TETRA Technologies, Inc. (TTI) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to TETRA Technologies Third Quarter 2017 Results Conference call. The speakers for today's call are Stuart M. Brightman, President and Chief Executive Officer and Elijio Serrano, Chief Financial Officer for TETRA Technologies Inc. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Brightman. Please go ahead, sir.

Thank you, Denise. And welcome to the TETRA Technologies' third quarter 2017 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. I will provide a brief overview of our third quarter results then turn it over to Elijio for some additional details, which will then be followed by your questions. I must first remind you that this conference call may contain certain statements that are or may be deemed to be forward-looking statements. 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're cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to net debt, free cash flow, adjusted EBITDA, adjusted profit before tax or adjusted earnings per share or other non-GAAP financial measures. Please refer to this morning's news release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In my remarks, I would like to cover an overview of the third quarter and our outlook for our businesses for the remainder of the year as well as our expectations going into 2018. The third quarter was extremely solid for all of our business segments as each reported improved sequential adjusted EBITDA. Additionally, TETRA only free cash flow was $17.8 million, an improvement of $11.8 million from the second quarter. The North America land businesses are all cycling up, especially our water management and compression services. We are also seeing pockets of strength internationally. The Gulf of Mexico activity remains somewhat subdued but our CS Neptune technology has differentiated us and allowed us to outperform the industry in the Gulf. Our fluids business third quarter revenue increased 5% sequentially despite the seasonal drop in the Northern Europe industrial fluids revenue that generally increases by approximately $10 million during the second quarter. Two significant contributors allowed us to increase revenue sequentially and to outperform last year by 49%. The first was the completion of our CS Neptune project. This is the project that started late in the second quarter and it was completed during the third quarter. This is another successful project where our zinc-free completion fluid allowed us, our customer to complete their well without exposing the accrued oil to zinc and allow them to operate the well without environmental concerns associated with zinc. As soon as that project was completed, we immediately mobilized to the next well, in the same field and are currently working on that project. This project is a recompletion of a previously completed well and it will be finished during Q4. We are in discussion on a project tentatively scheduled for mid to late 2018 and are in the early stages of discussions for two other potential projects. All of these projects are outside the Gulf of Mexico, the second two reference projects are significant projects where the timing is still too early to walk down. The second significant contributor to our strong third quarter fluids results was a major ramp up in water transfer activity onshore North America. Sequentially, revenue was up 46% for water transfer as the benefit of improved pricing and the capital redeployed pushed our water transfer revenue up 46% from the second quarter of 2016. Earlier this year, we started adding incremental hose capacity to address the more intense completion activity. We have ordered additional lay flat hose that is being delivered monthly through the first quarter of 2018. Revenues and margins for water transfer are approaching record highs for us. Our international offshore fluids business also saw stronger activity levels during the third quarter, particularly in the Middle East. As a result of all these factors, revenue exceeded $90 million for the first time since the fourth quarter of 2015 and adjusted EBITDA margins were very strong at 33%, an increase of 870 basis points from the second quarter. As stated earlier, for the fourth quarter, we expect to see the benefit of completing the current CS Neptune project and expect the water transfer business to continue to improve. For CSI Compressco, during this third quarter we saw an acceleration of positive momentum from many of our customers. The number of request for proposals, quotes and inquiries asking about availability of equipment increased as the quarter progressed. We deployed an incremental 23,414 horsepower during the quarter, increasing the amount of deployed horsepower by 2.7% to 886,971 horsepower. This increased demand is to address customers gathering system requirements in West Texas, South Texas, New Mexico and the Oklahoma areas resulting from the higher gas content from new crude oil wells. Customers have changed their focus from acreage acquisition to increased production from the existing fields requiring additional compression capacity for the gathering systems. During the downturn, many customers rationalized their gathering system and eliminated excess