TETRA Technologies Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2024

There are 9 speakers on the call.

Operator

Good morning and welcome to TETRA Technologies Third Quarter 20 24 Results Conference Call. All participants will be in listen only mode. Please note that this event is being recorded. I will now turn the conference over to Julian Higuera. Please go ahead.

Speaker 1

Thank you, Vincent. Good morning and thank you for joining TETRA's Q3 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.

Speaker 1

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 these projected in the forward looking statements. In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed and 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 subject for financial information referred in accordance with GAAP and should be considered within the context of our company's financial results for the period.

Speaker 1

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.

Speaker 2

Thank you, Julian. Good morning, everyone, and welcome to TETRA's Q3 2024 Earnings Call. I'll summarize some highlights from our Q3 results and provide an update on our strategic initiatives before turning the call over to Elijio to discuss more details on Q3 financials and additional perspectives looking forward with some views on 2025. For the Q3 despite considerable headwinds due to 3 Gulf of Mexico hurricane disruptions as well as lower customer completion activity on U. S.

Speaker 2

Land, 3rd quarter earnings, free cash flow and adjusted EBITDA of $23,500,000 came in consistent with our expectations. We achieved adjusted EBITDA margins of 31.7 percent for completion fluids and products and 14.6 percent for water and flowback services. Because of the 2nd quarter seasonal peak in our Northern European Industrial Chemicals business, the underlying performance of our business is highlighted by our year on year and Q1 comparisons. 3rd quarter revenue of $142,000,000 was down 6% for both year on year and from Q1 2024 while adjusted EBITDA was down $2,500,000 from Q3, 2023 but up $700,000 from Q1 of 2024. Although revenue was lower, we achieved some very good wins in the quarter that is helping us build significant momentum for 2025.

Speaker 2

First is a major deepwater completions fluid award in Brazil. This is a multi well, multi year deepwater award for our high value, higher density bromine based completion fluids. This is our 2nd major deepwater fluid award in Brazil in the last 3 years and establishes us as the clear deepwater heavy fluids market leader in Brazil. The first well for this award is scheduled to start in late Q1, 2025. Another important milestone for the Q3 was establishing an all time record for produced water recycling for frac reuse.

Speaker 2

With additional recent customer wins, this 3rd quarter record will again be eclipsed in the 4th quarter by another record that is a step change over Q3. Although U. S. Completion activity has drifted down for the past 18 months, produced water is increasing and will continue to increase for many years to come. At the same time, seismicity events are driving more rapid adoption of recycling for frac reuse to avoid more over pressuring of disposal wells.

Speaker 2

Our strategy to focus our technology and investments into the produced water side of the business is paying off and has been a key part of our success developing solutions for produced water beneficial reuse, which I'll discuss a bit later. A third highlight for the quarter was the recognition by Kimberlite, a leading oil and gas research company that conducted a study on the completion fluids and services segment. In arguably the most technically challenging deepwater market in the world, the Gulf of Mexico, the Kimberlite study concluded that TETRA Technology stands out as the performance leader. TETRA excels in technical support and service, responsiveness and availability, aligning well with its pricing strategy to create differentiation in the market. As future wells and production in the Gulf of Mexico will come from very challenging lower tertiary with extreme high pressures and temperatures, TETRA is very well positioned to benefit as validated by the Kimberlite report.

Speaker 2

Coming back to the financials, as the end of the Q3, our trailing 12 months adjusted EBITDA was 101,000,000 dollars We generated over $7,000,000 of trailing 12 months total adjusted free cash flow even after investing $23,000,000 in Arkansas. Our current liquidity is approximately $197,000,000 inclusive of the $75,000,000 delayed draw feature to fund our future Arkansas bromine project. Now turning to the segment results. Completion Fluids and Products 3rd quarter adjusted EBITDA margin excluding or unrealized gains or losses on investments was 32.1 percent up 200 basis points or 80 basis points compared to Q1. The increase in margin was driven by a very favorable mix of higher value completion fluid sales and our industrial chemicals business that continued its very strong financial performance.

Speaker 2

In the Q3, we announced the introduction of TETRA X, a new corrosion inhibitor for high temperature downhole well environments that is a step change improvement from what is available in the market today. We will market TETRA X as a blend with our current completion fluids as a premium product and service for high temperature wells and to expand our market share further for this segment including CS Neptune. We're also evaluating other non completion fluids market to potentially market TETRA X as a standalone corrosion inhibitor. Looking ahead for completion fluids and services, the Q4 will be comparable to slightly down from the Q3 as the Q3 hurricanes and a 4th in early October has had an impact on our customers' deepwater completion schedules. The 3 well CS Neptune project that we announced previously is now scheduled to start in early 2025.

