TETRA Technologies, Inc. (“TTI”) was written up by Motherlode in June 2021. The transformational initiatives mentioned in that write-up have been significantly de-risked and the economics are much clearer. Recently, the stock has declined 30% over the last couple of weeks, taking a 15% tumble post earnings alone, due to the delay/cancelation of two deepwater offshore projects that do not impact the investment thesis and overall value of the business. This has created the opportunity for a good entry point for long-term investors. I believe the stock is cheap based on its core business and has multi-bagger potential as its growth projects come online over the next 3 years. This write-up will attempt to outline the value of the core business and value accretion potential from each of its growth projects.  

Core Business

TTI core business is as follows:

Completion Fluids & Products (60% of EBITDA ):  This business is in a strong position to benefit from growth in deepwater drilling through the end of the decade. TTI has over 30% market share in the high value completion fluids market and a joint marketing agreement with Halliburton for its high margin CS Neptune product that is used in deep, high pressure offshore wells. TTI is uniquely positioned with vertical integration and a long-term bromine supply agreement, providing a competitive advantage over SLB, Halliburton and Baker. The Company recently invested to increase fluids blending and storage capacity in key offshore markets, such as Brazil and the North Sea, while also expanding its footprint in the Gulf of Mexico. The bromine market is an oligopoly, with ICI, Albemarle and Lanxness. There are only two sources of bromine in the world, the dead sea and Arkansas Smackover formation. 80% of bromine is used in fire retardants and 10% in the oil and gas industry. The oligopoly and largely non-secular uses keep the Bromine pricing quite stable. However, the dead sea has been a source of Bromine for over 50 years and there is concern about depletion and its environmental impact, creating some production risk in that region.  Also embedded in this segment is its industrial chemicals business where the Company manufactures calcium chloride, which is used in a diverse mix of industries including dust control and road maintenance, agriculture, food processing, construction, and water treatment. TTI is the largest producer of calcium chloride in Europe and the 2^nd largest producer of calcium chloride in the US. The chemicals business makes up roughly 40% of the total segment and moves more in-line with GDP, so it provides a relatively stable earnings profile, as was demonstrated during the 2020-21 Covid downturn. This year, the Company executed various cost-savings initiatives within its supply chain and operations to further enhance the margin profile of the segment from the mid-20’s% into the upper 20’s%.

Water & Flowback Services (40% of EBITDA):  TTI is a leading player in the transfer, treatment, and recycling of water produced from oil and gas operations in the US. I estimate that TTI is the largest service provider in the Permian Basin in the water treatment, transfer and flowback markets. An estimated more than 24bn of produced water is generated in all U.S., with more than 13bn barrels of produced water that needs to be treated and disposed of annually. The primary driver of this business is US frac activity which is expected to rebound in 2024 from current levels. TETRA also offers innovative frac flowback and sand separation solutions via their proprietary TETRA SandStorm™ Advanced Cyclone Technology that has proven to increase sand recovery much higher than competing desanders, with efficiencies of up to 99%. This is critical towards protecting the midstream pipeline infrastructure from damage as sand moves through the pipelines systems in a high-pressure environment.

The Company has invested heavily in technology and automation ,creating a significant competitive barrier to competition. More recently they have also invested in Early Production Facilities in Argentina, which are process facilities that enable customers to put wells into production faster, which is critical due to lack of infrastructure.

Recent Stock Price Decline

TTI’s stock price has taken a hit recently following a significant price appreciation beginning in late June, after the company announced a Memorandum of Understanding with Saltwerx, a division of ExxonMobil, for the joint development of a brine unit in Arkansas to process and extract bromine and lithium. The increase in share price was further supported after the Company reported historically strong second quarter results driven by improving offshore activity and seasonality within the industrial chemicals business. TETRA recently reported its third quarter results, which were the best third quarter results since 2015 but slightly below the consensus target for Adjusted EBITDA and EPS primarily due to timing of larger deepwater projects.  Q4 activity was guided to be like Q3. TTI did 15 deepwater completions in the Gulf of Mexico in Q2 and 9 in Q3. The management explained that the sequential decline in revenue, normalized for seasonality, was more of a scheduling issue as neither offshore rig count nor the amount of offshore activity has changed. Over time the revenues to TTI should normalize in line with offshore growth. However quarterly volatility is expected as a deepwater job is worth 5x to 10x more revenue to TTI than a non-deepwater job. So scheduling shifts can have a material impact. The beneficial impact of higher deepwater activity can be seen by looking at the business on a year over year basis, which demonstrated continued YoY revenue and adjusted EBITDA growth. Q3 adjusted EBITDA of $26.1 million, increased by 40% YoY.

