TETRA Technologies, Inc. (TTI) Q1 2022 Earnings Report, Transcript and Summary

Good morning and welcome to TETRA Technologies' First Quarter 2022 Results Conference Call. The speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I will now turn the conference over to Mr. Serrano. Please go ahead.

Thank you, Andrea. Good morning, and thank you for joining TETRA's first quarter 2022 results call. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking. 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 EBITDA, adjusted EBITDA, adjusted EBITDA gross margins, adjusted free cash flow, net debt, net leverage ratio, liquidity, or other non-GAAP financial measures. Please refer to yesterday's press release on our public website for reconciliation of non-GAAP financial measures to the nearest GAAP measure. 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 addition to our press release announcement that went out yesterday, we encourage you to refer to our 10-Q that was filed yesterday. I'll turn it over to Brady.

Thank you, Elijio. Good morning everyone and welcome to TETRA's first quarter 2022 earnings call. I'll summarize some highlights for the first quarter and current outlook before turning it back to Elijio to discuss cash flow, the balance sheet, and liquidity. I'm pleased to report very positive results for the first quarter of 2022 across both our completion fluids and Water & Flowback business segments, including multi-year highs for various sub-segments. First quarter revenue of $130 million, increased 15% sequentially and adjusted EBITDA of $20.5 million increased 57% sequentially. We generated $5.9 million of cash from operating activities and improved our liquidity by $28 million in the first quarter. These results clearly highlight that our strategies continued throughout the severe COVID-19 industry downturn. To continue to invest in automation and technology differentiation, such as our high value Completion Fluid, and sand management or Sandstorm, to focus on produced water treatment and recycling rather than water infrastructure challenged with seismicity events, and to leverage our vertical integration during unprecedented supply chain disruptions and inflation challenges have proven to be very successful. Our first quarter cashflow net income performance far exceeds our pre-pandemic first quarter 2020 results and our revenue and adjusted EBITDA are nearly on par with pre-pandemic levels, despite customer activity levels being double-digit percentages lower in terms of active frac crews, as well as U.S. and international rig counts. Not only have we gained market share in each segment, but we've improved our Water & Flowback margins on significantly lower activity. Our low carbon energy strategies continue to gain traction in spite very early days are generating positive adjusted EBITDA on cash flow. Each quarter is a step change in PureFlow deliveries to Eos, which is projected to accelerate throughout this year and beyond based on Eos' continued growing backlog and manufacturing ramp up. And while the extraordinary lithium market prices continue to maintain at record highs, adding more potential value to our Arkansas brine leases, it is creating more push towards the type of zinc bromide electrolyte energy storage technology developed by Eos and others where PureFlow is ideally positioned. Water & Flowback services benefited from stronger North American activity as revenue increased 17% sequentially and 85% from a year ago. First quarter revenue was down only 1% from the pre-pandemic first quarter of 2020, which compares to the U.S. rig count and active frac fleet count being down 19% and 14% lower, respectively from the same period. Adjusted EBITDA margins of 14.5% improved 160 basis points sequentially and for the month of March, adjusted EBITDA margins were 15.1%, getting to the total year target faster than what we were anticipating as a result of better pricing in the aforementioned investments in automation. As an example of our automation technology, benefiting our bottom-line are U.S. Water & Flowback headcount is down 16% from the fourth quarter of 2020 on essentially the same revenue. Our integrated water management offering is pulling through more services on less activity compared to pre-COVID levels as the adjusted EBITDA for North America in Q1 of 2022, was the highest since the third quarter of 2019. Our Permian Basin business led the increase with adjusted EBITDA in the first quarter, being the highest since the third quarter of 2019. Even though the Permian rig count in the first quarter of 2022 was 30% below that in third quarter of 2019. We continue to build on our produced water treatment and recycling success, with four new recycling awards in the first quarter, including our first recycling project for a midstream company. Our Appalachia region is also strengthening as pricing approaches pre-COVID levels, with demand for our -- continues to grow. We were also awarded another early production facility in Argentina that will come online in the first quarter of 2023. This is in addition to the other two awards received last year, that will come online in the second half of this year. Completion Fluids & Products' first quarter revenue increased 22% sequentially and 57% year-over-year due to stronger activity in the Gulf of Mexico and the international markets, plus an increase in industrial chemical product sales. While exceptional quarter-on-quarter and year-on-year revenue growth had