Speaker 2

For the Water and Flowback segment, 3rd quarter adjusted EBITDA margins were 14.6% consistent with the goals that we've set. The decline in U. S. Onshore frac crew activity which according to Rystad Energy is down close to 25% over the past 18 months As lowered our completion related revenues for our U. S.

Speaker 2

Business with some pressure on margins, but we're counting that with a more aggressive development of automation deployment of automation and new technology that allows us to get better or similar pricing but with much lower labor cost which is today the highest cost in this segment. Our strategy for water and pullback services remains a multipronged approach automating all aspects of the service aimed at enhancing efficiency and safety but with a goal of bridging us to water recycling for beneficial reuse such as agriculture and industrial applications. While we've made significant progress in deploying BlueLinx and water transfer automation, we're still in the early stages of rolling out automated systems for sandstorm and auto drill out. The early results have been exceptional and customer feedback has been very positive. Even in this lower activity environment, we're near maximum utilization for our automated sandstorms which today is only 20% of the fleet.

Speaker 2

We will be upgrading another 20% in 2025. This strategy linked with our growing recycling for frac reuse business will provide good cash flows to bridge us to the longer term goal of recycling for beneficial reuse which will be a much larger market with higher returns. With regards to water desalination and beneficial reuse, we're making good progress advancing the commercial terms for our 1st field pilot project in the Permian Basin. In addition, we're processing a second customer's Permian Basin water with a pilot unit at our R and D center to a very high quality level. We're in discussions with other major customers for projects that in addition to West Texas and South Texas include Mid Continent and Appalachia regions.

Speaker 2

We currently have non disclosure agreements with 7 customers and are in discussions with 2 additional major operators. Moving on to our strategic initiatives, we continue a very close and collaborative relationship and dialogue with EOS Energy for their long duration energy storage electrolyte. We're confident EOS is on the verge of materially higher production volumes requiring materially higher electrolyte. In the Q3, we manufactured, qualified and delivered our first full order of the EOS electrolyte. We've also increased our manufacturing and blending capacity in West Memphis to meet the planned EOS demand.

Speaker 2

As EOS ramps and brings the automated lineup, the volumes of PureFlow and electrolyte they require will increase materially over the minimal volumes we will ship this year. This is adding to our confidence for a very strong year in 2025. On the Arkansas bromine side, we completed the SK1300 definitive feasibility report earlier in the quarter highlighting very compelling economics with the CapEx investment of $270,000,000 yielding an annual adjusted EBITDA increase of $90,000,000 to $115,000,000 The adjusted EBITDA increase is a result of higher sales volumes from a mix of both deepwater projects and long duration battery needs and lower production costs from the vertical integration. While we are confident we can fund the project from free cash flow and current liquidity while keeping below 2.5 net leverage ratio, we are evaluating a decision to fund the project in stages. The first stage will be a considerable reduction in the CapEx from the $270,000,000 and we target initial bromine production of 66 percent of DFS published volumes.

Speaker 2

We're still evaluating the revised CapEx investment for the stage 1, while also in discussions with multiple bromine suppliers to bridge our bromine supply needs until the full plant capacity is funded and realized. For our lithium opportunity and project, we're continuing the engineer work to define the project economics, but in the meantime, we're prioritizing our strategic initiatives on projects that can immediately impact our near term results with a focus on TETRA CS Neptune Fluids in the Gulf of Mexico, TETRA PURE FLOW electrolyte shipments to EOS Energy, further advancing our water desalination commercial pilots. Long term, we believe that lithium prices will rebound to levels that support increased investment in supply especially from the U. S. And we and our evergreen unit partner remain focused on completing all the engineering studies required to define the lithium project economics.

Speaker 2

With that, I'll turn it over to Elijio to provide some additional commentary on our financial results and then we'll open it up for questions.

Speaker 3

Thank you, Brady and good morning everybody. We expect the first of the 3 Neptune wells that we previously announced begin in the Q1 and the other 2 wells in the subsequent quarters. We believe additional Neptune opportunities in the Gulf of Mexico are likely in 2025 based on projects that are under discussion with operators. These Neptune projects, the Brazil Deepwater Award and the very steady and predictable calcium chloride industrial business that has a seasonal peak in the Q2 plus the progress he is making with our automation and its related backlog is preparing us for what we believe to be a very strong first half of twenty twenty five. This is the most visibility we've had for our Completion Fluids and Products segment in many years.

