TETRA Technologies, Inc. (TTI) Earnings Call Transcript & Summary

Hi. Welcome, everyone. My name is Andrew Herring. I'm an associate on Sean Meakim's oilfield services and equipment team here at JPMorgan. And up next, we're joined by TETRA Technologies. TETRA is a geographically diversified oil services company, providing a suite of services to the upstream, including completions fluids, chemicals, water management and flowback and compression services. We're fortunate to be joined by both TETRA's President and CEO, Brady Murphy; and the company's CFO, Elijio Serrano. Brady has served as President and CEO since May 2019, before which he was President and Chief Operating Officer. Prior to joining TETRA in 2018, Brady was CEO of Paradigm Group, following a 26-year career with Halliburton. Elijio has served as Senior Vice President of -- and CFO of TETRA since 2012, prior to which he was CFO of UniversalPegasus International. Brady and Elijio, we're happy to have you here with us today. The floor is yours, and we can open up to Q&A at the end.

Well, thank you, Andrew. Elijio and I are pleased to be joining you for the JPMorgan 2020 Energy, Power & Renewables Conference. If you're following along with our slide deck that we posted, if you go to Slide 3, as a reminder, TETRA is listed on the New York Stock Exchange with the ticker TTI. CSI Compressco is on the NASDAQ as CCLP where TETRA is the 35% owner and GP of the MLP. Moving on to Slide 4. Essentially, it's been a little over 2 years since TETRA really restructured the company by divesting in the offshore decommissioning in Maritech oil and gas assets and establishing 3 business units focused on Water & Flowback for North America and International, our Completion Fluids & Products segment and Compression. We'll touch on these segments a little bit as we go through the presentation, but we're very happy with the position that we have established in each of these markets. Moving on to Slide 5. I think one of the things we're very pleased with that demonstrates the successful execution of our strategy that we laid out a little over 2 years ago can be highlighted by several different points. One, we had a very strong Q4 '19 and Q1 results with adjusted EBITDA of over $102 million. It's the highest combined quarters we've had in 6 -- in 5 years. We also had a very strong first quarter, $48 million EBITDA -- adjusted EBITDA, again the highest in over 5 years. Our adjusted EBITDA was 32% higher in Q1 year-on-year, while U.S. rig count was down 25% year-on-year. TETRA-only free cash flow improved by nearly $40 million year-on-year over Q1 2019. And CSI Compressco leverage ratio reduced to 5x, which is the lowest since Q3 of 2016. Other Q1 highlights that demonstrate the strength of our business coming into the downturn. Our Completion Fluids division adjusted EBITDA margins were 28.7% without material contribution from CS Neptune and the fourth consecutive quarter that we have maintained our target of over 20% EBITDA margins. We won a record number of integrated water management projects, 30 projects in the first quarter, ramping up from just a few when we introduced this integrated model last year. And our SandStorm advanced cyclone technology finished March with the highest utilization since the introduction in the second half of last year. Slide 6. TETRA has a very good story on sustainability. On the environmental side, we're very much focused on the recycle and reuse of produced water through, again, our integrated management water solutions and automation. Our Neptune high-end offshore completion fluid is an environmentally friendly option to competing products that was introduced to the market 4, 5 years ago and continues to be recognized as an industry leader technology. So again, we continue to focus on the sustainability and believe that this is a core part of our culture and identity. Moving on to Slide 8. TETRA worldwide, we like the markets where we are positioned. Clearly, a good position in North America land market through the -- all the shale basins. We also participate in Vaca Muerta in Argentina through our Water & Flowback business. Our Completion Fluids business is very well positioned in all the key deepwater markets in offshore basins, including Gulf of Mexico, West Africa, deepwater Brazil and again, well positioned in non-deepwater offshore operations in the North Sea and the Middle East. Moving on to Slide #9, a little bit of discussion around our Completion Fluids & Products business segment, which is really comprised of 1/3, 1/3 and 1/3 between deepwater, our industrial chemicals business and then our other offshore -- primarily offshore markets with a small amount of land participation. We are the only vertically integrated completion fluids provider in our segment, which we believe gives us a significant cost advantage and supply advantage with full R&D capabilities in the chemistry for our high-end completion fluids. In Q1, we've mentioned some fairly significant awards around the world for deepwater wins, and 35% of our revenue, again, in the first quarter came from deepwater projects. And we continue to gain the benefit of our seasonal European uplift with typical Q2 seasonal impact that we see on our business, which is on track. Moving on to Slide 10 about CS Neptune. We're very pleased that we received the Meritorious for Engineering Award, the E&P special innovation for drilling fluids and stimulation. We talked about our projects in Q4 where -- that helped us -- in the Gulf of Mexico that helped us