Author Topic: FTK - Flotek  (Read 3518 times)

writser

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FTK - Flotek
« on: May 02, 2019, 08:52:53 AM »
Has anybody ever looked at Flotek (FTK) recently? Was a somewhat fashionable short in 2015 / 2016 if I remember correctly. The company has since then sold most of their divisions. Only the 'energy chemistry technologies segment' remains. Basically they sell chemicals that increase productivity of oil and gas wells. Pro forma (link) the company has ~$100m in net cash, ~$17.5m in escrow. Market cap is ~$200m for an EV of ~$90m (all ballpark). Revenue of this segment has been around $200m the past few years.

Mgmt doesn't appear very competent and there's way too much overhead. But a shareholder (David Nierenberg from D3 Family Funds) is on the board since 2018, is now chairman and leading a 'strategic capital committee', determining what to do with the excess cash. Also, the company has hired a new CFO last December with a history of short stints and strategic transactions. She's also on the strategic capital committee.

I have a hard time judging how attractive / profitable the ECT business is but it seems like shareholders finally have a place at the table and that a sale and/or return of capital is a distinct possibility. Pro forma the company seems cheapish on a few simple metrics. Any thoughts?

VIC writeup that piqued my interest: https://www.valueinvestorsclub.com/idea/Flotek/9761947981 .
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Foreign Tuffett

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Re: FTK - Flotek
« Reply #1 on: May 02, 2019, 11:01:41 AM »
Weren't the short cases correct in that FTK's core fracking chemicals ("stimulation chemistry") business line is commoditized? I think part of the reason this was (as you mention) a battleground stock several years ago is that, with lots of new technologies and variables, onshore E&P companies didn't have great insight into how to maximize hydrocarbon recoveries (lateral lengths, proppant levels, etc). FTK was able to convince some industry players (and investors!) that their products deserved a premium price due to higher levels of effectiveness, but it was only a matter of time before the industry as a whole figured out that this was not, in fact, the case.

http://brontecapital.blogspot.com/2016/12/flotek-some-new-research.html

https://www.fourworldcapital.com/ftk-supporting-materials

Is this cheap on asset basis: Yes (@ a $3.41 stock price I came up with a $82 million EV #)

Is it a low quality business: In my opinion, yes

Nierenberg as Chairman is a positive development, but he has been long and wrong here for an extended period of time.

It's an interesting idea, but it's probably a pass for me.

writser

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Re: FTK - Flotek
« Reply #2 on: May 02, 2019, 01:19:38 PM »
Is it a low quality business: In my opinion, yes

Sure, but, despite that revenue from the segment was $188m in 2016, $243m in 2017 and $177m in 2018, with a gross margin of ~24% the past nine months (down from ~40% in 2015, 2016). Not superb but apparently the product is not totally b.s. either. Remainco is probably too small as a standalone entity, especially given the ridiculous overhead costs, but currently it is priced at ~0.5x EV/revenue or something like that. Shouldn't it be a very attractive acquisition target at that multiple?

Not saying I'm completely convinced either. But story might be worth following.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

SnarkyPuppy

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Re: FTK - Flotek
« Reply #3 on: May 03, 2019, 04:46:11 AM »
I own some for the reasons described.  Part of it is just a short term rare info arb (maybe I'm the one being info arb'd?) where the price is clearly ridiculous and should rerate as the VIC author describes.   VIC author also talks about recent Saudi deal which likely was the result of significant due diligence by knowledgeable people in the field vs desktop jockeys playing with excel. 

Let's just say that I don't intend to hold forever.

writser

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Re: FTK - Flotek
« Reply #4 on: August 08, 2019, 08:20:47 AM »
Glad I avoided this one so far. Q2 another ~15m net loss on 35m of sales. Gross margins were actually negative. Shares down ~30% today for a market cap of ~$125m. EV is basically zero. Cheap, but it will go down in flames quickly this way.

Quote
“Finally, our Strategic Capital Committee continued to make important progress in the second quarter in its detailed review that began with a deep-dive into the business and later moved into an evaluation of the alternative possible uses for the significant amount of cash on our balance sheet as a result of the sale of Florida Chemical Company.”

The deep-dive .. I don't see any urgency to sell this PoS as soon as possible. Maybe the conference call will bring up something interesting.
« Last Edit: August 08, 2019, 08:37:56 AM by writser »
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writser

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Re: FTK - Flotek
« Reply #5 on: August 09, 2019, 02:47:25 AM »
Conference call snippets:

Quote
we are in a buyers' market today for energy businesses. Therefore, we should recognize the very considerable opportunity costs of using cash merely for financial engineering.

