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2Q17 Results Analysis: Why Flotek Industries Stock Is Falling

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Part 4
2Q17 Results Analysis: Why Flotek Industries Stock Is Falling PART 4 OF 6

How Rig Count and Upstream Operator Capex Affected FTK

Flotek Industries’ EBITDA margin

From 2Q16 to 2Q17, Flotek Industries’ (FTK) EBITDA margin (or EBITDA as a percentage of revenues) improved to 2.3% from 0.7%. FTK’s EBITDA margin has been 6.3% on average in the past ten quarters. Flotek Industries makes up 0.10% of the iShares Micro-Cap ETF (IWC). From June 30, 2016, to June 30, 2017, IWC rose 26% versus a ~32% fall in FTK’s stock price during this period. During the same period, the DJIA-INDEX rose 19%. EBITDA is earnings before interest, tax, depreciation & amortization, and is a measure of a company’s operating earnings.

How Rig Count and Upstream Operator Capex Affected FTK

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Upstream operators’ capex cut

FTK’s EBITDA margin, which improved to 3.3% in 1Q17, retreated in 2Q17. As shown in the graph below, from 2Q16 to 2Q17, 19 of the largest US upstream companies, in aggregate, have reduced capex by 8%. Compared to 1Q17, though, upstream capex rose in 2Q17. Typically, higher upstream capex leads to a rise in revenues and operating margins for oilfield services (or OFS) companies.

EBITDA margin for FTK’s peers

Patterson-UTI Energy’s (PTEN) EBITDA margin was 22.5% in 2Q17. Halliburton’s (HAL) EBITDA margin was 16% in 2Q17, while Core Laboratories’ (CLB) EBITDA margin was 22%. Read more on HAL in Market Realist’s Why Is Halliburton Buoyant after Its 2Q17 Earnings?

Will rig count affect FTK’s revenues?

From 1Q17 to 2Q17, Flotek Industries’ revenues rose 7%. During the same period, the US rig count rose 14%. Since June 30, 2017, the US rig count has risen a further 2% until the week ending August 4, 2017. In June 2017, the international rig count also increased over the previous month’s rig count. A higher rig count could improve Flotek Industries’ revenues and earnings in 2Q17.

Next, we’ll discuss Flotek Industries’ indebtedness.

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