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

Good afternoon, and welcome to the TETRA Technologies company update and question-and-answer session, held by EF Hutton. The host today is Tim Moore, Director of Equity Research at EF Hutton, joined by Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer of TETRA Technologies. [Operator Instructions] Please note that this event is being recorded. I will now turn the conference over to Mr. Moore. Please go ahead.

Thank you. I am the senior analyst at EF Hutton, who [ launched ] coverage on TETRA Technologies in early June of last year. I also had the opportunity to spend nearly 2 days with them in the Permian Basin and at their R&D facility in Houston to observe and gain a deeper understanding of the water flowback and recycling facilities and the potential for the desalination of produced water. I will turn the call over to Brady, Elijio and Rigo for their comments and overview.

Thanks, Tim, for hosting us today, and thanks to everyone, who's joined us on the call. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking. These statements are based on certain assumptions and analysis made by TETRA and are based on several factors. These statements are subject to several risks and uncertainties, many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA gross margins, free cash flow, net debt, net leverage ratio, liquidity or other non-GAAP financial measures. Please refer to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results. I will now turn it over to Brady.

Thank you, Rigo. Thank you, Tim. Good afternoon, everybody. Thank you for joining us for our fireside chat discussion. We'll walk through some of the slides that hopefully everybody has access to with some commentary and then look forward to the question-and-answer part of the discussion. So I'll start with the first slide, which is really a quick overview of the company. TETRA was founded in 1981. So we've been in business for over 40 years. During that period of time, we've been in and out of quite a few different businesses. But a few years ago, we made the decision to refocus the company around our core technical and operating capabilities, which, in summary, is aqueous chemistry solutions. We divested the offshore decommissioning business. We sold the general partnership of CSI Compressco, which greatly simplified the company's business model and the balance sheet. And today, we have 2 operating segments that fit our core competency very well. They are of nearly equal size, our Completion Fluids & Products and Services segment as well as our Water & Flowback Services segment. The graph on the bottom right, I think, highlights the company's continuous financial improvement and the business resiliency even in the worst of downturns, such as what we experienced in 2020. The business is supported, and this trend is supported by a strong mix of business from the U.S. and international offshore specialty deepwater as well as a strong industrial chemicals part of our business. In summary, I think today, TETRA has a business model that's diversified, resilient in the down cycles and positioned for significant growth, as we'll discuss. Moving on to some Q4 highlights. We finished the year with a strong fourth quarter. Our revenue was up 9% and quarter-on-quarter and 30% year-on-year, which was led by our energy services Gulf of Mexico and offshore international, which was up 20% sequentially. Water & Flowback achieved our seventh consecutive quarter of growth, while our Q4 run rate annualized is greater than the full year 2018 revenue on about 30% fewer frac crews. So it's really, I think, that one statistic demonstrates the profitable market share growth that we've achieved in the last few years. Adjusted EBITDA was up 9% quarter-on-quarter and up 50% -- 56% year-on-year. For the full year highlights, revenue was up a significant 42%, which was led by our Water & Flowback segment growth of 66%, again on relatively flat frac crew activity over the past year. Adjusted EBITDA was up 56%, but when you exclude the gains on investments, it's up 112% over 2021. Water & Flowback moved our EBITDA margins from 8.8% in 2021 to 15.5% in 2022. And 2022 was an important year for key milestones in our low-carbon strategy area, completing our exploration well in Arkansas, finalizing our inferred resource study with an estimated 5.2 million tons of bromine and 234,000 tons of lithium carbonate equivalent. As we take a little bit of a deeper dive into our Water & Flowback segment, the financial chart shown here highlights the stair-step growth for the 7 consecutive quarters, while the active frac crew count has been pretty flattish over that period