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

All right. We're going to keep things moving. Again, Arun Jairam from JPMorgan's E&P OFS integrated or teams. Really excited to welcome Tetra to the stage. And I think this is 1 of the more unique companies that we have within the space because they have some really, really interesting long-term drivers that are really differentiated A lot of the companies within Alford service maybe have a little bit of a commodity type of field to them, but this is 1 of the more differentiated stories within the sector that showed up in your equity performance. Really excited to have Brady Murphy, who's the CEO of TETRA. Brady I just wondering if you can maybe just give investors today, just a little bit of a brief background on the company

Sure. Yes. Thanks, Arun, and glad to be here. Thank you for hosting us today. As you said, I think we do have a unique story. We are 45 years old. The company was founded in 1981. And the competency of the company really evolves around fluid chemistry. And we started in the completion fluids business, which is still a flagship part of our business today. like a lot of oilfield service companies over the last 20, 30 years, got into segments, got out of a lot of segments, but we did maintain that fluid chemistry competency and expertise over the years, which START several years ago after being in the CEO seat, we really want to start to look at how do we leverage the fluid chemistry expertise that we have into other higher growth areas outside of oilfield services and energy spaces, particularly energy storage. We were able to evolve some of our elation fluids chemistry into electrolyte space for long-duration energy storage. We have a very unique position in Arkansas. With our brine resources with critical minerals, whether it's bromine, lithium and magnesium, all of those represent future growth opportunities for the company. And then when the unconventional business started in North America. We got into the water management space to complement our completion fluids business and evolved that now is water and flowback 1 of our external segments, again, with some differentiated technology. But again, looking forward with what we can do with that business is desalinating produced water and establishing a whole new business line, which doesn't exist today, but is really an industry need particularly in the Permian Basin. So a good, strong company today, performing very well but with really 3 we think very strategic longer-term growth opportunities that we have the skill sets to execute -- these are not new businesses that we don't understand that all evolves around the competency of fluid chemistry and very confident we can execute on that.

Yes. Brett, you guys have described on TETRA 2030 as your plan to leverage these core fluids chemistry capabilities into these higher-growth markets -- what is the simplest way to describe the strategy today and that path towards -- on TETRA in 2030?

So we have 2 exported external reporting segments today. Our Completion Fluids business and our water flowback segment. As we looked to these growth opportunities that we had and projected where we would be by 2030, we decided that really we would look differently, instead of 78% of our revenue today from oilfield services, 80% in the future will be 1/3 and 1/3 and 1/3, so 3 reporting segments: one, on specialty chemicals and minerals to on desalinating the treatment of produced water. And then we will keep, obviously, the high-value components of our current energy services, our completion fluids our flowback business as part of our Energy Services segment. But between those 3 segments, we see them really kind of split 1/3 and a 1/3 and a 1/3 is kind of what we will look like in 2030, each of them with very good EBITDA margin profiles, 25% to 30% for some of them, we think, get above 30% on the critical minerals piece. But we laid all that out at our Investor Day. We got very good reception from our investors. I think we laid it out in a coherent way with a very credible way of how we can execute on that plan. And I think our investors have rewarded us accordingly.

Yes. I want to see if you can maybe talk a little bit about your calcium chloride business. What are some of the primary revenue drivers here? What's the competitive landscape?

So that's really the first business where Tetra started to take its I say fluid chemistry expertise and evolve it into the industrial outside of oilfield services. So we developed a calcium chloride industrial business today, where we're #1 in Europe #1 calcium cloud provider in Europe and #2 in the U.S. And so those markets are very different than your traditional oilfield services, food and beverage de-icing during weather, thus binding during the spring and summer in your water, mineralizing water. So all industrial applications, we still have a piece of it associated with oil and gas. But that was -- if you look at TETRA, that was kind of the first step of evolving the expertise that we have into industrial and other higher growth segments.

Great. I think the future plan, and Kurt, maybe you could shed some light on this, is to report in 3 segments starting in 2027, what's the strategic rationale? And what -- do you hope investors will gain from this kind of new reporting structure?

Brady, maybe you can kick that off, and I'll get back to.

