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Executives

James M. Hill – Chief Financial Officer/Acting Chief Executive Officer

Analysts

Richard Duro – Private Investor

William Blanchard – Private Investor

Richard Feldman – Axiom Capital Management, Inc.

Jeremy Hellman – Avenue T Fund

Richard Duro – Private Investor

GASFRAC Energy Services (OTCPK:GSFVF) Q1 2013 Earnings Call May 9, 2013 11:00 AM ET

Operator

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

James M. Hill

Thank you, operator. Good morning ladies and gentlemen. We will be giving a review of the first quarter. I’ll briefly go over the financial results for the quarter then talk about some operating highlights that happened in the quarter and then open it up for questions-and-answers.

On our financial review, revenue for the quarter was $31.5 million from eight customers, down approximately 30% year-over-year. In Canada, we earned $28.5 million from five customers, down from $35.4 million last year, largely due to the decline in propane costs, the benefit of which has been passed on to customers. Activity levels in Canada were 65 revenue days similar to 63 revenue days in 2012.

In the U.S., we earned $3 million from three customers, really reflecting the small amount of work performed by BlackBrush, our major customer in South Texas. We did complete one hybrid frac for BlackBrush in the quarter that left well and have restarted work with them effective May 1, with two horizontal wells scheduled per month for the remainder of the year.

On our cost side, in Canada, our cost of sales was 51.3%, compared to 48.7% in the first quarter of 2012. We saw fixed operating costs reduced by approximately $1 million to $3.9 from $4.9 and variable operating costs were at 10% of revenue, down from 12.1% in the prior year. In the U.S., cost of sales were reduced marginally from 56.9% to 54.7%, fixed operating costs were $2.2 million as compared to $2.1 million in the first quarter of 2012, and variable costs were up at 27% compared to 13.5%.

The increase in variable costs really reflects the semi-variable nature some of the travel and accommodation costs with the low level of revenue in the quarter and BlackBrush started up again in the second quarter. SG&A costs were down approximately $1.4 million from $6 million down to $4.6 million in this quarter.

From an EBITDA point of view, we earned EBITDA of approximately $500,000 as compared to $2.2 million. This reflects two things. One was the reduction in revenue, due to the customer concentration, but secondly on a more positive note was that we were able to put our cost structure in much better shape and that that $30 million level in a quarter, we are EBITDA positive, that’s down from approximately $41 million a year ago.

On the balance sheet side, we’ve renegotiated our credit facility to better reflect what our current needs are and our current needs really are to fund our working capital. We have minimal capital expenditure requirements in 2013 and therefore our draw on our line of credit will tend to fluctuate with receivables. Currently, we have net debt drawn of $19.2 million with as I said $50 million available and that reduction to $50 million allows us to have access to what we need and reduces our standby cost on our debt.

From an operational point of view, a few highlights for the quarter. Firstly, we completed our second and third hybrid LPG jobs in the U.S. and both of those well have had good results from a production point of view for our customer and importantly went off very well from an execution point of view. We have also introduced the hybrid capability to our Canadian operations effective this quarter. Also during the quarter, we’ve seen success with our fluids tailoring strategy that we’ve talked about in the past, whereby customizing the fluid for the particular formation of the customer. We’re able to have a recovery of that fluid to reduce the net cost of the fracturing treatment for our customer.

And finally from an operational point of view, although not in the first quarter, we’ve been able to complete pad work in the second quarter for two customers up here in Canada and therefore able to remain relatively active during April when typically that’s a slow period because of the spring breakup and road bans here. So those four things have combined to introduce new capabilities to our customers and we have seen more interest from customers. We’ve had bookings with new customers for Q2 and Q3 in both Canada and the U.S., looking at areas such as the Montney, Cardium and the Eagle Ford.

And then finally just to talk a bit about the second quarter, as I’ve mentioned, we’ve been able to complete some pad work and we’ve restarted work with Husky in the U.S. So actually quarter-to-date this year, our revenue is in excess of what we were able to do for the entire quarter of second quarter of 2012.

Positively, our major customer, Husky, has made some public comments recently on their conference call on the project that we work with them on, which is the Ansell project, up near Edson, Alberta. They indicated that Ansell is shaping up to be a real needle mover and that the company is reallocating more capital within their Western Canadian conventional portfolio towards the Ansell property. So that’s positive news for us.

