Brady Murphy; President, Chief Executive Officer, Director; Tetra Technologies Inc
Elijio Serrano; Chief Financial Officer, Senior Vice President; Tetra Technologies Inc
Good morning, everybody, and thank you for joining Tetra's first quarter of 2025 results conference call. I'm Kurt Hallead, VP, Treasurer and head of IR.
The speakers for today's call are Brady Murphy, Chief Executive Officer, and Elijio Serrano, Chief Financial Officer. I'd like to remind you that this conference may contain statements that are may 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're cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements.
In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA margins, free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed, or other non-GAAP financial measures. Please refer to yesterday's press release or to our public website for reconciliation of non-GAAP financial measures to the nearest GAAP measures.
These reconciliations are not a substitute 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 10Q that we also filed yesterday. I will now turn it over to Brady.
Brady Murphy
Thanks, Kurt. Good morning, everyone and welcome to Tetra's first quarter of 2025 earnings call. I'll summarize some highlights for the first quarter and provide an update on our strategic growth initiatives before turning the call over to Elijio to provide some more details on our segments and an update on cash flow on our balance sheet.
We're very pleased with our record first quarter adjusted EBITDA of $32.3 million and adjusted EBITDA margins of 20.5% at the Tetra level, led by strong performance from our completion fluids and product segment.
Total revenue of $157 million increased 17% sequentially and 4% from last year, while adjusted EBITDA of $32.3 million increased 41% sequentially and also when compared to last year. During the quarter, we successfully completed the first of the three scheduled Tetra CS Neptune wells and made significant progress on the second well, which was subsequently completed in April.
Year over year we saw a 60% increase in offshore deep water operations, having worked on 24 deepwater projects during the quarter compared to 15 in the first quarter of 2024.
This is consistent with what we have been seeing for some time that the deepwater market has been gaining momentum since the 2021 post-COVID pandemic low point for deepwater rig activity. The nature of these large higher pressure deepwater jobs can make our business somewhat lumpier depending on the timing of well completions, but the year over year deep water trend is a steady increase.
As a result of the stronger deepwater activity and the start of the seasonally strong industrial chemicals business in Northern Europe, completion fluids and products adjust the EBITDA margins increased to 35.7% from 27.3% in the fourth quarter. Revenue for water and flow back services segment declined 2% sequentially, outperforming US frac activity that declined approximately 10%.
The margins on water and flow of 13% were down slightly from the fourth quarter, but up 340 basis points from Q4 last year despite much lower frac activity levels as cost control actions and continued focus on automation contributed to improved year on year margins in a weaker environment.
In anticipation of weaker US land activity at current oil prices, we are taking cost actions within this segment, including exit of the poly pipe business, a small lower margin subsegment of our water transfer business. As we head into the second quarter, an encouraging aspect of the water and flowback segment is that our automated sandstorm and automated drill out units are operating at close to 100% utilization.
This is strong validation that our customers see the operational benefit and cost savings of less manpower to operate what are typically manpower intensive jobs. In this business environment, we will be reducing our overall CapEx for the water and flow back segment, but only, but with only 25% of our fleet automated, we will be prioritizing our CapEx to further automate our fleet.
Looking towards the second quarter, we expect to see the full benefit of our European industrial chemicals seasonal peak, the first well from our recently awarded multi-well, multi-year deepwater Brazil project and expect to complete the last well of the three wells CS Neptune project in the Gulf of Mexico.
We continue to track a healthy pipeline of CS Neptune projects across the globe but given the significance of these projects that have on our financials, we will wait until a project is awarded with a defined date before making any announcements.
With regards to tariffs, both segments within Tetra have a high percentage of products and raw materials sourced from within the US, so we don't expect much, if any, financial impact from tariffs. However, the current oil price environment does create more uncertainty for US land activity than previously anticipated.
As we've demonstrated in the past, we will be monitoring activity levels and our customer plans very closely to respond accordingly. Given our record first quarter performance and strong second quarter outlook, we have moved up the lower end of our previously communicated first half 2025 adjusted the guidance to now be between $57 million and $0.65 million. It was previously $55 million to $65 million.
Attainment of the adjusted even guidance for the first half of the year would also be a record high for the company with Tetra's current business segments, which will be achieved despite the uncertain environment the industry is experiencing.
