Flotek Industries, Inc. (FTK) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Flotek Industries Inc. Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded. At this time, I would like to turn the conference over to Mr. Glenn Neslony, Vice President and Treasurer of Flotek Industries. Mr. Neslony, you may begin.

Thank you, and good morning. Today's call is being webcast, and a replay will be available on Flotek's website. Our earnings and operational update, press release, as well as our quarterly report with the United States Securities and Exchange Commission, were filed and distributed last evening and are also available on the Flotek website. Before I turn the call over to Flotek's Chairman and President, John Chisholm, I wish to remind everyone participating in this call, listening to the replay or reading a transcript of this call of the following. Some of the comments made during this teleconference may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act -- Exchange Act of 1934, reflecting Flotek's views about future events and their potential impact on performance. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements on this call. These matters involve risks and uncertainties that could impact operations and the financial results and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings with the United States Securities and Exchange Commission. Now, I'd like to introduce Mr. John Chisholm, Flotek's Chairman of the Board, President and Chief Executive Officer.

Glenn, thank you. I would also like to welcome each of you to Flotek's third quarter conference call. With me today are Johnna Kokenge, Flotek's Vice President and Chief Accounting and Compliance Officer; Steve Reeves, our Executive Vice President of Operations; Kevin Fisher, Executive Vice President of Global Marketing and Business Development; and Chris Edmonds, Flotek's Senior Consulting Director of Finance. Last evening, we filed our quarterly report with the U.S. Securities and Exchange Commission. While we won't take your valuable time to regurgitate those filings, we will provide a summary of the results, attempt to add some color regarding current operations, as well as a sense of our future, and then be happy to answer your questions. As our third quarter results suggest, Flotek continues to produce steady results for you, our stakeholders, even as the oilfield technology cycle presents challenges and obstacles to growth. The uncertainty in the global economy and the volatility with downward bias in commodity prices continue to put pressure on oilfield activity in the third quarter. However, as a result of the hard work and determination from my Flotek's colleagues, the company managed to post growth in both revenues and gross margins. In fact, when comparing the third quarter of 2012 to the third quarter of 2011, Flotek was 1 of only 5 oilfield service companies in our peer group that posted revenue growth and 1 of only 2 that showed growth in gross margins, leading the group. On a sequential basis, Flotek also posted growth in both revenues and gross margins, again, among a very small group of peers. Our success, while somewhat muted in challenging markets, is a result of 2 very important tenets that differentiate Flotek. First, our focus on added value. Oilfield technology creates opportunities for our products across the oilfield cycle. While the time to initial sale may be somewhat longer than commoditized products, once Flotek products are inside a client's system, our retention and existing client growth rates are amongst the best in our industry. Second, we continue to penetrate new markets and new clients. For example, we recently told a story in a recent press release about our work in enhanced oil recovery and how that work for Chaparral Energy, a client committed to leading-edge technology to enhance production, led to an increase in production of 14,000 barrels over a 3-month period or over $1 million in incremental revenue. Project stories like that and our continued commitment to research and innovation are the reasons each member of the Flotek team brings their A game to work each and every day. While there isn't a lot we can do about the economic uncertainties that create the backdrop for our business, we can and continue to focus each and every day on what we can control: being the best at what we do, providing exceptional service to our customers to build durable relationships and being absolutely committed to providing cutting-edge technology to our clients, whether in the areas of chemistry, downhole technology or Artificial Lift systems, through the best research and innovation team in the industry. Not only does our commitment to research and innovation benefit customers, it applies to the internal processes of Flotek as well. The best example of the impact of internal innovation and process improvement comes in our chemical group. At our manufacturing facility in Marlow, Oklahoma, our production team worked together to develop a better and more efficient way to grow our production capacity. With cutting-edge design and less than $3 million in capital, Flotek was able to increase production by approximately 32% while reducing man hours worked by 27%. As we continue to grow our businesses, we will strive to find similar efficiencies in all of our business lines. Finally, our focus on our balance sheet and capital structure in recent months has put your company in its stronger -- strongest financial position perhaps in the history of the company. In short, we returned Flotek to financial normalcy, instilled in the Flotek culture our expectation of success and set in place the intellectual and physical infrastructure for the next chapter in Flotek's corporate evolution, one focused on technological innovation, which we believe will lead to unprecedented growth and value creation for our stakeholders. In short, we have positioned Flotek to operationalize our 2012 mantra, Making a Difference. We believe Flotek is now positioned to make a difference for our clients, our communities, our team members and most importantly, you, our shareholders, the owners of our company. You've been committed to this journey alongside us, had confidence in our abilities even when the challenges were great and provided the support and encouragement to return Flotek to its status as a premier innovator in the oilfield technology arena. Before Johnna and Steve walk through the specific financial and operational highlights, I would like to provide some high-level highlights of the quarter. Flotek reported quarterly revenue of $78.6 million, an increase of $3.5 million or 4.7% compared to $75.1 million for the same period in 2011. Revenue increased in the Chemical and Drilling segments but declined slightly in the Artificial Lift segment. For the quarter, the company reported operating income per common share, fully diluted, of $0.28. Operating income per common share, a non-GAAP measure of earnings, excludes certain extraordinary items, as well as interest and income tax impacts on the income statement. On a GAAP basis, the company reported income attributable to common shareholders of $9.8 million or $0.19 per common share, fully diluted. Johnna will discuss our financial results in more detail in just a moment. As I've said on each call since I took the helm, now a little over 3 years ago, it continues to be my privilege to serve as President of your company. I remain immensely proud and humbled by the commitment and support of members of the Flotek team that believed, as a group, they could make a difference in the future of Flotek and believed in our vision to restore stability and growth to the company and continue to be enthused that through the efforts of our people, the future is filled with opportunities to create value for our stakeholders. I have never been more excited about the future of Flotek than I am today. With that, I'd like to turn the call over to Johnna Kokenge, Flotek's Chief Accounting Officer, to review our third quarter financial highlights and provide some additional color on certain financial issues. Johnna?

