bjdlzx/E+ via Getty Images
bjdlzx/E+ via Getty Images
This article is a follow-up to three articles I have recently written about Tetra Technologies, Inc. (NYSE:TTI). I first recommended TTI in an article that was published on 2/22/22 (Tetra Technologies Stock: A Potential Double In One Year ( NYSE: TTI) ). I wrote that article before Q4 2021 earnings came out on 2/28/22, and importantly, before Russia invaded Ukraine. When I wrote my first article three months ago, WTI crude was trading at around $91, natural gas was around $4, and TTI was trading at $2.76. In that article, I opined that TTI’s fair value was around $4/share, and that a buy under $3.50 would likely yield at least a 30-50% one-year return. I was predicting that TTI would announce good Q4 results and opined as follows:
Of course, if TTI announces great earnings and guidance on 2/28/22, and provides encouraging guidance on the renewable initiatives, we may never see the $2 handle again
TTI did announce great earnings and indeed, the $2 handle disappeared. On 3/7/22, I wrote an updated article (Tetra Technologies, Inc. - 100% Return In One Year. (NYSE: TTI)) which reviewed Q4 results and also explained that Russia’s invasion of Ukraine would cause a “huge change in the hydrocarbons markets.” TTI was around $3.50 when I wrote my second article, and I believed then that the $3 handle would soon disappear as well, which it did soon thereafter.
Finally, I wrote an article on 4/13/22 ($100 Oil Is Here To Stay - 'Drill, Baby, Drill Is On The Way') in which I reviewed the global and domestic economics and geopolitics of oil and then recommended 5 equities which would benefit from the new hydrocarbon macro environment—TTI, of course, as well as Energy Transfer (ET), Ring Energy (REI), Callon Petroleum (CPE) and CSI Compressco (CCLP).
TTI was trading at $3.85 on 4/13/22, with WTI a bit under $100 and natural gas at $6.52. Since I believed high hydrocarbon prices were here to stay, I increased my one-year price target to $7.50 and opined that TTI would be a good buy up to the mid-$4’s. Because both WTI and nat gas have increased about 20% since my 4/13/22 article and because lithium contract prices of $38,000/ton are substantially higher than the $20-25,000/ton that I was previously modeling, I am now increasing my price target to $8.75. I believe that a buy anywhere in the $5’s today is likely to yield a 20-30% one-year return, and possibly much more if the lithium and bromine results to be announced in the next few weeks are strongly positive.
This article builds upon the previous three articles mentioned above, and if you are interested in investing in TTI, I highly recommend you read those articles to truly understand the value proposition which TTI presents. However, in case you have not read the previous articles, I offer a brief summary of TTI’s business and explain why I believe TTI offers at least 20-30% upside (and possibly much more) over the next year with limited downside risk.
Up until a couple of years ago, TTI was an oil-services company whose revenues and EBITDA correlated closely with oil and gas drilling and fracking. This is what I call TTI’s “legacy” business. I believe that TTI’s executives have managed the company very well, as shown by the fact that they maintained positive EBITDA and cash flow even during the depths of the various oil-and-gas downcycles in the past couple of decades.
However, despite their success in managing TTI’s legacy oil/gas business, TTI’s executives recognized that—although now essential to the running of the global economy—hydrocarbons were going to be phased out and therefore, TTI management began to pursue three renewable initiatives a couple of years ago, as follows.
TTI owns the mineral rights contained in “brine aquifers” (salty underground lakes) located under about 40,000 gross acres in the “Smackover formation” in Arkansas. These brine aquifers contain lithium and bromine, and TTI has sold an option on about 35,000 of those acres to a company called Standard Lithium (SLI) for the brine’s lithium (but not bromine) content. SLI is working on a process to extract lithium from TTI’s brine, and if successful, SLI will pay TTI a royalty on the extracted lithium (keep in mind SLI is unlikely to produce lithium until 2025, at the earliest—and hence those royalties to TTI, if they come, are several years down the road).
In addition, TTI owns all the lithium rights in the remaining 5,000 gross acres and TTI has recently drilled a well on its own acreage, the results of which TTI should be reporting sometime in the next few weeks. If those lithium and bromine results are good (and there is a reason to expect they will be because TTI’s well is in the same brine aquifer that was previously drilled by SLI, and SLI’s lithium results were quite good), that could add very significant value to TTI’s stock.
Finally, TTI retains title to all the bromine in the whole 40,000 acres, and being able to use the pumped brine to extract both lithium and bromine will provide two revenue streams to TTI. Bromine is a valuable mineral in its own right and TTI uses various bromine compounds in its own vertically-integrated business.
