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Edited Transcript of TTI earnings conference call or presentation 7-Nov-19 3:30pm GMT

Q3 2019 Tetra Technologies Inc Earnings Call

THE WOODLANDS Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Tetra Technologies Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brady M. Murphy

TETRA Technologies, Inc. - President, CEO & Director

* Elijio V. Serrano

TETRA Technologies, Inc. - Senior VP & CFO

* Jacek Mucha;VP of Finance & Treasurer

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Conference Call Participants

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* Bryan Anthony Maher

B. Riley FBR, Inc., Research Division - Analyst

* John H. Watson

Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good morning and welcome to TETRA Technologies Third Quarter 2019 Results Conference Call. The speakers for today's call are Brady M. Murphy, Chief Executive Officer; Elijio Serrano, Chief Financial Officer; and Jacek Mucha, Vice President of Finance and Treasurer.(Operator Instructions) Please note, this event is being recorded. I will now turn the conference over to Mr. Mucha. Please go ahead.

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Jacek Mucha;VP of Finance & Treasurer, [2]

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Thank you, Drew. Today's 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 reconciliation of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute of financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. I'll now turn this over to Brady.

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [3]

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Well, thank you, Jacek. Good morning, everyone, and welcome to the TETRA Technologies Third Quarter 2019 Earnings Conference Call. I will summarize some highlights for the quarter, then turn it over to Elijio for some additional details, which will be followed by your questions. I would like to start, again, by thanking the TETRA and CSI Compressco employees for delivering another strong quarter amidst a challenging industry environment. For the second consecutive quarter, our EBITDA margins improved sequentially across all 3 business segments, and our management employees did a good job executing our strategies while proactively adjusting our cost structure to rapidly changing conditions. Although the revenue for our businesses was flattish sequentially, we performed well relative to many of the macro market indicators, such as the U.S. land rig count, which on average declined sequentially more than 7%. Again, we did a good job across both companies navigating this challenging environment. On a consolidated basis, we achieved a $46 million adjusted EBITDA quarter. This is down 8% from the second quarter, but primarily as a result of the seasonal decline in our Northern Europe Industrial chemicals business, that peaks in the second quarter.

This is highlighted by the fact that our adjusted EBITDA was up 11% from third quarter a year ago. While average U.S. land rig count was down over 13% year-on-year. Completion fluids continues to benefit from improved activity in key offshore markets, as we've seen an uptick in our demand for products on top of a favorable product mix plus some pricing improvements.

Our adjusted EBITDA margins improved sequentially by 130 basis points to 23.7% and are the highest EBITDA margins for this division since the fourth quarter of 2015 when we exclude any benefit of CS Neptune. The Industrial chemicals business within completion fluids remains strong, that helps offset some of the volatility in our North America land business. Completion fluids' margins are further supported by our vertical integration advantage and long-term bromine supply agreements. In regards to CS Neptune, as previously announced in the second quarter, we signed a contract to provide Tetra CS Neptune completion fluids for a deepwater Gulf of Mexico project that was expected to be materially completed towards the end of the third quarter. Unfortunately, this project is delayed and is now expected to be completed during the fourth quarter. I will remind everyone, once again, that these projects are ultra-deepwater complex wells that are prone to unforeseen challenges and are not guaranteed until the drilling is completed and final pressures are confirmed. But based on the information we know today, it is our expectation to complete this project in the fourth quarter.

During the third quarter, we also launched at the Society of Petroleum Engineers Europe Conference, TETRA CS Neptune completion fluids monovalent family of products. Monovalent completion fluids expand and increase the range of applications in certain reservoirs and provide lower corrosion rates in certain downhole environments.

Feedback to date from our customers has been very encouraging, and we believe this new technology will open more opportunities to deploy our highly differentiated portfolio of TETRA Neptune completion fluids. We're very pleased to announce that TETRA was also a finalist for World Oil Magazine's Best Oilfield Fluids and Chemicals award for TETRA Advanced Displacement System or TADS, further highlighting our efforts and successful results in operating -- offering differentiated technology.

Water & Flowback held up very well in the third quarter, given our U.S. onshore footprint and the pullback activity throughout the quarter followed by pricing pressure during the latter part of the quarter.

Our adjusted EBITDA for this division improved sequentially to $11.2 million on slightly lower revenue, showing resiliency across most of the U.S. basins.

