Q1 2022 Tetra Technologies Inc Earnings Call
Good morning, and welcome to the Tetra technologies first quarter 2020.
22 results conference call.
Speakers for today's call are Brady Murphy, Chief Executive Officer, and <unk> Serrano Chief Financial Officer.
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I will now turn the conference over to Mr. Serrano. Please go ahead.
Thank you Andrea good morning, and thank you for joining Tetra first quarter 2022, we felt the call.
I would like to remind you that this conference call may contain statements that are or may be deemed to be forward looking.
These statements are based on certain assumptions and analysis made by Tetra and are.
Based on a number of factors the statements are subject to a number of risks and uncertainties.
Many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward looking statements.
In addition in the course of the call we may refer to EBITDA adjusted EBITDA adjusted EBITDA gross margin and adjusted cash flow net debt net leverage ratio liquidity or other non-GAAP financial measures.
Please refer to yesterday's press release or to our public website for.
A reconciliation of non-GAAP financial measures to the nearest GAAP measure.
These reconciliations are not a substitute for financial information prepared in accordance with cat and should be considered within the context of our complete financial results for the period.
In addition to our press release announcement that went out yesterday. We encourage you to also refer to our 10-Q that was filed yesterday I'll turn it over to Brady.
Thank you Leo good morning, everyone and welcome to touch with first quarter of 2022 earnings call.
I'll summarize some highlights for the first quarter and current outlook before turning it back to Lee Joe to discuss cash flow the balance sheet and liquidity.
I'm pleased to report very positive results for the first quarter of 2022 across both our completion fluids and water and flowback business segments, including multi year highs for various sub segments.
First quarter revenue of $130 million increased 15% sequentially and adjusted EBITDA of $25 million increased 57% sequentially.
We generated $5 9 million of cash from operating activities and improved our liquidity by $28 million in the first quarter.
These results clearly highlight that our strategies continued throughout the severe COVID-19 industry downturn.
To continue to invest in automation and technology differentiation, such as our high value completion fluid.
N sand management with sandstorm to focus on produced water treatment and recycling rather than water infrastructure challenge with seismicity events and to leverage our vertical integration during unprecedented supply chain disruptions and inflation challenges are proven to be very successful.
Our first quarter cash flow net income performance far exceeds our pre pandemic first quarter of 2020 results and our revenue and adjusted EBITDA are nearly on par with pre pandemic levels, despite customer activity levels being double digit percentage is lower in terms of active frac crews as well as U S and international rig counts.
Not only have we gained market share in each segment, but we've improved our water and flowback margins on significantly lower activity.
Our low carbon energy strategies continue to gain traction despite very early days, so generating positive adjusted EBITDA and cash flow each quarter as a step change in pure flow deliveries to iOS, which is projected to accelerate throughout this year and beyond based on iOS has continued growing backlog and manufacturing ramp up.
And while the extraordinary lithium market prices continue to maintain at record highs, adding more potential value to our Arkansas, Brian leases. It is creating more push towards the type of zinc bromide Electra like energy storage technology developed by us and others, where pure flow is ideally positioned.
Water and flowback services benefited from stronger North American activity as revenue increased 17% sequentially and 85% from a year ago.
First quarter revenue was down only 1% from the pre pandemic first quarter of 2020, which compares to the U S rig count an active frac fleet count being down, 19% and 14% lower respectively from the same period.
Adjusted EBITDA margins of 14, 5% improved 160 basis points sequentially and for the month of March adjusted EBITDA margins were 15, 1% getting to the total year target faster than what we were anticipating as a result of better pricing and the aforementioned investments in automation.
As an example of our automation technology benefiting our bottom line.
Our U S water and flowback head count is down 16% from the fourth quarter of 2020 on essentially the same revenue.
Our integrated water management offering is pulling through more services.
Less activity compared to pre COVID-19 levels as the adjusted EBITDA for North America in Q1 of 2022 was the highest since the third quarter of 2019.
Our Permian Basin business led the increase with adjusted EBITDA in the first quarter being the highest since the third quarter of 2019, even though the Permian rig count in the first quarter of 2022 was 30% below that in the third quarter of 2019.