compression capacity. As incremental wells are being brought online with a higher gas mix than anticipated, they are finding themselves short of compression capacity and reaching out to the industry to meet that demand. Many wells are coming online with a higher GRO or Gas to Oil Ratio that requires incremental capacity. We are also seeing increased demand for gas lift applications and for enhanced oil recovery applications at the well site that impact our smaller and mid-sized compression equipment, with particular areas of strength being the SCOOP/STACK and Permian basins. Gas jack units to address late life wells are also seeing an increase in activity, particularly in the Rockies. As a result, utilization increased 250 basis points to 81.4% at the end of the third quarter. Our larger horsepower equipment is focused on gathering systems is now at a utilization level of 90.1% up from 89.6% at the end of June. 47% of our total deployed fleet is greater than 800 horsepower in size. We've initiated orders for additional large horsepower equipment to meet the increasing demands from our customers focused on West and South Texas. This additional equipment will begin arriving soon and be deployed beginning in the fourth quarter and through the third quarter of next year. We are also evaluating opportunities for additional equipment to be ordered, fabricated and deployed. In addition to the strong environment from the deployed fleet, we saw a meaningful increase in new orders for the fabrication and sale of our equipment. Orders received during the quarter were $37 million compared to an average of $12 million per quarter during the prior three quarters. As a result, our backlog increased from $24 million at the end of June to $53.6 million at the end of September, the majority of the orders for large gathering system assets are from a domestic customer base. We reported sales of new equipment in the third quarter of $7.5 million and with the $37 million of new orders our book-to-bill ratio was 4.9 times. Third quarter production testing division revenue increased sequentially by 19% and generated a positive adjusted EBITDA of $1.1 million or 5.6% of revenue. This improvement was up without the benefit of any significant one-off early production facility sales and it was driven by improvements from all geographic areas, including North America flow back testing, Saudi Arabia in offshore rig cooling. Our strongest areas in North America remain in the Permian and Delaware basins. For the fourth quarter, we expect to see this positive momentum continue. The environment remains challenging, but we are beginning to see opportunities to increase pricing for those large customers that are focused on service and safety. Our offshore services segment revenue increased 16% from the second quarter to $32.7 million, adjusted EBITDA was $3.3 million or 10.2% of revenue, reflecting the seasonality of the business. Our decommissioning business underperformed relative to our internal expectations during the quarter by approximately $2 million as Hurricane Harvey impacted the performance with non-billable time as we brought our assets to the safety of the dock to avoid the hurricane. We did not normalize our adjusted EBITDA to reflect this impact from Harvey, some projects were delayed from the quarter moving to the fourth quarter as a result of the weather related events. On August 1st, we successfully launched our fully integrated ERP system, CSI Compressco that automates our quote to cash process and streamlines our business processes. Our sales team and field technicians are now connected with real-time visibility to all resources with automated resource scheduling, improved parts management, providing us real-time metrics to support us in managing the business in a rapidly changing environment. We've started to receive the benefit of lower cost and increased efficiencies from this new system and expect to generate more than $4 million of annualized cost savings by mid-2018. To date, we've seen about $1 million of these annualized savings and expect to seeing the full benefit by the middle of the year. In addition, we also expect to see the benefits of reduced working capital by accelerating our invoicing and reducing our field inventory levels. The timing of the system deployment appears to be ideal as volumes are increasing and as manpower requirements are increasing and which will leverage the system to more effectively respond to the market opportunities. I would also add that I spend a lot of time with the CCLP team over the last several months and as we've done the deep dive, I'm extremely excited about the opportunity set and the team is very focused on executing new growth opportunities. Overall, in summary we're very pleased with the third quarter despite the negative impact from Harvey on the decommissioning business, seeing stronger momentum for the US onshore businesses. As I said, we are investing incremental lay flat hose for water transfer and large compression investments to support a growing need in the natural gas gathering systems. We continue to make progress on expanding our customer base with CS Neptune. With that, I'll turn the call over to Elijio to provide some financial highlights.

