TETRA Technologies, Inc. (TTI) Q1 2019 Earnings Report, Transcript and Summary

Good morning and welcome to TETRA Technologies First Quarter 2019 Results Conference Call. The speakers for today are Brady M. Murphy, Chief Executive Officer and Elijio Serrano, Chief Financial Officer for TETRA Technologies, Incorporated. 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. Murphy. Please go ahead.

Thank you, Nancy. And welcome to the TETRA Technologies first quarter 2019 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 highlight a few key items 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 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 are cautioned that such statements are not guarantees of future performance and that actual results may differ materially for 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 this period. Well this is my first conference call as CEO of TETRA and Chairman of the Board of CSI Compressco following Stu Brightman's previous announced retirement effective May 3 at the May, 2019 Shareholder Meeting. I'm excited an honored to take over from Stu and wish him the very best in his retirement. Stu will remain on the Board of Directors of TETRA through May, 2020 and remain available to support, consult in and assist us as appropriate. Over his 10-year tenure as a CEO of TETRA, Stu, the Board and the management team were instrumental in evolving the company and providing the foundation for a very bright future. TETRA today is a company with great employees and energized and talented management team and three great business segments. They're very well positioned to take full advantage of the evolving energy services market in the coming years. Looking forward there are several areas of priority that you'll see from us. First I want ensure safe working environment for all of our employees, contractors and customers. No matter what part of the market cycle that we're in, this will always be a priority for us and all of our operations. Second, we'll be very focused on creating value for our shareholders and this will be realized by generating higher returns on capital. At the core of TETRA's capabilities, is the ability to innovate and differentiate in each of our various business segments and service offerings. We will leverage that strength to gain market share and improve margins and generate returns above our cost to capital. From unique offerings in our Water & Flowback division such as TETRA Steel, treatment recycling solutions for any produced water composition and closed loop Water and Flowback Automation Services to nearly 40 years of innovated completion fluid offerings from our fluid divisions including zinc-free, high density CS Neptune fluids. TETRA continues to bring high value fluid innovations to the shale and deepwater markets. Our compression division is participating in a long-term North America gas production growth cycle, which is one of the best and consistent growth markets in our industry. We continue to participate in new compression opportunities with returns greater than 20% in our key markets and for key customers that rely on our service offering for both gas gathering and gas lift. With that, I'll now provide some commentary on our first quarter results. In the first quarter we experienced continued improvements and compression services revenues and margins and are finalizing in agreement with major operator for CS Neptune project in the Gulf of Mexico. We experienced lower margins in Water and Flowback Services in a transition quarter driven mostly by significant shift in our customer concentration and profile. Comparing to the fourth quarter of last year in the Water and Flowback Services segment we've seen a major shift of revenue this quarter from smaller North America independent operators to large major operators. We believe this shift happened because the smaller independent operators were more negatively impacted by the drop in crude prices at the end of 2018. While we believe this transition is good for TETRA in the long run and will help us showcase our technology differentiation in integrated offerings through the operators with strong balance sheets. This transition came with additional job demobilization and mobilization cost within the quarter and had a meaningful impact on our margins. The Completion Fluids and Products segment saw some sequential decrease in revenue and margins partially from seasonally weaker Gulf of Mexico demand which was largely offset by strong international sales, which we believe is part of improved international market outlook for 2019. The compression segment continues to perform well and demand for services is outpacing supply and although we experienced a slowdown in the equipment sales and aftermarket business due to timing of shipments and overhauls, this was expected as we mentioned on our last call. Overall in a challenging quarter, when the drop in crude prices at the end of 2018 which led many E&P operators to revise downward their 2019 capital spending plans. We feel good about the quality of the customers and the quality of the revenue we added in the quarter and believe, we will deliver improved quarterly sequential results for the rest of the year after a quarter of transition. As we previously mentioned, a key part of our overall strategy in the Water and Flowback services segment is to increase our integrated solutions projects which allows us to stay on jobs for extended periods of time, showcase our technology and more effectively utilize our equipment and personnel. We have the ability to integrate our multiple service offerings and utilize closed-loop automation technology to be the lowest cost per barrel safest and most efficient water management service provider. We've made steady progress each quarter since we introduced this strategy almost a year ago at Analyst Day in New York. We were in 11 projects at the end of Q3 last year, 16 at the end of 2018 and 19 in Q1 of this year. Two of these additions in the first quarter were large recycling projects. Our first recycling awards started in the summer of last year and we continue to work this project and expand operations with this operator. We're pleased with the traction this strategy is delivering for us. It's important to note, that our customer mix with the integrated projects reflected a similar customer mix change as our overall North America business. Projects for our large operators improved by seven, but were offset by reduction of four from the smaller operators. The switching cost that I mentioned before also affected our margins on the integrated solutions projects for the quarter. We completed two acquisitions in 2018 and we'll continue to look at strategic