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TETRA Technologies, Inc. (NYSE:TTI)

Q4 2007 Earnings Call

February 26, 2008 10:30 am ET

Executives

Geoffrey M. Hertel - President and Chief Executive Officer

Stuart M. Brightman – Executive Vice President and Chief Operating Officer

Joseph M. Abell III - Chief Financial Officer

Analysts

Jim Rollyson - Raymond James

James West - Lehman Brothers

Mike Harrison - First Analysis Securities

Stephen Gengaro - Jefferies & Company

Joe Gibney - Capital One Southcoast

[John Ullisher] - Gruss & Co., Inc.

[Stephen Kallish – Scoffield]

Victor Marchon - RBC Capital Markets

Thad Vayda - Stifel Nicolaus

Operator

Welcome to the TETRA Technologies, Inc. fourth quarter 2007 results conference call. (Operator Instructions) It is now my pleasure to introduce your host Mr. Geoff Hertel, Chief Executive Officer for TETRA Technologies, Inc.

Geoffrey M. Hertel

Welcome to the TETRA Technologies fourth quarter 2007 conference call. Joe Abell, our Chief Financial Officer, and Stu Brightman, our Chief Operating Officer, are in attendance this morning and will be available to help answer any of 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 any such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements.

During the course of the call, we may refer to adjusted net income per share or adjusted income before taxes. These are non-GAAP financial measures which management uses to understand, manage, and evaluate the company’s business.

These non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the nearest comparable GAAP financial measure is included in this morning’s press release which is available in the Investor Relations area of our public website.

Normally, this would be the time in the conference call that I would turn to Joe to report the various financial statistics. However, with the complexity surrounding this quarter, generating GAAP earnings, and also earnings before and after discontinued operations and earnings before and after unusual items, we decided to make general comments and wait for your specific earnings questions, especially because many of these numbers were already reported to you, at least in preliminary form, on January 14th.

Some of the overview points that I would like to make this morning regarding our fourth quarter are number one, the major unusual items were almost exactly as we outlined in our January 14, 2008 press release. The major Maritech adjustments were $77.7 million versus our estimate of $75 to $80 million on January 14. We would hope to recover a significant portion of this amount from our insurers for the 2005 hurricane damage.

We also will pay $9.25 million contract termination fee to a supplier of bromides for our Fluids Division. This allows us to produce these products at reduced cost utilizing bromine acquired under our Chemtura agreement.

Secondly, the pretax gain on the sale of TETRA Process Services was $40.7 million, slightly more than the number estimated on January 14.

Thirdly, operations, excluding the unusual items during the quarter, continue to see improvement as production enhancement set profit records and the Well Abandonment Decommissioning Services returned to more normal conditions.

And fourthly, Maritech replenished its portfolio of developable properties with the acquisitions in the fourth quarter and in January of this year. That was necessary or we would have been in a position of declining profitability in that entity.

Looking forward, we have a number of factors that should augment 2008 results and beyond. In Fluids, the elimination of the high cost inventories throughout the year will allow us to generate improving financials as the year progresses.

Also, the beginning of substantial ultra deepwater well completions in the Gulf of Mexico in the latter part of 2008 should allow for increasing completion fluid quantities for the first time in years, and this is the biggest market in the world. This will predominantly affect 2009 and 2010, but we hope to have some effect on us in later stages of 2008.

Secondly, in Well Abandonment and Decommissioning Services, we expect to operate much more efficiently this year. This should lead to higher margins and higher profits as we have outlined in previous conference calls.

Thirdly, Maritech should improve as we go throughout the year. The addition of the Cimarex production, especially for the second half of ’08, will enhance volumes. The reason that you have this production coming on in the second half of ‘08 is that we are currently running various imbilicals and pipelines to some of their sub-sea wells and hope to have that production on by the end of the second quarter if not earlier.

Fourthly, the Production Enhancement Group is budgeting again for another record year. During 2007, this division recorded a 33.6% increase in pretax profits versus 2006. Using the mid point of our 2008 guidance, our pretax income for this division would increase another 42.6% this year. Our international expansion is a primary driver in this growth.

