I have often written about GasFrac Energy Services, Inc. (GFS in Canada and GSFVF on the Pink Sheets). Lately, I have received many requests for my opinion as to what is going on with that company. The reason for the requests is clear: since the start of 2013, GasFrac stock is up 52%, a stellar performance. That performance is even more extraordinary when one includes the fact that on Friday, the stock fell by just under 10% and it is still up 52% for the year to date.
While the stock has been soaring, however, nothing much has changed regarding the basic facts about the company. In truth, the rising stock price is probably due to a combination of four factors:
1) At the end of last year, the stock price was beaten down by shareholders who were selling to take advantage of their large losses for tax purposes. That downward pressure ended with December 31st.
2) In early January, Ecorp announced that it had completed a well using a fracking fluid of only liquid propane with no proppant or chemicals added. While there is no official confirmation, it seems that the completion with this new method was performed by GasFrac. Such a completion method avoids all of the current environmental issues concerning the injection of chemicals into the shale strata and the potential, however slight, of groundwater contamination.
3) In the last few weeks, a series of insider purchases at GasFrac has been revealed. The purchases are by quite a few of the officers, although none of them are very large in size.
4) Fund managers who are fans of GasFrac may have been engaged in window dressing at the end of the year. They sold their holdings in December so that the stock and its sorry record would not appear on their list of year end holdings. Once the new year began, these funds were free to buy back into the stock since the holding will not need to be reported for many months.
Put all these four factors together and what do you have? The end of tax selling and the window dressing by fund managers just mean that the year end price was a bit too low. The effect since then was just to rise to equilibrium. The new completion process announced by Ecorp may some day turn out to be important, but it is unlikely. The real question is whether or not fracking with only liquid propane will satisfy the environmental lobby. I think that we all know the answer to that question. Nothing that results in the production of fossil fuels will satisfy the environmental lobby. There will always be another and another reason for objection. Remember, EPA itself has already cleared fracking of responsibility for ground water contamination but the argument about it still rages. Even without the facts on their side, the environmentalists will continue the fight. So, excitement about the promise of the news from Ecorp is premature at best. Finally, we have the insider purchases. They look to me like a coordinated effort by management to show support for the company in its time of need. That is not an action to be ignored. The old management at GasFrac is unlikely to have even thought about such an effort, so kudos go to the new management for this undertaking. Nevertheless, it does not change the basic situation of the company.
For GasFrac, the basic issue remains what it has been for the last year, namely, can it achieve the necessary revenues to earn a profit? After that, the issue is how quickly management can grow the revenues so that all of the company's equipment can be put to work. Remember, if GasFrac can get to the point where all of its equipment sets are being used profitably, it can easily earn more than $1.00 per share, not a bad number for a company that began the year selling at $1.52 per share. The answers to these questions will only start to come once we see the earnings report for the last and teh current quarter. There should be no weather related issues to affect these results. Put another way, there will be no weather excuses for management if the revenues continue to sag. Those are the results that will tell us if the recent run up in the stock price will continue.
For the time being, I continue to rate GasFrac a hold. Its technology does provide clear advantatges over the normal hydrofracking. A new management deserves the chance to achieve success.
DISCLOSURE: I remain long GasFrac stock.
While the stock has been soaring, however, nothing much has changed regarding the basic facts about the company. In truth, the rising stock price is probably due to a combination of four factors:
1) At the end of last year, the stock price was beaten down by shareholders who were selling to take advantage of their large losses for tax purposes. That downward pressure ended with December 31st.
2) In early January, Ecorp announced that it had completed a well using a fracking fluid of only liquid propane with no proppant or chemicals added. While there is no official confirmation, it seems that the completion with this new method was performed by GasFrac. Such a completion method avoids all of the current environmental issues concerning the injection of chemicals into the shale strata and the potential, however slight, of groundwater contamination.
3) In the last few weeks, a series of insider purchases at GasFrac has been revealed. The purchases are by quite a few of the officers, although none of them are very large in size.
4) Fund managers who are fans of GasFrac may have been engaged in window dressing at the end of the year. They sold their holdings in December so that the stock and its sorry record would not appear on their list of year end holdings. Once the new year began, these funds were free to buy back into the stock since the holding will not need to be reported for many months.
Put all these four factors together and what do you have? The end of tax selling and the window dressing by fund managers just mean that the year end price was a bit too low. The effect since then was just to rise to equilibrium. The new completion process announced by Ecorp may some day turn out to be important, but it is unlikely. The real question is whether or not fracking with only liquid propane will satisfy the environmental lobby. I think that we all know the answer to that question. Nothing that results in the production of fossil fuels will satisfy the environmental lobby. There will always be another and another reason for objection. Remember, EPA itself has already cleared fracking of responsibility for ground water contamination but the argument about it still rages. Even without the facts on their side, the environmentalists will continue the fight. So, excitement about the promise of the news from Ecorp is premature at best. Finally, we have the insider purchases. They look to me like a coordinated effort by management to show support for the company in its time of need. That is not an action to be ignored. The old management at GasFrac is unlikely to have even thought about such an effort, so kudos go to the new management for this undertaking. Nevertheless, it does not change the basic situation of the company.
For GasFrac, the basic issue remains what it has been for the last year, namely, can it achieve the necessary revenues to earn a profit? After that, the issue is how quickly management can grow the revenues so that all of the company's equipment can be put to work. Remember, if GasFrac can get to the point where all of its equipment sets are being used profitably, it can easily earn more than $1.00 per share, not a bad number for a company that began the year selling at $1.52 per share. The answers to these questions will only start to come once we see the earnings report for the last and teh current quarter. There should be no weather related issues to affect these results. Put another way, there will be no weather excuses for management if the revenues continue to sag. Those are the results that will tell us if the recent run up in the stock price will continue.
For the time being, I continue to rate GasFrac a hold. Its technology does provide clear advantatges over the normal hydrofracking. A new management deserves the chance to achieve success.
DISCLOSURE: I remain long GasFrac stock.
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