TETRA Technologies, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
TETRA Technologies is a geographically diversified oil and gas services company operating through Completion Fluids & Products, Water & Flowback Services, and Compression. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. TETRA consolidates CSI Compressco LP (CCLP), with CCLP debt, cash, results, and noncontrolling interests included in the consolidated statements.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $245.9 million | $256.9 million | $778.5 million | $716.3 million |
| Gross profit | $45.0 million | $41.3 million | $129.5 million | $117.1 million |
| Gross margin | 18.3% | 16.1% | 16.6% | 16.3% |
| Loss before taxes and discontinued operations | $(7.5) million | $(12.9) million | $(30.3) million | $(42.6) million |
| Net loss attributable to TETRA stockholders | $(15.8) million | $(6.9) million | $(33.6) million | $(66.5) million |
| Net loss per diluted share | $(0.13) | $(0.06) | $(0.27) | $(0.54) |
- Q3 revenue declined 4.2%, while nine-month revenue increased 8.7% year over year.
- Q3 gross profit increased 8.8%; nine-month gross profit increased 10.6%.
- Q3 included a $9.1 million loss from discontinued operations, primarily reflecting a $7.5 million reserve for an Epic Companies promissory note and approximately $1.5 million of other receivables. Nine-month discontinued-operations loss was $9.9 million versus $40.9 million in 2018, which included a $33.8 million loss on disposal.
- General and administrative expense was $34.9 million in Q3 and $105.5 million for nine months. Nine-month expense included $1.8 million of executive transition costs and higher bad-debt expense.
- Net interest expense was $18.1 million in Q3 and $55.1 million for nine months, compared with $18.9 million and $52.2 million, respectively, in the prior-year periods.
- Cash provided by operating activities was $85.0 million for the first nine months, versus $1.6 million in 2018. Capital expenditures were $89.2 million, producing negative operating cash flow after capital expenditures of approximately $4.2 million before acquisitions and other investing activity.
- Cash and cash equivalents were $35.9 million at September 30, 2019, including approximately $15.3 million held by CCLP and not accessible to TETRA.
- Consolidated long-term debt was $858.3 million, consisting of $212.7 million of TETRA debt and $645.6 million of CCLP debt. Operating lease liabilities totaled $60.1 million following adoption of the new lease standard.
- TETRA had $41.6 million of ABL availability and CCLP had $7.8 million of credit-agreement availability at September 30, 2019, subject to borrowing-base and covenant restrictions. Both entities were in compliance with applicable debt covenants.
Material changes versus the prior comparable periods
- Completion Fluids & Products revenue decreased 5.9% in Q3 but increased 4.1% for nine months. Its nine-month gross margin improved to 23.2% from 17.8%, and pretax income increased to $32.1 million from $21.1 million.
- Water & Flowback Services revenue decreased 7.3% in Q3 and was broadly flat for nine months. Nine-month gross profit fell 40.9% to $24.6 million, with margin declining to 10.9% from 18.6%, primarily because of pricing pressure, demobilization and mobilization costs, maintenance costs, and less favorable project mix.
- Compression revenue decreased 1.3% in Q3 but increased 17.5% for nine months. Nine-month gross profit increased 40.6% to $58.8 million, and the pretax loss narrowed to $14.7 million from $30.5 million. Improved utilization, pricing, labor efficiency, maintenance costs, and inventory management supported results.
- CCLP redeemed all remaining Series A Preferred Units by August 8, 2019. The redemptions required approximately $28.0 million of cash during the first nine months, including redemption premiums, but eliminated the preferred-unit liability and related fair-value exposure.
- Adoption of ASC 842 on January 1, 2019 added approximately $60.6 million of operating right-of-use assets and $50.7 million of operating lease liabilities, with a $2.8 million increase to opening retained earnings.
Guidance, outlook, commentary, risks, and unusual items
- Management described continued volatility in oil prices and uncertainty in customer activity. Water and Flowback Services faced customer pricing pressure and weaker domestic onshore activity, while Permian Basin infrastructure constraints continued to support demand for compression equipment and services.
- Management is aggressively managing working capital, capital expenditures, and its flexible cost structure. It may postpone or cancel capital projects and indicated that future impairments or restructuring charges are possible.
- For 2019, TETRA expected approximately $25 million to $30 million of capital expenditures excluding Compression. Compression expected approximately $80 million to $85 million, primarily for fleet expansion. The filing does not provide earnings or revenue guidance.
- Q3 included a $0.8 million write-off of a compressor unit destroyed by fire. Earlier in 2019, Compression recorded $2.3 million of impairment on low-horsepower equipment.
- Goodwill of approximately $25.8 million related to Water Management exceeded the reporting unit’s estimated fair value carrying amount by approximately 17% at September 30, 2019. Management identified oil and gas prices, competition, customer activity, and industry outlook as significant uncertainties.
- Epic Companies filed for bankruptcy in August 2019. TETRA reserved the full $7.5 million promissory note and approximately $1.5 million of related receivables, while continuing to pursue collection and guarantor remedies.
- TETRA remains exposed to potential Maritech decommissioning liabilities through indemnities and guarantees. Orinoco did not provide required replacement bonds or escrow payments; a summary judgment dismissed TETRA’s current claims, and TETRA began an appeal. The original approximately $46.8 million bonds remained in effect.
- Variable-rate debt, commodity-price exposure, customer credit risk, foreign operations, litigation, regulatory changes, and potential capital-market constraints are material risks. TETRA does not hedge its indirect exposure to oil and natural gas prices.
Important facts for investors to verify
- Whether improved operating cash flow is sustainable and sufficient to fund capital expenditures, debt service, and fleet expansion without additional borrowing or equity issuance.
- The separate liquidity and debt capacity of TETRA and CCLP, including the portion of consolidated cash that is inaccessible to TETRA and the maturities of CCLP’s 7.25% and 7.50% notes.
- Compression backlog, fleet utilization, pricing, capital spending, and whether the Compression Division can reach sustained profitability.
- Water & Flowback Services’ margin recovery, customer credit quality, pricing, maintenance costs, and exposure to lower energy activity.
- The collectability of the Epic promissory note and related receivables, the outcome of the Orinoco appeal, and the magnitude and timing of potential Maritech decommissioning obligations.
- The assumptions supporting the approximately 17% Water Management goodwill cushion and the potential for future impairment.
- Compliance with debt covenants and borrowing-base requirements, especially if oil and gas activity or customer credit conditions deteriorate.