Last week saw the release of the third quarter results and the conference call by GasFrac Energy Services, Inc. (GFS:CA in Canada and GSFVF on the Pink sheets.) After pondering what was reported in the earnings and the call, one has to come to the view that the current estimates of future revenues are significantly too low for this stock. As I write this entry, the average analyst estimate for revenues for GasFrac for 2012 is $446 million. While that number would be about a 150% increase over the expected revenues for 2011, it is low by a significant amount.
I will explain the calculation of future revenues below, but first let me point out why revenues are more important for GasFrac than profits. GasFrac has been growing rapidly. As a result, it has been moving into new markets and adding equipment at breakneck speed. Right now, the company has been training new crews to run the equipment which is soon to be delivered. At some sites, the company has been running with a double crew so that the new hires will have hands on experience before they go off to run their own equipment sets. All of this drives current costs much higher than they need to be just to perform the work under contract. It is an investment in the future that nevertheless gets accounted for as a current expense. That all means that in the future, the rate of profit will rise for the same work that is currently being done, a fact which makes it more appropriate to track revenues rather than profits in the next year or so.
Let's now look at expected revenues for 2012.
First of all, one needs to examine the number of equipment sets that will be used by the company. At the end of the third quarter, GasFrac had six sets in use: two in the USA and four in Canada. There are four more on order which will be delivered by the end of the first quarter of 2012 according to the company. It is unclear whether and to what extent any of these four sets will arrive prior to the end of 2011. For purposes of modeling revenues, however, we should be conservative. Thus, let's assume that none of the equipment arrives in 2011 and that deliveries are 1 set in January, one set in February and two sets in March of 2012.
Second, one needs to consider in which market the new equipment will be deployed. We know from the conference call that GasFrac is focusing on a big increase in the USA rather than in Canada, the two markets where the company operates. Let's assume that this will translate into three additional sets of equipment in the United States and one additional set in Canada. That would bring the totals to five sets in each country. We will also assume that the first set (delivered in January) goes to the Canadian market.
Third, we need to consider further capital expenditures that will mean delivery of more sets towards the end of 2012. The company made clear that it could grow at a rate of 30% just on the basis of using free cash flow to finance purchases of new equipment. They also made clear that they expected the rate of growth to be higher than the 30%, thereby necessitating other sources of capital. This means that any order of new equipment will likely be at least four more sets. While the schedule for delivery of these new sets is unknown, one can be conservative and just assume delivery towards the end of 2012.
Fourth, let's look at the revenue from the USA market. Under the above assumptions, Gasfrac will have its current two sets for the full year, one set for 10 months and two sets for nine months just from the equipment already on order. Let's assume that the future orders bring in the equipment early enough so that the company has the equivalent of five sets full time for the year.
According to the company, in the USA it can achieve a usage level of 55% for the equipment, a level that would translate into about $75 million per set per year (again according to the company). Were GasFrac to reach this level, it would hit revenue fo $375 million just in the USA in 2012. Of course, it is unrealistic to think that the company will be able to achieve such a complete success, so I model the results based upon only 80% of that figure or $300 million in revenue from the USA in 2012.
Fifth, the revenue in Canada will be based on five sets of equipment for the full year as well. Because of long distances between sites as well as other considerations, the company has said int the past that maximum likely efficiency in usage in Canada is around 45% which translates into about $65 million of revenue per set for the year. We know now, however, that the Husky contract will increase that efficiency in a meaningful way. The Husky sites are close together and the fracking for Husky is done from a pad. GasFrac has not mentioned the increase in efficiency from the Husky contract, but has only acknowledged that it will take place. We also know from the company that the nature of the fracking for Husky will assure that the two sets being used on that work will be able to continue working even during the spring break up.
In order to come to some revenue estimate for Canada, we will need to make an assumption also for the length of the spring break up period. In 2011, this breakup lasted a bit more than three months, but for 2012, one should go back to the more normal assumption of six weeks. During those six weeks we will assume that work will be stopped for three of the sets and that the two sets doing work for Husky will be able to work at two thirds of the normal rate.
Putting all this together we get a total number of normal work weeks for Canada in 2012 of 236 (three sets with 46 weeks and two sets with 49 weeks each). This translates into 4.5 sets for a full year. At full efficiency or 65 million dollars per set, this comes to $292.5 million in revenue. We know that there will be some additional efficiency due to the Husky contract, but do not have enough information to add this back in. As a result, let's use 85% of the total as the estimate for Canadian revenues for 2012. This provides a revenue projection of $249 million.
Putting the Canadian and American revenue streams together gives us a projected total revenue for 2012 of $549 million or over $100 million more than the consensus analyst estimate. One also knows that the propane recovery system is moving towards field use. This could up the total revenue above the $549 million estimate.
Obviously, there are a number of projections and estimates that go into the revenue figure for 2012. There are also risks that could lower the results: the weather could interfere with operations; the market for fracking could decline; or an operational problem could arise. The point is not that GasFrac will have about $550 million in revenues in 2012. No, the real point here is that current estimate by the analysts of future revenue streams for the company seem low by at least 20%. As we move through 2012, if GasFrac is able to come near or exceed the figures discussed above, there should be a substantial bump in the price of Gasfrac stock.
DISCLOSURE: I remain long GasFrac stock. It is one of the larger positions in my accounts.
NOTE: There is more conjecture than usual in the foregoing discussion of Gasfrac stock. It is set forth not so that readers should rely on it, but rather to illustrate to an investor that there is a big potential upside with this stock.
2 comments:
I go along with many of your assumptions; however I think you far overestimate the rate at which new equipment will be put to work when delivered. I generally model a 15% utilization for new equipment in the first full quarter and then bump it up in following quarters. Also, the high US efficiency numbers were skewed by the 29 frac, $15M job in CO. While I believe US will be higher than CA (reason for shift in emphasis to US), I think we need to see the numbers up for more than Oct.
To Unknown:
I understand your point and I tried to take the uncertainty about how high the revenue could get by using a 15-20% discount in the calculations. Remember also that the point of my post was not to tell everyone exactly what the GasFrac revenue would be next year but rather to make clear that there was likely to be a major upside surprise. That would mean a major rise in the stock price.
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