TETRA Technologies' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.28.14 | About: Tetra Technologies (TTI)

TETRA Technologies, Inc. (NYSE:TTI)

Q4 2013 Earnings Call

February 28, 2014 10:30 AM ET

Executives

Stu Brightman – President and CEO

Elijio Serrano – CFO

Analysts

Jonathan Sisto – Credit Suisse

Jim Rollyson – Raymond James & Associates

Sean Meakim – Barclays

Kurt Hallead – RBC Capital

Mike Harrison – First Analysis

Stephen Gengaro – Sterne Agee

Operator

Good morning. And welcome to the TETRA Technologies' Incorporated Fourth Quarter 2013 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity for you to ask questions. (Operator Instructions)

Please also note today's event is being recorded. I would now like to turn the conference over to Stuart Brightman. Mr. Brightman, please go ahead.

Stu Brightman

Thank you, Jamie and welcome to the TETRA Technologies' fourth quarter 2013 earnings conference call. Elijio Serrano, our Chief Financial Officer is also in attendance this morning and will be available to also address any of your questions.

I will provide a brief overview of our fourth 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, profit 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 prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period.

Our adjusted fourth quarter 2013 earnings per share, is at the high end of the range we noted in our estimates on our call February, 14. Overall these results reflect continued strength Compressco business and a strong fourth quarter performance by our offshore services segment.

In our fluids division, we saw both sequential and prior year reductions in earnings. This was driven by delays on certain odd projects as well as adverse whether the constraint demand from our customers in the US onshore markets.

At the beginning of the first quarter this year, we've seen evidence objects. However, as we move through the quarter. We expect to see and have seen a return to a more a normal level of activity consistent with our guidance and expect this to continue through the rest of the first quarter and beyond.

We are also confident that the investments in our water management business will yield results for this product line that are consistent with our guidance. For the production testing segment, we believed that our fourth quarter results represent the low point of the cycle. We continue to be very aggressive in taking cost reductions and have seen initial success from our expanded sales efforts.

We expect, a sequential improvements in the first quarter of 2014 results and expect that continue sequentially through the remainder of the year. The primary contributors to the segments fourth quarter [indiscernible] results with continued market challenges in US and very modest demand in Mexico associated with slower drilling and related completion activity.

In the fourth quarter our Compressco segment achieved its highest quarterly profit since the IPO of the MLP in 2011. Compressco's fourth quarter results benefited from improved asset utilization and ongoing cost reductions as well as higher number of compressor package sales. We also recently introduced SuperJack to our compressor fleet support our gas lift market strategy. We believe that utilizing these assets in areas, in which we have a significant surface and customer presence will allow us to leverage our existing business.

Compressco's fourth quarter results are particularly encouraging given the ongoing challenges in Mexico. In the offshore services segment excluding the $9.3 million asset impairment adjusted earnings for the fourth quarter was $7.1 million. This compares favorably to adjusted pre-tax earnings of $6.1 million in the fourth of 2012. This unusually strong fourth quarter in fact our second highest fourth quarter ever excluding hurricane years and a year that was not impacted of that same nature.

This predictability of this business and improvement margins is attributable to the cumulative benefit of all the cost reductions we have implemented over the last year and half as well as the expansion of our diving business into the infrastructure support market in the Gulf of Mexico.

In the first quarter, our bid activity and preliminary contracts towards for the balance of the year encouraging and support our guidance estimates for 2014, which are predicated in part on our ability to replace the internal Maritech work with third-party contracts.

In Maritech, our objective continues to be the completion of work on the abandonment and decommissioning liabilities on our operated properties by early in the third quarter. We will do a portion of the work in the first quarter, but the majority will be executed in the second quarter where the weather conditions are more favorable.

We are getting very close to finishing this and despite the liability adjustments taken at year-end. We believe we have a clear line of sight to finishing on this schedule and within the amounts of the existing liabilities. We have a finite number of wells and structures remaining and a solid work plan to address these projects.

Net debt at year end was $329 million as we look forward, we remain confident in our ability to generate $80 million of free cash flow excluding Maritech in 2014. We believe that the earnings range set forth in our guidance combined with working capital efficiencies in an ongoing focus and optimization of capital spending, positions us favorably to achieve this goal.

With our overall balance sheet, we are comfortable with the existing leverage and believe we have sufficient liquidity to continue to evaluate strategic growth opportunities. Our two recent acquisitions the Water Transfer business in South Texas and the interest in our Saudi Arabian joint venture are indicative of the types of opportunities we continue to see, we believe are available in which we have a higher degree of execution and confidence.

