Flotek Industries Inc (FTK) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Flotek Industries Incorporated second-quarter 2014 earnings conference call.

(Operator Instructions)

This conference is being recorded. At this time, I would like to turn the conference over to Mr. Rob Schmitz, VP and Corporate Controller for Flotek Industries. Please go ahead, sir.

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 the US Securities and Exchange Commission, were filed and distributed last evening and are also available on the Flotek website.

Before we begin our formal remarks, 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 and Exchange Act of 1934 and other applicable statutes 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 the 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.

Rob, thank you. I would also like to welcome each of you to Flotek's second-quarter 2014 conference call. We're glad you are here. With me here today are Rich Walton, Flotek's Chief Financial Officer; Steve Reeves, our Executive Vice President of Operations; Chris Edmonds, our Senior Director of Corporate Finance and Strategy; and Rob Schmitz, Flotek's Vice President and Corporate Controller. 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. However, before doing so, a couple of bigger-picture comments. While it was hard for some of us -- and probably you -- to believe, it was five years ago this week that it became clear that Flotek was on the brink of a great financial abyss. The Company was in default on its credit facility, had at best marginal liquidity, and business prospects and opportunities were severely limited.

In the second quarter of 2009, Flotek reported $23.5 million of quarterly revenue. That's right -- $23.5 million in revenue. While the odds may have been stacked against Flotek, when the Board asked if I would step in as your President, I believed so strongly in the core product and its efficacy that I could not say no. Combined with bright financial minds, I was confident -- some would say foolish -- that we could build a team that could create a world-class oilfield technology Company, of which, all of our stakeholders could be proud.

Fast-forward to today -- five years almost to the day, [hence], and we are a long way to doing just that. The Company has never supported a better financial position, and revenues in the second quarter -- over $105 million -- set another record for Flotek. To provide even greater perspective, revenues for the entire 2009 calendar year were just over $112 million. Assuming we meet our objectives in the third quarter, we will exceed that number in just the next 90 days. I provide that color not to boast about our accomplishments, but to provide perspective on the journey. In fact, while we are pleased with our second-quarter results, we are not satisfied. We know we have significant work to do in the second half of the year, and that is where 100% of our focus is today.

That said, we wouldn't be where we are today without a team of dedicated women and men who are the best in the business and who, collectively, are acutely focused on two things -- creating better wells and bigger returns for our clients and, as a result, generating greater profits for our shareholders. As we noted last night, Flotek posted revenue of $105.3 million for the quarter ended June 30, 2014 -- record quarterly revenue for Flotek and the direct result of the effort and determination of our team. This represents the third consecutive quarter with revenue exceeding $100 million, a trend we expect to accelerate in the coming quarters.

Moreover, we not only were work harder, we continue to work smarter. In 2014, we are on track to generate over $800,000 of revenue per employee. That's nearly double what Flotek produced per employee in 2008. That impressive statistic is not only the result of better overall efficiency in Flotek facilities, but more importantly, the result of the hard work and dedication of Flotek employees that believe, as a team, we can create unique value for Flotek shareholders.

While I'm pleased with our efforts to date, I'm not satisfied. And as I've said before, Flotek is not willing to rest comfortably in the past, but rather, your Company will strive to reach for a future where our industry-leading innovation can create more value each and every day for all of our stakeholders. As I've said on each call since I took the helm, now, five 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 believe, as a group, they could make a difference in the future of Flotek and believe 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.

With that, I'd like to turn the call over to Rich Walton to review our second-quarter financial highlights and provide some additional color on certain financial issues. Rich?

John, thank you. As John mentioned, Flotek filed its quarterly report on Form 10-Q for the quarter ended June 30, 2014 with the US Securities and Exchange Commission yesterday afternoon.

