Flotek Industries Inc (FTK) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Flotek Industries, Incorporated first quarter 2011 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. An operator will provide instructions on how to ask questions at that time. (Operator Instructions). This conference is being recorded.

At this time, I would like to turn the conference over to Mr. Glenn Neslony, Vice President and Treasurer for 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 updates, press release, as well as our quarterly report with the US Securities and Exchange Commission were filed and distributed last evening and are also available on the Flotek website.

Before I turn the call over to Flotek's Chairman and 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 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 risk 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. John Chisholm, Flotek's Chairman of the Board and President.

Glenn, thank you. I would also like to welcome each of you to Flotek's first quarter conference call.

With me today are Johnna Kokenge, Flotek's Chief Accounting Officer; Jempy Neyman, Flotek's Executive Vice President of Finance and Strategic Planning; Steve Reeves, our Executive Vice President of Operations; and Glenn Neslony, Vice President and Treasurer. Last evening, we filed our quarterly report with the US Securities and Exchange Commission. While we won't take your valuable time to regurgitate those filings, we will provide a summary of the results, attempt to add color regarding current operations as well as a sense of our future, and then be happy to answer your questions.

Today is a transformational day for Flotek. For those of you new to the story, a little history will provide some perspective. In July 2010, Flotek's market capitalization was approximately $32 million. In addition to our earnings release last evening, this morning we announced that we've sold 3.665 million shares of Flotek common stock in a private placement to accredited investors, resulting in gross proceeds of $29.5 million. In addition, we announced the Company entered into an exchange agreement with holders of $4.5 million of our convertible notes to exchange the notes for 559,007 shares of Flotek common stock.

As a result of these transactions, Flotek essentially raised a total of $34 million in new equity, an amount greater than Flotek's total market capitalization at the trough of 2010. More importantly, the proceeds from this equity offering will be used to further deleverage the balance sheet, effectively eliminating our current outstanding senior credit facility, on which we are currently paying annual interest at a 12.5% rate. As a result of these transactions, Flotek could reduce its potential annual interest expense by as much as $4 million per year.

Over the past year, we've been consistent in our message. We will work tirelessly to improve operations to reach net operating income. We will focus on rebuilding the Flotek brand to the status of a leader in specialty oilfield technologies, and we will make strategic, opportunistic, and incremental steps to recraft the balance sheet. While Jempy, John, and Steve will walk through additional operational and financial details, our first quarter results combined with the capital transactions announced this morning, are a continuation of our mission to operationalize that message in a way that creates value for all Flotek stakeholders. While we are proud of our accomplishments to date, our recent success only makes us more determined to continue our work to craft Flotek into a world-class specialty oilfield technology company. We continue to focus on ways to improve the efficiency of our operations, be leaders in the innovation of products and services that meet the challenges of an ever-changing oilfield landscape, and accelerate innovation, growth, and profitability to the benefit of our stakeholders.

That said, today I'm very proud of our team for working hard to both assure the first quarter was another significant step in making Flotek a better Company and in assisting in a capital event that is truly transformational for Flotek. As I've said on each call since I took the helm in August of 2009, it continues to be my privilege to serve as President of your Company. I remain immensely proud and humbled by the commitment and support of members of the Flotek team that believed as a group they could make a difference in the future of Flotek and believed in our vision to restore stability and growth to the Company and continue to be enthused that, through the efforts of our people, the future is filled with opportunities to create value for our stakeholders.

Before Johnna, Jempy and Steve walk through the specific financial and operational highlights, I would like to provide some high-level highlights of the quarter. Flotek reported near-record quarterly revenue in the first quarter of $52.9 million, an increase of $24.5 million or 86.5%, compared to $28.4 million for the first quarter of 2010. Moreover, the Company reported net income of $10.4 million, compared to a net loss of $9.5 million for the same period in 2010. If you were to exclude all non-cash income impacting items, net income would have been approximately $5.1 million this year -- this quarter, compared to a loss of $7.2 million in the first quarter of 2010. Johnna will provide additional color shortly.

To be fair, however, included in the first quarter 2011 results was $7.6 million of non-cash income related to the change in the fair value of the warrant liability associated with the warrants issued in the August 2009 preferred stock offering. While we're pleased at the additional income on the income statement, it doesn't change the fact we continue to find this accounting treatment arcane and exclude it from our operating results. Nonetheless, Flotek posted income from operations of nearly $9.3 million in the first quarter, compared to a net operating loss of approximately $3.7 million in the year-ago quarter.

