| TETRA TECHNOLOGIES INC Item 1A Risk Factors |
| Forward Looking Statements Certain information included in this report, other materials filed or to be filed with the SEC, as well as information included in oral statements or other written statement made or to be made by us contain or incorporate by reference certain statements (other than statements of historical fact) that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 |
| When used herein, the words “budget,” “budgeted,” “assumes,” “should,” “goal,” “anticipates,” “expects,” “believes,” “seeks,” “plans,” “intends,” “projects” or “targets” and similar expressions that convey the uncertainty of future events or outcomes are intended to identify forward-looking statements |
| Where any forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that while we believe these assumptions or bases to be reasonable and to be made in good faith, assumed facts or bases almost always vary from actual results and the difference between assumed facts or bases and actual results could be material, depending on the circumstances |
| It is important to note that actual results could differ materially from those projected by such forward-looking statements |
| Although we believe that the expectations reflected in such forward-looking statements are reasonable and such forward-looking statements are based upon the best data available at the date this report is filed with the SEC, we cannot assure you that such expectations will prove correct |
| Factors that could cause our results to differ 10 _________________________________________________________________ materially from the results discussed in such forward-looking statements include, but are not limited to, the following: activity levels for oil and gas drilling, completion, workover, production and abandonment activities; volatility of oil and gas prices; foreign currency risks; operating risks inherent in oil and gas production; weather; our ability to implement our business strategy; uncertainties about estimates of reserves; environmental risks; estimates of hurricane repair costs; and risks related to our foreign operations |
| All such forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph, and we undertake no obligation to publicly update or revise any forward-looking statements |
| Certain Business Risks We have identified the following important risk factors, which could affect our actual results and cause actual results to differ materially from any such results that might be projected, forecasted, or estimated by us in this report |
| Market Risks: Our operations are materially dependent on levels of oil and gas well drilling, completion, workover, production and abandonment activities, both in the United States and internationally |
| Activity levels for oil and gas drilling, completion, workover, production and abandonment are affected both by short-term and long-term trends in oil and gas prices and supply and demand balance, among other factors |
| Oil and gas prices and, therefore, the levels of well drilling, completion, workover and production activities, tend to fluctuate |
| Worldwide military, political and economic events, including initiatives by the Organization of Petroleum Exporting Countries and increasing demand in other large world economies, have contributed to, and are likely to continue to contribute to, price volatility |
| In addition, a prolonged slowdown of the US and/or world economy may contribute to an eventual downward trend in the demand and, correspondingly, the price of oil and natural gas |
| Other factors affecting our operating activity levels include the cost of exploring for and producing oil and gas, the discovery rate of new oil and gas reserves, and the remaining recoverable reserves in the basins in which we operate |
| A large concentration of our operating activities is located in the onshore and offshore region of the US Gulf of Mexico |
| Our revenues and profitability are particularly dependent upon oil and gas industry activity and spending levels in the Gulf of Mexico region |
| Our operations may also be affected by technological advances, interest rates and cost of capital, tax policies and overall worldwide economic activity |
| Adverse changes in any of these other factors may depress the levels of well drilling, completion, workover and production activity and result in a corresponding decline in the demand for our products and services and, therefore, have a material adverse effect on our revenues and profitability |
| Profitability of our operations is dependent on numerous factors beyond our control |
| Our operating results in general, and gross margin in particular, are functions of market conditions and the product and service mix sold in any period |
| Other factors, such as unit volumes, heightened price competition, changes in sales and distribution channels, availability of skilled labor and contract services, shortages in raw materials due to untimely supplies or ability to obtain items at reasonable prices may also continue to affect the cost of sales and the fluctuation of gross margin in future periods |
| We encounter and expect to continue to encounter intense competition in the sale of our products and services |
| We compete with numerous companies in our operations |
| Many of our competitors have substantially greater financial and other related resources than us |
