Q3 2021 Tetra Technologies Inc Earnings Call
The quarter's completion fluid deliveries.
The third quarter 15 million dollar adjusted EBITDA grew 16% sequentially and 104% year over year and is the highest level since the first quarter of 2020 and prior to the market impact of the COVID-19 pandemic.
Third quarter adjusted EBITDA does include $6 $2 million 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 $2 million gain was largely offset in the quarter by reductions in adjusted EBITDA from revenue delays of approximately $11 million and completion 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 some inflationary cost on certain raw materials for our chemicals production.
We generated $1 million of free cash flow and again reduced our term loan this time by $8 million, while keeping liquidity around $90 million.
Turning to the segments as discussed on our second quarter earnings call, we expected our water <unk> flowback services margins to improve from five 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 560 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, an increase of 117% year over year.
We continued 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 improve 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 sand storms, which we will build and operate on a multi year contract starting in early 2022.
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.
Hello back equipment, including sand storms 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 K high pressure rated sandstorms, which is immediately helped us gain higher market share traction in the haynesville.
Overall, we're pleased with the improvement in our water <unk> flowback services business in the third quarter and although not yet back to the mid Twenty's adjusted EBITDA margin levels, we achieved at the height of the U S shale market in mid 2018, 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 million seasonal drop from the second quarter peak in our European chemicals business.
Aforementioned revenue reduction of $11 million due to hurricane Ida and global shipping delays.
The mark to market gains of $6 4 million 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 million and $11 million delayed revenue due to hurricane Ida and global shipping issues, both quarter on quarter and year on year revenue comparisons would've increased by double digits to mid teen percentages, which we believe is more reflective of our current business performance.
A similar analysis for adjusted EBITDA margin accounting for $6 four 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 Twenty's, which includes the inflationary costs.
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 tightened 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.
Firstly, 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 supply performance compared to our competitors.
We continue to be awarded large multi year contracts and deepwater markets with a new deepwater project awarded in Brazil. During the third quarter for large integrated service company.
This is in addition to the previously announced large multi year awards in the Gulf of Mexico for a super major operator, as well as the 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 twenties 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 and recovering oil and gas market.
The previously mentioned plant investment in Europe for 25% increase in production capacity is on track for completion in the second quarter of 2022.
And finally, we continue to refine the engineering and testing for what we believe will be an industry unique manufacturing process for <unk> 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 are 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 pure flow our high purity.
Bromide solution to a publicly traded energy storage technology company.
We are making progress in building and furthering our 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 pure flow orders for deliveries in 2022 to support their manufacturing and production needs. We're also in discussions with other energy storage companies, which using bromide as an electrolyte for energy storage.
Considering the forecasted high compound annual growth rates in the energy storage market, we will work collaboratively collaboratively with these companies to meet their longer term demands for our pure flow solution as well as our full electric needs.
Moving on to lithium and bromine reserves standard lithium completed their preliminary engineering assessment or P. A.
To extract lithium from brine from our acreage in the smack over formation in Arkansas.
Tendered lithium pega indicates very attractive economics for the acreage with 132 million tons of lithium carbonate equivalent at the inferred resource category.
Which is 49% higher than what was previously estimated.
Based on our 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 lengths as facilities. The timeline to standard lithium work on Texas, Arkansas Acreages of interest etcetera for several reasons. One we would begin generating royalties for lithium production on standard of lithium versus our current option fee agreed.
And so the bromine rich tail, Brian from standard lithium extraction process will be available et cetera.
As Tetra still maintains all the mineral rights to the bromine, which we have previously indicated exploration targets of two $504 million to $8 five 8 million tons of bromine.
In addition to the standard lithium option agreement acreage et cetera, previously communicated that we estimate between 85000 and 286000 exploration target tons of lithium on acreage outside the standard lithium agreement, which is 100% et cetera.
We're planning to drill an expert in explorer.
The 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 <unk> study in early 2022.
There is significant value in our mineral rights in the smack over formation in Arkansas from a combination of our ops or option agreement with standard lithium our bromine resources to meet the growing demands for completion fluids and energy storage. In addition to a 100% et cetera own lithium resources, we will continue to evolve these resources to create shareholder value.
Value.
Finally in the area of carbon capture carbon free continues to make progress on raising capital to launch their Sidoti Sky cycle capture technology, while we evolve the engineering on our unique cotwo 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 red.
To announce the first project.
Overall, despite the number of unusual circumstances with hurricane Ida.
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 fund the fundamentals and the need for E&P companies to invest to meet growing energy shortfall.
