TETRA Technologies, Inc. — FY2010 Form 10-K Summary
Business Context and Reporting Period
TETRA Technologies is a diversified oil and gas services company with five reporting segments: Fluids, Offshore Services, Maritech, Production Testing, and Compressco. Its businesses provide completion fluids and chemicals, offshore plugging and abandonment and decommissioning services, oil and gas production, production testing, and wellhead compression services. This Form 10-K covers the fiscal year ended December 31, 2010, with comparative information for 2009 and 2008. The company filed the report on March 1, 2011.
Financial Performance and Position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $872.7 million | $878.9 million | (0.7%) |
| Gross profit | $43.7 million | $213.1 million | (79.5%) |
| Gross margin | 5.0% | 24.2% | Down 19.2 percentage points |
| Operating income (loss) | $(56.4) million | $112.3 million | Turned negative |
| Net income (loss) | $(43.7) million | $68.8 million | Turned negative |
| Diluted loss per share | $(0.58) | $0.91 income | Turned negative |
| Cash flow from operations | $153.3 million | $272.3 million | (43.7%) |
| Capital expenditures | $107.7 million | $151.8 million | Down $44.1 million |
| Cash and cash equivalents | $65.4 million | $33.4 million | Up $32.0 million |
| Working capital | $198.1 million | $148.3 million | Up $49.8 million |
| Total debt | $305.0 million | $310.1 million | Down $5.1 million |
| Stockholders’ equity | $516.3 million | $576.5 million | Down $60.2 million |
Operating cash flow exceeded cash capital expenditures by approximately $45.6 million. Total assets were $1.30 billion at year-end, compared with $1.35 billion in 2009. The company reported no outstanding borrowings under its revolving credit facility at December 31, 2010, with $264.6 million of net availability after letters of credit and guarantees. The facility was reduced to $278 million and extended to October 2015. Debt consisted primarily of fixed-rate senior notes maturing between 2013 and 2020.
Segment Results and Material Changes
- Fluids: Revenue increased 22.5% to $276.3 million, largely due to the El Dorado, Arkansas calcium chloride plant and stronger onshore completion-fluid demand. Gross profit declined 18.0% to $39.0 million, reflecting start-up inefficiencies at El Dorado and a $7.2 million impairment of the Lake Charles, Louisiana plant.
- Offshore Services: Revenue declined 22.5% to $274.2 million and gross profit fell 77.0% to $21.7 million as activity and pricing fell from record 2009 levels. The company recorded a $15.3 million impairment of the Epic Diver and approximately $2.4 million of additional asset impairments.
- Maritech: Revenue increased 13.3% to $200.6 million because of higher realized oil and gas prices, including hedge benefits, despite lower production. The segment generated a $69.1 million pretax loss versus $22.0 million of pretax income in 2009. Results were burdened by higher decommissioning costs and $63.8 million of oil and gas property impairments.
- Production Testing: Revenue increased 33.8% to $104.0 million, driven by stronger U.S. onshore and international activity. Gross profit increased 31.6% to $22.2 million, although pretax income decreased slightly because 2009 included a significant legal settlement gain.
- Compressco: Revenue declined 10.5% to $81.4 million and gross profit declined 20.3% to $28.7 million due to lower natural gas prices, reduced demand, increased competition, and weaker Mexican activity.
The fourth quarter was especially weak: revenue was $213.2 million, gross profit was negative $68.0 million, and net loss was $62.9 million. Full-year results were materially affected by non-cash impairments, increased decommissioning obligations, and reduced offshore activity.
Unusual Items, Outlook, and Risks
- Maritech increased its decommissioning and asset-retirement obligations by approximately $131.9 million during 2010. The consolidated liability was $272.8 million at year-end; the filing also presents an undiscounted contractual obligation of approximately $321.7 million, including reimbursement arrangements from prior property owners.
- Approximately $54.0 million of 2010 decommissioning adjustments was charged directly to operating expense. About $63.8 million of oil and gas property impairments, $17.7 million of Offshore Services impairments, and $7.2 million for the Lake Charles plant contributed to the loss.
- The BOEMRE’s “Idle Iron Guidance,” issued after the Macondo oil spill, requires accelerated abandonment of nearly 3,500 nonproducing wells and dismantling of approximately 650 unused platforms. Management expects this to increase long-term demand for Offshore Services, but it also raises Maritech’s decommissioning costs.
- Management expected 2011 Production Testing revenue and cash flow to improve, Compressco revenue and cash flow to increase modestly, and Offshore Services activity to benefit from new decommissioning regulations while remaining below 2009 record levels. Fluids performance was expected to improve as the El Dorado plant became more efficient, with significant improvement not expected until mid-2011.
- The company planned more than $120 million of 2011 capital expenditures, primarily outside Maritech and Compressco, subject to cash flow and capital-conservation priorities.
- TETRA began reducing investment in Maritech, suspended its search for additional oil and gas acquisitions, reduced development activity, and explored strategic alternatives, including asset sales. In February 2011, Maritech sold properties representing approximately 11.4% of its year-end proved reserves.
- Maritech had approximately 11.5 million BOE of proved reserves at December 31, 2010, including 25.6 Bcf of natural gas. Production, reserves, commodity prices, pipeline access, and future abandonment costs remain significant variables.
- At year-end, Maritech had no natural gas hedges, while oil swaps covered 2,000 barrels per day through 2011 at an average price of $87.68 per barrel. The filing estimates that a $0.10 per Mcf decline in future gas prices would reduce after-tax earnings by approximately $0.5 million.
- Remaining hurricane-related abandonment, decommissioning, debris removal, and well-redrilling costs were estimated at $50 million to $65 million before insurance recoveries. The company had initiated litigation concerning disputed Hurricane Ike insurance coverage.
- Other contingencies include a derivative lawsuit of uncertain outcome, environmental remediation obligations, a proposed $487,000 EPA penalty for a zinc bromide spill expected to be covered by insurance, and $266.4 million of fixed and determinable raw-material purchase obligations extending through 2029.
Most Important Facts for Investors to Verify
- Whether Maritech’s decommissioning liabilities, future cash expenditures, and impairment assumptions remain adequate under evolving BOEMRE requirements and actual contractor pricing.
- Whether the El Dorado calcium chloride plant achieves the expected efficiency and profitability improvements and whether additional capital investment is required.
- The timing and recoverability of remaining Hurricane Ike insurance claims and the ultimate cost of hurricane-related restoration and abandonment work.
- Whether offshore permitting activity and Gulf of Mexico demand recover sufficiently to offset the post-Macondo decline in Fluids and Offshore Services activity.
- Maritech’s unhedged natural gas exposure, declining production, pipeline constraints, reserve revisions, and the impact of the February 2011 property sale.
- Compliance with debt covenants and the company’s ability to fund more than $120 million of planned 2011 capital expenditures while meeting decommissioning obligations.
- The potential for additional impairments, particularly Compressco goodwill, offshore equipment, oil and gas properties, and chemical plants.