TETRA Technologies, Inc. 2011 Form 10-K Summary
Business context and reporting period
TETRA Technologies, Inc. filed its Form 10-K for the fiscal year ended December 31, 2011. The company provides completion fluids and related products and services, production testing, wellhead compression, offshore well plugging and abandonment, decommissioning, diving, and limited oil and gas exploration and production services.
Operations are organized into five reporting segments: Fluids, Production Testing, Compressco, Offshore Services, and Maritech. The company increasingly shifted toward onshore shale-related activity while reducing its exposure to oil and gas exploration and production through the disposition of most Maritech properties.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $845.3 million | $872.7 million | Down 3.1% |
| Gross profit | $90.5 million | $43.7 million | Up 107.1% |
| Gross margin | 10.7% | 5.0% | Up 5.7 percentage points |
| Income before taxes and discontinued operations | $6.2 million | $(73.8) million | Improved by $80.0 million |
| Net income attributable to TETRA stockholders | $4.1 million | $(43.7) million | Returned to profitability |
| Diluted EPS attributable to TETRA stockholders | $0.05 | $(0.58) | Improved |
| Operating cash flow | $43.8 million | $153.3 million | Down 71.4% |
| Capital expenditures | $123.6 million | $107.7 million | Up 14.8% |
| Cash and cash equivalents | $204.4 million | $65.4 million | Up $139.1 million |
| Total debt | $305.0 million | $305.0 million | Essentially unchanged |
| Working capital | $296.1 million | $198.1 million | Up $98.0 million |
The 2011 fourth quarter was weak relative to the rest of the year: revenue was $186.2 million, gross loss was $7.3 million, and net loss attributable to TETRA stockholders was $25.1 million, compared with a $30.4 million attributable profit in the second quarter. The filing attributes fourth-quarter results primarily to increased Maritech decommissioning liabilities.
Segment performance
| Segment | 2011 revenue | 2011 pretax income | Key change |
|---|---|---|---|
| Fluids | $304.5 million | $32.1 million | Revenue up 10.2%; gross margin improved to 18.9% from 14.1% |
| Production Testing | $139.8 million | $36.0 million | Revenue up 34.4%; gross margin improved to 33.6% from 21.4% |
| Compressco | $95.8 million | $15.8 million | Revenue up approximately 17.6%; pretax income down 9.8% |
| Offshore Services | $287.3 million | $18.5 million | Revenue up 4.8%; gross margin improved to 11.6% from 7.9% |
| Maritech | $82.7 million | $(26.3) million | Revenue down 58.7% following property sales; decommissioning costs remained substantial |
Material changes versus the prior comparable period
- Maritech sold approximately 95% of its proved reserves held at December 31, 2010. The May 2011 sale to Tana had a base purchase price of $222.3 million, generated $173.3 million of cash at closing, and resulted in a consolidated gain on sale of approximately $56.8 million.
- Total cash proceeds from Maritech property sales were approximately $181.4 million net of adjustments. Remaining Maritech oil and gas properties were classified as held for sale, with only minimal future production expected.
- Maritech’s remaining decommissioning and other asset retirement obligations totaled approximately $139.8 million on an undiscounted basis, including $132.8 million of estimated decommissioning liabilities. Approximately $105.0 million was expected to be paid during 2012.
- Maritech recorded approximately $78.4 million of excess decommissioning expense in 2011, compared with $54.0 million in 2010. The company increased estimated decommissioning cash flows by approximately $80.2 million.
- Compressco Partners completed an initial public offering in June 2011. TETRA retained approximately 83.2% ownership, while public ownership was reflected as a noncontrolling interest. Net offering proceeds were approximately $42.2 million.
- Offshore Services purchased the TETRA Hedron, a 1,600-metric-ton heavy-lift derrick barge, for approximately $62.8 million. It entered service in the fourth quarter of 2011.