Quote
Next, because we are in a buyers market for oilfield services, have $100 million and are protecting it vigilantly, the Strategic Capital Committee is evaluating inorganic growth opportunities, which could grow revenue and profit. Our valuation of these with Citi has already considered approximately 40 possibilities. Our acquisition criteria include these goals: Buying immediate positive EBITDA in a buyers market; therefore, not buying a start-up, not buying a bleeder, but a well-managed partner with scale and profits.

Quote
if a company has a very weak balance sheet and isn't performing well, then it may need to sell itself. But we have a lot of opportunities to add value to what we have here, and we have -- I think all of us come to the conclusion that the better thing to do is to keep our head down and make those good things happen.

If 'buyers' market' was on your conference call bingo card you'd have had a great time. Phrase of the day .. Seems like these guys are pretty much focused on growing scale by acquisitions. Maybe that's the smart thing to do, but I don't think I want to get involved with that.
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kab60

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Re: FTK - Flotek
« Reply #6 on: August 09, 2019, 03:29:28 AM »
Haven't followed the Company but that management sounds like a structural short.

Homestead31

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Re: FTK - Flotek
« Reply #7 on: August 10, 2019, 02:41:43 PM »
one can certainly argue that there are real execution risks here, but I think criticism of "management" here is mis-placed.  The shots are being called by the Chairman of the board, who is guy that has run a concentrated small cap portfolio for 30 years.  Before that, he was Mitt Romney's right hand man at Bain.  He owns a decent sized position, and bought stock in the open market about 6 weeks ago at prices that are 80% higher than the current stock price.

again - you can argue about the execution risks - but the credentials and incentives of the guy running the show are impeccable in my opinion.

"buyers market" definitely got punched on the bingo cards, but so did "time arbitrage."  The simple fact is that this company has a ton of cash, and when capital markets are closed to most industry participants, each of those dollars is worth more than a dollar.

i recommend reading the transcript of the last call - or the last 3 calls - before passing judgement.  i think much of the selling was just from people who were playing for a quick buyback, and who were disappointed.  i get it - i am certainly disappointed - but the guy who knows the most about what is going on is not someone who  is career management and just trying to protect their own job.  he is someone whose real job is doing what alot of the people on this board do - investing in small cap stocks - and insider buying from someone like that right before a huge sell off should make people think a little deeper in my opinion.


Foreign Tuffett

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Re: FTK - Flotek
« Reply #8 on: August 12, 2019, 10:00:18 AM »
one can certainly argue that there are real execution risks here, but I think criticism of "management" here is mis-placed.  The shots are being called by the Chairman of the board, who is guy that has run a concentrated small cap portfolio for 30 years.  Before that, he was Mitt Romney's right hand man at Bain.  He owns a decent sized position, and bought stock in the open market about 6 weeks ago at prices that are 80% higher than the current stock price.

again - you can argue about the execution risks - but the credentials and incentives of the guy running the show are impeccable in my opinion.

"buyers market" definitely got punched on the bingo cards, but so did "time arbitrage."  The simple fact is that this company has a ton of cash, and when capital markets are closed to most industry participants, each of those dollars is worth more than a dollar.

i recommend reading the transcript of the last call - or the last 3 calls - before passing judgement.  i think much of the selling was just from people who were playing for a quick buyback, and who were disappointed.  i get it - i am certainly disappointed - but the guy who knows the most about what is going on is not someone who  is career management and just trying to protect their own job.  he is someone whose real job is doing what alot of the people on this board do - investing in small cap stocks - and insider buying from someone like that right before a huge sell off should make people think a little deeper in my opinion.

I get what you're saying, but there's such a thing as sector-specific knowledge, and Nierenberg appears to have little. He's owned shares since 2015, right? Most of what you are saying could have been written back then.

While I basically agree that the oilfield services space is a buyer's market right now, I don't see any indication that I want this management team to be buying anything on my behalf. Small cap oilfield services is a space filled with junk companies (like this one), that can become impaired faster than you can say "what happened here?"

I think this is suitable for a quant basket of net nets, but other than that no thanks.




Homestead31

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Re: FTK - Flotek
« Reply #9 on: August 12, 2019, 03:20:46 PM »
[

 Most of what you are saying could have been written back then.



Back then they were heavily indebted, preparing to sell assets, they had not yet gone through cost cutting exercises, the CEO had not yet agreed to a pay cut to stay on, Nierenberg was not an insider, there was no strategic capital committee, the CnF technology had not been validated by Saudi Arabia and others, they were relying on HAL for most of their distribution.

Now they are cash heavy, and preparing to buy assets, and all of those other things have changed as well, so I think the situation is markedly different.

that being said, i agree that Nierenberg is not a domain expert (probably a good thing given how much value destruction there has been in the space), and as i said previously there is certainly execution risk.