We generate strong free cash flow in the first quarter with a year over year free cash flow improvement of $41 million from the base business, including the benefit of the sale of our Kodiak shares. We have a strong free cash flow generating based business that should be able to navigate us through the near-term macro uncertainty and position the company to capitalize on its emerging growth opportunities for the coming years.
Before turning over to Elijio to discuss more details on each of the segments, I'd like to highlight the progress that we have made with regards to our emerging growth initiatives. 2025 will be a key year for us to complete milestones that will allow us to quantify the financial benefits for each initiative.
On the desalination of produced water side, with the announcement of our commercial launch of Tetra Oasis TDS and our collaboration with EOG Resources, we are very encouraged by our prospects for desalination of produced water for beneficial reuse. During the quarter, we announced a commercial pilot with EOG for a grassland study from Delaware Basin produced water.
We continue to see growing momentum across the customer base and regulatory support for this much needed industry solution. Energy estimates that in the Permian Basin alone over 6.3 billion barrels of produced water are discharged into saltwater disposable wells per year that could be recycled and reused for agriculture or industrial purposes, including semiconductor chip manufacturing and data center cooling.
Such reuse will enable oil and gas operators to mitigate the risk associated with reducing disposal of poor space and the transport of produced water. Since our commercial launch of Oasis TDS, our customer and regulatory engagement has increased significantly, including visits to our research facility and commercial proposal discussions.
There are several reports suggesting that with the current and projected rate of water injection occurring in the Permian Basin, that by 2030 or a few years after, there will not be available for space for water disposal injection. That is the reason why on April 21 of this year, the Wall Street Journal published an article calling this the Oil Patch's Manhattan Project.
On the energy storage front, as the contracted strategic supplier of electrolyte products for Eos' Z3 utility energy storage systems, we're all positioned to benefit as Eos scales its manufacturing capabilities and delivers on its backlog.
We believe that the high purity characteristics of our pure flow zinc bromide, electrolyte, the flame-retardant characteristics, and mostly US, but 100% North American content makes it ideal for large scale utility use. We are encouraged by the progress of the US implementing their automated production lines that is expected to result in significant step changes in electronic volume requirements from Tetra.
Regarding our Arkansas Evergreen brine production unit on April 24, we announced that the Arkansas Oil and Gas Commission, or approved our evergreen unit expansion, which will allow us to further optimize long-term bribe flow for bromine, future lithium, and other critical minerals extraction.
We completed the drilling and sampling operations for our final test well on the evergreen unit that indicated good reservoir results. The Tetra well results also identified encouraging levels of magnesium and manganese, both of which are listed as US critical minerals that are largely supplied from countries outside the United States.
We're continuing to advance the bromine project with critical milestone investments funded from our base business free cash flow. We're planning to commence drilling of the Evergreen unit's first of five planned production wells in the coming months while finalizing the plant engineering and plant site preparation for erecting the bromine tower later this year.
We are also encouraged that on April 22, 2025, the OGC approved SWA lithium's application to establish a unit for acreage under an option agreement between standard lithium, SWA lithium, and tetra.
The option agreement compensates Tetra with a 2.5% royalty on gross revenues from the lithium that standard lithium produces from the tetra option acreage. In addition, Tetra maintains the ownership of the bromine and other mineral interests that will meet the planned phase two bromine plant production capacity.
To ensure clarity on our bromine project, it's important to understand that we are taking all the necessary steps, including long lead investments, to ultimately build the bromine processing facility. With our deep-water bromine fluids demand flourishing and Eos still in the early stages of ramping production. The business case for the bromine facility is still very much intact.
We have also been clear that our intention is to fund the project from our base business cash flow without issuing expensive equity or increasing debt and overlevering Tetra at a time with uncertainty in the market.
We are currently balancing long lead investments with bromine demand projections from Eos and our deep-water projects while reducing risks, including bridging supply agreements in the event that bromine demand outpaces our current outlook.
Given these objectives, we have not yet set a final completion date for the plan. We remain of the opinion that this year our base business will generate in excess of $50 million free cash flow, so we are moving forward with planned investments likely between $40 million and $50 million on the project, advancing the engineering, putting in place the bromine tower, and bringing power requirements we need to the site.
At the end of the year, we'll reassess next steps and timing of next investments and target a go live date with our project. Each of these initiatives represent a material financial benefit to the company that we will quantify as we complete key milestones for each throughout the year. Collectively they are transformational for the company.
Now I'll turn it over to Elijio to give more specifics on the segments and the balance sheet.
