Flotek Industries, Inc. (FTK) Earnings Call Transcript & Summary

All right. Hi, everyone. Good morning. I'm Jeff Grampp from the research team at Northland. And thanks for joining our fireside chat session today with Flotek, ticker FTK. We currently have an outperformed rating and $16 price target on the stock. With us today from the team, we have CEO, Ryan Ezell; CFO, Bond Clement; and Director of Investor Relations, Mike Critelli. We'll start this off with just kind of a brief overview of the business for those maybe a little bit newer to the Flotek story and then I can do a Q&A session after that. So please send any questions through the Zoom portal or you can e-mail me directly as well, [email protected], and we can get those addressed in the Q&A portion of our call. So with that, I'll pass it over to the guys for a little bit of an overview before we get into the Q&A.

Good morning, Jeff. We appreciate you guys having us on the fireside chat today. I'm Ryan Ezell, I'm the CEO here at Flotek. And Flotek is a publicly traded company on the New York Stock Exchange. We've been around for over 30 years. But what I'd like to update you on today is kind of the revolution that we've undertaken here at Flotek since, I would say, starting at the end of 2020. Myself, I came on board in 2019, over 25 years in the energy chemistry sector. I'm a chemist by trade. And we came on as part of what I would really fundamentally look at as a turnaround story here at Flotek. The company had began to lose revenue and profitability in the late teens due to some strategic transitional issues in the way chemistry took place here in oilfield services. And my initial discussion with our Board at correcting that trajectory at the end of 2020 as we came in 2021, was that we laid out a plan to build Flotek into an innovative chemistry and technology company that was going to be propelled into the future by our innovative approach to real-time data measurements of our chemistry. We wanted to create a convergence of these innovative solutions to not only work inside of the energy infrastructure sector, but also broaden the horizon in the company as we looked at a 3-, 5- and 10-year overlay. And in doing so, we laid down the foundation of creating a plan to prepare our fundamental and innovative chemistry technology segments, which forged the way for improved ROI from oil and gas reservoirs and improved performance and combining that with a real-time data analytics, particularly around our proprietary near infrared and Raman technologies that allow us to look at chemistry in a way that's never been seen in terms of what we look at in oil and gas, particularly in energy infrastructure, more importantly, how fast we see the measurements, how accurate the measurements are that can actually drive fundamental, I would say, decisions that impact the overall performance of any operation. And in doing so, we laid out a plan around prescriptive chemistry management in 2021. I would say, our initial market share going into 2021, was about 1% of the chemistries moving to North American land. As we exit or move into Q3 of 2025, we now represent almost 20% of the chemistries utilized for North American completions. But most importantly, and what's really exciting is the growth of our Data Analytics segment, where we've continued to see not only a business transform from an acquisition we made of JP3 Measurement in 2020, which was, I would say, 100% capital sales. They were just selling instrumentation. Since 2021, we've been able to transition that business to where 70% of it or DaaS or recurring revenue service models and continuing to grow. And we're going to more than likely when we see the end of 2025, we will double -- more than double our data analytics revenue from 2024, which was $8.5 million. We'll come in at plus $20 million in revenue from the data analytics segment. Most importantly, we've now moved those measurement technologies into the upstream where you look at the growing power generation segment where we condition gas to run generators for data centers and power for peak power support where you're going to see massive growth here in North America, electricity needs and also the global demand overall. What we're looking at digital valuation on how you actually monetize the measurements of oil and gas improve valuation for reservoirs and their background production over the next 2 decades. And then also, we're looking on EPA regulatory bodies. And finally, when we look at in terms of a long-term play, you're starting to see in real time, Flotek transition and make an industrialized pivot to where we're no longer going to be held to the cyclical nature of the oil and gas operations for rig counts or frac fleet numbers. We're going to move into the downstream OpEx-driven components. We're also looking at adjacent markets for, I would say, other industrial chemical applications, water treatment, advanced analytics for chemical plants and what we're doing in the agricultural landscape. So in the long term, this strategy that we've laid out, has helped us turn the company EBITDA positive in 2023, where we generated about $1.5 million adjusted EBITDA. 2024, we saw that grow to $20.3 million of adjusted EBITDA. And in our current guidance, we have a range between $36 million to $39 million of adjusted EBITDA. And so there's a great trajectory of growth. The big component of that is going to be delivered by our Data Analytics segment as that helps us make this massive transition. And resultantly, we've seen significant improvements in our share price over the last 18 months. I'd say we're up almost 230%, and so that value creation of the strategy has now transitioned to our ability to deliver value for our shareholders. And when you lay out things, I would say, in the long term, we're in the first inning of a 9-inning baseball game for what Flotek is going to be. We've seen our addressable market in 2021 of about $2.6 billion expand to almost $20 billion where we sit currently in Q3 of 2025. So we believe that Flotek represents a very strong and strategic investment opportunity for the markets today, as we continue to execute on our strategy, improve profitability in every metric for the company and enter into what we consider to be a long-term play leveraged on real-time data, and that's extremely exciting for us. And that's kind of the rapid, I would say, 30,000-foot overview when you look at the improvements in adjusted EBITDA, revenue growth. We're early into our data analytics recurring revenue base where we're starting to record backlog. We've actually secured almost $180 million in recurring revenue backlog, which gives continuity for growth and financial performance. And most importantly, we're now delivering value to our shareholders as we create -- really complete this turnaround and start to move the company forward when we look at on a high-level overview.

