Yesterday and today brought the second quarter earnings report and conference call for Gasfrac Energy Systems (symbol GFS:CA or GSFVF on the pink sheets). The company faced some short term difficulties as a result of unusual weather in Canada, but the long term outlook for Gasfrac remains highly positive.
Gasfrac does completion of oil and gas wells using liquid propane gas rather than the standard hydrofacking process. As a result, it answers major environmental questions which get raised with hydrofracking. It also avoids the heavy water usage of hydrofracking which is a growing problem in Texas due to the drought in that region. The use of liquid propane also results in substantially better production results than hydrofracking, so the LPG process gives a better return to the E&P company. GasFrac holds (or has applied for) patents which protect its process using LPG for well completion. The sum of all of this is that in the long term, Gasfrac should develop into a very large and profitable entity.
In the short term, however, GasFrac has suffered due to a prolonged spring "breakup" period in Western Canada. Each year, when the land in Alberta and the neighboring provinces thaw, there is the breakup period when the filds are too muddy to allow the heavy equipment used by GasFrac to traverse them. This year, the thaw was accompanied by rain and even floods that kept large portions of the area impassable for nearly the entire second quarter. Since about 80% of the capacity of Gasfrac was assigned to Canada during the second quarter, the weather cut out a major portion of the revenues which the company would have earned. revenues beat those of a year ago, but only just slightly. While the company confirmed that they still have a major backlog in the area (so the work was postponed and not lost), this was still a major blow to GasFrac.
One important fact to come out of the conference call is that the bad weather and land conditions in Canada continued into the third quarter. We are now about 40% of the way through the third quarter, but the company reported today that it is only just now getting access to all of the areas where it must go to fulfill its current contracts. Since some portions of the areas were available to Gasfrac earlier, it is hard to model exactly what sort of a hit this current weather problem will inflict on third quarter revenues. It is all but certain, however, that the current estimates from the varous security analysts will be reduced.
On the bright side, the company confirmed that it has a backlog sufficient to keep all of its Canadian equipment working through at least the end of the year provided the weather cooperates. There is also substantial interest in the Texas centered operations, and Gasfrac is developing the labor force and infrastructure needed for a much larger operation in the USA. Four more sets of equipment should be delivered by the end of 2011, and this will be deployed by Gasfrac in the area where demand is greatest.
As I write this, the stock is at 7.96 in Canada and 8.04 in the USA. While this is down about 2% for the day, it is not much of a reaction to the big revenues miss that the company had. The market is looking ahead as it usually does, and GasFrac still has a bright future.
Right now, GasFrac is a compelling buy in my opinion. In 2012, the company ought to have revenues that are in the area of $550 to $600 million. given that revenue for the quarter just completed were close to $15 million, that is an incredible increase. If this comes to pass, and it seems to still be on track, the shareholders ought to be substantially rewarded. anyone buying the stock, however, has to realize that there may soon be downward adjustments for the analyst estimates of revenue for the third quarter as I discussed above.
One might well decide to wait for the downward revenue adjustments before buying. Alternatively, one could buy now. Either way, the rewards should be substantial.
Let me add, however, that before buying you need to carefully review the information available about GasFrac so that you perform your own due dilligence. This remains a stock in a risky business which may carry with it more risk than an investor wants to assume.
Disclosure: Long GasFrac stock.
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