Good morning, and welcome to TETRA Technologies' Second Quarter 2024 Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I will now turn the conference over to Julian Higuera. Please go ahead.

Good morning and thank you for joining TETRA's second quarter 2024 results call. The speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward looking, including projections, financial guidance, profitability and estimated earnings. These statements are based on certain assumptions and analysis made by TETRA and are based on several factors. These statements are subject to several 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, adjusted EBITDA, adjusted EBITDA margins, free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed or other non-GAAP financial measures. Please refer to yesterday'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 a complete financial results for the period. In addition to our press release announcement, we encourage you to refer to our 10-Q that we also filed yesterday. I will now turn it over to Brady.

Thanks, Julian. Good morning, everyone and welcome to TETRA's second quarter 2024 earnings call. I'll summarize some highlights from our second quarter results and provide an update on our strategic initiatives before turning the call over to Elijio to discuss second quarter financials and additional perspectives on our third quarter. Our second quarter results can be characterized as mostly consistent with the overall trending oil and gas markets during the second quarter, which was lower U.S. completion activity with increasing activity in the international offshore market. This combined with our seasonal second quarter peak for our European industrial chemicals business and lower deepwater project activity in the Gulf of Mexico contributed to our results of 14% sequential revenue growth and 32% increased adjusted EBITDA. Our Completion Fluids & Products and Water & Flowback segments achieved adjusted EBITDA margins of 28.9% and 15.2%, respectively. Water & Flowback adjusted EBITDA margins of 15.2% was an anticipated rebound from 9.6% in the first quarter, a sequential improvement of 560 basis points. Year-over-year, revenue was down 2% compared to U.S. onshore rig activity down approximately 16%. Adjusted EBITDA of $30.2 million was 17.6% of total revenue and inclusive of $1.1 million of foreign exchange losses. During the second quarter, we secured a three-well deepwater Gulf of Mexico CS Neptune fluids project for a super major oil and gas operator. This is an important milestone as this is the second super major operator in the Gulf of Mexico to select CS Neptune for their completions program and the first Gulf of Mexico deepwater CS Neptune fluids project since the fourth quarter of 2019. Following a dramatic impact to the timing of potential CS Neptune deepwater projects due to the COVID pandemic in 2020 and 2021, we have since seen our pipeline of projects move forward…

Thank you, Brady. Second quarter adjusted EBITDA of $30.2 million was negatively impacted by $1.1 million of foreign exchange losses. Nonetheless, this was below our expectations as the U.S. onshore market was progressively weaker during the quarter, especially around water transfer. We are focused on the quality of our earnings and will not be chasing work at low margin. With our focus on returns on capital and free cash flow, we are not prepared to chase lower margin opportunities. We had committed to improve Water & Flowback adjusted EBITDA margins to the mid-teens in the second quarter and achieved that with a 560 basis point improvement to 15.2%. We believe that revenue in the third and fourth quarters will be flat to the second quarter and we expect to continue our efforts on keeping our EBITDA margins above 15% in an environment where onshore activity is flat. Brady mentioned that our efforts of leveraging technology and automation are pivotal towards gaining market share in a declining market without compromising margins. Completion of fluids and products revenue saw the expected higher revenue and earnings from the peak industrial chemical season in Europe. Recall that a few years ago, we expanded production capacity in Northern Europe and took advantage of this and of the available higher volumes this peak season. Our second quarter could have been even stronger if we managed to do a few challenges. The first was a strike by port workers in Kokkola, Finland that restricted our ability to offload limestone to produce calcium chloride and also restricted our ability to load and ship product. This strike started in the first quarter and ended early in the second quarter. Additionally, the quarter started with winter conditions harsher than normal with a frozen harbor making the movement of vessels in…

Thanks, Elijio. In closing, we're pleased that we are achieving the goals that we've set out for the company. The CS Neptune Award is reflective of our strong market position in the deepwater market and will have a material impact on our financials over the next six to nine months. We're on track with our Water & Flowback business to continue margin progression, renew technology with the desalination for beneficial reuse continuing to gain momentum. We have a solid balance sheet, close to $180 million of liquidity, and we expect to continue to generate strong free cash flow from our base business to fund our strategic growth initiatives. We expect a strong finish to the end of the year, but just as important, significant momentum and heading into 2025 and beyond. With that, we'll now open it up for questions.

Thank you, presenters. [Operator Instructions] And your first question comes from the line of Bobby Brooks of Northland Capital Markets. Please go ahead. Your line is open.

