Tetra Technologies' (TTI) CEO Stuart Brightman on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Tetra Technologies (TTI)

Tetra Technologies Inc. (NYSE:TTI)

Q2 2014 Results Earnings Conference Call

August 8, 2014, 10:30 AM ET

Executives

Stuart Brightman - President and CEO

Elijio Serrano - CFO

Analysts

Jonathan Sisto - Credit Suisse

Jim Rollyson - Raymond James

Kurt Hallead - RBC

Martin Malloy - Johnson Rice

Mike Harrison - First Analysis

Marc Bianchi - Cowen

Joe Gibney - Capital One

Operator

Good morning and welcome to the TETRA Technologies’ Second Quarter 2014 Results Conference Call. All participants will be in a 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. President and CEO, please go ahead.

Stuart Brightman

Thank you, Emily and welcome to the TETRA Technologies’ second 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. I’ll provide a brief overview of our second quarter results then turn it over to Elijio for some additional details, come back with a recap and then we will be opened for 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 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 second quarter 2014 adjusted earnings excluding Maritech in unusual items was a profit of $0.10 per share. Unusually challenging weather conditions in the Gulf of Mexico in lower than anticipated P&A activity impacted the quarter by approximately $0.07 per share relative to our typical historical second quarter and our internal expectations coming into the quarter.

We incurred 40 days of weather downtime on our two heavy lift barges during the quarter this time of the year.

In our Fluids division, earnings were down sequentially as two of our main Gulf of Mexico customers continue to push projects into the second half of the year. We believe activity in the Gulf has not changed materially, but our customers have indicated that there will be an impact by operational issues that delay completion of their programs in addition to replace cost by drilling more complicated wells.

Water management remains strong as indicated by a record monthly revenue during May. Water management revenue was up during the quarter due to strong demand in West Texas, Appalachia, and Mid Continent areas in addition to expansion to the Rockies Region based on the acquisition of TD that we completed during the first quarter.

On the chemical manufacturing side, production at our El Dorado calcium chloride plant reached a record monthly high during the second quarter as we continue to see the positive impact of equipment changes we made last year and continued productivity improvements aided by strong demand for on shore completion fluids.

For the production testing segment, we reported a slight loss during the quarter. We continue to make progress with production testing June operating margins and our expectations for July were positive in both months indicating continued progress for the multiple initiatives we have taken to right size the business and expand the revenue base.

Customer wins in growing activity levels particularly in West Texas give us confident in our goal to exist the year in the low double-digit operating margin range.

Compressco revenue increased 8% sequentially on a significant increase in net sets deployed as we continue to benefit from the growth in the vapor recovery market. In addition, revenue in Latin America increased to the highest level since the first quarter of last year, reflecting slow continued improvements in Mexico, in addition to growth in Argentina.

Operating margins excluding transaction cost related to the CSI acquisition were 20% in the quarter, the highest we have achieved since the slowdown in Mexico started last year.

Offshore services was the challenge for us in the second quarter in addition to having one of our three diving assets in dry-dock during the quarter, we incurred 40 days weather down time that in conjunction with a slower P&A activity cost us about $0.07 per share relatively to historical performance.

We also had a cable mechanical issue in Hydrant during the quarter that resulted in an incremental 12-days of downtime and impacted earnings by $0.02.

I would highlight this is the first downtime we have had in the Hydrants since the vessel came into the fleet three years ago and that we have been back to work on the Hydrant since end of the quarter.

Since then we have seen a broader increase in recovery and diving in heavy lift activity. Both heavy lift barges are now on a multi-program campaign with customers where we are covering for weather, in addition due to strong demand and growing backlog we have temporarily charted and added a third heavy lift barge to deal with the backlog.

We've recently moved one of our diving assets to West Africa for a 90-day contract and certainly we will evaluate the possibility of extending that as we get over there.

Our plugging and abandonment activity continues to be weaker than expected as a result of short-term decline in market demand but we have seen a recent ramp-up of permitting activity and a slight increase of activity of our asset base.

With Maritech we completed the challenging property that required plugging two wells that had formation pressure and removed a platform that have been the majority of our fourth and first quarter challenges.

Finalizing this work resulted in an incremental adjustment to the ARO that we booked during the second quarter. We are now down to three properties to the required platform removals that are scheduled in September and lastly in a property that we are addressing the well situation.

With a weak second quarter offshore services results and Gulf of Mexico project delays, we are adjusting our full year earnings guidance to $0.50 to $0.60 per share. We continue to believe progress has been made in several fronts, but the slow start in the first and second quarters will be difficult to make up the second half of the year.

Our view of the third and fourth quarter estimates are consistent with our overall expectations we talked about earlier this year in our original guidance.

Final topic I want to cover before I hand this over to Elijio is the completion of CSI acquisition. All of us at TETRA and Compressco are extremely excited about this acquisition, certainly a transformational acquisition. Haven't been on the road raising capital

It was great to see the acquisition close on Monday as we had expected. We were able to fund it by raising close to $360 million in gross proceeds and equity $345 in long-term publically traded notes and by partially drawing down a revolver that adds up to $400 million of capacity.

We believe that this acquisition position us to be one of the most significant global compression services providers in the world where we can leverage the capability of CSI, the Bredford Services, our existing Compressco business as well as global infrastructure at TETRA.

As a result we are able to increase the public float of Compressco by a factor of five and we believe based on some of the guidance we gave in discussions at point of acquisition that we'll move into the splits more quickly as we go through the fourth quarter and into 2015.

From an integration point of view the management teams have been put in place and we've already started looking at how we put together the company’s consisting of Compressco, CSI and TETRA.

