Flotek Industries Inc (FTK) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Flotek Industries, Inc., Third 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 you 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 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 update press release, as well as our quarterly report with these US Securities and Exchange Commission will be filed and distributed -- were filed and distributed last evening and are available on the Flotek website.

Before I turn the call over to Flotek's Chairman and President, John Chisholm, I wish to remind everyone listening 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 21b 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. 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 Third Quarter Conference Call. With me today are Johnna Kokenge, Flotek's Chief Accounting Officer, Jempy Neyman, Flotek's Executive Vice President of Finance, 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 and attempt to add some color regarding current operations, as well as a sense of our future, and then be happy to answer your questions. By just about any standard, Flotek's third-quarter results provide a sense of just how far the Company has come since we began our repositioning journey in September of 2009.

While a quick look at revenues and profits provide good benchmarks of Flotek's health today, a couple of other statistics may more poignantly portray the dramatic two-year evolution of Flotek. In September of 2009, Flotek's market capital was somewhere south of $40 million. Today, the market cap is nearly 10 times those levels, approximately $370 million. In September of 2009, Flotek had approximately $600,000 in cash and no credit availability. Today, Flotek has close to $40 million in cash and a $35 million conventional credit facility that remains completely undrawn. Moreover, during that time, Flotek significantly improved its balance sheet by reducing its debt by nearly $50 million.

While those numbers are important, and something to be very proud of, it could not have happened without the dedication and belief of the entire Flotek team. What I'm most proud of two years later is the fact that each member of this team refused to quit, even after understanding that the chance of failure was high, and bought into the vision that with tenacity an exceptional work ethic, and unity of purpose, that Flotek could once again be a leading specialty oil field technology company.

To each member of our team, I say thank you for a job well-done. Without them, we would not have created value for our shareholders, provided a new level of service for our customers, and be on the cutting edge of new oil field chemistries and other products that improve production economics and address environmental challenges at the same time.

That said, when one chapter ends, another begins. While business transitions aren't as easily identified as page breaks in a book, today Flotek embarks on a new chapter, an extended journey with our focus evolving from survival and stability to an emphasis on growth, with concentration on new strategic decisions that will further accelerate profitable growth and enhance shareholder value.

As we begin planning for 2012 and beyond, we can afford to think about longer-term value creation and the deployment of capital for durable projects beyond just tomorrow. We are encouraged by the opportunities we see on the horizon and look forward to creating shareholder value through proactive decisions rather than reacting to short-term financial pressures.

That said, I pledge to you today that we will not lose sight of where we have been and the lessons we have learned. And we will continue to treat Flotek's capital as if it were our own, using due care in every decision we make. While our mission has evolved, our underlying principles have not. We remain acutely focused on smart capital stewardship, with a keen eye toward creating best-in-class returns for our owners.

Before Johnna, Jempy, and Steve walk through the specific financial and operational highlights, I'd like to provide some high-level highlights of the quarter. Flotek reported record quarterly revenues of $75.1 million in the third quarter of 2011, an increase of over 87% when compared to revenues in the same quarter a year ago. Moreover, after adjusting for the impact of non-cash adjustments related to warrants issued in the 2009 offering, Flotek posted income attributable to common shareholders of $10.1 million, or $0.21 per common share. Johnna will discuss our financial results in more detail in just a moment.

As I've said on each call since I took the helm now two years ago, 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 continued to be enthused that through the efforts of our people, the future is filled with opportunities to create value for our stakeholders. I have never been more excited about the future of Flotek than I am today.

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

John, thank you. As John mentioned, Flotek filed its form 10-Q quarterly report for the period ending September 30, 2011, with the US Securities and Exchange Commission yesterday afternoon. In that report, Flotek reported that revenue for the three months ended September 30 was $75.1 million, an increase of $35.1 million, or 87.7%, as compared to $40 million for the same period in 2010. Revenue increased across all of the Company's segments due to improved pricing, increased drilling activity, increased market share, and continued growth of industry demand for specialty oil field products.

