Q3 2024 TETRA Technologies Inc Earnings Call
Speaker Change: Good morning and welcome to Tetra Technologies' 3rd Quarter 2024 Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star, then 1 on your touchtone phone.
Speaker Change: To withdraw your question, please press star then 2.
Speaker Change: Please note that this event is being recorded.
Speaker Change: I will now turn the conference over to Julian Higuera. Please go ahead.
Julian Higuera: Thank you, Vincent. Good morning and thank you for joining Tetra's third quarter 2024 results call. The speakers for today's call are Brady Murphy, Chief Executive Officer, and Elijio Serrano, Chief Financial Officer. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking, including projections, financial guidance, profitability, and estimated earnings.
Julian Higuera: These statements are based on certain assumptions and analysis made by Tetra and are based on several factors.
Julian Higuera: These statements are subject to several 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 these projected in the forward-looking statements.
Julian Higuera: and other non-GAAP financial measures.
Julian Higuera: Please refer to yesterday's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures These reconciliations are not a subject for financial information preferred in accordance with GAAP and should be
Julian Higuera: considered within the context of our complete financial results for the period. In addition to our press release announcement, we encourage you to refer to our tank queue that we also filed yesterday.
Speaker Change: I will now turn it over to Brady.
Brady Murphy: Thank you, Julian. Good morning, everyone, and welcome to Tetra's third quarter 2020 for earnings call. I'll summarize some highlights from our third quarter results and provide an update on our strategic initiatives before turning the call over to Lijio to discuss more details on third quarter financials and additional perspectives looking forward with some views on 2025.
Speaker Change: Unknown Speaker
Speaker Change: For the third quarter, despite considerable headwinds due to three Gulf of Mexico hurricane disruptions, as well as lower customer completion activity on U.S. land, third quarter earnings, free cash flow, and adjusted EBITDA of $23.5 million came in consistent with our expectations.
Speaker Change: We achieved adjusted EBITDA margins of 31.7% for completion fluids and products and 14.6% for water and flow back services.
Speaker Change: Because of the second quarter seasonal peak in our Northern European industrials chemicals business, the underlying performance of our business is highlighted by our year-on-year and first quarter comparisons.
Speaker Change: Third quarter revenue of $142 million was down 6% for both year-on-year and from first quarter 2024, while adjusted EBITDA was down $2.5 million from Q3'23, but up $700,000 from Q1 of 2024.
Speaker Change: Although revenue was lower, we achieved some very good wins in the quarter that is helping us build significant momentum for 2025.
Speaker Change: First is a Major Deepwater Completions Fluid Award in Brazil. This is a multi-well, multi-year deepwater award for our high-value, higher-density bromine-based completion fluids.
Speaker Change: This is our second major deep water fluid award in Brazil in the last three years and establishes us as the clear deep water heavy fluids market leader in Brazil. The first well for this award is scheduled to start in late Q1, 2025.
Speaker Change: Another important milestone for the third quarter was establishing an all-time record for produced water recycling for frac reuse.
Speaker Change: With additional recent customer wins, this third quarter record will again be eclipsed in the fourth quarter by another record that is a step change over Q3.
Speaker Change: Although U.S. completion activity has drifted down for the past 18 months, produced water is increasing and will continue to increase for many years to come. At the same time, seismicity events are driving more rapid adoption of recycling for frac reuse to avoid more overpressuring of disposal wells.
Speaker Change: Our strategy to focus our technology and investments into the produced water side of the business is paying off and has been a key part of our success developing solutions for produced water beneficial reuse, which I'll discuss a bit later.
Speaker Change: A third highlight for the quarter was
Speaker Change: The recognition by Kimberlite a leading oil and gas research company that conducted a study on the completion fluids and services segment
Speaker Change: In arguably the most technically challenging deep water market in the world, the Gulf of Mexico, the Kimberlite study concluded that, quotes, Tetra technology stands out as the performance leader.
Speaker Change: Tetra excels in technical support and service responsiveness and availability aligning well with its pricing strategy to create differentiation in the market unquote
Speaker Change: As future wells in production in the Gulf of Mexico will come from very challenging lower tertiary
Speaker Change: With extreme high pressures and temperatures, Tetra is very well positioned to benefit as validated by the Kimberlite report.
Speaker Change: Coming back to the financials, at the end of the third quarter, our trailing 12 months adjusted EBITDA was $101 million. We generated over $7 million of trailing 12 months total adjusted free cash flow, even after investing $23 million in Arkansas.
Speaker Change: Our current liquidity is approximately $197 million, inclusive of the $75 million delay draw feature to fund our future Arkansas Bromine project. Now turning to the segment results.
Speaker Change: Completion fluids and products third quarter adjusted EBITDA margin excluding or unrealized gains or losses on investments was 32.1 percent, up 200 basis points, 380 basis points compared to Q1.
Speaker Change: The increase in margin was driven by a very favorable mix of higher value completion fluid sales and our industrial chemicals business that continues its very strong financial performance.