While we are pleased with our first quarter results, we are not satisfied. We believe there are a number of additional steps we can and will take to continue to improve our results, including finding ways to work smarter and more efficiently, diversifying our base material suppliers to assure availability of key materials, as well as creating price competition among vendors, and most importantly, continuing our efforts to improve our marketing and sales initiatives to more effectively reach decision-makers among our customers that will drive additional sales of Flotek's value-added technologies.

Now that Flotek has tasted profitability, our team wants to be sure we both remain profitable and we improve our profit position quarter-over-quarter. That said, we also know that profit growth is never perfectly linear, and we will face challenges from time to time that will cause us to evaluate our path and when appropriate, adjust our course. Rest assured, however, that recent successes have made members of the Flotek team even more committed to excellence and profitability. We will face challenges head-on and work collaboratively to turn them into opportunities. The Flotek team now knows what is possible, and our entire organization, from the Houston corporate headquarters to field offices from Appalachia to the Rockies, is focused on continued profitable growth across all business segments.

Finally, while not directly related to profitability, during the quarter I may be most proud of the fact that Flotek regained its status as a listed member in good standing with the New York Stock Exchange. We greatly value our relationship with the New York Stock Exchange and believe regaining good standing status is more than symbolic evidence of the hard work and undying commitment to success of all of the members of the Flotek family. We especially appreciate the patience and counsel of the Exchange as we worked through many challenges to regain our footing. In addition, we sincerely appreciate the work of our financial advisors, Air Cap Partners, for providing the strategic game plan to achieve success with the Exchange and in our overall financial strategy.

As I've said before, while one step further along in the process, our journey to reestablish Flotek as a premier oilfield technology company is just beginning. As such, our efforts must remain focused but flexible, to meet the needs of our customers and investors, enthusiastic but measured, to assure strategic success, and selfish but selfless, to put Flotek's long-term interest ahead of short-term passing fads that will assure the enduring successful future of Flotek. As in the past, I thank each of for you your patience, interest, and support for Flotek and hope we can count on each of you as a long-term supporter of our efforts for years to come.

With that, I would like to turn the call over to Johnna Kokenge, Flotek's Chief Accounting Officer to review our first quarter financial highlights and provide some additional color on certain financial issues. Johnna.

Thank you, John.

As John mentioned, Flotek filed its Form 10-Q quarterly report for the period ending March 31, 2011, with the US Securities and Exchange Commission yesterday afternoon. In that report, Flotek reported revenue for the three months ended March 31, 2011, at $52.9 million, an increase of $24.5 million or 86.5%, compared to $28.4 million for the same period in 2010. In fact, revenue increased across all of the Company segments, due to improved pricing, increased drilling activity, increased market share, and recovery of industry demand for specialty oilfield products.

For the three months ended March 31, 2011, the Company reported net income attributable to common stockholders of $5.5 million or $0.15 per common share, compared to a net loss of $12.1 million or $0.60 per common share for the same period in 2010. Included in our first quarter 2011 results was $7.6 million of non-cash income related to the change in the fair value of the warrant liability associated with the warrant issued in the August 2009 preferred stock offering. In the same quarter of 2010, the Company recorded non-cash expense related to the fair value of the warrant liability of $1.8 million.

Flotek's cash position remains solid. As of March 31, 2011, Flotek's cash balance remained comparable with the December 31, 2010, cash balance at approximately $19 million. It is noteworthy that the sustained cash balance is net of statement of interest of approximately $2.9 and payment of annual compensatory bonuses of approximately $1.8 million. Offsetting cash outlays was the collection of $4 million realized from warrant exercises. As of May 9, 2011, [ever increasing] cash activity continues, as the cash balance has grown to approximately $22 million.

At March 31, 2011, the balance of the Company's senior credit facility was approximately $31.9 million. As a result of provisions in our senior credit facility related to performance-based principal payments, the Company anticipates additional principal reduction payment of $2.6 million will be made on Friday. This payment, in conjunction with additional principal reduction payment anticipated as a result of our equity offering, which was announced earlier today, will likely result in full paydown of the current senior facility.

