Flotek Industries Inc (FTK) 2012 Q1 法說會逐字稿

Good morning and welcome to the Flotek Industries Incorporated first-quarter 2012 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. (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 the replay will be available on Flotek's website. Our earnings and operational update 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 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, President, and Chief Executive Officer.

Glenn, thank you. I would 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; Steve Reeves, our Second Vice President of Operations; Kevin Fisher, Executive Vice President of Global Marketing and Business Development; 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 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 first-quarter results provide a sense of just how far the Company has come since we began our repositioning journey in September of 2009. In fact we would posit that through the focused efforts of every member of the Flotek team over the past two plus years, we have returned Flotek to financial normalcy, instilled in the Flotek culture an expectation of success, and set in place the intellectual and physical infrastructure for the next chapter in Flotek's corporate evolution. One focused on technological innovation which we believe will lead to unprecedented growth and value creation for our stakeholders. In short, we've positioned Flotek to truly live our 2012 mantra, making a difference.

We believe Flotek is now positioned to make a difference for our clients, our communities, our team members, and most importantly you our shareholders. The owners of our Company that have been committed to this journey alongside us, had confidence in our abilities even when the challenges were great and provided the support and encouragement to return to Flotek to its status as a premier innovator in the oilfield technology arena. While there are a number of measurements of success, there are a couple I would like to share with you this morning to put into perspective just how far we have come in just over two years.

In September of 2009, Flotek's market cap was somewhere south of $40 million. Today the market cap is over 15 times those levels, approximately $650 million. In September of 2009, Flotek had approximately $600,000 in cash and no credit availability. Today Flotek has close to $20 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 from over $140 million to just over $70 million. Again while those numbers are an indication of success, the how we got there is just as important as the result. What I'm most proud of over 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 and exceptional work ethic and unity of purpose, Flotek can once again be a leading specialty oilfield 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 been on the cutting edge of new oilfield chemistries and other products that improve production economics and address environmental challenges at the same time. In 2012 we begin a new chapter that can make a difference for all of our stakeholders. Today we have begun a new journey. One focused on innovation and growth with concentration on new strategic decisions that will further accelerate value creation for you our shareholders. We continue to think about long-term durable value creation which is seen in our commitment to research and innovation. In fact, Flotek continues to be an industry leader in resource commitment to research and development.

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 John and Steve walk you through the specific financial and operational highlights, I would like to provide some high-level highlights of the quarter. Flotek reported record quarterly revenues of $79.2 million in the first quarter of 2012, an increase of nearly 50% 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 and the cost associated with the early retirement of debt, Flotek posted income attributable to common shareholders of $12.9 million or $0.25 per fully diluted common share. Johnna will discuss our financial results in more detail.

One final comment on the numbers as we get started. Due to a rounding error in a fact figure on an earnings number from 2011, we issued a corrected press release last night. Candidly, the error should have been caught in the proofing process but was simply missed. We've always said we will own up to our mistakes and we apologize to you for the error. The correct adjusted earnings per share number in the first quarter is indeed $0.25 per share. As I have said on each call since I took the helm now over 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 the members of the Flotek team that believe as a group they can 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 to 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 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 of ending March 31, 2012 with the US Securities and Exchange Commission yesterday afternoon. In that report, Flotek reported revenue for the three months ended March 31, 2012 of $79.2 million, an increase of $26.3 million or 49.7%, compared to $52.9 million for the same period of 2011. Significantly increased period-over-period revenue was realized from both our Chemicals and Drilling segments, due to sustained and stabilized pricing and drilling activity, increased market share, and increased industry demand for specialty oilfield technologies. For the three months ended March 31, 2012, the Company reported net income attributable to common stockholders of $3.6 million or $0.07 per fully diluted common share, compared to the net income of $10.4 million or $0.13 per fully diluted common share for the same period in 2011.

Included in 2012's first-quarter results was approximately $9.3 million of non-cash expense related to a $3.9 million increase in the fair value of the warrant liability, and a $5.4 million of loss recognized on the early retirement of certain of the Company's convertible notes. For the first quarter of 2011, the Company reported non-cash income of $7.6 million related to a decrease in the fair value of the warrant liability. Excluding non-cash items, the Company earned $0.25 per fully diluted common share for the first quarter of 2012. At March 31, 2012, the Company's cash balance approximated $13.3 million, compared to $19 million at March 31, 2011. Of note, during the first quarter of 2012, the Company repurchased $36 million of senior secured convertible notes, made a semiannual interest payment on the remaining $70.5 million of convertible notes, and paid approximately $4 million in federal and state taxes.

