Tetra Technologies Inc Q3 FY2024 Earnings Call

Good morning and welcome to TETRA Technologies' Third Quarter 2024 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'll now turn the conference over to Julian Higuera. Please go ahead.

Thank you, Vincent. Good morning and thank you for joining TETRA's third quarter 2024 results call. The speakers for today's call are Brady Murphy, Chief Executive Officer, and Elijio Serrano, Chief Financial Officer. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking, including projections, financial guidance, profitability and estimated earnings. These statements are based on certain assumptions and analysis made by TETRA and are based on several factors. These statements are subject to several 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 these projected in the forward-looking statements. In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed and other non-GAAP financial measures. Please refer to yesterday's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not subject 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, we encourage you to refer to our 10-Q that we also filed yesterday. I will now turn it over to Brady.

Thank you, Julian. Good morning, everyone, and welcome to TETRA's third quarter 2024 Earnings Call. I will summarize some highlights from our third quarter results and provide an update on our strategic initiatives before handing it over to Elijio to discuss more details on third quarter financials and perspectives for 2025. For the third quarter, despite significant challenges due to hurricane disruptions in the Gulf of Mexico and reduced customer completion activity on U.S. land, our third quarter earnings, free cash flow, and adjusted EBITDA of $23.5 million met our expectations. We achieved adjusted EBITDA margins of 31.7% for Completion Fluids & Products and 14.6% for Water & Flowback Services. The seasonal peak in our Northern European industrial chemicals business also highlights the underlying performance of our business when comparing year-on-year and from the first quarter. Third quarter revenue was $142 million, down 6% year-on-year and from the first quarter of 2024, while adjusted EBITDA decreased by $2.5 million from Q3 2023 but increased by $700,000 from Q1 2024. Although revenue declined, we secured significant wins this quarter that are setting us up for growth in 2025. A key achievement is a major deepwater completions fluid award in Brazil, which is a multi-well, multi-year contract for our high-value bromine-based completion fluids. This marks our second major deepwater fluid award in Brazil within three years and positions us as a leader in the deepwater heavy fluids market there, with the first well expected to commence in late Q1 2025. Another important milestone was setting an all-time record for produced water recycling for frac reuse, and we anticipate breaking this record again in the fourth quarter thanks to additional customer wins. Despite a decline in U.S. completion activity over the last 18 months, the volume of produced water is on the rise and is expected to keep increasing. Seismicity events are accelerating the adoption of recycling for frac reuse, helping us avoid excessive pressure on disposal wells. Our strategy to focus on produced water technologies and investments is yielding positive results and is crucial for our success in developing beneficial reuse solutions, which I will elaborate on later. A further highlight of the quarter was recognition from Kimberlite, a leading oil and gas research firm, which conducted a study on the Completion Fluids & Services segment. The study noted that TETRA Technology stands out as a leader in performance, with exceptional technical support, responsiveness, and service in the Gulf of Mexico—one of the world's most technically challenging deepwater markets. As production from more challenging lower tertiary regions with extreme pressures and temperatures grows, TETRA is well-positioned to gain from this demand, as confirmed by the Kimberlite report. Regarding financials, at the end of the third quarter, our trailing 12 months adjusted EBITDA was $101 million, and we generated over $7 million of total adjusted free cash flow despite investing $23 million in Arkansas. Our current liquidity stands at approximately $197 million, including $75 million in delayed draw capacity to fund our future Arkansas bromine project. Now, turning to the segment results, the adjusted EBITDA margin for Completion Fluids & Products in the third quarter, excluding unrealized gains or losses on investments, was 32.1%, showing a 200 basis point increase, or 80 basis points compared to Q1. This margin improvement was driven by a favorable mix of higher-value completion fluids sales and strong performance from our industrial chemicals business. In the third quarter, we introduced TETRA X, a new corrosion inhibitor for high-temperature downhole environments, marking a significant improvement in the market. We plan to market