With that I’ll turn it over to Elijio for his comments.

Elijio Serrano

Good morning. TETRA revenue of $241 million increased 14% sequentially reflecting the traditional ramp-up in activity from offshore services in the Gulf of Mexico and fluids in Northern Europe plus continued growth in our water management business. As a comparison this 14% sequential improvement compares to the Q2 last year increase over Q1 of 6%.

The better sequential change we are seeing reflects the bottom ring out of activity in Mexico and with the U.S. production testing business in addition to continued strong growth from water management.

Earnings per share excluding Maritech and unusual items were $0.10. The unusual items amount to $4.6 million or approximately $0.05 per share. These include $2.1 million of expenses related to the acquisition of CSI. $2.1 million related to the cable mechanical issue in the Hydrant that Stu mentioned earlier and $400,000 of salaries and employee related expenses.

To assist those of you building and updating your model, the $2.1 million of transactions we have made in expenses are all G&A of which $855,000 is embedded in Compressco and $1.2 million is embedded in TETRA’s G&A. The $2.1 million in the Hydrant is all impacting gross margins for offshore services and the $400,000 is mainly TETRA corporate G&A.

We did not count as unusual and we did not normalize for the much weaker than expected offshore services results primarily due to the 40 days of weather that impacted our second quarter by about $0.07 per share.

Production testing was down 3% sequentially on the seasonal slowdown of activity in Canada. However, it was very encouraging that the U.S. was up 3% sequentially. Our first sequential increase in revenue after three consecutive quarters have declined in the United States.

For the quarter we approach breakeven in production testing. The U.S. saw material improvement in profitability compared to the first quarter of this year and the fourth quarter of last year.

The continued cost reduction actions and revenue improvement initiatives have gained traction and have resulted in both June and July operating margins being in the 4% to 6% range. We continue to focus equally on cost reductions and revenue enhancements as we target low double-digit operating margins by year end.

We are seeing strong growth and continue to move resources and equipment to West Texas to service our expanding customer base. The Permian basin now represents our largest area of production testing revenue.

Compressco revenue increased 8% sequentially as all regions reported improvement compared to the first quarter. Latin America was up 19% sequentially as we continue to see steady improvements in Mexico in addition to growth in Argentina.

We have moderated our investments into Argentina given the financial situation in that country, but the existing assets are generating above average margins.

We continue to repatriate cash from Argentina back to the United States. The U.S. increases from the growth of the vapor recovering units and from the introduction of the 100 to 200 horsepower gas lift units we introduced in the first quarter. The acquisition of CSI will allow us to further accelerate our growth in this very attractive market.

Excluding the 885,000 of transaction related expenses, Compressco operating margins were 19.9%, the highest in the last six quarter and since the slowdown in Mexico. Compressco continues to benefit from the cost reductions we have implemented throughout the last quarters.

Fluids revenue increased sequentially by 11% to another record high reaching a $117 million despite the lower activity levels in the Gulf o Mexico as we continue to see customers delayed projects due to operational issues and step-out wells.

Reports by some of the other manufactures of calcium and zinc bromide have also reported lower revenue levels due to the same challenges.

In talking to customers we do not see a fundamental change in the Gulf of Mexico only what appears to be a conversion of operational project delays from complex altered deep water major projects.

Water handling also achieved a record quarterly revenue level and exceeded a $100 million annualized run rate on revenue. This is one of the areas that we have continued to invest capital by slowing down capital everywhere else other than Compressco.

The second quarter was stronger than normal seasonal increase in the Northern Europe. Operating margins of 14.6 have been impacted by the lower Gulf of Mexico activity level due to the project delays. Our manufacturing plans also continue to improve their performance. Last year we made significant investments in West Memphis to drive more volumes through the plan and have also changed out equipment in El Derado.

We have seen the benefit of those and with El Derado’s calcium chloride production we've been able to meet the growing demand from the onshore shale plays.

Offshore services was our biggest challenge in the quarter. Earnings per share were impacted by approximately $0.02 on the Hydrant cable mechanical issue, our first since the Hydrant was put into service in 2011 and the 40 days of weather and weaker plug-in and abandonment activity cost us approximately $0.07 per share compared to our expectations coming into the quarter on top of the $0.02 from the Hydrant mechanical issue.

Do mention that we're seeing a ramp-up in activity have added two assets on a short-term basis in our expanding our geographic revenue base to lessen the impact of being concentrated in the Gulf of Mexico. To also mention that during the third quarter we have rolled into a multi-program project for client activity provides us weather protection.

Maritech incurred an operating loss of $10.7 million during the quarter. We previously had four operated properties to address, one that wells with formation pressure that needed to be re-plugged before we could remove the platform. Those wells were plugged in the second quarter and the platform was removed in July. We are down to two operator properties with platforms requiring removal at this time.

If you recall one of them is a platform that was troubled by hurricane. We have now well scheduled to be removed in September.

The other has a third party pipeline that has to be rerouted before decommissioning of the platforms can begin. That pipeline is being rerouted as we speak. We plan on removing those platforms also in September.

That will leave us with one operating property that was previously plugged and abandoned that might require re-intervention. These wells are scheduled to have temporary well heads installed using a dive vessel in September after, which diagnostics will be performed to determine the next steps.

Our ARO at the end of June was $35 million of which non-operated properties represent $10 million out of the $35 million. Those non-operative proprieties will be completed on a scheduled managed by the operators. We continue to make progress, but it remains painful and expensive.

On the G&A side, early last year we committed to a goal of cutting G&A across the entire organization and target $15 million in annual savings. As you recall during the second half of 2012 we were averaging $35 million of G&A per quarter after the acquisitions that we made for production testing.

