TETRA - Earnings Call - Q3 2021

Transcript

Speaker 0

Good morning, welcome to TETRA Technologies Third Quarter twenty twenty one Results Conference Call. The speakers for today's call are Grady Murphy, Chief Executive Officer and Elhigio Serrano, Chief Financial Officer. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I will now turn the conference over to Mr. Serrano. Please go ahead.

Speaker 1

Thank you, Betsy. Good morning, and thank you for joining TETRA's third quarter twenty twenty one results 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 a number of factors. These statements are subject to a number of 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, adjusted free cash flow, net debt, liquidity and other non GAAP financial measures. Please refer to yesterday's press release or to our public website for reconciliation of non GAAP financial measures to the nearest GAAP measure. 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 for the period. In addition to our press release announcement that went out yesterday, we also encourage you to refer to our 10 Q that was filed yesterday.

I'll now turn it over

Speaker 2

to Brady. Thanks, Elijio, and good morning, everyone. Welcome to TETRA's third quarter twenty twenty one earnings call. I'll summarize some highlights for the third quarter, provide some perspective on the fourth quarter and then provide an update on our low carbon energy initiatives before turning it back to Elijio to discuss cash flow, the balance sheet and liquidity. To start, I'd like to give special recognition to our Louisiana Gulf Of Mexico employees that dealt with the devastating Hurricane Ida.

Fortunately, we suffered no serious employee injuries and our employees' property repairs are well underway. But special thanks to our employees and their incredible dedication to get our Fuchsia, Louisiana base, which supports our Gulf Of Mexico operations functionally back to being 100% in order to service our customers' needs. Again, special recognition and thanks to all of these employees and their families. For the quarter, despite some unique challenges for the industry, including massive Hurricane Ida impacting Gulf Of Mexico operations, growing shipping port choke points contributing to delayed deliveries across the globe and the type of inflationary pressure that we've not seen for many years, the overall macro environment for our industry continues to improve as we believe we're still in the early days of a multiyear oilfield services market recovery and the period of accelerating growth for our low carbon energy markets. TETRA's third quarter results reflect each of these macro factors, but more importantly demonstrates the success we're having executing on our strategies.

Year on year, we grew revenue by 30% and would have been over 40% if not for the impact of Hurricane Ida and the global shipping delays, impacting the quarter's completion fluid deliveries. The third quarter $15,000,000 adjusted EBITDA grew 16% sequentially and 104% year over year and is the highest level since the 2020 and prior to the market impact of the COVID-nineteen pandemic. Third quarter adjusted EBITDA does include $6,200,000 of mark to market gains from our equity ownership in Standard Lithium and CSI Compressco as more investors realize the significant value in the very lithium rich brines in the TETRA Arkansas leases and the announced progress towards monetizing these resources. The $6,200,000 gain was largely offset in the quarter by reductions in adjusted EBITDA from revenue delays of approximately $11,000,000 in completion fluid products and services from Gulf Of Mexico jobs that pushed into the fourth quarter due to Hurricane Ida and delayed deliveries due to the global shipping backlogs and to a lesser extent, inflationary costs on certain raw materials for our chemicals production. We generated $1,000,000 of free cash flow and again reduced our term loan this time by $8,000,000 while keeping liquidity around $90,000,000 Turning to the segments.

As discussed on our second quarter earnings call, we expected our Water and Flowback Services margins to improve from 5.3% in the second quarter to high single digits in the third quarter, a target that was exceeded to an actual 10.9% in the third quarter. This is an increase of five sixty basis points or 156% over the second quarter despite ongoing cost inflationary pressures in many operational areas. Third quarter revenues increased 24% sequentially despite the number of active frac crews in The U. S. Onshore being relatively flat compared to the second quarter and increased 117% year over year.

We continue to gain market share in The U. S. Shale plays because of our technology, quality of our services and a very compelling integrated water management business model supported by a well developed automation platform that delivers on cost efficiency, service quality and improved safety. Various factors contributed to this margin improvement. First, we completed the mobilization and were fully operational in the third quarter for the Sandstorm Project awards in Argentina.

Building further on our business in Argentina, during the third quarter, we also secured an early production facility project that also includes additional sandstorms, which we will build and operate on a multiyear contract starting in early twenty twenty two. Secondly, we are achieving success with price improvements for many of our U. S. Customers as the utilization rates of our recycling units, water transfer equipment, including TETRA Steel, flowback equipment, including sandstorms continue to operate at maximum utilization. Newly secured customers are coming in with pricing better than some existing customers and we are now turning down some projects where pricing is not at the levels we believe appropriate to generate an acceptable return on capital.