TETRA X as a blend with our existing completion fluids as a premium offering for high-temperature wells, further expanding our market share in this segment, including CS Neptune. We're also assessing the potential to market TETRA X as a standalone corrosion inhibitor in other on-completion fluids markets. Looking ahead for Completion Fluids & Services, we expect the fourth quarter to be comparable to slightly lower than the third quarter due to the impact of hurricanes on customer deepwater completion schedules. The three-well CS Neptune project we previously announced is now slated to begin in early 2025. For the Water & Flowback segment, adjusted EBITDA margins in the third quarter were 14.6%, aligned with our targets. A decline in U.S. onshore frac crew activity, which Rystad Energy reports has decreased by nearly 25% in the last 18 months, has affected our completion-related revenues and thus pressured margins. However, we are addressing this with more aggressive automation deployment and new technologies that allow for better or comparable pricing with significantly lower labor costs, which is currently the largest expense in this segment. Our Water & Flowback Services strategy remains multi-faceted, focusing on automating all service aspects to improve efficiency and safety while moving towards water recycling for beneficial use in agriculture and industrial applications. While we have made good headway with BlueLinx and water transfer automation, we are still in early phases of rolling out automated systems for Sandstorm and auto drill out, with early results and customer feedback being very promising. Despite lower activity levels, we are achieving near-max utilization of our automated sandstorms, which currently make up only 20% of our fleet. We plan to upgrade another 20% in 2025. This strategy, paired with our expanding recycling for frac reuse business, will produce solid cash flows as we work towards the long-term goal of recycling for beneficial use, targeting a significantly larger market with better returns. Regarding water desalination and beneficial reuse, we are progressing well in advancing the commercial terms for our initial field pilot in the Permian Basin. Additionally, we're processing water from a second customer in the Permian Basin with a pilot unit at our R&D center, achieving very high-quality output. We are in talks with other major customers for projects in areas beyond West Texas and South Texas, including the Mid-Continent and Appalachia regions. Currently, we have non-disclosure agreements in place with seven customers and discussions ongoing with two more major operators. Moving on to our strategic initiatives, we maintain a close collaboration with Eos Energy for their long-duration energy storage electrolyte. We believe Eos is close to significantly increasing their production volumes, which will require a substantial increase in electrolyte. In the third quarter, we completed our first full order of Eos electrolyte, and we've boosted our manufacturing and blending capacity in West Memphis to meet anticipated Eos demand. As Eos advances to automated production, the volumes of PureFlow+ and electrolyte required will rise considerably from the minimal volumes we will ship this year, adding to our confidence for a strong year in 2025. Concerning the Arkansas bromine project, we finalized the SK-1300 definitive feasibility report earlier this quarter, which shows compelling economics. With a CapEx investment of $270 million, we expect an annual adjusted EBITDA increase of $90 million to $115 million, driven by higher sales volumes from both deepwater projects and long-duration battery needs, as well as reduced production costs from vertical integration. While we believe we can fund the project through free cash flow and current liquidity, keeping our net leverage ratio below 2.5, we are assessing a phased funding approach. The first phase will significantly reduce the initial CapEx from $270 million and aim for an initial bromine production of 66% of the published DFS volumes. We are still evaluating the revised CapEx investment for this stage while discussing interim bromine supply agreements with multiple suppliers until full plant capacity is reached. For our lithium opportunities, we are continuing engineering work to establish the project economics, but for now, we are prioritizing strategic initiatives with immediate impacts on our near-term results. These include TETRA CS Neptune Fluids in the Gulf of Mexico, PureFlow+ electrolyte shipments to Eos Energy, and advancing our water desalination commercial pilots. Long-term, we are optimistic that lithium prices will rebound to levels supporting increased investment in supply, particularly in the U.S. Our Evergreen Unit partner and we remain focused on completing the necessary engineering studies to finalize the lithium project economics. Now, I will turn it over to Elijio for further commentary on our financial results before we open the floor for questions.

