Q3 2022 Tetra Technologies Inc Earnings Call
$1 $6 million, respectively, adjusting for our seasonal decrease in our northern European industrial chemicals operation revenue and EBITDA increased approximately 75, 5% and 12% from the second quarter respectively.
EBITDA, excluding one unrealized losses on investments of $5 million was $19 1 million for the quarter.
Our results were led by our energy services business, which grew revenue, 15% and EBITDA of 33% quarter on quarter.
Our compelling data point on how well we have executed on our water and flowback multi year strategy is that our annualized third quarter revenue for this segment equals the full year revenue in 2018, when the average Frac crew count was 441 or 35% above the third quarter of 2022.
This segment also increased adjusted EBITDA margins from 15, 1% in the second quarter to 17, 4% in the third quarter.
Both segments water <unk> flowback services and completion fluids and products increased their EBITDA margins from the second quarter.
With regards to our strategy, we executed an exclusive technology agreements for recycling produced water from oil and gas wells for the purpose of beneficial reuse.
These are also key enabling technologies for the extraction of lithium from our Arkansas, Brian leases as well as the extraction of key minerals from operators produced water a rapidly increasing interest from our customers.
We are currently seeing a produced water beneficial reuse pilot project for one of the largest north American shale operators with many other opportunities in discussion.
An additional key strategic milestone for the quarter was a positive inferred resource report, which solidified the previously announced bromine and lithium brine resource estimates in our Arkansas, Brian leases, our bromine inferred resource estimate was five 5 million tons for our approximately 40000 gross acres O'brien leases.
And within 5% of the midpoint of the previously announced exploration target, while the lithium inferred resource estimate was 234000 tons of lithium carbonate equivalent or.
For LTE, which was 26% above the exploration target midpoint for our approximately 5000 gross acres that are not covered by an option granted to standard lithium.
Now turning to the segments water and flowback services revenue of $76 million improved $29 million or 62% year on year, and $9 9 million or 15% quarter on quarter.
Adjusted EBITDA of $13 2 million improved by $8 million or 158% year on year, and $3 2 million or 33% quarter on quarter. This marks the highest adjusted EBITDA since the fourth quarter of 2018.
Our water <unk> flowback business continues to grow significantly faster than the active rig count and Frac crew count while expect while expanding margins for the sixth.
Consecutive quarter.
Our significant market penetration with three things versus the introduction of our Bluelinx automation, which reduces manpower by up to 40% on an integrated water management job.
In todays market when labor is tight and with growing operator concerns on safety from short service employees. This is an invaluable benefit.
Second is the introduction of differentiated technology, including our patent patented sandstorm, which has proven to be a game changer for operator, flowback sand management and.
And third is our focus on produced water, including treatment and recycling with increasing seismicity events operators are moving rapidly to increase their recycling and explore alternatives to disposal.
The month of September was the first month ever that our Permian operations managed and transfer it only produced water with no freshwater operations.
Contributing to our strong quarter was our early production facilities being online for the full quarter in Argentina, which are longer term projects with stable predictable revenues margins and cash flows as mentioned in our previous call. We received an award for an additional early production facility, which is on track to commence operations in the first half of 2020.
Our fleet of Sandstorms advanced iPhone equipment remains at high utilization with continued market trade market penetration and improve pricing.
Our early production facilities in Argentina include our Sandstorm technology.
We'll continue to Opportunistically add to the fleet to meet this growing demand.
Adjusted EBITDA margins on our completion fluids and products segment also improved sequentially. Despite the product ethylene from the seasonal uplift of our northern Europe industrial chemicals business. The improvement was led by international markets and higher shipments of Petro pure flow, which increased by 42% quarter on quarter.
As a reminder, our pure flow fluid.
As a high purity zinc bromide based electrolyte, which is part of a rapidly growing long duration energy storage technology.
<unk> fluids and products third quarter 2022 revenue of $59 million increased year on year by 22%.
The decrease from the second quarter of 2022 by 21%.
We remain very positive on the longer term outlook for the offshore and deepwater markets and our strong market position is validated by the 2022 kimberlite annual completion fluids and Wellbore cleanup tool supplier performance report.