In the first half of last year we averaged $33.6 million of G&A per quarter. In this recently completed second quarter, when excluding CSI transaction cost and severance, our total G&A has been reduced to $29.8 million, a $20.7 million annualized saving compared to the average from the second half of 2012, and a $15 million annualized saving from the first half of last year. We still have savings to be achieved from the system implementation in Compressco, so we expect those savings to increase.

On free cash flow, free cash flow during the quarter was a use of $2 million in the second -- during the quarter due to the lower cash earnings in offshore services and weaker fluids Gulf of Mexico activity. This was despite a six day improvement in DSO as revenue increased sequentially by $30 million, but receivables only increased by $7 million. As a reminder, we define free-cash flow been working toward our $80 million goal as cash flow from operations excluding Maritech less capital expenditures.

Our 2014 free cash flow target of $80 million will be a challenge to meet given the weak second quarter results. The CSI will help us get closer to the $80 million goal, but practically speaking, being between $60 million to $70 million this year is more realistic.

The cost of working capital improvement that we have been focused upon by reducing G&A and operating cost and by improving DSO have benefited us to-date, but this need to be coupled with continued improvements in production testing where we are seeing some progress, and with more normal offshore services profit level on top of traditional Gulf of Mexico fluid sales. The combination of these will get us towards our free cash flow goals we have committed toward obtaining.

With the progress made today on G&A and improving DSO, my attention will next be turning to reducing our effective tax rate. I'll be addressing goals and expectations on the next earnings call.

Final topic I will address before opening this up to questions, as I said, shareholder value creation we expect from the CSI acquisition. Tetra communicated a key strategic goal of growing Compressco; the IPO in 2011 was the first step. With the CSI acquisition now have an MLP with a public flow of over $350 million.

We mentioned in an earlier press release that once we combine the two companies and reflect a cost of debt and newly issued shares before realizing any synergies, we expect distributions per unit to grow from their current annualized run rate by 12% to 14% from the $1.81 rate that we recently announced.

By the fourth quarter of this year that would put us between $202 and $206 per unit. Getting up to the 25% Incentive Distribution Rights or IDRs with 7% yield that implies Compressco share price should be much higher than where it is today.

We also mentioned that we expect 2015 capital expenditures to be between $90 million and $100 million, of which only $10 million is expected to be maintenance capital. That amount of growth capital can add over 90,000 incremental horse power. We believe that the incremental horse power allow us to read the 50% split before the end of next year.

Therefore, we believe that the CSI acquisition will create Tetra shareholder value from the following. Number one, Tetra now owns 47% of the outstanding unit of a much larger market cap and more liquid MLP. Number two, as we move from the 15% IDR split, passed the 25% IDR split in fourth quarter and toward the 15% IDR split. Tetra is a general partner, we'll we see significant incremental free cash flow that is valued on multiples of 20 to 30 times on the GP cash flow. And third, the acquisition of CSI will represent a significant increase in the total amount of cash coming to debt rate on Compressco both via the GP and LP route.

When doing some of the parts valuation on Tetra you now add to the EBITDA multiples of our offshore fluids and production testing divisions, the 47% ownership we have of a much larger Compressco, the GP value based on distributions on a multiple of between 20 to 30 times, and the incremental cash from Compressco that Tetra will be receiving.

These financial drivers were the basis of us pursuing this transformational acquisition. Over the coming weeks we plan on reaching out to our shareholder base and the research community that covers us to ensure there is a good understanding of how this transaction is expected to create significant shareholder value.

Now, I'll turn it back to Stu for some closing comments.

Stu Brightman

Thanks, Elijio. Just a few items I want to make sure we close with. First of all, we announced during June that we've had a significant addition to the management team with Joseph Elkhoury starting as our Chief Operation Officer. And Joseph is coming up on a 60 days, and his main focus is to get us to the guidance that we reference, which includes a strong third and fourth quarter with particular emphasis on the areas we've highlighted as ongoing improvements, particularly in production testing. In addition, Joseph will take the lead on putting together the CSI and Compressco combination. So a lot of work for Joseph, but he's got broad shoulders and will do great.

Another key message I wanted to highlight is we do view the third and fourth quarter as being significantly better than the first half of the year. If you look at the support of the logic that we have is we've already started to see improvement in margins and testing as we exited the second quarter and move to the third quarter.

We've said on our call in May that we expected to be at the mid-single-digits as we get to the middle of the year with an exit rate of low-double-digits and we still believe that's appropriate for that business.

Fluids continues to be strong, little slower in some of the projects, but we've got line of sight in the second half for the year.

Offshore services caught us by surprise, particularly in May and June with the weather and some of the P&A activity. As we talked about, we've got a good backlog; we've bought on extra assets.

We feel good about where we are during the third quarter and beyond. And we continue to see strong performance with Compressco. And we'll see the first portion of the CSI benefit as we get to the fourth quarter, the first full quarter of that acquisition as we referenced in some of our prior comments of distribution expectations of 12% to 14% increase as we get through the fourth quarter.

I think when I take a step back, and have spent a lot of time on the road the last couple of weeks raising capital with our team. I would want to highlight that the great work our Compressco team has done over the last three or four years since we went public in June of 2011. The actual results distribution increase really allowed us to use that as a platform to buy a much larger capability.

So my thanks to that group, and I look forward to their ongoing contributions to the combined companies, as well as welcoming the group from CSI where we're impressed with the management. We've put the teams together that’s a great blend of leadership from both CSI and Compressco. And as always, Tetra will be in the middle of helping out overseeing and leveraging our platform.