Thank you, Brady and good morning, everybody. We expect the first of the three Neptune wells that we previously announced to begin in the first quarter and the other two wells in the subsequent quarters. We believe additional Neptune opportunities in the Gulf of Mexico are likely in 2025 based on projects that are under discussion with operators. These Neptune projects, the Brazil Deepwater Award and the very steady and predictable calcium chloride industrial business that has a seasonal peak in the second quarter, plus the progress that it is making with our automation and its related backlog, is preparing us for what we believe to be a very strong first half of 2025. This is the most visibility we've had for our Completion Fluids & Products segment in many years and the actions we've taken to expand blending and storage capacity in the U.K., Gulf of Mexico, and Brazil, plus sourcing additional bromine volumes in open market purchases is expected to allow us to capitalize on these opportunities. Ahead of next year, we will be building inventory to deliver on these projects that in the fourth quarter will add to working capital, but will be monetized in the first half of next year. In addition, recall that we previously expanded our production capacity in Kokkola, Finland for additional volumes of calcium chloride for the industrial sector. Our industrial chlorides business, calcium chloride business, is approximately $140 million per year, or just below 25% of our total revenue with EBITDA margins of approximately 30% and this represents a very steady and solid source of revenue, EBITDA, and cash flow for us when there is uncertainty in certain oil and gas markets. And we've recently expanded our capacity in West Memphis to produce the required volumes, PureFlow+, but also the full electrolyte to meet Eos's demands. The fourth quarter is expected to mirror the third quarter for revenue and adjusted EBITDA as the first CS Neptune project that we expected in the fourth quarter was pushed into the first quarter due to the hurricanes that came to the Gulf of Mexico in the past few months. We expect a material ramp-up in this segment in the first quarter from the Gulf of Mexico Neptune projects, plus the benefit of the Brazil award and electrolyte shipments to Eos. Then, another step up in the second quarter on the back of the European industrial calcium chloride seasonality. The second quarter should be very strong for us. Shifting to Water & Flowback Services, we expect revenues to be down in the fourth quarter in anticipation of a fourth-quarter slowdown and without the third-quarter EPF expansion sale. However, as Brady mentioned, we expect fourth quarter margins for Water & Flowback Services to remain in the mid-teens driven by increasing volumes of recycled produced water for frac reuse and the automation efforts that we're implementing. As operators continue to transfer and utilize more produced water in their frac operations through treatment recycling, the risk profile of produced water spills increases in the value of automation technology allows us to gain stronger margins in this segment. Overall, fourth quarter adjusted EBITDA will be modestly below the third quarter that included the benefit of EPF sale in Argentina. And while we won't be providing 2025 guidance, we believe that the step-up next year and expected earnings coming from Neptune, the Brazil Deepwater Award, and the expected ramp-up of shipments to Eos, plus our strong focus on cost controls position us for a very solid 2025 unlike what others in the industry might be expecting or projecting. Third quarter adjusted free cash flow from continuing operations was $19.9 million, including the impact of $8.7 million of capital expenditures for the Arkansas bromine and lithium projects, net of reimbursements by our partner. As expected, working capital came down materially in the third quarter as we monetize the receivables in Northern Europe during the quarter. We continue to work on cash flow from the base business funding the immediate capital requirements in Arkansas, both for this and next year. We continue to be reimbursed by our Evergreen Unit partner for the Evergreen share of cost we're incurring. Our objective remains to keep our net leverage ratio low and not issue any equity-linked securities to fund our Arkansas bromine investments. We will instead space out the project before over-leveraging TETRA or before diluting shareholders. In addition to the noted liquidity, we are also holding slightly over $14 million of marketable securities. This includes our holdings in Standard Lithium and Kodiak Gas Services. The mark-to-market gains we are recognizing can quickly be converted into cash given the trading activity of these two entities. At the end of the third quarter, our net leverage ratio was 1.5 times. Our return on capital is 16.6% for the trailing 12 months ended September 30 and compares to our weighted average cost of capital of between 11% and 12%. Let me close out by summarizing what I believe the key terms everyone should focus on. First, our Completion Fluids & Products segment performed quite well with adjusted EBITDA margins of 31.7% without mark-to-market gains. We're going into the fourth quarter when we expect margins for this segment to remain in the high-20% range and improve to the low-30% range when the Neptune projects kick in. We have the best backlog in many years going into next year. We remain confident that between our borrowing capacity and free cash flow that we can fund our bromine projects that have no plans to issue any equity-linked securities. As I mentioned, we have around $14 million of marketable securities completely at our discretion as to when we can monetize that. I'll remind everyone that the last time we did this, we raised $18 million by selling our prior holdings in Standard Lithium. Additionally, as we continue to deploy automation technology across all our Water & Flowback Services to maintain margins in the mid-teens even in a down market and in the third quarter, we set the all-time volume for produced water that Brady mentioned. It is anticipated that U.S. onshore activity will remain slower throughout the fourth quarter and as a result, we initiated in the third quarter a series of cost reduction actions including a slightly over 6% reduction in SG&A headcount and we'll continue to right-size our U.S. operations. I'll return this back to Brady for closing comments.

