TETRA Technologies (TTI) Q3 2021 Earnings Call Transcript – Motley Fool

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TETRA Technologies (NYSE:TTI)
Q3 2021 Earnings Call
Nov 02, 2021, 10:30 a.m. ET
Operator
Good morning, and welcome to TETRA Technologies’ third quarter 2021 results conference call. The speakers for today’s call are Brady Murphy, chief executive officer; and Elijio Serrano, chief financial officer. [Operator instructions]. After today’s presentation, there will be an opportunity to ask questions.
[Operator instructions]. Please note, this event is being recorded. I will now turn the conference over to Mr. Serrano.
Please go ahead.
Elijio SerranoChief Financial Officer
Thank you, Betsy. Good morning, and thank you for joining Tetra’s third quarter 2021 results call. I would like to remind you that this conference call may contain statements that are or may be deemed forward-looking. These statements are based on certain assumptions and analysis made by TETRA and are based on a number of factors.
These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and the actual results may differ materially from those projected in the forward-looking statements. In addition, and in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA gross margin, adjusted free cash flow, net debt, liquidity, and other non-GAAP financial measures. Please refer to yesterday’s press release or to our public website for a reconciliation of non-GAAP financial measures to the nearest GAAP measure.

These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out yesterday, we also encourage you to refer to our 10-Q that was filed yesterday. I’ll now turn it over to Brady.
Brady MurphyChief Executive Officer
Thanks, Elijio, and good morning, everyone. Welcome to TETRA’s third quarter 2021 earnings call. I’ll summarize some highlights for the third quarter, provide some perspective on the fourth quarter, and then provide an update on our low-carbon energy initiatives, before turning it back to Elijio to discuss cash flow, the balance sheet and liquidity. To start, I’d like to give special recognition to our Louisiana, Gulf of Mexico employees that dealt with the devastating Hurricane Ida.
Fortunately, we suffered no serious employee injuries, and our employees’ property repairs are well underway. But special thanks to our employees and their incredible dedication to get our Fourchon, Louisiana base, which supports our Gulf of Mexico operations, functionally back to being a 100% in order to service our customers’ needs. Again, special recognition and thanks to all of these employees and their families. For the quarter, despite some unique challenges for the industry, including massive Hurricane Ida impacting Gulf of Mexico operations, growing shipping port chokepoints contributing to delayed deliveries across the globe, and the type of inflationary pressure that we’ve not seen for many years, the overall macro environment for our industry continues to improve, as we believe we’re still in the early days of a multi-year oilfield services market recovery, and the period of accelerating growth for our low-carbon energy markets.
TETRA’s third quarter results reflect each of these macro factors, but more importantly, demonstrates the success we’re having executing on our strategies. Year on year, we grew revenue by 30%, and would have been over 40%, if not for the impact of Hurricane Ida and the global shipping delays, impacting the quarter’s completion fluid deliveries. The third quarter $15 million adjusted EBITDA grew 16% sequentially and 104% year over year, and is the highest level since the first quarter of 2020, and prior to the market impact of the COVID-19 pandemic. Third quarter adjusted EBITDA does include $6.2 million of mark-to-market gains from our equity ownership in Standard Lithium and CSI Compressco, as more investors realize the significant value in the very lithium rich brines in the TETRA Arkansas leases, and the announced progress toward monetizing these resources.
The $6.2 million gain was largely offset in the quarter by reductions in adjusted EBITDA, from revenue delays of approximately $11 million in completion fluid products and services from Gulf of Mexico jobs that pushed into the fourth quarter due to Hurricane Ida, and delayed deliveries due to the global shipping backlogs, and to a lesser extent, some inflationary cost on certain raw materials for our chemicals production. We generated $1 million of free cash flow and again, reduced our term loan this time by 8 million, while keeping liquidity around $90 million. Turning to the segments. As discussed on our second quarter earnings call, we expected our Water & Flowback Services margins to improve from 5.3% in the second quarter to high single-digits in the third quarter, a target that was exceeded to an actual 10.9% in the third quarter.
