Offshore Deepwater And Desalination Will Offer Opportunities And Risks

Key Takeaways

• Offshore deepwater projects and strategic collaborations are driving revenue and margin growth for TETRA's Completion Fluids & Products segment and energy storage initiatives.
  
• Expansion in mineral extraction and water desalination offers diversification and high-margin revenue opportunities, enhancing TETRA's earnings growth potential.
  
• TETRA Technologies faces financial stability challenges from volatile deepwater projects, weak frac activity, and reliance on nascent growth initiatives like desalination and energy storage.

Catalysts

Operates as an energy services and solutions company.

• Increased activity in offshore deepwater operations, with completed and upcoming multi-well projects such as the CS Neptune project and a new deepwater Brazil project, is expected to drive revenue growth and improved margins for TETRA’s Completion Fluids & Products segment.
  
• The strategic expansion in the Arkansas Evergreen brine production unit, focusing on bromine and exploring lithium and other critical minerals extraction, presents opportunities for future revenue diversification and potential increases in earnings.
  
• The collaboration with Eos Energy Enterprises to supply zinc bromide electrolytes for utility energy storage systems positions TETRA to capitalize on the growing energy storage market, which could result in significant revenue and earnings growth as Eos scales its production.
  
• Commercial launch of the TETRA Oasis TDS for produced water desalination, with anticipated regulatory support and growing customer interest, could open new high-margin revenue streams through beneficial reuse in sectors like agriculture and industrial use.
  
• Plans to further automate the Water & Flowback Services segment, leveraging technology to reduce costs and improve efficiency, are expected to enhance net margins by sustaining profitability amidst fluctuations in U.S. frac activity.

TETRA Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TETRA Technologies's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.0% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $110.5 million (and earnings per share of $0.83) by about May 2028, down from $113.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 3.2x today. This future PE is lower than the current PE for the US Energy Services industry at 10.5x.
• Analysts expect the number of shares outstanding to grow by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

TETRA Technologies Future Earnings Per Share Growth

Risks

• The completion of large, high-pressure deepwater projects can be volatile and lumpy, potentially leading to inconsistent revenue and earnings, depending on the timing of completions. This unpredictable nature can impact financial stability.
  
• The Water & Flowback Services segment faces declining revenue with a 2% sequential decrease, reflecting potential struggles in maintaining or increasing revenue, especially amid weak U.S. frac activity. This could challenge income stability.
  
• Although the company is focusing on automation to drive down costs and improve EBITDA margins, the existing reliance on manual operations in some areas could mean slower improvements in margins and increased costs in the near term.
  
• TETRA’s strategic growth depends heavily on emerging initiatives like water desalination and energy storage electrolyte production, which are still in early stages. The risk of delays or technical setbacks could impact revenue growth and rely heavily on external macroeconomic and regulatory factors.
  
• The company's ability to execute its bromine project without increasing leverage or issuing new equity is contingent on continued strong base business free cash flow. Any disruption in this cash flow could lead to financial strain or increased debt, impacting net margins and earnings stability.

Valuation

• The analysts have a consensus price target of $6.125 for TETRA Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $5.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $795.3 million, earnings will come to $110.5 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $2.76, the analyst price target of $6.12 is 54.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.