TETRA Technologies, Inc.
Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Good morning, and welcome to the TETRA Technologies Inc. Third Quarter 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 that this event is being recorded. Now, I would now like to turn the conference over to Stuart Brightman. Mr. Brightman, please go ahead.

[Stuart Brightman:]

Thank you, Keith, and welcome to the TETRA Technologies’ third 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 as well. I’ll provide a brief overview of our third quarter results, then turn it over to Elijio for some more details which in turn will be followed by your questions. I must first remind you that this conference call may contain 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, revenues, gross profit, profits before tax or earnings per share, excluding the Maritech segment and special charges, or other non-GAAP financial measures. Please refer to this morning’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 for period in accordance with GAAP and should be considered within the context of our complete financial results for the period. Third quarter 2013 adjusted earnings of $0.28 per share excluding Maritech were within the range we expected for the quarter. The strong performance by our Fluids offshore services and Compressco operations offset the weakness in the North American Production Testing business. In the fluids division we continue to be very pleased with the continued performance of all components of the business. Revenue for the quarter remained at the $100 million level. As you recall, last quarter we reported record revenues and this quarter we’re reporting record earnings in margins. Profit before tax of $20.9 million in PBT margins of 20.9% were both record highs for the Fluids division led by continued strength of offshore completion fluids, water management and higher production levels from our manufacturing facilities. I’ve demonstrated ability during the quarter to ramp up production in El Dorado, was very evident. The strong third quarter performance was despite the typical seasonal decline and activity levels in Europe. We expect fourth quarter activity levels to be consistent with last two quarters but margins maybe slightly lower as we have benefited from significant one-off sales. In the Production Testing segment our third quarter results continue to be negatively impacted by reduced spending levels by certain of our customers in the U.S. and Mexico. South Texas in particular has been harder than others due to pricing pressure resulting from new market entrance and by the decision from one of our major customers to curtail activities in the Eagle Ford Shale basin. We have taken a series of aggressive actions to consolidate offices and operations in South Texas and to redeploy equipment and staff to more robust areas such as West Texas. Additionally, we are strengthening our sales organization with the addition of sales leadership with the recent hiring of two key individuals and are on the process of further expanding the sales team. We believe the North American Production Testing market will continue to be an attractive market and we will continue to work on streamlining the operations and more aggressively pursuing the broader customer base to add to our existing anchor accounts. We’re also launching a series of actions to give us a longer term competitive advantage by working with our key clients on technical solutions that address the high liquid volumes and overall automation at the well site. This is similar – the overall cost reduction efforts are similar to what we did with our offshore services when combined with upgrading and expanding our sales organization and focusing on longer term differentiators are expected to bring this business to margins we believe to be acceptable. On October 21st our Compressco Partners subsidiary announced an increase in the distribution to $0.43 per outstanding unit up from $0.425 per outstanding unit. On an annualized basis, this increase reflects in a 11% increase in the quarterly distribution over the last five quarters. In addition, we continue to make progress towards the first IDR threshold of 15%. As our Compressco management team reported earlier this week on their earnings conference call, Compressco’s average – Compressco unit utilization of 84.2% increase from 82% is a result of increased demand for unconventional compression applications in the United States. Sequential quarterly net income grew by 17% compared to the second quarter of 2013 as a result of our success in pushing price increases, better utilization of the fleet and the sustained efforts from our ongoing cost reductions. Mexico has seen some modest increases in activity, we believe this trend will continue and we’ll see a further increase during 2014. The offshore services segment the third quarter profits before tax of $20.6 million was the second highest third quarter earnings in the history of the segment surpassed only by Q3 of 2009 which benefited from Hurricane Ike related activity. The cost reduction efforts launched last year contributed towards the earnings improvement in addition to the strong diving results as we have made progress in diversifying our revenue base by migrating into additional applications focused on Gulf of Mexico infrastructure related to deepwater. We encountered some challenging weather conditions in September but we’re able to overcome the weather with solid execution from all our vessels. Fourth quarter will reflect the normal seasonal reduction in activity. For Maritech, our focus continues to be on completing the work on its remaining abandonment and decommissioning liabilities. We are down to a handful of platforms that need to be removed in the small number of wells that need to be permanently abandoned. We have plans and resources allocated to the remaining platforms and wells and our primary challenge will be finding the appropriate working weather windows during the fourth quarter to complete this work. We continue to have strong balance sheet with the net debt of $310 million at the end of the third quarter. Our ability to generate $70 million of free cash flow year-to-date excluding Maritech gives us confidence in our forward projections and our ability to generate $80 million in free cash flow in 2014. That is based on the underlying cash generation capabilities of our businesses in the improvement in working capital we have achieved over the past several quarters. In the short-term we continue to be very focused on cost optimization in our challenging markets, well at the same time continuing to look for growth opportunities in our existing core service businesses. With that, Elijio, would you please start the financial overview?