With that, Elijio would you please start the financial review.

Elijio Serrano

Thank you Stu. I'll take the next couple of minute and walk through each of the divisions in more detail and then provide color on some of the internal initiatives we have working. Tetra revenue of $225 million decreased 11% sequentially reflect in the traditional seasonal decline on the third quarter and off shore services.

Sequentially, production testing was down 2% as the fourth quarter results reflect the full quarter of activity without Shell in South Texas and continue weakness in Mexico compounded by the challenging weather condition that Stu mentioned earlier. Compressco was up 9% sequentially on continued growth in the United States.

Fluids was down 11% sequentially as of fourth quarter was without any significant one-off sales and also due to shipments to some Gulf of Mexico projects being delayed to this year as client experience delays in completing the wells.

With respect to profitability, earnings per share excluding Maritech and unusual charges of $9.8 million were $0.12 per share at the high-end of the range we announced on February, 10. The $9.8 million of unusual charges were predominantly non-cash charges and were almost entirely attributable to a write down of DB-1 derrick barge they have been stacked as we try to sell it.

We sold this asset for $3 million in January of this year. Fluid's division revenue of $89 million was down 11% from the third quarter. Several significant shipments that we expected to occur in the fourth quarter were delayed into the first half of this year. As operators experience delays in completing some of the wells in the Gulf of Mexico.

We expect the first quarter to rebound to prior quarterly run rates. Water managements also declined sequentially they were also impacted by difficult weather conditions during December. We are seeing a growing trend by many operators to transfer treated water. Previously the majority of our Water Transfer business was moving fresh water from a source to the well site.

Many customers are seeing the strength of our leak free hose and conductors are increasingly using our services to transfer treated water from one-frac operation to another to reuse treated water. In some areas of the country, operators are paying as much as $1 per barrel for fresh water adding to the cost of completing a well.

The continued opportunities for our water management business was a catalyst for the acquisition that we recently announced in South Texas. We expect to leverage the customer base of this acquisition to expand our South Texas business and also penetrate further the progress that we've made in Permian Basin and the Rocky's market.

We have placed orders for additional deployments units and more miles of hose to address our growing market in the Permian Basin. Production testing operating profit was $13.7 million. I'm sorry, reduction 15 profit for the fluids division was $13.7 million. Our operating margins are 15.5% were down from our recent run rates reflecting the leakoff of Mexico shipment and impact from the cold weather on our water handling business.

Production testing, revenue was $47 million was down 2% sequentially. There's a full impact of Shell existing South Texas or so in addition to continue weakness in Mexico. As we expect the production testing operating margins decline from 6% in the third quarter to 1% in the fourth quarter, as we finalize the redeployment of assets previously servicing Shell in South Texas to the Rocky's in the Permian Basin where activity levels have been more robust.

We initiated several actions during the quarter, where we are starting to see the results of those actions. We added senior sales leadership to help us expand our customer base, to the recent senior hires, bring significant relationships in industry experience that we can attribute to recent win of account that we had not previously worked for.

We are also implementing salesforce.com. It's our CRM tool to better monitor client activity, opportunities, proposals, wins and losses, price and trends and to better monitor the performance of our expanding salesforce. We have also made the decision at some of the savings that we have been seeing from our recent G&A cost reductions, our B&E [ph] redirected into additional sales staff to address growing market opportunities as we build a broader customer base.

Well we have benefited from our relationships with a handful of large customers such as Shell in South Texas. We also realized that our more diverse customer bases require to a more significant changes in our business, when some of them change direction.

Our rig cooling business Optima that we acquired in early 2012, reported the strongest revenue quarter since the acquisition, due to strong activity in the Eastern Hemisphere. We have also been aggressively attacking our cost structure and undertook initiatives to identify areas where cost could be further reduced.

At first can be concentrated and assets redeployed to markets where pricing is more attractive. As we saw some of the smaller international countries that we are targeting to startups will be delays, so that we can stay focused on our current areas of strength. Our cost focus and initiatives are continuing.

As a result of the previously noted revenue and cost actions. We believe the fourth quarter represents the low point of our production testing trend as mentioned earlier by Stu. We expect first quarter revenue to grow sequentially after four consecutive quarters of decline due to Mexico and South Texas.

We also expect our Q4 operating margins to be the low point with first quarter margins expected to be at or better than the 6% we reported in the third quarter of 2013. In addition to the strong focus on our production testing management team. Stu and I have been devoting a significant amount of our time and efforts toward getting production testing moving back towards the direction of our historical operating margins.