For the three months ended September 30, the Company recorded net income attributable to common stockholders of $17.9 million, or $0.38 per common share, compared to a net loss of $2.4 million, or $0.09 per common share, for the same period in 2010. Included in the third quarter 2011 results was $7.8 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. In the same quarter of 2010, the Company recorded non-cash expense related to the fair value of the warrant liability of $1.1 million.

Excluding the non-cash income related to the change in fair value of warrant liability, the Company had net income of $10.1 million, or $0.21 per common share for the three months ended September 30, 2001. As of September 30, 2011, the Company's cash balance approximated $25.5 million, compared to $7.1 million on September 30, 2010. The Company's cash balances have improved as a result of the improved operating environment and continued diligence and expense management. As of November 3, 2011, Flotek's cash balance approximated $36 million, inclusive of $3.4 million in federal tax refunds recently received. Outstanding receivables, net of allowance for [doubtful] accounts as of September 30, 2011, were $46.5 million, compared to $25.1 million in 2010.

As discussed on our second-quarter call, our financial team continues to identify and affect solutions to become more efficient, more responsive, and more supportive of Flotek's operations. Our goal of creating a more efficient and effective best practices reporting environment led to the decision to implement a new accounting record-keeping and asset tracking system that is currently in operational testing and expected to be fully implemented by year-end.

The new system will provide real time 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 efficiencies, market awareness, and our ability to grow in the coming years.

Like John, while pleased with our progress in the third 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.

Thanks Johnna. As John mentioned, this quarter represents the two-year mark in Flotek's repositioning process. While at times challenging, it's also been an exciting time for our Company and our team members. While there have been a number of benchmarks that signify a return to financial normalcy, perhaps the most significant signpost of our success is our closing this quarter of a new conventional credit facility. The facility, through PNC Bank, provides up to $35 million of revolving borrowing capacity, to be used for working capital, acquisitions, and capital expenditures. The initial maturity date of the facility is December 2012, which can be extended at the lender's option through September 2014.

This facility, priced at the bank's base borrowing rate plus a margin, is not only symbolic of the hard work of Flotek's team members to return the Company to a position of financial strength, it provides flexibility for Flotek to execute future growth at a very reasonable price. The facility is currently undrawn and with over $35 million of available cash, we don't anticipate tapping the facility, except in the case of a strategic opportunity that would benefit other Flotek stake holders.

Flotek continues to consider strategic options regarding its convertible notes. The Company currently has a total of $106.5 million of convertible notes outstanding that can be put to the Company in February 2013. The Company also has a right to call the notes at the same time. With continued improvement in the Company's operations, balance sheet, and cash flows, Flotek believes it has a number of options available, now tied to our schedule and our timing to continue to opportunistically improving its balance sheet. In fact, the Company believes its liquidity should be more than sufficient to address any debt maturities in the normal course of business.

As mentioned in our second-quarter comments, the Company continues its comprehensive review of other obligations, especially those related to leased real property and other durable expenses. We've identified a number of opportunities to increase efficiency, from leased real properly to other general and administrative expenses, that should create a more efficient Flotek into the new year.

We also continue to review other vendor relationships. By better coordinating and streamlining our vendors, we're looking for additional ways to rationalize cost and improve our overall margins. We also are thinking creatively and collaboratively with all of our suppliers to find ways to create win-win efficiencies that should lead to improved results for Flotek in the coming months.

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

Thank you Jempy. In general, North American drilling activity continues to provide a constructive back drop for Flotek's portfolio of oil field technologies. While natural gas prices remain challenged, strength in liquid prices continue to provide new opportunities for growth. Our continued focus on developing a more balanced portfolio of oil field technologies to positively impact both liquids as well as natural gas projects continue 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.

In the Company's chemicals segment, revenue for the three months ended September 30, 2011, was $43.6 million, an increase of $25.4 million, or 139.7%, compared to $18.2 million in the year-ago quarter. Increased oil-directed and liquid-rich natural gas drilling activity was driven by period-over-period favorable fluctuations in global oil prices and stable pricing on liquid rich natural gas. Strategic adaptation of chemicals, natural gas effective complex nanofluid microemulsifiers to oil-effective complex nanofluid microemulsifiers, in conjunction with increased customer demand and industry growth, particularly within the Bakken and Niobrara plays, contributed to period-over-period increase in revenue.

