GASFRAC Energy Services' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar.14.13 | About: Gasfrac Energy (GSFVF)

GASFRAC Energy Services, Inc. (OTC:GSFVF) Q4 2012 Earnings Call March 14, 2013 11:00 AM ET

Executives

James Hill - CFO/Acting CEO

Analysts

Scott Treadwell - TD Securities

Todd Garman - Cormark Securities

Rich Feldman - Axiom Capital

Operator

Good morning ladies and gentlemen. Welcome to the GASFRAC Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr. James Hill. Please go ahead, Mr. Hill.

James Hill

Thank you, operator. Good morning, ladies and gentlemen. I will provide the conference this morning and I'll provide an overview of our financial results and talk about some operating highlights for the quarter and then open it up to questions.

First off, I should note that in late Q3, early Q4 of 2012, the company underwent a through operating review. The impact of which is reflected in our results of the fourth quarter. I would be remiss if I did not express my appreciation to all of the GASFRAC team for their hard work, dedication and pride that they've shown in the company during this process. I thank you all.

Now for the financial review. Firstly, we have removed approximately $3 million per quarter of fixed costs resulting in quarterly fixed costs of about $12 million as compared to $15 million that we saw in the third quarter. Field margins were approximately 48% on a consolidated basis and while this was an improvement it still remains below our target of 50%. Variable costs at 8% and have improved and are in line with our targets, all of this has resulted in an EBITDA breakeven on a quarterly basis of approximately $30 million, down from $40 million.

Sequentially, we saw improved revenue levels although on a year-over-year basis we were down and I will describe that later. As a result, EBITDA was approximately $6 million excluding a $2 million proceeds for an insurance claim as compared to $1 million in the third quarter. Going forward, our key challenge is to broaden our customer base to avoid quarter-to-quarter revenue fluctuations and build a stable revenue stream within our revised cost structure.

Looking geographically, in Canada revenue was $33.7 million, up from the third quarter of $26.7 million, but down marginally year-over-year compared to $36.3 million in the fourth quarter of 2011. The degree of customer concentration has increased as smaller companies have reduced their capital expenditure. As a result, three customers in the fourth quarter accounted for approximately 80% of our Canadian revenue. Husky continues to be one of our core clients with revenue increasing in Q4 2012, up 34% compared to Q4 of 2011. Another core customer is Artek and similarly we saw an increase year-over-year with them of in excess of 50%.

On the expense side, our field margin for the quarter was 48.7% compared to 44% in Q4 of 2011. However, it was down slightly compared to the third quarter of this year. Fixed costs reduced to $4.3 million sequentially from $4.9 million and variable costs were at 8.3% compared to 11.2% sequentially. Fixed costs for the quarter include about $400,000 of one-time costs relating to our operational review. The reduction in variable costs as a percent of revenue largely reflects improvements to our repairs and maintenance processes and the field margin at 48.7% is largely down to the mix of profit that we use.

In the U.S., revenues of $13.2 million were down compared to $14.1 million in the third quarter and $23 million in the fourth quarter of 2011. Revenue in 2011 was substantially from two projects in Colorado with Chevron and Quicksilver; Quicksilver has since sold these properties. We have a high degree of customer concentration in the U.S. also with three customers representing 96% of the revenue. BlackBrush being one of the core customers in the U.S. was active in October, but due to access restrictions on the land they are operating on did not frac in November and performed only one job in December.

On the cost structure side in the U.S., costs of sales were 53.6% compared to 62.5% in the third quarter and approximately 61% in the fourth quarter of 2011. So we have seen some improvement there and that’s largely relating to better pricing discipline on behalf of our sales team in the U.S. In fixed costs, we have seen a reduction there sequentially to $2.9 million from $3.3 million and variable costs have gone down by $1 million from $2 million, or 7.6% from 14%, the largest reduction in those variable costs relates to accommodation, where we had a fixed price accommodation contract in South Texas and we have changed that to as used facility.

In SG&A, a total of $5.5 million compared to $5.8 million in Q3; included in the $5.5 million in this quarter is approximately $500,000 in bad debt allowance for two accounts in the U.S. which we expect to collect on during the next quarter.