Thank you, John. As John mentioned, Flotek filed a Form 10-Q quarterly report for the period ended September 30, 2012 with the U.S. Securities and Exchange Commission yesterday afternoon. In that report, Flotek reported revenue for the 3 months ended September 30 of $78.6 million, an increase of $3.6 million or 4.8% as compared to $75.1 million for the same period in 2011. Revenue increased, as John stated, in the Chemical and Drilling segments but declined slightly in the Artificial Lift segment. For the 3 months ended September 30, 2012, the company reported operating income per fully diluted common share of $0.28 compared to operating income per fully diluted common share of $0.31 in the same quarter of 2011. Operating income per share is a non-GAAP measure of earnings and is only presented in an effort to disclose operational activity transparency, particularly in relation to the company's historic and significant noncash EPS impacted items. The per share calculated numbers referenced above also exclude period interest and income tax impact in order to remove all noise and to focus on the outstanding operating results being realized by Flotek. For the 3 years ended -- I mean, pardon me, for the 3 months ended September 30, 2012, the company reported income attributable to common stockholders of $9.8 million or $0.19 per fully diluted common share compared to net income of $17.9 million or $0.35 per fully diluted common share for the same period of 2011. A reconciliation of non-GAAP operating earnings per share to GAAP compliant earnings per share was provided within the November 7, 2012 press release and is also available on Flotek's website. At September 30, 2012, the company's cash balance approximated $21.9 million compared to $25.5 million at September 30, 2011. As of November 6, Flotek's cash balance approximated $24.5 million. Outstanding receivables at September 30 totaled $44 million compared to $46.5 million at September 30, 2011. As discussed on our second quarter call, our financial team continues to identify and implement solutions in order to be more efficient, responsive and supportive of Flotek's operations. We remain committed to best practice development across the organization. As such, strategic modification to our JD Edwards ERP system and associated functionality continues. The ERP system will continue to be enhanced to provide real-time information and analytic capabilities that until now have been unavailable to corporate and field personnel. While this constituted a major investment for Flotek, this system fundamentally changes the way Flotek does business and dramatically improves efficiency, market awareness and our responsiveness to market movement. I am pleased to report that the new ERP system is now serving as our primary accounting and reporting system. In fact, this quarter, I am pleased to say it's the first quarter where we have relied entirely on the new ERP system to close and report. Like John, while pleased with our progress, I am more excited about the future opportunities and possibilities that lie ahead for Flotek. I would now like to turn the call over to Steve Reeves, our Executive Vice President of Operations, to discuss the company's current operational activities and initiatives. Steve?

