Flotek Industries Inc (FTK) 2009 Q4 法說會逐字稿

Good morning and welcome to Flotek Industries' 2009 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of the Company's prepared remarks. I will provide instructions on how to ask your questions at that time. (Operator Instructions). This conference is being recorded. At this time, I would now like to turn the conference over to Mr. Glenn Neslony, Vice President and Treasurer of Flotek Industries. Mr. Neslony, you may begin.

Thank you and good morning. Today's call is being webcast and a replay will be available on Flotek's website. Our earnings and operational update press release, as well as SEC filings regarding the Company have been distributed in the past 24 hours. All are available on Flotek's website.

Before I turn the call over to Flotek's interim President, John Chisholm, I wish to remind everyone participating in this call, listening to the replay or reading a transcript of this 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, 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 United States' Securities and Exchange Commission. Now I will introduce Mr. John Chisholm, Flotek's interim President.

Glenn, thank you. I would also like to welcome each of you to Flotek's fourth-quarter and year-end 2009 conference call. With me today are Jempy Neyman, Flotek's Executive Vice President of Finance and Strategic Planning; Steve Reeves, our Executive Vice President of Business Development and Special Products. Steve also continues to oversee operations of the Company. And of course, Glenn Neslony, Vice President and Treasurer.

As noted in recent news from the Company in our annual report filed with the Securities and Exchange Commission last evening, and in our earnings release, Flotek remains in a period of transition. It remains my privilege to serve as interim President of your Company. I continue to focus my energies on doing everything I can to position Flotek to benefit from the next cyclical acceleration in the oilfield services business.

2009 was a year of challenges and transitions for the Company. From economic uncertainty that led to the precipitous decline in business to internal challenges inside the Company, it is fair to say that last year was not the best in Flotek's colorful past.

Two good things can be said, however. First, 2009 is over and in the rearview mirror. And second, as a former collegiate professional athlete, my coaches always stressed that challenges always create opportunities and those who find the opportunities from adversity always exit the other side stronger. I believe that is and will continue to be the case at Flotek.

While Flotek has faced its leadership challenges in the past 18 months, the field personnel and corporate staff at our small oilfield service company have bonded together like family, working harder than ever to assure your Company is positioned correctly to benefit from the opportunities that present themselves. While we still have meaningful heavy lifting to face, I am very proud of the way our colleagues and associates continue to represent Flotek.

That said, let me be clear, Flotek's performance in 2009 was simply unacceptable. While we can point to many reasons for the decline in revenue and losses incurred for shareholders, we simply must execute better, become more conscientious of the need to operate more efficiently, and recommit ourselves to returning our Company to a position that can create profits for our shareholders.

While that won't happen overnight, I am committed to returning Flotek to sustainable profitability as soon as practical and will consider every option available to do so. We are not going to spend much time on this call today rehashing 2009 results as they are both now ancient and irrelevant to the future of your Company.

Our review is simple. We lost money and the magnitude of those losses and the decline in revenue is unacceptable. However, we are going to spend time on this call talking about what we are doing to reposition the Company to better execute in our current markets and reach new markets and opportunities to grow both our top and bottom lines.

We also want to talk about the recent financing transactions that were announced yesterday that we believe are the first step in a process to rejuvenate the Company's capital structure and create shareholder value. Let's start with the balance sheet issues. For that, I would like to turn the call over to Jempy Neyman, Flotek's Executive Vice President of Finance.

Thank you, John. During our third-quarter call, we indicated that a primary goal of the Company was to restructure its credit facility indicating we felt the current position of the Company was such that lenders -- that new lenders might better serve the needs of Flotek.

As noted, we announced on Wednesday an agreement under which we entered into a $40 million senior secured credit facility with Whitebox Advisors of Minneapolis and Gates Capital Management of New York. Both Whitebox and Gates have been longtime stakeholders of the Company and we are very pleased that they agreed to strengthen their financial relationship with Flotek.

While the credit facility is described in detail in the Company's annual report filed yesterday with the US Securities and Exchange Commission, most of the features are relatively straightforward for this type of credit facility. However, a couple of features deserve note.

First, a significant portion of this facility is tied to Flotek's equity. The new lenders took a majority of the commitment fee in common stock and have also agreed to allow the Company to reduce principal on a quarterly basis through the issuance of common shares.

Our new lender's equity position in the Company, management believes, is in the best interest of all Flotek stakeholders. Your management team is very focused on the task of working to deleverage this Company and believes that the periodic use of equity to do so is prudent.