Our EBIDTA margins of 15.4% increased 50 basis points. We continue to focus on integrated projects utilizing our automation capabilities by driving efficiencies into our operation and provide our customers with a fully integrated water management solution.

We finished the quarter working on 20 integrated projects with 13 different customers. 4 of the projects were with either new customers or in new basins. The penetration into new customers and new basins is encouraging, as more and more customers are realizing the value of these integrated offerings.

Furthermore, to support our closed-loop water management capability, we released our new BlueLinx automated control system, which provides remote control and monitoring for every aspect of our integrated water services.

We also made progress commercializing our Advanced Cyclone system, which is achieving improving sand-recovery efficiency greater than 95%, which compares to traditional cyclones which are closer to 50% sand-recovery.

As mentioned on our press release this morning, we signed a contract with a major E&P operator in the Permian Basin, it was the first to run extensive trials with our Automated Cyclone system. This is a large order of units to displace their current technology on a take-or-pay contract. We've also been awarded a contract for multiple test separators in Argentina, our first Latin American contract for this type of technology.

TETRA was also a finalist for 2 World Oil Magazine's Best Water Management Technology Awards, one for the TETRA SwiftWater automated treatment system, the other for TETRA's Lowest Cost Per Barrel Water Management Solution. We were the only company that had 2 technology solutions in the finals for water management.

So while we see a weaker fourth quarter for this segment due to declining E&P spend, we will continue to focus on leveraging our differentiation while managing our variable costs to be nimble and proactive with our cost structure and to quickly interact to changes in market conditions.

The compression business yet again set records for compression services gross margins at 53.2% and utilization of 90.1% and continues to benefit from a long-term growth cycle of increased gas production and the use of compression for centralized gas lift in key shale oil basins. This was a second quarter in a row where we achieved record highs in compression service gross margins and utilizations.

While we have seen some customer slowdown with a request of additional compression services going into 2020, the overall fundamentals for the compression business have not changed, and this segment remains a very strong -- one of the strongest in the oil and gas industry.

Our revenue in the third quarter decreased sequentially to $114 million from $136 million or lower new equipment sales due to the timing of shipments, while our aftermarket services and compression services revenue was up sequentially on top of improved EBITDA margins.

Total compression adjusted EBITDA in the quarter was slightly down to $31.3 million from $32.8 million in the second quarter but was up $6.7 million from this time last year.

While centralized gas lift continues to see the highest demand for our equipment, our increased focus on liquids artificial lift methods for aging unconventional wells, such as our Gas Assisted Plunger Lift, or GAPL, combined with our Backside Auto Injection System, or BAIS, has resulted in a fourfold increase in the number of GasJack sets we have working for this application since the beginning of the year. We're very pleased with the amount of interest and demand these new applications are creating for the GasJack fleet.

We've also received a large international order in the third quarter and have net orders of $29 million, increasing our backlog to $63 million, up $3 million from June in 2019.

We expect to see 1 or 2 more large orders in the fourth quarter or in the early 2020 to help fill our 2020 new order book for equipment sales.

While orders were slow in the first half of the year, our new equipment sales pipelines remain strong with over $250 million of identified opportunities.

We added 14,300 active horsepower this quarter, utilization for 1,000 and higher horsepower equipment focused on gathering and centralized gas lift, was 97.4% as of the end of September, up 30 basis points from the end of June 2019.

Overall utilization for the entire fleet is at 90.1%, up 100 basis points sequentially, and again, another record high since the acquisition of Compression Systems, Inc.

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 some questions.

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Elijio V. Serrano, TETRA Technologies, Inc. - Senior VP & CFO [4]

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Thank you, Brady. I'll spend a few minutes on free cash flow, capital expenditures, the balance sheet, then CSI Compressco's capital allocation strategy.

In the third quarter, TETRA only generated free cash flow from continuing operations of $9.7 million. This compares to $3.1 million generated in the second quarter of 2019 and $35 million consumed in the first quarter of this year.

We have historically consumed cash in the first half of the year and generated free cash flow in the second half of the year, and we are trending along those lines.

We expect to generate positive free cash flow from continuing operations in 2019 and exceed the $3 million that we generated last year.

For TETRA only, we expect total year capital expenditures to be approximately $25 million to $30 million, in addition to $15 million, 1-5 million, of equipment that we've agreed to buy and lease to CSI Compressco, supporting their high-return opportunities.

