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Thursday, May 10, 2012

The GasFrac First quarter 2012 report and conference call

There were some surprising elements in the conference call for GasFrac today after release of the expected earnings report last night. First to the report. Revenue was as pre-announced early in April and came in at $45 million as expected. Nothing extraordinary came out of the rest of the report; the quarter was quite poor and the numbers showed it.

Now the conference call! This was a much more open group of officers than was the case on previous calls. It seems that the CEO and his sidekicks have gotten the word that investors are unhappy with their performance and were working hard to regain the trust of the investment community. Here are some highlights:

1) We got a revenue estimate for the second quarter of $45 million. To be completely accurate, management said that revenue in the second quarter would be about the same as in the first quarter (which was $45 million).
2) We also got a revenue estimate for the third and fourth quarters. We were told that the current estimate of $90 million for the first half of the year would be about 30 to 35% of the total for the year. This means that total annual revenue for 2012 is estimated to be between $257 million and $300 million. That leaves second half revenue at between $167 and $210 million. NOTE: the current consensus estimate for revenue for 2012 is $291 million and the second quarter consensus is $52 million. The figures from the company are slightly below those estimates.
3) We learned that the equipment purchased by the company has not yet all arrived. One set was just accepted; it was the eighth set in total. The ninth and tenth sets should not get into operation until the fourth quarter.
a. A bit of history is appropriate here. For a long time, we were told that all ten sets would be received by the end of 2011. Even in the last conference call of 2011,we were told that delivery of sets 7 through 10 would commence at the end of December of 2011 and continue at one every three weeks for the following two months. By now, all ten sets were to have been delivered. Management said that the problem with the equipment had to do with delays in its manufacture. Nothing was said about any price reductions due to the significant delays in completion. One has to wonder how the procurement process could have failed to this great an extent.
b. The major delay in delivery of the last three sets does help explain the reductions in the revenue stream. It did sound, however, as if there was no place to use these extra sets had they been here for the first quarter, however.
4) The work for Blackbrush seems to be going well. This is a major contract which is supposed to use one set full time over the next two years. GasFrac is opening a new location in Texas which is closer to this work and other possible jobs in the area.
5) The Husky work is also going well. Husky, of course, is the contracting party to Gasfrac’s major work in Canada.
6) Work is going to pick up in the Niobara. Management said that the main portion of this work is a resumption of work for Quicksilver. This is good news. Obviously, the results on the first wells completed by GasFrac were good enough to bring Quicksilver back for more.
7) There was an interesting question about work in Saudi Arabia. Management said that GasFrac had just signed a non-disclosure agreement with Aramco in connection with the possibility of work in that country. That means that the possibility at least exists that there will be work there for Aramco in the next year or so. Obviously, however, it is far from a definite thing.
Overall, the call had plusses and minuses. The revenue stream continues to contract as we look into the future. One hopes that by now giving estimates for the future, that the company was conservative. Beating the estimates will be fine; missing them will be a severe blow given all of the past. Nevertheless, it seems that management has now decided that it has to be more open about where things are headed. Indeed, at one point we were told that moving into the future a fair expectation would be revenue of $60 million per year per set with a margin of 22-23%. Translating that into English, one gets $600 million of revenue with the current ten sets and a gross profit margin of about $135 million. In other words, the EPS would be above $1 per share at that point with no further growth in the equipment base or licensing of the technology.
Conclusion: GasFrac has had a disappointing few months. It is unlikely to turn the corner during the second quarter either. All that we have is the expectation that the second half of the year will be substantially better than the first. For the faint of heart who are still holding the stock, it may be time to sell and move elsewhere. Nevertheless, my conclusion is exactly the opposite. The GasFrac technology remains revolutionary. It provides better results while removing all sorts of environment objections. Further, I am prepared to believe that the last few months have been a period during which the new management was cleaning up some of the mess left by their predecessors. At the current depressed level for the stock, I am prepared to stay with GasFrac and allow events to unfold to see if the management forecast is valid.
If, indeed, we can move into 2013 with the expectation that the company will earn something close to $1 per share, the GasFrac stock should be at least twice its current price or even more. It is a nice carrot to hold out in front of investors. Still, management should be treated as if it is on probation. If they get it right, then great! On the other hand, they do not get many more chances to succeed in my opinion.

DISCLOSURE: I remain long GasFrac

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