The Kimberlite report indicated that Tetra holds the second highest market share and completion fluids in the Gulf of Mexico at 30%.
Within the report Kimberlite mentioned Tetra technologies continues to be as the top performing supplier in the Gulf of Mexico and received the highest customer loyalty ratings as measured by the net promoter score.
This was further supported by a multi year contract renewal for one of the most active deepwater supermajors in the Gulf of Mexico that was executed in the third quarter.
As the offshore and deepwater markets continue to improve our.
Our pipeline of Tetra CS Neptune completion fluids opportunities continues to grow as well. We're currently executing a smaller tetra CS Neptune completion fluid job in the UK and have a job is confirmed and expected to be delivered in the first quarter of 2023.
The disruption to our European supply chain that we mentioned in the second quarter is to improve and although not yet back to full production, we have growing confidence that we will be well prepared for the seasonal peak sales in the second quarter of next year.
Now turning to our low carbon initiatives I've mentioned during the third quarter. We also announced the completion of our maiden inferred bromine and lithium brine resource estimation report.
The technical report reflects the bromine resource and are approximately 40000 leased acres and the lithium resource or approximately 5000 leased acres, which is a subset of the 40000 acres, where tetra holds the lithium mineral rights.
We are currently well into an initial economic assessment for the bromine resource development and production initially from the aforementioned 5000 acres that we expect to complete by year end. We're also finalizing a detailed reservoir model and are planning to drill another well on our 5000 acres in the first quarter of 2023 that will use to further re.
Find the reservoir characteristics as well as the estimated lithium and bromine volumes.
Pending the results of our detailed reservoir modeling our current plan is designed and positioned Knicks next well as our first of several production wells from this acreage. The initial economic assessment will essentially communicated business plan and returns on our bromine assets. This will be the first time, we will communicate to the market the expected uplift in revenue and more.
<unk> of bringing this bromine resource.
Okay.
As also noted in our inferred resource report our research team has demonstrated successful pilot unit results for a direct lithium extraction process that we will continue to validate in the coming months.
This will provide this will involve proving out each step in the process from the lithium rich Brian production from the wells of our smack over leases through the DLA and purification process to our high purity lithium chloride solution. We continue to believe that we're in.
In a unique position with a U S resource rich in two key minerals bromine and lithium for the energy storage markets and the ability to produce both minerals for much of the same Brian production wells and pipeline infrastructure.
Looking forward to the fourth quarter. Despite some improved adjusted EBITDA margins in the third quarter supply chain and inflation continued to be challenging issues, especially with certain chemicals and raw materials in North America key raw material prices are still inflated and as we exhaust our yearly contractual supply of bromine, we were fulfilling demand with spot market bromine.
<unk>, which will impact our margins in the fourth quarter before resuming to a long term contract supply volumes and pricing starting in the new year.
As one of our primary customers are pure flow electrolyte yields announced yesterday, they will be shifting some of our planned Q4 deliveries into 2023 to allow their customers to take advantage of a significant of significant tax credits under the inflation reduction Act.
Although this will impact our planned Q4 deliveries to iOS the long term benefits under the <unk>.
Significant to energy storage providers <unk> as a uniquely positioned U S provider, which also adds to the tax benefits.
We expect each of these issues to become one time events for the fourth quarter.
Despite the short term challenges our management team employees have done an excellent job in helping us navigate the company in the right direction as we look to the future. There is a lot to be excited about we believe we are well positioned to continue generating positive momentum as our technology investments are paying off giving us opportunities to grow and continue expanding margins into 2023 or <unk>.
Focus on low carbon energy markets, which requires critical minerals and chemistry expertise is creating significant growth opportunities for the company and are already contributing financial benefits with more to come in.
And finally, we continue to find new markets for our existing products, which collectively contribute to a broader earnings base and higher growth market opportunities I'll turn it over to Leo for some additional commentary then we'll open it up for some questions. Thank you Brady.
Adjusted EBITDA for the third quarter was $18 6 million and compares to $18 seven minutes in the second in the second quarter.
<unk> was up 24% from $15 million in the third quarter of last year.
