A Note about GasFrac

I have written often about GasFrac Energy Services (symbol GFS:CA or GSFVF on the pink sheets), but I think an update is in order after the recent market slide. At the close on Friday, GasFrac was trading at 7.26 in Canada and $7.29 in the USA. In my opinion, this remains a buying opportunity.

Let’s look at the numbers. The estimates from the various analysts were adjusted after the recent earnings report. Right now, there are six who cover the stock. Their estimates for earnings per share in 2011 range from a profit of 18 cents to a loss of three cents. In other words, their numbers are all over the lot. In my opinion, however, these are the wrong numbers to consider. The weather problems in Candada and the startup delays and expenses in Texas have distorted the earnings for this year in major ways. I prefer to look at the expectations for 2012; that year should have a substantial run with essentially all of the equipment sets that will let us get a better view of the true potential of GasFrac. According to the analysts, the EPS estimates for 2012 run from a low of 84 cents to a high of $1.21. The average is $1.01 per share. Revenue estimates for 2012 run from 386 million to 582 million dollars. Since the Gasfrac management itself says that it should be able to gross 65 million dollars per set per year and the company will have ten sets for the year, you can see that all of the analysts have provided for a substantial discount from full usage. Indeed, the low estimate allows for only about sixty percent of the maximum revenue (even assuming that there are no additional sets added in late 2012).

The estimates for 2012 vary greatly, but the overarching point is that they are all outstanding numbers. At the low estimate of 84 cents, the stock is currently trading at just over eight times next year’s earnings. For a stock growing at the rate of GasFrac, this is an extremely low valuation. If one uses the average of the analysts instead of the low, the P/E multiple is just over seven! The stock price should be substantially higher.

It seems that the market either does not believe the numbers or it does not understand the nature of GasFrac’s business. So we should examine the potential causes why Gasfrac might miss these numbers.

1) GasFrac could experience more bad weather that would delay its work. Obviously, this is possible, but at the worst, it will just affect three or four months in Canada. With more work going ahead in the USA, the importance of such a weather delay is much less than it was in 2011. This is not enough to cause a major miss.
2) GasFrac could be rejected in the market in the USA. Since all of the data suggests that wells completed with liquid propane perform substantially better than those which are completed with hydrofracking, I find it hard to accept this as a real risk.
3) GasFrac could find that the liquid propane system has an inherent safety risk that was not discovered during the first years of usage. Again, this is an obvious risk, but it is highly unlikely that a safety risk will appear now that the system has been extensively and safely used for a number of years on hundreds of wells.
4) GasFrac could be denied its patents that give it exclusive use of the liquid propane process. The US patent office could deny the patent, but the current indications in no way point to that. It is generally expected that the patent protection will issue within the next year.
5) Another competitor could come forward with a better system. This is true of every company that provides services. It is not a reason to avoid the stock.
These reasons do not explain the low stock price in my opinion. So what are reasons that might give an explanation for the current depressed price?
1) The price of oil is falling and the price of natural gas is low. Anyone who thinks that this is a reason for the stock to be priced as it is, does not understand the economics of the Gasfrac business. GasFrac provides a method to complete wells in shale formations that results in better outcomes with reduced environmental problems. Over the next year, it is highly likely that the price of oil will remain high enough to support continued drilling of wells in shale in both of GasFrac’s markets. Since GasFrac now has less than two percent of that market, there is planty of room for growth even if the overall market contracts (which is not very likely.)
2) The market as a whole is falling and people are fleeing from stocks. I cannot argue with this one; it is probably true. Nevertheless, now may be the best time to get into GasFrac for just this reason. The price is unreasonably low due to panic. What better time to buy.
3) There could be some other reason of which I am unaware. After years in the market, I have come to realize that this is always a possibility. That is why each person who buys stock has to do his or her own due diligence to investigate the company involved. Do not take the word of some columnist (even if he is as charming and knowledgeable as me).
In summary, Gasfrac seems to remain a good long term buy. I realize that I have been saying this consistently as the price of the stock has declined. That only makes it a better buy in my opinion.

Disclosure: I remain long GasFrac stock. It is one of the largest holdings in my accounts and I may add more to the position from time to time.