of time. Market share gains have been achieved through the deployment of SandStorm and the automation of our integrated operations depicted on the picture here on the right-hand part of the slide. For the unconventional water business, TETRA has been delivering innovation and efficiency, while creating barriers to entry to a critical part of the completions business, which is water management. Argentina continues to be a strong growth contributor with a third EPF plan for start-up at the end of the second quarter. As we look to 2023 in terms of margin expansion, as we mentioned on our earnings call, we will be less focused on growth. Again, we achieved a 66% growth in this segment last year. But we also put a fair amount of capital into this business last year. This year will be a different focus. It will be less CapEx, less focused on growth and continued focus on margin expansion. And we feel there's 3 -- really kind of 3 pillars to achieve that margin expansion. The first is we'll have a full year of SandStorms with an overall fleet count, which will be 20% higher in 2022 than in 2021, just following the deployment of our SandStorms throughout the year during 2022 -- I'm sorry, I meant 2023 over 2022. Again, SandStorms continue to be one of our highest margin services. The further deployment of automation increasing from what is approximately 60% of our Integrated Water Management jobs to a target of 85% by the end of 2023. Again, each of these integrated jobs where we can fully automate, we have the opportunity to reduce manpower on average about 30%, sometimes as high as 40%. And then a full year of the 2 early production facilities that we will have in Argentina and the third one will be starting at the end of the second quarter. You can see the contribution that we are anticipating, estimating from each of these areas with an expectation that we can get close to the 20% overall target for 2023. Slide #9. The highlights what we believe is really what I'll call the next big thing for water in North America, which is described as the convergence of produced water desalination and the extraction of minerals. The disposal of produced water is a well-known challenge for the industry with increasing seismicity becoming an urgent issue. The chart on the right was presented by Mike Hightower, who is the Director of the New Mexico Produced Water Research Consortium at a recent Produced Water Conference in Midland, which I had the opportunity to participate on one of the panels. Mike's comments were that in 2018, they thought they had 10 years of disposal capacity ahead of them. And clearly, as the chart shows, that capacity has already been reached within 5 years and really struggling to determine how the next 5 years will be addressed with limited permitting capability due to the seismicity and just the overall volumes of produced water to deal with. For TETRA, we're a leading producer or provider of produced water, recycling today for frac reuse, and we're leveraging that capability as well as our core R&D capabilities to be a first mover in this area. We've partnered with 2 technology providers for desalination and combined with our proprietary pretreatment, we feel in a very good position to be -- have a first-mover advantage. Desalination for beneficial reuse, such as farming or industrial applications, solve multiple issues, more available useful water and much less disposal. At the same time, we are desalinating produced water. We have the chemistry and experience know-how to extract key minerals, such as iodine, bromine and potentially lithium that we are looking at. So oftentimes, people are surprised when they hear that iodine is selling at the same price as lithium. So there are opportunities in this space to have a very attractive commercial model. Moving on to our Completion Fluids business. As the financial chart demonstrates, this continues to be a very strong segment, consistently delivering mid- to upper 20s EBITDA margins. TETRA is well known in the industry as an innovation leader with built-in vertical integration advantages. Our competency in brine chemistry is key for us to maintain our innovation leadership, such as the development of CS Neptune, the industry's zinc-free, high-density completion fluid, and our zinc bromide electrolyte, PureFlow, which is now qualified for 3 different long-duration energy storage companies. As Rystad forecast, we believe we're in the early stages of a deepwater offshore recovery, where TETRA's Completion Fluids will greatly benefit. Our growth strategy for Completion Fluids is really around 3 areas. First, the deepwater recovery and the projected floater rig count for our base Completion Fluids