Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: writser on May 02, 2019, 08:52:53 AM

Title: FTK - Flotek
Post by: writser 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: .
Title: Re: FTK - Flotek
Post by: Foreign Tuffett 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. ( (

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.
Title: Re: FTK - Flotek
Post by: writser 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.
Title: Re: FTK - Flotek
Post by: SnarkyPuppy 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.