TETRA Technologies, Inc.
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good day, and welcome to the TETRA Technologies, Incorporated First Quarter of 2013 Results Conference Call. 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 would now like to turn the conference over to Mr. Stuart Brightman, President and CEO. Mr. Brightman, the floor is yours sir.

[Stuart Brightman:]

Thank you, Mike, and welcome to the TETRA Technologies’ first quarter 2013 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'll do a brief presentation and overview and then turn it over to Elijio to provide additional details and commentary on our first quarter results then we will open it up for questions. I must first remind you that this conference call may contain statements that are or maybe 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 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, revenues, gross profit, profit before tax or earnings per share excluding the Maritech segment special charges or other non-GAAP financial measures. Please refer to this morning's press release through our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information for period in accordance with GAAP and should be considered within the context of our complete financial results for the period. First quarter 2013 earnings of $0.06 per share excluding Maritech was slightly below the range we noted in our guidance on February 1st. The primary contributor to the shortfall was slower than anticipated first quarter activity onshore U.S. and Canada and a reduction in activity in Mexico as we exited the quarter. All of our other businesses met or exceeded our internal expectations for the first quarter. In the Fluids Division, we continue to be very pleased with the continued growth of the business. Over the years, we have invested in our capability to service the offshore market and that has been rewarded in the Gulf of Mexico Deepwater. In addition, investments over the past year in our Water Management business continues to generate outstanding returns; both of these areas, we expect to continue to grow as we move through 2013 and beyond. In addition, our Chemicals business both in the U.S. and Europe performed inline with expectations. In the Production Testing segment, our first quarter results were negatively impacted by lower than anticipated activity in the U.S. and Canada. In the U.S., we noted in our previous call in February that we expected activity to pick-up after a sluggish fourth quarter. In fact, this was not the case. However, we anticipated an improvement in the second quarter and continued improvement in the second half of the year. Despite this positive intermediate term outlook, we took aggressive cost cutting measures in our Production Testing segment during the first quarter and supported that with G&A cuts in this and other businesses across the company during the first quarter and into the second quarter. We continue to be very confident over the intermediate term and beyond that our 2012 acquisitions and continued investments in organic growth in Production Testing will be solidly rewarded. We have a long history of outstanding performance in the Production Testing business. For the third consecutive quarter, our Compressco Partners subsidiary increased the distribution on its outstanding units. Overall, this segment performed well in the first quarter, however in early March, we saw the beginning of a decrease in activity in Mexico due to operations in certain areas being suspended by our customer for budget reassessment. As a result, we expect our assets to be idle for certain period of time; we view this is short term in nature and only a temporary suspension of activity. We will attempt to reallocate the assets within Mexico as appropriate. We have taken aggressive headcount reductions over the past month in Mexico and we continue to respond to the situation as necessary. TETRA has operated in the Mexico for 15 to 20 years and over that time period we have demonstrated a record of outstanding performance and understand how to deal with the changing market environment. During the first quarter, we increased our fleet size in the U.S. and Canada in response to positive market opportunities driven by the continued strength of our liquids and non-conventional applications as well as an improvement in our legacy natural gas applications. This lot of area continues to be supported by improved natural gas prices has had positive demand for our services. In the Offshore Services segment, our first quarter results were consistent with internal expectation. A portion of our backlog was delayed to the second quarter result of challenging weather conditions. This postponement in addition to our existing backlog gives us a very good line of sight to activity over the next several quarters. Permitting for decommissioning continues to improve and overall we view these transitions as favorable for the segment. Despite this, the market continues to be very competitive and we remain focused on optimizing our cost structure in addition to the savings noted in the second half of 2012, we continue to find additional opportunities to streamline the operations and take costs out of the business. In Maritech, our primary objective continues to be to complete the work in our abandonment and decommissioning liabilities. We expect to execute this plan and have virtually all of these liabilities extinguished by the end of the third quarter related to operated properties. We ended the first quarter with a strong balance sheet with net debt of $299 million. We also recently announced the refinancing of $35 million of senior notes at very favorable 4% interest rate. Overall, we remain very comfortable with the health of our balance sheet and confident that we will continue to have the ability to take an opportunistic approach to additional growth opportunities. With those comments I will turn it over to Elijio to provide additional commentary.

