Flotek’s shares plunge as SEC inquires into their FracMax and CnF products

Falling graph
Source; DollarPhotoClub

The shares of Flotek Industries (NYSE: FTK) – a global developer and distributor of oilfield technologies, including specialty chemicals and down-hole drilling and production equipment – plunged 22.6% last week after disclosing that the U.S. Securities and Exchange Commission had opened an inquiry into the reporting and accuracy of its FracMax software as well as the efficacy of its CnF completion chemistries.

Flotek announced on January 19th the creation of a special committee of independent directors to direct the review of issues related to the company’s FracMax software and the efficacy of CnF, and notice from the SEC of an inquiry related to FracMax software and the efficacy of CnF.

The committee announced that it retained Denver-based MHA Petroleum Consultants as advisors to assist in its charge of independently validating the effectiveness of CnF and assist in the review of the FracMax software and associated database.

MHA is an oil and gas consulting concern that provides a broad range of services, such as corporate planning and reporting, acquisition and disposition, litigation support and identification of optimal plans for field development and depletion. MHA conducts reserve and resource evaluations in the U.S. and internationally, onshore and offshore. MHA has experience in converting complex technical reservoir data, production forecasts, and economic information into reserve and resource valuations. Its integrated analysis incorporates the disciplines of geophysics, geology, petrophysics, production facility engineering, economic valuation and risk assessment. The firm assists companies across the energy spectrum in analyzing production and reserve data, including the evaluation of various drilling, completion and production techniques and strategies.

Tim Hower, MHA’s Chief Executive Officer, is the principal investigator conducting the CnF studies. Mr. Hower has over thirty years of petroleum engineering evaluation experience spanning a broad range of issues including unconventional reservoir assessment and reserves, field development planning, reservoir simulation and enhanced recovery. He holds a BS in petroleum engineering and an MS in petroleum engineering, both from Pennsylvania State University. Mr. Hower is a licensed petroleum engineer in the state of Colorado and Wyoming.

MHA’s work began in November 2015 with the development of a methodology to assess the impact of CnF on production, including attention to data collection focused on ensuring, as much as possible, the accuracy of third party data to be used in the analytical model. MHA has been tasked with reviewing CnF performance in three basins: The Denver-Julesburg Basin of Colorado, the Permian Basin of Texas and the South Texas Basin. It is anticipated that the results will be released on a basin-by-basin basis, beginning with the Denver-Julesburg Basin, once the studies are completed and reviewed.

MHA began its investigation in the Denver-Julesburg Basin because of readily available data for this basin, including both input data as well as well-centric production data. As the company noted in its November 2015 release regarding issues and errors in the FracMax analytical process, production data from Texas is aggregated by lease or unit, making analysis of individual well production data more complex and time-consuming.

As a result of issues raised in an independent report regarding the accuracy of the company’s FracMax software and efficacy of the company’s CnF completion chemistries, Flotek was named as a defendant in a number of shareholder class action and derivative lawsuits. In addition, the company received notice from the U.S. Securities and Exchange Commission that it has opened an inquiry related to similar issues.

The company’s Board of Directors subsequently formed a Special Committee consisting of five independent members of the Board of Directors to conduct an independent review of the issues as well as any other relevant issues that may arise in connection with the shareholder litigation or SEC inquiry.

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