Welcome to the TETRA Technologies, Inc. First Quarter 2016 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 note this conference is being recorded. I would now like to turn the conference over to Stu Brightman. Mr. Brightman, please go ahead.

Thank you, Austin, and welcome to the TETRA Technologies’ first quarter 2016 earnings conference 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. I will provide a brief overview of our first quarter results and 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, earnings per share excluding the Maritech segment or other non-GAAP financial measures. Please refer to this morning'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 completion financial results for the period. In my remarks, I would like to cover an overview of the first quarter, our perspective going forward including the second half of the year. We missed the low end of our adjusted earnings guidance and we exceeded the top end of our…

Thank you, Stu. TETRA revenue of $169 million was down 34% from the fourth quarter, slightly better than the 36% decline in the U.S. onshore rig count and also due to the traditional slowdown from our offshore decommissioning business as adverse with the conditions that historically required us to bring our small fleet of assets to the dock. Without this offshore service, seasonal slowdowns sequentially were down 28% compared to 36% decline in the rig count as our compression business is less dependent on drilling activity. Adjusted profit before tax is attributable to TETRA shareholders with a loss of $31 million in the first quarter compared to a profit of $658,000 in the fourth quarter, representing a decremental margin of 33% as we continue to demonstrate our ability to flex our cost with aggressive cost management and the variability in our cost model. Adjusted EBITDA for the first quarter was $19.4 million or 11.5% of revenue in compares to $54 million or 21% of revenue in the fourth quarter reflecting the seasonality of our offshore decommissioning business and our lower rig count. We expect the seasonal improvement in revenue and earnings in the second quarter compared to the first quarter as weather conditions improved in the Gulf of Mexico and we deploy our decommissioning assets on a backlog of projects. In addition, we have historically enjoyed approximately $10 million sequential improvement in fluid revenue in Europe as our chemical sales in response to the sale of low treatment chemicals. In the first quarter, we recorded $117 million of non-cash charges as we took further write-off as goodwill and intangible assets mainly on our compression and production testing operating units. Excluding this non-cash charges $755,000 of severance, $620,000 of Maritech losses, and normalizing for an effective tax rate of 30%, our…

Thank you, Elijio. And at this stage, let’s open up lines for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Marshall Adkins with Raymond James. Please go ahead.

Good morning guys. Hi, Elijio, could you – thank you for the guidance on cash flow. Could you give me a little more color on that? Are we looking for any meaningful working capital improvements from here? Or just help us to breakdown what the cash flow guidance is based on?

We believe there will be some amount of working capital, but not significant in the remaining three quarters. We believe that the majority of the cash flow from here forward will be the TETRA earnings where distributions coming to TETRA from CSI Compressco.

Okay. Stu, let’s shift gears to fluid that was the area that disappointed at least in our model. Do we need the offshore side to get a lot better to see an improvement longer-term in there? And help us walk through your confidence, I guess, that you have mentioned earlier in the back half of the year for fluids?

Yes, I mean, I think, Marshall, the answer to that depends on the time periods you’re looking at. I think if you kind of take it in the second quarter we obviously expect a seasonal improvement in our European chemicals business that happens and we expect that to happen during the second quarter. Now, second quarter assumptions would be that North America activity probably is less than we had for the first quarter given that it’s a full quarter impact and it was declining as we exited the quarter. We don’t see that activity improving during the second quarter. I’d say as we get to second half of the year, we do have some visibility on some projects going forward and we’re confident they’ll continue to go forward and we’re positioned to supply Neptune and other fluids to those customers. So we do feel good about the second half compared to the first half. So we’re not going to be at the level we saw last year where those multiple activity and just a lot more work going on. I think longer-term for the fluids division to generate results anywhere similar to 2015. You’re going to need to have a much healthier Gulf of Mexico. But I think until that happens, we still have the business we feel good about going forward. And I remind you that as we’ve said before about 20% of the fluids is non-energy and that’s remaining steady, a little bit slow in the first quarter because of the mild winter, but over the course of the 12-month period we think that’s going to hold up fine.

Right, that makes sense. Last one to squeeze, one last one here, in your offshore services division, it sounds like you’re getting a lot of abandonment orders. What’s driving that? And usually when cash flows are down like they are for the industry right now, people tend to delay that. It sounds like there maybe regulation or something that is causing the kind of the table and force some of these abandonments?