In recent weeks, we have visited operations and customers in South Texas the Mid-con area, Permian Basin and have upcoming trips to Marcellus, Rocky's and Canada. Production testing improvement is our priority.

Compressco revenue of $33 million increased 9% sequentially despite the lack of a rebound of activity in Mexico reflecting the growth we are seeing in United States for the both the conventional gas market and from our vapor recovery technology.

We continue to manufacture additional units for the United States as our utilization in the US is above 85%. We have also been able to secure modest price increases in the US and Canada. We don't expect any material change in Mexico into second half of 2014 at the earliest. Compressco operating margin increase from 18.2% in the third quarter to 19.6% in the fourth quarter, so we saw revenue growth, price increases and cumulative impact from cost reductions that have been ongoing during the year.

Our fourth quarter operating margins are the highest in 2013 and the second highest in the past few years to surpass only in the third quarter of 2012 when operating income in Mexico was very strong.

As a result, we increased earlier, this year our distribution to $43.75 per unit our fifth increase in the last six quarters. We have further cost reduction initiatives ongoing for Compressco targeting G&A cost reductions as we leverage Tetra's support structure.

Additional benefits are expected beginning in the third quarter. We also remained on expanding our product and service offering and announce the early generator we acquired 18 mid-sized horsepower units. We continue to aggressively look at acquisition opportunities to further expand our US footprint and move into the mid-range size compressors.

Compressco's balance sheet affords capacity to make small-to-mid sized acquisitions. Offshore services revenue of $67 million prior to elimination decreased $19 million of reflecting the sequential seasonality of our business. Compared to a year ago, revenue was up 10% reflecting the strong growth of our diving business, as we expanded into the installation repair and maintenance markets.

Excluding work done for Maritech our E&P [ph] league commission in work, revenue was up 25%. Fourth quarter offshore services operating margins were 10.5% excluding the write-off we took when the sale of the DB-1 derrick barge. Generated an operating margin about 10% as we entered the difficult weather conditions we normally see in the fourth quarter, we believe is a result of a very aggressive cost focus we are having still on this division.

In addition to the focused sales efforts and diversifying our customer base expanding our market and adding sales leadership. We believe the approach we have taken with offshore services are indicative, therefore we can accomplish with production testing. We currently have both of our heavy lift derrick barges at the dock, one going to a mid-cycle dry-dock and class inspection and the other going through a normal full cycle dry-dock in class inspection.

During the first quarter, we'll also be bringing one of our three diving support vessel for dry-docking class inspection. As a result, we expect offshore services first quarter revenue and profit to be lower than normal. As we prepared these vessels for another strong spring in summer.

Our diving and heavy lift backlog looks very encouraging as we approach the spring season having to cure significant projects and no indications at permitting time to get permits is an issue. With respect to Maritech, during the quarter we increased our ARO liability by $243 million.

We are down to four properties, three to half platforms and two to have wells that need to be addressed. We did not make the progress we wanted to make in the fourth quarter as a challenging weather conditions would have been very costly to have our assets ideal waiting on the appropriate weather window.

In addition to the return of production testing profitability and top line growth, this is the other area where Stu and I spend significant amount of time and effort advance in this as quickly as we can, without taking undue operational or safety risk. The nature and unpredictability of wells previously abandoned and subsequent buildup of formation pressure has continue to represent a challenge for us.

Well by using a full body [ph] analogy we believe we are now in the red zone with four remaining properties that we operate. We do have other property that we don't operate or by we contribute our proportionate share of the cost and those operators have indicated area of progressing on completing this work.

We continue to believe during early Q3, we should be complete with this work, pending no new well issues. The final two items, I would like to address are free cash flow and G&A reductions. Our stated goal is to generate $80 million of free cash flow, once we are done with the Maritech decommissioning obligations.

In 2011, we generated $22 million of free cash flow. In 2012, we generated $4.6 million of free cash flow with a definition of free cash flow being cash flow from operations less capital expenditures and excluding the cash burn from Maritech.

Comparing the $4.6 million from 2012 in 2013, we ended the year generating $62 million under the same computation. This $62 million is despite the significant decline in activity in Mexico that impacted both Compressco and production testing and also a downturn in production testing that we saw in the second half of the year.

Capital expenditures of $101 million in 2013 were the lowest in the last three years, despite the significant investments we made for water handling, the upgrades we made in West Memphis to support the growth in the Gulf of Mexico in our larger production testing footprint in Marcellus, Eureka, Rocky's, Bakken and Canadian markets with the acquisition of Greywolf and ERS that were completed in 2012.