As reported in our January 14 press release, the distribution of our earnings between quarters will be slightly modified in 2008. Normally, the second and third quarter is operationally our best, primarily due to the seasonally strong second and third quarters in Well Abandonment and Decommissioning Services.

However, during 2008, our fourth quarter will benefit from a number of very positive items: first, the expected sequential improvement in production enhancement profits, which is a continuing theme that we very much appreciate; two, the ultra-deepwater fluids work that I alluded to earlier that should begin in the latter part of the year; and three, the increased Maritech production in 2008 second half.

The combination of these items should create strong earnings in our fourth quarter approximating the levels attained during the second and third quarters. That is a unique happenstance for us. Normally, our first and fourth are very weak compared to the second and third.

At the beginning of 2007, we knew we had a $50 million profit hole to dig out of. This was caused by decisions we made regarding our Fluids operations and the price difference in our natural gas hedges between 2006 and 2007.

We stretched our other businesses to make up for this shortfall. This strategy obviously failed as we tried to grow our other operations too rapidly and you saw the effect during the summer of 2007. Fortunately, this year, we anticipate both Fluids and Maritech will have better earnings than in 2007. We can therefore allow our other businesses to grow at a more measured pace. That strategy worked well for us between 2000 and 2006, and we think it will again in 2008.

Joe, Stu, and I will now entertain any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jim Rollyson - Raymond James.

Jim Rollyson - Raymond James

When you back out the charge just in the Well Abandonment Decommissioning Service part of the business, looks like margin’s about 18% which kind of more in line with your normal seasonal fourth quarter margin. Can you maybe talk about how, I know you mentioned a little bit of how that’s starting off, but what you are seeing in the Well Abandonment Service business as far as how that’s tracking for you today and how things are running versus your expectations of what you want?

Stuart M. Brightman

In that business, as you indicated, the fourth quarter was a strong quarter for us and continued the trend. In the first quarter, we are seeing a lower activity strictly because of the weather offshore. It’s starting to improve as we get into the quarter, but it’s going to probably be less than we had expected just because of the weather.

Once we get through that, we are still very confident that the remainder of the year will be consistent with what we had given guidance on. So, we feel good about the ongoing business. We might be a little bit light in the first quarter on that business.

Jim Rollyson - Raymond James

Do you think you’ll make up some of that beyond the first quarter?

Stuart M. Brightman

I do. The level of bids and some of the market feedback makes us feel good about the balance of the year once we get this weather behind us.

Jim Rollyson - Raymond James

Geoff, you talked in the past about the prospects for some Fluids contract awards domestically and internationally, any update there.

Geoffrey M. Hertel

There are a number of large ones out there, both domestic and internationally. Some of those being bid for the ultra deepwater in the Gulf of Mexico are being bid in the April through June time period. So, we obviously don’t have any results yet. We would hope to be fairly optimistic about getting some.

But at this point in time, nobody has been awarded any of those contracts. In the international arena, there are a couple of large ones, neither one of which have been officially awarded at this point in time yet.

Jim Rollyson - Raymond James

I know you won’t get into detail, but just plans on spinning out Compressco still on track, any thought process changes given a little bit of compression in the multiples in that business?

Geoffrey M. Hertel

First of all, in timing and what we are doing, obviously, we are not able to get into a lot of detail. I’ve made the statement before that if we were changing our mind in what we were doing, we would come out and tell you so, and we have not told you anything. So, you can presume we are moving ahead in the same direction that we’ve announced to you previously.

As to the compression in the multiples, there has been a modest one as it relates to look-alikes. We think that the uniqueness of this entity would be such that it would get a premium or, if you will, a lower yield.

However, we are not going to let half a point or a three quarters of a percentage point make any difference in bringing this to the market in that we are not going to be selling that much of it anyway. Therefore we are not going to be in a position of having a problem letting this go at a rate that’s different than it was six or nine months ago.

Operator

Our next question comes from the line of James West - Lehman Brothers.

James West - Lehman Brothers

Stu, I have a question for you. I’d asked, I guess it was in your January conference call about the Well Decommissioning business and if you’d seen any tightness or change in the market as a result of the large contract award that went to Superior. Has there been any change at this point now that we are a month and a half later?

