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Executives

James Hill – CEO

Lori McLeod-Hill – CFO

Analysts

Scott Treadwell – TD Securities

Brooks Whitehouse – Wells Fargo

John Hilly – Berlin Capital

Brett Reiss – Janney Montgomery Scott

John Rosenberg – Loughlin Water Partners

Robert Howard – Prospector Partners

Richard Lewis Feldman – Axiom Capital

Brian Jones – Richardson GMP

GASFRAC Energy Services (OTCPK:GSFVF) Q4 2013 Earnings Conference Call March 13, 2014 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the GASFRAC Year End 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, Melanie. Good morning, ladies and gentlemen. I am here with Lori McLeod-Hill, our CFO. Lori will give a brief review of the financial results for the quarter and year, following that, I’ll give some highlights of the operations and then we will open up the call for questions. Go ahead, Lori.

Lori McLeod-Hill

Thanks, Jim. Good morning. For the fourth quarter of 2013, GASFRAC generated consolidated revenue of $29.4 million compared to consolidated revenue of $46.9 million in Q4 2012.

During the quarter, GASFRAC earned revenue from five customers. The top three customers represented 97% of the company’s revenue. For the year ended December 31 2013, consolidated revenue was $121.8 million compared to consolidated revenue of $149.4 million for the prior year.

GASFRAC’s Canadian operations generated $22.8 million in revenue during Q4 2013, down from $33.7 million during the previous year’s quarter. Revenue was generated from three customers during the fourth quarter.

For the fourth quarter 2013, Canada executed 34 revenue days, at 672,000 per revenue day. During Q4 2012, Canada executed 79 revenues days at 425,000 per revenue day. The reduction in revenue reflects fewer smaller oil companies utilizing the company’s services due to capital constraints.

For the year ended December 31, 2013, Canadian revenue was $92.9 million, compared to revenue of $107.8 million for the prior. Canada executed 177 revenue days at 525,000 per revenue day during 2013 compared to 227 revenue days at 475,000 per revenue day during 2012.

Our U.S. operations generated $6.5 million in revenue during Q4 2013, down from $13.2 million during Q4 2012. Q4 2013, the United States executed on ten revenue days at 654,000 per revenue day versus Q4 2012, where we executed 27 revenue days at 490,000 per revenue day.

For the year ended December 31, 2013, U.S. revenue was $28.9 million, compared to revenue of $41.6 million for the prior year. The U.S. executed 58 revenue days at 499,000 per revenue day during 2013 versus 94 revenue days at 443,000 per revenue day during 2012.

The increase in daily revenue is due to the successful introduction of the hybrid LPG fraction that allows the company with the ability to place more place more propane into our customer's formation in a revenue day.

From a cost perspective, cost of sales as a percentage of revenue, increased slightly to 53% from 52% of revenue in the fourth quarter of 2012. As a percentage of revenue, cost of sales decreased to 61% for the year ended December 31, 2013 from 53% for the year ended December 31, 2012.

Canadian cost of sales was 59% of revenue for the quarter, as compared to 51% of revenue in Q4 2012. Canadian cost of sales increased from 50% for year ended December 31, 2012 to 55% for the year ended December 31, 2013.

U.S. cost of sales was 34% of revenue for the quarter as compared to 54% of revenue in Q4 2012. U.S. cost of sales decreased to 36% of revenue for the year ended December 31, 2013 from 61% of cost of sales for the year ended December 31, 2012.

This decrease in U.S. cost of sales reflects the direct purchase of fracturing fluid by the customer. This process has the effect of reducing GASFRAC’s revenue and cost of sales by like amounts and effectively decreasing cost of sales as a percentage of revenue.

Variable operating cost as a percentage of revenue decreased to 9.2% of revenue in the fourth quarter of 2013 or 9.7% of revenue in the fourth quarter of 2012. As a percentage of revenue variable operating decreased to 10.5% of revenue for the year ended December 31, 2013 from 13.4% of revenue for the year ended December 31, 2012.

Fixed operating costs were $5.4 million for the quarter as compared to $6.4 million in Q4 2012. Fixed operating costs were $22.2 million for the year ended December 31 2013, down from $28 million during the prior year.

