Flotek Industries Inc (FTK) 2009 Q2 法說會逐字稿

Good morning and welcome to the Flotek second-quarter earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end today's of presentation. An operator will give instructions on how to ask your questions at the appropriate time. (Operator Instructions) Please note this conference is being recorded.

Now I would like to turn the conference over to Scott Stanton, Chief Accounting Officer of Flotek. Mr. Stanton, the floor is yours, sir.

Thank you and good morning. Today's call is being webcast, and a replay will be available on Flotek's website. A number of press releases and SEC filings regarding the Company have been distributed in the past three days. All are also available on the Flotek website.

Before I turn the call over to our Chairman and Chief Executive Officer, Jerry Dumas, I wish to remind everyone participating in this call, listening to the replay, or reading a transcript of the call of the following. Some of the comments made during this teleconference may constitute forward-looking statements within the meaning of section 27A of the Securities act of 1933 and Section 21E of the Securities Exchange Act of 1934, reflecting Flotek's views about future events and their potential impact on performance. Words such as expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements on this call.

These matters involve risks and uncertainties that could impact operations and the financial results and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings with the US Securities and Exchange Commission.

Now I would like to introduce Mr. Jerry Dumas, Flotek's Chairman and Chief Executive Officer.

Scott, thank you, and welcome all to my final call as the Chairman, President, and Chief Executive Officer of Flotek. With me today are John Chisholm, a longtime member of Flotek's Board of Directors, who has been named the Interim President of the Company; Jempy Neyman, Flotek's Chief Financial Officer; Steve Reeves, Flotek's Chief Operating Officer; and Scott Stanton, the Company's Chief Accounting Officer.

Before I begin a review of the Company's second-quarter earnings, I would like to make a couple personal observations. In my 10-plus years at Flotek, I've experienced the up and downs of building a business as well as the euphoria of success and the challenges of the adversities. While I have many fond memories of my time at the helm of Flotek, the fondest of my memories relate to the wonderful, committed people that have taken this journey with me. Through thick and thin, through good times and bad, the members of the Flotek team have always believed in the Company, its products, its services, and they have strived to build the best company possible and the best they can be.

I'm leaving the day-to-day operations of the Company to the very capable hands in the interim of John Chisholm. However, know that I still believe in the Flotek mission and I will work tirelessly in any way the Board and the new management team wish to assure the future success of Flotek.

With that, let me make a few comments about the current operating environment, the position of the Company, and the future. In my nearly five decades of work in the oil field I can't remember a more rapid cyclical decline in the fundamentals of the business than those that have occurred in the last few months, in the past several months. Measured on just about any metric -- drilling activity, commodity prices, or hydrocarbon demand -- the decline has been sharp and relentless, sparing very few oilfield service companies from the pressures of lower volumes and margin contraction.

Flotek is no exception. Our leverage to North American unconventional natural gas production has exacerbated the impact of the slowdown on our business. While we continue to grow in both oil and international activity, our business will continue to be leveraged to North American activity for the foreseeable future.

While the cyclical downturn has had a marked impact on our business, Flotek will survive and has recently positioned itself to emerge as a stronger Company as the environment does improve.

While in some ways difficult, we have significantly reduced expenses as we've worked diligently to resize the Company for the current reality, without eliminating opportunities that will present themselves as the cycle improves. Our research and development efforts remain at the forefront of the industry, whether in our innovations in drilling and completion chemistry, our work in downhole tools including our proprietary Teledrift offerings, or our continued work to improve our suite of Artificial Lift and electrical submersible pump offerings, I am most confident in Flotek's ability to innovate and create solutions for future challenges in the drilling and completion world.

Finally, this week we have gained significant balance sheet flexibility with the renegotiation of our senior credit facility and the private placement of $16 million of convertible preferred equity that we believe places the Company on more solid financial ground well into 2000. My continued belief in Flotek and its prospects led me to participate as an investor in this most recent private placement.

No doubt challenges remain. However, the people of Flotek remain committed to the future of this Company and I'm confident that new leadership, a focused Board of Directors, and loyal customers and shareholders will all find a future rich with opportunities as Flotek enters a new era.