And also with BlackBrush in the U.S., they are now also working with a company called Terrace that recently raised about $60 million and is focused on work in the Eagle Ford area and we anticipate doing our first fracturing treatment with them later this quarter. And finally, I just draw your attention to that on June the 6th in downtown Calgary, the company’s will be holding an event to introduce our latest improvements to our technology and our operations put it on display at the 5th and 4th parking lot corner and inviting customers down to see what we’re doing.

So that is it for me from the formal presentation. I’d now ask the operator to open that up for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) First question is from Richard Duro, Private Investor. Please go ahead.

Richard Duro – Private Investor

Hi, Mr. Hill, how are you doing today?

James M. Hill

Good. How are you Richard?

Richard Duro – Private Investor

I am good. There is a dealer that’s been talked about with Tesera and with BlackBrush down in South Texas. You said they will be drilling their first well in second quarter. They indicated that they had 1225 drilling locations in the land area down there. When do you anticipate drilling all those wells?

James M. Hill

Well, I’d love to be involved in all of them, but we have to be realistic. And the first, as I said, we anticipate doing work for them later this quarter and then continue on at sort of a steady pace. But right now, they are just beginning that project. The opportunity obviously is significant and within that area, we have seen a great deal of success in terms of the production results. So, I would anticipate, once they’ve done a couple of wells that we’ll see a good customer out of Terrace.

Operator

Thank you. (Operator Instructions) We have a question from [Larry Sabino, Sabino Capital Management]. Please go ahead.

Unidentified Analyst

Hey, Jim. If everything comes together, is there a shot that Q2 you’re going to have record revenues for the second quarter of your fiscal year?

James M. Hill

Well, I understand Q2 is typically a difficult quarter in Canada, Larry, because of breakup. So, typically, if you can’t get pad work, it’s bad. I mean we anticipate that if everything goes well, Q2 should be EBITDA breakeven or even potentially positive that is what our aim is. And if it goes extremely well, we should exceed the first quarter, but we need to be careful and ensure that the work gets executed efficiently in terms of, I guess, I don’t want to see any times when operation start. And that’s the concern that we have had is that operations get going with the customer and then are halt it for a period of time. If everything goes as planned, yes, we should have a record quarter.

Operator

Thank you. Our next question is from Paul (inaudible) Investor. Please go ahead.

Unidentified Analyst

Yes, thank you very much. First, your thoughts are to be complemented on a terrific progress you’ve made toward restructuring the financial model of the company. A couple of quick questions. One is definition of what hybrid LPG means relative to what you’re doing? And the second question has to do with a comment I got out of someone on the industry that a lot of the fracking wells that contain a clay have a great disadvantage of putting water in there because of the slowing and that it’s a distinct differential advantage to your approach. And I’m wondering if there are particular areas where that is an advantage?

James M. Hill

Well, to answer your second question first, yes, one of the issues with water fracking in clay formation is that clay will tend to absorb the water and creates swelling and hinder production of hydrocarbons and propane is a great solution for that area. And in fact that’s one of the attributes that we look for as being formations that are particularly susceptible to our technology. And that’s one of the reasons that we’re in South Texas. In terms of the hybrid, the Hybrid LPG system for us is a system where we’re adding frac fluid from two different sources.

So we have our high-pressure side, which is our conventional side, if you will for us, where we’re adding pure gel propane without proppant being up. And then from the hybrid side, we’re adding a refined frac fluid with a high concentration of proppant. Those two comes together at the wellhead and commingle and give the efficacy down whole similar to pure LPG in terms production for our customers. The advantage of that process is that we’re able to have more than our 100 ton limitation of sand addition per day that’s currently our limitation with the conventional side. So this allows us to do much larger fracs, get more done in a single day. So it’s advantageous for our customers.

Operator

Thank you. The next question is from William Blanchard, Private Investor. Please go ahead.

William Blanchard – Private Investor

Good morning. Could you help us to understand how eCORP and their liquid propane process compares to what gas frac is doing? And what is any relationship or competition currently exists with them?

