SEC opens inquiry into Flotek

US securities regulators have opened an inquiry into services player Flotek Industries to look into allegedly inaccurate claims made in company presentations that appeared to inflate the performance of one of its key business products.

Luke Johnson

Flotek revealed on Tuesday that the US Securities & Exchange Commission (SEC) will inquire into issues raised by a report last year that questions the company's stated efficacy of its complex nano-fluid (CnF) line of surfactants.

The company, which has been named in numerous class action lawsuits over discrepancies in its reporting, has formed a special five-member committee 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".

Flotek has also formed a "special technical committee" that will develop "an independent methodology to analyse the performance" of CnF. The committee has retained Denver-based MHA Petroleum Consultants to assist in "independently validating the effectiveness of CnF". MHA chief executive Tim Hower is the principal investigator.

Investors were apparently not impressed, and sent Flotek's stock down nearly 25% on Tuesday. Shares closed at $5.52. The stock traded in the $18 range just before an Australian blog brought the presentation's discrepancies to light in November.

Bronte Capital pointed out at the time that data presented by Flotek "looks like it was made up or at least systematically rigged".

At issue were three Eagle Ford wells for which Flotek culled public data to show low production performance. The company compared that data to a fourth well where its CnF product had been applied, reportedly leading to increased production.

However, Bronte Capital found that months of production figures had been omitted from the performance of the three wells to make them look worse, while the CnF well's figures were largely unadjusted.

Flotek continues to blame the errors on bad third-party data. It has admitted no wrongdoing.

Analysts had suggested that customers might start turning away from Flotek and CnF. However, the company said on Tuesday that its CnF chemistry business was "resilient" in the fourth quarter of 2015, and volumes of the product "are expected to increase" by more than 20% from a year earlier, even though revenues from the CnF will likely be lower.

"We are pleased with the strength in CnF activity, especially given the sharp decline in overall oilfield activity," said chief executive John Chisholm.

Hear more about the implications of the Flotek case on Upstream's podcast, The Bit.