We continue to build on our produced water treatment and recycling success with four new recycling awards in the first quarter, including our first recycling project for a midstream company.
Our Appalachia region is also strengthening as pricing approaches pre COVID-19 levels with demand for us.
Continues to grow.
We were also awarded another early production facility in Argentina that will come online in the first quarter of 2023. This is in addition to the other two awards. We received last year that will come online in the second half of this year.
Completion fluids and products first quarter revenue increased 22% sequentially and 57% year over year due to stronger activity in the Gulf of Mexico, and international markets, plus an increase in industrial chemical product sales.
While the exceptional quarter on quarter and year on year revenue growth had some one forecasted sales due to customer well changes in the Gulf of Mexico, and the acceleration of some international offshore sales moving from the second quarter to the first quarter. The overall trend of higher offshore activity is gaining momentum.
Completion fluids <unk> products, adjusted EBITDA increased 14% sequentially sequentially to 26, 1%, which excluding the benefit of realized mark to market gains in the fourth quarter of 2021 improved 570 basis points.
First quarter adjusted EBITDA, excluding C S Neptune sales and Mark to market gains was the highest since our first quarter of 2020.
Our North American industrial chemicals business had an outstanding first quarter, achieving the highest adjusted EBITDA since the first quarter of 2017, driven by market share gains and favorable customer mix.
In the first quarter, we executed a new and first time MSA with a super major deepwater operator in the Gulf of Mexico, where the application of CS Neptune.
Testing for their future deepwater projects. We also recognized a small portion of the North Sea first generation one C. S. Neptune job that we mentioned in our last earnings call, which was scheduled for the second quarter of this year, but the full job execution now it looks like what happened in the third quarter.
As a reminder, the typical CS Neptune job in the North sea will be considerably smaller than what we have historically seen in the Gulf of Mexico.
Overall, we are very well positioned for what we expect to be a multiyear growth cycle in the key deepwater and offshore markets, such as Brazil Gulf of Mexico, North Sea and increasingly growing offshore market in the middle East.
As we look towards the second quarter of 2022 based on new customer awards and ongoing activity increases we expect to see further growth and margin expansion for our water and flowback segment in the second quarter for.
For completion fluids <unk> products, we will see the revenue benefit from the seasonal increase in northern Europe calcium chloride activity be it at slightly less levels than in prior years due to supply chain and inflation issues that is impacting Europe from the Russia and Ukraine conflict.
Offshore completion fluids business in the first quarter benefited from the movement on some projects from the second quarter into the first quarter. So depending on timing of key customer completions, we expect to see flattish revenue quarter on quarter with a mix of higher European sales and slightly lower offshore sales.
For the third quarter and beyond we anticipate continued offshore activity increases, including the benefit from our previously announced awards in deepwater.
Our low carbon energy business initiatives continue to progress.
Rapid pace, we completed the successful drilling and exploration.
Drilling an exploratory well on our Arkansas leases in the area, where tetra retains a 100% of the lithium and bromine rights.
It was drilled with fluid samples collected throughout the upper and middle smack over zones and to our knowledge. These are the first Brian samples within our 40000 gross acres collected and analyzed to include the middle Smack over formation.
We are encouraged with the results to date based on our own internal assessments, but are awaiting third party validation of the brine samples were collected.
Once we obtain a third party lab results, we will move forward with the inferred resources study, which should be completed within a few months.
This should further refined the current exploration target of 2.54 million to $8 five 8 million tons of bromine and exploration target age 85000 to 286000 tons of lithium carbonate equivalent.
We're currently interviewing engineering firms to award the project one of them to complete the preliminary economic assessment or P. A to produce both lithium carbonate and elemental bromine from our acreage.
Well the zinc bromide battery storage side, we continue to work with and ship increasing pure flow volumes that youll synergy on a quarterly basis deals is a leading U S provider of safe scalable efficient and sustainable zinc based long duration energy storage systems. Our team is working hand in hand with us to ensure the bowl perlmutter delivered.
As they expand the production of their proprietary battery technology.
Our executive team recently visited there expanding manufacturer operations in Pennsylvania to ensure full alignment on the increasing needs of zinc bromide in the touch or are ready to fill those needs.
