of $2.9 million and recorded $13.9 million of goodwill impairment.
- Compression gross margin declined to 8.5% from 22.1%, and the division recorded $92.3 million of goodwill impairment and $7.9 million of intangible-asset impairment.
- Offshore Services remained loss-making, while Maritech revenue fell 94.1% to $0.1 million because production on a remaining non-operated property was suspended.
- General and administrative expense declined 4.7% in dollars because of cost reductions, but increased to 19.8% of revenue from 14.0% because of the revenue contraction.
- Interest expense increased 6.1% to $14.6 million, reflecting higher borrowings and the higher-rate Series 2015 Senior Notes.
- Cash capital spending was sharply reduced as management deferred or canceled growth and maintenance projects.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal revenue or earnings guidance. It expects industry conditions to remain challenging and stated that demand for many products and services, particularly low-horsepower compression and production testing, may remain depressed for the foreseeable future.
- Management is pursuing headcount reductions, salary reductions, supplier negotiations, working-capital improvements, and capital expenditure deferrals to preserve liquidity.
- TETRA expects approximately $15 million to $20 million of 2016 capital expenditures excluding Compression, while Compression expects approximately $20 million to $25 million; actual spending depends on demand and financing conditions.
- Although TETRA and CCLP were compliant with their debt covenants at March 31, 2016, management stated that it was reasonably possible each could fail a financial covenant as of September 30, 2016 based on forecasts using current market conditions. Both were negotiating potential amendments with lenders, with no assurance of success.
- A covenant default could terminate borrowing commitments and accelerate outstanding debt. TETRA’s March 31 leverage ratio was 2.08-to-1 and interest coverage ratio was 4.55-to-1; CCLP’s total leverage ratio was 4.80-to-1 and interest coverage ratio was 3.78-to-1.
- On April 26, 2016, TETRA announced tender offers for up to $100 million of specified senior notes, contingent on financing and other conditions. TETRA also repaid an additional $10 million of Senior Secured Notes in May 2016.
- Maritech had approximately $45.3 million of remaining decommissioning liabilities at March 31, 2016, with approximately $3.7 million expected to be performed during the following twelve months. Costs could exceed estimates because of damaged offshore structures, unforeseen site conditions, and previously plugged wells that may become pressurized.
- TETRA may retain exposure to decommissioning obligations on properties previously sold by Maritech if purchasers or subsequent owners fail to perform. Management did not consider such exposure probable at March 31, 2016, but noted significant potential exposure and buyer financial distress.
- Customer credit risk is elevated because many customers are energy companies affected by low commodity prices. TETRA also faces interest-rate, foreign-exchange, litigation, environmental, regulatory, and cybersecurity risks.
- Goodwill remaining after the impairment charges was $6.6 million, all associated with the Fluids Division.
Most important facts for investors to verify
- Whether TETRA and CCLP obtain favorable covenant amendments before the September 30, 2016 testing date.
- Whether continued low commodity prices cause additional asset impairments, covenant pressure, reduced distributions from CCLP, or lower operating cash flow.
- The accessibility of consolidated cash, given that approximately $10.3 million was held by CCLP and separate from TETRA’s liquidity.
- Funding and final terms of the proposed senior-note tender offers and any related debt or equity financing.
- Actual 2016 capital spending compared with the stated ranges and the effect of spending deferrals on future competitiveness.
- Progress and ultimate cost of Maritech’s remaining decommissioning obligations, including potential liabilities relating to previously sold properties.
- Whether revenue stabilization and margin recovery occur in Fluids, Production Testing, Compression, and Offshore Services as customer activity changes.