TETRA Technologies, Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good morning and welcome to the TETRA Technologies’ Third Quarter 2014 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’d now like to turn the conference over to Stuart Brightman. Please go ahead.

[Stuart Brightman:]

Thank you, Amy and welcome to the TETRA Technologies’ third quarter 2014 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. Our Chief Operating Officer, Joseph Elkhoury is also joining us on the call. I’ll provide a brief overview of our third quarter results then turn it over to Elijio for some additional 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, profit before tax, earnings per share, excluding the Maritech segment and unusual items or other non-GAAP financial measures. Please refer to this morning's press release or to our public Web site 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 our complete financial results for the period. Our third quarter 2014 adjusted earnings excluding Maritech and unusual items was a profit of $0.12 per share. Some of the key highlights of the quarter include the following. A very successful start to the CSI acquisition, we’re very pleased with the progress of the team and the response in the marketplace by our customers, this includes our ability to execute during the quarter to our financial department appointment, in retention of the leadership team, in progress made to-date with the overall integration plan. We believe we are on-track for the fourth quarter and beyond to achieve all of the objectives set forth in our acquisition economics. In addition, we have made significant progress in the continued recovery of our production testing business. During the quarter, we saw a sequential improvement in operating margins achieving 6.8% consistent with our targets. Fluids, continues to be an area of strong performance across the majority of the business areas. On the negative side, our Offshore Services segment’s performance was significantly below the results we anticipated when we revised our annual earnings guidance in early August. There are several factors contributing to this associated both with specific customers and overall market demand. In our Fluids division earnings were down slightly compared to the second quarter of 2014. Key trends were an increase in overall activity in the Gulf of Mexico as several smaller projects materialized. However, the overall trend in delays and deferrals of projects in the Gulf continues. Water management remains strong, but negatively impacted during September by some of the flooding in West Texas. This is a business in which we continue to invest capital as we expand water transfer through additional basins and additional customers. In Chemicals we continue to see strength driven predominantly by our onshore shale activity. Overall, we expect the Fluids division’s fourth quarter to look fairly similar to the third quarter. We are very pleased with the continued progress of our Production Testing business. During the quarter our operating margin increased to 6.8% consistent with our targeted expectation, this was driven by virtually all areas of the testing business in our domestic and international geographies. Our ongoing process of expanding and diversifying our customer base, reallocating assets to areas of strong activity and ongoing operational improvement, and cost management actions have all contributed to the division’s improved results. We expect this sequential improvement to continue into the fourth quarter of 2014 and beyond. I continue to be extremely pleased by the overall management of our Compression business. The team continues to work diligently to bring the businesses together. All elements of our innovation plan are on-track, operating results have continued to be consistent with the acquisition economics and the customer response has been very positive. In addition during the third quarter, we completed the implementation of our ERP system in legacy Compressco business. This project which has been in process for several quarters puts Compressco on the same reporting platform as TETRA, with the associated cost and productivity benefits and more importantly it will provide the means for us to bring CSI on to the common platform as we start during 2015. This is a natural progression of our ongoing efforts to increase operating efficiencies across the company. Our Offshore Services segment performed significantly below our expectations in the third quarter and more specifically during August and September. This resulted from a combination of several factors; first, several of our customers postponed previously awarded projects. This impacted both our owned-assets, as well as several additional leased assets that we had secured. A second key factor was a significant decline in market demand for our P&A business. We’ve taken appropriate, aggressive cost actions but the activity in associated profitability of that portion of the segment has significantly declined. We expect this trend to continue in the fourth quarter. Our barges will work through most of the quarter, as well as our major diving assets, but we expect P&A demand to continue to be extremely weak. As we look into 2015, we expect improvement in this area but we’ll continue to take appropriate cost actions to size the business accordingly. During the third quarter we completed additional analysis of Maritech’s remaining wells and determined that the degree of intervention required will be greater than we had envisioned. As a result, we adjusted Maritech’s liability during the quarter. Our operating plan for Maritech is to remove an additional platform during November. The remaining wells in one platform will be completed in 2015. Our work scope during the fourth quarter will employ TETRA assets, all work requiring third-party assets for the most part will be deferred to 2015. Despite the lower than anticipated earnings, our cash flow for the quarter improved $17 million. Elijio will go into more detail regarding the balance sheet and specifics of our cash flow.

[Elijio Serrano:]

