Q4 2020 Tetra Technologies Inc Earnings Call
Okay.
Good morning, and welcome to the Tetra technologies fourth quarter and full year 'twenty 'twenty results come from.
Oh, that's the speakers for today's call on Mr. Brady.
For C Chief Executive Officer, and Mr. Andy Heal Solano Chief Financial Officer.
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Thank you Kate.
Good morning, and thank you for joining tetra fourth quarter and for years.
2020 results call.
I'd 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.
Gross margins adjusted EBITDA.
Adjusted EBITDA growth margins.
Adjusted free cash flow leverage ratio or 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 measures.
These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period.
In addition to our press release on numbers.
But they went out yesterday and is posted on our website, we'll be filing our 10-K in the coming day with that let me turn it over to Brady.
Thank you Leo and good morning, everyone and welcome to the Tetra technologies fourth quarter and full year 2020 earnings call.
I will summarize some highlights for the quarter and current outlook and then turn it over to Leo to provide information on our financial reporting without CSI, Compressco operating and SG&A costs cash flow and the balance sheet.
Let me start again by thanking all the Tetra employees and the management team for delivering another strong quarter and a very good year relative to the very challenging energy services market. This past year.
For the Euro 2020, despite the energy macro environment, we delivered positive adjusted EBITDA and free cash flow in every quarter.
Fourth quarter adjusted free cash flow from continuing operations of $16 million is the seventh consecutive quarter that we have delivered positive Keith Keith free cash flow with a total of 73 million generated over those seven quarters.
This was accomplished through exceptional cost management by reducing total costs as measured by adjusted EBITDA more than our revenue decline of 33 per cent and.
And increasing our adjusted EBITDA margin for the year.
Over last year by 150 basis points.
This was accomplished with the macro backdrop of a year on year U S onshore rig count decline of 55 per cent and inactive frac crew declines of 56%.
While delivering these results we were also able to successfully execute our key strategies, including the deconsolidation of CSI Compressco.
Positioning the company for a recovering oil and gas market and meaningful participation in low carbon energy markets, our focus on innovation and differentiated offerings in each of our business segments, along with our vertically integrated chemicals and completion fluids model is proven again to be resilient in the most challenging of downturns.
The value of our balanced revenue and cash contribution from U S on conventionals global offshore, including deep water International and industrial chemicals markets has been highlighted in a year like 2020.
But just as importantly positions us to participate in all segments as the market recovers.
Revenue for the fourth quarter was up slightly sequentially with strong revenue growth on the U S offset somewhat by lower international activity.
Fourth quarter adjusted EBITDA before discontinued operations was $11 million, which was an improvement of 49% sequentially with adjusted EBITDA margins, improving 460 basis points.
Tetra generated $16 million of adjusted free cash flow from continuing operations in the quarter and ended the quarter was $67 million of cash and liquidity of $92 million.
For the full year 2020, we generated $60 million of cash from continued operations an improvement of $91 million from last year.
Water on flowback saw sequential revenue growth of 46% in the fourth quarter compared to the modest 7% quarter on quarter Frac crew increase our strategies on produced water and treatment sand management automation and integrated water management are on track and clearly contributed to our ability to stay adjusted EBITDA positive.
And every quarter of 2020 and deliver 12% adjusted EBITDA margin in the fourth quarter. One Frac crew count there was still a third of the 2018 peak.
Adjusted EBITDA of $3 7 million increased $3 6 million sequentially.
We added 14, new customers in the Permian in the fourth quarter and two new produced water recycling contracts with a leading E&P operator in the Permian basin, which will increase our water recycling capacity by another 100000 barrels of water per day.
We are currently partnering with six leading E&P companies in the Permian Basin.
To provide full cycle produced water recycling solutions.
Based on our tracking of working Frac crews. We believe we are currently the oilfield service market leader for water transfer and water treatment in the Permian Basin.
In the fourth quarter, we averaged 26 integrated water management projects with 18 different customers.
And as we start 2021, we were above that run rate.
For Bluelinx automated control system is a key enabler for these integrated projects to deliver the efficiency and financial benefits of automation.
Continue to deploy our tetra sandstorm advanced cyclone technology to new customers and regions as we mentioned in this day.
The last evening's press release.
It drives secured our first project outside the United States and Argentina for a fully automated sand recovery project.
Just on customer demand.
Utilization of these assets and market share gains for our highly effective sand filtration technology, we are investing additional capital to increase our fleet by approximately 40% in 2021.
