Good morning, and welcome to TETRA Technologies Third Quarter 2020 Results Conference Call. The speakers for today’s call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I’ll now turn the conference over to Mr. Serrano. Please go ahead.

Good morning, and welcome to TETRA Technologies third quarter 2020 results conference call. I would like to remind you that this conference call may contain statements that are, or maybe deemed to be forward-looking. These statements are based on certain assumptions and analysis 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 EBITDA, gross margins, adjusted EBITDA, adjusted EBITDA gross margins, adjusted free cash flow, distributable cash flow, distribution coverage ratio, leverage ratio, or other non-GAAP financial measures. Please refer to this morning’s press release or to our public website for reconciliation 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. In addition to our press release announcement that went out earlier this morning, and it’s posted to our website, our Form 10-Q is filed with the SEC this morning also. With that, let me turn it over to Brady.

Thank you, Elijio. Good morning, everyone, and welcome to the TETRA Technologies third quarter 2020 earnings call. I’ll give a recap of our third quarter highlights and performance and then turn it over to Elijio to provide information on the balance sheet, cash flow and liquidity. I’d like to start by first recognizing all the TETRA and CSI Compressco employees and management teams for delivering another solid quarter in a very challenging environment. Despite the sequential 36% decline in the U.S. onshore rig count two hurricane storms that came through the Gulf of Mexico and the continued overhang from COVID-19. Our teams focus and execution of our strategies resulted in positive EBITDA for each of our segments and sequential improved EBITDA margins. I could not be more pleased with the way our management team and employees have responded to the most challenging eight months our industry has likely ever faced. On a consolidated basis, we achieved $30 million of adjusted EBITDA in the third quarter with the related margin improving 150 basis points sequentially as a result of our focus on cost management and maximizing the value of our latest technology. Compared to the third quarter of last year, we’ve reduced our costs by $345 million on an annualized basis or 41% as it impacts EBITDA. This compares to an annualized decline of revenue of $373 million reducing costs by $0.92 for every dollar decline in revenue. Our positive EBITDA on the past two quarters is reflective of a successful strategy of the executed and the diversity of our business with a short cycle of North America market, longer cycle deepwater and offshore segments and the steady consistent industrial chemicals market. TETRA only generated $7.7 million of free cash flow from continuing operations in the quarter and ended the quarter…

Thank you, Brady. I’ll first make some comments on TETRA’s balance sheet and cash flow, then I’ll do the same with CSI Compressco, and then we’ll open it up for questions. Brady mentioned that we generated $43.5 million of free cash flow year-to-date on a TETRA only basis, which is an improvement of $67 million from the same time a year ago. This is what’s achieved despite the incurrence of severance and other restructuring related cost. TETRA only adjusted EBITDA was $7 million in the third quarter. TETRA only capital expenditure in the third quarter were $1.6 million. Many of the service companies are generally in free cash flow this year from monetizing working capital. And as business re-bounce, working capital will increase and consume cash. We believe that a true metric for measuring the performance of the oil field services sector during difficult times is to measure their ability to generate free cash flow during the bottom of a cycle as earnings decline and without the benefit of monetizing working capital. In every quarter this year, TETRA without CSI Compressco has generated positive free cash flow without the benefit of monetizing working capital. Essentially, every quarter this year, cash earnings – growth and capital expenditures, less interest expense and less impact payment has been positive. Of the $43.5 million of free cash flow that we generated so far this year, $11.4 million is year-to-date earnings, less CapEx, less interest expense and less taxes. The other $32 million has been from monetizing working capital and monetizing receivables in this environment is not easy given the financial struggles by many of our customers. Our ability to generate $11 million in free cash flow this year without the benefit of working capital talks through the aggressive cost management we have implemented, the…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jim Roumell with Roumell Asset Management. Please go ahead.

Thank you. Elijio, two questions. And Brady, you mentioned that you’re in the process of winning a contract in Appalachia on the water flow backside. Can you give any color whether that business is being taken from a small regional player or a kind of larger player in the space?

Jim, good morning. We believe that’s a smaller regional player. It’s not what I would consider to be a large player that operates in multiple basins.

Got it. Thank you. And second question is, I just want to make sure, I’ve heard correctly, you are estimating that you are now a number one in water recycling in fracking. Was that in a particular basin or just a little color to that and whatever you were referencing, where would you have estimated that number to be a year ago?

Sure. So Jim, we had our first large recycling project award in late 2018. My reference in the current comments that I had made is this is now our third major recycling project. And based on our local knowledge in the Permian basin and the amount of barrels of water that we are cycling on a daily basis for frac reuse. We believe we’re the largest – we have the largest volumes of water that were refrack – recycling on a daily basis, it is my reference.

Got it.

In the Permian basin. Yes.

Got it. Thanks. Thanks very much, Brady.

Thank you.

The next question comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks, and good morning, gentlemen.