Well, thank you, Elijio. In closing, despite the third quarter headwinds that we discussed, our financial performance was in line with our expectations. Looking to 2025 and beyond, we're gaining more clarity around the strategic initiatives that we've been working on for some time. Meaningful contribution from CS Neptune, while recovering the deepwater market and market share wins including Brazil, automating our Water & Flowback Services for increased efficiency and enhanced margins, focusing on produced water treatment and recycling with record volumes, bridging us to beneficial reuse and a steady ramp-up in electrolyte sales all giving us more confidence in our 2025 outlook and beyond. With that, we'll open the call for questions.

Your first question comes from Stephen Gengaro with Stifel.

Hi. Thanks. Good morning, everybody.

Good morning.

So, I have two things to mention. First, as we consider the discussions about deepwater projects, I know Elijio mentioned some potential incremental CS Neptune projects in 2025. Where do these projects currently stand in terms of discussions? As we look toward the latter half of 2025, are these projects already in progress, in the drilling phase, and it's just a matter of choosing a completion team, or is there something else that assures you of that confidence?

Yes. So, Stephen, we've discussed the pipeline of CS Neptune projects that we've been monitoring for some time. Coming out of COVID, many of these projects were paused, but we've seen the pipeline starting to progress. We've announced our first ever three-well simultaneous award for the CS Neptune project with a major oil company that will begin in the first quarter. There are more projects in the pipeline, and I am cautiously optimistic that we can secure additional Neptune projects in 2025. However, these are not projects where drilling has already commenced, so we need to be careful about when we commit to securing those orders. We feel confident about the opportunities for Neptune, and it's not a question of whether another solution will be chosen since Neptune is unique in this regard, with no competing offerings at our price point in the market. It's more about project timelines and how well they align with other technologies being introduced in the well.

Okay. That's helpful. The other question I had was just around the Water & Flowback business. And as we think about 2025 at a high level, would you expect, I mean, what we're hearing pretty consistently is kind of flat U.S. activity from current levels. Would you expect to see growth in that business under that scenario and do you agree with that scenario?

Yes, I think early days for predicting the full year for 2025. I think we are anticipating a fourth-quarter slowdown with the typical seasonality at the end of the year. We think Q1 will start back up fairly flattish to up from where we end in Q4. But again, we're really more focused on margin enhancement at this point, Stephen, than we are at our growth. We've gained tremendous market share through our produced water recycling efforts, as well as sandstorm. But we're not investing a lot of capital in growth next year, but we are investing in our automation technology to continue to bring those margins up. And if we get additional growth on top of that, that's great. But our anticipation at this point is flattish for 25%, but continuing to increase our margins as we go through the year.

Okay, great. Now, that's all for me. I'll get back in line. Thank you.

Thanks, Steve.

Your next question comes from the line of Kurt Hallead with Benchmark.

Hey. good morning, guys.

Good morning, Kurt.

Hey. so, Brady, very encouraging dynamics, looks like now on some of those emerging growth opportunities and I know you guys are kind of more apt now to let the numbers speak for themselves. But in the context of how you think about the prospects for, let's say, the water desalination, you got what seven NDAs and another two more in negotiation. Can you walk us through just like what the process is at the E&P level and what they need to go through, and then how you try to kind of factor in timing?

