TETRA Technologies, Inc. (NYSE:TTI) Q3 2023 Earnings Call Transcript - Yahoo Finance
TETRA Technologies, Inc. (NYSE:TTI) Q3 2023 Earnings Call Transcript October 31, 2023
Operator: Good morning and welcome to TETRA Technologies Third Quarter 2023 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please also note that this event is being recorded today. I will now turn the conference over to Rigo Gonzalez, Manager of Corporate Finance and Investor Relations. Please go ahead.
Rigo Gonzalez: Thank you, Joe. Good morning, and thank you for joining TETRA's third quarter 2023 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. These statements are based on certain assumptions and analysis made by TETRA and are based on several factors. These statements are subject to several risks and uncertainties, many of which are beyond the control of the company. You're 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 margins, free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed or other non-GAAP financial measures. 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 substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement, we encourage you to also refer to our 10-Q that we filed yesterday as well. I will now turn it over to Brady.
Brady Murphy: Thanks, Rigo. Good morning, everyone, and welcome to TETRA's third quarter 2023 earnings call. Our third quarter delivered solid financial results in our base business with adjusted EBITDA of $26.1 million, the highest third quarter since the third quarter of 2015, while significantly advancing our strategic initiatives. Because of the second quarter seasonal peak in our Northern European Industrial Chemicals business, the underlying strength of our business is highlighted by our year-on-year growth and our progression from the first quarter. Year-on-year, we grew revenue 12% and adjusted EBITDA by 40%. Compared to the third quarter of 2023, we grew revenues 4% -- first quarter, sorry, of '23, we grew revenue 4% and adjusted EBITDA by 27%.
Our 2023 year-to-date adjusted EBITDA of $83 million already well exceeds our full-year 2022 adjusted EBITDA of $78 million. As of the end of the third quarter, our trailing 12 months adjusted EBITDA was $103 million. Furthermore, as of September 2023, our trailing 12 months return on net capital employed or RONCE, a non-GAAP measure was 20.7%, highlighting our focus on driving returns above our cost of capital to enhance shareholder value. I'll provide additional color on our overall Q3 performance, but first, I'd like to highlight a historical milestone for the company. As a reminder, on June 26th of this year, TETRA announced that it had entered into a memorandum of understanding with an indirect wholly owned subsidiary of a Fortune 500 company for the purpose of pulling respective bromine mineral rights in Arkansas Smackover formation.
This was done in support of an application for a 6,138 acre brine production unit with the Arkansas Oil and Gas Commission, or AOGC, for the purpose of bromine and lithium extraction from the brine. In September, the unit application was unanimously approved by the AOGC giving TETRA and our partner the rights to develop and produce the brine for bromine production and future lithium production once the lithium royalty is established by the AOGC. With this approval, the binding terms of our MOU have become effective and TETRA and our partner have entered into a joint venture negotiations for operating and joint development agreements relating to the development of the brine unit with the anticipation of having these agreements in place by the end of the year or early in 2024.
In addition, we completed the data gathering and sampling operations for the second test well with results yielding lithium measurements in the upper Smackover as high as 646 milligrams per liter or 35% higher than the first test well, which was located on the southern end of the unit that we reported in September of 2022, and bromine values of 5,890 milligrams per liter, which are in line with the first test well. These strong concentration results, along with a very positive porosity and well testing data are being used to update the lithium and bromine resource report for our approved brine unit, which we plan to complete in our release shortly. The updated resource report will update the estimated volumes of lithium and bromine in our unit, and we'll classify those between measured, indicated, and inferred.
Moving back to our third quarter business results. Our Completion Fluids & Products segment continues to see the benefit of strong industrial chemicals margins as well as the offshore and deepwater market recovery. We executed a moderate size TETRA CS Neptune job in the U.K. sector of the North Sea for a deepwater super major operator, the first TETRA CS Neptune job for this customer. The segment year-on-year revenue growth was 24% with adjusted EBITDA, up 42%. The recovery in growth in the offshore market that we've been forecasting as well supported by Rystad report, which highlights that for the first time since 2014, the average contract duration for high-spec drillships has surpassed 12 months and committed utilization for ultra-deepwater rigs is approximately 90%.