Finally, I want to thank each of you, Flotek shareholders and other interested parties, for your support of me and the Company over the past decade. Many of you in addition to becoming supporters of Flotek have become my friends, and I'll always cherish those relationships. While we may not have always seen eye to eye, we have always been respectful to one another and shared the same goal -- success for Flotek. I appreciate your support over the years and your friendship, which is something I will take with me as I transition into the next chapter of my life. Thank you for being a part of a very fulfilling period of my personal and professional life.

Now I would like to turn the call over to John Chisholm, the Interim President of Flotek. I have known John for many, many years, since he began his oilfield career. Most people would be proud to say that they started a company during their career. John, however, can lay claim to two oilfield entrepreneurial ventures. He founded ProTechnics in 1985, which he sold to Core Laboratories in 1996. After a brief stint as an energy investor, he founded Wellogix, an oilfield software company in which he remains involved today.

John has served on the Board of Flotek since 1999 and is very well suited to guide the Company through the search for the Company's new Chief Executive Officer, and he will play a large part in the future success of the Company. John, welcome.

Jerry, thank you. More importantly, thank you for your decade-plus of service to Flotek and for your vision and tenacity to transform an upstart oilfield concern into a company with an international presence and a stable of products that have forever improved the drilling and completion landscape for oil and gas producers.

I'm honored to have been selected by my fellow Board members and by Jerry to serve as the Interim President of Flotek. As an early investor I have watched Flotek's early growth, and as a Board member I have watched and helped guide the Company through recent periods of rapid growth which has created both opportunities and challenges. As the Interim President, I view my primary duty to be a steward to the employees, customers, and shareholders of Flotek.

While it is a bit too early to talk about the specifics of my role, I will say that I have a number of goals during my tenure at the Company. My top priority is to assure that the search for a new Chief Executive Officer is conducted in a timely, thoroughly, and openly fashion. It is our goal to find the absolute best candidate for the job. While searches such as this tend to be industry-focused, we will be open to all possibilities.

Leading this process will be Jim Massey, who chairs the Company's governance committee. Jim is a recently retired senior executive from Exxon Mobil with nearly four decades of experience in the oil and natural gas business. Powering Jim and his team to find the best person for the job is my top responsibility.

In addition I want to make sure Flotek's efficiency movement continues its momentum. As Jerry said, the Company has been very successful at resizing the business to the current environment. In addition, the Company is looking at all its practices, from procurement to professional consultants, and identifying ways to make our business more efficient. While times are challenging, these challenges can be transformed into opportunities if we continue to critically evaluate everything we do and find ways to improve as a result.

Finally, I will focus on building confidence in all of our stakeholders, from employees and vendors to customers and shareholders, that Flotek is a company with a bright future. And upon selection of a new Chief Executive, I will focus on introducing the new leader to you, focus on building relationships between Flotek's new leadership team and the Company's long-term supporters.

Communication with all of our stakeholders is critical in our business. While the resizing efforts have impacted our communication with many of our shareholders, I'm committed to reopening the dialog with our shareholders and pledging a more robust level of communication with the Street. However, we ask that you be patient as we work through this transition.

Jempy Neyman, our Chief Financial Officer, Scott Stanton, our Chief Accounting Officer, and myself will all make ourselves available to answer shareholder queries. Know, however, positioning Flotek to benefit from the next upturn in oil and natural gas activity is our number-one priority. And that currently takes nearly every working minute of every day.

We promise to return calls and respond to each of you in a reasonable time, yet we want to set realistic expectations for all involved. I look forward to visiting with and meeting many of you in the weeks and months to come.

Now what that I'd like to turn the call over to Scott Stanton, Flotek's Chief Accounting Officer, to review the Company's second-quarter results. Scott?

John, thank you, and on behalf of the rest of the Flotek management team, welcome aboard. We look forward to working with you.

As noted in our press release this morning, and consistent with declines in oilfield activity, total revenues for the second quarter of 2009 were $23.5 million, a decrease of nearly 58.6% compared to revenues of $56.8 million for the second quarter of 2008. Revenue decreased in all of our operating segments as a result of a decrease in drilling activity and margin pressure.

Since the 2008 cyclical peak, natural gas prices and drilling activity have declined nearly 60%, directly impacting demand for our products. Through the first six months of 2009, revenues decreased $39.1 million to 64.2 million.

Our loss from operations for the second quarter of 2009 totaled $25.5 million, a decrease of $36.5 million from the second quarter of 2008. Excluding the effect of the goodwill impairment of $18.5 million, the loss from operations is $7 million. Loss from operations for the first six months of 2009, excluding the effect of the goodwill impairment, was $6.5 million compared to income from operations of approximately $18 million for the 2008 period.

