FTK
#Sure, thanks for the question, <UNK>, and thanks for refreshing our memory.
I think everybody or I would hope everybody on this call understands that in this environment, if you are using a technology that some people have viewed as a like to have versus a have to have, the microscope look on every dollar that is spent is even heightened and the fact that that largest operator in Midland has continued to use CnF on best practices for every well and is increasing its usage speaks to the point of the benefit they can isolate for CnF being involved in the optimization of their completion program as they continue to refine and optimize it.
With respect to the peer-to-peer communication, I think there really is a change in the industry that a lot of, as you say, keep your cards close to your vest by many of these operators has changed.
I think everybody understands they are in this together.
A lot of the leases have been secured in the Permian.
Some people are even swapping leases with each other to be able to affect different operators having more lateral length to be able to drill with.
It's a level of cooperation that I have certainly not seen in many years, and so people are being a little bit more free with how they are going about their completions and drilling programs, which I think is overall very good for the industry.
And we are ---+ we like to point out that folks have a little different experience when they involve Flotek, and it is great that those operators are sharing that to the other people that are, in many cases, just across the fence line from them.
But we certainly, as you recognize, see a dynamic changing in the industry from what most of us have been used to for the last couple of decades.
Does that help.
Sure, so the adjusted EBITDA calculation for purposes of the bank covenants is EBITDA plus stock comp expense.
In the first quarter, stock comp expense was $2.4 million.
It was a little lower than normal because of how we settled the year-end stock comp expense for our executives.
Going forward, that number usually runs about $3.4 million per quarter.
Yes, that's the only addback, the stock comp expense.
That is two quarters, so at September 30, we will combine the second and third quarter adjusted EBITDA to achieve the $8.4 million that is required by the covenant.
Right, so if we bridge from the first quarter to what we would end up with in the third quarter for the trailing two quarters, we feel like the cost reductions that we have already taken and what we have near term, clear line of sight to, is going to be adequate to get us over that covenant level.
Now, the business obviously, as you are inferring, can continue to deteriorate and that will probably be manifested mostly in our drilling segment, but we feel confident that the opportunities that <UNK> was referring to internationally, as well as the new product line and other things that we have clear and close line of sight to, will be more than enough to offset any additional downturn we might see in the drilling business.
We don't have to have all of those things come in for us to achieve what we anticipate the additional downturn might be in the drilling segment.
So we are comfortable that going forward we will have the coverage that we need in the next couple quarters.
<UNK>, this is <UNK>, and for everyone on the call, I think like all of our brethren before us that have had their earnings call, they're talking about how difficult it is to see through the second quarter, and we want to remind everybody that the second quarter is traditionally a very difficult, unpredictable quarter even in good times, due to the Canadian breakup.
For heaven's sakes, I think there is 37 rigs running up there now, the weather that normally happens through the central part of the United States and the Rockies, but from what we can see, we don't see any type of material degradation in the chemistry activity.
In fact, and maybe we will have a chance to talk a little bit more during the rest of the call, but this PrF technology that we've worked on should really ---+ it's a market penetration story.
Once again, we are very confident of the market's receptivity to it because now we have got a whole series of years that people have trusted our way of customizing chemistry, as opposed to where we were 4-1/2 years ago.
But as comfortable as someone can feel in this environment, we feel okay looking through the second quarter heading into the summer.
Yes, so I will take just the first part of that and then <UNK> can give you the full color.
But we don't want anyone to leave this call feeling that we're concerned about a shortage of the citrus as it pertains in particular to the energy chemistry effort.
And it is really through the proper positioning of the purchasing, the short- and long-term contracts we have, that give us that great assurance that really was a terrific result of the acquisition of Florida Chemical.
But the guy who purchases more citrus oil in the Western Hemisphere than anyone, fortunately, is with us, <UNK>, and he will give you a little more color on that.
Good morning, <UNK>.
When you look at our inventory position, we have to think not only about internal moves, but our external needs of our customers.
And we lay that against what we see coming not only out of Florida, but out of Brazil and Mexico and other places around the globe, to ensure that we have availability for those needs.
That is one of our primary functions to the marketplace.
And in anticipation of Florida's crop being lessened, we went ahead and purchased more materials, accelerated some deliveries from offshore suppliers to make sure that we would be in an adequate position during Q1 to supply the market needs.
That certainly has proven to be a good strategy.
I don't see any shortages or any concerns about availability going forward.
We are well positioned, and when you look at our forward sales on the other side of the equation, we have also had more (inaudible) from the customer base externally that helps justify that increase.