Speaker Change: In the third quarter, we announced the introduction of Tetra X.
Speaker Change: and New Corrosion Inhibitor for High Temperature Downhole Well Environments.
Speaker Change: That is a step change improvement from what is available in the market today. We will market Tetra X as a blend with our current completion fluids as a premium product and service for high temperature wells and to expand our market share further for this segment, including CS Neptune.
Speaker Change: We're also evaluating other non-completion fluids market to potentially market Tetra-X as a standalone corrosion inhibitor.
Speaker Change: Looking ahead for completion fluids and services, the fourth quarter will be comparable to slightly down from the third quarter, as the third quarter hurricanes and a fourth in early October has had an impact on our customers deepwater completion schedules.
Speaker Change: The 3Well CS Neptune project that we announced previously is now scheduled to start in early 2025.
Speaker Change: For the water and flow back segment, third quarter adjusted margins for 14.6%, consistent with the goals that we have set.
Speaker Change: The decline in U.S. onshore frack crew activity, which according to Rydstad Energy, is down close to 25% over the past 18 months.
Speaker Change: has lowered our completion-related revenues for our U.S. business with some pressure on margins but we are counting that with a more aggressive development of automation, deployment of automation and new technology that allows us to get better or similar pricing but with much lower labor costs, which is today the highest cost in this segment.
Speaker Change: Our strategy for water and flow back services remains a multi-pronged approach, automating all aspects of the service aimed at enhancing efficiency and safety, but with a goal of bridging us to water recycling for beneficial reuse such as agriculture and industrial applications.
Speaker Change: While we've made significant progress in deploying BlueLynx and water transfer automation, we're still in the early stages of rolling out automated systems for sandstorm and auto drill-out. The early results have been exceptional, and customer feedback has been very positive.
Speaker Change: Even in this lower activity environment, we are near maximum utilization for our automated sandstorms, which today is only 20% of the fleet.
Speaker Change: We will be upgrading another 20% in 2025.
Speaker Change: This strategy linked with our growing recycling for frac reuse business will provide good cash flows to bridge us to the longer term goal of recycling for beneficial reuse, which will be a much larger market with higher returns.
Speaker Change: With regards to water desalination and beneficial reuse.
Speaker Change: We're making good progress advancing the commercial terms for our first field pilot project in the Permian Basin. In addition, we're processing a second customer's Permian Basin water with a pilot unit at our R&D center to a very high quality level. We're in discussions with other major customers for projects that, in addition to West Texas and South Texas, include mid-continent and Appalachia regions.
Speaker Change: We currently have non-disclosure agreements with seven customers and are in discussions with two additional major operators.
Speaker Change: Moving on to our strategic initiatives, we continue a very close and collaborative relationship and dialogue with EOS Energy for their long-duration energy storage electrolyte.
Speaker Change: We're confident EOS is on the verge of materially higher production volumes requiring materially materially higher electrolyte
Speaker Change: In the third quarter, we manufactured, qualified, and delivered our first full order of the EOS electrolyte.
Speaker Change: We have also increased our manufacturing and blending capacity in West Memphis to meet the planned EOS demand. As EOS ramps and brings the automated line up, the volumes of pure flow and electrolyte they require will increase materially over the minimal volumes we will ship this year.
Speaker Change: This is adding to our confidence for a very strong year in 2025.
Speaker Change: When the Arkansas bromine side we completed the SK 1300 definitive feasibility report earlier in the quarter highlighting very compelling economics
Speaker Change: While we are confident we can fund the project from free cash flow and current liquidity while keeping below 2.5 net leverage ratio, we are evaluating a decision to fund the project in stages. The first stage would be a considerable reduction in the CAPEX from the $270 million and would target initial bromine production of 66% of DFS published volumes.
Speaker Change: We're still evaluating the revised CapEx investment for this stage one, while also in discussions with multiple bromine suppliers to bridge our bromine supply needs until the full plant capacity is funded and realized.
Speaker Change: For our lithium opportunity and project we're continuing the engineering work to define the project economics But in the meantime, we're prioritizing our strategic initiatives on projects that can immediately impact our near-term results With a focus on Tetra CS Neptune fluids in the Gulf of Mexico such a pure flow electrolyte shipments that yields energy further advancing our water desalination commercial pilots
Speaker Change: Long term, we believe that lithium prices will rebound to levels that support increased investment and supply, especially from the U.S.
Speaker Change: and we and our evergreen unit partner remain focused on completing all the engineering studies required to define the lithium project economics.
Speaker Change: to begin in the first quarter and the other two wells in the subsequent quarters.
Speaker Change: We believe additional Neptune opportunities in the Gulf of Mexico are likely in 2025 based on projects that are under discussion with operators.
Speaker Change: These Neptune Projects
Speaker Change: The Brazil Deepwater Award and the very steady and predictable calcium chloride industrial business that has a seasonal peak in the second quarter.
Speaker Change: This is the most visibility we've had for our Completion Fluids and Products segment in many years.
