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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
  • Gasfrac Energy Needs Strategic Options  28 comments
    Aug 13, 2012 7:58 PM | about stocks: GSFVF

    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.

    Stocks: GSFVF
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Comments (28)
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  • firezeke
    , contributor
    Comments (2) | Send Message
     
    I agree there is a "perfect storm" for GFS, but in my opinion, that should refer to the horrific drought, the high price of guar and the general backlash towards hydrofracking, all of which should be throwing the door wide open for lpg fracturing. This management team has been unable to figure out how to capitalize on a set of competitive advantages that would have any competent ceo drooling. We'll see if they can ever get it figured out, or if they'll continue to under-deliver. Good to hear your updated opinion on this, Nawar.
    12 Aug 2012, 09:12 AM Reply Like
  • evan.prospect
    , contributor
    Comments (692) | Send Message
     
    Lots of good pros and cons, thank you. I hope time doesn't run out on Gasfrac...
    13 Aug 2012, 07:20 PM Reply Like
  • Ron55
    , contributor
    Comments (4) | Send Message
     
    Nawar,

     

    Thanks for the great article. By all accounts GFS should have better revenues in Q3 and Q4 - said to be 150 to 100 million. Will that be enough to keep the company solvent? If so then for how long?
    17 Aug 2012, 10:03 AM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Thanks Ron, I think if they deliver on those numbers this will go a long way to diminishing the risk of a dilutive financing, but for it to be enough the company needs to demonstrate tangible progress in expanding its customer base and gaining a wider adoption, only sustained and growing revenues/cash flow will turn the tide for good.

     

    Regards,
    Nawar
    17 Aug 2012, 10:21 AM Reply Like
  • wtblanchard
    , contributor
    Comments (2388) | Send Message
     
    Nawar,

     

    It sounded like on the conference call that they finally had solved the propane recovery issue (better late than never I suppose :-( )

     

    Do you think this will make a significant difference to securing more contracts?

     

    For those areas where propane is not readily available, might this make a big difference in both costs and equipment utilization?

     

    Is one of the reasons we haven't heard much about Gasfrac in Bakken the availability or propane, or is geological?
    17 Aug 2012, 11:06 AM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Wt, I do think that the propane capture system is an important milestone, and it should help them gain traction, however it is not clear if they are ready to role out the system through out all their key operating hubs.

     

    As for the Bakken I think their lack of presence there is more a question of geology rather than propane availability.

     

    Regards,
    Nawar
    17 Aug 2012, 11:38 AM Reply Like
  • Maninder Batra
    , contributor
    Comments (572) | Send Message
     
    What is the cost for a LPG frac currently for one well?
    1 Sep 2012, 07:30 AM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Last I heard it was about 50% above water fracturing if you don't recover the propane, if you do, it would be about 18% more. This is of course not counting any possible increased production down the line which would lower the overall cost.

     

    Regards,
    Nawar
    1 Sep 2012, 12:57 PM Reply Like
  • Maninder Batra
    , contributor
    Comments (572) | Send Message
     
    Thank you for your response.In one of your articles which was comparing methanol water frac and LPG frac .What did the flow rate(hours) mean?
    1 Sep 2012, 02:28 PM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » The flow rate is the production rate, how much oil or gas is produced during a certain unit of time, you can measure it in hours, days, months or longer.

     

    Regards,
    Nawar
    1 Sep 2012, 02:56 PM Reply Like
  • gtg279v
    , contributor
    Comment (1) | Send Message
     
    Propane Recovery available to customers Q4.
    17 Aug 2012, 12:47 PM Reply Like
  • bz1516
    , contributor
    Comments (97) | Send Message
     
    A great technology with industry leading high costs is not viable regardless what industry its in.
    17 Aug 2012, 02:04 PM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Indeed bz, this appears to be increasingly the case with LPG and Gasfrac. Congratulations on spotting that early on, I tip my hat to you.

     

    Regards,
    Nawar
    17 Aug 2012, 02:14 PM Reply Like
  • Billabeau
    , contributor
    Comments (3) | Send Message
     
    A couple of people have mentioned the possibility of GasFrac completing wells, not for cash, but for a percentage of the production of those wells. This could create a recurring revenue stream that strikes me as being a good second choice after contracts, which just aren't happening right now. Does that seem like a do-able option to you?
    20 Aug 2012, 12:24 PM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Bill, indeed this could be an interesting idea, but at this stage we need to move beyond the idea stage and into execution, we need specifics, clear time frames and actual cash flow generation because as I highlighted in the write up the company does not have the luxury of time.

