Flotek (NYSE:FTK) announced preliminary results on the 29th of July, which were initially interpreted badly. This was due to a decrease in Q2 consolidated gross margins when compared to Q1 of this year. This was clarified as Florida Chemical is a lower margin business, and its Artificial Lift segment's margins were excessively high in Q1 on a larger international sale. Since then the stock is up on the realization that its two largest businesses saw margins increase in Q2. I have already done some Q2 work on the drilling and completions fluids industry. Newpark (NYSE:NR) is a little known small cap with a significant market share in the fluids industry. Q2 saw its margins shrink, but this had little to do with demand or pricing. Although margins were down for the quarter, this was attributed to the spring break up in Canada and the pre-tax charge in Brazil. Flotek's stock has doubled since November, and I believe there is still value when we consider its growth. I have it growing 30% this year, and feel that is a conservative number. The only issue is its bottom line, as management has had some issues over the last three quarters.
Flotek estimates Q2 revenues to exceed $93 million. This compares to the Street's estimate of $89.3 million. It is already reaping the rewards of its Florida Chemical acquisition in May. It is the world's largest processor of citrus oils. It not only provides chemistry to the oil field, but also has industrial and consumer applications. This adds to its top line number, but more importantly, it will control costs aiding the bottom line. Without Florida's revenue, Flotek's businesses produced more than $79 million. This is at near record levels. Chemical Technologies produced $47.5 million. Drilling Technologies added $29.5 million with Artificial Lift having revenues of approximately $3.4 million. Both Chemical and Drilling Technologies will post sequential increases from Q1. The newest segment of the business is Non-Energy Chemical Technologies, which is Florida Chemicals' business. It adds revenues of $12.5 million, but only booked revenues from May and June. Chemical margins exceeded 43%, compared to Q1 margins of 42.8%. Drilling Technology margins were better than 41%, compared to last quarter's 39.2%. Artificial Lift Technology margins pulled back significantly at 25%. This compares to 46.4% in Q1. Artificial Lift underperformed in Q2 due to a very large international sale in Q1. This not only created the dip in revenues, but also the hit to margins. Gross margins from the acquisition of Florida Chemical were 29%. Most importantly, this was the second best quarter in company history. Flotek also plans to add Eclipse EOR Services to its business. It will pay $6.5 million in cash and stock. This polymer-based EOR/IOR company works with large operators engaged in enhanced oil recovery. These include Kinder Morgan (NYSE:KMI), Occidental (NYSE:OXY) and Apache (NYSE:APA).
The acquisition of Florida Chemical does several things for Flotek. First it decreases costs, by providing many of the parts Flotek uses for its fluids business. The second, it increases products to sell. Flotek's current customers that order "green" completion fluids can also buy the same type of cleaners and lubricants. It also provides an open door to international customers. Florida Chemical derives 20% to 30% of its business from outside the United States. Flotek plans to build a world class R&D center in Houston. Its employees will work with Florida Chemicals for the purpose of building these businesses together and expanding its scope in oil and gas. About 40% of Florida Chemical's business is in oil and gas.
Flotek's 2013 cap ex is $19.3 million. $10.1 million was spent in the first half of the year. Half of this was used on its chemicals facility to increase capacity. Total capacity is 2.5 times that of 2011. The money spent here will also decrease costs due to newfound efficiencies. In Artificial Lift, it recently completed its Dickinson, North Dakota facility. In the second half of the year, Flotek plans to spend approximately $7 million.
Flotek's growth could be greatest overseas. It recently signed a letter of intent with Gulf Energy of Oman. Flotek will build a specialty oilfield chemical production and distribution facility. It will be able to serve markets in the Middle East and North Africa. This is an important area for unconventional resource. Flotek will be on the ground floor when this growth begins. This region needs more than just green drilling and completion fluids. It will also be able to sell its drilling technologies. It is also seeing down hole tool growth in Oklahoma and the Eagle Ford. Flotek continues to gain market drilling motor market share in the Bakken, Barnett, and Eagle Ford. It also continues to see teledrift pricing strength in the Permian. Artificial Lift is seeing growth in the Powder River Basin and Bakken. ESP brand is growing, with margins of more than 50%.
In summary, this company looked like it may go bankrupt in 2010 as its market cap had dropped to $32.4 million. Since then, Flotek is up over 800%. I have been on this name since May of last year. I was a little early, but Flotek continues to grow its market share. Its green fluids division should continue to grow as companies become more environmentally conscience. Flotek is in direct competition with Halliburton (NYSE:HAL) and Schlumberger's (NYSE:SLB) products, which have seen significant interest since the media began going after fraccing. This company should continue to grow at a fast pace in upcoming years. If regulations are passed limiting chemicals down hole during drilling and completions, this could be a homerun.
Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market or financial product does not guarantee future results or returns. For more articles like this check out our website at shaleexperts.com. Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.