Good morning and welcome to TETRA Technologies' Second Quarter 2018 Earnings Conference Call. The speakers for today's call are Stuart M. Brightman, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer for TETRA Technologies Inc.; also in attendance is Brady Murphy, President and Chief Operating Officer. 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 event is being recorded. I will now turn the conference over to Mr. Brightman. Please go ahead, sir.

Thank you, Andrew. Welcome to the TETRA Technologies' second quarter 2018 earnings conference call. Elijio Serrano, our Chief Financial Officer and Brady Murphy, our President and Chief Operating Officer, are also in attendance this morning and will be available to address any of your questions. I will highlight few key items and then 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 certain 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, adjusted EBITDA, adjusted profit before tax or adjusted earnings per share, backlog, coverage ratio 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. Earlier this year, we announced a series of actions to streamline TETRA's segment structure through the divestment of our offshore decommissioning business in Maritech and to focus on our core businesses where, we believe, we can generate the highest returns on capital. With that realignment, we moved to new segment reporting to…

Thank you, Stu. Second quarter revenue from continuing operations was $260 million compared to $199 million in the first quarter of 2018 and compares to $180 million from the second quarter of last year. Consolidated and adjusted EBITDA from continuing operations for the first quarter was $46.3 million and compares to $26.2 million in the first quarter driven by increased demand across all business lines, better pricing, higher equipment utilization, the European fluid seasonality and a full quarter of the SwiftWater acquisition. Revenue for completion services and products were $77 million and compares to $53 million in the first quarter of 2018. Revenue increased sequentially from strong overall activity and the benefit of seasonality in our Europe Fluids sales, which typically post a strong second quarter. Completion Fluids and products adjusted EBITDA was $13.7 million or 17.9% of revenue. We had a typical seasonal step-up in activity in the second quarter from the European chemical sales, which materially increased revenue and EBITDA from the first quarter. We had no CS Neptune sales in the quarter, but as Stu mentioned, we are progressing on two potential projects for later this year. Our EBITDA margins were 17.9% without the benefit of any CS Neptune activity. Water management and flowback services revenue was up $84 million in the second quarter and increase of $23 million from the first quarter. We had one small early production facility sale this quarter. We also benefited from a full quarter of SwiftWater versus only one-month in the first quarter of this year. SwiftWater had revenue of $28.6 million in the second quarter. Water and flowback services second quarter adjusted EBITDA was $20.1 million or 24.1% of revenue. Quarter-over-quarter, we increased adjusted EBITDA margins and distribution by 510 basis points from strong activity across all basins and a…

Great. At this stage, we'll open the lines for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Praveen Narra of Raymond James. Please go ahead.

Thanks. Good morning, guys and great quarter.

Thank you.

I guess, we can start on Neptune and kind of what you're seeing in the 2019 time frame. It seems pretty clear what you guys are looking for 2H 2018. But can you talk about the Gulf of Mexico project that you're working on? Is it a new customer? Is there potential for a multi-well opportunity here? Can you just give us a little bit more color on what you're seeing over there?

Yes. I mean, a couple of elements. We talked about the Gulf of Mexico war. That's not Neptune. That's our standard product. So it is an existing customer we've worked with. We've been awarded that. We'll deliver it in 2019. So we'll go into 2019 in the Gulf of Mexico with a much larger backlog than we started the year. So that's one data point. The second data point, as we talked about the status of the two Neptune projects we've been discussing in the past several quarters and expect to execute those and collect the cash this year. One of those, we said, was at a fairly advanced stage in the drilling process. And then the third element as you look at Neptune on a broader base for 2019, and I'll let Brady give some color on it, we've had the first meetings with Halliburton. We're starting to lay out the marketing plan and the opportunity set. And we certainly think the funnel will be much larger, going forward. But Brady, you've been in the middle of that. Maybe you can add a little color.