Johnna, thank you. While overall oilfield activity moderated in the third quarter, a result of uncertainties regarding commodities prices and economic growth, resulting in less robust drilling and exploration activity, Flotek's business continued to post steady growth. Although growth in drilling activity has moderated, Flotek remains optimistic regarding opportunities, believing opportunities for growth exist in all 3 business segments. Chemicals revenue for the third quarter and year-to-date periods ended September 30, 2012 increased $0.6 million or 1.3% and $38.1 million or 38.2%, respectively, relative to comparable 2011 periods. The increase in third quarter 2012 revenue was primarily due to a net increase in service and product revenue of $0.6 million attributable to increased liquid and cement handling activity and milestone construction completions as compared to the third quarter of 2011. During the first 9 months of 2012, increased activity from key existing customers and cross marketing sales initiatives resulted in incremental product revenue of $36.7 million, while increased liquid and cement handling activity and milestone construction completions resulted in an increase in service revenue of $1.4 million compared to the first 9 months of 2011. The Bakken, Niobrara and Eagle Ford shale plays, in particular, were positive contributors to the year-to-date period-over-period increase. In general, revenue growth was the result of the company's development, strategic adaptation and customization of proprietary patented natural gas effective Complex nano-Fluid additives to oil effective Complex nano-Fluid additives for new and existing customers, increased market demand and increased domestic and international market penetration. Increasing industry recognition of proven production efficiencies and environmental benefits derived from use of Flotek's new and existing products increased demand for Complex nano-Fluid products in both domestic and international markets. Incremental period-over-period revenue from key customers alone totaled $19.8 million for the 9 months ended September 30, 2012 over the same period in 2011. Chemicals gross margin for the quarter and year-to-date periods ended September 30, 2012 increased $3.4 million or 19.4% and $22.2 million or 55.8%, respectively. The increase in gross margin for both the quarter and year-to-date periods is attributable to negotiated raw material price concessions with existing vendors, in addition to exploration of raw material sourcing alternatives. Of special note, Flotek's interests -- entrance into the Enhanced Oil Recovery or EOR, market continues to make progress. Flotek's newly developed Complex nano-Fluid based CO2 foam diversion product, StimOil FD-1, has been successfully applied to arrest premature CO2 breakthrough in a West Texas flood for Chaparral Energy. As a result, sweep efficiency in the pilot area of the field is improving, and oil recovery is steadily increasing. In the first trial, the use of Complex nano-Fluid resulted in a production increase of 14,000 barrels of oil in the first 3 months of use. Laboratory work and computer stimulations -- computer simulations are underway to apply the breakthrough technology in additional fields for new operators in the U.S. and Canada. In addition, the company recently introduced CnF 2.0, the next generation of Complex nano-Fluid chemistries. In early tests, the more concentrated form of Complex nano-Fluid allows an operator to experience the productive benefits of the chemistry and, at the same time, reduce consumables such as water, proppant and horsepower by as much as 20%. Drilling revenue for the quarter and year-to-date period ended September 30, 2012 increased $3.5 million or 12.8% and $15.1 million or 20.4%, respectively, relative to the same periods in 2011. The favorable variance resulted from domestic and international market share growth and market penetration with both new and existing customers, change in customers' product mix demands, increased oil rig count, favorable period-over-period crude oil commodity prices, new product development, specialized customer demand for new and existing product adaptation, continued cross marketing sales efforts, sales force revitalization and competitive pricing relief. Drilling gross margin for the quarter and year-to-date periods ended September 30, 2012 increased by $0.2 million or 1.5% and $3.9 million or 12.7%, respectively, over comparable period of 2011, primarily due to increased product and service prices as compared to 2011, tempered by competitive price pressures and increased domestic equipment costs. Flotek's Drilling segment continues to book solid revenues and grow its customer base. In the third quarter, sequential revenues were flat compared with a decline in the rig count of nearly 7%. The company continues to gain market share with a focus on increasing tool density per rig. We continue to see meaningful opportunities for growth in our 3 key regions: the Permian Basin, the Mid-Continent and in South Texas, especially in the Eagle Ford shale. We continue to increase our market penetration as at least 1 Flotek drilling tool can be found on nearly 1/3 of all rigs in the United States. Teledrift continues to provide leadership in our downhole tools group. Teledrift rental revenue increased approximately 6.9% for the year-to-date period ended September 30, 2012 as compared to the year-to-date period ended September 30, 2011. Teledrift's remote MWD data monitoring system, allowing engineers anywhere in the world with data access to view Teledrift results on remote computers or smart phones, has been a driving force supporting an increase in Teledrift business activity. Artificial Lift revenue for the 3 months ended September 30, 2012 totaled $4.0 million, a decrease of $0.5 million or 9.9% compared to $4.5 million for the 3 months ended September 30, 2011 due to decreased customer natural gas drilling and workover activity. While our Artificial Lift business has been dominated by natural gas installations, we are encouraged by new work in oil regions like the Bakken and Niobrara, as well as the international opportunities for our patented Petrovalve product. In addition, Flotek's patented gas separator has recently drawn attention of significant Artificial Lift players that could lead to additional opportunities for the segment. In addition to what we believe is a solid quarter in a challenging market, Flotek has spent the last several months preparing itself for future growth through key capital projects. John shared with you the exciting expansion of our Marlow, Oklahoma chemical facility, which has already had a dramatic impact on efficiency. In addition to Marlow, we are improving our Galleon tools manufacturing facility in Midland, upgrading our physical infrastructure in Mexico as work expands for Pemex and the large international integrated services companies, building a new downhole technology warehouse and service facility in Moore, Oklahoma, improving our Teledrift research and service facilities in Texas and increasing the research and development capacity of our industry-leading chemistry laboratory in the Woodlands. All of these projects, we believe, better position Flotek for future growth, create efficiencies in operations and support best-in-class service. In short, we are creating the best facilities for the best people in the oilfield technology business. While we faced challenges in the third quarter as oilfield activity moderated, we were able to react quickly, continue to post consistent results and look through the top toward new opportunities that can be found in any market environment. As a result, we are excited about the opportunities in front of us for the balance of 2012 and into the new year, while at the same time, we will remain vigilant in our careful watch of commodity prices and drilling activity. With that, I'd like to turn the call back over to John Chisholm.

