Flotek Industries Inc (FTK) 2021 Q3 法說會逐字稿

Greetings, and welcome to Flotek Industries' Third Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Nick Bigney, Senior Vice President, General Counsel and Chief Compliance Officer for Flotek. Thank you. You may begin.

Thank you, and good morning, everyone. We appreciate your participation with us today. Joining me today and participating on the call are John Gibson, Chairman, Chief Executive Officer and President; Michael Borton, Chief Financial Officer; and TengBeng Koid, President of Data Analytics; and Ryan Ezell, President of Chemistry Technologies. On today's call, we will first provide prepared remarks concerning our business and results for the quarter. Following that, we will answer any questions you may have. Yesterday, we released our earnings announcement for the third quarter, which is available on our website. Today's call is being webcast, and a replay will also be available on our website.

And before we begin, please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which can cause actual results to differ materially from our current expectations. Accordingly, we advise listeners to review our earnings releases and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliations provided in our earnings release as we may discuss non-GAAP metrics on this call.

And with that, I will now turn it over to John.

Thank you, Nick, and good morning, everybody. Our third quarter performance reflects the execution of our strategy to accelerate sales performance for Chemistry Technology and Data Analytics and focus on resolving our remaining legacy issues. I'll talk about all of this. We've been working very hard through the third quarter to grow revenues. I'm pleased to report that our revenues for the third quarter are up approximately 11% compared to the second quarter. When we review revenue growth for some of the larger oilfield service companies, we see modest gains versus the second quarter. We believe our quarter-over-quarter results compare favorably against our peers. Mike Borton is going to walk you through the financial numbers in more detail a little later in the call.

Our execution of our sales strategy has been a priority for us as we emerge from COVID, and we've already seen a positive impact. During our second quarter call, I communicated that we had trimmed cost in certain areas to reinvest in our sales team. We've executed on that decision, and I can report that we brought onboard 11 new sales professionals to date, 8 new members supporting the chemistry business and 3 new people for Data Analytics. These folks are all highly experienced professionals and with proven track records and substantial sales quarters in their previous roles, and hopefully, the role here as well. Their industry relationships will help us execute our go-to-market strategy. We continue to reinvigorate our sales effort with ECT, and the impact has been demonstrable growth and diversity of revenues for that segment. We were also fortunate in the third quarter as Hurricane Ida passed almost directly over our rail spur, Louisiana. We suffered minimal damage there, and we were able to continue service, which was a benefit to the industry and in particular, our customers.

We believe that our operational continuity presents us with upside for that facility, and we expect to see strong performance over the next few quarters in Raceland. In addition to the new sales professionals that I mentioned, our ProChem business has also signed 4 strategic agreements with manufacturing representation companies. Ultimately, these agreements give us immediate access to a sizable sales force and a broad geography. These alliances are key to our strategy of utilizing an indirect sales channel to increase targeting opportunities. We certainly didn't invent this approach are several well-established companies like Clorox, Gojo and 3M that leverage the model successfully, and we are looking to do the same. We believe this particular strategy has a lot to offer us in terms of minimizing our cost to execute versus potential returns.

Ryan is going to give you more detail around the sales and revenue trends for ECT as well as some additional highlights into programs milestones this past quarter. ECT and ProChem have certainly had a lot of activity over the third quarter, not to be out than, JP 3 issued 2 significant press releases on product deployment and new patent-pending technology. The first announcement was for the launch of the AIDA application, which we're very excited about, machine learning, AI-based application. The later release to serve international certifications for our online analyzers, which we've all been anticipating. I will let Koid give you more color around those releases. We believe that those 2 deployments will help us gain ground on our stated goals of increasing international sales and overall profitable revenue growth.

Now we continue to see a decent pace of consolidations in M&A activity in our space. Examples include next year's acquisition of Alamo Pressure Pumping, ProFrac's acquisition of FTSI and recently, (inaudible) merger with (inaudible). We are actively evaluating the M&A market and looking for opportunities that fit within our criteria for success. There are 3 main criteria. We would consider deals, only deals that are quickly accretive. With deals that involve cash requirements that will be supported by the market and shareholders. And finally, the deal has to have the potential to enhance our sustainability objectives. The successful execution of the sustainability objective is a critical path to our success, as I believe we're now on a path to widespread adoption in our industry of an environmental culture across the whole of the industry.

