Tetra Technologies Is Worth A Nibble After Significant Selloff YTD

seekingalpha10-27

Tetra Technologies offers a contrarian investment opportunity against the prevailing low oil price outlook advocated by the IEA and EIA, since it provides increasingly crucial oilfield services.TTI's ...

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THEPALMER/E+ via Getty Images Investment thesis: Tetra Technologies (NYSE:TTI) is an interesting avenue to make a contrarian bet against overly eager IEA and EIA efforts to advocate for a low oil price thesis. Tetra is a versatile chemical solutions company, but its main exposure is currently to the US shale and global offshore oil industry, providing products and services to oil & gas producers. Thus its outcome is in part tied to shale drilling activity trends, which have been on a declining path for about 2 years. Contrary to the EIA & IEA view on the oil market, claiming that we are going into a supply glut scenario, I view the current situation as one of global supply shortfalls, which will lead to a sustained oil market rally. The shale industry as well as conventional drillers are likely to increase drilling in response. Tetra is well-positioned to increase revenues on the back of an already-existing trend of higher offshore oil drilling trends, and a yet-to-happen shale drilling revival, which I see happening next year. Tetra sees steady quarterly results from its main segments. Tetra's stock price is down by about 1/3 YTD and its business profile, coupled with prevailing institutional views on the oil sector seem to be the main culprits.   Tetra stock and other metrics (Seeking Alpha) It is an oil services company, mostly involved in completion fluids as well as the treatment of water associated with oil production. If one looks at the Baker Hughes rig count for the US, where there are currently about 6% fewer rigs working in the oil patch than there were a year ago, it may be understandable why the market is negative on this stock. I also recently highlighted the EIA & IEA global oil market forecasts, which are in my view pursuing a low oil price policy, in other words, they are currently trying to keep oil prices low, instead of providing the market, companies, and policymakers with useful guidance. OPEC is of course doing the opposite. With so much industry negativity, it should come as no surprise that Tetra stock is trading significantly lower so far this year. The stock price decline is not entirely correlated to Tetra's financial performance to date.   Data source: Tetra Technologies As we can see, there has been no discernable decline in revenues this year that helps to justify the steep decline in Tetra's stock price. There has been some fluctuation in its two separate segments of the oil services business, but between the two they provided some stability in terms of total revenues. The steep decline in net income is one aspect of its financial performance this year that helps to partially justify its poor stock price performance. For the first half of this year, net income was $8.6 million, compared with $24.3 million in the same period last year. Looking at the factors responsible for the decline in earnings, it was broad-based, not a single factor. The cost of goods & services increased by about 8% for the period, and interest expenses increased by about the same amount. There was also a $5.5 million loss on debt extinguishment reported for the period. Given more or less flat revenues and the rise in costs, the decline in profits is to be expected. Misguided views on the global oil market outlook lead to misguided expectations on oil drilling prospects. The latest message of gloom regarding oil services companies and their prospects came from Schlumberger (SLB). It is seeing lower capital spending in the US & Canada, with somewhat better prospects outside of North America. Interestingly, the EIA's interim weekly oil report shows that US oil production reached 13.5 mb/d for two weeks in a row now. It is a new all-time high, and it shows that despite the decline in drilling activities, US production is still advancing, albeit at a more subdued pace than we have seen in the past decade and a half. This is not good news for oil service providers because drillers seem to be able to do more with less. It should be mentioned however that the EIA data is preliminary and it could still be subject to revisions. I believe there will be a global oil supply shortfall in supplies next year again just like this year, as I pointed out in a recent article. The market will react by driving oil prices higher, and the price signal, combined with evidence that the oil production shortfall may be more sustained than expected will stimulate drillers into action. Once oil prices exceed $80-$100/barrel on a sustained basis, drillers might even venture into second-tier shale drilling opportunities, which were written off in the past decade, as many companies went bankrupt trying to make that acreage profitable. I will not get into the technical details of how a hypothetical increase in shale drilling can benefit Tetra going forward. There is a great article that explains the challenges of water management in the Permian that provides a detailed explanation of the growing need for the treatment of water associated with oil production in the field. Tetra's business model is built around providing a service to drillers in this regard. It is also reported by Schlumberger that offshore drilling efforts are already growing and will continue to do so at a robust pace. It is important to keep in mind that Tetra operates all over the world.   