[Elijio Serrano:]

Thank you, Stu. Good morning everybody. Total revenue of $209 million increased 15% over a year ago reflecting the growth in Water Handling and Fluids and our 2012 acquisitions. Compared to the fourth quarter, revenue was down 10% due to the traditional seasonal decline in Offshore Services. Excluding Maritech, earnings per share of $0.06 were below our guidance due to the weaker than expected Production Testing activity in the US and Canada. All our other business units performed consistent with or above our expectations with Fluids significantly outperforming expectations. Our shortfall in Production Testing was primarily in the United States and Canada for the issues previously mentioned by Stu. On the Fluids Division revenue of $94 million increased 4% over what was a very strong fourth quarter. Compared to a year ago revenue was up 18.5% all from organic growth. The drivers of our continuing strong performance remain our North America, Water Management and Gulf of Mexico Fluids sales. Operating margins of 18.1% were only slightly below the fourth quarter of last year which you recall included significant one-off international product sales. Compared to a year ago, operating margins improved 360 basis points. Our Fluids Division continues to perform very strong given our vertically integrated fluids business model and recent investments in and high utilization from our water handling assets. We have ordered more deployment units and expect to increase a number of deployment units between now and September. We expect to be on an annualized run rate of a $100 million in revenue from water handling by the fourth quarter of this year, representing approximately 10% of total [10% plus] revenue. Production Testing revenue of $55 million was down 14% from the fourth quarter due to the previously mentioned lower activity levels in the US and Canada. Our customers’ delays in releasing 2013 budget funding and the slower start to the year from their capital programs clearly had an impact on our activity levels. Our international revenues were down 7% compared to the fourth quarter. Compared to a year ago, revenues were up 43%, reflecting the ERS Optima and Greywolf acquisitions completed during 2012. Operating margins of 11.5% were down from both the fourth quarter and from a year ago as we had a lag in reducing our cost structure with the rapid drop in North America Production Testing activity levels. The decline in activity levels was compounded by pricing pressures as customers continue to aggressively negotiate rates. Recent activity is pointing towards an improving environment. U.S. and Canada Production Testing revenue and profitability have been sequentially stronger for the past two months, with March better than February and April better than March. Nonetheless, we have taken steps to move assets to markets where activity remains robust, such as West Texas, while at the same time we have closed locations and reduced staff in geographic areas that have shown softness. Compressco revenue of $31 million was up 36% compared to a year ago, all from organic growth, from capital investments we've been making, mainly in Latin America. The U.S. and Canada were also up from a year ago by 6%. Sequentially, revenue was down from the fourth quarter by 5% as the fourth quarter included some significant product sales in the eastern hemisphere. [TBP] margins of 17% for Compressco were 150 basis points better than a year ago but down a 170 basis points from the fourth quarter as we invested in engine repair and maintenance cost in the U.S. as we're transitioning to a more robust engine repair process that we believe will get us better compressor run time and reduce our operating expenses over the longer term. On the Compressco earnings conference call yesterday, our management team indicated that April activity in Mexico had reflected a slowdown. I took the opportunity in April to visit with our client in Mexico to get direct feedback on their activity levels and inquire about their plans going forward. They indicated that they temporarily reduced activity levels while they assess their budgets. They expect activity levels in the coming months to resume but at significantly reduced levels on the exploration side. They also communicated that they expect activity levels to return to levels near what we've been experiencing recently on the production side where the vast majority of our activities centered around. They further indicated that when their new budgets a year resumes on October 1, they should be backed to normal levels on both exploration and production. We expect the impact to Compressco to be mainly in April and May without any long-term impact to our business. Our compressors and related equipment are essential to help maintain production levels, which they need to fund their budgets. In the meantime, our management team in Mexico have been adjusting cost accordingly. Offshore Services revenue of $38 million prior to eliminations was down $7 million from a year ago and down $24 million from the fourth quarter reflecting the traditional seasonal decline from the winter season. Compared to a year ago and excluding the $4.1 million gain we had last year on the sale of an asset, the loss during the traditionally weak first quarter was flat from a year ago despite the significantly lower revenue levels. This reflects the cumulative effort of our team to reduce our cost structure. Operating expenses compared to the same period a year ago are down 7.4% or 15%. The Offshore