Today, strong safety culture and demonstrable metrics have become table stakes in our industry, without them, you're not considered a bidder. Similarly, ESG performance will become another factor that defines what desirable business partners look like. There is no doubt that the ESG footprint inputs the Company's access to capital. We see strong adoption in philosophical alignment of the Board and C-suite levels that there is still some amount of latency in translation to buying habits at the operational levels. The industry's adoption of ESG principles and the establishment and the emergence of an environmental culture is likely to occur at a rapid pace in 2022. Flotek is well positioned to be the partner of choice for effective, responsible chemistry and data solutions. These changes that we made around our sales strategy and capacity as well as the groundwork we aligned with JP3 will be key to differentiating ourselves in the marketplace for the evolving environmental cultures of our customers.

Supply chain uncertainty is a topic that also got a considerable media attention of late, we continue to watch developments concerning the possibility of sanctions against China. As prolonged sanctions could change the drilling industry dramatically, China currently produces and exports considerable quantities of polyacrylamide and barium sulfate, both widely used in the OFS industry and by operators. Additionally, inflationary pressures and transportation constraints have the potential to impact our customers, pushing prices up and contributing to sourcing delays. While these factors increased complexity, they also present opportunities for us to work with customers and structure mutually advantageous outcomes.

We've implemented processes that are designed to help us monitor, and to adapt to many of these macro environmental factors. We've made investments in strengthening our own supply chain and logistics function. We've implemented system designed to more seamlessly communicate sales forecast with supply, and we have a team that is experienced in international agreements. Now most of my comments so far really highlighted accomplishments of what we've done in the quarter around our business. But it's -- and what we see is the path forward. However, I want to take just a moment to discuss one of our legacy matters. As you know, when I started in 2020, I inherited a take-or-pay terpene contract with Florida Chemical company that was well in excess of our need.

At the end of 2020, we booked $9.4 million of accrued liability for losses we expected to incur as a result of that contract. Earlier this year, we became involved in litigation with Florida Chemical and ADM is parent company. And as a result of that contract and our request for an audit, we pursued the litigation. In the course of the litigation, we were able to find a commercial counterpart of ADM, and we were successful in bringing the matter to a close and we settled the litigation last month. As a part of the settlement, we agreed to pay Florida Chemical $1.75 million, and the terpene contract is confirmed, terminated and with it the obligation to purchase an additional GBP10.5 million of terpene. This allows us to release the $9.4 million accrued liability as well, which Mike will tell you more about in his comments. We're grateful to ADM for their willingness to engage with us in a business negotiation, and we're happy to put this legacy matter behind us.

Now with that, I'd like to turn it over to TengBeng to cover Data Analytics. TengBeng?

Thank you, John. Good morning, everyone. In the Data Analytics segment, we continue to make significant progress on the international front as part of our growth strategy. As John mentioned, we did a press release recently on the new line of Varex analysis for the international markets, call Varex ISX and IMX, a single channel and multichannel systems. We have obtained necessary certifications for usage in hazardous locations globally. These analyzers are designed to operate at extreme operating conditions, including ambient temperature at 55 degrees C or 131 degrees Fahrenheit and pollutions come on to some harsh environments, including gas from St. Thomas.

Our prospects with this line of certified analysis is solid as it opens from the international markets for us, which we expect to ship this metalysis in 2022. Advanced Data Analysis is another pillar of effort for us, we did a press release, as John mentioned, recently on the launch of this new application using advanced machine learning algorithms. This revolutionary application enables online operators to differentiate between 2 batches or refined fuels moving to a product line. The second expanding application called AIDA or Advanced Interface Detection Algorithm, (inaudible) real-time detection of batch interfaces without the need for additional sampling of chemometric modeling. Pipeline operators will know that a new batches arrive with certainty and speed. The value created through this application in America, and we plan to launch more AI machine learning applications in the future.