Good morning.

I had a few things and I apologize if you hit on any of these, because I got disconnected, but first, when we think about the completion fluids business and the margin progression there, you put up very good margins in the quarter, despite the Gulf of Mexico storm issues and obviously, the sequential drops from the European business, when I look at these mid-20% EBITDA margins. Are they sustainable without CS Neptune work over the next few quarters?

Yes, we believe they are. I think, we’ve referenced several quarters ago that we had a target to maintain over 20% EBITDA margins. And I think now we’re on the sixth quarter or so, where we have not only been above 20%, but well into the mid-20% range. And that’s really a couple of factors. One, we’ve done a great job of streamlining our industrial chemicals business with some really favorable supply contracts – supplier contracts of raw material and streamlined our operations from several of our plants with the shutdown of our mechanical evaporation facility in El Do. Even with that, we still have plenty of capacity left to grow from the other plants that we operate at. So that all in has had a pretty significant impact on our ability to generate industrial margins, the similar to what you’re seeing. On the fluid side, although, we had – we were hurt by the Gulf of Mexico hurricanes this quarter. We had some very nice sales into the Middle East, we’ve mentioned before we had been awarding some market share gains, including several large NOCs that operate in the Middle East. We were able to secure those types of margins that you’re seeing, contributing to the margins that you’re seeing. And so we believe it’s sustainable. We’ll see, as we get 2021 and what the outlook looks for the markets, especially the offshore markets on our completion fluids markets. But for the foreseeable future, we believe we can sustain the types of profitability that we’ve been achieving.

Stephen, let me remind everybody at some of the margins that we’ve achieved. In the second quarter of last year, we were at 22.4%. Q3 a year ago, we were at 23.7%. Both of those quarters had no Neptune in there. In the fourth quarter with a Neptune project, we jumped all the way up to 35.2%. And then this year, we’ve done 28.7%, 25.7% and 26.8% for this segment on adjusted EBITDA margin. And there was a little bit of carryover of Neptune from Q4 into Q1, but it was minor. So it tells you that even without Neptune, we’re achieving those targets already.

And Elijio, I believe I had in my notes, and I’m not sure if you can give us a sense, but the U.S. land piece of that is a pretty small piece of the total revenue, I think. Can you give us any color on sort of the revenue contribution from different segments? Because given what’s happened in the U.S. land business, those margins are fairly stable and fairly high.

Yes, we’ve mentioned that on an annual basis about 40% of our revenue from this area is from the industrial, both Northern Europe and the United States. The rest of it is primarily the offshore business, both Gulf of Mexico and international. There is some amount of U.S. onshore, but not enough to move the…

Just I’ll add a little bit of color to that. On the completion fluid side of the business, we have a very small contribution from the U.S. land market. So we’re really not impacted on the completion fluids side. However, our industrial chemicals business, clearly is a contributor into the North America market segment geographically, obviously, it’s a different segment than the oil and gas segment. But from a U.S. perspective, our industrial U.S. business is a very good business.

Right. Thank you for that. And then as we look – just thinking about the other piece of the business, but on the water flow back business, I mean, that’s clearly more U.S. land focus. Should we expect that to kind of track the U.S. land market here over the next four to six quarters? Is that a reasonable way to think about it as you try to push to get EBITDA improvement?

Yes, we believe so. We’re clearly seeing an increase in activity – a meaningful increase in activity in both September from the low points in July and August and then again in October. And we believe that that will remain fairly consistent growth throughout the fourth quarter. As you look at the next year, I mean, it’s still little bit early days with where things are with COVID, et cetera. But based on the conversations we’ve had so far with our customers and from some of the projections on frac crews from Rice that others in the industry. We expect that 150 to 175 frac crew type of activity levels, which is not quite to the levels we were pre-COVID, but in this environment, that would be a meaningful impact for us from our business to grow and improve profitability.

And on the sand side of that business, you’ve gained some share on the sand side, I believe. Is that piece to the point where it’s potentially 10% or more of that segment or not yet is that margin accretive?

Well, it definitely a margin accretive. It’s a very automated. The amount of resources that we deploy on that relative to a typical flow back job is significantly less. It’s gaining traction very rapidly with several of our key customers. I wouldn’t say that we’re yet up to that, but it’s holding well, it’s gaining market share and it’s improving. And I think Brady mentioned on the earnings call earlier today, all our equipment in this area is pretty much fully utilized.

Yes, this is going to be one area where we will need some capital investment for next year if we continue on the growth path, because we’re sold out for our current number of units.

And just – I want from just a strategic current perspective, if we look at 2022, 2023, and we’re thinking about what TETRA looks like. Do you think – how do you think the business evolves? If we get back to kind of a more normal level of activity in the U.S. land market and globally things are settled down, I mean what’s the – what do you think about as sort of the margin potential of the entity and how the structure of the company looks?