Stuart M. Brightman

No, there really hasn’t. I gave you the same answers when we talked last month that hasn’t had an impact and we still think the fundamental activity level during 2008 is going to be strong. We are still going about the business as we talked about last time and optimistic.

James West - Lehman Brothers

And then one of your competitors or I guess subcontractors sometimes indicated last week on their earnings call that the MMS was becoming more aggressive about some of the operators removing some of these down platforms, have you seen any indications of that?

Stuart M. Brightman

We’ve seen a little bit. Some of the operators have come back over the last month and had some more detailed discussions. So, we are seeing a little bit of evidence in some of the bid and discussions, but that’s accelerating.

Geoffrey M. Hertel

The major difference there is right after the storms hit. Everybody knew that there was not enough available equipment nor had engineering been done to even think about doing this work. So, there was kind of a hiatus on pressure on anybody to do anything until you got a lot more information.

I think the difference today is not that they are going out and changing what they’ve said. It is that they are making the companies come in periodically and give updates as to what you are doing and show progress. And that progress is forcing people who had not been really moving very rapidly to begin the process and those that have begun the process to get into the contract stages and I think that’s the difference people are seeing out there.

James West - Lehman Brothers

On the fluid side of the business, I know we will see profitability improve, particularly as you get into the back half of this year, but are we going to see indications that the new bromine supply agreement as taken in the first quarter, I guess we will see a better margin in 1Q?

Geoffrey M. Hertel

I don’t know about the margin in the first quarter, honestly, versus the fourth or the first of last year. I haven’t looked at it that way. I think throughout the year that you are going to see improvement in that business, but you’ll see a lot more margin improvement as you get rid of those older inventories.

All we’ve done with the contract termination is to eliminate the need to buy more high cost inventory; we still have to get rid of what we’ve got. So, your improvement ought to go throughout the year, but I don’t know that I can give you a good number fourth versus first in terms of margin.

Stuart M. Brightman

It’s still early, but I think we will see a little bit. And I think, as Geoff said, we will see it continuing and accelerating during the second half of the year, but I do think we will see a little bit in the first quarter.

Operator

Our next question comes from the line of Mike Harrison - First Analysis Securities.

Mike Harrison - First Analysis Securities

In the Fluids business, can you talk about what you’ve been seeing in terms of pricing in the fourth quarter and also in other words through a couple of months of the first quarter?

Stuart M. Brightman

The fourth quarter, first quarter not a dramatic change, kind of consistent with our business plan, relatively flat, no big surprises there.

Mike Harrison - First Analysis Securities

And then in terms of the overlap between the Fluids business and the Testing business, particularly onshore, is there anyway to quantify the potential synergies that you gain from bringing those businesses under the same management or under the same roof?

Stuart M. Brightman

Obviously, we expect to see benefits. We don’t have a real hard number on that, but we are clearly spending a lot of time looking at those two businesses and where the touch points are and we are starting to see some opportunities that we are getting teed up. But at this stage, it’s probably not a number that we would throw out there, per se.

Geoffrey M. Hertel

I don’t know that I would characterize this as a cost saving type of move where we put two entities together, get rid of a lot of assets in terms of people, and have a cost savings. There may be a very small amount of that.

It’s more an effort on our part to expand into our customers with multiple services, and what you ought to see is on the top line as we go through this process which will then generate additional profits to the bottom line. It won’t be a cost saving mechanism that a lot of people employ when they put two divisions together.

Mike Harrison - First Analysis Securities

In terms of Maritech, you mentioned that you expect volumes growing by the end of the second quarter. Should we expect volumes to stay close to that 60 million cubic feet per day rate during Q1 and Q2, or do you think we will see a dip from that Q4 production level during the first half?

Geoffrey M. Hertel

The Cimarex acquisition included six sub-sea wells, one of which is producing. Two others are to be on stream in the next month or so, and three more by the end of the second quarter.

As those come on stream, you are going to see production increases offsetting any kind of declines that we might have had in other properties. That alone ought to create some impetus.

I’m just a little leery given where the weather is and knowing that we are going to have to be working out there to get some of these flow lines in giving production enhancement much earlier than the end of the second quarter for that second group of properties. It may be as early as May that we will get some improvement, but clearly that’s a function of already drilled, already proven reserves that just need to be hooked up so they can flow.