As of May 8, 2012, Flotek's cash balance approximated $19 million. At a point of reference, for increased operating growth, the estimated $8.5 million of receivables collected in the first week of May exceeded the total revenue generated in 2010 for the month of April. Outstanding receivables at March 31 totaled $47.7 million as compared to $44.6 million at March 31, 2011, a 7% period-over-period increase. As discussed in our fourth-quarter call, our financial team continues to identify and implement solutions in order to be more efficient, responsive, and supportive of Flotek's operations. We remain committed to best-practice development across the organization. As such, strategic modification to our JD Edwards ERP system and associated functionality continues. The ERP system will continue to be enhanced to provide real-time information and analytic capabilities that until now have been unavailable to corporate and field personnel.

While this constituted a major investment for Flotek, this system fundamentally changes the way Flotek does business and dramatically improves efficiency, market awareness, and our responsiveness to market movement. While fully functional implementation success has taken longer than expected, the impact on Flotek's managerial and reporting capabilities has overcome and surpassed prior ERP limitations. Like John, while 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 Steve Reeves, our Executive Vice President of Operations to discuss the Company's current operational activities and initiatives. Steve?

Johnna, thank you. In general, North American drilling activity continues to provide a constructive backdrop for Flotek's portfolio of oilfield technologies. That said, the shift to liquid-rich plays and away from depressed natural gas plays has had an impact on the overall mix of Flotek's business as well as presented its shares of challenges in our sales and marketing efforts. As long as natural gas prices remain challenged, limitations on pricing and growth in certain regions will be pervasive. Our continued focus on developing a more balanced portfolio of oilfield technologies to positively impact both liquids as well as natural gas projects continue to yield positive results. Currently our portfolio sales mix is approximately 70% liquids focused. We are pleased margins firmed incrementally in the quarter, a result of economies of scale and a reduction in input costs. While we don't expect significant pricing power in the near term, we do believe we can hold current levels and work to improve efficiencies as we continue to focus on margin improvement across our business lines.

Chemicals revenue for the three months ended March 31, 2012 totaled $47.7 million, an increase of $20.8 million or 76.9%, compared to $26.9 million for the three months ended March 31, 2011 due to increased oil directed and liquids-rich natural gas drilling activity driven by increased global crude oil prices and stabilized liquid-rich natural gas prices. Increased product sales volumes of stimulation chemicals accounted for approximately $20 million of the period-over-period increase. Chemicals gross margin for the first quarter of 2012 increased $9.6 million or 85.1%, and increased 1.9% as a percentage of revenue as compared to the first quarter of 2011. The period-over-period increase is primarily attributable to cost management initiatives and vendor pricing negotiations which resulted in raw material price reductions and purchasing efficiencies in 2012. Income from operations increased $8.6 million or 100.9% period-over-period due to increased product sales, service volumes, and improved pricing.

March was a record month for our Chemicals division. First-quarter 2012 CnF sales increased 35%, when compared to the fourth quarter, and 72% when compared to the first-quarter 2011 levels. Growth across unconventional resource plays, especially oily plays like the Bakken, Eagle Ford, and Niobrara continue to help accelerate sales. While the traditional April breakup had a meaningful impact on our business, we believe the overall growth trend remains intact for the balance of the second quarter. We continue to make progress in the enhanced oil recovery business, although our growth remains deliberate, our core IOR CnF product has been pumped on 35 wells in the Permian basin. Moreover, our newly developed CnF-based CO2 foam diversion product has been used to arrest premature breakthrough in a West Texas CO2 flood. While we are encouraged by our progress in the EOR arena, we are still in the early stages of development and anticipate meaningful growth to come in late 2012 and into the following years.

We continue to make steady progress in international markets. Sales in the key Middle East and North African 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 will be realized this year.

Drilling revenue for the three months ended March 31, 2012 totaled $29 million, an increase of $6.3 million or 28%, compared to $22.6 million for the three months ended March 31, 2011. The favorable variance resulted from domestic and international market share growth, penetration with both new and existing customers, changes in customer's product mix demands, increased rig count, increased lost in hole revenue, favorable crude oil commodity prices, new product development, specialized customer demand for existing product adaptation, continued cross-segment sales marketing efforts, sales force revitalization, and competitive pricing relief. Drilling gross margin for the three months ended March 31, 2012 increased by $2.6 million or 28.7% to $11.5 million from $8.9 million for the same comparable period over period. Drilling income from operations for the three months ended March 31, 2012 increased by a $0.9 million or 18.1% to $5.5 million from $4.7 million for the same comparable period in 2011.

