Tetra Technologies: 2-300% Upside Possible & Update on EPD Tax Implications

#oil $TTI $EPD

**Full credit for the idea goes to Jim Roumell of Roumell Asset Management. The only credit I can claim for this idea is the willingness to assess it(vs dismiss it), and then the courage and conviction to buy it. You can borrow great ideas from great investors, but you cannot borrow their great conviction. That, you must develop for yourself.

You can access all of Jim’s writings regarding this company under a Seeking Alpha premium Subscription. I do not earn commissions for you buying onto their premium platform.**

Note I will only go over the more broad strokes which makes this a brilliant play on the oil rebound. Jim Roumell’s very thorough write up has left little else to look for and I think everyone is far better off synthesizing from his articles.
disclaimer: I’m long $TTI and it is by far my biggest holding.

Short update on $EPD Tax Implications

A fellow fintwit user alerted me to the face that non-US residents in US listed MLPS face significant taxes at 37%. This lowers effective yield for non-US residents to 5.04%.

It’s a much less attractive investment versus where it was prices at 15% yields but it’s still a buy if you believe that overall, gas consumption and the rebounce of the oil industry is imminent.

A direct result of this is that I will not be using leverage to extend any gains in this. I will reserve it for when share prices take a material hit again. If it doesn’t ever do so, I’ll enjoy the upside ride.

From what I’m seeing that’s not the case yet as most producers are employing uncharacteristic discipline, but sooner or later, most will turn on the taps once prices are comfortably above profit lines ($55-60/barrel for most of them).

In the meantime, you get to collect a small yield on a toll road of extreme quality. I remain long. Just understand that the calculations have slightly shifted.

With regards to capital gains taxes, I’ve double and triple checked but most sources state Non-US residents are not on the hook for it.

This remains to be seen since I don’t think I’ll ever sell $EPD until the day solar energy can safely and sufficiently take over global electrical needs.

If anyone is aware of what the actual rules are (*down to the last cent of calculations!) please let me know.

If you still wish to have exposure to yields in the MLP sector, Antero Midstream is currently selling at 14.47% yields (9.11% post tax witholding rates discussed above) w its sponsor Antero Resources nowhere near default and successfully refinanced. I anticipate both to recover nicely along now that the market’s fear of bankruptcy has been removed. Reminder that AR once trade at under a dollar and is now $7.26. material upside is unknown to me. But AM being the captive MLP with AR holding a stake in AM and receiving dividends as a form of circuitous profit tells me AM is where I want to be.

Moving on.

Tetra Technologies (henceforth referred to as $TTI): 2-300% Upside

$TTI Numbers:

  • Stock price: $1.30

  • shares o/s: 126m

  • mkt cap: $171.33m

  • net debt: $843.2m

  • cash and cash equivalents: $75.1m

  • enterprise value: $939.3m

  • TTM FCF: $71.5m

  • 20%+ EBITDA Margins

  • Stake in CCLP is worth $21m approximate. deconsolidation alrdy slated to happen.

  • TTI only EV: $302.3m

  • $TTI only ev/fcf: 4.2x

The Elevator Pitch

Tetra Technologies (henceforth referred to as $TTI) is a severely undervalued free cash flow positive (over the past 4 quarters!!) oilfield and services business with 52% of its revenue derived from non-oil and gas related industries.

Insiders were smart enough to pick up shares near all time lows in June of 20’, which if nothing else, assures me that at least they’re not fucking stupid/crooks and have some skin in the game.

TTI screens badly and is basically left for dead primarily because;

  • (a) linkage to oil industry affected by covid headwind with 7% of the company sold short

  • (b) sub $300 million market cap leaves most bigger funds out of the picture and thus a lack of analysis

  • (c) owns a 35% equity stake in CCLP and hence is forced to consolidate CCLP debt onto TTI balance sheet, for which TTI has no financial obligations (as declared per 10k/10Q).

CCLP itself has debt maturities due in 2022 ($79 million), 2023, 2025, and 2026. All of which are years away from happening amidst a recovering oil and gas/slowing covid environment.

In the meantime, vaccines are rolling out and I fully expect covid19 to be in the rearview mirror by 2021E and inflation to start ramping up in 2022Q1 through 2023.