[Elijio Serrano:]

TETRA revenue up $254 million, increased 15% sequentially, reflecting the seasonally strong third quarter in offshore services. Sequentially Production Testing was flat as stronger international activity offset weaker U.S. activity. Compressco was up 6% on stronger U.S. activity. And fluids was flat sequentially as a seasonal industrial Chemicals Europe Q2 to Q3 declined was offset by strong offshore completion fluids in the Gulf of Mexico. Compared to a year ago, consolidated revenue was up 9%, primarily as a result of strong fluids activity levels including water management. With respect to profitability, earnings per share excluding Maritech increased $0.10 from $0.18 to $0.28 compared to both the second quarter of this year and the third quarter of last year. The self-measure we have been taking around our cost structure are clearly starting to impact our financial results despite the [indiscernible] environment. Last year we launched initiative to reduce our cost structure in the Offshore Services Division and Compressco Divisions. Earlier this year we launched a series of actions to reduce our G&A cost across the entire organizations. And we felt that those initiatives are positively impacting our profitability and are reflected in our earnings per share. G&A cost in the third quarter were lower than the second quarter by $2.2 million as a result of the headcount reductions we have been at early in the second quarter. Fluids Division revenue of $99.6 million was essentially flat versus the second quarter as the traditional seasonal decline in Europe Fluids activity was offset by strong U.S. Gulf of Mexico completion fluids sales. Operating profits of $20.9 million for the Fluids Division was a record high. Operating margins of 20.9% were up 310 basis points for the second quarter from the continued strong results from water management, U.S. Gulf of Mexico Completion Fluids sales and higher production level from our chemical manufacturing plants. Compared to a year ago, operating margins were 970 basis point better from those three contributors, water management, U.S. Gulf of Mexico Completion Fluids and production level from our chemical manufacturing plants. The strong performance from the Fluids segment as we said revenue and earnings records demonstrate the competitive advantage in our ability to take advantage of our unique vertically integrated Fluids franchise. Water management revenue and operating income were both up significantly compared to a year ago. We are seeing our water management services expand from simply moving fresh water from a source secured by our customers to their fracing operations. We now moving treated water from one well site to another as they use treated water. The [indiscernible] in companies that we are – that we have are nicely suited for this high pack of applications. Production Testing revenue of $47 million was flat from the second quarter and down 15% from a year ago reflecting the slowdown in the U.S. and Mexico markets. Stuart mentioned earlier that the main contributors to the slowdown in the U.S. is going to shift in drilling activity from a key customer in the Eagle Ford Shale basin in South Texas and pricing pressures from excess capacity mainly in South Texas. Production Testing operating margins declined from 9% in the second quarter to 6% in the third quarter due to the after mentioned items that impact the revenue. We expect this environment to remain in place for the next couple of quarters. To aggressive situation we are implementing several self-help actions comparable to what we have done with offshore services with Compressco and with our G&A functions. We might not be big enough to control pricing in the U.S. Production Testing market but we can control how we invest and how we manage our cost. As we have demonstrated with Offshore Services and Compressco within a couple of quarters have to – we have initiated actions – we have seen the result of those actions reflected in our financial results despite those divisions continue to operate in less than an optimal pricing environment. We have already taken actions to reposition stock and equipment to the more robust market such as the Permian Basin. We are in the process of consolidating districts in South Texas and are looking at expanding in the Permian Basin to take advantage of increasing activity levels there. Our approach to the U.S. Production Testing the environment will be two prong. Number one, we will rationalize our cost structure with some actions having an immediate impact over the next two quarters and other actions to mention that will take a bit more time to gain traction. The second area will be to enhance our sales organization diversifying our customer base to augment our anchor clients and repositioning in our districts, equipment and employees to those areas where customers have recognize and pay for the value of our services and rates better than those operators that are willing to hire local and regional competitors which have less emphasis on quality and safety than what we have. As we have done with Offshore Services we report a progress of those initiatives as we’re addressing this challenge with the same sense of urgency as we have recently demonstrated. Compressco