So we're pleased with that and we expect that's going to be a huge shareholder creation and consistent with some of the big changes we've made the past several years.

With that I'll open the lines for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Jonathan Sisto of Credit Suisse. Please go ahead.

Jonathan Sisto - Credit Suisse

Good morning, gentlemen.

Stu Brightman

Morning.

Jonathan Sisto - Credit Suisse

First off, congrats on the CSI deal, Stu. I know that they are very well regarded, so kudos to you on that.

Stu Brightman

Thank you.

Jonathan Sisto - Credit Suisse

I guess, Elijio, as it relates to production testing, something we've been keen on your low-double-digit exit rate kind of infer some pretty, pretty healthy incremental margins in Q3, Q4. Obviously, Canada comes back. You mentioned the profitability in U.S. Could you maybe just help us bridge the gap, will it be a material step up in Q3, or will it be a ramp? Just a little bit more color on that would be helpful, I think.

Elijio Serrano

I think that is going to be a gradual improvement from the levels that we've got. As you saw from the numbers we've reported, we were in the loss situation in the first quarter. We were essentially breakeven in the second quarter. I mentioned on the call that June and July looked in the mid-single-digit operating margins. I think that if we continue that's -- these on slope, it should put us in the high-single-digits, low-double-digits exiting the year.

And I think that reflects the combination of further cost reductions that we'll meet. And traction on revenue with certain accounts that we've been making progress with late last year, early this year. There's not one catalyst that’s going to get us there. It’s a series of many actions. And I think adding Joseph to the team that where his focus is, this area has given us incremental confidence of getting there.

Jonathan Sisto - Credit Suisse

Thanks. Just in the kind of sticking in the same vain. The rig cooling business you acquired couple years ago, just an update on that if you could.

Stu Brightman

Yeah. I'd say going back to Elijio's comments on testing it's not one single area that will contribute to that sequential improvement, it's many, and that includes the rig cooling business.

We've certainly seen that business activity increase as we went through the second quarter. And as we go through the third quarter we've got pretty good backlog there. And that is certainly part of the expectation that we see as we go through the third and fourth quarters contributing to that margin improvement.

Jonathan Sisto - Credit Suisse

That's it for me. I'll turn back. Thank you, guys.

Elijio Serrano

Thanks.

Operator

Our next question is from Jim Rollyson of Raymond James. Please go ahead.

Jim Rollyson - Raymond James

Good morning, guys.

Elijio Serrano

Good morning, Jim.

Jim Rollyson - Raymond James

Stu, it looks to me like your second half earnings guidance isn't really far off the mark you're thinking a quarter or so ago, which obviously we've kind of discussed so far, implies a pretty big ramp in second half. On -- I think you walked through the general reasons why you think you get there. Maybe a little thought on how you see the waiting between 3Q and 4Q, because it sounds like production testing is going to be gradually ramping, so better 4Q than 3Q. Obviously in Compressco you'll get the CSI benefits fully in 4Q. The offshore is probably the only place where it may be down seasonally in 4Q, but just if you had to attribute your guess as to weigh things.

Stu Brightman

Yeah. Great question. And first part of your statement, I agree with that the third and fourth quarters combined are fairly similar to what we have modelled earlier in the year for that time period.

So kind of just walk through the landscape of the business. Compressco kind of more of the same of what we've seen, two good quarters behind us, expect to continue to see strong quarters in the third and fourth quarter on the Compressco business.

And then when we layer on CSI, certainly that won't be a major impact on EPS, but it will help us on the EBITDA and position us for distribution increase. So I think Elijio did a nice job with kind of walking through where that value creating is as a result of some of those results.

But Mexico is picking up a little bit slowly, but positive trends, so just a little bit -- more of the same on Compressco sequentially. Fluids, I think we continue to see the strength of water, the strength of particularly the onshore oil and gas for the chemical side.

And we see a lumpier second half on Gulf of Mexico that gives us sequential improvement going forward. And I would think the third and fourth quarters are reasonably similar on fluids. I don't think it's a big staircase from the third to the fourth.

Testing, I think Elijio answered that question. We kind of go up linier from the mid-single-digits. We're kind of running at June and July towards the low-double-digits exit rate based on the five or six things that contribute to that which we would cover.

And then the one is probably a little bit atypical is offshore services. I do believe we'll work later into the fourth quarter; we'll have a bigger backlog during the fourth quarter. I think part of that is the natural knock-on impact of some of the delays we saw in the backlog because of weather in the second quarter, some of that is recent wins that lead us to bring additional assets. So I think we won't have as bigger drop off in the fourth quarter in that business as you would typically expect.

So you put all that together, my sense is the third and fourth quarters will be similar. There won't be a big change up or down between the quarters.

Jim Rollyson - Raymond James

Okay. That's very helpful on the color. On the Compressco side, as what Jonathan said, congrats on getting the deal done. Obviously, this provides a huge step up as you go through fourth quarter in next year in the cash flow you guys received from the distribution as you get hopefully into the 50% split.

A, what are your plans with the cash? B, as it relates to the GP, if we go through Elijio's math on 20 or 30 times, I mean, this could be something in the $1 billion value type range or so thoughts on what you do with that eventually. And now that you own less than 50%, are you going to keep consolidating results?

Stu Brightman

I'll let Elijio handle the first part -- first and the last part and maybe I'll help handle the middle part.

Elijio Serrano

So on the consolidating the results because we remained the general partner and we control the business. We'll be consolidating even if the ownership percentage drops even further from the 47% in the future if we were to do any capital raise or anything else to fund the business.

Jim Rollyson - Raymond James

Make sense.