Flotek reported that revenue for the quarter ended June 30, 2014 was $105.3 million, compared to $93.6 million for the quarter ended June 30, 2013. Consolidated revenue for the three months ended June 30, 2014 increased $11.7 million, or 12.5%, relative to the comparable period of 2013. This increase in revenue was primarily due to increased sales of stimulation chemical additives in our Energy Chemical Technologies segment. As expected, seasonal activity declines in Canada impacted revenue by nearly $3 million collectively in April and May. In addition, the transition to an optimized CnF blend in a key basin caused a transient reduction in revenue of approximately $1 million, as well as a modest, short-term impact on Energy Chemistry gross margins.

For the quarter ended June 30, 2014, the Company reported net income of $11 million, or $0.20 per share on a fully diluted basis, compared to net income of $8.4 million, or $0.16 per share on a fully diluted basis, for the quarter ended June 30, 2013. Earnings before interest, taxes, depreciation, and amortization, or EBITDA, for the quarter ended June 30, 2014 was $22 million, compared to $17.6 million for the quarter ended June 30, 2013. Stock compensation expense for the quarter ended June 30, 2014 totalled $2.4 million, compared to $3.6 million for the quarter ended June 30, 2013.

Selling, general, and administrative expenses remained relatively flat for the three months ended June 30, 2014, as compared to the same period of 2013. SG&A costs, as a percentage of revenue, declined from 22.5%, for the second quarter of 2013, to 19.8% for the current quarter, as revenue grew faster than SG&A costs. The Company recorded an income tax provision of $6 million, reflecting an effective tax rate of 35.1% for the three months ended June 30, 2014, compared to an income tax provision of $4.7 million, reflecting an effective tax rate of 35.9% for the comparable period in 2013.

Flotek continues to sport one of the strongest balance sheets in the industry. The current ratio continues to improve. During the quarter, Flotek's total outstanding debt did increase by $1.9 million, or 3.5%, since March 31, 2014, largely a result of seasonal inventory accumulation and higher estimated tax payments. However, during the six months ended June 30, 2014, Flotek has reduced outstanding debt by $5.2 million, or 8.4%, from the balance at December 31, 2013. Accounts Receivable at June 30, 2014 were $65.9 million, compared to $65 million as of December 31, 2013. The Companies allowance for doubtful accounts was 1.2% at June 30, 2014. Inventories in the quarter rose by $10.2 million, primarily as a result of traditional seasonal increase in citrus product inventory held at Florida Chemical.

Now, I would like to turn the call over to Steve Reeves, who will discuss second-quarter operating highlights. Steve?

Rich, thank you. As noted earlier, consolidated revenue for the three months ended June 30, 2014 was $105.3 million, compared to $93.6 million for the three months ended June 30, 2013. Second quarter enterprise-wide gross margin equaled 40.2% -- relatively flat, compared to the second quarter of 2013. Energy Chemical Technologies revenue in the first quarter was $62.6 million, an increase of $14.9 million, or 31.2%, compared to last year. Quarterly gross margins in the segment were 43.8%, compared to 43.1% a year ago.

While we continue to make progress in CnF adoption rate, the traditional spring thaw in Canada had a marked impact on completion activity for the North, and as a real result, CnF sales. We estimated the spring breakup reduced CnF revenues by about $3 million in April and May. Moreover, given nearly all that displaced revenue was CnF-related, gross margins for the quarter were also impacted.

The Consumer and Industrial Chemical Technology segment, or CICT, was formed in the second quarter of 2013 with the acquisition of Florida Chemical. Segment revenues in the second quarter were $12.6 million. CICT gross margin for the three months ended June 30, 2014 contributed $2.9 million. Gross margins for the quarter decreased from the comparable period of 2013, primarily due to the lower margin for terpenes.

Drilling Technology revenue for the quarter totaled $27.2 million, down $2.5 million relative to the same period in 2013, but an increase of $2.3 million sequentially. Drilling Technologies gross margin for the quarter was 39.5%, a decrease from 41.8% compared to the same period 2013, but a modest increase from 39.3% from the first quarter of 2014. Not only did Teledrift stabilize in the quarter, including strong international growth, but our core tools business gained momentum in key basins, especially in the southern United States. We continue to tweak the Stemulator design to ensure optimal performance. While Flotek's continued tool enhancements have temporarily slowed the growth of the Stemulator, the Company expects rentals to grow steadily in the second half of the year.

