Q3 2019 Earnings Call
Good morning, and welcome to Tetra technologies third quarter 2019 results conference call.
The speakers for today's call Bridie Murphy, Chief Executive Officer Elite he'll Serrano, Chief Financial Officer, and Yes, Mohawk Vice President of Finance and Treasurer, all participants will be in listen only mode should you need assistance. Please signaling comfort specialist pressing the star.
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After today's presentation, there will be an opportunity to ask questions to ask a question. You mean press Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note. This event is being recorded.
I will now turn the conference over to Mr. <unk>. Please go ahead.
Thank you Andrew <unk>.
This conference call may contain certain statements that are or maybe deemed to be forward looking statements.
These statements are based on certain assumptions and analysis made by Petrobras and are based on a number of factors. These statements are subject to a number of risks and uncertainties many of which I beyond the control of the company. You are cautioned that such statements are no guarantees of future performance.
Actual results may differ materially for both project it in the forward looking statement.
In addition in the course of its called we may refer can that that free cash flow adjusted EBITDA.
Profit before tax or adjusted earnings per share backlog coverage ratio or other non-GAAP financial measure.
Please refer to this morning's news release, our to our public website for reconciliations of non-GAAP financial measures to been yard GAAP measures.
These reconciliations are not a subsidiary Hansel information prepared in accordance with gap I should be considered within the context of our complete financial results for the period.
I'll turn this over to Brady.
Well. Thank you, yes, it good morning, everyone and welcome to the Tetra technologies third quarter 2019 earnings Conference call I will summarize some highlights for the quarter, then turn it over to Alito for some additional details which.
We'll be followed by your questions.
I would like to start again by thanking the touch or it seems like compressco employees for delivering another strong quarter amidst a challenging industry environment for the second consecutive quarter, our EBITDA margins improved sequentially across all three business segments, and our management employees did a good job executing our strategies, while proactively adjusting our CFO .
Cost structure to rapidly I rapidly changing conditions.
Although the revenue for our businesses was flattish sequentially, we performed well relative to many of the macro market indicators, such as the U.S. land rig count, which on average decline sequentially more than 7% again, we did a good job across both companies navigating this challenging environment.
One of consolidated basis, we achieved a 46 million dollar adjusted EBITDA quarter. This is down 8% from the second quarter, but primarily as a result of the seasonal decline in our northern Europe industrial chemicals business that peaks in the second quarter. This is highlighted by the fact that our adjusted EBITDA was up 11% from four quarter a year ago well.
Average U.S. land rig count was down over 13% year on year.
Completion fluids continues to benefit from improved activity in key offshore markets as we've seen an up tick in our demand for products on top of a favorable product mix plus some pricing improvements or adjusted EBITDA margins improved sequentially by 130 basis points to 23.7% and are the highest EBITDA margins for this division.
Since the fourth quarter of 2015, when we exclude any benefit of CS Neptune.
The industrial chemicals business within <unk> completion fluids remain strong and helps offset some of the volatility in our North America land business [noise].
Completion fluids margins are further supported by our vertical integration advantage and long term bromine supply agreements.
In regards to CS Neptune as previous previously announced in the second quarter, we signed a contract to provide tetra CS Neptune completion fluids for deepwater Gulf of Mexico project that was expected to be material completed towards the end of the third quarter. Unfortunately. This project is delayed and is now expected to be completed during the fourth quarter.
I will remind everyone. Once again that these projects our ultra deepwater complex wells that are prone to one foreseen challenges and are not guarantees until the <unk> drilling is completed and filed pressures are confirmed but based on the information. We we know today is our expectation to complete this project in the fourth quarter.
During the third quarter. We also launched at the Society of Petroleum Engineers Europe Conference Tetra CS Neptune completion fluids monovalent family of products Mata Velha completion fluids expands an increased the range of applications in certain reservoirs and provide lower corrosion rates in certain downhole environments feedback to date from our customers has been very.
Very encouraging and we believe this new technology will open more opportunities to deploy <unk> highly differentiated portfolio of Tetra Neptune completion fluids were very pleased to announce the touch. It was also a finalist for war oral magazine's best oilfield fluids in Chemicals award for Tetra advanced displacements systems or pads for.
Her highlighting our efforts and Cisco successful results.
In off rating offering differentiated technology.