Steve, thank you very much. As we mentioned in the press release last evening, while we're proud of our accomplishments in the third quarter, those results mean little unless we continue to build on our success. We believe 2 examples of new opportunities are the initiatives we mentioned earlier and introduced in conjunction with our investor days in October. Flotek's entrance into the enhanced oil recovery or EOR market, as well as the introduction of Complex nano-Fluid CnF 2.0, the next-generation of Complex nano-Fluids, have the potential to be game changers for Flotek. We believe over the course of the next several months and quarters, these products have the potential to transform Flotek and establish us as even more of a leader in innovative oilfield chemistries. While all new technologies take time to achieve market acceptance, initial indications and performance suggests these chemistries can be very special, not only to Flotek but to the customers who embrace them. There's still plenty of work to do, but we are very excited about the early results. While we're pleased with our performance, we're also cognizant of the expense side of the ledger, and I want to spend just a minute speaking to general and administrative expenses. While our G&A costs have increased, we continue to look for ways to improve efficiencies in every aspect of our business. The cost increases were largely associated with our rapid growth. For example, on renewal, our insurance premiums increased $600,000, a result of the increased business activity of the company. In addition, as we complete the implementation of our new accounting and reporting system, we incurred approximately $150,000 in expenses. Finally, nearly $350,000 in G&A expense was related to the retirement of Flotek former Executive Vice President of Finance, Jempy Neyman. Jempy was a loyal member of the Flotek team for many years, and it was important he be treated appropriate upon his retirement. All of those expenses have or will serve Flotek well in the past, current and into the future. Finally, it's important to note that nearly 19% of Flotek's G&A expense relates to equity grants to members of the Flotek team, and those grants just don't go to executives. I believe, without a doubt, our recent success has been tied to the incentive plans thoughtfully developed by our Board of Directors and myself that create an environment in which members of the Flotek team are encouraged to perform. Moreover, such a plan aligns the interests of our team with our owners, something all of us should support. In fact, the excitement about Flotek's business and the ability to create value for Flotek shareholders is likely one of the key elements of our success in October. While many of our brethren are concerned about the fourth quarter, we couldn't be more excited. As we noted yesterday, October revenues will exceed $29 million, one of the 2 best months in the history of the company. Moreover, the gains weren't the result of anything extraordinary but rather the Flotek team blocking and tackling, which resulted in strength in all 3 operating segments. While the Thanksgiving and Christmas holidays always create a bit of uncertainty in our business, we are pleased that the fourth quarter is off to such a robust start. As we look forward into the balance of 2012, we believe our plate is full of opportunities to continue to grow revenue and profits and, as a result, create meaningful value for shareholders. While the current economic backdrop may continue to present challenges, as may the recent election results, we will focus on what we can control and do our very best to make certain we remain exceptional stewards of your company and your capital. Moreover, we have faced big challenges in the past, and the Flotek team has endured and, indeed, prospered. The difference in 2012 and beyond is that Flotek has never been stronger, has never seen the number of opportunities for continued business development we have before us today and has never had a team in place with the level of talent, expertise and ambition we have today to capture those opportunities and transform them into value-creating business for shareholders. While pleased with our third quarter performance, we're not satisfied to look to the past but are eager to continue looking forward into the future, where we continue to work tirelessly to make a difference in the lives of each Flotek stakeholder, our clients, our communities, our employees and, more importantly, you, our shareholders. We value the confidence you've placed in us, and we'll continue to work hard every day to earn your trust and loyalty. Again, thank you for your interest in Flotek. We are proud of our quarter, excited about the future and energized by the opportunities in front of us. Operator, we will now open the call to questions.