SG&A costs were reduced from $5.5 million for fourth quarter 2012 to $4.8 million for fourth quarter 2013. SG&A costs were $18.5 million for the year ended December 31, 2013, down from $22.5 million during the prior year. Overall, fixed operating costs and SG&A were reduced by $10 million year-over-year.

EBITDA for the quarter was $1.2 million compared to EBITDA of $7.7 million in the fourth quarter of 2012. Overall, EBITDA increased by $7.3 million from $0.6 million for the year ended December 31, 2012 to $7.9 million for the year ended December 31 2013.

I'll now turn the call over to Jim to provide some operating highlights.

James Hill

Okay, thanks, Lori. I want to go through some of the highlights for the year not only the quarter just to put things in context. Firstly, we – year-over-year reduced our fixed operating and administrative cost by approximately $10 million.

Our operating team improved their service reliability to 98% in the field. We introduced two new value-add services to our customers and the key to both of these is that it reduces the net cost of the fracturing treatment for our customers. So, we are providing value by giving our customer greater production because of our superior fluid.

However, that initial cost in today’s environment is a critical purchasing decision factor. So, the processes we have looked at in terms of improving our equipment configuration as well as improving our fluid, the breadth of our fluid capabilities are focused on being able to do that in a manner that is more cost-effective for our customers.

So those two key services were the hybrid of LPG service which allows us to pump more profit per day therefore be on location for much fewer days than we had to be previously and then more recently engineered fluids which allow our customer to recover the fluid back in production and therefore received monitory benefit for it.

A significant event in the quarter is that we completed a fracture or a terrace in the oil window on the Northwest section of the Eagleford that’s a relatively low pressured shallow section where economic success of alternative fracturing techniques hadn’t been viable and terrace is able to get commercial production in their well with our service.

We have had discussions with them since then they are planning additional wells during 2014 in that area indicating that the plan to use us. In terms of our balance sheet, year-over-year, we’ve reduced our bank debt net of cash to $16.6 million from $22.1 million at December 31, 2012 and we are very proud of the safety record that we’ve achieved during the year.

No serious incidents in our terrace and the top docile of our industry. And that is something we pay a lot of attention to and all our staffs should be applauded for the work that they have done there and continue to do.

Now importantly in Q4 as well as looking at Q1, what we had done in 2012 was really – sorry, 2013, was really to set us up so that we could attract more customers to trial our technology and that’s the nature of the decision-making process for our customers is that they will trial the technology on a well or two wells collect data over, say a three months period.

So they can take a look at tapers, then perhaps enter into a second trial, more well, perhaps three at this time, three or four rather than one or two. And again, wait three months and collect more data and look at tapers before making a final decision.

Our challenge in 2013 is that we weren’t bringing these trials on board partially because of that cost I talked about that we’ve been able to address with the hybrid LPG as well as the engineered fluid and partly it was honing our sales processes. So, we had two trials in the fourth quarter of 2013. We have had as of today four new trial customers in the first quarter of 2014 and we expect to have one to two more before the end of this quarter.

So in terms of that metric which is important for predicting potential future revenue, I would say that we’ve seen some very good success, largely in Canada, right now the U.S. has been slower although that Eagleford well that we did has attracted attention and we’ve had a number of interactions with potential customers since then, but I can’t say that we’ve got wells lined up at this stage, but certainly there is some momentum.

And finally, I’d like to note that we did hire a President earlier this quarter Jason Monroe. Jason comes to us from working with two other independent pressure pumping companies in Canada.

He has got 17 years of experience in the field, largely in sales, sales management roles and that is where we see him bringing value to the company. As I said, we’ve looked at those processes. There is room for improvement and we are seeing that happen already and we’ve already begun to see some momentum created by actions being taken.

That’s the highlights for the quarter and I’ll now turn it over for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) The first question is from Scott Treadwell of TD Securities. Please go ahead.

Scott Treadwell – TD Securities

Thanks. Morning guys. I just wanted to, maybe refresh some of the discussions you’ve had in the past given that there has been a pretty substantial change in LPG prices and there it sounds like more occurrence of customers providing their own fluid.

Does that change in anyway materially your sort of thoughts the $10 million a month is your sort of breakeven revenue rate considering that the revenue mix may have changed suddenly here in the last couple of quarters?