Mike Harrison - First Analysis Securities

On the testing side, I know you are expecting to see some benefits from international contracts during 2008. Can you talk about what the pipeline looks like for any additional international testing contracts over the next few quarters?

Geoffrey M. Hertel

We really have to go back and look at what we’ve tried to do over a period of five or six years. We were the largest, five or six years ago, onshore western hemisphere company in that business.

We wanted to get into the eastern hemisphere and at the time we went after Halliburton’s subsidiary, which eventually sold to a money management group which then turned it to Expro later. The net effect of all of that was that in the eastern hemisphere, you have essentially two major players, Expro and Schlumberger, and the industry is very much interested in having a third player.

We are a very large player, obviously, in the western hemisphere. And therefore when we come in to go after pieces of contracts in the eastern hemisphere, we have a pretty good opportunity to get that work. Those contracts are typically two to four years in duration and as they roll, we have been going after that work over the last couple of years, and we are going to continue to do so. There is a large amount of that business that rolls in the next 24 months.

So, the answer is absolutely we are going to be more aggressive there. The new management addition that we announced here in the last week is a gentleman that has a tremendous amount of international experience and you see that one of the businesses that reports to him is our Testing Operation. So, the net effect of that is I think you’ll see us very aggressively going after eastern hemisphere business in addition to the Brazil and Mexico business that we already have.

Mike Harrison - First Analysis Securities

What the Q4 DD&A number would look like on more of an ongoing basis if you took out the impact of special items?

Joseph M. Abell III - Chief Financial Officer

That’s a difficult question because it is also impacted by the mix of properties that we have, but call it about $40 million or so.

Operator

Our next question comes from the line of Stephen Gengaro - Jefferies & Company.

Stephen Gengaro - Jefferies & Company

On the well abandonment side, you’ve obviously gone through some change in the business getting, I guess in your description, on a more a la carte basis than sort of project driven basis. Can you help us understand any progress which has been made there, and whether quantitatively or qualitatively to give us some comfort that things are operationally getting better?

Geoffrey M. Hertel

Well, again, first thing is, if you look back at the results in the third and fourth quarter on an adjusted basis, you’ll see that numbers are significantly better and very close to what we had in our guidance in August. Underneath that we continue to sell a la carte, we continue to sell multiple services. We’ve projects where we are selling three to four services; we’ve got projects where we are selling one.

Operationally, we’ve done very well executing, gotten good customer feedback on budget, on time. Coordination across the units in the Well Abandonment Group is going well.

So, I think we are positioned, as we’ve said in the past, to attack on a service by service, on a bundle basis, there is opportunity for both, and the feedback we are getting in the market is very positive. And we are confident the top line and the bottom line are going to with it. But in terms of executing projects, I feel we’ve done a very good job executing in the last two quarters and continuing into this quarter.

Stephen Gengaro - Jefferies & Company

Is your sense that the margins there on the Well Abandonment, on the services side, can they continue to go higher in the current sort of pricing supply-demand environment?

Geoffrey M. Hertel

I still think we have room for some margin improvement in the current pricing arena that we are at. I think we continue to improve operationally. I think the terms that we are looking at on the businesses are favorable to us. So, I think there is still little bit of margin to squeeze with the revenues that we are looking at, assuming pricing stays the same.

Stephen Gengaro - Jefferies & Company

And then along the same lines, obviously, everybody knows that Superior is out there as sort of a main kind of large competitor. When you are bidding on these jobs, whom else are you seeing? Are you seeing Cal Dive with their diving business, and now with Horizon are you seeing any more impact from that company? Are you seeing others be more/less aggressive in the business?

Geoffrey M. Hertel

Certainly with that combination, it gives them capabilities that we are seeing out there. And then the traditional players that we go up against are still very focused in the Gulf. So, there’s still a strong list of competitors and enough business out there that I think we can all do reasonably well.

Stephen Gengaro - Jefferies & Company

Is your sense that sort of the supply and demand there is reasonably in balance?