Speaker 3

And the actions we've taken to expand blending and storage capacity in the UK, Gulf of Mexico and Brazil plus sourcing additional bromine volumes in open market purchases is expected to allow us to capitalize on these opportunities. Ahead of next year, we will be building inventory to deliver on these projects. During the Q4, we'll add to working capital, but will be monetized in the first half of next year. In addition, recall that we previously expanded our production capacity in Coca Cola, Finland for additional volumes of calcium chloride for the industrial sector. Our industrial chlorides business, calcium chloride business is approximately $140,000,000 per year or just below 25% of our total revenue with EBITDA margins of approximately 30% and this represents a very steady and solid source of revenue, EBITDA and cash flow for us when there is uncertainty in certain oil and gas markets.

Speaker 3

And we've recently expanded our capacity in West Memphis to produce the required volumes pure flow but also the full electrolyte to meet EOS' demands. The Q4 is expected to mirror the Q3 for revenue and adjusted EBITDA as the 1st CS Neptune project that we expected in the Q4 was pushed into the Q1 due to the hurricanes that came to the Gulf of Mexico in the past few months. We expect a material ramp up in this segment in the Q1 from the Gulf of Mexico Neptune projects, plus the benefit of the Brazil award and the electrolyte shipments to EOS. Then another step up in the Q2 on the back of the European and the calcium chloride seasonality. The 2nd quarter should be very strong for us.

Speaker 3

Shifting to water and flowback services, we expect revenues to be down in the Q4 in anticipation of a 4th quarter slowdown and without the Q3 EPS expansion sale. However, as Brady mentioned, we expect Q4 margins for water and flowback services to remain in the mid teens driven by increasing volumes of recycled produced water for frac reuse and the automation efforts that we're implementing. As operators continue to transfer and utilize more produced water in their frac operations through treatment recycling, the risk profile of produced water spills increases in the value of automation technology allows us to gain stronger margins in this segment. Overall, Q4 adjusted EBITDA will be modestly below the Q3 that included the benefit of EPS sale in Argentina. And while we won't be providing 2025 guidance, we believe that the step up next year and expected earnings coming from Neptune, the Brazil Deepwater award and the expected ramp up of shipments to EOS plus our strong focus on cost controls position us for a very solid 2025, unlike what others in the industry might be expecting or projecting.

Speaker 3

3rd quarter adjusted free cash flow for continuing operations was $19,900,000 including the impact of $8,700,000 of capital expenditures for the Arkansas bromine and lithium projects, net of reimbursements by our partner. As expected, working capital came down materially in the Q3 as we monetize the receivables in Northern Europe during the quarter. We continue to work on cash flow from the base business funding the immediate capital requirements in Arkansas, both for this and next year. We continue to be reimbursed by our Evergreen unit partner for their agreed upon share of costs we're incurring. Our objective remains to keep our net leverage ratio low and not issue any equity linked securities to fund our Arkansas bromine investments.

Speaker 3

We will instead space out the project before over levering TETRA or before diluting shareholders. In addition to the NOLED liquidity, we are also holding slightly over $14,000,000 of marketable securities. This includes our holdings in Standard Lithium and Kodiak Gas Services. The mark to market gains we are recognizing can quickly be converted into cash given the trading activity of these 2 entities. At the end of the Q3, our net leverage ratio was 1.5 times.

Speaker 3

Our return on capital is 16.6 percent for the trailing 12 months ended September 30 and compares to our weighted average cost of capital of between 11% 12%. Let me close out by summarizing what I believe the key terms everyone should focus on. First, our completion fluids and PradaSec performed quite well with adjusted EBITDA margins of 31.7 percent without mark to market gains. We're going into the Q4 when we expect margins for this segment to remain in the high 20% range and improve to the low 30% range when the Neptune projects kick in. We have the backlog in many years going into next year.

Speaker 3

We remain confident that between our borrowing capacity and free cash flow that we can fund our bromine projects that have no plans to issue any equity linked securities. As I mentioned, we have around $14,000,000 of marketable securities completely in our discretion as to when we can monetize that. I'll remind everyone that the last time we did this, we raised $18,000,000 by selling our prior holdings in Standard Lithium. Additionally, as we continue to deploy automation technology across all our water flowback services to maintain margins in the mid teens even in a down market and in the Q3 we set the all time volume for produced water that Brady mentioned. It is anticipated that U.

Speaker 3

S. Onshore activity will remain slower throughout the Q4 and as a result we initiated in the 3rd quarter series of cost reduction actions including a slightly over 6% reduction in SG and A headcount and we'll continue to right size our U. S. Operations. I'll return this back to Brady for closing comments.

