TETRA Technologies, Inc. (TTI) Q4 2014 Earnings Report, Transcript and Summary

Good morning and welcome to the TETRA Technologies’ Fourth Quarter and Full Year 2014 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Mr. Stuart Brightman, President and CEO. Please go ahead, sir.

Thank you, Rocco, and welcome to the TETRA Technologies’ fourth quarter 2014 earnings call. Elijio Serrano, our Chief Financial Officer is also in attendance this morning and will be available to address any of your questions. Our Chief Operating Officer, Joseph Elkhoury is also joining us on the call and will be available to address any of your questions. I will provide a brief overview of our fourth quarter results then turn it over to Elijio for some additional details, which in turn will be followed by your questions. I must first remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses 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 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 net debt, free cash flow, revenues, gross profit, profit before tax, segment or other non-GAAP financial measures. Please refer to this morning’s press release 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. Our fourth quarter 2014 adjusted earnings excluding Maritech and unusual items was a profit of $0.09 per share. Some of the key highlights of the quarter include the following. Free cash flow of $57 million and $86 million for the full year of 2014. This is the second year in a row we have achieved at least $80 million free cash flow for the full year. This was driven by our continued focus on working capital, reductions in capital spending as well as distributions received from our MLP, adjusted Production Testing pre-tax margins of 15.5% which continues a favorable trend during 2014 of sequential improvements for Production Testing, continued strength in our Fluids division which has performed well throughout 2014 across virtually all of the major business units. During our first full quarter following the CSI acquisition, continued financial results for the Compression division that are consistent with our acquisition economics and continued implementation of our integration plan. Our Offshore Services division continues to face the challenging market as evidenced by its fourth quarter results. In the fourth quarter, our Fluids division showed revenue growth and earnings growth compared to both the prior quarter and the prior year’s comparable period. Overall, this division continues to hold up well. For 2015, we have several significant projects in our backlog and we expect this division to operate overall in a favorable environment during the year. Our Chemicals business should continue to hold up well with the only anticipated weakness being products sold into the North American oil and gas customer base. Sales to industrial markets should continue to perform well. Very modest capital will be required for this business as our investments in prior years have resulted in a demonstrated manufacturing capacity that is appropriately sized for future demand. We are very pleased with the performance of our Testing division. We’ve seen the sequential improvement over a number of quarters now, leading to the fourth quarter 15.5% pre-tax margin which is significantly above what we had communicated as a goal in our last call. Both our domestic and international operations were major contributors to this performance. In the U.S., the continued evolution of expanding our customer base, transferring assets to higher return basins and continuing to focus on cost reduction actions all contributed to this significant improvement. Clearly, this is a business that has already been impacted during the first quarter of 2015 by a reduced activity in North America. We have responded aggressively and proactively to take necessary actions that will mitigate this challenging market. Our strategy for this business in 2015 will be to attempt to protect profitability through gaining stronger positions with our most significant customers, continuing to add new customers and continuing our disciplined approach to asset optimization. CSI Compressco continue to perform as anticipated during the first full quarter following the acquisition of CSI. We were able to increase our annualized distribution to $1.94 during the fourth quarter. This marks the ninth quarter out of the last 10 in which we have increased distributions. Our coverage ratio for the fourth quarter distribution is 1.7 which clearly shows that we have taken a conservative approach to the distributions and that we remain comfortable for the outlook in 2015. Our capital program that is tied to our fleet at this stage has not been reduced. We are comfortable with our backlog for new unit sales as well as the projected demand overall in our business. One of the strengths of this business is that we are a leading provider in multiple basins within the U.S. and we have international exposure in a number of countries. During the fourth quarter of 2014 and through the first months of 2015, we have continued to roll out our integration plan and we feel comfortable that our operating and sales organizations have embraced the combined entity which provides a broader scope to our customer base. Offshore Services continues to face a challenging environment. In the current commodity price environment, it is our belief that spending by our customers will continue to be constrained and that profitability improvements will be mostly driven by cost actions. Consistent with that, we have continued to streamline the organization and have released our leased asset in the diving business during the fourth quarter. Our overall investment in this segment continues to be modest and we expect to see some modest improvements in profitability due to the cost actions taken to date. In Maritech, we’ve finished several projects during the fourth quarter and made adjustments at year end primarily for several wells that require a greater level of work based on analysis performed during the fourth quarter. We will continue to work towards completion of our abandonment and decommissioning liabilities with the expectation that this process will conclude in 2016. During the quarter, we generated free cash flow of $57 million through a combination of working capital improvements and reductions in capital spending. This is the second year in a row we have generated in excess of $80 million. In 2015, due to the operating climate, this will be a difficult milestone to achieve. However, we are confident that we will be significantly cash flow positive due to the further reductions of capital spending, reduction in abandonment and decommissioning spending and continued focus on working capital. To conclude, we have performed well in the fourth quarter. As we move into a much harsher operating environment, we are confident in fundamental profitability of our Fluids, Testing and Compression businesses. We will continue to proactively take cost reductions and optimize operations to maximize profitability in 2015 with the knowledge that we will have the liquidity to work through this period and be stronger as the market recovers. As we look at the businesses for 2014, clearly the North American shale business will be our most challenging, particularly for our Testing and Water Management. However, we believe our Compression business will have significantly fewer profitability challenges due to the existing backlog, strong market share in the infrastructure-driven applications. Other areas of strength during the year will be our Gulf of Mexico Fluids and our Chemicals business in the majority of our international businesses. As we move over to Elijio’s presentation, one area I’ve asked Elijio to provide details into is on liquidity and our balance sheet. And with that, I’ll hand it over to Elijio.

