Earlier this year I published a number of articles on Gasfrac Energy Services (GSFVF.PK) and their waterless LPG fracturing technology. In my earlier articles, I have attempted to introduce the company, its technology and demonstrate the superior production and reserves results obtained by oil and gas operators upon utilizing the company's novel fracturing process.
Following the company's fourth quarter earnings report and the associated conference call, I found it relevant to update readers about the progress of the company.
Brief Quarterly Overview
The company's 4th quarter was generally disappointing for stock market watchers despite the quarter being a record in terms of revenues. The company delivered lower profitability than the 4th quarter in 2010, but it did generate a 36% growth in EBITDA. Gasfrac claims that its results were negatively impacted by third party capacity constraints, which limited its capacity to execute for its largest customer Husky Energy (HUSKF.PK).
Those issues have been resolved by the end of the quarter. Furthermore, while the company reported good results from its operations in the United States, momentum in the US slowed early in the first quarter as customers paused to evaluate their LPG trials results and has only re-accelerated later in the quarter. The change of the company's senior leadership during the quarter further disrupted operations.
It is important to note that at this stage of Gasfrac development financial results take a backseat to technology adoption. Gasfrac is introducing a totally new process to the oil and gas industry. Only if the process is accepted and adopted will the company be able to generate sustainable financial results.
So where do we stand on the technology adoption?
The company appears to be making steady progress in that regard; following the signature of a long term contract with Husky Energy in Canada last year, the company indicated that a second Canadian major will be testing their process after the spring break up season.
In the US the company scored its first long term contract with the private equity backed operator BlackBush (900 potential locations) for fracturing services in the Eagle Ford. In the Niobrara the company scored a major coup for Quicksilver Resources (KWK) by unlocking the significant Sand Wash oil formation in Colorado, a formation that was previously uneconomic with existing fracturing technology.
Following this success several operators in the vicinity have already booked the company for business (Royal Dutch Shell and Continental Resources (CLR) are two of the largest operators in that area). The company further indicated that it will be undertaking fracturing operations in the Utica, Marcellus and the Permian. Gasfrac expects to sign several additional long term service contracts in the United States this year.
After four months on the job the company's new CEO, Zeke Zeringue, indicated that the company has decided to focus its resources on a number of basins where the technology has demonstrated a superior production profile. Those areas include the Cardium and Viking formations in Canada, and The Niobrara, Eagle Ford, Permian and Marcellus in the United States.
In conjunction with the geographic focus, the company will expand its back end support capacity, thus significantly reducing the time each fracturing set spend on a given job. This improvement, along with a specific geographic focus, should lead to a substantial improvement in the company revenues, cash flows and profitability levels going forward.
It appears that the company is moving away from showcasing the technology in as many formations as possible to leveraging its advantage in basins where the technology works best.
Gasfrac has often been compared to the other Canadian fracturing companies such as Calfrac Services (CFWFF.PK), Canyon Services (CYSVF.PK) and Trican Services (TOLWF.PK). I believe such a comparison is misguided; while Gasfrac and those companies both target the oil and gas industry, their approach is completely different. Gasfrac is introducing a new process, a process that is unfamiliar and novel for most of its customers. The market adoption of such a solution is vastly different from a provider offering existing water fracturing services.
The fact that Gasfrac remains early in the adoption cycle for its technology exposes the company to uneven financial performance as customers often go through a lengthy evaluation process before committing to long term contracts. Ideally a company like Gasfrac would only undertake an initial public offering once the technology is at a more advanced stage of adoption. However, the lack of adequate venture funding in Canada often compels Canadian technology companies to solicit public funding prior to full maturity. Thus, investing in Gasfrac is akin to investing in a pre-IPO technology company in the United States.
The real value of Gasfrac waterless fracturing technology - beyond the evident environmental benefits of reduced water usage, reduced pollution, reduced emissions and reduced fracturing footprint - is mainly derived from the technology ability to generate significant increase in oil/gas production:
Source: Gasfrac Energy
As can be seen from the graph above, applying Gasfrac LPG fracturing to the Cardium oil/gas formation in Canada leads to a significant and sustained increase in oil/gas production. Similar improvements have been observed in multiple other formations in North America. This increase has a material impact on oil and gas operators from both a cash flow perspective and increased ultimate recoverable reserves. (For further examples of improved LPG fracturing production, please refer to my previous articles on the matter).
The purpose of investing in Gasfrac Energy is not to own a piece in another fracturing company among the 70+ plus fracturing companies that operate in the $37B fracturing market. The purpose of investing in Gasfrac is to own a piece of the first true advancement in fracturing technology since the last major innovation in the industry in 1981 (the introduction of liquid CO2 as a fracturing agent).
None of the major oil service providers such as Halliburton (HAL), Baker Hughes (BHI), Schlumberger (SLB) and Frac Tech (who collectively control 56% of the fracturing industry) has access to LPG fracturing. It is highly unlikely that such key industry players will accept to be at a disadvantage in servicing their clients in formations where LPG fracturing has proven to be superior and often the only viable fracturing method. Thus, the probability of the Gasfrac being acquired in the next 24 months by one of its larger competitors is extremely high.
Gasfrac's benchmarks for success at this stage should not be based on its latest quarterly results, but should be focused on three core areas:
- Increased industry adoption
- Applying the technology safely
- Confirming the technology superiority in multiple basins
Progress on the above three fronts will guarantee that Gasfrac will emerge as a successful commercial enterprise and the owners of this company and this technology will control a key process to unlocking oil and gas reserves in North America and the world. The value of this prize vastly exceeds the value offered by owning a piece in a conventional well servicing company.