Completion fluids on products adjusted EBITDA margins of 32, 6% for the quarter included a benefit from our standard lithium agreement completion fluids and products fourth quarter adjusted EBITDA margin of $32 six six increased 580 basis points sequentially and was a record high for this segment without the benefit of a T S.
Tetra CS Neptune project.
Fourth quarter adjusted EBITDA margin was also 740 basis points better than a year ago, excluding the benefits of CS Neptune.
Revenue for the fourth quarter decreased 15% sequentially, primarily due to a large international completion fluids sale in the third quarter that did not repeat in the fourth quarter.
<unk> crude oil prices, averaging $36 between the start of the global pandemic in March of 2020 through the end of December 31, 2020 offshore rig count activity has declined throughout the year and ended down about 37% from the start of the year.
Deep water projects, including those where we are engaged with customers for CS Neptune were delayed and pushed from the original planned dates.
We believe that the offshore market will bottom in the first half of 'twenty 'twenty, one and start a meaningful recovery in the second half of 2021 and into 2022 through.
Through discussions with our customers. This includes several of the CS Neptune projects, which are now getting replant, we're optimistic several CS Neptune wells will be scheduled and executed this year.
Our industrial chemicals business continues to perform well and made up approximately 40% of the revenue for this segment and for 2021, we expect this business to remain strong as we're expecting strong seasonal sales in the U S East coast and Europe rubber.
Revenue of our calcium chloride Europe business in 2020 was a record high for us demonstrating the value of this business and even the most challenging of economic uncertainty.
The recent Arctic like weather conditions that we experienced in southwestern part of the U S resulted in a period of Frac and completion activity being significantly curtailed.
This impact may be somewhat offset from the cold weather, which will benefit our industrial chemicals business.
We are working on quantifying the impact of these two but have not yet fully quantify the net impact for the quarter.
On January 19th we issued a press release, highlighting strategic initiatives for low carbon energy solutions and appointed a senior executive to focus on these opportunities.
You mentioned, the $3 9 million tonnes of estimated bromine reserves resources I'm, sorry, an 890000 tonnes of inferred lithium resources for which we are partnered with standard lithium to recover on cell lithium from our Arkansas leases.
In 2020, our P&L. So all the benefit of $3 1 million from this agreement and in total lithium is extracted from our leases, we're receiving cash and equity compensation from standard lithium.
On the energy storage side, we are currently engaged with three different companies, who on a process of qualifying our high purity zinc bromide for application a battery energy storage.
At Wood Mackenzie September 2020 report states that energy storage is still a nascent market are relatively new investment class with underlying risks.
But also projects the energy storage market to grow at a 10 year, 31% compounded annual growth rate over the next decade and grow from 25 gigawatt hours deployed storage in 2020 to over 700 gigawatt hours by 2030, representing a $60 billion market by the year.
<unk> 2030.
Zinc bromide flow battery show great promise for meeting the portion of this market that require slow charge and discharge.
For 12 hours, such as wind and solar farms compared to lithium ion batteries, which are four to six typical discharge times.
Given the specifications of our high purity zinc bromide on our technical exchanges with flow battery Oems. We are highly confident we will qualify our products and advanced the commercial arrangements and.
And finally, we mentioned a recent advancement in carbon capture technology that uses calcium chloride. We're currently in discussions to put in place a memorandum memorandum of understanding with a company that owns patents around this solution.
These are very exciting opportunities for tetra and we will continue to keep you updated as they evolve.
Since January 5th we've announced both the beginning.
And the results of numerous strategic actions initiated by management and our board.
Aimed at one simplifying tetra and our business lines.
Two increasing operating efficiencies three reducing cost at all levels and for shoring up our balance sheet.
We've made meaningful progress on all of these areas.
The successful execution of our key strategies in 2020 has strengthened each of our business segments and positioned the company to capitalize on a recovering oil and gas market and continue to grow and strengthen our industrial chemicals business.
Furthermore, we remain committed to the important ESG initiatives that I mentioned earlier, including the use of our products and technology and battery storage applications carbon capture and our partnership with standard lithium.
With that I'll turn it over to <unk> to provide some additional color and we will open it up for questions. Thank you Brady the results we reported yesterday on all within the range on our pre announcement of January 2019, and more specifically at the midpoint of our pre announced results.
With the announced sale of the GP and <unk> and 11 million limited partner units of CSI Compressco also that we announced on January 29.
The financial result of CSI Compressco will be reported as follows.
The 2020 and prior year's income statement will reflect CSI compressco as discontinued operations revenue.
Revenue income before taxes, adjusted EBITDA will be tetra only without CSI compressco.