Yes, I think – again, I think, we’re fortunate that we’ve introduced some new abrasive cutting technology that’s been very well received, so we’re able to integrate that with our heavy lift work. We see a couple of projects that maybe going forward. But I wouldn’t say there’s a regulatory element that’s contributed. There’s a lot of choppiness and noise out there with the intersection of customers that are wanting to delay for the reasons you mentioned, intersecting with especially having a very strong focus on bonding and adequacy of bonding. You know where that intersection demand is kind of really hard to pinpoint, but I’d say, when you put all that together, I think there has been some changes in the competitive landscape. I think we’ve strengthened ourselves on a relative basis. So I think you put all that together with our existing backlog as we stand today, we kind of directionally think we’ll be similar to where we’re last year. I would also add that we’ve taken a lot of costs out of that business. So, we get a full-year impact this year. So, favorable on the cost side, some regulatory pressures, some distressed customers put it all that together and I think it’s similar to last year.

Thanks guys.

Thank you.

Our next question comes for Sean Meakim with JPMorgan. Please go ahead.

Hi, good morning.

Hey, Sean.

Stu, I think I just wanted to start off taking about the compression business. From a TETRA perspective, do you see any significant strategic actions required to get the covenant waiver this year or – and we’ve seen some more distribution cut in the compression space. Just curious how that options plays into your decision making this year?

Yes, on Friday, I thought the team did a very good job explaining that we’ll have the requisite disclosures in the Q when that comes out over the next few days. And again, similar to everything we do Sean; hopefully, we’ve kind of portrayed that demeanor. We tried to be proactive. We took the distribution cuts last quarter when we thought that was necessary. We cut back the capital. We’ve taken the headcount down. We continue to have a relatively strong business overall. The EBITDA margins in the high 20s are still pretty stout. We’ve had customers delays of spending because some of the dislocation in the mid-stream. But as we look at it, we’re talking with the banks. We think [indiscernible] working through that. And the coverage ratio in the first quarter was still 1.11. So I think the metrics all support where we are and the objective is to maintain where we are, take the conservative approach on covenants. We’ve seen others do that with very little cost or impact. And we think it’s going to be a relatively straightforward process.

Okay, fair enough. And then on the cash flow, you talked about – I was just trying to see the debt repurchase being driven by in an attempt to cap structure. It sounds like pushing out maturities a bit to be safe. I guess, you know, as you think about that process, was there increased confidence in the free cash flow that helps you in that decision, potentially the worst outlook versus what you saw a quarter ago, just curious some of the other rationales behind that decision.

Okay, Sean, the thing we look at what we think did in the first quarter, we look out into, but going on in the current environment, we think that the amount that we have available to us in the revolver even in order to use a revolver to redeem the notes will give us more than adequate liquidity to operate in this environment. And we think this explicit – simplifying the balance sheet dropping our interest cost, and pushing our maturities will give us or puts us in a much better position to weather this downturn.

Okay, I understood. Thanks a lot.

And Sean, I would kind of just expand a little bit. As you know, we were always looking at what are the scenarios we’re going to manage through in a further extended downturn. So, I think, proactively looking at the balance sheet, looking at the options how we simplify, how we get more flexibility is something given where the first quarter and second quarter is – by the industry that all companies are doing and we do the same thing. I think we tend to be very proactive about that.

Our next question comes from Kurt Hallead with RBC. Please go ahead.

Hey, good morning.

Good morning.

So, I was curious now – you gave quite a bit of kind of color there on a fluid side. And with the rig count declining the way it is here in the second quarter, you look at the production testing type business and you look at the revenue declines there vis-à-vis overall activity. Can you just walk us through kind of the dynamics on production test as we get into second quarter and then maybe give a sense as to what the customer mix is and what you may see from the customers internationally as well as domestically on production testing?

Yes, I think you see probably overall comment on North American services both fluids and testing, probably lower activity during the second quarter, hopefully assuming prices stay in the mid to high 40s, so a slight increase in activity during the second half of the year in North America. I think Joseph and his team, as we did last year, continue to be incredibly focused on those customers that appeared to be capable of stepping up their investment, indicating they’re looking at doing that where they do allow us to differentiate some of the technology. So I would think second quarter will be down, second half will be up a little bit internationally on testing. The international markets certainly become more challenging. We have some projects we’re chasing in the Middle East remains to be seen whether those come to fruition. But we think it’s going to be a little bit better in the second half. In West Texas, it’s certain a geography where we have a lot of our equipments and a lot of our focus at the moment.

