Flotek
Industries is a company that experienced phenomenal growth starting in
mid-summer. From the beginning of July until the first week of October when the
company peaked, the value of the stock increased by more than 34%. Since that
time, the stock has been on a well-defined bearish trend, but it looks like it
has reached an important support line at $19.05.
This
company may be a good long-term investment and the timing might be right to
look at it. This is a company that provides the chemicals to the oil and gas
industry that does vertical and horizontal drilling. One of the reasons I
encourage investors to look at this company is because it has “renewable
revenue” since oil and gas exploratory companies will continually buy their
products. This represents a healthy revenue source.
I
know the company has been in a bearish trend, but it mirrors (on a lagging
basis) the price of oil and gas. This is understandable since its clients are
also influenced by the price of oil and gas. The United States Oil Fund (USO)
peaked at the beginning of September, a month before FTK did, and it also
defined its bottom before it started to turn up at the beginning of November,
also a month before Flotek.
Let’s
take a look at the company’s third-quarter numbers; even though the value of
the stock continued to move down through most of the quarter.
Third
Quarter
The
company had a strong third quarter, with revenue of approximately $98.4 million
compared to a year ago when it was only at $78.6 million. Year-over-year,
Flotek generated a revenue increase of $19.8 million, but I must point out that
the main bulk of the growth came from an acquisition. When it purchased Florida
Chemical Company, the purchase added revenues of $18.6 million during the third
quarter.
Accounts
receivable also increased to $62.6 million from $44 million a year ago for the
same reason as revenue growth.
A
quick look at the company’s divisions will indicate that Energy Chemical
Technologies is by far the most productive segment:
•
Energy Chemical Technologies – $51.7 million with gross margins of 42.3%
•
Consumer & Industrial Chemicals Technologies – $15.3 million with gross
margins of 23.5%
•
Drilling Technologies – $27.6 million with gross margins of 39.3%
•
Artificial List Technologies – $3.9 million
The
Drilling division is being challenged by the reduction in well fracking due to
multi-well pad technology.
In
a recent article written on Halliburton (HAL), the development of multi-well
pads was mentioned. These new “pads” reduced traffic and made drilling more
efficient so that not as much service and equipment was in demand. The
following is a quote from the article: “With the development of horizontal
drilling, came the creation of multi-well pads. Vertical wells require a
separate pad for each well but horizontal drilling allows for multi-wells on
one pad. This is made drilling much more efficient because once wells drilled a
rig may only have to move 20 feet or so to drill the next one which also
reduces truck traffic.”
Solid
Company with Solid Ratios
For
a small-cap company, Flotek has performed well and consistently leads its
industry. One of the most important factors considered for an investor is sales
performance. Over the last five years, its sales have increased by 14.64%. This
is more than 60% above the industry average.
A
company that has growing revenue, can manage its finances well, is performing
well and has low debt should definitely be watched. Flotek seems to have all
these going for it.
•
Its gross margins are at 40.07%, well above the industry average of 26.80%.
•
It has very low debt compared to the industry with a debt/equity ratio of 0.17
while the industry floats well above it with an average debt/equity ratio of
0.75.
If
that isn’t enough, Flotek management has also done a good job with “efficiency
management.” Look at these income and revenue ratios as compared to the
industry average:
•
Income/Employee ($119,441.98) Industry ($51,329.10)
•
Revenue/Employee ($856,590.12) Industry ($578,054.61)
As
the company grows, it continues to develop its infrastructure to support its
oilfield portfolio. These are the projects that Flotek is currently working on:
•
Completion of production, storage and transportation enhancement to the
company’s primary chemistry production facility in Marlow, Oklahoma
•
The construction and development of a state-of-the-art technology facility for
Teledrift, Cavo motors and Flotek’s other drilling technologies in Moore,
Oklahoma
•
Construction of a new facility to house the company’s expanding operation in
North Dakota’s Williston Basin
•
Expansion of Florida Chemical’s storage capacity in Waller, Texas
•
The development of expanded laboratory facilities in the Woodlands to support
the combination of Flotek and Florida Chemical’s advanced chemistry research,
production of new Stemulator tools and capital for expansions to meet growth in
Commercial and Industrial Chemical Technologies facilities in Florida and in
Enhanced Oil Recovery infrastructure
We
have a company with a re-occurring and growing revenue base. It has minimal
debt with a management team that has shown great efficiency in being able to
use its resources and employees to generate income. As the exploration of oil
and gas through fracking continues to grow; so should the size of the company and
the value of the stock. This is a good value investment candidate.
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