GASFRAC Energy Services' (GSFVF) CEO James Hill on Q1 2014 Results - Earnings Call Transcript

| About: Gasfrac Energy (GSFVF)

GASFRAC Energy Services, Inc. (OTC:GSFVF) Q1 2014 Earnings Conference Call May 8, 2014 11:00 AM ET

Executives

James Hill - CEO

Lori McLeod-Hill - CFO

Jason Munro - President

Analysts

John Rosenberg - Loughlin Water Partners

Larry Chlebina - Chlebina Capital Management

Robert Howard - Prospector Partners

Robert Deblock - Osborne Brown

Dick Feldman - Axiom Capital

Operator

Good morning, ladies and gentlemen. Welcome to the GASFRAC First Quarter 2014 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, Sebastian. Good morning, ladies and gentlemen. This is the GASFRAC first quarter conference call. I am joined by Lori McLeod-Hill, our CFO and Jason Munro, our President. Lori will begin by giving you a brief overview of the financial results for the quarter then I will give you some operating highlights and we will open up the call for questions. Go ahead Lori.

Lori McLeod-Hill

Thanks Jim. Good morning. GASFRAC generated consolidated revenue of 12.2 million in first quarter 2014 compared to consolidated revenue of 31.5 million in Q1 2013. The decrease in revenue was primarily due to two major customers delaying projects from Q1 2014 to Q2 2014. During the quarter GASFRAC earned revenues from six customers the top-three customers represented 86% of the Company’s revenue.

In Canada we generated 12.2 million in revenue during Q1 2014 down from 28.5 million during Q1 2013. Revenue was generated by six customers. During Q1 2014 Canada executed 25 revenue days at 486,000 per revenue day. During Q1 2013 Canada executed 65 revenue days at 438,000 per revenue day. The United States did not generate revenue during Q1 2014 and was down from 3 million during Q1 2013.

Cost of sales as a percentage of revenue increased to 72% of revenue from 52% of revenue in the first quarter of 2013 and 53% of revenue in Q4 2013. Canadian cost of sales was 72% of revenue for the quarter as compared to 51% of revenue in Q1 2013 and 59% of revenue in Q4 2013. The increase in cost of sales as a percentage of revenue was largely attributable to lowering the price of our services to demonstrate the value of GASFRAC services to new customers. Variable operating cost -- as a percentage of revenue variable operating cost increased to 18.7% of revenue from 11.6% of revenue in the first quarter of 2013 and 9.2% of revenue in Q4 2013. The increase in percentage of revenue is partially due to repairs and maintenance, fuel and supplies to maintain the equipment.

Fixed operating costs were 5.5 million for the quarter as compared to 6.2 million in Q1 2013 and 5.4 million in Q4 2013. The decrease in fixed operating cost from Q1 2013 is due to reductions in salary and benefits realized from operating headcount decreases. Q1 2014 fixed operating costs were largely unchanged from Q4 2013. SG&A costs were 4.3 million for the quarter as compared to 4.6 million in Q1 2013. Included in Q1 2014 were severance costs of approximately $0.3 million. EBITDA for the first quarter was a loss of 6.5 million compared to EBITDA of 0.5 million in the first quarter of 2013.

I’ll now turn the call over to Jim to provide operating highlights for Q1.

James Hill

Okay. Thank you, Lori. Well, with our two major customers not busy in the quarter it was a disappointing quarter in terms of revenue but going forward we’re encouraged by the fact that we’ve restarted with Husky here in Canada and BlackBrush in the U.S. has indicated to us that they anticipate restarting June 1st and having an active period through to the end of the year, basically squeezing in the revenues that they were going to have for the full year into a shorter period of time.

