Q4 2019 Earnings Call
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After today's presentation, there will be an opportunity to ask questions to ask a question. You may press the star than one on your touchtone phone to withdraw your question, please press * then two please note event is being recorded. I would now like to turn the conference over to mister. Muha, please go ahead.
Thank you, Brandon. Today's conference conference call may contain certain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions. Am Alice is made by Petra 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 where caution that statements are not guarantees of future performance and that actual results May differ materially materially from both projected in the forward-looking statements in addition in the course of Life call. We may refer to net debt free cash flow adjusted ebitda adjusted ebitda margin adjusted profit before tax or adjusted earnings-per-share backlog liquidity off the radio or other non-gaap Financial measures. Please refer to this morning's news release or to our public website for reconciliation of non-gaap financial measures to the nearest gaap measures wage.
these reconciliations are not a substitute for financial information prepared in accordance with gaap and should be considered within the context of
Complete Financial results for the. I will now turn it over to Brady. Thank you and good morning everyone. Welcome to the Tetra Technologies fourth-quarter and full-year 2019 results conference call. I will summarize some highlights for the quarter and the full year and then turn it over to Ally show for some additional financial and operational details, which in turn will open it up for questions first. I'd like to start by thanking all the touch her and CSI compressco employees for delivering a very strong quarter while navigating a challenging Energy Services Market particularly off in the businesses that are heavily leveraged to us land exposure in the fourth quarter of 2019. Saw the land rig count decline approximately 25% year-on-year and many of our customers impacted disciplined approach to Capital spending with a focus on cash flows.
Although our water and Flowback revenues declined 20% from Q3 and in line with Market activity. We managed to have our best quarterly financial performance and over four years in terms of adjusted ebitda. These birth Financial results were driven by RCS Neptune project and the Gulf of Mexico a near-record adjusted ebitda from CSI compressco and the diversity of our business portfolio with exposure to Offshore International and a strong industrial chemicals Market. I'm especially pleased that our strategies to leverage our vertically integrated business model and to differentiate either through technology as in the bank to see us Neptune or our latest sand separation solution or through our service delivery strategy of Automation and integrated water management or very evident in our strong fourth-quarter results.
Which Eve the consolidated?
55 million adjusted ebitda quarter on $250 million of Revenue. The adjusted ebitda was 18% higher than in the third quarter in the highest results since the third quarter of 2015.
Completion fluids continue to benefit from improved activity in key offshore markets and in the fourth quarter benefited from RCS Neptune Project in the Gulf of Mexico completion fluid products adjusted ebitda margins for the car or 35.2% and was the third quarter in a row for this segment to generate none. Neptune adjusted ebitda margins over 20% the industrial chemicals business within completion fluids and products remain strong and helps offset some of the volatility in North America land business. We continue to grow our International offshore business with the award of three major projects in asia-pacific West Africa and Brazil wage that are scheduled for completion in twenty-twenty. These markets are good growth opportunities for us.
We're also seeing the benefits of our completion fluids products in North America from our long-term raw material supply agreements, which we announced in December of last year that is helping us to reduce costs at several of our chemical production plants wage. Although the number of Deepwater customer Deep Water Well completions with Reservoir pressures that fall into the Cs Neptune density range reached a twenty-year low in 2019. We are seeing a grass type of customer Deepwater projects where we believe CS Neptune is the best solution. We are currently in various stages of testing and qualifying CS Neptune for seven different customer projects in multiple markets. We have a high degree of confidence that we will be awarded Neptune work in the Gulf of Mexico and then Eastern hemisphere in 2020. However, the timing of wards and well completions for specific Wells is not yet determined our water and Flowback business is heavily levered into the US one short completions Market likely the most difficult market across the Energy Services sector in today's environment. We've seen some pricing pressure that be dead.
And the end of the third quarter and continued into the fourth quarter.
