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.
Summary
• 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