Elijio Serrano
Thank you, Brady, and good morning, everybody. Completion fluids and products segment first quarter revenue of $93 million. Increased 35% sequentially driven by a strong driven by strong activity. Adjusted EBITDA $33.2 million increased 77% sequentially. Representing I fall through of nearly 60%.
Adjusted EBITDA margins of 35.7% compared to 27.3% in the fourth quarter of last year, reflecting the impact of Neptune and the stronger offshore market. Water and flowback services revenue of $64 million decreased 2% sequentially but was up 13% versus a year ago.
While adjusted EBITDA $8.3 million increased $1.2 million year on year. It's fourth quarter slowdown in the US onshore completion activity carried over into the first quarter. Adjusted even though margins were down only slightly from the fourth quarter as our focus on leveraging technology.
And automation plus cost reductions to minimize the worker volumes are made an impact. First quarter adjusted free cash flow was $4.2 million of which $15.4 million was from the base business inclusive of $19 million proceeds from the sale of our investment in Kodiak.
We got the timing right on when to monetize the Kodiak shares, selling them around $42 per share in early January. This morning, Kodiak was trading below $34 having dropped to as low as [$29.50]. Total capital expenditures in the first quarter were $18 million inclusive of $11 million associated with the expansion of our Arkansas roaming plant, addressing some of the areas Brady mentioned earlier.
We expect working capital to come down materially in the second and third quarters as we monetize the Neptune receivable. And the calcium chloride inventory in northern Europe. As Brady mentioned, we remain of the opinion that free cash flow from the base business this year will be in excess of $50 million.
We also further expect the free cash flow from the base that will fulfill our cash flow requirements for Arkansas this year, and we will not need to draw on a revolver or use the delayed draw feature from our term loan in 2025.
This is consistent with our plans of self-funding as much as possible of our capital requirements for the roaming project. We're moving methodically in advancing our brooming plant. Liquidity is at the end of this week was approximately $219 million.
Inclusive of the $75 million dollar delayed drop page is available for the roaming project. At the end of the first quarter, our net leverage ratio improved to 1.5 times from 1.8 times at the end of the year. If we see a slowdown in the onshore business, we know how to manage in such an environment.
We manage cost and capital expenditures aggressively. We are doing this now. We'll pull back on capital expenditures in this segment and we focus on the markets, services, and customers that have technology competitive advantages.
Going into the second half of the year, the volumes of zinc bromide electrolyte shipments to yields will continue to increase. As Eos scales its manufacturing capabilities and delivers on its backlogs. We stay very close to that management team. We visited their production line in Pittsburgh three weeks ago. And came back very comfortable with their progress.
We get a rolling forecast from me that gives us confidence on the progress that they are making, and we expect every quarter to be stronger than the prior quarter. For upcoming investor events, we'll be in New York City on May 14 and 15 attending the Debora conference and also hosting an investor dinner and breakfast meeting.
We'll be in Boston on June 3 and 4 at the Stifel conference. And back to New York City on June 4 for the RBC conference. We will also participate in two virtual conferences, the Lytham Partners on May 29. In the Northland Growth Conference on June 25. We are working to expand our investment base into the water technologies, and the energy transition sectors, given the growth of our battery storage and produced water desalination technology.
Please visit our website or reach out to Kerr and Rye for more details. It was also very encouraging to see that in the last month, Tetra shares were acquired by two water index passive funds following our Oasis TDS and EOG announcements.
I believe that this is the start of our investor base expanding beyond the traditional oil and gas investors as we make progress with our growth initiatives.
I'll turn this back to Brady for closing comments before we open up the call for questions.
Brady Murphy
Thanks, Elijio. In closing, we're off to a great start for the year and anticipate a very strong second quarter. Despite recent macroeconomic uncertainty, we have a strong conviction in the longer-term outlook and our proven ability to differentiate in the markets in which we operate.
Our balance sheet is solid with close to $219 million of liquidity. We anticipate further growth in 2025 and expect to continue to generate strong free cash flow from our base business to fund our emerging growth investments.
The combination of these plus advances with our produced water beneficial reuse solution, our Arkansas resource position, and strategic partnerships provides us the opportunity to continue to drive long term shareholder value. With that, we'll open it up to Q&A.
Operator
Thank you. Good morning and ladies and gentlemen, we will now begin the question-and-answer session should you have a question please press start followed by one on your touchstone phone. (Operator Instructions)
And your first question comes from Mr. Bobby Brooks of Northland Capital Markets. Please go ahead.