Good morning everybody. Let me summarize a few key financial data points and then we’ll open it up for questions. TETRA revenue of $305 million increased 27% sequentially reflecting the acquisition of CSI by Compressco on August 4th. The results of Compressco and acquisition of CSI are fully consolidated in our financial statements. The acquisition that is $61 million of incremental revenue for the period of August 4th to September 30th, excluding the acquisition revenue was up 1% on a sequential basis. The second quarter to third quarter seasonal decline in Europe industrial chemical sales was more than offset by stronger activity levels in production testing, mainly West Texas and Saudi Arabia. As Steve mentioned earlier the Offshore Services activity levels were much weaker than expected and we didn’t see the traditional $20 million second quarter to third quarter seasonal increase in revenues. This year we only saw a $5 million sequential increase in Offshore Services. Earnings per share excluding Maritech and unusual items was $0.12, the unusual items were permanently related to transaction cost of $13.9 million related to the Compressco acquisition of CSI. These items include bridge loan fees, legal and financial advisor fees related to the acquisition. When computing normalized earnings per share of $0.12 we’ve also excluded a $0.02 per share favorable impact from lower taxes that would have made earnings per share of $0.14. Of the $13.9 million of unusual items $3.7 million is included in G&A expense and $10.2 million is included in other income expense. Our effective tax rate in the third quarter was low as a result of the mix of higher earnings internationally relative to earnings in the United States and our international tax rate is lower than the United States. In addition, as a result of the CSI acquisition in a reduced ownership of Compressco income attributable to non-controlling interest is higher, which reduces the amount of earnings and are subject to taxes for TETRA. I expect our effective tax rate for the year to be approximately 20% on the continued mix of higher international earnings we allocate to U.S. earnings and the amount of income attributable to non-controlling interest from Compressco with the lower tax rate. Our G&A expenses normalized to exclude the previously mentioned non-recurring Compressco transaction cost and excluding the acquired G&A from CSI was $31 million compared to $30 million in the second quarter. I’ll now briefly summarize a few key points for each of the divisions. We continue to see good progress from the multiple initiatives to improve the performance of production testing, production testing revenues increased sequentially by 18% and our third quarter operating margins were 6.8%, consistent with the target that we have been communicating. Of the incremental revenue 47% relative to bottom-line as we benefited from the redeployment of equipment and personnel to areas of strength, our more diverse customer base and our continued focus on lower operating cost, revenue of $50 million or 6% above the same quarter from a year ago and the highest since the first quarter of 2013. This was achieved despite our West Texas operations being impacted by significant rains and flooding in December. The sequential improvement was across all our geographic areas, but was led by strong results in Saudi Arabia and West Texas which represent our largest production testing divisions. We remain comfortable with our previously communicated goals of achieving high single-digit operating margins in the fourth quarter with an exit rate of low double-digit margins in Q4. Fluids revenue of $105 million was down 10% sequentially as the second quarter represents a seasonal peak for industrial sales in Northern Europe. Other than Europe’s traditional seasonal decline revenue increased 1% from the second quarter to the third quarter. While we saw an increase in Gulf of Mexico and its revenue, it remains below our traditional levels of deepwater projects continue to be delayed and get pushed out due to operational issues. Onshore Fluids sales of calcium chloride were exceptionally strong due to the higher shale play volumes, particularly South Texas, where we’re gaining market share and are seeing stronger pricing. Operating margins increased by 110 basis points to 15.7% during the second quarter that remains below our recent levels as a result of the aforementioned Gulf of Mexico activity levels. The progress by our manufacturing plants continues to be strong. Water management is at the $100 million annualized revenue run rate and continued growth is seen in West Texas and the Appalachian regions. Stu mentioned that the weak Offshore Services results that accounted for the GAAP of our earnings -- that accounting for the majority of our GAAP to the earnings expectations. Historically we’ve seen the third quarter be the peak revenue and earnings period with revenue historically increasing by about $20 million in the second quarter. This year we only saw a $5 million sequential increase as a result of weak P&A and diving activity levels. Last year in the third quarter we generated $20.6 million of profit before taxes in Offshore Services, this year we only generated $600,000 of earnings. Clearly this was the biggest gap to our expectations. Project that required diving services did not materialize, P&A activity was lower across the industry and with our key customers. We believe this environment will persist into the fourth quarter. Compressco revenue increased to $96 million with 61 million coming from the acquisition of CSI which closed on August 4th, excluding revenue from the CSI acquisition, revenue increased sequentially by 9% on higher North America and Eastern Hemisphere activity. Profit before taxes from Compressco including result of the acquired company were $6.6 million excluding the transaction related cost. Profit before taxes of Compressco connects a higher depreciation and amortization expenses from the acquisition and interest expense of the borrowings to complete the acquisition. Earnings per share to TETRA from Compressco were $0.03 in the third quarter. Without the CSI acquisition earnings per share to TETRA from Compressco would have been $0.04. This $0.01 dilution reflects the depreciation and amortization expenses on the acquisition, the borrowing cost and our reduced ownership percentage from 82% to 44%. As we mentioned during the capital base raise of the acquisition the impact to TETRA from the Compressco acquisition will not be from incremental earnings per share because of the items I mentioned, but from the higher cash to be distributed to TETRA from Compressco. Compressco earlier announced the distribution of $0.46 per unit which puts TETRA into 15% IDR. This was achieved with the coverage ratio of 1.21 times. We believe that Compressco is on-track to obtain an increase in distributions of 12% to 14% above the distribution in place at the time of the acquisition with the fourth quarter results. This will elevate TETRA into the 25% IDRs. The increased distribution to