Thank you, Stu. Total revenue of $216 million increased sequentially by 4%, reflecting the seasonal improvements in offshore decommissioning, strong production testing and water management activity levels in addition to the completion of the latest Gulf of Mexico CS Neptune project. On a consolidated basis, adjusted EBITDA, excluding Maritech and unusual charges was $45.1 million, with adjusted EBITDA margins of 20.8%. This represents an improvement of 710 basis points over the second quarter. Earnings per share were $0.03 for the quarter compared to a $0.10 EPS loss in the second quarter. Adjusting for special items, earnings per share in the quarter were $0.04 compared to a loss of $0.04 in the second quarter, also adjusting for special items. TETRA only free cash flow was $17.8 million in the third quarter, when compared to $6.1 million in the second quarter, an improvement of over $10 million. TETRA's balance sheet, excluding CSI Compressco, improved on the stronger earnings and free cash flow. TETRA only net debt declined to $104 million from $120 million at the end of June. At the end of September, there were no amount outstanding on TETRA's $200 million revolver. Cash on hand for TETRA was $13.5 million. I'll now provide a bit more color on each of the segments. Fluids Division revenue increased sequentially by 5% to $93 million due to the higher revenues from the Neptune project in the Gulf of Mexico, higher international offshore completion fluids and the exceptionally strong water management activity levels. The increase in the third quarter was achieved despite an $11 million sequential decline from our Northern Europe industrial fluids revenues due to the seasonality of that business. And as Stu mentioned, we are currently on the next CS Neptune project in the Gulf of Mexico and expect to complete that in the fourth quarter. The growth of the North America water management business is reflected the industry trend of more water required for completions activity. We have added incremental capacity by buying and deploying more lay flat hose. The incremental capital is on the back of better pricing to achieve our target rates of return. Utilization of that hose remains high. We have additional hose in order that is being delivered monthly into the first quarter of next year. The vast majority of our growth capital for TETRA is for water management where we [ph] recurrent support our investments. Production testing revenue increased by 19%. Adjusted EBITDA increased by $1.6 million to a profit of $1.1 million or 5.6% of revenue. Fall through margins, or incremental adjusted EBITDA margins were 56%, very strong fall through on the incremental revenue. The increases occurred in all our geographic areas including Saudi Arabia, North America and with our offshore rig cooling services offering. For CSI Compressco, the third quarter revenue decreased sequentially by 5% due to the timing of large new equipment sales. Compression services revenue reflecting the fleet of deployed equipment was $51.7 million and increased sequentially by 2.8%, reflecting the high utilization from equipment previously [indiscernible] that has been deployed in addition to the initial impact from better pricing. Compression services margins up 5.1% improved 240 basis points from the second quarter. Compression services fuel cost declined 1.6% or revenue increased. We have been incurring significant make-ready costs to prepare for deployment equipment that was previously idle. The vast majority of our large equipment is now deployed and make-ready costs going forward are expected to be minimal. In addition, we had a significant amount of internal resources focused on completing and deploying our ERP systems that are now dedicated focused on operations, adding incremental management support to an expanding business. Adjusted EBITDA for the third quarter was $20.9 million for CSI Compressco. We expect fourth quarter adjusted EBITDA to be sequentially better than the third quarter, excluding a benefit of a $3 million insurance settlement that we received for CSI Compressco. During the third quarter, we recorded a non-cash fair value adjustment to the Series A Preferred convertibles for CSI Compressco that improved earnings by $1.3 million. We've excluded this from adjusted EBITDA for CSI Compressco. In the second quarter, this non-cash value adjustment for the Series A Preferred's was $5.5 million, also favorable. For CSI Compressco, during the quarter, we received the $3 million settlement of insurance proceeds for CSI Compressco for equipment damaged in prior quarters. Offsetting some of these gain from the insurance proceeds were the premiums on our insurance coverage, the deductible and the policy and the off [ph] margin of these assets, which combined total approximately $1.5 million on an annualized basis. During the quarter, we also incurred for CSI Compressco approximately $583,000 of expenses to deploy our new system, mainly training related cost, that have reduced EBITDA in the quarter. Distributable cash flow for CSI Compressco was $10.8 million, a sequential improvement of $5 million or 87%. This resulted in a very strong coverage ratio of 1.56 times. Free cash flow for CSI Compressco defined as cash flow from operations less all capital expenditures was $11 million, up from $5.3 million in the second quarter and it's 15.3% of revenue. The leverage ratio at the end of September for CSI Compressco was 6.33 times, safely within the covenant of 6.7 times. Net debt for CSI Compressco declined by $5 million from $504.7 million at the end of June to $499 million at the end of September reflecting the stronger free cash flow generation. Offshore services revenue increased from $28 million in the second quarter to $33 million in the third quarter, reflecting the seasonality of the business, with the majority increase coming from our heavy lift operations. Adjusted EBITDA was positive at $3.3 million or 10.2% of revenue, despite the impact of Hurricane Harvey that Stu mentioned earlier was estimated to be at $2 million. TETRA only free cash flow guidance for the full year is expected to be between $15 million and $30 million. We have a revised the lower end of our prior guidance by $5 million for two factors. The first being the impact of Hurricane Harvey that pushed several projects from the third to the fourth quarter, with the expectation that those receivables will be collected in the January time period. The second is the continued investment that we are making for capital to support the demand in water transfer, with improved pricing and therefore improved returns. This is an area that appears to be outperforming most US onshore businesses and we intend to capitalize on this opportunity given the high paybacks we are receiving. For the third quarter, consolidated EBITDA was strong, profit before taxes improved significantly and net income attributable to TETRA stockholders was $3.1 million positive. EPS was $0.03 on a GAAP basis and $0.04 on an adjusted basis. TETRA's total leverage ratio at the end of September improved to 1.95 times, reflecting our improved earnings and lower debt levels from the better cash flows. As we transition into profitable earnings, I would like to remind everyone that TETRA has a significant tax loss carry forward that can be utilized to offset or materially reduce US income taxes in the future. Therefore, as profitability improves, and we move into a pretax profit position, free cash flow should improve faster than profit before taxes for US earnings. The same applies to CSI Compressco. When we purchased CSI in 2014, we have assigned a significant amount of the purchase price to the value of the assets, which can deducted from US income tax return with accelerated depreciation to offset or materially reduce US income taxes for taxes derived from aftermarket services, new equipment sales or any other non-qualifying income. Overall, we are very pleased with the third quarter, especially with the 33% adjusted EBITDA margins for fluids, the 29.1% adjusted EBITDA margins for compression on top of positive EBITDA for production testing and offshore decommissioning. We have also completed the successful deployment of the CSI Compressco ERP system without the challenges normally experienced with large ERP roll outs. And this new system will be the path towards incremental cost savings and better tools to manage into our growing market. At the end of September, TETRA had a high leverage ratio of under 2 times at $1.95 million given as the balance sheet to take advantage of this strong market. And with that we'll now open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Sean Meakim of JPMorgan. Please go ahead.

