Flotek Industries, a company known for its green chemistry solutions in the oil and gas industry, is quietly building a data analytics powerhouse. While their recent Q1 2024 earnings call highlighted strong profitability and a promising outlook for chemistry sales, a closer look at the transcript reveals a fascinating, potentially explosive trend: "chain of custody measurements." This unassuming phrase, mentioned by CEO Ryan Ezell [FTK Q1 2024 Earnings Call Transcript](https://www.fool.com/earnings/call-transcripts/2024/02/08/flotek-industries-inc-ftk-q4-2023-earnings-call-tr/) , could be the key to unlocking massive revenue growth in Flotek's data analytics segment, driven by their JP3 measurement system.

While JP3 has been primarily used for flare gas monitoring, Flotek is actively expanding its capabilities to address a broader, potentially lucrative market: production allocation and royalty verification.

Currently, the industry relies on composite samples taken every six to nine months to determine oil and gas quality, which dictates royalty payments. This method is flawed as it only provides a snapshot of the production stream at a specific point in time. The result? Inaccuracies and potential disputes over royalty payments.

Flotek's JP3 system offers a radical departure from this outdated method. By providing real-time, continuous measurements of hydrocarbon composition and BTU content, JP3 eliminates the guesswork and ensures accurate royalty calculations, benefiting both operators and mineral owners.

This is where the "chain of custody measurements" come in. Flotek is engaging with trust companies and legal entities responsible for processing royalty payments. These organizations are acutely aware of the limitations of current sampling methods and are actively seeking solutions to ensure accurate and transparent royalty allocation.

Flotek's JP3 system, with its ability to provide real-time data and create a verifiable chain of custody for hydrocarbon production, presents an ideal solution. It's a win-win for all parties involved: operators benefit from improved efficiency and reduced disputes, mineral owners receive accurate royalty payments, and Flotek secures a recurring revenue stream from subscription-based services.

This shift towards a Data-as-a-Service (DaaS) model is transforming Flotek's data analytics segment. In Q1 2023, DaaS represented just 23% of their data analytics revenue. In Q1 2024, this figure has skyrocketed to nearly 50% [FTK Q1 2024 Earnings Call Transcript](https://www.fool.com/earnings/call-transcripts/2024/02/08/flotek-industries-inc-ftk-q4-2023-earnings-call-tr/).

The Potential Impact

The potential impact of chain of custody measurements on JP3's adoption curve is staggering. The upstream market for such services is estimated at over $700 million. Even capturing a small fraction of this market could propel Flotek's data analytics revenue beyond their projected 50% growth target.

Data-as-a-Service (DaaS) Revenue Growth

The chart below illustrates the rapid growth of Flotek's Data-as-a-Service (DaaS) revenue as a percentage of total data analytics revenue.

Flotek's strategic focus on trust companies and legal entities could give them a significant first-mover advantage in this burgeoning market. Their collaboration with regulatory bodies, such as the Texas Railroad Commission, the Bureau of Land Management, and the EPA, further solidifies their position as a trusted partner in ensuring accurate and transparent royalty calculations.

While Flotek's chemistry business remains a strong foundation for growth, the potential of JP3 and chain of custody measurements could be the catalyst for explosive expansion in their data analytics segment.

"Fun Fact: Flotek's commitment to green chemistry extends beyond the oilfield. The company has developed environmentally friendly solutions for various industries, including agriculture, where their technology is being used to enhance crop yields and reduce water consumption."