Flotek Industries Inc (FTK) 2016 Q3 法說會逐字稿

Good morning and welcome to the Flotek Industries, Inc. third quarter 2016 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of the Company's prepared remarks. An Operator will provide instructions on how to ask your question at the end. (Operator Instructions). This conference is being recorded.

At this time I would now like to turn the conference over to Mr. Rich Walton, Flotek's Chief Financial Officer Emeritus. Mr. Walton, 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 the US Securities and Exchange Commission, were filed and distributed last night and are also available on Flotek's 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 Exchange Act of 1934, and other liable 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 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.

Rich, thank you. I would also like to welcome each of you to Flotek's third quarter 2016 conference call. We are glad you are here. Our call originates this morning from our new global research and innovation headquarters in Houston, a facility we believe is a game-changer for Flotek, and which we will discuss more in a moment. With me today Rob Schmitz, Flotek's Chief Financial Officer; Steve Reeves, our Executive Vice President of Operations; Josh Snively, President of our Florida Chemical subsidiary, as well as our Executive Vice President of Research and Innovation; and who you just heard from, Rich Walton, Flotek's Chief Financial Officer Emeritus.

Last evening, we filed our quarterly report with the US Securities and Exchange Commission. While we will not 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. As we noted last night Flotek reported revenue for the period ended September 30th, 2016 of $73.7 million, a 1.9% increase compared to the second quarter of 2016.

The current oil field environment remains one of the most difficult markets I have seen in my career. While we may well be at or near the bottom of this cycle, the volatility in underlying commodity prices and other economic and geo-political uncertainties continue to rattle the confidence of our clients and colleagues as they prepare to make new investment decisions. We feel fortunate that our focus on high end value-added technology, especially in our energy chemistry segment, has provided some insulation from the storm.

In fact, we are proud of the fact that while many of our peers continue to experience sequential challenges, Flotek specialty chemistry performance has held its own against sequential and year-over-year comparisons, especially when compared to overall completion activity. That is especially significant in light of the continued decline in overall completions as measured by the US Energy Information Administration, or EIA, and a meaningful transient decline in completion timing and activity by a large Flotek client.

In essence, even with those challenges other clients and opportunities stepped up to fill the gap and allow Flotek to show steady volumes and a modest sequential increase in CnF and overall revenue. In short the decline in a major client's activity combined with steady overall CnF sales suggest the base of CnF users broadened meaningfully in the third quarter.

Energy chemistry gross margins remained relatively stable on both a sequential and year-over-year basis. CnF accounted for approximately 68% of total segment sales in the third quarter. That said, as I noted last evening, we are beginning to see signs of positive development plans from clients as we enter the new year and do believe given what we know today that 2017 should provide constructive new business opportunities that were not present in previous months.

In addition, we do believe key clients who have recently been more deliberate in their completion activity are preparing to steadily expand activity in the coming months, which if true should benefit our core completion chemistry business. While we are optimistic we also want to be realistic.

As you know and as noted in our release yesterday, the fourth quarter can be impacted by holidays, which in more challenging market environments can provide relatively strong headwinds. While we will continue to work tirelessly through the holidays to produce results we are also realistic about opportunities as we approach the holiday season. We do not inspect significant changes to business patterns, but also want to be realistic about our own expectations as we exit 2016.

As we focus on 2017, however, we are encouraged by the opportunities in front of us. The successful introduction of our PrF, Pressure Reducing Chemistry Technology; the development of our Prescriptive Chemistry Management Total Fluid Service; and the acquisition of international polymeric all occurred in the worst market environment in decades, and yet have been end by clients as important innovations and enhancements to Flotek's stable of advanced chemistry technologies. Combined with continued growth in market share for our CnF suite of completion chemistries an new opportunity as energy markets steady, these innovations should provide opportunities for growth in 2017.

As we have recently discussed, we continue to consider a wide range of options that we believe are aimed at improving value for all of our business units. While such strategic opportunity take time and are more difficult to navigate in a challenging market, we continue to make progress in this process and believe there are opportunities to realize value of businesses, that while valuable, have become less central to Flotek's core specialty chemistry business.

While there is no assurance that any of the potential will be successful we are acutely focused on executing our strategy to focus on our core competencies while seeking alternatives for other ventures that may he be more valuable to others than they are to Flotek. We are excited that our state-of-the-art global research and innovation center is now fully operational.