Revenue for the Production Technology segment for the quarter was $2.9 million, a decrease of $0.5 million compared to the same period in 2013. Production Technologies gross margins increased by $0.4 million, or 42.2%, for the three months ended June 30, 2014, as compared to the same period in 2013. And gross margin percentage increased to 42.5% for the three months ended June 30, 2014, from 25.2% for the same period in 2013. These increases are due to product mix from increased international Petrovalve sales and decreased domestic rod pump component sales.

Under the leadership of David McMahon, our Production Technologies business continues to refocus its efforts on niche added value technologies that will create a competitive advantage to Flotek in the coming months. The Company is in the advanced stages of exploring options to accelerate its growth in unique technologies and services that will add value to Flotek clients and stakeholders.

As we have said in the past, the seasonality of the second quarter can create anomalous results that have little to do with the long-term reality and growth patterns of our business. Given the weakness in Canada and changes in chemistry formulations, that certainly was the case in 2014. I have little doubt that, given a continued stable environment for our overall hydrocarbon development, Flotek should post strong results in the second half of the year.

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

Steve, thank you very much. Before we take questions, I'd like to add a handful of concluding thoughts. First, like many of you, when I first reviewed margins in the Energy Chemistry segment, I had questions about the 300 basis point sequential decrement. However, after reviewing the data carefully and reviewing our activity pattern, it seems clear that the results are transient and relate almost entirely to short-term fluctuations that will dissipate as we move into the second half of the year.

Is important to remember that nearly 100% of the displaced revenue opportunities resulting from the thaw in Canada are high-margin CnF chemistries. In addition, we made a conscious decision to phase out an older completion chemistry blend that we felt was not as effective as newer formulations. While that was absolutely the right decision, both for our clients and for Flotek, it also temporarily removed a relatively high-margin sales opportunity from our stable of products. Hence, the product mix in the quarter was skewed to slightly lower-margin products, resulting in a lower blended gross margin.

That said, with recovery in Canada and clients redirected to better formulations, the product mix should be more favorable in the second half of the year. We have noted consistently, over the course of the last 18 months, that we felt gross Energy Chemistry margins should rise by 100 to 200 basis points from 2013 levels. Given 2013 margins were 44.1%, the math suggests overall sustainable gross Energy Chemistry margins should fall in the 45% to 46% range. For the first six months of 2014, Energy Chemistry margins were 45.3%.

As to the reformulation -- while the decision had a transient impact on second-quarter results, it was absolutely the right decision for the future of Flotek. For Flotek to remain the premier oilfield chemistry Company, our reputation for innovation and excellence is our single most important asset. Given the use -- and in some cases, misuse or misapplication -- of this particular formula, it was only prudent to replace it with a more robust, effective chemistry solution. We have done so, and when we look back a year from now, we'll have no doubt that we made the right decision for all of our stakeholders. Quite simply, we have a zero-tolerance policy for mediocrity. Our research and innovation group strives to be the leader in new chemistry technology, and this is just one example of how we will strive to bring our best technologies to the table each and every day, even if it means we have to redirect our efforts in real time.

As we discussed in our release last night, there are a number of exciting initiatives that should have a positive impact in the second half of 2014 and into the future. The introduction of FracMax, the Company's patent-pending application for comparing performs of wells using Flotek's advanced, next-generation CnF completion fluids versus those that use conventional surfactants, has been successful in fueling interest in Flotek's innovative chemistries. As a direct result of FracMax, Flotek has added meaningful commercial chemistry validation projects, with over a dozen prospective clients across multiple domestic basins. In addition, we are actively working on nearly 20 other validation projects, creating the most robust prospect book in the history of the Company.

