TETRA Technologies, Inc. — First Quarter 2011 Form 10-Q
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2011, compared with the three months ended March 31, 2010. TETRA is an oil and gas services company operating through Fluids, Offshore Services, Maritech, Production Testing, and Compressco. The company provides completion fluids, production testing, wellhead compression, offshore abandonment and decommissioning, diving, and related services, with a concentrated domestic exploration and production business through Maritech.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $222.5 million | $205.9 million | 8.1% |
| Gross profit | $26.4 million | $35.1 million | (24.9%) |
| Gross margin | 11.8% | 17.0% | Down 5.2 percentage points |
| Operating income (loss) | $(1.4) million | $12.3 million | Declined $13.7 million |
| Income (loss) before taxes | $(4.0) million | $8.5 million | Declined $12.5 million |
| Net income (loss) | $(2.5) million | $5.4 million | Declined $7.9 million |
| Diluted EPS | $(0.03) | $0.07 | Declined $0.10 |
| Cash flow from operations | $30.4 million | $51.9 million | Down $21.5 million |
| Capital expenditures | $19.3 million | $10.8 million | Increased $8.5 million |
At March 31, 2011, cash and cash equivalents were $72.5 million, total assets were $1.23 billion, and stockholders’ equity was $517.4 million. Long-term debt was $305.0 million, unchanged from December 31, 2010. The revolving credit facility had no borrowings; as of May 9, 2011, availability was $265.1 million after $12.9 million of letters of credit and guarantees.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Fluids, up 16.7%, and Production Testing, up 26.7%, reflecting stronger domestic and international onshore activity.
- Offshore Services revenue was essentially flat, but the segment moved to a $4.4 million pretax loss from a $2.4 million loss, due to weaker pricing and lower profitability in cutting and abandonment operations.
- Maritech revenue fell 5.6% and pretax results declined to a $4.5 million loss from $8.6 million of income. Lower realized natural gas prices, higher decommissioning costs, and $3.4 million of impairments were principal factors. Average realized natural gas price declined to $4.25/MMBtu from $8.34/MMBtu.
- Production Testing pretax income increased to $9.1 million from $4.0 million. Compressco revenue increased 5.6%, but pretax income declined 21.4% to $4.0 million because of higher operating costs and weaker domestic service profitability.
- General and administrative expense increased 21.9% to $27.8 million, including higher employee-related costs, professional fees, and bad debt expense.
- Operating cash flow declined primarily because the prior-year period included approximately $39.8 million of insurance settlement proceeds related to Hurricane Ike.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects modest increases in 2011 revenue and operating cash flow, supported by stronger domestic activity, but expects results to remain below the unusually high levels achieved during the first half of 2008.
- Management planned up to $120 million of 2011 capital expenditures, with spending expected to increase for most businesses other than Maritech and Compressco. Capital expenditures may be deferred or canceled depending on activity and cash flow.
- In April 2011, Maritech agreed to sell properties representing approximately 79% of its December 31, 2010 proved reserves for approximately $222.3 million, subject to customary closing conditions and purchase price adjustments. Including first-quarter property sales, approximately 92% of Maritech’s proved reserves were expected to be sold. Closing was expected around May 31, 2011.
- The planned Maritech sale is expected to transfer approximately $72 million of associated asset retirement obligations to the purchaser. TETRA expected residual decommissioning liabilities of approximately $150 million to $160 million, with approximately $100 million of related cash outflows expected before March 31, 2012.
- Maritech’s estimated remaining abandonment, decommissioning, debris removal, and well-redrilling costs were approximately $60 million to $70 million before insurance recoveries. Actual costs could materially exceed estimates; approximately $19.5 million of Hurricane Ike insurance coverage remained available, and coverage disputes were pending.
- TETRA liquidated its remaining oil hedge contracts in April 2011 and paid $14.2 million to the counterparty. Future commodity-price exposure is expected to be limited because of reduced remaining Maritech production.
- Offshore activity remains exposed to regulatory uncertainty following the Macondo incident. “Idle Iron Guidance” may increase demand for abandonment and decommissioning services but also increases Maritech’s obligations and cost estimates.
- Compressco goodwill was vulnerable to future impairment because its estimated fair value exceeded carrying value by approximately 5.4%. Relevant risks include natural gas prices, business growth, compressor utilization, fabrication activity, and security issues in Mexico.
- Environmental and legal matters include a $487,000 EPA settlement related to a zinc bromide spill, expected to be paid in the second quarter and reportedly covered by insurance, as well as ongoing remediation obligations and a derivative lawsuit that management considers unlikely to have a material adverse effect.
- The company was in compliance with its debt covenants as of March 31, 2011. No material off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether the Maritech sale closed on the expected timetable, the final net proceeds, purchase price adjustments, and the amount of liabilities transferred.
- The pace and cost of Maritech’s remaining decommissioning obligations, including whether projected cash outflows and insurance recoveries are realized.
- Whether the significant first-quarter margin decline is temporary or reflects continuing weakness in Maritech and Offshore Services.
- Progress toward the proposed Compressco Partners master limited partnership offering, which was not effective as of the filing date.
- Compliance with debt covenants and the availability of the revolving credit facility as operating cash flows and capital expenditures change.
- Potential Compressco goodwill impairment and the effect of natural gas prices, offshore permitting, commodity prices, insurance disputes, and environmental contingencies on future results.