TETRA Technologies, Inc. 2015 Form 10-K Summary
Business context and reporting period
TETRA Technologies is a geographically diversified oil and gas services company. Its five reporting segments are organized into Fluids, Production Testing, Compression, and Offshore divisions. Products and services include completion fluids, water management, frac flowback, production testing, natural gas compression, equipment sales, offshore well abandonment, decommissioning, diving, and related services.
The filing covers the fiscal year ended December 31, 2015, with quarterly information for the three months ended December 31, 2015. Results were heavily affected by the continuing decline in oil and natural gas prices, lower customer capital spending, the full-year contribution from the 2014 CSI acquisition, and significant fourth-quarter impairment charges.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1,130.1 million | $1,077.6 million | Up 4.9% |
| Gross profit | $189.2 million | $95.0 million | Up 99.1% |
| Gross margin | 16.7% | 8.8% | Up 7.9 points |
| Net loss | $209.5 million | $167.6 million | Loss increased |
| Net loss attributable to TETRA stockholders | $126.2 million | $169.7 million | Loss narrowed |
| Loss per diluted share | $1.59 | $2.16 | Improved |
| Cash flow from operations | $196.0 million | $108.6 million | Up 80.4% |
| Capital expenditures | $120.6 million | $131.6 million | Down 8.4% |
Fourth-quarter 2015 revenue was $257.6 million, gross profit was $2.8 million, and net loss attributable to TETRA stockholders was $146.4 million. Fourth-quarter results included $44.2 million of long-lived asset impairments and $177.0 million of goodwill impairments.
- Fluids: Revenue declined 3.0% to $424.0 million, but gross profit increased 14.5% to $112.0 million and gross margin improved to 26.4%. Higher-margin offshore completion fluids and clear brine fluid activity offset weaker onshore water management demand.
- Production Testing: Revenue fell 30.6% to $133.9 million. The segment reported a $3.0 million gross loss versus $12.6 million of gross profit in 2014, reflecting lower activity, pricing pressure, and competition.
- Compression: Revenue increased 62.0% to $457.6 million, principally because 2015 included a full year of CSI operations. Gross profit increased to $73.1 million, but gross margin declined to 16.0% from 23.5% due to market weakness, depreciation and amortization, and impairments.
- Offshore Services: Revenue declined 37.5% to $122.2 million, while gross profit improved to $10.6 million from a $10.3 million loss. Cost reductions and lower impairments offset lower Gulf of Mexico activity.
- Maritech: Revenue was $2.4 million and the pretax loss narrowed to $3.8 million from $71.2 million, primarily because excess decommissioning costs were substantially lower.
At December 31, 2015, cash and cash equivalents were $23.1 million, restricted cash was $6.7 million, working capital was $170.2 million, total assets were $1.66 billion, and total equity was $514.2 million. Trade receivables declined to $184.2 million from $227.0 million, while the allowance for doubtful accounts increased to $7.8 million from $2.5 million.
Debt, liquidity, and cash flow
Consolidated long-term debt, net, was $873.4 million at year-end, comprising $292.9 million of TETRA debt and $580.5 million of CCLP debt. TETRA had $22.9 million outstanding under its revolving credit facility and approximately $194.6 million of net availability. CCLP had $235.0 million outstanding under its credit facility and approximately $163.4 million of availability.
In November 2015, TETRA issued $125.0 million of 11.0% Senior Notes due 2022, generating $119.7 million of net proceeds. The proceeds were used to repay the TETRA revolving facility, repurchase $25.0 million of 2010 Senior Notes, prepay the $90.0 million Series 2006-A Notes, and pay related costs. The maturity of $50.0 million of Senior Secured Notes was extended from 2017 to 2019. Management characterized the transactions as a maturity extension and liquidity enhancement without a significant increase in net borrowings.