While our sequential revenue decreased due to seasonality as third quarter historically regaining the lowest quarter for the year. Revenue grew 23% when compared to the third quarter of last year. Also for some applications, we are encouraging customers to move to a subscription model rather than a copurchase and this push to a subscription model of expanded sale FICO significantly. Having said that, our annual recurring revenue is growing, and we expect the trend to continue. John mentioned that we added 3 new sales professional as well, and we expect that this will push further our growth in 2022.

With that, I'll hand over to Ryan to discuss the Chemistry Technology segment. Ryan?

Thank you, Koid, and good morning to everyone. Today, I'll discuss our Chemistry Technologies segment performance. First, highlighting our Energy Chemistry Technologies and the moving on to professional chemistries, which includes both industrial and consumer chemistry solutions. At the completion of the third quarter, I'm pleased to report that our energy chemistry technology strategy to be the collaborative partner of choice for delivering sustainable, optimized chemistry solutions as being fully executed and gaining momentum. Flotek's differentiated solutions focused on maximizing our customers' value by elevating their ESG performance, lowering operational costs and delivering improved return on invested capital. We are continuing to see growth with both domestic and international E&P operators as well as service companies, thus delivering on our second quarter commitment to diversify our revenue stack and minimize risk of customer concentration.

In the third quarter, we concluded the implementation of our accelerated structural changes by doubling the size of our sales force and adding over 150 years of industry experience in multiple disciplines across the entire energy life cycle in the process. Additionally, we completed the digitalization of our customer relationship management system, online demand planning and real-time geographical costing modules to drive efficiency and velocity of customer pursuits. As a result, we are pleased to report the following highlights for the third quarter. First, revenue for Energy Chemistry Technologies is approaching a 30% improvement quarter-on-quarter, thus significantly outpacing the market and indicating market share growth. Secondly, revenue generated from new or noncore accounts grew 34%, while the total number of customers grew by 22% quarter-on-quarter, demonstrating the continued emphasis of lowering customer concentration and improving revenue diversification.

And we continue to make notable progress in rebuilding our indirect channels to market with service companies. We have solidified a partnership with a major international service company to deliver a 4-well trial of Flotek's proprietary slick water hydraulic fracture fluid system to a major NOC operator in Saudi Arabia. And additionally, we have executed a 5-year service contract extension at our materials and translogistics facility in Raceland, Louisiana, with one of the world's top oil field services providers while expanding that business through the impact of Hurricane Ida. Furthermore, the segment accomplished a successful entry into an adjacent energy market with revenue generation in geothermal drilling and cementing operations. And also, in the spirit of minimizing risk, we proactively entered into early negotiations with key suppliers to secure future purchase prices and material allocation volumes with our top product lines for 2022 as we are focused on continued growth.

And finally, we are pleased to announce the commercialization of Flotek's ESG scorecard assessment, which analyzes the full well cycle chemical utilization and identifies opportunities to support customers' ESG reporting goals, operational efficiencies and enterprise risk management. Now turning to our professional chemistries business. During the third quarter, we saw significant progress and transition the product line into a long-term success. Our synergistic approach with chemistry at the core allows the organization to utilize the same assets, supply chain, logistics and technical teams to leverage uniquely adjacent buyers and markets with the flexibility to deploy to the most attractive opportunities. We are pleased to see diversification and the building of momentum for these categories, which will contribute to our growth as a collaborative partner of choice for sustainable chemistry solutions that maximize our customers' value.

Since our last update, we have executed the following milestones in our professional chemistry segment. First, we signed 3 contract manufacturing and toll blending agreements with U.S.-based suppliers. We also gained sales force expansion with manufacturing representations via 4 agencies, which now provide nationwide coverage in 48 states with over 150 sales representatives. It's very important to note that our professional chemistries product line leverages this commission-based indirect model to gain faster access to a broader market with a significantly reduced capital outlay. We're also able to extend our product line with 18 private label options for distribution and redistribution groups.