Okay. And then I just wonder if you could give us some additional color on the TTI specific CapEx for the year?

Kurt, for TETRA only we expect total year CapEx to be somewhere between $5 million and $10 million.

For TETRA only.

That’s correct.

Okay. All right, thanks.

Our next question is from James Wicklund with Credit Suisse. Please go ahead.

Good morning, guys.

Good morning.

Stuart, you talked about contract visibility in the second half. Can you tell me, do you expect an overall recovery in the second half or is this just specific contracts that you have and are these contracts long enough to get us through the bottom from the sound of all the talk about redoing de minimis covenants and everything, survivability is still everybody’s top issue. But I’m just wondering if the visibilities you see in the second half is based on expectations of a recovery or just the discrete contracts that you guys have won?

Yes, I mean, I’ll give the short answer and then I’ll let Joseph to expand on it. We’ve got specific backlog that we have that we were confident enough in the second half. Joseph, you may want to talk about overall activity in your view of how that’s going to play out?

Yes, I mean, specifically in the Gulf of Mexico, we have projects in our backlog and the timing of those drilling and completion programs put us completing these wells in the second half of the year starting in Q3. So that’s we’re why confident. A couple of our customers are in a mode where it’s drill, drill, complete, complete, and complete and complete which impact our completion fluids happens – happens in the second half of the year. In addition to that, I think Stu just mentioned a positive note on water management. You know that project will starts in around July and it will be made out of five individual projects and it will encompass somewhere between 160 and 260 wells starting in July, going into 2017 and that will have a visible impact to our results. With regards to international, we have had a few acceptances in the Middle East in terms of fluids and a little bit in Latin America. Albeit these are like small wins, they would yield contributions to our financial results in the second half of year. So that gives you an idea, why we see that the backlog is better compared to where we are in Q1 and Q2.

Jim, just to expand the last part, we do have the ability with our cost structure in the U.S. to look at some of those international opportunities on a spot basis beyond where we have operations to take advantage of our position.

Okay. And Stuart, you mentioned early in the call that you’re seeing increased pricing pressure internationally from fluids or competition like this – an overall competition in fluids internationally. Is it both somebody or others trying to gain market share, is it pricing pressure from your customers? And the contracts you’re signing internationally, do they reflect lower pricing? And what’s the duration of those? How long a contract are we willing to sign at the bottom of these prices?

At this stage, really we – the experience with regards to pricing pressure in the international market is really limited to the larger oil field services company as they continue to utilize their size and revenue scale [indiscernible] for market share. Now, we’ve also seen a few bizarre customer decisions that were not only driven by top control, but the willingness except a little bit more additional risk as an example, willing to do open well completions with no casing, or no liner and relying only on the formation and competence and only some sort of sense or flow control and completing that way. That has an impact to TETRA, because we’re on the completion cycle for the completion fluids. In one particular case, partial project award was given to less proven suppliers with limited or no capability. So the reason we’re looking at the second half is we feel that those will either come back to proper risk mitigation, come back to proper service delivery, proper cost analysis and maybe improve our share with these international projects.

Okay. And then my last question if I could stick [ph] one and you talk about offshore and you got your barge coming back out, how is pricing held up in the P&A business [ph] through this horrible downturn.

I mean, I wanted to give you a little bit of soft division visibility, the P&A where downhole services activity is overall down year-on-year. So it’s not really due to pricing, but more towards individual activity. With regards to have we left with our investors, we’ve experienced little pricing pressure with a few percentage points down compared to 2015, but we’re pleased with over three quarters of our backlog filled for the rest of the year. So when the dollar gets spend we’re going to benefit from that. For diving, for the routine generic commodity diving, there has been and continues to be pricing pressure, we play in that market, but we have also significantly seen our market share improve with what happened in 2015. And with the recent award towards the DP-2 Vessel and the Gulf of Mexico, we feel that we would have good access to additional projects that we did not bid for last year, come near the second and third quarters of 2016.

Okay, okay. Gentlemen, thank you very much. I appreciate it.

You’re welcome.