Good morning. TETRA revenue of $315 million increased 40% over the first quarter of last year to a record high reflecting the acquisition of CSI Compressco on August 4th. The results of Compressco are fully consolidated in our financial statements. Sequentially, the Fluids revenue increased 4.7% to $110 million, our second best revenue quarter for Fluids. Production Testing revenue increased 13% to the highest levels in the last eight quarters, driven by a 23% increase in U.S. activity following the revenue diversification and customer expansion initiatives Stu mentioned earlier in addition to repositioning the equipment to the most attractive shale basins. The Compression segment revenue increased substantially from $96 million in the third quarter to $125 million in the fourth quarter. As you will recall, the third quarter only included revenue for the August 4th to September 30 period for the acquired CSI company. Fourth quarter revenue from the acquired CSI company was $91.5 million. Offshore Services revenue was down following the season of decline we see every Q3 to Q4 in addition to weaker activity levels. Stu mentioned that earnings per share was $0.09 at the top end of the guidance we previously provided in November, excluding the unusual items, and I will cover it in more details in a few more minutes. The Fluids segment operating margins improved to 17.3%, a sequential improvement of 160 basis points without the special charges we recorded. Production Testing operating margins increased to 15.5%, also before special charges we recorded on the actions Stu previously mentioned. These margins approached our historical highs despite the further downturn that we are currently in. The attainment of a lower cost structure and a more diversified customer base was well timed going into a downturn. The Compression segment operating margins were not as attractive as they historically have been as they now include the depreciation and amortization expenses resulting from the purchase price allocation from last year’s $825 million CSI acquisition. We focus on cash profits and instead monitor EBITDA for CSI Compressco which was $34.4 million in the fourth quarter or 27.6% of revenues. Offshore Services have been a challenging market environment. We are continuing to optimize the cost structure and rightsize our fleet. We have reduced our fleet of diving assets from three to two and reduced the number of plug-in and abandonment crews from the peak levels over the last couple of years. Despite a challenging fourth quarter and the start of the winter season, we and our assets are brought back to the top. We were slightly positive at the EBITDA levels in the fourth quarter. At this time, we are down to two heavy-lift barges and two diving support vessels. We will continue to run an asset-light focused Offshore Services division to allow us to adjust our cost structure quickly to the challenging market environment. As part of our focus on fast [ph] and to address the downturn, we have continued to reduce cost throughout the organization. From October 1st to today, we have reduced over 400 staff across the organization which represents a 10% reduction. We have also approached our supplier base to reduce their prices to us and are achieving significant success in that area. We will continue to adjust our cost structures as activity levels decline. We have also reduced our non-CSI Compressco capital expenditures. Fourth quarter non-CSI capital expenditures were $15 million, a 36% reduction from the fourth quarter of 2013. With respect to Maritech, during the fourth quarter, we completed the assessment of the amount of work that needs to be done to address the wells we previously mentioned that need to be re-plugged. As a result, we increased our asset retirement obligations to $54 million as of the end of 2014. We are down to two operative properties that have to be addressed, both with wells that need to be re-plugged and one that includes a submerged platform. It is our intention to perform only the amount of work that we are required to do to comply with regulatory obligations in 2015, which we estimate to be approximately $10 million. During the fourth quarter, we took a series of write-offs, reserves and impairment charges to reflect what we believe to be the start of a very weak industry environment. We took a very hard look at our asset base and when we believed there was an opportunity to adjust our values for the upcoming environment, we did so. These charges were non-cash and include the following. Number one, goodwill and intangible asset write-offs of $64 million, mainly in the Production Testing segment. Number two, asset impairments of $37 million, mainly in our Offshore Services division where we wrote down the carry-value of some of our older assets. In Production Testing and Water Management, we also wrote down the value of some of our old equipment to reflect lower levels of expected utilizations. And number three, we also booked a deferred tax valuation of $63 million. Over the recent years, we have incurred significant losses on Maritech. These losses have accumulated to represent a deferred tax asset of $94 million. And on this amount, we established a valuation allowance of $63 million. We have built up a tax loss carry-forward that can offset approximately $0.25 billion of profits in the future before we pay any significant U.S. income taxes. As the Maritech losses wind down and our profits from Fluids, Production Testing and CSI Compressco distributions to TETRA accumulate, we will be in a position to credit back to income the $63 million allowance reserve in addition to paying minimal U.S. income taxes in the immediate future. We have until the year 2032 to use these operating losses and we have until the year 2020 to use any foreign tax credits. The sum of these charges impacted earnings per share by $1.74. If you already read our press release this morning, you will see that we significantly expanded the amount of information we are providing. We have done this to provide greater visibility and transparency into our financial results and have allowed you to understand how the unusual charges impact each of our segments. I will now spend a short time on the balance sheet and cash flow. We’ve