GasFrac Energy Services – UPDATE

On October 12, I wrote about GasFrac Energy Services, (GFS:CAor GFS.V) a Canadian company that has a proprietary system for fracturing shale formations with Liquid Petroleum Gas instead of the water based system used by others. The LPG system avoids water usage problems and reduces the chance of contamination of the ground water. The system seems like a wonderful solution to the hysteria from the environmentalists over the water based fracturing of the wells in the Marcellus Shale in Pennsylvania and New York. (Anyone interested in reading my earlier write up can reach that pice by clicking on the title to this post.)
At the time of the post I had opened a position in GasFrac with purchases averaging $7.07 (Canadian). In the three weeks since then, the stock has risen nicely, closing yesterday at $8.51 (Canadian), a gain of over 20%. So the question arises: what to do now?
I would hold the stock for the long term, and I intend to do that with the positions in the accounts I manage. GasFrac is not widely followed, so there is not much out there in the way of analysis. This is both a blessing and a curse. It means that the stock can move up unnoticed, but it also means that the could be hidden problems that are missed in the market. One company that does follow the stock is Raymond James. It gives GasFrac its highest buy rating and it also has estimates for future earnings for the company of $0.18 for 2010 and $0.83 for 2011. If these estimates are correct, the stock is selling at just about 10 times next year’s earnings with a growth rate of over 450%. Of course, before anyone gets too excited, it should be remembered that this is one analyst and things could easily change.
I believe, however, that the election results in the USA will also be a benefit to GasFrac. The new Republican governor of Pennsylvania along with the Republican state legislature is unlikely to stop drilling in that state. Pressure from the EPA in Washington may move more drillers to try GasFrac’s services, however. So the market will be there and, although lessened, the pressure to use the new technology will continue. It certainly bodes well for the earnings of the company over the next few years.
In addition, if the congress passes the Natural Gas Act which promotes the use of nat gas for automobiles, we could see a marked rise in the price of that fuel. This too would help enlarge the market for GasFrac’s services.
On the whole, there is simply too much upside in this stock to take short term profits at this point.