Perfect. Thanks, Ryan. Appreciate that. So as a reminder, we can hop into the Q&A here with that -- with those comments in mind. So you can either submit that through the Q&A portal on Zoom or again, e-mail me directly. Maybe just to kick it off, Ryan, I think as you kind of alluded to kind of shifting the business away from being tied to rig counts or frac fleets. I think most people just kind of say this is an oilfield service company that's going to kind of ebb and flow with cycles. Is there a way to quantify how that business has shifted in terms of how much of the business today is not necessarily tied to those metrics? And what could that be over the next couple of years in terms of that shift?

Yes. So that's a phenomenal question in terms of how we're starting to convey that message to the public markets in terms of -- if you look at 2021, I would say that 99% of our revenue and a little bit of profitabilities that we were incurring as a company, would have all been related to frac, I would say, cyclical nature of business, right? As we exited 2024, we saw that transition to where the Data as a Service really started to make a transition to where 10% to 15% of the revenue would have been coming from recurring revenue type service models that we had either in chemistry and/or data analytics. And where we sit and as we exited Q2, more than 26% of our gross profit actually comes from recurring revenue data service. So you've seen it grow from 0% to 26% in just the profitability side in those prior years. And along the way, we've been able to secure a $2 billion recurring revenue type chemistry contract as well as secure another $160 million data analytics contract just to name a couple, that's helped to stabilize the business, and I would say, insulate us from the cyclical nature of a lot of the commodity-driven focus. And I expect to see that continue to improve as we exit Q3. But more importantly, as you look out to the horizon of 2026, we expect adjusted EBITDA to grow from what our guidance. We haven't given that guidance yet, but we do expect it to grow year-over-year. We also expect that 60% roughly or anticipate around 60% of that adjusted EBITDA to come from data analytics, which would be a massive shift from where we said in 2021.

Great. Thanks, Ryan. I guess just to build on that last point, how much -- for that 60% metric to kind of ring through, how much success or momentum needs to continue from some of those data analytics growth vectors from power, custody transfer, flare and some of these other markets you guys have talked about?

Yes. I mean it's -- I would say a lot of it is already shown in our recurring revenue backlog. So you look at in 2023 -- I'm sorry, 2024, we did about $8.5 million in the Data Analytics segment alone. Our current -- just one of our single PWRtek contracts we delivered just under $30 million alone in 2026, just that single PWRtek contract where we're now moving into multiple contracts. So I believe that when you look at it just from that basis, you'll start to see a pretty strong directional indicator that we're going to be able to achieve that kind of growth in our adjusted EBITDA, particularly being a percentage of the data analytics revenue. And so we're continuing to see the growth of our digital valuation or custody transfer pieces. We've got almost 30 units out. And up until Q2 of 2025, we had never had one single dollar recorded in revenue. And so now we've got 30 units out on a recurring basis. We're having more and more Verax and gas treatment skids going out in PWRtek. And our entire flare monitoring fleet is active right now testing flares in the U.S. So we're pretty confident in being able to hit those growth metrics. And hopefully, we typically take a conservative approach because as part of a turnaround business as a recurring profitability, we like to set some strong guidance out and hit those metrics and deliver continuity to our shareholders and our stakeholders within the company.

Perfect. Thanks, Ryan. So one of the questions we had on the contractual side of the business, can you just touch on, I guess, kind of typical contract structure, the duration of these contracts and how that might vary by application?