Does that help you, <UNK>.
Okay, I think the folks ---+ and great question.
Again, really to refresh people's memory, I think if you check back over the last couple of earnings calls, I have tried to be pretty consistent that we see Latin America through South America with Argentina not only with chemistry, but also with our downhole technology, which is really increasing more distribution not only with Teledrift, but now Stemulator is down there, motors are there, and there's 100 some odd rigs running in Argentina, three times the amount of Canada, for heaven's sakes, or 4 times.
So, we think that, again, word of caution is everyone, I think, on this call knows international projects take a little bit longer, but Argentina has righted itself with the new government that is more favorable to doing business there, good for us, good for the other service companies that work down there, but the Middle East, as we have consistently said, we have more than a handful of unique research projects underway with the largest oil company in the world, Saudi Aramco, between their research group here and their group over there in Dhahran.
And our business is continuing to increase there as they are trying to figure out with us how to be the most effective in their unconventional completion efforts.
So I would say those two areas certainly have our focus, and stay tuned, and then in the weeks and months ahead we will be able, I think, to give you some additional information as to why we are positive there.
Does that help.
And in terms of the revenue side of things, <UNK> will give you a little bit of clarity on the international portion of our overall business.
About 15% of our total revenue is [being] outside of North America.
Yes, I don't know that we really give that level of specificity, as much as anything for just protecting some of our market penetration strategy.
We will tell you this, that there is a high level of movement, always has been, north of 80% easily when someone does a validation to become a repeatable client, and there is the repetitiveness retention rate of a repeatable client also is well above 80%.
And I think what folks really need to try to keep in perspective is that a lot of the validations that have been done in the fourth quarter and in the first quarter were done with companies that had expectations to have more rigs running now than they do.
So some may have six ---+ had six rigs and are now at two.
Some had four, now at one, but they keep running CnF, and then the opportunity has shrunk somewhat with those that have completed validations, but we have even, surprisingly enough, had commentary from some of those clients that when they pick rigs back up that they are targeting in June and July, they will start right back with CnF, which is really pretty unusual from my experience.
So, I hope that answers your question.
Not trying to be evasive, but trying to protect some market intel for ourselves, just because I think it's the prudent thing to do.
Does that help for you.
That's a great question.
I am sure other folks are thinking about it.
And right now, it is at about, on an average, about 1.2 gallons.
We have several folks that are injecting the CnF at 1.5 gallons and, as we mentioned, one particular validation at 2 gallons per 1,000.
And I think what, again, we need to try to put into perspective is that for years and years and decades, the rule of thumb, no matter what the attitude was, you pump 1 gallon per 1,000, I don't care what you are pumping, and what we are trying to illustrate here is that that is not necessarily the best and most optimum use of your investment.
And then, when it is appropriate to pump more than that, you should.
If it is appropriate to pump something less than that, you should do that as well.
So, moving the industry off of this traditional 1 gallon per 1,000 mindset has really been ---+ has been quite an accomplishment.
And I think it resonates with custom chemistry, but long answer to your question a little bit, but about 1.2 average, 1.2 gallons per 1,000, is the average right now, but it's moving up.
This is <UNK>.
I will take that.
The CapEx, certainly our biggest spend in CapEx right now is the completion of our global Research & Innovation lab.
That should be finished just around the end of the second quarter or early in the third quarter, so most of that spend is going to be finished by that point in time.
The remainder of our CapEx, we have a fair amount of flexibility around whether we pull the trigger on it or not.
So, I think in the last half of the year we certainly have more flexibility in whether we spend it or we don't.
The build in inventory was really ---+ impacted the working capital draw in the first quarter, and that will tend to unwind in the fourth ---+ in the third and fourth quarters of this year.
That really is ---+ that's a great question.
It's kind of a tough one to answer because these wells have such a variability in their volume, based on their lateral length.
But we would say that somewhere around 25% to 30% of that is continued increased penetration.
The rest of it is ramping up more usage, either at a more gallons per 1,000 or on some of our clients are going to longer laterals where they have a higher volume, but it's about a 25% to 30% of that number is with new folks that haven't been exposed to CnF prior to the first quarter.
Does that help you.
Yes, I think what we have consistently said, and we haven't really modified this even though, for heaven's sakes, since that investor day the world has changed in terms of activity, but we felt that exiting 2017 in the fourth quarter, we should be at 3 times the revenue run rate of what we were in the third quarter of 2015.
We don't see anything that makes us feel different about that right now.
And I think one thing just from a personal opinion, I think folks are going to have to recalibrate this whole rig count deal because they get fixated on this number and we all know that 400 rigs can drill more wells than what 400 rigs could do three years ago.