And thirdly, profitable market penetration through our integrated and digitized water management projects also contributed to improved profitability. During the third quarter, we achieved a record high 55 integrated water management projects with 27 different customers, out of which four were new customers. We continue to make market share inroads with private oil and gas operators that see the value in our differentiated offerings and rely less on centrally managed procurement groups. In the third quarter, we successfully launched our 15 ks high pressure rated sandstorms, which has immediately helped us gain higher market share traction in the Haynesville. Overall, we're pleased with the improvement in our water and flowback services business in the third quarter and although not yet back to the mid-20s adjusted EBITDA margin levels we achieved at the height of The U.

S. Shale market in mid-twenty eighteen when there were over 300 active frac crews, we are very pleased with the progression of our revenue and profitability and we continue to build the foundational blocks in our business to continue this improvement. Shifting to completion fluids products and services. For a number of reasons, there was an unusual number of moving parts for the quarter, including the $14,000,000 seasonal drop from the second quarter peak in our European chemicals business, the aforementioned revenue reduction of $11,000,000 due to Hurricane Ida and global shipping delays, the mark to market gains of $6,400,000 adjusted EBITDA from our investments in standard lithium and some cost inflationary pressures from some of our chemical production raw materials. Adjusting for the second quarter revenue seasonality of $14,000,000 and $11,000,000 delayed revenue due to Hurricane Ida and global shipping issues, both quarter on quarter and year on year revenue comparisons would have increased by double digits to mid teen percentages, which we believe is more reflective of our current business performance.

Using a similar analysis for adjusted EBITDA margin accounting for the 6.4 mark to market gain on standard lithium and the loss of EBITDA due to Hurricane Ida and delayed shipments, we believe the third quarter adjusted EBITDA would have been in the mid-20s, which includes the inflationary cost, which we see as likely to carry forward into the fourth quarter and potentially beyond. Going forward, we are increasing our prices to reflect these inflationary costs as we're seeing the global supply chain for our core products tighten as well, especially for bromine and calcium chloride products. During the third quarter, we continue to see the core strength of our Completion Fluids business improve, which we feel supported by a number of data points. First, a well known industry research expert reported on the completion fluids segment of the Global Oilfield Services, the results of which showed TETRA for the Gulf Of Mexico with an average 67% customer loyalty compared to the industry average of 33% and with superior supplier performance compared to our competitors. We continue to be awarded large multiyear contracts in deepwater markets with a new deepwater project awarded in Brazil during the third quarter for a large integrated service company.

This is in addition to the previously announced large multiyear awards in the Gulf Of Mexico for a super major operator as well as a deepwater award for a major integrated service company in Brazil. Looking forward, we expect to see materially higher revenue for this segment in the fourth quarter as the Gulf Of Mexico activity returns and many of the delayed shipments will be delivered during the quarter. We expect our fourth quarter adjusted EBITDA margins to return to the mid-20s range, not including any benefit from standard lithium shares, which through October are up another 40%. Our Industrial Chemicals business continues to stay strong, which is complemented by improved demand for calcium chloride in the recovering oil and gas market. The previously mentioned plant investment in Europe for a 25% increase in production capacity is on track for completion in the 2022.

And finally, we continue to refine the engineering and testing for what we believe will be an industry unique manufacturing process for CO2 free calcium chloride, designed for our own future production and to support the anticipated demand from our partnership with Carbon Free. In regards to our low carbon initiatives, we continue to be excited with our progress. As mentioned in our previous press release, we're ahead of our internal timelines to generate revenue from our low carbon energy initiatives. In the third quarter, we secured and shipped the second commercial order and sale of PureFlow, our high purity zinc bromide solution to a publicly traded energy storage technology company. We are making progress in building and furthering a long term strategic supplier with this customer and expect to have an agreement in place before year end.

Assuming this agreement materializes as expected, we anticipate a material increase in demand of PureFlow orders for deliveries in 2022 to support their manufacturing and production needs. We're also in discussions with other energy storage companies, which use zinc bromide as an electrolyte for energy storage. Considering the forecasted high compound annual growth rates in the energy storage market, we will work collaboratively with these companies to meet their longer term demands for our PureFlow solution as well as our full electrolyte needs. Moving on to lithium and bromine reserves. Standard Lithium completed their preliminary engineering assessment or PEA.