The Company's increased sales and cross-marketing efforts have resulted in increased industry recognition of the proven production efficiencies and environmental benefits derive from the chemicals' new and existing products and resulted in increased product demand for microemulsion products from both new and existing customers in both domestic and international markets. These efforts have also introduced both new and existing customers to a broader range of products within the Company's portfolio.

The Company's logistics business realized increased revenue of 189.1% in the third quarter of 2011 versus comparable periods in 2010 due to ongoing project completions and incremental new construction activity.

Chemicals segment income from operations for the quarter ended September 30, 2011, was $13.8 million, an increase of $7.8 million or 131.6% compared to $6 million in the year-ago period. While gross margin for the third quarter 2011 of 39.9% were lower than the 44.8% in the year-ago quarter, gross margins in the chemical segment increased from 37.8% in the second quarter of 2011.

As noted in our second-quarter release, chemical segment margins have been impacted by a combination of raw material costs, product mix, and pricing power. While the Company is focused on maximizing margins by controlling costs, short-term margin volatility resulting from product mix stands in support of the longer-term goal of building a broader customer base, which over time should result in durable margin growth. Moreover, price improvement realized in the second and third quarters of 2011 and continued growth in demand for core complex nanofluid chemistries stand in support of margin expansion. We are comfortable that we will continue to see longer-term margins continue to trend higher.

On the operational front, activity continues to increase in the Company's key basins in North America. Our core complex nanofluid chemistry sales increased 76% when compared to the second quarter. Our focus on basin-specific solutions helped post significant sales growth across several domestic basins, including the Niobrara, Marcellus, and liquid-rich portion of the Barnett Shale plays.

Also impressive is seasonal strength in Canada. Third-quarter chemicals sales north of the border were approximately $5.7 million, a 440% increase compared to second-quarter revenues. While Canadian sales can be seasonal and job specific, we continue to see opportunities for growth in the Canadian market. We continue to make steady progress in international markets. Sales into key Middle East and North Africa markets continue to grow, and we are seeing more opportunities in South America. Our work in Russia is in the commercial testing phase and assuming we continue to make progress, we believe commercial sales should come in 2012.

Flotek's efforts to work more directly with exploration and production companies are continuing to pay dividends in our chemicals segment. We continue to gain traction with new clients and continue to gain prospects in many unconventional plays, especially as prospective clients become more aware of the efficacy of our basin-specific chemistries. In addition, our efforts in the enhanced oil recovery arena continue to grow with the Company's involvement in EOR projects continuing to increase. We look for EOR to become a consistent revenue generator in 2012.

Drilling segment revenue for the period ended September 30, 2011, was $27 million, an increase of $9.8 million or 56.9%, when compared to revenues of $17.2 million in the year-ago period. Continued growth in overall drilling activity, combined with Flotek's ability to capture additional market share in key regions, contributed to the growth. Market share growth in both sales and rentals in regions such as the Permian Basin and the Eagleford shale play continue to benefit Flotek. In addition, growth in motor sales and our proprietary Teledrift measurement while drilling product offerings continue to provide the major impetus for growth.

International activity, especially Teledrift's continued growth in the Argentina market, also added to the quarterly revenue. Activity in the Company's Galleon mining tool divisions also increased, a result of increased copper and gold prices. The Galleon mining business has a strong order visibility well into 2012.

The evolution of Flotek's marketing efforts, including improved collaboration and cross-selling from Flotek's marketing team, has expanded both Flotek's customer base as well as the depth of relationship with Flotek's customers.

Drilling Products segment income from operations total $5.6 million in the third quarter of 2011, an improvement of $3.2 million, or 138.7%, as compared to $2.3 million in the same period of 2010. Segments gross margins in the third quarter were 41.1%, compared to 37.1% in the third quarter of 2010. While gross margins were slightly off from second-quarter levels, a number of non-recurring items, such as an ENO inventory adjustment, impacted the quarter. Removing those items results in margins equal to, or slightly better than second-quarter levels.