business as well as increasing more Neptune opportunities as deepwater activity increases. Continued expansion in the Gulf of Mexico with the acquisition of Newpark's inventory and [indiscernible] base gives us additional capacity to grow. And internationally, we're well positioned in key deepwater markets, offshore markets such as Brazil, the North Sea and the Middle East. This chart shows our bromine Completion Fluids relative to the global floater market. We estimate that bromine Completion Fluids, which are primarily used in deepwater applications, about 70% of the Gulf of Mexico deepwater completions used a bromine-based completion fluid. And again, this chart highlights the growth that we've been able to achieve, even while the floater market from the peak in 2014 continue to decline up and through 2021 and it just started to turn the corner. If you look at the revenue per floater back in 2016 relative to the revenue per floater in 2022, that's a 300% increase for revenue per floater for TETRA's bromine-based business. And as shown, the floater market is expected to increase another 26% through 2025 based on Rystad's forecast, and we believe, based on our intelligence that, that's a fairly consistent forecast. Moving into our low carbon energy. We talked about the strategy that we put in place a few years ago. I think it's a very important reminder that each of these opportunities are extensions of our existing core capabilities and allow us to participate in a long-term area of significant growth. The first area is the zinc bromide electrolyte that I had mentioned. We have a patented manufacturing process to manufacture a high purity form of our oil and gas Completion Fluids chemistry. We see that as a key opportunity for the company to participate with the energy storage companies, and we are in close contact with each of them on a go-forward basis. Calcium chloride for CO2 capture. We've talked about our relationship with CarbonFree precipitating CO2 to precipitated calcium carbonate. We continue to stay engaged with CarbonFree as they make progress on their early commercialization. We talked about the water desalination. That's really an extension of our current recycle and reuse capabilities. And then lithium from our brine resources. We'll talk a little bit about the bromine project. That's our first priority out of our brine resources, but following that, we plan to take advantage of extracting the lithium from that same brine source and as we perfect and develop the direct lithium extraction process that we'll be using. If we move to talk a little bit about the bromine project that I'm sure we'll get into in the Q&A. The bromine market really is going through some tightness in supply, but at the same time, some pool in the market. The largest percentage is shown in this pie chart is fire retardants, is the largest global segment for bromine, and the electric vehicle market, as highlighted here by the chart at the top, uses about 5x the amount of bromine for fire retardants as a conventional ICE vehicle. So that clearly is going to be a pull on bromine. The deepwater market, as I've mentioned, we estimate about 70% of deepwater wells in certain markets use bromine-based Completion Fluids. That market has bottomed, and we expect to continue to grow over the coming years. And then a brand-new market that we had just mentioned is using bromine along with zinc for electrolyte in the new -- in the energy storage segment. So each of these areas, we think, are going to be continually pulling on what is today a somewhat tight market in the bromine space. If you look at TETRA's bromine forecast, and this is what I would call an unconstrained bromine forecast. Relative to 2022, you'll see the darker blue color represents our oil and gas forecast projections and the gray bars on top represent what we believe is the PureFlow or the zinc bromide energy storage electrolyte forecast. You'll see a very strong growth, 11% CAGR through 2030 and represents a great opportunity for the company to leverage our offshore Completion Fluids business in a growth market as well as our PureFlow in the energy storage market. But as I mentioned, this is an unconstrained view and a tight market of bromine, which really leads us into the next discussion around our resource [ play ] in Arkansas that we have talked about for -- since introducing the inferred resources report last year, our 40,000 gross acres, the 5,000 acres that we're focused on initially for both the bromine and the lithium carbonate. And then I'm sure we'll save some more time for discussion on this topic as we get into the question and answer. So with that, I'll pause, Tim and open it up for questions.

