There's a lot to be said for better mousetraps in any industry, but service companies that can help energy producers reliably increase their well productivity are almost always popular. With its patented and proven surfactant, Flotek (NYSE:FTK) has battled back from near bankruptcy with strong growth. Given that management has big expectations for its fluids business, the growth story may yet have room to run.
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A Diverse Set of Services
Flotek offers a relatively diverse array of services across chemicals, drilling equipment and artificial lift, but the chemicals business is more than half of sales and gross profits. We'll get back to the chemicals business in a moment, but the company's tools and drilling equipment (which are sold under brand names like Teledrift and Cavo) appear on as many as one-quarter of the rigs in North America. While the artificial lift business has historically been weighted toward gas production, some of the technologies and products can be used in oil production.

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Chemicals are the most interesting part of this business. A wide range of chemicals are used in virtually every drilling and production situation - whether it's the "mud" used to facilitate drilling, or other chemicals used to cement a well or stimulate production. In Flotek's case, the company has a patented surfactant that it calls "complex nano-fluid" (CnF).

Although this product costs more than twice the price of low-end fluids, it has been shown to lead to meaningful production benefits and improved well economics. While this is presently used mostly in primary completion operations (including fracking), management has talked about expanding into enhanced recovery operations - a move that could double its market potential.

As so much of fluid activity is held within large energy service companies like Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) (which is also a large Flotek customer), market shares can be difficult. Nevertheless, it seems as though Flotek's CnF has about 10% share in the high-end frac market, but management is hoping to triple this over time.

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Ample Risks Remain
Even though energy companies are almost always interested in getting more oil out of their wells, that doesn't make Flotek a risk-free stock by any measure. After all, the company's history includes a flirtation with bankruptcy a couple of years ago that was brought about by excessive leverage going into the recession-induced slump in the energy markets.

The energy fluids market is quite competitive, split among a few identifiable names like Flotek, Newpark (NYSE:NR) and Albemarle (NYSE:ALB), as well as dozens (if not hundreds) of smaller private companies. Complicating things further, major energy service companies are both potential customers and competitors, and often both at the same time.

Flotek is also still vulnerable to pricing and activity levels. When oil prices are weaker, well economics may not favor the use of more expensive fluids. Elsewhere, different reservoir geologies require different types of intervention, and Flotek's fluids aren't equally valuable in all situations.

The Bottom Line
It wasn't that long ago that investors could pick up these shares for less than $2 each. Those days are clearly long gone, but even at over $600 million in market cap, there is very little sell-side coverage on these shares, and institutions have not piled in yet.

Flotek shares don't look especially cheap. The company's growth and growth potential certainly merit premiums, but it's hard to push those multiples beyond a fair value of $15 today. While growth investors are often famously insensitive to multiples, more value-oriented investors will probably want to wait in hopes that these shares get a little cheaper.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.