[Operator Instructions] Our first question coming from the line of Michael Marino with Stephens Inc.

John, you and Steve mentioned, I guess, an expanding customer base, but I was wondering if you could put some more color around that. Specifically, as it relates to -- in the past, you've mentioned some conversations with maybe bigger potential customers or big players that weren't necessarily customers or were small customers, how those talks have progressed. And then the customer base by region, is it certain basins where you're seeing more traction than others? Or, I don't know, maybe if you could just put some color around kind of the customer base.

Sure, Mike. As I mentioned, Kevin Fisher, our Executive Vice President of Business Development, is here, and he'll take that for you.

Mike, this is Kevin. Regarding bigger customers, there really are no bigger customers than the Halliburtons, Schlumbergers, Bakers that we already work for in relation to chemical side of the business. But you are right in that we talked about, and it's true that we are expanding our sales and marketing approach to the operating E&P companies, not selling to them but selling through the service companies and creating that demand with the end user out there. Companies like Pioneer, who in the press release before, who have their own stimulation capacity, are certainly high profile targets in that realm because they not only control the resource but have a service capacity to do that. We have put that -- I think our customer count increase Q-over-Q of about 5%, and that's across the entire Flotek business, the Drilling, the Artificial Lift and the stimulation, the Chemical business out there. So the number of clients are increasing, the number of stimulation clients for the chemical business, that the same number of fractional [ph] companies exist, maybe even fewer due to mergers and acquisitions today than they did a quarter ago. But the number of clients that we're working for has increased, so that's the market penetration you were asking about.

Okay, that's helpful. Yes, I was going to ask another question on the new initiatives John mentioned, I guess, the CnF 2.0 and the EOR. Was there any contribution in Q3 in terms of revenue or was it de minimis?

Yes, I know -- it was -- you used the correct word. De minimis is the right word. It's enough for us to understand what the value is but not a significant part of the top line number.

Okay. And just to be clear on the CnF 2.0, the results you all expect, is that still based on lab tests? Or are you actually -- is that working in the field yet?

Yes, that is primarily from our lab tests that -- we have enough of an experience on that with previous CnF products that we can extrapolate and feel very comfortable with what the laboratory data is showing us.

Our next question coming from the line of Ryan Fitzgibbon with Global Hunter Securities.