achieve a 35% adjusted EBITDA quarter. And we continue to work with customers for their major projects for testing and qualification of Neptune currently on 5 different projects, some of them through our Halliburton agreement and relationship and some of them directly on our own. And you can see on Slide 11, we've got a very good trend with our Completion Fluids business. From a margin perspective, we talked about 4 consecutive quarters where we've achieved over 20% EBITDA margins and in Q1, 29% without the benefit of CS Neptune. We continue to build good market share presence with the awards that we've previously talked about. On the Water & Flowback, clearly, this business segment is impacted by the COVID-19 downturn, but we'll continue to be very pleased with what we've been able to achieve with our Water & Flowback by focusing on differentiated technologies, including automation, recycling and desanding through our SandStorm technology. Slide 14 highlights -- I think captures the essence of our integrated and automated water management solution, all the different components that go into a job for a frac completion with water all the way from sourcing, getting it to location, automating the blending component of it, automating the recycling and ultimately disposing it back to -- or handing it back to the customer for disposal. Our BlueLinx Automated Control System enables ourselves to automate the entire job, which clearly helps us to reduce costs, improve service quality. And we're getting a lot of really strong uplift from our customer base with this solution. We talked about 30 integrated jobs in the first quarter. Even in this current downturn, through May, which we believe is the low point of the number of fracking operations that are ongoing in the U.S., we were able to maintain a healthy 16 integrated operations during that time. So we feel good about the market penetration this solution is affording us. On the technology side for Water & Flowback, we continue to introduce differentiated technologies. TETRA Steel has been around for some time but is still the leading solution for moving produced water. In many customers' segments, it's the only qualified lay flat hose for transferring water. Our BlueLinx Automated Control System, we've talked about our water recycling. We continue to see great opportunities as more and more operators shift from freshwater to produced water in our operations. And in our SandStorm, which is our latest desanding technology, achieving over 90% to 95% sand removal efficiency and we maintain a near 100% utilization on that fleet even in this downturn. Page 16 shows the financials. Coming into this market, we were running about 12% EBITDA margins. We've been very aggressive on the cost side of rightsizing the operations in North America, while continuing to gain share and maintain a healthy market share portion as we go through this downturn in Q2. We do believe that Q2 will be the bottom in activity and are poised to continue to grow as we go through the rest of this year. On the compression side, we have invested quite significantly in the high horsepower portion of our fleet. Now 55% of our total fleet is over the 1,000 horsepower. We will see an impact -- or have seen an impact of the coronavirus downturn in the second quarter in our utilization, primarily due to some key blue-chip customers that we've had in the Permian who have gone into production shut-ins. So we are -- we have seen an impact of that in Q2. Although we are in discussions with those customers about timing of returning, some of the smaller independents have already reversed those shut-ins. We believe some of the larger, more capitalized customers may delay that until sometime in the third quarter. One of the things that we've worked very hard on and have been very successful at is continuing to advance our compression service margins. You can see the progression in our margin since 2017 through the first quarter of 2020. We continue to bring a lot of focus to this. And quite frankly, we're pleased with what we've been able to achieve so far through this Q2 downturn. I think very much a growing trend that CSI Compressco has benefited from is the use of high horsepower compression for centralized gas lift. You can see the Spears graph showing that this has been by far the highest growth segment within the compression space in the last 4 to 5 years. CSI Compressco has benefited from that, primarily in the Permian Basin through some very large IOC customers who have gone to this model of using centralized gas lift for essentially liquids lift production. We think that the customers see this as very favorable economics and reliability relative to the alternatives, including ESPs. And our 3516 model is ideally suited for this application. In the basins where we operate, 75% of our horsepower is located between the Permian, Eagle Ford and the SCOOP/STACK. We continue to make investments, certainly in the Permian Basin going forward and see that as a long-term growth market. On the financial side, as we've mentioned, we had our highest adjusted EBITDA margin of 28 -- nearly 29% since the third quarter of 2017. We've improved our leverage ratio down to 5 at the end of the first quarter. Fleet utilization has dropped to 86.5% at the end of Q1 from 90% at the end of 2019. And we have made the decision to cease our fabrication operations in Midland and we'll be exiting the unit sales business on a go-forward basis. With that, I'll ask Elijio to give some financial summary overviews.