This is just the beginning of the impact of FracMax, as we believe operators will find it hard to ignore the data, which conclusively validates the economic advantage of using CnF chemistry in completions. While we have to execute on these opportunities, the ability to get in front of these new prospects is a big first step. I pledge, today, that you'll be hearing much more about the business benefits of Max in the coming weeks.

Our international efforts are continuing to provide great opportunities to create value for Flotek's shareholders. In Canada, while spring breakup had an impact on April and May results, Flotek's presence continues to accelerate. The Company's monthly Canadian revenues is now four times 2013 levels. And growth should continue, with solid partnerships with Canadian service companies. In addition, we believe Canada can provide an opportunity to rapidly prove the efficacy and environmental value of our Xylene replacement chemistry. We're also excited about second-half opportunities in Mexico, as we are beginning to provide advanced completion chemistries to a major national energy company. The Company expects the multiple well validation project to continue through the balance of the year.

Halfway around the world, we continue to grow our Chemistry business in both the Middle East and South America. Flotek Gulf, our Omani joint venture, continues to progress with Flotek and Gulf Energy completing negotiations with an engineering and construction company for the development of Flotek Gulf's chemistry manufacturing facility. Completion for the facility is expected in early 2015. Moreover, our presence in the Middle East has resulted in increased chemistry sales across the region, including into Saudi Arabia.

Not only are we making progress on a chemistry side, but Teledrift is also becoming a big deal on international market. Teledrift is now working on nearly 40% of all Saudi Aramco rigs. Plus, Teledrift continues to expand its presence in Argentina, with Teledrift working on over 55% of all rigs drilling in the South American nation. It should be noted that our investment in our professional team and facilities in Saudi Arabia has made a marked difference on how Saudi Aramco views our relationship and has meaningfully accelerated our growth in the region.

While every country and region is different, we're look and carefully at our Saudi and Middle Eastern operations as a model for potential growth in other hydrocarbon-rich countries and regions around the globe. As mentioned last night, July preliminary revenue should be around $37 million, a continuation of the acceleration seen as we exited the second quarter. Moreover, with hard work and focus from the Flotek team, we expect month-over-month growth to continue in the second half of the year.

That said, I can't emphasize enough that adoption of disruptive technology is not an activity prone to straight-line behavior, and sales occur without regard for the convenience of calendars. While I can't and won't predict the precise timing of our success, I know that I get up each and every morning excited about the opportunities in front of us and knowing that the growth horizon is virtually unlimited.

Moreover, I'm convinced both the results of our scientific and technical expertise, as well as the empirical data now validated by FracMax, that there is a big opportunity to improve the way our clients and prospects complete and produce wells. And that opportunity creates better economics for all of them and significant financial benefits for you, the owners of Flotek. Hence, we will continue to be focused on the task at hand -- spreading the message of benefits of complex nanotechnology in the oilfield, investing aggressively in technologies that are central to our vision and long-term success, and remain determined to creating best-in-class value for all of our stakeholders.

Imagine, for just a moment, what it would be like to wake up five years from now and realize that Flotek repeated what it has done over the past five years. Remember, there were very few believers in 2009, but those who did believe are pretty glad they did. Now, our dream is to do just that -- repeat. I challenge myself and our team to make it happen, and we will do everything we can to create and maintain an environment where the seemingly impossible is not only possible, but probable.

What I pledge to you today, as I did on my very first call, now, five years ago, is that my team and I will come back to work each and every day, knowing that you have placed your confidence and trust as stewards of your capital. We will take that responsibility very seriously and work hard each day to earn that trust. Let me be clear. The success of Flotek is a result of hard work and untiring efforts of a group of people who believe they can shape the future. As a leadership team, it's incumbent on us to communicate our vision, challenge the spirit, and ensure our team has the tools to exceed even their wildest expectations.

Thank you for your interest in Flotek. I'm glad to be here, and we look forward to sharing our journey with you in the coming months. Operator, we'll now open the call to questions.

(Operator Instructions)

Michael Marino, Stephens.