Alright guys, thank you for taking the question. So, I was just curious, you've been engaged with customer, you've been engaging customer discussions on Oasis for from with a number of parties, both EMPs and midstreams, and I was just really curious to hear what you guys believe is kind of the biggest hold up from these perspective customers on doing a commercial pilot and eventually an an actual commercial unit.
Brady Murphy
Yeah, sure, Bobby. I think the first step is the customers need to get, totally comfortable, with the technology itself and with the, environmental framework that that's evolving, quite frankly, and it's come quite a long way. I think if you track, what's what's happening on the regulatory side, the legislative side, all things are starting to move in a positive direction, both in Texas and in Mexico.
We are, as I've mentioned previously in our calls, our expectations for this year was that we would have multiple pilot projects running, and in 2026, I think we would really start to see more commercial projects being negotiated.
I think that timeline now as we look at it could be accelerated. We're starting to see more requests by customers for commercial discussions of smaller scale commercial projects. So, we'll see how things evolve as we go through the year. It's a pretty dynamic environment.
But we are seeing things trending, I would say quicker on the commercialization side than than maybe we were, on our last earnings call.
It's very helpful caller and then just kind of piggybacking on that. You had mentioned that I think in the prepared remarks that you've seen some more regular and you just mentioned it on the on the in that answer but like more regulatory support for beneficial reuse could you maybe just point us to some specifics where you're seeing that, more that the better, the more support for this, revolutionary technology.
Brady Murphy
Yeah, so we're engaged very heavily with both the Texas Railroad Commission and the TCEQ. That really looking over the permitting process now for Texas and so we have our own direct engagement with them so that's obviously we get a direct read from that. But I think if you look at some of the legislation that has been moving through the Texas House and Senate.
All, as I mentioned earlier, I can't point to a specific piece of legislation right now, but there have been several pieces of legislation moving through that supports the surface discharge and use of produced water for beneficial reuse, which in the past, has really been prohibited. So those are some key, I would say some key things to look at, Bobby from your perspective.
Thank you, that's very helpful. And then maybe just the last one for me and I'll jump back in the queue is you're going to commence drilling for Evergreen's first production while in the coming months.
And I just and I just wanted to understand, is this kind of a scenario where you can drill it and then leave it as like a duck like uncompleted and then as you build once the processing facilities is fully up, you can just kind of quickly go back there and turn it online. I just want to make sure I'm kind of understanding the timing here right.
Brady Murphy
Yeah, that's that's exactly right. We will drill, obviously one well at a time. Once we drill and complete the first well, we'll essentially put it on standby without production until we have the bromine processing facility and then the full plant ready to be commissioned and then essentially you turn the brine field on and again, we'll start the first well this year.
We'll announce the timing of the second through the fifth well, which is what we have planned for the Evergreen unit as we as we go through the year.
Elijio Serrano
Brady, I think it's also important to remind everybody that we have a partner for all the upstream work and the cost of anything we do on the upstream side is shared with our partner proportional to the ownership that we have in the Evergreen Unit.
Brady Murphy
Correct.
Very helpful, thank you guys and congrats on the strong quarter.
Brady Murphy
Thank you.
Operator
And thank you. Our next question is coming from Mr. Martin Malloy from Johnson Rice. Please go ahead.
Brady Murphy
Oh good.
Elijio Serrano
We lost you there, Marty, if you can repeat.
Brady Murphy
Marty, can you hear us? We can't hear you.
Yeah, I'm sorry, I'll dial back in.
Brady Murphy
We got you now.
Elijio Serrano
Kim, let's go to the next one and we'll circle back to Marty, make sure we cover him.
Operator
Sure, alright, next question is from Jesse Sobelson from the Boral. Go ahead, sir.
Hey guys, thanks for taking my question. Just real quick on the numbers here, somewhat of a housekeeping item, but I noticed from the guidance that.
The, I noticed that the number coming up a little bit was appreciative, but there seems to be, is it correct that you guys are implying a $30 million range for the second quarter of the year here, and I'm just kind of curious if so or not, yeah, second quarter of the year, and then I'm just curious if so, what the drivers of that dramatic, range could be to get to both sides of the high end of the line. Thank you.