James Hill

That’s – I am going to sound like a lawyer here Scott, it depends. Simplistically, I look at it is that a dollar earned where the customer is supplying the fluid is equivalent to a $1.50 where we are supplying the fluid in terms of what falls to the bottom-line. So in answering your question, over time I see that $10 million is going down as more and more of the revenue reflects customer supplied fluids. But I can’t give you an exact number.

Scott Treadwell – TD Securities

Okay and that’s sort of all I was really open for was the direction and I guess, secondly on to sort of on the propane side, there is obviously been a huge amount of issues in the northeast with propane supply and pricing. Has that sort of trickled through to the operations that you’ve seen thus far in Q1, or has your operating areas in Texas largely been insulated from that?

James Hill

That’s so much – yes, Texas we haven’t had issues with, unfortunately there has not been a lot of activity for us in Texas right now as BlackBrush is restarting in April. But in terms of the Canadian operations, not so much is supply, but we saw in the first part of the quarter, propane prices go as high as $900. And at that point, butane was actually almost half the price.

So we saw some conversion to butane rather than propane as the fluid. Now we’ve seen that come down substantially, I mean propane is back to – I think just over $400 now. But it does reflect why one of the initiatives that we’ve taken is, engineered fluids for instance where our customer is able to recover the value of our load fluid.

So we want to ultimately get in a position whether that propane prices are $100 or $300 our customer is going to get most of that value back. So it shouldn’t matter. That’s the ultimate goal.

Scott Treadwell – TD Securities

Okay, that’s good. That’s all I’ve got guys. I appreciate the color. Thanks, Jim.

James Hill

Okay, thanks, Scott.

Operator

Thank you. The following question is from Paul Rogers from (inaudible). Please go ahead.

Unidentified Analyst

Please, when you go through a series of trials with a customer and the client ultimately says no, thank you, what feedback do you get as for why they are not choosing your services?

James Hill

Well, we always look to go through a post-mortem if you will, and look at, is this a cost issue, is it an issue of not getting the expected production. Is there formation variables that are causing issues, or formation variables that we thought were X and in fact turned out to be Y.

So we go through that whole process with our customers. In fact, prior to starting the trials what we attempt to do is, define the variables of success, so that if there is a yes or no, it’s clear against those variables, what caused that yes or no.

Unidentified Analyst

And is there a commonality within the rejections as to…

James Hill

I guess, I can’t – this is sort of a reset of trials, as I was trying to describe based on the new values that we’ve added. So this set of sort of the two in the fourth quarter and five to six that we are seeing now are relatively new.

So, we don’t really have any acceptance rates at this stage, because those trials haven’t reached the timeframe in which they’ve had sufficient time to do their full analysis. That really is a second half of the year metric that we will be seeing.

Unidentified Analyst

So the post-mortem data you collected, the history is extremely short, it sounds like you don’t have it going back two, three years. You can’t give me an answer…

James Hill

Well, I can say two or three years, but I think the environment is significantly different than it was then, both the industry environment but more importantly what GASFRAC is able to provide the customers.

Unidentified Analyst

Got it.

James Hill

So that data isn’t – now that data told us one of our key issues was – our service too costly and we had to spend too many days on location. And that’s why we’ve made the changes with the hybrid and the engineered fluids that we’ve addressed those two issues that we got from the post-mortems out two and three years ago and that we are into the next set of trials.

Unidentified Analyst

For the trials that are undergoing this quarter, how many are the one well versus we are Phase II where we are doing three and four wells?

James Hill

The ones that we are looking at this quarter are all first time trials.

Unidentified Analyst

Is there any – I am always surprised how little I see in the public press or a public media about the environmental advantages of your technology and it’s been touched upon in previous conference calls, do you have a social media strategy to get GASFRAC’s technology out in front of the green groups and the green community and the public – North American public at large?

James Hill

There is an element of our marketing that we look at that. Frankly, our most significant focus right now is, one-on-one with potential customers. But we have our marketing group also talking about that environmental benefit and certainly we do talk to the press on occasion about that as well to try to get it out through more broadcast media.

Unidentified Analyst

No, – that mean concentrating on the sales operative is excellent. My thought would be that you could do a credo back pressure from the public in general for more green and force the E&P companies to come to you a secondary effort. That concludes my questions right now. Thank you. I’ll get back in the queue.

James Hill

Okay, thanks Paul.

Operator

Thank you. The following question is from Richard Draw, a private investor. Please go ahead.