opportunities to add to our footprint and offering. We've already seen some opportunity this year and will evaluate them for strategic bid at the right values. We're highly focused on cash returns as we pursue any future acquisitions. First quarter revenue was modestly down sequentially and adjusted EBITDA was down $5.8 million for Water and Flowback Services. Again reflecting the additional cost incurred from the aforementioned mixed shift and some higher repair cost on our flowback equipment after a three-year revenue and activity high in the fourth quarter of 2018. Our segment adjusted EBITDA margins of 12.8% were below the 19.9% margins which we achieved in the previous quarter. We expect adjusted EBITDA margins to improve during the second quarter but not yet recovered to the fourth quarter levels. We will continue to invest in our proprietary technology such as TETRA Steel, automation and produced water treatment recycling offerings. We expect to have more opportunities for the differentiated offerings as we build out relationship and market share with the major operators. Also as we move more into the post frac flowback and treating produced water. We expect that we'll see projects of longer duration giving us a more consistent revenue stream and more predictability in our future operations. This segment is expected to continue to grow despite some of the short-term challenges and we will continue to add capital organically as we look for inorganic opportunities to aid our growth. Completion Fluids and Products segment revenue decreased modestly from $64.7 million in the fourth quarter to $61.6 million in the first quarter or 4.8%. We saw some weaker Gulf of Mexico demand mostly offset by strong international fluid sales. Our chemicals business performed well and benefited from an early start of our seasonal, our European industrial activity. Adjusted EBITDA margins of 16.8% were down 340 basis points sequentially but were 520 basis points better than the first part of 2018. Excluding last quarter margins we've previously seen adjusted EBITDA margins in this segment mostly in the low-teens in quarters without the benefit of CS Neptune to 16.8% in this market environment it's something we're comfortable with and given the benefit of our vertical integration and [indiscernible] supply cost advantage, we believe this segment can generate 20% type EBITDA margins in the low deepwater market activity and without the benefit of CS Neptune. Most of completion fluid sales are for the deepwater wells in which drilling and completion has been depressed for several years. However we're seeing signs of deepwater activity coming back. As this segment strengthens and drilling activity improves we should see some real benefit for our completion fluid and sales even excluding the benefit of CS Neptune. With respect to CS Neptune on the last earnings call we reported that we were in advanced discussions for Gulf of Mexico project scheduled for this year. I'm pleased to announce that we reached an agreement on the technical and commercial terms for our project and are in the process of finalizing the contract details. This is Gulf of Mexico lower tertiary development project in the field with existing production and where other wells in this field have pressures that require a fluid density in the CS Neptune generation one range. Drilling has started and the need for the completion fluid is expected to be in the second half of this year. As with prior projects, these are deepwater complex wells with the exact timing on completion being a challenge to accurately predict. We expect this project to be similar size as our previously Gulf of Mexico CS Neptune wells. As we've done previously, we will now disclose the specific customer revenue and profitability of these projects. We continue to have other advanced discussions for additional CS Neptune projects across the globe some of those discussions are directly with operators and some off [indiscernible] relationship with Halliburton. As a list of opportunities for such projects increase, we see the potential for additional projects this year and in 2020 although timing of these complex projects are always difficult to predict as mentioned earlier. As the offshore drilling sector increases activity particularly deepwater we'll have more opportunities for this proprietary fluid. We also continue to work on the next generation of CS Neptune that will have broader applications with higher densities as well as reservoir drilling fluid designs and applications. For compression segment, while our revenue decreased sequentially 25% to $103.5 million this was entirely a function of the previous quarters record high and equipment sales and aftermarket service which we had previously communicated will decline in the first quarter before rebounding in the second quarter. Compression adjusted EBITDA was sequentially down $3.3 million to $25.9 million, but was up $7.1 million from this time last year. Our compression service with line continues to strengthen and improve in revenue and profitability. The demand for high horsepower equipment to be added to our fleet continues to outpace supply which gives us the ability to increase prices as contracts rollover and we put new units into service and what we believe to be the high end of market pricing. On average we're getting high single-digit price increases on large horsepower equipment as contracts rollover. On the new larger horsepower equipment our fall through margins are in the 65% to 70% range that are driving 20% returns on capital. All the new equipment we put in the service is attached to customer contracts as we do not build anything on speculation or anticipation of client demands. We expect equipment sales and aftermarket to pick up starting with the second quarter and expect revenues to be significantly higher over the first quarter levels. In the first quarter and for the first time in CSI history operating horsepower surpass the million mark. Utilization in 4,000 and higher horsepower equipment focus on gathering systems and centralized gas lift was 95.6% as of March 31, 2019 which is essentially a full utilization for the large horsepower equipment. Over utilization of the entire fleet is 87.2% up 60 basis points sequentially. CSI ended the quarter with backlog of $94 million in April and May they have added another $14.5 million of additional backlog all of which is expected to be delivered in 2019. We remain bullish on the overall compression space as the industry is one of the strongest in the oil and gas spectrum. With that I'll turn it over to Elijio to provide some financial comments on cash flow and the balance sheet and then we'll open it up for questions.

