Flotek Industries (FTK) is a Growing Small-Cap Company with Prudent Management

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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