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Nawar Alsaadi
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I am an independent investor with a background in finance & marketing. My investment philosophy is focused on value growth or special situation investing with an added focus on the O&G sector. I am also interested in shareholder activism and issues related to corporate governance.
My company:
Semper Augustus Capital
My book:
The Bull of Heaven
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  • Gasfrac Energy Needs Strategic Options

    I have written about Gasfrac Energy (OTCPK:GSFVF) extensively in the past. In several of my articles I highlighted the merits of their LPG fracturing technology and demonstrated the large market opportunity available for this environmentally friendly waterless fracturing process.

    Effective technology, but cost remains a barrier

    It does seem that LPG fracturing continues to gain praise from industry executives. On August 6th Approach Resources (NASDAQ:AREX) CEO Ross Craft, mentioned the following during his company's quarterly conference call:

    Yes, as far as - the NGL using the propane fracs. We did a series of about nine wells using propane fracs early on, most of it was geared around the Canyon - tight Canyon gas - and then we did three Wolfcamp wells. The problem we saw was the cost. The process is very good process. No question about it. But the cost just far exceeded the gains that we've realized on it, at least in our initial test. I love the product. I think, it's going to have a lot of influence and a lot of impact going forward, especially in tight gas and tight oil reservoirs.

    So, we're really not pursuing that at this particular time, once gas prices solidify a little bit and we start going back into a full-blown combination of Canyon development and Wolf block then we'll look at that again.

    While he does highlight the problematic cost aspect, he does endorse the efficacy of the technology for tight gas and tight oil reservoirs.

    On August 9th, Robert Watson CEO of Abraxas (NASDAQ:AXAS) had this to say in his company's quarterly conference call:

    Well, I think it's a very novel approach. We've used it before. It's very site-specific, because you have to have the supply of propane or butane close by, and then you have to have an outlet for it when you flow it back, or you're just wasting a lot of money. It's more expensive than water frac-ing. I guess the jury's still out on the, on how well it does, but I think we were pleased with the 1 well did it on out in West Texas, and certainly in the appropriate instance going forward, we would certainly consider doing it. But not all areas have a pipeline outlet to flow the gas back into. And we certainly don't want to flow it up in the air and burn it cause it's very expensive to frac with. But they are getting big, they're getting big in the Eagle Ford. They're building a camp down here in a little town south of San Antonio, and I wish them the best of luck. And I think it's a novel approach that's got a future.

    Again another executive is pleased with the performance of the technology, but is uncomfortable with its cost.

    The above two companies are just an example of several companies that have been impressed with the technology, but are unwilling to assume the higher cost associated with its usage.

    The perfect storm

    Gasfrac unfortunately made its push in the United States in a very difficult pricing environment for the fracturing industry. The collapse in natural gas, and to some extent in NGLs prices, has created significant excess fracturing capacity in the liquid basins where Gasfrac operates. The pricing environment is so competitive that Martin Craighead, CEO of Baker Hughes (NYSE:BHI), characterized it as a "knife fight" in his company's quarterly conference call on July 20th.

    Meanwhile in the company's original market, Canada, the industry suffered yet again through another extended wet season during the second quarter, hence significantly hampering the company's ability to resume its operations with its biggest customer Husky Energy.

    In addition to the above, Gasfrac has explained in its second quarter earnings report on August 8th that it is facing three fundamental obstacles in gaining more traction:

    - Demonstration of cost/benefit;

    - Safety considerations and technology awareness;

    - Inertia (inability to break exiting operators' relationships with their service providers).

    Gasfrac did highlight that it is making progress on all fronts; unfortunately however this progress is not translating into better financial results after the company missed its own revenue projections for the quarter by over two thirds.

    Arguably some of the issues faced by the company are manageable in time. However, the company does not have the luxury of time; persistent weakness in the company's financial performance is putting undue pressure on the company's balance sheet. With only $41m available on its credit line, $6 million already withdrawn at the end of the second quarter and $8 million remaining in committed capital spending, the company has limited financial capacity to withstand the long adoption cycle that is imposed on it by the industry.

    Further complicating matters is the steady diminishing credibility of the new management team. While they are clearly operating under difficult circumstances, they have mismanaged investors' expectations and have failed in making significant headway in tackling many of the challenges faced by the company. As a result they have lost the support of the analyst community and have been largely abandoned by their largest investors, as evident by the severe decline in the stock price.

