Picks & Shovels for the Energy Patch

11/19/2012 7:45 am EST


Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

You know the story. It wasn't the gold miners that made the big money it was the people that sold them picks and shovels and that's the role of this company in the dynamic global energy exploration and production sector observes Taesik Yoon of Forbes Investor.

TETRA Technologies (TTI) is a global provider of products and services to the oil and gas market.

Its Fluids Division, which produced 40.7% of first-half revenues, makes and sells clear brine fluids (CBFs), additives, and related products. CBFs assist in well drilling by reducing the chance of damage to the well bore. The segment also provides related services, including onsite fluid filtration, recycling, and fluid engineering consultation and management.

TTI’s Production Enhancement Division consists of two operating segments. Production Testing (21.3% of revenues) offers after-frac flow back, production well testing, rig cooling, and related services.

Compressco (11.5% of revenues) provides conventional and unconventional wellhead compression services, well monitoring, sand separation services, and other compression-based production enhancement solutions. These services are available in major oil and gas basins, and onshore producing regions in the US, Mexico, Canada, South America, Africa, Europe, the Middle East, and Australia.

The company’s Offshore Division (26.5% of revenues) consists of its Offshore Services segment, which provides downhole and subsea oil and gas services, such as well plugging and abandonment; decommissioning and construction services that use heavy lift barges and cutting technologies; and conventional and saturated air-diving services.

The division also houses Maritech, a business that produces oil and gas from acquired producing properties. Over the past two years, TTI has aggressively exited this business, selling substantially all of these properties. Remaining liabilities associated with Maritech are expected to be extinguished in 2013.

Due to the company’s significant presence in the Gulf of Mexico region, the US is its largest market, responsible for 79.5% of 2011 revenues. This is followed by Europe (8.9%), Canada and Mexico (5.8%), South America (3.4%) and Africa (1.6%). Asia and other markets generated the rest.

Customers consist of private and public oil and gas producers, including Anadarko (APC), Devon (DVN), Halliburton (HAL), Marathon Oil (MRO), Petrobras (PBR), Shell Oil (RDS.A), BHP Billiton (BHP), Chesapeake (CHK), ConocoPhillips (COP), PEMEX , Saudi ARAMCO, EXCO Resources (XCO), Apache (APA), and Chevron (CVX).

While second-quarter results met expectations, TTI lowered its full-year adjusted earnings per share guidance to 60 to 70 cents, from a prior range of 70 to 90 cents. The company blamed weaker-than-expected demand in its Offshore Services segment, which is expected to linger for the remainder of the year. No doubt this is partly responsible for the 23% decline in the stock since.

Investors may also be turned off by key operational risk factors inherent in its businesses, such as weather-related disruptions and commodity price fluctuations (which impact production activity by customers and demand for TTI’s products and services).

We recognize that the unpredictable nature of these risk factors is an ongoing concern. However, the company has made several key acquisitions that should help minimize the expected underperformance in its Offshore Services segment and result in accelerated earnings growth in the year ahead.

Last March, TTI acquired Optima Solutions, a provider of rig cooling services and associated products that suppress heat generated by high-rate flaring during well test operations. Based in Scotland, Optima enables TTI’s Production Testing segment to provide customers with a broader range of testing services, and expands its presence in many significant global markets.

With the acquisitions of Eastern Reservoir Services (ERS) from Patterson-UTI Energy in April and Greywolf Production Systems in July, the company expanded its well testing and after-frac flow back operations to serve oil and gas operators in the Appalachian basins, the Rocky Mountains (including the Niobrara Shale formation), the Williston Basin located in the Midwest, and western Canada.

Not only do these acquisitions expand TTI’s portfolio of services, they also broaden its geographic footprint, and make the company less reliant on business from the Gulf of Mexico.

The integration of Optima and ERS has proceeded smoothly, with initial returns on these investments exceeding expectations. Due to the complementary nature of Greywolf, we expect its integration to also be relatively quick.

With the stock’s most recent dip, shares now hover near their lowest levels in more than three years and are currently trading at less than ten times the low-end of TTI’s revised full-year earnings guidance.

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