In line with this data point, our pipeline of deepwater opportunities for offshore completion fluid projects continues to grow. And although the overall activity trend is upward, because deepwater completions for TETRA can be as much as 5x to 10x the value of a non-deepwater well, our revenues will experience fluctuations depending on the overall number of customer deepwater wells completed in a given quarter. For example, although the deepwater rig count has remained consistent in the Gulf of Mexico, the number of deepwater completions is down in the second half of '23 compared to the first-half with nine -- jobs completed compared to 15 in our record set in Q2. This is driven by the timing of our customers well drilling operations versus completion activity, which depending on the project can be separated by months.
For this reason, as deepwater continues to ramp up, it's important to look at TETRA Completion Fluids & Products over a longer time horizon than quarter-by-quarter. Year-to-date, TETRA Completion Fluids & Products are up 16% on revenue and 59% on adjusted EBITDA without mark-to-market losses. I'm also pleased with the results of the 2023 Completion Fluids offshore supplier analysis reported by Kimberlite International Oilfield Research. TETRA remained ranked as the top supplier in the Gulf of Mexico for product quality and overall performance. Kimberlite is an international oil and gas market research and consulting company that uses data collected from one-on-one interviews with operators to assess market trends and establish performance benchmarks for oilfield equipment and service providers.
This report indicated that TETRA continues to receive the highest customer loyalty rating as measured by the Net Promoter Score. In the third quarter, we were awarded a multi-year multi-well contract extension with one of the most active deepwater super majors in the Gulf of Mexico further validating our market position and strength in the region. Our chemicals business also posted a strong quarter as manufacturing utilization and production volumes remain strong. Our TETRA Chemicals Europe business recently entered into a distribution agreement with European-based GC Rieber focusing on calcium chloride extracted from Fly Ash with no CO2 emissions. This agreement will provide us with incremental volumes of sustainable and more environmental-friendly calcium chloride to supply to our network of customers.
In our Water & Flowback Services segment, we continued the strong momentum by focusing on margin enhancement by achieving adjusted EBITDA margin of 19% which was our fourth consecutive quarter of margin expansion and within our previously announced year-end 2023 adjusted EBITDA margin target. Year-over-year, our U.S. revenue was relatively flat, even though the U.S. onshore average rig count was down nearly 15% and active frac fleets down nearly 5% from the third quarter of last year. Sequentially, our U.S. activity was also flat as demand for our products and services has remained resilient in this slight downturn. Our target to have the engineering -- our engineering completed for our first produced water desalination plant for official reuse applications is on track for yearend or early in 2024.
In parallel to the engineering design work, we were in commercial discussions with one of the largest North American shale producers for their beneficial reuse projects in multiple unconventional basins and expect to have our first project awarded shortly. We continue to see strong customer interest and regulatory support for bringing a solution to market, not only to reduce the volume of freshwater for fracking operations, but also reducing the number of disposal-related seismicity events and bringing a valuable resource to local communities and industries. Finally, in the third quarter, we received notice from standard lithium exercising the lithium extraction option in the identified acreage outside of the approved brine unit, consistent with our 2017 agreement.
Based on the assumptions in Standard Lithium's preliminary feasibility study of their Southwest Arkansas project, which includes a base case production of 30,000 tonnes per year of battery-quality lithium hydroxide monohydrate or LHM, with a long-term selling price of $30,000 per metric ton of LHM. TETRA's illustrative royalties would be $22.5 million per year based on our 2.5% royalty on gross lithium revenues, without any investments required by TETRA. From this study, standard lithium is targeting construction in 2025 and commencing production in 2027. Now, I'll turn it over to Elijio to provide some additional commentary, and we'll open it up for questions.
Elijio Serrano: Thank you, Brady. Completion Fluids & Products segment revenue was $73 million, representing an increase of 24% year-on-year. Sequentially, revenue decreased $25 million reflecting the seasonal decline in our Northern Europe industrial calcium chloride business in addition to two large deepwater projects that we expected in the third quarter that did not materialize. Adjusted EBITDA margins, excluding unrealized losses on investments was 30.2% and our second consecutive quarter above 30% without the benefit of any large CS Neptune projects. These margins reflect a vertically integrated business model that we have that has significant leverage to higher volumes. The value of our long-term supply agreements that protect us during inflationary periods and our strong market positions that allow us to pass along price increases.
