Flotek: a plea for accuracy

% of readers think this story is Fact. Add your two cents.

Warning: this is a really gonzo story. We tried to check the data and use the main marketing tool for a billion dollar company. 

None of it worked out. The data looks like it was made up or at least systematically rigged. The marketing tool (an iPad app) simply crashes and is non-functional. 

We can’t tell whether the whole company is this suspect – but this is as non-sensical as anything we have seen on Wall Street. The closest comparable on this blog was Universal Travel Group, a stock which is now delisted and where the principals settled civil fraud charges.

If you own the stock you must work this to the end. Try to reproduce our results. If this is the whole story this stock will trade with a low single digit handle or lower.

John W. Chisholm is a fan of accuracy. Demands it, even. As the CEO of Flotek Industries, Inc., (NYSE:FTK) he requires factual, mathematical accuracy.

The attraction of the stock (and the miracle of Flotek’s business resilience) comes from Flotek’s citrus-based “complex nano-fluid” (“CnF”) surfactants. These, they say, boost the production of oil and gas from hydraulic fracturing of existing and newly-completed wells. 

Here’s John Chisholm describing it to Jim Cramer in February 2015:

Have a look:

Slide #	API #	TX Lease#	Well Name	Operator
58, 59	42-285-33654	10702	Targac 1H	Sabine Oil & Gas LLC
60, 61	42-285-33673	10811	Gillespie 1H	Sabine Oil & Gas LLC
62, 63	42-285-33756	10920	Molnoskey 1H (CnF)	Sabine Oil & Gas LLC
64, 65	42-285-33802	10972	Berger Unit 1H	Devon Energy Corp

The table below shows, by month, the production data for oil and gas from Targac 1H. The first column under each of Oil and Gas headings, labeled “FTK – FracMax,” reproduces the numbers as shown on Chisholm’s slide above that was presented to investors. The middle column under each of the Oil and Gas headings, labeled “Texas RRC” shows the original production data (not disposition) as reported by the Texas RRC and reproduced in full above. The final column under each of the Oil and Gas headings simply divides the FracMax number into the Texas RRC number, stated as a percentage.

Eagle-eyed readers—who no doubt share our commitment to correctness—will note several problems here. 

• The production data shown on Chisholm’s slide does not match what was reported to the RRC. 

• The data appears to have been adjusted, as the numbers shown on the FracMax slide total only 60% of the oil production reported to the RRC and 50% of the gas. 

• The first month’s oil production was not 8900 barrels in December 2013, but 17,761 in November 2013. 

Chisholm it seems understated production data for the well that contained none of Flotek’s special “complex nano-fluid”. 

As before, we use the API#, 42-285-33673, to look up the Texas RRC ID #, which is 10811.

After retrieving the production data using ID # 10811, we find that Gillespie has the same undisclosed adjustment as Targac. Using the same table as we did for Targac, we compare the FracMax numbers from Flotek’s slide and the original RRC data.

Once again, the numbers don’t match. Chisholm correctly notes that both water use and production at Gillespie 1H were lower than at Targac 1H. 

But what he didn’t say was that his numbers did not match the official data from the Texas Railroad Commission: production was both a month earlier (May, not June) and substantially higher than he claimed.

John Chisholm fails to meet his own “accuracy” standard

Not only were Flotek and Chisholm’s repeated insistences that the data is “as reported by the operator” incorrect, but the adjustments we have seen ARE consistently favorable to the Company’s CnF well and detrimental to the non-CnF wells. 

Mistakes happen, though they undermine the many declarations of FracMax’s statistical robustness. 

Given this pattern of adjustments we can’t help but wonder if these divergences are, in fact, mere mistakes. It is just too suspicious to consistently understate the results from wells that did not use their product. 

As Chisholm’s claim was that Molnoskey produced more oil than Targac with less water—thanks, he implies, to CnF—the final two columns check that claim using the original data. 

Under the heading “Diff in Production (Mol. – Targ.),” we subtract the two sets of reported numbers. First, we show Flotek’s numbers for Molnoskey – Targac, for the same month of production. These show an increase, as Chisholm stated. But when we use the original Texas RRC numbers, in the rightmost column below, we find that, for at least some months, Targac (no CnF) outperformed Molnoskey (CnF).

Sure many factors affect production (eg geology, how much water and sand and maybe acid are pumped into wells and maybe even the surfactants use). 

Our aim is not to prove that CnF makes no difference. To do that we would need a large sample set. Rather we point out that on John Chisholm’s data (after taking out the errors) it is impossible to conclude that Flotek’s complex nano-fluids do anything.

We believe in “accuracy” but there ain’t none here.

Using the API#42-285-33802, we retrieve its RRC Lease ID#10972:

As above, we look up the production data for Berger from the RRC using ID# 10972. Once again, Flotek’s reported production data from FracMax does not match the RRC’s, as the by-now-familiar table below shows:

Where before Flotek omitted the first month of production (usually the largest), in this case they have omitted the first two months of September and October 2014, as well as the most recently reported month, June 2015. And we find again the same undisclosed alteration of the RRC’s data, as FracMax displays only 60% of the RRC’s number for oil and 50% for gas.

It’s worth quoting Chisholm’s statement at 45:48 in the replay in full: 

“[W]hat you’ll see today is on a FracMax instance that has 98 thousand wells. Not 98. Not 980. Not 9000. Ninety-eight thousand wells in the United States that we have all categorized based on what went in and what the production is. And 10% of it has CnF in it. And any statistician will tell you that’s enough of a database that you can make algorithmic, statistic inferences as to what the economic impact is on a dataset that big.” [emphasis in original]

So we thought we might test the whole data base. And it was all meant to be in their FracMax app all ready for your ipad.

So we downloaded an app claiming to be FracMax.

We just can’t make it work and we tried with a brand new ipad just to test compatability.

A version of what claims to be FracMax is available in the Apple iTunes Store under the name “Flotek Max.” Released on 17 February 2015, the description of the app fits the public descriptions of FracMax:

 A quick but important caveat: we cannot know for certain if this is the app Chisholm demonstrated or the app used by Flotek’s sales force. It is entirely possible—likely, even—that another version of FracMax exists. That said, our reading Apple’s policies make it unlikely that a parallel private app exists. 

With that caveat out of the way, we do what we can to try to use the app. 

We find the same Flotek application pictured in the consumer app store above:

Clicking on the link leads us to the same page as before, except with “Volume Purchase Program” as the header:

(Note the section on “Managed Distribution” on the webpage above.  It indicates that free apps are only available in bulk when using a “Mobile Data Management” solution, which implies control over the end user’s iPad.  This form of distribution would be more common within a single enterprise whose mobile devices are managed centrally.)