Hi, guys. Good morning. Thank you for taking my question. My first question is just on the CS Neptune outlook, right? So great that you guys got the three projects nailed down with the one super major. But if I recall, in the first quarter, you guys talked about how the level of discussions for CS Neptune projects within the Gulf of Mexico was at the highest that you've ever seen, and that was occurring with multiple different operators. So I just wanted to get a sense of what -- how those conversations, obviously, these three you got, is there potential for more from this operator? And then maybe just any – how have discussions went with those other ones? I know that at the end there, talked about these might be the first of several in the coming years. So, just kind of more detail on that?

Yes, Bobby. So we have a pretty extensive pipeline of projects with operators that we've been tracking for many years. I think I've mentioned before that these types of projects come a long lead time in terms of the types of testings that's required. Last-minute testing, formation testing, fluid compatibility with everything the operator is doing with their completion. And so, we've got a very healthy list of pipeline of projects. Obviously, we're pleased with this award, but we are having multiple discussions with multiple operators that are part of that pipeline. Some of those could materialize before the end of the year in terms of new awards. Some of them may carry into the next year or beyond. It's difficult to say until you actually get the award. We want to be careful of how we communicate that. But I can tell you we are having multiple discussions with multiple operators regarding additional projects beyond just these first three.

And just to clarify, that is specifically for these CS Neptune projects in the Gulf of Mexico, which obviously are very revenue intense and high EBITDA margins for you, right?

That's correct. The Gulf of Mexico wells are quite unique just from the pure volume of the fluid that's involved in the completions and the technical requirements of the fluid to meet these ultra-deep water temperature and pressure conditions.

And Bobby, just to add, this is on top of our traditional completion fluids business in the Gulf of Mexico. Some of the bigger projects that can be addressed with the basic calcium bromide or zinc bromide could range anywhere from $2 million to $5 million per well for the basic completion fluids before we move to a Neptune-type well.

Got it. Thanks for that color. And then jumping over to the beneficial reuse, as mentioned how you signed seven different NDAs with seven different operators, right? I think it could be helpful to just help frame that a little more, maybe contrast that with how many NDAs were signed at the beginning of the year versus now. Were any of the NDAs that you had signed at the beginning of the year, did those back out?

We have not had any NDAs back out. And I don't know the exact number, Bobby, but I would tell you they have definitely increased as we've gone through the year. The nature of these discussions, obviously, we have some proprietary technology, some of which we have filed some patents for. But obviously, until we're issued the patents, we want to be very protective of the proprietary nature of our technology. That's the reason for the NDAs. And that allows us to have very deep discussions with the operators, the customers, for their very specific requirements around their produced water and the treatment procedures and technologies we will use for their program, which obviously, we hope, evolves into a pilot program, which we've already done with the first customer we've been discussing for some time. But now we're in multiple, serious pilot commercial discussions with multiple operators.

Got it. Thanks for that color. And then just last one for me is, could you so, $9.8 million in CapEx towards Arkansas, right? That's net of reimbursement from the partner. Are you able to disclose how much the reimbursement is total?

Yes, those are covered by our NDA. So we'll obviously only report what impacts TETRA's financial statement. But assume that our partner continues to work side-by-side with us on all the initiatives around Arkansas.

Fair enough. Congrats on the solid quarter, and I'll return back to the queue. Thanks, guys.

Thank you.

Thank you. And your next question comes from Josh Jayne of Daniel Energy Partners. Please go ahead. Your line is open.

Thanks. Good morning. First one I wanted to ask, just on Sandstorm being deployed to the Middle East market. Could you talk about the total addressable market and what it looks like for you if this is successful, maybe over the next couple of years as a starting point?

Yes, I mean, we're clearly seeing some activity increase in the Middle East, several markets for the unconventionals markets that are developing. And clearly there's an addressable market today. I don't want to give specifics about the numbers in today's market. But as that unconventional activity continues to increase in several of the Middle East countries, it's a perfect application for Sandstorm. So, we'll keep you posted as that market develops and we can quantify it. But it's a little early for us to do that at this point.

Okay. And switching gears a little bit to offshore completions, fluid activity, you noted that it was stronger in Q2 than Q1. Maybe you could just walk through the markets outside of the Gulf of Mexico and how you're seeing those markets shape up over the next 12, 24 months would be helpful?