TETRA-only capital expenditures in the third quarter were $8 million and compared to $20 million in the first half of the year.

TETRA-only net debt at the end of June was $192 million, with cash on hand of $21 million. Our debt structure does not include any material maintenance covenants, which provides us the flexibility to maneuver the volatility in the market.

As always, I'd like to again remind everyone that Tetra and CSI Compressco's debts are distinct and separate. There are no cross defaults, cross collateral or cross guarantees on the debt between TETRA and CSI Compressco.

I'll spend a minute now on CSI Compressco. CSI Compressco's cash flow from operating activities was $27 million. A significant increase from $8.7 million generated in the second quarter of 2019.

At the end of September, CSI Compressco's total gross debt outstanding was $657 million, of which $350 million are secured notes that don't mature until the year 2025 and $296 million are unsecured notes that mature in August of the year 2022.

CSI Compressco's net leverage ratio at the end of September was 5.2x. When annualizing our third quarter adjusted EBITDA, CSI Compressco's net leverage would be approximately 4.8x. Well on their way towards a 4.5x target that we have set.

From a high of 7x at the end of Q2 2018, CSI's net leverage ratio has improved to 5.2x.

Yesterday, CSI Compressco -- we confirmed their prior year -- prior total year EBITDA guidance, which represents a year-over-year improvement of between 26% and 31%. We are encouraged that the compression business as we navigate a challenging North American market with declining rig activity.

So far, the weaker market activity in the broader oil and gas North American market has not had any effect on our compression business. And in fact, the business fundamentals have continued to improve in the last quarters, amid all this uncertainty.

At the midpoint of CSI Compressco's 2019 full year adjusted EBITDA guidance and after accounting for cash interest expense, maintenance capital expenditures and cash taxes, CSI Compressco expects to generate approximately $57 million of free cash flow.

This year, slightly over $30 million of their free cash flow was directed towards cash redeeming the Series A preferred units, a small amount towards distributions, and the rest was towards growth capital.

CSI Compressco remains capital disciplined. Their growth capital investments in 2018 and 2019 are obtaining 20% returns on capital. CSI Compressco are targeting more than 50% of next year's distributable cash flow towards the reduction of debt to further strengthen their balance sheet. They expect 2020 investments in growth capital to be below the amount that we expanded in 2019 and further expect to continue to generate 20% returns on capital.

It is our goal to improve CSI Compressco's leverage ratio to 4.5x by the end of 2020.

Back to comments on TETRA. In the last downturn, TETRA remained free cash flow positive for each of the downturn years. We have the playbook to manage during difficult times and will again execute on the actions necessary to remain free cash flow positive during periods of reduced activity levels.

Our diverse business model, which includes industrial chemical sales, international onshore and offshore activity, vertical integration in chemicals and compression, and the proprietary Neptune technologies all contributed towards generating free cash flow in the last down cycle. And we fully expect that we will continue to generate positive free cash flow in periods of a weaker market.

We encourage you to read our news release on this morning and CSI Compressco's news release from yesterday with all the supporting detail.

I'll now turn it back to Brady.

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [5]

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Thank you, Elijio. And before we open to questions, I'd just like to summarize and reiterate a couple of key messages to leave with you. Again, overall, I'm pleased with our results this quarter, as demonstrated by our second consecutive quarter of increased EBITDA margins for each of our 3 business segments and a 250 basis point improvement in overall TETRA EBITDA margins over Q3 of last year.

We're confident we'll be able to complete the Gulf of Mexico well, which is scheduled for our CS Neptune completion fluids in the fourth quarter. While North America land market is experiencing pricing pressures and potential budget exhausted by our customers, we're committed to optimizing our flexible cost structure to adapt to any new market conditions. Although our North America land businesses were resilient in the third quarter, we don't expect to be immune from the potential budget exhaustion and industry macro indicators that point to a weaker fourth quarter for our Water & Flowback business segment. Our successful strategy is to differentiate from our competition is validated by a large take-or-pay contract award for our latest de-sanding Flowback technology, introduction of monovalent CS Neptune and TETRA's first ever nominations for World Oil awards.

Our compression division continues to achieve operational and financial record highs, and we continue to see this business strengthen even amidst sign of weakness throughout the industry.

Lastly, we remain very focused on cash flow generation and still expect total year TETRA-only free cash flow to exceed $3 million that we generated in 2018. We generated free cash flow in the second and third quarter of this year and are looking forward to ending on a very strong note.