TETRA will be realized in Q1 of next year from the earnings being generated by Compressco in the fourth quarter of this year. 90 days after the acquisition we remain comfortable with the goals outlined at the time of acquisition. We remain on-track to invest approximately $90 million of growth capital in 2015 that we believe will generate incremental distributions at Compressco that puts TETRA into the 50% IDR by late next year and should almost double the cash being received by TETRA from Compressco. During the third quarter we also successfully implemented Compressco in the TETRA financial system in addition to a new field data capture system to support the mechanics and technicians. This system will allow us to further reduce G&A cost at Compressco and provide Compressco additional tools to manage their business. We plan on extending this system into CSI in the coming year also to reduce their expenses and give them additional tools to manage the business. With respect to Maritech, during the third quarter we completed additional engineering studies and assessment of the work that needs to be done to complete three relating operating properties. As a result of those assessments we increased our reserve for work to be done to $46 million at the end of September, which includes $10 million for non-operated properties. For the property with the platform that was previously obstructed with the pipeline, we plan to removing that platform in the coming days. This will leave us with two properties to complete. All the work that can be done with our heavy lift barges will have been completed this year. We have smaller amounts of work to be done with our diving barges to remove the bleach and so site clearance, but the bulk of the work to be done on the two remaining properties will be in the third-party assets. We will be sourcing those assets next year and depending on availability and optimal pricing, we will schedule those accordingly. Clearly Maritech has been a long and challenging road, since the end of 2010 we have plugged and abandoned 490 Maritech wells, both operated and non-operated. We have removed 96 platforms and we removed 119 pipelines. While the remaining properties continue to be a challenge from the numbers I just mentioned you can see that we have made tremendous progress but with a significant cash burn over the recent years. We’re focused on completing the two remaining properties on most appropriate cost, prioritizing cost and cash burn overtime. With the acquisition of CSI by Compressco and our reduced ownership percentage our balance sheet and cash flow have a much different look from before when owned maybe 2% of Compressco. We continue to fully consolidate Compressco despite the lower ownership percentage as we are the general partner. I believe it’s important to take a few minutes and fully understand TETRA’s balance sheet and cash flow with a much target Compressco in our financial statements. I previously mentioned that the impact to TETRA shareholders from the acquisition of CSI by Compressco in the expected increased distributions from Compressco to TETRA as we move up the IDR thresholds. Our consolidated balance sheet reflects debt of $939 million. Of this debt $430 million is for TETRA and $509 million is for Compressco. TETRA and Compressco have separated distinct debt and capital structures. TETRA excluding Compressco is the party to a bank agreement and senior notes which are obligations of Compressco. Compressco have a separate bank agreement and senior notes of which TETRA is not a party. Each party’s debt obligations are independent of each other and there are no cross defaults, nor cross guarantees. TETRA’s debt of 430 includes $305 million of high replacement notes that mature overtime and $125 million that was outstanding on a revolver at the end of September. Compressco’s debt of $509 million includes long-term debt, long-term notes of $345 million that mature in 2022 and $165 million outstanding on a bank revolver as of the end of September. We believe to appropriately assess our balance sheet and debt structure that one must look at TETRA’s debt separate from Compressco’s and vice versa. Compressco’s separate debt and capital structure will support Compressco capital expenditures and working capital requirements, which we anticipate to meet by growing on the $400 million revolver without any support from TETRA. We have previously communicated a free cash flow of $80 million for TETRA in Compressco combined which included our 82% ownership of Compressco. Given our separate capital and debt structures in our 44% ownership of Compressco’s much larger operations, the appropriate measure of free cash flow for TETRA as it relates to TETRA shareholders should be viewed as the following; it should be viewed as a TETRA’s cash flow from operations, in TETRA’s capital expenditures plus the cash that is being paid from Compressco up to TETRA. And to demonstrate what our cash looks like on a go forward basis we’ve been excluding Maritech. On this basis, TETRA’s free cash flow for the third quarter was $17 million which includes $5.9 million of distributions paid by Compressco to TETRA in the third quarter. TETRA’s capital expenditures were $14 million and cash flow from operations was $24 million excluding Maritech and the unusual items. On a year-to-date basis free cash flow was $41 million to TETRA, which we’ve achieved despite the weaker offshore profits and the recovering production testing profitability. I will publish to our Web site in our Industrial Presentation this cash flow analysis. We believe that this method appropriately accounts for the cash TETRA is generating and available to TETRA to either further invest, reduce debt or evaluate for shareholder return purposes, given TETRA and Compressco’s separate debt and capital structures. TETRA’s capital expenditures of $14 million in the third quarter was the lowest this year, down from 23 in the first quarter and from 18.5 in the second quarter as we continue to reduce capital expenditures across all business areas other than water management. Now to summarize the key points in the quarter; first, production testing is making progress and we’re achieving the goals we communicated. Second, the CSI acquisition of Compressco is consistent with our expectations and we believe we’re on-track to generate increased distributions that will move us towards a 50% IDRs splits by late next year and increase the cash coming to TETRA from Compressco. Three, Fluids continues to experience the lift in the Gulf of Mexico, a deepwater projects lift, but water management and calcium provide onshore sales to remain strong. Number four, Offshore Services is going through some challenges as we’ve done before we’ll aggressively manage our cost structure. And lastly we’re managing capital expenditures and working capital with further DSO improvements to continue to making progress towards our $80 million free cash flow goal despite the weaker Offshore Services profitability. And with that Amy, let’s open it up for questions. Question-and-Answer Session