Yes. We haven't decided it will be for sure 27%, it could be 28%, but we will be reporting 3 segments in the future. And again, it's to give investors a little bit more understanding of the composition of the company outside of just our oilfield services, specialty chemicals and minerals for instance. In addition to our calcium chloride business, we will layer in our electrolyte sales and show the growth of that segment separately. Our desal will marry up with our current recycling water for frac reuse, forming a whole new segment, again, showing our investment community, what that business looks like on a discrete basis and then keeping our flagship completion fluids and energy services component separate. So that's really the rationale behind it is giving more transparency, more visibility of what these 3 strategies, growth strategies, how they materialize into future growth in earnings.

Maybe just add to that with Brady too. The whole concept is to leverage our fluids chemistry expertise into new growth end markets, right? One being the battery electrolyte and the other 1 being the cell for beneficial reuse. I think the other dynamic around that is these businesses and these segments all have very similar EBITDA margin profiles, all around that 30% margin dynamics. So we're looking to shed kind of a lower margin element of our water business right now. We'll see how that evolves. But ultimately, as we get through the end of the decade, we'll be closer to 30% margin across the board.

Okay. I want to now maybe to go down maybe peel layer the onion on your businesses. Let's start with deepwater completion fluids, this is where you compete at the high end of the market. We got a lot of very complicated deepwater reservoirs, high-pressure, high temperature wells. Could you talk a little bit about your business there and what are some of the growth drivers?

Yes. So first of all, just a deepwater in general, we have a very bullish outlook for what the next 5 years looks like from a deepwater perspective. But the good thing about the types of deepwater projects that we're engaged in with our customers is we have almost a 2-year window on those projects because we have to go through a very thorough testing of the metallurgy, how the fluid reacts with the casing of the metallurgy, the elastomers formation damage. So we're involved in all these testing programs well ahead of these projects getting kicked off. So that gives us excellent visibility. And that's why we feel really bullish about the coming years in the deepwater overall. But I think the trends are also helping TETRA in terms of deeper, hotter, more complex environments because that fits our higher profile, higher density, less corrosive completion fluids technology, which obviously Neptune fits into that portfolio as well. So I think the combination of just the general up and to the right deepwater market, coupled with some of the trends of deeper, higher pressure fits our sweet spot.

I think adding I think to what Brady is saying too, in terms of lead indicator, if you take a look at the subsea tree installation profile through the end of the decade, every subsea tree represents a completion fluid opportunity, right? We have generally, what, 30% to 40% market share overall in the business. So as I know you have TechnipFMC here. So if you guys look to take the FMC and their visibility, you kind of like to like our visibility as well.

Great. I want to talk a little bit about the bromine project in Southwest Arkansas, can you talk a little bit about what's exciting about this project?

Yes, absolutely. Bromine is a critical component for number one, our completion fluids, our zinc bromide completion fluids, which again is the same chemistry that we utilize to move into the electrolyte space, zinc bromide electrolytes or core part of the electrolytes that EOS energy uses. And so the growth projections that we have for our deepwater business that we just talked about. And for what we see on the electrolyte side requires us to really ramp up our capacity to acquire bromine. Fortunately, we have a great resource base in Arkansas, Brian leases in Arkansas, very rich in bromine. We've had this project on the radar for a long time and we've timed it to marry up with our long-term supply agreement that comes to an ending in 2029. So this project will do 2 things. It allows us to grow our offshore business as well as our electrolyte business and also gives us a lower cost base being vertically integrated with our own bromine supply and not relying on third-party purchases, again, as our long-term supply agreement comes to the end at the end of 2029. So a very important project. We've communicated this project will add an estimated $100 million of EBITDA to TETRA's business by 2030, combination of growth as well as cost reduction. So the project financials are extremely attractive. Our Board, FID, the project A month or so ago, we announced that. We did a capital raise to finalize the funding that we need for the project to be started or completed at the end of 2027 and starting in 2028. So first of what I would consider to be 3 really critical minerals in TETRA's future. Bromine first, lithium, we think will probably be second and then magnesium, the third, all of them in the same brine, each of them leveraging some of the investment that we're making in Arkansas today.

Can you maybe impact that $100 million of incremental EBITDA contribution? How much is that of cost....

Yes, we won't give discrete numbers on that, but I would just think in rough terms, half of that will come through growth and half of that will come through some cost reduction opportunities.

Okay. Speaking of growth markets, you've been leaning into electrolytes and long-duration battery demand as a major growth vector. Can you talk a little bit about kind of the opportunity there.