TTI already sells about $100 million of calcium chloride per year, but it has recently made a connection with a company called CarbonFree, which says it can use TTI’s calcium chloride to cost-effectively remove carbon dioxide from the air. I think the earliest that TTI could sell meaningful quantities of calcium chloride to CarbonFree would be in 2023. To be honest, I’ve not seen much evidence to suggest that CarbonFree’s “SkyCycle” system can in fact cost-effectively remove carbon dioxide from the air. That being said, there are a lot of subsidy dollars chasing methods of carbon dioxide removal and sequestration. So, there may still be a lot of money to be made via this renewable initiative, although I find it difficult to quantify the value this brings to TTI.
TTI’s third renewable energy initiative—and the one that is closest to adding meaningful revenue for TTI—involves one of TTI’s core competencies, namely TTI’s deep know-how of aqueous chemistry, especially that involving bromine compounds. It turns out that zinc bromide—which TTI has sold for years—can be used as an electrolyte in “stationary storage batteries,” which are used to store electricity that has been generated by solar photovoltaic panels (and to a lesser extent, by wind turbines and other renewable sources). These batteries sit next to the solar panel arrays and can be huge—hundreds to thousands of times larger than the biggest batteries you would find in an electric car.
Such stationary storage batteries enable intermittent sources of renewable electricity—like solar panels—to keep supplying power even after the sun goes down. If properly sized, the solar array can produce enough power during the day to cover the load it is meant to supply during the day AND produce enough extra power while the sun is shining to also fully charge the attached stationary batteries. Once the sun goes down, the target load continues to receive solar-derived power (that was stored in the stationary batteries during the day), with the whole process repeating the next day.
Although it is not well appreciated yet by either the public nor even by the investment community, demand for stationary storage is increasing by leaps and bounds, and is expected to grow tenfold by 2030. In December, 2021, TTI announced that it had entered into an agreement with Eos Energy Enterprises (EOSE) whereby TTI would supply its high-purity zinc bromide which EOSE would use to construct its stationary batteries. Although TTI has not had any meaningful sales of its zinc bromide for this purpose, I think there is a good chance that will change by the end of this year, the reasoning for which I discussed in more detail in my previous articles.
As I explained in my second article, TTI’s EBITDA totaled $50 million in 2021, versus $40 million in 2020. TTI generated $7.4 million of FCF and reduced debt by $13 million in Q4, for a total $68 million debt reduction in 2020/21. Net debt as of 12/31/21 was $120 million, yielding a net debt-to-EBITDA ratio of 2.4X at the end of 2021. In my second article, I projected a 2022 EBITDA of $80 million, lowering net debt-to-EBITDA ratio under 1.5X by the end of 2022.
Q1’s results support an even more bullish case than the bullish projections I provided in my second TTI article (my full-year 2021 projections were substantially ahead of the analysts’ consensus). Q1 revenue hit $130 million—up 15% sequentially, and up 68% YoY. EBITDA hit $20.5 million, just a bit ahead of my $20 million projection and up 56% sequentially (and up 128% YoY).
Based on the above results and based on the macro factors discussed in the next section, I am upgrading my EBITDA projection for 2022 from $80 million to between $90 and $100 million. I should add that my more optimistic $100 million EBITDA projection is based on the potential that TTI garners a “CS Neptune” job in 2022. CS Neptune jobs—especially those in the ultra-deep waters of the Gulf of Mexico—are complex and generally last several quarters and can add anywhere from $10 to $15 million in extra EBITDA above the normal legacy business’ EBITDA. Chevron recently announced that they are proceeding with a $1.6 billion project in the Gulf of Mexico that may present a CS Neptune opportunity. In contrast to Gulf of Mexico CS Neptune jobs, CS Neptune jobs in the North Sea are less lucrative for TTI but are more likely to be won. Given the macro observations discussed in this article, I think there is at least a 50:50 chance that TTI gets a CS Neptune job in 2022 (they recently announced a CS Neptune contract win in the North Sea), although revenue from such CS Neptune jobs might run into 2023.
In my third article, I opined that WTI was likely to average $100 in 2022, with a potential downside of around $90. As it turns out, since Russia invaded Ukraine, WTI has indeed approached $90 on several occasions but has not dropped below $90. I also previously opined that WTI could average well in excess of $100 in 2022, but I did not make a prediction as to the likelihood of that because there were too many unknown variables that would influence whether WTI substantially exceeded $100 in 2022.
