Monday, February 13, 2017

A current AIM holding: Flotek Industries (FTK) by Casey McClelland. “Frack Baby, Frack”

Flotek Industries (FTK, $10.27): Returns Are Getting Stuck in the Pipes
By: Casey McClelland, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Flotek Industries (NYSE:FTK) Is an oilfield products company that specializes in chemical technologies used in the drilling process as well as providing technology for the drilling and pumping mechanisms. The company operates through three main segments: Energy Chemical Technologies, Consumer and Industrial Chemical Technologies, Drilling Technologies and Production Technologies.

Surprisingly, Flotek has not benefitted as much as the other energy related names in our portfolio. In fact, Flotek is actually down 12.8% since the announcement from OPEC that they would be putting production caps on cartels countries.

• FTK has found itself in a battle with one of their key investors FourWorld. The activist investment firm issued a letter to the management team of FTK demanding that they provide real hard data on the benefits of their chemical product CnF.

FTK has tried to fight the claims against their product by citing a report done by a consulting firm that praises the product and its effectiveness. Though the consulting firm has given it the thumbs up, they have not brought forth in any data that properly backs the claim.

§  Flotek also announced during their third quarter earnings release that their CFO, Rob Schmitz, would be retiring during the first quarter of 2017.

Key points:
While the rest of the industry is reveling in the new production capped world, Flotek is in a battle with Hedge fund investor FourWorld over the legitimacy of their chemical product CnF. The historic OPEC news has propelled other domestic energy companies to enjoying fruitful returns since the agreement and are pursuing aggressive strategies in this new environment due to the positive outlook going forward. 

Flotek meanwhile has dropped 12% since the agreement are stagnating due to these allegations. They tried to present evidence through a letter from the MHA Petroleum Consultants that supported the legitimacy of their product. The problem with the letter from the consulting group is that it lacks tangible real word evidence of the product efficacy. The company is in dire need of field evidence that supports their product so that they can put this issue behind them.

To compound the stocks issues, the CFO has decided to retire in the early part of this year. This has created more uncertainty for the company as they are now facing the challenges of an activist while also trying to transition in a new CFO into the executive team. A smooth transition in the executive team will be critical for the company as they try and defend the activists claims as well as get back on track with their performance.

In the recent quarter FTK failed to meet EPS and revenue consensus targets. They came in three pennies short on their bottom line and failed to meet top line expectations by over three million. The company stated during their 3Q earnings release the decrease in revenue was driven by the continued decline in drilling activity, as indicated by the 43.2% reduction in average North American rig count. 

As the OPEC agreement had yet to be made during the quarter, they struggled through the challenged U.S. shale market which lead to the top line miss. CEO John Chisholm then went on to say, While we saw a slow but steady improvement in business from the beginning to the end of the quarter, we remain guarded in our assessment of overall oilfield activity. This slow gain in business seen throughout the quarter could provide momentum into the 4th quarter and a better environment could improve the management teams outlook on the companys near term future.

What has the stock done lately?
In the past 3 months, the stock has performed negatively at a loss of 8%. This is of course due to the multitude of problems mentioned earlier that have occurred in the last three months that they are still trying to work through.

Source: FactSet

Past Year Performance:
Since the introduction of FTK in to the portfolio, the stock has performed extremely poor. Though we were able to recover some of the downside by entering the position again when it bottomed out during the commodity collapse, it has still yet to regain its inception price. The stock is up year to date 50% but since inception the company is still performing at a loss of 40%. This years rally has been great but it has yet to make up for the losses occurring after the collapse.

My Takeaway

With the turmoil from the activist hedge fund, transition in the management team, and underperformance in recent quarters, it is time for this position to exit the portfolio. The stock is currently down 40% since it was pitched in 2015 and the possibility of attaining that loss back does not seem realistic at this point. There are too many for hurdles currently for this company to have to get through right now and I believe that their needs to be a replacement for this company in the portfolio. The only current benefit of Flotek in the portfolio is that it is diversifying are energy sector but that pro is being far outweighed by the companys immense cons.

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