Speaker Change: and the actions we've taken to expand blimping and storage capacity in the UK, Gulf of Mexico and Brazil, plus sourcing additional roaming volumes in open market purchases is expected to allow us to capitalize on these opportunities.
Speaker Change: Our head of next year will be building inventory to deliver on these projects that in the fourth quarter will add to working capital, but will be monetized in the first half of next year.
Speaker Change: In addition, recall that we previously expanded our production capacity in Coca-Cola Finland for additional volumes of calcium chloride for the industrial sector.
Speaker Change: Our industrial chloride business, calcium chloride business is approximately $140 million per year.
Speaker Change: or just below 25% of our total revenue, with EBITDA margins of approximately 30%. And this represents a very steady and solid source of revenue, EBITDA and cash flow for us when there is uncertainty in certain oil and gas markets.
Speaker Change: And we've recently expanded our capacity in West Memphis to produce the required volumes of not only pure flow, but also the full electrolyte to meet EOS's demands.
Speaker Change: The fourth quarter is expected to mirror the third quarter for revenue and adjusted EBITDA. As the first CS Neptune, the project that we expected in the fourth quarter was pushed into the first quarter due to the hurricanes that came through the Gulf of Mexico in the past few months.
Speaker Change: We expect a material ramp-up in this segment in the first quarter from the Gulf of Mexico Neptune Project plus the benefit of the Brazil award and the electrolyte shipments to EOS.
Speaker Change: Then another step up in the second quarter on the back of the European Industrial Calcium Chloride Seasonality.
Speaker Change: The second quarter should be very strong for us.
Speaker Change: shifting to water and flow back services. We expect revenues to be down in the fourth quarter in anticipation of a fourth quarter slowdown and without the third quarter EPF expansion sale.
Speaker Change: However, as Brady mentioned, we expect fourth quarter margins for water and flow back services to remain in the mid-teens, driven by increasing volumes of recycled produced water for frack reuse.
Speaker Change: and the automation efforts that we're implementing.
Speaker Change: If operators continue to transfer and utilize more produced water in their frac operations through treatment and recycling, the risk profile of produced water spills increases and the value of automation technology allows us to gain stronger margins in this segment.
Speaker Change: Overall, fourth quarter adjusted EBITDA will be modestly below the third quarter that included the benefit of EPF sale in Argentina.
Speaker Change: And while we won't be providing 2025 guidance, we believe that the step up next year in expected earnings coming from Neptune.
Speaker Change: The Brazil Deepwater Award and the expected ramp-up of shipments to EOS, plus our strong focus on cost controls, position us for a very solid 2025, unlike what others in the industry might be expecting or projecting.
Speaker Change: Third quarter adjusted free cash flow for continuing operations was $19.9 million, including the impact of $8.7 million of capital expenditures for the Arkansas bromine and lithium projects, net of reimbursements by our partner.
Speaker Change: As expected, working capital came down materially in the third quarter, as we monetized the receivables in Northern Europe during the quarter.
Speaker Change: We continue to work on cash flow from the base business funding the immediate capital requirements in Arkansas, both for this and next year.
Speaker Change: We continue to be reimbursed by our Evergreen unit partner for their agreed upon share of cost we're incurring.
Speaker Change: Our objective remains to keep our net leverage ratio low and not issue any equity-linked securities to fund our Arkansas bromine investments.
Speaker Change: We will instead space out the project before over-levering Tetra or before diluting shareholders.
Speaker Change: In addition to the knowledge liquidity, we are also holding slightly over $14 million of marketable securities.
Speaker Change: This includes our holdings in Standard Lithium and Kodiak Gas Services.
Speaker Change: The market gains we are recognizing can quickly be converted into cash given the trading activity of these two entities.
Speaker Change: At the end of the third quarter, our net leverage ratio was 1.5 times. Our return on capital is 16.6% for the trailing 12 months ended September 30, and compares to our weighted average cost of capital of between 11 and 12%.
Speaker Change: Let me close out by summarizing what I believe are the key terms that everyone should focus on. First, our completion fluids and product segment performed quite well with adjusted bid-doubt margins of 31.7% without mark-to-market gains.
Speaker Change: We're going into the fourth quarter when we expect margins for this segment to remain in the high 20% range and improve to the low 30% range when the Neptune projects kick in.
Speaker Change: We have the best backlog in many years going into next year.
Speaker Change: We remain confident that between our borrowing capacity and free cash flow that we can fund our broming projects. I have no plans to issue any equity-linked securities.
Speaker Change: As I mentioned, we have around $14 million of marketable securities completely at our discretion as to when we can monetize that.
Speaker Change: I'll remind everyone that the last time we did this, we raised $18 million by selling our prior holdings in Standard Lithium.
Speaker Change: Additionally, as we continue to deploy automation technology across all our water and flow back services to maintain margins in the mid-teens even in a down market.
Julian Higuera: And in the third quarter, we set the all-time volume for produced water that Brady mentioned.
