This morning, GasFrac Energy Services (GFS in Canada and GSFVF on the Pink Sheets) announced a major shakeup of management. The CEO Zeke Zerengue and the COO Steve Batchelor are “leaving the company effective immediately”. That is corporate talk which translates into “they were told to go.” The current CFO Jim Hill is taking over as interim CEO. The board also announced that it is undertaking an “operational review”. That is corporate talk which translates into “the board is trying to figure out what the #$%*& just happened and to make sure it doesn’t happen again.”
The shares of the company have tumbled by about 13% since the announcement. After all, this announcement brings uncertainty rather than clarity to the future. There will be a new CEO, but we do not know who it will be or when he or she will be appointed. We have to assume that the third quarter results have come in below the projections that the old management gave us a month ago during the second quarter conference call. Here too, we do not know just how bad things are.
It may seem strange, but I view these events as a buying opportunity. Bad news will now be expected when the third quarter results come in. If we get a report that is lackluster but not awful, the market will take that as good news. But that is just the short term for the stock. In the longer term, GasFrac will now have another chance to find a first rate CEO who can market the company’s unique technology in a way that could lead to enormous growth. After all, GasFrac still has a patented process for well completion that does away with the need for water, produces better results from the wells, and which reduces both pollution and traffic in the area surrounding the drilling. The right CEO could get GasFrac tested by companies both in North America and abroad, and this ought to result in a major leap forward in sales. Another benefit is that GasFrac will be able to get a management that is believed by investors as the company moves forward. Generating trust was certainly not the strong suit of the departed management; all one needs to review is the last six months of guidance during conference calls followed a few months later by actual results. A change in CEO may also finally produce for the company a person who can properly market the company’s process. Anyone who ever saw the former CEO speak about GasFrac will understand clearly that he was not the best spokesman for the company. I have to assume that the style used to sell the process to the public was also the one used to try to sell the process to customers. In that regard, things can only get better.
Because I believe that things will get better at GasFrac with this change, I used today’s very heavy trading to increase my holdings by about 15%. I may buy more in the next day or so. Obviously, there is the risk that the company’s process will just not be accepted and that GasFrac will collapse. That is a risk that I am prepared to take. In the long term, the merits of the GasFrac process ought to prevail.
DISCLOSURE: I am long GasFrac. I may increase my holdings further in the next day or so.
3 comments:
I think the problem is that the company is under the gun now, in terms of solvency. An analyst said that if GFS didn't post an $8 million profit this quarter they would have to renegotiate some of their debt. Recapitalizing at these levels isn't a pleasant thought for current shareholders. 2012 was the make or break year and it appears we got the latter. Also, keep in mind that this is a much more expensive company to run than it was a year ago, starting with a new 20 acre home base in Texas with god knows how much fracking equipment and crews sitting around doing nothing.
I hope you are right. Gasfrac's biggest problem may not have been its strategy, but rather the way it handled its last CEO search. The company had better get it right this time.
The LPG technology certainly wins for best performing frack fluid and not using water, but loses for effective application. They are suffering for their aggressive growth - the technology has been built-out before the application issues were solved.
Within the developed LPG technology, the method used to add sand severely limits the application range and scope. The ‘big’ 250,000 lb capacity sand pressure tanks are used to add sand and only one tank is used at a time. These tanks are as big as is legal to move on most roadways so a larger sand tank is not likely. Unfortunately, in a world of 1,000,000+ lb fracks, 250,000 lb is small and limits their market. Yes, they can refill the sand tank, but it takes hours and extends the time to finish the frack, one in the morning and one in the afternoon. Two 250,000 lb fracks a day pumping 125,000 lb for 20 stages take 5 days to pump. This is too much time. IF they can find a way to string tanks together they get bigger and faster jobs, but more sand pressure tanks means more needed capital. A better way to add sand is a MUST - smaller fracks that take more time limits their market.
The LPG recovery issue is an operational, economic and environmental barrier and mobile recovery units will not solve the problem. Consider two days to pump a frack followed by five days to recover the LPG. The equipment then completes one and a half more fracks while LPG from the first well is being recovered. They need at least two and maybe three LPG recovery units for each fracking set. This requires more capital outlay and presumes the mobile LPG recovery method is efficient and cost effective. Status and/or capability of these units seems to be closely held by the company. For recovery where LPG can be captured by a facility, the facility’s capacity needs to be sufficiently large. Two days fracking with 500,000 gal of LPG to recover needs a big facility with at least 1,000 bbl/day LPG capacity for recovery in a reasonable time. Without a means of recovery the alternative is to flare the LPG – a poor economic and environmental choice. The LPG recovery issue again narrows their market considerably.
Raising capital and building out the 10 equipment sets based on a great frack fluid and not using water is about half right. Doing that while not addressing the frack size issue or solving the LPG recovery problem is all wrong. The company has attempted to aggressively grow with, one would suspect, knowledge of these deficiencies and is now bumping into the hard realities of their choices. Another management change is not going to change the Gasfrac reality – an undersized and incomplete technology.
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