As you know, Flotek's research and innovation team and infrastructure have been a key component in some of our business development opportunities both here and abroad. We believe our new global R&I facility provides a key asset in the acceleration of the CnF validation process as well as the development and acceptance of other innovative chemistry technologies. Finally, we noted last evening that in partnership with PNC Bank, we restated our credit facility providing additional financial flexibility to Flotek and reaffirming our strong relationship with PNC. These provide ample liquidity for our needs today and into the future, extend the maturity into 2020, and do so without an increase in our base interest rates.

While there are costs associated with the restated facility consistent with the risk profile of the overall oil field services market, we believe repositioning the facility with a single bank, adjusting certain covenants, and extending the maturity are all net benefits to Flotek. Most important, our balance sheet remains strong, including the equity offering and acquisition of IPI we reduced our overall outstanding debt to $42.6 million on September 30th, 2016 from $64.9 million on June 30th of this year, a reduction of over 34% during the quarter.

Combined with our repositioned credit facility, I believe Flotek has a solid liquidity profile and balance and is well-positioned regardless of market direction into the future. While I know a myriad of challenges both known and unknown remain for Flotek and the industry in the coming months, I am more confident about our intermediate and long-term opportunities than I have been at any other time this year. I continue to sleep well at night knowing Flotek has built one of the best teams in our industry from our corporate leadership and support team in Houston to our technicians and client service folks from Williston to Waller and Denver to Dalton.

We will continue to balance our enthusiasm with realism, turning challenges into opportunities. We remain focused on ensuring the appropriate balance between caution and opportunity. making certain that our business is appropriately sized to a more constrained and volatile opportunity set, yet not lacking the resources to size what we believe should be an abundance of business opportunities as we navigate through the cyclical trough.

As I have said on each call since I took the helm now seven 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 belief, as a group, they could make a difference in the future of Flotek. Today we remain focused on our vision to grow the Company and continue to be enthused through the efforts of our people; the future will once again present opportunities to create value for our stakeholders. While we may not always get everything right, we will strive even in the most difficult of environments to do the right thing for all of our stakeholders. With that, I would like to turn the call over to Rob Schmitz to review our third quarter financial highlights and provide some additional color on certain financial issues. Rob?

Thank you, John. As John mentioned we filed our Form 10-Q for the period ended September 30th, 2016 with the US Securities and Exchange Commission yesterday afternoon. Revenue for the current quarter was $73.7 million, a decrease of 16.2% compared to the same period of 2015, but an increase of 1.9% compared to the second quarter of 2016. We reported a loss from operations of $4.3 million for the quarter.

For the quarter ended September 30th, 2016 we reported a net loss of $2.7 million or $0.05 per share fully diluted, compared to a net income of $2 million or $0.04 per share for the quarter ended September 30th, 2015. Gross margins for the Company increased sequentially to 34.4% from 33.1% in the second quarter of 2016, as margins in the drilling, production, and consumer and industrial segments all showed increases. Margins in our energy chemistry segment were essentially flat sequentially.

Company-wide SG&A returned to normal levels after our second quarter downward adjustment to our incentive compensation accrual. Year-over-year company-wide SG&A is up only 3.3%, as growth in our energy chemistry business has been offset by significant reductions in the drilling segment as we have adjusted to the new market reality for that business.

Adjusted earnings before interest taxes, depreciation and amortization are adjusted EBITDA for the three months ended September 30, 2016 was a negative $.8 million compared to a positive [$7.3] million for the three months ended September 30, 2015. As John mentioned earlier, we discussed -- and we discussed in last evening's release, we have altered our credit facility with PNC Bank, now the Company's sole lender.

The new agreement extend the maturity of the facility to May 2020 from the previous maturity of May 2018 and provides a total of $65 million in debt capacity, consisting initially of a revolving line of credit of $55 million and a term loan amortized over five years of $10 million. As the term loan is repaid, the amount of reduction in the principal will provide additional availability on the revolver. As a result, when the term loan is fully repaid the total size of the revolver will be $65 million. Proceeds from the sale of assets will be applied first to the term loan and we expect to pay off the term loan no later than mid-2017.

Under the revised agreement the fixed-charge coverage ratio and senior debt covenants are deferred until the first and second quarter of 2017, respectively. When these covenants do become effective they will provide significantly greater flexibility than our current agreement. We believe this revised facility provides Flotek with more than ample financial flexibility into the foreseeable future, and we look forward to our continued relationship with PNC Bank.

