Gasfrac -- what to do now

I have been asked repeatedly in the last few weeks what to do with regard to Gasfrac Energy Services (symbol GFS:CA or GSFVF on the pink sheets). As any reader of this blog knows, I have been recommending purchase of that stock for quite a while, but the trading in the last month has not been encouraging. Please remember, however, that GasFrac is a long term investment, not one that will shoot up for short term profits. The success of the company relies on its being able to execute its growth program over the next year and a half, a result that depends on two things: a continuing demand for liquid propane as a fracking medium and proper management of the company's growth.

The likely demand for Gasfrac's services is extremely high. It is true that we have heard that the initial opening of the office in Texas has met a more difficult environment than expected, but that ought to be only temporary once the results pour in. The simple truth is that the use of LPG is not only much better from an environmental standpoint, but it gives better results. For example, Seaview Energy, Inc. reported in its financial and operating report for the first quarter of 2011 that it had used LPG to complete two wells and gotten initial results that were three times better than similar wells that were completed by hydrofracking. (this report can be reached by clicking on the title to this post.) While wells can differ even if they are deemed "similar", the three times multiple in the results is a compelling deifference that ought encourage many others to used the LPG completion technology. For what it is worth, Seaview itself says in the report that it is preparing to use LPG for other wells. Nothing will convince other E&P companies like the actual results achieved by their competitors.

Management seems also to be handling the expansion of the company well, although there have been some problems encountered. The biggest problem seems to have been one that no one could control, the weather this spring in Canada. As a result, the expected results for the second quarter will likely be worse than the estimates in place at the start of the quarter.

When the second quarter results are released, we may see a drop in the stock price to even a lower level. If that happens, I believe it to be a major buying opportunity. The gross revenues of the company should soar as the quantity of equipment available for use rises by year end to a level that is about five times higher than it was at the start of the year. The earnings for 2012 should well exceed one dollar per share (latest analyst estimate consensus for 2012 is $1.06 Canadian), so the stock is selling for around nine times next year's earnings while growing at a rate of close to 200%.

In summary, now is the time to buy, not sell GasFrac.

Disclosure: I remain long GasFrac with a substantial holding in the stock.