John, you guys posted top line growth in the energy chemicals business of around 25% in the quarter. And based on the pipeline of work that you see, is there any reason this can't be or won't be sustained for the entirety of the second half of the year and even to next year?

I'm just trying to understand, maybe, the puts and takes. I recognize the growth isn't linear, but if it's going to be better than that, why might that be? If it's going to be worse than that, why might that be?

Yes, sure. No -- great question. I'm sure it's a lot of questions folks have that are listening in on the call.

As we just mentioned here, in our comments, Michael, the FracMax application, which shows public data that's modeled with frac focus and production data from wells around the country, we believe -- I think the folks who have looked at it empirically believe that there is a validating ability of the increased costs of complex nano fluid. That's why we have a higher backlog of validations now, than ever before in the Company.

So to directly answer your question -- we expect that growth to continue on that plane through the balance of the year. And when you're in a market penetration story -- as this is -- you get to what's called the halo effect, which that every evidence of a validation creates a halo that should make it -- compress the time for the next client to consider, and in fact, use the technology. And that's the phase of this market penetration effort that we're entering into right now.

And to follow-up on those validation projects that you outlined -- are those field tests or lab tests or is that a combination of both? And then what has been the historic conversion rate of those types of projects into -- whether it's a lab test moving to a field test, or a field test moving to a more consistent customer?

Sure. The validations that we mentioned are all field validations in numerous basins. I think, give or take a little bit, it's 44 wells that will essentially happen with new clients to the Flotek technology between now and end of the quarter. And the sustained rate -- once people send cores or drill cuttings and oil samples into the lab, they've pretty well committed to a validation. And so that's all in place for these validations that we mentioned today.

And then it becomes a matter of the stickiness to continue to illustrate that these folks are getting a value and should sustain the usage of the complex nano fluid, going forward, well beyond the validations. And those have about an 80% success rate.

The reason why it may not be 100% is the client company may move people in and out of the decision-making process that were involved in the validation. And it's not like you're starting over, but you kind of are. But it's a very high success sustained rate, once the validation occurs.

And I might also add -- those validations, typically, are a minimum of three wells. One point never makes a trend line, so they're typically three wells -- sometimes, they're five. We have one that's a 12-well validation, so that gives you an idea of the number of wells that we're talking about on these different projects.

So it would be fair say that those validation programs from a year ago -- 80% of those have turned into consistent customers? And now you're moving along with the next group? And the hope is that becomes consistent?

I think that would be a fair assessment. And our hope is based on the history of the sustained rate when someone enters into a validation program.

Thanks. I'll turn it back to others.

Georg Venturatos, Johnson Rice.

John, I wanted to -- you did a great job of outlining the impacts to the chemicals margins in the quarter. As we look at the back half -- certainly see improvement back to that run rate we talked about.

Is it safe to think 3Q is a little bit of a transition to, probably, getting back to the upper end of that rate in Q4? Or do you think it's as quick of a bounce back in 3Q?

It's certainly -- you use the term transition, but the biggest effect that will accelerate that transition, quite friendly, is Canada. As we mentioned there, the activity in July is right at four times greater than a year ago July. And nearly all of that business -- 80% of it -- is complex nano fluid in nature.

The one thing that we're doing -- it's a little thing, but again, it puts an emphasis on our focus of looking at every part of the margin thread inside the chemistry side -- is we now have dedicated trucking to three distinct areas in our operation in North America, which really means we have take or pay contracts with dedicated trucking that is able to reduce our freight. That's part of the 100 to 200 basis points we talked about that we felt would go on.

We now have the type of ability to forecast where we think the utilization of these products will be through the balance of the year, that we can step out and do take or pay type contracts with these trucking groups that can reduce that in that area. Maybe a longer answer than you wanted, but we feel pretty confident that by the end of this third quarter, those margins are going to be back where we thought they would be, in terms of the high 45%, approaching 46%.

Okay, great.

And then also, just wanted to touch on FracMax. Certainly early days -- seems like you're gaining some nice traction, with regards to the validation projects. I guess, you mentioned this was a record with the 17 ongoing currently. I know things fluctuate, but compared to the first six months to prior to the introduction of FracMax, how many were we running on average, then?