Great. Thank you, Brady. As demonstrated by TETRA's impressive results this past year, Its Water & Flowback adjusted EBITDA margin expanded strongly and nearly doubled from 2021, driven by the very high sales growth that continued in the December quarter. Our view at EF Hutton is that the CEO, Brady and the CFO, Elijio have significantly improved the company's growth prospects and profitability and appear to be on track to grow EBITDA in EPS this year very strongly. We, at EF Hutton, are forecasting nearly 90% EPS growth this year. We also want to point out to investors that, based on our estimates, TETRA could drive approximately 35% of its EBITDA this year from industrial calcium chloride. And we think that's an important point to make. And just reminding investors based on our research, our price target represents more than a double from today's stock price. And we also want to point out that the management team was very active last week with acquiring over $300,000 worth of shares and separately requested to be paid their 2022 incentive bonus in stock shares instead of a cash bonus, which we find terrific. So now we're going to open up the question period. Audience members can submit questions through the webcast. I will start off with a few questions received over the past 2 weeks since the company reported its results.

So for the first question, Brady, you touched on the SandStorm fleet utilization and the uptick in automation this year to possibly 85% in the Water & Flowback. Can you talk about any other opportunities for water treatment and recycling this year? And do you think it's possible to add additional early production facilities in South America, in late this year or next year after the third one comes online midyear?

Yes, sure, Tim. So the drivers that we had mentioned for increasing our EBITDA margins, we feel very, very good about. There are additional opportunities in the recycling for frac and reuse. Remember, a lot of operators are still in the early stages of just recycling their produced water for frac and reuse purposes. And so that's an area where we continue to grow and see opportunities for and to -- it is a good margin business for us. So as that business grows, there's opportunity in addition to what we had mentioned during our overview. On the EPS, the early production facilities, we like very much the projects that we have, the 3 that we have that did require some CapEx for us last year. We're probably going to take a pause once we have these 3 up and running before we will take on additional projects, early production facility projects. We don't have capital allocated for projects this year, but we do see demand for those projects because Argentina is in such a high activity mode and they don't have the infrastructure in place to the permanent infrastructure in place to take advantage of it. So there are more EPS opportunities coming. If we do take one additional EPS, we will probably structure them somewhat differently not using our capital, but potentially our customers' capital and a bit of a different model going forward for now.

And Brady, we might add that on the early production facilities in Argentina, given how well they are performing the 2 that we have active. We've already engaged in discussions about expanding them. And as Brady mentioned, if we expand them, we're going to work with our customers that they fund the expansion CapEx, and we'll continue to run them and leverage the facilities we've already put in place.

Great. That's helpful. And we're looking forward to that EBITDA uplift from those projects going through this year. And maybe just switching gears, a popular question I've been getting from investors is your bromine development projects. And there were some investors going into your earnings call 2 weeks ago that might have prematurely anticipated that it was a definitive decision to invest soon. It seemed like you might have been on step 3 or so, and you still have a couple more gates to go through and data reports to receive before making an official approval decision. Can you walk us through the steps in the time frame for approval or rejection of the potential bromine project?

That's a good point, Tim. I've also talked to a lot of our investor base. I think it's important that we clearly articulates the sequence of the events that we're going to go through. We're going to be very methodical knowing that this is a very important decision for the company. And I'm sure most of our investor base are not mineral development expertise. So the process we're going to go through is we published an inferred resource study, which is the most basic of the studies out there using a lot of publicly available information plus data from one well that we drill. That's an inferred resource study. The next level of quality that we can move toward as an indicated resource study that takes more data points. It will require us to drill another well to validate the results of the first well, and that takes us from inferred resources to indicated resources. From there, if we want to move to the next resource level, it will be measured resources to, again, provide better quality now to move from resources to reserves. Now we have to confirm through economic and engineering analysis that we can profitably produce the bromine, which means that we move from a preliminary analysis or what in Canada is known as a PEA, or preliminary economic analysis. And again, I want to emphasize that, that's preliminary. If we want a more definitive study, we go into a feasibility study. And from that feasibility study, we can move from resources to reserves. So once we move from inferred to indicated, pro forma feasibility study, that takes us into a probable reserves. And at that point, we've got a higher degree of confidence that we can economically produce the bromine. We've already done the front-end engineering study using an outside engineering firm. We're using a firm with high reservoir and geological knowledge to move us from referred to indicated. We're right now in the process of launching the second well to give us that incremental data point. We expect that we'll be working on the feasibility study between Q2 and Q3 to move into a probable reserve. And at that point, we can move some of the 5.2 million tons of bromine from inferred to indicated. And with a feasibility study, it gives us a higher degree of content. We do not expect to go to our Board of Directors until we are in a probable reserve level at a minimum and that we have identified the sources of funding to be able to execute on the project. Now with respect to funding, which is the next logical question to come up, we indicated that we have engaged an investment banking firm to help us identify potential partners so that TETRA does not overlever, does not take too much risk with the project. We are simultaneously reaching out to chemical, industrial and other partners in the sector to see whether there's a level of interest participating with us. Simultaneously, we are working with the Department of Energy, both through the grant and the loan program office. We have had preliminary discussions with the DOE on both sides. On the loan program side, for example, the DOE will loan as much as 70% of your capital needs for projects such as this as long as you can demonstrate certain criteria, and they contribute to reduction of CO2 emissions in the process. So we've got several steps underway to evolve from inferred and a preliminary to a feasibility study with probable reserves and then identifying the capital before we go to our Board with any investment decision.

