How Flotek Could React to Upstream Operators’ Capex and the Rig Count

From 1Q16 to 1Q17, Flotek Industries’ (FTK) EBITDA (earnings before interest, tax, depreciation, and amortization) margin shrank to 3.3% from 4.1%. FTK’s EBITDA margin has been 1.7%, on average, for the past five quarters.

FTK’s EBITDA margin made considerable progress in 1Q17. From 1Q16 to 1Q17, 19 of the largest US upstream companies, in aggregate, have reduced their capital expenditures or capex by 21%.

Usually, lower upstream capex leads to a fall in revenues and operating margins for OFS (oilfield and equipment services) companies.

Weatherford International’s (WFT) EBITDA margin was 6% in 1Q17. Halliburton’s (HAL) EBITDA margin was 13.7% in 1Q17, while National Oilwell Varco’s (NOV) EBITDA margin was 4.5%. You can read more about WFT in Market Realist’s series Why Weatherford International Fell despite Margin Improvement.

From 4Q16 to 1Q17, Flotek’s revenues rose 51%. During the same period, the US rig count rose 25%. Since March 31, 2017, the US rig count has risen another 14% as of June 30, 2017. In May 2017, the international rig count also rose by one over the previous month’s rig count. Remember, a higher rig count can increase Flotek’s revenues and earnings in 2Q17.

Flotek makes up 0.13% of the iShares Micro-Cap ETF (IWC). From March 31, 2016, to March 31, 2017, IWC rose 26%, compared with the ~74% rise in FTK’s stock price during the same period. DJIA-INDEX rose 17% during that time.

Now let’s discuss Flotek’s debt.