Thank you, Brady. I'm going to start on Slide 24 and cover a couple of key financial items, and then we're going to open it up for Q&A session. On Slide 24 on the left side, one of the things that we're quite proud of as to how we've been able to manage both TETRA and CSI Compressco is the downturn that we saw in 2015, '16 and '17, we're able to keep both TETRA and CSI Compressco EBITDA positive and cash flow positive. And you can see that in 2019, we rebounded back to over $1 billion of revenue and the margins -- EBITDA margins rebounded to 18%. Then on the bottom left of that slide, you can see the quarterly progression. And in the last 4 quarters, on a trailing 12-month basis, we've generated $199 million of EBITDA, almost $200 million while the industry went through a period of turmoil in the fourth quarter and saw the start of the downturn in the first quarter. The EBITDA margins in the fourth quarter saw a significant benefit from the CS Neptune project that we did in the Gulf of Mexico. Nonetheless, those margins held up and actually improved in the first quarter without the lack of any material Neptune revenue. As we came into the downturn, we started taking very aggressive cost actions, everything from headcount reductions through salary adjustments, through furloughs, through adjusting even the compensation for our Board of Directors. We have materially reduced the capital expenditures for both TETRA and CSI Compressco. In a downturn, we can take the CSI Compressco maintenance capital expenditures down into the $18 million to $20 million range. In the last downturn, we took TETRA's maintenance capital expenditures to under $10 million. We've a lot of flexibility in maneuvering to consistently generate free cash flow. On Slide 25, a couple of notes on the balance sheet. Remind again everybody that the debt of TETRA and CSI Compressco are distinct, separate with no cross defaults, no cross collateral and no cross guarantees. TETRA has $221 million of debt with a term loan and a 9% coupon with a maturity not until the year 2025. At the end of March, we had almost nothing outstanding on our ABL facility. And last year, TETRA, on a stand-alone basis, generated slightly under $70 million of EBITDA. And the only maintenance covenant that we have is onetime interest expense or about $16 million to $17 million. So you can see that we're quite comfortable with TETRA's balance sheet and the position that we have from a maintenance covenant perspective. Then on the right side of that page is CSI Compressco. So CSI Compressco's EBITDA is more stable. In the last cycle, EBITDA went from $132 million to $86 million. Currently, we had $646 million of debt outstanding with $296 million of it scheduled to be refinanced August of 2022. We launched several weeks ago in exchange, working with our unsecured bondholders an offer to exchange the unsecured bonds for first lien bonds and also for second lien bonds. Last Thursday night, we announced that we successfully completed that process. As a result, you can see the maturity schedule on the bottom left to where $400 million is due April of 2025 and $156 million is due April of 2026. So instead of a $296 million maturity that was 26 months away, we're down to an 81 -- $86 million -- $81 million maturity, sorry, that is due in 26 months. We were able to conclude that swap at what we believed to be very attractive rates. The first lien unsecured bonds are 7.5% coupon with no maintenance covenants. The second lien bonds are either a 10% cash coupon or 7.25% cash coupon with a 300 (sic) [ 350 ] basis point PIK. And then the unsecured bonds that don't have any maintenance covenants and no change of control at $81 million that mature in 26 months are at 7.25%. So all of a sudden, the balance sheet for CSI Compressco looks even better as we pushed out the maturities and we have no maintenance covenants to go. So through a combination of the business model that we have between the fluids, the water management and flowback testing and the compression, we believe that we're positioned to manage through this downturn, build liquidity in the TETRA side as we monetize accounts receivable and then aggressively manage the cost structure on both sides. So Andrew, with that, let us open it up for Q&A.

Great. Yes. So I was wondering for Q&A if we can start on the Water & Flowback side. Just interested to hear the latest update you have on what you're seeing on the ground in the second quarter. You had mentioned that you think it's going to be a low point for activity. Is there anything you can do to help us kind of frame out the quarter-over-quarter change in volumes and what you're seeing going forward?

Yes. So I think it's -- there's been a lot of different reports out there, and I think our intelligence leads to a pretty similar frac count between 50 and 60 active frac fleets in the second quarter. We believe the low point of that was in May. We've had several of our customers come back to us and start back some operations in mid-June, second half of June and into July. That's about all the visibility that we have right now. I think it's going to still be a very short-term window that we'll all have a view of. But at least from our perspective, we have seen a bounce off the bottom. We're hearing more and more customer get ready for some increased activity on a go-forward basis as we go into the third quarter.

Okay. Great. That makes sense. I'm just wondering, have you seen any differences, kind of noticeable differences across the basins, maybe in the gas [ tier ] plays, I think has demonstrated a little more stability? And then as well if you could talk about any sort of realized pricing changes you get. Or is that kind of yet to materialize?

Yes. Well, I think pricing is -- the good part about pricing is, for us, we believe it's stabilized. It's not deteriorating any further. And it really hasn't deteriorated that much from Q1, which is good for us. Activity-wise, Appalachian and Permian have been the 2 busiest basins for us. And we're seeing, I would say, the most bounce off the bottom in the Permian, not so much so yet in any of the other basins that we've seen.

Okay. Understood. And then just last thing on Water & Flowback, curious, you gave a bit of update on the integrated agreements. Just wondering what's the latest on how economics have trended there. And what do you see as kind of the remaining opportunity set for maybe future integrated agreements?