Elijio Serrano
Yeah, we're simply looking at the timing of the deep-water projects. We've mentioned in the past that they're large projects. We believe that we're obviously going to be in the range that we've highlighted both on the revenue and leave it.
Brady Murphy
If I understand your question though, also you were saying a $30 million range for just Q2, that's actually for the first half of the year, the range just to clarify.
And then in the ranged the range spread is no different than what we said coming out the beginning of the year we just kind of reduced the range of the 315 to 345. So ranges comparable to what we said it's just a little bit lower.
Okay, and the timing of the project is what's really going to determine what that number is and where we perform in the second quarter here. Okay, great, thanks. Thanks for taking my question.
Operator
Okay, thank you. And our next question is from Tim Moore from Clear Street. Go ahead, sir.
Thanks, and nice operational execution in the March quarter. For my favorite perennial topic, the desalination of produced water, I mean, you have such an early first mover advantage there. You got the prior pilot experience ahead of any other competitors and you know that recent EOG Resources, important pilot project, the agricultural irrigation study with the acre.
So, my question really is, how do you decide which additional pilot plant customers to prove you're going to have this. Inflow of demand, do you have a preference for ones that you already do the pre-treatment stuff advantage for in place. Just kind of curious how your kind of sorting through that and wait listing folks.
Brady Murphy
Yeah, so I think we've announced we have seven NDAs in place with major operators. They're all important to us. They're all actually current customers of ours that we serve for our water and flow back business and recycling and treatment today.
So quite frankly we treat them all, equally as we can. Some are wanting to just do, testing at our research facility to demonstrate our capabilities with Oasis. Others are looking at deploying small pilots depending on, their appetite for risk and how quickly they want to move.
We're able to run multiple pilot projects whether we're running them at our research facility or in the field. So, we have the capacity to work with all of them to demonstrate and get them comfortable with the technology. That's really not a challenge at this point.
I think the challenge will be if all of them, decide to start wanting to stand up a commercial plant, within a short period of time, that that is where we'll have to, start negotiating and discussing with them how we can handle the timing of that.
Great, yeah, that, that's what I was definitely getting out more on the commercial side, but I'm just switching gears to Eos. I mean, you mentioned you visited their production facility earlier this month.
I expect you probably have a rolling production order schedule from them as they ramp up their output this summer for battery storage systems. If their first production line reaches that 2 gigawatt hours of annual production rate, maybe, I don't know, late next year, early 2027.
Do you have all the sourcing already in place, or do you need to sign up more 30, third party suppliers to meet that demand?
Brady Murphy
Yeah, that's a fair question, and obviously this is something we track very closely for our deepwater project demands versus the EOS ramp up. We're very comfortable that for the first line of production for EOS there are two gigawatt hours that, we will be able to source and supply, all that we need.
To meet that, the timing of when they move to their, additional capacity, which they talked about I think up to eight potential gigawatt hours, depending on the timing of that is clearly where we will need to have additional sources of certainly bromine, everything else we can source with the quantities that we need.
Brooming will be the one that will have to closely match our future demand with their planned production, and we have those discussions with them, as Elijio said, very frequently.
And we're putting in place a lot of different things to make sure we're ready, whether it's our own bromine plant that will provide plenty of bromine to meet both our deep water and EO's future demand or the bridging supply agreements that we are having discussions with existing suppliers with today. So that's the balance that we're managing.
Great, Brady. I got one last question for you and Elijio. So just for the potential bromine development project, I mean, it truly seems like you can self-fund it without triggering any equity dilution, which I think investors aren't giving you credit for yet, but would you.
I mean, you don't have to answer this now, but are you, would you consider a project financing partner for, maybe, I don't know, 20%-25% stake, or would you rather maybe have project finance partners to roll out more desalination plans later on? I'm just trying to think about it in the back of my head, just, keep your leverage low.
Elijio Serrano
Absolutely, assume that we're constantly testing the market. We're looking for partners so that we can move with a higher degree of confidence in case the base business free cash flow does not move as fast as we expect. We are constantly looking for partners and testing the markets to find the optimal solution without diluting our shareholders and without over levering the company.
Great, thank you, I'm Brady. That's it for my questions.
Brady Murphy
Thank you.
Operator
And our next question is from Colby Sasso from Daniel Energy Partners. Go ahead, sir.
Hi, thanks for having me on the call. Your water and flow back margins for this quarter were 13%, which is down slightly quarter over quarter, but up nicely year over year. And you highlighted that automation and technology combined with cost controls are the reason for the expanded margins in the last 12 months.