We are pleased with the progress in our drilling business. While the slump in natural gas prices has impacted us in areas such as the Marcellus Shale and the Haynesville Shale, our efforts in the Permian, the South Texas Eagle Ford, and other liquid-rich basins has more than offset the challenges. For example, sequential revenue growth in the Eagle Ford was 44% in the first quarter. Our CAVO Drilling Motor division also continues to post solid results with revenue up 19% sequentially and 33% when compared to the first quarter of 2011. In addition, other tools such as jars and shocks have contributed to our growth with revenues up 26% and 42% respectively year-over-year.

Finally, growth in Teledrift continues in nearly all basins, we introduced our remote monitoring telemetry system and field trials during the quarter and now have a mobile application available for use. We expect the availability of this advanced technology as well as new state regulations to provide a positive environment for improved market share to the balance of 2012. We recently opened the Denver sales office to better serve both the Rockies and the Williston Basin. We remain constructive on our growth opportunities in those liquid-rich areas. Finally we continue to make progress on the international front. In addition to continued activity in South America and the Middle East, we recently shipped a series of Teledrift tools to [convex] them for a multiyear project. We continue to evaluate other international opportunities through to ensure an appropriate balance of opportunity and risk.

Artificial Lift revenue for the three months ended March 31, 2012 totaled $2.6 million, a decrease of $0.8 million or 23.3%, compared to $3.3 million for the three months ended March 31, 2011 due to lower unit installation activity resulting from lower natural gas drilling activity, driven by low natural gas prices as compared to 2011. The decrease in revenue was partially offset by an increase of $0.4 million order from an international customer. While the gas-centric Artificial Lift business remains severely challenged, we're upbeat about opportunities we have seen related to our Petrovalve products. We recently installed Petrovalves in projects in the DJ basin and the Bakken Shale, some of the first uses of the valve in domestic production systems. Early indications suggest solid results and we will continue to seek additional opportunities to expose new customers to the product. In addition, international opportunities with [Petavasith] and Petrobras for Petrovalve sales should give an international boost to revenues later in 2012.

We are excited about the opportunities in front of us for the balance of 2012 and while we will remain vigilant in our careful watch of commodity pricing and drilling activities, we believe 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. And thank you for the effort and leadership. As we mentioned in the press release last evening, while we are pleased with first-quarter results, they mean little unless we continue to build on our success. As noted we expect April revenues to be approximately $24 million. While below March's record levels, April will exceed February. As is typically the case, spring break-up in the Rockies had a marked impact on our business and 2012 is no exception. However, comfort is provided in the previous two years where equal revenues of 2010 and 2011 were 16% and 20% below respective March revenues. While April's slight decline is noted, we are confident that the growth experienced in the first quarter will continue in the remaining two thirds of the second quarter as early signs of a May spring in revenues are apparent. That said we will be extra vigilant in May and June to ensure we execute precisely to continue along our profitable growth path.

Also yesterday we announced the contract with the pumping subsidiary of Pioneer Natural Resources to provide various chemistries including our Complex Nanofluids for many of their unconventional completions. Not only are we pleased about the continued growth of our relationship with Pioneer, we are excited about the chance to showcase the partnership with a major exploration and production company with other clients and prospects. Pioneer's belief in the impact of patented chemistries resulted in their desire to more formally memorialize the relationship of Flotek. It is our belief that such pioneering spirit will be noticed by others in service model for the development of deeper relationships with other exploration and production clients. We appreciate Pioneer's partnership and look forward to continuing to find ways to create value for valuable clients like Pioneer Natural Resources.

Finally as we look forward into the balance of 2012, we believe our plate is full of opportunities to continue to grow revenue and profits and as a result, create meaningful value for our shareholders. While we are less sanguine on our short-term outlook for natural gas, the evolution of Flotek from a company dependent on natural gas activity to the current version of Flotek, which is truly hydrocarbon agnostic has created a more balanced and robust Company with respect to growth. Assuming oil remains above $80 to $85 per barrel, we believe the impact of lower natural gas prices will be more than mitigated by opportunities for Flotek in the liquids markets.