Speaker 2

Well, thank you, Elijio. In closing, despite the Q3 headwinds that we discussed, our financial performance was in line with our expectations. Looking to 2025 and beyond, we're getting more clarity around the strategic initiatives that we've been working for some time. Meaningful contribution from CS Neptune, recovering deepwater market and market share wins including Brazil, automating our water and flowback services for increased efficiency and enhanced margins, focusing on produced water treatment and recycling with record volumes, bridging us to beneficial reuse and a steady ramp up in electrolyte sales all giving us more confidence in our 2025 outlook and beyond. With that, we'll open the call for questions.

Operator

We will now begin the question and answer session. Your first question comes from Stephen Gengaro with Stifel.

Speaker 4

Thanks. Good morning, everybody. Good morning. So I guess two things for me. And what I would I guess what I would start with is, as we think about the conversations you're having on deepwater projects and you I know Aliyo alluded to some maybe some incremental CS Neptune projects in 2025.

Speaker 4

Where do these sort of stand as far as the conversations? Like as we sort of think about the back half of 'twenty five, I mean, are these projects which are underway, they're in the drilling phase and you're it's just a matter of kind of who they choose from a completion perspective or is it something else that kind of gives you that confidence?

Speaker 2

Yes. So, Stephen, we've talked before about the pipeline of CS Neptune projects that we've been tracking for some time. And as we came out of COVID, a lot of those projects were put on pause, on hold. But we've mentioned previously, we've seen that pipeline starting to move forward. And obviously we've announced our first three well award, 1st ever three well simultaneous award of the CS Neptune project that with a super major that will start in the Q1.

Speaker 2

There are additional projects in the pipeline. I think we're cautiously optimistic that we can secure more Neptune projects in 2025, but again these are not projects that I would say the drilling has already started. So we want to be careful about the timing of committing to when we'll secure those orders. But we feel really good about the pipeline of opportunities for Neptune and it's really not a case of will another solution be selected because really Neptune is unique in that regard and that today there's not a competing offering in the price range that we have Neptune positioned. So it's really more of project timelines and compatibility with a lot of their other technologies that they're putting in the well.

Speaker 4

Okay. That's helpful. The other question I had was just around the Water and Flowback business. And as we think about 2025 at a high level, would you expect I mean, what we're hearing pretty consistently is kind of flat U. S.

Speaker 4

Activity from current levels. Would you expect to see growth in that business under that scenario? And do you agree with that scenario?

Speaker 2

Yes, I think early days for predicting the full year for 2025. I think we are anticipating a 4th quarter slowdown with the typical seasonality at the end of the year. We think Q1 will start back up fairly flattish to up from where we end in Q4. But again, we're really more focused on margin enhancement at this point, Stephen, than we are our growth. We've gained tremendous market share through our produced water recycling efforts as well as Sandstorm.

Speaker 2

But we're not investing a lot of capital in growth next year, but we are investing in our automation technology to continue to bring those margins up and if we get additional growth on top of that, that's great. But our anticipation at this point is flattish for 2025, but continuing to increase our margins as we go through the year.

Speaker 4

Okay, great. Now that's all for me. I'll get back in line. Thank you.

Speaker 2

Thanks, Steve.

Operator

Your next question comes from the line of Kurt Hallead with Benchmark.

Speaker 5

Hey, good morning, guys.

Speaker 2

Good morning, Kurt.

Speaker 5

Hey, so Brady, very encouraging dynamics, looks like now on some of those emerging growth opportunities and I know you guys are kind of more apt now to let the numbers speak for themselves. But in the context of how you think about the prospects for, let's say, the water desalination, you got what, 7 NDAs and another 2 more in negotiation. Can you walk us through just like what the process is at the E and P level and what they need to go through and then how you try to kind of factor in timing?

Speaker 2

Yes. So this is a very interesting market. It's a brand new market. So it's still emerging, Kurt. But the way we see it emerge, first of all, we've had one customer that we've been working with very collaboratively with an Aflac for a couple of years.

Speaker 2

We've already done a field pilot trial. 2 years ago, we announced the South Texas project that got somewhat put on hold due to permitting shifted to the Permian and we're now very close to having that one moving forward. But in the meantime, we've opened up dialogue with, as we said, 7 different customers that were willing to go under NDA and look at our technology and 2 more major operators that we're negotiating NDAs with. So the stages as we see it is they will take their produced water samples and analyze the specifications of these water and they're all very different. The Permian is by far the most complex just because of the amount of constituents and organics that are in it.

Speaker 2

And then they will give us an opportunity to run those sample waters through our pilot operations at our research center. And once we show them what we're capable of doing at the research center, then we move into field pilot operations, commercial pilot operations discussions. And that's more or less where we are right now with several of those customers. Again, we've been successful with every water treatment that we've been asked to process. And so as we go through 2025, I think you'll see multiple pilots announced, field pilots announced.

