Market Share Gains Despite Headwinds
Flotek’s suite of chemical solutions, which can help customers increase economic returns on their capital investment, helped the company gain market share during FY23 despite headwinds created by a declining US rig count. The company’s prescriptive chemistry solutions, combined with its proprietary Complex nano Fluid (CnF)® technologies, have demonstrated improved production performance over a large population of wells completed in the Permian Basin. Customer efforts to improve their returns on capital could continue to provide a buffer against headwinds and result in further market share gains in 2024. Contract shortfall payments stipulated by the 10-year chemical supply agreement signed with ProFrac in 2022 contributed to gross profit margin expansion in 2H23. Margin improvement drove positive adjusted EBITDA in 3Q23, the first time since 2018. Flotek’s Data Analytics segment exposes the company to future revenue streams as customers recognize the value that its JP3 Verax analyzers can provide through real-time precision hydrocarbon measurements. For example, precision measurements at custody transfer points could ensure all stakeholders are compensated on the true value of the hydrocarbons produced and sold. The EIA’s February Short-Term Energy Outlook forecasts continued US Lower 48 oil & gas production growth throughout 2024. Operators across the unconventional shale plays continue to push the boundaries of drilling and completion technology, resulting in more intensive hydraulic fracturing. The trends could drive demand for Flotek’s chemistry solutions. Flotek’s revenue is closely tied to the drilling and completion capital cycles of the US E&P industry. The 4Q23 US rig count averaged 622, a 28-rig decrease from 3Q23. The frac spread count averaged 267 in 4Q23, a pickup of eight from 3Q23. We have updated our estimates for 4Q23 and FY24. Management’s last full-year 2023 revenue outlook was $185-200 million, with a gross profit margin of 12-14%. Entering 2024, management remains committed to taking advantage of opportunities to gain share and control costs in order to convert revenue to positive adjusted EBITDA.
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