As discussed on our year-end conference call, our financial team continues to search for ways to become both more efficient, as well as more supportive of Flotek operations. Our goal of creating a more efficient and effective reporting environment led to the decision to implement a new accounting, record-keeping, and asset-tracking system projected to be in use by the end of the year. The new ERP system will be based on an Oracle platform and will provide information and analytic capabilities that until now have been unavailable to corporate and field personnel. While this constitutes a major investment for Flotek, this system will fundamentally change the way Flotek does business and dramatically improve efficiency and our ability to grow in the coming years.

I am proud to say we are currently on target with our planned implementation schedule, and I remain confident that once in place, this new system will provide a number of operational tools that will assist management and front-line team members in making more profitable decisions for Flotek. Like John, I'm pleased with our progress in the first quarter. I am more excited about the future opportunities and possibilities that lie ahead for Flotek.

I would now like to turn the call over to Jempy Neyman, our Executive Vice President of Finance, to discuss current financial initiatives of the Company. Jempy?

Thank you, Johnna.

John has previously discussed the major financial initiatives of the quarter that resulted in what we believe are very positive transactions announced this morning that continue the process of recrafting and strengthening Flotek's balance sheet. The pending elimination of expensive senior debt is a key step in positioning Flotek for durable growth. Moreover, the equity offering announced this morning will require Flotek to file a registration statement for the shares issued, which we expect to file on Friday. While a private offering required a commensurate discount, we believe the pricing was better than traditional market pricing for similar transactions, and unlike Flotek's offerings in recent years, the offering was straight common stock without any expensive sweeteners such as warrants. This morning's announcements will assist us as we continue the process of establishing a revolving credit facility under more conventional terms to meet the Company's needs. We're in advanced conversations with a number of traditional lenders to establish a new credit facility, which we anticipate would provide access to $20 million to $25 million in capital. We expect to be able to report additional progress by early summer.

Flotek is also considering a number of alternatives to address the Company's convertible notes. After today's announcements, the Company will have a total of $106.5 million of convertible notes outstanding that can be put to the Company in February 2013. With continued improvement in the Company's operations, balance sheet, and cash flows, Flotek believes we have a number of options available to recraft these notes. We will continue to carefully balance any capital activity with the impact such activity could have on our current stakeholders. We will act opportunistically when market conditions are appropriate to help minimize dilution. And as noted earlier, it is very likely that our capital strategy will involve a number of diverse steps, rather than any single event.

In addition, we continue to review our current vendor relationships, including insurance and real estate. By better coordinating and streamlining our vendors, we are looking for additional ways to rationalize costs and to improve our overall margins. This process has already resulted in improved efficiencies in the Company's overall insurance profile.

I would now like to turn the call over to Steve Reeves to discuss our business operations. Steve?

Jempy, thank you.

In general, North American drilling activity continues to provide a constructive backdrop for Flotek's portfolio of oilfield technologies. While natural gas prices remain challenged, strength in liquids prices continue to provide new opportunities for growth. Our continued focus on developing a more balanced portfolio of oilfield technologies to positively impact both liquids, as well as natural gas projects, continues to yield positive results. As discussed on our last call, while pricing improvement typically lags in the early stages of a recovery, we are experiencing incremental pricing power across our business segments and are cautiously optimistic that opportunities for stronger prices will continue. For example, in addition to our price adjustment in January, we are optimistic that an additional price increase in our Chemical division will be fully implemented by June 1. We continue to focus on both pricing and margin improvement in all of our business lines.

In the Company's Chemical segment, revenue for the three months ended March 31, 2011, totaled $26.9 million, an increase of 105.4%, compared to $13.1 million for the same period in 2010. Increased oil directed drilling activity, driven by favorable expectations of liquid-rich natural gas prices, combined with period-over-period increase in global oil prices, contributed to the increase. Strategic adaptation of Flotek's proprietary chemicals to liquid-rich basins enabled the Company to benefit from increased industry demand and growth, particularly within the Marcellus and Niobrara plays. Income from Chemicals operations was $8.5 million for the three months ended March 31, 2011, an increase of 129.2%, compared to $3.7 million for the same period in 2010.

Activity continues to increase in the Company's key basins in North America. Flotek's work in the Marcellus shales continues to accelerate, and new warehousing operations in Pennsylvania are strategically positioned to support the growth. In addition, major players in the Niobrara are specifying the use of Flotek fracture additives in Niobrara completions where we expect solid growth through 2011. Our success in the Niobrara is beginning to translate into success in the Eagle Ford. While still relatively small compared to other basins, our Eagle Ford growth should accelerate in the coming months. Flotek's efforts to work more directly with exploration and production companies, explaining the economic benefits of Flotek's suite of complex nano-fluids, are beginning to pay dividends. New clients and prospects have resulted in the Niobrara and Eagle Ford plays, as well as in the Fort Worth Basin.