So, Stu, maybe just wanted to start with water management, you know the numbers were very impressive. Could you give us a sense of some of the underlying drivers of that acceleration, maybe breaking down volume versus price and what that read through remains for Q4 and into 2018?

Yes, I think the good news is we saw a significant contributor from activity and pricing and the good news is we saw it across most of the basins. So, we kind of had good breadth and coverage there. We will continue to invest in the business, I expect as we go forward, we'll continue to see the benefit of the additional investment as it gets deployed as well as the expectation that will continue to have a favorable pricing trend, but it's definitely a strong mix of both activity and pricing.

Could you give us a sense of the incremental contribution between the Neptune project versus water management? I'm just trying to get a sense of the relative contribution on the incremental margins something to that effect.

While we don't want to get into specific margin on those projects, I would say that both were significantly strong than most of our other businesses fall through margin on the incremental revenue.

So then just thinking about the incremental capital you're going to deploy, you mentioned the paybacks are quite strong, could you give us a little bit more detail on what does payback look like.

Yes, I think in the water business, today's activity and today's price levels, we're going out there, we certainly expect that's going to be 12-month, 18-month type of payback and that's the way we're looking at it and that's the way it's been working for us. And hopefully, in some instances it will be less but that's probably a conservative estimate for us.

Okay. Very good. Thank you.

The next question will come from Stephen Gengaro of Loop Capital. Please go ahead.

I guess a couple of things, but if I could start with fluids, as we think about fourth quarter, is the CS Neptune revenue contribution similar in 4Q versus 3Q? Or is it better or worse?

It's going to be significantly lower as we said those are wells that we've bid in before, it's getting finished. So, I think we've always been fairly transparent that the one that was going to finish during the third quarter was a much larger contributor.