In addition, the facility costs for the Company to make additional principal payments as performance improves. If the Company were to rationalize assets or should the Company receive a tax refund during the term of the facility, something we believe is likely in the second half of 2010.

In addition, the senior credit facility just mentioned, Flotek entered into an agreement with both Whitebox Advisors and Gates Capital Management to exchange a portion of their current holdings in our outstanding convertible debentures for new secured convertible notes.

Again, the terms provide for additional deleveraging of the Company's balance sheet as the current convertible notes were exchanged into secured convertible notes equal to 90% of the par value of the original notes and 5% in common stock.

None of the terms of the original debenture, including the interest rate, were altered in the exchange. Most important, the restrictive financial covenants of the previous facility have been removed providing for significantly greater financial flexibility. This transaction is the first step in what management hopes will be a transformational year for Flotek.

The steps to delever our balance sheet will not be easy and will be taken with due care and deliberation by management and the Company's Board of Directors. The process will continue to involve a series of strategic decisions, the continued diligent review of all aspects of our business and the appropriate use of equity and other capital market strategies to reduce debt while at the same time working to maximize value for all of Flotek's stakeholders.

One additional item of note is Flotek's relationship with the New York Stock Exchange. As noted in December, the Company received notice from the Exchange that it was not in compliance with the continued listing standards of the Exchange. As a result, the Company submitted a plan to the Exchange to regain compliance with such standards in an 18-month period. The exchange has accepted that plan, meaning the Company will remain listed subject to quarterly review by the appropriate Exchange committees.

We appreciate the advice and counsel of the Exchange as we developed our strategy and look forward to working with them to regain our status as a member in good standing of the New York Stock Exchange. Now I would like to turn the call over to Steve Reeves to discuss our business operations.

Jempy, thank you. As John indicated, 2009 is a year many oilfield service companies would rather forget. However, as poor as our results were, we remain an important player in the oilfield services arena. Nearly 20% of the rigs working in North America are touched by a Flotek product or service. From our world-class chemical products to our innovative approach toward rental tools and artificial lift, Flotek provide services needed by every person searching for oil and gas.

While 2009 was in general a difficult year, the fourth quarter began to show signs of stabilization and modest growth in many areas. The focus on emerging resource plays and horizontal drilling applications continue to provide opportunity for the Company, especially our chemicals application.

More importantly, while we remain cautious as a result of continued pressure on natural gas prices, we are optimistic that 2010 will be a much better year than last. The first quarter is likely to show meaningful sequential revenue growth. In January, Flotek posted $9 million in revenue; in February, $8.4 million and we believe March will continue to build on January's growth. While a quarter doesn't necessarily establish a trend, we like the steady momentum we see building in the demand for Flotek products and services.

After a difficult 2009, our chemical and logistics business has shown meaningful improvements in the first part of 2010. The acceleration and horizontal drilling activity, especially in resource plays, has provided nice baseline growth for our core microemulsion chemicals. Moreover, we continue to expand our productlines into other areas, including beginning to address the needs of companies engaged in enhanced oil recovery. Regionally, Canada bounced back with a stronger winter drilling program, which helped boost chemical revenues.

In 2010, we have implemented new marketing initiatives. Not only have we better aligned compensation to match sales and service results, our chemical marketing efforts are more accurately focused on the economic decision-makers benefiting from our products, the exploration and production companies. As a result, we have increased our penetration of key resource play participants while continuing to develop our relationships with pressure pumping and other service companies.

Flotek's downhole tool business is steady, but not yet returning to the growth experienced before the 2009 downturn. Many of our tools are more suited to vertical drilling applications, which have improved -- which have not improved as rapidly as horizontal drilling opportunities. However, we are seeing the beginning signs of new life in certain vertical plays and continue to focus on building a better and more efficient business to capture new opportunities.

An exception to the overall sluggishness in the tool business has been Flotek's Teledrift unit where sales and margins are steadily improving. We continue to find ways to introduce Teledrift's unique capabilities to new operators with high acceptance rates. In addition, next-generation Teledrift equipment is finding its way onto more rigs, providing better margins and opportunities to cross-sell other products and services.

To combat the sluggishness in the tool business, we have undertaken a strategic review of the structure and operations of the downhole tool segment. While we have much more to do, we have already identified cost savings without sacrificing quality. We have recently combined our Grand Junction, Colorado unit with our Utah operations, eliminating unnecessary overhead. We continue to review our operations with the goal of reducing overhead without sacrificing our quality. We believe we can take another 10% to 20% of the cost out of the business in the coming 12 to 18 months through consolidation and efficiencies.

