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Tuesday, October 12, 2010

An interesting energy play -- GasFrac Energy Services

GasFrac Energy Services Inc. of Canada is an interesting energy play. GasFrac has a proprietary system for completing natural gas and oil wells using Liquified Petroleum Gas known as LPG. Right now, the predominant method for completing gas wells in formations like the Marcellus Shale or the other big gas plays is through fracturing by means of liquids that are mostly water. In fact, Range Resources recently disclosed the composition of the liquid that it uses to fracture or "frac" the shale formations, and it was over 99.5% water. GasFrac uses no water in the process at all. This is a critical difference.

First, when wells are completed by using water, about half of the liquid stays in the ground and eventually blocks the extraction of the gas. The LPG used by GasFrac actually converts back to gas in the ground and does not block extraction at all. As a result, a well frac using LPG results in increased production over a well frac using the water based method. Obviouisly, this makes the LPG based completion method more profitable to use.

Second, there is now a great deal of complaining by environmentalists about using water to frac wells. New York State has essentially banned drilling of wells that will be completed with the water based system. this takes the northern end of the Marcellus and places it out of bounds for development. The complaints against the water based system are unproven, but they boil down to two things: 1)the water injected into the wells will mix with the ground water and contaminate it, and 2) the quantity of water used will deplete area resources. Using LPG will solve both problems. As the LPG converts back to gas, it just joins the other gas in the ground; the ground water near the surface is unaffected. Also, since no water is used, local water resources will not be overtaxed.

GasFrac has applied for US, Canadian and other patents for its LPG process. If this patent is granted, it should be very valuable. Even without the patent, however, GasFrac has been growing quickly and is EBITDA positive. For the six months ending June 30, 2010, revenue was up well over 100% from the prior year and reached just under $30 million. net profits were 2 cents per share.

The reason to buy GasFrac is not for its current earnings, however. Rather, the impetus comes from the possibility that this company will move to control a major portion of the completion work in many fields across North America and elsewhere. Nearly all of its completion work to date has been in Alberta, but it is starting to do work in Pennsylvania on the Marcellus. That field in Pennsylvania is growing so rapidly that there could be an enormous quantity of work for GasFrac there.

The stock is selling today at $7.10 (Canadian). I recently opened a position on it and may add more on dips.

Anyone interested in investing in the stock should check out the company's web site. It can be reached by clicking on the title to this post. Obviously, this is a more speculative investment than most. Nevertheless, I think that the return here could be great.

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