Elijio Serrano

And remind me of the first question again, Jim.

Jim Rollyson - Raymond James

Just plans for the uptick in cash which obviously goes to help your $80 million plus target of free cash flow, just any updates on that.

Elijio Serrano

Right. So we've mentioned that our objective and the target that we had was to invest in those businesses that we're producing strong results, invest organically. And earlier in the year we did a small acquisition on the water handling side and we also bought out our partner in Saudi Arabia as that business is performing quite well.

We would continue to evaluate small acquisitions in those areas that are performing well such as the water. We've also indicated that once Maritech is behind us and we're at the $80 million run rate, then we would look at dividend or a share repurchase program. We have not formalized anything; we have not proposed anything to the Board, but that's clearly one of the targets.

And then, also look at that debt reduction and pay down our revolver or address the $90 million of long term notes that are coming to maturity in April. We want to be cautious and not commit to spend any of it until we see the last platform removed and the last well being plugged. Then at that point we'll lay out a suggestion for the Board to approve.

Stu Brightman

On a broader response to one of those sub-questions on long-term value of the business and to kind of coordinate that with your cash question, again, capital allocation, we spent a lot of time and it's really, really a key part of the business. And it's an area that having Joseph with Elijio on adds another very capable element of that debate with our strategy guys, our business guys, etcetera.

But if you look at what we've done, testing, we've got to fix the margin, improve the margin programs which means we're capital-light in that business in the short term by design. It's all about optimizing assets, moving assets to the highest return basins, a very tactical approach in the short term for that business to get those margins to the levels that we talked about exiting this year.

Water, we continue to invest in and get very good returns and we'll continue to find opportunities in the right basins with the right customers that give us those types of returns. On the remainder of the fluids, there'll be opportunities, but we're well invested in our manufacturing. We continue to improve the productivity of the plans we've invested. We're well invested in our deep water capabilities; we're well invested in cash that's not a huge source of investment.

And then you look at Compressco. I mean I think we've just written the business case of how you grow that business multiples with that type of structure, and we'll continue to look at that structure for growth because we have the access to the capital markets. Even offshore services, well, we haven't invested at the same rate and we've talked about that.

Again, I think the team is doing a great job of looking at incremental opportunities without major investments. I mean the fact that we're able to go out and get additional assets, match them to contract duration is indicative of how we want to run that business. Then you overlay that. We want to continue to move up the value chain and look at opportunities there. Just like we've done in water, like we've done in some of the other areas.

That's a big focus of Joseph. How do we move up the value chain across these business just like we just did on the compression side with the acquisition where we’re getting into richer margins and some of that.

Stuart Brightman

And James, I would add that with Joseph’s background to where his former employer has demonstrated consistently that they find a way to move up the value chain, that’s one of the big benefit that attracted his skills and background to our business and that’s where the focus I think is going to help us evolve that part of the offing that we do today.

Jim Rollyson - Raymond James

Great. I appreciate all the color. Thanks.

Operator

Our next question is from Kurt Hallead of RBC. Please go ahead.

Kurt Hallead - RBC

Hey. Good morning.

Stuart Brightman

Good morning. Kurt.

Kurt Hallead - RBC

Lot of good color there provided on lot of near-term kind of dynamics and so on. Kind of curious Stu as you kind of look at the varying portfolio businesses and what you’re trying to do with Compressco and kind of build that out, get some critical mass and how do you view -- what's the strategy in terms of building out critical mass for completion fluids or production testing and then when you think about that in broader context, would that be more of a U.S. trading opportunity set or an international driven opportunity set?

Stuart Brightman

Yeah, I think on fluids we continue like our position on the completion of fluids in the Deep Water, the Water Transfer. We will continue to look just like we did in Saudi, just like we did earlier this year in the Water Transfer acquisition where we had it give us a better footprint South Texas in the Bakken, kind of those bolt on areas domestically and internationally that leverage some of that Water Transfer technology that we have plus the manufacturing vertical integration technology piece of completion fluids.

I think it’s a combo of domestic and international and if you look at where we’ve invested in fluids the last several years, it’s more the same. Additional geographies, international markets that we may already be at bolt on capabilities that all leverage that completion fluids competency we have.

Testing, we still continue to view that that’s intermediate long term, a very good platform to be in. We think the market activity is going to be strong building out our sales force in North America’s been part of that strategy. We’re starting to see the benefits. I think testing is short term, fairly tactical in terms of ongoing cost optimization, moving assets, continuing to look at the size of the organization, leveraging, Saudi and Brazil and Mexico where we have significant capabilities.

Looking at the Optima type opportunities where there is incremental technology and niches, so I think it’s more of the same of what you’ve seen and we just need to demonstrate in the short term on the testing that will get into the margin targets that we have led out earlier this year. As we do that, we’ll certainly feel more comfortable reinvesting some of those areas.

But when looking at the short term, we are focused on that business of getting, squeezing out better margins on returns on the assets that we have.

Kurt Hallead - RBC

Okay, great. And then I know you kind of mentioned this again on the prepared commentary and some in the Q&A but again just to kind of test the conviction level on the Maritech, what is the conviction that is definitely going to get done before the end of the year, let alone before the beginning of third quarter?

Stuart Brightman

Yeah, so going back to the granularity, during the same quarter we got two of the big -- we got one of the big projects behind us, which was wonderful. We have execution plans for one of the platforms over the next four to five weeks. We’ve done a lot of engineering work. We’re comfortable with what we’re going to do there.

We’re still making progress on the permitting of one of the other structures that’s the gating item on that. As soon as that happens that gets done. And then on the operated properties, we’ve got a few of those wells that we’re evaluating and that’s the wild card if something goes beyond the third quarter.