We have over the last sort of while taken some steps to strengthen our focus on sales and utilization of our assets. As you are aware we hired Jason Munro as our President in February. Jason has a sales background and he is very much focused on building that expertise in the Company, and building our sales team both here and in the U.S. where we’ve added already to our technical sales support team and continue to do that. We continue to broaden our fluid offering. This allows our customer-specific solutions from LPG to engineered fluids to poly C3 and ultimately we anticipate it being able to utilize infield fluids. We are prototyping our HRVP system that can allow us to use infield fluids for fracturing. This is important because it helps reduce the cost of the frac for our customers both in terms of transportation cost as well as fluid costs. It also significantly reduces logistics, complexities and constraints, which is an area that is a key focus in the fracturing business today.

In Canada we had six trials during the first quarter, which included trials utilizing, both LPG as well as our hybrid system and hydrocarbon fracturing. We anticipate doing work for Corridor in New Brunswick this summer, and in the U.S. although we didn’t have trials during the first quarter, we have had a trial completed in the second quarter and we have completed programs for anticipated work in both Texas and in the Utica. The Utica is particularly interesting because that’s an area particularly within the oil window where hydraulic fracturing has not been successful and the GASFRAC technology should be an enabler to get economic production from that area. Currently we are in mid-stage discussions with about a dozen companies in the U.S. and we are seeing increased momentum of interest there.

In terms of our balance sheet we sold approximately $9.5 million worth of assets during the quarter to help pay down debt. As at the end of the quarter, our net debt was standing at $13.1 million which is a very manageable level given our asset backing. We are in discussions both with our bank and with an asset backed loan provider for a new facility that we would anticipate closing in the next 4 to 8 weeks. And finally I would like to close by congratulating our team at GASFRAC for winning the Gold Edison Award in San Francisco, late last month. This was for our Vantage system and in the category of Energy & Sustainability.

I’ll now turn it back to you, operator, for questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) The first question is from John Rosenberg from Loughlin Water Partners. Please go ahead.

John Rosenberg - Loughlin Water Partners

Yes hi good morning. Loughlin Water Partners and thanks very much for taking my question. You guys mentioned…

James Hill

Good morning, John.

John Rosenberg - Loughlin Water Partners

Good morning Jim. You mentioned in your press release, there was something in the release last night regarding changes to cost of sales implying some change the pricing dynamic, could you talk a little bit more about that?

James Hill

I guess, not so much of change in the dynamic just some background on the industry in total, and then into GASFRAC. But the industry in total, I think during the first half of this year, particularly in Canada we are seeing increased utilization of the entire fleet which has been building up over the last three years I guess. And we are seeing competitors indicate that they anticipate increasing prices in the second half of the year and those prices will sort of gradually build out to the end of the year. So the overall dynamic of the industry is stable to increasing pricing. What we talked about in our press release was for some of the trials where we are looking at bringing on new customers, enticing them to try out this new technology, we’re offered some level of discount at that stage. So it’s not sort of an overall reduction in pricing as a standard for GASFRAC.

John Rosenberg - Loughlin Water Partners

Okay, that’s certainly very good to hear. So basically, if I may state that and perhaps you could validate this, so this is, you were offering -- it is very clear to these new customers, just the cost of your trials was a little bit less?

James Hill

I think it is.

John Rosenberg - Loughlin Water Partners

And just in economics.

James Hill

Yes again, the industry is very busy, you’re asking somebody to look at something new. There is some interruption to their standard operating procedures. And although we’re very confident of the value they are going to get out of it, they have to -- they assess some risk to achieving that value. So on that basis we are saying, we are investing in our relationship with you going forward in this manner, let’s give this a try.

John Rosenberg - Loughlin Water Partners

Okay, great. Well, thanks very much for the clarification. Good luck going forward. And I’ll get back in the queue. Thanks.

James Hill

Okay. Take care, John.

Operator

Thank you. The next question is from Neil Bank, a private investor. Please go ahead.

Unidentified Analyst

Hey Jim I understand that Terrace is planning on doing three wells in the Eagle Ford in the Maverick County, going forward. Are we going to be participating in those three wells with GASFRAC?

