TETRA Technologies, Inc. (NYSE:TTI) Q4 2023 Earnings Call Transcript
TETRA Technologies, Inc. (NYSE:TTI) Q4 2023 Earnings Call Transcript February 28, 2024
TETRA Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to TETRA Technologies Fourth Quarter 2023 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I will now turn the conference over to Rigo Gonzalez. Go ahead.
Rigo Gonzalez: Thank you, Joel. Good morning, and thank you for joining TETRA's Fourth Quarter 2023 Results Call. The speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward looking, including projections, financial guidance, profitability and estimated earnings. These statements are based on certain assumptions and analysis made by TETRA and are based on several factors. These statements are subject to several 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, free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed or other non-GAAP financial measures. Please refer to yesterday's press 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 a complete financial results for the period. In addition to our press release announcement, we encourage you to refer to our 10-K that we also filed yesterday. I will now turn it over to Brady.
Brady Murphy : Thank you, Rigo. Good morning, everyone, and welcome to TETRA's fourth quarter earnings call. 2023 was a historical year for the company. And despite higher-than-usual year-ending activity slowdowns in a few of our segments, we are seeing good activity recovery in the first half of 2024, and expect another year of growth. For 2023, we achieved numerous historical financial highs, but also achieve some strategic milestones that will benefit the company for many years to come. Our full year 2023 adjusted EBITDA, excluding mark-to-market, of $106 billion, grew by 37% from 2022 and nearly 3x higher than that of 2021, as both of our segments posted another year of strong returns. Our full year 2023 adjusted free cash flow of $41.1 million was 61.6% higher than 2022, and was slightly above our guidance from the beginning of the year, representing approximately a 40% conversion rate of adjusted EBITDA to adjusted free cash flow.
This was achieved despite significant investments made in Arkansas and investments made to finalize the engineering design for our first ever commercial produced water for beneficial reuse project, a solution that we believe will be disruptive for the industry in transforming oil and gas well produced water from a waste into an important resource. Our strong 2023 adjusted EBITDA growth was achieved, despite little contributions from TETRA CS Neptune and TETRA PureFlow, which we believe will be catalyst for further growth in 2024. For the full year, our Completion Fluids & Products segment grew revenue by $40 million or 15%, while adjusted EBITDA grew $22 million or 32%, representing an EBITDA fall-through of nearly 55%, driven by a strong performance in our industrial chemicals business and growth in our international offshore completion fluids operations.
Full year Completion Fluids & Products revenue of $313 million was the highest since 2015, when we completed 2 large TETRA CS Neptune projects in the Gulf of Mexico. Our industrial chemicals business posted a historical year, achieving its highest revenue and adjusted EBITDA in our history. With 2023 revenue growth over '22 of over 18%, our Industrial Chemicals business is now 22% of the company's total revenue. And as we ramp up deliveries of zinc bromide based electrolyte in the coming years, we expect this percentage to continue to increase. Our diversity and product offering, including grades for technology and food and superior product quality, allows us to participate in a wide range of markets and applications, as evidenced by our recent entry into the lithium production process in South America and the chip manufacturing process in the United States.
Our leading market positions in Northern Europe and U.S. gives us stable markets in which to operate with predictable revenue and earnings and strong free cash flow, allowing us to reinvest in our new high-growth opportunities. For Energy Services, total revenue attributed to offshore projects increased 11% year-over-year, and we anticipate another double-digit top line growth in 2024, as our pipeline of offshore projects continues to build. We have already recovered the investments made in recent years, where we strategically expanded capacity in key deepwater offshore markets, and expect to continue to generate positive momentum in those markets. We have intention to build our inventory levels to capture the upcoming growth in deepwater activity.
Although floater utilization shows increasing rig availability through 2024, [indiscernible] expects operators will continue to exercise outstanding options and/or continue to recontract rigs currently under contract. Marketed utilization is expected to peak in 2028 at 91%, due to steady growth in project development activity. TETRA is well positioned to benefit from this multiyear growth trajectory. Our outlook for TETRA CS Neptune continues to improve, and we've secured a second quarter job in the North Sea, and we are in early discussions with 2 different super majors for projects in the Gulf of Mexico that are scheduled for late 2024 or early 2025. Earlier this month, the executive team and I have visited Eos' state-of-the-art automated manufacturing line at the Akros, Wisconsin facility, and came away with high confidence they will deliver to Eos' requirements.
Earlier this year, Eos announced that it expanded its partnership with TETRA and designated the company as its preferred strategic supplier for the full electrolyte of its Z3 long-duration energy storage cube. The company was previously only providing out TETRA PureFlow zinc bromide solution, which is only a portion of the full electrolyte. The evolution of increasing TETRA's participation with Eos from such a TETRA PureFlow to the full electrolyte will be accomplished without the need for incremental bromine and is a good fit within our chemistry expertise. TETRA is expected to supply a minimum of 75% of the total electrolyte product demand going forward, and we anticipate deliveries to be meaningfully higher than 2023, mostly in the second half of the year.