Julian Higuera: It is anticipated that U.S. onshore activity will remain slower throughout the fourth quarter, and as a result, we initiated in the third quarter a series of cost-reduction actions, including a slightly over 6% reduction in SG&A headcount, and we'll continue to right-size our U.S. operations.
Speaker Change: I'll return this back to Brady for closing comments.
Brady Murphy: Well, thank you, Elijio. In closing, despite the third quarter headwinds that we discussed, our financial performance was in line with our expectations. Looking to 2025 and beyond, we're getting more clarity around the strategic initiatives that we've been working for some time.
Brady Murphy: Meaningful contribution from CS Neptune of recovering deep water market and market share wins including Brazil, automating our water and flow back services for increased efficiency and enhanced margins, focusing on produced water treatment and recycling with record volumes, bridging us to beneficial reuse.
Brady Murphy: and a steady ramp up in electrolyte sales, all giving us more confidence in our 2025 outlook and beyond. With that, we'll open the call for questions.
Speaker Change: . . . .
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: To withdraw a question, please press star then 2.
Speaker Change: Your first question comes from Steven Gangaro with Stifel.
Steven Gangaro: Thanks. Good morning, everybody.
Steven Gangaro: Morning.
Steven Gangaro: So I guess I guess two things for me and what I would I guess what I would start with is as we think about the conversation you're having on on deep water projects and you I know a Leo alluded to some maybe some incremental
Speaker Change: She has Neptune Projects in 2025.
Speaker Change: Yeah, so Stephen, we, you know, we've talked before about the pipeline of CS Neptune projects that we've been tracking for some time, you know, and as we came out of COVID, a lot of those projects were put on pause on hold, but we mentioned previously, we've seen that pipeline starting to move forward.
Speaker Change: and obviously we've announced our first three well award first ever three well simultaneous award of a CS Neptune project that with a super major that will start in the first quarter there are additional projects in the pipeline
Speaker Change: You know, I think we're cautiously optimistic that we can secure more Neptune projects in 2025, but again, these are not projects that I would say the drilling has already started.
Speaker Change: So we want to be careful about the timing of committing to when, you know, we'll secure those orders, but, you know, we feel really good about the pipeline of opportunities for Neptune. And it's really not a case of.
Speaker Change: you know, will another solution be selected because really Neptune is unique in that regard and that
Speaker Change: Today, there's not a competing offering in the price range that we have Neptune positioned. So it's really more of project timelines and, you know, compatibility with a lot of their other technologies that they're putting in the well.
Speaker Change: Okay now that's that's that's helpful. The other the other question I had was was just around the water and flow back business and as we think about
Speaker Change: 2025 at a high level.
Speaker Change: Would you expect, I mean what we're hearing pretty consistently is kind of flat U.S. activity from current levels. Would you expect to see growth in that business under under that scenario and and you agree with that scenario?
Speaker Change: Yeah, I think early days for predicting the full year for 2025. I think, you know, we are anticipating a fourth quarter.
Speaker Change: you know, slow down with the typical seasonality at the end of the year.
Speaker Change: We think Q1 will start back up, you know, fairly flattish to up from where we end in Q4. But again, we're, we're really more focused on margin enhancement at this point, Stephen, than we are our growth. We've, we've gained tremendous market share through our produced water, recycling efforts, as well as sandstorm.
Speaker Change: But we're not investing a lot of capital in growth next year, but we are investing in our automation technology to continue to bring those margins up. And if we get additional growth on top of that, you know, that's great.
Speaker Change: Our anticipation at this point is flattish for 25, but continuing to increase our margins.
Speaker Change: as we go through the year.
Speaker Change: Okay. Great. Now, that's all for me. I'll get back in line. Thank you.
Speaker Change: Your next question comes from the line of Kurt Hollid with Benchmark.
Speaker Change: Hey, good morning, guys. Good morning, Kurt.
Speaker Change: Hey.
Speaker Change: So, Brady.
Kurt Hollid: Very encouraging dynamics, looks like now on some of those emerging growth, you know, opportunities and I know you guys are kind of more apt now to, you know, let the numbers speak for themselves, but in the context of, you know, how, how you think about the prospects for, let's say, the
Kurt Hollid: the water desalinization, you got what, seven NDAs and another two more in negotiation. Michael, can you walk us through just like, you know, what the what the process is at the E&T level and what they need to go through and, and then, you know, how you try to kind of factor in timing?
Michael: Yeah so this is this is a very interesting you know market it's a brand new market so it's still emerging Kurt but the way the way we see it
Michael: emerged first of all we've had you know one customer that we've been working with very collaboratively with an outlook for a couple years we've already done a field pilot trial
Michael: You know, two years ago, we announced the South Texas project that got somewhat put on hold due to permitting shifted to the Permian and we're now very close to, you know, having that when moving forward, but in the meantime.
Michael: The stages, as we see it, is they will take their produced water samples.
Michael: You'll analyze the specifications of these water and they're all very different the permeate is the by far the most complex just because of the amount of Constituents and organics that are in it and then they will give us a opportunity to run
Michael: You know those sample waters through our pilot operations at our research center and and once we show them what we're capable of doing
Michael: at the Research Center, then we move into field pilot operations, commercial pilot operations discussions. And that's, that's more or less where we are right now with several, several of those customers. Again, we've been successful with every water.