Yes. So, we clearly, outside the Gulf of Mexico, we have strong market positions in Brazil, in the North Sea, and to a lesser degree, West Africa and Asia Pacific. But certainly we see a very good growth going into 2025 in the Brazil market. And we are extremely well-positioned in the Brazil market for that growth, again, outside the Gulf of Mexico. North Sea, we continue to see steady improvement, steady progress, not just in the typical completion activity, but also opportunities for us for Neptune opportunities in the North Sea. Now, typically they're not as large of a size of projects, clearly not as large as in the Gulf of Mexico, but they are very profitable opportunities for us as that market continues to evolve. And then, we have spot markets around the world that we work with the major service providers on providing completion fluid technology for those markets. But overall, the international offshore market we see is a continuing trend, improving. And that obviously includes the Gulf of Mexico.

Okay, thanks. And then maybe just one last one to ask the Gulf of Mexico Neptune question a little bit differently. When we think about the margin uplift from this specific project that's going to happen for you in Q4 and early into 2025, is the margin profile different or better for this project than we might see from traditional projects? Because not only maybe is the pricing environment a little more constructive, but also just the fact that the wells are stacked back to back, I was just curious if you could elaborate on that a little bit more and to help frame your expectations for the first half of 2025? And then I'll turn it back. Thanks.

Josh, good question. The margin that we make on a Neptune project has many variables that go into it. It depends on how many volumes, how many thousands of volumes of fluid barrels we inject into the well. It depends on the duration of the fluid in the well, whether it's in there for a few weeks or many, many weeks. And also on how much fluid is lost in the well. The prior project that we did, the losses of the fluid in the well were quite significant. At this point, we're making an estimate as to how much fluid might be recovered from the well. But they will be higher than traditional offshore completion fluids projects. And they can move the entire segment meaningfully.

Okay, thanks. I'll turn it back.

Thank you. And your next question comes from Kurt Hallead of Benchmark. Please go ahead. Your line is open.

Hi, good morning, everybody.

Good morning, Kurt.

Hi, I think I want to come back around to that, the water opportunity, recycling reuse and so on. And it's awesome to see that you guys are getting some traction with a number of different EMPs around it. I think it probably speaks to the value proposition. Now, I'm kind of curious, when you think about the dynamics at play, and you think about how the customer base may be pursuing this, could you give us some sense as to is this being like supported by the governmental and regulators in Texas? And is that a key element of the driver? Or is it a combination of that and maybe the EMPs wanting to reduce their environmental exposure? Just kind of curious what the underlying drivers of this market will be that will help it make a reality?

Right. So, the largest fundamental driver behind this, Kurt, is the fact that the seismicity events in West Texas are clearly linked to over-pressuring the disposal wells and formations in the region. I think we've seen the Railroad Commission put restrictive injection profiles around certain areas. I think there's three or four in effect today in term that are starting to restrict the amount of water that operators can dispose into these formations. There was just recently, as I mentioned in our comments, a number of fairly sizable earthquakes, one of them hitting a 5.1 Richter scale just last week, that there was an article out that the Railroad Commission was going to be investigating that. And so, this problem is not going to go away until there is a solution to address the over-pressuring of disposal wells and lack of pore space to inject additional disposal water. Now, there's a couple of solutions to that. Operators can truck water from the areas where it's being produced to other areas farther away that are not under pressure. That gets pretty expensive pretty quickly. We think that the best solution is to treat that water and turn it into a resource right in the general vicinity of where that water is being produced. And so, operators are definitely looking at those options relative to their alternatives. And we think the price point that we can achieve, the cost point that we can achieve with our technology, that it's going to be a sizable market opportunity for us. But that's really the drivers. The regulatory agencies are definitely tracking this extremely closely. They've actually visited our facilities, looked at our technology, given us very encouraging feedback as to the solutions that we're offering. But clearly, there's a lot that goes into permitting produced water that potentially has a lot of organics and nasty elements in it to allow for beneficial reuse. As I mentioned in our comments, that's already happening in California today. That's been going on for several years now, where treating produced water for agricultural purposes has been in place. I just think it's a matter of time before Texas and New Mexico, quite frankly, get caught up with getting their regulatory guidelines and specifications in place.

Okay. That's really good color. So maybe shifting a bit in the context of the opportunity that you have going on in Arkansas and the investments that you've been making. I know you referenced there's a final review that's kind of underway right now. I guess my commentary is this, right? You guys have a royalty agreement with Standard Lithium for what they produce. It looks like Equinor has made an investment in what Standard Lithium is doing. That follows on with the joint venture that you have with Exxon on your acreage. So, should we think about this dynamic at play now with Exxon and Equinor? Are these firm interest levels? Or do you think that this is more of from an oil company standpoint, we've got to get a sense of what's going on here, but we're really not fully committed? And I know what the answer is on Exxon, but I'm just kind of curious what your take is with respect to Equinor's investment in Standard Lithium's project. And do you think that makes that more real and the outcomes there more real?