Speaker 2

And then hopefully as we get into 2026, we'll start to see kind of more scale commercial plant type operations opportunities come up.

Speaker 5

Yes, that's great. And then what about the context like is it the E and Ps, right? Just kind of refresh your E and Ps have to get the permits from the Texas Railroad Commission. How long is that do you have any sense on how long that process might take?

Speaker 2

Yes. It is the E and Ps water. They own the water. We don't take possession of the water. We're charging a technology and servicing fee to process that water for them.

Speaker 2

So they are responsible for getting the permits with the Railroad Commission, although obviously the Railroad Commission is defining those specifications to be able to put produced water into the environment on the ground, into industrial applications, in the farming etcetera, etcetera. That process is moving forward. I think the Railroad Commission is pretty highly motivated to get this moving. But we are obviously dependent on how fast they will approve our customers' permits to how fast we'll be able to grow with that, Kurt. So it's hard.

Speaker 2

We don't control that process, but I can tell you we're seeing a lot of momentum.

Speaker 5

Okay. Appreciate that color. And maybe for Elijio. I think Elijio, you just gave us a reference point in terms of the industrial chemicals part of your business about $140,000,000 a year. I guess then simple math would tell us that the oil and gas completion fluids part would be about $160,000,000 Looks like that's going to basically hold pretty consistent going into next year with all the growth and coming from Brazil and the Neptune project.

Speaker 5

So is there I know you've been somewhat hesitant to kind of provide specifics on this in the past, but is there any kind of range you can potentially provide us as to what these Neptune and Brazil projects could mean in terms of revenue growth?

Speaker 3

The Neptune projects are hard to predict, Kurt, because it really depends on how much fluid is lost in the well and how long the fluid is in the well. We've indicated that these are slightly smaller projects than what we saw with Exxon when we did the Exxon projects between 2015 2019, but the margins are very strong and even smaller Gulf of Mexico projects will have a meaningful impact on EBITDA. And I did mention that when we do Neptune projects, it pushes the entire segment into the low 30 EBITDA margins.

Speaker 5

Okay. And then the Brazil project is not a Neptune project though, right?

Speaker 2

No, Kurt. That's not a Neptune project, but it is one of our heavy brine, bromine brine solutions. So it's similar to a Gulf of Mexico deepwater project that is non Neptune. So it's material for us.

Speaker 5

Okay. And then maybe just a follow-up, Brady, you had mentioned staging out the bromine expansion type of dynamic. And how should we think about that if the total investment, I think you referenced was like $75,000,000 I know $270,000,000 was the total, but you referenced the delayed draw of $75,000,000 potentially being earmarked for the bromine. How do you think about the staging of it?

Speaker 2

Yes. So we're not prepared yet to say what the stage 1 financials will look like. Kurt, we're still doing our evaluation on that. We will be targeting a lower initial bromine production. As I mentioned on the call, probably in over 60%, 65% of what's published in the DFS is the bromine target.

Speaker 2

But we think the CapEx savings will be pretty significant. We're just not ready yet to publicize what that reduction in CapEx will be for the first phase.

Speaker 5

Okay. Thanks. Appreciate it, guys.

Speaker 2

Thanks, Fred.

Operator

Next question comes from Martin Malloy with Johnson Rice.

Speaker 6

Good morning. First question I wanted to ask is on the bromine project as well. You had previously talked about FID in the Q4, I think, for this project. Is that still the case? And then I also wanted to find out with this project, is there the possibility of offtake agreements to derisk the project some?

Speaker 2

There is possibility of offtake agreements, but the reality of the situation is right now for us, Martin, between our deepwater demand needs and what we anticipate from EOS, we won't have additional capacity until later years when we're fully utilizing the plant to take on too many additional off take agreements. We've got our demand pretty well consumed. In fact, we're as we mentioned, we're negotiating with bromine suppliers to get additional supply to supplement the bridge that we may do if we stage this out as opposed to FID the full 2.70. I would say at this point the way we're thinking, I think it's highly likely we will execute on the staged approach with the lower capital and somewhat lower bromine supply initially from the plant. So FID in the full 2.70 in the Q4 will probably not happen, but I think it's very likely you'll see some announcement and approvals of a staged approach if not in Q4 potentially in Q1.

Speaker 3

And Marty, I'll add that we've been taking steps and investing in the amount that we've expended to date to secure land, to clear the land, to make sure we've got access to power and also to advance a lot of the engineering studies. So it's not as if we've been waiting for FID to take some of the initiatives required to make sure that we bring our project online and time to meet the demand.