Well, I think we’re very happy with the components of the business that we have, the segments that we have, we’re very well-positioned in the water and flow back segment as that market recovers. Clearly these are unique times with this downturn. And we feel we get back to more normal levels of U.S. land activity, maybe not all the way back in 2021, but certainly by 2022 and 2023, we think from our business perspective, with some of the share gains that we’ve had and the fundamental cost structure that we’ve put in place, we will be closer to 2018 type levels of profitability. On the fluid side, we continue to find new opportunities for our industrial chemicals business. And as I said, we’ve changed the profitability profile of that business. Our offshore completion fluids business continues to gain share. So I don’t expect 2021 to be a huge ramp up in offshore activity, but 2022, 2023, I think you will start to see some meaningful activity return. And then our Neptune projects that we’re tracking we expect to see some contribution in 2021 in some meaningful significant contribution 2022 based on the projects that we have been working with operators on. So yes, I would expect 2022 and 2023 to be perhaps our most profitable years yet to come for TETRA.

And Stephen, I’ll also remind you in mid-2019 water and flow back was generating mid-teens EBITDA margins. And since then we’ve made significant investments in automation and remote monitoring. SandStorm has gained quite a bit of traction. And I think that we’ll see that benefit in a recovery market. And then we also mentioned earlier that we believe that we can continue to achieve mid-20% EBITDA margins on the fluid side. And when we pick up Neptune projects that those can easily push up into the 30%s. So we think that we’ll have the benefit of automation, technology, and new introduction of equipment in the future.

Very good. Thank you, gentlemen. If I could just add one more, do you – has there been any visibility slash traction from the Halliburton alliance. And as you sort of think about the deepwater market, I mean obviously it’s seems to be a little behind, but do you see that the sort of increased traction on the CS Neptune side going forward?

Yes. In fact, we have a major project in the North Sea with an operator where Halliburton has the contract. And we’re working hand in glove with them to deploy Neptune and we expect that to show results in 2021.

Okay, great. Thank you, gentlemen.

Thank you.

The next question is from Joseph Von Meister with Intermarket. Please go ahead.

Hi, most of my questions have been answered, but I guess we could go back to your plans for CSI Compressco and the potential deconsolidation if I could call it that. Thank you.

Good question, Joseph. I think that we’ve been very clear in our message in the last year and a half in that both the management team of TETRA and the Board of Directors of TETRA are focused on enhancing shareholder value. And we’re also open to evaluating all options and alternatives. This year, we completed a debt swap with CSI Compressco, and in June, we extended the maturities for our unsecured debt into 2025 and 2026. We also stripped any of the change of control covenants, so that the $81 million of unsecured debt does not trigger any maturities on a change of control. So feel confident that both the management team and the Board of TETRA are focused on enhancing value and we’ll evaluate all options and I’ll stop my comments at that.

Thank you.

Next we have a follow-up question from Jim Roumell with Roumell Asset Management. Please go ahead.

Thank you. Brady, a question we get from shareholders who contact us. I’m just going to put it to you to kind of put out there. So we don’t have to answer it. We get informed a lot that the company’s non-energy fluids business, the industrial side of the business, that those businesses are now trading at 10 to 12 times EBITDA, which would make your non-energy fluids business potentially worth something like $200 million. My question is, first, just are the businesses separable? Are they my understanding is that that business was purchased several years ago. So I just wanted to ask, are they separable? And two, given the place where energy stocks are trading in general, now withstanding your confidence in the market on the inside returning in the next two years to three years. Where do you see, if that business stays trapped, the value of that business stays trapped because of the energy narrative surrounding the company. At what point in your mind, is it worth the company thinking of strategic actions to kind of unlock that value, particularly if it’s true that those industrial fluids businesses right now are – there’s just a lot of interest in them evidently in the private equity world. Just any kind of high level color would help.

Sure. No, that’s a fair question. They are separable. Our industrial operations plants supply to both industrial applications for our chemical products, as well as feeds our offshore fluids business. If we separated that and sold it to another party or somebody else operated, we would still be able to buy the chemical products to calcium chloride, et cetera, that we would need to operate our completion fluids business. We might have a bit of a margin impact on that, but they are very separable and can operate independently from TETRA today. As far as unlocking the value, I mean clearly, today we get a lot of synergy – we think we get a lot of synergies between a lot of the fluid developments, a lot of the technologies that we develop both on the completion fluid side and having that vertical integration, the R&D that goes with that, products like Neptune and other products we have in works are a result of that, that synergy. But clearly if the energy markets didn’t play out as I feel they will ultimately, we would certainly look at strategic options to unlock that value, Jim.

Got it. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Murphy for any closing remarks.

Thank you very much. We appreciate your interest in TETRA Technologies, and thank you for taking the time to join us this morning. That will conclude our call.

The conference is now ended. You may now disconnect. Thank you for joining today.