    It is worth noting that Gasfrac management is guiding for a much better performance in the 3rd and 4th quarter as its key customers resume their operations. Nonetheless, a failure to perform in the latter part of the year could materially hamper the company's financial flexibility, reduce its competitiveness and discourage new clients from contracting with the company due to their worries about the company's ability to perform its obligations. Opening the perverse cycle of a weak balance sheet driving business away, thus weakening the balance sheet further still and driving even more business away.

    The solution

    When contemplating a solution for Gasfrac it is important to differentiate between the technology and the company. LPG fracturing technology is a promising technology and the usage of the technology is being considered by the world largest oil and gas companies, such as ARAMCO of Saudi Arabia, Shell and Chevron.

    However, Gasfrac - the company - does not appear to be the best venue to fully nurture and monetize this technology. As a matter of fact, as early as April 10th 2012 I wrote a letter to the company's Chairman Mr. Gerald Lynn Roe, advocating the sale of the company to a larger entity that can better withstand adverse market developments. Follows is an excerpt from that letter:

    I feel the Gasfrac's continued inability to gain financial traction is a growing impendent to the company's ability to achieve its long term goals. The Canadian financial markets are notoriously hostile to funding and sustaining high-tech businesses, especially when those businesses are under financial duress. Unlike the United States, our national culture is not supportive of growth oriented enterprise.

    For the sake of preserving shareholder value, I urge the board of directors to consider a sale of the company and its technology to a larger entity that can better nourish and grow LPG fracturing. The company's decision to licence the technology through "technical solution contracts", while appealing at this juncture, could undermine Gasfrac's ability to maximise value in a strategic transaction.

    I ask the board of directors to fulfill its fiduciary responsibilities and to explore all venues to enhance shareholder value prior to embarking on a course of action that maybe hard to reverse. Time is of the essence, Gasfrac's and the technology's reputation will be further undermined if the company fails to gain operational and financial traction in the near future. I urge you not to wait to the last moment prior to taking action. The inertia of following an existing course of action has often blinded boards to the alternatives; please give those alternatives serious consideration.

    On May 11th upon meeting with Mr. Roe, I was promised that he and the board would give serious consideration to this letter and that a formal response would be forthcoming. Unfortunately however since the meeting, I am yet to hear from the company and its board of directors. Admittedly, I should have been more vocal both publicly and privately in my efforts to pursue a strategic option.

    I do need to highlight one worrisome comment I heard from Mr. Roe during my conversation with him regarding the finances of the company: he mentioned "that should Gasfrac need to recapitalize, it won't be the first fracturing company to do so. Other names, such as Calfrac Well Services, have done so in the past." What struck me, is how lightly that recapitalization option was being discussed; an option that would effectively wipeout most of current shareholders ownership in the company. He did, however, indicate that they would entertain a buyout offer, should they be approached.

    Regardless of the board's position, I continue to stand by my assessment that the best way to save this promising technology is through a combination/sale with/to a larger operator that can allocate the necessary time and resources to further maturate the technology, lower its application cost and deploy it in the specific basins where the technology works, best both in North America and internationally.

    The international fracturing industry remains in its infancy and has a long growth profile ahead of it. Meanwhile water issues, environmental worries and physical limitations to key supply components like Guar in North America continue to favour the development of alternative fracturing techniques such as LPG fracturing.

    Investors will be well served to pressure the company and its management team to explore an alternative course of action; instead of accelerating spending, the company needs to conserve cash and study available strategic alternatives. It is unlikely that the company will fetch a double digits valuation in a transaction. However, investors may recoup a sizable portion of their investment if a number of majors such as Halliburton (NYSE:HAL), Baker Hughes (which praised the technology in the past) or Schlumberger (NYSE:SLB) express interest in adding LPG fracturing to their portfolio of services. Gasfrac has valuable intellectual property, unique knowhow and a number of exclusive patents that cannot be easily duplicated; those attributes could prove very attractive for the majors in the field.

