GasFrac Energy Services (GFS in Canada and GSFVF on the Pink Sheets) came out with their fourth quarter 2011 earnings report last night. A month ago, I was worrying on this blog that the company’s announcing an earnings report on a Friday evening was a sign that there was going to be a poor report. Now we have the reality of the report and while I would not characterize it as “poor”, it is certainly not good.
Let’s start with the basic numbers. Revenue for the quarter was $59,304,000 which is up 3% from the $57,437,000 revenue of the third quarter of 2011. Profit was $1,519,000 which is down 74% from the $5,911,000 in profits earned in the third quarter. Both numbers are disappointments. Even comparing on a YOY basis, revenues are up by 44% from the fourth quarter of 2010, but profits are still down 24% in the same comparison. Again, these are hardly good numbers. In 2011, the company had three-times as much equipment as it did in 2010, so the revenues indicate a fair amount of time that the new equipment was idle.
Worse than the numbers, however, was the tone of the report. Instead of starting with the results, the company began with a statement by Zeke Zerengue, the CEO, who went on at length explaining that the objective of increasing utilization “will not be without its challenges.” He went into details about both the good and the bad facing the company, but to any veteran reader of company reports, the structure and manner of what was said indicates that there is a batch of troubles facing the company. Another troubling aspect to the report is the outlook given by management. The release of the report came with the first quarter of 2012 just about 85% complete. There was not one word in the outlook to indicate how the numbers for that quarter will come in. Clearly, such a statement is not required, but if the numbers were outstanding, they would have most likely been mentioned.
The key to GasFrac has always been its rapid growth as its LPG technology is accepted in the oil and gas industry. Here, the report also indicates that the growth may be slowing as acceptance is taking longer than anticipated. The company has gone through a number of years of rapid equipment growth. Indeed, there are still more sets about to arrive which will increase the capacity of the company by 25%. Of course, we were told during the last quarterly report that these sets would all have been delivered by now, and there is no explanation offered for the delay. More interesting than the delay, however, is the clear indication that the company is unlikely to order more sets of equipment in the near future. It is moving from rapid growth to consolidation. This is not a bad thing; in fact, it seems an inevitable phase for nearly every small, rapidly growing company. It is a good indicator that the new management does not see the same sort of quick acceptance of the GasFrac technology as previous management did. It might even explain most clearly the reason for the management change last fall.
The report is not all negative by any means, however. GasFrac turned in some surprisingly high numbers for revenues per treatment with an increase of 35% in this metric over the same period of 2010. There is no clear explanation as to why the increase has occurred. Hopefully in the conference call on Monday, we will hear more about this.
There was also a confirmation from the company about the positive impact that its two long term contracts will have moving forward. This will be particularly helpful when the Husky contract keeps a big part of the Canadian operation working even during the spring breakup, thereby avoiding the big downturn experienced during that period in 2011. There was also a lot of anecdotal commentary about prospects moving forward and an outlook for the customer base to have a robust year with resulting maintenance of the demand for fracking services.
On the whole, however, the report is only the first act of a two act play. On Monday morning, management will hold the quarterly conference call. There are many questions that will need to be answered. We will need to hear about the prospects for further long term contracts in both markets. We will need some color on the results for the first quarter. We will need to understand where the new equipment will be used and if there are customers waiting for it to arrive. There is also the need for an explanation about the expansion into new markets like Europe (the MOU with eCorp is not mentioned anywhere in this release.)
Any recommendation that I might make with regard to GasFrac stock will have to wait until after Monday’s conference call.
DISCLOSURE: I remain long GasFrac stock.
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