some on forecasted sales due to customer wealth changes in the Gulf of Mexico and the acceleration of some international offshore sales moving from the second quarter to the first quarter, the overall trend of higher offshore activity is gaining momentum. Completion Fluids & Products' adjusted EBITDA increased 14% sequentially to 26.1%, which excluding the benefit of realized mark-to-market gains in the fourth quarter of 2021 improved 570 basis points. First quarter adjusted EBITDA excluding CS Neptune sales and mark-to-market gains was the highest since our first quarter of 2020. Our North American industrial chemicals business had an outstanding first quarter, achieving the highest adjusted EBITDA since the first quarter of 2017, driven by market share gains and favorable customer mix. In the first quarter, we executed a new and first-time MSA with a super major deepwater operator in the Gulf of Mexico for the application of CS Neptune and -- testing for their future deepwater projects. We also recognized a small portion of the North Sea first generation one CS Neptune job that we mentioned in our last earnings call, which was scheduled for the second quarter of this year, but the full job execution now looks like will happened in the third quarter. As a reminder, the typical CS Neptune job in the North Sea will be considerably smaller than what we have historically seen in the Gulf of Mexico. Overall, we are very well positioned for what we expect to be a multi-year growth cycle in the key deepwater and offshore markets such as Brazil, Gulf of Mexico, North Sea, and increasingly growing offshore market in the Middle East. As we look towards the second quarter of 2022, based on new customer wards and ongoing activity increases, we expect to see further growth and margin expansion for our Water & Flowback segment in the second quarter. For Completion Fluids & Products, we will see the revenue benefit from the seasonal increase in Northern Europe, calcium chloride albeit at slightly less levels than in prior years due to supply chain and inflation issues that is impacting Europe from the Russia and Ukraine conflict. While offshore Completion Fluids business in the first quarter benefited from the movement on some projects from the second quarter into the first quarter. So, depending on timing of key customer completions, we expect to see flattish revenue quarter-on-quarter with a mix of higher European sales and slightly lower offshore sales. For the third quarter and beyond, we anticipate continued offshore activity increases, including the benefit from our previously announced awards in deepwater. Our low carbon energy business initiatives continue to progress at a very rapid pace. We completed the successful drilling and exploration -- drilling and exploratory well, on our Arkansas leases in the area where TETRA retains 100% of the lithium and bromine rights. The well was drilled with fluid samples collected throughout the upper and middle Smackover zones. And to our knowledge, these are the first brine samples within our 40,000 gross acres collected and analyzed to include the middle Smackover formation. We are encouraged with the results to-date based on our own internal assessments, but are waiting third-party validation of the brine samples we collected. Once we obtained the third-party lab results, we will move forward with the inferred resources study, which should be completed within a few months. This should further refine the current exploration target of 2.54 million to 8.58 million tons of bromine and exploration target 85,000 to 286,000 tons of lithium carbonate equivalent. We're currently interviewing engineering firms to award the project one of them to complete the preliminary economic assessment or PEA to produce both lithium carbonate and elemental bromine from our acreage. On the zinc bromide battery storage side, we continue to work with and ship increasing PureFlow volumes to Eos energy on a quarterly basis. Eos is a leading U.S. provider of safe, scalable, efficient, and sustainable zinc-based long duration energy storage systems. Our team is working hand-in-hand with Eos to ensure the bromide are delivered as they expand the production of their proprietary battery technology. Our executive team recently visited their expanding manufacturing operations in Pennsylvania to ensure full alignment on the increasing needs of zinc bromide, and the TETRA ready to fulfill those needs. Both Eos and TETRA recognize the need and value of being able to recycle the end-of-life electrolyte and that a collaborative long-term supplier relationship is important for both sides. CarbonFree continues to make progress with our SkyCycle technology as we successfully launched our first CO2 reaction-free calcium chloride pilot plant, developed to supply of large quantities of low level CO2 calcium chloride for their innovative SkyCycle technology. We remain engaged and are working closely with them as they move towards their first commercial arrangement with one or several potential CO2 emitters. Overall, we had a very successful quarter on every front, including strong financial performance from both segments, validation of our successful strategies, and great progress on our low carbon businesses. I'm very pleased with what our employees were able to deliver in the first quarter, and the future we are creating for our company. I'll turn it over to Elijio to provide some additional color and we'll open it up for more questions.