A complete review of the changes to the credit agreement can be found in an 8-K filed last evening. As we have demonstrated in the past, we will continue to be vigilant in protecting our liquidity, rationalizationing costs, and making certain that we maintain a high level of financial flexibility; something I believe we have shown positive with our strategic financial moves over the past two quarters.

Finally, while I intend to retire in early 2017, I am looking forward to the coming quarter and year-end close as we continue to and a half date through the cycle. I will continue to be actively involved in the year-end process, and look forward to participating in the fourth quarter and year-end review call. I have truly enjoyed my time at Flotek, the opportunity to work with a group of outstanding financial professionals that have made a difference in the accounting and financial reporting process and have had a positive impact on our business, has been a truly exceptional experience.

While I will miss the interaction with these terrific people I am looking forward to new opportunities ahead with my family and other opportunities that the extra time will afford me. And to John and the rest of my colleagues here at Flotek, thank you for this opportunity. Now I would like to turn the call back over to John Chisholm for some closing remarks.

Rob, thank you. Before we take your questions, I would like to add a few concluding thoughts. In last evening's release, Flotek announced a new cooperative agreement with Anton Oil Field Services Group of China. While still in its early stages our relationship is worth noting for a number of reasons. Anton, headquartered in Beijing, is a leading integrated oil field service company in China. Listed on the Hong Kong exchange, the company is rich in oil field intellectual property, with nearly 400 industry patents and patent applications.

Anton's commitment to research is evidenced by its scientific research commitment in China, as well as its technology R&D center in Houston. In China, Anton works in all major onshore oil and gas fields in China, with regional bases covering the Tarim, Erdos, and Sichuan Basins, as well as Beijing.

Internationally Anton is focused on Central Asia and the Middle East as well as the Americas. The strength of the Anton name and its global brands is further amplified by the fact that the world's largest integrated oil field service company is a meaningful equity investor in Anton.

Under the terms of the agreement, Flotek will provide Anton with exclusive rights to use certain Flotek chemistry in China and other key Anton market in exchange for certain purchase commitments. In addition, I am honored that Anton has asked me to join the Board of Directors, an appointment the Flotek Board has approved. We are pleased that a company within Anton's reach has selected Flotek as a strategic partner, especially in one of the key global hydrocarbon growth markets outside of North America.

The Chinese market presents challenges for foreign companies, and the right partner is the primary key to success. Our discussions quickly led me to understand that the cultures of Anton and Flotek fit well together, especially given Anton's desire to advance oil field technology to the next level in China and other Eastern Hemisphere markets. Anton's belief in the efficacy of Flotek's chemistry, and their commitment to work side-by-side to promote Flotek technology in the Eastern Hemisphere, should be a key component of our growth in Asia and beyond.

While it will take a team effort to succeed in this new market, the offer of a seat at an topic's governance table is another indication of the level of commitment to cooperation between our companies that I believe will benefit Flotek into the future. In South America, Flotek's Argentinean initiative continues to progress, with teams from Flotek and YPF scheduled to meet again this months to review results from the initial pilot validation wells using CnF chemistry, and to develop well designs for the next series of wells to be drilled in the new year.

In addition Flotek and [Wytech], the technology arm of YPF, continue to work on plans for broader collaboration on both oil field and industrial chemistry applications. While international initiatives take time and results are certainly not linear, we are pleased with the effort and commensurate results in the first months of our new relationship. As noted last night, Flotek's recent acquisition of International Polymerics has generated meaningful interest from existing and prospective clients. The company has made progress in transferring IPI into the Flotek systems, which should allow for near complete sales, operational, and financial integration in the coming months.

In addition, IP's Monahans, Texas facility in the heart of the Permian Basin is being transitioned to handle the full suite of Flotek chemistry logistics, which should provide an additional competitive advantage as Flotek continues to focus on Permian Basin growth. That said, we continue to believe the key benefit of the IPI acquisition is the ability to offer natural polymers to our clients as we continue to grow our prescriptive chemistry management, or PCM service; an opportunity for clients to procure entire fluid systems from Flotek, and benefit from the expertise and experience of our entire chemistry and fluids team.

