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.
Summary
•
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 cartel’s 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
stock’s 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 activist’s 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 company’s 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 year’s 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 company’s immense cons.