This relationship and the timing of their expected growth also dovetails nicely with our Arkansas bromine production plants. Turning to our Water & Flowback Services segment. Despite declining rig activity and active frac fleets for most of 2023, all 4-year revenue was up $33 million or 12% and adjusted EBITDA was up $10 million or 23%. The majority of the growth was driven by continued market share gains and high utilization within our fleet of TETRA Sandstorm and an increasing part of our business dealing with produced water, which despite declining U.S. drilling and completion activity in '23, is only increasing along with oil and gas production. The market share gains and benefits of shifting our focus to production, rather than drill bit, can be seen by our 2023 revenue exceeding that of our previously year high in 2018, but with 50% less rig activity.
These market share gains were achieved as we improved our adjusted EBITDA margins from 15.5% to 17% in 2023. International business, mainly Argentina, also drove some of the revenue increase. And although we strategically sold one of our EPS in the fourth quarter, we anticipate earnings to be flat year-over-year in that region. As previously mentioned, these projects are longer-term contracts with established day rates, which also provide a steady stream of cash flows. Over the last several years, we have deployed significant growth capital in this segment to build out our fleet of TETRA Sandstorms, introduce new technology to help drive efficiencies, increase our capacity for water treatment and recycling and investments in EPS to grow beyond North America.
These investments are paying off, as demonstrated by our improvement in return on net capital employed, as we expect that they will continue to drive higher returns. As we move forward with this segment, we will continue to invest in technology and automation, but we'll maintain our focus on returns rather than additional growth, as we plan to divert much of the growth capital to Arkansas and our produced water for beneficial reuse projects. In November, a 5.2 magnitude earthquake was recorded in the Permian Basin, marking the fourth strongest recorded in Texas. Just within the past few weeks, earthquakes over 4.0 magnitude were reported in New Mexico, South Texas and Oklahoma. As earthquakes become more frequent and more intense in areas of produced water disposal, regulators have increased sense of urgency to limit volumes of produced water disposal and find alternative solutions.
Multiple agencies across multiple states are now very active in defining regulatory specifications for using produced water for industrial, farming and other applications. TETRA is engaging with regulatory agencies as well as operators to ensure our solutions will meet these requirements. We met our year-end target date to complete the engineering design for our first commercial produced water for beneficial reuse projects. We are currently in advanced negotiations with one of the largest U.S. oil producers for their beneficial reuse project, and have entered commercial discussions for a second high salinity Permian Basin demonstration project. We are on track to deploy our first commercial project in the second half of this year. Lastly, in 2023, we significantly advanced our Arkansas lithium and bromine brine project.
In June, we announced an MOU with Saltwerx at LLC, a wholly owned subsidiary of ExxonMobil, to pull both of our acreage to form the Evergreen Brine Unit, which was subsequently and unanimously approved by the AOGC in September. In the fourth quarter, we launched and completed a technical resource study for the Evergreen Brine Unit, which advanced our prior inferred resources to include the measured and indicated category, reflecting higher confidence in the resources evaluated by the study. The study highlighted the highest lithium concentrations to date of any lithium brine resource in the U.S., for which an SK-1300, NI-43-101 or JORC-compliant technical report summary has been published. I'm also pleased to announce that yesterday, we closed on a 120-acre plant site that is ideally located just south of Stamps, Arkansas that is within our 35,000 leased acres and 1 mile north of our Evergreen Brine Unit.
We are currently performing soil sampling before planning to break ground later this year. Finally, we're currently focused on completing the lithium feed study as well as finalizing the negotiations for operating joint venture and/or joint development agreements relating to the development of the Evergreen brine unit. Based on that report, plus the engineering studies that were previously completed, we were able to secure the remaining finances required to complete the bromine processing facility once we get to FID, which we expect to be later this year. Now I'll turn it over to Elijio to provide some additional commentary on the successful financing and our financial results. Then we'll open it up for questions.
Elijio Serrano : Thank you, Brady, and good morning, everybody. 2023 was a strong year for TETRA. Adjusted EBITDA was up 37% and operating income was up 183%. Adjusted EBITDA margin of 17.1% increased 300 basis points year-over-year. And more importantly, we generated over $40 million of free cash flow in 2023. We also significantly improved our balance sheet, ending the year with a net leverage ratio of 1.1x and a 27% reduction in net debt. As of February 26, liquidity was $212 million, inclusive of the $35 million delayed draw feature that is available to TETRA for the bromine project. In addition, based on Friday's closing prices, our holdings in Standard Lithium and CSI Compressco combined for a total market cap of approximately $12 million, and these investments can be monetized as necessary.