The third quarter included Mark to market losses of $548000.
Without the mark to market losses, adjusted EBIT in the third quarter was $19 1 million.
The second quarter included Mark to market losses of $710000.
But we also have you doing modeling the fluids segment, resulting pollutants.
<unk> of Mark to market gains from our holdings in standard lithium and carbon fleet.
Corporate and other includes the mark to market loss of $733000 from our holdings in CSI Compressco.
The third quarter included $2 9 million of nonrecurring charges and expenses.
This compares to $4 7 million in the prior quarter.
Cash from operating activities of $2 1 million.
Capital expenditures net of cash proceeds on the sale of assets.
It was $12 million compared to $10 $3 million in the second quarter.
Free cash flow, our cash from operating cash flow.
And cash from operating activities and capital expenditures.
It was negative $9 $8 million in the third quarter.
We expect total year capital expenditures in the $40 million range, which includes prior noted investments and Stan sandstorms.
Payback significantly better than 18 months and in early production facilities in Argentina with strong margins.
And with the expectation that the client Vitals project back within a two to three year period after the startup of the facility.
Working capital consumed $88 $6 million in the third quarter income compared to $4 million of cash generated in the second quarter.
As we had mentioned in our prior call we expect it to build inventory for some significant deepwater national projects coming up in the fourth quarter and expect that third quarter free cash flow to be negative but to be in the <unk>.
Fourth quarter.
Free cash flow this year should be in the mid to high single digit million dollars, even after taking into account significant costs that we're incurring in Oregon, Arkansas drilling our test well.
The resource study the front end engineering design study and the initial economic assessment.
This demonstrates the value of having a strong EBITDA and free cash generating oilfield services and industrial business to fund the startup cost of our low carbon initiatives in this macro formation in Arkansas.
Without having to issue diluted equity.
Our incurred debt a diesel.
Total debt outstanding was $154 million <unk> September while net debt was 100 and planning $129 million.
At the end of the quarter, our net leverage ratio of one seven times an improvement from one eight times at the end of the second quarter.
Liquidity ended the third quarter of $92 million.
Liquidity is defined this unrestricted cash plus availability on our revolving credit facility.
And in the third quarter unrestricted cash was $25 million and availability under our credit facilities was $67 million.
We have now been positive.
Profit before tax level for three consecutive quarters generating GAAP profit before taxes up $12 million.
This is a good time to remind everyone that we have significant federal tax loss carryforwards in the United States.
It can also approximately $440 million.
Our future profits.
Keep in mind that if our oil and gas and industrial chemical businesses continued to improve and we look forward to creating more income from the incremental bromine and from lithium from our acreage in this medical information. This will allow us the opportunity to have a very high conversion of profit before tax to cash flow from operations and two five.
<unk> or quickly paid back some of the expected investment from our low carbon initiatives.
The one trillion dollars bipartisan infrastructure Bill and the over 400 billion inflation inflation reduction Act that was passed earlier this year contained.
Several Gwen and loan programs that we believe are very applicable to what we'll be doing to bring critical minerals of lithium and bromine in this macro formation to market and to build and expand manufacturing capacity to support battery storage.
We are very engaged and are having dialogue with the department of energy and will be and have been applying for government grants and loans to support our upcoming investment.
We will report our progress on this initiative in the future with key milestones are achieved.
Nonetheless, we expect to end this year with liquidity of around $100 million.
And expect to generate significant free cash flow in 2023, and 2024 to fund a significant portion of our expected bromine investment.
When we published that bromine initial economic assessment in December we will essentially be communicating our bromine business plan.
With formula require capital investment and expected returns on capital.
And as Randy mentioned, we will be doing the same later in 2023 for lithium.
We are very focused and have a high sense of urgency to bring both the bromine and the lithium assets to market as the demand and the returns are already there by others that are already producing such key mineral.
To demonstrate how both in the lithium business are benefiting from the high net them prices and strong market demand. Let me give you. An example of such returns S. QM.
Publicly traded global lithium producer increased their lithium EBITDA from $41 million in the second quarter of last year.
The $1 2 billion in the second quarter of this year.
About 30 times year over year increase in quarterly lithium EBITDA.