This trend reflects our capital discipline and focus on the property investments into the existing product lines. This disciplines and prioritization will continue into 2014. The trend that I just outlined gives us the confidence that in 2014, we can obtain our $80 million goal of free cash flow after Maritech and before acquisitions.

The recent investments into Saudi Arabia in the small Water Management acquisition indicate how we plan to deploy some of the free cash flow. Once we are done with Maritech, we will evaluate further uses of cash, which could include a combination of a dividend, share repurchases, repayment of debt or additional tuck-in acquisition for those business with the proper risk returns profile.

As an update on the G&A cost reductions, we initiated an action plan early in 2013 to reduce our total G&A by $16.5 million. Our benchmark was a gift that G&A expenditure levels that we were running at in the second half of 2012, after completing the three acquisitions that brought a certain amount of G&A with those acquisitions.

The third and fourth quarters of 2012, G&A was averaging $35 million for quarter. Our goal was to reduce that to $30.9 million with the quarterly reduction being one-fourth of the $16.5 million goal. Fourth quarter G&A was $32.4 million putting us close to our target run rate of $30.9 million.

I would like to note that in the fourth quarter we incurred slightly over $700,000 of cost or legal fees to do our joint venture in Saudi Arabia. Recruiting fees to add some of our senior sales staff, employee relocation, expenses as we shifted some management around and other operational fees.

We also made the decisions to invest some of the G&A savings into the sales staff to improve our production testing revenue. The work still to be done is about $3 million of reductions in the support functions mainly in the accounting area. We have a planning phase to consolidate our accounting staff and reduce redundant functions found within each division, which we plan by to achieve by consolidating functions using systems.

The first phase is well is ongoing as we speak, that second phase will be completed in the third quarter of this year. By Q4 this year, the full impact of $16.5 million should be anchored and in place. And as I previously mentioned, we will use some of our those savings to add to our sales organization to expand our production testing and water management business.

And before I turn this back over to Stu, a couple of housekeeping items for those of you that are updating your models. The tax rate for the year ended at 30%, reflecting the mix of lower US profits with a high tax rate versus higher international profit with a lower tax rate. As our production testing business improves in 2014, we believe that 2014 tax rate will be somewhere between 32% and 33%.

Also the Saudi Arabia joint venture by up 2014 will add up approximately $30 million of revenues for production testing and approximately $15 million revenue to fluids. We are already reflecting in 2013 in other income expense below the line. The earnings from Saudi Arabia, those earnings included our 50% of the fluids profits and 100% production testing profits less the commission we are paying on production testing.

Our purchase is essentially buying out the commission previously paid on production testing and the 50% of the fluids that we not previously owned. We will consolidate the full P&L of Saudi effective Q1 of this year. The unusual items of $9.8 million in the fourth quarter were primarily the write down of the DB-1 barge in offshore services.

The only other item of note, was $300,000 asset write-down in Compressco. To summarize the fourth quarter, we believe production testing fourth quarter performance was the valley of the recent trend and we expect revenue margin improvements in the first quarter.

The fluids business saw some delays in the first half of this year. Plus the impact of challenging cold weather conditions on the water handling site. Compressco continues to perform very strong despite weak activity levels in Mexico and off shore services is benefiting from the moving into the installation, repair and maintenance market and the benefit of the aggressive cost actions we have taken.

We believe our Q1 earnings will therefore be in the $0.03 to $0.06 range consistent with our internal forecast we previously compiled as a basis for the total year guidance that we issued on February 10.

The main contributor to this will be the key assets for offshore services being at dock for the majority that quarter undergoing dry-dock operations.

The total year guidance of $0.80 to $0.90 per share and free cash flow target of $80 million with completion of Maritech in the third quarter our targets deeply engrained in the minds of each of our managers in our messages Stu and I are constantly delivering as we visit our operations.

With that let me turn it back to Stu.

Stu Brightman

Thank you and at this time we will open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Jonathan Sisto from Credit Suisse. Please go ahead with your question.

Jonathan Sisto – Credit Suisse

Good morning, Stu. Good morning, Elijio. So Stu, obviously Q4, 2013 were pretty challenging for production testing but Barry [ph] and Dean [ph] seem to be making some new sales progress in the early part of this year given some of your prepared comments. Could you maybe discuss geographically where are those some of those successes have been and maybe how that competitive landscape to a pricing standpoint looks right though?

Stu Brightman

Yes, I mean again if you look at the guidance compared to the fourth quarter and you look at some of the trends that we need to improve on to get to the guidance. Clearly testing was the one that stands out. I'd argue all, the other three segments when you factor in timing of some projects on fluids. The other ones are pretty easy to see the line of sight to the numbers we had. If you look at the sales effort, which is a big part of our focus on testing. We kind of seen in most of the districts.