Unidentified Analyst

Good morning, Jim.

James Hill

Good morning, Richard. How are you?

Unidentified Analyst

I am pretty good. Jim, have you had any news regarding Chevron or Shell down the road for some business?

James Hill

I am hopeful in the second half of the year, we have some opportunity with – and I am not going to talk specifics because, both agreements contain confidentiality provisions. But there is a new area being developed in Canada, where there has been an indication to us that they want to try our technology as one of the completion techniques to evaluate what is best looking at – it’s – area where completion techniques haven’t been fully mapped out yet.

Unidentified Analyst

When do you think you’ll have an announcement on that?

James Hill

I’d say, that is second half of the year.

Unidentified Analyst

Okay, thanks, Jim.

James Hill

Okay, take care, Richard.

Operator

Thank you. The following question is from Brooks Whitehouse of Wells Fargo. Please go ahead.

Brooks Whitehouse – Wells Fargo

Hi, Jim.

James Hill

Hey, Brooks.

Brooks Whitehouse – Wells Fargo

I just wanted to know, you mentioned that you had four new customers in Canada and a possibility of two more added on at the end of this quarter or is that at the end of next quarter?

James Hill

Yes, we had four trials with new customers in Canada, so far this quarter and potentially one to two more.

Brooks Whitehouse – Wells Fargo

And how of those trials were done?

James Hill

Well, in terms of execution, they went very well. In terms of production results with – it’s just too early days to have that information.

Brooks Whitehouse – Wells Fargo

Okay and are you still just concentrating on this continent and not going into any other foreign countries?

James Hill

Yes, I mean, we see lots of opportunity in North America, it’s still 75%, 80% in the pressure pumping market. We need to focus our efforts – not just on this continent but particularly on the Canadian Western Sedimentary Basin and South Texas areas like the Eagleford, the Wilcox and the Permian.

Brooks Whitehouse – Wells Fargo

And they worth the problems?

James Hill

Unfortunately, believe it or not, despite the cold weather you had out there in Boston, it’s warming up out here and we actually had one job just recently got postponed because of damp conditions on the lease. So break up seems to be coming up here in Canada relatively quickly.

Brooks Whitehouse – Wells Fargo

Okay, thank you. Good luck.

James Hill

Okay, take care.

Operator

Thank you. The following question is from John Hilly of Berlin Capital. Please go ahead.

John Hilly – Berlin Capital

Hi, Jim, quick one for you. On the sales funnel, can you give me some insight into what your historical trial to consistent work ratio is and also how that ratio has been trending over time?

James Hill

I am going to give you the same answer that I gave the caller a couple calls ago. There is really – I view what we are doing now as a new set of trials that past data is relevant to. Two and three years ago, we did a number of trials and I guess a couple of things happened.

One is, a lot of those were junior companies in Canada and largely that set of junior companies doesn’t exist anymore because the cost of drilling and completing wells has gone up so much and the ability to raise capital has been limited. So the pool of customers is different in that sense certainly in Canada.

Secondly, is those trials where we got results back that said generally the result that came up with we don’t want to continue was we like the service, the results we are getting into the well are pretty good, but the upfront cost is just too much for us.

Now, we did get somewhere the results weren’t as good as they thought they would be, but the majorities were the customer didn’t continue was the cost issue and as I said, we addressed at least partially that issue with the introduction of hybrid.

So we could get more done in a day to reduce cost for our customers and the enhancements to our breadth of fluids and really the objective there being to lower the cost of the fluid to the customer either through providing the ability for that customer to get that back in their production flow and therefore get monetary value or by the mix of the fluid reducing the upfront cost of it.

So that’s the past. The trials that we are talking about now, we don’t have historic information on, because really the first two were in Q4 of 2013. That’s a long way to answer your question.

John Hilly – Berlin Capital

Okay, since hybrid and engineered fluids came in, there has been just two trials?

James Hill

Correct.

John Hilly – Berlin Capital

Got it. Okay.

James Hill

Two trials in the fourth quarter and then four more so far this quarter and two potentially more.

John Hilly – Berlin Capital

Right and it will be – call it nine months before we can get any real data about conversion?

James Hill

Yes, I think that’s more or less a good metric, yes.

John Hilly – Berlin Capital

Okay, and one final one. The EPA rule changed on flooring that’s coming up on – let’s say in about nine and a half months now. Have you seen increased interest from that? Or what’s the feedback you are getting from operators on that issue?

