Tetra Reports 3Q:23 Results, Updates on Lithium Brine Unit

(TETRA, 30.Oct.2023) — TETRA Technologies, Inc. (NYSE:TTI) today announced third quarter 2023 financial results. Brady Murphy, TETRA President and Chief Executive Officer, stated, “In addition to another strong financial performance, in the third quarter we achieved an important milestone in our Company’s history with unanimous approval by the Arkansas Oil & Gas Commission (“AOGC”) of the 6,138 acre joint brine unit application, giving TETRA and our partner the rights to develop and produce the brine for bromine production and future lithium production once the lithium royalty is established by the AOGC. In addition, we completed the data gathering and sampling operations for the second test well with results yielding lithium measurements in the upper Smackover as high as 646 mg/l, 35% higher than the first test well which was on the southern end of the unit that we reported in September 2022, and bromine values of 5,890 mg/l, in line with the first test well. These results are being used to update the lithium and bromine resource report which we plan to complete and release shortly.

On 8 August, Standard Lithium Ltd. released a Preliminary Feasibility Study (“PFS”) on its South West Arkansas Project, which is part of the roughly 35,000 gross acres held by TETRA and where Standard Lithium has the option to acquire lithium mineral rights. The Standard Lithium PFS indicates a base case production of 30,000 tonnes per annum of battery-quality lithium hydroxide monohydrate (“LHM”). The PFS also assumes a long-term selling price of battery-quality LHM of $30,000 per metric ton. Based on these assumptions, TETRA’s illustrative royalties would be $22.5mn per year based on a 2.5% royalty on gross lithium revenues, without any investments required by TETRA. The PFS study stated that Standard Lithium is targeting construction in 2025 and commencing production in 2027. In October we received notice from Standard Lithium exercising the option in accordance with the 2017 option agreement.

Financial results for the third quarter are highlighted by year-on-year revenue growth of 12%, net income before discontinued operations growth of $5.5mn, and adjusted EBITDA growth of 40%. Net income was $5.4mn, inclusive of $3.7mn of non-recurring charges, net of credits, and compares to net income of $0.3mn in the third quarter of 2022, inclusive of $2.7mn of non-recurring charges, and to net income of $18.2mn in the second quarter of 2023, inclusive of $0.9mn of non-recurring credits, net of charges. Third quarter results included unrealized losses on investments of $0.6mn. Excluding these unrealized losses on investments, Adjusted EBITDA for the third quarter of 2023 was $26.6mn, or 18% of revenue. Completion Fluids & Products led the way with year-on-year revenue growth of 24%, net income before taxes and discontinued operations growth of 37% and Adjusted EBITDA growth of 52%, when adjusted for unrealized gains or losses on investments. Due to the strong Northern European industrial chemicals seasonality impact each year on the second quarter results, the third quarter performance can be compared to the first quarter performance. Compared to the first quarter, total company revenues were up 4%, net income before discontinued operations was down 10%, and Adjusted EBITDA was up 27%. Both segments contributed to the Adjusted EBITDA growth as both segments achieved fall through of 100% or greater versus the first quarter, when excluding gains or losses from investments.

“Third quarter cash flow from operating activities was $14mn and compares to $2.1mn in the third quarter of 2022 and to $28.4mn in the second quarter of 2023. Adjusted free cash flow was $7.1mn in the third quarter of 2023 and compares to a use of cash of $9.8mn in the third quarter of 2022 and to cash flow of $17.7mn in the second quarter of 2023. Working capital at the end of the third quarter was $110mn and represents a slight increase from the prior quarter due to a temporary build in inventory which is expected to be monetized as products are shipped for future projects. Working capital is defined as current assets, excluding cash and restricted cash, less current liabilities.

“Completion Fluids & Products revenue of $73mn increased 24% year-on-year driven by another robust performance in our industrial calcium chloride business where utilization and production volumes remained strong. Higher offshore activity year-on-year also drove higher demand for our high value completion fluids products. Sequentially, revenue decreased 25% reflecting the seasonal decrease in our Northern Europe industrial calcium chloride business. Net income before taxes for the quarter was $16.9mn (23.1% of revenue) and compares to $12.4mn (20.9% of revenue) in the third quarter of 2022 and to $32.0mn (32.5% of revenue) in the second quarter of 2023. Adjusted EBITDA was $20.9mn (28.6% of revenue) and compares to $14.7mn (24.9% of revenue in the third quarter of 2022 and to $31.8mn (32.4% of revenue) in the second quarter of 2023. The third quarter included $1.2mn in net unrealized losses from investments. Excluding unrealized losses from investments. Adjusted EBITDA margins were 30.2% and above the 30% mark for two consecutive quarters.