Michael: treatment that we've been asked to to process. And so as we go through 2025, I think you'll see multiple pilots announced, field pilots announced.
Michael: And then hopefully as we get into 2026, we'll start to see kind of more scale commercial plant type operations opportunities come up.
Speaker Change: Yeah, that's great. And then what about the context? Like, it's the EMPs, right? And just kind of refresh, refresher here. The EMPs have to get the permits from the Texas Railroad Commission. How long is that, you know, do you have any sense on how long that process might take?
Speaker Change: Yeah, it is it is it is the MPs water. They own the water. We don't take possession of the water. We're charging a technology and servicing fee to process that water for them. So they are responsible for getting the permits.
Speaker Change: to be able to put, you know, produced water into the environment, on the ground, into industrial applications, into farming, etc. etc. That process is moving forward. I think the Railroad Commission is pretty highly motivated.
Speaker Change: to get this moving. But we are obviously dependent on how fast they will approve our customer's permits to how fast we'll be able to grow with that current. So it's hard, we don't control that process, but I can tell you we're seeing a lot of momentum.
Speaker Change: Okay, appreciate that color and maybe for for Alijio.
Speaker Change: I think Elijio just gave us a reference point in terms of the industrial
Speaker Change: Chemicals part of your business, about $140 million a year.
Speaker Change: I guess simple math would tell us that the oil and gas completion fluids part would be about 160.
Speaker Change: Looks like that's going to basically hold pretty consistent going into next year.
Speaker Change: with all the growth and coming from, you know, Brazil and the Neptune project. So, is there, I know you've been somewhat hesitant to kind of provide specifics on this in the past, but is there any kind of...
Speaker Change: you know, range you can potentially provide us as to what the Neptune and Brazil projects could mean in terms of, you know, revenue growth.
Speaker Change: The Neptune Projects are hard to predict, Kurt, because it really depends on how much fluid is lost in the well and how long the fluid is in the in the well.
Speaker Change: We've indicated that these are slightly smaller projects than what we saw with Exxon when we did the Exxon projects between 2015 and 2019.
Speaker Change: But the margins are very strong, and even smaller Gulf of Mexico projects will have a meaningful impact on EBITDA, and I did mention that when we do Neptune projects, it pushes the entire segment into the low 30 EBITDA margins.
Speaker Change: Okay, and then the Brazil project is not a Neptune project though, right?
Speaker Change: No, Kurt, that's not a Neptune project, but it is one of our heavy brine, bromine brine solutions. So it's similar to a Gulf of Mexico deep water project that is non-Neptune. So it's material for us.
Kurt Hollid: Okay, and then maybe just to follow up where you'd mentioned, you know staging out the bromine expansion type of dynamic and
Kurt Hollid: How should we think about that if the total investment I think you referenced was like 75 million bucks I know 270 was a total but yeah, you referenced the the delay draw at 75 million potentially being earmarked, you know for the Bromine, how do you think about the staging of it?
Speaker Change: Yeah, so we're not prepared yet to say what the stage one financials will look like. Kurt, we're still doing our evaluation on that. We will be targeting a lower initial bromine.
Speaker Change: Production, as I've mentioned on the call, probably over 60-65% of what's published in the DFS is the is the bromine target, but we think the CAPEX savings will be pretty significant. We're just not ready yet to publicize what that reduction in CAPEX will be for the for the first phase.
Speaker Change: Thanks. Appreciate it, guys.
Kurt Hollid: Thanks, Kurt.
Speaker Change: Next question comes from Martin Malloy with Johnson Price.
Martin Malloy: Good morning. First question I want to ask is on the bromine project as well. You had previously talked about FID in the fourth quarter I think for this project. Is that still the case? And then I also wanted to find out
Martin Malloy: With this project, is there the possibility of offtake agreements to de-risk the project some?
Speaker Change: There is possibility of offtake agreements, but the reality of the situation is right now for us, you know, Martin, between our deep water demand needs.
Speaker Change: and what we anticipate from EOS.
Speaker Change: We won't have additional capacity until later years when we're fully utilizing the plant to take on too many additional offtake agreements. We've got our demand pretty well consumed. In fact, as we mentioned, we're negotiating
Speaker Change: with Bromine Suppliers to get additional supply to supplement, you know, the bridge that we may do if we, if we stage this out, as opposed to FID, the full, the full 270. I would say at this point, the way we're thinking,
Speaker Change: I think it's highly likely we will execute on the staged approach with the lower capital and somewhat lower bromine supply initially from the plant.
Speaker Change: So, FID-ing the full 270 in the fourth quarter will probably not happen, but I think it's very likely you'll see some announcement and approvals of a staged approach, if not
Speaker Change: in in Q4, potentially in Q1. And Marty, all that that we've been taking steps and investing in the amount that we've expended to date to secure land to clear the land to make sure we've got access to power.