| To the extent competitors offer comparable products or services at lower prices, or higher quality and more cost-effective products or services, our business could be materially and adversely affected |
| Certain competitors may also be better positioned to acquire producing oil and gas properties or other businesses for which we compete |
| 11 _________________________________________________________________ We are dependent upon third party suppliers for specific products and equipment necessary to provide certain of our products and services |
| We sell a variety of CBFs, including brominated CBFs, such as calcium bromide, zinc bromide, sodium bromide and other brominated products, some of which we manufacture and some of which are purchased from third parties |
| We also sell calcium chloride, as a CBF and in other forms and for other applications |
| Sales of calcium chloride and brominated products contribute significantly to our revenues |
| In our manufacture of calcium chloride, we use hydrochloric acid and other raw materials purchased from third parties |
| During 2005, one of our main suppliers announced that it had permanently ceased production of a raw material used in our manufacture of calcium chloride, and we are now reviewing alternative sources of supply |
| In our manufacture of brominated products, we use bromine, hydrobromic acid and other raw materials, including various forms of zinc, that are purchased from third parties |
| We acquire brominated products from a variety of third party suppliers |
| If we are unable to acquire the brominated products, bromine, hydrobromic or hydrochloric acid, zinc or any other raw material supplies at reasonable prices for a prolonged period, our business could be materially and adversely affected |
| A portion of the well abandonment and decommissioning services performed by our WA&D Division require the use of vessels and services which must be provided by third parties |
| We lease equipment and obtain services from certain providers, but are subject to the availability of third party equipment and services in the Gulf of Mexico region, and could be adversely affected by a lack of availability or prohibitively high prices |
| The fabrication of wellhead compressors by our Production Enhancement Division’s Compressco operation requires the purchase of many types of components that we obtain from a single source or a limited group of suppliers |
| Our reliance on these suppliers exposes us to the risk of price increases, inferior component quality or an inability to obtain an adequate supply of required components in a timely manner |
| Our Compressco operation’s profitability or future growth may be adversely affected due to our dependence on these key suppliers |
| Our operating results and cash flows for certain of our subsidiaries are subject to foreign currency risk |
| The operations of certain of our subsidiaries are exposed to fluctuations between the US dollar and certain foreign currencies |
| In particular, we have exposure related to fluctuations in the dollar value of operating receivables and payables denominated in other currencies |
| In addition, in September 2004, related to the acquisition of the European calcium chloride assets from Kemira, we entered into long-term Euro-denominated borrowings, as we believe such borrowings provide a natural currency hedge for our Euro-based operating activities |
| Historically, exchange rates of foreign currencies have fluctuated significantly compared to the US dollar, and this exchange rate volatility is expected to continue |
| Significant fluctuations in foreign currencies against the US dollar could adversely affect our balance sheet and results of operations |
| We are exposed to interest rate risk with regard to a portion of our outstanding indebtedness |
| As of March 16, 2006, dlra161dtta1 million of our outstanding long-term debt consists of floating rate loans, which bear interest at an agreed upon percentage rate spread above LIBOR Accordingly, our cash flows and results of operations are subject to interest rate risk exposure associated with the level of the variable rate debt balance outstanding |
| We currently are not a party to an interest rate swap contract or other derivative instrument designed to hedge our exposure to interest rate fluctuation risk |
| Our oil and gas revenues and cash flows are subject to commodity price risk |
| Our revenues from oil and gas production are increasing significantly; therefore, we have increased market risk exposure in the pricing applicable to our oil and gas production |
| Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices in the US natural gas market |
| Historically, prices received for oil and gas production have been volatile and unpredictable, and this price volatility is expected to continue |
| Significant declines in prices for oil and natural gas could have a material effect on our results of operations and quantities of reserves recoverable on an economic 12 _________________________________________________________________ basis |
| Our risk management activities involve the use of derivative financial instruments, such as swap agreements, to hedge the impact of market price risk exposures for a portion of our oil and gas production |
| Because of this, we are exposed to the volatility of oil and gas prices for the portion of our oil and gas production that is not hedged |