While pleased with our record first-quarter performance, we are not satisfied to look to the past. But are eager to continue looking forward into the future where we continue to work tirelessly to make a difference in the lives of each of Flotek's stakeholders, our clients, our communities, our employees, and more importantly you, our shareholders. We value the confidence you've placed in us as stewards of your Company and your capital will continue to work hard everyday to earn your trust and loyalty. Again, thank you for your interest in Flotek. We're pleased with our quarter, excited about the future, and energized by the opportunities in front of us. Operator we will now open the call for questions.

(Operator Instructions)

Walt Chancellor, Stephens Inc.

Regarding the Pioneer announcement yesterday, clearly you are making progress marketing to E&Ps. Is there any more detail you can go to the development of that deal, and how that relationship has evolved into this longer-term agreement?

Sure. About several quarters ago we began a conversation explaining to folks like yourself that the chemical side of Flotek was going to expand their product offering. I think a couple quarters ago we mentioned that 6 out of the top 10 revenue-generating chemical products of 2011 weren't even around in 2010. And that is a direct result of the effort and capital we have committed to research and development.

Our research and development technical folks worked closely with Pioneer's technical people. And in fact, came up with a proprietary scale inhibitor, a proprietary cross-linker designed specifically for Pioneer's applications in their various resource plays. And that led to this more formal contract. We have been providing chemical sales to Pioneer for a period of time. It's not like it's just starting now. Over the last year that activity has increased. But as we got closer connected between the two technical efforts, that is what led to the formalization of this contract.

Okay thanks. That's great color. And then sort of along those lines, are there other relationships where you are in a similar place to where you were with Pioneer? I guess more recently? And do see this as a template for continuing to gain share with other E&Ps?

There is certainly that opportunity. One thing that we want to make clear is that the invoicing and distribution model for Flotek's Chemicals goes through the pumping service companies. Although as you've probably listened to us over the past calls, we have made a conscious effort in the way we have gone about making sure that the ultimate end-user is aware of the value of Flotek's Chemicals.

That led to the hiring of Kevin Fisher in November to be able to bring more of a depth and breadth to being able to sell value. So now Flotek actually is able to offer a suite of Chemicals. Like more than one to Shale in the Marcellus. More than one to Liberty in the Bakken. Just to name a couple along with Pioneer. So, we believe that with the technical resources we have at our research facility, there is the opportunity of more relationships like we announced with Pioneer.

Great. And if I could just follow up with one more on the Pioneer agreement. How do you expect activity to ramp over the coming quarters here? Under that agreement?

I think I would look closely to Pioneer's calls in the future for that. They've talked about how they're going to increase their capital expenditure on their vertical integration with their stimulation company as to how they're going to add more frac spreads to that. And as the contract calls for 80% of those blended chemicals that we talked about we'll provide for them on their wells where they use their in-house stimulation Pioneer Pumping Services company.

Okay. That's very helpful. Thank you. That's it for me.

Brian Uhlmer, Global Hunter

Good quarter. I wanted to follow-up on the 35 wells you said that you were in, did out in the Permian and the CO2 flood. Just curious on two things. Number one, if there is results of that that are going to come out in the white paper, SPE paper or something like that? Or if you could go to the results little bit and what you're seeing out there? And number two, if that was for a variety of customers or if this is all targeted primarily to one or two customers?

Sure. Several questions embedded in that one question. We are planning as we get a further amount of time between injection and production profiling to be able to have a white paper as you suggested, but I wouldn't expect that in the near-term. Just because as a chemical person yourself, you know that the breakthrough and the actual results of when you are injecting something in an injecting well takes time to see throughout the full field that you are flooding there. The specific two different applications. There was a CO2 diverted foam injection, that was for a particular client. And then the other wells that were referenced were injector wells for a separate client. So it's two different clients that we're talking about there. And we are just not yet at a position to discuss their names. And as we mentioned in the last call, we have got other projects in various states of development. Hopefully that answers your question for you.

Yes it does. Thank you very much. Following up on the Petrovalve commentary and how we're looking at the Artificial Lift. Were the Bakken and the DJ installations, number one, was it DJ gas or was it the Niobrara used for oil and liquids type play? And number two, was that in Q1 or was that something that occurred just recently here in April?

That was in the Niobrara play in the liquids rich. And that occurred just right at the end of Q1.

In the Bakken?

Yes. Same thing.