On the balance sheet side, two items to bring to your attention, one is that we have impaired certain of our equipment by approximately $45 million. Under IFRS accounting policies, we are required to assess impairment of assets periodically and in particular when there is an indication such as a reduction in market cap, we are required to perform this assessment. Pursuant to our operating review, we have decided to part five sets of equipment and based on this we made a determination of the write down of $45 million.

As at year-end we had approximately $30 million drawn on our bank line; since year-end we have paid down $12 million and have $18 million outstanding under the line.

That concludes the financial review. For a few operations highlights; firstly, we during the quarter and early in this year received two patents in the U.S. that have been pending for approximately four to five years. These were core patents with respect to our process for pumping LPG. We were also awarded the Platts Energy Award for a leading technology/commercial application. And importantly, we successfully completed our first hybrid frac in late December and then early in February our second hybrid frac. This process allows us to place more [propane] per day and therefore allows us to address plays with larger fracs that require more or larger stages. And this is particularly well suited for oil plays.

So that concludes my formal presentation and I'll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Scott Treadwell from TD Securities. Please go ahead.

Scott Treadwell - TD Securities

I wanted to maybe follow-up on that hybrid frac operations update. I know in the past you had sort of pointed to sort of structurally lower level of utilization partly around the need to reload and that I know part of that was around your ability to kind of move propane into the system.

I know its obviously early days, you don't want to get expectations too high but if you were doing hybrid fracs does that structural level of utilization were it was kind of in that 30% to 40% range move materially higher up towards what a conventional frac spread might get over time if it was kind of fully engaged in this hybrid frac?

James Hill

That's dependent and you are right its early days and we've just completed the first two beta tests on this hybrid frac, but under the right structure I mean, its well suited for instance for pad fracking where that could significantly enhance the utilization but there's still upfront time to get loading done and so on. So in terms of our own planning, we are not planning for this too so much increase structural utilization so much as open up the breadth of the addressable market for us.

Scott Treadwell - TD Securities

Okay, that was kind of a follow-up. Have there been any particular plays that I know you referenced oil, are there any particular plays where this hybrid frac system if it gets some operational traction is really going to allow your sales team to get their foot in some [doors] as it would, as it would be?

James Hill

I believe so but again I don't want to talk about those specifically now because we are just getting the sales team focused but as we said oil plays where you are looking at larger stage sizes that type of thing is where this is best suited for.

Operator

The next question is from [Kenneth Mack] a Private Investor. Please go ahead.

Unidentified Analyst

My question is at the primary target of revenue which is most important thing to even reach EBITDA and have a real profit. Right now, you are either in or right at the beginning, this spring break often in Canada is this anticipated, it's going to be an extended break this year and is it affecting right now the revenue for quarter one and how do you expect it to affect quarter two?

James Hill

Well, breakup predicted. You know, it's a farmer’s gain because it's all about weather but anything I’ve seen indicates that it's going to be a typical break up but in terms of our planning, we got a couple of customers. We're already planning have works of replacing the equipment there early which allows us to do the work even with road bans being on. So that’s a positive. We didn’t have that opportunity in 2012.

Also, we're not affected by spring breakup with our work in the US and depended on the speed of which Black (inaudible) reengages their operations down there that offers us some good revenue opportunity for the second quarter.

Early indications there are that they’ll recommence in April. So, we certainly expect to see a much better second quarter than we did in 2012.

Unidentified Analyst

Going along with that, the financial people had removed restrictions on our trailing EBITDA with our credit lines until the end of the first quarter in 2013. Do you anticipate the first quarter than completing without any restriction than due to the spring break up?

James Hill

Yeah. I don't anticipate that we are going to have issues with respect to our bank line.

Unidentified Analyst

Good. I really was hoping that’s what you would say. Next, there is a lot of talk in across all people who have stock in the company about eCORP, is eCORP even affiliated with us any longer with the MOU or is this (inaudible)?

James Hill

Well, right now we are focused on our North American operations that’s where we need to be focused that’s where we see a significant amount of growth in the near-term. They are focused on Europe so there is just not a congruence of targets right now.

Unidentified Analyst

So at this point, you are saying that there really is no MOU impacted at this moment until something might happen is that right?

James Hill

I am saying we are focused on North American, they are focused on Europe. So at this stage, no, we are not working together because our goals are different currently.