previously mentioned that the debt in capital structures at TETRA and CSI Compressco are distinct and separate. We believe it is important to understand the cash flow profile and debt structure of each. In the press release we issued this morning, we’ve shown the debt of TETRA and CSI Compressco separately as the debt of each has no cross default provisions, no cross guarantee provisions and are not cross collateralized between TETRA and Compressco. We encourage you to spend a few minutes reading this section of the press release. TETRA’s free cash flow in the fourth quarter was a very strong $57 million as we reduced capital expenditures, had good cash earnings and aggressively managed working capital. This is the second year in a row that we’ve achieved our $80 million per year free cash flow target for TETRA. And as a reminder, we measure TETRA’s free cash flow as cash flow from operations before ARO expenditures, less capital expenditures of TETRA, plus the cash proceeds we receive from CSI Compressco. We believe that this metric will give you an insight into how our core business can generate free cash. It is with this free cash flow that we believe we can weather our downturn industry. There are several areas that, if fully understood, will give you insight into how we are going to manage in 2015 and 2016. Let me elaborate on these cash-focused initiatives. In the recent years, we have averaged approximately $100 million a year in ARO cash expenditures for Maritech. Last year, we reduced this to $63 million from $114 million in 2013 as we are winding down to what needs to be done. In 2015, we expect this to be approximately $10 million. This represents a reduced consumption of cash by Maritech of $53 million between 2014 and 2015. TETRA’s capital expenditure over the last two years have averaged $69 million. We plan on reducing this approximately 40% in 2015 which will reduce cash outlays by $25 million going into 2015 from 2014. In addition, the CSI Compressco acquisition is expected to significantly increase the distributions to TETRA, especially as we move up the ladder with the infinite [ph] distribution rights or the IDR splits. Between Q1 of a year ago and this Q1, we increased the distributions from CSI Compressco with TETRA by 30%. Annualized distributions coming to TETRA from Compressco are now expected to be in the low to mid $30 million range. This will represent an increase of approximately $11 million to $12 million. Therefore, the combination of an 85% reduction in ARO cash outlays, a 40% reduction in capital expenditures and a 35% increase in distributions from CSI Compressco to TETRA are expected to improve our overall cash position by approximately $90 million when comparing ’14 to ’15, which should more than offset an expected reduction in cash earnings from Production Testing, Fluids and Offshore Services. We have demonstrated that when costs need to be reduced, we have acted with a sense of urgency such as what we have completed with Offshore Services, with the G&A reductions and the 10% reductions since October 1st that we mentioned earlier. We also have the benefit of recently installed ERP system at the legacy Compressco segment to further drive down cost. We also plan on continuing with our aggressive working capital management initiatives by using electronic invoicing to speed up the invoicing process and improve DSO. With respect to the balance sheet, CSI Compressco has net debt of $506 million. We are comfortable with a leverage ratio of 4.0 to 4.25 given the long-term nature of their contracts and predictable revenue stream. It should also be noted that over the past two years we have invested over $85 million per year in growth CapEx that is speeding our EBITDA stream. Our goal over time is to work this to 2.5x. CSI Compressco has over $250 million of liquidity available to fund growth. Stu mentioned earlier that cash earnings at CSI Compressco were strong and the coverage ratio was very conservative at 1.7x on the announced distributions for the fourth quarter. For TETRA, we are carrying net debt of $381 million with a leverage ratio below 3x. I earlier mentioned our ability to reduce ARO cash expenditures, reduce capital expenditures and receive higher CSI Compressco distributions to offset an expected reduction in cash earnings. Therefore, we expect to be free cash flow positive in 2015 from the previously noted actions. We expect to work our leverage ratio closer to 2.5x as the year progresses from these actions. We are focused on a strong balance sheet, generating cash and reducing our cost structure as activity volumes decline. TETRA has a $90 million note maturing at the end of April of this year. Earlier today, we filed an 8-K that noted that we have received a commitment letter for the sale of $50 million of senior secured notes. We will use these proceeds to absorb the $50 million of the maturing $90 million private placement notes. The other $40 million will be absorbed into our existing revolver. At the end of December, TETRA had $225 million revolver in place with only $90 million outstanding. Moreover, we have adequate capacity to absorb the remaining $40 million. The press release we published this morning has the details I’ve discussed with respect to free cash flow and the debt structures of TETRA and Compressco. TETRA has multiple levers to pull should the environment be even more difficult than we are projecting. We have stress-tested our balance sheet and feel comfortable with the actions and levers available to us to remain in a good position throughout the downturn. We cannot control the rig count nor the price of oil, but there are several items we can control - capital expenditures, the timing of Maritech ARO expenditures, our internal costs such as headcount and supplier expenditures and in addition, the CSI acquisition will boost our cash proceeds from CSI Compressco. These 2014 to 2015 changes are expected to improve our cash position to offset the decline in profitability from weaker activity levels and put us in a position to generate a good free cash flow in 2015. This concludes the financial summary. And, Rocco, let us now open it up for any questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kurt Hallead of RBC Capital Markets. Please go ahead.