Yes. Thanks, Stu. So as we mentioned in the press release, we have a joint governance team between TETRA employees and Halliburton, and we've had our first session with that. Identified significant pipeline of projects that we've had, but landed on a subset of those projects that we will jointly pursue under the terms of our new agreement, and those are spread out throughout various markets around the world.

Okay, perfect. That was actually going to my follow-up question. So thank you very much for that. The other interesting thing, I guess, you mentioned was the integrated projects that you guys have on the slate now, three projects, I guess. Can you tell us a little bit – are these tests of the integrated solution? Are they true awards that have sizable scope? Can you give us a little bit more on that?

Yes. So if you saw our New York investor presentation, we introduced our integrated fluid management strategy, which encompasses transferring water to the wellsite, handling the produced water through flowback and desanding, transferring produced water on location and transferring it to various customer locations and then also the recycling and aboveground storage that is growing rapidly due to the amount of produced water that is being used in fracs All of those operations that exist on the wellsite are pretty people-intensive. Our solution involves quite a bit of automation of that entire cycle. So reducing people cost, more efficiency, those types of projects are what we are pursuing and talking about from an integrated standpoint that were mentioned in our earnings release.

Okay, perfect. Thank you very much.

The next question comes from Sean Meakim of JPMorgan. Please go ahead.

Thank you. Hey, good morning.

Good morning.

I was hoping to maybe continue on that line of thinking on integrated projects. It sounds very interesting. Could you maybe give us a little more insight into the economics of the projects? I'm just trying to think, in a general sense, the magnitude of the revenue potential, how much incremental capital would you have to deploy? Or is it using existing equipment? I'm thinking about any paybacks on incremental capital. Is this something that's replicable across a number of customers and basins? I think just trying to size the opportunity a little bit better would be great?

Yes, I mean I think several things. We were excited with the strategy. We rolled out that discussion point in the investor day. We're getting a good reception. Brady did a good job of articulating the advantages. I would say, overall, we're in the execution mode. We're getting awarded jobs. We're not in the proving out stage. We think it's scalable. It is not capital-intensive. It's not a major change from our normal capital profile. Again, the areas we're rolling out, the Permian were fully utilized – close to fully utilize on existing equipment, so there's some incremental capital. And as you saw, we increased our capital guidance for the full year. And part of that is attributed to continuing to expand the water business, we think, most of that benefit accruing to next year as the capital comes in, in many cases, in the fourth quarter. Margin-wise, it's very good. And so we think it's – it will average up the margin for that segment. But it's just a good, continued evolution of the strategy, and it's been very well received. And you see it predominantly in the Permian, where the integrated organization we have is able to combine the strengths of SwiftWater technology with legacy Tetra from the Tetra Steel, the automation, the recycling, and I think it's a great holistic solution.

Okay, great. Yes, thank you for that feedback. That’s helpful. Maybe we can touch on working capital a bit. Can you provide a little more granularity of what drove the better results given the improvement in the top line? Good to see that working capital is fairly restrained and just how those moving pieces influence the guidance for the back half of the year on free cash flow?

Well, Sean, you've seen that, historically, in the first quarter and sometimes in the second quarter, we consume a lot of capital. It's driven through three things. The first is that you see the typical ramp-up in activity in Canada. And then the spring break up occurs. We start monetizing all that revenue in the second quarter. The third thing is that you see a significant ramp-up in revenue in Northern Europe with our chemicals business, and it begins in late March, early April. We start invoicing and collecting that in the back end of the second quarter, all the way into the third quarter. So those had been the ones that have been consuming in Q1 and generating partially in Q2. Then we'll see the benefit of the ramp-up from the Neptune projects that we expect to build and collect in the second half of the second half of the year. That will be a very significant impact of it.

Got it. Okay great. Thank you, both.

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

Hi, good morning, guys.

Good morning.