Flotek incurred a net loss of nearly $20 million or $1.01 per fully diluted share for the second quarter of 2009 compared to net income of $4.5 million or $0.23 per fully diluted share for the same period in 2008. For the first six months of 2009, we incurred a net loss of $21.8 million or $1.11 per fully diluted share compared to net income of $7.7 million or $0.39 per fully diluted share for the 2008 period.

As a result of our interim review of goodwill and other intangible assets, we recorded a non-cash charge of $18.5 million on a pretax basis to impair goodwill in our Teledrift reporting unit, which is included in our Drilling Products segment.

The continued decline for the first six months of 2009 of broad economic indicators that were impacted beginning late in the fourth quarter of 2008 caused us to evaluate our existing business plans. Given the general economic climate we assessed our 2009 full-year forecast compared to the base year we used in our prior-year annual goodwill test, and concluded that an impairment of goodwill was appropriate.

As Jerry and John both noted, Flotek has worked diligently to resize our business to meet the current market reality. We have reduced headcount by approximately 40% and other general and administrative expenses commensurately. We believe there are still opportunities to create a more efficient business and are working diligently to identify additional ways to reduce costs while maintaining the highest standards of quality and innovation.

We also continue to focus on receivable collections. While the economic backdrop presents challenges, our accounting staff continues to find ways to improve our collection metrics. This remains a top priority for the entire management team and the Board of Directors.

I would now like to turn the call over to Steve Reeves, Flotek's Chief Operating Officer, for a review of the Company's business by operating segment.

Thank you, Scott, and I too would like to thank Jerry for his years of dedication to Flotek and for his friendship. And to John Chisholm, who has been a friend for many years, welcome; and I look forward to working with you.

The second quarter was challenging for Flotek and its three primary businesses, Specialty Chemicals, Drilling Products, and Artificial Lift. As Jerry noted, the rapid decline in drilling activity has a direct impact on all of our business segments.

First, in our Chemical and Logistics segment, revenue decreased as a result of lower sales volumes related to well fracturing activities and increased pricing pressures due to the recent decline in oil and gas and exploration activities. Sales of our proprietary biodegradable chemicals declined as the number of well completions continued to decrease.

With product pricing pressures leveling off in North America, and anticipated improvement in international sales, we anticipate modest improvement in revenue growth and margins for Chemical and Logistics in the third and fourth quarters of 2009. We believe there are hundreds of wells in unconventional natural gas resource plays that may have been drilled but not yet completed. While weak natural gas prices continue to delay completion plans, there are early signs of plans by exploration and production companies to slowly begin the completion process later this year and into 2010. As completions accelerate, demand for our completion chemicals will begin to improve.

Late July and early August intelligence support this conclusion. Moreover, the continued relative growth of unconventional natural gas drilling should drive long-term growth for our Chemicals units.

In addition, while small relative to our North American business, Flotek is beginning to see opportunities in international markets. Work in both the North Sea and Middle East showed signs of growth in the second quarter, and such growth has continued into the early part of the third quarter. While we remain cautious on the timing and magnitude of this growth, we are targeting several international markets for future expansion.

In our Drilling Products division, second-quarter revenue decreased as a result of lower drilling activities in North America related to both oil and gas and competitive pricing pressures, partially offset by revenues from Teledrift. We have partially offset the effect of this revenue decline through growth in new areas, particularly the Northeastern United States.

Like our Chemicals segment, we do see some signs of modest improvement in North America, although such growth is not universal and will likely be slow and inconsistent as the cyclical bottom is established.

We do expect international sales to gradually improve in our Teledrift product line through the balance of the year. In addition, the continued relative growth of horizontal and directional drilling should create leverage for our Drilling Products segment as the cycle improves. Flotek is well positioned to capitalize on the long-term growth trends in unconventional natural gas exploration and development.

In addition to weakness in oil and natural gas drilling, Flotek has seen a modest downturn in its mining products business, where the Company sells equipment to domestic and international metals companies. Weak metal prices impacted our mining business beginning in late 2008. However, our mining business has begun to improve as metal prices have firmed. We are seeing a number of growth opportunities with copper producers, given the recent surge in copper prices.

Finally, our Artificial Lift revenue remained consistent on a year-to-date basis but declined sequentially. For the three-month period, revenue decreased due to a decline in coalbed methane development activity due both to lower gas prices and environmental regulation.