And so outside of fluids, when you look at your other couple of segments, I mean obviously you got offshore services, you're trying to get some fourth quarter seasonality, but in the other businesses, they both sound like you're going to get sequential EBITDA improvement in both testing and compression and fluids, I guess will play out based on how we're managing and new hose comes into the market relative to hose with some of that revenue.

Yes, I think that's accurate. We expect to see a compression in testing both trend up sequentially. On the compression, we expect to see the utilization continue to improve, we'll start to see some of that backlog on equipment sales convert to revenue, that's going to be a much bigger impact in the first half of 2018 and the fourth quarter just because of lead times associated with that. And on the testing, it's certainly moving at a much slower pace than the water as we've said in the prior quarters, but we're starting to see some pockets where we're getting some improved pricing and a little bit more activity.

Stephen, I would add that on the decommissioning side, when we went through the hurricane Harvey, many clients pushed some of their projects into Q4, but it's going to be a matter of when the difficult winter conditions kick in and we bring our assets back to the dock so the strength of the decompression [technical difficulty] weather gets challenging and we cut the season short.

Okay, great. Thank you.

Next question will come from Kurt Hallead of RBC. Please go ahead.

So, and maybe my quick follow-up for you guys, kind of looking at the positive dynamics that are driving the demand for your lay flat hose. Can you give us some indication of what the magnitude of pricing improvement you've either seen or expect to see on a go-forward basis? And in that context, what can we take away from those - the demand dynamics, should we read that more as a kind of leading indicator for just increased completion activity or is this more of a kind of a lagging indicator and just telling us what we already know about completion activity?

You know, I think it's several things. I think it's certainly an indicator of the completion activity and that's how that benefits us is on the water management. So, I think the market activity is significantly increased. Again, we have exposure in all the key basins. So, we have the ability to kind of look at our asset base and move it as necessary to the higher performing areas. So, I think that's a huge advantage of being in all the basins that we've always enjoyed. I'd say, the pricing is probably up high-single digits, it's not 20, it's closer to 10, but it's been moving up at a pretty good rate, we've deployed more capital. Our management assessment is that we've taken some market share during the process as well. So, I think those three variables activity price share, customer mix, re-deployment across basins, have all led to that.

And then with respect to the Neptune and the potential projects, I know you might be kind of reticent to call out maybe specific areas, but as we think about the opportunity set, and maybe we kind of broadened out so you can give us some element of color, just kind of more of a Western Hemisphere or Eastern Hemisphere opportunities for Neptune?

Yes, I think it's both. I think we feel good that we're expanded in the funnel to continue to focus on the Gulf as well as Western Hemisphere outside the Gulf of Mexico and several geographies versus the Eastern Hemisphere. I mean, it's a major effort for the fluids management team to expand that leverage, the capabilities of what we've proven in the Gulf. So, the opportunity set's there, I think as I said, the timing of this probably more of a second half 2018 revenue, but we've got two or three that we feel pretty comfortable with.

And maybe if I just finish up and kind of stay along the lines of the fluids and the Neptune element of the business, can you give us some insights on what you may be thinking about doing to broaden out the distribution of that product?

I think first and foremost is continuing to have the team in front the end user. So, at the end of the day, the end user has to be convinced this is the right technical and commercial application. So, we've added technical sales resources to make certain that message continues to be delivered and the value add delivered to the end users. And then with that, it's always a function of how the end users continue to - how they contract. In many instances they contract directly, in other instances, they may use the bundled fluid solutions. So, we try to work all the elements of that to-date strength in our success has been direct, but that may be something that develops as we go forward. But getting to all the potential customers that have needs that we think we saw with our technologies with the teams predominantly focused on.

Great color. Thanks Stu.

The next question will come from Praveen Narra of Raymond James. Please go ahead.

In terms of the capacity adds on the water transfer side, can you talk about how much capacity you're adding relative to your current fleet or is it kind of 20% add on the lay flat, how do we think about that?

It will be a double digit, I prefer not to get that precise, but it's going to be certainly double-digit percentage increase to what our current capabilities are.