So we felt that the high market prices.
Now, let the revenue increase of $163 million in Q2 of last year to $1 $8 billion in Q3 of this year and 11 times increase.
These type of return, it's a high profit being achieved in the market by lithium producers when we're holding significant lithium and bromine assets in Arkansas.
<unk> management team are highly focused on getting these assets to market to create what we believe will be significant shareholder value in the coming years.
And when you combine the above numbers that others are achieving with our significant tax loss carry forwards.
To minimize our cash taxes.
You can understand our focus and sense of urgency to take advantage of market conditions.
I encourage everyone to read our news release that we issued yesterday and the 10-Q that we.
Yesterday for all the supporting details and additional financial and operational metrics.
I'll turn it back over to Brady, Okay. Thanks, Lucia and closing our earnings from our base business continues to improve while the significant upside from our Arkansas resources and low carbon energy opportunities continue to become more defined for the Frac crew count is unlikely to materially change before 2023, we believe our north American land business.
<unk> continued to increase EBITDA margins and capture more share.
The global offshore completion fluids business is subject to longer cycle recovery, but we're pleased with the project awards will be captured this year and expect this market to continue growing at an even higher pace in the coming years with deepwater projects, providing significant upside et cetera through our high value offerings for this market, including Neptune.
And with that we'll open it up for some questions.
Thank you we.
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 keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Stephen <unk> from Stifel.
Please go ahead.
Thanks, Good morning, everybody.
Good morning.
So a couple of things from me.
The first is probably pretty straightforward.
You look at the consensus has you at about $21 million EBITDA in the fourth quarter.
I know the quarter, we just reported some gains is that how do you see the bridge into two segments between the third and fourth quarter.
What are the positives and negatives I understand seasonality, but how should we be thinking about the progression for the fourth quarter.
A couple of items to consider Steven one of them is we think that our onshore business water flowback will continue to do well in the Etfs in Argentina will continue to do well.
Brady mentioned that.
<unk> made an announcement yesterday.
<unk>.
To take advantage of some of the tax credit that they were pushing quite a bit of revenue. Originally scheduled in Q4 into 2023 that clearly will have an impact on us as it will push some of our expected sales to them that we're ramping up quite nicely.
From Q4 into.
2023, so I expect I want to be a bit of a headwind.
Then I think we continue to see some inflation on raw material prices, but at the same time, we do have some nice big projects coming online.
Overseas, especially in South America. So those are the items that I think you should take into account when considering the Q4 projections.
Okay.
You mentioned your loss is that a is that a sequential drop or is it just not growth.
For the onshore.
For the Eos piece, you mentioned that they were pushing revenue out of 2023 and that'll be a sequential decline okay. Okay and then.
Yes, the other maybe bigger picture question.
As we start to think about.
Free cash generation and you have these projects that you're evaluating and thinking about funding.
How should we think about.
Or how do you think about.
Capex versus the need to.
Generate free cash and reduce leverage in a world where sort of the oil service peers are all.
Basically have no debt and are starting to give cash back to shareholders. I know you are in a different spot because you have these these significant growth opportunities, but how do you sort of balance those two.
We made some significant investments early production facilities in Latin America. This year, we don't expect that level of investment to occur in 2023 are likely 'twenty 'twenty four both are going to generate some very very high margin.
<unk> returns.
We also made quite a bit of investments on the sand storms that our turns are.
Very strong.
We expect that Capex next year will be below the $40 billion that we had this year.
I mentioned the.
Types of returns that we're seeing in the lithium business by others. They are incredibly strong.
To continue to generate free cash flow pay down debt to have the capacity to either fund from cash on hand, the initial bromine investment.
Have capacity on our revolver to fund the investment so at this point generate as much free cash flow as we can.
I use it to fund the initial part of the bromine.
Then we can evaluate the lithium second after that.
Okay, great. Thank you I'll get back in line.
Okay.
Ken Let me remind you if you would like to pose a question press Star then one.
Yes.
We will now hear a question from Tim Moore from F. Hutton.
Tim Please go ahead.
Thanks, and good morning.
Good morning Brady.