James Hill

It’s certainly something they are beginning to pay attention to and there is a number of attempted solutions to that issue. I mean, that’s one of the great benefits of engineered fluids, because if that frac fluid is coming back into production flow, there is no need for flooring. So, it is an added attribute to our sales that the customers look at. I can’t say we’ve made any sales strictly because of that yet.

But it – nine months sound short to you and I maybe, but the decisions I think when we are three months away from that date are going to become more critical and that issue is going to become higher value and higher visibility to customers.

John Hilly – Berlin Capital

Thank you.

Operator

Thank you. The following question is from Brett Reiss of Janney Montgomery Scott. Please go ahead.

Brett Reiss – Janney Montgomery Scott

Hi, good morning. The two tweaks to your system with the hybrids and the engineered fluids which have reduced the upfront cost and after those tweaks, how much of a differential with the competing processes is there – how much if you narrow the gap by these tweaks?

James Hill

And those that have talked to me know, I hate to give generalities in the oil field because every formation and every piece of rock is different, but I can give you examples. So, one of the examples is, BlackBrush shows, I’ve already talked about this where they’ve seen their cost when they initially used us, our cost was about twice that of what they were paying for a water frac and we’ve moved that now to about 20% to 25% more than what they’re paying for a water frac.

So we’ve moved it down very significantly in terms of upfront cost and we do see more opportunities with the traditional feature that we are now trying to add to our system that would even reduce that further. That’s one example, but it’s going to be different whether it’s a oil formation or liquids or gas, but that sort of gives you an idea of the potential quantum of change.

Brett Reiss – Janney Montgomery Scott

Since more drilling is being done with oil and liquids, do the tweaks reduce the differential more for oil and liquids versus natural gas?

James Hill

Again, that’s going to depend on the specific parameters of the frac program, but in general, I would say yes.

Brett Reiss – Janney Montgomery Scott

Well, that’s good and this is pretty dramatic, good show on that. Now you have basically eight fishhooks in the pond as client of mine would say, I know, since the trials are kind of new for you, but when you walk – when you are sitting around the water cooler up there, how many of the – how many fish do you expect would be good in …

James Hill

I am going to give the excuse I have given in the past. I am a professional accountant by training and therefore necessarily conservative that I am going to say, I don’t have enough data right now.

I could give you a number but, I’d rather ask let’s collect three more months worth of data where we can really see – not just production, but tapers coming from some of these wells and have more discussions with these customers before I sort of just give you a number that’s not off the top of my head, but not with sufficient data to give you a level of confidence that you might want.

Brett Reiss – Janney Montgomery Scott

Okay, fair enough. And in the MD&A, there is a very modest heads up that because of revenue mix in the coming quarters you might periodically drop below technical compliance with some of your bank covenants. How serious is that going to be and do you have good relationships with the banks and you’ll be able to kind of give some make up?

James Hill

Yes, I mean, we’ve had – because of the lumpiness of our revenue, we’ve had that issue in the past where we’ve been offside covenants and we negotiated that with our banks. We’ve got good relationships with them. I think more importantly, we’ve got as at year end and that’s almost $17 million drawn on our bank lines.

We had at that time $26 million in receivables and about a $190 million in fair value of assets. So they’ve got lots of coverage that way which banks will get cash flows but securities like to have to do it, so, that’s one of the comfort levels they get that they’ve got a strong asset backing.

Brett Reiss – Janney Montgomery Scott

Right, right and although I haven’t seen this a client of mine who owns the stock said that the Kipling letter which are lot of retirees in the United States received, it’s well known talked about companies that have alternative fracking technologies and that GASFRAC was mentioned and I’ll try to make sure that if you haven’t seen it that you get a copy of that.

James Hill

Okay. That’d be great Brett.

Brett Reiss – Janney Montgomery Scott

All right, thank you for fielding my questions.

James Hill

Okay. Have a good day.

Brett Reiss – Janney Montgomery Scott

Right.

Operator

Thank you. The following question is from John Rosenberg of Loughlin Water Partners. Please go ahead.

John Rosenberg – Loughlin Water Partners

Yes, hi, good morning. Thanks for taking my question.

James Hill

How are you John?