While still in the early stages, we believe IPI is a key component to our future growth of this initiative. The early commercialization of our PrF chemistry, a pressure-reducing fluid which contains at least 25% less polyacrylamide, and requires less volume than traditional friction reducers, continues with opportunities across multiple operating basins. While we remain cautious in our enthusiasm due to current market conditions, our early results are encouraging.

Outside the energy space Florida -- excuse me Flotek's consumer and industrial chemistry technologies posted another solid quarter with year-over-year sales up 39.2%, compared to same period in 2015. And CI CT's nine months results for the revenue, operating income, and EBITDA are all at record nine month highs since Flotek's acquisition of Florida Chemical Company in May 2013. CI CT continues to experience strong demands for its flavor compounds which could provide unique growth opportunities for the next several years.

As such, Flotek is considering expanding capabilities to meet he growing client demand including the recent addition of Dr. David McKeithan, a well-known veteran of citrus chemistry who will further our research and innovation efforts in the flavor and fragrance arena. Unlike crude oil, citrus oil market remain firm and well above historic levels. However, we are well-positioned on inventory and forward purchases to meet market and internal needs, as well as take advantage of market opportunities as they arise.

Finally, on the operational front, I would be remiss if I did not thank the entire Flotek team for their tireless efforts in completing and opening our new global research and innovation facility this summer. Since we softly opened early in the third quarter there has been a whirlwind of activity, including a number of school groups and public events at the request of various organizations. And while early on it may have seemed to some as a cavernous building with little energy, quickly it has transformed into a hub of client and industry gatherings that we believe is not precursor of the future.

Since opening, we have hosted two significant industry lectures attracting over 40 professionals from two dozen unique exploration and production companies, had over 40 clients and prospective clients on-site for collaborative efforts, and hosted university groups interested in Flotek research and opportunity. A special thank you is due to Donna Mayo, who was the point person on so many of the details that it took to get the R&I center to the finish line.

Her extra effort and dedication exemption the spirit of the Flotek team. As I said three months ago, the last now truly nearly two years have been challenging on a number of levels. The greatest of which is knowing that regardless of how hard we labor, there is nothing that the Flotek team can do to change the deceleration of the cycle and the daily decline in oil field activity that continually shrinks our opportunity set. Yet each and every day my colleagues have come to play looking for opportunities when it seems few if any exist.

In short this is a team that does not quit, that tries to be better each day, and believes that they can make a difference no matter the size of the challenge or the length of the odds. Most importantly, they face the challenges with enthusiasm and perseverance, an they do things the right way. And they do make eye difference; not only for their clients and their colleagues, but also for the communities in which they live.

As I mentioned on our last call, Flotek along with TIPRO - the Texas Independent Producer and Royalty Organization - agreed to donate a portion of September sales to fight childhood hunger. As a result of that effort, Flotek and its clients will provide funds for over 1.2 million meals for children who otherwise could go hungry.

And as we approach Veterans Day, to each and every active or former member of the US Armed Services, I say thank you for your service and dedication to our great country on behalf of all members of the Flotek team. It is important that we all remember regardless of the madness of this political season, that we are all first and foremost citizens of the United States of America, which is possible only because of the service and sacrifice of our men and women in uniform. Thank you.

Finally as I conclude, I want to thank Rob Schmitz for his nearly four years of service to Flotek. However, I also want to be very clear about his retirement and the process going forward. Rob has indicated his desire to retire from the world of oil field accounting and finance after four decades in the business. He was kind enough to provide ample notice and after discussing with the Flotek Board of Directors, we decided it was appropriate to announce his retirement today and indicate his willingness to stay full time until we complete our year-end 2016 filings and conference call.

While I am sad about his decision to retire, I understand and accept his decision to spend more time with his family and enjoy life without worrying about the daily price of a barrel of crude oil. Rob has been an incredibly important part of our team and an integral leader in building a financial infrastructure that resulted in Flotek accelerating our filing schedule, improving transparency, and providing valuable improvements in our business decision making process. We will miss Rob, but we also respect his decision to spend more time with his family and his wife's antique and real estate business in the Texas Hill Country.

I also want to take a moment to comment congratulate late Scott Sheffield, Chairman and Chief Executive at Pioneer Natural Resources on his pending retirement. Scott has been a personal friend and a key supporter of Flotek, something for which I will be forever grateful. He has provided sage advice, been more than fair yet candid in his work and feedback from Flotek, and may have answered nearly as many questions about our Company as I have. Moreover, he managed to make it through over 100 quarterly earnings calls in his tenure, a number I am unlikely to ever approach. Congratulations and thank you, Scott.

