BKR - TETRA Technologies: Highlighting Potential Lithium Royalty

2023-12-04 11:35:41 ET

Summary

• TETRA Technologies, an industrial water and fluids service company, has a market capitalization of $620 million. It does not pay a dividend.
• The company provides water and flowback services for onshore oil and gas development in the US and internationally. It's developing a key water recycle process.
• The company is highlighting prospective royalty revenue from its lithium acreage in Arkansas.

TETRA Technologies, Inc. ( TTI ) is a small-cap industrial and oilfield services company. It operates in the US, Latin America, Africa, Asia, and the Middle East and has two segments: Water & Flowback Services and Completion Fluids & Products. Revenue from each segment is about the same.

The Water & Flowback Services segment provides water management, frac flowback, and well testing for onshore oil and gas in the US, Mexico, and internationally. The Completion Fluids & Products segment sells clear brine fluids and additives for use in well drilling, completion, and workover operations in the US and abroad. It also markets liquid and dry calcium chloride products and ultra-pure zinc bromide to battery technology companies.

The company’s price has picked up recently on a Reuters report that it's partnering with or alongside Exxon Mobil ( XOM ) on lithium development in Arkansas. TTI's third quarter report clarifies it may receive royalties on its lithium carbonate acreage.

TTI also is developing a water recycle project (desalination) that could have a wide market in onshore shale drilling.

Although its market cap has nearly doubled to $620 million in the last two years, TETRA Technologies is still a small cap that does not pay a dividend.

TETRA Technologies is not recommended to dividend hunters or those looking for mid-cap and large-cap public companies but may interest speculative investors looking for oilfield services companies (water/fluids), new oilfield water recycle technologies, bromine products, or lithium royalties.

Bromine and Lithium Activities

According to its website, TETRA Technologies’ “low carbon energy initiatives include commercialization of an ultra-pure zinc bromide clear brine fluid used for stationary batteries and energy storage and development of TETRA’s lithium and bromine acreage to meet the growing demand for oil and gas products and energy storage.” The development of its lithium acreage aligns with Exxon Mobil’s just-announced project to mine lithium in Arkansas for use in EV batteries.

Exxon Mobil acquired 120,000 acres in Arkansas’ Smackover basin for $100 million, estimated to contain four million tons of lithium carbonate and has said it intends to invest $17 billion through 2027 in low-carbon emissions and low-carbon technologies.

TETRA Technologies has more than 40,000 acres of brine leases in Arkansas with lithium carbonate exploration targets of 234,000 tons and about 5.25 million tons of bromine. The company has agreements with Standard Lithium ( SLI ) that give Standard Lithium the right to explore, produce, and extract lithium from TTI’s Arkansas leases and from a California location.

Third Quarter 2023 Results, Lithium and Recycle Notes

For the third quarter of 2023, TETRA Technologies reported revenue up 12% over a year ago to $151.5 million.

Net income for the quarter was $5.4 million or $0.04/share. Adjusted EBITDA was $26.4 million, a 40% increase year-over-year.

Cash from operations was $14.0 million for the quarter, compared to $2.1 million for 3Q22.

As can be seen in the six-month price chart below, TETRA Technologies’ stock price recently peaked in September. The prior month, news of prospective lithium royalties on the company’s acreage were released. Quoting from TTI’s 3Q23 report:

“On August 8, Standard Lithium Ltd. ("Standard Lithium") released a Preliminary Feasibility Study ("PFS") on its South West Arkansas Project, which is part of the roughly 35,000 gross acres held by TETRA and where Standard Lithium has the option to acquire lithium mineral rights. The Standard Lithium PFS indicates a base case production of 30,000 tonnes per annum of battery-quality lithium hydroxide monohydrate ("LHM"). The PFS also assumes a long-term selling price of battery-quality LHM of $30,000 per metric ton. Based on these assumptions, TETRA's illustrative royalties would be $22.5 million per year based on a 2.5% royalty on gross lithium revenues, without any investments required by TETRA. The PFS study stated that Standard Lithium is targeting construction in 2025 and commencing production in 2027. In October we received notice from Standard Lithium exercising the option in accordance with the 2017 option agreement.”

The attraction is like any minerals partnership. Receipt of royalty revenue does not require upfront costs from TETRA Technologies. This contrasts with recent excitement about Ramaco Resources ( METC ) and ( METCB) whose potential multi-billion dollar rare earth reserves development require initial capital costs of hundreds of millions of dollars for mining and processing.

Nearer term and more widely applicable, the company completed engineering for a water desalination plant, important for water recycling in the Permian Basin and elsewhere. TTI is in discuss ions with a large US shale producer to apply this technology across several basins.

Shale basin water recycle is important not only for reducing freshwater use in drilling but to reduce wastewater volumes injected into deep saltwater disposal wells (SWDs) which have led, in some cases, to “seismicity events,” e.g. earthquakes, where previously there had been none. Large water volumes in SWDs can lubricate previously unknown fractures, which then slip.

Flowback and Produced Water, Permian Basin Example

In the Permian basin, between one and four barrels of water are “surfaced” for every barrel of oil. As wells mature, they produce even more water. In the Permian, this adds up to more than 10 million barrels per day of water. The water is both “produced” (from the formation) and “flowback”—from the water injected for hydraulic fracturing. In both cases, it has an extremely high salt and mineral content and cannot be recycled, even for reinjection in fracturing, without treatment. The cheapest means of water handling is to inject it into deep SWDs. However, even in an area as big as the Permian, over 10 million barrels per day of water is an issue.

