Gasfrac trading after UBS

I write often about GasFrac Energy Services (GFS in Canada and GSFVF on the Pink Sheets). Just two weeks ago, I mentioned that the upcoming earnings report has been scheduled for a Friday afternoon with the conference call coming the next Monday morning. This seemed either like an ominous portent of bad news or the mark of an inexperienced management team. The stock at the time was trading around $6.80 per share. The market, however, ignored the possible meaning of the timing issue and began buying shortly thereafter. In the last two weeks, GasFrac has risen to hit $9.06 less than an hour ago. That is an increase of 33% in two weeks. Volume has also been quite heavy during this rise. As of 1:00 pm, the combined volume in Canada and the USA is already three times the 90 day average volume. This makes the price rise much more impressive. There has been serious buying.

About 45 minutes ago, the wire service reported that UBS cut the stock to sell from neutral. That took the price down 5% but the stock is still up nicely today. So what can one make of all of this? Is UBS correct or is it missing something big?

The best answer depends on one's time horizon. If you are looking for another 33% rise in the next two weeks, I suggest that you look elsewhere. On the other hand, if you are looking for a good long term value, then it is time to get aboard and ride Gasfrac to much a much higher price over the next year or two. Here are the key facts you should know:

1) Just the other day, Quicksilver reported earnings and mentioned that it used Gasfrac in Colorado and achieve significantly better results than it would have had with regular hydrofracking.

2) There is continual chatter that Gasfrac is about to announce some long term contract(s) with companies in the USA. This would signify market acceptance of the process in the USA and would move Gasfrac down the road between a "developmental" type company to an "established" one.

3) As more and more months go by and GasFrac continues to operate, the participants in the oil/gas market are becoming more accepting of the LPG process. There is surely a long way to go, but we have not seen any poor results for wells that were completed by the company. As each day goes by, the likelihood that GasFrac will meet the high revenue projections for 2012 and 2013 becomes higher.

4) If GasFrac can announce at least one long term contract with an American company prior to earnings, the importance of the results from the fourth quarter will be diminished. The market always looks forward, and this is particularly true with new companies like GasFrac.

5) In the last two months, the press coverage for the company has dramatically increased. This may be in part the reason for the rise in the stock. Of course, one always has to wonder what is happening when a stock has a move like the one GasFrac has been having. Did some big news leak out; in other words, is news of a long term contract getting around before the public announcement?

6) Do not forget that according to the latest estimates, GasFrac is expected to increase revenues year over year by 141% in 2012 with eps jumping from $0.02 to $0.69. These are analysts' estimates, so they can change at any time, but each number includes figures from at least six firms.

So what does all this mean, particularly in the face of the UBS cut to sell? In my opinion, GasFrac remains an outstanding long term investment. Nothing has come forward which in any way calls into question the long term prospects of the stock. We may see some short term gyration, but Gasfrac remains a strong buy. It is not a place to put next month's rent money, but over time, it should make quite a profit.

DISCLOSURE: I remain long GasFrac. It is one of the largest holdings in my accounts.