Thank you, Brady. First quarter adjusted earnings per share was $0.06 per share compared to breakeven in the fourth quarter of 2021. The first quarter results include $1.1 million of unrealized mark-to-market gains in the coming units that we own in CSI Compressco. As of March 31st, 2022, we did not have any shares of Standard Lithium, but we did receive 400,000 shares on April 25th when the Standard Lithium share price was $6.36. Going forward, we'll be booking mark-to-market adjustments each quarter relative to the $6.36. We excluded non-recurring items from our first quarter results, which total $564,000 of non-recurring income net of non-recurring expenses. In the quarter we receive cash proceeds of $3.75 million for an insurance settlement related to the hurricane damages in 2022 to our Lake Charles plant. We incurred $1.9 million of costs associated with exploratory brine well in Arkansas. And there were $1.3 million of cumulative non-cash adjustments to long-term incentive and appreciation rights expenses. All these were excluded from non-recurring items. To demonstrate the quality of the first quarter revenue, I'll mention some fall-through numbers. Income from continuing operations of $7.7 million improved $19.7 million from the first quarter of last year, on a revenue improvement of $52.7 million, representing 37% fall-through of incremental net income to the incremental revenue. Q4 2021 to Q4 -- to Q1 2022 fall-through, the net income was 50% inclusive of the market-to-market [ph]. Sequentially, revenue increased $16.9 million and adjusted EBITDA without the mark-to-market gains increased $7.7 million for a fall-through at the EBITDA level of 46%. Cash flow from operating activities improved $11.7 million sequentially for a fall-through of 69%, representing the incremental cash flow from operating activities on the incremental revenue. In other words, for every dollar increase in revenue Q1 over Q4, cash flow from operations increased $0.69. DSO or day sales outstanding improved two and a half days from December to March. First quarter cash from operations was $5.9 million and adjusted free cash flow with a use of cash of $2.9 million, reflecting a $12 million sequential increase in accounts receivable on the back of 15% sequential first quarter increase in revenue. The revenue increase in March was very strong versus February on the back of continued strong onshore activity in Gulf of Mexico and Middle East offshore projects that moved up from the second quarter into March. The first quarter has historically been a use of cash for us, reflecting a series of payments we traditionally make in the first quarter for prior year accruals such as variable compensation. First quarter cash included the benefit of $3.5 million of the insurance settlement I mentioned earlier. However, we did not reflect that $3.7 million in our computation of adjusted-- Total debt outstanding was $154 million at the end of March, down from a high of $222 million in 2019 third quarter, while net debt was $121 million. Our leverage ratio has continued to improve. At the end of the quarter, net leverage ratio was 2.1 times, the best since the second quarter of 2018. In the early stages of an oil and gas upcycle, we have improved our net leverage ratio to already be at almost a goal we said for peak cycle leverage ratio of two times. Our working capital, our current assets less current liabilities and excluding cash was $87 million at the end of the first quarter. Liquidity at the end of the first quarter was $95 million. Unrestricted cash was $33 billion, and availability under our credit facilities was $62 million. Our liquidity continues to increase, our leverage ratio continues to improve, and working capital is a solid $87 million. All these are driven by a strong rebound in our oil and gas business, not yet including any benefit of our potential futures CS Neptune projects. We are building liquidity and borrowing capacity to begin investing in the development of our bromine and lithium assets in Smackover formation in Arkansas. We've already paid $1.9 million for an exploratory well and we will be completing the inferred resource study this quarter, followed by the -- second half of this year. The PEA is expected to detail the economics of developing our assets in Arkansas, including the capital required, the timing of those outflows, and the potential returns. This PEA will be similar to a Standard Lithium as published -- will encompass both bromine and lithium. This year our only outlay should be for the consultants and engineering studies we do plus any other exploration wells we might want to do. The inferred resources study will be made publicly available as soon as it is completed. It should provide a more refined bromine and lithium targets as Brady mentioned earlier. Also yesterday Standard Lithium announced that they will begin a preliminary feasibility study or PFS for lithium on our acreage. They had previously completed a preliminary economic assessment. According to Standard Lithium, the PFS will consider an integrated project including brine supply and injection wells, pipelines and brine treatment infrastructure, a direct lithium extraction plant using the proprietary technology, and a lithium chloride to lithium hydroxide conversion plant. And as a reminder, as Standard Lithium begins pulling brine to get to the lithium, we are entitled to the bromine without having to drill any wells. Also, as a reminder, Standard Lithium has an option to secure all the lithium on approximately 35,000 of our gross acres and we maintain all the mineral rights to the bromine on those 35,000 gross acres. On the approximately 5,000 gross acres, we own 100% of both the lithium and the bromine mineral rights. We have also started meetings and discussions with the Department of Energy to potentially apply for low-cost long-term tenure loans, and for government grants to bring this United States-based critical minerals to the market. In some cases, we might leverage what Eos is doing in this area. I encourage you to read our press release that we issued yesterday and the 10-Q we filed last night for all the supporting details and additional financial and operational metrics. Last item before turning it back to Brady, we have been reaching out to all our current and potential investors and shareholders communicating our oil and gas recover and low carbon strategy. We have scheduled a following a Non-Deal Roadshow to Los Angeles and San Francisco May 11 through 12. We will also be presenting a hosting one-on-one conferences at the H.C. Wainwright Conference in Miami on May 25, the Louisiana Energy Conference in New Orleans on June 2nd and 3rd; at Cowen's Virtual Conference on June 7th, at an RBC Conference in New York City on June 8, and at a Stifel Conference in Boston on June 9th. Please contact me if you'd like to meet with us on those days. I'll turn it back over to Brady.