Thank you Brady. Good morning, everybody. Consolidated first quarter revenue from continuing operations was $244 million compared to $282 million in the fourth quarter of 2018. And this compares to $200 million from the first quarter of last year. Consolidated and adjusted EBITDA for the continuing operations for the first quarter was $36.3 million and compared to $46.6 million in the fourth quarter and to $29.9 million in the first quarter of 2018. I'm going to spend a few minutes on TETRA's free cash flow and the balance sheet. We had no CSI compressed [indiscernible] strategy that was communicated to the market yesterday. In the first quarter, TETRA-only consumed free cash flow from continuing operations of $34.9 million. This compares to $29.9 million in the first quarter of a year ago. For the full year of 2018, TETRA-only [ph] free cash flow was $3 million profited. And as a reminder, during the entire 3.5 year downturn, TETRA generated free cash flow and was adjusted EBITDA positive for every one of those years. First half of the year, we had historically consumed cash that have generated cash in the second half of the year. This is driven primarily from changes in working capital. There are four items that drive the timing on free cash flow. The first being the timing of payable, the benefit to full year. This type of payments includes items such as insurance premiums, incentive bonuses for the prior year, property taxes, income and other taxes and other such items that are paid in the first quarter for either the prior year or prepayment for the coming year. The second is timing of capital expenditures and how we sequence them during the year. The third is [indiscernible] Northern Europe Industrial Chemicals business. For the Northern Europe Industrial chemicals business we build a significant amount of inventory in the first quarter convert that inventory to receivables in the second quarter, then monetize those receivables in the third quarter. The fourth driver is timing on any major project. Brady mentioned that we've reached agreement for our CS Neptune project and we expect to be completed in the second half of the year. Some of these four items impact a timing of when we consume and so we generate free cash flow. It is still our expectations that free cash flow in 2019 will be above $3 million of free cash flow that we generated in 2018. The confirmation of the CS Neptune project adds to our confidence of achieving this target. For TETRA-only, we expect full year capital expenditures to be approximately $25 million in addition to 15 of equipment that we've agreed to buy and to lease the CSI Compressco supporting their high return opportunities. While the equipment is on lease to CSI Compressco TETRA will be making the vast majority of the returns on $15 million investment. This $15 million investment will be made throughout the year. TETRA-only capital expenditures in the first quarter were $8.9 million. TETRA's balance sheet remains strong. We have an outstanding $200 million term loan with a delayed [indiscernible] option available to us that can be used to finance acquisitions. We also have in place an asset base revolver which we'll use primarily for working capital needs. At the end of March, we had net debt outstanding of $192.2 million inclusive of $20 million of cash on hand. We have a debt structure with no significant maintenance covenant. And as always I would like to remind again everyone that TETRA, CSI Compressco's debt are distinct and separate. There are no cost default, no cost collaterals and no cost guarantees on the debt between TETRA and CSI Compressco. I'll now spend a couple of minutes on CSI Compressco. For CSI Compressco at the end of March, we had $16.9 million of unrestricted cash. The CSI Compressco new debt structure