Good morning, and welcome to TETRA Technologies' third quarter 2021 results conference call. The speakers for today's call are Brady Murphy, Chief Executive Officer, and Elijio Serrano, Chief Financial Officer. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I will now turn the conference over to Mr. Serrano. Please go ahead.
Thank you, Betsy. Good morning, and thank you for joining TETRA's third quarter 2021 results call. I would like to remind you that this conference call may contain statements that are or may be deemed forward-looking. These statements are based on certain assumptions and analysis made by TETRA and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA gross margins, adjusted free cash flow, net debt, liquidity and other non-GAAP financial measures.
Please refer to yesterday's press release or to our public website for reconciliation of non-GAAP financial measures to the nearest GAAP measure. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out yesterday, we also encourage you to refer to our Form 10-Q that was filed yesterday. I'll now turn it over to Brady.
Thanks, Elijio, and good morning, everyone. Welcome to TETRA's third quarter of 2021 earnings call. I'll summarize some highlights for the third quarter, provide some perspective on the fourth quarter, and then provide an update on our low-carbon energy initiatives before turning it back to Elijio to discuss cash flow, the balance sheet and liquidity. To start, I'd like to give special recognition to our Louisiana Gulf of Mexico employees that dealt with the devastating Hurricane Ida. Fortunately, we suffered no serious employee injuries and our employees' property repairs are well underway. Special thanks to our employees and their incredible dedication to get our Fourchon, Louisiana base, which supports our Gulf of Mexico operations, functionally back to being 100% in order to service our customers' needs. Again, special recognition and thanks to all of these employees and their families.
For the quarter, despite some unique challenges for the industry, including massive Hurricane Ida impacting Gulf of Mexico operations, growing shipping port choke points contributing to delayed deliveries across the globe, and the type of inflationary pressure that we've not seen for many years, the overall macro environment for our industry continues to improve as we believe we're still in the early days of a multi-year oilfield services market recovery and a period of accelerating growth for our low-carbon energy markets. TETRA's third quarter results reflect each of these macro factors, but more importantly, demonstrates the success we're having executing on our strategies. Year-on-year, we grew revenue by 30%, and would've been over 40%, if not for the impact of Hurricane Ida and the global shipping delays, impacting the quarter's completion fluid deliveries.
The third quarter $15 million adjusted EBITDA grew 16% sequentially and 104% year-over-year and is the highest level since the first quarter of 2020 and prior to the market impact of the COVID-19 pandemic. Third quarter adjusted EBITDA does include $6.2 million of mark-to-market gains from our equity ownership in Standard Lithium and CSI Compressco as more investors realize the significant value in the very lithium rich brines in the Tetra Arkansas leases and the announced progress towards monetizing these resources. The $6.2 million gain was largely offset in the quarter by reductions in adjusted EBITDA from revenue delays of approximately $11 million in completion fluid products and services from Gulf of Mexico jobs that pushed into the fourth quarter due to Hurricane Ida and delayed deliveries due to the global shipping backlogs.
To a lesser extent, some inflationary costs on certain raw materials for our chemicals production. We generated $1 million of free cash flow and again reduced our term loan, this time by $8 million, while keeping liquidity around $90 million. Turning to the segments, as discussed on our second quarter earnings call, we expected our water and flowback services margins to improve from 5.3% in the second quarter to high single digits in the third quarter. A target that was exceeded to an actual 10.9% in the third quarter. This is an increase of 560 basis points or 156% over the second quarter, despite ongoing cost inflationary pressures in many operational areas.
Third quarter revenues increased 24% sequentially, despite the number of active frac crews in the U.S. onshore being relatively flat compared to the second quarter and increased 117% year-over-year. We continue to gain market share in the U.S. shale plays because of our technology, quality of our services, and a very compelling integrated water management business model supported by a well-developed automation platform that delivers on cost efficiency, service quality, and improved safety. Various factors contributed to this margin improvement. First, we completed the mobilization and were fully operational in the third quarter for the SandStorm project awards in Argentina. Building further on our business in Argentina, during the third quarter, we also secured an early production facility project that also includes additional sandstorms, which we will build and operate on a multiyear contract starting in early 2022.