John Rosenberg – Loughlin Water Partners

I am well, thanks, thanks very much and hope you guys are doing well. I have a question pertaining to – Jim, you’ve covered pretty well, you’ve been asked twice by my count about new clients versus old clients data you are collecting, conclusions you are drawing.

I have a question kind of along those lines, but a little bit differentiated and that is, can we believe – what is the cost structure like for you during the trial versus if as a shareholder we all hope, some of these clients who are trailing you come back to you and say, okay, we like your technology – we like what we’ve seen, let’s get this thing going. Does the cost structure change really one way or the other?

James Hill

It can do – I mean, I think there is the number is the reality of the overall fracturing market both in Canada and in U.S. where despite sort of an increase in utilization of the entire industry split, particularly in Canada we haven’t seen any price appreciation yet this quarter, it’s still fairly competitive, but there are indications certainly Canada price increases in the second half of the year.

You hear that from some of our competitors and in the U.S. maybe a bit later than that. So that’s number one to understand. So that’s still where the market is at. In terms of what we look on trials is that, we need to be competitive with that market.

So, we won’t – sort of deep discount it – we don’t want to lose money on job. Let’s put it that way. But it’s important to get clients being able to trial this so that they can see the results of the value.

The opportunity to change the margins if you will, after success with a company have more to do with utilization than absolute pricing, because key in our business is, we’ve got that high fixed cost that we got to leverage.

So, doing one well really isn’t where you make your money, it’s getting utilization of that set of equivalent so that, you got that crew instead of working ten days a month, they work 15 days a month say, that makes a significant difference in overall margins. So that’s the objective in winning customers and changing profit model.

John Rosenberg – Loughlin Water Partners

Got it. I understand that. Thank you and you do a good job of amongst many other things of breaking out your fixed cost and you certainly did a good job last year reducing your fixed cost overhead.

I was just wondering, you kind of wandered into price in your answer, I am not going to ask you about pricing right now. This is a very inceptive market I suppose, but, I guess, we would see then – we would see better absorption then if you had more utilization. I guess, that’s the simple answer and likelihood.

James Hill

Yes.

John Rosenberg – Loughlin Water Partners

Okay, great. Thanks very much and good luck.

James Hill

Okay, thanks, John.

Operator

Thank you. The following question is from Robert Howard of Prospector Partners. Please go ahead.

Robert Howard – Prospector Partners

Hi, the trials that you guys are talking about, are they sort of all four, six in the same basin and formation or is it something that you are going to be in like – for different types of formations which are going to give data for a wider area that could have opportunities for lot of places or maybe it’s good to have it all in one formation, so that people know that, hey this is a great spot and get a lot of focus there, kind of – I guess which way is that sort of focused on right now?

James Hill

Well, I guess, we are focused on specific formations where we see we can add the most benefit and where frankly there is money being spent to drill and complete wells. That said, as we are talking to customers if they want to look at basins outside of those ones, and we feel that we can help them.

We certainly will do that. The trials that we’ve looked at I think at this stage are in three different basins as I recall. But they are all in a relatively combined area in the Canadian Western Sedimentary Basin. They are sort of – what I would call west of the pit.

Robert Howard – Prospector Partners

So just kind of – by being those three different basins though that’s if we want a successful – or if we had each of them being successful in three different basins that may sort of help provide a greater reach into attracting other people to use it with that, it makes sense?

James Hill

If there is – when there is success with these, if it all occurs in one basin or occurs in three different basins, I don’t think the effect of that is the significant effect. The success under either those metrics is going to create momentum and more value for our shareholders.

The key point is converting those trials, that is the critical point and so, I am not sure which is the better outcome. Three successful customers in three different basins or three successful customers all in the same basin, I think relatively those are the same level of success.

And if we got success with three all of one basin, I think that gives us still the opportunity to go to different basins because that success in and of itself is going to promote interest in those other basins.

Robert Howard – Prospector Partners

Sure. And then also, we’ve been hearing a lot about the pool of – and all that, I was just wondering, is your technology maybe a little easier to use in the cold, obviously, if someone is doing a water frac, I would think there would be freezing issues and that type of thing that may cause problems. Is there an advantage from operating in sort of extreme cold weather that you might have over others?

James Hill

It depends what you mean by extreme, but certainly we have an advantage over water. I mean, propane doesn’t freeze at the same temperatures water does and so we don’t have all those issues and issues of water freezing in traverses of equipment and so on. So there are some advantages to that.