From an operational standpoint, the drilling segment was especially strong in the Eagleford, Oklahoma, and Marcellus areas, where sequential revenues increased 38%, 41%, and 25% respectively. The international star of the quarter was Teledrift in Argentina, where sequential revenues increased over 50% to approximately $1.6 million from just over $1 million in the second quarter. Finally, our Galleon mining tools division, which manufactures various tools for precious and base metal mining companies, continues to work near capacity, and has a solid order book well into 2012.

Artificial lift segment revenue for the three months ended September 30, 2011, totaled $4.5 million, relatively flat when compared to $4.6 million for the three months ended September 30, 2010. While persistent weakness in natural gas prices continue to depress new drilling activity in the Company's Powder River basin coal bed methane region, the segment did benefit from a new focus on oil-based properties.

In addition, the Company sold approximately $1.1 million in petro valve equipment to the National Oil Company of Venezuela. The Company expects additional petro valve sales to the same customer into the first half of 2012. On an operating income basis, the artificial lift segment posted income of $1.8 million for the period ended September 30, 2011, compared to income from operations of $1.2 million in the third quarter of 2010.

While Flotek's business remains weighted to North American drilling markets, we continue to make significant progress in key international arenas and believe that international opportunities will be a key component of Flotek's growth in the coming year. In the third quarter, total international sales were $11.2 million, or 14.9% of total revenue, compared to 11.9% of total revenue in the second quarter. While a significant portion of those sales come from north of the border, Flotek's products now consistently reach from Canada to Columbia, and Oklahoma to Oman

A key strategic initiative of Flotek into 2012 is to continue our focus on growing international markets through existing alliances, as well as through new opportunities. Geographic diversification of our revenue stream will provide Flotek with more stability across cycles and exposure to a more diverse set of opportunities to showcase our chemistry, drilling technologies, and other products.

We continue to work with Basin Supply Corporation to jointly market Flotek chemicals and its Teledrift products into countries in the Middle East, North Africa, Latin America, and the former Soviet Union. Flotek continues to make progress with Basin's assistance in Russia, the Middle East, and South America. We look forward to growing this relationship in the coming year.

Finally, as we prepare our budgets and plans for 2012, we are considering a number of strategic investments that will stand in support of plans to create a more efficient and responsive Company for our customers and other stakeholders. These capital investments will prepare Flotek for the next quarter of our growth story, and provide significant opportunities to extend our reach, both here and abroad.

That said, each capital investment will undergo detailed vetting to assure that our investments are appropriate for our mission and make the best use of capital to provide best-in-class returns for our shareholders. As we work through this process, we look forward to sharing our plans with you. We are excited about the opportunities in front of us for the balance of 2011 and into the new year. While we remain vigilant in our careful watch of commodity prices and drilling activity, we believe that we are well-positioned to gain market share as we focus on our mantra of profitable growth.

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

Steve, thank you very much. As we mentioned in the press release last evening, while we are pleased with third-quarter results, they mean little unless we continue to build on our success. As an early glimpse into the fourth quarter, we expect October revenues to be in excess of $25 million, continuing strong monthly top-line results.

As mentioned in the press release, while uncertainty from holidays and the winter flurries make the fourth quarter somewhat more challenging to project, early returns from November suggest results similar to October, potentially removing a couple of days for the Thanksgiving day holiday. Absent some major exogenous global economic event that jars the domestic economy further, we remain constructive on both oil field activity and results into December.

Finally, I would like to conclude on a personal note. Tomorrow is Veterans Day, a holiday that is all to often forgotten in today's frenetic world. Ironically, it is also a holiday that should be among the most celebrated in a country that was formed as a result of the belief of our first veterans that principles were worth fighting for. Regardless of your views on our nation's battles throughout the years, we are unified as a citizenry in our support for the brave men and women who have defended our nation and indeed, our core principles of liberty and freedom.

Renowned World War II newsman Elmer Davis may have said it best. This nation will remain the land of the free only so long as it's the home of the brave. There are members of the Flotek team that have served our great nation, including my colleagues Jempy Neyman and [Mike Segal], as well as Flotek Board members Dick Wilson and John Reiland. Each of you are the veterans on the Flotek team and all of our cherished veterans we salute you, we thank you, and we will always be indebted to you.