And to further elaborate on that Brian, what we are trying to test out there is the economic model of the Petrovalve that is able to be placed further back into a horizontal well than just in the vertical section of these non-conventional oily Shale wells in those two basins. And we're at the infancy of determining the economic model of that.

We just thought it was worthwhile to point out that this is a technology that has been used almost exclusively internationally. But because of the way these completions have changed, there may be, and I'll emphasize, may be a business opportunity here in the United States.

Right, thank you for clarifying that. And finally on your final segment, Teledrift I don't think I missed it but I don't think you mentioned you had an international expansion there with Weatherford. Just curious if you could update us on where you are in regards to that and if there's any update available for that?

All of the equipment is shipped. It should be getting there. The contract is starting. I would expect revenue streams to start coming out of it in either late May or early June. We have to go over and do all of the calibrations, set the shop up. But the drilling activity has started. So, we are very close to recognizing revenue streams from there.

Okay, I'll look forward for updates in the future. Thank you. I will turn it back over.

Josh Silverstein, Enerecap Partners.

I was curious on the Chemicals gross margin. Not only did you guys have an improvement year-over-year, but it was a pretty big jump sequentially. It looked like you went from about 40% in Q4 to about 44% in Q1. Can you just talk about what really changed in the quarter? Just a little bit more color there? And if you think that is sustainable going forward?

Good question Josh. Because one of the things that we work with very closely with our vendor, the [delimanine] cost and a couple of other cost that had gotten a little bit high that jumped much like the guar issue had jumped up. And we were able to go in and do some negotiating with them, buy some certain volumes.

Also there was some pricing relief as we come at it and most of it is as you well know, this is very important in our stimulation chemicals and our CnFs. Most of it came from the price negotiations on those. We do expect to be able to hold those for the rest of this year. Those margins we picked up. We expect to hold them throughout 2012. We would be surprised if we don't.

Got you. That's helpful. Also just wanted to get an update on the chemical plant expansion? Just wanted to see where you guys were in that process?

We're probably -- this is going to be an evolving situation. If you go up and look at it, you don't see a lot of difference in it except for just a pure output. The extra acreage that we've bought, we have it designed out. We figured by May we are going to be 75% of the way through with the initial production which would add probably 250% to 300% production capabilities and bulk tank and yet we don't see that as the end of what we can do.

We're making it a very modular expansion. So as we add products, as we add new technologies, it is not going to be a redesign. It is simply going to be add a modular on here, add a bulk tank out here, add another farm, add another blender. And we expect growth obviously for quite a while.

Got you, okay. And lastly Steve I just wanted to see where your odds were for the Thunder, winning it this year? Think that's looking good?

It is looking good I can tell you. I like our chances. Go Roll Thunder. Thank you.

Greg Garner, Singular Research.

First of all very nice quarter. Just wondering if you could characterize how you perceive the drivers of growth in the future here? Because you had some strong rebound from the weakness of a few years ago. And yet you are still identifying some growth opportunities. And in light of the Pioneer agreement, would you characterize the growth coming from penetration to new basins? Or is it within existing basins? Is it just penetrating the client base, or perhaps some more E&P providers in the existing basins? Can you give us some flavor on that? Or is it just totally different from basin to basin?

Sure. Great question. Multiple part answer. It does vary basin to basin. In the case of Chemicals, we've tried to explain this to folks that this is a market penetration story and an education story. Not dependent on an uplift of significant activity.

For years, Flotek relied on the stimulation companies to provide the education and the value understanding of the chemicals that those stimulation companies were pumping. And we felt that that was a flawed model to make the ultimate end-user understand when they pay more what they're getting for that. And that just takes time. So we believe we are in a football analogy. The first quarter of a four-quarter game of educating the industry of the value of these value-added products from Flotek Chemical.

With respect to downhole tool, actually innovation and just improvement in performance is what is driving that growth. We talked about Teledrift innovation where we have taken a technology that has been around for a couple of decades for heaven sakes, and automated into the wireless iPhone era where now you will be able to get Teledrift readings anywhere you have a smartphone. And we believe that is going to drive people that otherwise may not have used Teledrift will now take another look at it. People who do will use more of it.

In the case of the CAVO Motors, quite frankly the effort of the internal operational group under Steve Reeves headed up by Randy Merritt have done a heroic job of transforming that division from a significant loss provider 2.5 years ago to where it is a main contributor to the performance of downhole tool, and that is strictly because of performance. So there's two or three different ways we are attacking it. Educational on Chemicals, innovation on Teledrift, and just right down better performance regarding specifically the CAVO Motors.