Our product lines also continue to expand. For instance, in the quarter, we saw meaningful increase in sales of cementing additives in both North America and Latin America, an indication that our international sales efforts are beginning to gain traction. While margins on some of these products are incrementally lower than our other specialty chemicals, we believe the expansion of our product offerings will ultimately support higher margins and opportunities to build broader client relationships. We continue to work on specific applications of our complex nano-fluids for enhanced oil recovery and specific field applications. The volume of surfactants used in enhanced oil recovery dwarfs most of our applications, making it a priority market for Flotek. While still in the early stages of development, our complex nano-fluids appear ripe for effective use in EOR projects.

International markets are also presenting opportunities. In recent months, we have discussed our role in new projects in Turkey, Poland, and the Paris Basin. Over time, we expect to see more business from all three areas. Specifically, we continue to work with our customer in Turkey to provide a wide array of chemical products and are discussing the possibility of assisting with the development of field laboratory and logistics facilities. We believe these relationships will grow meaningfully over the course of 2011, although timing of international projects is always less certain than domestic projects.

Our recently announced partnership with Basin Supply Corporation is also beginning to provide a positive impact to Flotek. Opportunities in Russia, Colombia, and multiple countries in the Middle East should begin to provide revenue in the coming quarters. Again, we know international revenue will at first be lumpy and inconsistent. However, the depth and breadth of international opportunities continues to grow, and with our key partners we look forward to participating in the development of exciting international opportunities.

We continue to believe that environmental friendliness will grow in importance in the coming months. Flotek ranks at or near the top of our major customers' environmental assessments of drilling chemicals. Moreover, Flotek has played an integral role in the development of major pressure pumping companies' efforts to create environmentally friendly, food grade chemical compounds for drilling and completion.

The cost of raw materials placed slight pressure on gross margins in the Chemical segment. Margins in the first quarter were 42%, compared to 44.5% in the year-ago period and 42.7% in the fourth quarter of 2010. The increased cost of hydrocarbon-based products as well as other raw materials, combined with product mix, resulted in the margin pressure. The Company has begun to implement price adjustments, which are expected to be fully effective in June 2011 that should largely mitigate the sequential decline. In addition, the Company expects that the introduction of lower-margin products will, over time, have the intended impact of increasing overall oilfield chemical market share, which in turn should improve longer-term margins.

Drilling Product segment revenue for the three months ended March 31, 2011, was $22.6 million, an increase of 75.4%, compared to $12.9 million for the three months ended March 31, 2010. Continued growth in overall drilling activity, combined with Flotek's ability to capture additional market share in key regions, contributed to the growth. For example, Flotek's Drilling Products experienced a nearly five-fold increase in sales from our Casper, Wyoming region, a result of strong demand for drilling products in liquid-rich plays like the Niobrara. Consistent with the liquids theme, market share growth in both sales and rental in the Eagle Ford Shale play was also a highlight of the quarter. In addition, growth in motor sales in our proprietary Teledrift measurement while drilling product offerings continue to lead the way.

Finally, we have been successful in providing specialty stabilizers to a large customer in Mexico focused on deep drilling targets, one indication that our international efforts are continuing to progress. Finally, our Galleon mining tools division, while relatively small, continues to post solid results. Income from drilling operations totaled $4.7 million in the first quarter of 2011, an improvement of 247.1%, as compared to a $3.2 million loss in the same period of 2010. On the international front, we continue to realize market opportunities with Saudi Aramco with Teledrift products and see continued growth opportunities for the balance of the year.

Artificial Lift segment revenue for three months ended March 31, 2011, totaled $3.3 million, an increase of $1 million or 42.2%, compared to $2.3 million for the three months ended March 31, 2010. The growth is primarily attributable to an increase in period-over-period product sales revenue of $900,000 or 41.4% related to workover activity derived from ongoing services with key customers. The majority of Artificial Lift revenue is associated with coalbed methane drilling. Despite the unfavorable natural gas trend, management's ongoing development and retention of key customer relationships, as well as increased prices, mitigated the negative impact of decreased natural gas prices and natural gas drilling activity. Income from Artificial Lift operations improved $200,000 or 67.1% to $400,000 in the first quarter of 2011, from $200,000 in the first quarter of 2010.