Thank you, Elijio. So, in closing, the rate of recovery of our earnings is moving at a good speed despite activity -- still lagging pre-pandemic levels. All the actions that we took during the last downturn have prepared us to capitalize on this market recovery that has all the signs of being a multi-year cycle. This recovery on top of a clear path towards higher revenue and profits coming from key mineral production and chemistry to support energy, storage technology, and CO2 capture will position TETRA to be a stronger and more balanced company between traditional energy and the energy transition opportunity. With that, we'll open it up for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Stephen Gengaro of Stifel. Please go ahead.

Thanks. Good morning, gentlemen.

Good morning.

So, obviously, a very good start to the year. The -- when we think about and you commented on this a little bit on the Completion Fluids front, I mean suggesting maybe flattish revenue sequentially, with some puts and takes, what's the relative margin impact of the European chemicals business versus sort of that 25%, 26% level you did in the first quarter?

We made comparable margins, Stephen in the mid-20%s for our European calcium chloride as we do with the traditional offshore.

Okay, great. Thank you. And then on the on the Completion Fluid side, I'm curious, what you're seeing on the raw material front, I know you have some control that versus your peers, and how the pricing dynamics are in the Completion Fluids business, and what that could mean for maybe some margin expansion in the back half of the year off of the -- off the current mid-20%s levels?