Just a quick question drilling down on the guidance on the full-year. So like, for example, on water, if your second half results were just flat from 2Q levels, plus $72 million in EBITDA, guidance is standing at $60 million to $66 million. Any color there would be helpful. Is this just caution over what Permian activity is going to look like? Or what – which drove you guys not to revisit that guidance today?

So Jake, good question. We did have a really solid quarter on the water and flowback testing side. Brady talked about picking up some integrated projects that, we think, would have upside opportunity. We're going to take a cautious approach, reassess during the quarter to make sure that the impact of any other takeaway concerns don't impact our outlook. And then when we report the next quarter, you'll see us address the opportunity to continue the profitability with the water management and flowback testing.

Okay. So fair to say a bit of just conservatism baked into it?

Fair to say that.

Okay. And then secondly, if I look at SwiftWater sort of the growth rate relative to – if you just annualize their – or gross up the 1Q result, looks like it's growing at about 18%, but that implies kind of a materially lower growth rate in the legacy business. I was wondering if you could just give us a little bit color. What's going on there?

The legacy business is holding its own. It's doing well. One of the benefits that we're seeing is that the customer base that came across with SwiftWater didn't have access to TETRA STEEL double-jacket, lay-flat hose. So we're moving a lot of our service offerings and technology in this area and benefiting the customer base that So keep in mind that this is a collaborative TETRA-SwiftWater customer base product offering, employee base is supporting both. And as we get further into the integration, it's going to be harder to segregate one versus the other because we're starting to move people, equipment and assets back and forth. And it's a matter of, do you assign a TETRA STEEL project to an existing opportunity brought forward with a SwiftWater customer base or pursue a completely new opportunity? As we reported in the future quarters, it'll be hard to distinguish what is SwiftWater versus TETRA because we're integrating it significantly.

And just to add to that, Jacob. Again, I think, one of the points we want to get across is, in addition to the strength in the Permian, we've seen strength in the other basins, which is very encouraging. And within that construct, we've seen continued strength in margin enhancements on the testing side. We've said over the last year that we thought the domestic testing margins would lag the water progression, and I think it has. But we're starting to see, as we said on the call, margin starting to move back to where they were back in 2014. So we're very encouraged about that progression as well.

Got it. Appreciate the color. Good quarter guys.

The next question comes from Kurt Hallead from RBC. Please go ahead.

Hey, good morning.

Good morning.

Appreciate the updates and the conservative approach for the year, especially as it relates to the Permian. Gentlemen, I thought it might be worthwhile maybe to discuss some opportunities that you may have outside of North America, whether that be Completion Fluids or production testing?

Yes. I mean, I'll start and then Brady can add to it. I think – when we look internationally, I would say, we continue to be very comfortable in our chemicals business in Europe. It's very predictable. Second quarter had the seasonality we expected, so we continue to feel very strong in that. I would say, the areas we're seeing some positive trends would be our legacy Fluids business in the North Sea. And we're starting to see some progress in our legacy Fluids business in West Africa. I think Brazil is up a little bit this year, and we expect that to continue. The big opportunity set to change that scope even stronger will be as we start to look at the sales funnel on some of the Neptune opportunities working with Halliburton. I think the base business continues to grow, particularly offshore. I mean, I think the offshore fluids piece, non-Neptune on a global basis is certainly starting to move in a positive direction after being fairly quite at the last period of time.

No, the only other thing I would add to what Stu mentioned, particularly on the water side and flowback is Argentina. We do see some very good opportunities for us. Some of the major IOCs that we work for here in the U.S. are not quite active in Argentina. And we're getting quite a bit of interest in our water solutions there as well. So we see that as a growth opportunity in the future.

Maybe in the context, if we just focus and Argentina, right, you have this joint marketing agreement with Halliburton and CS Neptune for the completion side of the business. Is there an opportunity to do maybe something similar with a larger diversified service company or getting a much larger presence or foothold in places like Argentina for your water business and so on? Is that feasible?