Yes, for sure. Are you talking about specifically the data or chemistry versus data?

Let's talk more on the data side than [indiscernible] PWRtek. Yes.

Yes. So it's interesting because traditionally speaking, when we look at the data business as a whole, we break it into downstream, midstream and upstream. When you look at the -- I would say, the downstream and midstream section is kind of a blend between recurring revenue services and still what I would consider to be capital sales. When you look at a big installation like distillation plants or crackers or different components like that on the refinery side, most of those are capital sales that come with a maintenance and services software contract. So we still do some of those. As you move further into the midstream, we look at TransMix, the Vapor Pressure Monitoring, et cetera, those go into a hybrid between an upfront capital purchase and a recurring revenue model. As you transition fully to the upstream, where we have our PWRtek business, our digital valuation and flare monitoring, those are over 95% recurring revenue model. And it's interesting because as we're seeing the evolution of each one of those businesses in the upstream, we're starting to see it play out as the use cases kind of come above. And I'll give you an example on PWRtek. Traditionally, on power services, when we look at conditioning fuel, we essentially serve as a smart or modified carburetor to feed dual fuel engines, turbines, different components. We break that segment up into 4 or 5 major categories where you're looking at rig operations, which should include frac or rig power, we look at peak power units that helps provide power support to the grid during high points of summer or during storms, et cetera. We look at data center power and then we look at industrial applications. And it's unique, I would say all of the contracts that go into rig power or oilfield services are all recurring revenue anywhere from 6 months to 2-year type contracts, right, on a fixed basis. As we move over into the data center side, those tend to go 5 to 10 years that we see in a hybrid, there's a capital purchase upfront and then it comes with recurring revenue rental services for some additional measurements that go along the way. Peak Power does similar to oilfield services because those tend to be mobile generation, and they are mostly recurring revenue models. On the industrial side, those are similar to data center because they're fixed installation. And so those come with some capital purchase upfront for the fiber, et cetera, for the installs and then they have a recurring revenue model. They typically go anywhere from 5 to 10 years. So as you can imagine, the oilfield services and peaker plants tend to move around and more mobile. And so they have a little bit more, I would say, transactional in nature where the bigger installations have that 5- and 10-year revenue layout.

Got it. That's really helpful, Ryan. And I guess that's kind of interesting commentary. I don't know if you guys saw there's a Wall Street Journal article out in the last week or so about some of these mobile power fleets in data centers, which I think is one of the markets you guys have talked about. And the article seemed to kind of hint that this is a kind of shorter-term gold brush, but yet you're talking about 5- to 10-year contracts. So it would be interesting for you to maybe clarify how you guys can penetrate that market in a more durable way.

Yes. I think what they're starting to see, and it's something we've been studying and the reason why we talk about we want a balanced approach to our power services is that a lot of the larger, I would say, data centers that get above 1 gigawatt are now looking at -- they run a lot of the times on what we call or city gas quality. In other words, it has very little fluctuation in the quality or type or composition of it. And so what they're concerned about is consistency and continuity. And so most of the other, I would call, support power. So they're seeing massive swings in needs for power. They happen very rapidly. So we'll have these peak power support comes on. What Flotek does in that is we help monitor and distribute the gas. There's not a whole lot of condition that goes on mainline from a refinery. So we help monitor and distribute power equally, so that they can handle the big swings and fluctuation for those well-thought-out plants. For those that move further into remote locations that take straight from the wellhead gas, that becomes more of an issue of where we have our skids that actually condition, either one, removing water or removing different components of NGLs or doing conditioning with CNG to keep the BTU quality flat. And so I think that these guys look out for how they support because they have this quality where they need the five 9s as they call it, the 99.999% of the time uptime. If they have anything lower than that, the centers can tend to overheat and they have some other electrical issues. And so you're going to see a unique, I would say, transition there to where it's very fixed installation, high-quality gas, et cetera, for some of these mega centers. But there are those that are out, I would say, in West Texas, South Texas, some of the ones that move in Mexico that use straight from the wellhead. And our value proposition is extremely strong in those have been conditioned the gas. To me, the interesting market for us is still, there are a lot of remote areas for grid support where they move power to help handle the swings depending on the weather where it's cold during some areas or hot during other ones. And we move with these megawatt installations to provide off the wellhead grid support. And that's another exciting market for us, I think, as well.