So I think there is going to have to be some kind of understanding that even though we get down in the mouth and all that about the depressing rig count, the efficiency of these rigs, the technology we have introduced and others, like the Stemulator, that you drill these wells faster, you're able to have a higher level of drilling.
So, I think because of that is why we still believe that when we exit 2017 we should have that type of activity.
Does that help you.
Yes, another great question.
There was kind of a storyline that had circulated and it involved us.
It may have involved other companies that deal with both of them, that if they got together, would there be some type of technology that might make it difficult for us.
And the way we've always responded to that is Halliburton has been a very key client for us to distribute our technology to their clients.
Baker Hughes has consistently been a top five or six client for us to distribute to some of their clients, obviously, and for that reason we didn't see much of a change as to what would happen.
So, we believe that the fact that they are now going to be independent won't ---+ shouldn't affect us.
I think there are some opportunities in particular, since you brought it up, with Baker Hughes for us to work with some chemistry with them, but we will see how that plays out.
They have got a big mission on their hand, sort things out as they move forward, but we don't see any change and there hasn't been any change.
The only change has been the reduced activity from both of them as an industry, not regarding us specifically.
Sure, and I hope everybody indulges me for an expanded answer to those questions because they were good ones.
Let me take the last one first, regarding PrF.
So, again, we want everyone to leave the call with a clear understanding.
First, as we mentioned, it is multi-patented and we've spent over two years to develop the technology, which essentially is undoing a 40-year approach to pressure in this industry, and without getting too technical in the weeds, folks pump friction reduction chemistry to reduce the hydraulic horsepower on a frac job, A, to reduce cost and, B, to be able to have the tubulars withstand high rate and higher pressure as they pump these fluids.
And it has been essentially the same technology for 40 years.
And as often the case, the engineers will solve a problem instead of trying to find the best solution and there is a big difference.
So we challenged our own people to reduce the amount of really what is damaging chemistry.
It is called polyacrylamide and the layman's term for that is Saran Wrap.
So when you pump that down to reduce the friction, you are actually putting a damaging chemical into the reservoir, and we challenged our folks to be able to reduce that per gallon and to reduce the overall volume that is needed, and I think that's what really sets Flotek apart is not many companies start out with the mission to sell less of what you are empowered to do, but it's not about selling more.
It is about selling what's right.
So, it really also was designed in conjunction to be enhanced when you have CnF with it.
The chemistry activity between the two additives create a better performing fluid in terms of helping the reservoir than not together.
And it is not in any way that we see a diminishment of CnF activity.
It is an effort for us, again, to take our customized chemistry approach to something that, like I say, has not changed for over 40 years.
On your other question, <UNK>, yes, I think just like any other segments in this industry, the smaller, less capitalized, overleveraged regional chemical companies have ---+ some of them have disappeared.
And I think we don't really see much competition in our segment that we have carved out for ourselves, and that's not to say that we are not always aware of what people are trying to do.
But what is interesting, I think, and we would like to take a little bit of credit for this, but both of those big service companies, I think if everybody looked back four or five years ago in the earnings call, they didn't spend a lot of time talking about chemistry.
And what's happened is that chemistry now has no longer the forgotten part of how do you improve the performance of these wells.
And the more people talk about that, the more that you're going to have the best opportunity to have good chemistry.
And hopefully, that answers your question.
If I can expand just one more thought on that, I think everybody gets caught up in the numbers when you report your earnings and you have a tendency often to miss out that you are really in the middle of a movement.
And for example, five years ago, I don't think people expected the amount of household products could be delivered at your doorstep that Amazon does.
Three years ago, we didn't know the word Uber, much less now that's the way you get cars instead of taxis.
And the amount of people that no longer go to malls, but shop on the Internet on their phone.
Well, as it pertains to us, five years ago folks didn't know what CnF was.
Three years ago, I think custom chemistry was not a familiar term.
A year ago, we opened the virtual Flotek store, and now it is the introduction of PrF.
And so, it is the movement that is changing the industry that is focusing on something that really is important as these folks try to reduce their cost per barrel, but at the same time improve their production.
And hopefully that wasn't too winding of the story, but I think it puts into perspective why we are doing what we are doing, why we are spending the money on research to have that differentiation.
Okay.
Thank you for everyone's interest on our call this morning.
Thank you for the questions.
I am sure they spoke for a lot of people that were listening in, and as always, we appreciate your interest and are pleased you joined us.
We hope everybody has a great Wednesday.
