The stock for March -- GasFrac Energy Services

My Stock pick for March is an old favorite of mine: GasFrac Energy Services (Symbol GFS:CA in Canada or GSFVF on the Pink Sheets in the USA). I first recommended GasFrac last October when the stock was selling at $7.07. Since that time, it has risen over 70% and closed Friday at $12.68 (US) and $12.40 in Canada. Normally, I would not make a stock with that type of history a stock of the month, but recent events have given new life to the stock, a trend which will continue in my opinion.

GasFrac engages in the completion of natural gas and oil wells in shale formations. Rather than using the typical water based process that gives hydraulic fracturing its name, GasFrac uses its own completion process based upon injection of liquefied propane gas (LPG). As a result, no water is needed for the well which means that no water has to be cleaned up after use. Because the LPG turns back into a gas once it has been injected into the ground, it is removed easily from the well for sale or reuse. Water based fracking leaves about half of the water in the ground, and this results in lower final production and potential contamination of the gas or oil as it is extracted. There is also concern that the water left in the ground could contaminate local groundwater supplies. while this concern borders on the nonsensical, it is a problem faced by E&P companies nevertheless. So the Gasfrac process results in the avoidance of all the environmental problems of hydraulic fracking, it produces more gas or oil, it lowers cleanup costs, and it gives fracking a "green" patina. Overall, the Gasfrac process is more economical than conventional hydraulic fracking even though it cost more up front.

So why is GasFrac a good buy now? The answer comes from President Obama and Muammar Gaddafi. President Obama has put in place a drilling moratorium for off shore oil wells which, in turn, has led to lower US oil production, higher oil prices and higher gasoline prices. Gaddafi and the Libyan uprising have led to a halt of most exports from Libya and much higher oil prices. The potential for more unrest in the Arab world is another source of possible further rise in oil prices. As oil prices rise, the demand for action by the US to cut the need for foreign oil also grows. It is highly unlikely that Obama will remove his ban on off shore drilling; he has already been ignoring a court order to do just that. so what remains? The answer is easy, a switch to natural gas.

At the moment, natural gas is much less expensive than oil. the proper word to use for gas is inexpensive. If gasoline is now at $3.50 per gallon, the comparable amount of nat gas would cost 75 cents. There is technology existing for buses, trucks and autos to be posered by natural gas. There are also over 5 million homes that could easily switch from oil to natural gas for heating fuel and about 5% of the power generating facilities in the country that could do the same. Simply put, as the price differential between oil and gas gets larger, the push towards gas will get stronger and stronger. Eventually even the government will have to notice and take steps to assist the switch.

So, that is good for gas, but why buy GasFrac? Here's the reason: there is a large group of people out there in America who hate all fossil fuels. They believe that fossil fuels pollute and will not last. They are trying as much as possible to cut back on the production of such energy sources even though it hurts the US economy. Right now, the big attack by these eco-folks against natural gas is focused on hydraulic completion. They spread information that hydraulic completion contaminates the ground water and uses up most of the local water supply. Because the current administration is beholden to the eco-folks, these charges are under investigation by the EPA. It may well be that in a year or two the EPA will issue regulations that cripple the ability of companies to complete wells with the hydraulic method. In a state like New York which has enormous reserves of natural gas, all use of hydraulic completion has in effect been banned with the result that tens of thousands of jobs that could have gone to New York are instead being created elsewhere. For the eco-folks in NY, a perceived threat to the environment is more important than jobs for the unemployed. Just yesterday, the New York Times carried a lengthy article that claimed that the waste water from hydraulic completion was causing radioactive contamination of water from radon gas.

Since GasFrac is the solution to the perceived environmental threat, it is a process that any E&P company has to investigate if it is acting with any prudence at all. That investigation should include hiring GasFrac to complete some wells for the company. If, as should be the case, that completion effort results in lower total costs than completion using water, GasFrac should win a big group of new customers.

GasFrac has prepared itself for a big surge of orders. Over the last year, it has doubled the amount of work that it can take on by investing in a large amount of new equipment. The full impact of the new equipment will not be felt in the current quarter since there was a shutdown for about two weeks over a safety issue that was resolved. By next quarter, however, the company should have the full impact of the new equipment. In my opinion, there will also be a big push by E&P companies to try out the GasFrac process and then to move towards using it on all wells.

Disclosure: I remain long GasFrac stock which has been the case since I first recommended it last October. I may even add more to my holdings.