Yes. Yes. We really like zinc bromide electrolytes. Obviously, we're not a battery company, but we have the capability to produce very cost-effective high purity electrolytes for the battery producers. Obviously, EOS is one of the first EOS Energies. It's one of the first companies to get out there on a large commercial scale. There are others that are developing their own solutions around that, but they're not near to the level of commercial scale that EOS has achieved. So we're very happy with the relationship we have with EOS. But there's really 2 key advantages to that technology. Number 1 is the long duration energy storage, you can cycle their batteries 10, 12 hours, compared to a typical lithium battery of 4 to 6 hours. So it fits the utility applications very, very well, having that long 12-hour charge, discharge cycle time. And then your other safety aspect of the largest market for bromine around the world as a fiber card. And so when you think of a large utility scale lithium ion, it has a fire risk associated with it. that still exists today and the amount of cost investment you have to put in place to mitigate that fire hazard. By nature, because of the zinc bromide chemistry, there's no fire hazard with the technology. So we like the technology. EOS is out and running, I think, at first commercial scale, but there are others that are coming.

And what are the opportunity set to scale volumes of electrolytes over the next year to a couple of years?

Yes. So that's why this bromine project is quite important to us. EOS has been -- has announced just recently. They have their second line, which will give them 4 gigawatt hour of manufacturing capacity up and running by the end of the year. I think their target is publicly stated. I'm not sure they've changed yet, but it was 2027. They wanted to be at 8 gigawatt hours. And obviously, that's a meaningful volume of electrolyte for TETRA to keep pace with, which is another reason why we need the bromine plant.

Okay. And just general commentary on like the margin profile.

Yes. I mean we want to obviously get into specific margins of different products. But in general, we're -- we think the electrolyte margin profile will be similar to our current completion fluids which they have to compete for for product, right?

Coming back to what we said earlier in our 3 segments, right? So like-for-like will be part of our Specialty Chemicals & Minerals business. And as we outlined in our Investor Day, we expect the margins in that business to be in that 30% EBITDA range.

25% to 30%.

25% to 30%. Brady, as you approach the end of the preferred supply window with EOS in 2027, what are the key priorities to extend or expand your commercial position?

Yes. So we're having discussions with EOS today to extend that contract. I would say we're not going to get into the specific details of those discussions, but we like the partnership -- they know they need a good, reliable provider, a U.S. provider. We're the only provider in the U.S. of zinc bromide. So there's a security supply equation to that as well. And obviously, we want to help them be successful. So we're optimistic that we'll get things agreed upon to extend.

Okay. And are you in discussions with other OEMs as well? Or is this...

Yes. Well, not to the commercial scale that EOS is, but there are other providers out there that are investing in this technology. Yes.

Let's talk about produced water, your kit for deselling nation. Can you talk a little bit about how the Oasis pilot performance has been doing?

Yes. Yes. So we've announced publicly that we partnered with EOG. Actually, quite a few years ago now, 3, 4 years ago, we've started the partnership -- we put our pilot in place, and I believe it was October of last year, so been running over 6 months now. we're under a nondisclosure agreement, so I can't provide a lot of details, but let's just say we're very happy with the results that we've been achieving. We feel confident EOG is happy with the results. and we feel happy the regulatory agencies are happy with the results. So we're going to continue that pilot. I think the plan is to go through several growing seasons of different grasslands and crops et cetera. In the meantime, though, we're in discussions with other midstream companies, other operators for commercial scale applications. So very excited about that. I think that the data centers coming into West Texas have given some new -- a new push as if there wasn't enough of a push to address the injection disposal problem in West Texas. You now have an end user that's interested in buying this treated water. And so that's become an exciting aspect of this. So a lot more to come on that. We're doing our engineering design work for our 100,000 barrel per day plant. And once we have that, we'll be able to have deeper commercial discussions with our customers.

Yes, Chevron, at the conference, did announce a major agreement with Microsoft to build over 2.5 gigawatt power facility just south of Pecos, can you talk a little bit about kind of the -- not the business model, but how you could leverage these capabilities into that data center market?