| Operating Risks: Our operations continue to be affected by recent hurricanes and we could suffer additional losses in the future related to storm repair efforts |
| During the third quarter of 2005, we incurred significant damage to certain of our assets as a result of hurricanes Katrina and Rita, which affected several of our operations in the US Gulf of Mexico region |
| We suffered damages at certain of our fluids facilities, and to certain of our decommissioning assets, including one of our heavy lift barges |
| Our Maritech subsidiary suffered varying levels of damage to the majority of its offshore oil and gas producing platforms, and three of its platforms were completely destroyed |
| During the third and fourth quarters of 2005, we repaired some of the damaged assets; however, we are continuing to assess the extent of certain damages, particularly to the destroyed Maritech platforms, and this assessment process will likely extend throughout 2006 and beyond |
| While it is still difficult to accurately predict the total amount of damage, our best estimate is that total Company-wide repair costs, including the cost to repair fluids and well abandonment facilities and equipment, abandon damaged offshore wells and decommission the destroyed platforms, will range between dlra85 to dlra105 million |
| The majority of these costs are expected to be incurred in 2006 and 2007, with some costs likely also to be incurred in later years |
| We maintain insurance protection covering substantially all of the property damages incurred; and repair costs incurred up to the amount of deductibles were charged to earnings as they were incurred during 2005 |
| If actual repair costs are significantly greater than our estimates, we may exceed these maximum coverage amounts |
| In that event, it is possible that a portion of future repair expenditures will have to be funded with our capital resources and result in charges to our earnings |
| In addition, for repair expenditures that are covered by insurance, the collection of insurance claims may be delayed, resulting in the temporary use of our working capital to fund such repairs |
| Our insurance protection does not include business interruption coverage |
| Maritech has resumed daily production from a majority of its producing properties; however, much of its production is processed through neighboring platforms, pipelines, and onshore processing facilities of other operators and third parties |
| The full resumption of Maritech’s production levels, therefore, also depends on the damage assessments and repairs of certain of these third party assets, the timing of which is outside of Maritech’s control |
| There can be no assurance that all of these third party assets will be repaired, or that the timing of these repairs will not result in significant delays in production from several of Maritech’s properties |
| Our operations involve significant operating risks, and insurance coverage may not be available or cost effective |
| We are subject to operating hazards normally associated with the oilfield service industry and offshore oil and gas production operations |
| These hazards include injuries to employees and third parties during the performance of our operations |
| Our operation of marine vessels, heavy equipment and offshore production platforms involves a particularly high level of risk |
| Whenever possible, we obtain agreements from customers and suppliers that limit our exposure |
| However, the occurrence of certain operating hazards, including storms, could result in substantial losses to us due to injury or loss of life, damage to or destruction of property and equipment, pollution or environmental damage, and suspension of operations |
| We have maintained a policy of insuring our risks of operational hazards that we believe is typical in the industry |
| Limits of insurance coverage we have purchased are consistent with the exposures we face and the nature of our products and services |
| Due to economic conditions in the insurance industry, from time to time, we have increased our self-insured retentions and deductibles for certain policies in order to minimize the increased costs of coverage |
| In certain areas of our business, we from time to time have elected to assume the risk of loss for specific assets |
| To the extent we suffer losses or claims that are not covered, or are only partially covered by insurance, our results of operations could be adversely affected |
| 13 _________________________________________________________________ Following the hurricanes in the Gulf of Mexico region during the third quarter of 2005, the cost of the insurance coverage we have typically purchased in the past has increased dramatically |
| We estimate that future coverage premiums will cost several times more than they have historically, particularly for offshore oil and gas production operations |
| Insurance coverage with similar deductible and maximum coverage amounts may not be available in the market, or its cost may not be justifiable |
| There can be no assurance that any insurance will be adequate to cover losses or liabilities associated with operational hazards |
| We cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase |
| Our operations, particularly those conducted offshore, are seasonal and depend, in part, on weather conditions |