If we need to do broader innovation on those then that’s going to push us out a little bit of time potentially and then you’ve got the $10 million of non-op that the majority of what we think will be done this year, early next year that again we don’t drive the timing but we’re certainly proud of the process in reviewing annual fees and discussing it.

So we’ve made progress. We’re going to make a lot of progress in the third quarter. I think we’re going to be pretty close to our target of having the operated properties done by the end of the third quarter.

Kurt Hallead - RBC

Okay. Thank you.

Stuart Brightman

Thanks Kurt.

Operator

Our next question is from Martin Malloy of Johnson Rice. Please go ahead.

Martin Malloy - Johnson Rice

Good morning.

Stuart Brightman

Good morning.

Martin Malloy - Johnson Rice

On the offshore services, I was wondering could you talk a little bit more about what gives you the confidence that we’re going to see a pickup, second half of this year the contract support and you’ve got three direct barges and three diving vessels now, that with the short term charters.

Stuart Brightman

Well I think you’ve got several things. One is, you look at the actual backlog we have, you look at the weather terms on that. Well most of that weather risk is on the customer.

As we went into the second quarter, there was a bigger mix where we took on some of that exposure, which is fairly typical so the combination of the dollar amount of the backlog, the number of incremental assets that we have under contract matched against that and the specific terms related to weather are what gives us that confidence as we look through the third quarter and fourth quarter and going back to my prior comment, we do see a pretty good backlog that gets us very deep into the fourth quarter.

Martin Malloy - Johnson Rice

And how’s the weather been thus far in the third quarter?

Stuart Brightman

So far in the third quarter, the weather has been good. The July activity in weather was consistent with what we’ve been talking about.

Martin Malloy - Johnson Rice

Okay, and then my next question is on Compressco and the cash flows coming up to you all both through the LP and the GP interest that you have, I just want to double check the math I am doing but at the current distribution rate, you all are getting about something in mid 20s in terms of millions of dollars a year in distribution up.

Elijio Serrano

Correct. Last year it was $21 million.

Martin Malloy - Johnson Rice

Okay. And then the $2.05 annual rate, it goes to about $33 million roughly.

Elijio Serrano

Right, so let me, for your benefit and this is part of the education process that we’re going to go through over the next month or so with everybody that follows us.

At a 15% IDR, we get about $200,000 as a GP and from being now a 47% shareholder we would get $25 million as an LP for a combined $25 million.

At 25% IDR, we would get $900,000 from the GP and about $27 million for combined $20 million and at a 50% IDR, which is $233 a share we would get $4 million as a GP and $33 million as an LP for a total of $37 million and then if you throw out even a big number just for the sake of arguments, say that it’s up in the 260 range type, you would get $9 million as a GP and I mentioned earlier, that a lot of the GP valuations are 25 to 30 times that you start putting the multiple of $25 million to $30 million or $9 million, you can see what the future for potential could be.

Martin Malloy - Johnson Rice

Thank you. That's helpful.

Elijio Serrano

So those are the cash that would be obtained should those split be achieved.

Stuart Brightman

No that’s a great question and it kind of certainly reinforces the fact that Elijio and I need to be very communicative in the valuation, how we see that, be very precise going forward to make sure everybody understands it. But as you know the math is fairly compelling as we go forward and it shows that just looking at pure EPS relative to the acquisition is not the way to look at this acquisition.

We need to educate everybody on the cash flows, the EBIDTA, those metrics that come with it as opposed to the EPS per se. We've been very clear at the TTI level, the EPS impact is de minimis.

Martin Malloy - Johnson Rice

Thank you. That’s helpful.

Operator

Our next question is from Mike Harrison of First Analysis. Please go ahead.

Mike Harrison - First Analysis

Hi, good morning.

Elijio Serrano

Morning Mike.

Mike Harrison - First Analysis

Just because you’re talking about the linear progression of the testing margins, any thoughts on how that progresses as we get into 2015 and maybe where that levels out. I know that in the past, you had a year where you did 25% to 26% margin and you kind of communicated that the world’s changed and that’s probably not attainable, but where do you think we start to level out once you guys make the progress you want to make?

Stuart Brightman

Yeah, I think as we go out into next year and we will certainly have the occasion to be more precise about it as we get to the end of this year and early next year that with the various initiatives we have and again it’s not one element, it’s the five or six things of cost and revenue enhancement and repositioning of assets in the higher margin basins and etcetera.

I think getting into the load of mid-teens during next year is an appropriate target. As we get into that 20% operating margin next year is probably going to be big challenge and I wouldn’t be modeling that. I think going to the low to mid-teens at an operating margin is probably the appropriate way to look at that business for 2015. I don’t think we will get to the plateau at the end of this year.

There will be opportunities beyond that as we continue to progress at what we’re doing.

Elijio Serrano

And Mike, I would also add that in addition to focusing on the operating margins, expect they’ll be very aggressively managing capital and equipment utilization so that even if the margins don’t hit historical high teens that the cash that we extract from this business is going to be better than what we have given the focus that we’ve got on capital here.

Mike Harrison - First Analysis

Would you really need Mexico to come back in order to get closer to the 20% level?

Stuart Brightman

I think to get to that level you’re going to need a significantly healthier Mexico for testing, and again I emphasize testing because we’re seeing improvement in decent results on Compressco in Mexico, not at its peak but certainly still very attractive. So yet to get to that level, we’ll need to see a healthier Mexico to get to that level, I think a continued growth in Saudi, which we’re very comfortable with our position there and the acquisition of our partner’s interest we did earlier this year.

