Author Topic: FTK - Flotek  (Read 5708 times)

writser

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Re: FTK - Flotek
« Reply #10 on: October 18, 2019, 02:43:11 AM »
Artko capital has a 10% core position in Flotek (gutsy) and shares his thoughts on Flotek in his latest letter: https://www.hvst.com/organization/art-capital-lp/posts/artko-capital-3q-2019-partner-letter-EvrTnLGB .
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We believe at these prices we are well compensated for this risk and in return we are getting free optionality on a number of potential positive external and internal scenarios within the next few years such as a return of stronger oil and gas markets; CnF product and the new technically oriented salesforce being as good as management claims it to be and receives customer recognition in form of higher revenues as a result; a profitable revenue layer acquisition and further cost  cutting  efforts  create sustainable profitability  for  the  company;  at the  current  stock price  the strategic committee changes its mind and initiates a share buyback; a successful sale of the company at  a price higher than the zero value  the market assigns to it today  and so on. In a nutshell, Flotek represents  the  type  of  investment  we tend to get  excited  about:  a stock with  extreme  negative sentiment,  industry  and company  specific;  with  low  permanent  capital  impairment  risk,  high uncertainty  and  free  optionality  for  potential  returns  in  the  100s  of  percent  from  these  levels.

Can't say I'm quite convinced but a decent read nonetheless.
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Foreign Tuffett

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Re: FTK - Flotek
« Reply #11 on: October 18, 2019, 09:59:27 AM »
Artko capital has a 10% core position in Flotek (gutsy) and shares his thoughts on Flotek in his latest letter: https://www.hvst.com/organization/art-capital-lp/posts/artko-capital-3q-2019-partner-letter-EvrTnLGB .
Quote
We believe at these prices we are well compensated for this risk and in return we are getting free optionality on a number of potential positive external and internal scenarios within the next few years such as a return of stronger oil and gas markets; CnF product and the new technically oriented salesforce being as good as management claims it to be and receives customer recognition in form of higher revenues as a result; a profitable revenue layer acquisition and further cost  cutting  efforts  create sustainable profitability  for  the  company;  at the  current  stock price  the strategic committee changes its mind and initiates a share buyback; a successful sale of the company at  a price higher than the zero value  the market assigns to it today  and so on. In a nutshell, Flotek represents  the  type  of  investment  we tend to get  excited  about:  a stock with  extreme  negative sentiment,  industry  and company  specific;  with  low  permanent  capital  impairment  risk,  high uncertainty  and  free  optionality  for  potential  returns  in  the  100s  of  percent  from  these  levels.

Can't say I'm quite convinced but a decent read nonetheless.

Several things I disagree with in that letter about FTK:

* One of the few times I've seen someone lump in restricted cash in with unrestricted cash balance ($97.5 + 0.7 = his $98.2 million #). It's not meaningful difference, but seems like an odd thing to do.

* The land and buildings they own are really only liquid if the company (1) liquidates or (2) does some sale-leaseback transactions, which would immediately cause it to start burning even more cash. Also, they may or may not be worth the ~$40 million they are carried at on the balance sheet.

* The real risk here isn't a "10 - 20% permanent capital impairment loss." This could be a zero in a couple of years if management blows most of the cash hoard on a bad acquisition and the core business continues to burn cash. Cyclicality aside, it is brutally difficult to make successful acquisitions in the oilfield services space, particularly when you don't have a strong core business to bolt smaller companies on to.

I continue to think this is only suitable idea for a net net basket or quant strategy.

mjohn707

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Re: FTK - Flotek
« Reply #12 on: October 18, 2019, 10:44:36 AM »
Artko capital has a 10% core position in Flotek (gutsy) and shares his thoughts on Flotek in his latest letter: https://www.hvst.com/organization/art-capital-lp/posts/artko-capital-3q-2019-partner-letter-EvrTnLGB .
Quote
We believe at these prices we are well compensated for this risk and in return we are getting free optionality on a number of potential positive external and internal scenarios within the next few years such as a return of stronger oil and gas markets; CnF product and the new technically oriented salesforce being as good as management claims it to be and receives customer recognition in form of higher revenues as a result; a profitable revenue layer acquisition and further cost  cutting  efforts  create sustainable profitability  for  the  company;  at the  current  stock price  the strategic committee changes its mind and initiates a share buyback; a successful sale of the company at  a price higher than the zero value  the market assigns to it today  and so on. In a nutshell, Flotek represents  the  type  of  investment  we tend to get  excited  about:  a stock with  extreme  negative sentiment,  industry  and company  specific;  with  low  permanent  capital  impairment  risk,  high uncertainty  and  free  optionality  for  potential  returns  in  the  100s  of  percent  from  these  levels.

Can't say I'm quite convinced but a decent read nonetheless.

Several things I disagree with in that letter about FTK:

* One of the few times I've seen someone lump in restricted cash in with unrestricted cash balance ($97.5 + 0.7 = his $98.2 million #). It's not meaningful difference, but seems like an odd thing to do.

* The land and buildings they own are really only liquid if the company (1) liquidates or (2) does some sale-leaseback transactions, which would immediately cause it to start burning even more cash. Also, they may or may not be worth the ~$40 million they are carried at on the balance sheet.

* The real risk here isn't a "10 - 20% permanent capital impairment loss." This could be a zero in a couple of years if management blows most of the cash hoard on a bad acquisition and the core business continues to burn cash. Cyclicality aside, it is brutally difficult to make successful acquisitions in the oilfield services space, particularly when you don't have a strong core business to bolt smaller companies on to.