Although we do expect a modest pause in U U S onshore activity around the holidays early feedback from our customers points to a robust increase in extra 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 <unk> to provide some additional details and well open it up for questions. Thank you Brady.
Third quarter adjusted free cash flow from continuing operations was $2 8 million, which compares to $1 $8 million of adjusted free cash flow from continuing operations in the second quarter.
Free cash flow for the quarter was $1 million.
An improvement of $5 $5 million from the second quarter.
We are free cash flow positive on a year to date basis. Despite.
10% year over year growth in September year to date revenue and capital expenditures of $10 $6 million.
Total debt outstanding was $164 million in September.
While net debt was $122 million.
We have reduced our term loan by $44 million from $220 million on September 30 last year.
$76 million on September 30 of this year.
And we expect to reduce debt by at least another $10 million in the fourth quarter from cash flow.
Operations.
With this expected reduction in the fourth quarter, we would have paid off at least $55 million since last year, reducing our term loan by 27% and saving interest expense.
A $4 million on an annualized basis, which further improved free cash flow.
Liquidity at the end of the third quarter was $90 million, an increase of $8 million from the end of the second quarter. Despite.
The pay down of $8 million on our term loan a.
L Amendment in the third quarter added more than $10 million of liquidity.
We also extended the maturity of our ABL to May of 2025.
At the end of the third quarter unrestricted cash was $42 million and availability under the revolver was $48 million.
And we have no amounts drawn on the ABL.
The third quarter included a $6 2 million dollar gain on mark to market adjustments in the coming in it that we own in CSI Compressco and to the one 6 million shares that we own in standard lithium.
We will continue to see market mark to market adjustments for the equity that we own at least two publicly traded entities.
The market value of this investment at the end of September was $22 million.
And Brady mentioned earlier and 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 this asset.
From the beginning of the year to the end of September the value of this equity holdings have increased by $11 8 million.
And as you evaluate our balance sheet, our liquidity and our cash position one must recognize that we had $22 million of marketable securities.
As of the end of September available to us to monetize at the appropriate time.
Given this our marketable.
Included in this mark to market adjustments in our adjusted EBITDA.
We expect to receive another million dollars of cash by the by the end of the year and another 400000 standard lithium shares early next year per our option agreement.
The 400000 shares we expect to receive early next year at the current share price of standard lithium equates to approximately $4 $9 million in value not insignificant.
We excluded unusual items from our third quarter results with which totaled $1 $3 million of nonrecurring income net of expenses.
These charges include a gain of $3 2 million of noncash stock warrant value.
Just been expense.
$1 6 million of legal settlement and other expenses and $2 million 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 million from hurricane item.
And the global logistics supply chain issues.
And our reported adjusted EBITDA was also negatively impacted by Hurricane Ida in the global supply chain issues. In addition to raw material inflation issue that you mentioned.
And other than hurricane items, 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.
From September a year ago to a goal by the end of this year, we expect to reduce the term loan.
10%.
Approximately $55 million.
Effectively moving $55 million of enterprise value to our equity holders.
Without negatively impacting liquidity.
Which has actually improved from $84 million a year ago to $90 million at the end of September.
And from September a year ago to September of this year, our enterprise value has more than doubled.
From $212 million to $518 million.
And we have increased our equity value by more than five times from 64 million to $396 million.
Which we believe represents the best performing oilfield service stock on the U S exchanges.
And in process, we have brought back into our stock several significant long term debt.
Index base holders.
We are clearly focused on creating shareholder value.
I encourage you to read our news release that we issued yesterday and the 10-Q that we filed last night.
For all the supporting details.
Financial and operational metrics.
Betsy with that well open it up for questions.
Thank you we will now begin the question answer session to ask a question you May Press Star then one on you touched on it.
If youre using a speakerphone please pick up your handset before pressing the keys.
My question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble Iraq there.
And your first question comes from Stephen <unk> Stifel. Please go ahead.
Thanks, Good morning, gentlemen.
Morning.
A couple of things.
I just wanted to start I just wanted to clarify something.
You'd mentioned on the fluid side.
Third quarter EBITDA and then in the mid twenties, when you're talking about we're talking about margins excluding.
The Mark to market, where you are with that.
Yes, Steven if we take the mark to market out, which I think pushed us over 31% with it in.
And we had adjusted.
Delays in the shipments and hurricane Ida we felt a more reflective EBITDA margin would have been in the mid twenties.
Okay. Okay, that's what I just wanted to clarify that so.
So when we think about charades going forward and obviously, excluding the mark to market for now and given the delays you saw in the third quarter.
I mean can you give us an order of magnitude on what kind of revenue growth for the fourth quarter should bring and I guess, and then addition to that kind of.