So getting these five or six things to get you there and certainly the inherent profitability of North America is our biggest short term focus on where we are starting to see some pretty good business.

Mike Harrison - First Analysis

All right and then looking at the fluids margin, its looked maybe a little weaker than we would normally except in Q2. Are we seeing any pricing pressure or any competitive issues in the water handling business or maybe you can give a little more color on what’s going on with margin?

Stuart Brightman

Yeah, there’s a couple of elements that have contributed to that. I think first and foremost is the timing of some of the Gulf of Mexico projects as well as not having kind of the amount of international lumpiness that we’ve had in some of the prior quarters as well on the offshore fluid.

On the water, the margins have held up really well. The returns we’re getting the new capital deployed are fairly consistent with what we’ve thought and there’s pricing pressure in certain areas and part of the water management team is very focused on is make it certain they understand the different price points and we’ve deployed the capital to the areas we’re going to get the best return.

We’ve always said, we’re not going to be the solution for everybody and we’re going to be very targeted in the applications we go after and the customers that understand the value creation that we articulate and that’s part of the strategy but we continue to do well there.

Mike Harrison - First Analysis

Fine and last question’s on the offshore business. Did I understand you that you did move an asset to West Africa or that you’re going to and if you did, did you incur cost in the second quarter?

Stuart Brightman

Yeah, we’re moving an asset that will be a third quarter activity and those move cost in reimbursements are all kind of part of the updated guidance that we just deliver. Those are all third quarter and beyond impacts.

Mike Harrison - First Analysis

All right. Thank you very much.

Operator

Our next question is from Marc Bianchi of Cowen. Please go ahead.

Elijio Serrano

Good morning, Marc.

Operator

Marc, your line is perhaps on mute on your end?

Marc Bianchi – Cowen

I am here. Sorry.

Operator

Please, go ahead.

Marc Bianchi – Cowen

Apologies. Good morning guys.

Stuart Brightman

Good morning, Marc.

Marc Bianchi – Cowen

Apologies for another question on production testing margins, but I think it’s important for us to understand the underlying assumptions to hit the roadmap here. When you talk about low double digits exiting the year, is that a fourth quarter average or is that sort of where you see kind of coming out of December with those margins?

Elijio Serrano

Well Marc, if continue to see the progress that we’re making we think that the fourth quarter will be in the high single digit low double digit range, call it 10% type.

Marc Bianchi – Cowen

Okay. Great, and what is the underlying assumption for pricing to get to that level?

Stuart Brightman

I would say that there is not any assumption that the overall pricing changes up or down. It’s continuing to do the things we’ re doing and not getting any significant help from the market in terms of that element.

Marc Bianchi – Cowen

That’s great. Thanks Stu, and then just a unrelated follow-up on the fluids division. You mentioned some delays related to more complicated wells. I was hoping you could expand on that a little bit and maybe how much that might have impacted in this quarter and whether or not that’s going to be something that continues.

Stuart Brightman

Yeah, I think in general my observation is some of the Deep Water wells have just taken longer to go through the cycle to get to production and that has impact on the timing of the some of the work for us and we’ve seen some of that in the first quarter, the second quarter and we shouldn’t expect as we’re on just halfway through the third quarter, greater activity in the third and fourth quarter based on just of pure timing of those activities.

But I do think it’s something we’ve seen on ongoing basis that people are starting to get geared up, it just takes longer to get through that cycle.

Marc Bianchi – Cowen

Sure. Okay guys. Thanks very much.

Stuart Brightman

Thank you.

Operator

Our next question is from [Ken] (ph) of Brasada Capital Management. Please go ahead.

Unidentified Analyst

Hi thank you much. You provide a lot of data on the IDR accretion and at the different levels. Can you walk us through on the EBIDTA or cash flow contribution from Compressco. What it is today and what we should expect pro forma?

Elijio Serrano

So, last year we received a total of $21 million at the TETRA level being both the GP and 82% unit holders of Compressco. This year based on the guidance that we’ve provided, we thought that was going to be in the mid to high $20 million range.

I am not comfortable we want to provide 2015 guidance yet on Compressco given that we still have an overallotment out there and we’ve been guided by our legal term to be very careful about talking about anything related to 2015 guidance, but as you have read on the guidance on the press release that we’ve said that we think that we can already move up to between 203 and 206 on a per distribution basis in Q4.

We’ve also indicated how much we think we can grow revenue through the capital. So I think if you do a little of bit of math, it will point you directly how significant we think that can be.

Unidentified analyst

And can you remind us what you had said on the road show, was it $125 million on EBIDTA?

Elijio Serrano

So, on the road show we never did provide total year guidance. What we said is that after we move up on distributions from a $1.81 to somewhere between $2.02 and $2.06, then we also said that in terms of incremental revenue from the $80 million to $90 million of growth capital that we thought that would add over 90,000 incremental horsepower and the revenue per horsepower of about $281 per horsepower and with 55% gross profits and even after taking the cost of money into account, we indicated during the road show that we think that that incremental distributions per units can be somewhere in the $230 per unit range.

Unidentified Analyst

Thank you very much. And if I'm doing my math right, Compressco is now something like 60%, 70% of our market cap. Is my math right, or am I missing something?

Elijio Serrano

Not if you do Tetra plus if you imply 47% ownership of the publicly-traded market cap of Compressco, and then even assume something for the GP, you're right that some of the parts doesn't, in our opinion, properly get reflected in the share price of Tetra today.

I think that's where Stu and I have a job to do in making sure that everybody understands how the components of the EBITDA multiple from offshore services, from fluids and production testing, plus our 47% ownership of a much larger MLP market cap, plus a multiple on the GP indicates that the Tetra share price does not reflect that right now.

