TETRA Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
TETRA Technologies 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 quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Results were materially affected by sustained low oil and natural gas prices, reduced customer drilling and completion activity, competitive pricing pressure, and constrained capital spending across the energy industry. TETRA consolidates CSI Compressco LP (CCLP), although TETRA and CCLP maintain separate debt structures without cross-defaults, cross-collateralization, or cross-guarantees.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $175.7 million | $316.3 million | $345.0 million | $567.4 million |
| Gross profit | $16.3 million | $69.9 million | $20.9 million | $115.9 million |
| Gross margin | 9.3% | 22.1% | 6.1% | 20.4% |
| Income (loss) before taxes | $(27.5) million | $18.1 million | $(176.6) million | $16.1 million |
| Net income (loss) | $(29.2) million | $15.4 million | $(177.0) million | $11.7 million |
| Net income (loss) attributable to TETRA stockholders | $(26.6) million | $14.9 million | $(114.9) million | $10.5 million |
| Diluted EPS | $(0.32) | $0.19 | $(1.42) | $0.13 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $33.6 million | $82.2 million |
Six-month results included $106.2 million of goodwill impairment, primarily related to the Compression and Production Testing reporting units, and $10.9 million of long-lived asset impairments. Excluding these reported impairment charges, the filing does not present a single non-GAAP earnings measure that fully reconciles underlying profitability.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $23.9 million at June 30, 2016, compared with $23.1 million at December 31, 2015. Approximately $16.7 million of the June 30 cash balance was held by CCLP and was not accessible to TETRA.
- Total assets were $1.386 billion, down from $1.636 billion at year-end 2015, primarily reflecting impairment charges and lower receivables.
- Consolidated long-term debt was $788.2 million, consisting of $219.1 million of TETRA debt and $569.2 million of CCLP debt. TETRA and CCLP debt must be analyzed separately because the capital structures are not guaranteed by one another.
- At June 30, TETRA had $114.2 million of net availability under its revolving credit facility, while CCLP had $101.9 million of net availability, subject to covenant compliance and other borrowing limitations.
- TETRA's June 30 consolidated leverage ratio was 2.27 to 1 versus a 4.00 to 1 maximum, and its fixed-charge coverage ratio was 4.32 to 1 versus a 1.25 to 1 minimum. CCLP's total leverage ratio was 5.04 to 1 versus a 5.50 to 1 maximum, and its interest coverage ratio was 3.81 to 1 versus a 3.0 to 1 minimum.
- Capital expenditures were $9.0 million in the first six months, compared with $73.3 million in the prior-year period. Management expects 2016 capital expenditures of approximately $10 million to $15 million excluding Compression and approximately $20 million to $25 million for Compression.
Material changes versus the prior comparable period
- Second-quarter revenue fell 44.5%, and six-month revenue fell 39.2%, as every operating segment experienced lower demand.
- Second-quarter gross profit declined 76.7%, reducing gross margin to 9.3% from 22.1%. The comparison was also affected by a favorable prior-year customer project involving new completion-fluid technology.
- Fluids revenue decreased 50.5% in the quarter and 46.0% year to date; pretax income fell to $0.5 million for the quarter and was approximately breakeven for the six months.
- Production Testing revenue decreased 61.6% in the quarter and 53.8% year to date, with a second-quarter gross loss and a six-month pretax loss of $23.7 million, including goodwill and intangible-asset impairments.
- Compression revenue decreased 39.8% in the quarter and 31.2% year to date. The division reported a second-quarter pretax loss of $4.0 million and a six-month pretax loss of $108.7 million, including $92.3 million of goodwill impairment.
- Offshore Services revenue decreased 26.9% in the quarter and 23.5% year to date. Maritech remained a negligible-revenue business but generated additional losses from decommissioning-related items.
- General and administrative expense declined 27.5% in the quarter and 16.4% year to date due to headcount, salary, and other cost reductions, but increased as a percentage of revenue because of the substantial revenue decline.
- Operating cash flow decreased 59.1% year to date, while capital expenditures declined 87.7%, reflecting aggressive cash preservation and deferral of growth and maintenance projects.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects low oil and natural gas prices and reduced customer activity to continue affecting demand, pricing, revenue, and operating cash flow. The filing provides no formal revenue or earnings guidance.
- Management expects adequate liquidity to fund operations, service debt, and maintain compliance with amended covenants through June 30, 2017, based on forecasts using market conditions as of August 9, 2016. This outlook is dependent on cost reductions, operating cash flow, customer activity, and continued access to financing.
- In June 2016, TETRA issued 11.5 million common shares and received $60.4 million of net proceeds. The proceeds were used to repay the remaining $30.0 million of Senior Secured Notes, reduce revolver borrowings, pay offering costs, and support general corporate purposes.
- TETRA repurchased $100.0 million principal amount of older senior notes in May 2016. In July 2016, it amended its revolving credit agreement and 11% Senior Note agreement, including financial covenant changes and first-lien security provisions.
- On August 8, 2016, CCLP received $49.8 million of net proceeds from issuing Series A Convertible Preferred Units; TETRA invested $10.0 million. The preferred units carry an 11% paid-in-kind distribution and are senior to CCLP common units, creating potential dilution and reducing the economic position of existing common unitholders.
- Maritech had approximately $45.6 million of remaining decommissioning liabilities at June 30, 2016, with approximately $3.3 million expected to be performed during the following twelve months. Actual costs may exceed estimates because of uncertain offshore conditions, pressured wells, weather, and incomplete historical information.
- TETRA may have future exposure to decommissioning obligations assumed by purchasers of previously sold Maritech properties if those purchasers cannot perform. Management did not consider such exposure probable at June 30, 2016, but identified significant uncertainty, including purchaser financial distress and a prior bankruptcy.
- New BOEM financial-assurance requirements effective September 12, 2016 could require additional bonding or collateral for Maritech obligations and reduce borrowing capacity.
- Additional impairment charges, covenant pressure, reduced CCLP distributions, customer credit losses, higher financing costs, and restricted access to capital remain material risks. Litigation and environmental proceedings were not considered reasonably likely to have a material adverse effect based on management's assessment.
Important facts for investors to verify
- Whether oil and gas prices and customer drilling, completion, compression, and offshore activity improve sufficiently to stabilize revenue and margins.
- Whether TETRA and CCLP generate enough cash to remain within their amended debt covenants through June 30, 2017, particularly given limited covenant headroom at CCLP.
- The accessibility of CCLP cash and the sustainability of distributions to TETRA, considering CCLP's separate debt obligations and preferred-unit distributions.
- The ultimate cost and timing of Maritech's remaining decommissioning obligations, including potential liabilities on properties previously sold and the impact of BOEM financial-assurance requirements.
- Whether the Compression and Production Testing businesses require further goodwill or long-lived-asset impairments if weak market conditions persist.
- The effect of the CCLP preferred-unit issuance on future dilution, distributions, voting power, and CCLP common-unit value.
- Whether reduced capital expenditures preserve liquidity at the expense of fleet condition, operating capability, or future competitiveness.