Operating cash flow of $196.0 million included approximately $101.9 million generated by CCLP. TETRA received $30.5 million of CCLP distributions. CCLP's distribution attributable to the fourth quarter of 2015 was reduced to $0.3775 per unit, down 24.9% from the prior quarterly distribution. Approximately $10.6 million of consolidated cash was held by CCLP and was not available to TETRA directly.
Management stated that both TETRA and CCLP were in compliance with debt covenants at December 31, 2015 and expected to maintain compliance through December 31, 2016 based on projected cash flows and cost reductions. TETRA's leverage ratio was 1.86 to 1, compared with a 3.25 maximum under its revolving facility; CCLP's leverage ratio was 4.56 to 1 under its facility.
Material changes versus the prior comparable period
- CSI contributed a full year of revenue in 2015 versus approximately five months in 2014, increasing Compression revenue by approximately $175.1 million.
- Lower oil and gas prices reduced customer drilling, completion, production, and capital spending activity, particularly affecting water management, production testing, low-horsepower compression, compressor equipment sales, and offshore services.
- Consolidated gross margin improved significantly because of the Fluids product mix, cost reductions, improved Offshore Services performance, and lower Maritech decommissioning charges.
- Fourth-quarter impairment charges totaled approximately $221.2 million, including $177.0 million of goodwill and $44.2 million of long-lived asset and intangible asset impairments. Remaining goodwill fell to $112.9 million from $293.9 million.
- Maritech decommissioning expenditures declined to $10.3 million from $63.3 million, but approximately $48.4 million of decommissioning liabilities remained at year-end.
- Capital spending remained elevated in Compression at approximately $95.6 million, primarily for the CSI compressor fleet, but management expected Compression capital expenditures to decline significantly.
Guidance, outlook, risks, and unusual items
The filing does not provide formal revenue or earnings guidance. Management expected continued weak demand in early 2016 and planned additional headcount reductions, wage actions, vendor renegotiations, and other cost restructuring measures. Planned 2016 capital expenditures were approximately $5 million to $10 million excluding Compression and $20 million to $30 million for Compression, subject to demand and acquisition activity.
- Extended low oil and natural gas prices could reduce revenue, pricing, utilization, operating cash flow, customer collections, and CCLP distributions, and could trigger additional asset or goodwill impairments.
- CCLP's debt is separately financed and limits the cash available for distribution to TETRA. A covenant failure at CCLP could reduce distributions and restrict liquidity.
- Maritech retains approximately $48.4 million of decommissioning liabilities, including approximately $7.8 million related to a hurricane-damaged platform. Actual costs may exceed estimates because of damaged structures, underwater conditions, and previously plugged wells that become pressurized.
- TETRA may have continuing exposure if buyers of previously sold Maritech properties fail to perform assumed abandonment and decommissioning obligations. One buyer filed for bankruptcy in 2015, although management did not consider a loss probable at year-end.
- The company had $135.1 million of fixed and determinable Fluids Division purchase obligations extending through 2029 and total contractual cash obligations of approximately $1.48 billion.
- Other risks include offshore accidents and environmental liabilities, evolving regulation, supplier concentration, foreign currency exposure, variable interest rates, customer credit risk, cybersecurity, and potential losses on fixed-price contracts.
The company recorded a $6.7 million correcting adjustment to equity-based compensation expense during the fourth quarter and stated that it was not material to any individual reporting period. Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether oil and gas prices and customer spending recover sufficiently to stabilize Production Testing, Compression, Fluids water management, and Offshore Services demand.
- Whether TETRA and CCLP generate enough cash flow to remain within their respective debt covenants through 2016 and beyond.
- Whether CCLP can sustain distributions to TETRA after debt service, capital spending, and weaker market conditions.
- Whether additional goodwill or long-lived asset impairments are required, particularly for Compression and Production Testing.
- Whether Maritech's remaining and potentially assumed decommissioning obligations can be completed within recorded estimates.
- Whether planned cost reductions and lower capital spending offset declining activity without impairing long-term operating capacity.