revenue of $29.8 million was up 6% sequentially on improved U.S. activity and better utilization levels. In the United States, utilization of our equipment is now above 87% allowing us to secure modest price increases in the U.S. and Canada. Mexico have continued to show slow and modest improvements and we don’t expect any material change in Mexico until Q2 of next year at the earliest, anything before that will be premature to anticipate. Compressco operating margins increased from 11.3% in the second quarter to 18.3% in the third quarter as a result of the cost reduction efforts, improved utilization levels and price increases. These improved results offered the opportunity to continue to increase our distributions. Offshore Services revenue of $86 million prior to eliminations increased $22 million sequentially reflecting a seasonality of our business. Compared to a year ago, revenue was up 10%. Our diving revenue and margins are up significantly from both the second quarter of this year and the third quarter of a year ago reflecting the move we’ve made to be able to successfully transition in to the new capital and maintenance markets versus the decommissioning markets. Third quarter Offshore Services operating margins of 23.8% are up 840 basis points from a year ago and are up 880 basis points sequentially. Our cost reduction efforts now annualized to almost $19 million and are reflected in our record high non hurricane third quarter profits. Our Offshore Services management team a year ago in best aggressive and necessary cost reductions and we are now seeing the impact of those. With respect to Maritech, during the quarter we reduced the liability to $37 million. We are down to four properties and a handful of growth to address and are currently working on those four properties and other wells that need to be addressed. Our challenging is finding the weather windows between now and the end of the year for getting our pipeline rerouted so we can go and we move one of the platforms. We are working with [Bessie] on the actions necessary to permanently plug and abandon the remaining handful of wells. If weather doesn’t cooperate with us between now and the end of the year we might have one or two other platforms and related wells pull over into next year. We continue to make progress and bring into conclusion that Maritech decommissioning and obligations that they are putting up a fight to the very end. Final item, I would like to address this free cash flow. We communicated a goal of $80 million free cash flow post Maritech. During the first six months of the year, we had generated free cash flow of $50 million with free cash flow being the finest cash flow from operations excluding Maritech that’s all capital expenditures. During the third quarter, we generated free cash flow of $20 million also excluded Maritech putting us a $70 million after nine months. The strong third quarter free cash flow performance was up despite a sequential quarterly revenue increase of $33 million that one would have expected would have increased working capital. We expect the fourth quarter free cash flow to be very strong as we collect the peak third quarter revenues. To summarize the third quarter, profitability was strong in Offshore Services and Compressco as a result of a significant focus on cost reductions and good execution. Our G&A costs are coming down consistent with our stated goals. Free cash flow is strong and continues to improve exiting the goals we’ve laid out. Completing the Maritech liabilities continues to be a challenge but we are actively working at each of the remaining platforms and wells and with the exception of weather we have our hands around what needs to be accomplished. Production Testing is in a challenging market right now but we intend to address that challenge with the same vigor and urgency that we have demonstrated we are capable of doing. We expect that next couple of quarters to remain a challenge for Production Testing as our new sales initiatives, cost actions and equipment repositioning gains traction. We believe that if this environment improves, we’ll come out of this with a very low and effective cost structure and a strong cash generating company leveraging our strong vertically integrative Fluids franchise. Once Maritech is completed we intend to recommend to our board the direction we want to go with free cash flow, be at a dividend, share repurchase for additional investments into some of our higher margin businesses. Triggering actions before Maritech is completed we believe it’s premature. We will continue to manage our balance sheet very prudently. Before I turn this back to over Stu, couple of housekeeping items for those of you that are updating your models. Other income was normally high at $7.2 million. This includes a one-time gain of $5.3 million as we’ve sold one of our wealth and transfer fee associated liability at Maritech with it. This one time gain is not included in our normalized EPS of $0.28 as we reflected that in the Maritech results. Normalized other income should be in the $1.9 million range consistent with prior quarters as you revolve your models. Also the effective tax rate to use for the quarter and going forward is 34%. With that, let me turn it back over to Stu.