[Operator:]

(Operator Instructions) Our first question comes from Jonathan Sisto with Credit Suisse. Jonathan Sisto - Credit Suisse Stu I guess the silver lining is that the businesses that you’re investing in on a go forward basis, Fluids, Testing, Compressco all did pretty good in the quarter. Kind of wanted to hear your view about more ’15 some of the levers you see you can pull in those businesses and your outlook for them?

[Stuart Brightman:]

Yes, thanks, I mean I think I agree with your summary I think when you look at the third quarter and our commentary on the fourth quarter, I’d encourage everyone to look at the businesses that we continue to invest in for our primary growth Fluids, Testing, Compression all had decent quarters as I said on the call Compression totally in line with the acquisition economics, Fluids progress on some of the timing of projects in the Gulf of Mexico continue to strengthen water and Chemicals and onshore in the U.S. and Testing, great progress on the operating margin which is nice to see after really working it hard over multiple quarters. So we feel very good about that and expect to see similar performance in those businesses in the fourth quarter and I think in those businesses as we look at 2015 obviously we’ve got to look at commodity prices and activity levels as we do and as everybody else is doing as we see the budgets but in general we would expect to see good opportunities onshore in the water the overall Fluids continued progression and our Testing margins and as Elijio mentioned very significant growth on the Compression business resulting in opportunities to materially increase the distribution. I think Offshore Services, kind of bifurcates the discussion Offshore Services very challenging August-September, expect that to be a challenging fourth quarter I would expect similar earnings in the fourth quarter as we saw in the third quarter in that business. We continue to do what we’ve done as necessarily that business on the cost side and management is committed to sizing appropriately. We’ll not put new capital into the business until we can see a clear line of improvement and we haven’t, obviously that hasn’t happened. So, we’ll run that tight. We’ll optimize. We’ll continue to take care of the opportunities in the short-term. But that is the growth engine until we demonstrate better performance. And we think that’s going to be a better market next year but we’re going to get through the budgets with the customers and see which ones are going to increase. There is very specific reasons with certain customers that budgets have been cut back this and we think that will change. But we’ve been proven wrong. So we’re going to be very conservative. In Maritech, we’ll do the work as Elijio said optimally during the year on weather and asset availability by third-parties. But we do feel very good about our core businesses that we have been putting capital to work over the last year or two. Jonathan Sisto - Credit Suisse Stu as it relates to fluids, you were pretty early in highlighting the delays around projects in the Gulf of Mexico as early as like 2Q. Is that improving in any way? We’ve heard a lot from the biggest market cap down about loop currents and the like. Is that improving and will dissipate for the fourth quarter?

[Stuart Brightman:]

I think you will see it similar to what we’ve seen for the year I think the third quarter was actually a very good quarter there. But I think that was more several of the medium sized projects coming together at the same time that had been delayed in the first half. So that was positive. We’ve had some good international activity. We continue to feel good about areas like Saudi on the Fluids side. But I think our overall approach is that’s the project is going to be longer in developing. It’s going to be similar going forward. And we’re not overly changing our view based on the timing of some positive timing during the third quarter.

[Operator:]

Our next question comes from Jim Rollyson at Raymond James. Jim Rollyson - Raymond James Stu, just circling back to Maritech now that it sounded like we’ve done more detailed engineering on what remains for you guys to take out. Just curious the risk of the liabilities getting revised upwards in any meaningful fashion from here between now and the time you get the rest of the stuff done besides the non-op stuff?

[Stuart Brightman:]

Let me try to be very granular on some of that stuff Jim because I know it continues to be a moving target and I share the frustration that others do in that respect. We are going to get one of the platforms out over the next few weeks we think that’s going to be fairly straight forward. The main areas where we’ve seen the increase that we referenced it during the third quarter revisions relates to couple of properties with the wells associated on those properties whereas we’ve done additional analytics towards the second half of the quarter. We’ve seen that the scope of intervention is going to be significantly higher than we expected. And we chose not to do it at the moment because we still have planning additional analysis to do asset allocation and we want to do that in favorable weather conditions. Last thing I want to do is take, some of the challenges we’ve had in Maritech and exacerbate that by layering on challenging weather conditions into that scenario. So there is going to be another round of analytics that will take place on an ongoing basis as they always do as we select the assets that we’ll do the work as possible that those wells on those two fields are, we’ll look at again. And the one remaining platform to that we’ll go into 2015 of our operated properties is one of the down structures from previous hurricanes that we’re doing more analysis. And based on that we’re going to most likely use an outside asset and do the work but we’ll continue that during the quarter. So there is more analysis to be done and it’s more analysis than expecting the physical work we do during the quarter to vary from what we’ve estimated. Jim Rollyson - Raymond James And I guess I’ll ask the question that you’ve been hearing at on the other calls. Just when you look at where oil prices are today come down quite a bit maybe you could just walk through your view of how that might flow through and impact your various businesses? And I am thinking specifically like in Testing you guys are on this margin improvement track and obviously in the Water Handling business you’re kind of on this market opportunity track. As you just think about lower oil prices and walk through your various business lines. How you think things might shape up for next year and how this might impact you?

[Stuart Brightman:]

I mean you’re really talking about three of our segments when you are talking about that Testing, Fluids and Compression. And I have said in the Compression side we’ve got a very good balance of well head related gas gathering midstream market segments with the acquisition of CSI I mean one nice data point as we have $140 million plus backlog of unit sales in our Compression business. That gets us to the middle of next year. We feel very good about that, that number has been very constant over the last few months as we shift we replenish it and we feel good about that. So, on the energy recall on the Compression side the legacy Compressco business about 70% of the U.S. is end of light natural gas production enhancement about 30% is Liquids driven. So kind of that 30% of the legacy business at Compressco kind of the gas lift, gas gathering piece of CSI would have some exposure although, no, that would probably be very small in the grand scheme of things next year. So we’ll watch that monitor that look at some of the long lead time items, make sure we calibrate that. But I think to-date the team remains pretty optimistic that’s going to have very minor impact on that business. Fluids the negative to water side you have get these the fluid sales into the shale, few of the areas we have our strongest activity at the moment in the Permian. We feel pretty good with the customer base that will be in decent shape there. Appalachia, we do well, we feel reasonably well there. South Texas and other area there maybe some impact there. So, that would affect the pace of growth on water transfer, the pace of growth that we’ve seen on the Fluids side and set everything on the flow back Testing. So just like that everybody else we’ve had some impact, hard to quantify at the moment and we feel better about our protection given the CSI acquisition that we aren’t more diversified than we would have been 90 to 120 days ago.

[Operator:]

Our next question comes from Martin Malloy of Johnson Rice. Martin Malloy - Johnson Rice Just on Offshore Services, if I step back and look at just what happened, look at what has been taking place in the industry over the last couple of years with hurricanes coming through in ’05 and ’08 causing a lot of damage and resulting in a lot of work for companies like yourselves and Offshore Services segment. And then after that company seem to look to accelerate their P&A decommissioning of platforms out there but that seems to be moderating failing off and the jack of recounts not increasing in the Gulf of Mexico on the U.S. side, why do you think ’15 looks better than ’14?