Well, thanks for running through that sequence. And you beat me to my next question that we're getting from some investors about the funding. There was also a follow-up question maybe to that funding comments that you made. One of the questions on the chat is, if you could possibly do a JV or even use some companies with infrastructure to raise the IRR, maybe lower the CapEx a little bit? I just want to remind investors that the latest economic report, the midpoint estimate was for about $41 million of annual EBITDA at an incremental EBITDA margin of about 48% and an IRR of 50%. So we do have one question just asking if there's anything you can do maybe on the infrastructure side or JV to raise the IRR?

Yes. So we're in the early phases of engaging with potential partners. The partners that might take one of many forms that could represent offtake agreements that will provide capital to secure some of the offtake. They could represent an opportunity for us to leverage some of their infrastructure and reduce the amount of capital that we have to expand or they may partner with us to want to participate in the high-growth battery storage and/or the high-growth deepwater market and share some of the capital, but also obviously share some of the upside also. So at this point, we're in the early phases of simply engaging in dialogue to determine the optimal path that we believe will create the most value to our shareholders.

That's great color. We appreciate that there's a couple of interesting paths that you can take there on that. And there's another question was for bromine. We realize you have your long-term supply agreement. The question is, can you reduce maybe that long-term supply agreement enough for possibly the year 2026, assuming maybe that could be the year? You start producing enough bromine yourself, just allow you to generate enough incremental EBITDA from the Arkansas facility.

So Tim, a couple of perspectives on that question. Number one, as Brady showed with the graph earlier, our estimation of the amount of bromine we cover that is going to be required by a recovering deepwater market is going to be above and beyond what our current supply agreement is. And in fact, in the fourth quarter, we communicated to The Street that we're doing quite a bit of open market purchases of bromine and realize that even despite doing quite a bit of open market purchases in the fourth quarter, we still deliver a solid mid-20% EBITDA margin in there. Now our assumption is that the battery storage market takes off gradually. We don't assume that everyone is going to hit on all cylinders and immediately place significant orders. We think it's going to be a slow ramp-up in the projections that we have out there. But if they do gain traction, if they raise the capital and they hit their production targets, we believe that between now and the end of the decade, we can not only -- we will not only absorb the volumes view us under a long-term agreement, but it will also absorb the volumes that we produce from our plant once we bring it up in Arkansas.

That's helpful. And we actually have a related question in the queue about EOS. Investors probably know that the consensus estimate for sales this year came down a bit. I believe the current consensus is $50 million, but the consensus sell side at $260 million in sales for next year, which will be a big uptake, and it seems like you can get a pretty good margin on the PureFlow. Investors were wondering as you ramp up maybe with that second customer for PureFlow, do you think that you could still redirect any zinc bromide to the oil sector, like you did late last year, as maybe EOS is a little bit slow to accelerate sales in the first half of this year?

Yes. If you look at the chart, Tim, that we showed on the bromine revenue forecast, I guess, demand forecast, you'll see we've got a very conservative estimate for the PureFlow ramp-up in our model. We have no question right now in the market that we're in and the market that we are seeing. We have a home for all of the bromine that we can get our hands on, including, as Elijio said, the third-party purchases that we've made last year, and we'll be making again this year to bridge us over to when we're able to bring our bromine supply project into the market. So yes, absolutely, we're forecasting a pretty conservative view. There's a possibility that they could ramp up even quicker than what we're showing here. But again, as we've mentioned, that supports even further the bromine development project that we're looking at and will ultimately help us with decide the timing of that project.