In honor of those veterans, Flotek is pleased to announced a donation of $50,000 to the National Foundation for Veteran Redeployment. The National Foundation for Veteran Redeployment, or NFVR, is a not-for-profit dedicated to providing education and training to the men and women of the United States military returning home from active duty. The NFVR Scholarship Fund and professional resources provide veterans with the skills necessary for future employment in the energy sector.

We were introduced to the National Foundation for Veterans Redeployment by a long-time Flotek shareholder, and were struck by both the mission of the organization and the fit with our business. The innovative thinking of a group of people that have chosen to give back to those who have served this nation was enough to persuade us to act. It combined with the mission to prepare veterans returning from active-duty for work in the energy sector should not only provide well-paying jobs, but also address the labor shortages in the oil field.

We salute the efforts of NFVR, and Flotek is honored to be among the first oil field companies to support their efforts, and in a very small way, provide a modest thank you to those who have risked everything to keep our nation free. John F. Kennedy said it best -- as we express our gratitude, we must never forget that the highest appreciation is not to other words but to live by them. We look forward to having our oil field brethren join us in this worthy cause.

Again, thank you for your interest in Flotek. We are pleased with our quarter, excited about the future, and energized by the opportunities in front of us. While there is plenty of serious work ahead of us that will require the commitment of our entire team, we are ready and willing to face the challenges and create new opportunities to create value for our shareholders. We appreciate your ongoing support. Operator, we will now open the call to questions.

(Operator Instructions)

Jonathan Hegranes is from Singular Research.

Good morning guys, great quarter.

Thank you.

I was curious, on the international front it seems like domestically it's been a big part of your strategy to really customize for the region or the basin. Is that something you're doing internationally? And to that end, what other obstacles or differences do you see as you go into international markets?

I'll take the first stab at that, Steve can chime in. As an example of that, our chemicals are now being tested for compatibility, specifically for fluids that are pumped in the former Soviet Union. That's a process, and that's why we've asked everyone to be patient with this international progression. But same thing is true in Columbia. So there certainly is specific requirements from at least a chemical nature, compatibility, and maximum effectiveness. Steve if you want to chime in?

If you have worked in the international arena at all, one of the things that you discover over there is while in North America, in both Canada and the United States, things are very flexible. You can do a lot of things quickly at the well site, you can make changes overnight. In the international marketplace it is much more structured and drawn out. If you go in with a process or a procedure, you may see a better way to do something, but the process of getting a different chemical path and interjected into that takes a long time. We expect things to be slower, but we also expect to bring the same methods that work for us over here and get the final answer.

Okay, and just a follow-up, I imagine the reverse is that once you get more ingrained into those markets, it will also be more of a sustained or competitive aspect, versus other players that want to get in, is that correct?

That is our expectation.

Great. Thank you guys very much.

Jon Evans with Edmunds White Partners.

Can you just talk a little bit about -- you mentioned that you thought sales for October would be about $25 million. Is there any seasonality to November and December, and would you expect to grow sequentially revenues this quarter?

This is Steve. Obviously, in November and December, and with our business, it is weighted to North America and especially to the Rockies, as it is. We all know that winter is coming. We've seen the effects of the winter storms, the big storms hitting in the northeast, covering the Marcellus and hitting in the Rockies. Then we also look at the fact that you're going to lose a couple of days over Thanksgiving and a couple of days over Christmas, because of people just shutting down for the holidays. Having said that, we are running pretty close to peak, and are comfortable that it would take something pretty heavy to knock us off, pretty close to those run rates.

Okay, got it. And can you talk just a little bit about the incremental margins? It looks like sequentially your incremental margin to the op income line was about 42% of pull-through for every added dollar that you grew sequentially. Is that a good run rate? Does it get better from here? Does it get worse, do you have to invest? Can you give us some insight there?

Yes, from the point of view on a 40% -- 42% is an excellent follow-through run rate. I would not expect, unless we continue to get some real pricing power, which we look to get some, but also the cost of materials continue to put real pressure on us, I would not look to make much more than a 42% follow-through rate. That would be very excellent to run.

