GasFrac -- target update

After posting my 18 month target price of $40 for the stock, I received a number of e-mails asking me to explain how I came up witht that figure. I will try to outline my method in this post.

Let's begin with revenue. The GasFrac revenue is driven almost entirely by the number of sets of equipment that are being used by the company. For the foreseeable future, that number is limited not by available business but rather by the number of sets that the company owns. 2010 ended with three sets in the field and the projection is that 2011 will end with ten sets in the field. Using the projected levels of sets available to the company each month during 2011, there should be about 77 set months available to generate revenue.

Then there is the issue of the efficiency of Gasfrac in the use of these sets. According to management, in 2010, efficiency which is the number of days that the sets are available for revenue generation out of total days ran about 30%. Through the purchase of more auxilliary equipment, that efficiency is expected to rise to 45-50% in 2011. I model the efficiency for the year at 42%.

In 2012, my model assumes that the company begins the year with 10 sets and then increases that number by only 20% during the year. This increase of two sets is much lower than the company's historical approach would indicate, but it is a conservative number that can be achieved without the need for new financing sources. I also use the efficiency rate of 48% for the year.

On the basis of these figures, the revenue for 2012 should be just under twice that achieved in 2011. Of course, that allows nothing for revenue generated from the propane recovery system should that come on line as scheduled. It also understates the likely growth in the number of sets during 2012 as described above.

At the moment, the consensus earnings estimate for 2011 is 58 cents per share. If revenue doubles, earnings should more than double reaching $1.35 for the year. Using a conservative multiple of 30, this brings one to a price of $40.50 which gives the price target of 40.

This is actually a conservative target in my opinion. If any of the anti-hydraulic fracking hysteria gains a real foothold, the price for GasFrac's services could soar. Even a ten percent price rise would mean substantial additional revenue that would all go directly to the bottom line after taxes are paid. If the company grows at a faster pace as it has in the past, the target should be exceeded. On the other hand, if someone else finds a method that gets around the GasFrac patent applications or if those applications are unexpectedly denied, there may suddenly be competitors that do not exist currently. On balance, though, the target ought be achieved.