This is a very interesting and new market that is still developing. We've been working closely with Aflac for a couple of years and have already conducted a field pilot trial. Two years ago, we announced the South Texas project, which was delayed due to permitting but is now progressing as we're shifting focus to the Permian area. In the meantime, we've opened discussions with seven different customers willing to enter NDAs to explore our technology, and we are also negotiating NDAs with two more major operators. The process involves them taking produced water samples to analyze their specific characteristics, which vary significantly. The Permian region is particularly complex because of its diverse constituents and organics. After analyzing the samples, they will allow us to test those waters at our research center. Once we demonstrate our capabilities at this stage, we can progress to discussions about field pilot operations and commercial pilots. So, we are currently engaged with several customers, and we have successfully treated every type of water we’ve been asked to process. Looking ahead to 2025, I expect to see several field pilots announced and, as we move into 2026, the potential for larger-scale commercial plant operations.

Yes, that's great. What about the context? The E&P companies need to obtain permits from the Texas Railroad Commission. Do you have any idea how long that process might take?

Yes, it is E&Ps water. They own the water. We don't take possession of the water. We're charging a technology and servicing fee to process that water for them. So, they are responsible for getting the permits with the Railroad Commission, although obviously, the Railroad Commission is defining those specifications to be able to put produced water into the environment, on the ground, into industrial applications, in farming etc. That process is moving forward. I think the Railroad Commission is pretty highly motivated to get this moving, but we are obviously dependent on how fast they will approve our customers' permits to how fast we'll be able to grow with that, Kurt. So, it's hard. We don't control that process, but I can tell you we're seeing a lot of momentum.

Thank you for the insight. Elijio, you mentioned that the Industrial Chemicals segment of your business generates around $140 million annually. So, by simple calculation, the oil and gas completion fluids segment should be approximately $160 million. It appears that this will remain fairly stable as we move into next year, especially with the growth anticipated from Brazil and the Neptune project. While you've been cautious in providing specifics previously, can you share any potential range for the revenue growth these Neptune and Brazil projects might bring?

The Neptune projects are hard to predict, Kurt, because it really depends on how much fluid is lost in the well and how long the fluid is in the well. We've indicated that these are slightly smaller projects than what we saw with Exxon when we did the Exxon projects between 2015 and 2019. But the margins are very strong and even smaller Gulf of Mexico projects will have a meaningful impact on EBITDA and I did mention that when we do Neptune projects, it pushes the entire segment into the low-30 EBITDA margins.

Okay. And then the Brazil project is not a Neptune project though, right?

No, Kurt, that's not a Neptune project, but it is one of our heavy brine bromine brine solutions. It's similar to a Gulf of Mexico deepwater project that is not related to Neptune. So, it's significant for us.

Okay. And then maybe, just a follow-up, Brady, you had mentioned staging out the bromine expansion type of dynamic. And how should we think about that if the total investment, I think you referenced was like $75 million, I know $270 million was the total.

Yes.

but you referenced the delayed draw of $75 million, potentially being earmarked for the bromine.

Yes.

How do you think about the staging of it?

Yes, we are not yet in a position to disclose what the stage 1 financials will entail. We are still evaluating that. Our aim is to target a lower initial production of bromine, likely around 60% to 65% of the figures reported in the DFS. However, we believe the savings in capital expenditures will be considerable. At this point, we are not ready to announce the specifics of the capital expenditure reduction for the first phase.

Okay. Thanks. Appreciate it, guys.

Thanks, Kurt.

Next question comes from Martin Malloy with Johnson Rice.

Good morning. First question I wanted to ask is on the bromine project as well. You had previously talked about FID in the fourth quarter. I think for this project, is that still the case? And then I also wanted to find out with this project, is there the possibility of offtake agreements to derisk the project some?

There is the possibility of offtake agreements. but the reality of the situation is right now for us, Martin, between our deepwater demand needs and what we anticipate from Eos, we won't have additional capacity until later years when we're fully utilizing the plant to take on too many additional offtake agreements. We've got our demand pretty well consumed. In fact, as we mentioned, we're negotiating with bromine suppliers to get additional supply to supplement the bridge that we may do if we stage this out as opposed to FID the full $270, I would say at this point, the way we're thinking, I think it's highly likely we will execute on the staged approach with the lower capital and somewhat lower bromine supply initially from the plant. So, FID in the full $270 in the fourth quarter will probably not happen, but I think it's very likely you'll see some announcement and approvals of a staged approach if not in Q4 potentially in Q1.