Subsequent to the end of the quarter, we refinanced, extended and expanded our term loan at a more attractive interest rate than our prior term loan, further strengthening our balance sheet and providing us the flexibility to execute on our growth initiatives. We were very pleased with the reception we got on the refinancing, which we reached out to a significant number of potential capital providers, including those in the oil and gas, mining and chemicals sector, and received interest from over 60 capital providers. We received 11 term sheets, and 5 of those wanted on their own to help us refinance the entire term loan without partners, providing us the capital to help us with the bromine initiative and indicate a strong interest in supporting us with the required capital for the lithium initiative.
In talking to those in the industry, getting 5 term sheets from capital providers willing to take on the entire opportunity on their own, plus another 6 willing to be part of a consortium is rare for a small or mid-capped oilfield services company in today's environment. We believe this demonstrates the value of a company like TETRA, with over $100 million of adjusted EBITDA, a leverage ratio of 1.1x, free cash flow of over $40 million and working with a partner like ExxonMobil, plus an Industrial Chemicals revenue base of $130 million, not subject to the fluctuations of the oil and gas industry, plus our history of being free cash flow and EBITDA positive in the last 2 downturns, makes us an attractive partner to raise capital. Our term was refinanced 50 basis points below our prior term loan and the maturity is now January of 2030.
Our balance sheet is nicely set to invest in lithium and bromine in Arkansas. [indiscernible] our current liquidity, expected free cash flow in 2024 and 2025, plus the $75 million delayed draw feature available to us, we believe we have the capital necessary to complete the bromine project without having to issue equity. Our focus will now shift towards finding the capital for our 49% of the expected lithium joint venture with ExxonMobil. Just like we did with the bromine project, our objective is to source the capital for lithium without relying on the equity market. We will evaluate project financing at the JV level and government loans and grants for a portion of the lithium project. From an outlook perspective, we expect 2024 revenue, adjusted EBITDA and free cash flow to be above 2023.
And as mentioned earlier, 2023 cash flow was $41 million. Our base business free cash flow in 2024 is expected to be better than 2023, before investments in bromine and the lithium project in Arkansas. We don't expect our Arkansas investments in 2024 to be more than the free cash flow we generated from our base business, and we don't expect to use our delayed draw revolver until 2025. We believe we remain on plan to be generating revenue and EBITDA from the bromine and lithium projects in 2026. We also expect a ramp-up in electrolyte sales into the stationary battery storage market in the second half of 2024. We also expect to be generating revenue and EBITDA from the first desalination project in the second half of 2023 -- 2024. These will be the catalyst to our 2024 being stronger than 2023.
In the first quarter, we expect Water Management to be stronger than the fourth quarter, due to the ramp-up in fracking activity that we saw earlier this quarter. We expect flowback services to be weaker in the first quarter, relative to the fourth quarter, as the flowback lags Water Management and fracking by 2 to 3 months. The sum total of this is a Q1 Water Management and Flowback services, EBITDA should be comparable to Q4, but been stronger in the second quarter as flowback services rebounded from the stronger first quarter fracking activity. Also, remember that in the second quarter, we see a seasonal peak in the Industrial Chemicals business in Northern Europe, that has historically added approximately $50 million in revenue Q2 over Q1 and has added between $4 million and $6 million in EBITDA Q2 over Q1.
We expect the second quarter of 2024 to be at or above the second quarter of last year. From an Investor Relations perspective, we have several events coming up to help us further communicate our initiatives. We will be hosting one tomorrow at the Scotia Conference in Miami. Northland Capital, who initiated coverage on TETRA last month, will be hosting us for a virtual fireside chat on March 14. And [indiscernible] with Benchmark, who also recently initiated coverage on TETRA, will be hosting us for a non-deal roadshow in New York City, Philadelphia and Boston in the first week of April. This will include a group lunch on April 1 in New York City with Brady, myself and our Chairman of the Board, Jay Glick. Please reach out to me if you would like to participate in any of these events.
The strong performance by our base business, our long-duration battery storage opportunity and our lithium arrangements with ExxonMobil have created strong industry -- interest in TETRA. We now have 6 research analysts covering TETRA up from just a couple of years ago. I'll turn this back to Brady for closing comments before we open up our call to questions.
Brady Murphy : Thanks, Elijio. We're ending 2024 with a strong and growing base business, a solid balance sheet, over $210 million liquidity, with a constructive outlook for our products and services. We anticipate further growth in '24 and expect to continue to generate strong free cash flow from our base business, to fund our strategic growth investments. A combination of these plus advances in our produced water beneficial reuse solution, our Arkansas resource position and strategic partnerships provides us with the opportunity to continue to drive long-term shareholder value. While '23 was a historical year for the company, we anticipate '24 to be both historic and transformational. With that, we'll now open up to questions.
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