Got it. Okay. That's really helpful. On the custody transfer side, we have a question. If you could kind of touch on the growth trajectory expectations there. And maybe for those newer, Ryan, if you want to spend a minute just kind of giving an overview of what specifically that application entails for you guys?

Yes. So we look at custody transfer as part of our digital valuation component in that when you look at our technology, whether it's a Verax unit or XSPCT unit, these are near infrared proprietary devices that plug directly into hydrocarbon flow lines, whether they're direct wellhead, a gathering section of high volume for rich natural gas or liquid hydrocarbons, et cetera. And what we do is we take compositional analysis of this flow, BTU values, net heating values, et cetera, in real time, measurements taken anywhere from 5 to 8 seconds, which provides constant flow rate monitoring. And the reason why this is important because most of the value of reservoirs, hydrocarbons, inventory, et cetera, are taken on composite manual sampling that only takes place like once every 6 months at a certain time of the day. And so as you can imagine, if something is flowing in real time over every single day, 24 hours a day, there's potential compositional changes, fluctuations in quality, et cetera, that compositional testing doesn't catch. And we see this all the time where we see as much as 25% changes in BTU values during a single day. More importantly, the manual sampling itself, depending on what ASTM or standardization that they're following, often introduces error into the sample. It doesn't always catch the natural gas liquids that could come along in rich gas and they bring it to running on gas chromatography. So it's not that we're saying that our instrumentation is more accurate than gas chromatography. What we're saying is there's a methodology issue in terms of the way they look at doing the measurements. And obviously, real-time data points are more accurate. And if you can look at the slide that we have up on the screen now, those stars represent a composite sample testing where they test it once every 2, 4, 5 days on a 60-day window, whereas that curve you see in the background is the real-time monitoring measurements taken every 8 seconds. And what we are typically seeing is that most of the time, there's a negative 3% to 5% bias by manual sampling in GEC versus what the real-time data actually says. And as you can imagine, these are huge swings in overall valuation of production whenever you have that kind of thing. We look at the volume in the time period. Some of these sites we're seeing up to $4 million annually per measurement point. And so we believe that we'll be -- we're one of the only -- or the only optical unit that can measure in real time that gives us ASTM standardization levels for doing digital valuation. We've gone out and worked on this for over 1.5 years, proving these points out with customers, and that's where you saw us bring this. We started talking about these pilot programs last year, and they started to all convert over to revenue creation here in Q2. And we believe that now they're being considered a standard on the new wells that are being built, we're going to see prolific growth in the future with these. There was initial concern that doing them on older production wells could potentially open a liability of a resource owner or a production company that felt they have been underpaid. Our E&P guys have been underpaid. But -- we're actually, in most cases for that, we're typically brought in to resolve an issue or a conflict over what they think the value should be. And that's worked out pretty well for us because we don't want to be the -- we just want to be the true teller on what the data says. We look at it being a data company. But when you look at the potential impact, there's over 250,000 of these sites currently in the United States that could utilize real-time measurements, not even counting all the interchanges and injunction points where they collect all these fuels. So we think this is a huge opportunity for Flotek in the future. And when you look at our instrumentation, these units go out, they have no moving parts. They have on-site calibration that we call a proprietary or patented validation cell. So there's a calibration gas that shot through the laser, goes through at the same time that it's monitoring the flow so that we ensure the unit stays in calibration throughout its lifetime. We see all these on a real-time monitoring dashboard through our VIPER technology and other proprietary software that we have, which we think is, again, going to give even further growth from a software aspect for Flotek in the future. But there's no doubt, as you can tell my excitement around the digital valuation piece, I think this is going to be an extremely valuable sector for Flotek in the coming years.

Great. Thanks, Ryan. What -- is there a way to kind of quantify like how big could this market be for you guys? I mean is this something where every new well in the country should have one of these or only certain like centralized gathering facilities? Like what's -- how do we wrap our head around this?

So most of the companies that we're working with, they have different value statements for what we do with instrumentation. What started out for us was at these larger junction sites where you have a solid amount of flow, and we really started to see the impact there. Most of these -- on the 30-day trials, we're creating anywhere from $750 million to $1.2 million of initial value in the first month, which is huge for the operators. These things are sensitive enough that if you've got multiple wells flowing to a location as soon as you turn another well on, we can see it instantaneously. We can see when a junction facility doesn't do a maintenance over the weekend and they have changes in water content. I mean we give them all that data in real time. And then it expanded to what we're seeing at the wellhead where operators are starting to understand that we could impact the overall inventory of an entire set of wells or reservoirs that they have. And so I think depending on what the operators' intentions are with their future, we see this, like I said earlier, we would base these things on revenues of anywhere from $5 to $8,000 a month per unit, we could put in -- there's opportunities to have hundreds of thousands of these deployed. Now that would be assuming we took all the market. But we do see over 250,000 measurement sites currently in the U.S., and that grows every year as they drill new wells.

