NEW YORK, Dec. 28, 2016 /PRNewswire/ -- Investor FourWorld Capital Management has issued an open letter to the CEO of Flotek Industries (NYSE: "FTK", "Flotek"), asking the company to provide real-world data to support the benefit of its "crown jewel" fracking additive known as CnF.
On December 7, FourWorld issued a research report challenging the value of CnF for use in hydraulic fracturing. Using both granular well production comparisons and a data-driven regression analysis of performance at more than 600 wells in Colorado's DJ Basin, FourWorld concluded that CnF (or "Complex nano-Fluids") produced zero benefit in extracting oil from fracked wells relative to wells using generic equivalents. The report also questioned Flotek's repeated statements about increased "penetration" of CnF in the face of data indicating large declines in users. The full report, entitled Drilling Down to Zero, can be found here: http://www.fourworldcapital.com/research/.
Then on December 21 Flotek posted a letter from MHA Petroleum Consultants, the firm it had commissioned for its past studies of CnF. MHA produced no new data or field studies – but defended its support of CnF by citing a performance metric it previously downplayed in its earlier reports.
On December 27, FourWorld sent a letter to Flotek CEO John Chisolm, urging the company to address a list of concerns raised by its December 7 report. Among other requests, FourWorld asks that Flotek release a list of specific well identifiers used by MHA for its reports touting CnF performance, "so that investors can verify the results."
FourWorld also requests that Flotek "release a complete list of trade names for frack fluid additives that contain CnF, so that independent third parties – operators as well as investors – can evaluate the performance of the product."
FourWorld further challenges Flotek to refute the findings of a detailed analysis it produced describing a "rapidly shrinking customer base" at Flotek, which the Houston-based company has failed to acknowledge on recent earnings calls with investors.
"After stating at two investor conferences that you would respond to Drilling Down to Zero, you issued interim guidance on your operations for the first time since you have been CEO, but did not address our report in any way," FourWorld portfolio manager John Addis writes in his letter to Mr. Chisolm.
"You instead published a letter from MHA which acknowledges that their previous report on the DJ Basin was misleading, because it failed to control for operator, lateral length and location, before summarizing in a single paragraph new results stated in a mysterious performance metric that MHA downplayed in its previous report. Neither you nor MHA shared any raw data that could reveal the miraculous properties of CnF."
FourWorld's letter succinctly restates its harsh view on CnF and Flotek:
- CnF performs no better as a fracturing fluid additive than "commodity" products available at a fraction of the cost. The estimated uplift in oil production associated with using CnF cannot be distinguished from zero. This fact is readily apparent when you evaluate a large sample of well completions while controlling for operator experience, lateral length and location, which any competent oil professional knows affect oil production.
- The CnF customer base has been shrinking rapidly as both major operators and smaller independents have stopped using the product. Sales volumes have been maintained by the purchases of two large users. A re-pricing of the product that is consistent with its demonstrated performance and shrinking customer base could make the business unprofitable.
The full text of FourWorld's letter can be found via link: https://static1.squarespace.com/static/56f439ff1bbee05ec5ca56d1/t/586275bc37c58129993777f7/1482847676586/Open+Letter+to+John+Chisholm.pdf.
As with its December 7 report, the letter stays focused on data for its conclusion that CnF brings no benefit to well extraction.
As of the publication date of FourWorld's report, FourWorld, and its managed accounts, have a direct or indirect short position in Flotek stock, and stand to realize significant gains in the event the price of Flotek stock declines. The consulting firms hired by FourWorld, and referenced in the report, are receiving a fee based on the performance of FourWorld's positions in Flotek stock, and, independent of FourWorld, may have a direct or indirect short position in Flotek stock. Following publication of this report, FourWorld intends to continue transacting in the securities covered herein. The firm may be long, short, or neutral at any time hereafter regardless of its initial recommendation.
About FourWorld Capital
FourWorld Capital Management LLC is an SEC registered investment adviser based in New York. FourWorld focuses on event-driven investing, with an emphasis on tax, legal and regulatory catalysts. For more, visit www.fourworldcapital.com.
Following publication of this report, FourWorld intends to continue transacting in the securities covered herein. The firm may be long, short, or neutral at any time hereafter regardless of its initial recommendation.
Please see the full Disclaimer appearing in the report available on the FourWorld website at: http://fourworldcapital.com/research-flotek.
FourWorld Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 284138.
Contact: Allan Ripp 212-262-7477 firstname.lastname@example.org
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SOURCE FourWorld Capital Management LLC