Oil—and Profits—Are Flowing

08/15/2007 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Strategic Advantage, says beating estimates, expanding business, and more room for price appreciation—are just a few of the points he likes about this company…

Flotek Industries (AMEX: FTK), which provides drilling and production services to the oil and gas industry, reported an excellent second quarter. The company earned 25 cents per share—a few pennies above consensus expectations. The market was fearful that the historic rainfall in Texas had negatively impacted earnings by reducing the number of days that Flotek's crews were making money, but the weather turned out to be a non-issue.

Flotek moved to an all-time high, giving us a 195% gain in eight months. As you know, I think there is more to come. Flotek's results were driven by the company's chemical business, which grew substantially by expanding geographically. Its salesmen added the Permian Basin and the Rockies to their usual territory in the Barnett Shale area of West Texas. Management said that they were comfortable with projections of 80% growth in the proprietary chemical business in 2007 and 65% more in 2008.

This is possible because Flotek has strong pricing power, and margins are around 50%. Consequently, to meet the rising demand that the company is expecting for its chemicals, Flotek is already invested in a plant expansion. This project, as I mentioned a few weeks ago, will boost its ability to make $225 million in sales, up from $50 million last year.

Also, in terms of expansion, Pritchard Capital analysts reported that they believe the company has added a second large pressure pumping customer that should add materially to results in the second half of the year. Flotek has not commented on this, but it makes sense as acquisitions are one of the keys to the company's growth initiatives.

Looking forward, I still see the potential for more than $2 per share in earnings in 2008 as the company pursues its three-pronged strategy of proprietary chemical sales, drilling rental tools, and artificial lift services. The model works because FTK has a unique way of creating "micro-emulsion" chemicals that stimulate production in aging coal bed methane fields, and by all accounts, they enhance gas flow a great deal. Flotek also has a lot of luck with a product called capillary injection foam, which is a different gas stimulant used in the North Sea.

I'm still looking for shares to move over $50 over the next 18 months as more investors catch onto this very impressive growth story. Continue to buy FTK on pullbacks like the one we just experienced over the last three weeks.

Subscribe to Strategic Advantage here…

Related Articles on

Keyword Image
How to Play Preferreds
8 hours ago

Preferred shares are one pocket of the fixed income market where investors can still typically find ...