As well as the reduction in overall completion activity or adjusted ebitda from this division was 5.6 million a decline of five point six million from the third quarter on fifteen point five million of less Revenue off. Margins were 9.8% We continue to focus on integrated projects using our automation capabilities by driving efficiencies into our operations and to provide our customers with a fully integrated Water Management solution during the quarter. We peaked at 28 integrated projects with 20 different customers up from twenty projects and 13 customers in the third quarter are Blue Links automation control was deployed on Thursdays projects as we demonstrate to the customer base the advantages of this capability.
We previously announced the introduction of our latest and separation technology, which we have branded as sand storm during a major operator trial in the fourth quarter Sandstorm achieved greater than 95% sand removal efficiency wage compared to the more traditional sense Cyclones of around 50% upon completion of the trials. We were immediately awarded a large service project in the Permian Basin Basin Witcher dialed deploying in the current course since that award. We're currently negotiating an additional volume with that same customer and have penetrated three other Shale plays in North America with the sandstorm solution. We also deployed more test separator units in Argentina and our first Latin America contract for this type of equipment while we expect the EMP operator budgets to be challenged through 2020 with an expected ten to fifteen percent drop year-over-year. We continue to invest in technology and automation that will help us achieve our longer-term objective objectives. We have also launched several key initiatives to right-size this business by scaling back non-profitable operations and adjusting our club.
structure diminutive nimbly respond
To the changing Market Outlook for this business.
The compressor business yet. Again performed extremely well benefiting from continuing trend of improved utilization for centralized gas lift as a cost-effective and efficient means to drive liquid Dakshin which drives demand for our high horse power equipment while customer drilling activity and new. Well Capital expenditures are expected to decrease in 2020. We see applications continue to grow with our key customers in our core basins are adjusted ebitda of 32.6 million was a sequential Improvement of one point three million from third quarter and only two hundred thousand less than our record high of thirty two point eight million dead accomplished in the second quarter of 2019 or compression Services gross margins slightly declined declined to 51.6% from a record high of 53.2% last quarter due to increased Jake in parts from weather-related outages utilization of our compression Services fleet was ninety percent second quarter in a row in the ninety percent plus range.
the overall fundamentals for the compressor
Some business have not changed and the segment remains one of the strongest in the oil and gas industry. However, we expect a slower pace of growth from the past two years, which is reflected in our guidance. We gave yesterday on the CSI compressco earn a call. We expect the first quarter of 2020 for a compressor business to be much softer than the fourth quarter of 2019, but primarily due to decreased equipment sales and after market activity, which typically has a slow start to the week our revenue for the fourth quarter increased sequentially to 124 million from 114 million as each product line within the compressions segment improved Its Top Line in particular. We had a very strong or after market business as a demand from our court customers remain strong given the timing of shipments and consistent with our expectations mentioned on our last earnings call. We ended the quarter with new equipment sales of 34.3 million, which were higher sequentially by 5.9 million. However, 4th court orders for new equipment sales were only four million leaving our backlog as a December 31st, 2019 at 36 million wage.
Thing to see how the pipeline of new unit sales operator.
Saturdays, but I've seen several large projects that were expected to be awarded in the fourth quarter 2019 pushed out with delay towards we still expect to receive those large orders, but not likely until the second half wage went. We added over $26,254 power this quarter and ended the quarter with a total active horsepower of 1059590 utilization for the thousand and higher horsepower equipment was 97.9% as of the end of December up fifty basis points from the end of September 2019. So in summer, we had a very strong quarter in a challenging environment Page Believe We Believe in the strong fundamentals behind each of our businesses. We will continue to stay the course on the strategies that we have highlighted and our employees continue to rise to the challenge including a strong commitment to Excellence and you're over your improvement in our safety performance with that. I'll turn it over to Ally Howe to provide some Financial comments on cash flow and the balance sheet, and then we'll open it up for questions. Thank you Brady.
In the fourth quarter Tetra only generated free.
From continuing operations of a million dollars are free cash flow from continuing operations of the lower expectations as some key receivables including full payment from the large CSM project was received in early January this receipt in January will positively impact first quarter 2020 cash flow.
Over the last two years due to the timing of payments. The first quarter has been a significant use of cash last year. We consumed thirty-five million dollars of cash in the first quarter this year. We expect First Choice only free cash flow to be more than 25 million dollars better than a year ago reflecting the timing of collections in early January.