Are there still more benefits to be seen from automation and technology, and can you maybe just speak to how you see the margins for the in the intermediate to long term?
Brady Murphy
Yeah, absolutely, probably one thing we didn't mention for the year over year improvement in margins. You'd mentioned the automation, certainly that's contributed the cost management, that's contributed, but we've also have a much larger portion of our water and flow back business that is treatment and recycling of produced water that has been a rapidly growing segment of our business throughout 2024, and we expect that to continue to grow.
In 2025 and that is typically a higher margin profile business for us. Yeah, as we go forward, I think I mentioned on the call, we only have about 25% of our fleet automated between sandstorms and our auto drill outs. We will be looking at directing the capital that we spend for this segment into automation as a priority and supporting our recycling and treatment.
Operations, so we believe we still have the ability to move margins up from where we are today. Now, second half uncertainty right now with the current climate, oil prices, tariff situation, it has created some uncertainty that that it's a little bit harder to give us specific guidance for the second half of the year, but our expectations is with the things that we're putting in place. We will still be able to move, margins upward from the from where we posted this quarter.
Elijio Serrano
And Colby, to add a little bit to what Brady said, we've taken investors out to visit some of our water treatment facilities in the Permian Basin. And we've been on job sites where we're treating 100,000 barrels a day, and there's only one person at the job site, per shift, and that's because of the automation that we've got in place.
And obviously those are much higher margins. The second point is we also mentioned that some of our lower margin businesses that we're closing and exiting those, so we'll end up with a better profile of the remaining business that we have as part of this changes that we're making.
That was great color. Thank you so much. And just kind of switching up a little bit, going back to Oasis, could you talk about your expectations for the program and the Permian and what success would look like in your opinion compared to the results you've achieved in South Texas?
Brady Murphy
Are you talking about technical results or commercial results or both Colby.
Both would be perfect.
Brady Murphy
Yeah, so in South Texas, because it's a much lower TDS total dissolved solids, we were able to achieve a 92% recovery of desalinated water from the from the feed water, which is obviously very high. The Permian is a much higher total dissolved solids, about 150,000 on average or so compared to 30,000 in South Texas. So, the yield that we will get, we're hopeful to get as high as 60%.
Yield of desalinated water from produced water that can go higher if we decide to start precipitating solids, precipitating salts out of the feed water, but initially that would be our target from a from a performance standpoint and an acceptable target from the customers that we're dealing with. As I've mentioned commercially, we've got commercial pilots.
We are getting paid for the pilot operations that we have. We're having discussions with multiple customers on first commercial scale units. Still early days for that. It's actually ahead of schedule from where I thought we would be, but we'll keep you posted as we go through the year in terms of our progress with commercial discussions for commercial plans.
Thanks for the color, I'll turn it back.
Operator
Thank you. So, next question is coming from Steven Yenshaw from Stifel. Go ahead, sir.
A couple for me. What I, what I'd start with, if you don't mind, is maybe for Leo on the free cash flow side you guys during COVID and other periods have always done a good job of maintaining, cash flow at solid levels. You mentioned kind of base free. Cash flow I think of about $50 million, and I think $30 million of that is excluding the sale of stock.
How do you think about that number in the in the environment we're in over the next several quarters and into next year? You think it's sustainable at that level? How do you kind of look at the puts and takes there?
Elijio Serrano
Let me first clarify a comment. We keep saying in excess of 50, and we're trying to give us enough cushion in here so that we can exceed the benchmarks that we're laying out. In 2020, the first year of COVID, we generated almost $50 million of free cash flow as we monetized a lot of the receivables and inventory.
We don't think we're going to see a slowdown this year anywhere near what we saw with COVID. So, while we'll monetize some of the working capital, we still think that we've got a growth business occurring both with desalination and with the growth in the calcium chloride business and the electrolytes for Eos. We're pulling back on capital expenditures for the onshore business, and we will be below levels that we've been at before.
Also recognized that in the recent years, we had expanded capacity on the offshore fluids by building more storage and blending capacity in Brazil and also in the Gulf of Mexico. So those are behind us. We think that we can continue to pull down base business CapEx.
Without impacting the slowdown, without impacting our opportunity to take advantage of that offshore market, and that's why we keep repeating, we'll be north of $50 million of free cash flow inclusive of the Kodiak sales, and that does not imply $30 million for the base business.