As noted in our earnings press release last evening, spring breakup arrived in April, which as anticipated, has the normal temporary seasonal impact on revenues. While April will likely be approximately 20% below March's near-record revenues, we both expected the seasonal weather-related decline and forecast a rapid recovery beginning in May. We remain optimistic that the second quarter, typically the weakest of the calendar quarters, will be in line with first quarter operating results. We are excited about the opportunities in front of us for the balance of 2011. While we will remain vigilant in our careful watch of commodity prices and drilling activity, we believe we are well positioned to gain market share while at the same time continuing to improve margins through pricing power and better operating efficiency. In addition, we will continue to focus on smart international growth that should provide even better margins.

With that, I would like to turn the call back to John Chisholm.

Steve, thank you very much.

As we mentioned in the press release last evening and Steve highlighted a moment ago, spring breakup has typical impact on April revenues, something we expect, budget, and plan for each year. While meaningful, we believe May and June will produce results in line with favorable expectation for the quarter. It is worth noting that breakup traditionally begins to show with the March numbers, something that didn't happen this year.

We believe that the balance of 2011 provides a number of exciting opportunities for Flotek. From initiatives in both primary and enhanced liquids recovery to international growth, as well as initiatives to innovate new products to address environmental concerns, the pressing needs of the oilfield plays to Flotek's strengths. Combined with our continued initiatives to improve efficiencies, we believe Flotek has an opportunity to continue to post meaningful top and bottom line growth throughout 2011.

To learn more about these initiatives, we invite you to consider attending our 2011 Investor and Analyst Days next Monday evening through Wednesday afternoon. We'll be showing off our key products and services, as well as many of our key facilities in Houston and Oklahoma City, and you'll have a chance to meet more of the Flotek team. While filling up fast, please send an e-mail to IR@flotekIND.com for more information, and we will respond promptly. Also, our annual meeting will be held in Houston next Thursday, May 19.

Finally, on a personal note, on our March 2011 call, we discussed the tragedy in Japan and what each of us might do to help. At that time, Flotek pledged a minimum of $50,000 to help earthquake victims. Flotek employees rose to the occasion, and as a result, we donated over $55,000 to the Red Cross to be applied to its Japan earthquake fund. We live in an ever-growing, interdependent world. I'm proud of the Flotek team members' response and am pleased we're in a position to help, even if in a small way.

Again, thank you for your interest in Flotek. We're pleased with our quarter, excited about the future, and energized that Flotek stakeholders and supporters stepped up to the plate to support us in the transactions announced this morning. While there is plenty of serious work ahead for us that will require the commitment of our entire team, we are ready and willing to face the challenge and create new opportunities to create value for our shareholders. We appreciate your ongoing support.

Operator, we'll now open the call for questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Trevor Hamilton with Maple Tree Capital. Please proceed.

Hi, guys. My question specifically -- actually it's two-pronged.

The first one 's on drilling products. You guys indicated a pretty significant margin increase for the quarter, if you guys could outline how the drivers behind that. I think they went from 33% to roughly 40%. That seems fairly meaningful. Is that primarily US-driven on the rental side, or is that contribution from Teledrift?

And second question is on Teledrift. Is there any way you guys can give us an example of utilization for that product, and in doing so, also discuss possible increases in CapEx for that product line, specifically? Thank you.

Okay. Yes.

We did get a significant gain, and the gains have come because we've been paying very close pricing attention, and while not implementing a price increase across the board in strategic markets, we've had some pretty significant price increases on our drilling motors. Our drilling motors revenue has grown significant.

The other side of it that you hit was the Teledrift. Teledrift has had three great months, beating our expectations -- not exceeding them, but meeting them -- and the margins in Teledrift are significant. The bigger part of that business that follows to us, the better.

As far as utilizations, we're running full throttle with Teledrift, but we're adding to continuously. It is a product that is pretty simple. It is not people-driven. There's only about 45 to 50 people in the Teledrift organization, and that's all we need. Tools are able to put together very easily as soon as you can get the parts. Capitalization is real. We have 50% of our entire Drilling Products budget set up for Teledrift capitalization, because we plan on that being a major driver of growth in the next year to two years.

And is that growth primarily focused on US basins, or is that kind of 50/50, international/US?

We are looking very hard at international. We have some opportunities through our basin supply rep to be in Russia, to be in Colombia. There are other opportunities there.