And finally, we were able to add revenue from an agricultural adjacent market with our green solvents and adjuvant applications. Now I got to be honest, we're very excited about the continued opportunities for Chemistry Technology segment, and we look forward to the future as we continue to empower our customers' social license to operate with our enhanced chemistry solutions.

Now I'll turn the call over to Mike to discuss our financial results.

Thank you, Ryan. Good morning, everyone. Now I will expand the quarterly financial performance. During the quarter, consolidated revenue was $10.2 million, up 11% from the second quarter. This is below the $12.7 million of revenue in the third quarter of 2020. By segment, in the third quarter, Chemistry Technologies had revenues of $9.4 million, an increase of 22% from Q2, with a decline of 22% from Q3 2020. The decline in chemistry from Q3 2020 was primarily driven by the reduced sales activity attributed from our second quarter loss of a large customer, but we also saw a similar drop in sanitizer sales from a year ago. These drops were partially offset by several new and returning customers in the third quarter.

Turning to the Data Analytics segment. Revenue was $804,000, was up 23% from the third quarter of 2020, below the $1.5 million of revenue in the second quarter. Third quarter was historically lower quarter for Data Analytics. Consolidated operating expenses were $5.4 million in the third quarter, a 55% decrease sequentially and an 82% decline from prior year's level of $29.5 million in the third quarter. Operating expenses were down from the second quarter primarily due to the net impact of the $9.4 million lease of ADM excess trucking loss reserves, offset by the $1.75 million pending payment. [Trajection] operating expenses was partially offset by the higher material costs associated with higher revenue in the quarter.

Q3 2020 expenses were compare higher due to a $9.6 million of E&O reserves associated with last year's product rationalization and a $3.3 million associated with the JP3 earn-out provision. Third quarter corporate G&A was $2.7 million, which is a 7% reduction versus the prior quarter. The decline is primarily due to the release of the 2020 bonus accruals in the prior quarter segments accrual. Also, the employee retention credit period higher in the second quarter as it contained the catch-up credits for Q1. G&A also includes an accrual for all the remaining ADM legacy associated with the cellular. Reported profits we continued operations of $509,000 or $0.01 profit per diluted share in the third quarter. This compares to a $0.09 loss per diluted share in the second quarter. The current quarter results are a significant improvement over the loss of $45.2 million or $0.66 loss per diluted share in the third quarter of 2020.

The ADM settlement impacted current earnings per diluted share by roughly $0.11, whereas Q3 2020 EPS include the negative impact of the JP3 impairment of $0.36, rationalization of inventory of $0.14 and JP3 earnout provision of $0.05. Our adjusted EBITDA for the third quarter was a loss of $6.3 million, lower than last quarter's loss of $6.7 million and last year's loss of $6.5 million.

Now let's move on to the balance sheet, where our focus remains on preserving and improving agility. At the end of the third quarter, we had cash equivalent of $20.5 million versus $27.8 million in the second quarter. Our cash position was impacted by the operating losses and customers extending prematures primarily outside the U.S. Our cash position was positively impacted by a 23% reduction in net inventory levels. On the payment side, we are seeing some cost suppliers, advertising customers or agreed to better payment terms for some of our products.

In late September, Flotek's bank submitted an application to the FDA for (inaudible) of new law of the remaining $4.8 million in PPP loans on the balance sheet. In addition, in late October, we received approval to pay back any NFL given PPP loan balances but were a term of 5 years instead of 2. Furthermore, we continue to be in due doses on an asset-based line, which we will use to fund working capital growth as the business expands. Lastly, we completed long-term lease agreements for both our Waller and Monahans facilities. We have also engaged with a national research firm to market several of our facilities for sale and to assisting subleasing or renegotiating of one of our facility bases.