Randy you mentioned that the purchasing bromine at the spot market and continued supply chain shortages.
I'm just trying to wrap my head around maybe gross margin in the fourth quarter was that impact.
Can you maybe also provide an update on the Finland calcium chloride plant that was.
Wrapped it I mean, how far along is that to getting back to normalization or is that more of a <unk>.
Spring 2023 time horizon.
Yes sure so.
Regarding the bromine youre, probably well aware, we do have a long term supply agreement.
Who will provide our bromine because our business was so strong in the first half of this year, we will consume.
The supply volumes that we are committed to it.
Head of schedule quite frankly.
And what that leaves us within the fourth quarter, because we still have great.
Opportunities as this market is still in the early days of.
Of a recovery we have to go to the spot market for bromine that will affect our margins as <unk> indicated in the fourth quarter, but we see that as a one time issue that will affect us in the fourth quarter and certainly not as we go into 2023 has resumed back to our our contractual supply and volumes.
From our existing contract.
Again, the longer term I think it points to why we are so focused on being able to develop the Arkansas resources, because that will give us significant uplift.
And volumes of bromine to help us not only with our completion fluids business.
For future growth, but also for the energy storage side of things.
On the <unk> plant, we've continued to make progress.
Deferred from the second quarter, which.
I had a pretty significant impact to us from.
Almost a complete disruption of supply due to the Russia, Ukraine conflict.
As we progress through the year, we're not 100% back to 100% capacity, yet our full production, but we're probably.
80%, 70% to 80% of where we were we would like to be and we're making progress essentially each each quarter.
As we move forward to that we're quite confident that we will be able to be full speed by our second quarter peak sales seasons.
That we need to take advantage of.
Great. That's helpful is there any update if you've shipped out any calcium chloride for that six month order that you received from international lithium processor.
Yes, we continue to deliver.
A fairly sizable order. So it was not all shifts at one time and we continue to have monthly deliveries to meet that commitment. We will have we will have completed that order before the end of the year and then we will.
We assess where order stand for next year with this supplier and others that are potentially using the same process.
That's terrific very good opportunity I'm glad you've won that initial made an order just switching gears to your early production Argentina facilities, we know that the first one was online for the full quarter.
You mentioned on the call that the second one comes online I believe mid.
Mid next year can you give us a rough sense of maybe what the revenue potential is there on an annualized basis between those facilities when there.
Both running as it could be $15 million to $20 million.
Tim.
We have two units operational they both came online early July and the operated essentially for the full quarter. The third one is expected to come online.
Either at the end of Q1 or the beginning of Q2, so that'll be a third one that we have out there.
And the revenue is actually not a.
Significant.
We might want but the margins are very strong given that theyre a bit capital intensive so it's more on the margin enhancement and the.
Margin dollars that it's bringing then the revenue associated with it.
Great that's helpful.
And one other question I just had was.
It might be too early.
Rent on that but I'm, just wondering as your customers from.
E&P folks begin to do their capital allocation budgets, which are probably started last month.
Is there any initial read or take on how much the spending increase could be next year.
For E&P and Capex.
Given the strong oil prices and gas prices have held up so I'll look here.
Yes, we're expecting in the high double digits, 10% level and again in another way that we track that Tim is the.
The Frac companies the service companies in terms of the frac fleets additions or bringing back into the market.
And that's by our calculation running close to that 10% level of additional frac crews right now the market is constrained by available Frac crews.
We think that that will help next year in terms of increasing the overall.
<unk> spend.
As growth opportunities for us in North America.
As far as far as international goes I think it's a little too early to tell but clearly the.
The international markets, I think we will exceed that 10% growth but.
We'll probably give you a much better picture of our next earnings call after.
<unk> announced their budgets.
Terrific. Thanks, that's a great sneak peek and thanks for that color. One other final question actually just came to mind.
You mentioned the desalination produced water pilot project with the shale operator.
Do you think that could be commercially viable in the third quarter of next year.
This pilot is.
Actually going to be completed within a 30 day window and we've already tested the results.
With our own pilot.
At our West Memphis facilities. So we're very optimistic we are.
We'll achieve the results, it's really more of setting it up on location.