All our historical results on CSI Compressco will be reflected as discontinued operations.
Given that we were still at the general partner for CSI Compressco at the ended the year the balance sheet at the end of 2020 and prior yield prior years will reflect all of CSI compressco assets.
Assets held for sale.
And all of the liabilities CSI Compressco will be reported as liabilities held for sale.
This will allow everyone to look at tetra balance sheet and quickly excluding the impact of CSI compressco by excluding assets on liabilities for those items held for sale.
Net cash flow statement for 2020 in prior years will include the impact for CSI compressco in each of the various line items.
In the press release, we issued yesterday, we continue to show Tetra only free cash flow, excluding the impact for CSI compressco.
And as previously mentioned this is because cash flow was still the general partner of CSI Compressco at the end of 2020.
When we reported first quarter 2021 result in the future quarters. The income statement will be tetra, only and CSI Compressco result.
In prior periods, we will continue to be reported as discontinued operations.
The balance sheet will completely excludes CSI compressco given that we will not be the general partner has at the end of March 31 2021.
Net cash flow statement for the first quarter of 2021 will include the days in January that we were still the general partner of CSI Compressco.
And noting that we continue to own five 2 million common units of CSI Compressco are future results will include a mark to market valuation adjustment for the units we own.
The price that the CSI Compressco units were training net when we sold the general partnership with a $1 25.
Any increase or decrease from debt.
Price will be reflected as income or loss in the other income or loss items of the income statement.
So far this quarter given the CCL P unit price has increased materially that gained to date of the $5 $2 million that we own in CSI Compressco is $4 million.
Reflected net unit price of two or three years of the close of market yesterday.
We will evaluate tetra precision on how long and at what price we might monetize this $10 6 million dollar asset.
In the fourth quarter, we incurred $3 $4 billion from nonrecurring charges of which $2 1 million or cash related.
During the year on into the fourth quarter, we remain very focused on optimizing our cost structure.
We implemented a series of temporary and permanent cost reduction actions by reducing salaries across the board.
The spending for <unk> match and implement in a furlough program.
We also implemented several significant permanent cost reductions that we intend to keep into a recovery.
This included streamlining the management structure by eliminating several executive and senior management positions.
Shutting down locations that were not earning returns on capital acceptable to us such as our El Dorado facility.
Entering into long term supply agreements to lock in multi year favorable pricing, especially in our chemicals business.
And as Brady mentioned aggressively implementing technologies that reduce staff cost at the well site and automating and digitizing, our welfare operations, including remote monitoring.
As a result of these actions, we reduced company wide cash costs as Adam as they impact EBITDA.
$497 million for $329 million or by 34% when revenue declined 33% year over year.
Our adjusted EBITDA margin has actually improved in the down year by 150 basis points.
Decremental margins for only eight 4%.
In other words for every dollar decline in revenue, we reduced cash costs by 91, 6%.
This demonstrates how flexible are on cost model, we have that allow us to rapidly scaled back our cost structure in a down year.
With respect to SG&A cost.
Year on year will reduce company wide SG&A cost adjusted for unusual items by $26 million or 28% relative to net 32% decline in revenue.
Our fourth quarter corporate G&A costs were $5 9 million.
Down 45% from the fourth quarter of last year.
And compared to the fourth quarter revenue being down 40%, 44% from a year ago.
On an annualized basis fourth quarter, corporate G&A was reduced by almost $20 million <unk>.
Compared to a year ago.
Corporate G&A in the fourth quarter was seven 9% of revenue.
To generate liquidity, we aggressively managed our working capital so underperforming assets and minimized capital expenditures.
A result, we generated 50 $59 million of Tetra only free cash flow.
And net debt 30 $33 million from working capital.
Also we sold under utilized or non core assets such that the proceeds from the sale of assets were $2 million more than the all the capital expenditures that we made in 2020.
This included the previously announced sales to Spartan energy partners of $14 $2 million of compresses. The Tetra previously owned.
2020, total year free cash flow without the benefit of monetizing working capital was $26 million.
In addition to having a flexible cost model, we have demonstrated that we can keep monetizing assets as necessary.
Aggressively manage working capital.
And keep capital expenditures at a minimum such that in a difficult year, we can generate positive free cash flow, even without the benefit of working capital.
As a result of the positive EBITDA monetization on working capital and selling underperforming non core assets, we reduced total debt from $189 million at the end of 2000 $19 million to $133 million at the end of two.
<unk> 2020.
And following receipt of the proceeds from the sale of CSI Compressco, we have further reduced net debt to $120 million.