The balance sheet includes the settlement payments for ADM, payables and associated outside legacies that will be sold over the next 2 quarters. The balance sheet also included a $1.9 million balance associated with the employee retention credit that will be applied to reduce future cash outlays, watering employee payroll taxes. Finally, I would like to give you an update on our remediation efforts concerning our previously reported 2020 material weaknesses. We have made very good progress throughout the year in executing the remediation plan. To begin with, we have served more control over the program by bringing internal audit management in-house. The accounting and finance team also implemented certain new controls and work to improve operating effectiveness of our key controls into areas of material weaknesses. Our testing program is ongoing and will continue through the fourth quarter. We expect to be full in line by December 31.

Now I'll turn it back to John for closing comments.

Thank you, Mike, and Ryan, and TengBeng. Last year, during the Q3 2020 call, I told you that both people will essentially go home and Thanksgiving and not come back until the second week of January. We took a lot of criticism for those from March, but I think remarks held out to be true. But unlike last year, we're seeing crude prices increase faster than many of us would have anticipated. In fact, we've seen the price continue to increase through most of the third quarter, and they still look strong. We saw WTI prices climbed to $85 a barrel opcode, which is the first time that's reached that level since 2014. And today, I feel much more confident about activity levels remaining consistent, increasing and continuing right up to the Christmas holidays and maybe even through. We're excited about all of the positive developments and steady economic improvement we're seeing, and we're confident that Flotek is well positioned to continue to provide our value-added products and services as activity continues to accelerate and that the adoption of an environmental culture is going to provide a firm foundation for our growth going forward.

There is one elephant in the room, I'll try to address our next call when you hear from us on the year and Q4 is going to primarily focus on our execution of our -- the current strategy to secure the cash that we need going forward, and that will make up the principal element of our next call as we define what we've done and what we're doing, so that the -- we remain a going concern, and we're excited about what we've got available to us more to execute that. Closely, let me thank our team members, our customers and particularly our shareholders for continued support.

And with that, we're going to open it up to questions.

(Operator Instructions) Our first question comes from Eric Swergold with Firestorm Capital.

I'll ask one big question, and then I'll get back in queue because I know a number of people have questions. But could you give us some color on the number and size of companies that are either evaluating or in test for your chemistry or CNF from E&P players, global integrateds and state-owned oil companies. I think that would be helpful to have some idea what targets you're shooting at?

Yes. I'll go ahead and step in with that. So when I look at it now from the size-wise, I'll talk first about the international markets and the campaigns that we have ongoing there. As I mentioned, we're looking at a full fluids development with the major NOC players in Saudi Arabia. And then also, we've had the complex nanofluid applications in trial with major NOCs in Kuwait as well as United Arab Emirates, and those are continuing to have success and data improvement for -- we're hoping to be moving to full field applications. We've also continued the growth in pursuits with some of the major players were sort of be independents in the Permian Basin, the Anadarko Basin as well as in the DJ. And we've had great performance in those trial tests so far. We've mentioned a couple of them in the prior quarters. But again, for us, is we're looking for these full field deployments that are going to help move the needle for us in growth, and we're seeing solid improvements there. And then the final thing that I'll mention is, along with the lines, utilization of our complex nanofluids, we've also seen the expansion into the remediation and waterflooding markets that we're seeing some of those in Canada as well as California and also strong remediation application in the Permian Basin. And those are continuing to grow in double-digit percentages quarter-on-quarter. So quite a few things, and I hope this kind of a unique blend of major independents and large NOCs and some in the Middle East that are really going to help us help move that needle with magnitude in 2022.

Our next question comes from Daniel Burke with Johnson Rice.

I guess just some questions on the energy chemistry side. Can you update us on the 2 larger customers where you experienced disruptions due to M&A? I think there was an expectation or hope that one could kind of be back by year-end. I was wondering if we could get an update on that if possible? And then I also know you guys have been working to rebuild or understand you've been working to rebuild your sort of channel sales, the other service companies into the oilfield, update on how that -- the reestablishment of those connections is going?