Yes, so there are some dynamics in that space, as you can imagine. Our own internal supply chain vertically integrated operations helps us quite a bit on that. Bromine is certainly tightening. So, we think bromine-based fluids pricing, still some opportunity as we go forward on that. However, there are some inflationary activities that are happening as well; zinc prices have gone up; energy prices in Europe, obviously, are up where we produce our calcium chloride. So, there are some dynamics both in our favor and that we have to work against going forward, Stephen. So, it’s a little difficult to predict how exactly it will play out, but we feel pretty confident with our mid-20%s margins being able to sustain that on a on a go-forward basis. Now, whether we get some additional Neptune projects this year or that they really start to come in line next year, which we're fairly confident with, that will be a pretty good potential upside to our current margin levels that we're attaining.

Great, thank you. And then just one follow-up for me and I'll refrain from asking you what you think about the full year consensus of EBITDA after for the strong first quarter, but I will ask you when you look at the normal seasonal patterns in the business, and obviously, you mentioned how sort of second quarter has some -- maybe some pull into the first quarter versus second. But when you look out past second quarter, I mean, generally speaking, the third quarter has been a pretty strong quarter and it's and you've had a little -- maybe a little bit of a drop off in the fourth quarter. How should we think about the seasonality you would expect this year based on what you know so far?

Yes. Based on what we see so far, I think we can -- we believe that we will continue to see growth and margin expansion, certainly on our Water & Flowback business. We continue to win new projects, new awards. We'll have Argentina coming online in the second half of the year, in addition to the growth we're seeing here in North America, that we have been winning. So, we continue to see that progression really going into the end of the year, we'll see if we see the traditional holiday slowdown or not, that's always a little bit unpredictable, but that's what we expect as we go through the second half.

And Stephen, you mentioned previously, that the fourth quarter has been a bit softer from relative to the third quarter. Historically, that's been driven by budget exhaustion on the onshore business. But last year, we didn't see that because we saw a nice ramp up in business Q4 over Q3. We anticipate that this year will be the same pattern that we will not see budget exhaustion and we will see, given the pricing environment, activity remains strong Q3 going into Q4.

Okay, great. Thank you gentlemen.

Thank you, Stephen.

Our next question comes from Samantha Hoh of Evercore ISI. Please go ahead.

Hey, good morning, guys or good afternoon. Congrats on the great quarter. I have to apologize, I dialed in a little late, so I might have missed a chunk of the prepared remarks. But I was just wondering if you could speak to some of the tightness we're seeing on the rig side, particularly for North Sea for delays in permitting of wells, et cetera. Where do you guys fit in in terms of when you're really contracted for these rigs -- or for these wells using CS Neptune? Is it long after the rakes are contracted and the wells are permitted? Like where do you guys fit in on the planning stage of all the offshore increase in activity that we're anticipating?

So, on offshore side, Samantha, if it's a potential Neptune project, we are involved, I would say years ahead of time because the operators really have to plan you know the metallurgy of their wells, the elastomers, they flow back into their facilities. So, we're very involved -- very early days if it's a CS Neptune, or a highly complex Completion Fluid job. Now, obviously, in the Gulf of Mexico, where you have active rigs moving between wells or moving between operators, there's not necessarily that type of lead-time, it's probably three to six months, where we'll have visibility of a completion job that we need to schedule. So, that's a bit of the horizon that we're working with, there are clearly more ready from some of the smaller I would say non-traditional operators in the Gulf of Mexico. We're seeing quite a bit of activity increased from those customers that we think are going to drive the short-term -- demand short-term by the rest of this year into 2023. And then I think there's some major projects that will be coming online 2023 and beyond that will realize the benefit from.

And Samantha I would also -- on the Gulf of Mexico side, for some of the offshore wells. The customers traditionally come out to the market and solicit pricing from each of the service providers. Then they award a primary contract to one of us and then we traditionally get the call out to supply the fluids for all those wells. We mentioned last year that we had secured contracts to be the primary service provider and fluids provider to some of the super majors in the Gulf of Mexico and that will benefit as will be their primary call out for those wells that they complete.

Okay, that's great. Is pricing then fully dynamic, is it -- you said with changes in your cost structure and material costs?