Robert Howard – Prospector Partners

Okay, okay. And, lastly, sorry I missed early during the call, and you may have discussed this some, but just a decline in revenue days versus last year is that just some projects or sites sort of rolling off and not getting replaced or was there something else driving that?

James Hill

Yes, it was – what Lori mentioned is that, we had some smaller customers last year that aren’t repeats.

Robert Howard – Prospector Partners

And is there – they just – they did their well and decided not to continue or…

James Hill

Yes, I mean, the couple I look at actually were dry gas related, so they did the wells and it was a success operationally, but at the prices of the commodity it wasn’t economically viable.

Robert Howard – Prospector Partners

Okay. So, from that perspective, if there was an increase in natural gas prices, there may be hope that some of these guys that you had success with last year could come back in if that aspect of the economics improves from – that they are able to sell the gas at?

James Hill

Certainly there is that, yes.

Robert Howard – Prospector Partners

Yes, okay, great. Thanks a lot.

James Hill

Okay, take care.

Operator

Thank you. (Operator Instructions) Following question is from Rick Feldman of Axiom Capital. Please go ahead.

Richard Lewis Feldman – Axiom Capital

Good morning and thanks for taking my questions. I’ve got a couple of questions. The first has to do with your competitive position. You’ve spoken about how recent escalation in LPG prices has been hurt you a bit and in general gas fracking has been more expensive.

But at the same time, in certain regions anyway there has been a tremendous increase in the cost of water – acquiring water for fracking handling it and then quite significantly disposing of it. Has that changed the economics, particularly did you configure your flow back, because the flow back that you get from fracking with water?

James Hill

Let’s deal with two sides of that. One is, yes, the handling of water is becoming more expense. Now part of that is the completion part of what the oil company looks at, part of that is infrastructure and sort of sits outside the A&P that they look out for fracking. And so the acquisition, the treatment, the disposal of water had certainly become more expensive.

But I hate to tell you, but, propane is still more expensive than water on a per volume basis. So, we have to deal with that issue as I stated before with looking at ways that our customers can get value back from that load fluid, such as the engineered fluids which allows it to go into production stream or different mixtures that somewhat reduce the upfront cost from our end. So that still will become a driving force to our continuous improvement efforts in our operations.

Richard Lewis Feldman – Axiom Capital

Is the flow back from propane fracking easier to handle and less costly to handle than from a hydraulic fracking?

James Hill

Again, that’s going to depend program to program where we’ve designed engineered fluids and flow back is just part of the production stream, yes it’s much easier. In other parts, where it needs to be flared for whatever reason, it’s similar to water. The advantage that we have with pumping propane – hydrocarbon into a hydrocarbon well is that, when it comes back out, we always have the opportunity if things are right to keep that with the production stream. Water is not burnable and therefore cannot go down that sales line ever.

Richard Lewis Feldman – Axiom Capital

Okay. There has been a trend in fracking to use more and more propend, how do you – how does this up to you?

James Hill

Well, again, we work with our customers on the program and depending on what profit load they think makes sense with our fluid we can design for that. But that’s a certainly a variable that we are seeing in the industry.

You’ve got somewhere – you’ve got a school of thought that says on these formations the denser the profit load, the better the result but you’ve got another school of thought another formation where they are actually saying that the fluid that’s making the difference and they are loading with relatively low profit levels.

So the key for us is, we don’t have a fixed answer. We work with our customers specifically on their formation and come up with the answer that the two of us think is best for their well.

Richard Lewis Feldman – Axiom Capital

In an ideal world, what would be the type of formation would you think your system on a relative basis performs best?

James Hill

Well, I guess, I’d answer that with what we’ve been able to achieve is a broad mean what I would call our system. I mean, the fluids that we are able to provide now are a much broader range than when we did our first frac in 2008 and therefore the range of formations which they will be compatible and very effective on is also broader.

Some examples are, I mean, tight – I’ve described these in the past. Low permeability, low pressure, water sensitivities of clays, so those formations like that northwest section of the Eagleford oil low pressure, are likely some of the best because not only do we provide a better result, we maybe the enabler that is the only service that can provide in economic results at all. But that doesn’t mean there is not a whole range of possibilities.