As I conclude, I pledge to you today as I did on my first call now seven years ago that my team and I will come to work each and every day knowing that you have placed your confidence and trust in us as stewards of your capital. We will take that responsibility seriously and work hard each day to earn that trust. Let me be clear. The success of Flotek is the result of the hard work and untiring efforts of a group of people who believe they can shape the future. As the leadership team it is 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 am glad to be here and we look forward to sharing our journey, both challenges and successes, with you in the coming months. With that, Operator, we will now open the call to questions.

Thank you. (Operator Instructions). And our first question comes from the line of Matt Marietta with Stephens, Inc. Please proceed with your question.

Thanks and good morning, guys.

Hello.

I wanted to -- first question out of me here on the G&A line, that is really the biggest variance in supply model versus what you reported, probably others as well. Can you maybe help us understand what is behind the step-up from the second quarter to the third quarter and maybe how to think about that on a run-rate going forward and maybe to 2017 to get our models in line? Perhaps we just kind of failed to model the R&I center or additional sales force, or maybe the dynamic there would be great.

This is Rob. Yes. I will help you out there. Yes. I think kind of mid-20s is a good path forward on that line. The variance from the second quarter is we made a significant cash up adjustment to our incentive accrual in that quarter. You know, you are going to see us continue to invest in the sales force in our energy chemistry business, but throughout the rest of the businesses, I think you will see those very stable. And obviously when we -- if we do something strategic in the other businesses, then that will certainly help in that area.

Thanks. Thanks for the color. Congratulations on the retirement announcement, Rob and all the color behind the reason helps remove any speculation out there that anyone may have. But as Rich steps in is this a permanent move? If not, is there a timeline that we should think about, shareholders should think about, in the transition planning process just to kind of set expectations?

I think -- yes. The plans are still under development there. So we are just beginning our planning process. That is why we established a longer leadtime on this.

Got it. And switching gears can we talk a little bit about the customer mix. Pretty well known that your largest customer stepped down in activity from the second to the third quarter and I appreciate the color there. Definitely a cause of concern by many into the report, but it looks like with CnF volumes managing to remain flat; you know, John you hit on this a little bit but can you elaborate more on the offsetting pickup in CnF demand? Was this through pumping companies, was this direct sales? Maybe the composition, you know, is this new customers, current customer base increasing? And then just kind of walk through knows dynamics to give us a sense on who is picking up as, you know, obviously pioneer the completed well count stepped down.

Right. Good question, Matt. The majority of the uplift in the non-pioneer business has operators essentially through our Flotek store. As you know, sometimes we will actually sell-through a service company. But really it was all business that was picked up from our sales force out there working directly with operators. In term of the change from the second quarter, the vast majority that may not have been new customers all time with Flotek but they were -- they were new in the third quarter versus the second quarter.

So, you know, it is a result of our guys out there really hustling, pursuing a lot of different opportunities and then getting people to convert. And these are all people who, you know, they may not be there quarter after quarter, but they are not -- they are not validation case. They are business that we expect over time to continue to have with these guys.

That is encouraging. South a wider footprint in the customer base just to kind of be specific?

Right. Absolutely.

Yes. I think it speaks to the effort that sometimes it takes a quarter and sometimes two to see the realization of the effort, but there is been a narrative that the A and B clients overweight the perception of the complete market penetration of the CnF. I think the third quarter hopefully at least started a change that thinking as to as you have noted keeping the volume up with the decrease of that client, at the same time a reduction in the completion overall activity we are very enthused with that internal market penetration for sure.

Great. And a final one out of me. You have executed a couple of higher-profile joint ventures internationally this year, one in Argentina and one in the Far East that you discussed today. Can you maybe elaborate on why you guys are forming these sort of arrangements, why the structure is beneficial to shareholders and the Company and, you know, are there minimum volume agreements, are there any deliverables on your side, and maybe help us understand why this sort of structure? And that is all out of me. Thank you.

Yes. No. Sure. Great question, Matt. The agreement in Argentina and with China may appear to be similar, but they are different. The agreement in Argentina is with Wytech, the technology arm of YPF, to work with them to develop collaboratively through our experience with shale, that their experience what has the opportunity to be the best total fluid system for them to realize the best opportunity to maximize their unconventional shale resource.