The past almost-two-months since I wrote my third article have been largely bullish on the WTI front, and as I write this on 5/31/22, WTI is trading at $118.20 largely because it appears that Europe is going to impose a crude oil embargo on Russia, because driving season has begun in the US, because China is in the process of lifting lockdowns, and because there does not appear to have been much “demand destruction” so far despite gasoline in the mid-$4’s and diesel in the mid $5’s.
I again find it difficult to predict what WTI will average in 2022, but I think the opinion I provided in my third article that “WTI could easily average over $100 in 2022” has even more support for it now than it did when I wrote that almost 2 months ago. Unlike other experts who have predicted that WTI could easily hit $150 or even $200 in 2022, I think those are very unlikely because lack of refining capacity both in the US and globally are already adding a refining premium on top of the cost of crude, and I think that WTI at $150 (resulting in gasoline prices at $5.50 and diesel over $6) will cause demand destruction. Therefore, if WTI does hit $150, I don’t think it will stay there for very long, meaning (in my view) that maintaining $150 is unlikely and reaching $200 is extremely unlikely (for a whole lot of reasons, the delineation of which would take another article).
However, that unknown (and unknowable) precise WTI price in 2022 probably doesn’t matter much because WTI averaging $100 to $110 in 2022 is more than enough to incentivize extra drilling and fracking, providing a tailwind to TTI’s legacy business. Of course, the WTI tailwind is potentiated by nat gas pricing, which has averaged about $7 so far in Q2 (April and May), is at $8.38 as I write this, with significant nat gas pricing relief very unlikely in the rest of 2022—or beyond.
I believe that WTI above $100—as well as stratospheric nat gas prices in Europe and Asia—will constitute a huge tailwind to domestic and international drilling for oil and gas in 2022 and beyond. And since TTI has both domestic and international operations, I think this change in hydrocarbon pricing supports increasing my EBITDA projections for 2022 from my previous $80 million projection to my new midpoint projection of $95 million.
In deciding whether to invest in a company, I compare my projected return in the next year versus the downside risk. I usually do not bother to look more than a year out because doing so is a fool’s errand due to the numerous variables that will change unpredictably over a period of 12 months. Indeed, even looking six months out is often a challenge.
When I wrote my first article on 2/22/22, WTI was around $91 and I concluded that “due to the recovery of the oil/gas business, the downside risk in TTI’s legacy business is very low and there is significant upside potential (at least 20 to 30% increase in stock price over the next six months) from the legacy business alone.”
Part of the downside risk was due to the possibility that WTI might go below $75, which event would markedly decrease any potential for additional drilling in the U.S. Given that WTI is at $118 now, and in view of the discussion above, I do not believe $75 oil is anywhere on the radar, and I think the downside risk now is whether WTI will go back below $100, which still presents excellent returns to just about every hydrocarbon producer on the planet. In essence, in the past three months, the “downside risk” scenario has reset from an oil price of less than $75 to an oil price of $100. And whereas the plausible upside a couple of months ago might have been $110, the plausible upside now seems to be $120 to $130.
Therefore, the elimination of $75 WTI as a plausible downside scenario, and the introduction of a plausible upside of $120 to $130, provide upside that I could not reasonably project when I wrote my previous articles. For these reasons, I now believe that TTI’s legacy business is worth $6.50 in one year, instead of the $4.00 legacy price target I set in my first article, the $5.00 I set in my second article and the $5.50 PT in my third article.
My new legacy PT of $6.50 represents an 18% increase above the $5.50 in my most recent article, and this is commensurate with my updated $95 million EBITDA projection for 2022 above the previous $80 million projection (additional valuation analysis is provided in my previous articles). Note that this implies no expansion in the EV/EBITDA metric for TTI, and obviously, higher PT’s would result if I were to model an increase in the EV/EBITDA ratio.
Determining the amount of upside that may be generated from TTI’s renewable initiatives is a harder call but the way I see it, if you buy TTI at less than $6.00, you are getting 20% upside (TTI is at $5.15 as I write this on 5/31/22) from the legacy business and you are getting the potential upside from the renewable initiatives for free. Based on the macro projections discussed above, I believe that TTI’s legacy business by itself justifies a stock price of $6.00 today. Of course, if you believe none of TTI’s renewable initiatives are worth anything, then $6.00 is maybe just a decent deal or a fair price.