Secondly, we are achieving success with price improvements for many of our U.S. customers as the utilization rates of our recycling units, water transfer equipment, including TETRA Steel, flowback equipment, including TETRA SandStorm, continue to operate at maximum utilization. Newly secured customers are coming in with pricing better than some existing customers, and we are now turning down some projects where pricing is not at the levels we believe appropriate to generate an acceptable return on capital. And thirdly, profitable market penetration through our integrated and digitized water management projects also contributed to improved profitability. During the third quarter, we achieved a record high 55 integrated water management projects with 27 different customers, out of which four were new customers. We continue to make market share inroads with private oil and gas operators that see the value in our differentiated offerings and rely less on centrally managed procurement groups.
In the third quarter, we successfully launched our 15K high-pressure rated SandStorm, which has immediately helped us gain higher market share traction in the Haynesville. Overall, we're pleased with the improvement in our water and flowback services business in the third quarter. Although not yet back to the mid-20s adjusted EBITDA margin levels we achieved at the height of the U.S. shale market in mid-2018 when there were over 300 active frack crews, we are very pleased with the progression of our revenue and profitability, and we continue to build the foundational blocks in our business to continue this improvement. Shifting to completion fluids, products, and services.
For a number of reasons, there was an unusual number of moving parts for the quarter, including the $14 million seasonal drop from the second quarter peak in our European chemicals business, the aforementioned revenue reduction of $11 million due to Hurricane Ida and global shipping delays, the mark-to-market gains of $6.4 million Adjusted EBITDA from our investments in Standard Lithium, and some cost inflationary pressures from some of our chemical production raw materials. Adjusting for the second quarter revenue seasonality of $14 million and the $11 million delayed revenue due to Hurricane Ida and global shipping issues, both quarter-on-quarter and year-on-year revenue comparisons would have increased by double digits to mid-teen percentages, which we believe is more reflective of our current business performance.
Using a similar analysis for Adjusted EBITDA margin, accounting for the $6.4 mark-to-market gain on Standard Lithium and the loss of EBITDA due to Hurricane Ida and delayed shipments, we believe the third quarter Adjusted EBITDA would have been in the mid-20s, which includes the inflationary cost, which we see as likely to carry forward into the fourth quarter and potentially beyond. Going forward, we are increasing our prices to reflect these inflationary costs as we're seeing the global supply chain for our core products tighten as well, especially for bromine and calcium chloride products. During the third quarter, we continue to see the core strength of our completion fluids business improve, which we feel is supported by a number of data points.
First, a well-known industry research expert reported on the completion fluid segment of the global oilfield services, the results of which showed TETRA for the Gulf of Mexico with an average 67% customer loyalty compared to the industry average of 33% and with superior supplier performance compared to our competitors. We continue to be awarded large multiyear contracts in deepwater markets with a new deepwater project awarded in Brazil during the third quarter for a large integrated service company. This is in addition to the previously announced large multiyear awards in the Gulf of Mexico for a super major operator, as well as a deepwater award for a major integrated service company in Brazil.
Looking forward, we expect to see materially higher revenue for this segment in the fourth quarter as the Gulf of Mexico activity returns and many of the delayed shipments will be delivered during the quarter. We expect our fourth quarter Adjusted EBITDA margins to return to the mid-20s range, not including any benefit from Standard Lithium shares, which through October are up another 40%. Our industrial chemicals business continues to stay strong, which is complemented by improved demand for calcium chloride in the recovering oil and gas market. The previously mentioned plant investment in Europe for a 25% increase in production capacity is on track for completion in the second quarter of 2022.
Finally, we continue to refine the engineering and testing for what we believe will be an industry-unique manufacturing process for CO2-free calcium chloride designed for our own future production and to support the anticipated demand from our partnership with CarbonFree. In regards to our low carbon initiatives, we continue to be excited with our progress. As mentioned in our previous press release, we're ahead of our internal timelines to generate revenue from our low carbon energy initiatives. In the third quarter, we secured and shipped the second commercial order and sale of PureFlow, our high purity zinc bromide solution, to a publicly traded energy storage technology company. We are making progress in building and furthering a long-term strategic supplier with this customer and expect to have an agreement in place before year-end.
Assuming this agreement materializes as expected, we anticipate a material increase in demand of PureFlow orders for deliveries in 2022 to support their manufacturing and production needs. We're also in discussions with other energy storage companies which use zinc bromide as an electrolyte for energy storage. Considering the forecasted high compound annual growth rates in the energy storage market. We will work collaboratively with these companies to meet their long-term demands for our PureFlow solution as well as our bulk electrolyte needs. Moving on to lithium and bromine reserves. Standard Lithium completed their preliminary engineering assessment, or PEA, to extract lithium from brine, from our acreage in the Smackover formation in Arkansas.
