Flotek Industries Inc. (NYSE: FTK) reported Q2 results this week and executives discussed operations for the company’s oil and gas industry segment during the Q2 2018 earnings call.

2Q Financial Snapshot

  • Revenue of $59.1 million for 2Q 2018 decreased 2.4% compared to 1Q 2018 and decreased 30.6% compared to 2Q 2017.
  • Cash SG&A of $13.1 million for 2Q 2018 (excluding stock compensation expense of $2.4 million) decreased 3.9% compared to 1Q 2018 and decreased 22.6% compared to 2Q 2017.
  • Net income (loss) of ($75.0) million for 2Q 2018, compared to $0.1 million for 1Q 2018 and net loss from continuing operations of ($1.1) million for 2Q 2017.
  • GAAP earnings (loss) per share (“EPS”) of ($1.30) for 2Q 2018, compared to $0.00 for the 1Q 2018 and GAAP EPS from continuing operations of ($0.02) for the 2Q 2017.
  • Adjusted EPS of ($0.34) for 2Q 2018, compared to $0.01 for 1Q 2018 and adjusted EPS from continuing operations of ($0.01)for 2Q 2017.
  • Adjusted EPS for 2Q 2018 excludes pre-tax charges of $37.2 million impairment to goodwill, $2.6 million write-down of assets held for sale, $1.2 million for discontinuation of corporate projects, and $0.4 million related to the closing of a business venture, and $22.8 million deferred tax asset valuation allowance, totaling $55.5 million, or $0.96 per share, net of tax. (See our Reconciliation of Non-GAAP Items and Non-Cash Items Impacting Earnings at the conclusion of this release.)
  • Adjusted EBITDA, a non-GAAP measure, of ($4.0) million for 2Q 2018, compared to ($1.0) million in 1Q 2018 and $6.0 million in 2Q 2017.
  • Free cash flow (operating cash flow less capital expenditures) of ($8.7) million for 2Q 2018, compared to ($13.5) million for 1Q 2018 and ($7.3) million for 2Q 2017 partially due to working capital investments of ($1.7) million as we fulfill a large CnF® order.
  • Net debt position of $46.0 million at 2Q end 2018 increased from $36.9 million at 1Q end 2018, principally due to inventory build, EBITDA losses and funding of Capex.

In his prepared remarks in the management commentary, Flotek CEO John Chisholm said:

“Based on commercial successes with our existing client base, we see opportunities to expand our partnerships into new basin with a broader product offering, including the use of our CnF technology. We are doing our part, the effort to continue to reduce the costs of our client spend per well, while at the same time increasing their performance.

“During the second quarter, we received the single largest ever Complex nano-Fluid order related to a large unconventional gas project in the Middle East. This is the fruit of multiple years of research, testing, and validation by the technology divisions of our business partners, and we are excited to provide our technology to help maximize the recovery of hydrocarbon from this large-scale program.”

Josh Snively, EVP of operations at Flotek said: “Our business continues to evolve from a traditional chemistry manufacturing operation to providing full fluid systems to the industry, which has resulted in a negative impact to our gross margins as we scale.

“Many of our PCM prescriptions have changed the reservoir-centric fluid design to alter proppant carrying capacity and thereby reducing our clients’ costs while improving the performance of their reservoir. And one recent and evolving case, our PCM program has reduced our client chemistry spend by 50%, while maximizing their profit delivery and resulting in better performing wells. This is opening the door to enhancing the reservoir treatment to include CnF and other proprietary offerings, which can mitigate damage to well offset and increase the primary production of new completions.

“Building on these successes, we have been able to continue to add PCM personnel and equipment to meet demand. Our field crews require a few field chemists and a mobile chemistry facility to provide real-time fluids system diagnostics. To further support these efforts, we added additional tanks, increased our committed truck drivers and optimized our blending capabilities in our Waller facility, as well as expanded our operations in Marlow.

“Additionally, through our research and innovation efforts, we have enhanced our offerings, expanding applications of our CnF technology to address the full lifecycle of the well, beyond completions to include secondary and tertiary recovery, IOR or improved oil recovery will enhance water flooding, acidizing and remediation. While we’re in the early stages of market development for new applications for our flagship technology, we are excited about the initial update as well as commercial successes.”

Q:  You guys mentioned the loss of your largest customer with – it’s kind of been an ongoing discussion here. Going forward and I assume, and you can correct me if I’m wrong, that’s not embedded within any forecast to see them coming back, but just wanted to maybe revisit – certainly, this has occurred before in the past I think back in 2015, I believe, so any thoughts or at least comments on whether you still remain engaged with that customer moving forward and what kind of expectations you have baked in which I assume are nothing at least in the near-term forecast.

Flotek CEO John Chisholm No. As we’ve – as everybody has come to understand, we don’t specifically talk about our clients, but there is no basis for revenue with respect to that client for the remainder of the year but we are engaged with them on a technical level, and I’ll let Josh speak a little bit more to that, on an ongoing basis with different products that – and services that they’re interested in. And we’re on good terms with them, but Josh will certainly add to that.

Flotek Executive Vice President of Operations Joshua A. Snively: As we mentioned on the Q1 call that we had introduced some new products to match the needs of the market, largely driven by lower cost points with certain benefit characteristics. So, we talked about our FR lines for proppant-carrying and viscosity-building. We talked about our lower cost low-back aids. Those are specifically designed to meet the needs that the market is asking for. And so, we are certainly engaging not only the customer that you’re asking about, but other customers across the basin as well.

So, we constantly knock on doors. We have very good relations with most operators. They’re very interested in our chemistry options, and we are at a point now where we can expand those offerings and give them more of what they’re asking for to help them meet their price points.

Flotek is presenting at the EnerCom conference

Flotek CEO John Chisholm is presenting at the EnerCom – The Oil & Gas Conference – Aug. 19-22 at the Denver Downtown Westin hotel. Investors may register for the conference at the website.

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