And then I guess just kind of what Eli has said before in terms of the payback period. Is it fair to think of the margins on the water transfers being higher than the overall fluids division?

I'd say that if you look at the overall margins there over the course of the full cycle, they're probably at or slightly higher than what the average is. The margin this quarter was very, very high, so I prefer not to comment on any specific quarter. But generally, I'd say over the fourth full cycle, those margins are certainly hold their own versus the average for the segment.

And then just one more from me on the offshore projects that are in the pipeline and I certainly understand that you won't disclose any information particular about them, but should we think of the scope of that work as being similar to the wells done in the 3Q and then also could you talk about, if this would be a new customer or kind of similar customer profiles what we had?

Yes, I would say, these would be additional customers for Neptune, not for TETRA.

Right.

In most cases. And I would say they're going to vary in size, but in general, I would probably expect the size of those individual projects to be less than what we saw in the third quarter, but still very significant.

Perfect. Thank you very much guys.

The next question will come from Jacob Lundberg of Credit Suisse. Please go ahead.

Just a clarifying question on Neptune in the quarter. So, was there any revenue recognized from that project that has been deferred from last year, the one that you're working on now in 3Q or is that entirely contained within 4Q?

That will all be within Q4.

Okay. All right. And then I guess, can you talk a little bit about the early production facility sales that you're - I guess on the 2Q call you're talking about some early production facility sales in 2Q 2017, did you realize any of those sales in 3Q and what's the outlook for 4Q?

Yes, none of those were recognized in 3Q and there is one that we expect will come in 4Q.

And I guess how do you think about that out into 2018?

I think we've, over the last couple years, had one or two or two per year. And I think that's kind of our ongoing outlook. It's a good business. I think we've done a good over the last several years of improving the commercialization in terms of cash flows and making certain at the end of the project, there is a capability to sell the asset and not have anything stranded. So, the team has done a good job of learning lessons, finding where our sweet spot is. And in some instances, trying to tie that up with some compression as well, both the testing and compression guys continue to work closely together to find that synergy. So, I'm very encouraged by that.

All right. And then I guess, can you give us a sense of the relative size of the water management business within fluids? Maybe if we just look at 3Q, like roughly what percent of those revenues are from water transfer?

I think we've always said that through - that it's typically about 20%, 25% of the segment.

Okay. And then that still holds true?

In general, yes. Yes again, I'm trying not to get that precise within quarters, but yes, I think that holds true.

Jake, the only think you have to take into account is when we have a big Neptune project in a quarter, that skewed that percentage, but Stu's comment, if you look at it over a full year period, I think it's a good number.

All right. Thanks for the color guys.

The next question will come from Martin Malloy of Johnson Rice. Please go ahead.

I guess I had a question on Compressco and you mentioned the higher gas liquids mix and also, I think there was a pick-up going on in terms of demand for gas. What size horsepower units are you seeing go to those sorts of applications?

On the large [ph] gas gathering systems, they're going to be over 800. And then on the gas lift, a lot of them are going to be 200 the 400.

And just in terms of the water transfer, could you maybe talk about how that market works with your customers, do you have MSAs with them or is it kind of well to well? How those crews are priced?

Yes. I mean, it's on kind of a day rate basis and it's a combination of - with most of our customers will have MSAs, will be first or second call, hopefully first call and we'll have pretty good visibility into their completion program and pretty good visibility out at least a quarter. But we've got ongoing MSAs that we have with our major customers.

Marty, the practice is that we will follow-up frac crew and then the customer just takes us to follow-up frac crew as they complete each of their wells.

Okay. And then if I could just one last question with the ERP implementation that's going on at Compressco, can you maybe talk about the potential impact that you're targeting on the DSOs there and what that could mean in dollar amount?

So, the capability that we've received is not only for the field services, but also for parts sales or aftermarket services. Our systems, when we were out there performing services or selling parts, is gathering data real-time, every night we upload the data and invoice that night without any manual intervention. Most companies accumulate paper work, documentation, get signatures and invoice a few times during the month. So now we're going into a nightly invoicing process that should have a nice impact and if we believe there are opportunity to increase - improve DSO, yes, somewhere in the three, four, five, six days area, that could represent the free cash flow benefit to us somewhere between $3 million and $5 million.