Yes. No, it's -- we've been talking about this coming. I think it's the first of many that you're going to see. It's -- obviously, Chevron can provide natural gas for the power solution that these data centers need as they get behind the meter, have their own self-generated power. Obviously, there's land is not an issue in West Texas, but you do have a water issue in West Texas. Actually, in all of Texas. 50% geographically of Texas is technically under a drought condition. So water is a valuable resource in the state of Texas. And we're producing -- state is producing 20 million barrels a day of produced water, which today is just treated as a waste because it's reinjected down hole. But I think most people in the industry realize the challenge that's coming with disposing of all this produced water and the overpressuring of the of the formation. So the operators needed a solution to address this water disposal problem for some time, which is really where TETRA started down this path, which was to provide a solution to our customers to treat this water to avoid disposal restrictions. Well, as you mentioned, Chevron and the other hyperscalers that are coming into West Texas now. They need water. They need water for cooling. There's power generation that needs water for for their systems. So this is again, when we did our Investor Day in September last year, the data centers weren't even not on the radar screen. We were we laid out our 2030 targets just on what we felt the oil and gas E&Ps would need to address their disposal issues. And that's changed pretty rapidly now with this whole new demand of the hyperscalers and data centers coming in like the Chevron announcement and needing a water solution. So that's where we come into play.

Got it. Put numbers around that? Yes, Arun. So we think from -- if you look at a 1 gigawatt data center, you have 2 opportunities to get a cool the power gen unit. You got to cool the data center itself. So 1 gigawatt facility could be 600,000 barrels a day of water throughput for us, right? And in context, what Brady was saying on our 2030 plan, we had outlined maybe 500,000 barrels a day by 2030 for just ag and industrial use. So the data center becomes a plus point to that.

Got it. Got it. And are you seeing opportunities for this segment outside of the Permian Basin?

I think anywhere in the future, any unconventional market in the future is going to see similar-type challenges with water like the Permian is seeing now. It's just that the Permian is obviously well advanced from any other market. The volumes of water that are produced in the Permian per barrel of oil and now just the pure volume of the Permian has it well ahead of any other market. But I think the future unconventional markets are going to face the same challenge.

Let's move to critical minerals. Talk to us about what you're doing in this space.

Yes. So look, when we laid out our 2030 targets, we had a post 2030 objectives, which was really where most of the critical minerals for us were targeted at. As we look at things today, I would say we may likely try to accelerate the lithium side of that project, lithium prices have rebounded nicely there now in metric ton range. The synergies, capital synergies savings we will get from our bromine investment because all of the upstream and the brine flow will be in place a lot of the plant infrastructure around the bromine plant will be common to what we will need for lithium. So really, we're talking about a direct lithium extraction plant on the backside of our bromine facility. Really taking advantage of a lower CapEx, the CapEx synergies, a nice price environment, what we think could be a low OpEx environment. And so that project, we'll be talking more about that as we get closer. No decisions have been made, but that we think will probably accelerate that project. And then magnesium is right behind it. Very interesting market. I know we're getting short on time, but of the world's magnesium comes from China. The U.S. has no commercial scale volume of magnesium. And of course, it is relied upon by defense industry for whether it's helicopters, drones, whatever, it's a very lightweight, high-strength metal. And so we think it's a critical mineral. We think we'll get good government support to help get our projects off the ground and -- by the way, the gift that keeps giving us back over is rich in magnesium as well. So that's clearly on our radar and our plans as well.

Yes. Just maybe in closing, you guys held a recent Analyst Day, it's been a few months, but maybe just kind of and with some of the key kind of financial targets and maybe the investment thesis and TETRA today?

Yes. So at our 2030 Investor Day was September of last year, we said, by 2030, we thought we would more than double revenue and triple EBITDA over $300 million of EBITDA. A big part of the milestone for that is our bromine plant. As we said, that's $100 million of contribution to the company. these other -- the desalination opportunities that we have in front of us are another fairly significant contribution, the deepwater market, we think will continue to grow. Critical Minerals as I said, was not a big part of those 2030 targets. But as we think about it now, we may try to accelerate those. So I'd say ever since our Investor Day, presentation and we laid out, I'd say our confidence level being able to deliver and execute that has only gotten higher, maybe exceed those numbers.

Okay. Any last word?

I think what Brady laid out is true. I think the critical springboard for us was getting the financing to fund the Bromine project. That puts us well on pace and target to get the project in 2028. And at that point in time, we'll be in a position to generate some higher levels of free cash flow to continue to invest in our future growth.

Great. Why don't we end things there -- thank you so much, gentlemen. Really appreciate it.

Thank you. Appreciate it.

Well done.

Thanks a lot.