| The WA&D Division has historically enjoyed its highest vessel utilization rates during the months from April to October, when weather conditions are more favorable for offshore activities, and has experienced its lowest utilization rates in the months from November to March |
| This Division, under certain turnkey contracts, may bear the risk of delays caused by adverse weather conditions |
| In addition, demand for other products and services we provide are subject to seasonal fluctuations, due in part to weather conditions that cannot be predicted |
| Accordingly, our operating results may vary from quarter to quarter depending on weather conditions in applicable areas of the United States and in international regions |
| We could incur losses on well abandonment and decommissioning projects |
| Due to competitive market conditions, a portion of our well abandonment and decommissioning projects may be performed on a turnkey or a modified turnkey basis, where defined work is delivered for a fixed price and extra work, which is subject to customer approval, is charged separately |
| The revenue, cost and gross profit realized on a turnkey contract can vary from the estimated amount because of changes in offshore conditions, the scope of site clearance efforts required, labor and equipment availability, cost and productivity from the original estimates, and the performance level of other contractors |
| In addition, unanticipated events such as accidents, work delays, significant changes in the condition of platforms or wells, downhole problems, environmental and other technical issues could result in significant losses on certain turnkey projects |
| These variations and risks may result in us experiencing reduced profitability or losses on turnkey projects, or on well abandonment and decommissioning work for our Maritech subsidiary |
| We face risks related to our growth strategy |
| Our growth strategy includes both internal growth and growth through acquisitions |
| Internal growth may require significant capital expenditure investments, some of which may become unrecoverable or fail to generate an acceptable level of cash flows |
| Internal growth may also require financial resources (including the use of available cash or the incurrence of additional long-term debt) and management and personnel resources |
| Acquisitions also require significant financial and management resources, both at the time of the transaction and during the process of integrating the newly acquired business into our operations |
| Our operating results could be adversely affected if we are unable to successfully integrate such new companies into our operations or are unable to hire adequate personnel |
| We may not be able to consummate future acquisitions on favorable terms |
| Additionally, any such recent or future acquisition transactions by us may not achieve favorable financial results |
| Future acquisitions by us could also result in issuances of equity securities, or the rights associated with the equity securities, which could potentially dilute earnings per share |
| Future acquisitions could also result in the incurrence of additional debt or contingent liabilities and amortization expenses related to intangible assets |
| These factors could adversely affect our future operating results and financial position |
| Our expansion into foreign countries exposes us to unfamiliar regulations and may expose us to new obstacles to growth |
| We plan to grow both in the United States and in foreign countries |
| We have established operations in, among other countries, Finland, Sweden, Canada, Mexico, Venezuela, the United Kingdom, Norway, Nigeria, and Brazil and have entered into joint ventures in Saudi Arabia and The 14 _________________________________________________________________ Netherlands |
| Foreign operations carry special risks |
| Our business in the countries in which we currently operate and those in which we may operate in the future could be limited or disrupted by: • government controls; • import and export license requirements; • political, social or economic instability, particularly in Venezuela and Nigeria; • trade restrictions; • changes in tariffs and taxes; • restrictions on repatriating foreign profits back to the US; and • our limited knowledge of these markets or our inability to protect our interests |
| Foreign governments and agencies often establish permit and regulatory standards different from those in the US If we cannot obtain foreign regulatory approvals, or if we cannot obtain them when we expect, our growth and profitability from international operations could be limited |
| The acquisition of oil and gas properties and related well abandonment and decommissioning liabilities is based on estimated data that may be materially incorrect |
| In conjunction with our purchase of oil and gas properties, we perform detailed due diligence review processes that we believe are consistent with industry practices |
| These acquired properties are generally in the later stages of their economic lives and require a thorough review of the expected cash flows acquired along with the associated abandonment obligations |
| The process of estimating natural gas and oil reserves is complex, requiring significant decisions and assumptions to be made in evaluating the available geological, geophysical, engineering and economic data for each reservoir |
