TETRA TECHNOLOGIES INC quarterly report, Q3 FY2016

TETRA Technologies, Inc. — Q3 2016 Form 10-Q Summary

Business context and reporting period

TETRA 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 unaudited three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.

Results were materially affected by low oil and natural gas prices, reduced customer drilling and completion activity, competitive pricing pressure, and lower demand across substantially all operating segments.

Key financial metrics

Metric	Three months ended September 30	Change	Nine months ended September 30	Change
Revenue	$176.6 million	Down 42.1%	$521.5 million	Down 40.2%
Gross profit	$28.8 million	Down 59.2%	$49.6 million	Down 73.4%
Gross margin	16.3%	Down from 23.1%	9.5%	Down from 21.4%
Net income (loss)	$(24.0) million	Versus $10.7 million income	$(201.0) million	Versus $22.5 million income
Net loss attributable to TETRA stockholders	$(15.0) million	Versus $9.8 million income	$(129.9) million	Versus $20.2 million income
Loss per diluted share	$(0.16)	Versus $0.12 income	$(1.53)	Versus $0.25 income

General and administrative expense declined 30.1% in the quarter and 21.4% year to date, reflecting headcount, salary, work-week, and other cost reductions. G&A nevertheless increased to 16.2% of quarterly revenue from 13.4% because revenue declined faster than expenses.
Interest expense increased to $14.3 million in the quarter and $43.3 million year to date, primarily due to higher-cost 11% Senior Notes and paid-in-kind distributions on the CCLP preferred units.
Cash provided by operating activities was $25.7 million for the first nine months, down from $118.2 million in 2015.
Capital expenditures were $15.4 million, down from $96.1 million in the prior-year period. Net cash used in investing activities was $9.1 million.
Cash and cash equivalents were $22.2 million at September 30, 2016, including $13.4 million held by CCLP and not accessible to TETRA. Restricted cash was $6.7 million.
Consolidated long-term debt was $738.0 million, down from $853.2 million at December 31, 2015. TETRA debt was $242.3 million and CCLP debt was $495.7 million; the capital structures have no cross-default, cross-collateralization, or cross-guarantee provisions.
At September 30, 2016, TETRA reported $91.8 million of net availability under its revolving facility and CCLP reported $151.3 million of availability, subject to covenants and other restrictions.

Material changes versus the prior comparable period

All operating divisions reported lower revenue. Third-quarter declines were 43.4% in Fluids, 47.9% in Production Testing, 45.1% in Compression, and 22.8% in Offshore Services.
Compression revenue fell $58.2 million in the quarter, driven by lower compressor equipment and parts sales, lower fleet utilization, and pricing pressure. Reduced equipment fabrication backlog indicated continued pressure on future package sales.
Fluids revenue fell $48.0 million in the quarter, largely because of lower U.S. Gulf of Mexico activity and the absence of a significant prior-year customer completion-fluid project.
Production Testing generated a quarterly gross loss of $2.0 million compared with prior-year gross profit of $0.9 million. Offshore Services also reported lower gross profit, while Maritech continued to generate negligible revenue and losses.
Year-to-date results included $106.2 million of goodwill impairment charges, comprising $92.4 million for Compression and $13.9 million for Production Testing. The company also recorded $10.9 million of long-lived asset impairments.
Assets declined to $1.37 billion from $1.64 billion at year-end 2015, primarily reflecting impairments, depreciation, and reduced goodwill. Goodwill declined from $112.9 million to $6.6 million.
TETRA issued 11.5 million common shares in June 2016 and received approximately $60.2 million of net proceeds, which were used to repay the remaining Senior Secured Notes, reduce revolver borrowings, and fund general corporate purposes.
CCLP raised approximately $77.3 million of aggregate net proceeds through private placements of Series A Convertible Preferred Units. The units carry an 11% annual paid-in-kind distribution and are scheduled to convert into CCLP common units beginning in March 2017, potentially diluting TETRA’s existing CCLP ownership.

Guidance, outlook, risks, contingencies, and unusual items

Management expects low industry demand and reduced activity levels to continue for an uncertain period. The company has deferred or canceled significant growth and maintenance capital expenditures and continues to pursue cost reductions and working-capital improvements.
Based on forecasts prepared as of November 9, 2016, management believes TETRA and CCLP will have adequate liquidity, earnings, and operating cash flow to fund operations, service debt, and remain compliant with covenants through September 30, 2017. This conclusion depends on operating and market assumptions that may not prove accurate.
TETRA’s September 30 leverage ratio was 3.64 to 1 versus a 4.00-to-1 maximum, and its fixed-charge coverage ratio was 2.32 to 1 versus a 1.25-to-1 minimum. CCLP’s total leverage ratio was 4.83 to 1, secured leverage was 1.75 to 1, and interest coverage was 3.36 to 1.
In July 2016, TETRA amended its revolving credit and 11% Senior Note agreements, including covenant relief and first-priority security interests over substantially all applicable TETRA assets. In November 2016, CCLP converted its credit facility to an asset-based revolving facility and further amended its covenants.
CCLP repurchased and retired $20.0 million principal amount of its 7.25% Senior Notes in September 2016 and an additional $34.1 million in October 2016. The October transaction occurred after the balance-sheet date.
The CCLP preferred units generated a $6.3 million third-quarter fair-value expense and increased earnings volatility. They are recorded as a $77.0 million long-term liability and may require future common-unit issuance or cash settlement.
Maritech had approximately $45.6 million of remaining decommissioning liabilities at September 30, 2016. The company faces potential additional obligations if purchasers of previously sold properties fail to perform required abandonment and decommissioning work.
New BOEM financial-assurance requirements could require Maritech to obtain additional bonds, post collateral, provide guarantees, or otherwise fund decommissioning obligations, potentially reducing borrowing capacity and liquidity.
Key risks include commodity-price volatility, customer credit deterioration, covenant compliance, refinancing and capital-market access, interest-rate exposure, foreign exchange, litigation and environmental matters, and the possibility of additional asset impairments.

Most important facts for investors to verify

Whether oilfield activity, customer demand, compressor utilization, equipment backlog, and pricing improve sufficiently to stabilize revenue and margins.
Whether TETRA and CCLP generate enough operating cash flow to maintain covenant compliance and service their separate debt structures through September 30, 2017.
The availability and borrowing-base limitations under CCLP’s amended asset-based facility, including the effect of cash-dominion provisions.
The potential dilution, cash-flow priority, and fair-value volatility associated with CCLP’s 11% convertible preferred units.
Whether further goodwill, intangible-asset, or other long-lived-asset impairments are required if market conditions remain weak.
The final financial-assurance requirements imposed by BOEM and the potential exposure from Maritech’s remaining and previously transferred decommissioning obligations.
The company’s ability to preserve liquidity while maintaining adequate maintenance capital expenditures and operational competitiveness.