    Investing in technology companies is a double edged sword; a successful technology can bestow endless amounts of wealth to the company investors and early supporters, however failure to deliver in time could be near fatal. I would like to salute the investors/observers who correctly predicted the long adoption cycle of LPG fracturing and the many obstacles the company would face in achieving its goals. LPG fracturing may ultimately prove to be a viable and successful technology, but Gasfrac has certainly proven to be a lousy investment proposition for its shareholders.

    Tags: GSFVF
    Aug 13 7:58 PM | Link | 28 Comments
  • Gasfrac Q1 Update - Comments

    Finally few hours after the release, and after talking with a number of fellow shareholders, it is time to put things in prospective.

    Gasfrac has disappointed a lot of believers, operationally the company over promised and under delivered for several quarters, I would say for many the story has regressed from steady growth to: does the technology even work?

    As usual the truth is somewhere in between, the technology is certainly working, too much empirical data has been released from several formations to indicate that the technology works well in a number of basins; however it is clear that data is not enough, the company needs to deliver the service quicker, better and does it safely, those imperatives seems to have slowed down growth, the growth in capacity has run widely ahead of demand, something the new team already addressed in their Q4 release when they stopped capacity additions.

    It is also clear that management is also limiting expectations for the whole year at a range of $250m to $300m; this is significantly lower than the average of $370m expected by the street, at $250m to $300m growth in 2012 will be 56% to 88% from 2011. Those are positive and courageous steps; we finally have proper guidance from the company, thus we are not subject to analysts varying expectations.

    Starting from tomorrow and after the severe sell off, the company will basically have to re-prove itself, this will only be done through:

    - Signature of additional long term contracts.

    - Translation of those contracts into revenues and cash flow.

    - Progressing with its partnerships model and demonstrating the revenue potential of such a model.

    The management team has a window between now and the end of the year to show that the obstacles the company is facing can be overcome; Q1 was the last quarter in my book that can be blamed on lack of time to react to conditions created by the previous team.

    Long term the jury is still out, I don't think this $20m miss is the coup de grace to the company or to LPG fracturing, but they are certainly cruising too close to the edge; without concrete steps in the next few months conforming increased adoption, the likelihood of Gasfrac turning into a limited operator will look increasingly likely (flat scenario number 4 in the article I published today).

    Disclosure: I am long OTCPK:GSFVF.

    Tags: GSFVF
    Apr 10 12:22 AM | Link | 7 Comments
  • Goldman Launching CROs (Collateralized Religious Obligations)

    In a new twist in the Goldman Sachs fraud allegations and in an effort to safeguard its business and generate new revenues, Goldman Sachs (NYSE:GS) is officially launching its Collateralized Religious Obligations (CROs) product , a CRO is based on a complex mathematical formula to slice and dice existing religions and package them into a new offering.

    "One reason we have developed this product is due to the evolving nature of the religious market" states David A. Viniar, Goldman Sachs CFO, Mr. Viniar added "Muslims and Jews are tired of not being able to eat pork, thus we developed a CRO where the Judaism and Islam none-pork eating component is stripped and replaced with a God approved pork eating component from Christianity, thus allowing Muslims and Jews to eat pork without violating God's wishes"; it is a win - win situation.

    Mr. Ahmed Misdar the Imam at AL-Azhar, one of Islam's greatest religious learning centers based in Cairo informed Reuters "We never knew how to deal with Islam restrictions before Goldman's CROs; today if you need a fatwa modified to fit your lifestyle, you can call Goldman, they will custom make you the product and find you a buyer on the hell side of the trade".

    Immediately after the announcement S&P rated the product Triple Cross, Moody's (NYSE:MCO) gave it a Triple Crescent rating, while stating that it is "virtually hell proof". In addition the Vatican in partnership with AIG (NYSE:AIG) have started to sell Heaven Default Swaps (NASDAQ:HDS) on all Goldman Sach's issued CROs.

    However, due to the current Collateralized Debt Obligations (CDOs) debacle, rumours quickly spread that Goldman is offering CROs handpicked by Satan, and has been shorting the product outright, by buying HDSs from the Vatican and AIG.

    Mr. Lloyd Blankfein quickly denied those allegations, he stated "Goldman is only market making between heaven and hell, just as God does", he then added "Does God ever disclose on which side of the trade he is?".

    Nawar Alsaadi, reporting live from Goldman Sachs New York head quarters

    Disclosure: No positions
    Apr 01 6:57 PM | Link | 2 Comments
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