Hey, good morning.

Good morning, Kurt.

It was a great summary. I really appreciate that. Obviously, still all we know is [ph] - hearing all that process and be very clear on the debt dynamics, there’s still I think a lot of question out there in the marketplace on the flexibility and so on and so forth. Are there any other tidbits of information that someone could take away from your assessment of the balance sheet situation and liquidity and flexibility to get some degree of confidence that you guys won’t be pinned against the wall this year?

Yes, Kurt, I encourage everybody to read the press release and go through the different capital structures that we have. We’ve addressed the $19 million of maturity notes that we have in place. And there’s other levers available to us should the market get really difficult. As an example, if we wanted to do a sale leaseback with some of our offshore assets and raise cash to reduce overall debt, that is a lever available to us. The management team feels comfortable that we’ve got enough levers to pull - cost reductions or generation of capital to reduce debt. That is something that we feel very comfortable going into this difficult environment.

And Elijio, from an operating - and Stu, on an operational standpoint, EP [ph] spending coming down in North America north of 30%, international spending coming down about 10% to 15%, I think in prior discussions you guys have given some indication that you think that your business lines may actually be able to hold up a little bit better than those aggregate declines. And then from a margin standpoint, I think margins will be pressured but what are some of the things that you’re doing from an internal corporate standpoint maybe to descend the tide [ph] a little bit?

Yes, I mean let me give a portion of the answer and then I’ll let Joseph finish up on the questions. Clearly if you look at our portfolio, some of the businesses that will be under the most pressure and already are as we get past the halfway point of the first quarter are going to be the North America shale services such as water and testing. And we’ve seen that activity, we’ve seen pricing pressures already and we’ve responded - what we try to do is respond on a very tactical basis where we’re looking at the situation, assessing how we can offset it and where we’re going to get some cost concessions from the supply chain, how we control our cost, asset utilization, all those variables. But those have been the two that I think are going to be under the most pressure. Others that I think hold up reasonably well I think our Compression business, given the majority of it is associated midstream, not at the well head, given that we’ve got a large backlog already that goes through the second half of unit sales. That gives us protection as far as that goes. I think our Chemical businesses, the part that’s exposed to general industrial. I mean, we’ve already been dealing with any areas where there’s been a tough macro economy. We’ve dealt with that cost in pricing over the last couple of years. So we think those margins will hold up. Gulf of Mexico, we’ve got pretty good line of sight on some projects and backlog. And I think even with the noise that’s in the Gulf of Mexico, we’re very comfortable with our Gulf of Mexico Fluids. And that’s kind of the overall - I’ll let Joseph talk about a little bit more detail of some of the specific tactics that we’re working on.

Thank you, Stu. Just to try and answer the activity question. In the U.S. land operation, the rig count from December is down about 28%. If you look at the peak in October to today, it’s probably 35% to 37% down in land activity. Canada is down 40% year-on-year. And we are starting to see the impact in Q1 on specifically Water Management, Production Testing and some of the land fluids. Now having said that, we feel confident that we have retooled the organization to manage and safeguard profitability in the land business, as demonstrated by our Fluids results that are impacted by significant improvement in land and Production Testing margins for the activity in Q4. Exiting Q1, we think that the activity overall for us is going to be somehow related to the rig count drop from December. But we have what we call the tactical execution customer playbook to really define and safeguard market share, continue to win new customers with some of the differentiating bits and pieces of technology we introduced in Water Management and our service delivery in Production Testing. Are we going to see a more severe impact in different basins? Absolutely. And we will continue to reshuffle and reposition our fleet to the basins that are less impacted and are preferable customer positioning because we have gained a significant amount of new customers in Q4 and we have bet on customers that are less likely to get either out of business or less leverage on debt or dropping less rig count. And we continue to try and figure out how to gain a little bit more market share with those businesses with customers that have announced less drastic measures on cutting rig count or cutting CapEx. With regards to the Chemicals business, we’re exposed to several industries. We have not seen the impact yet in Q1, so we continue to have a very strong footprint with very strong sales. The profitability mix is still there. We have not seen any impact on price yet. We have a few tactical initiatives to improve the distribution channels through some of the byproducts like salt that we have. And we continue to track pricing on a basin-by-basin metric, if you will. So that gives you an overview to the land activity that is going to be basically impacted with the drop of rig count and cut in spend from the big E&P companies.

That’s a great summary. I appreciate it.