For the four-year only free cash flow from continuing operations with the use of cash of $21.
Significantly below our expectations due to the timing of the aforementioned key collections that slipped into January.
And it's a reminder in 2019. Tetra funded almost 15 one five million dollars of equipment purchases on behalf of CSI compressco to meet key client demands.
For Tetra only totally year 2019 Capital expenditures for $47 inclusive of the $15 of equipment. We agreed to buy at least two CSI compressco.
For 2020 we expect tech only Capital expenditures to be between $20 and $30 almost a 50% reduction from 2019.
Tetra only net debt at the end of June was $189 with cash on hand of $1,500. Our debt structure does not include any material any significant maintenance, which is the flexibility to maneuver to the volatility in the market. I also like to again remind everyone that Tetris CSR compress goes dead or distinct and separate page. There are no cross-default Norcross collaterals on the dead between Tetra and see if I can press go.
TSI compressors net leverage ratio at the end of December was 5.1 times when analyzing our fourth quarter adjusted ebitda. CSI compressco net leverage wage would have been approximately 4.6 times. Well on our way toward the 4.5 times Target been communicating.
from
Higher 7 times at the end of the second quarter of 2018. CSI compressco has net leverage has improved significantly given our Capital discipline policy of not allowing for additional debt off to Pond Road Capital requirements and reflecting the 20% return on Capital. We are attending with our investments.
We will continue to improve our leverage ratio as we navigate through 2020 yesterday morning CSI compressco release this 2020 Revenue adjusted ebitda Catholic churches in other key financial metrics for guidance.
2020 revenues estimated to be between $400 and $460 with adjusted ebitda to be between $125 and $140 which includes the non-cash cost of compressors old the compression business has been one of the least affected businesses in the broader us Land Oil and Gas Market which has experienced volatility in the recent quarters with what we have seen some slowdown has been minimal and we are very encouraged for this business heading into twenty-twenty.
Midpoint of CSI compressco full year twenty-twenty adjusted ebitda guidance and that for accounting for cash interest expense maintenance Capital expenditures and cash taxes wage. CSI compressco expects the generate approximately 56 million dollars of free cash flow.
at the
We expect to use between twenty and twenty-five million dollars of that distributable cash flow to fund growth capital for a core customers had strong rate with 20% return on invested Capital targets, and we expect to use the remaining to reduce outstanding debt.
When comparing 2019 to 2024 CSI compressco and queen taking the midpoint of guidance into account. We will be reducing growth Capital expenditures from 47.8 million to $20,000 will be reducing the amount of horsepower adding to the fee from $98,500 and 2019 two slightly under 30,000 horsepower in 20, the 48 million dollars of growth Capital. We added in 2019 excludes $15 that responded by tetra.
out of the two
Out of the twenty nine thousand nine hundred horsepower that we expect do any 2020 only $10,600 is currently on order.
We are very diligent and committed to Capital Investments and will maintain our twenty 20% return thresholds in our only ordering equipment on the back of customer commitments.
I encourage you to read our news release on this morning and see as I can press release from yesterday for all the supporting details and additional financial and operational metrics.
That I'll return it to Brady.
Okay, we'll open it up to questions.
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing them to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
Our first question comes from Steven gengaro with stifel please. Go ahead. Thanks. Good morning. Gentlemen.
I guess I guess two things I would sort of just start with can you comment at all on the first quarter ebitda consensus of around forty 1 million?
So maybe maybe the maybe the puts and takes that we should be looking at as we in one cue versus for Q.
Let me give you a few data points as you build out your model Steven the fourth quarter had a really strong impact from the Neptune Project Brady also mentioned that we ended the off the year with some solid International offshore completion fluids projects. We don't expect that also carry over to that extent in q1, but radio station that we picked up some projects that will benefit the total totally Ur. So sequentially expect that the fluids business will be down reflecting Neptune.
we think that the
For market and did the year slightly better than what we were expecting. The ramp down was not as bad as we had anticipated and therefore the ramp up not having to be as aggressive or so expect those to be flat to modestly and then on the compression side, we had some big equipment sales that occurred into the year. We had some very often aftermarket Services projects that also will not repeat. The fleet performance will continue to steadily increase given that we're deploying more more money into that sector and getting good pricing, but we will see a sequential decline Q4 to q1 due to the new equipments of an after-market services.