[Stuart Brightman:]

I think I’d say there is two variables where I think we should see better activity next year and again clearly you’re starting point that some of the uniqueness of those three hurricanes and ‘5 and ‘8 are behind us is certainly correct. I’d just say it’s been very -- there has been a lack of some of the infrastructure construction projects on the diving side that we saw last year we haven’t seen this year and we think with our specific customers we’ll see that as we get to the second quarter and beyond next year. So we do have a little bit of reasonable visibility into some of those diving projects that would happen at that point. And I think on the P&A side, we saw a couple of very specific customer budget cuts this year on that, that our feedback over the last few weeks talking with those clients is that they expect to see a bigger well count next year which we should participate in. So I think those would be the two areas. Again I think it will be very challenging to get that business in 2015 back to where we thought it was going to be this year but I do expect it will be better than what we’ve seen in the second half of this year. And then internally on the micro side we’ve got the guys very focused on asset optimization and some of the ongoing cuts et cetera. I think we’ve proven over the last two years our ability to manage the cost side very well. So it’s going to be activity driven and positioning so I think short answer, I think we’re better than this year clearly not at the level but we’ve in had our original plans of ’14. Martin Malloy - Johnson Rice Okay. I think the volatility of this Offshore Services segment makes TETRA stock difficult for a lot of investors to own, can you talk about longer term how you view this as it’s a core business that you want to remain in?

[Stuart Brightman:]

Clearly if you look at our results this year and you look at the predictability or band of results on Fluids, testing and Compression, it’s in the narrow band and we’ve done a pretty good job of improving some of the areas like Testing and operating within that predicted band over the last couple of quarters and I’m pretty comfortable that’s going to continue. The volatility of Offshore Services certainly is visible at the moment and the reality is any strategic alternatives in that business step one as you have got improved profitability we’re focused on improved profitability as we are on any business that is not meeting our financial objectives. If you look at the market out there and others that operate in that space clearly we’re not the only company that’s challenged in that area and I think we’ve done a good job overall versus peer group over the last couple of years but given the volatility, given the challenge, given the big mist the second half of this year compared to what we talked about 90 days ago focus number one, is let’s take the short-term steps to improve, optimize, that would get the best returns on what we have and as we go through that, then you’ve got more range of options in the short-term until you have got inherent predictable business that operating at a better level, it’s fixed what you have but longer term we’ll figure that out as we look at the improvement but it clearly is a much more volatile business than the other segments that we have.

[Operator:]

Our next question comes from Mike Harrison at First Analysis. Mike Harrison - First Analysis I was hoping I could get an update in the testing business an update on the competitive environment in the basins where you’re working, are you able to secure attractive pricing and kind of a project-to-project risk and can you maybe give us any metrics on how your customer base has expanded and diversified over the past two to three quarters?

[Stuart Brightman:]

Yes, I think I’d characterize the competitive nature being similar I don’t think we’re getting any improvement in the overall market environment that’s correlated to, that’s driving our improved performance. My view is, we’ve got a handful of items that we’ve very aggressively focused on over the last 4, 5, 6 quarters that we’ve talked about that being diversification of customers, reallocation of assets, cost management, just continuing to make certainly offer best-in-class service and delivery and quality and safety and I think between asset reallocation, the cost management, diversification of customer, sales expansion, starting to see some nice benefits international places like Saudi, a little bit better market in Canada I think all of those have done but I wouldn’t give credit to a better market environment has given us any of that benefit, it’s all been internal execution. So, like I am real appreciative of the hard work that the team has done to move that in the right direction. And the scenario where Joseph has clearly spent a lot of his time in the first quarter and we’ll continue to building on the progress we’ve made over the last year. We look at it it’s a big 740 basis points a big step up sequentially and it came in exactly as we expected when we had the call in August. Mike Harrison - First Analysis And in terms of the number of customers you’re serving I mean is that customer base up 20% versus where it was at the end of last year, help us to understand that.

[Stuart Brightman:]

Yes, I’m not sure I have got the exact number in front of me but I think directionally that’s probably not a bad estimate in the U.S. we track dollars of new customers, the number and it’s certainly a significant number to give you some metrics to go around it, the number of new customers certainly is north of 15 to 20 of what we picked up in the U.S. from 12 months ago and I think if you go -- if you have the customer list and you look at where we’re getting incremental activity the sales team is kind of brought in order of magnitude 15 to 20 plus. Mike Harrison - First Analysis Alright, on the CSI side, are there any surprises that you’ve seen as you enter some of the newer markets outside the traditional well head compression in other markets that Compressco was involved in and are you seeing additional opportunities as you’re digging in that business a little more?

[Stuart Brightman:]

Yes, I think if you look at the CSI I think there is all the learnings have been positive, everything is come together very nicely and we’ve got several instances where the combined sales team has been able to leverage relationships and bring incremental revenue fairly straight forward that’s great I think we found that the operating guys have a line of sight to get us towards that $8 million integration savings we expect in 2015 so we’re very pleased with that. The guys are focusing on the existing customers, existing basins and the capital allocation of that $90 million growth capital number that we’ve referenced we will be in the existing basins where we already have footprint that we can leverage. So, the good news is no major surprises and it’s going very much according to plan. Mike Harrison - First Analysis Alright, and maybe a last one for Joseph, you’ve been pretty quite so far but I was hoping maybe you can talk about what attracted you to the TETRA opportunity and what your main focused projects are at the moment?