And Tim, you made -- I think a statement is very important. When we reported third quarter earnings, we reported that one of our customers for PureFlow was going to scale back and the demand that they had previously anticipated for Q4 was being rescinded. And I think there was a concern that, that would cause a shortfall in our results in the fourth quarter. But our fourth quarter results exceeded expectations, came in stronger than the third quarter, which demonstrated that we could very quickly pivot it and pushed all that zinc bromide into the oil and gas sector. So we believe that short term, any demands coming from the long-duration battery storage, if they're [ evolved ], then we get an opportunity to direct it here to the oil and gas or to the battery storage market. And if they don't evolve, there's a demand on the oil and gas side that quickly absorbs it at very good margins.

Now that's very helpful and great to hear. While we're on this topic of CS Neptune and offshore drilling projects, can you just go through the timing again? I believe you said in the latest call that you're expecting a Norway project in the second quarter and investors are curious. You know that the Gulf of Mexico has been a little bit quiet lately, but there is some rumblings of a project that could get started there late this year. Can you just maybe add any color on that, if it were to start by the end of November, December, how much of a lag is it on your revenues? Would you get a lift on that April, May, June next year?

Yes. So Neptune, Tim, as we've talked about, we've -- we wanted to get a more steady cadence of Neptune jobs. And we feel we're right on the threshold of that in the North Sea, both we executed a U.K. -- our first U.K. job in the fourth quarter. We've got a Norway job scheduled in the second quarter. And we're seeing that cadence of Neptune opportunities on a more frequent basis, which is really one of our key objectives for the North Sea market. The Gulf of Mexico is quite -- quite a bit of a different market. These are basically linked to approval of long-term deepwater developments. We have a pretty long list of pipeline projects that we've been tracking. They're all still there. Most of these projects were paused during 2020, COVID and even really through most of 2021 and began to see the movement of those projects again in 2022 -- second half of 2022, looking for some stability in the oil prices, which the market has seen for the most part. We could land a Gulf of Mexico project that could hit before the end of the year, but it's most likely going to be the first project that we're really tracking was most likely in 2024 -- the first half of 2024 is our current expectation. But again, these projects are now moving forward. We have a more optimistic view of understanding the timing of many of these projects. And hopefully, the oil prices will stay in the ranges that it's been and where it's at, that will support the economics of these projects going forward.

That's terrific color because I always get asked by investors, they've looked at the Gulf of Mexico projects over the last few years and sometimes they could be 4x the sales amount and much higher EBITDA margin. So it does seem like it can be a pretty great catalyst for your 2024 results. Another question that we're getting in the Q&A is somebody wants to know is, how sensitive are your earnings to natural gas prices, oil prices have averaged nearly [ $78 ] year-to-date are hanging in well, but natural gas prices are lapping a big spike from last year.

Yes. So we do not have a great exposure to the gas market. We do have a good business in the Marcellus that we've been there for quite some time, and it's a good business for us. Fortunately, the customer mix that we have are quite a bit hedged and our long-term players that -- we have not seen any activity reductions from yet. We're not as big in the [ Haynesville ]. So we're not really too affected by what happens in the Haynesville market. But so far, number one, it's not a big part of our business. And so far, we haven't really seen any pullback from our customer base as it relates to the kind of the volatility in gas prices as I would describe it.

That's terrific to hear. The next question is for the desalination of produced water, you did the pilot project on that. And we're wondering what hurdles remain for that? And could there be an update by the [ regulators ] for their review for permitting for the operators sometime later this summer or late this year?