Great. Thank you.

The next question will come from Connor Lynagh of Morgan Stanley. Please go ahead.

I have a little one for me here. As you look at 2018, which of your segments do you think is going to be the largest contributor to EBITDA growth and I'm thinking more in a dollar basis, because obviously we've got a scale.

I think it will be probably the two largest groups, fluids you'd expected two largest groups, fluids and compression to lead the path. I would expect next year the continued growth on the onshore fluids, the continued growth internationally and I think the Gulf of Mexico in general is going to be relatively modest next year. I don't think 2019 is the year where we see that slip and uplift in activity in the Gulf of Mexico completions. That's probably a year out from there. And again, kind of the wild card is how many of those Neptune projects we're able to execute and get revenue in the second half of the year. I think taking that aside, other businesses within fluids we feel very good about. I feel good about that, but that one's a little lumpier and the timing's always something that we talk about. I think testing were on good trends. Domestically, I think we see opportunities internationally, so I think that's going to be good in compression. We're gearing up with more capital. We've seen the utilization go and offshore services, I would expect some of the deferred demand that was a natural consequence of the hurricane, hopefully comes to higher activity levels next year and as we've said before, we're very strong financially compared to a lot of the folks that are in that space in the Gulf of Mexico. And I think that's a real advantage that our customers understand. So, I feel good about all of them, but short answer to your question, fluids and compression.

And how do you think about - so I think you called out the large compressors and water management as areas where you're basically fully utilized or close to it and investing capital. How do you think that utilization across the rest your business? Where is the next area that you're going to need to capital and is it likely that you're going to have a lot of capital spend in 2018?

No, I think after those two areas, the rest them if get you think through the businesses, offshore services, we've got the assets we wanted, if business were to pick up, we would go get some third-party assets to go back to back with that demand. So, we're not going to be large investors into that space. Our fluids manufacturing, we still have a lot of utilization available, even with the growth in fluids we're not pressing that anywhere close to the limits. So, I think that's a little bit of maintenance capital, which we have on an ongoing basis very little growth capital on that. In testing, we may have pockets of sizes of equipment where we need a little bit, but I think by far the growth capital next year will be the large horsepower compression and the water side. I think that is going to be the vast majority.

And I would just sneak one more in here. So, you mentioned the hurricanes and offshore services. What is the impact of the hurricane season you had is there an excess backlog or at least a visibility on there being an excess backlog of projects for offshore services next year?

I think what you've seen is - you've seen the season extend deeper into the fourth quarter than usual to make up for those delays. And again, we had some bad weather as you recalled in the second quarter that's not quite as material, but impacted. So, I think you've seen that movement of timing and our customers being impacted as well by the earnings hit on disruption of production associated with the hurricane. We've had several of them come back and say, you know the orders in the backlog that you have, we're choosing to move that to next year, and that's part of what we've seen. So again, I would assume everything else being equal, that the activity and the normal weather situation would be higher next year.

Got it. Thanks a lot.

The next question will come from John Watson of Simmons. Please go ahead.

Two quick ones on the production testing side. You gave some helpful guidance on pricing for water management. What's the pricing environment look like for flow back? Has that improved at all and do you expect improvement in the near term?

Yes. I think between - and I think we have seen some improvement, I think a portion of it is the underlying market, I think the portion of it is the customer base that we have and us being very tactically focused on which customer, certainly there's mid single-digit but it's sequentially better than we saw in the first half of the year.

And then on, flow back again, are your crews spending more time on location than they were maybe six months ago? And can you talk to us about how that's benefiting production testing earnings?

Yes, I think the jobs are long where they're spending more time here that's part of the revenue improvement that we're seeing here. So, I think that is a positive trend.

And then maybe one more on the offshore side. With Brent in the mid-60s, is divestiture of the offshore segment, is that more feasible or is that not something that you are thinking about right now?

We're thinking of making more money in that business. And I think Brent in the mid-60s would be a catalyst to that. And in any business, you have, you always have a better scenario or range of options with better results.

Okay, understood. Thanks guys.

The next question will come from Blake Hutchinson of Howard Weil. Please go ahead.