[Stuart Brightman:]

Thank you, Elijio. And at this stage, we’ll now open the call to questions.

[Operator:]

Thank you. We will now begin the question and answer session. (Operator Instructions) And the first question comes from Marshall Adkins with Raymond James.

[Marshall Adkins:]

Hi, Stu.

[Stuart Brightman:]

Good morning, Marshall.

[Marshall Adkins:]

Can I get a little more color on the fluid management or the fluid side of the business. It sounds to me – I’m saying this in the form of a question that did you water management business and Gulf of Mexico drove pretty strong results. Is that accurate or is it other geographic regions or is it something else that I’m missing?

[Stuart Brightman:]

It’s a combination of several factors clearly the two items you’ve mentioned were very strong during the quarter, Gulf of Mexico, Fluids as well as water transfer business. But in addition to that, we had very good activity coming through our domestic chemicals operations and a couple of significant projects that we’re able to execute to our well and take advantage of the opportunity which resulted in us getting our El Dorado production to record level. So, that certainly is a contributor to the strength. So, if you kind of look at this on a go forward basis, we continue to see the growths in the two primary Fluids businesses we talked about water transfer in Gulf of Mexico and we continue to be able to take opportunities where chemicals business is able to ramp up to respond to project in short-term opportunity. So, all the trends are favorable.

[Marshall Adkins:]

So, on the chemical side, what – was that selling into a different market?

[Stuart Brightman:]

No, it’s oil and gas, again we have a pretty sizeable onshore calcium chloride business. We talk about all the time our Gulf of Mexico on the high end calcium bromide, zinc bromide but in addition to that in the shale activities in some other areas we’re a leading supplier of calcium chloride into those markets. So, that also cycle during very strong particularly on a couple of projects this quarter.

[Marshall Adkins:]

Is that going to the – in to E&P companies or other service companies, the calcium chloride?

[Stuart Brightman:]

It will be a combination, we have multiple roads to market onshore.

[Marshall Adkins:]

Okay. All right. That sounds good. Let me turn to the other side, you gave a lot of good detail in the Production Testing, obviously that was the weaker element here. What I want to try to understand is how much of the weakness is been shale slowing down versus the shift to – from vertical to horizontal creates fewer wells or is pad drilling affecting this and last part of that is you mentioned Mexico, I didn’t really heard that much in Mexico. How much of that would be Mexico in terms of the weakness?

[Stuart Brightman:]

Yeah. If we talk about testing the primary area that contributed to the weakness during the quarter was the U.S. And I don’t see a structural change that we’re worried about in terms of horizontals or pad drilling or any of the trends that are going on with our customers. I think if you look at the market overall, it’s a combination of several factors, first and foremost South Texas which is very important region for us is very, very tough at the moment in general. I think you’ve heard everybody the last couple of weeks talk about that it’s in the onshore service business and we’re no exception to that.

[Marshall Adkins:]

Competitive reasons or is it just less overall demand?