James Hill

Yes. They raised the money recently, and they’d indicated that, I think they had said 3 to 5 wells actually in what I have seen and we continue to speak for them, and we had a great deal of success with the first while we did with them that’s in partnership with BlackBrush and the indications they had given to us and this was both from Terrace and from the guys at BlackBrush is that they would utilize us. I don’t know that we have programmed anything with them at this stage, but again that’s been the indication that they’ve given us I think the last time I talked to them was about a month ago.

Unidentified Analyst

Thanks Jim.

James Hill

Okay, take care.

Unidentified Analyst

You too.

Operator

Thank you. The next question is from Larry Chlebina from Chlebina Capital. Please go ahead.

Larry Chlebina - Chlebina Capital Management

Thank you. Jason, are you online?

Jason Munro

Yes, you bet Larry. Good morning.

Larry Chlebina - Chlebina Capital Management

Hey Jason can you kind of since you’ve been with the Company for three plus months now can you give us a kind of a background of your view of where the sales effort stands, and kind of your perspective of the industry?

Jason Munro

Well, certainly in the states with the addition of Daniel it’s been a big gain relative to the sales group down there and he self augment that team. We’re getting in front of more customers down there and with the value proposition of the water restrictions that we’re seeing in Texas I look at lots more work developing particular in Texas. Now the Utica in the oil window up north as Jim stated before there is a real application with our LPG and even hybrid technology there as well. So, I certainly look or have a bullish viewpoint of the U.S. going forward. In Canada it’s a bit of a tougher slog I think we need to augment the sales teams like we’ve done in the U.S. and certainly our focus is to look at more of the hybrid-based systems where we can dovetail into applying our LPG systems as well. So, does that answer your question Larry or…?

Larry Chlebina - Chlebina Capital Management

Pretty much, the HRVP, it’s being prototyped. Is there a timeframe when you’re going to frac the first well?

Jason Munro

Yes, we’re going to test that within a month’s time and then we’ll actually do that with regular frac well, so it won’t be a higher VP to start with and then once we’re confident that we can pump it with a conventional system then we’ll roll it out and do it with the higher VP.

Larry Chlebina - Chlebina Capital Management

And is all that work going to done in Texas?

Jason Munro

Yes, that’s correct.

Larry Chlebina - Chlebina Capital Management

Alright, that’s all my questions. Thank you.

Jason Munro

Yes, you bet.

Operator

Thank you. The next question is from Robert Howard, Prospector Partners. Please go ahead.

Robert Howard - Prospector Partners

Hi. I was wondering if you could have or give any comments of how the trials went I mean did you think they were successful or you’re getting some positive feedback or is there going to be some sort of changes going forward with them. How do you kind of look at how they went?

James Hill

Well, I think it was a range there certainly I am aware of at least two of the trials where we’re getting follow-on work from those customers. As I’ve stated in the past though I think we have to recognize that there is a series of decisions that customers make after trials. I mean number one they’re looking at did the Company execute and I would say in all six instances we got very positive feedback in terms of execution and safety. So that’s number one. Number two is that they want to see initial production and then production over a period of months and I understand what that means to type curves and to their economics. And then there’d be a tendency to do second trails, and as I say that’s where I am aware with a couple of customers it appears they are going to do that for sure. The others, I don’t know at this stage. And then once they’ve done the second trial they sort of go through that iteration again. So, overall I think that I am confident that we will see follow-on work from the trials we did in Canada. And as Jason stated I think we’re seeing the momentum in the U.S. and the decision making down there may be a bit faster than we’ve seen up here.

Robert Howard - Prospector Partners

Okay. So, it sounds like at least from the operations perspective and from your end of things that they went pretty well for you guys?

James Hill

Very much so, and I can’t overstate how critical that is to not only with the six customers we worked with but those -- it's a small community so they’d be talking to others and say listen we had GASFRAC onsite and those guys really know how to execute they pump the job they got it in the ground and my god they’re the safest company out there. And we’ve I mean I am using language maybe a bit too binocular there but the feedback we’ve gotten from many of those customers is our focus on safety is very impressive, and our ability to execute and work with the guys on location pleased their operators.