Our next question comes from Blake Hutchinson of Howard Weil. Please go ahead.

Good morning.

Good morning, Blake.

Just starting with your commentaries, Stu, that you kind of let off with regard to the backlog in the Fluids business, the kind of Gulf of Mexico deepwater content was something that was clearly missing a bit in ’14. The backlog that you see right now, would that allow you to have that be a favorable comparison most likely for ’15 or pretty flat with ’14?

I think it would be flat to up a little bit maybe. I think sort of based on line of sight of projects we have and the timing, we’re pretty comfortable that at minimum we’ll be flat year-on-year for that piece.

Okay. And then speaking again to Production Testing, can you refresh us - just give us again another overview of kind of the international portion of that business, maybe the non-Canadian international portion of the business and how that might fare in the markets you see?

Yes, we’ve got - our main testing operations outside the U.S. would be Saudi where as you recall about a year ago we purchased a 50% interest from our partners, so we now own and operate that 100%. We think that business will continue to be strong this year. Mexico, we would say that I think long-term there’s going to be opportunities. I think ’15 is still going to be dealing with a constrained budget in Mexico. So I’d say we’ve taken additional cost actions and we’re now looking for any relief in Mexico this year. And then the Middle East, we’ve got some other projects that we executed last year and we think we’ve got some backlog and some other projects out there for this year. So I think overall on testing - and I guess the last piece is Brazil and I think like everybody, we’ve got our challenges down there. But we’ve taken actions, so we’ll make some money down there and it’ll be a positive contribution. Nothing major but certainly there. Joseph, any other areas you want to highlight on that?

I mean, if you want more micro details, we can provide a little bit on each of the countries. We think that in Saudi with their focus on gaining market share, they’re not going to cut any activity. There is a pressure on price. We’re trying to mitigate that with volume. We believe that we can repeat our performance in Saudi. And Brazil, we just won a significant award with regards to working for one of the major oil field services. So that will take us through all of 2015 with a better utilization of our asset base. We’ve already taken action on headcount there and we are going to be PBT or profit before tax positive in Q1 moving into the rest of the year. So we’re very confident about Brazil. In Kurdistan, we were working for one customer with regards to our EPS. That work has stopped and now we’re trying to replace it with another customer. We have a dozen opportunities to be able to replace that work. We’ve always won work for another major operations in Kurdistan. So we believe that is going to be PBT positive as well - profit before tax positive. With regards to Mexico, when PEMEX reduced budgets for moving into 2015, we’ve taken extreme cost actions and we believe that we are going to generate positive returns as well in line with what we have generated in Mexico in the previous year. When it comes to Canada, it’s probably where we are hurting the most because of the expected activity. The premise were there late into 2014, those did not translate into rigs or activity in Q1. So there we have already taken action. Elijio and Stu both mentioned to the headcount actions we’ve taken and we’re trying to make sure we stay ahead of the curve and safeguarding profitability in every business unit where we operate. So we feel confident that we’re going to try and mitigate all this downturn with actions that will keep us basically PBT positive.

Thanks, and an excellent review. And then just finally, Elijio, can you remind us, as you think about the two entities, is there a shared service element between TETRA and CSI? And if so, how large is that?

Right. So what we’ve done, Blake, is all back office support - accounting, legal, HR, all those type of items, payroll - we’re doing out of the corporate office in Houston. Last year, if you recall, we implemented our ERP system in the legacy Compressco to further streamline that cost structure and consolidate costs more. It is our intention to now extend that ERP system during the year into the acquired CSI company and approach the same cost structure initiatives on the acquired company. So today, all back office functions are being done centrally.

Okay. That’s helpful. Thank you very much. Appreciate that.

Yes, let me just add one other point on that because I think it’s really important is that’s our overall approach to all of our businesses. We’ve evolved over the last year or so where all that back office we want centralized, we want to take those costs out and let the operating guys focus on customer service, HSE and the things they do really well. And last point I had mentioned going back to the question on CSI, it’s important to highlight again that’s a business that’s been around since 1971. They’ve been through many cycles and they’ve done well on the cycles. They know how to deal with the cycles. And when TETRA bought the company, we knew we were bringing with it a very strong management team. So as you know, we deal with some of the challenges on some of the North America shale business that Joseph referenced. It certainly helps that we’ve got a team in place combined with the talent we had in our legacy Compressco business that can manage that big piece of the company working with Joseph and Elijio and the rest of the group.

Great. Thank you, Stu.

Our next question comes from Joe Gibney of Capital One. Please go ahead.

Thanks. Good morning, guys.

Good morning.

I appreciate all the extra detail on the release; certainly helpful. Elijio, I just wanted to calibrate a little bit on CapEx into next year, the TETRA standalone ballpark $40 million here, how does that allocate from a provisional standpoint?