Yes. So we continue to see really strong customer uptake. Interestingly enough, I think this downturn has forced customers to look even harder at an integrated model because of the cost savings that we can bring by taking people off of the jobs, running more automation, showing them the BlueLinx capability from a service quality centralized management perspective. So from our viewpoint, it's been all really strong momentum. In some ways, I think the downturn has helped kind of push us that direction. Clearly, as the market rebounds, we want to be able to -- could not only continue that momentum but continue to build on it. And based on the customer interactions that we're having, we strongly believe we can achieve that.

Great. Okay. So touching on the Completion Fluids side of things as well. Obviously, we've seen pretty strong results in the past few quarters. Just wondering if you can talk about the outlook in 2Q for margins on the non-Neptune side and maybe some of the offsetting factors around European sales and general international exposure?

Yes. So our -- we have a lot of strong momentum on our Completion Fluids business. We talked about the Q4 results, but they were aided by a big Neptune project, but our Q1 results really had very little Neptune but still very strong results with almost 29% EBITDA margins. And we continue to see good momentum for that business coming through the second quarter. As you're aware, most of our completion fluids in the oil and gas sector are from offshore markets not impacted by the dramatic downturn in the North America land and fracking business. And so far, what we can see as we go through Q3 and Q4, we've not seen a lot of projects, if any, projects canceled. We have seen a few projects perhaps pushed to the right. But up to this point, we remain quite bullish, quite optimistic about our Completion Fluids business for the rest of this year. And as you know, 30% to 40% of that business is in industrial component. That's held up quite well for us in the North America segment. We've seen a little bit of a drop-off as it relates to some of the industrial uses but not a significant demand drop-off. And then our European seasonal Q2 that we see every year that contributes about an additional $10 million of free cash flow over our normal run rate business is very much on track and has not seemed to have been impacted at all by the coronavirus.

Okay. That's great. And on the -- that mix, the kind of 1/3, 1/3, 1/3 breakdown you had in the segment at the moment, when you look at it over kind of longer term through the cycle, would you say that's the appropriate place you want to be? Or do you think that the current downturn could end up kind of rethinking that allocation?

So far, the visibility that we have, we think that allocation is pretty solid through the rest of this year. That could change if we're at $30 oil next year at this time. But we don't think that's the scenario that we're going to see. We do believe longer term deepwater markets are going to start -- will return at some point. And when that does, we think that we will disproportionately benefit with our offering, particularly with the Neptune projects that we have queued up with a lot of our customers.

Great. Yes, that was actually the next thing I wanted to ask about. How would you characterize sort of the inroads that have been made through the Halliburton agreement, particularly with some of the largest international players on the Neptune offering?

Yes. So we are pleased with the [indiscernible] of, at any one time, 5 or 6 different projects over the last year. [ Our customer projects with CS Neptune, as we mentioned, has some ] program. Half of those are through our Halliburton relationship. The other half [ will be on our own ]. Again, these -- some of these are mixture of ongoing operations where we could replace an existing completion fluids operator and some are basically projects, new projects that we may not have a definitive start date yet, and in this environment, they may get pushed a little bit. But they're all super majors that eventually will switch those projects on.

Excellent. Very helpful. And then I want to touch on Compression as well. So you mentioned some of the opportunities in gas lift and how that was one of the areas of highest growth. I guess how does the outlook there change? Is that -- [ if you can ] talk about, I guess, the geographic mix there and what you kind of see sort of the opportunity set for growth going forward?

Yes. So we think the Permian really established the trend for the highest growth of centralized gas lift. But now we're seeing other basins adopt a similar approach. We think that even if the overall compression market flattens a little bit in this cycle that the opportunities for centralized gas lift, particularly where wells have been shut in, where they're using ESPs, as they turn these wells back on, we believe centralized gas lift is still very much a good option to continue to be a preferred kind of manufacturing method, if you will, for operators who have larger programs. So we're still quite optimistic. We're clearly on pause right now, especially where customers have shut-in wells, and we may be going to a standby as opposed to a fully operational situation. But those will get turned on fairly quickly. And then as I said, we still believe that's a good growth opportunity for the segment in general.

Sure. Yes. Very good. So I see that we're bumping up against the end of our time here. Just want to pass it off and see if you have any closing remarks you'd like to make.

Well, we appreciate everyone's interest and attention, and we feel very good about, as I said, the strategy we put in place 2 years ago and where we are executing along that strategy. And as Elijio mentioned, we feel very well positioned to come through this downturn and even stronger on the other side.

Excellent. Brady, Elijio, thank you both very much. Really appreciate you guys taking the time to speak with us today.

Thank you, Andrew.

Thank you, Andrew.