With the third quarter of 2012 unfolding, it seems time for an update regarding Gasfrac Energy Services (symbol GFS in Canada and GSFVF on the pink sheets). Trading during the second quarter was not kind to GasFrac; the price of a share fell from $7.51 to $3.09 during the quarter. It even got as low as $2.49 just before the end of the quarter. Most of this fall was the result of the poor results for the first quarter that were announced in May together with the lowered estimate for the second quarter that was released at that time. Couple these facts with a general weakening in the oil services field and GasFrac got clobbered. That, of course, is history, and the question now is where do we go from here?
First of all, let's look at expectations for the second quarter. During the first quarter conference call in mid May, management told us that revenues for the quarter should be about the same as those of the first quarter. That means about $45 million for the quarter. The analysts are now estimating just over $40 million in revenues, however. What are the variables? One major one is that the company has not signed any new long term contracts during the second quarter. In fairness to management, they told us during the conference call that they were working on obtaining such contracts and expected that the effort would bring results for the third and fourth quarters. Nevertheless, another contract would have been quite welcome.
Another reason for lower results in the second quarter is the spring breakup in Canada. We know that the thaw came earlier this year than usual. Indeed, something like two-thirds of March was lost to the breakup in Alberta. As of the conference call in mid May, the breakup was still preventing most work. Since the company does not disclose where it is working, however, we cannot determine just when the breakup ceased to be an issue for GasFrac. This variable could have major impact on the total revenues for the quarter.
The decline in drilling for natural gas and the decline in the price of oil may also have a negative impact on the revenues although this is more likely to kick in during the second half of the year. If prices charged by competitors decline, GasFrac will also have to lower prices even if the services offered are demonstrably different.
None of these points sound positive for the company, and the price of the stock reflects this. Even so, there have been developments that bode well for the company's future. Specifically, there has been a great amount of interest in drilling in other countries in areas that have essentially no water available for use in hydrofracking. One example is the new possible discovery of major shale oil deposits in the deserts of Israel. Some of the initial press on the topic reports potential reserves as large as those of Saudi Arabia in this new discovery. This and other similar sites seem like a natural for GasFrac.
Of course, these discoveries may turn out to be nothing more than hype. It may also be that GasFrac never gets involved with them. The possibility is there, however, and it is a major plus.
Given all of this, it seems likely that GasFrac will come in with a second quarter report that has revenue in the 40-45 million dollar range. In other words, the quarter will be pretty much as expected. It is the third and fourth quarters, however, where management has to perform. Either there will be a marked increase in the revenue with additional long term contracts signed, or it may be time to throw in the towel on this once highly promising company.
DISCLOSURE: I remain long GasFrac
2 comments:
I have always enjoyed reading your comments and generally found them to be even handed. That said, Gasfrac appears to be slowly slipping into the oblivion of a penny stock.
Management stated that they were elephant hunting for contracts; however none have been announced. In fact, one is compelled to ask "why should a customer enter into a long term contract with a company with surplus equipment, a less than sterling balance sheet, and now hungry competition?"
One would hope that management could spare discouraged stockholders a bit of good news about fracing activity levels ... if there is any.
The last analyst report I read (TD?) hints that 2Q might even disappoint a bit.
Absent a quick turnaround, the company is going to end up selling off its technology for a song and sinking into the stuff from Spring Breakup.
Thank you for your coherent comments.
I am a water hauler in the Niobrara Basin (north east Colorado.) I ran into GasFrac a week or two ago on a three well frack. Two of the wells at that location were fracked conventionally. (Halliburton was running the down hole operation.) The company for which I drive was hauling flowback to disposal from the two Haliburton fracks when the GasFrac trucks came onto the location to frack the third well.
Given the large quantity of water that was provided for the two conventional fracks, I assume that the wells were all horizontals. I cannot remember their designations however.
I assume that GasFrac was there as an experiment, but that is just an assumption. I do not know how any of the three wells at the site are producing.
I guess this opportunity was a good thing for GasFrac. As a water hauler, it is difficult to know what to wish for. I think I'll buy 100 shares of GasFrac, nevertheless.
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