Just starting, and I apologize if I missed this, if it was covered specifically in Eli's commentary, but I guess with the change in free cash flow guidance for the year, if I'm following the annuals properly, we should expect somewhere between $5 million and $15 million for 4Q. And I guess to step back in the guidance was all or more than all attributed to the greater outlay for the onshore water handling equipment?

There are two items, Blake. That's one of them is that we're investing more in the water handling, given the strong returns. And the other item is when Hurricane Harvey came across, some of our customers pushed some of their work from Q3 into Q4, that work they will do in October, November. Those receivables are more likely it would be monetized in January. So, the combination of those two is what caused us to drop down our lower end of the guidance by $5 million.

And are we looking at correctly to say $5 million to $15 million, would kind of be the bogey for 4Q?

Yes. That's to get us to the guidance that's what we laid off for the total year.

Great. And then Stu, I guess just specify or clarifying your commentary around Neptune for next year, you said all the opportunities that you had visibility on were international would you I guess, given that, if you don't have a line of sight on a project in the Gulf at this point, would you caution us to include that or could that still come back into the picture?

I think that still could come back, I think we've got one or two, I think the more advanced internationally.

Okay, that's helpful. And then just a final question. Stu, at the beginning of your preamble, you talked about pockets of strengths internationally, maybe you could just elaborate on that beyond just the kind of Neptune opportunities?

Yes, I think we continue to see increases in our fluid sales in the Middle East, which have been good. And I think we're seeing some good opportunities in the North Sea that have been good. Those would be the two major geographies.

Okay. Great. Appreciated. I'll turn it back.

The next question will come from Cole Sullivan of Wells Fargo. Please go ahead.

Most of mine have been already covered, but in the US Gulf non-Neptune completions activity, can you give us an update on how that tracked in the third quarter, and how you kind of see that over the next six months, any discussions, visibility you're seeing there?

Yes. I'd say it's been relatively modest during the year and I would expect next year to be similar. I think we've done a good job on the areas that are out there, but some of the major projects just aren't out there at the moment so it's kind of modest, nothing great.

And you kind of touched on the relative size of the international Neptune projects or prospects out there. Certainly, from a revenue basis, it maybe a little smaller I guess in scope, how do we think about that when we look at margins?

Yes. I think, as I said earlier, the ones that we're looking which is smaller projects and I think they'll be solid margins, but just smaller in scope compared to what we've been working on this year. I'd like to expect margins to be very good on those opportunities.

All right. Great. I'll turn it back. Thanks.

And the next question will be a follow-up from Stephen Gengaro of Loop Capital. Please go ahead.

Two quick ones, one on the fluid side. Are you willing to tell us, if we look at the pretax margins that 26.7%, which were up almost 1,000 basis points sequentially? I would imagine 4Q would be between the second and third quarters but north of 20%, is that fair?

That's probably too precise questions, Steve. So, I think your initial predicate, would you be willing to is, respectfully no. I think we in kind of gave you some good information on the kind of the contributions of both water and Neptune during the third quarter as well as what normally happens in the second quarter because some of the seasonality of the business in Europe. That was an easy question.

I have to at least try. The CapEx levels as we go into 2018, any guidance there?

I would say, we haven't got through our business plan yet, that's something we'll talk about when we catch up in February. And going back to one of the earlier questions, I think the capital allocation next year is clearly going to be on large horsepower for the compression side and continued investment in the water for the TETRA side. If you look at it kind of on a comparative basis, I would expect our investment in large compression next year to be quite a bit bigger than this year. I think, we see a lot of opportunities, as I said on my commentary, I've just been very, very impressed with - getting closer to the business, the last several months the opportunity set we have and I clearly encourage the team to be more aggressive and going after some projects in terms of some pretty lumpy things that they've been strongly encouraging. So, I think that one, sequentially is going to be a lot bigger. I think we'll put more money into the water, but we put a lot this year. So, I think on a comparative basis, it would be similar.

Okay, thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back to Stuart Brightman for his closing remarks.

Thank you. And as always, I appreciate the focus and the interest and the quality of the questions. And Elijio and I will look forward to updating the group in February. So, thanks again.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.