I mean we've just taken in not just with the two gentlemen you mentioned but even you know we've added another areas. We've expanded both of the city sales as well as the field's service roles. We are just getting a broader penetration with customers and just about all of the regions.

It's hard to signal [indiscernible]. Highlights one that stands out. One I probably also add a little bit of color is, we are very encouraged in the first few weeks and just expanded customer base we get with the acquisitions we announced in South Texas. We think with some of the customer base down there, the salesforce that comes with that, as well as some of the contacts they have in places like the Bakken, that's going to help not just the water side of the business, but also get some leverage with flow back testing as well.

So again, it's kind of, the icing its spread. It's in multiple areas, we are seeing progress Elijio's teams implementing and delivering some system enhancement to support and facilitate that. We are early into the effort, but we are encouraged, what we've seen today.

Jonathan Sisto – Credit Suisse

Okay, so it's a little bit of Tetra initiatives and then the market that will kind of lead to that 450 basis point improvement.

Stu Brightman

I mean from a market assumption, I think we are of the view like most folks slight uptick in activity onshore US this year 3%, 4%, 5%, 6% probably assumption is pricing stays pretty flat. We are not assuming not get a lot of help there. We are adding the small amount of capital to areas we need to supplement the equipment repositioning what we had in certain areas, where customers have changed.

So again, it's an efforts that's not two or three things, there's five or six key elements that drive that ridge from a current run rate to what's in the guidance.

Elijio Serrano

And Jonathan also remember Q4 is the first full quarter without any of the Shell revenue in South Texas, when lot of assets were in the process of getting redeployed. There were all pretty much in place and anchored in terms of their new markets Permian Basin and Rocky's in a revenue generation mode.

Jonathan Sisto – Credit Suisse

All right and then you mentioned at the closing of your remarks that kind of $15 million from the Saudi JV that layers in this year too.

Elijio Serrano

Correct.

Jonathan Sisto – Credit Suisse

Last one guys. One of your competitors earlier this week hinted that pretty publicly about existing the Gulf of Mexico decommissioning business does that kind of announcement in anyway change your outlook for offshore services?

Stu Brightman

No, I mean we've been pretty steadfast in our approach to that business in terms of looking at the cost structure taking actions, expanding some of the applications and we've over the last two years liquidated some non-core assets, taken cost, improved the margins, positioned ourselves for like after Maritech so that comment that's out there won't affect what we're doing short day and long-term.

Jonathan Sisto – Credit Suisse

Thanks guys, I'll turn it back.

Operator

Our next question comes from Jim Rollyson from Raymond James. Please go ahead with your question.

Jim Rollyson – Raymond James & Associates

Good morning, Stu and Elijio. Stu, I guess first one just on Maritech and the abandonment and decommissioning liabilities. What's the risk going through the rest of this year, obviously you're going to get to hopefully getting all this work completed in the second, third quarters?

What's the risk of any further upward adjustment to that number, you think?

Stu Brightman

You've got two or three components of it, that just so, I'll reiterate again. Out of that, $43 million about two-thirds of it is operated properties that we control. The other third, we expect majority of that to be done this year. They'll probably be $4 million, $5 million of that just pure timing of the sequencing by the operators goes to the following year.

So of the operated piece, the two-thirds that we control. You've got couple wells that we're still working through that we've got challenges on, that again we believe what we have at the end of the December is our best estimate and then we have couple of structure. One of which I would say is, pretty straightforward and just more function of timing and getting, the third-party pipeline approved then it is of complexity and then the other big structure we have, has a little bit more size and scale and complexity to it, but we've done all the engineering work and think we've got a very good execution plan.

Those platforms will wait to the second quarter to execute, the wells will probably get one of them done during the remainder of the first quarter. So again, we are taking the approach when the weather came through during the fourth quarter, shutdown where we were deferred till, weather got better take a portion of that, take that weather hit in the fourth quarter. The work we did do and revise up the estimates particularly on the wells, where we knew we had some additional news that led us to a longer execution plan.

So again, like you know as Elijio said we are getting near the end. Just like your bells, looking forward to not talking about, but we think we've got a game plan to get it finished.

Jim Rollyson – Raymond James & Associates

Perfect, well looking forward to that myself. Going back to production testing, you've described a lot of good things as to what the issues were last year in the fourth quarter and how you're getting better. Can we talk about the weather a minute because If I recall correctly in the guidance call a couple weeks ago, weather was part of this equation in the fourth quarter and from most of the folks, we talked to in the service side weather hadn't been all that great from where weather's standpoint in the first quarter.

