T-3 Energy Services (TTES) Earnings

TTES out with a 10Q tonight. Stock was down big today. Clearly, somebody knew about earnings and sold beforehand. But, I didn´t see much in the financial report that changes anything as it relates to the stock, and there is no reason to sell now. However, there are two non-financial items that are worth noting.

Before getting to the financials, here is a brief review of what TTES does (from the 10Q). It is important to point out that the company´s industry, oil and gas field services, is quite good at the present time, and that is the main reason for hanging on here:

We manufacture, repair and service products used in the drilling and completion of new oil and gas wells, the workover of existing wells, and the production and transportation of oil and gas. Our products are used in both onshore and offshore applications. Our customer base, which operates in active oil and gas basins throughout the world, consists of leading drilling contractors, exploration and production companies and pipeline companies, including Grey Wolf Drilling, Nabors Drilling International, Diamond Offshore Drilling, Weatherford International and ExxonMobil, among others.
     We have three product lines within our pressure control reporting segment. Those product lines are pressure and flow control, wellhead and pipeline. Within each of those product lines, we sell new products and also provide aftermarket parts and services. New products are those we manufacture or have manufactured for us by others who use our new product designs. Aftermarket products and services include all remanufactured products and parts and repair and field services.
     Demand for our pressure and flow control and wellhead products and services is driven by exploration and development activity levels, which in turn are directly related to current and anticipated oil and gas prices. Demand for our pipeline products and services is driven by maintenance, repair and construction activities for pipeline, gathering and transmission systems.
     We typically bid for new product sales and repair work. Field service work is offered at a fixed rate plus expenses.

Now on to the financials. The company did about $0.20 per share for the quarter. This is from continuing operations. The non-continuing operations which were already sold, are also included in the report, but they are meaningless as it relates to the value of the company. As compared to the previous quarter, revenues came in a drop higher, but operating earnings fell slightly in the Pressure Control Segment, which is TTES´s only current operating business. Overall, the earnings were OK, but it is very important to note that: "This increase was partially offset by down time caused by Hurricanes Katrina and Rita. We estimate that this down time delayed revenues of approximately $2.6 million for the three months ended September 30, 2005 to future periods." So without the Hurricane, TTES would probably have reported about $0.23 per share. Again, nothing stellar, but still in line with what I expected. I still think the company can do $1.00+ in EPS next year.

On the non-financial front here are two important developments:

Lawsuit:

On October 26, 2005, a shareholder derivative lawsuit (Berger v. Halas, et al., C.A. No. 1733-N) was filed in the Court of Chancery of the State of Delaware in New Castle County, against the Company (as a nominal defendant), Gus D. Halas, all other members of the Company’s Board of Directors, and First Reserve Fund VIII, L.P., the principal stockholder of the Company. This lawsuit relates to the filing by the Company of a preliminary registration statement on Form S-1 with the U.S. Securities and Exchange Commission on October 21, 2005. The complaint alleges a breach of the duty of loyalty and a bad faith breach of the duty of full disclosure by all defendants. In addition, the complaint alleges that the payment of a transaction bonus to Mr. Halas in connection with the offering contemplated by the preliminary registration statement is improper. The plaintiff seeks a temporary and a permanent injunction against the proposed sale and the payment of the transaction bonus. The plaintiff also seeks a judgment awarding costs and fees incurred in filing and prosecuting the case. The defendants intend to vigorously pursue their defense. Management believes that the ultimate resolution of the case will not have a material adverse impact on the financial condition or liquidity of the Company.

My take: I´m happy to see this lawsuit, as I happen to agree that the S-1 Filing was completely unexpected, uncategorically anti-shareholders, and improper. Luckily, there are shareholder activists out there.

Employment Amendment

On November 14, 2005, the Company entered into an agreement with First Reserve Fund VIII, L.P. and Mr. Halas further amending Mr. Halas’ Employment Agreement to provide that the transaction bonus payable thereunder will also become payable upon the consummation of a sale by First Reserve Fund VIII, L.P. in a public offering, pursuant to a firm commitment underwriting, of at least 50% of the outstanding shares of the Company’s common stock. The agreement also extends the time period during which the change in control of the Company must occur in order for the transaction bonus to be payable from December 31, 2005 to January 31, 2006. In addition, pursuant to the terms of the agreement, First Reserve Fund VIII, L.P. will make a capital contribution to the Company in order to reimburse the Company for the payment of any transaction bonus to Mr. Halas, but only in the event of a public offering meeting the requirements described above. The amount of the capital contribution will be equal to the transaction bonus less the tax benefits the Company will receive from the related federal and state tax deductions. The Company will account for the payment of the transaction bonus, if any, as compensation expense in the period the obligation is incurred.

My take: The fact that First Reserve is willing to change the bonus structure with Halas to be based on the number of shares he is selling, and to reduce their requirement by 50%, shows that TTES is having a hard time selling the shares in the S-1. And that´s good. First Reserve has no right to just sell shares as they contemplated to. Let them stick it out in the company a bit longer, like everyone else. If business is so good, why is First Reserve selling? By maintaining a larger stake in TTES, First Reserve would signal their bullishness on the business. All in all, if I was buying stock in this secondary, I would demand that First Reserve maintain some shares. Plus I would demand that Salas´s bonus be completely revoked. Fat chance, though.

The bottom-line, I´m sticking it out with my shares, as I don´t have too much here. It´s an interesting enough situation to be involved in.