| As a result, these estimates are inherently imprecise |
| Actual future production, cash flows, development expenditures, operating and abandonment expenses and quantities of recoverable natural gas and oil reserves may vary substantially from those initially estimated by us |
| Also, in conjunction with the purchase of certain oil and gas properties, we have assumed our proportionate share of the related well abandonment and decommissioning liabilities after performing detailed estimating procedures, analysis and engineering studies |
| If actual costs of abandonment and decommissioning are materially greater than original estimates, such additional costs could have an adverse effect on earnings |
| Our success depends upon the continued contributions of our personnel, many of whom would be difficult to replace |
| Our success will depend on our ability to attract and retain skilled employees |
| Changes in personnel, therefore, could adversely affect operating results |
| Financial Risks: We have significant long-term debt outstanding |
| As of December 31, 2005, we had approximately dlra157dtta3 million of long-term debt outstanding, and as of March 16, 2006, this amount has increased to approximately dlra249dtta3 million |
| Additional growth could result in increased debt levels in order to support our capital expenditure needs or acquisition activities |
| Debt service costs related to outstanding long-term debt represent a significant use of our operating cash flow and could increase our vulnerability to general adverse economic and industry conditions |
| Our long-term debt agreements contain customary covenants and dollar limits on the total amount of capital expenditures, acquisitions and asset sales, as well as other restrictions and requirements |
| In addition, the agreements require us to maintain certain financial ratio and net worth requirements |
| Significant deterioration of these ratios could result in a default under the agreements |
| The agreements also include cross-default provisions relating to any other indebtedness we have that is greater than dlra5 million |
| If any such indebtedness is not paid or is accelerated and such event is not remedied in a timely manner, a default will occur under the long-term debt agreements |
| Any event of default, if not timely remedied, could result in a termination of all commitments of the lenders and an acceleration of any outstanding loans and credit obligations |
| 15 _________________________________________________________________ Certain of our businesses are exposed to significant credit risks |
| Maritech purchases interests in certain end-of-life oil and gas properties in connection with the operations of our WA&D Division |
| As the owner and operator of these interests, Maritech is liable for the proper abandonment and decommissioning of the wells, platforms, pipelines and the site clearance related to these properties |
| We have guaranteed a portion of the abandonment and decommissioning liabilities of Maritech |
| In certain instances Maritech is entitled to be paid in the future for all or a portion of these obligations by the previous owner of the property once the liability is satisfied |
| We and Maritech are subject to the risk that the previous owner(s) will be unable to make these future payments |
| We and Maritech attempt to minimize this risk by analyzing the creditworthiness of the previous owner(s), and others who may be legally obligated to pay in the event the previous owner(s) are unable to do so, and obtaining guarantees, bonds, letters of credit or other forms of security when they are deemed necessary |
| In addition, if Maritech acquires less than 100prca of the working interest in a property, its co-owners are responsible for the payment of their portions of the associated operating expenses and abandonment liabilities |
| However, if one or more co-owners do not pay their portions, Maritech and any other nondefaulting co-owners may be liable for the defaulted amount as well |
| If any required payment is not made by a previous owner or a co-owner and any security is not sufficient to cover the required payment, we could suffer material losses |
| Maritech’s estimates of its oil and gas reserves and related future cash flows may be significantly incorrect |
| Maritech’s estimates of oil and gas reserve information are prepared in accordance with Rule 4-10 of Regulation S-X, and reflect only estimates of the accumulation of oil and gas and the economic recoverability of those volumes |
| Maritech’s future production, revenues and expenditures with respect to such oil and gas reserves will likely be different from estimates, and any material differences may negatively affect our business, financial condition and results of operations |
| As a result, Maritech has experienced and may continue to experience significant revisions to its reserve estimates |
| Oil and gas reservoir analysis is a subjective process which involves estimating underground accumulations of oil and gas that cannot be measured in an exact manner |
| Estimates of economically recoverable oil and gas reserves and of future net cash flows associated with such reserves necessarily depend upon a number of variable factors and assumptions |
