Tuesday, September 19, 2017

A Current AIM Small Cap Equity Fund Holding: Flotek industries (ticker: FTK) by William Reckamp. "The Struggle for FTK Continues"

Flotek Industries (FTK, $5.51): “Flotek Flooding Investors with Uncertainty
By: William Reckamp, 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, Inc. (NYSE:FTK) develops and distributes specialty chemicals, and down-hole drilling and production equipment for the oilfield service industry.

• Flotek is currently advertising its patented Complex nano-Fluid technologies that supposedly can increase well IRR from 22% to 34% with little associated risk.

• The company has recently sold off its drilling technologies business which net the company $17 million in cash.

• Headquartered in Houston, the company still expects to fulfill orders as it shifts manufacturing from Texas to Oklahoma.

• IBM and Flotek have partnered to create Flotek’s Reservoir Cognitive Consultant, which will allow data scientists and chemists to analyze well data and provide customized chemical solutions to clients.

Key points: The uncertainty of oil prices act as a double edge sword. We’ve seen WTI prices stay between the $45-$50 range in recent months. This has caused Flotek’s share price to float between $5.50-$6 dollars. However with the volatility in prices, upstream companies are looking for improved extraction methods which is cheaper than trying to search for new reserves.

During their August investor presentation, management has expressed considerable optimism in their Complex nano-Fluid technologies. Even during the downturn of oil prices, operators have focused on cost reduction. Upstream clients have flocked to these patented extraction technologies which has caused Domestic Complex nano-Fluid volume (gallons) to grow substantially. The numbers of gallons for these technologies has increased 9 of the last 10 quarters. Even though raw material costs are rising, for the products, John Chisholm (CEO) reassures demand is still there. He states in the 2Q17 earnings call, “Our clients are showing signs of receptivity to a period of increasing pricing as we experienced domestic complex nano-Fluid or CnF revenue outpace volume growth in the quarter.”

Management would like to further match the supply with demand so they have an outlined plan for obtaining this objective. At the end of 2Q17, Flotek was producing 1.5 million gallons of nano-Fluid per month. By the beginning of 2018, they are shooting to expand production to around 2 million gallons per month. Additionally, they have successfully expanded in both the Marcellus and Utica regions which will allow business to increase more quickly into the US northeast region. The new development will likely contribute an extra $.50 a gallon of gross margin.

What has the stock done lately?

Flotek shares have decreased from $5.97 to $5.51 in the past month. Shares rebounded from the monthly low on September 8th at $4.80 largely due to a weekly surge in WTI prices. We have seen an overall downward monthly trend due to an announcement of deteriorating cash flows.

Past Year Performance: Over the course of a year, the share price has fallen 67% from $15.65 to the current $5.21 while WTI prices have grown 4.7%. This relationship begs the question about Flotek’s poor performance. Revenues grew sharply in the first two quarters but it has reported net losses in the last four quarters causing the slide.

Source: FactSet

My Takeaway

It seems as though Flotek is revitalizing its business model and therefore investors should be cautious. They have recently sold off its drilling technologies business and are placing a focus on the complex nano-Fluid technologies segment. Management has made this change seem like a growth catalyst; however, if you look at this internationally they have struggled to sell these products. Flotek’s partnership with IBM seems promising, but they are still in the beginning stages of this technology. Shares have decreased 67% in the last year because they have not reported positive income in the last four quarters. In order to attract investors, Flotek needs to provide an income generating and decisive business model. Hold Flotek until a better energy stock is pitched in the AIM Fund.

Source: FactSet