Geoffrey M. Hertel

I still think there is strong demand out there in the finishing up the down structures, the traditional heavy lift, decommissioning, plugging. I think that demand, as we’ve said in the past, is going to continue to be strong, we see evidence of it, and I think it’s still a good position for us to be in.

Stephen Gengaro - Jefferies & Company

As a second question, when you look at sort of the first half of 2008, there certainly are seemingly some things here which are sort of second half weighted from a profitability perspective. But when you look at the first half of ‘08, or maybe more importantly as we look at it from a Wall Street perspective and investment perspective, what should we look for that will be signs of progress?

What are kind of the milestone near-term you are looking for to sort of demonstrate progress toward sort of material improvement off of a tough ‘07? Obviously, we’ve always got numbers, we’ve always got margins, but what are sort of the key other events that you can either talk about or we can look for to show the progress is occurring?

Geoffrey M. Hertel

Well, first of all, I want to make sure that the quarters that are set up, we are not back end loading the year. What happens is the fourth quarter, because of the issues that I went through, is going to be stronger than it normally would be. It’s not that the first half is going to be weaker than it normally would be. It’s that the second half has a number of items that are actually going to propel it.

If I were looking for the items, and I don’t know whether you will see them until after the fact, but in each of the various businesses, obviously in the Fluids business, the most important factor to us is our cost position.

But almost equally important, if you go back and look, I believe in the last four and a half years the rig count in Gulf of Mexico has gone down from like a 172 to its current level, which means that the biggest market in the world had a decline in volumes for completion fluids even with deepwater. That is a very unique happenstance in oil service businesses. Almost every other oil service business you can talk about had increasing volumes in that time period.

In the second half of this year, you will begin to see a pickup in volumes in that business which ought to go from ‘08 to ‘09 and into 2010 at least, because of the ultra deepwater projects that have been drilled, that will be completed later this year and into ‘09. That is a huge change for us fundamentally in the fluids business, and it shouldn’t be lost on yet. So, we’ll actually have volumetric growth not only cost improvement but volumetric growth going as an industry into ‘09. So that’s a very key factor looking ahead.

In the case of Well Abandonment, we told you what we think is important, and that is we need to get our margins back to the levels that we’ve talked about previously. And as you get into the second quarter, look at those margins, obviously that’s important.

You also though ought to look at the first quarter. The issue there won’t be the same total margins, because you are going to be in a position where you have seasonally weak time period. But you ought to make sure that the contracts and the projects have adequate margins even in those quarters, and I would hope that you would query us on that when we talk about our first quarter.

So looking at the fourth quarter, those were pretty good margins given the fact that you are in a seasonally down time period. The third quarter was also pretty good margin. So I think what’s going to happen is you’ll be able to see the margin improvement, and then all you have to do is wait for the activity improvement, which again is generally the second and third quarter.

In the case of Maritech, it’ll be simple. You can see production growth and we report that, so there should be no reason that you can’t see that pretty easily.

Obviously, we have in production enhancement the Compressco situation, and one would hope that we would be able to talk more about that in the relatively near future so that we can move on with getting that accomplished, that being a positive as well.

So, I think there are some very key things going on during the year that you can look to and that we’ll have to discuss as we get into each of those time periods.

Stephen Gengaro - Jefferies & Company

On the rig count on the fluids side, what percentage of your Fluids business comes from the Gulf? Can you give us a rough idea?

Geoffrey M. Hertel

Half give or take, remember when you talk about rig count now, rig count is flattening. But remember the key here is completions. So, you’ve got a bunch of deep wells that have been drilled over the last couple of years and will be drilled this year that are going to be completed and brought onto production.

It’s going to be that completion trend that’s going to be just as important to the fact that rig count is beginning to flatten for the first time which is positive as well.

Stephen Gengaro - Jefferies & Company

And then you said that on the Well Abandonment side that you would hope to be as at the end of the first quarter, you are almost two months into the quarter, can you give us any sign for how good the quarter is going?

Geoffrey M. Hertel

Well, I think that Stu just told you what was happening in the quarter. I think the jobs, and I’ll let him address it, but the job margins, I think are fine.

In terms of activity out there has been slow because of the weather and we are going to have to push as much of it into the second quarter and the end of the first quarter as possible.