This is an increase of 560 basis points or 156% over the second quarter, despite ongoing cost inflationary pressures in many operational areas.Third quarter revenues increased 24% sequentially despite the number of active frac crews in the U.S. onshore being relatively flat compared to the second quarter, and increased 117% year over year. We continue to gain market share in the U.S. shale plays because of our technology, quality of our services, and a very compelling integrated water management business model, supported by a well-developed automation platform that delivers on cost efficiency, service quality and improved safety.
Various factors contributed to this margin improvement. First, we completed the mobilization and were fully operational in the third quarter for the SandStorm project awards in Argentina. Building further on our business in Argentina, during the third quarter, we also secured an early production facility project that also includes additional sandstorms, which we will build and operate on a multi-year contract starting in early 2022. Secondly, we are achieving success with price improvements for many of our U.S.
customers, as the utilization rates of our recycling units, water transfer equipment, including TETRA Steel, flowback equipment, including sandstorms, continue to operate at maximum utilization. Newly secured customers are coming in with pricing better than some existing customers, and we are now turning down some projects where pricing is not at the levels we believe appropriate to generate an acceptable return on capital. And thirdly, profitable market penetration through our integrated and digitized water management projects also contributed to improved profitability. During the third quarter, we achieved a record high 55 integrated water management projects with 27 different customers, out of which four were new customers.
We continue to make market share inroads, with private oil and gas operators that see the value in our differentiated offerings and rely less on centrally managed procurement groups. In the third quarter, we successfully launched our 15k high-pressure rated sandstorms, which has immediately helped us gain higher market share traction in the Haynesville. Overall, we’re pleased with the improvement in our Water & Flowback Services business in the third quarter. And although, not yet back to the mid-20s adjusted EBITDA margin levels we achieved at the height of the U.S.
share market in mid-2018 when there were over 300 active frac crews, we are very pleased with the progression of our revenue and profitability, and we continue to build the foundational blocks in our business to continue this improvement. Shifting to completion fluids products and services. For a number of reasons, there was an unusual number of moving parts for the quarter, including the $14 million seasonal drop from the second quarter peak in our European chemicals business, the aforementioned revenue reduction of $11 million due to Hurricane Ida, and global shipping delays, the mark-to-market gains of 6.4 million adjusted EBITDA from our investments in Standard Lithium, and some cost inflationary pressures from some of our chemical production raw materials. Adjusting for the second quarter revenue seasonality of 14 million and the 11 million delayed revenue due to Hurricane Ida and global shipping issues, both quarter-on-quarter and year-on-year revenue comparisons would have increased by double-digits to mid-teen percentages, which we believe is more reflective of our current business performance.
Using a similar analysis for adjusted EBITDA margin, accounting for the 6.4% mark-to-market gain on Standard Lithium and the loss of EBITDA due to Hurricane Ida and delayed shipments, we believe the third quarter adjusted EBITDA would have been in the mid-20s, which includes the inflationary cost, which we see as likely to carry forward into the fourth quarter and potentially beyond. Going forward, we are increasing our prices to reflect these inflationary costs, as we’re seeing the global supply chain for our core products tighten as well, especially for bromine and calcium chloride products. During the third quarter, we continue to see the core strength of our completion fluids business improve, which we feel is supported by a number of data points. First, a well-known industry research expert reported on the completion fluids segment of the global oilfield services, the results of which showed TETRA, for the Gulf of Mexico, with an average 67% customer loyalty compared to the industry average of 33%, and with superior supply performance compared to our competitors.
We continue to be awarded large multi-year contracts in deepwater markets, with a new deepwater project awarded in Brazil during the third quarter for a large integrated service company. This is in addition to the previously announced large multi-year awards in the Gulf of Mexico for a super major operator, as well as a deepwater award for a major integrated service company in Brazil. Looking forward, we expect to see materially higher revenue for this segment in the fourth quarter as the Gulf of Mexico activity returns, and many of the delayed shipments will be delivered during the quarter. We expect our fourth quarter adjusted EBITDA margins to return to the mid-20s range, not including any benefit from Standard Lithium shares, which through October are up another 40%.