To extract lithium from brine from our acreage in the Smackover Formation in Arkansas. The standard lithium PEA indicates very attractive economics for the acreage with 1,320,000 tons of lithium carbonate equivalent at the inferred resource category, which is 49% higher than what was previously estimated. Based on the standard lithium press release, the economics on the TETRA acreage are attractive to advance work on this acreage in parallel to their current work on LANXESS facilities. The timeline of Standard Lithium work on TETRA's Arkansas acreage is of interest to TETRA for several reasons. One, we would begin generating royalties from lithium production on standard lithium versus our current option fee agreement.

And two, the bromine rich tail brine from standard lithium's extraction process will be available to TETRA as TETRA still maintains all the mineral rights to the bromine, which we have previously indicated exploration targets of 2,540,000 to 8,580,000 tons of bromine. In addition to the Standard Lithium Option Agreement acreage, TETRA previously communicated that we estimate between 85,286 exploration target tons of lithium on acreage outside the standard lithium agreement, which is 100% TETRA. We're planning to drill an exploratory well in the fourth quarter on our dedicated acreage to obtain lithium and bromine samples, allowing us to move from exploration target to an inferred resources target phase. We then intend to move towards a PEA study in early twenty twenty two. There's significant value in our mineral rights in the Smackover formation in Arkansas from a combination of our option agreement with Standard Lithium, our bromine resources to meet the growing demands for completion fluids and energy storage, in addition to our 100% TETRA owned lithium resources.

We will continue to evolve these resources to create shareholder value. Finally, in the area of carbon capture, Carbon Free continues to make progress on raising capital to launch their CO2 SkyCycle capture technology, while we evolve the engineering on our unique CO2 free calcium chloride manufacturing process. We will continue to work with Carbon Free to source and supply the required volumes of calcium chloride as they get ready to announce their first project. Overall, despite the number of unusual circumstances with Hurricane Ida, the global shipping and logistics issues and overcoming inflationary pressures, we had a good quarter. Heading into 2022, we see continued improvement in the industry macro fundamentals and the need for E and P companies to invest to meet a growing energy shortfall.

Although we do expect a modest pause in U. S. Onshore activity around the holidays, early feedback from our customers points to a robust increase in activity early next year. At the same time, we will continue to make progress on our multiple low carbon energy opportunities, potentially putting us in a position in the near future to communicate to the market the potential revenue, EBITDA and cash flow targets from these initiatives. Now, I'll turn it over to Elijio to provide some additional details and we'll open it up for questions.

Speaker 1

Thank you, Brady. Third quarter adjusted free cash flow from continuing operations was $2,800,000 which compares to $1,800,000 of adjusted free cash flow from continuing operations in the second quarter. Free cash flow for the quarter was $1,000,000 an improvement of $5,500,000 from the second quarter. We are free cash flow positive on a year to date basis despite a 10% year over year growth in September year to date revenue and capital expenditures of $10,600,000 Total debt outstanding was $164,000,000 at the September, while net debt was $122,000,000 We have reduced our term loan by $44,000,000 from $220,000,000 on September to $176,000,000 on September 30. And we expect to reduce it by at least another $10,000,000 in the fourth quarter from cash flow from operations.

With this expected reduction in the fourth quarter, we would have paid off at least $55,000,000 since last year, reducing the term loan by 27% and saving interest expense of $4,000,000 on an annualized basis, which further improves free cash flow. Liquidity at the end of the third quarter was $90,000,000 an increase of $8,000,000 from the end of the second quarter despite the pay down of $8,000,000 on our term loan as our ABL amendment in the third quarter added more than $10,000,000 of liquidity. We also extended the maturity of our ABL to May 2025. At the end of the third quarter, unrestricted cash was $42,000,000 and availability under the revolver was $48,000,000 and we have no amount drawn on the ABL. The third quarter included a $6,200,000 gain on mark to market adjustments in the common units that we own in CSI Compressco and to the 1,600,000 shares that we own in Standard Lithium.

We will continue to see mark to market adjustments for the equity that we own of these two publicly traded entities. The market value of these investments at the September was $22,000,000 And Brady mentioned earlier that the share price of Standard Lithium increased another 40% in the month of October. We do not have any holding restrictions that might prohibit us from monetizing these assets. From the beginning of the year to the September, the value of this equity holdings have increased by $11,800,000 And as you evaluate our balance sheet, our liquidity and our cash position, one must recognize that we had $22,000,000 of marketable securities as of the September available to us to monetize at the appropriate time. Given these are marketable, we are including this mark to market adjustments in our adjusted EBITDA.