[Joseph Elkhoury:]

Good morning everybody, it’s nice to take part of the analyst call specially when some of the tactical execution that has been put in place over the last few months is starting to bare fruits on the results of the production testing, specifically with the 740 basis point improvement quarter-over-quarter which would as we see it right now after we closed October is continuing towards the stated objectives and moving into Q4. What attracted me to TETRA is the opportunity to lead some very diversified businesses from where I came from and try to move from services that are diversified and target customers across the upstream and a little bit of the midstream with compression and try to move up the value chain in terms of figuring out how to bring those services together into more of a bundled service approach. If I wanted to talk about how we’re trying to link up all these businesses we’re looking at adding valuable solutions and we’re working with specific customers today on making up frac flow back, water transfer, water treatment and trying to figure out how to become the preferred fluid manager around the well head. That’s really what I am focused on over the short-term my main focus has been on building the playbook of the practical execution with that really focusing on restoring profitability in all our operations, making sure that we address and eliminate redundancies in the system, continuing with the plans that were put in place before I arrived at TETRA, figuring out the best ways to optimize our cost and leverage our back office from business systems to supplier management. And definitely my biggest focus is on growing profitably, diversifying our customer base, allocating the resources that we have without the need to spend new capital to locations where we can expect better returns. So that summarizes the things that I have been focused on in the first three, four months of my assignment at TETRA.

[Operator:]

The next question comes from Stephen Gengaro at Sterne, Agee. Stephen Gengaro - Sterne, Agee Two question, I think first Elijio could you give us just quickly your expectations for depreciation SG&A and interest cost in the fourth quarter kind of on a TETRA consolidated basis?

[Elijio Serrano:]

So incremental DD&A that we picked up as a result of the acquisition of CSI let me tell you, give me a second it’s $9.6 million and that reflects essentially two months of DD&A for the acquired company so you can assume that we’ll pick up an incremental $4.5 million above our existing run rate that’s above the third quarter numbers. Stephen Gengaro - Sterne, Agee And then on the interest side, I assume the G&A is relatively similar?

[Elijio Serrano:]

Yes, in the same way on the interest expense. And on the interest expense remember to exclude in other income expense the non-recurring transaction cost and then on the interest expense when you look at the amount of interest that we picked up on the CSI is about $2.5 million in for the two months of the third quarter. So you can assume that we’ll pick up another $1.2 million-$1.3 million on top of that for full 90 days. Stephen Gengaro - Sterne, Agee And then getting back sort of Stu to the overall picture I mean it does seem like you’re kind of what I will call your core segments are doing fairly well. Is there any change in plans here as far as what we’re doing on the Maritech side, what we’re doing sort of on the Offshore Services side as far as different attack on improving, for actually getting rid of the liabilities? Or is it just kind of more of the same? I mean you’ve assessed the situation, you just kind of prior ahead from an execution perspective from here?

[Stuart Brightman:]

Yes I mean I hate to characterize it as more of the same because I am certainly not thrilled with the revisions we have. But I would say we’re spending incredible amount of execution time with Maritech guys using the expertise in our Offshore Services group. And just making certain we’ve got the best execution plan out there this isn’t an execution issue. To be very-very clear this is the type of challenge that a normal E&P Gulf of Mexico shelf company deals with. This is not Maritech unique. And the difference is we’re at the last three properties some challenging wells that as we go through the analytics of proving to have big rig challenges than we thought. And it’s as simple as that. So when you see new inflow and more complexity you need to take a step back and make absolutely certain your execution and your engineering planning and your asset allocation and the timing, one subtlety is clearly we want to get this done this year, we’ve said that over and over again and probably the one minor shift is, we want to get it done absolutely as soon as possible, we want to get it done with the lowest cost in the optimal way and if that takes us longer to do than we had thought that’s what we’re going to do. We’re not going to go and make the situation worse by doing it sub-optimally. So that’s probably a slight deviation based on new learnings that we’ve had in light of 60 days. And on the Offshore Services piece we’ll continue to do what we’ve done in the last couple years. We’re not going to spend growth capital in a market that is this choppy that’s not a reasonable expectation and we’re going to task our team with doing exactly what we’ve done in some of our other businesses over the years, improve what we have, focus on the opportunities, look at both construction as well as abandonment decommissioning, make sure we’re positioned on some of the big diving projects as we go forward. Leverage the integrated services that we have what we do is really good job on the complex technical projects that involve planning project management, and multiple services, look at a couple of low risk close to home international markets as appropriate don’t diversify for the sake of diversification and be very-very tactical. The management team clearly understands that this is a technical business in the short-term until you demonstrate improved profitability just like it was on Testing. This is no different than the approach we took on Testing it’s just a different market and Joseph has spending a lot of his time with the team going through the tactical execution just like we’ve done on Testing.

[Operator:]

The next question comes from Joe Gibney at Capital One. Joe Gibney - Capital One Just a couple of quick ones from me, we hear you reference as it pertains to the Maritech arrows prioritizing cost, cash burn overtime I certainly appreciate that timing but nonetheless still a very acute investor topic when it comes to dispensing this legacy business. So as it pertains to the remaining wells and platform that are expected be completed in the ’15 I mean what as it stands now what are your thoughts on what that timing means. If you don’t want to address that it’s still more of a moving target predicated on completing this first platform, I fully understand just trying to appreciate what you’re seeing now in terms of the timing on the remaining removals on AR obligations?