Income from operations decreased in the quarterly period mainly due to the revenue decrease and pricing pressures from our customer base. For the six-month period, income from operations increased due to market share growth in the first quarter of the year, offset by decreased demand in the second quarter.

In Artificial Lift, we expect that a slight improvement in natural gas prices should lead to an increase in coalbed methane drilling, which in turn we expect will improve revenue generation late in the third quarter and through the remainder of the year. I'll be happy to go into more detail regarding each segment during the question-and-answer session.

Now I'd like to turn the call over to Jempy Neyman, Flotek's Chief Financial Officer.

Thanks, Steve. Jerry, I too would like to personally thank you for your years of service at Flotek and for your friendship and mentorship, and I'd like to welcome John in his role as Interim President and look forward to working closely with him as well.

Consistent with the decline in the business has been a decline in the revenue and profits, as Scott Stanton outlined earlier. We've offset much of the decline through significant reductions in cost, and we believe we can still create additional efficiencies in the business. However, the rapid decline in revenues combined with large inventory builds and unavoidable fixed cost has put pressure on the Company's liquidity. As a result, in the past several days Flotek has outlined a number of measures to improve our liquidity and balance sheet as well as provide significant operating flexibility.

This morning, the Company announced it had closed a $16 million offering of a convertible preferred security with net proceeds exceeding $15 million. Details of the securities can be found in Tuesday's 8-K filing with the SEC and press release announcing the transaction and in this morning's operational update and expanded earnings release. While dilutive, the success of this offering should provide the Company with adequate liquidity well into the future.

In addition, with the new equity capital we were able to work with our bank syndicate group to renegotiate the terms of our senior credit facility to allow for relaxed covenants and covenant waivers, providing additional financial flexibility for the Company to maneuver through these challenging times. Complete details of the credit facility amendment can also be found in Tuesday's 8-K and the accompanying press release.

FIG Partners Energy Research & Capital Group served as our adviser in the bank renegotiations as well as the exclusive placement agent for the convertible preferred equity offering. I'll be happy to discuss additional financial details during the Q&A session.

I do believe that our work over the past two months to restructure the balance sheet and the resulting announcement this week significantly improve the Company's financial position. We'll continue to work on ways to improve our balance sheet in the coming months as we work to create opportunities for Flotek to benefit from the next cyclical upturn.

Now before I turn the call back over to John, as many of you know, this week Flotek has been named in a number of lawsuits which are now known as shareholder strike suits. Flotek with its General Counsel and other advisers plans to vigorously defend itself against these allegations. The Company will only comment further when advised by its Counsel such comment would be appropriate.

With that, I'll turn the call back over to John.

Jempy, thank you. I look forward to working with you, Scott, and Steve as we work to continue to build the Flotek brand in oil and natural gas fields around the world. Operator, we would now like to open the lines for questions.

(Operator Instructions) Mark Brown, Pritchard Capital.

I wanted to check. What was your leverage calculation used in the covenant for the end of Q2? And then maybe you could just summarize where your new covenants go for the leverage ratios in the quarters going forward.

Go ahead, Jempy.

Mark, I can give you the leverage. I wasn't quite sure which number you were asking for. Were you asking for what the leverage ratio would have been under the old agreement?

Right.

Pre-amendment?

Correct.

I don't have that right now.

Wait just a minute, we'll check on it. The covenant was waived for the second quarter. That was part of the amendment. Going forward, that amendment will be waived until the -- hold on just a second; I'll give you the exact numbers.

Yes, the leverage ratios going forward, Mark, would be -- they will be suspended, but they will commence again with the fiscal quarter ending 6/30/2010, so the second quarter.

And that debt to EBITDA, total consolidated debt to EBITDA will have to be 4.75-to-1; and then it steps down to 4-to-1 as of the end of the third-quarter 2010; and then it will step down to 3.75-to-1 by the end of the fourth quarter. And the facility matures the end of the first quarter of 2011.

Okay. Do you have any guidance in terms of where margins you expect to go from here, say, for the Chemicals and Logistics business, and where you see revenues or prices going forward?

Steve, take that.

Just like we talked, Mark, we expect to see a slight upturn as the year goes out. We also expect for all of the cost-cuttings that we've put in and the fact that the pricing reductions, the discounting, is starting to level out, I think if you just look at the Q and comparatively go forward with slight to modest improvement through the end of the year, that is where our expectations are.