Let's start with the chemical side of the business. Can you touch a little bit on what maybe drove the revenue decline on a sequential basis? When we look at some of the other product lines out there consumed by the pumpers, it seems as if they are winding down inventories in the quarter. Is that something that happened in Q3 and hit the chemical revenues? And are those guys now restocking and maybe that's driving up some of the October performance?

Yes, you, I think, pretty much accurately answered your own question. There was at least 2 of the service providers that we deal with on a regular basis that really made an effort from the -- as you talked about, looking at their inventory towards the end of the quarter and have restocked heading into the fourth quarter. It is primarily that issue.

Okay. And then looking at margins for the quarter, up about 300 basis points sequentially, John did a nice job outlining the efficiencies you guys have gained at Marlow. Is that the rationale there? Are we not expecting pricing declines at this point to impact margins?

Yes, we've made a very conscious effort to be transparent to folks like yourself, starting at the end of last year through the early part of this year, of what we felt would be the basis point improvement on the margins. That's driven by 2 things. One of them is, because the way the facility has been improved, in large part by the really stellar design effort of Todd Sanner, who runs CESI for us in Marlow, and Steve, that we're now able to buy in bulk, store in bulk, ship in bulk. And we've said that consistently throughout the year that we now can purchase out 6 months ahead of time of what we feel like the raw material usage will be for that part of our business. And that has a meaningful impact on what the raw material cost is into Flotek, and I think we have done a very good job of expressing that to folks like yourself throughout the year. The second thing is, is we have been just resilient on pricing pressure on our patented products and make no mistake about it. On a regular basis, folks ask us for some type of pricing relief, and we've been very hesitant to provide that, except on a rare instance [indiscernible] there. All of us have enough experience in this industry that once you give pricing relief, it is a whole lot harder to claw it back than it was to give it, and we've been very resistant to any of that.

So in your opinion, are margin levels in the mid-upper 30% range sustainable?

That's our view as of this point.

Okay. Understood. And then touching back on the EOR side of the business. I believe on the last call, you mentioned there were 4 other field tests to be run for Chaparral. Are any of those underway? Or are there any other field tests that we should be thinking about? And when would you expect to be able to release results from those?

Yes, Chaparral, that's always good. Once -- it's kind of the old story about dog food. The dogs really like the food once they eat it, and it's always good once Chaparral saw the first results to go on to that second program, they are. That's very encouraging for us, repeat business. We have closer to 8 field projects underway right now than what we have mentioned maybe even 90 days ago of 4. And those are various sizes. We hope to be able to give you more color on that early in the first quarter of 2013.

Our next question coming from the line of Greg Gardner with Singular Research.

Regarding the CnF 2.0, has this been fully rolled out? I just want to understand how the marketing of it -- has it been fully communicated to the E&P community? Or is it really more with Halliburton, Schlumberger, Baker? I'm just wondering where that is and how that may proceed.

Sure. Kevin will take that question for you.

The answer really is no. The first appearance of CnF 2.0 was during our Analyst Day about [indiscernible] months ago where we [indiscernible] to the public out there. To this date, we've talked to 1 or 2 of the major service companies, to 1 or 2 E&P companies about that. We've made enough of the fluid to go out on a significant-sized pilot and be able to pump that in the ground. We expect that to happen during this quarter. But most of the work has been done during the lab testing phase. We initially started out with a goal of creating a new nano-fluid that would be at least as effective as the existing family of nano-fluids and to be pumped at half the concentration. So half the volume needed to be transported to and from location and performed at least as well. And we've been very pleased with the lab results. And as John said, we've gotten good enough now with our lab testing and the protocols there that we can translate the lab performance to performance in the field. And, in fact, the new CnF 2.0 product is outperforming the existing family of CnF products when run at half the concentration. So it's been a real definite [ph] success for us, and we'll be getting some jobs in the ground soon and start collecting data from the field.

So does that mean the first field tests are just in the stage of being completed right now? Is that what I'm hearing?

Yes, we're -- you want to qualify the wells when you're going to be pumping these in the field to be sure they're representative wells and there are no funny geologists or fuel hazards or other things that might cause well performance to be much better or much worse on its own. But those projects are being identified, and I have to say that we hope to be pumping that in the ground during the quarter.