Speaker 6

Okay, great. And then second question, just wanted to ask about the desalination technology. Could you maybe just take a moment to discuss how your technology compares to others that are out there? What the advantages are that you see with your technology?

Speaker 2

Sure. Hope I don't get too far into the weeds in this, but since you ask, I'll try to address it. So there's think of it in 3 stages of the process. The first stage is pretreating all of the produced water that we receive to treat it to take out a lot of the organics, a lot of the harmful constituents in that water to allow us to run it to the 2nd stage of the process. And that first stage is very proprietary to us.

Speaker 2

It's something we've been working on for a very long time through our current recycling of produced water services that we offer today and the experience we've gained from that. But the second stage of that allows us to run this through 2 different types of technologies that are both membrane technologies. If it's a low total typically if it's a low TDS, total dissolved solids type of produced water, we will run that through the high rec unit, which is an osmotically assisted reverse osmosis. And again, that technology is used to desalinate ocean water all over the world. So it's a proven technology.

Speaker 2

It's just that no one is pre treating produced water to the levels that allow it to run through the membranes to allow the economics of the technology to work through not changing fouling membranes every couple of weeks or so. So that's if it's a high total dissolved solids produced water, then we will run that through typically the KNX unit. That's a different type of technology. It's a vacuum membrane distillation type of technology. What allows us to process much higher levels of salts and desalinate higher levels of salts in the water.

Speaker 2

Both of those are proprietary technologies to TETRA. We've got proprietary for oil and gas, I should clarify, proprietary for oil and gas applications and really pleased with the relationships and the technologies that we've been able to prove out with both of those. And then the third phase is really another kind of final treatment process by TETRA and that will depend on the specific customer specifications for certain constituents in the water or if it's related to the permitting that ultimately the Railroad Commission will give to meet certain thresholds of minerals. And again, that will be another proprietary post treatment process. So those three stages, the 2 in the middle are the 2 proprietary membrane technologies and then our pre and post treatment on the TETRA side.

Speaker 2

I hope that describes it without too much detail.

Speaker 6

That was great. I really appreciate it. Thank you so much. And I'll turn it back.

Operator

Next question comes from the line Bobby Brooks with Northland Capital Markets.

Speaker 7

Good morning, guys. So the AOGC ruling on lithium royalties is slated for next Monday. You guys are in a really unique spot given you will be both you guys are both producers of lithium at Evergreen and then also you're going to be receiving royalties from Standard Lithium because of your Acreage deal, right? So could you just take a few minutes or a couple to discuss your expectations for the ruling and maybe anything important to note from an outside perspective?

Speaker 2

Yes. So the November 4, I believe is the date for the hearing. We again collaborating with others in the industry have been working really most of this year, I would say, preparing what we think is a very justifiable and optimal royalty structure that will support both investment in lithium and benefit the residents and citizens within Arkansas for this type of technology. But I can't predict how the outcome of that hearing will go, but I will say that I think the state officials are very motivated to get this royalty set and in place so that investment can move forward. I don't think until the royalty is set, you're going to be seeing any commitments for any projects until that royalty is set.

Speaker 2

It's very difficult to obviously do your economics of a project until that royalty is set. So I can't predict the outcome, but I do know the state is very motivated to get this approved and moving forward and we're quite hopeful. I'm sorry, Bobby, was there a second part of your question? I know you were asking about our expectations for the 4th, but that Yes.

Speaker 7

I think no, like I think you hit it there, but maybe just as a follow-up, right? So that got it was supposed to the ruling was supposed to happen like September 26, but then yourself as well as the other producers kind of send in some more information to kind of make your point as or make the point as to why it should go your way versus what the landowners were asking and maybe just any insights of like kind of because I mean you guys are landowners as well, right? And so you guys do have that unique perspective. So maybe just and I get, yes, you can't you don't have nobody has a crystal ball, right? But maybe just discuss kind of those documents that were submitted to the AOGC and maybe what you're hoping that what that highlights to them?

Speaker 2

Yes. The only thing I will say about our standard lithium royalties, those are already set. Those were negotiated in our option agreement with standard lithium. So TETRA and this is public information, TETRA will be getting 2.5% royalty off of any commercial lithium production that standard lithium achieves. So in terms of documents that were submitted, really it's really I would say more around the capital investment OpEx, the things that need to be put in play to justify where we think the optimum royalty should be, which is less than 2.5% than the 2.5% that we have with standard lithium.

Speaker 2

But again, we'll see how that goes. I can't predict the outcome.