Okay, great, thank you. That helps. The other two questions I had, what was the bigger picture, and I get this from investors a lot, and when you think about the water desal opportunity and the technology, as it evolves, like what should we be thinking about as far as the Environment in which it's most applicable as far as it's one thing to kind of recycle the water, it's another thing to have a beneficial reuse. So what are sort of the drivers or parameters of an area that need to be in place for it to be kind of most applicable?
Brady Murphy
Yeah, Stephen, so there's a couple components to that question. I think the first one is. That you know the available pore space directly in the Permian Basin, where the water is being produced. And the Delaware Basin, but the available pore space is filling up. These reservoirs are overpressuring.
You can see various reports that show the pressure trends within the reservoirs where they inject. That's public information. And so there is a time horizon where the in basin space in basin injection is essentially going to be restricted even further, considerably further than what it is today. So what you see now are operators who have to start designing.
Midstream systems working with midstream companies to carry produced water outside of the basin and that's pretty, that's expensive both from a capital and an CapEx perspective. I think you've probably seen several announcements made in the last few months about out of basin disposal systems being set up by the midstream companies.
But again, ultimately, that's going to face the same type of challenge that you see with the in basin. It's just such a huge volume of water that physics, will ultimately take over. So that's one part of it, the cost the operators have to find a solution to the problem.
I think the other part of it is water is a valuable resource. The Permian goes through a lot of droughts, a lot of parts of Texas, South Texas, go through periods of droughts. There's incredible need for water. That we can treat this for, as we say, beneficial reuse for agricultural purposes, industrial purposes, the data centers that are going to be stood up.
All of these, the manufacturing centers that we're talking about now, all of these applications require, pretty high spec water in some cases that we can meet. So, I think it's a combination of both factors that set the conditions that are going to make this this thrive, Stephen.
Okay, thanks. And then my file, you, I think Elijio alluded to this response to a prior question, but when you think about the margin profile in water and the automation, I think Elijio suggested that there is potentially some upside in the second half of the year, or was that a longer-term comment?
Elijio Serrano
Well, so let's be clear. I think it depending on the magnitude of the pullback in the second half of the year and how much excess capacity might be out there to compete against, that's an unknown. We think we can control our destiny by focusing on those clients that value technology.
That take advantage of the differentiations that we bring, that we keep upgrading the revenue base and keep moving to produced water and away from the lower margin business, but we don't have this completely under our control. It's going to be partially market dependent and a lot of our efforts are going to be to counter that.
Got it. Great. Thank you for the details.
Brady Murphy
Thanks.
Operator
Alright, next question is from Mr. Bobby Brooks from Northland Capital Markets. Go ahead.
Hey guys, thanks for taking this, second round of questions. Just one for me. I was just curious, had not necessarily touched on in the Q&A, but I was really.
It interested in, could you maybe just compare and contrast the deepwater market outlook now versus when you reported 4Q in February and WTI was in the low 70s? Does the long cycle nature of these deep water market deep water products projects really help insulate development from stalling due to commodity price downturns?
Brady Murphy
Yeah, Bobby, clearly, deep water is a longer term cycle. So I mean I would answer that by saying, we haven't seen any changes by operator deepwater projects, that are scheduled for this year.
There is obviously some uncertainty in the market right now. Commodity prices went lower. You could potentially see some projects being pushed to the right, but probably not the projects that are on the calendar for this year. They're most likely already contracted, already a lot of things put in motion to deliver those wells.
So, we don't expect any real change to the water this year. Now if oil prices go lower and stay lower for longer, for the rest of this year, you could start to see some projects again pushed out to the right. We don't expect that, but clearly there's quite a bit of uncertainty that we can't say specifically that won't happen.
Bobby just real quick, just want to add to that. I think this week we've already had a couple of offshore drillers announce their earnings and provide some outlooks with some additional contracts which are slated to the start in 206 and roll into 2027. So as of this juncture, there's been no real pause on these deep-water drilling programs.
Got it. Okay, that's really helpful caller. I'll return to the queue. Thanks guys.
Brady Murphy
Thanks.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Mr. Murphy for any closing marks.
Brady Murphy
Thank you very much for joining us again. We're very pleased with the start that we've got to the year, very pleased with the outlook we have for both the second quarter and the business that we are we are evolving to with our with our future projects. So, thank you for your interest and thanks for joining us.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participation. You may now disconnect.