And Marty, I'll add that we've been taking steps and investing in the amount that we've expended to date to secure land, to clear the land, to make sure we've got access to power and also to advance a lot of the engineering studies. So, it's not as if we've been waiting for FID to take some of the initiatives required to make sure that we bring our project online and time to meet the demand.

Okay, great. And then second question, just wanted to ask about the desalination technology. Could you maybe just take a moment to discuss how your technology compares to others that are out there? What the advantages are that you see with your technology?

Sure. I’ll provide an overview of our desalination process. It consists of three stages. The first stage involves pre-treating the produced water to remove harmful substances, which enables us to proceed to the second stage. This pre-treatment process is unique to us and has been developed over years through our recycling services. The second stage utilizes two different membrane technologies. For produced water with low total dissolved solids, we use a high rec unit that employs osmotically assisted reverse osmosis, a technology also used for desalinating ocean water globally. This method is efficient because we pre-treat the water to a suitable level to avoid frequent membrane fouling. For produced water with high total dissolved solids, we typically use the KMX unit, which operates using vacuum membrane distillation technology and can handle higher salt concentrations. Both of these technologies are proprietary to TETRA, specifically for oil and gas applications, and we are pleased with the results we’ve achieved. The third stage involves another treatment process tailored to meet specific customer requirements or regulatory thresholds for minerals. This post-treatment process is also proprietary. In summary, we have three stages: proprietary pre-treatment, two types of proprietary membrane technologies, and proprietary post-treatment. I hope this clarifies our approach without overwhelming you with details.

That was great. I really appreciate it. Thank you so much. And I'll turn it back.

Next question comes from the line of Bobby Brooks with Northland Capital Markets.

Good morning, everyone. The AOGC ruling on lithium royalties is set for next Monday. You find yourselves in a unique position since you are both producers of lithium and associated with Evergreen, and you will also receive royalties from Standard Lithium due to your acreage agreement. Could you take a few minutes to share your expectations for the ruling and any key points from an external viewpoint?

Yes. So the November 4th, I believe is the date for the hearing. We again, collaborating with others in the industry have been working really most of this year, I would say, preparing what we think is a very justifiable and optimal royalty structure that will support both investment in lithium and benefit the residents and citizens within Arkansas for this type of technology. But I can't predict how the outcome of that hearing will go. but I will say that I think the state officials are very motivated to get this royalty set and in place, so that investment can move forward. I don't think until the royalty is set; you're going to be seeing any commitments for any projects until that royalty is set. It's very difficult to obviously do your economics of a project until that royalty is set. So, I can't predict the outcome, but I do know the state is very motivated to get this approved and moving forward, and we're quite hopeful. I'm sorry, Bobby, was there a second part of your question? I know you were asking about our expectations for the fourth, but that…

Yes, I believe you are correct. However, as a follow-up, the brewing process was meant to take place around September 26. Then, you and the other producers provided additional information to support your position against what the landowners were requesting. Could you share any insights on this? You are also landowners, which gives you a unique perspective. Although it's understandable that no one can predict the future, could you discuss the documents submitted to the AOGC and what you hope they convey?

Yes. The only thing I want to mention about our Standard Lithium royalties is that they are already established. These were negotiated in our option agreement with Standard Lithium. TETRA will receive a 2.5% royalty from any commercial lithium production that Standard Lithium generates. Regarding the documents submitted, it's really more about the capital investment and operational expenditures that need to be addressed to determine where we believe the optimal royalty should be, which we think should be less than the 2.5% we have with Standard Lithium. However, we will see how that unfolds, and I cannot predict the outcome.