Okay. I'm sorry, I was try to write but I didn't get it all down. How much did you say your gross margin in dollars was affected this quarter from one-time?

We are going to be looking in -- if you look into the drilling products, it's close to $1 million in our cost of products in the third quarter over second quarter. And that's where we had about three or four different one-time hits that will end up hitting us. We had a new methodology in our ENO, which is about 40% of that. It was a non-cash item, but a reclassification, and that's why we say we lost about $1 million in cogs that would've put us close to the same rate on one-off hits.

Okay. Then two final questions. Your change in fair value warranty, does that go away next year? Then can you help us understand what you think the tax rate will be for 2012?

Hello, this is Johnna. Basically, the warrant, or the change in the fair value of the warrant liability will remain outstanding until either all of the warrants are exercised or forfeited. That warrant liability will continue to fluctuate with the Flotek price per common share, and to a lesser extent, volatility surrounding that. To answer your first question, yes it will go away as soon as all the warrants are gone.

Can ask a follow-up at all to that? In your weighted average common share, the diluted number, is that already including the warrants being exercised? So basically the $54.3 million, or how do we think about that?

If I am remembering properly, the warrants were considered and anti-dilutive. They are included with basic calculation.

Okay, got it. And then the tax rate for next year?

Which is interesting to speak to, because it is impacted significantly by our non-cash items. So I don't necessarily feel that the effective tax rate is necessarily representative of where we'll end up, because it is so impacted by the number of non-cash items that the Company has, as best I can speak to, It's somewhere south of 28%.

Okay. I apologize, I do have one more question. You talked a little bit about trying to get the converts paid off, et cetera. Would you look to potentially do a new convert deal? I assume you think you think your equity is cheap, so you don't raise capital on the equity side. Can you give us a sense of the type of options that you may explore down the road? Or can you not talk about that?

This is Jempy. I think the most appropriate answer to that is that there are a number of options on the table that we have explored and are continuing to explore. We have not settled on any one strategy in particular, but I think you could consider most rational opportunities to be under consideration.

Okay, but you do agree that your equity is really cheap? It seems like you don't want to sell equity to do it, I assume. But I don't want to put words in your mouth. You want to answer that or not really?

I would not disagree with that comment.

Okay. Thank you.

(Operator Instructions)

Josh Silverstein with EnereCap Partners.

Good morning guys.

Good morning Josh.

Just curious which basins and products you guys think have the most visibility through 2012?

I think we'd have to say that we're pleased, Josh, with all basin expansion of the entire Flotek product and service line. I think it'd be a mistake at this point for us to say that any one basin has more of our interest than another. We've clearly demonstrated the ability to modify and adapt the chemical compatibility across the country basin by basin, and to have that basin-specific in terms of maximum value. There is not a basin that we found from a drilling standpoint that is exclusive of the value of our products.

Got you. Then I was wondering from the chemicals standpoint, on an ability to produce different chemical lines, if you guys have enough capacity for this growth or if you'll need to expand your production capabilities?

Josh, we've gone back to the Board of Directors at the end of this year, and what we've asked for was another $3 million worth of additional capital funds which they graciously approved to us. We will put all of that into expanding our chemical facility to make it more efficient and to broaden our base of what we can put out there. We have put some added emphasis. While it didn't increase the current capacity for CNS, it does make us much more efficient and able to put out different product lines. So we have already started to address that.

That's helpful. Lastly for me, given the balance sheet improvement, the cash that you have on hand, and the credit facility available to guys, is it possible for you guys to start looking at some small tuck-in acquisitions, or is all the growth you're looking at pretty much organic at this point?

Everything is on the table, Josh,. As you might imagine other folks on this call as Flotek is gaining success and visibility, more things become available to us that weren't available a year or 18 months ago. So as we tried to talk about in the prepared remarks we have -- we feel like a pretty rigorous vetting program to make sure that we stay focused on the core business, but when an opportunity presents itself, we feel we are positioned to take advantage of it, if it benefits the Flotek stakeholders.

Thanks guys.

Thank you.