[Elijio Serrano:]

So Joe three properties left to be done to-date that we operate, one of them can be done with our assets that’s removing a platform on the property that had the pipeline running next to it so we’re going to be addressing that in the next week and a half and that will get done and behind us. At that point all the work that can be done with our own assets is essentially done and behind us. The two remaining properties require significant third-party assets based on the engineering study and the assessments that have been completed in the last 50 days. And they are costly as you can see by the reserves that we adjusted in the third quarter. We want to do it at the right time with the right pricing with best weather conditions knowing that those assets are beyond our control. So we’re going to go out to the market, we’re going to price what it takes to get a rate to come in and get -- go back into some of those wells based on pricing and the timing that we get we’re going to make that call whether that’s April or May we’ll decide based on pricing and availability of assets that we need. And I mentioned also earlier that the target that we have made is getting this behind us. We eliminated almost 500 wells in the last three years, almost 100 platforms and over 100 pipelines we are down to the last few, we’re not going to rush and do it at any cost, we’re going to do it at the optimal cost. And if that pushes is out several months to a couple of quarters so be it.

[Stuart Brightman:]

The other thing I’d add to that Joe just to reiterate now we’re very focused on our cash targets we’ve laid out there. So again the timing and the execution and capital deployment across the company it’s all part of one overall integrated approach that we look at and we’re very focused on hitting those targets that we’ve laid out. Joe Gibney - Capital One Last question, just trying to calibrate a little bit on offshore profitability, Elijio I mean you referenced additional cost cuts 4Q tax similar to 3Q as you alluded to when we exit this year I’m talking gross profitability kind of low to mid single-digit percentage run rate on a business historically that can be call it mid-teens so it was flattish next year in ’15 you’re taking some cost out since some of this business comes back on this customer postponed projects. What is on a gross profitability basis I mean what can offshore run at next year, is it a double-digit margin business or we’re going to be challenged to get to that level?

[Stuart Brightman:]

So in 2013 after we went through a round of cost reductions we were able to get up in the 12% type operating margins which we think was top cortile versus the industry when we look at results of some of our competitors and peers out there. Clearly this year is going to be way below that number because of our highly unusually weak third quarter that we saw when compared to either a year ago or to the second quarter we thought we’re going to be north of $15 million profitability and we ended up slightly above breakeven. We don’t expect the Q3 of next year is going to be anywhere near that low level. We expect it will see a seasonal slow start to Q1 as we are at the dock because of that where we have been generally in early March. We expect that in the second quarter we will come out on projects that are out there that we’re getting decent pricing on. We do have a project that gives us some usage of our assets into the summer already ahead of us and I think that you’ll see us with the strategy coming out of the first quarter focused on utilization with a lower cost structure to get us north of a win we're going to end up this year but I think below the low double-digit margins as we ended in 2013. If you take a midpoint between those is most slightly perform 2015 looks like for Offshore Services.

[Operator:]

Our next question comes from Paul Finkel at RBC Capital. Kurt Hallead - RBC Capital Markets Hey, it’s actually Kurt Hallead here. Hi, so a lot of ground has already been covered and I am probably going to rehash some things that have already been asked and discussed probably inadvertently so I apologize in advance for those that have already asked some of these questions and to you guys on the call. The Maritech thing is like an albatross, this is supposed to be what I remember like a year and a half ago you guys indicated that was likely to kind of be off your books by the end of ’13 early ’14 that was in the ’14 now at sometime in ’15 and this is not a negative commentary I can understand there is some challenges involved with it. But again what kind of assurances you think you guys can have that it’s definitely going to get done in ’15?

[Stuart Brightman:]

Well certainly it’s taken us longer that’s a fact if you compare to our prior statements and at higher cost if you look at what we’ve got to get done next year on the one structure and the two properties that have the challenging wells clearly based on our record there is obviously a risk that it takes longer and cost us more we haven’t gotten to all of the engineering on it et cetera as I say all the times based on what we know at the moment we think we have a reasonable estimate but there is always going to be additional learnings when you get out there and see it and you are talking about wells that are challenging a structure that’s a down structure where we haven’t had full access to it yet, we’ve had some we planned it based on that until we’re out there you have full access, you run the risk that it’s changing and again I would encourage you and others to benchmark and think about this to others that have similar properties out there that are seeing the same type of challenges. So it’s a best estimate, it’s going to be the thing you can rest assured as we’re not going to execute until we’ve done all the engineering, all the project management, the optimized asset allocation and we think we have our best chance of executing safely at the lowest cost but intent is to get it done, the intent was to get it finished this year but we think at the end of September that reflects everything that we know now and we’re going to get a good portion of that work done with our TETRA assets during the fourth quarter and that mass structure and the associated wells of two properties our game plan is to get that done in ’15. And we won’t start to work until we have a weather environment that’s optimal.

[Elijio Serrano:]

And Kurt again, takes it as a higher perspective over the last 3 or 4 years the population that we’ve to deal with is down tremendous where we’ve eliminated almost 500 wells, almost 100 platforms and we’re down to one platform and we’ve eliminated all the pipelines almost 120 of them but when you look at the population issue that we’ve to deal with looking tandem on the one to two hands now versus where we were just several years ago. Kurt Hallead - RBC Capital Markets So what’s the thought process in the context of plotting earnings guidance excluding Maritech as at the end of the day Maritech is part of your operation and goal is not, right? So what was a perspective on providing your earnings guidance ex-Maritech?

[Stuart Brightman:]

Methodology was we would anticipate due in that early part of next year as we always do and in the similar segment thoughts as we do and with our best estimate of what the cash spend for 2015 and so when we get to end of January, early February and how that call, we’ll have an updated estimate based on the work that we’ve finished during the quarter and work that remains any thoughts differently than what we have and we’ll make a statement as to when we expect to get that done next year. So we’ll, as we always do, we’d take our best shot based on what we know of giving details and supporting it.