Personally, because I believe that both the zinc bromide and lithium initiatives are likely to positively impact the stock price this year, I would add $1.50 to $3.00 on top of my $6.50 legacy-based price target in order to reflect the renewable-initiative potential for TTI, for a total one-year price target of $8.00 to $9.50—with the midpoint of that range representing 70% upside from the price of $5.15 right now. Obviously, my $1.50 to $3 add is speculative—the renewable initiatives might not add anything to the stock price in 2022. On the other hand, if very successful, the renewable initiatives could easily add more than $3 to the stock price—so I invite you to make your own (similarly speculative) projections as to what TTI’s renewable opportunities might do for its stock price this year.
TTI’s executives have indicated on their recent earnings calls and in their recent investor presentations that there are several upcoming events that should give more clarity on TTI’s renewable initiatives, including
(A) results of the test well (as discussed above) to validate the lithium and bromine content in their acreage with a-soon -to-be-published “inferred resources” study
(B) the release of a Preliminary Economic Assessment (PEA) late this year that would quantify the economics of developing the aforementioned bromine and lithium assets,
(C) the possibility of announcing a second zinc bromide customer in addition to EOSE (although again, as is my view of EOS’s zinc bromide purchases, I doubt that a second zinc bromide buyer will add much revenue this year).
Each of these announcements could create additional momentum to TTI’s share price this year.
As you make your own speculative projections (as I have), keep in mind that if more than one renewable initiative gets meaningfully monetized—or if only one gets monetized but does so to a large degree—TTI may, over the next year or two, start being thought of as a leading innovator in the renewable space (rather than being thought of just as an oil-and-gas services company), leading its EV-multiple valuation to expand, adding even more value to the stock price on top of a meaningfully-expanding EBITDA.
Also keep in mind that TTI’s lithium potential is enhanced by the fact that due to various geopolitical and supply-chain concerns, there is tremendous governmental and industry support to launch lithium-production and electric-battery-production industries here in the United States. It is noteworthy that most of the global lithium resources are found in Australia, South America and China—and the vast majority of lithium-ion batteries are produced in China. Therefore, the fact that TTI’s resource is located in Arkansas aligns well with the tailwind pushing domestic production of lithium. TTI has indicated that they are pursuing Department of Energy loans and grants, although I would not hold my breath that DOE money would be forthcoming to TTI this year.
Finally, very exciting news about lithium pricing was just released in the earnings announcement by Sociedad Quimica y Minera de Chile, S.A. (SQM), the largest or second largest (depending on whom you read) lithium producer in the world. To put SQM’s announcement in context, we need to discuss some background. Spot prices of lithium carbonate, a key component of lithium ion batteries in electric cars, have gone up about ten-fold in the past 18 months, from about $6,000 or $7,000 per ton to about $70,000 per ton. However, most companies sell only a small proportion of their lithium production on the spot market, with most production in the past having been sold on fixed-price contracts. However, the big lithium producers finally got smart and started selling their lithium on variable-price contracts. But up until SQM’s earnings announcement, it wasn’t clear how good those variable-price contracts were, and in my previous articles, I assumed longterm lithium contracts might be signed at $20,000 to $25,000 per ton. Given that most economic analyses of lithium resources have been made on $15,000 lithium pricing, it is obvious that getting $25,000/ton for your company’s lithium is already pretty lucrative. But when SQM announced earnings on 5/19/22 (Sociedad Química y Minera de Chile S.A. (SQM) CEO Ricardo Ramos on Q1 2022 Results Earnings Call Transcript), they noted that they realized a price of $38,000/ton for their lithium, a huge jump above the $20,000 to $25,000 I was using to model likely future offtake contracts that SLI or TTI might enter into. This is why I have increased my speculative stock-price add from my original range of $1.00 to $2.00 to $1.50 to $3.00, although even the $3.00 add could turn out to be pretty conservative if TTI’s lithium drill results show high concentrations of lithium in TTI’s wholly-owned brine resource.
In summary, given where oil and gas prices are now, and given increasing rig counts, TTI’s legacy business is in recovery mode and EBITDA from TTI’s legacy business should increase substantially in 2022, providing not only downside protection but also a tailwind to TTI’s stock price.
In addition, I believe 2022 will prove up the viability of at least two of TTI's renewable initiatives, the prospect of which is also likely to add some (and potentially very significant) value to TTI's stock price.
It’s always essential to consider “Risks” so as to remind the reader that every investment has its risks—despite my confidence of small downside risk and meaningful upside potential.