The one positive that I'll highlight that I think we're going to be very pleased with is first quarter free cash flow. I mentioned that last year we consumed over $30 in free cash flow the year before that. It was somewhere in the same range. We expect that to be significantly better this year given a lot of the receivables and slipped into the first week in January. So that gives off of colors you try to lay out your progression of the businesses.
Yeah, thank you.
And when we we can look back historically and we can get you know, you you can obviously clearly see the quarters where you have CS Neptune jobs is are there any plan right now for 20?
So Stephen, we've we've mentioned that you know, we're in discussions qualification and testing for for seven different projects. These are longer-term projects. We we had a degree of confidence that we will be awarded some work in 2020, but we really don't have definitive time for the specific Wells and dates off, you know that we could speak to at this point and I will mention Stephen that even without Neptune. We've been hitting some very solid 20% plus eBay margins on the fluid side the vertical integration or long-term Supply agreement the ramp-up of activity internationally that Core Business is is holding up incredible in this market.
Okay.
So and you mentioned the number so I'll ask around it. But that that 20% plus level is a reasonable gauge if we exclude Neptune and we exclude the second quarter European chemicals business. Is that fair? Yes. Yeah, that's correct. Okay great. Great. Thank you. Gentlemen. Thank you ma'am. Question comes from Praveen Nara with Raymond James, please. Go ahead.
Good morning, guys. I guess I wanted to follow-up. I guess I want to follow up on the pipeline for the projects kind of talked us through on the seven how we should think about the timeline. Are they mostly twenty-twenty when you say long term. They're mostly twenty Twenty-One and out and then also are these projects that are being worked on through the Halliburton Alliance or these separate from them? Yeah. Okay Praveen. So all of a sudden, you know, currently three of them would be through our house that Halliburton has the contract and it would be through their birth integrated project activity that they have the other four currently. We are in direct contact with the operators for the testing that is ongoing. It doesn't mean when I think of the potential award comes that it wouldn't be through Halliburton or or perhaps one of the other service providers, but we are engaged directly with the operator to qualify CS Neptune on on the other four dead.
of those seven
About you can think of it as half Gulf of Mexico and and the other half the Eastern hemisphere in terms of the split.
Okay, great. And then when I think about you guys mentioned the softness and water and pull back services at least the first half. How how are you guys thinking about managing costs according to that? Are you guys sucking down? Are you guys holding for a potential second-half Improvement? Yeah. So if you look at the progression of our water business through 2019, you know, we we we were still clubs along very well through the third quarter obviously by the end of the third quarter we started to see, you know, the activity decline we started taking cost measures at the beginning of the fourth quarter, but we're a little bit through October before we were able to get a lot of the costs out. So our actual November December results. We were fairly encouraged with but we may have some costs in October that impacted our overall quarter. Now as we head into twenty-twenty, we're seeing a little mainly flattish activity at this point from Q4 activity levels dead.
But we do expect the second.
Half of the year or two to improve at least under today's environment which which is difficult to predict, but we do expect the second half to improve from where we are today. Thanks guys.
Our next question comes from Ryan things with B Riley FBR, please go ahead.
Hey, good morning guys morning to follow up on water and Flowback. I know you're expecting the challenging first half but I just wanted to ask where you think you can get your margins back up to, you know by mid-year maybe picks up a little bit.
So Ryan, the challenge that we have is trying to predict customers spending level if there remains depressed you've got competition out there trying to keep their Chrome active and putting pressure on the market trying to differentiate ourselves and Brady made mention of several of our technology initiatives, whether it's our automation of the pumps or whether it's our integrated business model or the sandstorm that we're introducing those will try to differentiate ourselves and protect us a bit from competition with very generic product offering we are trying to hold our ebitda margins in the low double-digits, but I think in the first half of the year, we're going to be high single-digit.