Our industrial chemicals business continues to stay strong, which is complemented by improved demand for calcium chloride in the recovering oil and gas market. The previously mentioned plant investment in Europe for a 25% increase in production capacity is on track for completion in the second quarter of 2022. And finally, we continue to refine the engineering and testing for what we believe will be an industry unique manufacturing process for CO2-free calcium chloride, designed for our own future production, and to support the anticipated demand from our partnership with CarbonFree. In regards to our low carbon initiatives, we continue to be excited with our progress.
As mentioned in our previous press release, we are ahead of our internal timelines to generate revenue from our low-carbon energy initiatives. In the third quarter, we secured and shipped the second commercial order and sale of PureFlow, our high-purity zinc bromide solution, to a publicly traded energy storage technology company. We are making progress in building and furthering a long term strategic supplier with this customer, and expect to have an agreement in place before year end. Assuming this agreement materializes, as expected, we anticipate a material increase in demand of PureFlow orders for deliveries in 2022, to support their manufacturing and production needs.
We’re also in discussions with other energy storage companies which use zinc bromide as an electrolyte for energy storage. Considering the forecasted high compound annual growth rates in the energy storage market, we will work collaboratively with these companies to meet their longer term demands for our PureFlow solution, as well as our full electrolyte needs. Moving on to lithium and bromine reserves. Standard Lithium completed their preliminary engineering assessment, or PEA, to extract lithium from brine, from our acreage in the Smackover Formation in Arkansas.
The Standard Lithium PEA indicates very attractive economics for the acreage, with 1.32 million tons of lithium carbonate equivalent at the inferred resource category, which is 49% higher than what was previously estimated. Based on the Standard Lithium press release, the economics on the TETRA acreage are attractive to advance work on this acreage in parallel to their current work on LANXESS facilities. The timeline to Standard Lithium work on TETRA’s Arkansas acreage is of interest to TETRA for several reasons. One, we would begin generating royalties for lithium production on Standard Lithium versus our current option agreement.
And two, the bromine-rich tailbrine from Standard Lithium’s extraction process will be available to TETRA, as TETRA still maintains all the mineral rights to the bromine, which we have previously indicated, exploration targets of 2.54 million to 8.58 million tons of bromine. In addition to the Standard Lithium option agreement acreage, TETRA have previously communicated that we estimate between 85,000 and 286,000 exploration target tons of lithium on acreage, outside the Standard Lithium agreement, which is a 100% TETRA. We’re planning to drill an exploratory well in the fourth quarter, on our dedicated acreage, to obtain lithium and bromine samples, allowing us to move from exploration target to an inferred resources target phase. We then intend to move toward a PEA study in early 2022.
There’s significant value in our mineral rights in the Smackover Formation in Arkansas, from a combination of our option agreement with Standard Lithium, our bromine resources, to meet the growing demands for completion fluids and energy storage in addition to our 100% TETRA-owned lithium resources. We will continue to evolve these four resources to create shareholder value. Finally, in the area of carbon-capture. CarbonFree continues to make progress on raising capital to launch their CO2 SkyCycle capture technology, while we evolve the engineering on our unique CO2-free calcium chloride manufacturing process.
We will continue to work with CarbonFree to source and supply the required volumes of calcium chloride, as they get ready to announce their first project. Overall, despite the number of unusual circumstances with Hurricane Ida, the global shipping and logistics issues, and overcoming inflationary pressures, we had a good quarter. Heading into 2022, we see continued improvement in the industry macro fundamentals, and the need for E&P companies to invest to meet a growing energy shortfall. Although we do expect a modest pause in U.S.
onshore activity around the holidays, early feedback from our customers, points to a robust increase in activity early next year. At the same time, we will continue to make progress on our multiple low-carbon energy opportunities, potentially putting us in a position, in the near future, to communicate to the market the potential revenue, EBITDA, and cash flow targets from these initiatives. Now, I’ll turn it over to Elijio to provide some additional details, and we’ll open it up for questions.