We have not yet seen a ramp-up in activity for our PureFlow long-duration battery storage electrolyte light [ph]. Our main customer for PureFlow recently received a conditional award for a Department of Energy alone that is expected to support them as they ramp up production in 2024. In the meantime, all available zinc bromide fluids are being directed towards high-pressure deepwater wells. Water & Flowback Services revenue improved 3% year-on-year and was flat sequentially despite the pullback in the U.S. onshore drilling and completion activity. Adjusted EBITDA margins improved by 13% year-on-year and by 4% quarter-on-quarter. Adjusted EBITDA margins further improved by 60 basis points from 18.4% in the second quarter to 19% in the third quarter of 2023, which is the highest adjusted EBITDA margin, since the fourth quarter of 2018 and is consistent with the goals we set earlier this year.
We remain focused on operational efficiencies, margin expansion and returns on capital. In October, we sold one of the three early production facilities in Argentina to the operator for an amount between $5 million and $6 million with a full payment received in October. TETRA will continue to operate and maintain the EPF on behalf of the operator for a fixed monthly fees. We are also currently in the process of expanding that same EPF to process greater volumes of oil and are in discussions with the same operator to potentially construct one to three additional facilities in the future. The sale of the EPF will be reflected in our fourth quarter results been a low margin as we unwind the net book value associated with the assets. However, the key thing here is the cash inflow will fully recover in our original investment was a very attractive return on capital.
Cash flow from operating activities was $40 million in the third quarter of 2023 compared with cash flow from operating activities of $2.1 million in the third quarter of 2022 and compared to $28.4 million in the second quarter of 2023. Adjusted free cash flow from continued operations was $7.1 million. Working capital at the end of the first quarter was $110 million and represents a slight increase over the second quarter due to a temporary build in inventory. At the end of the third quarter, unrestricted cash of $34 million and availability under our credit revolver was $73 million. Liquidity at the end of the third quarter was $107 million. Net debt at the end of the third quarter was $125 million. Our net leverage ratio further improved to 1.4x, down from nearly 2x just nine months ago.
In addition, based on Friday's closing prices, our holdings in Standard Lithium and CSI Compressco combined for a total market value of approximately $9.5 million and our investment in CarbonFree is currently valued at approximately $6.6 million. Combined, these investments totaled almost $16 million. Finally, we anticipate strong cash from operating activities and adjusted free flow in the fourth quarter, driven from the cash proceeds from the EPF sales and working capital improvements. Total year 2023 cash from operating activities is expected to be between $70 million and $79 million, while adjusted free cash flow was expected to be between $35 million and $40 million. This translates to free cash flow of between $15 million and $20 million in the fourth quarter driven by improvements in working capital, plus the cash proceeds from the seller EPF I previously mentioned.
Our goal coming into this year was to improve the balance sheet and generate $30 million to $40 million of free cash flow to position us to begin developing and invest in our assets of bromine and lithium in Arkansas. I would suggest that we are on plan to achieve this objective. The expected $35 million to $40 million this year of free cash flow is after investing over $14 million in 2023 on test wells, reservoir analysis, engineering studies, all preparedness for a final investment decision in 2024. We have also built-up liquidity of almost $125 million when taking into account our marketable securities and have improved our net leverage ratio to 1.4x. Shortly, we will refinance our $163 million term loan to extend the maturity and create even more liquidity.
When you combine the improvements in the balance sheet and the liquidity with the MOU with Saltwerx and the joint venture arrangements we are finalizing with them, and as a reminder, Saltwerx is a full-owned subsidiary of our well-capitalized Fortune 500 company. One will appreciate that we have neatly positioned ourselves to begin developing our Arkansas bromine and lithium assets without diluting our shareholders. Our focus is shareholder value creation by generating strong returns on capital from our base business, leveraging our base business to generate cash to invest in bromine and lithium without diluting our shareholders. I'll turn this back to Brady for closing comments before we open the line for call.
Brady Murphy: Thank you, Elijio. I think we'll open up for Q&A, and then we'll have some closing comments.
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