GasFrac – Just How Bad are the Numbers?

It has been a momentous day for GasFrac Energy Systems (GFS in Canada and GSFVF on the pink sheets). Last night, GasFrac pre-announced a major miss in revenues for the first quarter of this year. While the exact number has not been released, the company indicated that revenues would be about 50% higher than the same quarter in 2011, which indicates total revenue for the quarter of about $45 million. In response to last night’s news, the stock is trading down just under 20% today. Now that we have had time to digest the news a bit, we should look at what has happened to ascertain just how bad the news really is.

Let’s start by looking at what the expected revenue figure means. In the past, the company has told us that for equipment sets in Canada, we could expect about $65 million in revenue per set per year at full usage. The comparable figure for equipment sets in the USA is about $75 million due to less weather interference and better access to work sites. The company has not told us clearly how many sets of equipment it had throughout the first quarter. We know that they have eight sets as of now, but the arrival date for the last sets is less than clear. A conservative view would be that during the first quarter, GasFrac employed four sets in Canada and three in the USA. If these sets were fully employed, revenue from Canada would have been about $65 million and revenue from the USA would have been about $56 million for a total of $121 million. Note, when I talk about sets being fully employed, this does not mean that they are used non-stop. There is time when equipment is being transported from place to place or is sitting idle while another function is being carried out. Full employment as used here means used to the fullest extent that the company reasonably expects.

The expected revenue for the first quarter is only $45 million. That is only 37% of the revenue expected from seven sets. It is a terrible number. It means equipment was just sitting idle for a good part of the quarter. That is especially bad since there are three additional sets of equipment which have either been delivered to GasFrac or are about to arrive.

For those of you who think that the seven sets which I reference above are too many, we should look at what the numbers are if only six sets are considered. We know that in 2011, the company had four sets in Canada and two in the USA. Just those sets would be expected to generate revenue of $102 million during the first quarter, so the actual revenue is still less than 45% of the expected total even for this reduced batch of equipment.

Without a doubt, the revenue figures for the first quarter are telling a bad tale. The figures cannot be explained by the excuse offered by GasFrac of an earlier start to the Canadian spring breakup. Indeed, that earlier start could maybe explain about 10% of the shortfall at most, but the rest is due to one simple problem: lack of work.

During the last conference call on March 17th, management obviously knew how bad the first quarter was shaping up to be. Nothing, however, was said to warn investors. Indeed, management was asked directly about how things were going in the first quarter (which was then about 85% completed), and they avoided answering the question. The sidestep was so apparent and troubling that I wrote about it here in my piece of March 17th. Instead of the facts, we were given the plan for the future at that time. We heard about marketing plans and all other sorts of ways that management was going to grow the company. In my view, however, that response was not sufficient. This was not a case where management knew that a small miss was likely but not a certain thing. By mid-March the entire GasFrac management well knew that the results for the first quarter were going to be a disaster. Particularly in view of the direct question asked about the subject, it seems completely wrong for management to have kept silent at the time.

The silence of management is a serious mistake. The CEO and the others should want investors to trust them and accept what they say as honest. GasFrac does not have a long history of meeting market expectations and Zeke Zerengue certainly has no credit built up with GasFrac shareholders. Silence in the face of impending bad news does not help increase that credit.

In the next conference call, management will have to lay out everything on the table. That means both the bad and the good have to be put before the investment community. Another “surprise” like the one last night will be a total disaster.

Yesterday, I wrote that GasFrac is a story stock. That only works if the story is both believable and a good one. The lack of forthrightness from management has made it harder for a rational investor to believe the story. Nevertheless, the promise of the technology is such that it still seems that the company has a bright future down the road. Obviously, the future is always down the road, but for investors, we have to see it getting closer, not receding into the distance. We may be willing to buy the story for the moment, but it just cannot become a fairy tale.