Yes. So in terms of -- I'll start with -- let me talk about the indirect channel markets right now. We're seeing great movement in indirect channels. When we look at -- if you compare, say, Q3 of last year, in 2020 and Q3 of 2021, we've seen a 47% improvement in the service company applications that we're seeing through the indirect channel, and we'll continue to see that even the growth versus Q2. And when we look at that, there's quite a few aspects and avenues that we're going down for that. Some are what we consider to be full prescriptive chemistry management maintaining all chemistry profiles. Some are on engineering components that we're doing in the data analytics for chemistry applications as part of that service and also laboratory testing. So we're really happy about where that's moving, and that's putting us in a strong position to follow up even with our E&P operators to those indirect channels. Now the comments around the 2 major customers, when we look at that, I would say that out of the 2, we are now kind of reengaging with one of them for the future in 2022. And for the other one is an ongoing process right now. It's just in discussions because there's minimal activity right there in that point.

Understood, TengBeng. I know we are actually excellent in that. I don't think we'd have the relationship issues that we had 3 quarters ago. We're in business, and we just need to provide a great solution, and they're willing to buy from us. There's no impediments to them purchasing at this point. So I think we've made tremendous relationship progress over the last 12 months to put us in a good position going forward.

Okay. Let me make pivot then and ask one on the JP3 side, the harsher environment analyzer. I mean does that unlock anything in, I guess, practically speaking, the near term? I mean, is the outlook discernibly stronger in Q4 as you come back from some of the seasonal impacts in Q3 on the data side?

Thanks, Daniel. I think the -- obviously, with this new analyzer, one of the biggest challenges that we had before that is the analyzer is certified for North America and not international. So we had to build a new one that is certified for international. International goes through 2 different bodies. One is known as ATEX, and the other one is IECEx. So we have -- some countries require ATEX certifications, some requires IECEx. So that opens up a market for us in international that we did not have before. Secondly, obviously, we wanted an analyzer that can handle all conditions, including the extreme temperatures for sample in the Middle East and as well as evolution as well. So we make sure that we are able to get certified for that. And with that, then we can cover the rest of the countries in Asia, Africa, Europe as well. So certainly it opens up a new market for us. We expect that we'll probably shift some of this as a newer lines 2022. So yes.

It's a good question, Daniel. If you look at sort of the sales cycle that codes leading, we've had numerous pilots that we needed to get started, but we couldn't actually deploy the equipment to the pilots until we have the certified equipment. Now that we have the equipment certified, we go into the pilot stage, and then the pilots will convert into sales. And so we've got a great pipeline there. But without the certified locks for the environment we were working in, sales cycles, you built how to put an end on it. So now we have the beginning on it, and the pilots are initiating, and it's exciting to see that the opportunity that exists for JP3 in the international market. I mean, people -- this is the most exciting part of the conversation when you go in and talk about digital transformation.

Got it. Okay. I -- let's see, for now, I'll leave it there, guys. We'll stay tuned. John, as you promised for some color in the future on the liquidity side.

(Operator Instructions) Our next question comes from Jeff Robertson with Water Tower Research.

I think you, TengBeng mentioned moving to a subscription model on some of the data analytics services. I'm wondering if that will enhance the ability -- or I guess, I'm wondering how that -- how you expect that to enhance your revenue model either through more customer adoption or subscriptions or longer-term of relationships?

So really, the whole idea is to get to a longer-term annual recurring revenue that is predictable in the future. So that's the plan. Now we are obviously still starting capital purchases. So we're selectively moving some applications to that. Now obviously, when you move from a capital purchase to subscription to revenue drop, but in the long term, that will pick up.

It's interesting right now, Jeff. If I had to describe it, we have 3 sales models working, the preferred is annual recurring revenue. The second one would be a hybrid. And then the third one is an equipment sale. And so since we're selling into people that have bought a few that still have the opportunity to deploy a lot more of our technology. it's converting them from where they were historically buying equipment into a hybrid or into ARR. And so we are working to transition them through that cycle. And some of them just like buying equipment. Because revenue is so precious and cash to us, Koid and I are often discussing business judgment around whether to just take the hardware, push them to hybrid or pushing ARR. We can -- we don't want a time to sell out too long. They're not leaving us, but it does cause the sales cycle to get extended when you hold out for ARR, and they want to buy equipment. So we're working through that transition.