We expect to receive another $1,000,000 of cash by the end of the year and another 400,000 Standard Lithium shares early next year per our option agreement. The 400,000 shares we expect to receive early next year at the current share price of Standard Lithium equates to approximately $4,900,000 in value, not insignificant. We excluded unusual items from our third quarter results, which totaled $1,300,000 of non recurring income, net of expenses. These charges include a gain of $3,200,000 of non cash stock warrant value adjustment expense, dollars 1,600,000.0 of legal settlement and other expenses and $200,000 of cumulative adjustments to our long term incentive and appreciation right expense. Also, we estimate that third quarter revenue was negatively impacted by approximately $11,000,000 from Hurricane Ida and the global logistics supply chain issues.

And our reported adjusted EBITDA was also negatively impacted by Hurricane Ida and the global supply chain issues in addition to raw material inflation issues that Brady mentioned. And other than Hurricane Ida, we expect those challenges to linger into the fourth quarter. In summary, we continue to generate free cash flow and reduce the term loan. From September a year ago to our goal by the end of this year, we expect to reduce the term loan by 7% or approximately $55,000,000 effectively moving $55,000,000 of enterprise value to our equity holders without negatively impacting liquidity, which has actually improved from $84,000,000 a year ago to $90,000,000 at the September. And from September a year ago to September, our enterprise value has more than doubled from $212,000,000 to $518,000,000 and we have increased our equity value by more than five times from $64,000,000 to $396,000,000 which we believe represents the best performing oilfield service stock on The U.

S. Exchanges. And in the process, we have brought back into our stock several significant long term value index space holders. We are clearly focused on creating shareholder value. I encourage you to read our news release that we issued yesterday in the 10 Q that we filed last night for all the supporting details and additional financial and operational metrics.

Betsy, with that, we'll open it up for questions.

Speaker 0

Thank you. We will now begin the question and answer session. And your first question comes from Stephen Gengaro with Stifel. Please go ahead.

Speaker 3

Thanks. Good morning, gentlemen.

Speaker 2

Good morning.

Speaker 3

A couple of things. I just wanted to start I just wanted to clarify something. Brady, you'd mentioned on the Fluids side, third quarter EBITDA in the mid 20s. When you talk about margins excluding the mark to market when you with that?

Speaker 2

Yes, Stephen. If we take the mark to market out, which I think pushed us over 31% with it in, and we had adjusted for the delays in the shipments in Hurricane Ida, we felt a more reflective EBITDA margin would have been in the mid-20s.

Speaker 3

Okay. Okay. That's what I just wanted to clarify. When we think about Fluids going forward and obviously excluding the mark to market for now and given the delays you saw in the

Speaker 2

third quarter,

Speaker 3

I mean, you give us an order of magnitude on what kind of revenue growth the fourth quarter should bring? And I guess and in addition to that, kind of is that mid-20s a relatively good number going forward? Or are there some puts and takes there that could move you higher as you move into 2021 excuse me, 2022?

Speaker 2

I'll take the margin progression and then ask Elijio to comment on the fourth quarter revenue. Yes, the margin progression we feel within the current environment in the mid-20s is appropriate. And partly because some of the inflation pressures that we're seeing, we don't know how long we will see these or if we will see some other new inflationary pressures pop up. We are getting some price increases because of the tightening of the market in both the bromine and calcium chloride, but the timing of which we're able to overcome some additional inflationary pressure if we see it is still all a bit unknown, but we still feel pretty confident about the mid-20s until this whole inflation situation hopefully is behind us.

Speaker 1

Okay. And Stephen, on the revenue progression, we've got the benefit of a lot of the jobs that got delayed because of Hurricane Ida from Q3 to Q4. And then Brady mentioned that we picked up some long accounts in the Gulf Of Mexico and we picked up some Latin America projects. We've got a significant Latin America project scheduled towards the end of the year. It's not unlikely that this segment could be up 20 sequentially.

And if all the projects come to fruition as they're scheduled, it could be as high as 30% sequential progression.

Speaker 3

Thanks. That's pretty clear, Alito. Thank you. And then you guys have obviously done a very good job on the new energy front, and things seem to be progressing there. It might be too early for me to ask this question.

But when you think about the TETRA PureFlo opportunity, I imagine the third quarter, you shipped your second one, it's probably obviously a net positive. But is there any way to frame what this could look like in 2022?

Speaker 2

Yes. So the way I'll answer that, Stephen, obviously, it's still a fairly small portion of our overall completion fluids business in 2021. Based on the forecast we're seeing for 2022, we will see a material increase in 2022. What we are projecting by the 2022 into 2023, it will now start to be what we would consider a meaningful impact of our overall bromine demand and business. So that if you think of it in terms of that progression, that's how rapidly we see things moving on that side.