James M. Hill

Well, I wouldn’t say there is any competition because I don’t believe they’ve got any equipment in place that has done any operations. I haven’t seen there particular liquid but pure liquid propane has been used for years for propane flooding, so that’s nothing new. And I believe secondly that eCORP is focused on their European properties, not on North America and we’re very much focused on North America. And currently, we don’t have any particular relationship with eCORP.

Operator

Thank you. Our next question is from Dick Feldman from Axiom Capital. Please go ahead.

Richard Feldman – Axiom Capital Management, Inc.

Thank you for taking my question. I’ve got two questions. When you spoke about BlackBrush planning to do two wells (inaudible) month for the remainder of the year until the hunting season? Does that include their relationship with Terrace, or was that just BlackBrush on their own?

James M. Hill

That is just BlackBrush on their own. The relationship with Terrace, as I mentioned earlier, somebody have said they’ve got 1,150 wells to drill, but this is just starting out with them and we’re doing the first one later on and then they will let us go from there, how much they’re going to continue, but that will be additive to the BlackBrush work.

Richard Feldman – Axiom Capital Management, Inc.

Great. And the other question has to do with your comments about having the ability now to customize the fluids used in the frac. Does that gives you any better recovery or is that mostly due to making the economics of that frac more attractive to your customer just from a recovery of fluid point of view?

James M. Hill

Well, I guess there is two things. One is the customerization tends to be specific to the formation, so almost by definition the fluid is friendly to the formation, so no damage. But the driving force is the recovery of that frac fluid form the monetary benefit of our customer, so that it reduces their cost of fracking and in fact in some circumstances customers have said that it reduces the cost on a per stage basis to even less than that of water. So it’s a very positive benefit.

Operator

Thank you. The next question is from Jeremy Hellman from Avenue T. Please go ahead

Jeremy Hellman – Avenue T Fund

Hi, good morning.

James M. Hill

Good morning.

Jeremy Hellman – Avenue T Fund

First question for me speaking about Texas in particular and the formations down there. Do you get a sense when you think about what’s going on with draught conditions in Texas that operators are trying to accelerate their water based recovery, which maybe a hindrance to you guys getting more adoption or do you get some feedback that could be any water usage restrictions that might help your cost?

James M. Hill

I would say more the ladder, I haven’t heard people are accelerating the use of water because they afraid it might not be available later on, which is what I think you said. What we’ve seen more or so as an industry, companies looking at, there maybe some risk going forward as to degree of availability even in Northern Canada, here we’ve seen during certain seasons, bans on the use of water from riverbeds and ponds. And certainly, if you look at areas such as the Northeast, other than may not be bans on the use of water, the cost of disposal is increasing in some situations as much as $120 a cube. So that is propelling companies to look at alternatives.

Operator

Thank you. The next question is from Tom [Hawkins] Private Investor. Please go ahead.

Unidentified Analyst

Well, can you tell me, every time we hear the news release, there a politician complaining about fracking. Should we be saying well wait a minute, there is an option to using water, are you guys ready to actually propel any kind of production that could be used by the industry?

James M. Hill

By the way just (inaudible) on the last person’s question, I think that we certainly see the issues around water has been beneficial to adoption of our technology. We have to understand the reality is that water fracking will exists for a period of time because it is the majority of what’s going on now. So that changes is going to happen overnight. The major benefit that our customers see and that really drives that I believe will drive the adoption is that we provide them with more production, which makes their assets more valuable, gives them a greater return on investment. And that’s really their key decision maker.

Operator

Thank you. The next question is from Richard Duro, Private Investor. Please go ahead.

Richard Duro – Private Investor

Jim, I have a question regarding the new CEO. Could you talk a little bit about that for us please?

James M. Hill

Yeah the board is continuing to look at that, Richard. I mean they’ve got a couple of guys on the line right now. And they’re being very careful with their analysis and going through a series of interview. So I expect again, over a short period of time that they will reach a decision, but that’s the board that’s really focused on that activity right now.

Operator

Thank you. Our next question from [Larry Sabino, Sabino Capital Management]. Please go ahead.

Unidentified Analyst

Hey, Jim, I think you misunderstood my question.

James M. Hill

Okay, it’s been known to happen, Larry.