And Bobby, I'll add that in the last in the third quarter, a couple of items happened in favor of Standard Lithium that are very encouraging that they bring their production up. Number one, Equinor, the national oil company essentially of Norway teamed up with them. And then second, Standard Lithium received a grant from the Department of Energy. So, I think those two incremental data points are very encouraging from a TETRA perspective that Standard Lithium can produce lithium in the future. And the key part to us also remember is that Standard Lithium drills wells to get the brine out to get to the lithium by default, they're bringing out the bromine, which then gives us an incremental source of bromine to feed our needs in the oil and gas, and the battery storage market.

Thank you for the clarification and reminder. I appreciate it. Moving on to the next question, you've discussed in detail the reasons why you need more bromine supply. The investor community understands this well. In yesterday's release and your prepared remarks, you mentioned that you are now in talks with bromine suppliers to expand that supply in the near term before Evergreen begins production. I'm curious about why this is happening now compared to nine months ago. The factors influencing the outlook haven't changed, yet you are now seeking additional supply.

Yes. I think we just want to make sure we have some flexibility in the way we look at how the market evolves over the next couple of years. Nothing has changed in terms of our demand for bromine. That is, I would say, we're probably as bullish on that as we have been since we started. But I think there are some options for us on the supply side given where the current market is right now as it relates to bromine to be able to secure some additional bromine supply that gives us more flexibility on how we stage the capital investment that we have with Arkansas. And so, that's somewhat attractive for us to take a look at. We haven't concluded anything yet. We haven't published what the stage 1 of the bromine project would look like yet. But obviously, we want to evaluate all of those before we make any final investment type decisions.

Okay. That makes really good sense. It's just nothing changing with the outlook.

Right.

Outlook still remains as strong as it was nine months ago, but now it's, hey, maybe we're doing this in a staged manner, getting the evergreen up. and so let's give ourselves some flexibility.

That's exactly right. Yes.

Thank you, Brady. I have one last question. You mentioned the deepwater Brazil project, which has a lot of activity in that area. Could you remind us that your capacity there was expanded by 80% in 2023? Do you think winning this job is a result of that capacity increase? Also, does winning this job potentially open up opportunities for you to secure other deepwater projects in countries near Brazil?

Yes, we had anticipated that the market in Brazil would shift towards higher density completion fluids. Brazil is one of the largest deepwater markets globally in terms of rig activity. However, much of the traditional deepwater activity hasn't focused on high temperature, high pressure wells like we see in the Gulf of Mexico. A couple of years ago, we noticed trends towards higher pressure requiring heavier brines when we secured a deepwater contract after several years. We made an investment in additional capacity expecting this market shift. We're pleased that our predictions were correct. We see more opportunities in Brazil, particularly if there’s a continued move towards heavy brines, as that’s where TETRA’s technology and value truly shine in the completion fluids market.

Thank you very much guys on the color and congrats on the solid quarter. I'll return to the queue.

Thank you, Bobby.

Your next question comes from Josh Jayne with Daniel Energy Partners.

Thanks. Good morning. First question is just around automation technology across Water & Flowback Services. You guys alluded to this being one of the driving factors behind how you can increase margins going forward. I just wondered if you could speak to the sense of urgency on behalf of your customers here wanting to move towards further automation and your outlook for sort of their sense of urgency on that front into next year?

Yes. So, we're seeing very good customer acceptance of automation. One of the defining factors of our Water & Flowback business is traditionally has been a fairly labor-intensive operation. People costs are the highest cost of this particular segment and you're also putting people in the red zone oftentimes, wellheads under pressure etcetera. So, there's a critical safety factor involved in this. And so, we realized a while back that in order for us to get the efficiency margins, where we wanted to get the returns on the equipment we were putting into place, as well as address customer safety that, that would be very appealing to the customers and we're seeing that. So, some customers will move faster on these types of things than others. But as again, an indication we have right now is we're pretty well sold-out maximum utilization with the automation equipment that we have in the field. But we are taking a staged approach. We'll probably do 20% per year until we automate the entire flowback technology. But obviously, if we see some demand from customers accelerating that or even wanting to put some money upfront for some of that, we'll consider that, but that's our plan today.