The number one risk I am concerned about today—and not just with TTI—is overall market risk. Many experts still consider the market overvalued and many are calling for an additional correction of 10-20-30%, and some (Jeremy Grantham comes to mind) are calling for an even greater downdraft. Since I bought my crystal ball at the dollar store, I have no idea as to the likelihood of a continuing correction in the stock market, but obviously the possibility exists. If the market corrects meaningfully over the next year—and especially if we have a recession that leads to lower oil and gas prices and therefore lower drilling and fracking activities—the legacy-business upside discussed above is unlikely to be realized.
Having said that, TTI has bucked the recent downward trends in the DJIA, Nasdaq and the S&P 500, with an increasing stock price while those indexes have floundered. Therefore, it is possible that TTI will hold its ground even if the markets correct another 10 or 20%, especially if the brine lithium results are good (we should know within a few weeks) or if the other two renewable initiatives start producing EBITDA this year. Of course, if Grantham is right and the markets are due to drop another 40 or 50%, TTI may go back to the $4’s unless TTI continues its decoupling from the overall markets, as it has in the past few months. In essence, TTI may be a stock that diverges from falling markets due to the unique characteristics discussed above.
A second risk is that the whole energy field is unloved by investors-- and there is a reasonable “risk” that this may not change even despite TTI’s efforts to be viewed as a company that is transitioning into the renewable space. Therefore, it’s always possible that TTI expands its EBITDA to $80 or $90 million in 2022—and the market yawns. This risk obviously increases if oil and gas prices reverse substantially from their current highs. Having said this, even though the markets have continued to fall in the past few months, TTI has bucked that trend. This supports the conclusion that TTI has been trading on its merits, part of the “rotation to value” that has received much attention of late.
A final risk is the potential that none of the three renewable initiatives bear fruit, and since I am attaching $1.50 to $3.00 in additional stock price based on at least one of those initiatives succeeding meaningfully in 2022, if none succeed, TTI’s upside in 2022 will be limited (but again, downside is limited as well).
TTI’s price action in the past few months suggests that other investors are seeing the same thing that I have been writing about. TTI was $2.76 when I wrote my article on 2/22/22, and was at $3.48 when I wrote my second article on 3/7/22. As discussed above, I now believe TTI is a good value anywhere under $6—but ONLY if you agree with me that oil will stay in triple digits in 2022. If you believe that oil is going back to the $90’s or $80’s, then TTI is not for you.
As to deciding on a good entry point, it is worth noting that, as discussed above, TTI’s stock price recovered nicely in 2020-2021-2022, going from under $1 to the $5’s in the past week. In fact, TTI has run pretty hard in the past three months, having almost doubled in that period of time. The question then is whether macro events and company performance have justified that rise or whether TTI has run up on momentum, unsupported by the fundamentals.
I would argue the former—that TTI’s current price in the low $5’s is still a bargain price—especially in the current environment where an equity that has simply been maintaining its stock price would be considered a success story. Given those alternative equities, a stock like TTI that has a good prospect for 10-20% upside based solely on its legacy business and even more upside (albeit speculative) on top of that (due to the renewable initiatives), might legitimately be considered a bargain anywhere in the $5’s.
It is also worth noting that TTI has been moving up over the past few weeks on substantial volume, with the 10-day average at 1.5 million shares per day, resulting in 15 million shares having traded in the past two weeks—representing somewhere in the neighborhood of 20% of the non-closely-held (and therefore largely non-trading) shares of TTI.
Finally, I would add that TTI traded at well over $10/share around 2010, and I would posit that the macro situation with hydrocarbons now may be at least as good as it was in 2010, so heading back to above $10/share in 2023 is certainly not out of the question, especially if one or more of the renewable initiatives hit paydirt in 2022 or 2023.
Of course, if you buy TTI in the $5’s, there is no guarantee it won’t go back to the $4’s on profit-taking or on negative market sentiment. After all, when I bought some shares around $3.15 in late 2021 (because I thought it was a screaming bargain at $3.15), I didn’t think I would be able to buy more TTI at $2.50—but TTI did go down to $2.50, whether that made sense or not (it didn’t), and I bought even more TTI shares at $2.50.
As we all know, timing the market to find the bottom is hard to do, but based on the assumptions I have made above (very strong oil and gas prices and likely to stay stronger for longer, crazy-good lithium prices, major growth in stationary battery sales), I think buying TTI anywhere in the $5’s will give you at least a 20-30% one-year return and a decent chance (50:50?) at a 50-60% return if oil and gas prices stay high and TTI’s renewable initiatives start hitting paydirt.
Although one can never know for sure, it seems to me that the reward/risk ratio is very positive for TTI. Time will tell if my projections are correct!
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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Disclosure: I/we have a beneficial long position in the shares of TTI, REI, CCLP, CPE, ET either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.