I'd say was probably a quarter of that number. And you're one of the folks who had a chance to see it.

In our view -- and still, a lot of these E&P companies are, what I would say, prisoners of their point of view. Which, at all costs, they cut costs. And our mission is to change that point of view to where incremental spending that's validatable and creates economic uplift is what they should consider.

We think, because it's not our data -- it is their data, it's there information they turn into state production records, they're information they turn into [the] frac focus -- that their data is what creates the economic validation by using the technology. And that's our mission, is to change that point of view, to modify that point of view, and we believe that FracMax, because of its independent nature, should go a long way to helping us do that.

Okay, great.

Then lastly, is there any particular basin or region where the FracMax data has been incrementally helpful, versus your previous marketing efforts in that region? Or has it been pretty broad, in terms of the helpful nature of incremental activity?

I would say, overall, it's broad, but there might be a slight edge to South Texas. The percentage of these validations is slightly skewed to South Texas over any other particular geographic basin. But I'd say, overall, it's broad, but again, it's slightly skewed to South Texas -- Eagle Ford and that area.

Got you. Appreciate the answers, John.

(Operator Instructions)

George Austin, Private Investor.

John, both [Michael] and Georg introduced the question I have, regarding FracMax and the validation projects. And you roughed it to, say, maybe 80% hit ratio. But let me expand the question into timing of the validation projects.

The press release mentions 12 underway and 17 -- and by the way, in your comments, you mentioned 20, so I don't know whether there's been a few more very recently, but either way -- is there a rough estimate of the timing to bring any one of the validation projects to fruition? And the point here is that, since FracMax was just introduced in June -- but you did say, maybe, some were underway before that -- so that's six, seven weeks ago, is there a rough idea, like weeks, months, to bring a possible 80% hit ratio to -- if you will -- a deal with any given producer?

Good question. I'm sure that's also a question on the minds of a lot of folks that are listening in on call.

As you might expect, all of these producers are different. They all have a different process of understanding and becoming encouraged on a different way of doing things.

But I would say, overall, what used to take months, now takes weeks up to a month or two in the sales process to create a validation. And, again, I don't want to, in any way, oversimplify the process of changing the point of view of introducing an element that will cost money to make money. You have to still get different levels of acceptance and buy-in with these E&P companies, and that normally doesn't happen around one meeting around a conference table.

But again, the fact that the data is independent and is derived from their very own information, a lot of the second-guessing, a lot of the engineering of questioning the normalization process of showing value -- that, in large part, has been taken away in the discussion of whether they are going to increased the cost of their completion. And that's really what compresses the decision timeframe for these people.

But, again, I don't want anyone to leave this call thinking that it's like going over to the wall and flipping a switch. It's not that easy.

You still have to have different levels of buy-in. And it's still, really, amazing that you can have -- on a team of six people, five folks buy in. And there's the one guy that doesn't understand or doesn't, for whatever reason, doesn't accept it, that you have to work on extra hard to get the whole team to go along. And I don't want to take everybody's time up about the sales process of value added, but again, it's still a process out there.

Thank you for the clarity of the response and the caution regarding each individual producer.

(Operator Instructions)

Mark Brown, Global Hunter Securities.

I wanted to ask about the Flotek micro solutions product that you discussed with the analysts today. It think you had referenced some trials of that in July and early August. And wanted to know what you're seeing there and what plans you have.

If you could, maybe, give a sense of the contribution, in terms of revenues that you expect. And perhaps, what basins you think that would be most applicable to be used in?

Great question.

Interestingly enough, the first meaningful validations of the micro solution are very likely to incur with Saudi Aramco in this quarter. The product is on the water. We've had extensive laboratory testing.

Saudi Aramco individuals have been over to our Woodlands facility. We've been over there. And now that we've put that out there, I'm sure there will be an increased focus on our third-quarter earnings call, as to how that does because, quite frankly, if it performs the way we think it will, who better to validate it than the largest oil and gas company in the world as to how it can improve their drilling fluid process?