Okay, and then just maybe 00 you talked a lot about the business conditions as they were for the quarter. What are you thinking about strategically in terms of -- are you looking at divesting some of your, I don't know, non-core assets? Are there any businesses that you might look to sell in order to get additional liquidity? Maybe you could talk a little bit about your strategic thoughts going forward.

This is John. We're not in that process right now. What we're focused on is making sure that the clients out there understand that our products have value. A lot of times when you go into a downturn like this, there's a lot of focus on what does something cost versus what's the value. And fortunately our products have got value, and we need to do a better job of making the clients understand that.

Okay. Thank you. I'll go back in queue.

Josh Silverstein, FIG Partners.

Hey, good morning, guys. Two regions where activity seems to be growing is up in the Marcellus and the Haynesville Shale. Could you guys talk about where you were maybe six months or a year ago, where you are right now, and what the opportunities are for both the Chemical and downhole businesses there going forward?

Steve will take that. Thanks, Josh.

About a year ago, we had a pilot in the downhole tool division. We had a satellite camp in the Haynesville Shale. Today, it is our first or second strongest camp that we have in North America and continue to grow.

Same way in the Marcellus. Six months ago, five months ago, we took zero dollars in our downhole tool division out of the Marcellus Shale. Last month, it was the first or second strongest operation that we had and we're growing every month in them.

In the Haynesville, we've done several value-added studies down there, and are hitting the customers from our Chemicals and Logistics. And this is an area -- when we talked about the wells that had not been pressured and completed, this is going to be -- we see this as just a very bright future for us.

In the Marcellus, we're finishing up a study with an operator up there and with our Chemical. And when we finish these up, these are just -- these open the door for stronger and stronger sales. So those two areas that are strong in North America and will be strong going forward, we see them as very strong for us.

Got you, great. Also can you just give us an update about the motor business? Any update there? Any signs of a pickup?

Yes, in the past month our motor business has gone up. We leveled off two months in a row in our rentals. Last month it went up; and the first half of this month we have rented almost as many motors -- have as many on location -- as we had all of last month.

We also have come up with our design. The Bakken Shale is a tough place to drill down, and we have now come up with two different designs that we will be going after two different customers and running up in there. We have tremendous opportunity to work in the Bakken with the motor business up there.

Got you, great. Then my last question was, can you talk about the international opportunities that you guys have been looking at over the past six months?

The international opportunities -- I don't -- one of the things that I have always been a little bit hesitant on is because it takes so long to actually get them to the forefront and get the revenue streams to coming. For example, we had at the end of the year in our Teledrift location, we really felt great about an Aramco contract that we had on testing equipment and getting our stuff in. It has delayed and delayed simply getting all contracts signed and getting everything done; but we're closing in on that.

Our Middle East Chemical sales has picked up. [Jamaal] is making some good progress there.

Once again, the capillary foamer that we're starting in the North Sea, we thought we would be putting revenue on the table three months ago, and we're just now getting started with it. But that is a sweet operation. We have two operations starting next year in the North Sea that were delayed a couple of months, three months; but the revenues, they will be coming in.

So overall, I also want to add we count Canada as part of the international operation. In the month of May, to give you an example, our sales were in Canada $10,000 in Chemical. In one week this month we did $0.25 million in sales in Chemical in Canada. So we see improvement coming in Canada even with half the rig count. So we're very excited about some international opportunities that will turn to cash for us, and we will focus more and more strongly on each one of these.

Got it. Great. Thank you.

(Operator Instructions) Roman Kuznetsov, Gates Capital.

It's actually Jeff Gates from Gates Capital Management. I just had a question on the placement of the preferred. Can you tell us how many, since you basically have given up about half the fully diluted Company, who it was sold to and whether they bring anything to the table besides money?

Yes, the investing group were all accredited investors and institutional investors. Many of them that were already participating in the ownership of the Company and/or in the convertible preferreds. And there were about two dozen investors in the group.

Thank you.

Gentlemen, at this time we are showing no further questions. (Operator Instructions)

Those that have participated on the call, we look forward to visiting with all of you or any of you that are interested in the future to contact us, and we'll be back with you next quarter. Thank you, operator.

Thank you, gentlemen. We thank everyone for attending today's conference. At this time you may disconnect your lines. Thank you.