And so can you walk me through how this would typically roll out then in the next quarter or 2? It sounds like it's really more of a first quarter, next year full deployment, just because the data coming through and communicating this to the 3 major distributors and also then the E&P companies. Is that a good way of looking at it?

We'll start prepping the E&P companies and all of the fracture service companies during the quarter about the fluids that we have. We certainly -- and you know our mantra is to be cautious and over-deliver after under-promising, but we're spending a lot of time trying to understand this fluid. Once we start putting it in the ground, we're going to be spending even more engineering time looking at production results and normalizing so that we understand exactly how it's performing. I would say the marketing push will certainly continue through Q4, and it will expand. But the real push will probably come in Q1 when we start getting the early returns on the wells that we pumped during Q4.

Okay. And any sense on pricing and profitability on the CnF versus, I guess, CnF 1?

I don't think we generally talk about pricing of these products.

Yes, I think you can be assured it will be at least as good as what we are currently experiencing from a margin benefit with the current CnF suite of products, at least as good as.

Okay. Yes, it certainly seems like it'd be quite attractive. And just a final question on the EOR. Any new comment on the pricing model there as to how that may be priced? You had mentioned before it may be a valuation or value to the customer based pricing. Any commentary on that?

Yes, no. Good memory there, Greg. And for those that may be new to that comment, one of the more challenging things in this industry from a service company standpoint is to enter into what's called a value pricing model, where it's not just so much what it is per gallon but are you able to attract a percentage of the performance that the well or the reservoir or the field improves. And we feel that we have a unique opportunity to fully explore that pricing model because that -- when you see an uplift in performance, it's identifiable to one thing, and that's the chemical, the product that was put in by Flotek as opposed to these hydraulic fracture stimulations where there's so many different variables that people are changing, if not on a regular basis, a semi-regular basis. And it's really a challenge to identify 1 event that had the performance enhancement. In the EOR process, you know what a production is in a field, and if the only thing changes is the introduction of a new product, you pretty well know that's the reason why something improved. Again, word of caution, those are difficult pricing models to accomplish, but that's not to say that we're not going to do all we know to try to accomplish that.

[Operator Instructions] Our next question coming from the line of Richard Dearnley with Longport Partners.

You mentioned that once you're in with the -- an E&P customer, you have high retention. And on your Analyst Day, you also said that your largest customer used you in about, I am supposing this is CnF, in about 4% of their completions. Is that because -- why is that? Is that because the CnF is not widely applicable to what they're doing? Or is it by basing or by rock quality? Or -- 4% seems quite low if you have a measurable difference.

Right. So a point of clarification, and it's always good to hear questions like this because it reinforces in us, are we accurately conveying what we want to convey? The 4% give or take number is what our estimate is of the use of CnF in the overall market in North America. We have numerous clients that use CnF on all of their completions. But when you look at the overall complete market, that's the number we get to, which has led us to, I think, accurately represent to the industry that we believe this is a market penetration education story of illustrating the benefits of the product. As a follow-up to that, we recently had a client that had used CnF throughout their entire completion of horizontal wells, thought they could save money by not running CnF in what is called the pad portion of a hydraulic fracture stimulation, which is roughly the first 25% of a hydraulic trackable well, did that for 60 days and have returned to using CnF throughout the entire fluid portion of their hydraulic fracture because of declining performance in their wells. So hopefully, that provides a little bit better clarity on that percentage number that you referenced.

Yes, that does. Then on the data on Chaparral where they increased by 14,000 barrels over 3 months, what was the base they were getting over the prior 3 months period that we can add the 14,000 to, or a percentage or something? 14,000 is just a number floating around.

Yes, that is about -- that's a fair question. And I'm looking to Kevin, but we want to make sure that -- we'll get back specifically to you on that. Obviously, it's a meaningful uplift, but I don't want to overstate what it is. And we'll be glad to get back to you on that.

There are no further questions at this time. Please continue with your presentation or closing remarks.

Yes. Thank you, operator, for your help on the call. Thanks for the interest. I think we have more folks on this call than ever for Flotek, and we appreciate that. Everybody, have a nice holiday coming up. And again, thank you for your interest.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.