Flotek wants its critics to stop squeezing its citrus-based style
Walk into the Houston research center of Flotek Industries and you enter a faux orange grove with artificial citrus trees, the sounds of chirping birds and murals that make the orchard seemendless—aparticularly unusual introduction to an oil field services provider.
The chief executive, John Chisholm, wants potential customers to know they’re dealing with a different type of energy company, one that’s developing more earth-friendly citrus-based injection chemicals to help free oil and gas from shale rocks. Flotek’s website even lets visitors download free music for meditation, adding to the firm’ s Zen fr ac king vibe.
“We’re a believer if you keep stress out of your life,” Chisholm said, “the universe will guide you where you need to get.”
Chisholm’s faith in the universe, however, has been tested lately as his company fights to prove its legitimacy. Flotek is under investigation by the Securities and Exchange Commission
and under attack by shortsellers. Its technology has been doubted, and its marketing claims questioned. Its stock has fallen 30 percent in less than amonth.
But Chisholm says all this will pass. Flotek weathered the oil bust better than most energy companies, and its main product, derived from oranges, is helping to extract more oil from hydraulically fractured wells, the company says.
“The driver is still performance,” he said. “That it’s environmentally sustainable is just another benefit.” Stepping out
F lo te kw as founded more than 30 years ago as a more traditional oil field services company providing drilling, equipment, and chemicals to oil and gas production companies. In recent years, the company has made injection chemicals its primary business, focusing on its citrus-based hydraulic fracturing fluids developed in early part of the last decade.
The company is now pushing its brand name aggressively after changing its business model. Flotek previously sold chemicals and other products to large services companies like Houston-based Halliburton, which would rebrand them and mark up the prices. Now, Flotek sells directly to oil and gas producers, which cuts out the middleman, allowing Flotek to lower prices for customers while keeping more of the profits for itself.
As Flotek reached beyond its usual customer base, the company stepped up its marketing — which helped it get in trouble. The first sign was an analyst report that noted Flotek’s sales presentations overstated production gains related to its chemicals.
That apparently drew the attention of the U.S. Securities and Exchange Commission, which is investigating potential false advertising. Flotek previously admitted to a single “unintentional data and processing error” related to its production claims.
In December, Flotek also became the target of a New York hedge fund, FourWorld Capital Management, which is “shorting,” or betting against, Flotek and its stock. Short-sellers borrow shares, sell them and seek to buy the shares later at lower prices to return them to the lenders, pocketing the difference.
Four World, founded less than two years ago by John Addis, a former Merrill Lynch executive, released a 132- report to rebut a Flotek-commissioned study that found that the Houston company’s injection chemicals were highly effective in most oil wells. Addis contends the report used poor data and wrongly credited Flotek chemicals for output gains in Colorado wells that would have produced more oil regardless of whether drillers used Flotek chemicals.
The increased production was the result of geology and drilling quality, not chemicals, Addis said. Flotek, he argued, is all style and image, with little substance to its claims.
“We put our money where our mouth is. We stand by our short,” Addis said. “The company is a highly skilled marketing organization.”
Flotek strongly disagrees, responding that the oil sector too often only focuses on the geology and mechanics of drilling. Injection chemicals are just as important in the success of oil wells, said a Flotek vice president, Trudy Boudreaux.
Chisholm said he stands by the study that found Flotek’s products made substantial improvements to oil recovery in most wells in Colorado and West Texas’ Permian Basin. Flotek also has supporters among investors.
Matthew Marietta, an analyst at investment group Stephens, is one of them. He conducted his own research into data from wells using Flotek products and found they can improve a well’s oil production by an average of at least 20 percent. Flotek also has shaken up the industry by going straight to the producers and making their pricing more transparent, Marietta added.
“This is a nontraditional model,” said Marietta, whose firm, through a subsidiary, increased its stock holdings in Flotek. “I think the company will emerge from this period of transition and scrutiny more strongly.” Acts as a solvent
The main ingredient of Flotek’s patented “Complex nano-Fluid” technology comes from citrus oil derived from oranges. The extract, called d-limonene, acts as a solvent, which is added to fracking fluids with other surfactants that help separate oil from water so crude can flow more freely through the well. The idea came from using d-limonene to clean oil stains from garage floors.
Flotek is emphasizing its chemical technology and scaling back its oil field rental tools and other services. Flotek three years ago bought Florida Chemical Co. so it wouldn’t have to keep buying the citrus oil. As a result, Flotek also sells citrus additives for cleaning agents, soaps, sodas and even alcoholic beverages like Grand Marnier. The business segment now makes up about a quarter of Flotek’s revenues.
As with many energy companies, Flotek lost money in the bust. F lo te kr eported a $2.8 million loss in the third quarter, compared with a $2 million gain in the same time in 2015. For 2016 — through nine months — Flotek lost $35.2 million versus a $12.1 million loss during the same period in 2015.
Chisholm said he sees the beginning of as low rebound as drilling activity resumes. Flotek’s citrus-based chemicals cost more than traditional formulations, he said, and it’s admittedly hard to sell more expensive products during times of costcutting. But, he predicted, growth is on the way.
“And it all starts with an orange grove,” hesaid. jordan.blum@chron.com twitter.com/jdblum23