John, does that model increase the number of potential customers you have for data analytics?

It depends. It's interesting. Let Koid address this too. Some countries don't like ARR. They just want to buy equipment. And so they're designed for purchasing capital equipment, deploying it, and they don't want to have a subscription base, much like in the software business, they're not designed to pay maintenance. So they want to buy a license and then just use it. And then when they need to update it, they just buy again, would be their prefer. So we have to be adaptable to the markets that we're selling in. But the good part about our ARR is it's sticky after they're in there, you're in there, and it's like SAP or any other ERP system. It's something that just is on their desktop, it works. They depend on it. It's a part of their business DNA. And our goal is to get there. Where it's not just equipment that they may turn off or you change out of an operator, and they don't see a value in the measurement because it's not integrated into their process. So we're working on that.

I guess one other extension to that. There's a lot of -- obviously, there's a lot of talk about carbon capture and storage. Do you all have anything either through chemistry or data analytics that you're working that you're evaluating those of potential new opportunities?

CCS, carbon capture sequestration, that's actually turned into CCUS, most people are interested in utilization now instead of just sequestration. Working on that. I mean the injectability of CO2 can be enhanced by our chemistry. And so we're looking at solutions to help in the injection rates and the preparation of a reservoir for acceptance of CO2 and understanding what chemistries are the best for that environment. It's an opportunity that we're looking at, and we think it's going to expand. We're very fortunate that we're having this discussion in the Texas Gulf Coast area because, I mean, the Bureau of Economic Geology in Texas identified close to a year's worth of sequestration reservoirs and the near offshore mission in the state of Texas. So I think it would be something like 35 gigatons that could be put into depleted fields offshore that we could hold it because they held natural gas for hundreds of years, for thousands of years. And so I think as that infrastructure evolves, the Texas Gulf Coast to be a big part of that. Second place we'll be injecting into saltwater brand. And it's -- I don't think we have enough work to really comment on that at this point, but it looks like there's such a tremendous volume of saltwater reservoirs, onshore North America that if we can capture it economically, we can inject if not any difficulty. The real problem here is in CO2 capture as opposed to the injection of the subsurface, will be a part of that solution. But I think the bigger trigger in this point of the node that needs to be gotten through is how we're going to capture it more efficiently.

Our next question is a follow-up from Eric Swergold with Firestorm Capital.

I have 2 more questions. Following up on the CO2 side, what can you tell us about what you're doing in methane because that seems to be a big focus of some of the new environmental regulations?

Well, we have done some experiments here in the laboratory on how we're going to measure other gases or other molecules with the JP3 analyzers, and that work continues to go on. We did work with a particular customer to see the feasibility of it and it looked quite good. It does mean that we would have to expand our analyzers because the spectrum we're sweeping down probably is not the best for measuring CO2 or in methane. But it's an excellent opportunity for not very much money because everything is known for us to add monitors inside of our box to measure the additional molecules or increase the suite frequency in a future generation of the equipment. All of those things are being worked on, Eric. I think the environmental nature of that and the regulatory environments are going to support us, expanding what we measure. And so we have active efforts going on in that area. Not close enough that I can give you an estimate of what quarter, but we continue to look at that. It's an important part of the future.

Okay. And then circling back to ADM. I'm not sure if you can discuss this or not, but is there a margin improvement potential and having gotten out of that unfavorable ADM contract in terms of your cost of goods sold going forward? Should your CNF business be able to achieve a better margin now that you kind of put that old contract behind you?

Well, it's a good question. I'm sitting here looking at my general counsel and making sure I don't violate any in the settlement agreements. But we did have an uplift in cost associated with the terpene we were buying, no matter what the price in the market was, there was a fixed piece that we had to pay above that. That's certainly going to come back to us because we'll be buying at market without that uplift and that it's material. I mean -- and so it should give us some impact. Now of course, we are blending that with other chemicals. And so the actual margin impact gets diluted some part and much like it gets diluted in the blend. But it's -- and we are using less of it in our blends than we were in the past. And so consequently, we're not passing as much through. That's one of the reasons we needed to get out of the contract. But it should give us some margin improvement, and it certainly gets us back to open market pricing, which I think is going to be a tremendous opportunity for us.