Both deals in tetra recognize the need and value being able to recycle the end of life electrolyte and that our collaborative long term supplier relationship is important for both sides.
Carbon free continues to make progress with our Scotch cycle technology as we successfully launched our first C. O. Two reaction free calcium chloride pilot plant the bulb to supply large quantities of low level C. O two calcium chloride for their innovative sky cycle technology.
We remain engaged and are working closely with them as they move towards their first commercial arrangement with Warner or several potential C O two emitters.
Overall, we had a very successful quarter on every front, including strong financial performance from both segments validation of our successful strategies and great progress on our low carbon businesses I'm very pleased with what our employees were able to deliver in the first quarter in the future. We are creating for our company I'll turn it over to illegal to provide some additional.
It'll color and we'll open it up for more questions. Thank you Brady.
First quarter adjusted earnings per share was six cents per share compared to breakeven in the fourth quarter of 2021.
The first quarter results include $1 $1 million of unrealized mark to market gains in the common units that we own in CSI compressco.
As of March 31, 2022, we did not have any shares have standard lithium.
But we did we see 400000 shares on April 25th.
When the standard lithium share price was $6.36.
Going forward, we will be booking mark to market.
Adjustments each quarter relative to the 636.
We excluded nonrecurring items from our first quarter results, which totaled $564000 up nonrecurring income net of nonrecurring expenses.
In the quarter, we received cash proceeds of $3 $75 million.
For an insurance settlement related to the hurricane damages in 2022 our lake Charles plant leaning.
We incurred $1 $9 million of costs associated with exploratory Brian well in Arkansas.
And there were $1.3 million of cumulative noncash adjustments to long term incentive and appreciation rights expenses.
All of these were excluded from recurring nonrecurring items.
To demonstrate the quality of the first quarter revenue I'll mention some fall through numbers.
Income from continuing operations of $7.7 million improved $19 $7 million from the first quarter of last year.
The revenue improvement of $52 $7 million.
Representing about 37% fall through of incremental net income to the incremental revenue.
The Q4 2021 to Q4.
Q1, 2020 to fall through to net income was 50% <unk>.
Inclusive of the market to market.
Sequentially revenue increased $16 $9 million and adjusted EBITDA without the mark to market gains increased $7.7 million.
For our fall through at the EBITDA level of 46%.
Cash flow from operating activities improved $11.7 million sequentially for a fall through of 69% representing the incremental cash flow from operating activities.
On the incremental revenue.
Yeah.
First for every dollar increase in revenue Q1 over Q4 <unk>.
Cash flow from operations increased 69 cents.
DSO or day sales outstanding improved two and a half days from December to March.
First quarter cash from operations of $5 $9 million and adjusted free cash flow was a use of cash of $2 $9 million.
Flagging up $12 million sequential increase in accounts receivable.
On the back of a 15% sequential first quarter increase in revenue.
The revenue increase in March was very strong versus February on the back of continued strong onshore activity.
And Gulf of Mexico, Middle East offshore projects that moved up from the second quarter into March.
The first quarter has historically been the use of cash for us, reflecting a series of payments.
We traditionally making their first quarter for prior year accruals such as variable compensation.
First quarter cash included the benefit of $3 $5 million of the insurance settlement I mentioned earlier. However, we did not reflect that $3 $7 million in our computation of adjusted well.
Total debt outstanding was $154 million at the end of March down from a high of $222 million in 2019 third quarter, while net debt was $121 million.
Our leverage ratio has continued to improve.
At the end of the quarter net leverage ratio was two one times.
The best since the second quarter of 2018.
In the early stages of an oil and gas upcycle, we have improved our net leverage ratio.
You already be at almost a goal we set for peak cycle average ratio of two times.
Our working capital or current assets less current liabilities excluding cash.
$87 million at the end of the first quarter.
Liquidity at the end of the first quarter was $95 million.
Unrestricted cash was $33 million and availability under our credit facilities was $62 million.
Our liquidity continues to increase our leverage ratio continues to improve and working capital is a solid $87 million. All of these are driven by a strong rebound in our oil and gas business, not yet, including any benefit of a potential future CS Neptune projects.
