GasFrac – the impact of the new convertible debt

Yesterday, GasFrac Energy Services (symbol GFS in Canada and GSFVF on the Pink Sheets) announced that it was issuing 30 million dollars of convertible debt. Today, that figure was revised up to $35 million (Canadian) in total debt. Since I write frequently about GasFrac, I have received a fair number of e-mail questions today asking my view of the financing. The short answer is that I think it is an excellent move. Of course, no one is ever satisfied with the short answer, so let me make some important points about the debt.

1) GasFrac is raising $35 million and will be paying only 7% interest on the bonds. For a new company like GasFrac, this is low cost debt.
2) The bonds are convertible into GasFrac stock at $10.50 per share. This is just under 50% above the current price of the stock. It is a vote of confidence in the ultimate success of GasFrac that the buyers of the bonds have accepted such a high conversion price.
3) The Canadian companies that are buying the bonds include BMO Capital Markets, Cormark Securities Inc., TD Securities Inc., Scotia Capital Inc., AltaCorp Capital Inc. and Haywood Securities Inc. These are some of the larger Canadian underwriters, and it is another vote of confidence in GasFrac.
4) If the entire issue is ultimately converted into stock, it will result in the issuance of about another 3.3 million shares. This would increase the total number of shares outstanding by just over 5%. Even if the conversions take place five years from now when the bonds are about to mature, there will still be no dilution. Five years of interest payments at 7% will total 35% or about $12 million; adding this to the current stock price for 3.3 million shares will bring the total cost to just about the amount raised by the offering. If the conversion takes place earlier than five years, then there will be a surplus in the amount raised.
5) The funds raised are designated to be used for “funding of the remaining capital expenditure of the previously announced capital equipment expansion program, working capital and for general corporate purposes.” The company already had the funds to pay for the remainder of the current capital expansion program, so these funds are really freed for other uses. The most likely use is investing the new cash in a further expansion of the number of equipment sets. With last quarter’s earnings’ report, management said that they had the cash flow to continue to grow the company’s revenue by 30% per year. This new cash means that the 30% growth rate should be exceeded.
6) The final documents filed in connection with the issuance of the debt ought to give us a preview of how the company performed in the fourth quarter of 2011. There will not yet be audited year end financials, but there will have to be unaudited data on revenues which is the key metric for GasFrac at this juncture in its development. The closing is scheduled for February 8, 2012, so the details should appear on SEDAR at that point.
7) For all those of you in the USA who have said to me that you were interested in buying the bonds, I am sorry to tell you, but you cannot. The deal is only being registered in Canada. That means it would be illegal for anyone to sell the bonds in the USA. If you have a brokerage account with a Canadian Broker, you may be able to buy the bonds in Canada using Canadian currency, however.
8) The goal for GasFrac has always been to grow as rapidly as possible so long as the cost of growth can be managed in a rational way. These convertible bonds are a big step forward on that front.
DISCLOSURE: I remain long GasFrac stock.