TTI - TETRA Technologies: Bromine Project Potential Continues To Grow

2023-06-15 10:16:08 ET

Summary

• TETRA Technologies is starting to see strong demand from several industries, which is helping fuel growth.
• The potential of the bromine project seems very good and could be a catalyst for the company.
• Until there is more clarity however regarding their projects and results posted, I will rate TTI stock a hold.

Investment Rundown

Even though TETRA Technologies Inc. ( TTI ) is expected to see strong growth over the next couple of years, I can't seem to shake my pessimism about the company given its inconsistent history of both revenues and cash flows. Revenues of $553 million in 2022 are still far from the highs back in 2015 of $1.1 billion. The cash flows have taken a similar dive and the levered FCF has remained negative since 2020.

The company is bleeding cash and now building up its long-term debts again. TTI has managed to establish itself with a 30% market share with high-value completion fluids and remains a leader with their TETRA CS Neptune fluids. Besides that, the position they have in the Permian Basin is also a major support for the company's revenues. Even though I had a rather pessimistic start to the article, the potential for long-term growth remains robust and I think TTI can still provide some value at these prices, and it will be rated a hold from me as a result.

Company Segments

Within the business , there are two main segments, the Completion Fluids & Products and then the Water & Flowback Services. Within the first segment TTI is a major player with their 30% market share and in the second segment, the company is ensuring its position as they offer digitalized field operations which help sites reduce costs.

The company has primarily operated in the oil & gas industry, but also in agriculture. Looking ahead, TTI sees opportunities amounting in the energy storage market and produced water, as a result of mineral extractions and desalination. Looking at the energy storage market, the industry here is expected to grow exponentially as capital is flooding into the industry to support the technology being developed. This ensures TTI has a solid base of demand they can tap into.

For 2023, TTI aims to grow the margins quite strongly in their water & flow back segment. The aim is to achieve 20.5% in EBITDA margin, which would be record-breaking for the company and a major catalyst for the share price potentially if they achieve it and even beat it perhaps. The reasoning behind these targets being achievable is that TTI is heavily implementing automation into their sites, reducing manpower by an average of 30% per job. This will heavily benefit the margins and should fuel expansion. For the coming quarter, it will also be crucial to watch the impact of the completion and operation of three EPFs, which is a solid move by TTI to grow its market position beyond North America.

Markets They Are In

One of the more exciting markets that TTI is entering is energy Storage, one that I mentioned before that will experience very strong growth over the coming years as plenty of capital is flooding into the industry to support the growth.

Energy storage will become an incredibly important part of our society as the preservation and potential transportation of energy will be a game changer . Where TTI is ensuring its part in this market is by entering into partnerships with some of the more established businesses here, like Eos Energy Enterprises Inc. ( EOSE ). Here TTI will act as a long-term strategic supplier to them. Being the only US supplier of a high-purity zinc-bromide, the TETRA PureFlow they offer has an advantage over the competition given the exclusivity of it.

One of the driving parts of the TTI business is the growing demand for Bromine Energy Products, which by 2030 is expected to see a 2x in demand. TTI is seemingly making strong steps in ensuring this part of the business is developing at a solid rate. The project in Arkansas where there has been an estimated 5.25 million tons of bromine identified. The incremental annual EBITDA that TTI is estimating their Bromine projects could generate is with the upside case of $83 million. Which is double what they generated in 2022. I view this as one of the major key things to watch with TTI going forward. The development of their Bromine projects could help fuel share price appreciation.

Risks

Where investors should be worried is the share dilution that has happened over the last few years as a result of TTI needing to raise capital to invest in their projects, like the Bromine which I covered above here. I don’t think we will see a stop in the dilution until TTI first achieves a positive levered FCF margin and can begin to generate their investable capital from their rather.

Other than that, delays in the projects the company has going on are also cause for concern. Much of the growth prospects lie on top of the potential of some of the projects the company has doing right now. Delays will mean more quarters of share dilution and a lack of shareholder returns.

Final Words

Looking at TTI I think they offer inventors the opportunity to gain exposure in a variety of industries which are all placing strong demand for the products and services that TTI provides. The most exciting is perhaps in the energy storage industry, where the CAGR expected over the coming years is very high. But a key development to watch is the Bromine projects the company has. Here there is a potential for TTI to generate nearly $83 million in annual EBITDA, which offers a solid upside from the 2022 numbers of $54 million in EBITDA.

The margin targets the company has seems very achievable and will help drive EPS growth in the coming quarters and could be a reason to justify the current valuation. I am however worried about there being some overexcitement and too much optimism about the outlook for some of the projects the company has. I fear disappointment could lead to a severe fall in the share price. I like the business they have established but would rather get in the company when there has been more solid proof of the Bromine projects delivering what they were hoping for. Until then I will view TTI as a hold.

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