Thank you, I appreciate that. Can you give us any update on the EOR? Or is it just a work in process as we go along? And anything along the lines of, you've mentioned before about how that this is a much larger market than the fracking market. And is there a quantification of how much larger that is?

Sure. That's an area that we've just got to ask folks like yourself on the phone to be patient with the understanding of it. When we talk about the EOR fluid market being as big or bigger than the stimulation market, quite frankly that is the truth. They pump as many surfactant type chemicals and EOR secondary recovery as they do on hydraulic fracture stimulation jobs. The reason we can't give you a good quantification of that overall area-by-area field-by-field market is there's no such thing as an average.

When you can average the typical horizontal well that is completed uses 5 million gallons of fluid almost basin-by-basin, there's a little variance there, then you're able to compute typically how many Flotek chemicals could go into an average horizontal non-conventional completion. With EOR it is completely different. You may have a five-well spot program that you're trying to increase flood, you may have a 100-well spot program that you are trying to increase the flood.

So, we just can't give you an average target revenue that we are looking at. And as I discussed earlier with Brian, the thing that we have really got to do a good job of making sure folks up here understand, is the EOR process is, by itself, an elongated process before you see returns. It takes in many cases weeks if not months when you've injected a particular additive in a well to see has it performed the way you wanted it to at the producing wells. And that is just the way it is.

But we are encouraged about our technology. We are encouraged about the research capability that we have developed for this. And we are committed to fully exploring what the ultimate economic benefit it is for Flotek.

Okay. It seems like it is a really good new market area for the chemical technology. Thanks for that color. Just one follow-up on what you mentioned about how in the stimulation, you can more easily understand the volumes that are used in the basin. Does that give you a sense for what kind of share you might have on a basin-to-basin area, and whether or not you want to share that, could you give us at least a sense for, you are in let's say the low 20s or low third component of total share, and you have been seeing this, obviously, grow in this last year. My orientation is just trying to get a quantification of how far can this Chemical Logistics grow. Because it has been doing so well. I'm just wondering how much further can this continue if the rig count is relatively stable from here?

Fair question. We don't from a competitive standpoint, breakout penetration basin by basin. And hopefully you understand that. Both from an overall US standpoint of non-conventional stimulation work, the product that is the most identifiable is the Complex Nanofluid. And through the effort of Kevin and the sales group and the whole CSI team, we believe that we are on something less than 10% of those completions with that product.

Our internal goal, and we've stated this in different presentations, different one-on-one meetings with folks like yourself, is that within a three-year period to triple that to 30%. We have targeted that as a number, due in large part to the experience of myself and Kevin and others who have been involved with value-added products in this industry. Three that come to mind are radioactive tracers, microseismic fracture mapping, and specialty ceramic type proppant.

All of those different value-added services products typically penetrate the market somewhere around 30% to 35%. And when you do that, then you really feel at that point that you have educated a fair portion of the industry on the value. So, we have placed a similar target inside our Company to grow up to that point and then see where we are there and we think that is a three-year plan to get there.

(Operator Instructions)

Richard Dearnley, Longport Partners.

To follow-up on the Pioneer announcement. Does that include Teledrift and EOR product? And are you allowed to market the formulations you derived with them to others in the Permian or any other basin?

Good questions. And this contract is specifically regarding Chemicals, specifically regarding primary completions. Although I think you could intuitively assume that the relationship of Pioneer, we would certainly hope would expand to include other offerings inside Flotek. And the second part of your question, that is in part why there was this formal contract, is these products that have been developed are privately labeled specifically for them based on -- and I might add here for a second that if you've had a chance anybody to listen to their earnings call a couple of weeks ago, they talked about using certain wells as scientific wells where they take core analysis, they do microseismic fracture mapping to better understand how these completions are going to act and react.

We have been able to use that information in conjunction with them. Core analysis, drill cuttings, fluid samples, understanding the water that they are using so that we can specifically design what they and we think give the best chance for the performance of their wells. So, those products are specifically tailored and confined to their usage.

Right. And the first part was so Teledrift and EOR are not in the contract?

That is correct. At the moment that is correct.