There is not a commitment from YPF of purchasing the chemistry, but there is certainly a very tie-in connection between YPF and Wytech as to what we are doing with that technology arm. And I think as everybody has read in recent time, whether it is the CEO of BP, the CEO of Exxon, GE Oil and Gas have all talked about increasing the capital into have Argentina as recognized as the largest potential unconventional resource outside of North America. And the relationship we have with the technology arm of YPF, we think should position Flotek uniquely as that develops.

Regarding China, we felt for some time there is really two frontiers that you would have to look at in a special way for Flotek to feel comfortable about the opportunity to penetrate, and those are China and Russia. The former Soviet Union. And the China opportunity presented itself over the last several months with the leading independent energy services company there that is looking at a term that you are familiar with, Matt, that some of the service companies here have talked about which is trying to become more asset light. And they have looked at how this chemistry that does not require as much assets improve their continued penetration into China and other international areas.

And we felt that Flotek going it alone in China had the opportunity to be a recipe for disaster. That many people who are listening in on this call when you hear about China they immediately go to one thought process, which is the potential re-engineering of your technology. And so we, after several quarters of looking at this as we mentioned in our prepared remarks, the DNA of Anton and Flotek is very similar. And the fact that they wanted me to sit on their Board I think speaks to the confidence I have that we are going to keep the technology confined to a specific service provider in China as a way to develop the market there.

So, hopefully, that gives some more background for not only you but the folks on the call. And there is a commitment of CnF usage by them that is, we felt, important to have the exclusivity conversation in China, but hopefully that will better answer any questions that folks may have and also yourself.

Thanks a lot for all that color. Really appreciate it. I will hop back in queue.

Thanks a lot.

Our next question comes from the line of Georg Venturatos with Johnson Rice. Please begin with your question.

Hey. Good morning, guys.

Hey Georg.

John, you know, maybe circling back to CnF, I wanted to discuss little bit further detail of the third quarter numbers. You know, I take a look at just kind of back into what we would assume Pioneer contributed on the CnF side, which expect primarily majority of that spend was on CnF. You know, certainly implies a pretty strong CnF revenue growth next Pioneer in the quarter north of the rig count gains. I know you talked about some of those were some customers that may be coming on and off, but would you anticipate that that progression should be sustainable for that non-Pioneer portion of your business absent some holiday season impacts upcoming? And then second one on that is it is just -- I know you touched on this in terms of the incremental customers, but could you maybe give a little bit more detail on kind of the basin mix that the new customers in the quarter as well?

Yes. No. Great series of questions there, Georg. The CnF uplift was essentially slightly over 20% of companies that were new, and again as Rob did a good job of explaining, they may be new from the third quarter to the second quarter, but I think if folks look back into our previous earning calls, we talked about how numerous of the people that had done validations at the end of 2015 and 2016 had said that although their rig count activity would not stay up, when it did come back, they would re-engage with the technology of CnF. That is certainly part of the uplift in the third quarter.

And as long as their activity stays up we expect that uplift to continue. So we are very encouraged about that and the fact that what they told us over six months ago they would do, in fact, they have done and I think it speaks to the resiliency of the technology. So I think we are outside of the holidays, we continue to expect to outperform what I think has become a new metric in the industry, which is the completion metric as identified by the EIA. And through this earning season I think different companies have tried to speak to this completion number as opposed to the drilling rig number, whether it is folks that brought rigs back and they had numerous wells on a pad that they would not start completing until they drilled all their wells, and I think the drilling activity in large part gave some folks some unrealistic expectation of the timing of an increase in completion activity, but I think that will now start to come.

So as we continue forward we are going to try to focus people's attention on what the reported completions are, but we continue to expect to outperform that number as we have consistently said as it is a -- it remains a market penetration story for Flotek. With respect to your question, I think everybody on the call would expect this. The overall US industry is dominated inside the Permian Basin.

I think over 50% of the drillings rigs now in the United States are in 150-mile radius of Midland so I think the number we are comfortable with telling you is that over 50% of the chemistry revenue for us course in that area in North America, you would expect that. And you would also expect that the majority of the increase in those clients in the third quarter occurred in the Permian Basin.

That is helpful, John. I appreciate that and kind of building off that second question, care to give us an update just in terms of a stab at anticipated market share currently in the Permian? And then just building off some of the comments you said in terms of IPI and their positioning in the Basin, how that might be helpful going forward in terms of building that position?