[Elijio Serrano:]

We’ve tried to be Kurt as transparent as we can with the information that we have at the time and then we’ll let the investment community a list of the pre and post numbers with or without Maritech. Kurt Hallead - RBC Capital Markets I was wondering if you guys could give us some thoughts on or could you just give us your thoughts on maybe simplifying the corporate structure, going forward?

[Stuart Brightman:]

I am not certain I am interpreting that as the portfolio of businesses if that’s the question Kurt I’ll respond accordingly. I think hopefully one of the consistent messages that we continue to deliver is the areas where we continue to invest both organically and through acquisition Fluids, Testing and Compression we think we’re continuing to perform well fix the areas where we needed to in Testing, demonstrate the margin improvement there continue to do well in Fluids. We’ve done a transformational acquisition during the third quarter on Compression that lets us to be one of the largest players in that space. We think we’ve got $90 million of growth capital that’s incredibly actionable next year that translates to a range of distributable cash flow improvements that maps over to the TETRA shareholders that pushes us through the IDR and to the value of the GP. So we think we’ve got a very clear line of sight on that, a line of sight on our improvement on Testing, continued strong performance on Fluids despite some of the choppiness in the Gulf of Mexico that everybody has seen this year and that those are the businesses we’ve invested in. And Offshore Services in the short-term is a business that we need to tactically go in improve in a tough market as we get that improvement which Elijio referenced should be somewhere between where we’ve been this year and where we hope to be this year as we walk through that improvement and demonstrate it that gives us at least the opportunity to evaluate range of options. Today, our focus is improving that business and taking the actions to do that. Management improves this 100% focus on short-term performance improvement in Offshore Services. It’s not anymore complication than that.

[Operator:]

The next question comes from Bill Dezellem at Tieton Capital Management. Bill Dezellem - Tieton Capital Management I am just simply not clear, the fall off that you experienced in the P&A and diving demand in August and September you referenced that it was a couple of customers. I don’t think we understand really why. What it is this that’s behind that? And I guess from a bigger picture perspective we have the regulatory issues that are supposed to be driving demand. And I guess one of the things that I am also inclined to do is take your experience with Maritech and overlay that with your customers. And shouldn’t they be having the same challenges and so your business should be blooming as a result?

[Stuart Brightman:]

All good questions and I’ll deal with the macro then I'll deal with the micro. And in my opinion, you are seeing areas where there are challenging wells and we participate some of that others participate in some of that. I think from an overall oversight point of view I do think some of the guidelines has come out several years ago have been helpful over the last several years in stabilizing demand and you’ve seen some of that. But I do think there has been a lot of industry consolidation this year. I think one of the things that’s unique is there has been a lot of industry consolidation on the shelf that I think has correlated to deferral of demand of some of the activity. So again I am not going to get into specific customers, specific companies, that’s not the purpose of this call but I think that trend has been part of the explanation. We’ve had a couple of customers that have just made a decision to change the timing of projects they previously committed I mean they’ve come at very-very short lead times and said we don’t want to do the work in the third quarter we’re pushing it up to next year for internal reasons period. And we’ve seen that affect us with some of the diving projects and we’ve seen that affect us in some of the P&A and if you overlay that with the fact that if you study the dynamics of the competitor landscape in this space there is certainly continued pricing pressure that’s driven by consolidation in competitive landscape. So those are the three things that have come together. And we know the utilization of the P&A spreads is down materially from what it typically is during the peak part of the season. We went through on the P&A spreads we just saw a very rapid decline against that historical demand during the peak months related to those areas that I referenced. So three or four things obviously that add up to that magnitude and we really saw that in August and September. We didn’t see that to the same degree in June and July. Bill Dezellem - Tieton Capital Management Thanks for letting me neat at the horse. And on a more positive note, the Fluids gross margin was up sequentially and that was up sequentially on lower sequential revenue which is a little counterintuitive. Would you please address what led to that success?

[Elijio Serrano:]

Now Bill remember that in the second quarter that’s our peak season for revenue out of Northern Europe for industrial sales so that one increased in the second quarter and then drop to normal run rate in the third quarter. Then at the same time we saw an increase in calcium chloride sales into shale free market. We saw some of the smaller Gulf of Mexico projects come online that with shipment of product and the mix of those two margins versus the mix of the Europe margins are more in our favor and that resulted in higher operating margins for Fluids.

[Operator:]

And we have one last question from Jason Wangler at Wunderlich Securities. Jason Wangler - Wunderlich Securities Just had a quick one on the CSI acquisition, how far along are you with switching those contracts over what is the timeline as far as getting that all completed?

[Stuart Brightman:]

We’re in the initial stages of getting the format, talking to customers, getting the salesforce focused and we’re making good progress on that. As we’ve said we think it’s a 12 to 18 month process and also recognized that through the mechanism that we acquired the company we’ve got some good favorable tax treatment that enables us to defer some of the cash taxes regardless of the pace of that. So we’ve got that as a benefit but at the same time I think we’re making good progress and I would expect to see an acceleration of those conversions in the short-term.

[Operator:]

This concludes our question-and-answer session. And I’d like to turn the conference back over to Stuart Brightman for closing remarks.

[Stuart Brightman:]

Thank you. And again I appreciate all the questions as always we tried to be extremely transparent and we’re very focused on the two areas that we’ve been challenged in Offshore Services and Maritech and I think we explained our game plan. And I think we tried to also highlight the positives of which I thought there were many continued progress in some of the businesses that we’ve been more investment-focused, Compression, Testing, Fluids and continued expansion in the margins on Testing, customers et cetera. And we’ll update all the areas where we get together earlier in the year and talk about the fourth quarter as well as the 2015 guidance. So, thank you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.