Elijio SerranoChief Financial Officer
Thank you, Brady. Third quarter adjusted free cash flow from continuing operations was $2.8 million, which compares to $1.8 million of adjusted free cash flow from continuing operations in the second quarter. Free cash flow for the quarter was $1 million, an improvement of $5.5 million from the second quarter. We are free cash flow positive on a year-to-date basis despite a 10% year-over-year growth in September year-to-date revenue, and capital expenditures of $10.6 million.
Total debt outstanding was $164 million at the end of September, while net debt was $122 million. We have reduced our term loan by $44 million, from $220 million on September 30 last year, to a $176 million on September 30 this year. And we expect to reduce it by at least another $10 million in the fourth quarter from cash flow from operations. With this expected reduction in the fourth quarter, we would have paid off at least $55 million since last year, reducing the term loan by 27%, and saving interest expense of $4 million on an annualized basis, which further improves free cash flow.
Liquidity at the end of the third quarter was $90 million, an increase of $8 million from the end of the second quarter, despite the pay down of $8 million on our term loan, as our ABL amendment in the third quarter added more than $10 million of liquidity. We also extended the maturity of our ABL to May of 2025. At the end of the third quarter, unrestricted cash was $42 million, and availability under the revolver was $48 million, and we have no amounts drawn on the ABL. The third quarter included a $6.2 million gain on mark-to-market adjustments in the common units that we own in CSI Compressco, and to the 1.6 million shares that we own in Standard Lithium.
We will continue to see mark-to-market adjustments for the equity that we own of these two publicly traded entities. The market value of this investment at the end of September was $22 million. And Brady mentioned earlier that the share price of Standard Lithium increased another 40% in the month of October. We do not have any holding restrictions that might prohibit us from monetizing these assets.
From the beginning of the year to the end of September, the value of these equity holdings have increased by $11.8 million. And as you evaluate our balance sheet, our liquidity and our cash position, one must recognize that we had $22 million from marketable securities, as of the end of September, available both to us, to monetize at the appropriate time. Given this our marketable — we are including this mark-to-market adjustment in our adjusted EBITDA. We expect to receive another $1 million of cash by the end of the year, and another 400,000 Standard Lithium shares early next year per our option agreement.
The 400,000 shares we expect to receive early next year at the current share price of Standard Lithium, equates to approximately $4.9 million in value, not insignificant. We excluded unusual items from our third quarter results, which totaled $1.3 million of non-recurring income, net of expenses. These charges include a gain of $3.2 million of non-cash stock warrant value adjustment expense, $1.6 million of legal settlement and other expenses, and $0.2 million of cumulative adjustments to our long term incentive and appreciation right expense. Also, we estimate that third quarter revenue was negatively impacted by approximately $11 million from Hurricane Ida and the global logistics supply chain issues.
And our reported adjusted EBITDA was also negatively impacted by Hurricane Ida and the global supply chain issues, in addition to raw material inflation issues that Brady mentioned. And other than Hurricane Ida, we expect those challenges to linger into the fourth quarter. In summary, we continue to generate free cash flow and reduce our term loan. From September a year ago, to our goal by the end of this year, we expect to reduce a term loan by 7%, approximately $55 million, effectively moving $55 million of enterprise value to our equity holders, without negatively impacting liquidity, which has actually improved from $84 million a year ago to $90 million at the end of September.
And from September a year ago to September of this year, our enterprise value has more than doubled, from $212 million to $518 million, and we have increased our equity value by more than five times from $64 million to $396 million, which we believe represents the best-performing oilfield service stock on the U.S. exchanges. And in the process, we have brought back into our stock, several significant long term value index base holders. We are clearly focused on creating shareholder value.
I encourage you to read our news release that we issued yesterday and the 10-Q, that we filed last night, for all the supporting details and additional financial and operational metrics. Betsy, with that, we’ll open it up for questions.
Operator
Thank you. [Operator instructions]. And your first question comes from Stephen Gengaro with Stifel. Please go ahead.
Stephen GengaroStifel Financial Corp. — Analyst
Thanks. Good morning, gentlemen.
Brady MurphyChief Executive Officer
Good morning.