Speaker Change: and also to advance a lot of the engineering studies. So it's not as if we've been waiting for FID to take some of the initiatives required to make sure that we bring our project online in time to meet the demands.
Speaker Change: Okay, great. And then second question. I just wanted to ask about the desalinization technology. Could you maybe just...
Speaker Change: Sure, I hope I don't get too far into the weeds in this, but since you asked, I'll try to address it. So think of it in three stages of the process.
Speaker Change: The first stage is pre-treating all of the produced water.
Speaker Change: that we receive to treat it, to take out a lot of the organics, a lot of the harmful.
Speaker Change: Constituents in that water to allow us to run it to the second stage of the process and that that first stage is very proprietary to us it's something we've been working on for a very long time
Speaker Change: which is an osmotically assisted reverse osmosis. And again, that technology is used to desalinate ocean water all over the world. So it's a proven technology, it's just that no one is pre-treating produced water to the levels that allow it to run through the membranes.
Speaker Change: to to allow the economics of the of the technology to work through not changing fouling membranes every you know every couple of weeks or so, so that's
Speaker Change: If it's a high total dissolved solids
Speaker Change: produced water, then we will run that through typically the KMX unit. That's a different type of technology. It's a vacuum membrane distillation type of technology. What allows us to process much higher levels of salts and desalinate higher levels of salts in the water.
Speaker Change: Both of those are proprietary technologies to Tetra. We've got proprietary for oil and gas, I should clarify. Proprietary for oil and gas applications.
Speaker Change: Unknown Speaker
Speaker Change: and really pleased with the relationships and the technologies that we've been able to prove out with both of those. And then the third phase is really another.
Speaker Change: kind of final treatment process by by Tetra. And that will depend on the specific customer specifications for certain constituents in the water, or if it's related to the permitting that ultimately the Railroad Commission will give to meet, you know, certain thresholds.
Speaker Change: of minerals. And again, that will be another proprietary post-treatment process. So those three stages, the two in the middle are the two proprietary membrane technologies, and then our pre- and post-treatment on the tetra side. I hope that describes it.
Speaker Change: too much too much detail
Speaker Change: That was great. I really appreciate it. Thank you so much. And I'll turn it back.
Speaker Change: Unknown Speaker
Speaker Change: Next question comes from the line Bobby Brooks with Northland Capital Markets.
Speaker Change: Hey, good morning guys. So the AOGC ruling on lithium royalties is slated for next Monday.
Speaker Change: and you guys are in a really unique spot given you will be both you guys are both producers of lithium and evergreen
Speaker Change: And then also you're going to be receiving royalties from Standard Lithium because of your acreage deal, right? So could you just take a few minutes or a couple to discuss your expectations for the ruling and maybe anything important to note from an outside perspective?
Speaker Change: Yeah, so the November 4th, I believe, is the date for the hearing, you know, we again collaborating with others in the industry have been working
Speaker Change: You know, really, most of this year, I would say, preparing what we think is a very justifiable and optimal royalty structure that will support both investment in lithium and benefit.
Speaker Change: You know The the residents and citizens within Arkansas for this this type of technology but I can't predict how the outcome of that hearing will go, but I will say that
Speaker Change: I think the state officials are very motivated to get this royalty set and in place so that investment can move forward. I don't think until the royalty is set you're going to be seeing any commitments.
Speaker Change: for any projects until that royalty is set. It's very difficult to obviously do your economics.
Speaker Change: of a project until that that royalty is set. So I can't predict the outcome but I do know the state is very motivated to get to get this approved and moving forward and we're quite hopeful.
Speaker Change: I'm sorry, Bobby, was there a second part of your question? I know you were asking about our expectations for the fourth, but yeah.
Speaker Change: I think no, like I think you hit it there, but maybe just as a follow up, right. So that got it was supposed to the room was supposed to happen like September 26. But then
Speaker Change: yourself, as well as the other producers kind of send in some more information to kind of make your point as or make the point as to why it's
Speaker Change: why why why to go your way versus what the landowners were asking and
Speaker Change: Maybe just any insights of like kind of because I mean you guys are landowners as well, right? And so I so you guys do have that unique perspective. So maybe just
Speaker Change: and I get yeah you can't you know you don't have nobody has a crystal ball right but maybe just discuss kind of those documents that were submitted to the AOGC and maybe what you're hoping that what what that highlights to them
Speaker Change: and this is public information, Tetra will be getting 2.5% royalty off of any commercial lithium production that standard lithium achieves.
Speaker Change: So, you know, in terms of documents that were submitted, really, I.
Speaker Change: It's really, I would say, more around the capital investment, the OPEX, you know, the things that need to be put in play to justify where we think the optimum morality should be.
Speaker Change: Which is less than two and a half than the two and a half percent that we have with standard lithium But again, we'll see we'll see how that goes I can't predict the outcome and Bobby all that that in the last in the third quarter a couple of items have been in favor Of standard lithium that are very encouraging that they bring their production up
Speaker Change: Number one, Equinor, the national oil company essentially of Norway, teamed up with them. And then second, Standard Lithium received a grant from the Department of Energy.