Operator

Thank you. The next question is from [Jeremy Helane] from Avenue Fund. Please go ahead.

Unidentified Analyst

I wanted just touch on the US market rather and just kind of the general landscape around water availability throughout the US, there is a lot of areas that might be looking at and I'm kind of curious as to how that’s affecting the landscape for you guys and obviously you are an emergent technology in some respects and I am wondering if that’s creating any additional interest or are you seeing any contingency planning that might lead someone to bring you in if there are any local water restrictions in the like, just any kind of commentary in that would be helpful? Thanks.

James Hill

Yeah, I think Jeremy, you are likely right using the term it’s creating interest because that is very much an emerging issue but not necessarily an issue that’s having a current impact on customers. So they are looking in areas you know Texas is a good example where there is a concern about water restrictions and what we are talking about there is the actual availability of water.

Although, it’s not currently having the significant impact on frac in operations. Certainly, people are talking about it much more than they did even six months ago, and some of the longer term planners are beginning to look at options such as GASFRAC.

The other aspect with water is that related to that conservation of water is the issue of water disposal which is becoming more expensive. So the concern is regulations are building up around the usage of water that are making its use more expensive. So, again other alternatives to that.

Unidentified Analyst

Okay, so is it fair to characterize it as the industry really isn't expecting any meaningful shift this year but maybe in the out years is when there could be more significant impact?

James Hill

I think that’s my personal assessment from what I have seen. I mean there is very much more real focus and I would say more concerned about than I've seen in the past. But its not impacting certainly first half of 2013 operations, but going into out going years I think it could be a factor affecting purchasing decisions.

Unidentified Analyst

One last, just on the spread and then I'll hop off. In your corporate messaging to clients, the potential clients is it something that you are incorporating into your pitch at this point or is your kind of if you want to characterize as aggressiveness so to speak on this area going to mirror that curve.

James Hill

Well, no I’d think in terms of speaking to our clients and potential clients and helping them understand where this is heading because we tend to face it more day to day than they do is helping them to understand where restrictions on wattage usage is heading as well as the overall cost and recognizing the full cycle cost of alternatives is important.

Operator

The next question is from Jeff (inaudible) private investor.

Unidentified Analyst

You didn't mention anything regarding the selection for a new CEO, can you give some color maybe on that and whether the individual that would be selected would be required to own at least a portion of shares of the company. That would show that they have a base commitment to the company.

James Hill

Well, I can speak to the selection that requirement would be that of the Board, so that's out of my arena. But I know that the Board has a special committee, they spent an extensive amount of time with the executive search firm looking at a number of candidates. As we stated in our press release, they expect within the next 60 days to reach a final decision and that's based on the fact that they say they've gone through these interviews and have identified qualified candidates.

Unidentified Analyst

The five units that have been I guess you call it mothballs what would it take to, would it take much capital to get them up and running, should they be required if work picks up.

James Hill

No, not a significant amount.

Operator

The next question is from Todd Garman from Cormark. Please go ahead.

Todd Garman - Cormark Securities

I'm not sure I fully understand what the hybrid frac is, is this using another fluid in conjunction with propane to stimulate the well or can you give us a little bit more insight in terms of what hybrid means.

James Hill

Yeah, it’s using a conventional blender with a specialized fluid that we are pumping with a heavy concentration of propane and then the gel propane without propane in it is on the pressurized side and they are co-mingled at the well head. So that allows the use of that conventional blender and therefore we don't have the 100 ton restriction on a daily pumping basis that we otherwise have.

Todd Garman - Cormark Securities

And the specialized fluid on, I realize it would differ by well but what would be the percentage of the overall fluid volume?

James Hill

That’s going to vary and I am not going to speak to that right now. Our technical experts are better at that than me Todd, but it does vary depending on the formation.

Todd Garman - Cormark Securities

Is it water or hydrocarbon?

James Hill

It's not water.

Todd Garman - Cormark Securities

Okay, and so if we think about going further is the strategy then to migrate towards more conventional fracturing operations that it is to use propane?

James Hill

No. not at all. I think that’s a complete misread of the hybrid process; the hybrid process is still based in terms of the efficacy of the process down hole is based on that gel propane coming and co-mingling at the well head and it's largely the attributes of the gel propane that continue to provide that production benefits to our customers. The purpose of the hybrid is to allow us to place more profit on a daily basis.