A word of caution -- and they are aware of this -- that the opportunity of having complete success on the first two or three validations, although it's reasonable, isn't certain. So it may take two or three efforts to modify the exact recipe, if you will. But they have as much of a level of expectation and hopefulness that this solution will meaningfully add to them, of not having to run oil-based drilling fluid as frequently as they are right now. We will keep everyone posted on that.

We've also had meaningful discussions with -- I would call it -- one or two independent drilling fluid companies, here in the US, that are ongoing, that we should have opportunities again towards the end of this quarter in a couple of geographic areas, here in the United States. Does that answer your question for you?

Yes. That's great. Thank you.

And the other question I had is -- I think you put out a press release, recently, on the Xylene replacement technology. And I just wanted to check -- is that a new branding to emphasize environmental benefits of the [fracturing] fluid additive, or is there a different formulation involved in that product line?

Well, yes. Great series of questions, there. Let me talk about it in, maybe, two or three different ways.

We have an increased level of interest, from the service company sector in California, about our Xylene replacement chemistry. And I think, just stay tuned on that, as the year moves on, for the acceptance for what we're trying to do there.

Was specifically mentioned Canada because the folks that are on this call, certainly, are smart enough to understand with asphaltene and paraffin prevalence in wells in Canada, it is a target-rich environment.

There are at least a couple, again, service companies who've expressed a keen interest of walking away from pumping Xylene anymore. And we're working out, now, the volume requirements that can make our solution what we would call price competitive, which means it's going to be slightly higher than Xylene. But we believe taking the environmental risk off the table will be worth a certain price above what you can pump Xylene for.

There is a particular service company in the East Coast area -- Utica Marcellus -- that has exclusively gone away from Xylene, to the extent they've actually turn down work from their clients that the client specified Xylene. So I'd say, from the start of this year to now, there is movement in the industry of people wanting to understand more the economics and the technical benefit of moving away from Xylene.

We remain very encouraged that the momentum we thought would be coming is starting to come. Again, I wouldn't expect a meaningful layering on of revenue the remainder of this year for Xylene replacement, but there are some very unique opportunities in different parts of -- certainly in North America -- that we hope to be able to share more with you, after the third quarter.

Alright. Looking forward to it. Thank you very much.

Michael Marino, Stephens.

John, you mentioned a number of different basins and geographies where you're optimistic -- like Canada and Mexico and the Middle East. But I want to understand, within the commentary around top line growth in the back half of the year that you addressed in my first question, is one of those areas, or is it another basin, domestically, that's driving that growth more than others?

I mean, obviously, Canada has got the seasonal impact, but absent, maybe, normalized for seasonality. I mean is there -- on a year-on-year basis -- is there one basin or region that you're more excited about and that's going to drive more of the top line growth than another?

Sure. I would say that it's -- between now and the end of the year -- it's going to be two of them. It's going to be Canada, and it's going to be the Eagle Ford. And if things play out the way we think they will in Mexico, heading into 2015, we'll likely add Mexico to that list.

And that's not to say at all that we're down on the DJ basin or the Permian basin or the Barnett. We're not. But I think, since you asked the question, to give you our most objective answer -- it would be Canada, the Eagle Ford, and heading into next year -- again, if things work out -- we'll add Mexico to that list.

Okay. Thanks.

Sir, there are no further questions at this time. Please continue with you presentation or closing remarks.

No. If there are no further questions, we appreciate those questions. I think they were of the nature that answered thoughts of a lot of folks that were on the call.

We'll be at a conference in Denver in a couple of weeks at the EnerCom Conference. Then we'll be in San Francisco for an IPAA conference. Those will be all webcast if you can't make it there.

And certainly, we appreciate everyone's interest and pleased that you were able to join us. Have a great Thursday, and we'll talk to you -- if we don't see you before -- at the end of the third quarter. Thank you very much.

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