TETRA Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
TETRA is a geographically diversified oilfield services company operating through Fluids, Production Testing, Compressco, Offshore Services, and Maritech. Its offerings include completion fluids, water management, flowback and well testing, compression-based production enhancement, offshore services, and decommissioning. This unaudited report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $242.5 million | $221.1 million | $455.3 million | $429.7 million |
| Gross profit | $35.5 million | $31.0 million | $60.3 million | $69.4 million |
| Gross margin | 14.6% | 14.0% | 13.2% | 16.2% |
| Net income (loss) | $(1.6) million | $(2.5) million | $(7.6) million | $(0.4) million |
| Net income (loss) attributable to TETRA stockholders | $(2.5) million | $(2.9) million | $(9.4) million | $(1.6) million |
| Diluted loss per share | $(0.03) | $(0.04) | $(0.12) | $(0.02) |
- Second-quarter revenue increased 9.7%, while six-month revenue increased 6.0%.
- Second-quarter gross profit increased 14.3%, but six-month gross profit declined 13.1% because of weaker Production Testing and Offshore Services performance.
- General and administrative expense declined 5.2% in the second quarter and 2.3% for the six-month period. Net interest expense increased 10.2% and 11.2%, respectively.
- Six-month operating cash flow was $40.6 million, compared with $30.4 million in 2013. Investing cash flow was $(67.3) million, including $52.2 million of capital expenditures and $18.3 million of net acquisition spending. Financing cash flow was $26.3 million.
- Cash and cash equivalents were $37.6 million at June 30, 2014, compared with $38.8 million at December 31, 2013. Restricted cash was $8.9 million.
- Total debt was $417.1 million at June 30, including $90.0 million classified as current, compared with $387.8 million at December 31, 2013. Total equity was $591.1 million.
Material changes versus the prior comparable periods
- Fluids: Second-quarter revenue increased 16.4% to $116.7 million; six-month revenue increased 14.2% to $221.8 million. Growth came from water management, international completion services, foreign clear-brine-fluid sales, manufactured products, and the consolidation of TETRA Arabia. Margin declined because of competition, operating costs, and weaker Gulf of Mexico activity.
- Production Testing: Second-quarter revenue declined 10.7% and six-month revenue declined 15.7%. Gross margin fell to 10.0% in the quarter and 7.4% for six months, reflecting customer activity reductions, pricing pressure, and competition in North American markets. The segment reported a pretax loss of $3.0 million for the six months.
- Compressco: Second-quarter revenue increased 14.4% to $32.0 million and pretax income increased 73.3% to $5.5 million. Gross margin improved to 34.6%, supported by stronger unconventional compression activity, higher compressor-package sales, increased utilization, and cost reductions.
- Offshore Services: Second-quarter revenue declined 12.7% and pretax income declined 81.1%, primarily because of unseasonal weather, heavy-lift barge repairs, and lower well-abandonment activity. Six-month gross profit was negative $0.2 million.
- Maritech: Pretax loss improved to $10.7 million in the second quarter and $17.2 million for six months, principally because excess decommissioning costs were lower than in 2013. Excess decommissioning costs charged to earnings were approximately $11.1 million in the quarter and $19.0 million for six months.
- January acquisitions included the remaining 50% of TETRA Arabia for total consideration of $25.2 million and TD Water Transfer for $15.0 million plus potential contingent consideration of up to $8.0 million. TETRA recorded a $5.7 million remeasurement gain and a $2.9 million charge related to the prior shareholder relationship.
Guidance, outlook, risks, contingencies, and unusual items
- On August 4, 2014, after the reporting date, Compressco Partners acquired Compressor Systems, Inc. for $825.0 million in cash. The transaction was funded with $350.0 million of 7.25% senior notes, $346.0 million of net equity proceeds, and $210.0 million of borrowings under a new $400.0 million credit facility.
- CSI is expected to expand Compressco’s horsepower from approximately 187,000 to more than 1,045,000. Management expects broader market participation, synergies, and higher future distributions to TETRA, but warns that integration problems or failure to achieve synergies could adversely affect results.
- The CSI financing materially increased leverage. Management disclosed approximately $1 billion of consolidated indebtedness as of August 8, 2014, including the new Compressco debt. Higher interest expense, refinancing risk, covenant compliance, and reduced financial flexibility are significant considerations.
- As of August 8, 2014, TETRA reported approximately $121.9 million of availability under its revolving credit facility and Compressco reported approximately $179.1 million of availability under its new facility. TETRA stated that it was in compliance with its credit and senior-note covenants at June 30, 2014.
- Management planned up to approximately $145 million of 2014 capital expenditures, excluding acquisitions. The filing does not provide a revised earnings or revenue outlook.
- Maritech’s remaining decommissioning liabilities were approximately $34.0 million at June 30, 2014. Actual costs may exceed estimates because of additional remediation and offshore abandonment requirements.
- Production Testing goodwill was approximately $122.9 million, and its estimated fair value exceeded carrying value by approximately 12%. Management identified a reasonable possibility of a future material impairment if activity, customer demand, or competitive conditions deteriorate.
- Key risks include oilfield activity and commodity-demand sensitivity, customer concentration and cancellations, pricing competition, offshore operating hazards, environmental liabilities, foreign-exchange exposure, interest-rate exposure, acquisition integration, and potential litigation or regulatory proceedings. Management does not currently expect ordinary-course litigation or the Fairbury, Nebraska environmental matter to have a material adverse effect.
Most important facts for investors to verify
- Post-quarter CSI acquisition accounting, including the final purchase-price allocation, goodwill, intangible assets, and resulting consolidated debt.
- Actual CSI integration progress, realized synergies, cash flows, and impact on Compressco distributions to TETRA.
- Compliance with TETRA and Compressco leverage, interest-coverage, and other debt covenants after the acquisition.
- Trends in Production Testing demand and pricing, particularly in the United States, Canada, and Mexico.
- Progress and ultimate cost of Maritech’s remaining decommissioning and remediation obligations.
- Whether the limited valuation cushion for Production Testing goodwill results in an impairment charge.
- Future capital expenditures, acquisition funding needs, refinancing of debt maturing beginning in 2015, and the effect of substantially higher interest expense.