Speaker 3

And Bobby, I'll add that in the last in the Q3, a couple of items have been in favor of Standard Lithium that are very encouraging that they bring their production up. Number 1, Equinor, the national oil company essentially of Norway teamed up with them. And then second, Standard Lithium received a grant from the Department of Energy. So I think those two incremental data points is very encouraging from a TETRA perspective that Standard Lithium can produce lithium in the future. And the key part to us also remember is that standard lithium drills wells to get the brine out to get to the lithium by default they're bringing out the bromine, which then gives us an incremental source of bromine to feed our needs in the oil and gas and the battery storage market.

Speaker 7

Yes. Thank you for that clarity and reminder on that your guys have royalty already set up. Appreciate that.

Speaker 3

Then going to kind of jump

Speaker 7

to the next question. You guys have talked extensively about the factors underpinning why you guys are going to need more bromine supply, right? And I think that's pretty well understood by the investor community. And then in yesterday's release and you guys prepared remarks, you mentioned how you're now talking to bromine suppliers to expand that supply in the near term prior to Evergreen getting up in producing those production volumes. So could what I'm curious to hear on this, could you just give us some color as to why that's happening now versus maybe 9 months ago?

Speaker 7

Because it seems like the factors underpinning the outlook haven't changed, but now it's going to but now you guys are going out to secure more supply?

Speaker 2

Yes. I think we just want to make sure we have some flexibility in the way we look at how the market evolves over the next couple of years. Nothing has changed in terms of our demand for bromine. That is I would say we're probably as bullish on that as we have been since we started. But I think there are some options for us on the supply side given where the current market is right now as it relates to bromine to be able to secure some additional bromine supply that gives us more flexibility on how we stage the capital investment that we have with Arkansas.

Speaker 2

And so that's somewhat attractive for us to take a look at. We haven't concluded anything yet. We haven't published what the stage 1 of the bromine project would look like yet. But obviously, we want to evaluate all of those before we make any final investment type decisions.

Speaker 7

Okay. That makes really good sense. It's just nothing changing with the outlook. Outlook still remains as strong as it was 9 months ago. But now it's, hey, maybe we're doing this in a staged matter, getting the evergreen up and so let's give ourselves some flexibility.

Speaker 2

That's exactly right.

Speaker 7

Yes. Got it. Thank you, Brady. And then just maybe last one for me. Could you so I guess you guys already kind of you mentioned the Deepwater Brazil project.

Speaker 7

Obviously, a lot of stuff happening in that region. And could you just maybe remind us like you guys expanded your capacity in 2023 there by like 80%, right? Do you think winning this job is kind of a result of that capacity expansion because now you guys can serve it and maybe just give us some read through on if this then opens you, if this winning this job is going to then help you win other deepwater jobs off other countries near Brazil?

Speaker 2

Yes. Our investment in Brazil, we had anticipated the market moving towards some of these higher density completion fluids. Again, Brazil is one of the largest, if not the largest in terms of actual rig activity, deepwater markets in the world. But a lot of the traditional deepwater have not been the high temperature, high pressure type wells necessarily in that we see like similar in Gulf of Mexico. We start to see some trends of some of the higher pressure requiring heavier brines a couple of years ago when we secured our first not the first in several years deepwater contract.

Speaker 2

And so we invested we made that investment in additional capacity in anticipation of the market moving that way. So obviously we're very pleased that it's worked out that way. So yes, we see more opportunity in Brazil, especially if there's continuing shift to the heavy brines because that's where really TETRA brings its technology and value to the completion fluids markets.

Speaker 7

Thank you very much guys on the color and congrats on the solid quarter. I'll return to the queue.

Speaker 2

Thank you, Bobby.

Operator

Your next question comes from Josh Jain with Daniel Energy Partners.

Speaker 8

Thanks. Good morning. First question is just around automation technology across Water and Flowback Services. You guys alluded to this is going to be one of the driving factors behind how you can increase margins going forward. I just wondered if you could speak to the sense of urgency on behalf of your customers here wanting to move towards further automation and your outlook for sort of their sense of urgency on that front into next year?

Speaker 2

Yes. So we're seeing very good customer acceptance of automation. The one of the defining factors of our Water and Flowback businesses is traditionally has been a fairly labor intensive operation. People costs are the highest cost of this particular segment. And you're also putting people in the red zone oftentimes, wellheads under pressure, etcetera.

Speaker 2

So there's a critical safety factor involved in this. And so we realized a while back that in order for us to get the efficiency margins where we wanted to get the returns on the equipment we were putting into place as well as address customer safety that would be a very appealing to the customers and we're seeing that. So some customers will move faster on these types of things than others. But as again an indication we have right now is we're pretty well sold out, maximum utilization with the automation equipment that we have in the field. But we are taking a staged approach.

Speaker 2

We'll probably do 20% per year until we automate the entire flowback technology. But obviously if we see some demand from customers accelerating that or even wanting to put some money upfront for some of that, we'll consider that. But that's our plan today.