We are building liquidity and borrowing capacity to begin investing in the development of our bromine and lithium assets in the macro over formation in Arkansas.
We've already paid $1 $9 million from an exploratory well.
We will be completing the inferred resource study this quarter followed by the second half of this year.
The Pea is expected to detail the economics of developing our assets in Arkansas, including the capital required.
Now those outflows and the potential returns.
D. S. P. A will be similar to our standard lithium is published ours will encompass both bromine and lithium.
This year, our old El they should be for the consultants and engineering studies, we do plus any other exploration wells, we might want to do.
The inferred resources study will be made publicly available to us and if it is completed.
We'll provide a more refined bromine and lithium targets as Brady mentioned earlier.
Also yesterday standard lithium and announced that they will begin a preliminary feasibility study or PFS for lithium on our acreage.
They had previously completed a preliminary economic assessment.
According to standard lithium the PFS will consider an integrated project, including Brian supply and injection wells.
Pipelines and Brian treatment infrastructure.
A direct lithium extraction plant using the proprietary technology.
And our lithium chloride lithium hydroxide conversion plant.
And as a reminder, if standard lithium began pulling Brian to get to the lithium we are entitled to the bromine without having to drill any wells.
Also as a reminder, stand up get them has an option to secure all of the lithium on approximately 35000 of our gross acres.
And we maintained all the mineral rights to the bromine on those 35000 gross acres.
On the approximately 5000 growing either 5000 gross acres, we own 100% of both the lithium and bromine mineral rights.
We have also started meetings and discussions with the department of energy.
Potentially apply for low cost long term tenure loans and for government grants to bring this United States based critical minerals to the market.
In some cases, we might leverage what U S is doing in this area.
I encourage you to read our press release that we issued yesterday and the thank you we filed last night for all the supporting details.
An additional financial and operational metrics.
Last item before turning it back to Brady.
We have been reaching out to all our current and potential investors and shareholders communicating our oil and gas we cover.
And low carbon strategy.
We have scheduled the following a non deal roadshow to Los Angeles, and San Francisco May 11, and 12.
We will also be presenting the hosting one on one conferences at the HC Wainwright conference in Miami on May 25.
The Louisiana Energy Conference in New Orleans on June 2nd and third.
And I'm, calling virtual conference on June seven.
In RBC Conference in New York City on June eight.
And at the Stifel Conference in Boston on June 9th. Please contact me if you like to meet with us on those dates.
I'll turn it back over to Brady.
Thank you Leo so in closing.
The rate of recovery of our earnings is moving at a good speed despite.
So so loudly lagging pre pandemic levels.
All the actions that we took during the last downturn have prepared us to capitalize on this market recovery that has all of the signs of being a multi year cycle.
This recovery on top of a clear path towards higher revenue and profits coming from key mineral production and chemistry to support energy storage technology and C. O. Two capture will position <unk> to be a stronger more balanced company between traditional energy in the energy transition opportunity.
With that we'll open it up for questions.
Yeah.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using speaker phone please pick up your handset before pressing.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Sure.
Yeah.
Okay.
And our first question will come from Stephen <unk> of Sterne.
Paul Please go ahead.
Thanks, Good morning, gentlemen.
Morning.
So obviously, a very good start to the year.
What when we think about you you commented on this a little bit on the on the completion fluids fun, suggesting maybe maybe flattish revenue sequentially with some puts and takes.
What's the what's the relative margin impact of European chemicals business person inside of that.
25, 26% level data in the first quarter.
We may comparable margins, even in the mid twenties for our European calcium chloride as we do with the traditional offshore.
Okay, great. Thank you and then on the on the completion fluid side I'm curious what you're seeing on the on the raw material front I know you have some control of that versus your peers and and how the pricing dynamics are in the completion fluids biz.
And what that could mean for for maybe some margin expansion in the back half of the year off of the off the current.
Mid 'twenty as well.
Yes. So there are some dynamics in the in that space as you can imagine.
Our own internal supply chain vertically integrated operations helps us quite a bit on that bromine is certainly tightening.
So we think a bromine based fluids pricing still some opportunity as we go forward on that however, there are some inflationary.