Expected Results and Current Valuation

Street expects approximately $108MM EBITDA in 2023. Management has guided to $35 million to $40 million this year of free cash flow after investing over $14 million in 2023 on growth initiatives outlined below. Core free cash flow, excluding growth spending is therefore $49M-$54M. In 2024, due to normalization of offshore related revenues and expected cyclical recovery in frac activity.  Consensus Adjusted EBITDA is expected to be approximately $130MM and free cash flow of over $50M before growth initiatives. The Company is consequently trading at a 10%+ 2024 free cash flow yield on its core business and approximately 5.5X 2024 Adjusted EBITDA. 2025 Adjusted EBITDA estimate is $150M-$160M. Due to the secular expected growth in offshore activity and increased water generation in fracking, a mid to high single digit annual topline growth is expected with a 50bps annual improvement in EBITDA margins beyond 2025, for the foreseeable future. I believe these growth characteristics warrant an 8-10X 2024 EBITDA for this business, which will give us a $7 to $9 share price just based on the core business – 50%-100% upside from current levels.

GROWTH INITIATIVES

I’ll outline the Company’s growth initiatives below, which I believe would significantly increase the upside in the Company’s stock over the next 3 years and currently do not seem to be reflected in its current valuation.

Desalination Opportunity – $175MM EBITDA potential in 3 years

This opportunity should start generating revenues in mid-2024 and ramp up significantly post 2025. TTI has exclusive licensing agreements with both KMX and Hyrec for the recycling and reuse of produced water. The Company is developing a desalination process that cleans water to the point that it can be used for crop irrigation, industrial applications, and surface discharge. Both partners are already capable of achieving recovery yields as high as 92% of produced water to distilled water quality (less total dissolved solids than the average municipal tap water). TTI expects to have the engineering completed and commercial arrangement signed for the first produced water desalination plant for beneficial re-use applications by year-end 2023 or early part of 2024 and commission it in summer of 2024 for the pilot customer.

The need for such a solution is immediate and soon may be mandated by regulators. In Texas, an average of seven barrels of water is now produced for every one barrel of oil. Operators inject most of the water back underground in deep disposal wells. But after a spate of earthquakes linked to the wells and increased cost and environmental risk associated with the disposal of the water, there is growing demand for recycling and re-use of produced water. The size of the potential market for this solution in the Permian (TX and NM), where I estimate TTI has a 35% market share of the water recycling and treatment, is enormous, as illustrated below:

Post the pilot plant in mid-2024, I estimate TTI can build and operate three 100k bbl/day desalination plants per year starting in 2025. At $2/bbl current rate for water disposal, each 100k bbl/day plant generates $73MM in revenues for TTI and $29MM in EBITDA. With 6 plants operating by 2026, the run rate EBITDA would be $175MM and a blue-sky growth opportunity to capture the $500 million EBITDA potential outlined above. I estimate that TTI can build at a pace faster than 3 plants per year if the market demand is there and they have at least a 2-year lead over any competitors offering a comparable solution. The capex for the plant is expected to be funded by the Super Majors and Large Independents customer base as well as infrastructure providers in the Permian and is expected to be comparable to what they are currently spending on similar infrastructure. TTI may also fund some small-scale plants itself, if the economics are compelling, for smaller operators.

Lithium and Bromine Reserves Development – $160mn EBITDA potential

TTI has the mineral rights to approximately 40k acres in the Arkansas Smackover Formation (“ASF”), which has some of the highest concentrations of lithium in the world. An inferred resources report estimated that TTI’s 40,000 acreage potentially contains 1.5M tons of lithium and 5.25M tons of elemental bromine. The Company is working on a commercial arrangement with Saltwerx LLC, a subsidiary of ExxonMobil to develop the 5,000 acres of this formation that it owns and has 100% of the lithium and bromine rights. Standard Lithium has an option for the rights to lithium in the other 35,000 acres where TTI would be entitled to a 2.5% royalty arrangement. This agreement gives SLI the right to lithium in that acreage, but TTI retains 100% of the Bromine rights. TTI’s three initiatives in the ASF are described below can generate $[190MM] of cumulative EBITDA by 2026/27-time frame.

Owned Acreage Development: In June 2023, TTI signed a Memorandum of Understanding (MOU) with Saltwerx (ExxonMobil) for the potential joint production of lithium and bromine. The agreement covers a combined 6,138 acres of which approximately 5,000 is owned by TTI. Based on third-party inferred resources reports, this acreage is estimated to contain 250,000-300,000 tons of lithium with 234,000 of it on TTI acreage. In the third quarter of 2023, the Arkansas Oil & Gas Commission ("AOGC") approved the 6,138-acre joint brine unit application, giving TTI and Saltwerx the rights to develop and produce the brine for bromine production and future lithium production once the lithium royalty is established by the AOGC. With this approval, the binding terms of MOU have become effective and TTI and Saltwerx have entered into a joint venture negotiation for operating and joint development agreements relating to the development of the brine unit with the anticipation of having these agreements in place by the end of the year or early in 2024. The expected structure of the project is that Saltwerx would own and fund 51% of the lithium unit, with TTI owning and funding the remaining 49%. TTI is currently working on a Front-End Engineering Design (“FEED”) study, to present the economics of the project. The project Capex is estimated at $300M and expected to produce 10K tons per year of lithium. At an assumed $25K per ton lithium price and $5k per ton of opex, the project would generate approximately $200M EBITDA. With Saltwerx taking a 51% stake, the EBITDA applicable to TTI in this scenario would be $100M roughly, while the capital requirements by TTI would be 49% of the $300M estimate or approximately $150M, a payback of less than 2 years. The lithium reserves have a 20+ year mine life.