In addition, we continue to look for pieces of the business that might fit better with organizations other than Flotek. While small, we are in agreement to sell a subsegment of the tools business for approximately $200,000. The sale of the business will have no meaningful impact on our overall product service offerings. We will reduce headcount by nine people and eliminate an approximate $200,000 dragged on the annual EBITDA. Small but smart steps such as this is one of the ways we help return Flotek to profitability.

Our artificial lift business, while small, has provided a number of pleasant surprises in the first three months of the year. It recently was awarded a contract with a major Powder River Basin CBM operator to provide well services with revenue potential of over $5 million per year over the next two years.

In addition, we believe the contract has the potential to grow as Flotek shows its integrated product and service offerings in the region are superior. As [Williams] has discovered, Flotek's ability to both provide superior products and best-in-class service can make a difference in overall downtime and production. We believe we can continue to build a growth business in the Powder River Basin and potentially in other CBM regions with the major risk being the volatility and currently depressed price of the CBM hedge.

All indications are the first quarter will be meaningfully better than anything experienced in the last year (inaudible) a lot of work to do to return Flotek to profitability. We will continue to work to create an efficient and customer-driven oilfield services company. With that, I will turn it back to John.

Steve, thank you very much. There is plenty of hard work to do as we face numerous challenges in the weeks and months ahead. However, we have hard-working people with a sense of pride and resolve. Flotek will not only survive, but thrive in 2010 and beyond.

I know there is likely to be meaningful scrutiny of the Company's administrative costs and overhead. Well, I won't make excuses as it can and must get better. We do believe that 2010 will be a much better year on the cost side of the ledger.

Tumult in the executive suite and the boardroom place Flotek in a position to rely on a number of outside consultants that have added significant expense to the Company. However, without the help of many of those people, the Company would not be in a position to focus on growth and execution in the year ahead.

Naturally, as we continue to reshape the organizational structure and corporate culture, we expect our SG&A expenditures to decline. However, it is important that we not only watch absolute spending, but also make certain we are spending smart.

From weekly staff reviews to being cognizant of major and minor corporate expenses, we continue to make progress in reducing our costs. I hope to share additional cost-saving measures with you throughout the year both at the corporate and operational levels.

This is an exciting time to be with Flotek. We have a lot of serious work to do that will require serious commitment on the part of our people. We appreciate you remaining interested in our Company and look forward to sharing our successes and challenges with you throughout the balance of 2010. Operator, we will now open this call to questions.

(Operator Instructions). [Nick Turchin], DCF Capital.

Hi, guys. It's David Floren calling. How are you doing?

We are fine. Thanks for -- go ahead.

Hey, did I miss earlier in the call that you gave monthly sales numbers for Jan. and Feb.?

We did.

Well, can you just repeat them?

I'm sorry, go ahead.

Can you give monthly sales numbers for January and February?

Yes, we did.

Yes, can you repeat them, please? I missed them.

Yes, we had $9 million worth of sales in January and $8.4 million in February.

All right. And March came in -- still closing the books, so March looks (multiple speakers)

(multiple speakers) January.

All right, great. Now I had a couple questions on this -- the refinancing stuff. I see in the 10-K that there are still restrictions on your ability to add leverage, pursue certain transactions, etc., but are there restrictions on your ability to do debt for equity swaps?

No, this is Jempy. No, there are not.

Okay and what is the impact on these -- the new financings on the preferred equity, either on the warrants that come with them or on the conversion price of the preferred equity?

If you would recall, there are two tranches of warrants that were issued with the preferred and each of those tranches had anti-dilution price protection and so those warrants will be repriced at the -- I think it is $1.27 per warrant down from their original strike price.

All right, good. And as far as the asset sales, you mentioned one. Are there any additional ones you are pursuing?

I'm sorry. Would you repeat that?

Sorry. I am having trouble -- you mentioned the one asset sale, the one that helped you shave headcount a little bit. Are there any other asset sales that you are currently pursuing?

We are looking at all aspects of the operation and all are under review at this current time.

All right, great. That is pretty much it. Thanks, guys.

Thank you for your interest.

Sarah Hunt, Alpine Funds.

Good morning, gentlemen. This sort of dovetails off of that last question, which is, since a lot of the Teledrift assets were more for vertical drilling and we don't seem to be doing quite so much of that, is there a market for those assets? Do you think you can find a home for some of that in a way that can help out the rest of the business?

Yes, we are finding some really good international opportunities. We have about three of them on the cooker that we are looking at and we are really coming on with the vertical opportunities that we are having. We are picking up continued marketshare with that and replacing the other. We have expensed quite a bit in Teledrift in the first quarter alone.