With that, let's open it to some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Praveen Narra of Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [2]

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I guess when we think about the CS Neptune well, it sounds like you guys are pretty confident in that getting completed in 4Q. But can we talk about how the 2020 schedule may play out? Do you think we can see any of the kind of Halliburton coworks coming through in that time frame? Or how should we think about 2020's profile for that?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [3]

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Yes. And thanks for bringing that -- as I mentioned, we've had a lot of really good interest in our monovalent completion fluids introduction. And we are expecting some business in the -- particularly, in the North Sea for our monovalent CS Neptunes in 2020. It's a little early to predict some of the larger deepwater projects for our Generation 1 Neptune at this point for 2020, but we hope to have a little more clarity as we see the budgets for our customers into the new year.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [4]

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Okay. And then I guess, just thinking about the fluids margins x CS Neptune without having the project in 3Q we're still fairly strong. Can you talk about the ability to hold that, if we don't see these CS Neptune projects? Or how do we think about 3Q as a kind of normalized margin?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [5]

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Yes. We've communicated before, we think our base completion fluids business is holding up very well. We, I think, communicated, we think consistently, we can achieve 20% or above EBITDA margins for that base business without CS Neptune. And based on what we see right now as we look at the market of Q4 and beyond for next year, we believe that's still very much intact.

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Elijio V. Serrano, TETRA Technologies, Inc. - Senior VP & CFO [6]

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And Praveen, remember that we are vertically integrated in the bromine's market. And we've got the long-term agreement to get the elemental bromine. That vertical integration contributes towards steady margins.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [7]

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Right. Okay. If I could squeeze one more in. Just thinking of CapEx for 2020, obviously, CSI talked about there's yesterday. How do you think about TETRA-only CapEx for next year?

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Elijio V. Serrano, TETRA Technologies, Inc. - Senior VP & CFO [8]

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I would suggest that we're early in the process right now. We're gathering feedback from our customers in terms of what their plans are for 2020. Once we complete that information, we'll do our internal budgeting process. I would suggest that it's early in the process for us to volunteer any 2020 CapEx.

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Operator [9]

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The next question comes from John Watson of Simmons Energy.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [10]

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Brady, on the Neptune side, can you remind me how long it takes typically to complete one of those projects? And has the project you expect to complete in Q4 already begun?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [11]

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We really don't want to get into any more specific details about our customers' well operations for the completion phase of this well. As you can imagine, it's a very major project for our customers and we prefer not to give any more details. On the timing, after a well is drilled and the well log data is taken for the pressures, then we're typically mobilized to the rig site for the completion phase of the project, which can run from a few days to a month.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [12]

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Okay. Secondly, Water & Flowback revenues were impressive relative to completions activity in the third quarter. Can you give us some more detail on what you attribute that outperformance to? And maybe expectations for it to continue or not continue into 4Q?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [13]

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Yes, I think in the third quarter, as I said, I think our teams executed very well. Our integrated projects help us, we believe, to streamline costs, providing some automation, reducing some labor costs as part of our operations. Introducing some new technology. Our margins or our pricing on our Sand Cyclones, the new technology, hold up very well. Having said that and very pleased with what we did in Q3, clearly, we see Q4 activity pulling back and more pricing pressure in the fourth quarter. So we expect that will be weaker for Q4.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [14]

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Okay. Understood. Lastly, water treating specs. Have you seen those become less intensive of late? And are we coming closer to reaching a consensus water spec among E&P customers? And if so, does that benefit TETRA?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [15]

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I wouldn't say we've seen a major change with the customers that we are working with, with their water specs or you're talking about produced water for reuse in frac operations, John?

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [16]

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That's right, yes.

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [17]

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Yes, I wouldn't say with the customers that we are operating with, we have seen any real major change. Now, I'll leave it at that.