Yes. So those are two great questions. I think I would ask for your indulgence and also the folks on the call. We will try to give you greater color on that by the -- in our year-end call sometime in January as to allow us to have the whole year come together. You know, I think clearly -- you know, we have talked about that we believe we are on 15% of the completions in the seven most active basins; and that is what EIA tracks, is the seven most active basins.

We believe that the CnF technology is on 15% of those completions, and we will certainly give better clarity as I mentioned at the start of 2017 as to what it looks like in the Permian Basin keeping in mind that, you know, some of that is a competitive number for us, but we will try to give as much clarity as we can for that. Regarding IPI, we mentioned when we made the acquisition that -- this acquisition was actually made in 2014.

You could talk to the total value might be worth what Monahans is worth. The strategic positioning of that facility and the fact we have already -- the team has already I think within 45 to 50 days created a what we call a micro blending capability there, will be meaningful for us as we try to continue to contain and where we can reduce the internal cost structure of the logistics of serving the Permian Basin.

And, again, I think we will be able to give you more clarity on that in January as we will have, you know, nearly a quarter and a half of what we believe will be a cost reduction event. And I just do not want to say how many basis points now, but I think it stands to reason to have a micro blending facility in the heart of why where the majority of your activity is, is a very meaningful asset as we continue to focus on our internal cost. Does that help you?

Perfect. That is helpful. And last one for me. Just in terms of the progression of CnF throughout 3Q, if you could just comment on that and then whatever details you feel comfortable providing in terms of where we have run at least quarter-to-date relative to kind of exit rate 3Q, you know, ahead of what could be a choppy holiday season would be helpful. Thanks, John.

You know, to the extent that we really do not get into kind of monthly outlook, you know, October is very nice from an activity standpoint. I think I have not listed all the earnings calls, but I think some that have occurred and some that may still occur, folks are saying that the fracturing activity, many people are saying that they are booked up through the end of the year. That is in the Permian that we are talking about.

That is certainly encouraging for us. And so I think the fourth quarter should be just fine unless there is some type of unique weather event, it should be just fine I think for us and other folks. Is it going to be a dramatic uplift from the third quarter, no. But I think -- I think it should be just fine. Does that --

Yes.

Help you there?

That is perfect. I appreciate it, John. Thanks for the comments.

Sure.

(Operator Instructions). And our next go comes from the line of Mark Brown with Seaport Global Securities. Please proceed with your question.

Hey John. Hey everybody.

Yes, sir.

I wanted to congratulate you on the construction of the global research and innovation center. That is a great accomplishment. I was wondering if you can talk a little bit about what you see as the goals of that facility, whether it is branding the Company or educating your customers, or you mentioned you have taken a few university to tour the facility, and is this a potential recruiting tool for you? Maybe you can just comment a little bit about that.

I do not want anyone to think I am a smart Alec but my answer would be yes. I think you hit all the high points. You know, we have -- if folks have listened to the way we have positioned this commitment, it was a commitment not only to helping brands Flotek, but also a commitment to the industry that we would have the ability for interaction with university studies, we would have space available for entrepreneurs that are starting businesses that may need the access to a chemistry research area like we have here that otherwise they wound not be able to afford, and it really was a commitment to the industry as much as it was just to our own internal requirements.

That said, the facility was design the to be very interactive, and from time to time folks like yourself and others on the call certainly are invited and we will get you here so you can fully appreciate it, but it was designed to be an interactive experience much more than just coming in to see a research lab. I think that is the starting point.

I think when you go through that experience, you leave with an understanding of just what it takes to create this transformational technology that the group of the research folks here at Flotek are able to do; and I think it positions that technology in a different way when you leave the facility than if you had maybe gone to just a typical lab. We are very committed to the community. We are right in the middle of the independent school district of Cy-Fair.

We have got initiatives with that school district of awarding teacher recognition in science an math; not only are there field trips planned for the facility, but also there is a scholarship program for kids in that disciplined start in their middle school up and through high school that will lead them into college.

We think that is important. So, again, I think you normally do not do that when you open just a lab, but when you open up a facility that is trying to create an experience you are I think in -- it is a commitment that you have to look a little bit outside of just your own benefit and that is what we are trying to it here, but thank you for noticing that. It took a lot of people to pull it together and it really is special.