Okay. And on the international front, how is that looking for the chemical business too because the microemulsion part of the story was that there was some interest overseas? And I am just wondering what that looks like right now because, right now, we have got enough gas in the US that people aren't that worried about what their flow rates are.

When you speak that, that is semi-true. Everybody is worried about what their flow rates are. But in international activity, we have -- Canada has been very good for us, continues to be good for us and we have several opportunities internationally that we are looking at and addressing from the Middle East all the way into Europe. There are several as you have read in the paper, several shale plays in Europe that they are looking at now. So we see continued interest in microemulsion growth.

Okay. Thank you.

Peter Imber, North Point Partners.

Hi, guys. I wanted to ask quickly -- I was wondering if you guys can give a little color on EBITDA, operating cash flow, both fourth quarter compared to third quarter and sort of progress, how it looks this year compared to comparable revenue rates.

Last year, we were close for the year, we were slightly negative on an EBITDA basis and from quarter-to-quarter, we were positive in the third quarter about $1 million and negative in the fourth quarter about $2 million. And I think that was primarily due to the situation John mentioned. We had to bring in quite a bit of professional help because of some of the resignations and trying to get the financials posted.

I think for the coming year, we look -- based on our plan, which we think is fairly conservative, we should have fairly significant EBITDA for the year positive and the operating cash flow, we think we have got the business sized that, at about an $8 million revenue run rate just from a cash basis, that pretty much supports the operations without any further cost-cutting efforts, which we have a number of them on the drawing board that we will implement during the year.

So I think with this new financing, with the relief and amortization, the ability to pay some of the debt with stock, from a cash position, I think we feel fairly comfortable and we can also fund whatever capital we need to grow the business as those opportunities present themselves.

Okay, terrific. That's helpful. And just the -- and the notion that you guys are not burning cash or shouldn't be burning cash as we go forward through the year I guess gives a little more comfort. So I appreciate that. Thank you.

Thanks for the question.

(Operator Instructions). Bo McKenzie, Global Hunter.

Hey, guys, I apologize; I missed the first 10 minutes of the call because it was overlapping with our morning call here at work, but did you guys talk about -- now that you guys have got some capital expenditure capability -- where you see the opportunities to expand the most right now?

Sure, we have a couple that are pretty good opportunities that I mentioned before and didn't expand on. We see some good opportunity in Teledrift over in Saudi. We said we have a couple of other international opportunities where the return will be pretty good for the investment. We have done a couple of areas that are working very well for us, have been up in the northeastern [Arkoma] -- northeastern United States in the Marcellus and we have grown that area quite a bit and the Bakken. So we are looking at where we can put some dollars, tying them to oil plays as best as we can.

All right, and a couple of months ago, Jempy and I -- I was out visiting with Jempy and Jempy, I think you talked about trying to look to market more on the microemulsifiers to the end-users as opposed to the frac companies. I know it has been a short period of time, but any kind of update on how that is going and the reception of the direct marketing as opposed to going through the Halliburtons and Schlumbergers and I guess Baker Hughes now?

Yes, this is John. I will take that answer. We are finding that the initial reaction to that approach is being successful. It is a work in progress in terms of realigning the chemical sales group in that area. One part of that work in progress is the vice president of sales we are moving from Marlow to Houston to head up that effort. That will also create greater continuity between the relationships of downhole tools and chemicals in terms of some of the similar customers. So it is a work in progress, but as we expected, the initial results are what we expected them to be.

All right. Thanks a lot.

[Roman Kuznetsov], Gates Capital.

Yes, it's actually Jeff. Could you just speak a little bit about the controversy about the use of chemicals in fracking and whether your chemicals use biocides or the anti-bacteria and impact on the environment and all that stuff that we read about in the papers?

Sure, it's a great scare tactic. The deal is that we always ask someone show one case where there is contaminated water in the hole and the great part about our microemulsions, we are environmentally-friendly. We are green, but we are good with them. There is going to be this going (inaudible) -- we see it as another way probably to tax -- you can put some kind of tax on top of it, but we don't see it as a great threat in the short term and probably even in the long term.

Did you have another question, sir?

No, we are all set. Thank you.

Jeffrey Kerr, Kerr Financial Group.

Good morning. I was interrupted during your prepared comments, so I apologize if I am repeating something, but could you comment on what the competitive landscape may look like and what are perhaps some of the obstacles or are there any obstacles from an ongoing concern for the Company in the sales process?