Services team continues to aggressively reduce cost. The goal that we had set a $15 million has been achieved and they are now working on an incremental $2 million above that target. With respect to Maritech, during the quarter we completed $9.4 million of work on the Maritech ARO with our own assets. Including work completed with assets other than our own and work completed on non-operative properties, we reduced the ARO liability by $16 million net of incremental adjustments or work done above the reserves. Maritech’s ARO liability at the end of March was $71 million. The schedule we are working with remains on plan for us to complete the vast majority of the ARO work by the end of the third quarter. We believe we are within three to four month of completing the Maritech decommissioning obligations. Any amount that might carry over beyond the third quarter will be on non-operative properties and will be in the single-digit $1 million range. It is possible that we will continue to make adjustments through the reserve for work beyond the scope that has been identified. On the balance sheet side, we reduced long-term debt in the first quarter by $34 million and as Stuart mentioned our net debt is now under $300 million. Cash flow from operations in the quarter was $15 million, which includes $26 million of cash consumed by Maritech and capital investment during the quarter were $26 million. We are calibrating toward a run rate post-Maritech of generating strong free cash flow. And if you look at our first quarter, cash flow from operation, excluding Maritech, would have been $41 million, less $26 million of capital investments given us $15 million of free cash flow annualizing that and that will give you a [sense of] to the direction of what we are pointing towards post-Maritech. The final item, I’d like to address before turning this back to Stuart are the actions we have taken to streamline our cost structure and improve margins. We have identified several areas and methodically targeted those areas that we want to focus upon to improve TETRA’s margins and liquidity. We are taking them one by one to ensure we execute on this targeted initiative. We have previously launched and completed cost reduction effort within our Offshore Services Division. They have since yielded savings approaching $17 million annualized. We did launch an effort to generate $87 million of cash during the fourth quarter, from asset sales and improvements in working capital to fund the Maritech work that's been done this year. The next area, we had an array (inaudible) reducing our G&A and support costs. We accelerated our efforts this year when we saw that North American Production Testing was off to a slow start. We performed the comprehensive review of our G&A and support costs to evaluate how they have moved over the recent periods relative to our revenue levels. We are working with the management team that we identified our goal of reducing our G&A and support costs by an annualized amount of $16.5 million, such that this would save us $33 million over a two-year period. We quickly identified where we could make an medium impact in between late Q1 and the end of April. We have taken actions by reducing 67 staff, all in support and G&A functions. No division was left untouched in this process. No corporate department was left untouched in this process. The savings from actions already completed are $11 million annualized and this included the flattening of the organization and eliminating levels of management throughout the organization. We have another $5.5 million to go between now and end of the year with process improvements and changes to our business processes. Similar to what we did with the Offshore Services Division, we will [attack] this target and [believing us] in our efforts to streamline and continue to reduce our cost structure. These actions on the G&A and support costs are in addition to actions taken by the division managers in adjusting their cost structure, productivity levels and volumes fluctuate mainly in the U.S., Canada and Mexico. So the cumulative actions that we have taken are not only at the G&A side, but I mentioned they have already yielded savings of 11 with another 5.5 to go, but on top of the actions that our division managers have taken in those areas for volumes that shifted. In addition to the cost focus, we are temporarily reviewing all requests for capital expenditures and applying a more critical review of those requests to ensure areas being targeted after the returns are being achieved. We expect and we will continue to deal with the moving of cyclical market conditions in the future, some up, some down. What we are committed to doing is proactively addressing those market changes by optimizing our cost structure. We are also focused on the goal of improving free cash flow past Maritech to the $80 million per year target in 2014. The combination of extinguishing the Maritech liability investing in the growth areas of fluids, water handling and compression while focusing on the 2012 acquisitions to perform consistent with expectations should lead us towards our goal. The management team remains strongly committed towards this goal and to take the actions appropriate for getting us there. We believe that the headcount reductions that we've just completed in the G&A support functions are the most significant the company has made in its history and demonstrate our commitment towards those goals. With that let me turn it over to Stu for some closing comments.