Speaker Change: So I think those two incremental data points is very encouraging from a TETRA perspective that standard lithium can produce lithium in the future.
Speaker Change: And the key part to us also, remember, is that Standard Lithium drills wells to get the brine out, to get to the lithium. By default, they're bringing out the bromine, which then gives us an incremental source of bromine to feed our needs in the oil and gas and the battery storage market.
Speaker Change: Yeah.
Speaker Change: Thank you for that clarity and reminder on that you guys as well, appreciate that. Then going to kind of jump to the next question.
Speaker Change: You guys have talked extensively about the factors underpinning why you guys are going to need more bromine supply, right? And I think that's pretty well understood by
Speaker Change: Investor Community. And then in yesterday's release and you guys prepared remarks, you mentioned how you're now talking to bromine suppliers to expand that supply in the near term.
Speaker Change: prior to Evergreen getting up and producing those production volumes.
Speaker Change: So what I'm curious to hear on this, could you just give us some color as to why that's happening now versus maybe nine months ago, because it seems like the factors underpinning the outlook haven't changed, but now you guys are going out to supermarket supply.
Speaker Change: Unknown Speaker
Speaker Change: Yeah, I think we just want to make sure we have some flexibility in the way we look at how the market evolves over the next couple of years.
Speaker Change: Nothing has changed in terms of our demand for bromine. That is, I would say, we're probably as bullish on that as we have been since we started.
Speaker Change: But I think there are some options for us on the supply side
Speaker Change: given where the current market is right now as it relates to bromine to be able to secure some additional bromine supply that gives us more flexibility on how we stage the capital investment that we have with Arkansas and so that's somewhat attractive for us to take a look at.
Speaker Change: Okay, that that makes really that makes really good sense. It's just said not nothing changing with the outlook outlook remains As strong as it was nine months ago But now it's hey, maybe we're doing this in a staged matter getting the evergreen up and and so let's give ourselves some flexibility
Speaker Change: That's exactly right.
Brady Murphy: Yeah, got it. Thank you, Brady. And then just maybe
Speaker Change: Last one for me. Could you, so I guess you guys already kind of mentioned the Deepwater Brazil project.
Speaker Change: Obviously, a lot of stuff happening in that region. And could you just maybe remind us, like, you guys expanded your capacity in 2023 there by like 80%, right? Do you think winning this job is kind of
Speaker Change: Yeah, our investment in Brazil, you know, we had anticipated the market moving towards some of these higher density completion fluids. Again, Brazil is one of the largest, if not the largest in terms of actual rig activity.
Speaker Change: Deepwater markets in the world.
Speaker Change: but you know a lot of the traditional deep water have not been the higher high-temperature high-pressure type you know wells necessarily in that we see like similar in the Gulf of Mexico. We started to see some trends
Speaker Change: of some of the higher pressure requiring heavier brines a couple of years ago when we secured our first
Speaker Change: The first in several years deepwater contract.
Speaker Change: And so we invested, we made that investment in an additional capacity in anticipation of the market moving that way. So obviously we're very pleased that it's worked out that way.
Speaker Change: So, so yeah, we see more opportunity in Brazil, especially if there's continuing shift to the heavy brines Because that's where really Tetra brings its its technology and value to the the completion fluids markets
Speaker Change: Thank you very much guys on the caller and congrats on the solid quarter. I'll return to the queue.
Speaker Change: Thank you, Bob.
Speaker Change: Your next question comes from Josh Jane with Daniel Energy Partners.
Josh Jane: Thanks, good morning. The first question is just around automation technology across
Josh Jane: Water and Flowback Services you guys alluded to. This is going to be one of the One of the driving factors behind how you can increase margins going forward I just wondered if you could speak to the sense of urgency on behalf of your customers here wanting to move towards further automation and your outlook for sort of their sense of urgency on that front end to into next year
Speaker Change: Yeah, so we're seeing, you know, very good customer acceptance of automation, you know, the one of the defining factors of our water and flow back businesses is traditionally has been a fairly labor intensive operation. People costs.
Speaker Change: are the highest cost of this particular segment and you're also putting people in the red zone oftentimes you know well heads under pressure etc so there's a critical safety factor involved in this and so we realized a while back that
Speaker Change: In order for us to get the efficiency margins where we wanted to get the returns on the equipment we were putting into place, as well as address customer safety, that would be very appealing to the customers, and we're seeing that.
Speaker Change: Some customers will move faster on these types of things than others, but as again, an indication we have right now is we're pretty well sold out.
Speaker Change: Maximum utilization with the the automation equipment that we have in the field, but we are taking a staged approach We'll probably do 20% per year until we automate the entire flow back
Speaker Change: technology, but obviously if we see some demand from customers accelerating that or even wanting to put some money up front for some of that, we'll consider that, but that's our plan today.
Speaker Change: Okay, thanks. And then for my follow-up, I was hoping we could just talk about Tetra-X a little bit more. I thought the release...
