TETRA Technologies, Inc. 2010 Q2 Form 10-Q Summary
Business context and reporting period
TETRA Technologies is a geographically diversified oil and gas services company operating through Fluids, Offshore Services, Maritech, Production Testing, and Compressco. The filing covers the unaudited three and six months ended June 30, 2010, compared with the corresponding 2009 periods. The company filed the report on August 9, 2010.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $241.6 million, up 10.9% | $447.5 million, up 8.3% |
| Gross profit | $47.8 million; 19.8% margin | $82.9 million; 18.5% margin |
| Operating income | $22.9 million | $35.2 million |
| Income before taxes and discontinued operations | $20.5 million; 8.5% of revenue | $29.0 million; 6.5% of revenue |
| Net income | $13.6 million, or $0.18 diluted EPS | $19.0 million, or $0.25 diluted EPS |
| Operating cash flow | Not separately provided | $90.5 million, down from $130.0 million |
- Six-month product sales increased 18.6% to $217.1 million, while services and rentals were essentially flat at $230.4 million.
- Six-month gross margin declined from 20.3% to 18.5%, primarily because Offshore Services profitability declined from unusually strong 2009 levels and Fluids experienced calcium chloride plant start-up inefficiencies.
- Cash and cash equivalents were $89.2 million at June 30, 2010, compared with $33.4 million at December 31, 2009. Total current assets were $431.5 million versus current liabilities of $227.8 million.
- Long-term debt was $304.2 million, down from $310.1 million at year-end 2009. No balance was outstanding under the $300 million revolving facility; $15.6 million of letters of credit and guarantees left $284.4 million of net availability.
- Capital expenditures were $33.9 million in the first half, and management planned less than $130 million for full-year 2010.
Material changes versus prior comparable periods
- Fluids: Second-quarter revenue increased 27.5% to $79.3 million, driven by higher clear brine fluid sales, increased activity, and the new El Dorado, Arkansas calcium chloride plant. Six-month revenue increased 15.6%, but gross margin fell to 18.1% from 24.0% because of start-up inefficiencies, lower selected product pricing, and higher product costs.
- Offshore Services: Second-quarter revenue fell 7.4% to $85.4 million and pretax income fell 38.0% to $14.3 million. Lower activity, pricing, vessel utilization, and operating efficiencies reduced gross margin to 21.5% from 28.9%. Management expects profitability to remain below 2009 levels.
- Maritech: Second-quarter revenue rose 10.9% to $50.3 million and shifted from a $11.4 million pretax loss to $1.0 million of pretax income. Higher realized commodity prices, lower decommissioning charges, and lower depreciation more than offset production declines and impairment charges. Average realized prices, including hedges, were $99.26 per barrel of oil and $8.43 per MMBtu of natural gas.
- Production Testing: Second-quarter revenue increased 35.8% to $24.8 million, but pretax income declined 55.0% to $3.3 million because the 2009 period included a $5.8 million legal settlement gain and current-period administrative costs were higher.
- Compressco: Second-quarter revenue declined 5.7% to $20.0 million and pretax income declined 19.8% to $4.7 million due to lower U.S. demand, natural gas prices, pricing pressure, and reduced international activity, particularly in Mexico.
- Six-month net income declined 6.6% to $19.0 million despite higher revenue. The prior-year period benefited from asset-sale and legal-settlement gains, while 2010 had higher interest expense and lower Offshore Services profitability.
Guidance, outlook, risks, and unusual items
- Management expected continued growth in many businesses during the remainder of 2010, dependent on the continuing economic recovery and oil and gas activity. No formal consolidated revenue or earnings guidance was provided.
- The Deepwater Horizon/Macondo spill, Gulf of Mexico deepwater drilling moratorium, permitting delays, and potential regulatory changes could reduce demand, revenue, utilization, and cash flow, while increasing costs.
- Maritech had estimated remaining hurricane-related intervention, abandonment, decommissioning, debris removal, platform construction, and redrilling costs of approximately $75 million to $90 million before insurance recoveries. Actual costs could materially exceed estimates.
- Maritech’s total undiscounted decommissioning obligation was approximately $266.5 million, including $224.0 million recorded liability and $42.5 million of contractual reimbursement arrangements. The recorded decommissioning liability was $216.1 million at June 30.
- Maritech collected approximately $39.8 million of Hurricane Ike insurance proceeds in the first quarter, including an advance for future costs. The settlement produced approximately $2.2 million of pretax insurance gains and left approximately $29.5 million of maximum remaining hurricane-related coverage.
- A $9.9 million first-half impairment charge included an $8.9 million second-quarter impairment of Maritech oil and gas properties. Management stated that the impairment was not expected to require future cash expenditures.
- Compressco’s estimated fair value exceeded carrying value by approximately 9.6%; management identified a reasonable possibility of future goodwill impairment, potentially material, if natural gas prices or business demand decline.
- The $300 million revolving credit facility matures in June 2011, and the Series 2004-A and 2004-B Senior Notes mature in September 2011. The company had begun refinancing or replacement efforts and was in compliance with debt covenants at June 30.
- Management resumed purchasing windstorm insurance for the policy period ending June 2011, but coverage has lower limits, higher deductibles, and less favorable terms than before the 2008 hurricane season. Premiums will increase future operating expenses.
- A proposed $8.25 million settlement of the federal securities class action was expected to be paid by insurers and was awaiting court approval. A related derivative lawsuit remained unresolved.
- The company expected to pay a $487,000 EPA penalty related to a 2009 zinc bromide spill, which it expected to be covered by insurance.
- In July 2010, Maritech purchased South Texas onshore oil and gas interests for approximately $6.7 million.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2010, with no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether Gulf of Mexico permitting, drilling restrictions, and post-Macondo regulations materially affect Fluids, Offshore Services, and Maritech activity.
- The timing and ultimate cost of Maritech’s hurricane-related decommissioning, platform reconstruction, and well-redrilling obligations, including insurance recoveries.
- Progress refinancing the June 2011 revolver maturity and September 2011 Senior Note maturities, and continued compliance with financial covenants.
- Whether Compressco’s recovery in demand and natural gas pricing is sufficient to avoid a goodwill impairment.
- The sustainability of cash flow after excluding the $39.8 million insurance settlement and considering ongoing decommissioning expenditures.
- The final resolution and insurance funding of the securities class-action settlement, the derivative litigation, and the EPA penalty.
- The impact of resumed windstorm insurance premiums, Gulf of Mexico exposure, Mexican security disruptions, and potential derivative-market regulation on future margins and liquidity.