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Operator [18]

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The next question comes from Bryan Maher of B. Riley FBR.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [19]

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Sticking with water for temporary transfer, how did pricing evolve over the third quarter? And what's your outlook for 2020?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [20]

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So I think, during the first 2 months of the quarter, pricing held up fairly well. We definitely saw some more pricing pressure along with some of the customer pullback in the last month of the quarter in September. Which, in that pullback, we also saw for more pricing pressure. I think it's a little early to predict what's going to happen in 2020 as it relates to pricing. Obviously, we'll be paying close attention to our customers' budgets as they're announced for 2020 and how we position ourselves along those budgets. We do like the customer base that we have. We do like the differentiation that we have with TETRA STEEL, with our automation and with our sand Flowback. So we do believe we can achieve premium pricing than what's in the market. But to give an overall, I guess, number at this point or expectation at this point, I think it's a bit early for 2020 for us.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [21]

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That's fair. And then, could you perhaps share a rough range of how much the industry's supply of lay flat hose will have likely grown in 2019? And maybe, could continue to expand here?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [22]

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I'm not sure I could answer that with a fair degree of accuracy. I think -- Elijio, do you have any comments on that?

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Elijio V. Serrano, TETRA Technologies, Inc. - Senior VP & CFO [23]

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I would suggest that we've been disciplined, and we've focused on our high-end proprietary hose that's double jacketed, that we believe represents a competitive advantage. However, for the traditional single jacket host, I couldn't comment or we couldn't comment on what the others are doing in the industry. We're focused on technologies that represent a differentiator.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [24]

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And then just one more on Water & Flowback. Could you share a percentage of revenue that -- or percentage of projects that entails BlueLinx so far and maybe, a target that you guys have a year from now or so?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [25]

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So we're targeting -- there's 2 different answers to that. For all of our jobs, we are targeting to have pump automation, 100% is our objective. We're not there yet. But BlueLinx is part of that solution anytime we have a piece of automated kit on a particular job. For the fully automated jobs where we have integrated offerings BlueLinx is a critical part of managing that whole closed-loop network. And I think we mentioned we had 20 jobs this quarter. So between all of our transfer jobs with automation and our integrated projects is where BlueLinx plays a key role for us.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [26]

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Got you. If I could just sneak one in on compression. I know on the Compressco call you guys said you plan to direct 50% or so of future distributable cash flow towards growth capital. But could you possibly share how much horsepower you currently have on order for delivery in 2020?

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Elijio V. Serrano, TETRA Technologies, Inc. - Senior VP & CFO [27]

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The amount of horsepower scheduled for delivery equates to, in dollar-wise, less than $3 million at this point. And we are being very selective in terms of what opportunities we respond to and only responding to those that are either with existing concentrated customers and/or generating 20% returns on capital. So at this point, only $3 million of next year's capital that'll be funded with cash flow from operations is committed.

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Operator [28]

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The next question comes from Stephen Gengaro of Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [29]

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I dialed in a touch late so I apologize if you've answered this. Have you seen any more traction from the Halliburton alliance? And what are you seeing as far as expectations on the CS Neptune side, as you look into 2020?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [30]

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Yes, we talked a little bit about that earlier, but I'm happy to answer your question. The Halliburton traction, we view very positive. I think last quarter, we announced that we were engaged with 6 super major operators on some of their key deepwater projects, 3 of those 6, we -- were brought in by our Halliburton relationship. We introduced our monovalent technology at SPE in Europe this quarter. And again, Halliburton has a very strong presence in some of these markets, even some integrated drilling type projects, where they're the lead and they have introduced monovalent technologies into those clients. And we feel very good about that pipeline and business revenue for 2020. So overall, very positive, gaining traction. Some of them longer-term than others, but still very positive from our perspective.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [31]

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Do you have a guess -- based on what you're seeing in the deepwater market? One of the things that I think ultimately will be helpful for the -- I think, just for the consistency of earnings, but some other factors and returns, et cetera, is sort of a more normal pattern of these projects where it becomes maybe a little less episodic and a little more consistent. I mean, some of that's based on just the deepwater market in general. But any sense for, kind of, how that plays out over the next couple of years?

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [32]

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Yes, I think the deepwater market is still fairly suppressed from, obviously, the peak days that we saw perhaps in 2013, '14 levels. So I think there's still a lot of upside on the deepwater. I think the overall offshore market -- again, our monovalent solution is not specifically tied to deepwater, I would say it's more tied to offshore North Sea type markets or even Middle-East markets, we're seeing that activity, fairly robust, not back to full peak levels by any means, but certainly better than the troughs that we saw in the last few years.

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Operator [33]

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

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Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [34]

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Well, thank you. We appreciate your interest in TETRA Technologies, and thanks for taking the time to -- for joining us on our call this morning. This concludes our call.

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Operator [35]

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The conference has concluded. You may disconnect your line at this time.