Activities that are happening as well zinc prices have gone up.
Energy prices in Europe , obviously are up where we produce our calcium chloride.
So there are some dynamics both in our favor and that we have to work against going forward Stevens.
Got to predict.
How exactly it will play out, but we feel pretty confident with our mid twenty's margins being able to sustain that on a go forward basis now.
Whether we get some additional Neptune projects this year or that day.
Really start to come in line next year, which we're fairly confident with that that will be a pretty good potential upside to our current margin levels that we're attaining.
Great. Thank you and then just just one final for me.
I'll refrain from asking you what you think about the full year consensus EBITDA. After a strong first quarter, but I will ask you. When you look at the the normal seasonal patterns in the business and obviously you've mentioned household second quarter has some.
Awesome.
Some pull through into the first quarter versus the second but when you look out past second quarter. I mean generally speaking the third quarter has been a pretty strong quarter in <unk> and <unk> had oh look maybe a little bit of a drop off in the fourth quarter. How should we think about the seasonality you would expect this year based on what you know so far.
This is what we see so far I think we can.
We believe that we will continue to see growth and margin expansion certainly on our water and flowback business. We continue.
To win new projects, New awards will have Argentina coming online in the second half of the year. In addition to the.
The growth, we're seeing here in North America.
That we have been winning so we continue to see that progression.
Really going until the end of the year, we'll see if we see the traditional holiday slowdown or not that's always a little bit unpredictable, but that's what we that's we expect as we go through the second half.
And Stephen you mentioned.
Recently at the fourth quarter has been a bit softer.
Relative to the third quarter historically, that's been driven by budget exhaustion on the onshore business, but last year, we didn't see that because we saw a nice ramp up in business Q4 over Q3.
We anticipate that this year will be the same pattern that we will not see budget exhaustion and we will see given the pricing environment activity remained strong Q3 going into Q4.
Okay, great. Thank you gentlemen.
Thank you Steve.
Our next question comes from Samantha Hoh of Evercore ISI. Please go ahead.
Hey, good morning, guys good.
Good afternoon, and congrats on the great quarter.
Let's apologize I dialed in a little late so I might have missed that a chunk of the prepared remarks, but I was just wondering if you could speak to some of the tightness, we're seeing on the zinc side.
Particularly for North Sea frequently.
Well okay.
Where do you guys fit in in terms of when Youre really contracted pretty shrinks or 40 small it's easy.
Long after the rigs are contracted and the wells are permitted.
Where do you guys fit in.
Thanks, Dave and all the offshore.
And actually that we're anticipating.
So on the offshore side Samantha if it's if it's a potential Neptune project we are involved.
I would say years ahead of time because.
The operators really have to plan the metallurgy of their wells the elastomers the flow back into their facilities. So we're very involved very early days of it if it's I see us Neptune or a highly complex.
Completion fluid job.
Well, obviously in the Gulf of Mexico, where you have active active risks moving between wells are moving between operators.
Necessarily that type of lead time, it's probably three to six months, where we will have visibility of a completion job that we need to schedule. So that's a bit over the horizon.
That we're working with there are clearly more.
Clearly from some of the smaller.
I would say non traditional operators.
Operators in the Gulf of Mexico, we're seeing quite a bit of activity increase from from those customers that we think are going to drive the short term demand short term by the rest of this year into 2023.
And then I think theres, some major projects that will be coming online in 2023 and beyond.
That will realize the benefit from and cement out all debt on the Gulf of Mexico site for some of the offshore wells.
The customers traditionally come out to the market and solicit pricing from each of the service providers.
Then they award.
Our primary contract to one of us.
And then we traditionally get the called out to supply the fluids for all those wells, we mentioned last year that we had secured.
Contracts to be the primary service provider and fluids provider to some of the Super majors in the Gulf of Mexico, and that will benefit us as we will be their primary call out four of those wells that they complete.
Okay, that's great if it's pricing.
Fully dynamic.
Let me start with changes in your cost structure and material cost.
Yeah, well we.
We have been successful passing on some levels of price increases Samantha based on the cost.
Zinc and other types of materials.
We have to include in our manufacturing processes.