Well your answer segues nicely into the second question. Which is in the March conference call, you said stay tuned in 30 or 60 days for data demonstrating CnF productivity increases, statistics to help I guess with marketing. I talked to an E&P company two days ago and asked if they had looked at Flotek CnF and they said yes it looks expensive to us. And I said did you get around to what it might do for you productivity wise? And he said no. Any breakthroughs on the data front?

That's exactly -- you've hit the nail on the head for the education process. We've got -- and I may be a little bit over eager in the timeline that it takes to get some of the clients we're doing business with to release the information. But we've got what we feel is very encouraging information that further layers on on top of the white papers that are already on our website that talk about the value creation of this Complex Nanofluid.

And believe me I hate to say stay tuned, but again stay tuned. Because it is just a build on, again, of what is already on the website. And if you had a chance to see the video. And these are all different ways to try to attack this education issue that we are in the middle of.

The last time I looked at the website, most of the white papers were sort of '08 kind of data.

Right, and I think what we will do, and we can go off-line and certainly reach out to you, there's been a couple of more SPE papers presented that talk about the CnF value, in terms of different types of sand that are pumped in these completions, as to what that does to the performance of your well. And point well taken, we will doublecheck to make sure it is all updated, but certainly off-line we'll be glad to send you that information specifically.

Okay, thank you very much.

Oren Shaked, Credit Suisse.

My questions are related to pricing in SG&A. On pricing I was just curious with 70% of the portfolio focused on liquids, can you give us a little bit of a better sense of why you're simply holding the line on pricing? And why not maybe see some more pricing momentum and maybe give us a sense of pricing over the intermediate- and long-term periods?

And then on SG&A, maybe you can give us just a framework of how to think about the SG&A growth. Obviously it was up quite a bit year-over-year. And I'm just curious. I know you were up in dollars. And throughout the year last year. But I'm just curious how to think about the progression of SG&A going forward through the balance of this year. Thank you very much.

Sure. We have tried to express that pricing as much as anything compared to the last year, when we increased prices over the course of the year 10% or 15% based on the different services. We just want to make sure everyone understands, don't expect that this year. That is not to say that we won't have isolated targeted pricing uplift in all of the different services of Flotek.

Perceptually, in the Stimulation business it is difficult to increase pricing materially on a value-added product like Complex Nanofluid when the service companies, the Halliburtons and Schlumbergers and all that are not uplifting their pricing, as well. But that doesn't mean that on some of our other specialty products and even those in certain targeted areas, that we don't look after that on a month-to-month basis.

Regarding SG&A, as a percentage, obviously, compared to revenue, it will stay where it is or go down. One of the main components of SG&A is the stock compensation for this Company that we believe is appropriate based on the performance of this Company. Since I have been here we have pushed down the equity availability down to people at the administrative assistant level in offices like Chickasha, Oklahoma and Robstown, Texas. We believe that when we're able to push down the equity opportunity to people at that level in this Company, everybody has a alignment with our shareholders to do everything they know how to impact the stock price.

And so the largest increase in that SG&A is attributable to that. We don't expect any material increase in manpower in the SG&A, slight increase in sales personnel. And again, I think a couple of calls ago I mentioned that due to the financial performance of Flotek, we have been able to attract a higher caliber person into Flotek than we otherwise might have.

That is absolutely no disrespect for the folks that have been here and fought the good fight. We have been able to attract people in that can interact with sea-level executives with the oil and gas companies when perhaps previously a lot of the sales focus has been on the more field-oriented people. But I think that hopefully will give you a better understanding of the SG&A component.

(Operator Instructions)

Josh Silverstein, Enerecap Partners

One more question for me. I did not hear much about Russia. I just wanted to get an update there where you are?

Fair question. Russia is an interesting environment. For heaven sakes I didn't know this, but every May they take two weeks off just because they want to, just to give you an idea what it's like to deal over there. But we are committed to understanding, it is economically viable to have a presence in Russia.

As we have mentioned, the first entry into there is through the Chemical side of Flotek. The initial chemicals have been tested, have been verified, have been validated with the products that are currently used over there. And we're working through some economic issues from a taxing environment of taxes, value-added and all that to make sure, again, as we mentioned in our prepared remarks, we are not going to go somewhere just to say we have been there if it does not create the proper shareholder return for our stakeholders. So, we're in the middle of making sure we clearly understand that.

Got it, thanks.

And there are no further questions at this time.

Okay. Thank you operator and thanks for the interest and the questions, and your interest in Flotek. If we don't see you at an upcoming conference, we will look forward to visiting with you after the next quarter. 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 good day everyone.