Speaker 8

Okay, thanks. And then for my follow-up, I was hoping we could just talk about TETRAX a little bit more. I thought the release last week was pretty interesting when you talked about what the total addressable market could be for oil and gas or what ultimately corrosion cost back in a study that was done in 2013. Could you just talk about when you would expect TETRAX to start contributing and then maybe give some framework around total addressable market as a standalone corrosion inhibitor, I think just would be interesting for some color. Thanks.

Speaker 2

Yes. We're right now we'll be marketing it blended with our completion fluids. And so we think that's going to allow us to get a premium price again in high temperature in markets. And then the Rystad is estimating I think 187 to 190 wells or so that would qualify for high temperature wells next year. And so that's a pretty sizable market opportunity for us.

Speaker 2

We're not prepared yet to put any dollar numbers on what that will mean to us at this point in time. We're still in the early days of commercializing it, but we'll hope to be able to announce more color on that in the future. As far as outside of the oil and gas market, again, the attractive part of TETRA X is the high temperature above 275 degrees is where TETRA X value really, really comes into play. It significantly reduces corrosion compared to what else is in the market. So we have to find markets that have that type of temperature environment to where we'll benefit from TETRA X.

Speaker 2

Obviously oil and gas wells is one of them. There are other markets that we're looking at, but we're not prepared yet to be able to quantify what we think that value would be outside of oil and gas.

Speaker 8

Okay. Thank you. I'll turn it back.

Speaker 2

Sure.

Operator

Next question comes from Jeff Silbertson with E. F. Houghton.

Speaker 7

Hi, everyone. Thanks for taking my questions. Really impressive margin management this quarter. I was just wondering, could you talk more about the PureFlow electrolyte business with EOS Energy? It sounds like you're all set with the processing capacity to meet anticipated demand next year.

Speaker 7

And I'm curious if you could elaborate on the solution and how these sales are anticipated to influence your margins next year?

Speaker 3

So, Jesse, if you recall, we started selling an ultra high purity zinc bromide to EOS last year. And we took our zinc bromide that we have historically used that in the oil and gas sector. We find it to a much higher level of purity parts per billion and that was our initial engagement with EOS. Then we announced earlier this year an arrangement so that instead of just selling them PureFlow, we would instead blend the full electrolyte for them, which means that we're buying products in the open market and blending it with PureFlow and then shipping them the complete electrolyte. We started doing that in a small scale in the last couple of months and we added lending capacity in West Memphis to take on those higher volumes and now we're set to meet EOS' demands as they complete their automation process and take it to that level.

Speaker 3

So at this point, we're prepared to meet their demands of either PureFlow or the complete electrolyte once they're up and running with a fully automated line.

Speaker 7

And then on the margin front for the business?

Speaker 3

Yes. We won't comment on margins for any specific customer, but assume that it's going to be consistent with what we're seeing in the oil and gas sector.

Speaker 5

Thank you.

Speaker 3

Thank you, Jesse.

Operator

Next question comes from Dan Weston with Westcap Management.

Speaker 5

Yes. Hi, good morning guys. Thanks for taking the questions and congrats on all the progress. Last quarter, I think you mentioned that you were deploying your first sandstorm into the Middle East for a major national oil customer. If you can give a little guidance on how that trial is progressing and when you think a reasonable timeframe for a final investment decision there would be?

Speaker 2

Sure, Dan. I think we announced we had actually reached an agreement with a major Middle East National Oil Company. And we have the agreement in place. We've actually had to make some modifications to our sandstorm to meet the local requirements in that market. We've completed that.

Speaker 2

We're delivering the sandstorm this quarter. And so the actual trials in the field won't take place until the Q1 of 2025. Hope that clarifies a little bit on the timing.

Speaker 5

Yes, yes. Thank you. Yes, I may have missed that. Thanks for clarifying that. And then lastly, just relating to Elijio's comments relating to standard lithium in the DOE.

Speaker 5

Could you remind us, has TETRA made a formal application for your DOE funding and any status update you can give would be appreciative?

Speaker 3

Yes. We won't comment on whether we've submitted applications or not. We don't want all future calls to focus on is an application in the system for our in the process. But assume that anything that's available out there that either qualifies us for battery production on the bromine side or on the lithium side that will work to try to take advantage of that. I hope that rather than try to communicate progress that we communicate success if we can get there.

Speaker 5

No, I get it. Yes, thank you, Leo. Okay, that's all for me. I appreciate it guys.

Speaker 2

Thanks, Dan.

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Earnings Conference Call
TETRA Technologies Q3 2024
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