[Stuart Brightman:]

No, it’s a competitive reason. The activity level overall is still very good. Virtually all of the challenges in the testing is much more driven by the competitive landscape than it is the activity levels of the structures of the market. Now, you’ve seen new market entrance coming to certain areas including South Texas, so that’s contributed to the competitive market. In addition to that we have a mix down there where one of our large customers is changing their investment profile. So, we need to adjust to that, redeploy the people and equipment, in our case we’ll move a lot of that to West Texas, we’ll move some of the people with it. We’ve shutdown certain operations to make certain we’ve got the smallest footprint of properly satisfy the customer base down there. But it’s all newer on the micro and the competitive landscape that it is on a broader. Our assumptions on the domestic testing business it’s going to continue to be very good activity, it is going to be price pressure that we have to work through that’s going to be cost driven from our side, it’s going to be continuing to work with our major customers to look at better applications, better solutions to their flow back testing, redeploying of assets in a combination of all those factors. The second part of your question on Mexico, again Mexico is a bigger impact on our Compressco business than it is on testing. We’ve seen on testing that impact just like we’ve seen on Compressco of the budget pushing back being cut earlier in the year similar to Compressco we expect to see that trend move forward favorably slowly but favorably as we go into next year.

[Marshall Adkins:]

Right. Thanks guys.

[Stuart Brightman:]

Thank you, Marshall.

[Operator:]

Thank you. And the next question comes from [indiscernible] with Barclays.

[Unidentified Analyst:]

Hey, good morning gentlemen.

[Stuart Brightman:]

Good morning [Shaun].

[Unidentified Analyst:]

So, congrats on a good quarter.

[Stuart Brightman:]

Thank you.

[Unidentified Analyst:]

As we look towards 2014 I had a couple of questions kind of beyond. So, first I guess start at Maritech, how would you frame the probability of completing the work on sliding into 1Q and I know there is obviously weather is kind of the big variable but if things were to slide in 1Q I mean can you kind of frame for us what the impact could be to some degree?

[Stuart Brightman:]

Yeah, I mean I think as we stated on the call right now we’re down to a handful of platforms the majority of those scheduled to be executed this quarter. One of them dependent on third party pipeline getting done it’s outside of our control. We’ve done a lot of the tough wells, we feel good with that, there is certain discussions going on with [Bessie] that need to be finished, that will take place during the quarter. And then we have non operated properties where it’s clearly a portion that’s all out of our control and our sense is a lot of that work will end up getting pushed into next year. So, the part we control, I suspect we may have one or two structures and we may have two or three wells that go to the first quarter. And as we go through the balance of the fourth quarter, we continue to look at some of those open items get resolved, the economics of finishing the work and we were challenging the weather versus differing it to the end of the first quarter when the weather improves.

[Unidentified Analyst:]

Okay. So, given the $70 million of free cash generated this year and then kind of a – the clarity you’re getting on Maritech, it sounds like the confidence is improving as far as free cash flow in 2014 kind of getting to that $80 million.

[Stuart Brightman:]

Yeah, absolutely, for both of those reasons I mean I think clearly as Elijio articulated, the drivers of that year-to-date free cash flow was sustainable. We believe it sustainable the working capital we still think there is some improvements to be add there. And just fundamental cash generation of our service business give us our confident in looking out that $80 million plus. And the Maritech, even with the challenges, we’re down to a handful of structures the few wells, they’re all planned, we know what we – we know when we want to execute them. And the worst case is a little bit of that slopes over to next year.

[Unidentified Analyst:]

And so then I guess it be the time I think to refresh kind of where you guys sit in terms of uses of cash in 2014. So, lot of cash coming in the door, whether it’s M&A, returning cash to shareholders kind of how you guys are feeling about that today?