So let’s walk through each of the divisions. Offshore Services, as you recall, we had put in minimal capital in there. It’s pretty much maintenance capital that’s going in there and we expect that to be $5 million to $7 million this year. On the capital level in this, it’s going to be slow or small on the growth capital and there will be opportunities that we target with very quick payback. So we’re prioritizing all the growth opportunities and only those with the highest return and quickest payback are we investing on in the Production Testing or Fluids. We think that on the Water Management side, we have built up an inventory of lay flat hose and deployment units to more than cover the market that’s available to us this year. So we don’t expect any growth there other than some small maintenance capital. I would say that most of [ph] it will be equally split between Fluids and Production Testing or we will have few growth opportunities there.

Okay, that’s helpful. And if you could, just remind us a little bit on within Fluids, just trying to calibrate and probably from the starting revenue run rate if I think about Water Handling in your North America onshore fluids businesses into the downturn. So your Water Handling and Fluids, you’ve alluded to sort of the approaching or exceeding time of this low $100 million level in terms of total revenue. Is that still an accurate sort of base to begin working from into next year? And where is the North American Fluids piece?

Yes, I think that’s a good starting point as you exit last year and kind of look at the impact that Joseph referenced for 2015.

Okay. And how about the sort of the non-Water Handling North America onshore fluids piece, is that in the same $90 million to $100 million ballpark?

It’s probably less than that. I think when you look at - I’m specifically responding to some of the chemical products that we sell there, into the oil and gas. Again, we recognize that we sell a good portion of offshore, we sell a good portion onshore and we sell a good portion into the industrial base in North America. So when you look at that, that’s probably closer to 5%, 10% of revenue of the segment, closer to 5%. And it’s a number that’s been growing pretty significantly over a period of time. And the reason being, again, another point we want to highlight is, the benefit of the infrastructure that we’ve put in place over years which is both the manufacturing plants, not just ELVO but all the plants that we have along the Gulf Coast up near Marcellus and Utica on the West Coast, beyond ELVO and the terminals and distribution we have across North America, is a tremendous advantage as that demand has grown and as it comes back being close to the customer. And that leverage we have of both distribution and plant close to the customer is great benefit for us. So that number has been growing, but you should think of it in the 5% to 10% number.

Okay. Helpful. Last one for me and I’ll turn it back. Just a couple of months in here on offshore into the first quarter, so you’ve tiered [ph] back your fleet a little bit here referencing the releasing of that one dot [ph] support asset. But you’re also sort of indicating modest improvement in profitability ahead. I know 1Q can be a seasonal dip because there’s a little bit of gap in those margin and revenue. But we’ve come off more of a pronounced trough exiting the year. So how do we think and calibrate a little bit in our 1Q for offshore services will helpful. I appreciate it.

Yes. I think one truth [ph], clearly, we’ll have the seasonal impact. And I think it will be a little bit more severe than last year and previous years due to the fact that we have one of our barges in for work, planned work, chaotic [ph] work. And so we’ll have that asset out as we exit the first quarter. But our internal forecast is that none of the major assets in offshore services will work during the first quarter. So I think if you looked at what we’ve done in the last couple of years in the first quarter, you would assume this would be a little bit worse than that because of the utilization. And other areas I think - the highlight in that, as I said, we released the least asset in the diving. We think that’s going to be certainly very slow the first half of the year, may pick up the second half. We certainly think 2016 looks like there’s some projects out there that will be in a sweet spot that we’re pursuing both on diving as well as on the heavy lift side. We have a couple of projects we’re tracking that the guys remain comfortable. It’s more a function of timing than it is what our position in it. But in the meantime, we’ve taken our P&A organization very modest. We’re very comfortable of that piece of the business. Doing the P&A work will make money in a very tough market given the way we’ve shrunk that organization and some of the backlog we’re seeing there. So it’s going to be a tough market. But again, I commend the team of getting ahead of the issue in both from an asset leasing from the organization, sizing, and also from sales focus going after the business that is out there.

So I would add that historically, we’ve come out of the winter downturn sometime in March when we can negotiate with customers if they accept followed the weather risk in this environment and the lower volumes and they’re not willing to accept the weather risk, we’re not going to come out and work and put all the weather risk on us in March, therefore we expect to see our assets at the top until the full [ph] time period.

Okay. Makes sense. I appreciate it guys. Thanks for providing [ph] more detail.

Our next question comes from Stephen Gengaro from Sterne Agee. Please go ahead.

Thanks. Good morning, gentlemen. Two things. I think I’d start with, guys, when you look back at history and you look at sort of the decremental margin performance in the different segments and you sort of try to calibrate that with the cost savings initiatives you’ve been able to achieve, how should we think about that in Testing and Fluids over the next couple of quarters?