So the equipment operate in real time with this customers produced water.
But after that 30 day trial, we have full expectations that we will be entering into a commercial contract.
And we have a significant number of other customers wanting to get pilots of similar nature setup, but we'd like to get this first one completed first and then get a commercial arrangement in place and then move forward from there.
Well thanks.
Brady for answering those questions and that concludes my questions.
Thank you Tim.
We now have a follow up question from Stephen <unk> from Stifel. Please go ahead.
Thanks, So you mentioned in the press release and earlier about the.
Your supply agreements in the bromine and the needs to buy it on the on the spot market.
I imagine that's driven by strong demand for our end.
Where this year have you seen sort of the strongest demand that is maybe different than prior years, that's driven.
This position.
And how do you see that.
On the holding going forward as far as your contracted volumes versus kind of what you would need in 2023.
Yes.
Appropriate question, Stephen I mean, we've had some very good awards this year, the Brazil market.
We haven't seen really a lot of the benefits from those awards are just in the contracts are just getting started but we've had to build inventory well ahead of those contract starting.
Our Gulf of Mexico, We've had a great market wins this year as validated by the kimberlite.
Again, we have to build product ahead of time before a lot of that activity starts.
We've had some good wins in the North sea.
And even in the Middle East, where we've seen the offshore market in Saudi Arabia really pick up so when you combine those four markets.
And what we've had to do.
Getting inventory prepared for a lot of these these ramp ups.
That's where we've consumed are our normal our ongoing supply agreement.
Ahead of schedule.
But we don't think we will see that type of pressure going into next year, but if we do that's great. This just means we have more demand. We will we will channel more of our completion fluids to the the high margin opportunities such as Neptune.
And take advantage of that.
So when we think about the impact of those contracts.
And as you build inventory going into next year should should fluids margins with that and the.
Pure flow should fluids margins be creeping higher next year because of the calorie content of <unk>.
You've built inventories for.
That will be the case, Stephen we've not given guidance on next year, yet we'd like to make sure we understand the A&P spend budgets.
But for the visibility that we have of our contracts. The awards that we've won this year the Neptune opportunities I would fully expect that.
Okay, great. Thank you for the details.
Sure.
Our next question comes from Martin Malloy from Johnson Rice. Please go ahead Martin.
Good morning.
Good morning, two questions. The first is good morning.
The first is on PFS in their announcement yesterday, they also talked about retooling there.
Factory in preparation for the <unk> III their next generation.
The artery coming out and I believe that was supposed to be commercially introduced.
Kind of impacts more second half of 'twenty three.
Could you maybe talk about your expectations for the sales of pure.
Next.
The first half of next year compared to the second half.
Yes, I don't want to give too much.
Color until iOS, maybe has their call and gives a more more guidance as it relates to that but obviously, we have been working very closely with them with their.
Their current technology as well as their <unk>.
We believe that <unk> will be from what we know from our production process a much more streamlined easier to ramp up type of technology, which.
Allow our electrolyte flow to grow even faster.
Then what we were able to achieve with our current technology because it is a quite complicated.
Battery technology that they've been producing up to this point so.
The only thing we will be able to communicate and that is they've announced they have pushed a lot of our Q4 sales into next year.
And we will have to let them give you more color on how they plan to rollout there their units for next year.
Okay and then.
With respect to carbon free.
Can you maybe talk about the outlook there.
Potential calcium chloride sales in light of the inflation reduction act and some of the benefits for carbon capture that were in that.
Yes, we remain in active dialogue with a carbon free management team in terms of where they are on site.
Site selection first customer contract capital raise and so on.
And we remain.
Enthused about the progress that they're making in their technology.
Believe that theyre going to represent a revenue opportunity for us.
Best case, very late 2023, but most likely 2024.
And we believe that a lot of the funds available from the inflation reduction act with a bipartisan bill are equally.
Applicable to carbon suite, but potentially also to us as we create.
Alright production facilities that are dedicated to each of their carbon capture operation.
Great. Thank you very much.
Okay.
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 very much for your participation today this will conclude our third.
Quarter earnings call. Thank you.
Okay.
Okay.