TETRA Technologies, Inc. 2016 Form 10-K Summary
Business context and reporting period
TETRA Technologies is a diversified oil and gas services company operating through Fluids, Production Testing, Compression and Offshore divisions. Services include completion fluids, water management, production testing, natural-gas compression, equipment fabrication, offshore plugging and abandonment, decommissioning and diving. The Offshore Division also includes Maritech, a residual oil and gas production and decommissioning business.
The filing covers the fiscal year ended December 31, 2016, with comparisons primarily to fiscal 2015. The company reported consolidated results including CSI Compressco LP, which is controlled and consolidated by TETRA but has separate debt and liquidity arrangements.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $694.8 million | $1,130.1 million | Down 38.5% |
| Gross profit | $51.4 million | $189.2 million | Down 72.8% |
| Gross margin | 7.4% | 16.7% | Down 930 basis points |
| Net loss | $239.4 million | $209.5 million | Loss increased |
| Net loss attributable to TETRA stockholders | $161.5 million | $126.2 million | Loss increased |
| Loss per share | $1.85 | $1.59 | Loss increased |
| Cash flow from operating activities | $54.0 million | $196.0 million | Down 72.5% |
| Capital expenditures | $21.1 million | $120.6 million | Down 82.5% |
| Cash and cash equivalents | $29.8 million | $23.1 million | Increased |
| Total assets | $1.316 billion | $1.636 billion | Down |
| Consolidated long-term debt, net | $623.7 million | $853.2 million | Down $229.5 million |
Revenue declines affected all operating segments. Fluids revenue declined 41.8% to $246.6 million, Production Testing declined 52.5% to $63.6 million, Compression declined 32.0% to $311.4 million, and Offshore Division revenue, before intersegment eliminations, declined to $77.4 million from $119.5 million.
At December 31, 2016, working capital was $158.9 million and total equity was $400.5 million. TETRA's cash balance was $9.0 million and CCLP's cash balance was $20.8 million; CCLP cash was not generally available to TETRA. The filing states that TETRA had approximately $189.2 million of availability under its revolving credit facility and CCLP had approximately $85.0 million of availability, subject to covenants, borrowing-base limitations and other conditions.
Material changes versus the prior comparable period
- Lower oil and natural gas prices and reduced customer drilling, completion and capital-spending activity caused broad revenue and margin deterioration. Competitive pricing pressure further reduced profitability.
- Goodwill impairment was $106.2 million in 2016, compared with $177.0 million in 2015. The 2016 charge fully impaired remaining goodwill in the Compression and Production Testing reporting units; only $6.6 million of Fluids goodwill remained at year-end.
- Long-lived asset impairments totaled $18.2 million in 2016. The filing also identifies approximately $7.2 million of fourth-quarter long-lived asset impairments and approximately $10.7 million in the first quarter.
- TETRA reduced its own debt from approximately $286.6 million at year-end 2015 to $119.6 million at year-end 2016. CCLP reduced debt from approximately $566.7 million to $504.1 million.
- TETRA completed common-stock offerings in June and December that generated aggregate net proceeds of $168.3 million, primarily used to repay debt. The December offering also issued warrants to purchase 11.2 million shares.
- CCLP issued Series A Convertible Preferred Units generating approximately $76.9 million of net proceeds. The preferred units carry an 11% paid-in-kind distribution rate, rank senior to CCLP common units and began scheduled conversion into common units in March 2017.
- CCLP repurchased and retired $54.1 million principal amount of its 7.25% Senior Notes for approximately $50.9 million, producing a $1.4 million net gain on extinguishment.
- Capital spending was materially reduced as management prioritized liquidity preservation. The company implemented headcount reductions, salary reductions, workweek reductions, deferred salary increases and suspension of 401(k) matching contributions, with some salary reductions partially restored in January 2017.
Debt, liquidity and contingencies
- TETRA's debt consisted primarily of approximately $3.2 million under its revolving credit facility and $116.4 million carrying value of its 11% Senior Note due November 2022. CCLP had approximately $217.5 million under its credit facility and $286.6 million carrying value of its 7.25% Senior Notes due August 2022.
- At December 31, 2016, TETRA reported a 1.34-to-1 fixed-charge coverage ratio and a 3.47-to-1 leverage ratio. CCLP reported a 3.13-to-1 interest-coverage ratio, 5.40-to-1 total leverage ratio and 2.35-to-1 secured leverage ratio. Both entities were in compliance with applicable covenants at year-end.
- Management forecast sufficient liquidity and covenant compliance through March 1, 2018, but emphasized that the forecast depends on operating and market assumptions that may prove inaccurate.
- Maritech had approximately $45.6 million of remaining decommissioning liabilities at year-end, with approximately $1.0 million expected to be performed during 2017. The company also estimated $7.9 million of remaining hurricane-related work for one toppled platform.
- BOEM's NTL 2016-N01 could require Maritech to provide additional bonds, collateral or other financial assurance for decommissioning obligations. Such requirements could reduce borrowing capacity and liquidity.
- The company had approximately $127.1 million of fixed and determinable purchase obligations under Fluids supply agreements, extending through 2029, and total contractual cash obligations of approximately $1.116 billion.
- Management did not believe ordinary-course litigation or environmental proceedings were reasonably likely to result in a material loss beyond amounts accrued. Separately, an arbitration award of $12.8 million related to the El Dorado facility was received on January 5, 2017 and recorded in first-quarter 2017 earnings.
Guidance, outlook, risks and unusual items
Management reported early 2017 indicators of improving demand in North American markets as oil and gas prices and rig counts recovered from 2016 lows. International and offshore markets remained weak, and no formal revenue or earnings guidance was provided in the filing.
- Future performance remains highly sensitive to oil and natural gas prices, customer capital spending, drilling and completion activity, utilization rates and pricing competition.
- Additional asset or goodwill impairments remain possible if commodity prices, market capitalization, demand or expected cash flows deteriorate.
- CCLP's preferred-unit distributions are paid in kind and may result in substantial future dilution. The filing estimated approximately 8.7 million CCLP common units would have been issued if all preferred units had been settled at the December 31, 2016 conversion price; the maximum potential issuance was described as potentially unlimited under the conversion provisions.
- Maritech's decommissioning estimates are subject to uncertainty from subsea conditions, pressured wells, hurricanes, regulatory changes, contractor costs and potential defaults by purchasers of previously sold properties.
- Operational risks include offshore accidents, environmental incidents, weather disruption, aging vessels and equipment, supplier concentration, foreign currency exposure, customer credit risk, regulatory changes and cyberattacks.
- The filing states that no conditions or events, considered in the aggregate, raised substantial doubt about the company's or CCLP's ability to continue as a going concern through one year from issuance of the financial statements.
Facts an investor should verify
- Reconcile the reported 2016 operating cash flow figures: the audited statement shows $53.98 million, while portions of management's discussion refer to approximately $53.0 million.
- Verify covenant headroom and borrowing-base availability for both TETRA and CCLP, particularly as leverage thresholds tighten after 2017.
- Assess whether improving rig counts and commodity prices translate into sustained revenue, utilization and margin recovery.
- Quantify potential dilution from TETRA's 11.2 million warrants and CCLP's convertible preferred units.
- Monitor Maritech decommissioning spending, BOEM financial-assurance requirements and possible liabilities from previously sold properties.
- Review the assumptions supporting the $6.6 million of remaining goodwill and the potential for further impairments.
- Confirm the treatment and timing of the $12.8 million El Dorado arbitration award in 2017 results.