Got it. That's really helpful. Is it fair to think -- I guess it's kind of a 2-part question. How do you guys envision a typical contract for custody transfer being structured? But from a practical standpoint, given that these are kind of built in line, no moving parts, all that, I mean this is like I don't know life of the well is a fair kind of duration of contract, but like why wouldn't these just continue to have near 100% renewal rates over time?

Yes. I mean we typically push anywhere from 24- to 36-month type contracts and have like an evergreen renewal, right? As long as they want the measurement service, the device stays at the wellhead. In my opinion, I feel that -- I mean, this thing proves out the life, even if an E&P operator has production for the first 24 months and then they sell it to non-op. The non-op guys want to ensure they're getting paid for what's being produced. So you're seeing a long lifetime of these potential assets for us on the recurring revenue models. What's interesting though is it does take a little bit longer sales cycle as you introduce new operators. They want to ensure because you got to realize you've got 75 years, 100 years plus of using gas chromatography as the standard for the valuation component. And so there's a lot of people, they just like to see the real-time valuation, prove it out against an ASTM, do a pilot phase and then do a transition. But -- for the ones, I would say, in the history of our Data Analytics business, these are the ones that are reaching senior executive enterprise-level bias to where we're seeing double-digit units going out at one time for multiple installations that we select out over X number per week or per month. And that's really what we want. And most importantly, these contracts drive that plus 80% gross margin on a basis. And so that's what's really exciting for us.

Got it. Sorry, I was just taking not there's a lot of good stuff in there. On the -- we've got a question on the data center market. Can you, I guess, clarify, is that a market that Flotek is currently generating any revenue on? And what is kind of the, I guess, progression or commercialization pathway there?

So we're definitely -- what I can say on that is without getting anything ahead of the skis here, we are pursuing those opportunities. I think that we're in a good position for that. We haven't disclosed any on what that particular specific revenue to that area is just yet. But we're definitely, I think, making a lot of headway in those areas, not only for fixed large installations with city gas, but even further support in these -- I consider to be more remote locations that use from the wellhead gas. And so it's pretty interesting. I mean, we're working with a lot of major players in that. And we're hoping to provide a pretty detailed update to that in our -- at the end of Q3 in our earnings call. And so I'll save a little bit of that before we're going to talk about earnings.

Okay. Perfect. And can you touch on -- or I think, Ryan, in the prepared remarks, you talked on just all the data that you guys get from, I guess, both the data analytics and your history in the chemistry side. How are you guys able to leverage that data into any particular insights or strategies and penetrate the customer base? And does that provide any kind of durable competitive advantage in any of your end markets?