Richard Lewis Feldman – Axiom Capital

And the tariffs, what type of – did they use propane, some mixture?

James Hill

I am not sure off-hand exactly what the fluid was, but it was a sort of C3 or C4 base. But I have to go back and look at the program.

Richard Lewis Feldman – Axiom Capital

Okay. Could you mention, you also said you are working on other initiatives to try to make your system less cost, could you share with us what some of those are or is it too early?

James Hill

I’d like to go through the prototyping before we share that information, but just as I said, we are continuing to looking to improve our process. There are some specifics that we are working on right now that we believe will provide the next level of benefit. But as we prototype that and get some results, we will announce it.

Richard Lewis Feldman – Axiom Capital

Are these what you would call fine tuning or could they be significant?

James Hill

In terms of if we get the right result, I think it can be a significant cost savings for our customers.

Richard Lewis Feldman – Axiom Capital

Okay. All right. Thank you and good luck.

James Hill

Thanks.

Operator

Thank you. The following question is from Camoskin, a private investor. Please go ahead.

Unidentified Analyst

Hello there, Jim.

James Hill

Hello.

Unidentified Analyst

Yes, I’ve heard it over the last couple of years – a couple there from places that there is some interest in Saudi Arabia, like I heard earlier that you didn’t want to expand into other continents, but could you comment on that please?

James Hill

Yes, we’ve heard that and you know, I guess, this is a temporal thing in terms of we need to look at where to focus our most of our energy in the near term in order to create success, get customer adoption, get a broader understanding within the industry of what we can do and get money in the bank more money in the bank.

That said, we will have discussions and have discussions with opportunities overseas, but to look at those and say those are going to create significant revenue in the next year, I don’t think it is a logical conclusion. Certainly the areas that we see most interest from are likely Saudi Arabia and China. Both because of lack of access to water.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. The following question is from Brian Jones of Richardson GMP. Please go ahead.

Brian Jones – Richardson GMP

Hi, Jim. I have missed the questions earlier on, but anybody ask about Artek and they’ve gone to water frac and I am just wondering if you guys are just still doing work for them or if they have left you guys completely?

James Hill

They’ve tried a number of techniques in their formations, because they were doing evaluations. We have done work for them. We haven’t done work for them this quarter. We did in the fourth quarter. I know our guys are still talking to them and have recently submitted a program. So we just see what they do, but I wouldn’t say they have abandoned us completely. We are still talking to them and talking about particular wells.

Brian Jones – Richardson GMP

Okay, thank you.

Operator

Thank you. The following question is from Rick Feldman of Axiom Capital. Please go ahead.

Richard Lewis Feldman – Axiom Capital

Hi, thanks for taking the question again. How many equipment sets do you have and are they all fully manned?

James Hill

We’ve got three operating in Canada, two in the U.S. and currently there are four that are parked.

Richard Lewis Feldman – Axiom Capital

Okay. So the ones that are not parked, are they crewed or if you got business you have to hire more people?

James Hill

No, what we have is, when I talk – number one, when we talk about a set or spread, let’s call a equipment a spread and people a crew, so that we are clear.

Richard Lewis Feldman – Axiom Capital

Okay.

James Hill

We define more or less a spread is 15,000 horsepower and the ancillary equipment necessary to operate that. On any single day that might be 20,000 horsepower sitting there, it could be 10,000 horsepower depending on size of the job. What we have is basically three of those spreads available to operate in Canada and two in the U.S. and we’ve got the crews that can operate those.

So, those aren’t at the utilization levels that we want them to be at with that equipment we could – their capacity in that five spreads of equipment is likely close to $300 million or they are both operating at peak utilization. So, we’ve got men that can produce that much revenue today. So we don’t have to hire more guys to get that equipment working.

Richard Lewis Feldman – Axiom Capital

So, as you can have significant marketing success, there is enormous leverage here?

James Hill

Yes, and that’s what I was talking to with an earlier caller, I think it was John, that he said, that the opportunity is more utilization to leverage those fixed costs to improve the EBITDA margins.

Richard Lewis Feldman – Axiom Capital

Okay. Sounds good. Thank you.

James Hill

Okay, thanks very much Rick.

Operator

Thank you. There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Hill.

James Hill

Okay, thanks, Melanie and thank you everyone for your interest and your questions and have a good day. Take care.

Operator

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

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