The Standard Lithium PEA indicates very attractive economics for the acreage with 1.32 million tons of lithium carbonate equivalent at the inferred resource category, which is 49% higher than what was previously estimated. Based on the Standard Lithium press release, the economics on the TETRA acreage are attractive to advance work on this acreage in parallel to their current work on LANXESS facilities. The timeline of Standard Lithium work on TETRA's Arkansas acreage is of interest to TETRA for several reasons. One, we will begin generating royalties from lithium production on Standard Lithium versus our current option fee agreement.
Two, the bromine rich tail brine from Standard Lithium's extraction process will be available to TETRA, as TETRA still maintains all the mineral rights to the bromine, which we have previously indicated exploration targets of 2.54 million-8.58 million tons of bromine. In addition to the Standard Lithium option agreement acreage, Tetra previously communicated that we estimate between 85,000 and 286,000 exploration target tons of lithium on acreage outside the Standard Lithium agreement, which is 100% TETRA. We're planning to drill an exploratory well in the fourth quarter on our dedicated acreage to obtain lithium and bromine samples, allowing us to move from exploration target to an inferred resources target phase. We then intend to move towards a PEA study in early 2022.
There's significant value in our mineral rights in the Smackover formation in Arkansas from a combination of our option agreement with Standard Lithium, our bromine resources to meet the growing demands for completion fluids and energy storage, in addition to our 100% TETRA-owned lithium resources. We will continue to evolve these resources to create shareholder value. Finally, in the area of carbon capture, CarbonFree continues to make progress on raising capital to launch their CO2 SkyCycle capture technology while we evolve the engineering on our unique CO2-free calcium chloride manufacturing process. We will continue to work with CarbonFree to source and supply the required volumes of calcium chloride as they get ready to announce their first project. Overall, despite the number of unusual circumstances with Hurricane Ida, global shipping and logistics issues, and overcoming inflationary pressures, we had a good quarter.
Heading into 2022, we see continued improvement in the industry macro fundamentals and the need for E&P companies to invest to meet a growing energy shortfall. Although we do expect a modest pause in U.S. onshore activity around the holidays, early feedback from our customers points to a robust increase in activity early next year. At the same time, we will continue to make progress on our multiple low carbon energy opportunities, potentially putting us in a position in the near future to communicate to the market the potential revenue, EBITDA, and cash flow targets from these initiatives. Now I'll turn it over to Elijio to provide some additional details, and we'll open it up for questions.
Thank you, Brady. Third quarter Adjusted Free Cash Flow from continuing operations was $2.8 million which compares to $1.8 million of Adjusted Free Cash Flow from continuing operations in the second quarter. Free Cash Flow for the quarter was $1 million, an improvement of $5.5 million from the second quarter. We are Free Cash Flow positive on a year-to-date basis, despite a 10% year-over-year growth in September year-to-date revenue and capital expenditures of $10.6 million. Total debt outstanding was $164 million at the end of September, while net debt was $122 million. We have reduced our term loan by $44 million from $220 million on September 30 last year to $176 million on September 30 of this year.
We expect to reduce it by at least another $10 million in the fourth quarter from cash flow from operations. With this expected reduction in the fourth quarter, we would have paid off at least $55 million since last year, reducing the term loan by 27% and saving interest expense of $4 million on an annualized basis, which further improves free cash flow. Liquidity at the end of the third quarter was $90 million, an increase of $8 million from the end of the second quarter, despite the pay down of $8 million on our term loan as our ABL amendment in the third quarter added more than $10 million of liquidity. We also extended the maturity of our ABL to May 2025.
At the end of the third quarter, unrestricted cash was $42 million, and availability under the revolver was $48 million. We have no amounts drawn on the ABL. The third quarter included a $6.2 million gain on mark-to-market adjustments in the common units that we own in CSI Compressco and on the 1.6 million shares that we own in Standard Lithium. We will continue to see mark-to-market adjustments for the equity that we own in these two publicly traded entities. The market value of these investments at the end of September was $22 million. Brady mentioned earlier that the share price of Standard Lithium increased another 40% in the month of October. We do not have any holding restrictions that might prohibit us from monetizing these assets.