Yes. It's -- honestly, Jeff, I think it's interesting because when I laid these strategies out back in 2021, a lot of people that we talked to because the company was still in such financial strain, most people were just caught up with how much money we were [ losing and ] coming in those years and weren't fully grasping the impact that real-time data analytics is going to have on our business. And whether we're looking at the growth of the pure data segment or the impact that our chemistry business has. But what we did in terms of building out prescriptive chemistry management in combination with data analytics is that we combined -- on the chemistry side, we've completed over 20,000 wells globally in the U.S. And we have the database of every single chemistry type and what the production output has been from those wells, right? And we leveraged that data in combination with our chemometric modeling for our Data Analytics segment with the over 70,000 crude samples that we have already modeled globally from over 1,500 measurement points. And what that's allowed us to do is fundamentally, when we go to an operator, we do a joint sale approach is that, hey, we receive anywhere from 5 to 8, what I call physical chemical properties of where they want to drill and complete a well. We look at target depth, temperatures, pressures, the XRD analysis of what the reservoir looks like in terms of composition, what that crude looks like from those areas, what the connate water be, et cetera. We plug that into a chemometric model that pulls from these different databases in real time, which we have been building and those things update every week. They update in the backlog. And so for that, where we used to spend anywhere from $11 million to $12 million a year on technical services and R&D, we're doing it for less than $1.2 million a year now. And we generate solutions faster modifications to the chemistry. We've combined that to real-time microfluidic modeling, that's allowed us to advance our understanding of reservoirs and deliver more impactful chemistry. What's the best part is that we work with the operators to say, hey, you can leave an XSPCT unit or near infrared monitoring devices at the wellhead. And when you bring this production on, you can actually see the impact of the chemistry. So we're monitoring what chemicals go downhole and their efficacy in real time. We're also monitoring the impact on the production side of the well as a total solution. And this drives massive understanding and removes the -- I would say, it used to be the veil of what does the chemistry do, how does it work? We're providing a level of transparency and real-time data that's never been achieved before in the U.S. frac space and more importantly, how to handle the quality of production on the back end. We've advanced what we're doing at the well to where now, we're actually monitoring the water quality, et cetera. And we have built a proprietary chat system in combination with our biggest customer, ProFrac on the pump side to where we're not having to bring 8 to 10 massive tanks out there of this diluted chemistry to pump down. We're bringing out 5 totes on a single trailer, this [ chem ] unit. And based on the water quality in real time, we changed the concentrates utilizing the water on location as they pump it down the hole. So that's faster, quicker, less carbon footprint, operational efficiency and in terms of accuracy for the chemistry goes downhole that's never been achieved before at frac locations. And so that's how the real-time data drives reservoir performance improvement, operational efficiency, cost, carbon footprint reductions. And we're hoping to get to that holy grail of making this Tier 2 acreage receive the economic impacts of Tier 1. And that's going to be a big thing, I think, for the future. But what that also does for us from a chemical landscape is, look, there's no doubt, we have 170 patents in the chemistry space. We're going to continue to look for novel innovative solutions there, but the ability to monitor the data and make real-time decisions on operational efficiency helps insulate the commoditization of the chemical business for us. And as long as we have our service revenue components in there, that drives the growth of the business, and it's highly profitable in comparison to just selling commoditized chemistry. And so that's been the whole shift of what we look at. And that's just on the chemistry side. And then you move over to the data components to where we're out monitoring and we find issues on flow, even in industrial applications, we can identify where they've got acidic conditions with H2S or other products. And we actually sell chemistry to treat the things that we find by the data business. So they've now truly had a convergence and the data business is driving what we do better on the chemistry side.

Got it. That's super cool stuff, Ryan. What -- there's a lot of headlines now about inventory exhaustion, like you mentioned, operators being forced to kind of Tier 2 acreage or maybe deeper gassier zones that are not as preferable as some of their Tier 1 rock. How much is that a tailwind for your business given that operators seem to be needing to get a little more creative to earn the returns that they're accustomed to seeing?

Yes. I would say that this fits, honestly, where we are now fits in the wheelhouse of what this business was designed to do. And that is to provide transparency, efficiency and innovative technologies for what we do. If you were to go back and look since 2021, public available data and anywhere where our PCM service, combined with our data analytics modeling has been applied, most operators are getting on average 26.3% better production out of target zones. That's on average across all basins in the U.S. There are some where we're getting over 35% better production in comparison. And so that alone should drive better adoption for what we do on the chemical and data side. And then also when you combine that with being able to look at things that -- for us, when we monitor this data, we can detect paraffin builds, we can detect when there's additional water influxes, anything that can -- needs to be modified to improve flow performance. We see these things in real time. We don't have to wait for 6 months until there's some issue downstream from there to do it. And all these things just overall make better decisions for the E&P operators and I would say, the OpEx component of the energy infrastructure. And this not only just plays in what we do on the oil and gas side. But you look at the fact that on most of these wells, if we stop drilling to date and we kept doing production, we produce around 10 barrels of water per 1 barrel of oil in the Permian Basin. And we're now moving into the understanding and measurements of these waters and how we treat those for additional what we call beneficial reuse, whether you put them back into agriculture or you put them in other industries or it permits you having to do the additional disposal downhole, which can cause other issues with the subterranean environment, particularly around -- there's always talks about injection sites and seismic issues. This helps minimize those impacts as well. And so there's a huge proliferation at what we're going to do. I think it's going to continue to drive efficiency and improvements on the environmental aspect, the efficiency aspect and the overall return on the investment inside this energy space. And I think Flotek is going to be spearheading that, those improvements for time to come.

Great. Shifting back to custody transfer, one of the questions we got was constraints that an E&P may have in adopting the custody transfer solution on all or most of their well sites. What are -- is there -- are there costs or labor or kind of ROI hurdles? Or what's the main bottleneck there?

