Let’s look at the key facts in the Ops Review:
1) Revenue for the third quarter will be about $41 million (US). This is about 30% less than the consensus of analysts immediately before the announcement. In other words, for the third quarter in a row, GasFrac came nowhere near the level of revenue that was expected. Remember that analysts’ expectations about revenue were based to a great extent on the projections made by the company itself. In other words, not only did the company miss the analysts estimates, it also proved that the company’s management had no idea of the real state of Gasfrac’s prospects.
2) GasFrac is reducing costs by limiting itself to staffing only two sets of equipment in the USA and three sets of equipment in Canada. It is important to remember that in the early days, GasFrac purchased ten sets of equipment which cost in the area of $30 million per set. All of that equipment was supposed to have been delivered to the company by the end of 2011, but that schedule slipped so that GasFrac has eight sets with two more due at the end of 2012. What this means is that by the start of 2013, GasFrac will have spent something in the area of $150 million for equipment that will sit idle due to a lack of work. To say the least, this is another indication that GasFrac’s management had no idea of the real state of the company’s prospects. It is possible that the figures for the cost of the idle equipment may be less than stated above, since the delivery was so delayed, but the company has never shared this information with the market.
3) GasFrac’s cost cutting measures are designed so that it will “drive revenue breakeven levels towards $10 million on a monthly basis from previous levels of $14 million.” In typical fashion for GasFrac, we were not told if “revenue breakeven levels” refer to net profits or a net positive cash flow (or positive EBITDA.) Remember, if GasFrac has somewhere between $250 million and $300 million in equipment, the depreciation on that equipment alone will come to between $3 million and $4 million per month.
4) Marketing is going to be focused on Western Canada and Colorado and South Texas in the USA. This is an acknowledgement of the existing reality. It also means, however, that work in the Marcellus or the Utica Shales is not on the radar at this time. Previous positive statements from management about work in Ohio and Pennsylvania are no longer operative.
So what does this all mean?
1) The general rule of thumb with regard to revenue is that a set of equipment in Canada can generate about $65 million per year while a set in the USA can generate about $75 million during the same time. The difference between the two countries is due for the most part to the Spring break up in Canada that stops work and the proximity in the USA of one well to the next. These figures also assume that GasFrac has work to perform for the whole year for these sets. If one uses only $60 million per year for revenue per set, then the new configuration of five sets gives GasFrac a capacity to generate about $300 million for the year. If the cost structure is reduced to a $10 million per month break even, then GasFrac could have $180 million of profit, cash flow or EBITDA (depending on what “revenue breakeven levels” means.)
2) No rational person would expect that the company will reach the $300 million revenue level in 2013. If past history is any guide, the company could be looking at half that amount. We do not have any clear information, however, as to what the true prospects are. We need to hear more from management.
3) In a major positive move, the board dumped the senior management in mid-September. This is the second shake up in a year, and one which will hopefully result in an improvement in performance this time. It also means, however, that when the third quarter report is issued and the conference call held, we will be hearing from a caretaker CEO. In other words, we will not be getting full information; nor will we hear truly meaningful projections.
4) Natural gas prices have bounced back from earlier this year. They are now about double where they stood just 5 months ago. Some respected projections say that because of the dramatic decline in drilling this year, we may see natural gas prices double again before the end of the upcoming winter. Such a price move for natural gas would inevitably lead to a major increase in drilling and a corresponding increase in fracking. GasFrac’s market could rebound in a major way.
5) All of the inherent advantages of the GasFrac process remain in place. Over the long term, fracking with liquid propane ought to have a bright future for environmental, water-usage and production reasons.
Here is what I recommend.
1) GasFrac is a “hold” at the current price levels. I still believe that the company has a decent chance for success in the long term. Further, since the price is now so low, it is now a small investment. I believe that the board should get a chance to find new management for the company and that the new CEO ought to have a decent chance to correct the course of the company. If the price of natural gas does recover, GasFrac could move quickly towards profitability. Indeed, if it can break through in the market and gain work, GasFrac could expand its revenues rapidly with essentially no need for further capital expenditures. It would just take the extra sets out of mothballs.
2) I would not put new money into GasFrac at this point. Giving the company more time is not the same as giving it more money.
3) I could not fault anyone for selling the stock at this point. That is particularly true if you need tax losses for 2012.
DISCLOSURE: I remain long GasFrac stock.
No comments:
Post a Comment