Operator

The next question is from John Hill from [Berilian] Capital. Please go ahead.

Unidentified Analyst

Two questions for you this morning and two categories of question. On BlackBrush, what's the percent of revenue in the US that they were in Q4?

James Hill

Don’t have that at the top of head, but it was more than 50%.

Unidentified Analyst

Okay, so did I hear you correct that they haven't done anything, January, February and March and expected to recommence in April?

James Hill

Not exactly. They did one job in February and they are recommencing in April

Unidentified Analyst

And then second thing is with the fluid recovery, what's the delta between the cost of gas frac with fluid recovery and a hydro frac in today’s market in today’s pricing.

James Hill

People always ask me this question, I will give my legally [provisos] upfront, which is that depends on the design of the program because you can't always do apples-to-apples because if you design the program properly you could do propane fracking with less profit for instance.

But if we assume everything is the size and you have complete recovery of the fluid and you are looking at full cycle cost being there, anything from comparable to in some circumstances you can even, our customers have told us that we can be cheaper than water, but over the range from 0% to 15% more expensive.

Unidentified Analyst

If I recall then that is a pretty significant decline from premium that you would commence may be last year even. Meaning, the line is coming down between the difference...?

James Hill

We are becoming more competitive on a cost basis. Number one, the price of propane has come down year-over-year and with the tailored fluids and other efficiency steps that we’ve have taken, there is opportunity for our customers to receive reductions in their overall cost of the provision of the service.

Operator

The next question is come Rich Feldman from Axiom Capital. Please go ahead.

Rich Feldman - Axiom Capital

Early on in the company’s existence we were quite comfortable asserting that clients would get better ultimate recovery using your process, and it’s clear that in certain basins you had good success. Earlier management has spoken about collecting a data base to be able to demonstrate this to the vast majority of the market that still uses other methods. What are you trying, first are you still confident that you do get better recoveries and second have you convinced the world that this is so?

James Hill

First yes, I am confident that in our targeted basins we do get better production, our customers get better production as a result of our service. Is the world convinced? Part of that are, but that is the challenge of the adoption of the new technology is demonstrating that and collecting enough data in a not different formations or at least the formations that we are targeting and that is part of the process that are sales and business development team is going through is that they are continually upgrading that data base of information to provide to customers and potential costumers, but that will be an ongoing process for a period of time.

Rich Feldman - Axiom Capital

When you look at customers who tried the technology and decided not to adopt it broadly in a given basis, what are their reasons?

James Hill

There can be you know we've had some particularly smaller clients which has been the big change year-over-year, where the upfront capital cost is more although you get a relatively quick recovery when you look at the differential in production. But for those guys capital is tight so that upfront cost is an issue, and the other challenge frankly is more of a human one which is now I have this way I do business everyday that I've done for 10 to 15 years why do I want to change you know the actual guy on the ground.

So to adapt to new technology takes some time in understanding of how you implement that change throughout your processes. So it’s not like buying the new Blackberry 10, you just turn it on and make it work. You've got to connect this to the other interfaces in your process.

Rich Feldman - Axiom Capital

Is that the [inertia] you refer to in the press releases.

James Hill

Yes.

Rich Feldman - Axiom Capital

Okay, well where do you think you have the most promising opportunities given your scale back resources.

James Hill

Well, I think clearly in the Canada western sedimentary basin is where our primary opportunity is, that's where we have been the longest, that's where we have the most data demonstrating the success of the process and certainly that's where we are seeing more and more interest from customers.

Rich Feldman - Axiom Capital

In the US without BlackBrush who are the other two customers you mentioned, three customers.

James Hill

Yeah, we got a number of customers there one was [Wind] Energy. I don't have the other customer name right in front of me. But right now the US is an area that we are developing BlackBrush as the core customer down there. We are building in South Texas and also looking in Colorado where we've had PDC working with us and we want to try to build around that. But that is at its beginning stages as we’ve discussed in our MD&A.

Operator

Thank you this concludes today's question-and-answer session. I would like to turn the meeting back over to Mr. Hill.

James Hill

Okay, thank you very much and thank you everyone for participating in the call, and I look forward to talking to you again. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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