[noise] water flow back has held up very well in the third quarter, given our U.S. on shore footprint and the pullback in it activity throughout the quarter, followed by pricing pressure during the latter part of the quarter or adjusted EBITDA for this division improved sequentially to $11.2 million on slightly lower revenue showing resiliency across most.
Well the U.S. basins, our EBITDA margins of 15.4% increased 50 basis points. We continue to focus on integrated projects you utilizing our automation capabilities by driving efficiencies into our operation and provide our customers with a fully integrated water management solution.
We finished the quarter working on 20 integrated projects with 13 different customers for the projects were with either new customers or a new basins the penetration into new customers, a new basins is encouraging as more and more customers are realizing the value of these integrated offerings.
Furthermore to support our closed loop water management capability, we released our new Bluelinx automated control system, which provides remote control and monitoring for every aspect of our integrated water services.
We also made progress commercializing our advanced like loan system, which is achieving proving San recovery efficiency greater than 95%, which compares to traditional psych loans, which are closer to 50% Sam recovery.
As mentioned on what our press release. This morning, we signed a contract with a major N P. Operator in the Permian Basin. It was the first the run extensive trials with our automated cycling system. This is a large order of units to displace their current technology on a take or pay contract.
We've also been awarded the contract for monitor.
That's up writers in Argentina, our first Latin American contract for this type of technology.
That's it was also finalist for two World All magazine's best Water Management Technology Awards, one for the Tetra Swiftwater automated treatments system. The other for touches lowest cost per barrel water management solution. We were the only company that had to technology solutions in the finals for water management.
So what we see a weaker fourth quarter for this segment due to declining in peace spend we will continue to focus on leveraging our differentiation, while managing our variable cost to be nimble and proactive for their cost structure and the quickly Iraq to changes in market conditions.
[noise] the compression business, yet again set records for compression service gross margins at 53.2% and utilization of 90.1% and continues to benefit from a long term growth cycle of increased gas production and the use of compression for centralized gas lift in key shale oil basins. This was the second quarter in a row, where we achieved.
Record highs in compression service gross margins and Utilizations.
Well, we've seen some customer slowdown for their request of additional compression services going into 2020. The overall fundamentals for the compression business have not changed and the segments remains a very very strong one of the strongest in the oil and gas industry.
Our revenue in the third quarter decreased sequentially to 114 million from 136 million or lower new equipment sales due to the timing of shipments, while our aftermarket services and compression services revenue.
It was up sequentially on top of improved EBITDA margins.
The compression adjusted EBITDA on a quarter was slightly down to 31.3 million from 32.8 million in the second quarter, but was up 6.7 million from this time last year.
Well centralized gas lift continues to see the highs the man for our equipment or increased focus on liquids artificial lift methods for aging on conventional wells such as our gas assist the plunger lift or Gopal combined with our backside auto injection system or a bias has resulted in a fourfold increase in a number of gasjack sets, we have working for this application.
Since the beginning of the year.
We're very pleased with the amount of interest and demand. These new applications are creating for the Gasjack fleet.
We've also received the large international order and a third quarter had net orders of 29 million, increasing our backlog to 63 million up 3 million from June 2019.
We expect to see one or two more large orders in the fourth quarter on early 2020 to help fill our 2020, new order book for equipment sales.
While orders were slow in the first half of the year on new equipment sales pipelines remain strong with over 250 million of identified opportunities.
We added 14300 active horsepower this quarter utilization for a thousand higher horsepower equipment focused on gathering and centralized gas lift was 97.4% as of the end of September up 30 basis points from the end of June 2019.
Overall utilization for the entire fleet is at 90.1% up 100 basis points sequentially and again another record high since the acquisition of compression systems incorporated with that I'll turn it over to Alito to provide some financial comments on cash flow in the balance sheet.
And then we'll open up for some questions.
[noise]. Thank you Brady.
In a few minutes on free cash flow capital expenditures the balance sheet.
Then, yes, I compressco capital allocation strategy.
In the third quarter Tetra only generated free cash flow from continuing operations up $9.7 million.
This compares to $3.1 million generated in the second quarter of 2019.
And $35 million consumed in the first quarter of this year.
We have historic historically consume cash in the first half of the year in generated free cash flow in the second half of the year and we are trending along those lines.
We expect to generate positive free cash flow from continuing operations in 2019.
And exceed that $3 million that we generated last year.
For Tetra only we expect go to your capital expenditures to be approximately 25 million to 30 million.
