Flotek Industries’ Strategy: Will It Generate Positive Returns?

Between December 2014 and December 2016, Halliburton’s (HAL) stock price rose 40%. In the past two years, returns from the VanEck Vectors Oil Services ETF (OIH) have been close to -8%. OIH tracks 25 OFS (oilfield service) and equipment companies. The SPDR S&P 500 ETF (SPY) has risen 13%. Also, in the past two years, the Energy Select Sector SPDR ETF (XLE) was at its highest in April 2015. Its price has fallen just 4% since then.

In the past two years, FTK has underperformed the industry. Lower-market-cap peer BHI outperformed the industry ETF. Many of the OFS stocks reached a high in mid-2014 and then fell. The crude oil price was also at its highest in June 2014 and then pulled back. Also, there has been renewed merger and acquisition activity in the OFS space recently—the latest is Patterson-UTI Energy’s (PTEN) bid to acquire Seventy Seven Energy (SVNT). For more on this deal, read Market Realist’s Oilfield Services Deal: PTEN Will Acquire Seventy Seven Energy.

Flotek Industries’ management expects growth to emanate from the following drivers:

• the introduction of pressure-reducing chemistry technology (or PrF)
• the development of its Prescriptive Chemistry Management Total Fluid Service
• the acquisition of International Polymerics in July
• the market share growth of FTK’s CnF (Complex nano-Fluid) suite of completion chemistries

Despite some positive drivers, Flotek Industries is primarily dependent on its US energy operations, which continue to face uncertainty. Its capex is restricted for the remainder of 2016 following the amendment of its credit facility. FTK’s debt is high, which can lead to debt covenant maintenance issues.