[Stuart Brightman:]

Yeah. So, again we’ve got the envious position of having a range of options. And there is certainly organic growth that we could accelerate for the right opportunity is very similar to what we’ve done on the water transfer side during 2013. There is still a very robust M&A environment out there. The businesses that we would look at that makes sense both organically in M&A that will be sent around the Fluids, the water side. Clearly we need to get the testing margins moving in a positive direction as we look at reinvesting in that business, I think long-term that’s clearly something we will continue to do. But being conservative and prudent we want to see the demonstrated improvement in that business as we look at those opportunities. And then the return to shareholders as Elijio say there is couple of different options there whether it’s in the form of a dividend and/or the form of a share repurchase that’s something we evaluate as we go into the year being conservative people that we are. We don’t trigger those decisions until we see the Maritech number just above that zero. Certainly we evaluate and plan for it but in terms of disclosing and discussing we’ll wait till we get to the end of the Maritech liabilities.

[Unidentified Analyst:]

And I guess there is one more to follow on to that. Compressco had a good quarter. Where do we stand in terms of M&A opportunities for that business to really kind of get the growth going there?

[Stuart Brightman:]

Yeah I, first of all I totally agree with your assessment that Maritech had an outstanding quarter and other than Mexico which improved sequentially all the other components of Compressco site went up very nicely. We’ve said this before we talk about it internally with the management teams across the company. They’re great example of their core business being late life natural gas production enhancement being challenged last several years and despite that the management team has found new opportunities in the unconventional to liquids internationally to grow. So we’re particularly proud of that. We see other than Mexico all our international business is growing. Our domestic business is growing despite the natural gas prices. And later on some of that cost actions both organizational redesign as well as supply chain that’s the contributory to it. So, all that heightens our desire to grow that business fast, we’re spending a lot of time at the corporate level of TETRA working with the Compressco management team we’re looking at opportunities, we’re looking accelerating some organic investment as well, there is a lot of stuff out there and we’ve been very disciplined in looking and evaluating but we haven’t found that right opportunity yet but we continue to focus on that.

[Unidentified Analyst:]

Very helpful. Thanks Stu.

[Stuart Brightman:]

Thanks John.

[Operator:]

Thank you and the next question comes from Bill Dezellem from Titan Capital Management.

[Bill Dezellem:]

Thank you we have a couple of questions. First of all relative to offshore service, are you seeing an increase in the decommissioning interest or discussion activity level from your customers or the big threats from the regulatory environment that’s not impacting their mindset?

[Stuart Brightman:]

I think we’ve seen a steady discussion. I wouldn’t describe that is materially different than six or 12 months ago. I would describe the market activity demand and the abandonment and decommissioning is steady up from where it was a couple of years ago as a result of certainly influenced by the idle iron guidance certainly improved with the permitting cycle term getting back to a normal time period. I think where we’ve done a really good job obviously the cost side has been a big contributor in the team it should be commended and we continue to reinforce they’re the leaders if it they’ve taken the actions and we’ve seen the benefit. I think in other area that we’re particularly pleased with is kind of the diversification of opportunities on our diving side. The team has done a very good job supplementing our abandonment and decommissioning markets with some pretty nice wins on the project side on some of the pipeline infrastructure coming in from the deep water. And I think the combination of the cost in some of those new markets has resulted and that dividing business is having a really good second half of the year to-date.

[Bill Dezellem:]

Thank you. And I guess sticking – staying with that business you’d mentioned – I believe it was in the release that some poor weather in September negatively impacted the results. How bigger number does, did that turn out to be?

[Stuart Brightman:]

It wasn’t large enough to note but we did have, we had a really good working conditions through the first two months of the quarter and then in September we had probably 7 to 10 days of inclement weather that affected our ability to work. But – what wasn’t a big enough number is stand out note but despite that the guys achieved that set of results we mentioned.

[Bill Dezellem:]

Thank you and then finally I believe in your comments today you mentioned expanding services at the well side pretty board comment. Would you dive into more detail and discuss what you’re thinking there?

