TETRA Technologies, Inc. — 2013 Second-Quarter Form 10-Q
Business context and reporting period
TETRA Technologies is a geographically diversified oil and gas services company providing completion fluids, frac water management, production testing, compression-based production enhancement, offshore services, and well abandonment and decommissioning. The filing covers the three and six months ended June 30, 2013, compared primarily with the corresponding 2012 periods.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Total revenue | $221.1 million | $234.9 million | Down 5.9% |
| Gross profit | $31.4 million | $53.1 million | Down 40.9% |
| Gross margin | 14.2% | 22.6% | Down 8.4 percentage points |
| Net loss attributable to TETRA stockholders | $2.9 million | Net income of $11.6 million | EPS: $(0.04) vs. $0.15 |
| Operating cash flow | Six months: $30.4 million vs. $(8.0) million | Improved by $38.4 million |
| Six-month metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $429.7 million | $415.7 million | Up 3.4% |
| Gross profit | $70.1 million | $85.5 million | Down 18.0% |
| Gross margin | 16.3% | 20.6% | Down 4.3 percentage points |
| Net loss attributable to TETRA stockholders | $(1.6) million | Net income of $12.3 million | EPS: $(0.02) vs. $0.16 |
At June 30, 2013, cash and cash equivalents were $30.5 million, restricted cash was $9.1 million, and total assets were $1.17 billion. Total debt was $346.0 million, including $346.0 million classified as long-term debt and current debt of approximately $0.1 million. Net debt based solely on unrestricted cash was approximately $315.5 million.
Six-month investing cash outflow was $50.4 million, including $51.5 million of capital expenditures. Financing cash outflow was $22.4 million, primarily reflecting $85.9 million of debt repayments partially offset by $65.4 million of new borrowings. Cash declined by $43.5 million during the first six months, to $30.5 million from $74.0 million.
Material changes versus the prior comparable period
- Q2 revenue declined primarily because of lower Offshore Services and Production Testing activity. Offshore Services was affected by Gulf of Mexico competition, pricing pressure, and weather delays; Production Testing was affected by lower Mexico activity, weaker domestic natural gas activity, and lower OPTIMA activity.
- Fluids was the principal growth contributor. Q2 revenue increased 11.6% and pretax income increased 27.9%, supported by frac water management and clear brine fluids demand. Six-month revenue increased 14.8% and pretax income increased 37.1%.
- Production Testing Q2 revenue decreased 5.8%, gross margin fell to 16.2% from 30.6%, and pretax income declined 61.4%. The 2012 acquisitions of OPTIMA, ERS, and Greywolf increased revenue but did not offset weaker underlying activity and higher costs.
- Compressco Q2 revenue increased 10.8%, but gross margin decreased to 28.7% from 36.6% because of lower Mexico activity and higher labor and maintenance costs. Compressor utilization improved to 82.6% from 79.7%.
- Maritech recorded approximately $23.6 million of excess decommissioning costs in Q2 and $32.9 million in the first six months, substantially reducing consolidated profitability. The six-month charge included approximately $15.4 million of work expected in the second half of 2013.
- General and administrative expense increased 9.2% in Q2 and 8.9% for the six-month period. Approximately $1.3 million of employee severance costs was recorded in Q2, with further cost reductions expected.
Guidance, outlook, commentary, risks, and unusual items
- Management expected Maritech to complete remaining operated-property abandonment and decommissioning work by the end of 2013. Maritech’s remaining liability was approximately $49.5 million at June 30, excluding the broader consolidated asset retirement obligation balance of approximately $57.3 million.
- Management planned approximately $100 million of 2013 capital expenditures, excluding acquisitions. Capital projects may be deferred or canceled depending on market conditions and liquidity needs.
- As of August 8, 2013, TETRA reported approximately $252.0 million of net availability under its $278 million revolving credit facility. Compressco Partners reported $18.3 million of availability under its amended $40 million facility.
- In April 2013, TETRA issued $35.0 million of 4.0% Senior Notes due April 29, 2020, using the proceeds to repay the $35.0 million of 6.3% Senior Notes that matured on April 30, 2013.
- Management expected Mexico activity to recover slowly, but future revenue depends on customer budget decisions, contract renewals, extensions, or new awards. Offshore Services had contracts expected to produce significant work later in 2013.
- The $7.6 million insurance settlement received in February 2013 related to hurricane damage claims; a portion was credited to operating expenses during the first six months.
- Key risks include oil and natural gas price volatility, oilfield activity levels, customer concentration in Mexico, weather and Gulf of Mexico market conditions, execution and cost uncertainty for Maritech decommissioning, environmental and litigation exposure, foreign currency risk, interest-rate risk, and compliance with debt covenants.
- Management stated that it was in compliance with the applicable credit facility and Senior Note covenants at June 30, 2013. No material changes to previously disclosed risk factors or market-risk exposures were reported.
Important facts for investors to verify
- Whether Maritech’s remaining abandonment and decommissioning costs remain within estimates and are completed by year-end 2013 without additional material charges.
- Whether Mexico customer budget reviews are resolved and Production Testing and Compressco activity and revenue recover.
- Whether Offshore Services’ anticipated later-2013 contracts offset Gulf of Mexico pricing pressure, competition, and weather-related delays.
- Whether cost reductions improve Production Testing, Compressco, Offshore Services, and corporate margins without impairing operating capacity.
- Whether planned 2013 capital expenditures remain near $100 million and can be funded while maintaining debt-covenant compliance and adequate liquidity.
- The effect of the 2012 acquisitions on sustainable earnings, cash flow, goodwill, and contingent purchase-price obligations.