that we implemented last year is without maintenance covenants and no near term maturities. CSI Compressco's net debt at the end of December was $617 million inclusive of the cash on hand that I mentioned earlier. The net debt balance was essentially unchanged from the prior quarter. CSI Compressco yesterday reaffirmed its guidance of generated between $125 million to $140 million of adjusted EBITDA. At the end of that guidance and after allowing for approximately $49 million of interest expense, $19 million of maintenance capital and $4 million of cash taxes is they're expecting to generate over $60 million of free cash flow in 2019. [Indiscernible] deployed and price increase continue to be obtained given the very strong operating environment that free cash flow should increase in 2020 and beyond. In 2019, over $30 million of the free cash flow was returned to equity holders in the form of the securities Series A cash redemption or in distribution. The Series A preferred units are down to a balance of $13.3 million as of to-date. The free cash flow for 2019 was spent on cash redeeming the Series A preferred units and on growth capital opportunities that are generating 20% returns on capital. On the Series A preferred units that are being fully redeemed through the end of August of this year. CSI Compressco will finalize plans once this redemption is complete for the deployment of the free cash flow that will create the most value to their unit holders. TETRA is a general partner and also approximately 35% of the outstanding common unit of CSI Compressco. To make the determination of how the fourth quarter of 2019 and all of the 2020, CSI Compressco free cash flow will be deployed. They will carefully assess how the CCLP unit price is trading, the price of the CCLP unsecured bonds are trading and CSI Compressco's continued ability to generate higher returns and push price increases on the equipment being deployed. Once those are determined, we'll make a determination as to how we'll deploy the cash. However, CSI Compressco will commit to is that, we will not invest all of the free cash flow into growth capital. CSI Compressco moving towards 50-50 split of free cash flow going through high return growth capital opportunities and towards returning cash to their stakeholders being both bond holders and equity holders. CSI Compressco are committed to improve in their leverage ratio to 4.5 times or better. If CCLP's unsecured bonds traded a material discount, CSI Compressco are likely to take the opportunity and move some of the available free cash flow towards retiring unsecured bonds, accelerating their path towards the 4.5 times leverage ratio. As part of the 50-50 growth versus stakeholder return CSI Compressco will also evaluate the amount of distribution. The focus for CSI Compressco is to improve their leverage metrics to enhance unit holder value while taking advantage of the high return opportunities with our major customers. Those customers that have strong balance sheet and will continue to drill to periods of oil, price volatility. Returning to comments on TETRA consolidate, we expect second quarter profitability to be up sequentially across all of our segments. With the main driver being the transition towards major operators for Water and Flowback Services. The timing of equipment and the sales and deployed equipment for CSI Compressco and the seasonality of the Northern Europe Chemicals business among other drivers. We further expect EBITDA to increase each quarter for the rest of the year, with the major contributor being CS Neptune project Brady mentioned earlier. I encouraged you to read our news release from this morning and CSI Compressco's news release from yesterday for all the supporting details. With that I'll turn it back to Brady.