Unidentified Analyst

If you have decent results this quarter, it looks like you would have record Q2 results or revenues. And since, now you have the hybrid plus the customerization, can we look at this as kind of a reset and hopefully it ramps from here and if we can finally get customerization of the units…

James M. Hill

I hope so Larry. I mean I’m an account so I’m cautious by nature, but that’s what we would try to layout here. I mean when we sort of reset last September, if you will, we said we need to do three things. Number one, we need to get our cost structure and our profit model sort it out. So we’ve done that and we think the results of the last two quarters demonstrate that.

Secondly, we wanted to insure that we enhanced our service delivery capability to provide our customers more specifically with what they need, based on the feedback we’ve gotten over the last couple of years. So the hybrid, the customized fluids and just the pure improvement and execution reliability, I mean our execution reliability has been 98% and above for the past eight months. So we’ve done that.

And then that having accomplished those two things put us in a position to broaden our customer base to get that level of revenue consistency and revenue growth that I think you’re talking about. And that is our number one focus now. And we’re beginning to see the results from that in terms of the level and the type of interest from new customers. So for instance in Canada, we have seen – customers talk to us about using our new services in areas such as the Montney which we haven’t done a lot of work in yet, but now because of the capability of the hybrid that’s interesting because those are the larger frac sizes.

Also some customers in that area are saying, well, maybe there is the opportunity to use some of these customized fluids as well and that will save us transportation cost. We’ve also seen customers that are in, sort of, our core formation areas like the Cardium, who we haven’t dealt with before now coming to us and saying we’d like to test this so – on a two to three well program. And that we haven’t seen for a while in terms of that specific type of interest in those specific locations. I mean I’ve got in Canada for this quarter, there is already three new customers that we have a work with that are on the books.

Now, it’s a question of how quickly that turns into consistent revenue, I mean that’s our goal. Create a new customer, turning them into a repeat customer then turn them into a consistent customer. And we’re very much working rigorously and going through that process. In the U.S. and we’ve already talked about couple of these guys, I mean Terrace coming on board and they have a lot of information based on their relationship with BlackBrush and they clearly see the benefit from a production and a service execution point of view. And then we have a couple others who I can’t name right now because we’re under NDA with them. But again they’ve seen the results from the specific areas, they’ve seen the results from our new processes and that’s what’s created the interests. So that is a long one that answer to your question, yes, I do believe this is the reset and that we’re beginning to see the momentum to create consistent number one and number two growing revenue.

Operator

Thank you. Our next question is from Dick Feldman from Axiom Capital. Please go ahead.

Richard Feldman – Axiom Capital Management, Inc.

Thanks for taking the follow-up question. Given the current sets of equipment that you have, what is your effective capacity?

James M. Hill

Well, we’ve got five sets of equipments that our manned and we’ve always use the metric of something like $60 million revenue capacity for that set of equipment, so that’s $300 million capacity that we can produce with that those sets of equipment.

Operator

Thank you. Our next question is from Paul (inaudible) Investor. Please go ahead.

Unidentified Analyst

Yes, it’s a similarly related question. It’s a capital intensive business, your efforts to throttle back the growth and get the financial model in shape, is giving you a little period here where your capital outlines have been also limited. And I would guess that the working capital expenditure per dollar and revenue is a pretty small number at the moment. So the question is looking forward we get this all in control, how long before you have to really ramp up the, buy new compressors, do things like that to burden your capital expenditures?

James M. Hill

Well, I guess that that sort of relates to the last caller’s question, which is we’ve got five man sets of equipment. We’ve got another depending on how we configure them, four to five that our part currently. So we’ve got equipment today with revenue capacity of, call it, $500 million to $600 million. So we can grow to that level without significant new growth capital expenditures except perhaps some additional expenditures for conversion to hybrids, but that’s only maybe $1.5 million to $2 million to add a hybrid set. I mean it’s relatively limited because it’s integrated well with our conventional delivery system. So I will be happy to have that challenge of meeting to the add new equipment, because that means, we will have got reached that sort of $500 million to $600 million in revenue, in which case, we should be producing a fair amount of cash. Operator, I’ve got another meeting, so I would ask that this next question be the last question.

Operator

We have no further questions at this time, sir.

James M. Hill

Okay. Thank you very much everybody. As always, I’m available if you wish to call me directly, if you haven’t had an opportunity to get your question answered here.

Operator

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

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