Stephen GengaroStifel Financial Corp. — Analyst
On a couple of things. I just wanted to start — I just wanted to clarify something. Brady, you mentioned on the fluid side, third quarter EBITDA in the mid-20s. Are we talking about — we talking about margins excluding the mark-to-market, when you — with that?
Brady MurphyChief Executive Officer
Yes, Stephen, if we take the mark-to-market out, which, I think, pushed us over 31% with it in, and we had adjusted for the delays in the shipments and Hurricane Ida, we felt a more reflective EBITDA margin would have been in the mid-20s.
Stephen GengaroStifel Financial Corp. — Analyst
OK. That’s what I just wanted to clarify. So when we think about fluids going forward, and obviously, excluding the mark-to-market for now, and given the delays you saw in the third quarter, I mean, can you give us an order of magnitude on what kind of revenue growth the fourth quarter should bring? And I guess — and in addition to that, kind of, is that mid-20s, a relatively good number going forward? Or are there some puts and takes there that could move you higher as you move into ’21 — excuse me, into ’22?
Brady MurphyChief Executive Officer
I’ll take the margin progression, and I’ll ask Elijio to comment on the fourth quarter revenue. Yes, the margin progression we feel, within the current environment in the mid-20s, is appropriate. And partly because some of the inflation pressures that we’re seeing, we don’t know how long we will see these, or if we will see some other new inflationary pressures pop up. We are getting some price increases because of the tightening of the market in both the bromine and calcium chloride, but the timing of which — we’re able to overcome some additional inflationary pressure if we see it.
It’s still all a bit unknown, but we still feel pretty confident about the mid- 20s until this whole inflation situation hopefully is behind.
Elijio SerranoChief Financial Officer
And, Stephen, on revenue progression, we’ve got the benefit of a lot of the jobs that got delayed because of Hurricane Ida from Q3 to Q4. And then Brady mentioned that we picked up some long-term accounts in the Gulf of Mexico, and we’ve picked up some Latin America projects. We’ve got a significant Latin America project scheduled toward the end of the year. It’s not unlikely that this segment could be up 20% sequentially.
And if all the projects come to fruition as they are scheduled, it could be as high as 30% sequential progression.
Stephen GengaroStifel Financial Corp. — Analyst
Thanks. That is pretty clearly, so thank you. And then, you guys have obviously done a very good job on the new energy front, and things seem to be progressing there. It might be too early for me to ask this question, but when you think about the TETRA PureFlow opportunity, I imagine in the third quarter, you shipped your second one, it’s probably, obviously, a net positive.
But is there any way to frame what this could look like in ’22?
Brady MurphyChief Executive Officer
So the way — I’ll answer that, Stephen. And obviously, it’s still a fairly small portion of our overall completion fluids business in 2021. Based on the forecast we’re seeing for 2022, we will see a material increase in 2022. What we are projecting by the end of 2022 into 2023, it will now start to be what we would consider a meaningful impact of our overall bromine demand and business.
So that — if you think of it in terms of that progression, that’s how rapid do we see things moving on that side.
Stephen GengaroStifel Financial Corp. — Analyst
If I could slip in one more just for Elijio. When you think about the 2022 free cash flow, do you have any guidance on capex and/or how we should think about any big moves in working capital?
Elijio SerranoChief Financial Officer
I hope working capital is of big use because revenue is ramping up materially. That would be, I think, a positive. But we don’t see any significant capital investments. Even the expansion that we talked about for our European calcium chloride business, that’s had a big number that would move the capital number by any significant, to increase capacity by around 25% there.
So, no, we don’t see any material step-up in capex next year. And working capital could be a burden if there’s a big ramp-up in business, and we think that there’s a good possibility that could happen.
Stephen GengaroStifel Financial Corp. — Analyst
OK. Great. Thank you, gentlemen.
Brady MurphyChief Executive Officer
Thank you, Stephen.
Operator
The next question comes from Samantha Hoh with Evercore ISI. Please go ahead.
Samantha HohEvercore ISI — Analyst
Maybe just to go back to completion margins. Was there any lift from CS Neptune in 3Q? I kind of was under your assumption that you guys were on a job in the North Sea. And I’m just kind of wondering what you’re kind of building into your guidance here for 4Q?