So on Testing, Stephen, a lot of our labor is hourly labor that we got out of the job site. They go from their house straight to their jobs and they mobilize back to the house. So it’s not as if they go to the shop and wait around to be deployed. So we see a one-to-one reduction of variable cost related to people [indiscernible] fuel, maintenance as the activity levels drop off in the Production Testing market segment. Clearly, the only one that will not vary will be depreciation of equipment. But that represents a much smaller piece of the cost price. So we believe that there’s a lot of variability. So we can adjust and Joseph and his team have taken very aggressive approaches to monitor that on a day-to-day, week-to-week basis to map it accordingly. On the Fluid side, the same applies to Water Transfer. Water Transfer job site personnel, mobilized to the job site and mobilize to their home. So there’s never lingering cost that hangs around at the district level. And as Stu mentioned that we have a very nice network manufacturing distribution in place, but those are not people-intensive. That’s more volume of product moving through. So when the revenue is not there, the cost of goods sold is not there. So we believe that those two business have a high correlation of variable cost that can be taken out as activity levels defined and Joseph and his team are taking that as a day-to-day, week-to-week monitoring process.

Okay. That’s very helpful. And then on the other side, when you look at the Compressco business and obviously their guidance that they provided on the call yesterday was pretty solid as you look into ’15, can you give us how much visibility is there in vary with guidance as you look at ’15?

I think the fact that we got into that level of detail by definition on their guidance yesterday kind of helps answer the question that it is pretty visible. Tim and Ron and the rest of the team are out talking to customers daily, making certain we’ve got a home for the new capital that’s coming in and they still remain confident and they’re talking to customers on the backlog. We haven’t seen evidence of cancellations, delivery rescheduling, some of the things that you worry about. So we do feel secure about that. We certainly took what I consider the conservative approach on segment [ph] distribution when we had that announcement back in January just to make certain that we protected ourselves against any of that market risk going forward. But we feel good about it. And the other part of it, the highlight is, when you went to the last downturn with both the legacy, Compressco as well as CSI, the utilization decline came down to the mid to high 70s at the low point. Pricing was single digit at the low point that degradation. So there are analytics associated with the history but also reinforce that confidence we have.

And Stephen, recall the revenue stream of CSI Compressco. So the legacy company have 70% of the revenue coming from late life wealth to in-house cash production. And that’s going to be drilling activity related. Both compressors are normally out there around 30 months at time. And about 30% was coming from vapor recovery that is drilling activity related. And those are primarily on tank farms to research related [ph] vapors. Then the acquired revenue is a significant concentration on midstream gathering systems, gas processing, pipeline, more infrastructure with a smaller piece doing either gas lift or gas production at the well site. So those units have historically been in place anywhere between three and four years at a time. For the longer-term nature of that business gives us more predictability.

That’s very helpful. And if I could sneak in one other one. When you look at their - if you assume their midpoint of their EBITDA guidance was accurate, how would you calibrate what that means for your distributions next year?

Well, if you look at the distributions that we just declared, it jumped up from Q1 a year ago 5 points in the quarters [ph] or the cash coming from Compressco to TETRA a year ago and we just pushed that up to $7.5 million. And that’s to start with a coverage ratio of 1.7x. We believe that the cash to be pushed up to TETRA from Compressco is going to be mid to low $30 million next year.

Very good. Okay. Thank you.

Our next question comes from Martin Malloy of Johnson Rice. Please go ahead.

Congratulations on the progress you made last year in production testing.

Thank you.

Two questions. I guess with respect to offshore services, one of the major diving providers in the Gulf of Mexico appears to be in serious trouble and probably going away. And then I was wondering what the impact might be to your offshore services over time there. And then also, with respect to the Baker-Hall merger and Fluids, if you can maybe talk about what might happen there?

Yes, on the first question, I don’t want to comment on any specific competitor or company. I’ll take a broader comment in that space. I think the demand that we’ve seen over the last year, the demand that we anticipate over the next year, there’s going to be consolidation opportunities. There’s going to be some of the smaller players out there that are going to be challenged with the demand. So it’s a very fragmented competitive landscape in that business by definition. So I do think it will be evolved and I do think there will be opportunities for those that want to be in that mode. We’ve kind of clearly signaled that’s not where our investment dollars have been and probably will not be going. So I would not look at us as the candidate for that. But I think that’s the environment that you’ll see. In the meantime, our focus is to preserve the profitability of that business, continue to be very tactical and use the capabilities we have. We’ve got some great assets. We’ve got a great organization. There’s customers that put a tremendous amount of value in us providing a solution across the different services we have. So that’s all part of that. I think on the Fluid side, I mean clearly anytime a couple of folks get together and there’s one eliminated, I think that creates opportunities. We’ve proved ourselves over the years as being a very strong player in Fluids. And even in the current market environment, we’ve got a lot of efforts internally of looking for new technology, how we do things better in that business. And I do think there’s an opportunity for us to hopefully to play a bigger role in that going forward. Fluids growth, Fluids profitability is certainly a core strategy of the company as we go forward.

Okay. And then a question on Maritech and the increase in expected cost during the fourth quarter. Can you talk about - is that most of non-op properties and now that you pushed out from I think the last time was 2Q ’15 during that quarter, you’d finish up on your operating properties, not it’s in the ’16. How comfortable are you that you’ve got a firm grasp around what needs to be done?