We don't think we've even -- we've just scratched the surface for what we think we can do in the Middle East. Our Argentina operation, while rock solid and sound, has grown. We are -- we're looking at about 50/50 growth. We would like to see our international grow at exactly the same rate that we've grown in North America.

Okay. Thank you, guys. Good quarter. Great quarter.

Thank you.

(Operator Instructions)

Our next question comes from the line of Josh Silverstein with EnereCap Capital Partners. Please proceed.

Good morning, guys.

Hi, Josh.

I wanted to learn a little bit more about what you guys were doing over in Turkey. Are these unconventional formations that your customers over there are targeting? What type of work you've done for them and what sort of programs they might be looking at? Is this something like a 10-well program or could it be expanded a lot more than that, where you can have several products working over there for an extended period of time?

Sure, Josh. It is unconventional-type gas that they are going after. I think the important thing to understand on that project with Flotek is it's not just limited to the complex nano-fluid surfactants, but it's an entire suite of completion fluids and drilling products and cementing additives. And the indications we have from that operator there is they are certainly logistically and infrastructurally gearing up for an extended program. And I think we'll leave it to them to talk about the extent and the activity rate that they intend to build on that program.

Got you.

And then just wanted to focus again on the Niobrara and the Eagle Ford. Around this time last year, you were talking about significant growth coming out of the Marcellus. Is this similar to what you guys are seeing now in the Eagle Ford and the Niobrara? Can it become those types of growth levels?

The early indications are certainly that. I think that's one of the key things that we'll have a chance to demonstrate in the Investor Day that we talked about earlier at the Flotek research facility in The Woodlands. We've been able to modify the main base chemical additives for Flotek to be adaptable to these oil-rich plays like the Niobrara and the Eagle Ford. That's why they are gaining acceptance at the pace that they are.

Got you.

Then lastly for me, I was curious if there was an anticipated amount that you might get from the federal income tax refund.

We do. Unfortunately, our federal income tax refund has not been finalized, but we are expecting in excess of approximately $2 million.

Great, thank you.

Thank you, Josh.

(Operator Instructions)

Our next question comes from the line of Hondo Sen with Cetus. Please proceed.

Hi, guys. Congrats on a great quarter.

I had a quick question. When you look at -- obviously, you got some strong growth out of the chemicals and also with the drilling sites, very strong growth. When you look at your capital budget and capacity availability on both segments, do you think you need to spend a few dollars to expand that, or is the operation set up now where there's sufficient capacity that at least, unless you have really kind of rocket-like growth, you're pretty well situated?

The way we want to answer that, Hondo, is again -- is another reason to, if you have time, come to the Investor Day. You'll have a chance to see the Marlow blending and distribution facility for the Chemical business unit. When that facility was constructed seven years ago, the footprint was such that it can have a significant increase in throughput over our current levels, so not a lot of capital requirements necessary this year, or certainly into early next year. The capital that we've got put aside is on an as-needed basis that's focused for the downhole tools, and in within that segment, as Steve talked about, it's primarily in the two areas. That's downhole motors, matching up with the request that we've had from clients and Teledrift.

Steve, do you want to add anything to that?

No, and we're very comfortable that the budget, if you go back and look from 2008 on, you can see that we've mainly spent maintenance money. And we are still able to expand and have the money to go into key strategic basins or marketplaces with what we have, without overstepping what we've already reserved.

That's great. Well, I appreciate it. Congrats, again, for a great quarter.

Thanks, Hondo.

Thanks.

Our next question is a follow-up from the line of Josh Silverstein with EnereCap Capital Partners. Please proceed.

Hi, guys. Just two more questions.

The first was -- just wanted to get a little further clarity on what you guys are doing on the EOR front and what the opportunities are there. Is this business that didn't exist at this time last year? Is it a new suite of products that you guys have just put together? Just a little bit more on there?

Sure. It is a new effort for Flotek. As we talked a little bit earlier, it's certainly our view, supported by others, that the total volume of surfactants used in enhanced oil recovery, or improved oil recovery is at least as or greater than the amount of chemical additives in the primary completion work, so Flotek had to get into that segment of the industry.

We're focusing on a subset of that segment, which is CO2 involved with EOR. Our initial laboratory tests and pilot field tests are very encouraging with respect to the use of our chemicals in conjunction with CO2.

