FTK - Flotek Industries (FTK) - Partnership provides growth adds an investment partner and improves the financial position

Flotek and ProFrac enter into a three-year agreement to integrate operations. ProFrac, the largest private provider of hydraulic fracturing services, commits to use Flotek chemistry solutions in part of its operations in exchange for $10 million in convertible notes. ProFrac will also participate in a PIPE sale of notes. See Flotek press release for details.The agreement provides growth and stability — view it as a sales agreement. The agreement creates a backlog of $230 million and should more than double sales, while providing stability. We believe the agreement could ultimately be extended and lead to others.The agreement adds an investment partner — view it as a partial merger. ProFrac receives convertible debt representing 10-30% of Flotek's diluted shares and two board seats. Both firms have an incentive to see the other's operations grow. Recall that Flotek previously indicated (12/27) that it had received an unsolicited indication of interest, which we now believe to be ProFrac.The transaction improves Flotek's financial position — view it as an offering. Flotek boosts its cash position by $29 million. Combined with its current cash position of $20 million (as of 9/21), the company is better positioned to manage an annual cash draw down of approximately $20 million. We view the transaction as a positive for Flotek and reiterate our Outperform rating and $2.50 price target. We believe the only investors who could be disappointed with the agreement are ones that thought Flotek might be considering selling the company after it announced it had received an indication of interest. Given weakness in the stock the last two years, we believe an outright sale of the company at a price near the current stock price would be underestimating the long-term value of the company. Read More >>