TETRA Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. The unaudited interim statements reflect three continuing divisions: Completion Fluids & Products, Water & Flowback Services, and Compression. Offshore Services and Maritech were classified as discontinued operations after their March 1, 2018 disposition.
Business Context and Key Transactions
- TETRA provides completion fluids and products, water management, frac flowback, production well testing, offshore rig cooling, and compression services and equipment to oil and gas customers.
- On February 28, 2018, TETRA acquired SwiftWater Energy Services for $42.0 million in cash and 7.8 million shares valued at $28.2 million. Contingent consideration may reach $15.0 million. SwiftWater contributed $8.1 million of revenue after closing.
- On March 1, 2018, TETRA disposed of its Offshore Division. The transaction produced a $31.5 million after-tax loss on disposal and transferred substantially all related Maritech decommissioning obligations to the buyer.
- CCLP issued $350.0 million of 7.50% senior secured notes due 2025, generating approximately $344.1 million of net proceeds. Proceeds repaid and terminated CCLP’s bank credit facility and support fleet expansion.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $199.4 million | $159.4 million | Up 25.1% |
| Gross profit | $28.0 million | $19.7 million | Up 42.4% |
| Gross margin | 14.0% | 12.3% | Up 170 basis points |
| Loss before discontinued operations | $21.1 million | $4.2 million | Worsened by $16.8 million |
| Net loss | $62.8 million | $11.3 million | Worsened by $51.5 million |
| Loss attributable to TETRA stockholders | $53.6 million | $2.5 million | EPS: $(0.46) vs. $(0.02) |
| Operating cash flow | $(31.3) million | $(20.5) million | Use increased $10.7 million |
| Capital expenditures | $28.9 million | $5.1 million | Higher growth spending |
- Revenue growth was led by Water & Flowback Services, up $22.9 million, and Compression, up $19.9 million. Completion Fluids & Products revenue declined $3.1 million.
- Water & Flowback Services generated $61.1 million of revenue and $6.5 million of pretax income, compared with a $1.3 million pretax loss in the prior-year quarter.
- Compression generated $85.4 million of revenue, up 30.3%, but reported a $14.0 million pretax loss. The loss included higher interest expense and a $3.5 million charge for unamortized CCLP financing costs.
- Completion Fluids & Products generated $53.1 million of revenue and $2.4 million of pretax income, versus $19.5 million in the prior-year period, which included a $12.8 million arbitration award.
- Cash and cash equivalents were $104.1 million at March 31, 2018, plus $9.0 million of restricted cash. Approximately $90.1 million of consolidated cash was held by CCLP and was not accessible to TETRA.
- Total long-term debt was $823.6 million, including $191.2 million at TETRA and $632.4 million at CCLP. TETRA had $119.5 million of net availability under its revolving credit facility at March 31, 2018.
- TETRA’s leverage ratio was 2.62x versus a 4.75x maximum, and its fixed-charge coverage ratio was 2.54x versus a 1.25x minimum.
Material Changes Versus the Prior Comparable Period
- Revenue and gross profit improved materially, reflecting higher oil and gas activity, increased domestic rig counts, stronger customer pricing in some markets, higher compression fleet utilization, and the SwiftWater acquisition.
- Net loss expanded primarily because of the $41.7 million after-tax loss from discontinued operations, including the disposal loss, and because Q1 2017 benefited from a $12.8 million arbitration award.
- Operating cash flow deteriorated despite improved operating profitability, principally because of working-capital needs and the timing of accounts-payable payments.
- Interest expense increased to $15.0 million from $13.8 million and is expected to remain higher following the CCLP senior secured notes issuance.
- Corporate general and administrative expense increased 31.8%, partly due to transaction, professional-service, compensation, consulting, and other general expenses.
- The company adopted the new revenue recognition standard using the modified retrospective method; management reported no material impact on the balance sheet, results, or cash flows.
Guidance, Outlook, Risks, and Unusual Items
- Management expects operating cash flow to improve as SwiftWater contributes for a full period and activity levels remain favorable, but notes that oil and gas prices and customer activity remain volatile.
- Expected 2018 capital expenditures are approximately $40 million to $50 million excluding Compression, primarily for water-management equipment, and $90 million to $110 million for Compression fleet expansion.
- Management expects adequate liquidity, earnings, operating cash flow, and covenant compliance through May 10, 2019, based on forecasts prepared May 10, 2018. This outlook depends on operating assumptions and continued CCLP distributions.
- Key risks include commodity-price volatility, customer activity and pricing pressure, competition, acquisition integration and valuation, access to capital, debt covenant compliance, foreign exchange exposure, litigation and regulatory matters, environmental obligations, and cybersecurity.
- CCLP’s preferred units had a $54.2 million fair-value liability and generated a $1.4 million earnings charge. Warrants generated a $2.0 million earnings credit. These items may create future earnings volatility.
- SwiftWater integration into internal control processes is expected to continue through fiscal 2019; the company expects to exclude SwiftWater from its December 31, 2018 internal-control assessment.
- Management stated that ordinary-course litigation and the Fairbury, Nebraska environmental monitoring obligation are not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
Investor Verification Checklist
- Verify the composition and accessibility of cash, particularly the portion held by CCLP, and the separate liquidity of TETRA and CCLP.
- Assess debt maturities, interest costs, covenant headroom, and refinancing needs, including TETRA’s 2019 revolving facility maturity and 2022 maturities.
- Evaluate whether planned capital expenditures and compression fleet expansion generate sufficient returns and operating cash flow.
- Review SwiftWater’s final purchase-price allocation, contingent consideration exposure, integration progress, and sustained contribution to Water & Flowback Services.
- Separate recurring operating performance from the $31.5 million disposal loss, prior-year arbitration gain, financing-cost charge, and fair-value adjustments.
- Monitor oil and gas prices, rig counts, customer pricing, compression utilization, and the sustainability of CCLP distributions.
- Confirm the buyer’s performance under the offshore transaction indemnities and bonding arrangements, including responsibility for Maritech decommissioning obligations.