[Stuart Brightman:]

Yeah I Think in the context I indented to say testing certainly the most challenging business we have there in the third quarter And part of it is the tactical side of cost and asset redeployment and some of things we’re doing but, in all of these business whether it was Compressco last year, Offshore Services last year, testing at the moment there is the tactical side and then there is the strategic side and you have to do both simultaneously. On the strategic side I think there is opportunities out there as we look at the impact of pad drilling the duration of the work force the equipment used at the well side as the market has evolved for us to work with our customers in terms of solutions that are win-win. Examples of that maybe we’ve got a very strong preserve in developing with Compressco on the vapor recovery in certain areas we’re able to tie that in with our testing business and find opportunities. Potentially looking at automating some of the services at the well side associated with the flow back testing is another area. In another area where we’ve done well particularly internationally which I think there are some opportunity U.S. is early production systems where we kind of an expanded testing footprint for a longer duration as the customer looks to their permanent infrastructure. So, again we test the testing management team with the dual responsibility of getting the tactical targets aggressively and coming on with a comprehensive strategic plan that leverages the fact we are the big player in that space in North America.

[Bill Dezellem:]

Thank you.

[Stuart Brightman:]

Thinks Bill.

[Operator:]

Thank you. The next question comes from Mike Harrison with First Analysis.

[Stuart Brightman:]

Good morning Mike.

[Mike Harrison:]

Hi good morning and congratulations to your red socks, Stu.

[Stuart Brightman:]

Thank you, I appreciate you noting that.

[Mike Harrison:]

I’m going to ask a couple of questions on offshore. First of all you said that you expect key assets to show good utilization in Q4. Is that all in the Gulf of Mexico or are we starting to see further deployment into other geographies particularly of a diving side?

[Stuart Brightman:]

We, my comment relates to the Gulf of Mexico but in addition to that we’re starting to see, what I would describe as a richer set of opportunities outside the Gulf of Mexico. So, I think it’s very likely during the fourth quarter and beyond that we start to see some of that activity. It may be in the form of assets being deployed it may be in the form of personal being deployed.

[Mike Harrison:]

And as I think about the weather impact on offshore. Is it sure to say that some of your bigger assets like the TETRA Hedron as well as some of the diving asset or may be less deceptible to a weather impact than you have been in the past?

[Stuart Brightman:]

I would say that if you look at the Hedron and you look at some of the least diving assets that we have that’s an accurate statement, certainly they’ll be subject to probably to a lesser degree than some of our legacy assets.

[Mike Harrison:]

Okay and in the testing business, I was wondering if Elijio could talk about the magnitude of the expected cost savings relative to the $19 million run rate that you’re adding in the off shore business. Is it a similar number?

[Elijio Serrano:]

Mike we’re, we’ll say that we’ve got a two-step approach, the division management and the district mangers automatically adjust our cost structure by reducing people on activity level, decline in their individual districts that happens on a day-to-day week-to-week basis. The actions that Stu and I mentioned are more structural to the organization in terms of repositioning some of the districts repositioning people and equipment above and beyond activity we lay the type items. We’re in the process of formalizing and addressing the magnitude of those items and we’ll be able to talk about it more I think in some of future calls. But today the team is taking actions at a district level and adjusting to those volumes that are moving around on a day to day basis.

[Mike Harrison:]

Okay, and last question I had is on Fluids, what do you see in terms of supply and demand dynamics for some of the higher value fluids in the Gulf of Mexico? Are prices up, would you expect them to trend higher or lower over the next few quarters as we presumably are seeing good visibility on continued deep water demand?

[Stuart Brightman:]

Yeah I’d say overall the market, the activity is great and the pricing level is stable and – as we go forward and evaluate the opportunities out there we always look for those the ability to do some of that positive stuff. But I would expect it’s going to be a good environment to be operating on and I think from our perspective the key thing I always continue to emphasize is we’ve made a lot of investment to be able to service that market. We’re beyond the obvious at El Dorado we’ve expanded our West Memphis production over the last year. So, we’re able to operate at much higher level, we’ve made the investment in our blending facilities along the Gulf of Mexico. So, I think our cycle time to respond opportunities is very, very good. And I might add if you look at we don’t talk about it enough it’s also at a time when we’ve taken our inventory down $9 to $10 million. So, not only we have capacity service into market with a little cycle time the teams been able to go out and do it in a more effective and efficient manner.

