Flotek Industries taking diverse steps to 're-craft' balance sheet

By Jennifer Lanning Drey

Savannah, Ga., May 12 - Flotek Industries, Inc.'s capital strategy going forward is likely to involve a number of diverse steps rather than a single event to improve the balance sheet, Jesse "Jempy" Neyman, its executive vice president of finance and strategic planning, said Thursday during the company's first-quarter earnings conference call.

"We will make strategic, opportunistic and incremental steps to re-craft the balance sheet," John Chisholm, Flotek's chairman of the board and president, said during the call.

Accordingly, Flotek also announced Thursday that it has entered into agreements to issue $29.5 million of common stock through a private placement and exchange agreements with two affiliated holders of $4.5 million of the company's 5.25% convertible senior notes due 2028.

Proceeds will be used to effectively eliminate Flotek's senior credit facility, which had a $31.9 million balance outstanding at March 31.

Flotek also expects to make a $2.6 million payment to the credit facility on Friday as a result of provisions related to performance-based principal payments and a scheduled $1.0 million principal payment on June 30.

Flotek pays annual interest on the facility at a 12.5% rate.

"The pending elimination of expensive senior debt is a key step in positioning Flotek for durable growth," Neyman said.

Neyman also noted that while Flotek's private offering required a discount, the company believes the pricing was better than traditional market pricing for similar transactions and it didn't require any "expensive sweeteners" such as warrants.

The shares are being sold at $8.05 each, which is a 12.88% discount to the company's $9.24 (NYSE: FTK) closing share price on Wednesday.

Flotek had $19 million of cash at March 31. The figure improved to $22 million at May 9, helped by an improved operating environment, diligent expense management and exercises of warrants issued in connection with the company's August 2009 preferred stock offering, Johnna Kokenge, Flotek's chief accounting officer, said during the call.

Positioned for new revolver

Flotek's private placement and convertible exchange offer will help the company as it continues the process of establishing a revolving credit facility under more conventional terms, Neyman also said during the conference call.

"We're in advanced conversations with a number of traditional lenders to establish a new credit facility, which we anticipate would provide access to $20 million to $25 million in capital," he said.

Flotek expects to report additional progress on the endeavor by early summer, Neyman said.

Options for convertibles

The company is also considering a number of alternatives to address its convertible notes, Neyman said. After the exchange offer, Flotek will have $106.5 million of convertible notes outstanding that can be put to the company in February 2013.

"With continued improvement in the company's operations, balance sheet and cash flows, Flotek believes we have a number of options available to re-craft these notes," Neyman said.

"We will continue to carefully balance any capital activity with the impact such activity could have on our current stakeholders."

Revenues improve 86%

Flotek also reported Thursday that first-quarter revenues improved to $52.9 million, up from revenues of $28.4 million in the first quarter of 2010. The company said revenue increased across all of its segments due to improved pricing, increased drilling activity, increased market share and recovery of industry demand for specialty oilfield products and technologies.

For the three months ended March 31, Flotek reported net income attributable to common stockholders of $5.5 million, compared with a net loss of $12.1 million in the same period of 2010.

Houston-based Flotek makes oilfield technologies such as specialty chemicals and down-hole drilling and production equipment.

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