From the beginning of the year to the end of September, the value of these equity holdings have increased by $11.8 million. As you evaluate our balance sheet, our liquidity, and our cash position, one must recognize that we had $22 million of marketable securities as of the end of September available to us to monetize at the appropriate time. Given this are marketable, we are including this mark-to-market adjustments in our Adjusted EBITDA. We expect to receive another $1 million of cash by the by the end of the year and another 400,000 Standard Lithium shares early next year per our option agreement. The 400,000 shares we expect to receive early next year at the current share price of Standard Lithium equates to approximately $4.9 million in value, not insignificant.
We excluded unusual items from our third quarter results, which totaled $1.3 million of non-recurring income net of expenses. These charges include a gain of $3.2 million of non-cash stock warrant value adjustment expense, $1.6 million of legal settlement and other expenses, and $0.2 million of cumulative adjustments to our long-term incentive and appreciation right expense. Also, we estimate that the third quarter revenue was negatively impacted by approximately $11 million from Hurricane Ida and the global logistics supply chain issues. Our reported Adjusted EBITDA was also negatively impacted by Hurricane Ida and the global supply chain issues, in addition to raw material inflation issues that Brady mentioned. Other than Hurricane Ida, we expect those challenges to linger into the fourth quarter.
In summary, we continue to generate free cash flow and reduce the term loan. From September a year ago to our goal by the end of this year, we expect to reduce the term loan by approximately $55 million, effectively moving $55 million of enterprise value to our equity holders without negatively impacting liquidity, which has actually improved from $84 million a year ago to $90 million at the end of September. From September a year ago to September of this year, our enterprise value has more than doubled from $212 million to $518 million. We have increased our equity value by more than five times from $64 million to $396 million, which we believe represents the best performing oil field service stock on the U.S. exchanges.
In the process, we have brought back into our stock several significant long-term value index space holders. We are clearly focused on creating shareholder value. I encourage you to read our news release that we issued yesterday and the 10-Q, that we filed last night for all the supporting details and additional financial and operational metrics. That's it. With that, we'll open it up for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Your first question comes from Stephen Gengaro with Stifel. Please go ahead.
Thanks. Good morning, gentlemen.
Morning.
A couple of things. I just wanted to start. I just wanted to clarify something. Brady, you'd mentioned on the fluid side third quarter EBITDA in the mid-20s. Are we talking about margins excluding the mark to market when you with that?
Yeah. Stephen, if we take the mark to market out, which I think pushed us over 31% with it in, and we had adjusted for the delays in the shipments in Hurricane Ida, we felt a more reflective EBITDA margin would've been in the mid-20s.
Okay. That's what I just wanted to clarify. I mean, so when we think about fluids going forward and obviously excluding the mark to market for now and given the delays you saw in the third quarter, I mean, can you give us an order of magnitude on what kinda revenue growth the fourth quarter should bring? And I guess, in addition to that, kind of, is that mid-20s% a relatively good number going forward, or are there some puts and takes there that could move you higher as you're moving into 2021 -- excuse me 2022?
I'll take the margin progression and then ask Eli to comment on the. Yes, the margin progression we feel within the current environment in the mid-20s is appropriate. And partly because, you know, some of the inflation pressures that we're seeing, we don't know how long, you know, we will see these or if we will see some other new inflationary pressures pop up. We are getting some price increases because of the tightening of the market in both bromine and calcium chloride, but the timing of which, you know, we're able to overcome, you know, some additional inflationary pressure if we see it. It's still all a bit unknown, but we still feel pretty confident about the mid-20s until this whole inflation situation hopefully is behind us.
Okay.
Stephen, on the revenue progression, we've got the benefit of a lot of the jobs that got delayed because of Hurricane Ida from Q3 to Q4. Brady mentioned that we picked up some long-term contracts in the Gulf of Mexico, and we picked up some Latin America projects. We've got a significant Latin America project scheduled towards the end of the year. It's not unlikely that this segment could be up 20% sequentially. If all the projects come to fruition as they're scheduled, it could be as high as 30% sequential progression.
Thanks. That's pretty clear, Elijio . Thank you. You guys have obviously done a very good job on the new energy front, and things seem to be progressing there. It might be too early for me to ask this question, but when you think about the TETRA PureFlow opportunity, I imagine the third quarter, you know, you shipped your second one. It's probably obviously a net positive, but is there any way to frame what this could look like in 2022?
So the way I'll answer that, Stephen, obviously it's still a fairly small portion of our overall completion fluids business in 2021. Based on the forecast we're seeing for 2022, we will see a material increase in 2022. What we are projecting by the end of 2022 into 2023, it will now start to be what we would consider a meaningful impact of our overall bromine demand and business. That if you think of it in terms of that progression, that's how rapidly we see things, you know, moving on that side.