Our term loan has been reduced from $220 million for 202 at the end of the year and we expect to further pay down debt term loan with cash on hand before the end of the first quarter.
Further reducing our interest expense.
We believe that the business model that will be successful via company that has a diverse revenue stream.
Can introduce technologies to be a differentiator in good and bad cycles.
Can flex its cost structure down very rapidly do impeccable times.
Can leverage its infrastructure and support costs in an up cycle and can generate free cash flow in all cycles, even without the benefit of monetizing working capital.
We believe we have that business model has and have demonstrated in a difficult year that we can do all of those and on top of that we have demonstrated the ability to generate cash from our ESG initiatives and are in the early stages of this of this growth opportunity.
And with that and with a deconsolidation of CSI Compressco. We believe we have a simpler better understood model for the investment community.
The recent movement in the share price following our communication on January 4th.
In addition to the announcement of the completion of this transaction on top of the pre announcement of January 29th certainly indicates that.
Since the end of 2020 and since our communications to the public markets of our fourth quarter results and strategic moves in addition to highlighting our opportunities in the clean energy market, our equity value has increased by $220 million.
From $110 million $330 million.
We further believe that the increase in equity value that we have.
<unk> seen since the beginning of the year.
<unk> positions us to be included in the Russell 2000 in June that would create a significant amount of activity in our trading volumes is a passive index funds that mimic the Russell 2000 begin buying shares and tetra.
We will remain focused on streamlining the organization.
And generating free cash flow to further reduce outstanding debt.
I encourage you to read our press release that we issued yesterday for all the supporting details on additional financial and operational metrics.
Additionally, tetra.
We'll file the 10-K in the coming days with the SEC.
With that we'll open it up for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the clue. What's on your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from Stephen <unk> from Stifel.
Oh thanks.
Thank you good morning, gentlemen.
Good morning.
So a few questions the first being.
As we think about the.
Progression into the first quarter.
What are the moving pieces that we should be kind of contemplating in the two segments. After.
I know, there's probably a little seasonality in some of the areas, but how do we think about the progression into the first quarter.
So I'll take it from the different segments, even from our chemicals business.
Strong activity.
Whether has supported us in terms of the X I should say the extreme weather has supported us in terms of the seasonality portion of that of that business, but even our industrial business is picking up and looking looking very strong and then as you know as we head into Q2, we have our seasonal peak in Europe.
So so that piece looks very good clearly we had some very good momentum.
And in January on our water on flowback in North America before the freeze.
We like everyone else, we were impacted by a dramatic reduction in activity Frac and completion activity for for a week or so we're still trying to assess that but we are we are seeing a fairly significant bounce back in terms of customers, calling us back out to work and resuming.
<unk> activity so.
Difficult to quantify all of those pieces, yet, but we expect going into the second quarter certainly in the March Inc.
Net into the second quarter North America activity.
Continuing to rebound.
International as you saw was down a little bit for us in the fourth quarter pretty consistent with the international activity. That's been declining we think that's going to stabilize and bottom in the first half of the year and then all indications that we are getting will be a pretty strong recovery the second half of year and certainly in.
Into 2022.
From the international and deepwater side of the business.
Which obviously.
This supports our completion fluids activity.
Great. Thank you and then when we think about next year.
Well without I know, it's hard to pinpoint the entire year, but I think he did a little under $50 million of Tetra only EBITDA in 2020 than we were thinking in terms of something like 60 in 2021 and I was just curious on two things like one does that seem reasonable on two under that scenario what would free cash flow.
Real quick.
So even.
Given how much uncertainty in the market. There is we arent, giving total year guidance, but I think a couple of items that Brady mentioned, I think that $60 oil and and if it holds is clearly opening up a deep water and accelerating some of the offshore projects. They have not materialized when the oil prices are at.
Bridging 40, we think that there is good opportunities for growth to materialize from the second half of the year and have a good impact. We also believe that our indoor.
Industrial business will continue to perform well and the market opportunities and we also need that the frac crew counts that have rebounding and recent activity that we're hearing from our customers to keep adding to those frac crew counts will create meaningful upside.
We expect capital expenditures to be slightly higher.
2021 day in 2020, we expect interest expense.
To be lower as we keep paying down the debt. So I think that there is an opportunity here. There are free cash flow will again be very strong in 2021.
Alright. Thank you and then just one final if I missed this.
Because I joined a little late but I think Brady mentioned, a couple of Neptune jobs on the prepared remarks, but.
But I don't know if you were talking about bidding on them or or where that where that stands for 'twenty one.