- Revenue growth in Production Testing and Fluids was driven by U.S. onshore shale activity, frac-water services, international clear-brine-fluid sales, and higher production-testing demand.
- The company liquidated its remaining Maritech oil hedge contracts in April 2011 and recorded a $14.2 million charge related to hedge ineffectiveness and liquidation.
Liquidity, debt, and capital resources
At December 31, 2011, TETRA had $204.4 million of consolidated cash, although approximately $17.5 million was held by Compressco Partners for its operating needs and distributions. The company reported approximately $270.0 million of net availability under its revolving credit facility, excluding approximately $17.0 million of additional Compressco Partners capacity.
Total debt was approximately $305.0 million, consisting primarily of fixed-rate senior notes maturing between 2013 and 2020. There were no borrowings outstanding under the principal revolving credit facility or Compressco Partners’ credit facility at year-end. The company reported compliance with its debt covenants.
Operating cash flow was reduced by approximately $101.9 million of decommissioning expenditures. Investing cash flow was positive $46.8 million because property-sale proceeds of approximately $188.3 million exceeded capital expenditures and other investing uses. Management planned to spend more than $140 million on capital expenditures during 2012, focused on core service businesses.
Guidance, outlook, risks, and unusual items
- Management expected continued strong demand in 2012 for Production Testing and Fluids, supported by onshore shale activity and crude oil prices.
- Compressco’s near-term domestic service growth could be pressured by low natural gas prices. Management also indicated that compressor-unit sales were expected to decline from the elevated 2011 level.
- Offshore Services expected long-term demand to benefit from the “Idle Iron Guidance” regulations requiring plugging and decommissioning of nonproductive wells and platforms.
- Management expected Maritech revenue to be minimal going forward and intended to sell its remaining oil and gas interests during 2012.
- Remaining Maritech decommissioning estimates are subject to significant uncertainty, including changing regulatory requirements, offshore conditions, weather, project costs, co-owner or purchaser performance, and the timing of work.
- The company discontinued windstorm insurance coverage for remaining Maritech assets because premiums, deductibles, and coverage limits were considered uneconomic. Future hurricane losses could therefore be significant and largely uninsured.
- Approximately $27.5 million of remaining work related to two hurricane-damaged platforms was accrued. Maximum remaining Hurricane Ike insurance coverage was approximately $19.5 million, and an underwriter disputed certain claimed costs.
- The company remains exposed to Gulf of Mexico permitting and regulatory delays, commodity-price volatility, competition, raw-material supply constraints, foreign-currency risk, customer credit risk, environmental liabilities, and operating hazards.
- Fixed and determinable raw-material purchase obligations totaled approximately $250.6 million through 2029, including $15.3 million due in each of 2012 through 2016.
- The filing reports no material off-balance-sheet arrangements. Ordinary-course litigation was not expected by management to have a material adverse effect. An environmental consent order requires future remediation and monitoring at the former Fairbury, Nebraska facility.
Most important facts for investors to verify
- Whether the remaining Maritech decommissioning liability and the approximately $105.0 million expected 2012 cash outflow are accurate and adequately funded.
- Whether decommissioning costs, hurricane-related work, insurance recoveries, and purchaser or co-owner obligations produce additional charges or cash-flow pressure.
- Whether Production Testing and Fluids growth can offset weakness in Maritech and potential pressure from low natural gas prices.
- Actual utilization, contract wins, costs, and profitability of the TETRA Hedron and broader Offshore Services fleet.
- Compressco’s post-IPO distributions, operating cash generation, public-company costs, and ability to maintain service growth.
- Compliance with financial covenants and the company’s ability to refinance the $35.0 million of senior notes maturing in 2013.
- Exposure to Gulf of Mexico regulation, environmental claims, hurricane losses, raw-material supply agreements, and customer credit deterioration.
- The sustainability of reported profitability, given the material contribution from Maritech asset-sale gains and the absence of comparable future property sales.