[Stuart Brightman:]

Thanks Elijio. In summary our first quarter results were slightly below our prior guidance with primary area of shortfall being an onshore North American production testing market. I would highlight despite the challenging North American market in some of our customers capital coming out slower than anticipated we have been able to grow in that market our water management, our onshore fluids as well as our Compressco businesses during the first quarter. We expect this market to improve and as Elijio mentioned we've seen evidence of that the last 60 days, but despite that we've taken very aggressive organizational reductions and other cost reduction measures. In Mexico we are experiencing a short term reduction in activity, but we view this as temporary in nature. In the meantime we've taken aggressive measures to offset that activity decline. We remain confident in our ability to deliver the full year guidance outlined in our February 1 conference call due to continued strength of our fluids business expected improvement in production and testing. The improvement as we go through the year and go in to a strong quarters and offshore services as well as the go-forward impact on the cost actions delineated by Elijio. We clearly recognize that over the past two years, we have made significant investment in production and testing and continue to focus in growing this business and realizing those returns that we expect. With that, I'll turn it back for questions and Elijio now will be happy to take all.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mike Harrison of First Analysis. Please go ahead.

[Mike Harrison:]

Just looking at the offshore business, as you pointed out, you guys showed a similar pre-tax loss compared to last year despite the fact that you had some $8 million of lower revenues. So clearly we're seeing some benefit there from the lower cost structure. Was the weakness on the revenue side there with a primarily having assets deployed and just kind of having bad luck with the weather, does you have things and more assets and dry dock than usual?

[Stuart Brightman:]

I would say Mike that on the topline for that segment, the major impact was some of the weather we experienced as we went through the quarter. We didn’t have an overly significant dry dock program during the quarter and some of that worked that didn’t get executed in the first quarter moves to the second and forms the basis of that starting backlog. So again even though, we were similar to last year lower revenue, we didn’t work as much as we thought when we started the quarter.

[Mike Harrison:]

And I guess now that we have got five weeks or so of the second quarter under our belt and getting into the busier season in offshore, can you just give us an update on how things are progressing in that business.

[Stuart Brightman:]

I would say the progress of backlog is going strong for our major assets in the heavy lift and diving. We’ve got very strong backlog through the third quarter. Market competitive nature continues to be challenging, so I think the utilization will be good, the market environment will be challenging, we will continue to look for opportunities to find incremental areas where we can add value and continue to grind away on the cost, which we have demonstrated over the last several quarters that that management group has done a great job of exceeding our internal target and continuing to carry forward with that.

[Mike Harrison:]

And then switching over to the testing side, can you just remind us how big is the international piece of the business now and what is the growth look like on international is compared to domestic if you could strip out the impact of acquisitions?

[Elijio Serrano:]

So Mike in the first quarter the production testing in the United States represented about 63%, 64% of our total revenue and that includes [ERS] and the Greywolf part in the Balkan. So I would see that excluding the acquisitions for coal production testing was slightly less than half being US legacy production testing already.

[Mike Harrison:]

I was thinking more in terms of the sort of underlying organic growth rates, if we excluded the acquisitions presumably the US was down and international was up, is that fair?

[Elijio Serrano:]

The U.S. was definitely down and international was also down but by the single digit factor versus domestic being down very more.

[Stuart Brightman:]

I think in the international I will attribute that Mike as you are anticipating your follow up question is little bit related to the Mexico piece that we talked about as we exited the quarter and little bit related to just a timing of some other lumpy your projects out there, I don't see that as a trend, I think Mexico we kind of bracket it as short term and we see that improve as we go through the second half of the year from where we are at the moment and timing of international projects will improve as we go forward based on backlog we have.

[Mike Harrison:]

And then last couple of questions just on Compressco you talked about some changes in the and sort of how you approach the engine repair side of that business. Can you maybe give us some more details on that and kind of what the returns on that projects looked like?