I mean, we know Equinor quite well from our dealings with them in the oil and gas world. And we've met their project team that's based here in Houston for that project. And my perspective is they're every bit as committed as any other operator would be for this type of a project that's invested in this. I mean, obviously, things can change, but from what we can tell, they're very much committed. I don't want to speak for them, but that's just our observation. I think at this point in time, we're still going through the engineering process and don't want to get ahead of ourselves until we get the final engineering and the economics of the project in place that we can publish and talk about. We expect to have that completed before the end of the year, and then we'll be able to publish, hopefully the results of that, both in terms of the CapEx, the OpEx, the financial returns, like we're getting ready to release, hopefully, as soon as next week on the bromine definitive feasibility study. But until we have all those numbers kind of pulled together, and each of, whether it's ourselves, whether it's Equinor and Standard and Lithium, and ourselves with Saltworks and ExxonMobil, we don't want to get ahead of ourselves until we have some economics to speak about.

Yes, that's all fair. All right. And then maybe just to kind of wrap on this one, you guys have an electrolyte supply agreement for battery energy storage systems, as you referenced. I think there was some opportunity or possibility to start delivering those electrolyzers in volumes before the end of the year. Do you have any updates for us on the timing of that?

Yes. So, Kurt, just as a reminder, we did ship and we have sold electrolyte to Eos in prior years. A lot of what they sold in 2022 and 2023 included our electrolyte. That's part of what's out in the market right now, both charging and discharging battery. Recall that last year they made a decision to transition to their latest version of the technology and then suspended activity as they were making that transition. Brady and I, a little over a week ago, made another trip to Turtle Creek and visited with the Eos management team. And it was very encouraging to see how they progressed the automation of the latest version of the battery, how they are now fully automating the assembly and production of the batteries. When Brady and I were there, we saw how the electrolyte was automatically being injected into every battery. We think we're going to go from shipping them electrolyte in totes [ph] to full tanker trucks. And just as an example, one tote can contain around 4,200 pounds of electrolyte. A tanker truck can contain 45,000 pounds of electrolyte. And what Eos was doing was modifying their facility to take tanker trucks instead of totes. We believe, based on what we saw, that they will be up in full production in Q4. And at that point, the expectation is we're going to start shipping electrolyte in tanker trucks versus totes. And the volumes increase meaningfully. And the impact, we think, to us is going to be quite significant in 2025.

Okay. That's awesome. Appreciate that. That's it for me.

Thanks, Kurt.

[Operator Instructions] And your last question comes from Patrick Ouellette of Stifel. Please go ahead. Your line is open.

Hi, good morning. It's Pat on for Steve Gengaro. Thanks for taking questions.

Good morning.

Good morning. I believe you had mentioned a potential second customer for the zinc bromide electrolyte. Could you just talk about your ability to meet that sort of demand or how margin changes if you need to source bromine from the open market?

Well, first part of the question, we've been working with the second customer for some time. I think they're clearly, in terms of their ramp-up manufacturing capacity, just really getting started in terms of developing that manufacturing capacity here in the United States. So, well, time will tell how fast they're able to ramp up. But I don't see, you know, a big impact to us in terms of our overall bromine supply in 2025 or potentially into 2026. It just depends on how fast they scale up their manufacturing, certainly relative to what Eos has done, who put an entire automated assembly line with a battery coming off the line every 10 seconds or so. So, it's not really comparable yet at this point. But the fact that they're using zinc bromide, the technology works, they've got commercial installations at a pretty small scale, it gives us a lot of good confidence in the technology itself, as we have with Eos. So, I don't think it's really going to be much of an impact for any third-party purchases that we would need over the next year or so to support that activity.

Okay, great. Thanks Brad. And then, so, for the third quarter, could you just remind us of any seasonal impacts in completion fluids from Europe or maybe what you're expecting to see there?

No seasonality beyond what we see in the second quarter for the calcium chloride business in Northern Europe. Obviously, we're hoping that there's no hurricanes in the Gulf of Mexico that disrupt activity. But that would be the only seasonality that might be out there.

Okay, great. That's all for me. Thank you.

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. End of Q&A:

Well, thank you very much. Appreciate you joining us and appreciate your interest in TETRA Technologies. We look forward to our next discussion with you. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for participating and ask that you please disconnect your lines.