Stu Brightman

Elijio, I also want to just reemphasize again, because I don't want to lost within the valuation discussion, which we need to continue to detail is, we've got a heck of a business we bought, we have a heck of business we already had at Compressco, so we're going to -- the combined business is going to be very attractive, it's going to be a world-class business, lots of opportunities.

And within the MLP structure and within the impact on TTI, there's going to be a lot of value creation. As Elijio said, once we're allowed to talk a little bit more on forward looking data beyond what we've already talked about, we'll be very precise on how we map over the cash flow impacts back to Tetra and the LP valuation within the Tetra framework as well as the GP valuation.

Elijio Serrano

And one of the things that I think we also have to do is that Tetra is big, unique and then we have an MLP who's growth strategy is not dropped down.

Most of the MLPs out there, the parent companies in the exact same line of business or almost exclusively in the same line of business as the MLP, here our MLP on the compression side is different from the rest of the businesses.

Yet we are able to leverage infrastructure, management team, district offices to benefit both the Tetra businesses and the MLP business. So given that we've got a slightly different business model versus the traditional MLPs, I think that's where we have to make sure that the investment and shareholder community understands what we have.

Unidentified Analyst

Okay. Thank you very much.

Operator

Our next question is from Joe Gibney of Capital One. Please go ahead.

Joe Gibney - Capital One

Thanks. Good morning, guys.

Stu Brightman

Good morning, Joe.

Joe Gibney - Capital One

Just a quick clarification on testing; just curious what the U.S. offshore testing portion of your revenue stream was up -- is this up sequentially quarter-over-quarter, how much was it up?

Elijio Serrano

So we've never really provided that granularity in terms of the split between U.S. international or the Optima. But I think that it's fair to assume that somewhere in 50% range is not far off.

Joe Gibney - Capital One

Okay. And then, Stu, just qualitatively speaking and thinking about testing and the issues of customer diversification, I think you guys have kind of identified that in the past on the issues that maybe getting a little bit over your skies on too much clustering on a few concentrated customers.

In your prepared comments, you're certainly indicative of adding new customers within your U.S. base. I mean, could you just provide a little bit more color about the importance of that, and in writing, testing and where you go from here in terms of better diversification, about a breadth of your customer base in the U.S.

Stu Brightman

Yeah. I think that's a great question. I think you are accurate saying that part of the success we've enjoyed in the past is very strong position with certain customers that we've worked with for a while, we've done a great job, and it was a win-win for both parties. And as that mix has changed, we need to aggressively replace it. What we've done is, you know, added pretty significant additions to the sales force in just about all the basins.

I think the point I would make is that effort has been in almost all the basins, not in one or two. And we're seeing the benefit of that in many basins. I mean, if I go across the geography, I would say that we're feeling I think the Canadian market is healthier this year.

I think we're seeing some new wins up there. West Texas is certainly a strong market, and we're seeing some nice wins there. South Texas continues to be a tough market, but we're picking up some wins there, but certainly a tough market for us and others, not just Tetra. Appalachia is getting busier. We've picked up some nice expansion there.

So it's in multiple fronts. And its part of one of those five or six assumptions embedded in that kind of continued sequencing going forward. The combination of having ample accounts, you can count on new accounts in bidding into the full market and understanding those opportunities is huge.

And the whole ongoing focus on customer segmentation and those customers that truly will be prepared to have a shorter vendor list appreciate some of the things we do uniquely from a safety and equipment point of view. That's where we need to continue to drive that business to fill the backfill.

Joe Gibney - Capital One

Okay. I appreciate it. Thank you.

Operator

(Operator Instructions) And our next question is from [James Burke of Siemens & Company] (ph). Please go ahead.

Unidentified Analyst

Good morning.

Stu Brightman

Good morning.

Unidentified Analyst

Can you remind us about how we should think about basically when CSI contracts become MLP qualified going forward? And how that will affect the kind of the cash distribution to Tetra?

Stu Brightman

Yeah. I'm giving kind of overview, and then I may let Elijio speak to some of the more technical elements. But we've already put together a team looking at how we do that. We've got the benefit of having gone through that process several years ago at Compressco. I think we also have the benefit of being a lot more MLP compression related companies out there than we did that three or four years ago.

So I think some of that groundwork has been done by us and others. And we also have the benefit of the way the asset was -- the acquisition was constructed where we're able to get favorable tax treatment and write up the assets and get some tax shelters, and that would offset if that were to slip from the current schedule that we have. So we've got that protection, but we also think we'll get through the vast majority of it in the next 12 to 18 months.

Elijio Serrano

James, I think one of the -- yes, we do some of our public filings on the acquisitions. One of the things that might not be yet understood and really appreciated is that we were able to take a $338 tax selection and are able to step up the tax basis of the assets that we've acquired.

So I say that we can book accelerated depreciation for that tax deduction purposes, so that any taxes that might be paid before we convert them to being MPL-compliant are pretty much neutralized with the accelerated depreciation we're taking for our tax purposes. So we believe that we've got a significant runway ahead of us to get them converted without paying cash cost associated with taxes.

Unidentified Analyst

Yeah. That's helpful. That's all for me. Thank you.

Operator

We're showing no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Brightman for any closing remarks.

Stu Brightman

Well, thank you very much. And obviously, lots of good questions, and hopefully we provided greater clarity to both second quarter results and our expectations for the balance of this year, as well as on the CSI acquisition. We'll look forward to updating the Group by early November on the results of the third quarter, so thank you very much.

Operator

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

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