Operator, we'll open it up for questions now.

[Operator Instructions] the first question comes from Praveen Narra with Raymond James. Please go ahead.

I guess we could start on the integrated projects, it's nice to see number of customers using multiple. I guess I'll be curios to hear how long it took for operators to go from a single trial integrated service to adopting multiple, how many either pads or how much time it took and how you think about that?

Good morning, Praveen. I think it varies some of these operators we started early on in say Q3 of last year, so we serviced those through the end of the year. We were basically on 16 projects at the end of the year all of them were unique customers. As you move into Q1, we had five different operators adopt a second multiple or integrated offering. So that gives you a feel for the timing transitioning from 16 unique clients to now a customer base of five with multiple in the first quarter.

Okay, that's helpful and then I guess now, now that you have several projects going. Could you give us a sense as to for the segment what percentage of revenues are these integrated project?

I mean it's continuing to grow, it's becoming a meaningful part. I don't maybe Elijio can comment on the overall percentage of our North America revenue but it's the fastest growing portion of our revenue and particularly the recycling projects which we mentioned have been added. But I don't know the overall for tracking actually the overall percentage of our revenue at this point.

Praveen I would suggest that it's still a small percentage of the overall revenue from the segment. But the key part of it is that it's now a sustainable month-to-month continuous opportunity with less [indiscernible] as we typically see with water transfer jobs.

Great and then I guess just one more if I could. You mentioned some competitive pricing dynamics. I guess could you talk about how pricing is looking whether it's stabilizing across all segments or how you guys look at it?

Our TETRA Steel and our flowback business has really been pretty resilient to any degradation in pricing. We're still getting a premium we think, what's in the market. We did see in the first quarter some pricing pressures on our single jacket transfer lines, so that area in particular has seen some pricing pressures close to the double-digit range.

And Praveen on that and on the compression side, when we saw a rebound early next year, we started ordering equipment and there was some customer commitments with pricing that we could attain early last year that equipment started getting delivered in Q4 and Q1 and the equipment is being delivered in Q2 and beyond, an equipment that we priced in Q2 and Q3 of last year and now those are starting to come in at rates higher than what we've been deploying. So we're just now getting the benefit of that premium pricing for orders that were placed in Q2 and Q3 of last year, on that compression side.

Perfect, thank you very much guys.

The next question comes from Sean Meakim from JP Morgan. Please go ahead.

So I was just going to see that you're into another Neptune deal, but just given the uncertainty that's go inherent in the project. Could you maybe just give us some parameters around how we should think about the timing between when the project begins, when you think you would get a go, no go on the need for Neptune and then how long until you'll be able to recognize revenue? And it's meant more to be not to be so specific to this project, but for this type of project again I know there's a lot of, a lot of these can change for a project like this in the deepwater. But I think it will be helpful for us understand what that cadence looks like.

Right, so as I mentioned Sean your drilling has commenced. We're familiar with this particular field. There's existing production there, so we have fairly high confidence level that the well will be productive and we're pretty familiar with what the pressure regimes are projected to be. So from that standpoint, I think our confidence level is fairly high. But as you know, it is a deepwater well the pressure regimes could be different than anticipated. So wont' really know until they've drilled through the reservoir, taken the pressures, make sure they've got the zones that they want to complete and we'll be ready to mobilize on Neptune. So hope that gives you a little bit of color, but that's probably about as much as I can give at this point.

Can you give a generic timing is going from commence that drilling towards completion and how long that takes to make it into revenue for TETRA?

The completion phase at this point is projected probably latter part of Q3, if they stay on the drilling plan as we understand it. But again as we've seen before some of these projects can move to the right a little bit. But we would recognize revenue when that completion fluid is deployed for the well.

Got it, okay. That's very helpful. And then just so one on flowback. Can you maybe just give us a sense of on a run rate basis excluding some of the transitional issues we had in the quarter? Does the change in customer mix don't have an impact on margin or is the project based activity more what can drive differential in the margin and if we go to back half of 2019 and private E&P's, do we get ramp up activity. Is it fair to say that you'll try to pursue some type of all the above strategy in other words trying to maintain these new relationships you've been developing while also trying to win back some of the other work than maybe a bit more transitory?

Right. Yes. Absolutely. Let me answer the second part of that first because we really the relationship we had with some of the smaller independence who had to reduce their activity and we obviously plan to stay in contact with them, with their plans and as they go back to work. We feel we'll be ready to support them. But clearly we like the fact that we were able to transition so quickly in Q1 to the larger E&P's demonstrate the value to them and obviously they're going to be a more important part of our business going forward. From the margin standpoint, I think in terms of the highest impact clearly the shift in revenue was very unusual for us to see that type of shift in the same quarter, so I think mob and de-mob cost when you're mobilizing, you have a higher and de-mobilizing you have higher manpower cost and you're not getting the full services revenue for your equipment and offering that impacts your margins pretty significantly and we saw that in Q1. I think the flowback gear that we had a record quarter in Q4, the repair cost was second part of the largest contributor and then as I said, the single jacket transfer line pricing was down somewhat from previously but in terms of sequencing that's the lowest impact that we think in the overall margin progression from Q4 to Q1.

Got it. Thanks a lot, Brady.

The next question comes from Stephen Gengaro from Stifel. Please go ahead.