So yes, we've had some success to date.
Little bit unpredictable as to how much inflation will continue to grow it's grown more significantly than we would've anticipated as I said, Fortunately, we've been pretty successful with those price increases.
And we would hope to be.
Similarly, going forward, just because the whole market has tightened for a for a lot of these materials.
Alright, great.
And that's where they see deals and concentration for you know just curious was there any material contribution to <unk> results with that brand still to come.
I would suggest that that ramp is still to come. The most important thing is that we're now shipping on a monthly basis to keep up with their production levels.
And based on information that they have provided to us and we have seen on our visits with them will be praying for a significant ramp ups in those volumes.
Great and then just shifting to the water segment.
You know you've highlighted that you're sold out at San Juan.
And pricing.
Pre pandemic level.
Do you have incremental capacity coming over the next couple of quarters.
Getting pricing is going to be moving up from here So mhm.
Uh-huh, Yes, we are we have added some additional capital for sand storms reallocated some of our capital we have plan.
For additional sandstorm Samantha Unfortunately, we know within 60 days I have a pretty a reasonable lead time with our key.
Supplier on those so as we as we continue to put more sand storms into the market. We will keep a very close eye on the supply demand and pricing picture, we still have the opportunity to add additional to what we have currently in the pipeline.
Continues.
Okay, and then maybe one last one on water recycling.
You guys highlighted that you have your first contract with a midstream company.
Can you maybe talk about just what that means for the company in terms of expanding your customer base there.
Is that just.
It just sounded like a first entry type proved that there is the opportunity set in and you can just keep going from there.
Yes, so traditionally our recycling Samantha has been directly with the operators, where we provide all of the water transfer the chemistry, the recycling it and in the water transfer back to their Frac operations. So we know that model and have executed that model very well.
Midstream environment is quite different it's a fixed pipeline as you know, but they don't have a service company Cape.
Capability within most of these these infrastructure companies.
And so partnering with a company like Tetra and we've had multiple opportunities with the midstream companies, where we can bring that service component bring the chemistry component.
To their midstream operations. It makes a very strong partnership opportunity for muscle in the servicing chemistry side and their side with the.
Our fixed infrastructure and large volumes of water.
So we're optimistic as I've mentioned previously.
Many of the companies even the operators are trying to understand what key minerals are in there are there flow streams, we're continually to getting more and more requests to analyze the flow streams of our customers in midstream operators to see what might be commercial and.
Well, we will have something that we can announce on that front in the coming quarters.
Okay.
Alright, thanks, guys.
Thank you Samantha.
A question and answer session I would like to turn the conference back over to.
Mr Murphy for any closing remarks.
Andrea I think Steven lined up so let's take a question.
And our next question is a follow up from Stephen from Doral.
From Stifel. Please go ahead.
Oh, Thanks, sorry, sorry for the late pulling there and thanks for taking the question over here.
The <unk>.
You had talked about some additional potential customers for that pure flow product.
Has there been any any update your traction that you could share with us around that.
We continue to work with a few other companies in that space. Steven we're not we're not prepared to really announce anything at this point.
But we are optimistic we will be doing so in the coming quarter or so.
Okay. Thanks, and then.
No.
Are there any updates on the.
Calcium chloride product with carbon free.
Yeah. So.
I've mentioned in my talking points, we have completed our pilot plant.
For what essentially a new chemical process to make calcium chloride traditional calcium chloride production really has a pretty heavy <unk> footprint.
So it defeats the purpose a little bit of working with carbon free to supplied calcium chloride that has the highest <unk> footprint and their sky cycle.
We've been working on this for over a year as I've mentioned previously we have.
Some IP agreements between ourselves with carbon free.
And we were successful with our pilot plant.
That's operating in Lake Charles.
To be able to produce quantities of calcium chloride, that's essentially <unk> free. So we're pleased with that they are in the process of negotiating with multiple parties, where their first Scotch cycle plant will be.
And hopefully there'll be there'll be ready to announce that in the coming months or quarters.
Great.
Thank you again for the answers.
Thanks, Steve.
With that Oh drill that concludes our call and we thank you very much for your interest in Tetra and look forward to our next call. Thank.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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