Sure, there are always -- everybody -- we have some major competitors out there. They are tough, the way that you just outdo them, you outservice them. When we go back to our microemulsion chemicals, we feel like we have probably -- we know we are the leader in it, we know that there is competitors out there, but when you go back and you start looking at the [SCE] papers, the documented lectures that are given, we like our chances in going head-to-head with competition. So you're going to get it with superior service and in the case of our chemicals, a superior product. So while there is competition, it is up to us to compete in that marketplace.

But do you think -- do you feel that perhaps maybe some opportunities have been bypassed, that people aren't considering your products because of the turmoil in the Company in the past? Although it appears that that may be largely behind us, but is that -- has that been an obstacle and can that be overcome?

This is John. That's a fair question and one that may be on a lot of folks' minds, but we have had no indication that we've lost business from any client as a result of what you just suggested. So I think that, in large part, is to the credit to the folks in the field and to the salespeople that meet with these client representatives on a daily basis. They have done a very good job of projecting the stability of Flotek and the ability to deliver quality service for a fair value that is able to be verified. So we feel very good about that.

Very good. Well, thank you very much. Good luck.

Thank you.

Bo McKenzie, Global Hunter.

Hi, this may be thinking a little bit too far forward, but with the Teledrift being more tied into the vertical market, but with jars and centralizers and stabilizers and stuff like that in the rental tool side of the business, is there an opportunity to either add or to JV in some MWD-related stuff to kind of accelerate the penetration of the tool business with the fact that now, what are we running, 70%, 65% of our rigs running horizontal? Are there things that, as you look out that are -- I don't want to see easy, but simpler fixes to kind of accelerate the growth of CAVO, the jars and etc. by venturing in with somebody, buying a handful of assets or something of that nature?

Yes, Bo, we are looking at every opportunity we have got. In fact, out of multiple opportunities, we have gotten Saudi with Teledrift. There is one of them that is a little JV working [off]. So all the things that you are talking about, we are looking in pursuing from the motors, from the CAVO motors, opportunities to JV with directional companies. Each one of those is on the plate as we are taking a new look at the way we do business.

All right. And then on CAVO, if you look at the growth in the horizontal rig count and the fact that you have had some fairly high pressure, high temperature applications in the Haynesville and maybe not quite as extreme, but obviously up there compared to some of the historical work up in the Barnett with the Eagle Ford, how are the motors performing in those applications? Are you guys being able to hold your own, get $200 or $300 between maintenance cycles in those applications or should we look at some of the higher temperature, higher pressure markets as a bit more challenging?

They are much more challenging and that is one of the major issues during the past year. Having an open bearing motor that is mud tooled, you get down in those type environments you are talking about, it caused us real grief. As a result of that, what we did was we came in with a closed bearing that we have introduced in another line of motors and built it from within and are putting it out and that is one of the reasons the Bakken -- we are doing very well up there in the Bakken and the saltiness of that. We are starting to see some growth in some of these areas -- the Haynesville. We will attack the Haynesville not with the CAVO motors because they wouldn't stand up for 200 to 300 hours. So we have to come up with something else and we have been a little bit capital delayed in how we could introduce this other line, but we are getting it into the marketplace for these applications, Bo.

And on that specifically, is it more from the bearing assembly or more from the PCP that is keeping those hotter temperatures?

The hotter temperatures, when you have an open bearing and you are running across it, you are heating up too fast and the harshness of the environment around it. In benign conditions, you are okay with the CAVO. When you start going into salt saturated, oil-based, are very high temperatures, you don't want your mud to be getting directly on your bearings.

And not to minimize the challenge, but I mean the sealed bearing assemblies are -- I think they are relatively common, so that should be a somewhat easier fix than it might sound like on the surface or no?

It is a relatively easy fix. Once you did it, it is kind of like predicting who won the ballgame after it is over. You always know the answer. Well, once we started getting into it and building it and designing it, once we have got it, we use about one half of the old CAVO pieces and half of the other, which cuts down on our inventory and it will just withstand much harsher conditions.

Well, good. Congratulations on that. That is a good achievement. All right, man. Thanks a lot.

Thanks for your interest.

Mr. Chisholm, there are no further questions at this time. I will now turn the call back you. Please continue with your presentation or closing remarks.

Thank you very much. Thanks for the interest of everyone on the call and it will be just a few weeks from now that we will be back in touch with you after our first quarter. Thanks again for your interest and at any time, as our commitment was last year, in an effort to be as open and transparent as possible, feel free to call us. You don't have to wait for an earnings call. We will do the best we can to get the information you want. Thanks again.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.