I guess two questions, the first just from a bigger picture perspective. I mean you talk a little bit on that in your prepared remarks about this, that when you think about the products within the TETRA family and you think about returns on capital going forward. can you help us sort of with a roadmap to returns on capital that meet your cost to capital, what needs to happen, whether it's market driven, whether it's TETRA specific, which products are - guessed in are just contributors etc.? Just so we sort of understand that outlook there over the next say one to two-year.

Stephen let me start that and I'll let Brady add to that. three distinct segments and as you know, we've got a separate capital structure for CSI Compressco and other than this $15 million support that we're temporary providing for them, we kept them pretty much distinct and separate and then everybody lived within their cash flow. Well in the TETRA side starting first with the fluids business. You know that we've got a vertical integration we built out manufacturing facilities. We've got a very good network of distribution point, barges to move equipment back and forth on the opportunities across the globe and we've got that network fully built out. And so deepwater rebounds we don't have to add more manufacturing capacity. We don't have to add more barges to move product around. We don't have to add more tank farms to hold the product out there. It's really going to be cost of goods sold that move through the system and you've seen that during the downturn we can run this business with maintenance capital under $5 million a year. So the deepwater starts to benefit the rebound and the deepwater starts to benefits, there's very little incremental capital required on the fluids business. Now on the Water and Flowback testing side, we've been investing in recycling, in water treatment and in the value added coming from the TETRA Steel technology and we have previously mentioned that we're getting returns of 18 to 24 months on this investment and we've got [indiscernible] rate that we negotiate aggressively with all the requirements coming in from the various operating unit in terms of who's getting the capital. Those that are getting the best pricing that are getting consistent utilization and as we move now into some integrated projects. We're being out there and project multiple months at a time instead of de-mobilizing and re-mobilizing every couple of months. So - we turn expectations for this segment, remain in the 18 to 24-month period then with CSI Compressco we've been mentioning that we're attaining 20% return on capital. We're getting five-year payback on 20-year equipment. It is our position that we're pricing at the top of the market when we compare in here what others are doing out there. Those returns are holding. We're starting to concentrate our business toward those large operators that have the balance sheet to be more consistent in their spending patterns and I think that we're starting to see that on the CSI Compressco side especially when you look fall through rates in the 70% range on the compression services side, so that's how we think of it. We look at CSI Compressco as a standalone 20% returns on capital, focus on core customers. The water flowback 18 to 24 months and the fluids networks already fully built out, we don't expect to add more capital to that business.

Okay, thank you. But when you talk about those part portions of those businesses, will that be enough to drag the entire segments across the capital?

We believe so.

Okay, thank you. And then just as a follow-up or non-related follow-up, when I think about the second quarter consensus it was like $47 million, $48 million EBITDA and we sort of think about the moving pieces on the three segments. Any comments on the current consensus and also, as you assume to think about that, is there - which segments you think we see the biggest sequential improvement in?

We ended the third quarter with our three segments performing at a better run rate than we started at the first quarter. We've got a first pass of our April numbers and were encouraged, what we see. We think that the biggest impact is going to be first from the compression side of it. As more equipment gets deployed and then we also mentioned yesterday that equipment sales is almost going to double from Q1 to Q2 and then we're expecting second quarter equipment sales to be in the $50 million range compared to somewhere around $25 million range in the first quarter. So we think that those will translate into a very nice ramp up in EBITDA Q1 to Q2. The second area that we expect to see a benefit as we've now completed or we have seen a significant transition on the towards major versus the smaller independent that's gaining traction that's converting to incremental profitability, we think that will be the second significant benefit. Then if we get timing in our favor on some of the completion fluids offshore that will be the third opportunity on upside.

And then you also get the seasonal impact, right on the fluid side.

Yes and we have historically seen revenue improved from Q1 to Q2 anywhere between $10 million and $15 million of revenue with a very nice fall through of EBITDA through that.

Okay, great. Thank you for the color.

The next question comes from John Watson from Simmons Energy. Please go ahead.

On the mob and de-mob cost in Q1, should we think about that as being about $5 million on the EBITDA line?

We're not going to go into that level of granularity. I wouldn't suggest that it wasn't as much as $5 million but focus more on it - it was de-mobilizing and before we start generating revenue on the new opportunities we've got downtime of people transitioning our equipment from one project to the other. But the actual out of pocket cost were not that high.