     

    Regards,
    Nawar
    20 Aug 2012, 01:08 PM Reply Like
  • Seekingalfalfa
    , contributor
    Comments (91) | Send Message
     
    As always, Nawar, your article is thoughtful and well-informed, but what has that been worth thus far regarding this company? You have ridden it all the way down. I want to make money. Don't you? You can now point to all the reasons that this hasn't work out, but none of those reasons are novel or a surprise. I urged you to take a more balanced view of Gasfrac quite a ways back and, frankly, you refused. I'm not sure why that is. A lack of humility? Stubborness? In any case, those are very dangerous characteristics when investing. I could care less if you were losing your own money, but I know for a fact that more than several people invested in Gasfrac based almost solely on your chearleading (yes, they should have done their own dd). Humility and the ability to change one's mind are valuable investment tools. Your article above is "same old, same old" to me.
    5 Sep 2012, 03:37 PM Reply Like
  • Maninder Batra
    , contributor
    Comments (572) | Send Message
     
    My own analysis is that Gasfrac is an good company.But it seems to have restricted itself to North America which is not a good idea.They should an marketing team in Russia as Rosneft,Tatneft and others are in major plans to develop the Bazhenov Tight oil formation,the largest in the world .
    6 Sep 2012, 01:43 AM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Alfalfa, you are free to have your opinion, however an investment in a junior tech company is an evolving investment, the outlook changes based on how the fundamentals unfold.

     

    I don't claim that every investment I make makes money, but on average I have enough winners to offset the losers. Each investor is free to manage their risk exposure to a level they see appropriate; the focus of my articles was not portfolio management, but Gasfrac and LPG fracking technology in general.

     

    I have written my Gasfrac analysis in good faith and provided factual information, some agreed with it and some did not, this what makes a market; at least I put my money where my mouth is and this is more than I could say for any wall street analyst who recommend stocks on daily basis with no skin in the game.

     

    I am not sure what else you want me to say? You were right?, I was wrong?, I think I said as much in the article and subsequent comments. I never have an issue with admitting an error, however I derive my conclusion on whether an error is committed based on the change of the underlying fundamentals and not from a change of opinion.

     

    I certainly do agree that hubris and stubbornness is a very dangerous attribute for an investor, I also find the transposition of investment disagreements into the personal domain an equally dangerous attribute.

     

    Regards,
    Nawar
    5 Sep 2012, 06:42 PM Reply Like
  • raymond0
    , contributor
    Comments (2) | Send Message
     
    Nawar, good to see some new comments from you on this company. You always seemed to have an inside track on what was going on.

     

    Do you have any info on a company called NEXT?
    11 Sep 2012, 04:12 PM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Thanks for the comment Raymond. I have heard of NEXT, I am not that familiar with them, but at first glance their technology appears very close to that of Chimera (CHMR) which is practically a scam.

     

    Regards,
    Nawar
    11 Sep 2012, 06:11 PM Reply Like
  • Steveragain
    , contributor
    Comments (2) | Send Message
     
    Why is the Bakken geology not the best place for Grasfrac fracking?
    5 Oct 2012, 05:29 PM Reply Like
  • Steveragain
    , contributor
    Comments (2) | Send Message
     
    If a frack requires millions of gallons of fracking fluid, using propane would cost a lot wouldn't it? What is the cost of the fracking fliud?
    7 Oct 2012, 01:41 AM Reply Like
  • Nawar Alsaadi
    , contributor
    Comments (431) | Send Message
     
    Author’s reply » Propane requires 20% of the quantity, and it also can be recovered, if the propane is recovered the cost is about 18% more, if it not the cost could be 50% to 100% more.

     

    Regards,
    Nawar
    7 Oct 2012, 10:49 AM Reply Like
  • Craig Cooper
    , contributor
    Comments (2141) | Send Message
     
    One of the primary issues associated with propane fracs is that it doesn't appear to generate the quality or quantity of fracs associated with water-based methods.

     

    There are a number of efforts underway that are attempting to address this shortfall.
    7 Oct 2012, 12:37 PM Reply Like
  • Maninder Batra
    , contributor
    Comments (572) | Send Message
     
    @Craig ,

     

    do you have the underlying data in relation to that?
    8 Oct 2012, 12:57 AM Reply Like
  • Craig Cooper
    , contributor
    Comments (2141) | Send Message
     
    Maninder,

     

    I do not personally have data; only anecdotal feedback from D&C folk.
    8 Oct 2012, 09:35 PM Reply Like
  • BakkenRokkin
    , contributor
    Comments (9) | Send Message
     
    To answer Steveragain, there are 2 major reasons why this technology would not be applicable to the Bakken and Three Forks plays in North Dakota. First is the delay in hooking up the wells to gas lines due to poor gathering infrastructure. Many of the wells up here are flaring gas a year after completion. Propane used in the fracks would be wasted. Second, water availability is definitely NOT a problem up here. I'm heavily involved in the Bakken drilling and completion and do not see geology as an impediment.
    20 Oct 2012, 03:25 AM Reply Like
  • bigfourroad
    , contributor
    Comments (66) | Send Message
     
    I see that occasional comments here reflect persons following this stock and read them with interest. As an observation with the stock selling at less than $2 and definitely in "financially impaired" territory does anything change the picture for them?
    For example:
    New US EPA regulations (likely now to be forthcoming) regarding groundwater effects are said to raise the cost of fracking by $500,000 average;
    Marginally better and uptrending nat gas pricing;
    Groundwater concerns in the Eastern US where there is pipeline infrastructure for the most part.
    29 Nov 2012, 11:31 AM Reply Like
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