GasFrac – update 2

I have written twice before about GasFrac Energy Services Inc. (Symbol GFS.V or GFS:CA). In view of recent developments, I remain bullish on the company. First, there was a concern that the low pricesfor natural gas might reduce the drilling activity in that field with the result that GasFrac would suffer. This risk was addressed in a rather convincing fashion by the company’s management in its earnings conference call. Essentially all of the wells that are being completed with the use of GasFrac’s LPG system are now wet, that is, they are either oil wells or gas wells with a heavy component of natural gas liquids. Unlike natural gas, oil prices have remained high and can generate a great deal of new drilling. The same is true of the natural gas liquids. Thus, it seems that GasFrac will not fall victim to the low market price for natural gas.
Second, there was a concern that there has not been any big push for the use of the gasFrac completion system as a method to guarantee that the ground water in the area of the wells remains unpolluted. While it is true that there has not yet been a big push on this issue, it may just be a matter of time before the system breaks through into the “environmental” consciousness. For example, in the portion of the Marcellus that lies under New York State, there has been no drilling allowed due to the concerns of possible ground water contamination. While such fears are grossly overblown in my opinion, they remain a characteristic of the marketplace. Drilling is not banned per se in NY, but each well needs its own approval before it will be allowed to proceed. The effect is to drive the cost way up and make drilling unprofitable. A drilling company that gets approval for the gasFrac system, however, might actually get the jump on everyone else. Imagine having the only approved method for drilling in all of this field that lies under New York. It is only a matter of time before some enterprising company brings this method before the NY authorities and obtains such an approval. Pressure regarding possible pollution from wells completed using the standard water method will not be going away anywhere, and that should provide a continuing boost to gasFrac.
Third, the company will be completing its latest expansion by the beginning of 2011. At that point, it will have the capacity to generate much higher revenues and earnings. Most likely, these additional revenues and earnings will not affect the stock price in a material way until after the earnings for the first calendar quarter of 2011 are released.
In sum, gasFrac remains highly likely to succeed. Two questions about its prospects have been answered in a favorable manner and there is a likely bump to its revenues and earnings coming in the near future as well.

Disclosure: I remain long GasFrac. In addition to a large core position, I have been trading in and out on a short term basis to take advantage of some rather nice gains in the recent past. For example, during the past week, I was in and out for about a 14% gain over 5 days.