Yes, so my comments.
Steven was that when the price of oil dropped so materially last year and stayed I think on average $36 from March through last year, a lot of the deepwater projects and in particular the projects we've been working with customers on Neptune were pushed have been pushed out.
We are in discussions with those customers now about the re timing and re planning of some of those projects and my comment was that you know I'm fairly optimistic that we will.
Execute.
Job for two of Neptune this year under the under the current.
Discussions we're having.
Okay, great. Thank you.
Yeah.
Yeah.
Our next question is from Samantha Hoh from Evercore.
Sorry go ahead.
Hey, guys.
Thanks for taking my question, maybe just to stay on the CS Neptune technique, just kind of curious for those projects that you're in discussions for are they for the Gulf of Mexico or are we starting to see some of those international projects come to fruition.
Yeah, our pipeline Samantha for Neptune is really is really split.
The Gulf of Mexico, and primarily the North Sea. There are a couple of other geographies that we're in discussions with but when you look at the.
Really the pipeline, what we call pipeline of discussions and activities.
More or less split between golf in North Sea.
With a couple of one offs outside of the North Sea International.
So that sounds like potentially you could get on North Sea Apache.
And like the latter.
The latter half of the year.
We feel optimistic about that but clearly there is some ground there has to be covered for that okay. Great.
The other question that I wanted to spend some time on is just a day.
The growth Capex that you're putting into the water segment.
Related President you know how you guys have just taken such a strong market share. There can you maybe walk us through how the capex is going to be.
Okay.
For the year is it going to be pretty evenly.
And throughout the year, where you have like a steady state of on equipment being introduced.
Curious how that expansion into Argentina work trying to logistics standpoint, like I mean, if you are calling out that way it seems like you're probably going on at a much larger scale. There and then just overall you know I'm kind of curious how the equipment, how that's doing that extreme cold weather that you guys saw down in Texas.
Good question Samantha for only make the first stab at it.
With respect to capital expenditures.
We've increased the bar in terms of our Brady and I will approve.
If it doesn't have a direct customer behind it.
And if it doesn't have a quick payback cash on cash payback, where net approving those items. The sandstorm has done incredibly well and we've been generating paybacks.
That are difficult to say no to and they are all with.
Super majors that have very well defined drilling programs.
Fourth quarter did incredibly well with water more units and those are coming and being delivered primarily in the first half of the year again, all focused on specific customers.
And then it's interesting that the economy has rebounded in the price of oil is better we're starting to get even this week demands for more tetra steel.
To keep adding on given the sensitivity that many of our customers have around ESG and spillage. So we're also taking opportunities to deploy more tetra steel into the market I would suggest that most of the capex might be front end loaded, but theyre dedicated all to customers on projects with quick payback on those.
Then with respect to the impact of the weather.
It appears that the Frac crew count went from over 102 got it.
Almost zero.
In the Permian based on lending.
Backup total U S. Frack crew counts over 100 of which a big part of it is in the Permian Basin, and then dropped almost a zero whether last week and we're seeing it rebound almost to the <unk> last.
Last week levels immediately so we think that's going to be a very short term week type one week type impact on our water management flowback business.
And no damages to the equipment or anything that needs to be address alright, whether I think for future years or whatnot.
No no damage to equipment.
We don't think that that changes our approach in terms of how we react to those type of cold weather conditions.
Okay, and if I can just sneak one more in I'm just curious in terms of all the discussions that youre having with.
Other parties in your low carbon.
Initiatives do this.
Conversation potentially include some sort of fee or you know so similar to what you have with standard lithium where you.
You would get some sort of payment.
Payment just for that exclusive with.
With the customers, even with the partners even before you start actually.
Yeah, I think I think Samantha we will probably take a different approach with the energy storage folks that were in discussions with as well as the the carbon capture company.
I think instead of a royalty type arrangements that we've done with standard lithium we're bringing some some technology to the table ourselves.
And I think potentially we could see more partnerships more even even potentially JV type arrangements down the road if things progress as we envisioned it.
If not.
They represent.
Large potential markets for us to supply products into.
So that's beneficial to us, but we think we bring some additional things to the table on the types of discussions where have could be a little bit more meaningful than just our products part of the supply chain.
Our products provider.
That's really exciting guys and congrats on the quarter and good luck for everything.
Thank you.
This concludes our question and answer.
I'd like to turn the conference back over to Mr. Murphy for closing from.
Okay, well, thank you everyone.
Really appreciate your interest in Tetra technologies and thank you for taking the time to join US. This morning. This.
This concludes our call.