Any lingering weather effects that you think show up in 1Q that then hopefully go away, as we go to the rest of the year as well?

Stu Brightman

Yes, I mean I think the numbers that Elijio referenced the $0.03 to $0.06 of the first quarter are based on some challenging weather, the first half of the quarter onshore been a pretty consistent theme with everybody that's talked about first quarter outlook to-date. So again on testing, in our fluids that's embedded in the numbers we've talked about for the first quarter and it has been a very challenging quarter in some of the cold weather areas in the Rocky's and the Bakken up in the Northeast kind of believe that will get back to more normal weather mode, the balance of the quarter.

And then you know, the other variable that's probably a little bit unusual, but again it's included in our guidance. It hasn't changed from what we said several weeks ago. Is we do have a couple of heavy lift assets in for the majority of the first quarter, but when they come out by the end and they'll be out by the end of the first quarter. They'll go to work, they'll have backlog and we are confident that the utilization and price points that are out there consistent with the guidance.

So again those two variables are probably why we are probably a little bit lighter than we might, folks might have assumed in sequencing how we get to the full year guidance.

Jim Rollyson – Raymond James & Associates

Helpful and last one, Elijio. Fourth quarter DD&A little over $30 million which is a bit above the run rate kind of implied for 2014, just curios how that transitions?

Elijio Serrano

So make sure that on, when you look at the fourth quarter, you adjust for the $9.8 million that we took the write-off on the derrick barge.

Jim Rollyson – Raymond James & Associates

Perfect.

Elijio Serrano

When you look at that number?

Jim Rollyson – Raymond James & Associates

Okay. Thanks guys.

Operator

Our next question comes from Sean Meakim with Barclays.

Sean Meakim – Barclays

Good morning, guys. On the fluids business can you give us a little bit color on what drove the delays in the Gulf of Mexico, just trying to get a better sense for the rig deliveries and what's driving the change there and as we look forward the potential for more hiccups in the Gulf?

Stu Brightman

Yes I think it's more very tactical sequencing of the project with the customer very specific well conditions and project specific as oppose to rig or macro changes. We kind of looked at it, we have probably a portion of the fourth quarter. The first part of the first quarter sequencing of some that moved into mid-February and beyond to the balance of this quarter in what we see going forward that's those activity levels are pretty consistent with what we expected, but I would not look at it as anything other than short-term customer specific sequencing that drove the timing.

Sean Meakim – Barclays

Okay, that's helpful and then we talked a bit about big projects having some impact on kind of sequential changes or year-over-year changes for the Gulf of Mexico business, would you view big projects as kind of, the exception or the rule for that business?

Stu Brightman

I would say for the fluids segments as we've said in the deepwater portion, by definition it's lumpier. So it's going to be more than norm than the exception, I think there will be, if you go back over the last five or six quarters. It seems up top of my head, that the majority of those quarters, we benefited from some lumpiness and a couple of those quarters.

We've seen things slide a little bit and catch up later on. So I think you need to look at it more than just on a quarter-by-quarter basis and look at the overall trend. And our mind continues to be very robust for what we're doing out there.

Sean Meakim – Barclays

All right, that makes sense.

Elijio Serrano

Over the recent quarters you've seen significant one-off sales, we have one in the Gulf of Mexico, we had one internationally and we have one US onshore. So three out of the last four quarters we saw a significant one-off completely different areas.

Sean Meakim – Barclays

Right, that's helpful and just one more questions on the fluid side. It seems like water handling and Optima are probably the two fastest growing businesses. Can you give us kind of sense of little bit where they stand today in terms of materiality made from a revenue standpoint, and then what the growth rate assumptions are for this year?

Stu Brightman

I'd say it has been, water certainly has been at top of the list of growth over the last year and two and now embedded in the ramp up and revenue in our 2014 guidance, there is another pretty sizable increase in that, lot of its driven by CapEx, we invested in the second half of last year and planned CapEx for this year. Optima, I think we said last year, part of the challenge we had unusually, usual number of North sea projects that didn't happen because of wells just not working out, a lot of work that had been awarded that never took place.

And I think as we went through the fourth quarter when we look at the backlog going forward that's coming back to a more normal scenario and you kind of overlay that with moving into some new countries that's benefited that business as well. So again, part of the testing sequence this year. As I said, really as you know five, six, seven things that drive that improvement is certainly the expectation that we see that business continue to cycle up.

Sean Meakim – Barclays

All right, makes sense. Okay, thanks a lot guys.

Operator

Our next question comes from Kurt Hallead from RBC Capital. Please go ahead with your question.