Yes, well we have been successful, passing on some levels of price increases, Samantha, based on the cost of zinc and other types of materials that we have to include in our manufacturing processes. So, yes, we've had some success to-date, a little bit unpredictable as to how much inflation will continue to grow. It's grown more significantly than we would have anticipated. As I said, fortunately, we've been pretty successful with those price increases and we would hope to be certainly going forward just because the whole market has tightened for a lot of these materials.

All right. For the use and contribution for energy storage, was there any material contribution to 1Q result or is that ramp still to come?

I would suggest that that ramp is still to come. The most important thing is that we're now shipping on a monthly basis to keep up with our production levels. And based on information that they have provided to us and we have seen on our visits with them, we're preparing for significant ramp ups and those volumes.

Okay, great. We'll be shifting to the Water segment. You've highlighted that you're sold out of Sandstorm, and pricing near pre-pandemic level. Do you have incremental capacity coming over the next couple quarters? And I'm assuming pricing is going to be moving up from here. So--

Yes, we have added some additional capital for Sandstorms reallocated some of our capital we have planned for additional Sandstorms, Samantha. Unfortunately, we within 60 days, I have a pretty reasonable lead-time with our key supplier on those. So, as we as we continue to put more Sandstorms into the market, we'll keep a very close eye on the supply, demand, and pricing picture. We still have the opportunity to add additional to what we have currently in the pipeline, if that continues.

Okay. And then maybe one last one, water recycling, you guys had that you have your first contract or a word with a midstream company? Can you maybe talk about just what that means for the company in terms of expanding your customer base there? Is that just -- is this sort of like a first entry type prove the opportunity side and then you can just keep growing from there?

Yes, so traditionally, our recycling, Samantha, has been directly with the operators where we provide all of the water transfer, the chemistry, the recycling, and then the water transfer back to their frac operations. So, we know that model and have executed that model very well. The midstream environment is, is quite different. It's a fixed pipeline, as you know, but they don't have a service company capability within most of these infrastructure companies. And so partnering with a company like TETRA and we've had multiple opportunities with the midstream companies where we can bring that service component, bring the chemistry component to their midstream operations, it makes a very strong partnership, opportunity from us on the service and chemistry side, and their side with the fixed infrastructure and large volumes of water. So, we're optimistic. As I've mentioned previously, many of the companies, even the operators are trying to understand what key minerals are in their flow streams. We are continually to getting more and more requests to analyze the flow streams of our customers and midstream operators to see what might be commercial and we'll have something that we can announce on that front in the coming quarters.

Okay, cool. Looking forward to it. Thanks, guys.

Thank you, Samantha.

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

Andrea, I think, Steven lined up, so let's take his question.

Hey, our next question is a follow-up from Stephen Gengaro from Stifel. Please go ahead.

Thanks. Sorry. Sorry for the late polling there and thanks for taking the question over here. The -- you had talked about some additional potential customers for that PureFlow product. Has there been any updates or traction that you could share with us around that?

We continue to work with a few other companies in that space, Stephen. We're not prepared to really announce anything at this point. But we're optimistic we will be doing so in in the coming quarter or so.

Okay, thanks. And then is there -- are there any updates on the calcium chloride product with CarbonFree--?

Yes, so as I mentioned on my talking points, we have completed our pilot plant for what essentially is a new chemical process to make calcium chloride. Traditional calcium chloride production really has a pretty heavy CO2 footprint and so it defeats the purpose a little bit of working with CarbonFree to supply calcium chloride that has the highest CO2 footprint in their SkyCycle. We've been working on this for over a year. As I've mentioned previously, we have a -- some IP agreements between ourselves with CarbonFree. And we were successful with our pilot plant that's operating in Lake Charles to be able to produce quantities of calcium chloride that essentially CO2-free. So, we're pleased with that. They're in the process of negotiating with multiple parties where their first SkyCycle plant will be. And hopefully they'll be ready to announce that in the coming months or quarter.

Great. Thank you, again, for the answers.

Thanks Stephen.

With that, Andrea, that concludes our call. We thank you very much for your interest in TETRA and look forward to our next call. Thank you.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.