Great. If I could slip in one more just for Elijio. When you think about the 2022 free cash flow, do you have any guidance on CapEx and/or how we should think about any big moves in working capital?
I hope working capital is a big use because revenue is ramping up materially. That would be, I think, a positive. We don't see any significant capital investments. Even the expansion that we've talked about for our European calcium chloride business, that's not a big number, that would move the capital number by any significant to increase capacity by around 25% there. No, we don't see any material step up in CapEx next year. Working capital could be a burden if there's a big ramp up in business. We think that, there's a good possibility that could happen.
Okay, great. Thank you, gentlemen.
Thank you, Stephen.
The next question comes from Samantha Hoh with Evercore ISI. Please go ahead.
Hey, guys. Maybe just to go back to completion margins. Was there any lift from CS Neptune in 3Q, too? I kind of was under the assumption that you guys were on a job in the North Sea. I'm just kind of wondering what you're kind of building into your guidance here for 4Q.
Yeah. Samantha, we did mention. We had a small job in the North Sea, somewhat of a trial job in the North Sea that we executed. It was a very successful job, but was not a material part of our results in the quarter. It does set us up for a higher frequency number of these types of jobs going forward. That job was in the North Sea. As we talked about before, we track our Neptune project pipeline very carefully. You know, due to the COVID-19, we've estimated we lost 12 months of timeline in our project pipelines that we've been tracking. I would say with the Delta variant, we've lost another six months of that timeline.
We are in discussions with, you know, many of the customers for the projects that we track. We feel very optimistic that we will see some projects in 2022. We don't have specific well dates yet, but we are advancing those discussions, you know, at a much better pace than what we have been, say, the last, you know, 18 months with the pandemic.
Okay. Maybe switching to water. I guess there's been a lot of commentary about MAN spending up 20%-25% for next year. Are you guys sort of anticipating about the same and, you know, the similar sort of gains on your water side of the business?
Yeah. I think if you look at our progression through this year, Samantha, we would expect just a 20% jump over this year is not very meaningful over, you know, where we are right now from a quarterly run rate. We would expect somewhat higher of an overall gain year-over-year than the 20%-25% numbers that have been talked about. If you look at our quarterly revenues now, we would expect to be up double digits from that in 2022.
What kind of scenarios do you need for margins to sort of return to that sort, mid-20s level? I think that's what I heard, that like, you know, margins-
Right.
Yeah. What sort of can you kind of outline, sort of like a best case scenario of, you know, when you could achieve that target?
Yeah, it's difficult to say. There were over 300 frac crews operating at the peak in 2018. Clearly we're you know well below that number today. I don't think we have to get back to over 300 frac crews in order for us to get back to those margins, just based on the SandStorm technology, which we didn't have in 2018, the Argentina business that is generating some very nice margins and returns for us, the recycling capabilities, the integrated projects with our automation you know kind of reducing offsetting some of the inflation on wages.
You know, I feel pretty good about eventually getting back to that type of profitability well below 300 frac crews, but I couldn't tell you exactly, you know, where that number would be right now. Next year, you know, we're shooting to try to get back to that. You know, mid-teens% EBITDA margin in the first half of the year, and then we'll see how the market responds as we finish out 2022 and into 2023.
Okay, that's great. For the Sandstorm build for Argentina, I take it you're building that here in the States, and then you're just gonna be shipping it down there. I mean, are you seeing like long lead times for materials that you need? I'm just kind of thinking just given like the issues that we're seeing with logistics, you know, is there a concern of maybe not being able to meet the deadline for us to start those projects like you did last quarter and having to, you know, take-
Right.
On existing equipment? Can you address maybe how you're kind of like anticipating for that and then also addressing just slight higher costs on the build-out?
Right. No, that's a good question. We had some visibility of the supply chain issues when we negotiated the contract. We feel fairly confident with the timeline that we have to deploy the early production facility and the additional SandStorms. Unlike the previous contracts, which were a much shorter lead time that we had to mobilize for. We did build that into this contract, and we don't believe, we don't foresee any major supply chain issues for us to meet that timeline. Thank you.
Okay, great. Thanks, guys. Congratulations.
Thank you. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Murphy for any closing remarks.
Well, thank you again for joining us for our third quarter earnings call. We look forward to our next update. Thank you for your interest.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.