Okay, thanks. And then for my follow-up, I was hoping we could just talk about TETRA X a little bit more. I thought the release last week was pretty interesting when you talked about what the total addressable market could be for oil and gas or what ultimately corrosion costs back in the study that was done in 2013. Could you just talk about when you would expect TETRA X to start contributing and then maybe give some framework around total addressable market as a standalone corrosion inhibitor, I think just would be interesting for some color? Thanks.

Yes. right now, we'll be marketing it blended with our completion fluids. And so, we think that's going to allow us to get a premium price again, in high temperature and markets. And Rystad is estimating, I think, 187 to 190 wells or so that would qualify for high temperature wells next year. And so, that's a pretty sizable market opportunity for us. We're not prepared yet to put any dollar numbers on what that will mean to us at this point in time. We're still in the early days of commercializing it, but we hope to be able to announce more color on that in the future. As far as outside of the oil and gas market, again, the attractive part of TETRA X is the high temperature above 275 degrees is where TETRA X value really, really comes into play. It significantly reduces corrosion compared to what else is in the market. So, we have to find markets that have that type of temperature environment to where we'll benefit from TETRA X. Obviously, oil and gas wells is one of them. There are other markets that we're looking at, but we're not prepared yet to be able to quantify what we think that value would be outside of oil and gas.

Okay. Thank you. I'll turn it back.

Sure.

Next question comes from Jesse Sobelson with EF Houghton.

Hi, everyone. Thanks for taking my questions. Really impressive margin management this quarter. I was just wondering, could you talk more about the PureFlow+ electrolyte business with Eos Energy? It sounds like you're all set with the processing capacity to meet anticipated demand next year. And I'm curious if you could elaborate on the solution and how these sales are anticipated to influence your margins next year?

You may go ahead.

So, Jesse, if you recall, we started selling an ultra-high purity zinc bromide to Eos last year. And we took our zinc bromide that we have historically used that in the oil and gas sector. We find it to a much higher level of purity parts per billion and that was our initial engagement with Eos. Then, we announced earlier this year an arrangement so that instead of just selling them PureFlow+, we would instead blend the full electrolyte for them, which means that we're buying products from the open market and blending it with PureFlow+ and then shipping them the complete electrolyte. We started doing that in a small scale in the last couple of months and we added blending capacity in West Memphis to take on those higher volumes. And now, we're set to meet Eos's demands as they complete their automation process and take it to that level. So, at this point, we're prepared to meet their demands of either PureFlow+ or the complete electrolyte, once they're up and running with a fully automated line.

And then on the margin front for the business?

Yes. we won't comment on margins for any specific customer, but assume that it's going to be consistent with what we're seeing in the oil and gas sector.

Okay. Thank you.

Thank you, Jesse.

Next question comes from Dan Weston with Westcap Management.

Yes. Hi. good morning, guys. Thanks for taking the questions and congrats on all the progress. Last quarter, I think you mentioned that you were deploying your first sandstorm into the Middle East for a major national oil customer. If you can give a little guidance on how that trial is progressing and when you think a reasonable time frame for a final investment decision there would be?

Sure, Dan. I think we announced we had actually reached an agreement with a major Middle East National Oil Company. And we have the agreement in place. We've actually had to make some modifications to our sandstorm to meet the local requirements in that market. We've completed that. We're delivering the sandstorm this quarter. And so, the actual trials in the field won't take place until the first quarter of 2025. Hope that clarifies a little bit on the timing.

Oh, yes, yes. Thank you. Yes, I may have missed that. Thanks for clarifying that. And then lastly, just relating to Elijio's comments relating to Standard Lithium in the DOE, could you remind us, has TETRA made a formal application for your DOE funding and any status update you can give would be appreciated?

Yes. we won't comment on whether we've submitted applications or not. We don't want all future calls to focus on is an application in the system for or in the process. But assume that anything that's available out there that either qualifies us for battery production on the bromine side or on the lithium side that will work to try to take advantage of that. I hope that rather than try to communicate progress that we communicate success if we can get there.

No, I get it. Yes, thank you, Elijio. Okay. that's all from me. I appreciate it, guys.

Thanks, Dan.

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, everyone. Really appreciate your interest in TETRA and all the great questions. For now, we will conclude our call today. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.