Okay, got it. Thanks Elijio and then the repair cost in the flowback. Can you talk us through what that means? I think for some of your flowback equipment you charge back through repair to your customer. Can you give us some color regarding the higher repair cost in the first quarter?

Brady mentioned that in the fourth quarter of the volumes on the flowback testing side were incredibly high. It was one of the peak quarters that we've seen in recent history. As we complete one job and move to another we have to pressure test all the equipment. We have to go through and clean up equipment and any repairs that have to be done, if we believe it was caused specifically on a customer project due to the debris coming through or pressure that was different than what we modeled in, then we will charge it to the customer. But you have to come in and pressure test everything once it comes off and go through a cycle of doing that periodically and that's really the process that we went through.

Okay, that's helpful. Thanks Elijio and just one more within water and flowback. Are there any facility sales that we should be anticipating in the second quarter?

Not at this time.

Okay, great. Thanks for the color guys. I'll turn it back.

[Operator Instructions] our next question comes from Thomas Curran from B. Riley FBR. Please go ahead.

Elijio for the water and flowback services division. Could you just share with us what the revenue split was last quarter and this quarter between the two segments water services and flowback and treatment?

We've stopped providing that granularity, but I would suggest the water flowback is the greatest revenue stream within that segment. And that is inclusive of water treatment also.

In both quarters?

Correct.

Okay and then Brady, could you give us an update on specifically for the water side? Where you're at with your automation plan and at what point you would expect to have that concluded?

Sure. I mean - you may be aware we have a lot of components of our current offering automated whether it's the pumps, whether it's our distribution manifold, whether it's our recycling units. The next phase really is taking the entire system that's on location providing a holistic closed-loop automated software to be able to run that program even run that operation even remotely and we're in the final stages of testing that software as we speak. We're deploying it to couple of trial clients in this quarter and again we believe that will be another step change in the overall automation capabilities of TETRA.

Great and just in terms of the percentage of your pumps and manifolds that are automated at this point. Where do you stand currently for each?

Yes so we have nearly 100% of the pumps that we own, we always have a portion of our pumps that are on rental. Those we're working on a solution to be able to automate those are well, but that portion of that fleet remains not automated. But again we're working on a solution for that. The really the rest of our manifolds are recycling equipment that's deployed with automation capability, so that would be 100%.

All right, thanks for taking my questions.

Thomas, I'm going to add one more data point to the question that you raised. Remember that in the fourth quarter we did an acquisition of water treatment and water transfer company in ten Northeast so now we've got the full three months benefits in the first quarter. Therefore the water management business increased sequentially and the production testing was done modestly and we attribute a lot of it towards the integrated projects plus the acquisition now with three months in the first quarter versus one month in the fourth quarter, just little bit more cornered to the question you asked.

Thank you for that reminder, it's helpful. I appreciate the responses.

The next question comes from Cole Sullivan from Wells Fargo. Please go ahead.

On the last call there was an international Neptune project that was looked like it could be in the veins for the second half of the year. Is that something that's still in the pipeline at this point?

Yes, we actually have a fairly significant list of international pipeline projects. Now whether that falls into this year or 2020, little bit difficult for us to predict at this point. We don't like the comment until we actually have a secured order, but we're still tracking quite a few and a growing list of projects again through some of those through the Halliburton relationship that one could come into this year, but multiple projects hopefully in the coming years as well.

Okay and then just quickly on offshore and completion fluids. It looks like the 2Q is kind of ticking up in the commentary that you guys made on the second quarter expectations. How do you see that activity overall in 2019 versus 2018, is there any way to kind of frame that?

Yes on the offshore side our fluids business we believe internationally will continue to outpace 2018, we're clearly seeing some increased activity and opportunities for us. We also feel the Gulf of Mexico will be potentially up from 2018 certainly with the CS Neptune project that we have in our plans that will clearly be the case, but even with our base bromine business demand looks fairly strong. So we would say, yes year-over-year we should be seeing increased activity.

All right, I'll turn it back.

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

We appreciate your interest in TETRA Technologies and thank you for taking your time to join us this morning. This concludes our call.

The conference is now concluded and you may disconnect your line. Have a good day.