TETRA Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015. TETRA is an oil and gas services company operating through Fluids, Production Testing, Compression, and Offshore divisions. Its services include completion fluids, water management, production testing, compression equipment and services, offshore services, and decommissioning. Results include a full period of operations from the August 2014 acquisition of Compressor Systems, Inc. by CSI Compressco LP (CCLP).
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $305.1 million | $306.4 million | $872.6 million | $761.7 million |
| Gross profit | $70.5 million | $34.7 million | $186.5 million | $95.1 million |
| Gross margin | 23.1% | 11.3% | 21.4% | 12.5% |
| Income before taxes | $15.4 million | $(24.8) million | $31.5 million | $(38.0) million |
| Net income attributable to TETRA stockholders | $9.8 million | $(10.5) million | $20.2 million | $(19.9) million |
| Diluted EPS | $0.12 | $(0.13) | $0.25 | $(0.25) |
| Cash flow from operations | Not separately provided | Not separately provided | $118.2 million | $51.9 million |
Q3 revenue was essentially flat year over year, while gross profit increased 103.0%. Nine-month revenue increased 14.6%, and gross profit increased 96.2%. General and administrative expense rose 10.3% in Q3 and 10.6% for the nine-month period. Net interest expense increased to $12.2 million in Q3 and $37.4 million for the nine months, primarily because of higher debt associated with CCLP and the CSI acquisition.
At September 30, 2015, cash and cash equivalents were $25.5 million, including approximately $18.3 million held by CCLP and not accessible by TETRA. Restricted cash was $11.5 million. Total assets were $1.94 billion and total equity was $753.2 million.
Consolidated debt had a carrying value of approximately $919.5 million, consisting of $331.1 million of TETRA debt and $588.3 million of CCLP debt. TETRA reported approximately $149.9 million of availability under its revolving credit facility, while CCLP reported approximately $156.2 million of availability under its separate facility as of September 30, 2015.
Material Changes Versus the Prior Comparable Period
- Compression revenue increased 34.4% in Q3 and 127.2% for the nine months, primarily because CSI contributed a full current-year period compared with approximately two months in the 2014 comparable periods.
- Fluids revenue increased 5.0% in Q3 and 1.8% for the nine months. Higher offshore clear brine fluid sales and completion activity, including a customer project using new completion-fluid technology, offset weaker onshore water-management activity.
- Production Testing revenue declined 42.3% in Q3 and 25.9% for the nine months. The division moved to a pretax loss of $4.5 million in Q3 and $5.0 million for the nine months as lower activity, pricing pressure, competition, and higher bad-debt expense reduced profitability.
- Offshore Services revenue declined 38.4% in Q3 and 44.2% for the nine months, but gross profit improved because of fleet reductions, cost controls, and process efficiencies.
- Maritech’s pretax loss improved materially because excess decommissioning costs were $1.1 million in Q3 and $0.8 million for the nine months, compared with $22.9 million and $41.9 million, respectively, in the prior-year periods.
- Operating cash flow increased $66.3 million, or 127.6%, for the nine months, aided by improved earnings, CSI operations, cost reductions, working-capital changes, and significantly lower Maritech decommissioning spending.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued pressure from low oil and natural gas prices, reduced drilling and completion activity, increased competition, and constrained capital markets. Near-term priorities are liquidity preservation, cost reduction, working-capital management, and capital-structure improvement.
- On November 5, 2015, after the reporting date, TETRA agreed to issue $125.0 million of 11.0% senior notes due November 5, 2022. Closing was expected by November 20, 2015. Proceeds were intended to repay TETRA revolver borrowings, repurchase up to $25.0 million of 2010 Senior Notes, repay the $90.0 million Series 2006-A Senior Notes due April 2016, and pay transaction costs.
- Subject to the new-note closing, TETRA agreed to extend the maturity of its $50.0 million Senior Secured Notes from April 2017 to April 2019. The refinancing is expected to extend significant maturities but increases future interest expense because the new notes bear 11.0% interest.
- Management believed liquidity and covenant compliance would be adequate through September 30, 2016, but cautioned that this depends on future operating cash flows, cost reductions, capital availability, and commodity-price conditions.
- Remaining Maritech decommissioning liabilities were approximately $51.2 million, of which approximately $17.9 million was expected to be performed during the following twelve months. Actual costs may exceed estimates because of difficult offshore conditions, hurricane-damaged structures, pressured wells, weather, and incomplete historical information.
- TETRA could become responsible for decommissioning obligations associated with previously sold Maritech properties if purchasers or successor operators fail to perform. One purchaser filed for Chapter 11 bankruptcy in August 2015; management did not consider TETRA’s liability probable as of September 30, 2015, but disclosed significant exposure and estimated approximately $6 million of historical decommissioning liabilities associated with properties sold to that company.
- Production Testing and Compression goodwill had limited valuation cushions of approximately 10% and 4%, respectively. The related goodwill balances were $51.9 million and $233.6 million, creating a reasonable possibility of future material non-cash impairment charges if operating conditions worsen.
- Contractual cash obligations totaled approximately $1.44 billion as of September 30, 2015, including debt, interest, purchase obligations, decommissioning liabilities, and leases.
Important Facts for Investors to Verify
- Whether the $125.0 million Series 2015 Senior Notes issuance closed on the expected terms and whether proceeds were applied as described.
- The completed amounts and timing of the planned repayment of the Series 2006-A Notes, the revolving credit facility, and any 2010 Senior Notes accepted in the tender offer.
- CCLP’s ability to generate distributable cash flow while funding capital expenditures and servicing approximately $588.3 million of debt, and the extent to which TETRA depends on CCLP distributions.
- Actual oil and gas activity, customer credit quality, pricing, and demand trends affecting Production Testing, Offshore Services, water management, and low-horsepower compression.
- Future goodwill impairment testing results for the Production Testing and Compression reporting units.
- Changes in Maritech decommissioning costs, buyer and co-owner solvency, available bonding or escrow security, and potential obligations on properties previously sold.
- Whether management’s projected liquidity and debt-covenant compliance through September 30, 2016 are achieved under continued low commodity-price conditions.