[Stuart Brightman:]

In the Compressco world the big part of the cost structure is always the field, service and maintenance side of the business, one of the real strengths we have as we get a very large deployed field service organization and we continue to focus on our cost efforts is improving one of the year as the management team is teed up over the last year is looking at an insourcing versus outsourcing engine repair and then moving down the outsourcing pact tied up with a strategic vendor that everybody is very comfortable with and we are transitioning that and as we transition you need to move inventory and get everything level out, so there is a normal startup period associated with that and it what was reference in Elijio’s comments for the first quarter, I think as we go into the second quarter and beyond you start to see that transition period move over to positive for us. And the net result attributable to that we think the long term life cycle of those engines will get extended and available over a long period of time drive down that cost enrollment.

[Mike Harrison:]

And just looking at the benefit that you guys are seeing from slightly higher natural gas prices, can you give us some I guess order of magnitude of how much of the tail in that spend do you think its run its course already and is it sustainable or do we follow up as we see significantly higher gas production and the price income is up a little bit?

[Stuart Brightman:]

Yeah, I do not think its been a positive, I don't think its been lead driver of the overall performance but we have always talked about several trends in the Compressco business first over the last several years the team has done a great job moving into a liquid and non conventional applications and moving the mix what I represents in excess of 25% of the revenue and that trends continued and see that as an area we build in and we are making additional investment in that area. Internationally particularly Mexico and also other areas of Latin American and eastern hemisphere, we had grown we will continue to invest in that and we will work through the short term issues in Mexico. Again, as I said in my talks, I remind everybody and we've been in Mexico since the mid 90s and have had a long history of success down there. The legacy natural gas business was seen positive; I believe it’s growing slightly, it’s not the major catalyst, but it’s a nice positive trend that we've seen. Sensitivity analysis to that you know I think if natural gas stays in that $4 environment, we will continue to see that business continue to grow that subset of the overall business with Compressco.

[Operator:]

Next we have Blake Hutchinson of Howard Weil.

[Blake Hutchinson:]

I am seeing some good data so far on both Production Testing and Compressco and taking what you said about kind of sequential progression in Production Testing in the US. The fact that Canada probably works against you in that business and Mexico works against Compressco in the second quarter; would it be right to say that at least for 2Q the topline progression your feeling would be that its about flattish?

[Stuart Brightman:]

I would say that's directionally accurate because of some of those seasonal trends; I think if you look at the individual pieces, I would expect that the seasonality of Canada work against us. I would expect the short term impact in Mexico to be a negative for the second quarter. I would expect the other international activity to pick up as the timing of the projects and we’ve seen as Elijio referenced over the last couple of months the topline pick up in our domestic testing business. You net all that together, it’s probably going to be flattish.

[Blake Hutchinson:]

And I guess in terms of timing of both your cost right sizing in the U.S. and in Mexico with Compressco; could the same be said for the profit line or is Canada big enough of a whack that we kind of have to take a step back in PBT before we get better in the second half?

[Elijio Serrano:]

So, in the second quarter, Blake, we’ll be incurring some amount of severance cost. If you exclude that, the benefit of all the actions that we've taken will give us stronger profitability Q2 versus Q1 for Production Testing in U.S. and Canada.

[Blake Hutchinson:]

Okay, great. And then just to be perfectly clear on the segment as a final follow-up, the Production Testing business itself separate from Compressco; I hear you that there has also been a little bit of a pull back in activity in that or has that been unaffected and what's the feedback from the customer in Mexico at this point in time with Production Testing?

[Stuart Brightman:]

Yeah, we've seen a similar trend in Mexico for the testing business, and I think as we've referenced over a period of time, you know, within Mexico, even prior to the short-term pull back, majority of our business has migrated to the production enhancement Compressco side there, but during the end of the first quarter, we definitely saw testing come down and I would expect to see the trend similar to where I described and Compressco will pick up as we go in to the second half of the year.

[Operator:]

Next we have Stephen Gengaro of Sterne Agee. Please go ahead.