Speaker Change: Last week was pretty interesting when you talked about you know what the total addressable market could be for oil and gas or what ultimately corrosion cost back in a study that was done in 2013. Could you just...
Speaker Change: Talk about when you would expect Tetra X to start contributing and then maybe Give some framework around total addressable market as a standalone corrosion inhibitor. I think just would be interesting for some color. Thanks
Speaker Change: Yeah, we're right now we'll be marketing it blended with our completion fluids and so we think that's going to allow us to get a premium price again in high temperature
Speaker Change: and markets and in the rice that is estimating I think 187 to 190 wells or so
Speaker Change: that would qualify for high-temperature wells next year, and so that's a pretty sizable
Speaker Change: market opportunity for us. We're not prepared yet to put any dollar numbers on what that will mean to us at this point in time. We're still in the early days of commercializing it, but we'll hope to be able to announce more color on that.
Speaker Change: In the future, as far as outside of the oil and gas market, again, the attractive
Speaker Change: Part of Tetra X is the high temperature above, you know, 275 degrees.
Speaker Change: is where Tetra X value really, really comes into play. It significantly reduces corrosion compared to what else is in the market. So we have to find markets.
Speaker Change: that have that type of, you know, temperature environment to where we'll benefit from from Tetra X. Obviously, oil and gas wells is one of them. There are other markets that we're looking at, but we're not prepared yet to be able to quantify, you know, what we think that value would be outside of oil and gas. Unknown Speaker
Speaker Change: Unknown Speaker
Speaker Change: Okay, thank you. I'll turn it back.
Speaker Change: Sure.
Speaker Change: Next question comes from Jeff Soberson with EF-UTAN
Jeff Soberson: Hi, everyone. Thanks for taking my questions. Really impressive margin management this quarter. I was just wondering, could you talk more about the PureFlow Electrolyte business with EOS Energy? It sounds like you're all set with the processing capacity to meet anticipated demand next year. And I'm curious if you can elaborate on the solution and how these sales are anticipated to influence your margins next year.
Speaker Change: So, Jesse, if you recall, we started selling an ultra high purity zinc bromide to EOS last year, and we took our zinc bromide that we have historically used that in the oil and gas sector. We find it to a much higher level of purity parts per billion, and that was our initial engagement with EOS.
Speaker Change: Then, we announced earlier this year an arrangement so that instead of just selling them pure flow, we would instead blend the full electrolytes for them, which means that we're buying products in the open market.
Speaker Change: and blending it with PureFlow and then shipping them the complete electrolyte. We started doing that in a small scale.
Speaker Change: in the last couple of months.
Speaker Change: and we added blending capacity in West Memphis to take on those higher volumes and now we're set to meet EOS's demands as they complete their automation process and take it to that level.
Speaker Change: So at this point, we're prepared to meet their demands of either pure flow or the complete electrolyte once they're up and running with a fully automated line.
Speaker Change: And then on the margin front for the business.
Speaker Change: Yeah, we won't comment on margins for any specific customer, but assume that it's going to be consistent with what we're seeing in the oil and gas sector.
Speaker Change: Thank you.
Speaker Change: Thank you, Jesse.
Speaker Change: Next question comes from Dan Weston with Westcap Management
Dan Weston: Good morning, guys. Thanks for taking the questions and congrats on all the progress. Last quarter, I think you mentioned that you were deploying your first sandstorm into the Middle East for a major national oil customer. If you can give a little guidance on how that trial is progressing, and when you think a reasonable timeframe for a final investment decision there would be.
Speaker Change: Sure, sure Dan. I think we announced we had actually reached an agreement with a major Middle East national oil company and we have we have the agreement in place. We've actually had to make some modifications.
Speaker Change: to our sandstorm to meet the local requirements in that market. We've completed that. We're delivering the sandstorm this quarter, and so the actual trials in the field won't take place until the first quarter of 2025.
Dan Weston: Hope that clarifies a little bit on the time. Oh, yeah. Yeah. Thank you. Yeah, I may have missed that Thanks for clarifying that and then lastly just relating to Alijio's comments relating to
Speaker Change: Standard Lithium in the DOE. Could you remind us, has Tetra made a formal application for your DOE funding and any status update you can give would be appreciative.
Speaker Change: Yeah, we won't comment on whether we've submitted applications or not. We don't want all future calls to focus on.
Speaker Change: is an application in the system or are in the process.
Speaker Change: But assume that anything that's available out there that either qualifies us for battery production on the bromine side or on the lithium side that will work to try to take advantage of that. I hope that rather than try to communicate progress that we communicate success if we can get there.
Speaker Change: No, I get it. Yeah, thank you, Lijio. Okay, that's all for me. I appreciate it, guys. Thank you, Dan.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Mr. Murphy for any closing remarks.
Brady Murphy: Well, thank you, everyone. Really appreciate your interest in Tetra and all the great questions. For now, we'll conclude our call today. Thank you very much.
Brady Murphy: Unknown Speaker
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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