Tetra The way I see it, oil supply growth ambitions will more and more be pursued in the offshore segment of the oil industry, where Tetra does have a solid presence. This segment will provide no upside or downside surprises in my view. The surprise long-term growth for this company will come from the shale industry entering the next stage of its development, namely the mature phase, where companies will have to drill more just to keep production going. More and more companies will see their prime acreage drilling opportunities dwindle, which is arguably already causing them to slow down their activities. I believe we are seeing this stage now as evidenced by the Baker Hughes rig count data.   Baker Hughes US oil rigs (Trading Economics) It might be hard to tell from this chart since the 2020 COVID disruption interrupted the trend, but I believe we entered the mature phase in 2018 when rig activity started to decline regardless of price signals. The previous slump in drilling can be attributed to the 2014 oil price decline that ended the era of shale drilling in second-tier acreage. At some point, we will see a recovery in drilling, which will be triggered by price signals for companies to start drilling their second-tier assets. Tetra's services will then be called upon in higher frequency, which the market is currently not pricing into its future outlook for this company. A word on Tetra's other potential future revenue sources.   Tetra Energy storage, lithium, and other avenues being pursued should not be ignored. At the same time, it is hard to currently gauge the impact it will have on this company's future outlook and performance. The electrification of the global economy is an ongoing trend and I see the potential for lithium and other minerals & chemicals to bring companies with an ability to produce these goods financial benefits. Investment implications: The overly negative market sentiment thesis in the oil services space may not be as solid as thought. The bearish oil services thesis seems to make sense on the surface, especially when one factor in the oil glut forecast by the EIA & IEA. When one digs deeper, takes a step back, and examines the details available, there seems to be a good case to be made in favor of expecting a rise in drilling activities going forward, contrary to expectations. The timing of it may be somewhat uncertain, but the overall negative market sentiment makes this a buying opportunity for Tetra stock. Risks to my thesis. Given that Tetra is a small company, with a market cap of about $400 million, it might not take as big of an external shock, such as a prolonged industry-wide hiatus in drilling, similar to what we saw during the COVID shutdowns to inflict permanent losses on investors, either through an outright bankruptcy or through stock dilution measures that will leave its share price so battered that it will never recover to current levels again. There is also the risk that shale drillers will increasingly wind down their drilling activities rather than attempt to profitably tackle second-tier acreage, once they start to run short on prime drilling locations. They may even slow down their drilling dramatically to reduce the pace at which they are going through their prime drilling locations. It is hard to get an outsider's understanding of second-tier acreage profitability, in other words, what price of oil & gas drillers need to make it viable. We know that plenty of companies lost the acreage lottery in other words they were mostly sitting on second-tier acreage and went bankrupt as a result. Companies need to make second-tier acreage profitable in the $80-$100/barrel range for this aspect of my thesis to pan out. I do believe that we will see oil prices sustained in that range or even higher in the second half of the decade, but it may not be enough. Tetra Technologies has a diverse portfolio of projects and regions of the world where it is active, therefore shale is not a make-or-break industry for its future. However, if the current downward trend in shale drilling activities continues at its current pace, it will hurt Tetra's prospects. Potential upside outweighs downside risk, with the bearish oil price outlook already priced into Tetra's stock price, while any upside surprises are not. I started a small position in Tetra Technologies stock, in response to the most recent pullback in its price from October highs that were about 12% above current levels. It is currently trading at only 1/10 of the value it was trading at its all-time highs that it reached almost two decades ago. There is no chance that it will ever trade at those highs again. I do think it can more than double in price at some point in the second half of the decade, if both external factors, such as an intensification in drilling activities in the US and elsewhere pick up, while some of Tetra's other avenues of future potential revenues and profits will pan out as well.  There is some potential downside risk as well, which should not be ignored, but rather understood and priced accordingly. Given the steep decline in its stock price already so far this year, its decent P/E valuation, its continued profitability, and its relatively steady financial situation provide investors with some degree of confidence that they can ride out a further decline and wait for a turnaround. In the absence of internal factors or external realities that may intervene, as long as I see that my thesis is valid for the long term, I will probably look to increase my position in this stock if it declines further in price.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2478628231"}