I think it’s possible. I don't think it's a must-have for us. I think the integrated offering that we just spoke about from water, we're recognized for that solution. And we have a presence in Argentina, where we could execute on our own. I mean, it's a possibility. We may look at that in the future, but currently, we don't believe that's a must-have.

Great. And then maybe as a follow-up, I think in prior conversations, you guys have kind of laid out sum of the parts kind of dynamic for investors and analysts to assess on their own accord. How would you look at to some of the parts now? Do you think the value of Compressco is kind of mapping over to TETRA? And otherwise, what do you think investors might be missing in – on that dynamic?

Yes. I mean, we always like to talk about that. I'm sure, like others, we feel like the full sum of the parts isn't fully reflected. But I think we continue to focus on – we've got three solid businesses. They're all going through a good cycle. They all have differentiators. We've got a clean balance sheet on TETRA. We've got bonds with no covenants on the compression side. And some of the parts, how the MLP maps over, I think we've shown, as a leadership team, over the years, that we're always looking at the structure and the value, and that will be something we'll continue to look at. There's a lot of things going on in the MLP world. We see what others have done. And we'll continue to look and evaluate. I think, in the short term, we're laser-focused on the fact we increased EBITDA sequentially, $4 million in that business. We've seen the margins go up, particularly on compression services. We've seen the utilization. So we feel really good about the business and the short and intermediate opportunities just grow the profitability. That's what we're focused on, first and foremost.

Got it. Thanks Stu. Appreciate that.

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

Good morning.

Good morning.

I wanted to ask about the agreement with Halliburton. In that press release, there was some language about looking at potential new applications for the Neptune project – product that would utilize as a base fluid for other applications. Could you maybe talk a little bit more about that? In particular, what would be the potential scope there?

Yes, Martin. So this is Brady. The agreement does address joint development opportunities where both parties bring technology to the table, and we jointly identified projects that we will work on together. As you know, Halliburton has a great drilling Fluids business as well as a Completion Fluids business. And combined with our Neptune technology, there are some clear applications. One, in particular would be reservoir drilling fluid. The drilling market is a huge market. There are benefits to having a clear brine fluid, like Neptune, as your base fluid, certainly, as it relates to impact on the reservoir while you're drilling. And so that would be one example of a project that we may look at. We have not initiated any development projects at this point. We're still in the discussion phase of what projects we'll prioritize, but that would be the one example with a potentially large application.

Okay. And then as you look out to 2019, can you maybe give us some insight in the conversations you're having with customers about potential Neptune projects in 2019?

Yes. I mean, as we mentioned TETRA had a pretty significant pipeline of projects that we have been in discussions with customers for some time over numerous geographic areas. Since the Halliburton agreement has been put in place, as I've mentioned, we have taken a subset of those opportunities where Halliburton has a infrastructure, a good footprint in place, customer relationships and have decided to prioritize on those particular projects. Some of those could materialize in 2019. Some of them are in2019 and well beyond. These are long-range, mostly deepwater projects that we're identifying.

Thank you.

The next question comes from John Watson of Simmons and Company. Please go ahead.

Hi guys. Good morning.

Good morning.

I apologize if I missed this, but was the European chemicals contribution in Q2 quantified? If so, would you mind calling that out?

So historically, when you look at our cash results, John, Q2 is a $10 million to $15 million revenue step-up versus Q1, driven by the chemicals business, and this year was no different.

Okay, great. Super helpful. Thanks Elijio. And then for the guidance for the rest of the year, are there any production testing facility sales baked into that guidance?

Not in the second half of the year.

Okay, perfect. And then on flowback sand management, I wanted to dig into what you are doing there. Can you talk about sand-viking and trends you're seeing in sand management within the water and flowback segment?

Yes, this is Brady. We have a couple of sand management technologies that we are in development and deploying. We do have a couple of sand-viking assets that we are still in the development stages of tweaking for some of the current sands – micron sands that are being used, particularly in the Permian Basin. And we're – I would say, we are 90% plus at the – finishing up the engineering tweaks to that and we'll be commercializing that in Q3. We fully expect to be. We have a few other technologies in the works, as well, to modifying our existing flowback and desanding technology to improve the efficiencies that will – this is an area we're continuing to develop.