[Stephen Gengaro:]

Two questions; one is, when you look at the European business, its impact on the Fluids side in the second quarter; can you remind us the sort of magnitude we should be thinking about?

[Stuart Brightman:]

Yeah, we normally see a huge increase in our European calcium chloride business due to the customer mix and base and typically we would expect to see sequentially at least $10 million to $15 million revenue uplift from the first to second quarter with the associated margin on that. So it's material and as you are bridging the quarters and you look at the moving pieces you should certainly expect to see that benefit in our second quarter results.

[Stephen Gengaro:]

Thank you. And then as a follow-up, when you look at your full year, is there anything that we should be really keen on that changes sort of quarterly proportion of earnings in each quarter versus your history; I know Canada is a little bit for with one acquisitions, but anything that sort of significantly changes that?

[Stuart Brightman:]

Yeah, and I would say if you look at prior years versus ’13, you have got the full year impact of having a much larger Canadian business, which we’ve talked about and I think with somewhat unique 2013 as you have got the timing of the anticipated recovery down in Mexico. So again that’s not a normal seasonal business down there, but I think as we outlined, we will see that second half of the year better than the first half in Mexico for the reasons Elijio mentioned.

[Operator:]

The next question we have is Joe Gibney from Capital One.

[Joe Gibney:]

Just a couple of quick ones from me. Just simplistically apologize if this was addressed earlier, but is there any change to your full year guidance of earnings, $0.75 to $0.85 or is that still intact?

[Stuart Brightman:]

That’s still impact. And the reason as I summarized that review it that way is we have seen improvement last couple of months on the top line, on the domestic testing despite the challenging market we are doing very, very on our other onshore U.S. businesses in water management and Compressco and onshore fluids. Overall fluids as a segment continues to be at or above where we had the guidance, we’ve got nice backlog in our Offshore Services business and we expect Mexico to get better in the second half of the year. And then you overlay that with the G&A costs that we have taken. And again as highlighted, Elijio went into a lot of detail and [it won't be share by understands] in addition to the volume related areas in districts and geographies where we’ve had reduced activity. There is a material G&A that came out that is independent of volumes and revenue, that is permanent and we will see that benefit as we go forward.

[Joe Gibney:]

Okay, understood. And just to clarify with you, on your cost reduction effort, I know beyond offshore you are certainly targeting the entire organizations has been something you’ve talked about and certainly it was teed up in Production Testing at some point. I know you are accelerating these efforts now with North America off to a slower start. Just trying to ascertain timing of this, so your expectation to move forward cost reduction efforts on testing was probably going to happen this year, or it was going to happen in ‘14 and now with the slower start, you are moving this forward sooner or rather than later, joining trying to ascertain your thought process there, what changed so much structurally 4Q to 1Q that exacerbated this effort a little bit?

[Elijio Serrano:]

So, two areas, Joe, the first one is the division team took actions to reduce their local operating cost activity shifted around, so we had a couple of soft areas that they reduced cost in those areas and moved assets around. We expect that that occurs, week to week, month to month, as business fluctuate. The area that we accelerated, the work that we wanted to do was just overall G&A cost within the organizations. When we saw that the Production Testing numbers are going to come in softer, we work with the management team to get more aggressive in terms of moving up the target to address overhead support cost and then begin taking actions much quicker. So while we completed during the last part of the first quarter and into April, it was basically an assessment of all G&A costs whether they be corporate G&A or division G&A and then we started pulling triggers in terms of reducing cost, including a significant layoff that we had last month that cumulative reductions were 67 people incorporated in division G&A cost. So that is something that I think that we were going to be addressing more methodologically over a longer period of time, but we accelerated those actions. The remaining 5.5 that we have to go will be the benefit of changes in the business processes, in the streamlining of some of the actions that we have within the organization.

[Joe Gibney:]

And just my last question associated with CapEx and potential asset sale. (inaudible) things ramping a lot higher, $100 million run rate year had been kind of 60 million potential expectation if I was wrong. So obviously you’re getting a lot of customer traction, utilization and pricing on this front. How do we think your CapEx now for the year Elijio and then how much of that allocation is to water handling? And then secondary, just curious on the DB-1 barge potential sales, is that still on the docket potentially happening later this year?