In addition to 15, one 5 million up equipment that we've agreed to by at least as yes, I Compressco supporting their high return opportunities.
Tetra only capital expenditures in the third quarter were $8 million.
Compared to $20 million into first half of the or.
[noise] Tetra only net debt at the end of June with $192 million with cash on hand up $21 million.
Our debt structure does not include any material maintenance covenant.
Which provides us a flexibility to maneuver [laughter] volatility in the market.
Yes, always I like to again remind everyone that TETRAS, yes, I compresscos debt are distinct and separate there are no cross default.
Cross collateral or cross guarantees on the dead between Tetra and see if I compressco.
I'll spend a minute now, let's see if I compressco.
Yes, I compresscos cash flow from operating activities with $27 million I.
A significant increase from $8.7 million generated into second quarter of 2019.
At the end of September Thirtyth, I Compressco total gross debt outstanding was $657 million.
Upwards of $350 million are secured notes that don't mature until the your 2025.
And $286 million, our unsecured notes that mature in August of the your 2022.
Yes, I Compresscos net leverage ratio at the end of September were 5.2 times.
When you annualize you know third quarter adjusted EBITDA.
Yes, I Compresscos net leverage would be approximately 4.8 times.
Well under way towards a 4.5 times target that we have set.
From a high of seven times at the end of Q2 2018.
Yes, I net leverage ratio has improved to 5.2 times.
Yesterday see if I can compressco, we confirmed there probably are your.
Your prior totally your EBITDA guidance.
Represent a year over year improvement.
Between 26 and 31%.
We are encouraged that the compression business because he never get a challenging north American market.
With declining rig activity.
So far the weaker mark activity in the broader oil and gas North American market has not had any effect or a compression business.
And in fact, the business fundamentals have continued to improve in the last quarter amid all that uncertainty.
At the midpoint of CSR Compressco 2019 full year adjusted EBITDA guidance.
And after accounting for cash interest expense.
Maintenance capital expenditures and cash taxes.
Yes, I compressco expects to generate approximately $57 million a free cash flow.
This year slightly over $30 million or the free cash flow with directed towards cast redeeming the series C preferred units.
A small amount toward distribution.
And the rest whats towards growth capital.
Yes, I Compressco remains capital Lynn.
Their growth in their growth capital investments in 2018 in 2019 or 20, 20% returns on capital.
Yes, I can press corps targeting more than 50% of next year's distributable cash flow towards the reduction of debt.
To further strengthen their balance sheet.
They expect 2020 investments in growth capital to be below the amount that we expanded in 2019.
And further expected continued to generate 20% returns on capital.
It is our goal to improve CSR compresscos leverage ratio to 4.5 times by the end of 2020.
Back to comment on Tetra in the last downturn Tetra remain free cash flow positive each of the downturn years.
We have the playbook diminished during difficult times and go again to execute on the actions necessary to remain free cash flow positive during periods of reduced activity levels.
Our diverse business model, which includes industrial chemical sales.
International onshore and offshore activity.
Hi, vertical integration and chemicals and compression.
And that proprietary Neptune technologies, all contributed towards generating free cash flow in the last down cycle.
And we fully expect that we will continue to generate positive free cash flow in periods of a weaker market.
I encourage you to lead our news release on this morning.
Yes, I Compresscos news release from yesterday with all the supporting details.
I'll now turn it back to Brady.
Thank you really heal and before we open to questions I'd, just like to summarize them really a couple of key message to leave with you.
Well again overall I'm pleased with our results this quarter as demonstrated by our second consecutive quarter of increased EBITDA margins for each of our three business segments and the 250 basis point improvement in overall Tetra EBITDA margins over Q3 of last year.
We're confident we'll be able to complete the Gulf of Mexico, well, which is scheduled for our CS Neptune completion fluids in the fourth quarter, while North America land market is experiencing pricing pressures on potential budget exhausted by our customers, we're committed to optimizing our flexible cost structure to adapt any.
New market conditions.
Although in North America land businesses were resulting in the third quarter, we don't expect to be immune from the potential budget exhaust and an industry macro indicators that point to a weaker fourth quarter for our water inflow back business segment.
Our successful strategies to differentiate from a competition is validated by a large take or pay contract award for our latest de sanding flow back technology introduction of Monovalent, CS Neptune and TETRAS first ever nominations for World Oil Awards.
Our compression division continues to achieve operational financial record highs and we continue to see this business strengthened even amidst sign of weakness throughout the industry. Lastly, we remain very focused on cash flow generation.