Well, I think we are - and since I get this question fairly routinely and it’s a tough question given the changes in adjustments we’ve made. Clearly we’ve found a more complex environment in some of the projects that we envisioned. And as always, as we that, we adjust and that’s what happened in the fourth quarter, it’s operated properties, wells that are going to take more work to deal with. Probably, we’ll require a rig to come out and do the majority of the work. So that’s new learnings, new adjustments. We spent a lot of time on the analytics. We’re comfortable with it. And by definition, we’re down to a handful of wells. And I think we’ve got one structure left to do and it’s fairly finite. So with variability given, just a pure physical quantity remaining should be modest. And we think we’ve got it covered with the adjustments we made in December.

And Martin, our objective is in the second quarter to put some caps in some of those wells and then defer the work until we’re more comfortable that we’ve got a recovering environment before we expend cash release.

Thank you.

Our next question comes from Doug Dyer of Heartland Advisors. Please go ahead.

Hey, good morning, everyone. With regard to the free cash flow number you talked about for 2014, what would that number have been without the changes in working capital?

For the quarter, we’ve got a little over $20 million of working capital benefit aggressively managing up and down the balance sheet.

Okay. All right. And then Elijio in your prepared comments, there was something that I missed. You were talking about a $90 million difference from 2014 to 2015. Can you speak to that for me what contacts was that in?

Yes, Doug. I think that’s a very important point for the investment community to understand. So when I compare the cash expenditures, the cash inflows and outflows 2014 versus 2015, we will reduce the amount of work we’re doing at Maritech, dropping it from in the mid-60s to about $10 million. Cash out involved will be $50 million better related to Maritech 2014 versus 2015. Capital expenditures outside of Compressco had been averaging $60 million to $70 million. We expect to drop that below $30 million or below $40 million. That will give us worth of $20 million of lower cash cost to the organization. Then the distributions coming from Compressco to TETRA will improve from the low 20s to the low 30s. So that will give us increased cash coming to TETRA come Compressco of $11 million to $12 million. The sum of those three before we talk about any worth of capital changes in the TETRA level and before we talk about the cash earnings in this weaker environment, we’ve got $90 million improved adjustment in those three areas alone that are working against it.

All right. Thank you very much for the clarification. And it’s great to see the visibility into the free cash flow that you’ve been talking about. Thank you very much.

Doug, we’re incredibly focused on free cash flow.

And our next question comes from Will Dezellem of Tieton Capital Management. Please go ahead.

Thank you. That’s Bill Dezellem. A couple of questions. First of all, you’ve referenced the Gulf of Mexico activity and the thoughts relative to the Fluids business. To what degree do you believe that there is a risk that some of those projects could get pushed out with the more challenging environment now?

I think there’s a risk on maybe the back half of the year. I think the first half of the year would get pretty visibility on what those look like. And we’re confident in the second half. As you know, you’ve got the other variable of just projects timing and execution on these complex wells. Does it get pushed a little bit, just timing. But in general, we feel good about that Gulf of Mexico business this year.

And then Elijio, would you please walk through what the various impairments were for and what was written down from a goodwill standpoint? And if you prefer to take it offline, that’s fine too.

Let me give you a high level response and if you want to go into detail, I can call you after this call. The two big items were goodwill and intangible assets primarily related to production testing. We looked at the carry value of that investment. We assume that we’re going to go into a weak environment beginning this year and slow down the value of the goodwill and the intangibles related to the acquisitions that we did over the past several years. That was the main item. The second item that we took was slightly over $60 million is we built up a tax plus carry forward of a little over $94 million that can shield up to $25 billion of pretax income without us paying any U.S. income taxes. Now unfortunately over the last three years, the Maritech losses have been so significant that they’ve overshadowed the profit from production testing, Fluids, offshore services and the distributions we received from Compressco. So having seen a three-year tax loss on the income tax return for TETRA, we established a reserve of $63 million against that $94 million deferred tax. So that’s an allowance, that we have not used in the last couple of years. We’ve got until the year 2032 to use those deferred tax assets. So we have not lost the benefit of that tax loss carry forward. From a foreign tax credits, we’ve got until the year 2020. When the Maritech losses subside and the profits from production testing, Fluids and offshore services with the distributions from Compressco are greater than the Maritech losses, we’ll start reversing that $63 million back into income. So assume that we took a conservative approach looking at the projected earnings and so that’s how they’re reserved for that. The other items are much smaller in nature. But we basically looked at a lot of our assets on the offshore side and up our older production testing equipment and worked down the carried values of those. All of the items that I’ve mentioned are non-cash charges.

Great. Thank you.

And thank you. This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. Well, obviously, we’ve covered a lot of material and took a little bit longer than usual. I think we all felt from our side that it’s important to shed as much detail on the environment and probably more importantly line of sight on the balance sheet, some of the actions we’ve taken and our view of the free cash flow elements as we proceed. So with that, I will conclude and we look forward to updating everybody early May on the product risk of the first quarter. Thank you.

Thank you, sir. Today’s conference has now concluded.