Stuart M. Brightman

Yeah, and again, it’s all weather related. And as we go through the first quarter and explain it that will be part of what we’ll talk to.

Geoffrey M. Hertel

But unlike 2007 the job margins are not bad, is that correct.

Stuart M. Brightman

The job margins and the terms of the contract are very favorable, and we are hitting those. So, the operational side, the job margins are fine, it’s just the overall utilization due to the weather is the issue.

Operator

Our next question comes from the line of Joe Gibney - Capital One Southcoast.

Joe Gibney - Capital One Southcoast

Most of my questions have been answered just a couple of housekeeping items, just curious what the split was with crude and gas production in the quarter?

Geoffrey M. Hertel

I think it was modestly oil, maybe 51% or 52%. Oil has historically been 55% to 60%, but as we start bringing on the Cimarex properties, and we had just a very little amount of that in the quarter, we are going to go more towards the gas side of it such that it’ll be at least 50/50, if not 55/45 gas by the time we bring on all of the Cimarex properties.

Joe Gibney - Capital One Southcoast

Joe, just if you could update us a little bit on ‘08 on the tax and CapEx assumptions?

Joseph M. Abell III - Chief Financial Officer

I think the tax assumption is roughly 35%, I would run with that.

CapEx, about $290 million of CapEx, if you refer to our January 14 press release, and there are a couple of footnotes on the corporate expenditures, it’s about $290.

Joe Gibney - Capital One Southcoast

And just appreciate all the quantifying some of the seasonality to your earnings, certainly understand the lower activity levels in the WA&D front. Just curious on Fluids, how should we be thinking about top line here as we move into the first quarter?

Understand certainly we are going to have some margin appreciation; understand the potential here on the deepwater side of the second half of the year; just how should be looking at, given roughly half your business here Fluids in the US Gulf of Mexico side, sort of top line sequentially as we get into the first quarter here and the effect of the low on that business as well?

Geoffrey M. Hertel

I don’t think there’s going to be a dramatic shift in the first quarter versus fourth quarter on the top line in that business. I think you will see, as I said, a little bit of improvement with some of the inventory positioning, but top line volume, it’s not going to be significantly different.

Joe Gibney - Capital One Southcoast

On the Production Enhancement side, obviously, your efforts here internationally on the Eastern Hemisphere front, Joe, could you just update us now, what percentage of this business right now is international?

Joseph M. Abell III - Chief Financial Officer

Are you speaking Production Enhancement?

Joe Gibney - Capital One Southcoast

Yes.

Joseph M. Abell III - Chief Financial Officer

15% would be a good bet. The Fluids business is the most international. Geoff, getting back to the question when you mentioned half of our business is Gulf of Mexico, you were speaking domestically, I presume.

Geoffrey M. Hertel

No.

Joseph M. Abell III - Chief Financial Officer

No? Okay.

Operator

Our next question comes from the line [John Ullisher] - Gruss & Co., Inc.

[John Ullisher] - Gruss & Co., Inc.

Could you talk about the current environment and outlook for wellhead compression both regards to pricing and margins?

Geoffrey M. Hertel

Again, we have to be a little delicate given what we are doing, but our business historically, we bought Compressco in 2004 and it had a 31% PBT margin. We told people that we had been able to raise prices consistently as costs have gone up to continue have a 31% or better PBT margin, and I see no reason that history and the future aren’t equivalent. We’ve had no difficulty at all.

Remember, this is not the compression business as much as it is the Production Enhancement business. This is a piece of equipment, in the case of Compressco, that goes on the wellhead, not on the pipeline. So, it really needs to be looked at as a little different type pricing than you would if you were looking at Exterran and seeing what they can do.

[John Ullisher] - Gruss & Co., Inc.

And in terms of your allocation of that compression, what percentage is conventional drilling versus unconventional?

Geoffrey M. Hertel

Originally, we thought, as did the Compressco people, that the shales and coal-bed methane applications would not be very useful with our equipment. That’s turned out to be incorrect, and we have had a substantial amount of demand out of those areas for our equipment.

But because the equipment originally going back, to let’s say five or six years ago, was all in conventional drilling, I am going to a pull a number out whatever, but I would bet that it is about 10% or 15% unconventional right now, 90% conventional. However, that unconventional portion is probably growing faster than the conventional.