I still expect total year tetra only free cash flow to exceed $3 million that we generated in 2018, we generated free cash flow and second and third quarter. This year and looking forward to ending on a very strong note without let's open it to the some questions.
We will now begin my question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Praveen, not <unk> of Raymond James. Please go ahead.
Hi, good morning, guys.
I want to but I guess.
I guess, when we think about the the CS Neptune well it sounds like you guys are pretty confident and that getting completed and for Q, but can we talk about how the the the 2020 schedule may play out what do you think we should get see any of the kind of Halliburton co works coming through in that timeframe or how should we think about a 22.
Ladies profile for that.
Yeah, no. Thanks for being that I as I mentioned, we've had a lot of really good interest in our our monovalent completion fluids introduction and we are expecting.
Though some business in the particularly in the North Sea for our Monovalent CS Neptune is in 2020, it's a little early to predict a meal some of the larger deepwater projects for our generation one Neptune at this 0.4 2020, but we hope to have a little more clarity as we you'll see the budgets for our customers.
Into a into the new year.
Okay, and then I guess, just thinking about the fluids margins ex CS Neptune without having the project in Threeq you were still fairly strong.
Can you talk about the ability to hold that if we if we.
Don't see these he doesn't have to projects or how do how do we think about threeq you as a kind of normalized margin.
Yeah, we've communicated before we think our base completion fluids business, you know, it's holding up very well.
We think communicated we think consistently we can achieve 20% or above EBITDA margins for that base business without CS Neptune.
And based on what we see right now as we look at the market a few form beyond for next year. We believe that's a that's still very much intact and prevent remember that we are vertically integrated in the bromine market that the long term agreement to get the elemental bromine that vertical integration contributes to our.
Towards city margins.
Right, Okay, if I could squeeze one more in just think of Capex for 2020, obviously see as I talked about there's one yesterday.
How do you think about petrone capex for next year.
I would suggest that we're early in the process right now we're gathering feedback from our customers in terms of what their plans are for 2020 once we complete that information we'll.
Do our internal budgeting process.
I would suggest that it's hurting the process for us to volunteer any 2020 capex.
Thank you.
The next question comes from John Watson of Simmons Energy. Please go ahead.
Thank you good morning.
Morning.
Pretty on the Neptune <unk> can you remind me how long it takes to typically complete one of those projects and has the project you expect to complete in Q4 already begun.
We really don't want to get into anymore specific details about our customers well operations for the you know completion phase of of this well as you can imagine it's a you know so it's a very major project for our customers and.
We prefer not to give anymore details on the on the timing of a after a well is.
Those drilled and the wall log data is taken for the pressures. Then then we're typically motive mobilized to the to the rig site for the completion phase of all of the project, which which can run you know from a few days to two a month.
Okay. Thanks for that.
Secondly, waterton flow back revenues were impressive relative to completions activity in the third quarter.
Can you give us some more detail on on what you attribute that outperformance to and maybe expectations for it to continue were not continue into Q4 Q.
Yeah, I think in the third quarter as I said, our I think our teams executed.
Very well.
In our integrated projects or help us we believed to streamline cost.
Providing some automation, reducing some labor cost as part of our operations.
Introducing some new technology that Youre, our margins are our pricing on our sounds like loans, the new technology hold up very well.
Having said that and very pleased with what we did in Q3, you know clearly, we see Q4 activity pulling back and more pricing pressure in the fourth quarter. So we expect that will be weaker for Q4.
Okay understood and lastly.
Water treating specs have you seen those become less intensive of late and I read coming closer to reaching consensus water spec among N P customers and if so does that benefit tetra.
I wouldn't say, we've seen a major change with with the customers that we are working with with their water specs for you're talking about produced water for reuse and Frac operations. John That's right, yes, Yeah, I wouldn't say with the customers that we are operating with we have seen a and any any real major change.
Now I'll I'll leave it at that.
All right. Thank you Brad I'll turn it back.
Thank you.
Next question comes from Brian thinks of B. Riley FBR. Please go ahead.
Hi, Good morning, guys morning.
Sticking with water for temporary transfer how did pricing evolved over the third quarter and what's your outlook for 2020.
So I think during the first two months of the quarter pricing held up fairly well, we definitely saw some more pricing pressure along with some of the customer pull back in the last month of the quarter in September .