Okay, great. Thanks guys. Congrats on a good quarter.

Thank you.

The next question comes from Thomas Curran of B. Riley FBR. Please go ahead.

Good morning, guys.

Good morning.

Good morning.

If my math is correct, it looks like, for the legacy water and flowback services, so water and flowback division, excluding SwiftWater, your revenues increased from $53 million for the first quarter to $55 million for 2Q. And yet your adjusted EBITDA surged from $9.3 million to $13.3 million. So the legacy adjusted EBITDA margin increased from 17.5% to 24.2%. If all of those calculations are correct, could you speak to what the drivers were behind such a significant increase in profitability for legacy water and flowback

So Thomas, we're seeing much higher utilization of all flowback testing equipment across multiple basins in the United States. We're seeing better pricing in – on the flowback testing side. And also, as Brady mentioned earlier, that the water business, even outside the Permian Basin, in the Rockies, in the MidCon, in the Northeast, for example, they're also enjoying quite a bit of success, we're getting better pricing, getting better utilization. The overall performance of that business is beyond SwiftWater. We're seeing an uptick in all of our segments and all our geographic areas there.

And – so then turning to pricing, how much did pricing rise from March to June? How has it evolved since June? And where is it now relative to where it bottomed?

I’ll take the first part of that question from first quarter to second quarter. We believe there was slightly double-digits from first quarter to second quarter. Although, we have – during the later part of the quarter, seen it flatten out somewhat. From the bottom, I'm not sure. I'm going to have to ask Elijio to cover that one.

So from the value, if you take the 2015, 2016 time period and assume that, that's the value, if you calibrate where we are today versus right before the downturn, I would say that we're at or slightly above those numbers. And again, the driver here is just the intensity of the work, the volume of gas, of sand and water being moved and also the duration that they were at the job site. So in the past, if we were at the job site one to two weeks, then we'll not demobilize and mobilize to another project. And today, we're at a job site for four, five, six, seven weeks as I go through multiple stages. That utilization and the lack of demobilizing and mobilizing is having a significant impact on our profitability. So it's both practices and price that's giving us much better margins.

Okay, that’s gets closer to the crux of what – it appears to be happening. And then sticking with water and flowback, of your four geographic markets outside the Permian, Rockies, MidCon and Northeast and South Texas, which is presently the biggest? Where do you see the most growth potential? And then by this time next year, how much of the division's total revenue could you derive from basins other than the Permian? So where could the non-Permian share of the topline move to by this time in 2019?

Yes. I mean, again, without trying to forecasting too much detail next year, just to give you some color, I mean, I think, once you leave the Permian on the water side, I would say Appalachia and MidCon are probably our two strongest, and we expect both of those to continue to grow. What percentage that makes of total pie next year? I'm not certain I want to get out that pie because that involves not only that piece, but forecasting the Permian. But the message is the margins are very strong outside the Permian as well as in the Permian, and those businesses are cycling up. And it's one of the areas we feel good about that, if, in fact, things were to flatten out in the Permian, we've got other areas of growth that we're confident on. And again if it were to flatten out, our view is, as we've said before, our customers are in good shape. They've dealt with the takeaway capacity. But if that were to happen, we feel the other areas were in good shape.

And Thomas I would add that in the capital investments that we've made in the segment in the first half of the year, they're not all Permian concentrated. We've investment incremental capacity to the Rockies and into the Marcellus market to keep up with the demand in those areas.

Correct, very encouraging here. Thanks for fueling my questions guys. I’ll turn it back. End of Q&A

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Brightman for any closing remarks.

Well, thank you. Great questions, as always, and we'll look forward to updating the group on the third quarter in a few months. So thank you.

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