Flotek Industries

Stock: FTK

Rating: Hold

Author: Waleed M. Tariq

Overview

  • Flotek helps industrial, commercial, and consumer companies improve ESG performance and goals.
  • Future quarterly reports will be integrated instead of segmented. After PIPE, the company changes.

Bullish

  • Flotek and ProFrac Holdings signed a transformative deal.
  • Flotek secured $19 million in net capital through a PIPE offering in February 2022.

Bearish

  • The company’s balance sheet, income statement, and cash flow all weak.
  • The stock is worth 6.8 times its falling book value.
  • The corporation hasn’t recovered with the market from the pandemic.

PIPE Deal Highlights

  • Flotek issued 10% convertible notes due in February 2022 to raise $19 million.
  • Overnight, contract growth improved stock price. Flotek expects a $10 billion backlog, including $200 million in 2023.
  • FTK gave ProFrac $50 million in 10% convertible notes. ProFrac owns 48% of Flotek after conversion.
  • ProFrac must get a minimum supply of 30 fracturing fleets or 70% of its 10-year demands.

Profitability declined

  • Pandemic hasn’t helped the company’s market. 2019: $119.4 million; 2020: $53.1 million; 2021: $43.3 million.
FTK industries revenue and cost of goods sold
Data by YCharts
  • Seeking Alpha’s ranking system gave the company a F for its poor profitability relative to its peers.
Seeking Alpha

Unstable Liquidity

  • Non-cash expenses aren’t exciting since the organization needs cash. Despite expansion, the company’s cash burn is unsustainable.
  • Q2 cash will rise $50 million. 60% levered FCF margin and consecutive FCF per share raise cash conversion concerns.
FTK cash from operations, and cash and equivalents
Data by YCharts

Valuation

  • FTK’s P/B ratio of 6.8 is far higher than the industry standard of 1.89, which is troubling considering its book value declined from $4 to $0.18 in Q1 2019.

Conclusion

  • Due to the transformational deal, which may start providing favorable benefits in early 2023, I am neutral on the stock.