[Elijio Serrano:]

Right, for the water handling we have accelerated investment into water handling given the utilization and the returns that we are getting, so we are already spending above what we had budgeted and we are getting above budget returns in financial results on the water handling. We are doing this and up to the point it will be incremental to the amount that we guided. We will take funds from other areas that are underperforming and redirect capital for water handling. And we will continue to invest given the returns that we are seeing even beyond what we are doing to-date. Then with respect to the barge, we have targeted to sale, we still are marketing it, working through a couple of brokers. The offers that we've seen have not been attractive enough for us to pull the trigger on those as we are not in a fire sale mode. We are not in a situation to where we need to sell it because of liquidity purpose. We will cautiously keep working on this one until we get what we believe to be a fair price. In the meantime, it is at the dock incurring virtually no cost to maintain.

[Operator:]

(Operator Instructions) The next question we have comes from Martin Malloy of Johnson Rice.

[Martin Malloy:]

Just on the cost savings, just to be clear were the $11 million or the $5.5 million were they included in the initial 2013 guidance that you gave?

[Elijio Serrano:]

No, they were not in -- Stu mentioned why we feel comfortable with the total year guidance because we are seeing I think three factors in play here. Number one, we believe that Production Testing the slow start that we are seeing to the year, we have to make up that gap. That gap will be made up partially through the recovery of the business in 2Q, 3 and 4 but also there is a very strong performance we're seeing from water handling and also the completion fluid. Then in addition to that, the incremental savings that we're getting of the 11 already done and in place, plus the incremental 5.5 will help us over come what we believe to be the gap from Production Testing off to a slow start.

[Martin Malloy:]

Okay. And then just a bigger picture, as you look out, say 3 to 5 years, can you talk about how the company might look with respect to the role that Offshore Services would play in the company longer-term? It seems like you are not allocating additional capital, and you are actually selling, at least one, one of your three parties there?

[Stuart Brightman:]

Yeah, I think on Offshore Services, we continue to evolve that business as we went forward. I mean two years ago, we made a major investment, $70 million in the [Hedrin] looking at long-term growth and opportunities and kind of matching that asset capability to where we see that decommissioning market evolving. So we've been successful on that. We've brought that in and had great customer response. Obviously, we're transitioning overall business there as Maritech finishes up the internal work hopefully by the end of the third quarter we're on target to do that. We've been very focused the last year filling that gap of, if you look at the amount of internal work we've done this year, the 30 million round number that we're going to do internally is less than half of where it was a couple of years ago. So the team continues to evolve new customers, new market opportunities. So we're very focused on that. We've been very focused on asset rationalization (inaudible) exiting some non-core businesses, we have great focused on cost reduction as the number, the 17ish number that was referenced by Elijio. All that is focused on a very competitive market optimizing what we have and we will continue to look at what areas we are in that make sense to expand and what areas are we need to continue to refine. So I don't know there is a more fully baked answer to that long term other than I think we are going to have a good year this year better than last year for the reasons we mentioned and just like all of our businesses, the most success the management demonstrates, the more we will continue to look at opportunities to grow us.

[Operator:]

Next with Bill Dezellem of Tieton Capital Management.

[Bill Dezellem:]

Relative to the testing business you mentioned that you have the sequential improvement in last two months is that a result of your actions or the last two months improvement is that more a function of the overall market?

[Stuart Brightman:]

I would say it's more the latter, again clearly the top line for that business in the first quarter was less than we modelled and a lot of that had to do, like everybody else read all the material we talked to our customers, we have gone through this from the bottom-up across the organization district by district and it just seem in the first quarter the capital spend programs got rolled out a little lighter than we thought and we had a couple of our major customers that will particularly light on rolling that out. As we have seen the first quarter ended and migrate towards the middle of the second quarter and we have seen some of those customers begin to spend in line with what we expected, so I say overall is more of the overall market that is driven there.

