TETRA Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 9, 2011. TETRA is an oil and gas services company operating in Fluids, Offshore Services, Maritech, Production Testing, and Compressco. The financial statements are unaudited.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $201.4 million | $211.9 million | $659.1 million | $659.4 million |
| Gross profit | $35.7 million | $28.8 million | $97.8 million | $111.7 million |
| Gross margin | 17.7% | 13.6% | 14.8% | 16.9% |
| Income before taxes | $2.8 million | $(0.2) million | $46.3 million | $28.8 million |
| Net income attributable to TETRA stockholders | $1.4 million | $0.2 million | $29.2 million | $19.2 million |
| Diluted earnings per share | $0.02 | $0.00 | $0.37 | $0.25 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $48.4 million | $119.4 million |
- Q3 revenue declined 4.9%, principally because Maritech sold approximately 95% of its proved reserves. Stronger Fluids, Production Testing, and Compressco activity partly offset the decline.
- Q3 gross profit increased 23.9%, with margin expanding to 17.7% from 13.6%. The nine-month gross margin declined because of Maritech decommissioning costs and weaker Offshore Services profitability.
- Nine-month pretax income and net income benefited from approximately $58.5 million of consolidated gains on Maritech property sales, partly offset by a $14.2 million charge related to liquidated commodity hedges and higher decommissioning costs.
- At September 30, cash and cash equivalents were $224.9 million, compared with $65.4 million at December 31, 2010; restricted cash was $15.7 million.
- Total assets were $1.24 billion. Long-term debt was $305.0 million, unchanged from year-end 2010. The fair value of the Senior Notes was approximately $334.8 million.
- The company had no borrowings under its revolving credit facility or Compressco Partners’ credit facility. As of November 9, 2011, TETRA reported $269.9 million of net availability under its revolving facility after $8.1 million of letters of credit and guarantees.
- Capital expenditures were $99.9 million during the first nine months. Management planned up to $175 million of 2011 capital expenditures.
Material changes versus the prior comparable period
- Business mix: Maritech substantially exited oil and gas exploration and production through property sales. Its remaining operations primarily involve well plugging, abandonment, and decommissioning.
- Fluids: Nine-month revenue increased 13.8% to $231.6 million and pretax income increased 32.2% to $23.9 million, supported by clear brine fluids, calcium chloride, international activity, and improved El Dorado plant efficiency.
- Production Testing: Nine-month revenue increased 34.5% to $102.0 million and pretax income increased 123.3% to $24.7 million, driven by domestic onshore and Mexican activity.
- Offshore Services: Nine-month revenue increased 0.8% to $227.5 million, but gross profit declined 21.5% to $33.4 million and pretax income declined 24.8% to $22.7 million because of softer pricing, weaker diving and cutting activity, and approximately $5.5 million of barge-related due diligence and start-up costs.
- Compressco: Nine-month revenue increased 12.9% to $69.2 million, while pretax income declined 17.5% to $11.7 million because of higher operating, administrative, professional, and foreign-currency costs.
- Compressco IPO: Compressco Partners completed a June 2011 initial public offering. Public unitholders owned 16.8% at September 30, creating a $42.8 million noncontrolling interest in consolidated equity.
- Heavy-lift expansion: TETRA purchased the TETRA Hedron derrick barge for $62.8 million in July 2011; total investment was expected to reach approximately $71 million. The vessel was expected to enter service in the fourth quarter.
Outlook, risks, contingencies, and unusual items
- Management expected continued strength in domestic onshore services, particularly Fluids and Production Testing, and anticipated similar revenue and cash-flow increases through the remainder of 2011. Management cautioned that activity remained below 2008 levels.
- Management expected the BOEMRE “Idle Iron Guidance” requirements, now overseen by BOEM and BSEE, to increase demand for offshore abandonment and decommissioning services. Offshore activity and pricing nevertheless remained below historical levels and were affected by post-Macondo regulatory uncertainty.
- Maritech retained approximately $125.9 million of discounted decommissioning liabilities. Approximately $109.0 million of related cash outflows was expected before September 30, 2012. Estimates are subject to changes in project timing, costs, and regulatory requirements.
- Remaining work on two hurricane-damaged platforms was estimated at $33.1 million before insurance recoveries. Up to approximately $19.5 million of Hurricane Ike insurance coverage remained, but an insurer disputed certain costs and recovery timing was uncertain.
- Maritech discontinued windstorm insurance for its remaining offshore assets for the 2011 hurricane season, exposing the company to potentially significant uninsured losses.
- Commodity hedges associated with Maritech were liquidated in April 2011. The company paid $14.2 million to the counterparty and retained limited commodity-price exposure because remaining production was expected to be minimal.
- Environmental remediation obligations remain at the former Fairbury, Nebraska facility. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
- The derivative lawsuit was settled in October 2011 with corporate-governance changes; no monetary compensation was payable to stockholders and attorneys’ fees and expenses were to be paid by insurers.
- Management stated that the company was in compliance with its debt covenants as of September 30, 2011 and had no material off-balance-sheet arrangements.
Investor verification points
- Verify the sustainability of earnings excluding the approximately $58.5 million Maritech asset-sale gain and the effect of other unusual items.
- Monitor the timing and ultimate cost of Maritech’s approximately $125.9 million decommissioning obligations, including potential cost overruns and insurance recoveries.
- Assess whether the TETRA Hedron enters service as planned and generates the expected Offshore Services utilization, pricing, and profitability.
- Evaluate exposure to Gulf of Mexico regulatory delays, offshore activity levels, commodity prices, and oilfield-service spending.
- Review Compressco Partners’ distribution capacity, debt-facility compliance, and the potential effect of future unit issuances on TETRA’s ownership and cash flows.
- Confirm the availability and terms of revolving credit capacity and the company’s ability to fund planned capital expenditures and acquisitions without increasing leverage.