Kurt Hallead – RBC Capital

Good morning.

Stu Brightman

Good morning, Kurt.

Kurt Hallead – RBC Capital

So heard a lot of different territory, I was assuming, I'd start out with the point in time where Maritech gets up behind Tetra. I think last year at some point, there was some discussion or at least some consideration being given to potentially and just like to get an update on what your mindset might be at this juncture and whether or not, thought process may have changed.

Elijio Serrano

I'll answer that one, Kurt so the first thing is that we want to make sure that we're not premature and trigger actions until Maritech is done. In preparation and anticipation of that to occur. We work with outside parties and looked at the pros and cons, the financial consequences of all the options that we have listed whether, they'd be a share repurchase, how big or small, whether they would be at dividend program small or large, whether there would be debt pay down on some of our existing obligations.

We've got the analytics done but we have not yet taken anything to the board until we know that the last platform of Maritech is underweight. So we've got the work done it's a matter of making a recommendation to the board and we are still considering all those options.

Kurt Hallead – RBC Capital

And there's a definitely a lot of time spent on the call here this morning talking through some elements of Maritech and I've been doing this business a while and these offshore projects. I think if I recall, last year this time the thought process it was going to be done by the third quarter, 2013 and now we are thinking about 2014 and now we are getting third quarter, 2014.

Now we are going to be thinking second quarter, 2015. I mean, I know guys, I know what you outlined, but I got you can't help but be a little bit skeptical given some of the nature what goes on the offshore market. What kind of assurance as I mean you guys afraid aren't confident this thing is going to definitely get down here or what?

Stu Brightman

So valid question, a year ago we were still dealing with excess of 10 to 15 properties. Many of them with wells that had been temporarily abandoned years before, and at the time, that they were temporary abandoned we made our best estimate to go at what the cost was going to be, to going and do a permanent abandonment. In that meantime, formation pressure had built up that require us to reenter the well and instead of being $300,000 investment having to reenter the well is now $3 million to $5 million investment.

So the only confidence that we can give you, is that today we are down to four properties, two of them have wells with formation pressure. We've touched all the wells on the remaining properties, we've been engaged with Vesi [ph] we've got a work program agreed upon with Vesi [ph] on how to address those wells. If the program that we've outlined with them will address the formation pressure. We are often running to the races, if that program and a case, if there's formation pressure coming from another zone, then we have to continue to do some additional work with it.

So at this point, we are down to four properties one of them is platform that submerged, that all we need is a good weather window sparely predictable. The other one is platform still upright with no formation pressure on any wells. All we have to do is remove the platform that one, just a weather window.

Then the other two are platforms with wells that we are working through. So we are really down to two items, that could introduce variability, but we are touching those wells right now.

Kurt Hallead – RBC Capital

Got it. Great thanks, that's great color. Appreciate that. The – you made on the other topic which is always the land of hope and optimism and then always things get pushed out in Gulf of Mexico, when you guys gave some color around that. What's your assessment of the energy reform down there in the context of it potentially pushing any incremental work out another year into 2015 and have you thought about that in terms of risk adjusting your outlook on Mexico?

Elijio Serrano

So over the recent weeks and month and opportunity to visit with senior leadership of PMX we've had an opportunity to visit with other regional management of PMX and we've also had an opportunity to calibrate historically what they thought was eminent and when it actually occurs.

Our assumption is that the, [indiscernible] area is going to be very flat this year to no increase in activity. Our assumption is that the Burgos [ph] regions will increase due to the gas market and we will participate in that increase but primarily from the Compressco side, we are not assuming any meaningful increase in Mexico this year versus 2013.

We are also assuming that by the time, all the reforms and all the regulations and all the practices in terms of how to execute upon them, come to fruition that is going to be the back end of 2015 before that is benefiting any operators or any service company such as us. So no significant benefit in our opinion until late 2015 and from just ongoing regular activity, we think Chicanto [ph] will be flat. We think Burgos [ph] will show upside for Compressco this year.

Kurt Hallead – RBC Capital

And then lastly just on production testing. The one of the major service companies are looking to sell their production testing business. Not quite sure what are your thoughts are on that. In terms of impacting the competitive framework or having near-term impact on pricing or business or you getting business because of that, any thoughts on that?

Stu Brightman

I don't think that's going to have a major impact in the overall market dynamics.

Kurt Hallead – RBC Capital

Okay, that's great.

Stu Brightman

There's sufficient capacity out there still that we've got work through that. We are confident on self-help and actions we control to improve that margin.

Kurt Hallead – RBC Capital

Great, thanks. I appreciate that. Take care.