[Bill Dezellem:]

Thank you. And then relative to the water handling business, what was the revenue number for 2012 in that business?

[Stuart Brightman:]

I’ll let Elijio pull that number but clearly we put a lot of investment and I think when we talk last quarter, we describe that business as being about 20% of the overall fluids segment. So the number Elijio referenced are exit rate this year is obviously higher then we start in the beginning the year, so 70 would have been above the number for the full year, we’ll exit higher than that and that is a pretty big increase overall what we had last year.

[Elijio Serrano:]

So if you look at the trend knowing that a lot of a capital has been deployed during 2012 and 2013 as gaining traction by year ago, we are analyzing to about a $40 million annualized run rate versus up taken at by Q4 of this year will be in a $100 annualized run rate, and there has been a gradual step up from that $40 million run rate to the $100 million of equipment that arising?

[Bill Dezellem:]

In the $40 million we did not actually do $40 million of revenues in 2012 but that was the run rate in 2012.

[Elijio Serrano:]

That was our run rate in Q1 of 12 and then this perhaps gradually been stepping up?

[Bill Dezellem:]

Okay, that is helpful, and then as we think about the significant ramp that you have experienced is there something happening in the industry that has changed, that has created this opportunity for you, or has something happened with the competitive landscape that is lead to your success or so anything specific that you can point to that would help us understand, how this opportunity, I guess I will speak for myself, as crept-up on us.

[Stuart Brightman:]

I would say over a period of time, we’ve done a pretty good job introducing some new capabilities that been incremental to our legacy business and the teams have been very focused on finding those opportunities in the market where that value is recognized, so it's be in a very focused effort on bringing new capabilities and matching that to where we can create value into customer, I would say it's a revolution in the market, I would deal it more as it's just been a very good execution by the team.

[Operator:]

Next we have Ted Crawford of Roumell Asset Management.

[Jim Roumell- Roumell Asset Management:]

Hey Stuart this is Jim Roumell. Two questions, in terms of your confidence going forward for the rest of the year, how much is tide to and I apologize if this is already covered, I am just recently joined, how much is time to your increasing confidence that work in the gulf is picking up and in particular, Anadarko indicated a giant find a month or two ago and wondering if you can comment on whether the TTI will participate with that? And just secondly any more color on any potential full spin out of Compressco?

[Stuart Brightman:]

Yeah. The first part of your question on how much of the Gulf of Mexico projections influence by comment, I mean I think we continue to believe that business will grow as we continue through the year. You know its run well for the last several quarters. We had pretty good visibility on our customer base activity over the next couple of quarters where we've expanded our manufacturing capacity. We will make our high end products and that's gone on well. So overall that's a good part of it Jim that we think what we've demonstrated last couple of quarters will continue to grow. I'm probably not going to comment on any specific customer projection I will probably stay away from that one and the third part of that question remind me again so I get that one right.

[Jim Roumell- Roumell Asset Management:]

Anymore, any color on your thinking in terms of a future potential spin out of Compressco.

[Stuart Brightman:]

Yeah, I think we continue to as we've always said so we like our ownership position. We've intentionally retained that 83%. We started the business with zero debt. We levered up modestly. We still have ways to go, we are very focused on growing the business and I think as we grow the business and hopefully that necessitates us to put more equity in the business we will make those kind of investment options as we go forward but taking down our position is not an objective of mine. We will let that evolve over a period of time based on the relative economics. That would be much more focused on we have been able to increase distribution, we are growing the business for Compressco domestically and internationally. We got a short term challenge in Mexico which I categorize is temporary and as Elijio said he was down there a few weeks getting details on that and we want to invest in that business and grow it, make it much larger than it's current run rate.

[Operator:]

Well, it appears that we have no further questions at this time. We will go ahead and conclude the question-and-answer session. I will now like to turn the conference back over to management for any closing remarks. Gentlemen?

[Stuart Brightman:]

Thank you Mike and I appreciate all of the good questions and Elijio and I will look at updating the group in early August on the second quarter results. Thank you.

[Operator:]

We thank you sir for your time. The conference call is now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you and take care everyone.