Operator

Our next question comes from the line of [Stephen Kallish – Scoffield].

[Stephen Kallish – Scoffield]

But to whatever degree you are able, can you please update us on the contract conversion in Compressco both in terms of timing as well as progress in converting the contracts?

Geoffrey M. Hertel

I had that conversation with our lawyer this morning to see what I could and could not say. I am precluded, I am sorry, to give you any of that. I would love to but because we are in technical registration that’s new information and if I did that I’d have to issue a press release.

I guess all I can say to you is the same thing I did earlier and that is if there was any change in terms of the direction that we were going, we obviously would have to say something to you versus what we have said in the past.

Timing of it, we are moving along getting contracts converted. It has been somewhat slower than we thought only because it’s taken lot of time with the lawyers to get involved with all of this, but it’s moving ahead.

And again I am sorry; I can’t give you an exact timing sequence because I just can’t.

[Stephen Kallish – Scoffield]

In terms of just your strategic outlook, would it be safe to say you are as enthusiastic about its effect as you were prior?

Geoffrey M. Hertel

The only thing that’s changed from my perspective is that if it is coming out at all later than what we said, it ought to have higher earnings than it had originally because sequentially that business has been growing on a quarterly basis.

Operator

Our next question comes from the line of Victor Marchon - RBC Capital Markets.

Victor Marchon - RBC Capital Markets

On the Fluid business, I wonder if you could just help us out on the deepwater side to the extent of how much revenue is coming from the deepwater today, a ballpark number. And what that could look like looking out a year or two from now as the completion activity picks up in the latter part of this year?

Stuart M. Brightman

I don’t have an exact percentage. It’s certainly a growing number, but it’s a relatively small number at the moment that has the potential to make up a very significant portion in a year or two. But I’d be throwing out a number that I am not comfortable with.

Geoffrey M. Hertel

Our internal estimate is that it is conceivable that the Gulf of Mexico market could be twice as large by the end of next year as it is right now. In other words, it could double in volume. That’s probably the outside. But I would say a 50% to 100% increase is plausible in terms of the market for a short period of time given all of these completions that is going on. Is that anywhere near?

Joseph M. Abell III - Chief Financial Officer

Yes, probably of that magnitude.

Victor Marchon - RBC Capital Markets

What was that time period?

Geoffrey M. Hertel

By the time you get into the latter stage of 2009. Remember, this is a 2008 through 10 event, and maybe obviously a lot longer than that as ultra deepwater continues to be as positive as it is. If it is, it’ll go a lot longer than that time period.

And obviously, you’ve got international markets that are doing the same thing. But in terms of the known existing wells in the Gulf, if these all come on at point in time, at least the heavy fluids, the bromide types would probably be a 50% to 100% growth.

I don’t know if calcium chloride would grow that much, but clearly the most expensive fluids would.

Victor Marchon - RBC Capital Markets

Can you just update us on the pricing differentials that you see from shallow well or a non-shallow well to this ultra deepwater?

Geoffrey M. Hertel

Well, it’s not so much a price per barrel; that doesn’t change. Some of these ultra deepwater wells are using between five and ten. In fact, we have seen one that uses 12 times as much fluid as a conventional well. The reason for that is that you have huge risers that has to be filled up, that go through the water.

And then you have, usually because of the volume, very substantial casing in terms of the size of the casings and that is a geometric increase, not an arithmetic increase, as it gets bigger in the tubing. So, the net effect is that when you start adding up 7000 and 8000 feet of water plus 10,000, 12,000 foot well with bigger casing and a bigger riser, you get a dramatic increase in the amount of fluids which you have to use both for drilling and for completion obviously in our case more on the completion side.

So, you’ve got these dramatic cost increases, but it is not because the product itself costs more, it’s the volume you are using.

Victor Marchon - RBC Capital Markets

On the onshore market, I wanted to see if you guys are picking up any indication from your customers given where natural gas prices have gone of any pick up for this year and just on the US onshore piece of the business?