Bromine Reserve Development: Before the agreement with Saltwerx, TTI was planning to develop a plant to extract bromine from its owned acreage. The capex for that project was expected to be $280M and generate approximately $41M of incremental EBITDA. With the JV with Saltwerx for the lithium development, $100M of capex that would have been incurred for pipeline and infrastructure for bromine development would now be borne by the JV, reducing TTI’s capital needs to $180M. This additional bromine supply would replace TTI’s third party purchases and address emerging demand for zinc-bromide based long-duration energy storage batteries (described below). If zinc bromide batteries really take off, TTI can double its bromine production with an incremental $83M of capex. Construction of both the lithium plant and bromine extraction plant and infrastructure are expected to start in early 2024. The construction and process optimization could take 2 years and begin generating meaningful EBITDA by early 2026. The Bromine reserves have over a 100 year mine life.

Leased Acreage Development: In 2017, SLI entered into an option agreement to acquire the rights to conduct exploration, production, and lithium extraction activities on TTI’s acreage. The agreement provided Standard Lithium with an option to acquire up to 35,000 acres of lithium mineral rights. In return, TTI received cash plus 400,000 shares of SLI stock annually until the option is exercised. Upon commercial production, TTI will receive a 2.5% royalty on gross revenue. On October 31^st 2023, SLI announced the exercise of its option with TTI for this Project. 

Last month, SLI also completed a Preliminary Feasibility Study (“PFS”) for the South West Arkansas (“SWA”) Project (TTI acreage), which demonstrated robust economics and some of the highest reported lithium brine concentrations in North America. The PFS indicates base-case production of 30,000 tonnes per annum (“tpa”) of battery-quality lithium hydroxide with the potential to produce up to 35,000 tpa over a 20-year operating life. The base-case project economics yielded a pre-tax NPV of $4.5 billion and IRR of 41%, assuming production of 30,000 tpa and 20-year mine life. The Company anticipates completing a FEED and Definitive Feasibility Study for the SWA Project in 2024 and beginning construction in 2025. The first commercial production is expected in 2027. TTI's illustrative royalties would be $22.5 million per year based on the 2.5% royalty on gross lithium revenues, without any investments required by TTI.

Zinc Bromide Battery Storage – $33M EBITDA potential

Currently, there are 28 states that have mandated 100% of electricity be derived from renewable energy sources by 2050. To meet those aspirations, the amount of grid supported renewable energy will need to increase by 50%. Most of this will come from solar and wind power which will need to be supported by long-duration battery energy storage systems. In 2022, there was an installed base of 214 battery energy storage systems (BESS) providing 3,600 MW of power. By 2026, the amount of MW provided by BESS is expected to increase by 6x to 22,000. TTI is the only U.S. based manufacturer of a high purity zinc-bromide, TTI PureFlow®, an electrolyte for energy storage technology supporting wind and solar farms. In 2022, TTI signed a commercial arrangement with Eos Energy (EOSE) to supply PureFlow®, This agreement provides a tangible growth opportunity given that EOSE has a total 2.2GWh of binding battery system orders and recently received a contingent $400M loan from the US DOE to scale up the production of its EOSE Z3 zinc-bromine battery energy storage system (BESS). TETRA is also in discussions with other entities for similar supply agreements. In anticipation, TTI has outlined plans to increase bromine volumes as described above on its Arkansas acreage. Evercore projects EOSE revenues of approximately $550M in 2025. I estimate TTI’s share of these revenues is expected to be 15% with EBITDA margins of 40%. Illustratively, that translates to approximately $80M in revenues and $33M in EBITDA.

Liquidity and Financing Needs

At the end of the third quarter, unrestricted cash was $34 million and availability under the credit agreements was $73 million. Long-term debt, primarily with a September 2025 maturity, was $159 million, while net debt was $125 million. TTI’s net leverage ratio was 1.4X at the end of the third quarter of 2023. The Company intends to refinance its existing $163 million term loan to extend the maturity and create even more liquidity. TTI is comfortable with 2.5X leverage, which implies additional liquidity of approximately $130M, bringing its total liquidity to approximately $200M. Over the next 3 years, TTI should generate at least $150M of additional free cash flow from its core business. This total cash available of $350M would fund the anticipated capex needs of $330M ($150M for the lithium plant and $180M for the Bromine Unit) without a need to access the equity capital markets.

Valuation

The following is an illustration of the valuation potential for TTI at an assumed 8X EBITDA projections for the 2026/27-time frame and not attempting to be falsely accurate. One can haircut the key assumptions and timeline, but there is a high likelihood for a robust return on investment with the stock currently at $4.25.