Robert Howard - Prospector Partners

Good, great to hear it. And then also with the delay in work I mean or I guess related -- and how much can you say would you say that weather may have impacted the results I mean was that the reason just the extreme cold that we were having that allowed these jobs kind of get pushed back or it was…?

James Hill

No, I think it’s just that our customers’ drilling schedules. And the fact that they’re doing a lot of pad work now, so it’s not that one well comes up at the time we frac, it’s like you’re will get for wells or six wells at a time. And as I said their own drilling schedule is about where they anticipate doing the work, so, no, we can’t blame weather on that.

Robert Howard - Prospector Partners

Okay. So many people are so, and I guess, lastly, you’re talking about I guess bringing in doing more sales work. Is there also any work in terms of maybe I guess general marketing of the product, just when I look at the general media and people, fracing is always something that’s kind of in the news headlines but the idea of being able to do it in any other way besides water is never brought up. When it seems like you guys have something that you would be very appealing and yet there is a lot of people that don’t recognize it. Have you got any thoughts on maybe trying to get yourself better well-known, just sort of in a, from a general perspective?

Jason Munro

Yes hi it is Jason here, and it’s a valid point. We need to be better at promoting your value proposition, and to that effect we have hired a internal marketing rep. I think he’s going to contribute in a big way in terms of doing white papers, advertising more, just getting our name out there in publications where we need to be. So I think we’ve been lacking there in the past and look for more of a presence going forward.

Robert Howard - Prospector Partners

Excellent alright that is great to hear, that’s it from me thank you.

Operator

Thank you. We have a follow-up from Larry Chlebina of Chlebina Capital. Please go ahead.

Larry Chlebina - Chlebina Capital

Thank you, Jim just one more follow-up on the HRVP is it -- based on some comments that BlackBrush put in a presentation that they thought that improvement would get them to parity or below the cost of our slip water frac, is that still on-track I mean…?

James Hill

Yes now that’s going to vary customer-to-customer, but what we’re basically saying is for all or part of the fracs that’s being provided, it’s free because it’s your own fluid. We are going to charge to pump it, but to give you a general idea, you could save a third of the cost of a frac by going down that direction, and again that’s not even dealing with the logistics and the obvious compatibility with the formation because you’re using formation fluid. So we feel that there is a strong potential for the technology.

Jason Munro

Let me add to that a little bit, Larry, if I may. I have heard some numbers up in Canada and this is on the street that in fact water isn’t free. We know that, in terms of logistics and heating, and I have heard numbers up in the range of $100 per cube of cost if you are using water in your fracturing, so. That as we call it now is to be a real dramatic change in using your own frac fluids going forward, so yes.

Larry Chlebina - Chlebina Capital

Yes it seems to me that that’s really an amazing set of accomplishments or progress in the process and I think Jason, if that comes on like we hope, it seems to me your sales efforts would be a lot more easier than…?

Jason Munro

Well thanks Larry I hope that’s the case. But certainly in Canada we also have a lot interest in the RVP system, I mean we’re still working around the name of what we are going to call it. But lots of interest in customers saying, yes, if we can use our own fluids and tailor them to our formations and this makes a lot of sensible cycle, and it has a big value on both sides of the board, Larry, as you know.

Larry Chlebina - Chlebina Capital

Yes, alright thank you.

Jason Munro

Yes thanks.

Operator

Thank you. The next question is from Robert Deblock from Osborne Brown. Please go ahead.

Robert Deblock - Osborne Brown

Yes Jason and Jim, a couple of questions regarding Husky, you said in your statement yesterday that, you can do from some work them as you mentioned in April, their four well pad and their two well pad, how many fracs would that be, number one? And is there been any further discussions with Husky for the last six months of the year? And thirdly, could you comment on the new directors and how that’s going to have an influence on the Company going forward? Thank you.