As happened earlier in Oklahoma, the Permian Basin has experienced unusual earthquakes, some of magnitude 5.0 or more. This led the Texas Railroad Commission to limit volumes that could be put into nearby deep disposal wells.

Thus, Permian basin operators look for low-cost solutions for produced and flowback water, like the desalination project being developed by TETRA Technologies, instead of trucking or piping the water to SWDs.

(These volumes also could be slightly “naturally” reduced by expected less Permian drilling in 4Q23 and 2024).

Oil Prices and Macro

The Dec. 1, 2023, closing West Texas Intermediate oil price (January 2024 NYMEX contract) was $74.07/barrel and the forward curve through June 2024 is flat.

In the US, current oil production is back at the all-time high of 13.2 million BPD. For 2024, companies expect to hold drilling steady or drill less in the US, and to continue making efficiency improvements. These improvements lead to either lower cost or less use of oilfield services, both of which would be negatives for TETRA Tech and other companies in the sector.

Aside from Brazil joining OPEC in January 2024, the OPEC+ decision to keep cuts at about 2 million BPD, but allow each country to announce its cuts, suggests upward pressure on oil production, and so lower prices, in 1Q24. Also of potential concern is Venezuela’s threat to take over disputed areas within and offshore Guyana which could include its oilfields —which could affect Exxon Mobil ((XOM)), Hess ( HES ), Chevron ( CVX ) in its acquisition of Hess, and China's CNOOC.

The EIA’s 5-95 confidence interval charts for oil prices through the end of 2024 are shown below. The range by year-end 2024 is $40-$140/barrel.

Competitors

TETRA Technologies is headquartered in The Woodlands, Texas.

Its largest oilfield service competitors also are companies that may hire TETRA Technologies as a subcontractor: Baker Hughes ( BKR ), Halliburton ( HAL ), and Schlumberger ( SLB ).

The company has many other competitors in the water segment of oilfield services, including Select Water Solutions ( WTTR ), Aris Water Solutions ( ARIS ), which is part-owned by ConocoPhillips ( COP ), as well as partnerships and private companies like WaterBidge, Gravity, Pilot Water Solutions, H2O Midstream, and Goodnight Midstream. Competitors also may be other more generalist and private midstream and water-handling companies.

TETRA Technologies has competitive advantages in working outside the US (geographical diversity), in customer diversification outside oil and gas, and from its research.

Governance

On Dec. 1, 2023, Institutional Shareholder Services ranked TETRA Technologies’ overall governance as 2, with sub-scores of audit (1), board (2), shareholder rights (6), and compensation (2). In this ranking 1 indicates lower governance risk and 10 indicates higher governance risk.

Shorts were 2.7% of float on Nov. 15, 2023.

Insiders own 9.2% of the shares.

The company’s beta is a high 2.5, considerably more volatile than the overall market but in line with the company’s status as a supplier to the oil and gas market.

The four largest institutional holders on Sept. 29, 2023, are Blackrock at 7.55%, Fuller & Thaler Asset Management at 5.8%, Vanguard at 5.0%, and Neuberger Berman at 4.35%.

Financial and Stock Highlights

With a Dec. 1, 2023, closing stock price of $4.77/share, market capitalization is $620 million.

The 52-week price range is $2.43-$6.77 per share, so the Dec. 1, 2023, closing price of $4.77/share is 70% of the one-year high. The one-year target price is $7.80/share. The closing price is 61% of that level.

Trailing twelve months earnings per share is $0.21 for a current P/E ratio of 22.7. The average of analysts’ 2023 and 2024 earnings per share estimates are $0.35 and $0.49, respectively, which gives a forward P/E ratio range of 9.7-13.6.

TTM operating cash flow is $44.3 million; TTM levered free cash flow is -$2.4 million.

TTM returns on assets and equity are 6.5% and 23.0%, respectively.

TETRA Technologies does not pay a dividend.

On Sept. 30, 2023, TETRA Tech had $331 million in liabilities , divided approximately as $126 million of current liabilities and $205 million of long-term liabilities. Long-term debt comprised $157 million or more than three-fourths of the long-term liabilities.

With $472 million in assets (but less than 20% of that fixed property, plant and equipment) the liability-to-asset ratio is a steep 70%.

Average daily trade volume is 1.95 million shares, about 1.5% of the number of outstanding shares.

The ratio of enterprise value to EBITDA is 9.8, right at the top range for bargain territory of 10.0 or less.

Book value per share of $1.10 is below the market price, indicating positive investor sentiment.

The company’s mean analyst rating is a 2.1 or “buy” from 14 analysts. At least one analyst considers the company to be overvalued.

Positive and Negative Risks

TETRA Technologies’ major exposure is a second derivative of US and global oil price risk (the price risk itself, and then the level of US oil and gas drilling). US drilling is expected to flatten in 2024.

Its brine and lithium acreage and activities potentially open new channels of income, as does its desalination technology. The price of lithium will rely, in part, on demand for new electric car batteries and competitive sources of supply.

Recommendations for TETRA Technologies

I do not recommend TETRA Technologies to investors looking for large trade volumes, big market caps, dividend payers, or low-beta companies.

While the company is not large, it's internationally diversified, a benefit.

TTI has a 60% upside to its one-year target price and looks likely to be a royalty beneficiary of lithium mining on land that will be developed by Standard Lithium, in concert with the bigger lithium project also being developed in Arkansas by Exxon Mobil.

TETRA Technologies is recommended as a buy to those interested in a speculative investment who appreciate the company’s oilfield water and fluids focus and its new water recycle/desalination process in addition to its revenue from bromine products and prospective royalties on lithium. I may consider investing.

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