Traditionally speaking, it's not a cost or an ROI issue. I think it's a fundamental understanding and an inertial dogma shift of how the measurements have been made. I've used the issue of -- for those that are race car fans, whether you're Formula 1 or NASCAR, you go to a race and you've been going to us for a long time and you went to Talladega and you sit in the stage, you used to see in 20 cars that are 1,000 horsepower and the noise and the race, et cetera, and then somebody shows up with electric car that's faster, more powerful, but doesn't make any noise. Everybody is kind of like, man, I don't -- I got to get used to that. And traditionally, as we come in and we look at whether we're looking at TransMix or we're looking at the Vapor Pressure Monitoring, Digital Valuation, they're like -- they almost have like what do we do with all the data? Like we have so much of it, and it's telling us so many different things that we have to work through and pull out what do you need to focus on and our teams help them do that and just get used to having that thing at your fingertips. And oftentimes, we find inefficiencies that need to be fixed along how they were handling stuff on during their value chain. And so I think it's just a growth pattern. Anytime you bring something disruptive to the market, these things happen on the front end. And we're helping the operators work through those. But I don't think it's in terms of them understanding the value or the ROIs. I think it's just an adoption period getting used to saying, hey, I mean, because you got to realize there are a lot of dollars at stake here in terms of what this impact is. They want to ensure that everything meets ASTM standardizations, APIs, et cetera, to where there's no additional liabilities. And we've crossed those hurdles. And so now it's just a proliferation of business and introduction and growth.

Got it. Great. I've got a question on the M&A side of things. Given that you guys did the PWRtek deal a few months back, are there other opportunities in the M&A pipeline you guys are evaluating? And what kind of, I guess, end markets or types of acquisitions might you guys be considering?

Yes. We're definitely -- I mean, since I've been here, we're consistently always looking for potential opportunities for M&A. I do believe that as now you're starting to see the -- how our strategy is executing. I think our opportunities to execute M&A going forward is improving every day. I think this market lends itself for potential for us to do that. I would say this, though, is that we're more focused on M&A opportunities that move away from the impact of the cycle, which means that we want them to be steady and not cause any volatility to the growth of the business. And so we're also looking for things that have a data component to them. We don't look to do any M&A activity that would allow us to get a, what I would call commodity chemical business, like we're not interested in that. We prefer something that creates value through data and chemistry or data. And we have a few things that we look for in terms of, one, does it fit our safety and operational culture? Does it fit our technology profile? Do we feel that the activity would be accretive to our stakeholders as a company in terms of share price immediately accretive on the financials. And then also is in alignment with our long-term strategy for improving cash flow and long-term stability of the company. And those are some of the things that we're weighing out there. But there's no doubt that from sitting in my role from a strategic landscape, we're constantly looking for the right opportunities for Flotek. And we've been very protective of our balance sheet. I think as we've been -- I would consider to be in the fragile transition of a company recovering, growing and now setting a strong profitability strategic pathway. And we're going to continue to be, I would say, protective of our balance sheet. I think that our vantage point on leverage or anything we do for M&A could potentially change as you're pure volatile field services, you don't want to to any type of leverage. Our ability to withstand that type of leverage, should we do something gets better as a bigger piece of it is built on recurring revenue, high profitability, et cetera, right? So those are the types of things just to give you some insight on where our head space is and looking for these opportunities, but we are engaged in looking at things that we can help inorganically propel Flotek to plus billion market cap company.

Awesome. Sounds good. Just for the audience out there, if you guys have a couple more questions, we'll try to wrap it up here in the next handful of minutes. We've got a question on the ProFrac side of the business, Ryan. Majority shareholder, largest customer. I know you can't speak explicitly for them, but for those newer to the story, how would you kind of characterize kind of their longer-term engagement ambition? Do they want to remain majority shareholder as best you can tell? Or any thoughts there?