Operator

Our next question comes from Mike Harrison from First Analysis. Please go ahead with your question.

Mike Harrison – First Analysis

Hi, good morning.

Stu Brightman

Good morning, Mike.

Mike Harrison – First Analysis

Just wondering, if we can go back to fluids and looking at the gross margins there were relatively weak. Mostly volume and mix related or are you seeing any cost or pricing issues that affected you in Q4?

Stu Brightman

Yes, I'd say it's predominantly volume and mix. It's not a cost creep, there's not any cost issues don't see any overall changes in the structure of the competitive landscape. I think the combination of some of the Gulf of Mexico projects pushing out and some of the weather impact on our onshore fluids would drove that.

Mike Harrison – First Analysis

Okay and how many deployment vehicles did you have in the working in the water handling business during the fourth quarter and kind of where we expect it to be as we progressed through 2014, just trying to get a sense of your capability to roll out the hose?

Elijio Serrano

Mike, to protect our pricing our margin and our revenue per unit. We have not disclosed and prefer not to get into that granular level in terms of number of deployment units or miles of hose that we have out there.

Mike Harrison – First Analysis

All right, fair enough and just looking at the offshore business. You mentioned the additional diving work for some infrastructure supported is something that helped a lot in the fourth quarter, is that something that's more one-time in nature or is that something that's going to continue next year, expand next year?

Stu Brightman

It's lumpy, but we expect it to continue. I think that we've executed very well, we've gotten good response from our customers. So I would expect, it would be both lumpy and expect it to continue throughout this year and as a fact, we have some backlog already in that area.

Mike Harrison – First Analysis

All right and last one I have is on Compressco. Is there any way to breakout how much benefit you're getting from higher natural gas prices and growth in conventional gas applications and I guess the real question is the growth there sustainable or is that something that goes away if and when gas prices come off their seasonal highs.

Stu Brightman

Yes, I would say we've gotten a little bit but not a very big uplift associated with the higher natural gas prices. I think if you look at the sequential growth, the last few quarters in Compressco as well as our guidance for 2014. It doesn't build in a big impact on natural gas related activity. So I think the drivers we've seen in the US in the liquids and the vapor recovery and some of the other non-Mexico international markets will continue to be the catalysts for that business.

If we are fortunate enough in natural gas days where it is, for sustained period of time. I think there is upside.

Mike Harrison – First Analysis

All right. Thanks very much.

Stu Brightman

Thanks Mike.

Operator

(Operator Instructions) Our next question comes from Stephen Gengaro from Sterne Agee. Please go ahead with your question.

Stephen Gengaro – Sterne Agee

Good morning, gentlemen.

Stu Brightman

Good morning, Stephen.

Stephen Gengaro – Sterne Agee

Two things on Compressco. The first is, I think you're closing in on the 15% IDR threshold, how did that impact the cash flow, how should we think about that?

Stu Brightman

Yes, I mean we are closing in. I think our annualized distribution is at 175 now in the first IDR kicks in on an annualized distribution of 178 and given that we've increased distribution five or last six quarters. I think characterized as it is closing in, as very accurate and when we close in the once we get to that annualized distribution rate, Tetra is the general partner we will get 15% of the distribution above that.

Stephen Gengaro – Sterne Agee

Okay.

Stu Brightman

Just that tranche above it and then once we get to down the road to the next tranche, it ticks into 25 and ultimately the high tranche will be 50 down the road.

Stephen Gengaro – Sterne Agee

You know, I think that's like 233 if I remember correctly.

Stu Brightman

Right. Yes we have that number tattooed on our forehead.

Stephen Gengaro – Sterne Agee

And then the second question as it pertains to Compressco, you made the acquisition of these I guess medium horsepower units recently. How should we think about potential for growth there either organically or via acquisition?

Stu Brightman

Yes, I would treat that as an indication of us wanting to expand into that market segment. This is the first step by no means is it, large enough for what we think we want to do. The team at Compressco as well as team the corporate team at Tetra spend a lot of time looking at growth, opportunities for that business in the movement one of the primary reasons, we set that up as an MLP was to facilitate that type of growth and we like it because it's in the same space, same customers, that we are at, it's just a little bit larger compressor that leverages our sales and service organizations in our existing customer base.

So it's a natural evolution for us.

Stephen Gengaro – Sterne Agee

Okay, very good. Thank you guys.

Operator

And gentlemen at this time and showing no additional questions. I would like to turn the conference call back over for any closing remarks.

Stu Brightman

Thank you and again appreciate all the questions and we will look forward to updating the group on the first quarter results in early May. Thank you very much.

Operator

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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