Yes. So a couple of parts of that question, Tim. I'll take the regulator side. So we did a pilot project, our first pilot project in Texas for a major operator, very, very happy with the results, technically a huge success, desalinating 92% of the produced water volume. And so we worked with this operator quite closely to understand the permitting process. So the 2 agencies that are going to really have oversight of discharging produced water for surface discharge or beneficial reuse. First is the EPA. We understand the EPA regulations very well, and our technical specifications of our desalination project, we're well below the threshold limits that the EPA requires. So we're in very good shape there. The second regulatory, then it goes to the states and in the State of Texas is the Railroad Commission. On the project that we had worked with our customer, we were very solid and very specific regulatory thresholds that the Railroad Commission have required for this operator for their permitting. And so we understand that now very well and again, we're very happy that the technical solution that we have is going to be able to well within the thresholds of the Railroad Commission. So again, each produced water is different. I don't want to say that this automatically qualifies us for every produced water opportunity. But now that we understand what the objectives are and that we can meet those objectives, we feel pretty good about being able to expand this to other areas. As it relates to desalination in general, again, we feel like we've got a first-mover advantage here. We've got 2 great agreements with 2 companies that we're very pleased with after quite a bit of research and testing with KMX and Hyrec both for different applications in the market, lower TDS levels with the Hyrec unit, higher TDS levels for the KMX unit. And then we have to marry that up with our -- what we call our TETRA proprietary pretreatment capabilities to feed both of those technologies. As I said, our pilot went very well. There are some learnings from our pilot that we need to take from essentially what was a lab scale, field pilot out on location to actual full commercial plant. There are some engineering and some things that we need to do on the front end with our pretreatment that we are working on. But we feel quite confident that before the end of the year, we will have a fully commercial package that we can really get into negotiations with operators for deploying whether it's a high TDS, such as the Permian Basin, or the low TDS, such as the Hyrec unit, before the end of the year is our objective.

That's terrific, Brady. Thanks for those details and insights. I took a stab at estimating how much value it can maybe add to your stock after I was down in the Permian in the summer. So yes, that will be a great catalyst. I think you could add $1 to $2. But actually, the next question is around free cash flow. Your investor presentation provided a range of some of the components for possibly strong free cash flow generation this year. You have put in my estimate is $32 million. And looking at the consensus, EBITDA estimate for this year, it's $101 million. If I assume that your capital expenditures might come in $5 million lower than next year and the Arkansas investments could be $5 million, does Elijio think that the working capital could be neutral or only a minor drag this year? Just trying to get a triangulation maybe on potential free cash flow.

Good question, Tim. On the earnings call a couple of weeks ago, I indicated that, while we were not going to give EBITDA guidance, we're comfortable saying that we expect strong free cash flow this year. The slide that we put on the screen here reflects the deducts from cash flow to arrive -- from EBITDA to arrive at free cash flow. And you're right, we're going -- as Brady mentioned earlier, we're going to be more reserved in terms of capital expenditures. We believe interest expense, despite the higher interest rates, can remain between $16 million and $17 million. Cash taxes, which are all international taxes, especially as the profitability improves overseas, can be somewhere in the $4 million to $6 million range. We'll make another $4 million to $6 million investment in Arkansas, and we believe cash flow can be neutral, unless there is a spike in the fourth quarter of this year, and if there is a spike in activity, obviously, that means that there's also a spike in EBITDA. Now the big working capital consumption that occurred in 2022 was on the revenue side. Revenue increased from $388 million in 2021 to $553 million in 2022. That's a $165 million increase year-over-year or 43% -- 42% increase. AR increased $38 million because in November and December as we saw those significant deepwater shipments start to occur. We could not invoice them and collect them before the end of the year. And to demonstrate that the working capital is really restricted around the accounts receivable where the volumes are increasing, inventory was up only $2 million year-over-year. So that tells you that we're moving all the product out as quickly as we could manufacture it or if we could buy it, and the AR is simply a timing issue. So on the assumption that there's been a big ramp-up in year-end activity in '23, we think that can be neutral. And whether you're estimate on us as consensus or something above that or something below that, the deduct is between $50 million and $60 million that, in our opinion, gives you a very strong free cash flow for 2023.