Is that mid Twenty's, a relatively good number going forward or are there some.
Puts and takes there that could that could move you higher as you as you move into 'twenty, one excuse me into 'twenty two.
I'll take the margin progression and then ask <unk> to comment on the fourth quarter revenue.
Yes, the margin progression, we feel within the current environment and the mid Twenty's as 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.
Some additional inflationary pressure if we see it is still all a bit unknown, but we still feel pretty confident about the mid twenty's until this whole inflation situation.
Hopefully it's behind us.
Okay, and then Stephen on the revenue progression, we've got the benefit of a lot of the jobs that got delayed because of the hurricane item in Q3 to Q4.
And then Brady mentioned that we picked up some long account.
Accounts in the Gulf of Mexico, and we picked up some Latin America projects, we've got a significant Latin America projects scheduled towards the end of the year. It's.
It's not unlikely that this segment could be.
Up 20% sequentially.
If all the projects come to fruition as their schedule it could be as high as 30% sequential progression.
Yes.
Thanks.
That's pretty clear at least go thank you.
Dan.
Hum.
You guys have obviously done a very good job on the other new energy front and things seem to be progressing there at <unk>.
Might be too early for me to ask this question, but when you think about the tetra pure flow opportunity.
I imagine the third quarter you shipped your second wanted to.
Probably obviously, a net positive but is there any way to frame.
What this.
Could look like in 'twenty two.
Yeah, so the way.
I'll answer that Steven and 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 end of 2022.
Into 2023, it will now start to be what we would consider a meaningful impact of our overall bromine.
Demand in business so.
If you think of it in terms of that that progression. That's how rapidly we see things moving on on that side.
Great if I could sugar one more just for Lee when you think about it.
2022 free cash flow.
Do you have any guidance on Capex and how we should think about any big big moves in working capital.
I hope working capital is a big use because revenue is ramping up materially.
That 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 that capital number by any significantly increased capacity by around 25% there.
So no we don't see any material step up in Capex next year.
Working capital could be a burn it theres, a big ramp up in business and.
We think that there's a good possibility that could happen.
Okay, great. Thank you gentlemen.
Thank you Susan.
The next question comes from Samantha Hoh with Evercore ISI. Please go ahead.
Hey, guys.
Just to go back to completions margins.
Sure.
This expense is Neptune and three Q.
And I was wondering if you guys were only chopping the north sea and just kind of wondering what your what your kind of filtering into your guidance here for Q.
Yeah, So Matt that we did we did mentioned we had.
A small job in the north sea somewhat of a trial a job in the North sea that we executed there was a very successful job, but it was not a I guess.
<unk> part of our results in the quarter.
But it does set us up for a high higher frequency number of these types of jobs going forward that that job is in the north sea.
As we talked about before we track our Neptune project pipeline very very carefully and.
Due to due to the COVID-19, we estimated we lost the 12 months of timeline and 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.
Many of the customers for the projects that we track.
And we feel very optimistic that we will see some projects in 2022, where we don't have specific dates yet.
But we are advancing those discussions.
The much better pace than what we had been say the last.
18 months with the.
With the pandemic.
Okay, and then maybe switching to water.
I guess just for.
Caring about spending up 20% to 25% for next year.
Are you guys sort of anticipating the same.
And what are sort of gain on the water.
Hi.
Yeah, 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 from a quarterly run rate. So 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 revenue.
Now, we would expect to be up double digits from that in 2022.
And what kind of scenario would be a need for emergency use sort of a return to that mid twenties.
I think that's what I heard that right.
No more questions right actually yeah, what what's it kind of outlines it like a best case scenario.
You can achieve that target.
Yeah, well, it's difficult to say there were 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 Couldnt tell you exactly.
That number would be right now and 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.
Okay, that's great and what is the sandstorm golds 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 and how are you seeing like a long lead time screen materials that you need.
Our thinking is getting like.
Okay issues that we're seeing with logistics and you know it's.
Is there concern is maybe not be able to meet.
The deadline for us to start from scratch looks like you did last quarter and having to.
The existing equipment and can you tell us maybe how you're kind of like anticipating for that and then addressing them like higher cost I don't know.
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.
We feel fairly confident with the timeline that we have to deploy.
Deploy the early production facility.
Facility and the additional sand scarves and unlike the previous contracts, which were much shorter lead.
Lead time that we had to mobilize four 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 that timeline Samantha.
Okay, great. Thanks, guys. Congratulations. Thank you. Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Mr. Murphy for any closing remarks.
Well. Thank you again for joining us for our third quarter earnings call. We look forward to our next.
The next update thank you for your interest.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.