Our next question comes from Marc Bianchi with Cowen. Please go ahead.

Hey, good morning. You guys mentioned the, I think about a $10 million seasonal benefit that you expect in fluids or that you traditionally see in fluids. Is that enough to offset the rig count declines, are you expecting fluids to be up in the second quarter I guess, this is my question.

I think, go to Joseph.

I think overall, this will – maybe lessen the impact of the overall land activity and offshore activity in the first half of the year. I would not say it completely compensates for the overall results.

Okay. And then, I guess to looking to second half you’ve got the expectation for the projects in the GOM, is there any drilling success risk for those, are there any wells that are being drilled right now that if perhaps the drive that could impact the second half expectation.

I mean, look to be honest here. We didn’t expect to be hit with two unexpected dry wells, where two major customers in the Gulf of Mexico and the appraisal phase of the project after some costs have exceeded $200 million. So for that to repeat in Q3 and Q4, I’d be completely shocked. But is the risk there? Yes. Risk in drilling and the Gulf of Mexico and offshore is always there, but I’d be completely shocked if those projects that we have hit drive wells again.

Right, okay. Thanks for that Joseph. I guess just one more on the working capital in the first quarter, or sorry on the free cash flow in the first quarter, how much working capital benefited your free cash flow.

A little over $10 million.

Okay, okay. As we think about the free cash flow for the balance of the year, it’s sounds like it might be more back-half weighted just because of the activity, but I would expect that maybe as activities coming back you would be seeing your working capital be a headwind to free cash flow. Can you kind of talk through the underlying assumptions there Elijio.

Yes we have expect that between April and end of the year, we’re not getting any material benefit or use of working capital. And from here forward the free cash flow is earnings driven.

Okay, thank you. I’ll turn it back.

[Operator Instructions] Our next question comes from Martin Malloy with Johnson Rice. Please go ahead.

Good morning.

Good morning Martin. On the production testing award that you mentioned, I think you said 160 plus wells, what’s the term which that covers? And can you help us just frame the size of this relative to the normal amount of wells that you are doing on an annual basis?

Okay. So just to correct the project awards I mentioned was for water management and for really produced water and reuse, but let me give you some visibility. I think the question maybe how is the second half for production testing? We believe that the dock inventory had reduced significant in Q4 moving into the first part of 2016. And in recent weeks, we have seen that trend kind of shift a little bit. As an example, from our internal database of tracking the drilled and completed wells on land on – in U.S. lands, 700 to 800 docks were being added monthly in the second half of 2015. If you look at the first part of 2016 only 200 to 250 wells were being added and the number now is trending closer to over 300 to 350 per month. So, this is based on spud to completed record base. And maybe it gives you a little bit of idea why we think that if that trend continues, from the second half with stability of commodity prices closer to 50s and 40s, we think that some of our customers will just maybe not rush, but start completing these wells the same way we competed these wells in Q4. And that’s why from the production testing perspective, we see a slight improvement in the second half as well.

Okay. And then on this water management contract, are there other potential awards like this out there? And can you just help us with the size of this versus what you normally do during the course of the year?

This is probably as big as any projects we have seen. It will be the largest water – produced water and reuse program in North America. Our customer is expected to save millions in water reuse and disposal cost in addition to footprints. Trucks on the road, pits, clean up, pits disposal wells and so on. So, we hope to use that as a case study the same way a few years ago. We use the TETRA field case study to save our customer about $11 million to $12 million. If we’re successful, I am sure that other customers may start considering a similar type of project to reduce that footprint in the Permian, in the Mid-Continent area and other basins in U.S. land.

Okay. Just one last question if I can. On the Compressco side, particularly it’s a lower horsepower units, what gas price do you think you need to see for utilization to stabilize?

I think trending the gas price in the first part and exiting 2016 around $1 to $1.5 maybe $1.7 was not very good for us, but trending towards the $2.1 and getting closer to $2.5 will drive a little bit our customers to go back and maybe put these gas jacks into action. We’ve seen a few instances where we had $2.2 that there was some additional interest in putting the low horsepower back. But overall, year-on-year was still down.

Okay, great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Stu Brightman for any closing remarks.

Yes, thank you. Again as always appreciate the questions. And we’ll look forward to updating the Group on the second quarter results as we moved into August. So thanks again.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.