I'll look, to date, I'll speak a little bit on our partnership with those guys. Look, they've been a fantastic partner for Flotek. I mean you look at what they've been able to help us leverage and grow and create an economy of scale in our chemistry business as we brought those guys on in 2022. They've been great for an aspect of there. We've now coordinated a lot of strategic approaches about how we go with customer base on sales pursuits. And that business is firing on all cylinders, I'd say, on the chemistry side, and it's working well. They've been a proving ground for helping us prove use cases for our Data Analytics segment. When you look at the assets we bought for PWRtek, they help in the field deployment, testing, proving Verax units to condition field gas, they're on the forefront of that. When we look at the advanced Chem unit, they've been at the forefront of letting us try these things out, helping us build because that's their wheelhouse of building a big piece of equipment and advanced design, we provide a lot of logic and drive for it. So there's -- they've been phenomenal helping us do that. And they're big supporters of what we do operationally. and provide good, I would say, insight into what the markets are doing. And I think the goal there has always been Flotek to grow, and they've been in support of that. I can't really speak, honestly, Jeff, on the long-term positioning. I do know that I would -- in my conversations with some of the senior leadership there and some highest level executives is that they don't mind their size in Flotek coming down as we grow, whether that's through some M&A type activities or whichever. They're happy with the value that's been created in their investment so far. But they've been a great partner for us. so far. And I think it will continue to work that way. But I can't 100% give any guidance in terms of their position. But I do think that the long-term goal for them was to eventually -- they made a strong investment in us. They've seen us grow. They've helped us proliferate. And I think in time that, that ownership level will potentially come down. But we'll see how the growth of the company looks from there. But that's just my general feel. But again, I can't 100% speak on their behalf. But they don't have any hold on being of a certain size, right? I just think it comes with the natural growth and evolution of the company.

Understood. Of course. Okay. I think we'll wrap up with this last one unless some other last minute ones come in. But -- last question. With the data points that you guys have on the production side and real-time data and everything, is that an opportunity to organically enter the production chemistry space? Or is that a market just at a high level you're interested in?

Well, if you look back at Flotek's history, believe it or not, some of the companies that were consolidated to build Flotek, where you look at [ Center ] Chemicals, CESI Chemicals, et cetera, particularly our production plant in Oklahoma was built off production chemistry. So we have an entire arsenal of production chemistries. I shut that down in 2019, any pursuits on that until we got our core completion chemistry prepared and repaired and growing and proliferate. There is no doubt that the production chemistry business is a $5.5 billion, $6 billion a year segment. Margins is better than our completion side is. And it is not cyclical. It works OpEx spend. So if we stop drilling wells to date, we moved into that area where you look at production chemistry or the produced water side of it, either one, which technically need to be able to handle both. We -- it would be good for the company. We have a unique and differentiated way to enter that market and that we can make real-time measurements of composition of quality and create chemical treatments based on analytics in real time. And so I think that if you look at our Investor Day, which I encourage anyone who has seen to go to our website and check it out, we have a slide in there on the potentials for us in production chemistry. So I do believe that it's a unique opportunity for us. However, please keep in mind that our differentiating factor for that is we will be applying a real-time data service to drive the chemical treatment. And so it's a synergy between the 2 businesses. So the chemical business will come with a data revenue side to it. And that's what we figured. That's where the value creation is for us is that the actual measurements in real time from the Verax or XSPCT unit will drive the chemical treatment. And so that would be our unique approach to potentially entering that market. And I do suspect you will start to see that from us. There's capabilities for us to do that organically or inorganically. I think that there's the opportunity to do it inorganically gives much more rapid adoption and growth in the sector versus trying to grow it organically and spend there. I think there's -- I personally think there's potentially higher ROI in doing an inorganic approach versus trying to do it slow organically.

Understood. So Ryan, is it fair to say in a world where Flotek is in the production chemistry business, there's chemistry and data analytics revenue opportunities within that...

100%. And what I would say is we would expect that data revenue would be almost the first component in the chemical sales follow based on the measurements that we do.

Got it. Awesome. Okay. Well, I think we'll leave it there, give people some time to refresh for the next 12 top of the hour here. But Ryan team, I appreciate the time as always, and thanks, everyone, for joining. Ryan, if you have any closing remarks, I'll put it in your hands. Otherwise, we'll wrap up. Wish everyone a good week.

No. Look, again, I appreciate it. I think that, again, as I'd like to reiterate, I appreciate everyone's time this morning. I think Flotek offers a very unique investment opportunity for the market as we execute on this industrialized pivot and transition to a real-time and innovative data and chemical company. We expect this transition to look at the entire energy infrastructure, which we've seen now create a $20-plus billion addressable market for us. We will transition to other, I would say, connected adjacent markets in agricultural and other industrial applications. And this is the first inning of 9 for us. We've got a lot of growth coming. and we look to continue to deliver exciting results in the coming quarters, and thanks, everybody, for tuning in.

All right. Thanks, everyone. Have a great week.

Thank you.