I continue to think this is only suitable idea for a net net basket or quant strategy.

This was more or less my feeling as well.  And even for a net-net or Schloss type of investment, I thought that this could have been a little cheaper.  Could work out, who knows, but a 10% sizing is very brave to say the least
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Spekulatius

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Re: FTK - Flotek
« Reply #13 on: October 18, 2019, 01:31:23 PM »
^ These Artko folks have balls, that’s for sure. So far, it seems to be working out for them.
To be a realist, one has to believe in miracles.

Philbert77

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Re: FTK - Flotek
« Reply #14 on: October 18, 2019, 04:15:29 PM »

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 just read (mostly) the the most recent conference call transcript and I am pretty impressed with David Nierenberg.

" Our assessment of the current widespread wreckage in the oilfield services capital market today with so many once mighty companies share prices knocked down to under a buck or single-digit and with such pervasive fear of debt repayment, access the capital and busting covenants and with energy stocks being so out of favor as a percentage of the entire S&P 500 capitalizaiton, convinced us that we are in a buyers' market today for energy businesses.


Therefore, we should recognize the very considerable opportunity costs of using cash mainly for financial engineering, the opportunity cost of possible misallocation of capital today is about as high as I've ever seen it. Because our cash is so strategic revaluable now, we are intense about protecting it four ways; continuing to reduce cost, managing our balance sheet to generate cash through monetization of working capital controlling CapEx and discretionary investments and collecting escrows; steering the mix of our product sales toward our most profitable products; and using our new upgraded sales team to drive revenue growth again. Our policy has to be this, do not let our cash become a melting block of ice. Rather, use time to make prudent profitable allocations of scarce capital in a buyers' market.... To conclude, we would like to take full advantage of the balance sheet strength, which our cash is so precious and valuable today relative to paying out cash and dividends or repurchases. There is no certainty that we will make an acquisition, nor should we act under pressure to make one. But there would be a very different certainty if we had dividend and out the cash or use the large portion of it to do repurchases, because that cash then would be gone and could no longer be used to buy and build growth, scale, profitability, and build further on our solid C&S platform in a buyers' market. So we're going to keep the pressure on cost reduction, protect our cash, grow CnF and scour this buyers' market for sensible prudent business combinations, which could add value." https://seekingalpha.com/article/4284394-flotek-industries-inc-ftk-ceo-john-chisholm-q2-2019-results-earnings-call-transcript?part=single

I would also add that Matthew Sweeney of Laughing Water Capital is also a proponent of Flotek: https://static1.squarespace.com/static/5d93ed0b59166652b0d66427/t/5d9f479eca9e7941403f75d4/1570719647500/2019+LP+Meeting+Transcript.pdf

Essentially FTK is a bet on a jockey with a business sitting on a stack of cash.

Foreign Tuffett

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Re: FTK - Flotek
« Reply #15 on: October 20, 2019, 08:54:38 AM »
Philbert77, I disagree.

Nierenberg on the Q2 call on the strength of the core business:

So if I may borrow from Ronald Reagan, there definitely is a pony in this room, and this pony's name is CnF. If CnF were not the pony, then the strategic capital committee could lean towards paying out a large special dividend, or even towards selling the company. But a profitable core product, which adds value, which can be focused and grown and which has growth opportunities in EOP, we definitely want to build on that. And our C&S growth opportunity is being substantiated in real time by half of dozen large customer prospects. We do have several other organic growth opportunities in other parts of the company.

Well, the market is pricing the stock like their core business is complete garbage, so if he really believes all that then buying back shares with their surplus cash is a no-brainer. However, here's the very next thing he says:

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 to grow revenue and profit. Our evaluation of these with Citi has already considered approximately 40 possibilities.

He (1) is just bad at allocating capital and/or (2) is irrationally confident that he will pull the trigger on a really good acquisition and/or (3) he doesn't actually believe everything he said about the core business and/or (4) is now an entrenched insider.


Philbert77

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Re: FTK - Flotek
« Reply #16 on: October 20, 2019, 02:45:56 PM »
He (1) is just bad at allocating capital and/or (2) is irrationally confident that he will pull the trigger on a really good acquisition and/or (3) he doesn't actually believe everything he said about the core business and/or (4) is now an entrenched insider.

I'm not so sure about those statements. I don't believe his faith in the core business and the plan to make acquisitions in a cash starved environment to be mutually exclusive. Share buybacks are not the end all and be all of investing. Additionally, Nierenberg has substantial skin in the game - he is going to play this in a way that benefits his holdings as well.

I like what Matthew Sweeney thinks:

"with Flotek, sticking with valuation for another minute, we have an escape hatch too. There are multiple ways to win. Right now it seems like the plan is to clean up the business and then try to grow the business, but if it seems like that is too hard, or isn’t working, there is an escape hatch in that this business could be sold too...  if the incentives weren’t inline, if instead of Nierenberg we had a real born and bred wildcatter making the decisions then I would weight the probability of a sale at zero, but Nierenberg is rational – he has no ego tied up in this – he thinks like an equity owner because that is the business he is in – so if the current plan to clean up the business and make some acquisitions doesn’t work, he’ll look out for his best interest, which is the same as our best interest, and push to sell the company and we’ll do fine. " https://static1.squarespace.com/static/5d93ed0b59166652b0d66427/t/5d9f479eca9e7941403f75d4/1570719647500/2019+LP+Meeting+Transcript.pdf

Give it a 2 or 3 years and we'll see who is right.  As the saying goes - "time and truth march hand in hand".