“In the third quarter, we were awarded a multi-year, multi-well contract extension with one of the most active deepwater supermajors in the Gulf of Mexico, further validating our market position in the region. Kimberlite International Oilfield Research published an updated 2023 Completion Fluids Offshore Supplier Analysis where TETRA remained ranked as the top supplier in the Gulf of Mexico for product quality and overall performance. Kimberlite is an international oil & gas market research and consulting company that uses data collected from one-on-one interviews with operators to assess market trends and establish performance benchmarks for oilfield equipment and service suppliers. The report indicated that TETRA continues to receive the highest customer loyalty ratings as measured by the net promoter score.

“Water & Flowback Services revenue of $78mn improved modestly by 3% year-on-year while remaining flat sequentially. The increase in revenue was driven by international operations. U.S. revenue was relatively flat, even though the U.S. onshore average rig count was down nearly 15% and active frac fleets were down nearly 5% from the third quarter of last year. Net income before taxes for the quarter was $8.5mn (10.8% of revenue) and compares to $6.5mn (9% of revenue) in the third quarter of 2022 and to $8.0mn (10.4% of revenue) in the second quarter of 2023. Adjusted EBITDA of $14.8mn improved by $1.7mn (13%) year-on-year and by $0.6mn (4%) quarter-over-quarter. Water & Flowback Services Adjusted EBITDA margins continued to improve (up 60 basis points from 18.4% in the second quarter of 2023 to 19.0% in the third quarter of 2023) despite the pullback in fracking activity and achieved the Company’s target set earlier this year. The 19.0% margins are the highest margins achieved since the fourth quarter of 2018 and the fourth consecutive quarter of margin improvement, reflecting our focus on technology and automation. We have been successful in maintaining stable pricing for our differentiated products and services meanwhile continuing to drive cost-reduction efforts in our US land business, which helped us achieve sequential Adjusted EBITDA margin fall-through greater than 60%.

“In October, we sold one of the three early production facilities (“EPF”) in Argentina to the operator for an amount in excess of $5mn, with all the cash proceeds received in October. TETRA will continue to operate and maintain the EPF on behalf of the operator for a fixed monthly fee. We are currently in the process of expanding the EPF to process greater volumes of oil and are in discussions with this same operator to potentially construct 1 to 3 additional facilities in the future.

“Our target to have the engineering completed for our first produced water desalination plant for beneficial re-use applications is on track for year end or early part of 2024. In parallel to the engineering design work, we are in commercial discussions with one of the largest North America shale producers for their beneficial re-use projects in multiple unconventional basins and expect to have our first project awarded shortly.

“Finally, we anticipate strong cash from operating activities and Adjusted Free Cash Flow in the fourth quarter, driven by the cash proceeds from the EPF sale and working capital improvements. Total year 2023 cash from operating activities is expected to be between $70mn and $79mn while Adjusted Free Cash Flow is expected to be between $35mn and $40mn. Cash generation from our existing businesses positions us to continue investing in the evaluation and development of our Arkansas bromine and lithium assets.”

Third Quarter Results and Highlights

A summary of key financial metrics for the third quarter are as follows:

Free Cash Flow, Balance Sheet and Income Taxes

Cash from operating activities was $14mn in the third quarter and adjusted free cash flow from continuing operations was $7.1mn. Liquidity at the end of the third quarter was $107mn, an improvement over the second quarter. Liquidity is defined as unrestricted cash plus availability under our revolving credit facilities. At the end of the third quarter, unrestricted cash was $34mn and availability under our credit agreements was $73mn. Long-term debt, primarily with a September 2025 maturity, was $159mn, while net debt was $125mn. TETRA’s net leverage ratio improved to 1.4X at the end of the third quarter of 2023, down from 1.5X as of 30 June 2023 and down from almost 2.0X at the end of the fourth quarter of 2022. As of 30 September 2023, TETRA held $9.5mn in total marketable securities between its holdings in CSI Compressco and Standard Lithium. TETRA’s return on net capital employed improved to 20.7% at the end of the third quarter of 2023, up from 18.2% as of June 30, 2023.

Non-recurring Charges and Expenses

Non-recurring credits, charges and expenses are reflected on Schedule E and include the following:

• $1.8mn of costs associated with our Arkansas bromine and lithium project including evaluating the second test well as well as ongoing engineering and design work net of the amounts recovered from Saltwerx consistent with the recently completed Memorandum of Understanding (“MOU”).
• $1.1mn of non-cash stock appreciation right expense and $0.5mn of adjustments to long-term incentives.

Unrealized losses on investments totaling $0.6 million are included in both reported and adjusted earnings.

Conference Call

TETRA will host a conference call to discuss these results tomorrow, 31 October, at 10:30 a.m. Eastern Time. The phone number for the call is 1-888-347-5303. The conference call will also be available by live audio webcast. A replay of the conference call will be available at 1-877-344-7529 conference number 4719291, for one week following the conference call and the archived webcast will be available through the company’s website for thirty days following the conference call.

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