Shares of Flotek Industries (NYSE:FTK) sank on Tuesday morning and were down by more than 14% at 10:30 a.m. EST after the company provided an early glimpse into its fourth quarter.
Flotek actually gave a rather upbeat update on its current operating activities. The company said it has benefited from a "more constructive market environment," leading it to believe that revenue in its energy chemistry segment will be up 10% to 15% from the third quarter. That said, the company warned that margins deteriorated and should be in the range of 38% to 40%, which represents a decline from last quarter's 40.4% segment gross margin.
Meanwhile, the company said that it sees revenue in its consumer and industrial chemistry (CICT) segment declining by $2.5 million to $3.5 million from the third quarter. This decrease is due to seasonal demand fluctuations, changes in the product offering, and a focus on the company's energy chemistry business.
In discussing market conditions, Flotek CEO John Chisholm said:
While the recent and rapid fluctuation in commodity prices can be hard to decipher, it does appear companies are slowly returning to work, both drilling and completing wells...While business trends at the inflection point of any cycle are typically more volatile than normal, we are pleased with the way the fourth quarter is developing, especially that the 'holiday slowdown' that concerned us does not appear to be nearly as significant as we earlier expected.
The lack of a significant holiday slowdown is noteworthy because it had been a concern of service companies heading into the quarter. For example, on Halliburton's (NYSE:HAL) third-quarter conference call, CEO Dave Lesar pointed to holiday and seasonal weather-related downtimes as the driver behind the company's cautious outlook. Those slowdown worries prompted Halliburton and other oil-field service and equipment companies to issue tepid fourth-quarter guidance. However, this slowdown does not appear to have materialized according to Flotek, which bodes well for service company earnings in the fourth quarter.
While Flotek provided an upbeat view on the quarter, investors instead focused on the negatives, including shrinking energy chemistry margins and weakness in the CICT segment. They clearly have reason to be cautious given that there's still plenty of uncertainty in the market due to the volatility of oil prices.