Note: Inflation drives commodities and hard asset prices up. I expect TTI to materially benefit from this. If inflation fails to occur because covid takes awhile to get over, TTI is still on track to performing very well. Inflation is the “cherry” on the cake.

TTI and CCLP both have years to recover and plenty of time to ride the rebound - which translates to us shareholders having plenty of time to gain the upside.

Painting the Picture

As if the numbers above are not good enough, TTI has been confirmed by Roumell Asset Management (and as declared in their recent conference calls) to currently be the largest in water recyling services in the Permian.

They’ve also recently displaced a competitor in sand remediation (this too was confirmed after RAM spoke to a larger, highly reputable Permian Basin client transitioning all sand recapture needs to TTI). Note that the sand remediation is also separately confirmed via conference call recordings.

It’s on track to generate significant free cash flow and it has leveraged upside to an increase in energy prices which in turn incentivizes drilling and drives further TTI business segments.

Note that oil is now in the $50s range overall and natural gas has also come up to $2.60/mmbtu as well compared to sub $40 and sub $2 in july of 2020.

This bodes well for any oil/gas equities with direct exposure to the spot market - which $TTI and $CCLP are direct beneficiaries of.

Also, to confirm that oil drilling is coming back online; most rigs are coming off of standby and going back to active use. That is a statistic. Not an opinion. In simpler words, this is fact.

Evidence of fcf generation at the trough of business activity indicates strength

I personally think their collective bacons were saved by their non-O&G related business revenues. But this isn’t a competition for best in class oil and gas business services - this is a competition for free cash flow. And I’m happy to see them execute.

TTI is in no way responsible for CCLP’s debts;

20+% Ebitda Margins is supported by favorable contracts and will be bolstered by recent market share gains, which I expect to continue as covid19 pressure lifts.

I expect them to gain more market share primarily from the deep-water sea drilling segment. Note that Tetra Technologies is considered an industry leader/innovator with their deep-water well completion fluids. TTI owns the rights to “Tetra CS Neptune”, which is free of undissolved solids, zine, and other pollutants.

This is an environmentally friendly and importantly, is cheap to formulate from renewables, thus representing large savings. Note that most deep-water drilling either bans or imposes restrictions on completion fluids that can be used.

Amidst the high pressure on oil/gas companies to carry on more environmentally friendly practices, it’s obvious this is a win. This win compounds itself well when we consider that deep-water drilling/TTI has suffered from two hurricane storms and that deep water drilling will resume once normal weather resumes.

TTI Itself Has No Near Term Debts Maturities Until 2025

Ending Thoughts

Should TTI really be trading around 4x EV/Fcf in an improving environment whilst winning larger market share and showing improved performance? What’s a “fair price? 7x ev/fcf? 10x ev/fcf?

By any metric, I think it’s outrageously undervalued and the only answer i can think of when it comes to a share price is “much higher than what it is now”. I’d be happy with $5. But seeing how past oil bull markets have run, we might get to ride this for a long way up.

What all value contrarian left for dead plays need are time at its back and a positive catalysts.

  1. When an industry goes from terrible to mediocre, the stock goes north

  2. When it goes from mediocre to good, the stock goes north

  3. When it goes from good to terrific, the stock goes north.

Roumell Asset Management has a concept of “multiple shots on goal”. I like the analogy and the thinking behind it and I’ve always looked for such plays whenever possible.

To my mind, TTI’s has more than just multiple “shots on goal”;

  1. sale of any of its profitable business segments from significant value and cash

  2. rising oil prices/drilling activity,

  3. market share gains in deep sea drilling from an ESG focused world

  4. leveraged exposure to compression needs as drilling increases from CCLP

  5. leveraged gains itself compounded via their own water/sand filtration technologies,

  6. 4-5 years maturity to show positive business model/fcf and see share prices appreciate

  7. A history of significant free cash flow generation even in the troughs of the pandemic plus a long runway to recover.

  8. good old slow but steady increasing fcf and a market that is less dismissive of energy stocks as covid lifts

I’m long by a huge amount. Enough that I think buying anymore would probably be ill-advised since there’s always other opportunities (like Antero Midstream).

Disclosure: Long.
*This is not investment advise. You’re responsible for what you buy.