Speaker 3

Great. And if I could just slip in one more, just for Leo. When you think about 2022 free cash flow, do have any guidance on CapEx and or how we should think about any big, big moves in working capital?

Speaker 1

I hope working capital is a big use because revenue is ramping up materially. Would be, I think, a positive. But we don't see any significant capital investments, even the expansion that we've talked about for our European calcium chloride business. That's not a big number that would move the capital number by any significant to increase capacity by around 25% there. So no, we don't see any material step up in CapEx next year.

And working capital could be a burn if there's a big ramp up in business, and we think that there's a good possibility that could happen.

Speaker 3

Okay, great. Thank you,

Speaker 2

Thank you, Susan.

Speaker 0

The next question comes from Samantha Ho with Evercore ISI. Please go ahead.

Speaker 4

Hey guys. Maybe just to go back to completion margins. Was there any lift from CS Neptune in 3Q? I kind of was under the assumption that you guys were on a job in the North Sea. And I'm just kind of wondering what you're kind of building into your guidance here for 4Q?

Speaker 2

Yes, Samantha, we did mention. We had a small job in the North Sea, somewhat of a trial job in the North Sea that we executed. It was a very successful job, but was not a, I guess, a material part of our results in the quarter. But it does set us up for a higher frequency number of these types of jobs going forward. That job was in the North Sea.

As we talked about before, we track our Neptune project pipeline very, very carefully. And due to the COVID-nineteen, we've estimated we lost twelve months of timeline in our project pipelines that we've been tracking. I would say with the Delta variant, we've lost another six months of that timeline. But we are in discussions with many of the customers for the projects that we track. And we feel very optimistic that we will see some projects in 2022.

We don't have specific well dates yet, but we are advancing those discussions at a much better pace than what we have been, say, the last eighteen months with the pandemic.

Speaker 4

Okay. And then maybe switching to water. I guess there's been a lot of commentary about NAND spending up 20%, 25% for next year. Are you guys sort of anticipating about the same and the similar sort of gains on your water side of the business?

Speaker 2

Yes. I think if you look at our progression through this year, Samantha, we would expect just a 20% jump over this year is not very meaningful over where we are right now from a quarterly run rate. So we would expect somewhat higher of an overall gain year on year than the 20% to 25% numbers that have been talked about. If you look at our quarterly revenues now, we would expect to be up double digits from that in 2022.

Speaker 4

And what sort of scenario do you need for margins to sort of return to that sort of mid-20s level? I think that's what I heard that like margins could yes. Sort of can you kind of outline sort of like a best case scenario when you could achieve that target?

Speaker 2

Yes. And it's difficult to say. There were over 300 frac crews operating at the peak in 2018. And clearly, we're well below that number today. I don't think we have to get back to over 300 frac crews in order for us to get back to those margins just based on the Sandstorm technology, which we didn't have in 2018.

The Argentina business that is generating some very nice margins and returns for us. The recycling capabilities, the integrated projects with our automation kind of reducing, offsetting some of the inflation on wages. So I feel pretty good about eventually getting back to that type of profitability, well below 300 frac crews, but I couldn't tell you exactly where that number would be right now. Next year, we're shooting to try to get back to that mid teens EBITDA margin in the first half of the year. And then we'll see how the market responds as we finish out 2022 and into 2023.

Speaker 4

Okay. That's great. For the Sandstorm build for Argentina, I take it you're building that here in The States and then you're just going to be shipping it down there. How I mean, you seeing like long lead times for materials that you need? I'm just kinda thinking just given, the issues that we're seeing with logistics.

You know, is there a concern of maybe not be able to to meet the the deadline for us to start those projects like you did last quarter and having to, take existing equipment. Can you address maybe how you're kind of like anticipating for that and then also addressing like higher costs on the build out?

Speaker 2

Right. Now that's a good question. We do have a fairly we had some visibility of the supply chain issues when we negotiated the contract. So we feel fairly confident with the time line that we have to deploy the early production facility and the additional sandstorms, unlike the previous contracts, which were a lot shorter lead time that we had to mobilize for. But we did build that into this contract, and we don't believe we don't foresee any major supply chain issues for us to meet that time line, Samantha.

Speaker 4

Okay, great. Thanks, guys. Congratulations.

Speaker 3

Thank you.

Speaker 2

Thank you.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Mr. Murphy for any closing remarks.

Speaker 2

Well, thank you again for joining us for our third quarter earnings call. We look forward to our next update. Thank you for your interest.

Speaker 0

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