And then my last question is with respect to ESG in general. Last quarter, you did a major upgrade to your corporate presentation in terms of getting the word out on ESG. Can you update us in terms of where that ESG effort stands in terms of Investor Relations as well as -- I know you mentioned at the beginning of the call, pushing into corporate boardrooms change isn't necessarily immediate, but they're looking at ESG?

ESG, I'm going to let Ryan jump in here, James on branch forecasts and things, and we haven't gotten an update on the deck yet for investors, but we're going to work on that later today. There are some things that are happening that are pretty exciting to me. One is that we have been selling to suppliers that worked in the geothermal industry. And that's very much an ESG area. And you know that you can't drill a geothermal and declare yourself a green power supplier. If you, in any way, violate the principles of ESG in the preparation of the wells for circulating the fluids from the subsurface. So I think that's going to be a great area for us. We've got numerous conversations going on over the next several months talking to geothermal drillers or geothermal startups, and that's an area where there's a lot of money flowing around. Also ESG front, I think one of the reasons people are really talking to us at the C-suite level is just how in grain in our DNA. We've become with ESG and without turnover to refine and change to tell you where we are on the scorecard. Less on the investor side, so your question is, and we've done a great job with the green investors yet. And I would say the answer to that is no, Eric, and it's an opportunity for me over the next quarter.

Yes. And I would say, just to add some granularity on how we're talking to our customer base in future customer base is that in the last 2 quarters, we've had in excess of 25 meetings with various, I would say, asset owners in terms of C-suite, engineering and chemistry technical groups around the application of the chemistry scorecard, the ESG scorecard. And what we've done is really looked at it, we've gone to our top customers and done assessments for them. We've gone to what we consider to be industry leaders and responsible drilling and production of oil and gas work with them. And then we've also approached some companies that aren't just in the oil and gas or the energy business and looking at just industrial chemicals and had discussions with them around how the scorecard works, what kind of impact it plays because this thing has evolved from an annual sustainability reporting, so more to the evolution, how that also impacts operational efficiency and also the overall risk management. And James' team has led the spearheading of taking what we're seeing with our customers and future potential customer base and transition that into the reporting bodies, you talk about SaaS D and equitable origin and how that works together to give a true analytical response. And this transcends a way to investment opportunities with banks in terms of looking at enterprise, risk management for overall assets. And I think it's been a great interaction, and we're continuing to learn and evolve on that and seeing value being created by the application of the scorecard. So it's not just a number for an annual sustainability report. It's a true assessment and analysis for the overall chemical utilization of full life cycle.

And I do think that you bring up a good question, and I will report back next quarter note to a company here on the number of pitches we've made to green investment groups, Eric. And we'll set that out to make it done by objective rather than by accident.

This concludes our question-and-answer session. I would like to turn the conference back over to John Gibson for any closing remarks.

A lot of exciting things happening in the industry. And particularly on the service side, we're seeing consolidation, as I mentioned. And people that are big movers in this space that have great track records for really growing companies and being successful. We intend to be the same. And so we're excited about our future. We're appreciative of all of our shareholders, and I'm particularly appreciative of our finance team. We seem to keep moving legacy issues and other things around. And I'm grateful for the reliability of our financials and our ability to clear material weaknesses and the very close work that we have with our auditors. We've got a great company. We've got a hill to climb here, though. And I think our next call will be one where we really get into the details on the cash and the go-forward with regard to liquidity and what we've executed and what we are executing. Again, I really appreciate you guys staying with us. And it's been an interesting quarter, but I think Q4 is really going to set the stage for what we should expect in 2022 and much like all other CEOs in this space. I'm excited about the year ahead at this point and look forward to the next call. Thanks so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.