Without getting overly technical, when you inject CO2, you create what's called a supercritical fluid downhole. That happens when you've got 1100 PSI downhole, and our surfactants basically mean that you have to pump more CO2 to create that downhole, bottom hole pressure. And that intuitively says the more CO2 you inject, the more opportunity you have for oil being produced at the producing well.

As we've stated in previous calls, we think this is such a, truthfully, opportune area for us. We've got one chance to get it right. We had to tie up another patent from another person involving this that we've been able to do, so that we can really have some good intellectual property protection on this whole thing. And somewhere towards the end of the second, third quarter, we hope to be able to have a more robust field trial of the technology of Flotek.

Great. That's helpful.

And then the Teledrift work that you mentioned for Saudi Aramco, was this a direct relationship with them, or is this something via a basin or another service provider?

In this case, we had been working with another agent over there prior to the basin agreement, and we are continuing on and, like good stewards, we're honoring our other relationship, and they are trying to develop that on out. So it is not -- that one is not the basin. But the other opportunities that are being presented from the Middle East are from basin.

Got it. Thank you.

Thanks.

(Operator Instructions).

Our next question comes from the line of Michael Ross with NIC Holding. Please proceed.

Good morning, guys. Congratulations on a great quarter.

Thank you, Michael.

Why did you guys feel the need to do this financing deal, right now at this time? Thank you.

Well, great question. It's been under review for some time, as to when would be the best time, looking after our common shareholders of Flotek. And we got the collective conclusion with our Board members, and actually, with some input from some of our significant shareholders, that with the appreciation and the stock price, that this was the time to be able to do this placement, keep it to a reasonable number of under four million shares, and be able to just attack 30% of the debt on the Flotek balance sheet.

And so I hope that answers your question. It's been pretty well thought out over several months.

Yes, thank you very much. I appreciate the answer.

No. Thanks for the question.

No problem. No further questions. Thanks.

No, thank you.

And we have a question from the line of Roman Kuznetsov with Gates Capital Management. Please proceed.

Yes, it's actually Jeff Gates.

You talked about new product introductions on the Chemical side, some that are potentially lower gross margin, and I'm just wondering what kind of products you're talking about.

Sure. Couple of different ones. And then Steve could also add some color.

But friction reducer, a product that's used in nearly every one of these hydraulic fracturing completions, is designed to reduce the amount of hydraulic horsepower that's charged on these wells. Our chemical people have come up with some proprietary friction reducer methodology, de-emulsifiers, which is designed to reduce the opportunity of -- emulsions created when you produce oil and water, to name two. A couple other cementing and drilling product additives.

But Steve, go ahead.

This would be along the lines of biocides, breakers, and mainly the friction reducers. The friction reducers are almost a commodity in that everybody has one, but we've got a process down that we like. We're not able to capture the entire margins we could from our patented complex nano-fluids, but we feel like the revenue growth is well worthwhile getting into this, Jeff.

And secondly, if I can, if you look at your portfolio of sales in the chemicals business, what percent today is liquids versus gas, and where do you expect that to be, say, in a year or two?

Okay. You would have a very tough time dividing that out, liquids versus gas, because we sell the product, and the way that we have formulated it, it will go in both places in several. So it's not a clear-cut line in between them, Jeff. The stuff that we can run in some liquids rich, like up in the Bakken, we can also run in some other areas. So it's too convoluted to exactly say it.

Well, I know it's not exact, but what would it approximately be?

Well, I think the way to try to get to that answer, Jeff, is in 2008, the chemical additive, the complex nano-fluid was 100% with natural gas. That evolved with some technology for its applicability in non-conventional shale.

It has now evolved to where in more liquid-rich upper part of the Barnett, the Niobrara, and the Bakken and Eagle Ford, there's applicability with that patented product. We wouldn't say it's 50/50, but we would say it's probably in the range of 65% still in the gas area, 35% in what people would call liquid-rich areas. And as the oil price stays up and folks continue to exploit more of those oil-rich areas, we would expect that percentage to get closer to 50/50 through the rest of this year and early 2012.

Okay, thank you.

Sure. Thanks for the question.

I'm showing no further questions at this time.

Okay. Thank you for those questions. And again, more importantly, thank you for your support of Flotek. We look forward to speaking to you again in August and hopefully seeing as many of you as possible during our Investor Days or our annual meeting next week. And thanks again.

Ladies and gentlemen, that does conclude the conference call. We thank you for your participation and ask that you please disconnect your line.