| Because all reserve estimates are to some degree subjective, each of the following items may prove to differ materially from that assumed in estimating reserves: • the quantities of oil and gas that are ultimately recovered; • the production and operating costs incurred; • the amount and timing of future development and abandonment expenditures; and • future oil and gas sales prices |
| Furthermore, different reserve engineers may make different estimates of reserves and cash flow based on the same available data |
| The estimated discounted future net cash flows described in this Annual Report for the year ended December 31, 2005 should not be considered as the current market value of the estimated oil and gas proved reserves attributable to Maritech’s properties |
| Such estimates are based on prices and costs as of the date of the estimate, in accordance with SEC requirements, while future prices and costs may be materially higher or lower |
| The SEC requires that we report our oil and natural gas reserves using the price as of the last day of the year |
| Using lower values in forecasting reserves will result in a shorter life being given to producing oil and natural gas properties because such properties, as their production levels are estimated to decline, will reach an uneconomic limit, with lower prices, at an earlier date |
| There can be no assurance that a decrease in oil and gas prices or other differences in Maritech’s estimates of its reserves will not adversely affect our financial position or results of operations |
| 16 _________________________________________________________________ Our accounting for oil and gas operations may result in volatile earnings |
| We account for our oil and gas operations using the successful efforts method |
| Costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized |
| Costs related to unsuccessful exploratory wells are expensed as incurred |
| All capitalized costs are accumulated and recorded separately for each field, and are depleted on a unit-of-production basis, based on the estimated remaining equivalent proved oil and gas reserves of each field |
| On a field by field basis, our oil and gas properties are assessed for impairment in value whenever indicators become evident, with any impairment charged to expense |
| Under the successful efforts method of accounting, we are exposed to the risk that the value of a particular property (field) would have to be written down or written off if an impairment were present |
| Legal/Regulatory Risks: Our operations are subject to extensive and evolving US and foreign federal, state and local laws and regulatory requirements that increase our operating costs and expose us to potential fines, penalties and litigation |
| Laws and regulations strictly govern our operations relating to: corporate governance, environmental affairs, health and safety, waste management, and the manufacture, storage, handling, transportation, use and sale of chemical products |
| Our operation and decommissioning of offshore properties are also subject to and affected by various types of government regulation, including numerous federal and state environmental protection laws and regulations |
| These laws and regulations are becoming increasingly complex and stringent, and compliance is becoming increasingly expensive |
| Governmental authorities have the power to enforce compliance with these regulations, and violators are subject to civil and criminal penalties, including civil fines, injunctions or both |
| Third parties may also have the right to pursue legal actions to enforce compliance |
| It is possible that increasingly strict environmental laws, regulations and enforcement policies could result in substantial costs and liabilities to us and could subject our handling, manufacture, use, reuse, or disposal of substances or pollutants to increased scrutiny |
| Our business exposes us to risks such as the potential for harmful substances escaping into the environment and causing damages or injuries, which could be substantial |
| Although we maintain general liability and pollution liability insurance, these policies are subject to coverage limits |
| We maintain limited environmental liability insurance covering named locations and environmental risks associated with contract services for oil and gas operations, refinery waste treatment operations and for oil and gas producing properties |
| The extent of this coverage is consistent with our other insurance programs |
| We could be materially and adversely affected by an enforcement proceeding or a claim that was not covered or was only partially covered by insurance |
| In addition to increasing our risk of environmental liability, the rigorous enforcement of environmental laws and regulations has accelerated the growth of some of the markets we serve |
| Decreased regulation and enforcement in the future could materially and adversely affect the demand for the types of systems offered by our process services and the services offered by our well abandonment and decommissioning operations and, therefore, materially and adversely affect our business |
| Our proprietary rights may be violated or compromised, which could damage our operations |
| We own numerous patents, patent applications and unpatented trade secret technologies in the US and certain foreign countries |
| There can be no assurance that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of these rights |
| In addition, independent third parties may develop competitive or superior technologies |