Brady MurphyChief Executive Officer
Yes, Samantha, we did mention we had a small job in the North Sea — somewhat of a trial job in the North Sea that we executed. It was a very successful job, but was not a, I guess, a material part of our results in the quarter. But it does set us up for a higher frequency number of these types of jobs going forward. That job was in the North Sea.
As we talked about before, we track our Neptune project pipeline very, very carefully. And due to the COVID-19, we’ve estimated we’d lost 12 months of timeline in our project pipelines that we’ve been tracking, I would say with the Delta variant, we’ve lost another six months of that timeline. But we are in discussions with many of the customers for the projects that we track, and we feel very optimistic that we will see some projects in 2022. We don’t have specific real dates yet, but we are advancing those discussions at a much better pace than what we have been, say, the last 18 months, with the pandemic.
Samantha HohEvercore ISI — Analyst
And then maybe switching to water. I guess, there’s been lot of commentary about MAN spending up 20, 25% for next year. Are you guys sort of anticipating about the same and the similar sort of gains on your water side of the business?
Brady MurphyChief Executive Officer
Yes. I think if you look at our progression through this year, Samantha, we would expect a — just a 20% jump over this year is not very meaningful over where we are right now, from a quarterly run rate. So we would expect somewhat higher of an overall gain year on year than the 20%, the 25% numbers that have been talked about. If you look at our quarterly revenues now, we would expect to be up double digits from that in 2022.
Samantha HohEvercore ISI — Analyst
And what kind of scenario do you need for margins to sort of return to that sort of mid-20s level? I think that’s what I heard that like margin would actually —
Brady MurphyChief Executive Officer
Yes.
Samantha HohEvercore ISI — Analyst
What sort of — can you kind of outline to us like a best-case scenario, when you could achieve that target?
Brady MurphyChief Executive Officer
Yes. It’s difficult to say. There were over 300 frac crews operating at the peak in 2018, and clearly, we’re well below that number today. I don’t think we have to get back to over 300 frac crews in order for us to get back to those margins, just based on the SandStorm technology, which we didn’t have in 2018, the Argentina business that is generating some very nice margins and returns for us, the recycling capabilities, the integrated projects with our automation kind of reducing — offsetting some of the inflation on wages.
So I feel pretty good about eventually getting back to that type of profitability, well below 300 frac crews, but I couldn’t tell you exactly where that number would be right now. Next year, we’re shooting to try to get back to that mid-teens EBITDA margin in the first half of the year, and then we’ll see how the market responds as we finish out 2022 and into 2023.
Samantha HohEvercore ISI — Analyst
OK. That is great. For the SandStorm build for Argentina, I take it you’re building that here in the States, and then you’re just going to be shipping it down there. How — I mean, are you seeing like a long lead times for materials that you need? I’m just kind of thinking just given like the issues that we’re seeing with logistics.
Is there a concern of maybe not being able to meet the deadline for us to sort of these projects like you did last quarter, and having to taking existing equipment. Can you address maybe how you’re kind of like anticipating for that? And then also addressing quite higher costs on the build out?
Brady MurphyChief Executive Officer
That is a good question. We do have a fairly — we’ve had some visibility of these supply chain issues when we negotiated the contract. So we feel fairly confident with the time line that we have to deploy the early production facility and the additional sandstorms, unlike the previous contracts, which were a much shorter lead time that we had to mobilize for. But we did build that into this contract, and we don’t believe — we don’t foresee any major supply chain issues for us to meet that time line for that.
Samantha HohEvercore ISI — Analyst
OK. Great. Thanks, guys. Congratulations.
Brady MurphyChief Executive Officer
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Murphy for any closing remarks.
Brady MurphyChief Executive Officer
Well, thank you again for joining us for our third quarter earnings call. We look forward to our next update. Thank you for your interest.
Operator
[Operator signoff]
Duration: 35 minutes
Elijio SerranoChief Financial Officer
Brady MurphyChief Executive Officer
Stephen GengaroStifel Financial Corp. — Analyst
Samantha HohEvercore ISI — Analyst
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