Well, you thank you. Another question I had, separate topic, is CI CT. You know, that is -- you know, the focus has typically been on your energy chem segment, but CI CT has seen steady growth and is actually a pretty significant pores of your operating profit. And that, from your commentary, it seems like that might even grow. What -- and you mentioned in the press release some unique growth opportunities particularly in the field of research and innovation and I was just wondering if there is any -- anything specific you can talk about at this time?

Yes. Ultimately, where we want CI CT to get to, ultimately being in a couple, three years from now, is the balancing of any type of near-term slowdown in the energy activity that that activity would offset to be kind of a counter balance to these, you know, shorter slowdowns that occur from time to time in the energy sector. So we recognized ever since we acquired Florida Chemical they are great people, it is great technology, it has a dominating footprint in the Western Hemisphere regarding citrus oil, and I will let Josh Snively give some more color on that. As you know, he heads up that effort along with our research and innovation, and he will give you and the other folks some color as to what is happening there.

Good morning, Mark.

Good morning.

When it comes to CI CT and our growth opportunities, if you look at the total available citrus oil, specifically orange, it is declining, which means we have got to get more out of what we have to contribute -- to continue to contribute value-added compounds, signature compounds, to these beverage companies around the world. So we are really turning our attention to get more out of what we have and putting these molecules and unique combinations that they provide more uplift and more benefit and more impact to the consumers of these very large brands beverages that depend on citrus oils. Given our footprint and our size on the citrus oils, we are uniquely positioned to take advantages of those opportunities for the next several years. And that is where our primary focus is going to be.

Well, I appreciate it. Thank you.

Sure.

And our final question comes from the line of Sean Milligan with Coker Palmer. Please proceed with your question.

Hey, guys. Good morning.

Hey Sean.

Hey John. On the G&A side how much of you guys have been spending on a kind of quarterly basis in terms of the SEC inquiry? That would be my first question and then I will just ask the second question now. You know, a couple guys sent me news articles about the pricing of frozen orange juice concentrates, and maybe Josh can address how that might impact your business or your inputs.

Yes. Sure. So Rob will answer the first question for you and then we will also give you some color in terms of the insurance portion of these expenses, but Rob will give that to you.

Yes, we spent a total of about $2 million responding to the SEC inquiry and the defense of the shareholder lawsuit to-date, and from an insurance standpoint we think our total out of pocket exposure will ultimately limit it to something under a million dollars.

Does that help, Sean? Anything else you want on that?

No. That is great.

And that obviously is winding down.

Yes. And then -- well, and then the first part of the year how much were you spending on MHA studies? That would be the other part of that.

That is fairly small --

Okay.

Amount.

Yes. So small being it is under a quarter of a million dollars.

Okay. Perfect. And then on the -- you know, on the pros and cons orange juice pricing, I mean if you can just walk through -- I think I know the answer, but how that might impact your business? Obviously you use citrus oil as an input, but just kind of give us some feedback on that , that would be helpful.

Yes. Glad to do it Sean. This is Josh. You know, when we look at our raw material stream, and this is one of the key benefits of Florida Chemical or the CI CT group brings to Flotek, is we see that supply and demand ratio better than anyone else in the marketplace. And knowing that greening was going to be a problem in future years, we continually maintained our inventory positions, we staggered our purchasing programs beyond spot to multi-year type agreements to make sure that we had availability. And given, given the value that we can extract out of the citrus oils because of our manufacturing capability, it gives us an advantage on that raw material stream.

The fact is there is going to be less oil for the next several years. That is going to force prices up. So where our volumes may go down, the pricing will go up for external sales in CI CT. But the internal cost to Flotek should remain relatively stable the way we have positioned ourselves.

Perfect. Thank you.

Thanks for the question.

There are no further questions at this time. I will turn the call back to you. Please continue with your closing remarks.

Thank you. Before we sign off I do want to say that it is typically this time of year that I indicate I will see some of you in New York at one of our favorite conferences. However, due to a scheduling conflict that will take me and some of the Flotek team to Abu Dhabi for the ADIPEC Conference with a number of our key international clients. We unfortunately will not be in New York next week.

That said we look forward to visiting with you soon, certainly before the new year. Again, thank all of you for your support of Flotek. We appreciate your interest, and are pleased you joined us today on the call. Have a great Thursday and try to take time to enjoy the upcoming holidays. 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.