It should in that pull back we also saw <unk> from more pricing pressure.
I think it's a little early to predict what's going to happen in in 2020 as it relates to pricing, obviously, we'll be paying close attention to our customers budgets as there are announced for 2020 and how we position ourselves.
Along those budgets, we do like the customer base that we have we do like the differentiation that we have with tetra steel with our automation and with our San flow back. So we do believe we can achieve premium pricing. So what's in the market, but to give an overall I guess number at this point or expectation that.
This morning, I think it's a bit early for 2020 for us.
That's fair. Thank you and then could you perhaps share rough range of how much the industry supply of lay flat whos will likely grown in 2019, and maybe could continue to expand here.
I'm not sure.
I can answer that with a fair degree of accuracy I've <unk> elite helium any comments on I I would suggest that we've been discipline and we focused on our high end proprietary whos. That's double jacket. It that we were we believe represents a competitive advantage. However for the traditional single jacket hosts.
I can comment or we can comment on what the others are doing in the industry we're focused on.
Technologies that represent a differentiator.
Got you. Thank you for that and then just one more and water flow back.
Could you share a percentage of revenue that or or percentage of projects that entails blue links so far and maybe a target that you guys have.
A year from now so.
So where we're targeting is took two different answers to that for all of our jobs, we are targeting to have pump automation.
100% is our objective we're not we're not there yet.
But you know bluelinx as part of that solution anytime we have a piece of automated the kid on the on a particular job you know for the fully automated jobs, where we have integrated offerings at Bluelinx is a critical part of managed thing that whole closed loop network.
And I think we mentioned we had 20 jobs this quarter. So between all of our transfer jobs with automation and our integrated projects as was where Bluelinx plays a key role for us.
Gotcha, if I could just sneak one in on compression I know in the Compressco call. You guys said, you plan to direct 50% or so of future distributable cash flow towards growth capital, but could you possibly share how much horsepower. You currently have on order for delivery in 2020.
The amount of horsepower scheduled for delivery equates to in dollar wise less than $3 billion at this point.
We're being very selective in terms of what opportunities we responded to and only responding to those that are either with existing concentrated customers.
And our generating 20% returns on capital for at this point only $3 million up next year's capital that will be funded with cash flow from operations is committed.
Great I appreciate the answers I'll turn it back thanks guys.
Thank you. The next question comes from Stephen Gengaro of Stifel. Please go ahead.
Thanks, Good morning, gentlemen.
Hi, good morning, I been attach rates right.
I apologize if you answered is have you seen any.
Any more traction from the Halliburton Alliance and what are you seeing.
As far as expectations on.
Neptune side as you look into 2020.
Yes did we talked a little but at that early but I'm happy to.
To answer your question I know the Halliburton traction you know we view very positive I think last last quarter, we announced that we were engaged with six.
Super major operators on on some of their key deepwater projects three of those six you know we were brought and by a by our Halliburton relationship.
When we introduced our monovalent technology.
At SPE in Europe this quarter.
And again.
However, it has very strong presence in some of these markets, even even some integrated drilling type projects, where they're the where there are the lead and they have introduced the monovalent technologies into those clients and we feel very good about about that pipeline and business revenue for 2020.
So overall.
Very positive gaining traction some of them longer term than than others, but I'm still very positive from our perspective.
Thanks, Julie gas based on what you're seeing the deepwater market weren't one of the things that that I think.
Ultimately will be helpful for that kind of trying to.
Just for the consistency of earnings, but some other trackers and returns et cetera, it's sort of a a more normal pattern of these projects where becomes maybe a little less episodic in a little more consistent I mean, something that's based on just the deepwater market in general, but any sense for kind of how that plays out over the next couple of years.
Yeah, I think the deepwater market is still.
Fairly suppressed from obviously the peak days that we saw perhaps in 2013 14 levels. So I think there's still a lot of upside on the deepwater I think the the overall offshore market again, our monovalent solution is nuts, specifically tied to deepwater I would say it's more time.
I had two offshore north sea type markets are in the middle East markets, we're seeing that activity a.
Fairly robust not not back to fill peak levels by any means, but certainly a better than than the troughs that we saw in the in the last few years.
Okay. Thank you.
Over to Mr. Murphy for any closing remarks.
Well. Thank you. We appreciate your interest in touch with technologies and and thanks for taking the time to the joining us on our call. This morning is concludes our call.
The conference has concluded you make disconnect your line at this time.