[Mike Harrison:]

All right. Thanks very much.

[Operator:]

thank you. (Operator Instructions) And the next question comes from Blake Hutchinson with Howard Weil.

[Blake Hutchinson:]

Good morning guys.

[Stuart Brightman:]

Good morning Blake.

[Blake Hutchinson:]

Elijio first for you, I guess in response to Production Testing Q1 results you had outlined some actual initial kind of cost cutting and rationalization moves at that point and may be take us back there. Was that primarily at that point limited to cost reductions kind of the corporate support level? And understanding you don’t want to get into numbers are preliminary as we delve into more of these filed rationalization would you typically expect some magnitude compared to that initial cut to be reflected eventually or how should we think about the relationship between the two of those?

[Elijio Serrano:]

Right well in the first and second quarter of this year the Production Testing management team triggered their own actions when they saw a slowdown in some markets and they did reposition the equipment, they did with new set count at the district level to address those volumes. In the second quarter we launched G&A headcount reduction initiatives to try of streamline the organization. The Production Testing organization contributed significantly toward that goal that we set of $16.5 million. So a part of the G&A that the cut that we’re making came from that division. The next round of cut they were making is Stu mentioned earlier that one of our key accounts in South Texas announced a significant write down of their properties and stopped their drilling program into the process of selling those properties that was a significant anchor claim for us. That further reduced activity level and we saw that impact in the third quarter. And as we thought of that action by that client our management team started consolidating districts and making further headcount reduction and moving staff to other area such as a the Permian basin. So in Q1 and Q3 the management team has adjusted downward as those volumes had moved around. In Q2 with the G&A cost down now we’re looking at repositioning some districts and then in addition to that Stu mentioned they were taking some longer term perspectives as to how do we come more efficient at the well site, how we will reduce our dependence on the number of labors on a per job basis so that we can have a more differentiator versus our competition and not be competing in the mom and pops in the regional players that have the comparable type equipment out there. So, it’s a combination of the district cut that they’re making an ongoing basis G&A reductions and now we’re looking the more structural type reductions that will give us a lower cost structure.

[Blake Hutchinson:]

Thanks for that and I understand we’ve covered some ground that we already covered on that so sorry for the redundancy a bit. And then just talking about the onshore fluid business you mentioned kind of in the preamble that you’re starting to see an improvement in the moving treated water business between sites, does that have the potential to rival in size the business today that’s been more source to site business?

[Stuart Brightman:]

Yeah I think we’re seeing a pretty interesting trend there where we’re probably able to demonstrate a higher level of value with some of those opportunities. So, again I don’t that it’s going to be the same magnitude but I do think there will be a mix shift over a period of time where that becomes a bigger percentage of the total.

[Blake Hutchinson:]

Okay great and then a lot of conversation on the offshore business I just wanted to may be give you guys a chance to, given the wide swing I guess between results, quarterly results in general in 2Q and 3Q as we look into 4Q you mentioned steady asset utilization obviously some detrimental effects due to weathers you get later in the quarter but should we be thinking that 4Q looks like something between 2Q and 3Q or dialing in something that settles back into more of a 2Q to you type of PBT contribution?

[Stuart Brightman:]

Yeah I mean I think it’s going to closer to a traditional fourth quarter than between the 2Q and 3Q.

[Blake Hutchinson:]

Okay great that’s helpful Stu. I’ll turn it back.

[Stuart Brightman:]

Thanks Blake.

[Operator:]

Thank you. And actually there are no more questions at the present time. So I’d like to turn the call back over to management for any closing remarks.

[Stuart Brightman:]

Great thank you very much. I appreciate all of the questions and we’ll look forward to updating everybody earlier in the year on the results of the fourth quarter.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending the presentation. You may now disconnect. Have a nice day.