Geoffrey M. Hertel

Well, I can tell you that in general in the Fluids and Testing side, they’re hitting us up for their CapEx earlier than they’d said, which would indicate to me that they’ve got demand growth out there, maybe a little stronger than they previously anticipated.

Operator

Our next question comes from the line Thad Vayda - Stifel Nicolaus.

Thad Vayda - Stifel Nicolaus

On Well Abandonment Services, given the comments earlier on competition, are there any products, services, skill sets for the remaining storm related down platform work that are bottlenecks at this point in time or where you feel you have a distinct competitive advantage?

Geoffrey M. Hertel

I don’t think there’s any one service that will fall in that category of being a major bottleneck or where we have a major distinct advantage. I think our strength, overall, as we have said, is we’ve got a pretty good suite of services that we can sell individually or collectively and a good project management capability to run some of the larger projects.

So, I think it’s nothing dramatically different, but again consistent with our overall strategy being well positioned, depending on which way the customer goes. The two areas that originally had the problems, diving is a lost easier than it was before because the divers that were being used to repair the producing platforms and the pipelines have pretty much done that work. The divers that were being used for down platforms, that’s a growing market. But you’ve been able to at least soften up a little bit the shortage.

So, the diving is a pressure point and then the other real pressure point initially was in the Well Abandonment area. And I’d say if anything, that’s remained pretty tight in terms of demand from our customers, because they are aggressively not only going after the down platforms, but they are trying to get rid of the standing platform liability as well, especially for wells that aren’t producing.

So, that remains, I’d call it, a tighter market, but not as tight obviously as it was in early ‘06, and the diving has certainly loosened up from where it was in early ‘06.

Stuart M. Brightman

Thad, broadening your question a bit looking at beyond just the down platforms, I’ll mention that we have innovated some new sub-sea P&A technology that has been well received by the market. So, we do continue innovating new products and services in this area.

Thad Vayda - Stifel Nicolaus

From a business model perspective, you may have touched on this earlier, but the opportunity for something other than turnkey type of project, is it your expectation that going forward it is going to be a mix or is it going to fall more along the lines of the type of contract that we saw Superior awarded not too long ago?

Geoffrey M. Hertel

TETRA historically has had about 35% of its work in this area as turnkey. We told you that we were not going to do turnkey until we were very sure that the margins that we were generating were sufficient for our model as to what we thought we needed to generate to create a growth model for our Abandonment business. We are not taking turnkey contracts.

However, there are turnkey contracts out there as is evidenced by the one that you’ve discussed. I would expect somewhere down the line it will go back to taking some turnkey work once we are very comfortable that the returns that we are getting are adequate.

Stuart M. Brightman

But at present we are not going down that path, and we don’t have that risk with our backlog and don’t anticipate that in near future. We’ve been pretty disciplined internally over last year staying out of that arena.

Thad Vayda - Stifel Nicolaus

What about opportunity for international growth in this business?

Stuart M. Brightman

We continue on the Well Abandonment to chase several opportunities internationally, and we are optimistic that we will start to see the benefits of some of that in the future. I think that, on a longer term basis is going to be a very attractive growth opportunity for this business.

Geoffrey M. Hertel

One of the things that we try to do as we explained in our testing strategy a little while ago. Our fluid strategy on the integration which is something that was 20 years in the making, our strategy on Well Abandonment in 1995 and looking at it at that point in time was that there was a growth model in the US not because of the hurricanes, but for things that we’ve discussed before, and I’d be happy to discuss individually again.

But looking at that, we needed to figure some way that we could continue to have a model that would work until our expectation which was 2010, approximately the time when we thought international markets would open up.

Obviously, the strategy with Maritech allowed us a bridging mechanism to get there, as have the jobs now because of the new work created by the hurricanes. But we still believe that that’s kind of the time period, give or take a year, so that you’ll start to see material work in some of the international markets. And as Stu said, we are actively pursuing those and would certainly hope to be involved in those markets in that kind of time period.

Operator

There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Geoffrey M. Hertel

Thank you. We will be back in touch obviously at the end of our first quarter, and hopefully all of the items that we were mentioning today will continue to improve in that time period. Thank you for joining us.

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Source: TETRA Technologies, Inc. Q4 2007 Earnings Call Transcript
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