James Hill

Okay, with respect to Husky, those are similar wells to what we have done in the past. They are anywhere from 12 to 16 stages in size. In terms of the second half of the year, we anticipate continuing to work in that Ansell area with Husky but they roll out their plan quarter-to-quarter. So we anticipate levels of work not similar to last year.

Robert Deblock - Osborne Brown

How many working days would these six wells provide for your operation?

James Hill

What are we doing, we’re doing three a day, six wells 48 likely 20 to 25 days I would think there about.

Robert Deblock - Osborne Brown

Thank you.

James Hill

In terms of the new directors I think that we’ve got guys with a lot of experience with the industry who are pretty well connected to certainly the Calgary industry and understand what’s going on there. I don’t see this as a change in direction but they may help accelerate our focus on sales and the broadening of our fluid capabilities particularly looking at areas where water is not affective but water scarce those are some of the focus areas that I would see.

Robert Deblock - Osborne Brown

Thanks again.

James Hill

Okay.

Operator

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

Dick Feldman - Axiom Capital

Thanks for taking my call. You mentioned that you have seen a lot of recent interest in the U.S. Have you done anything yet in the Utica or is it mostly talking to operators in the oil window where hydraulic fracturing so far has not unlocked the economics?

James Hill

We haven’t performed a frac as of yet in the Utica but we have a few companies that as I said and are about in mid stage discussions where they’re looking at programming wells they’ve identified at least one of them has identified specific wells that they want us to look at there. And we’re in discussions as to what the programs looking, what the costs are going to be et cetera. But it is driven by this need to find a solution in that oil window.

Dick Feldman - Axiom Capital

The work that you’ll be doing up in New Brunswick would that be through drilling natural gas?

James Hill

Yes, that’s with the Corridor and that’s in Frederiksberg formation which is largely dry gas.

Dick Feldman - Axiom Capital

Would you have any idea as to the magnitude of that engagement?

James Hill

They’re looking at approximately 10 fracs.

Dick Feldman - Axiom Capital

Okay. In terms of the areas that you want to focus your marketing efforts are you still going to be sticking much to North America this year?

James Hill

Yes, I mean North America again is 75% of their fracturing dollars in the world we’re still a young company we’re gaining some traction focus I think is critical to our success we need to have our resources focused on the few areas right now that are going to give us the best chance of success and we have the Canadian Western Sedimentary Basin, Texas and the Utica is where we’re looking and where we’re beginning to get that traction. Longer term, are there opportunities internationally certainly but those take some time to develop and the core of the company needs to be focused on North America.

Dick Feldman - Axiom Capital

Okay, one more question and I’ll get back in the queue if I have anything else. And next question relates to the asset sales, to what -- I guess specifically what type of assets did you sell and how many units do you have active and how many units now do you have multiple and are the multiple of units could they be readily reactivated?

James Hill

Well units so let’s define we talk about the spreads of equipment which is a somewhat variable term but we’ve got five spreads of equipment that are in operation and 3.5 that are part, not multiple they’re parked and they can be brought back in the service relatively quickly they’re need inspections done and so on but they’re maintained in a way that over a period of two to three weeks let’s say they can easily be brought into service. And really as we increase utilization we’re going to have visibility towards that and our challenge is going to beginning that people to operate those it’s the equipment isn’t the big challenge. In terms of what we sold, we sold about 10,000 horsepower of pumpers and we don’t anticipate the need to sale anymore significant amounts of equipment.

Dick Feldman - Axiom Capital

Okay, thanks for taking my questions.

James Hill

Hey, thank you Dick.

Operator

Thank you. Since there are no further questions at this time I’d like to turn it back over to Mr. Hill.

James Hill

Okay. Thank you, Sebastian. And thank you ladies and gentlemen for participating in the call. And as always if you’ve got some follow up questions please don’t hesitate to call us. Thank you very much.

Operator

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

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