Richard Dearnley from Longport Partners.

Good morning. You speak about your proven production efficiencies from the nanofluids. Is that something beyond frac fluid, and if so, how?

Sure. First thing we'd do is to encourage you and anyone else on this call to go to the Flotek website. There is a three-minute video recently released --

That was my follow-up question.

Okay. There's about a three-minute video that we released at the National SPE Convention a week ago, that from a visual perspective, I believe very eloquently shows how the use of a complex nanofluid will not only improve the timing of oil regain, but the amount. We also on the website are numerous white papers that have been authored by independent consultants and ourselves, and SPE papers that have been written that document the economic benefit by using those products.

All in all, as we've said repeatedly, this is a value-added product. It's a process of convincing folks that you need to spend some incremental money to have incremental production improvement. This industry is still one that it's easier to cut costs than it is to spend money to make money. But that's a challenge that we look forward to, and we believe based on the last couple of quarters, we are making headway in that area.

But is there spend done at the time of fracking, or is it --?

Yes. Sorry didn't mean to interrupt you. Go ahead.

Or is it subsequent to that?

The primary revenue of the complex nanofluid is created on a fracture stimulation job. When they're injecting those fracture fluids, fracture stimulation fluids, they're injecting our patented chemical as well. However, we have also shown that the use of this product in CO2-assisted, and CO2 recovery products, improves the recovery of those reserves as well.

Again, as Steve mentioned in the prepared remarks, we expect that to become a meaningful revenue producer for us in the year ahead. I might also add we use complex nanofluids sometimes in sometimes in the coiled tubing cleanup process, when they're cleaning out these horizontal wells after the fracture stimulation. But the vast majority of the revenue is created with the initial fracture stimulation.

Right. And is the 150% production increase cited in the video -- is that somewhat consistent across basins?

That's pretty consistent. I'd say that is a pretty consistent number.

Right. Then finally, your green fluids, do they have a better productivity than the basic ones? Or a lesser one? And do they cost more or less?

They do have a significant increase in productivity, and they are also, as you might imagine, priced at the higher end of what you would expect from an additive into the fracture completion fluid.

Okay. Thank you very much.

Thanks for the questions.

(Operator Instructions)

Josh Silverstein.

Sorry guys, just a couple more follow ups. I was curious if you can dive a little more into some specific basin activity. You mentioned the Eagle Ford. I know previously you mentioned the oily part of the Barnett. What type of product push you've had in there, what type of growth opportunities do you see?

I'd like to say in the Eagle Ford, I was just down and attended the BUG down for the Eagle Ford, and very excited in the play. One of the things that we have seen from our tools division down there is, as we spoke to it in here, such a high increase in revenue, and from our chemical division, as we custom fit the cocktails that go in down there, this is obviously a very exciting play for us because of the liquid-rich and the oil play.

The Marcellus, that basin continues to hold excitement for us, with some of our custom CNS that we've done in the oily part of the Barnett. Once again, that's got us back up on [edge], and the old Permian. We are going to be going down as a group toward the end of this month, because of the performance of our entire Permian Basin, every segment of it, we're going to be going down and having a dinner for them. So that place is just a very exciting area for us. Those are major focuses is for us.

Got you, that's good to hear. Lastly, as you guys push into the international markets, and get a higher and higher revenue base there, I was curious how that impacts the margins. I was thinking maybe initially there might be a bit of a drop as you push more equipment there, but maybe the contracts have higher margins for you guys.

When you get down to international, you have the possibility, if you get the long-term contracts, they will hold up at good margins. But when you are making entry in, and you're fighting to get your foot in the door, your margins will not exceed what we're getting in North America at this time. But the whole point is, as an earlier questioner asked, once you get your base foot in the door, and get your contract over a long-term, you look for longer-term contracts that have repeatable revenue or repeatable margins, and that's the real value of international contracts.

Great, thanks guys.

(Operator Instructions)

We have no further questions on the line at this time.

Thank you operator, and again thank all of you for your support and interest of Flotek. We look forward to speaking to you in the new year if not sooner, and of course may each of you and your families have a joyous and safe holiday season. 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.