That's terrific to hear. I think a lot of investors will be excited to see that as a catalyst. Another question that I had recently -- I'm seeing is, can you explain maybe a bit more color on the net operating loss carryforward presentation plan for any ownership change? You have a very large amount of federal NOLs and they'll keep your tax rate low for many years. And it seems like cash taxes might only be international taxes like you just mentioned. So can you just maybe give us a little insight on that, the preservation plan?

Yes. So there's a significant asset that I don't think is really understood and appreciated that TETRA sitting on. Over the years, we've accumulated tax loss carryforwards of over $400 million. And if you assume a tax rate in the 30% range in the United States, that means that there's about $120 million deferred tax that as we generate profits in the United States, we do not have cash outlays to be responsible for, which means that a significant amount of our pretax income falls to free cash flow. Last year, we reported income before taxes of $11 million across the globe and paid no taxes, no U.S. federal taxes in the United States. We want to make sure that this approximately $120 million deferred tax does not get compromised. Now the IRS has a regulation called Section 382, and Section 382 of the IRS code indicates that if more than 50% of your shareholder base changes over a 3-year period, your ability to use that tax loss carryforward is severely restricted. That IRS code is essentially set up to keep a company from acquiring a different company with a big tax loss carryforward and then using it to offset the profits of the company that did the acquisition. So what we did is we put a plan in place that is very common and consistent with other companies with big NOLs to ensure that some shareholder accumulating significant position in TETRA does not inadvertently trigger that requirement. Now it does not prohibit shareholders from increasing significantly. It simply creates a situation to where we engage with the shareholders so that they don't inadvertently trigger that, and we lose that $120 million asset. So hopefully, that's a quick overview, Tim. And if any shareholder has any concerns about how that worked, please feel free to call me. This is not intended, and it does not have the consequences of a poison pill that are normally issued. This is strictly around our tax loss carryforwards.

Thanks for that deep dive, Elijio. And like you said, I think that's a huge asset that maybe some of the investors aren't aware of. I just want to briefly touch on your relationship with CarbonFree and their SkyCycle technology for your reaction-free calcium chloride production. It looks like CarbonFree just signed an agreement this month to do carbon dioxide emissions capture with U.S. steel plant. Do you think you'll be involved with that? And it looks like their operations have a [indiscernible] of 2025. And I also saw another press release around [ BP ], is there anything that you might be involved with there?

So CarbonFree, like any startup, is working on their capital plan, ensuring that their balance sheet is properly capitalized to execute on its business plan. We're not counting on them to contribute anything meaningful from a revenue or earnings perspective this year. You're right, Tim, they did sign an agreement with [ BP ]. They did sign an MOU with U.S. Steel. And I think those 2 companies, aligning with CarbonFree, points toward the upside and the possibilities that SkyCycle has. But short term, we're not counting on them to contribute meaningful to our numbers. I would suggest that keep an eye on CarbonFree. If they properly capitalize themselves and they can execute on their business plan, then it's a good topic of when it might translate to revenue with TETRA.

That's great, Elijio. It does seem like it's a later time horizon, but possibly 2025, that's not too far out. Rigo, are you seeing any more questions on the chat? I wasn't seeing any on my end.

No, nothing new.

Great. So...

Questions online and the questions that you had, all the key topics that are coming to us have been addressed.

Great. We really appreciate the questions and audience participation today, and we want to thank Brady and Elijio of TETRA Technologies for coming on to share their insights. And I wanted to just share that it's been consistently apparent to me that this management team has a high level of passion and appealing strategic initiatives. You don't see that in all companies and stocks. So any investors can feel free to call or e-mail me at EF Hutton, if you have any follow-up questions or you want to talk offline, and I'll turn it back over to Brady.

Yes. Thank you very much, Tim, and participate -- thanks for hosting this and an excellent dialogue. As mentioned, feel free to reach out to us, to the audience for any additional questions that you may have, and we greatly appreciate your interest. And with that, we'll conclude our portion of the call.

Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.