It’s Lack of Earnings Time at GasFrac

This afternoon, GasFrac Energy Services (GFS in Canada and GSFVF on the pink sheets) released its earnings report for the second quarter. It was an unmitigated disaster. Revenue came in at $16.7 million (Canadian) and the loss per share was 27 cents. Not only were the numbers extremely poor, but the release illustrated the inability of management even to keep investors informed as to the progress of the company (or, more precisely, the lack of progress.)

Let’s get the expectations game out of the way first. 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 meant about $45 million should have been the revenue for the quarter. Since then, the analyst community has been consistently lowering the expectations for the quarter. As of yesterday, they were expecting a loss of 12 cents per share on revenue of $36 million. That is 20% less than the management estimate from May. The reasons offered have been bad weather for fracking in Canada and delays in obtaining follow up work in the USA. Prior to the report, one had to assume that a miss by 20% of revenue for the quarter from what had been told to investors in May would have led to some sort of warning from management. There was no warning. Instead, revenue came in 63% below the figure that had been given out to investors in the middle of May. Keep in mind that when that figure was stated by the management, the second quarter was already half over, so it seems almost inconceivable that the revenue miss could be this large.

It is worth noting that during that first quarter conference call, management also told investors its revenue expectations for the second half of the year. Investors were told that the $90 million estimate 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 was estimated by management to be between $257 million and $300 million. That leaves second half revenue at between $167 and $210 million.

Those estimates for the second half are also out the window now. All that management says in the latest report is that it expects the revenues to rise sequentially in the upcoming two quarters. They also have a general statement about the second half being two thirds to three quarters of the year's revenue, but that would now be at least a 25% reduction over the what they previously said, and the range is getting larger not smaller.

Then there is the issue of deployment of equipment. As of the end of the first quarter, there were seven sets of equipment out in the field. The eighth set was at the company’s Red Deer facility in Canada undergoing the set up protocol. By the end of the second quarter, we should have seen this eighth set in the USA ready for use. Of course, that has not happened. The company now makes clear that it only has employees for seven sets. Further, there is no mention at all of the two additional sets which remain to be delivered.

I have tried to find something optimistic in the second quarter report. I cannot. Gasfrac seems clearly to have lost its way. There are no new contracts. Despite vague language in the latest release, there seem clearly to be few new customers. After all, there were twelve operating days during the quarter for the equipment in the USA. Three sets of equipment operated for 12 days out of 39 weeks (13 weeks per set). Even if one set was sitting and waiting for Black Brush the entire quarter (which, by itself, would be poor management), the other two sets were still used less than 10% of the time. That means no customers and certainly no new customers of importance.

I have been a strong booster of GasFrac for at least two years. Clearly, I was wrong. I still think that management deserves a chance to explain what happened during the conference call. Absent a compelling reason to stay, however, it looks like it is time to sell.

DISCLOSURE: I am long GasFrac for now, but I may sell some or all within the next 72 hours.