GasFrac Energy Services Inc.
TSX VENTURE : GFS

GasFrac Energy Services Inc.

May 09, 2011 17:27 ET

GASFRAC Announces First Quarter 2011 Results

CALGARY, ALBERTA--(Marketwire - May 9, 2011) - GASFRAC Energy Services Inc. (TSX VENTURE:GFS)

Dwight Loree, Chief Executive Officer commented "Revenue for the quarter increased 91% to $30.5 million from $15.9 million in 2010. However, this revenue was below our expectations due to capacity constraints resulting from a well site incident on January 14, 2011 which resulted in us suspending operations for a three week period. Subsequently we also added several data collection and monitoring systems to our operating procedures to enhance safety. This additional data monitoring capability exceeded the bandwidth of the data vans as currently configured resulting in an additional short-term constraint on revenue capacity which has now been alleviated. The net result of the shutdown and bandwidth limitation was to reduce the Company's effective revenue generation capacity during the quarter to 60% of that originally planned. With the added equipment from our capital build now coming on line, I expect revenue capacity to significantly increase in for the second half of the year."

Management's discussion and analysis ("MD&A") of the financial condition and the results of operations should be read in conjunction with the March 31, 2011 unaudited interim consolidated financial statements and the December 31, 2010 audited consolidated financial statements of GASFRAC Energy Services Inc. ("GASFRAC" or the "Company"), together with the accompanying notes. The interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") 1, "First-time Adoption of International Financial Reporting Standards" and with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standard Board. Previously, the Company prepared its interim and Annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("GAAP").

Readers should also refer to the "Forward-Looking Statements" legal advisory at the end of this MD&A. This MD&A has been prepared using information that is current to May 9, 2011.

All references to dollar amounts are in Canadian dollars. Figures are in 000s except share and per share data or as otherwise noted.

Unless the context otherwise requires, all references in this MD&A to "we", "us" or "our" mean GASFRAC.

Business of GASFRAC

GASFRAC Energy Services Company Inc. ("GASFRAC" or the "Company") was incorporated on February 13, 2006 in Canada under the Business Corporations Act in the Province of Alberta. The Company is an oil and gas well fracturing company that has developed new technology, the "LPG Fracturing Process", to enable wells to be fractured safely with LPG, more specifically propane and butane. The Company has four wholly-owned subsidiaries, GASFRAC Services GP Inc., GASFRAC Energy Services Limited Partnership, GASFRAC Luxembourg Finance, and GASFRAC Inc. (a U.S. incorporated entity).

Changes in Accounting Policies

On January 1, 2011, GASFRAC adopted International Financial Reporting Standards ("IFRS") for financial reporting purposes, using a transition date of January 1, 2010. The financial statements for the three months ended March 31, 2011, including required comparative information, have been prepared in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its Interim and Annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("Previous GAAP"). Unless otherwise noted, 2010 comparative information has been prepared in accordance with IFRS. The adoption of IFRS has not had an impact on the Company's operations, strategic decisions and cash flow. Further information on the IFRS impacts is provided in the Accounting Policies and Estimates Section of this MD&A, including reconciliations between previous GAAP and IFRS Net Earnings, Operating Earnings and other financial metrics.


Comparative Quarterly Financial Information

Three months ended:                          March 31, 2011  March 31, 2010
----------------------------------------------------------------------------
Revenue                                              30,452          15,906
Operating expenses                                   25,567          11,907
Selling, general and administrative expenses          3,670           1,932
EBITDA(1)                                                66           3,943
Net (loss) income                                    (2,515)          1,729
Net (loss) income per share - basic                   (0.04)           0.05
Weighted average number of shares - basic        60,662,082      32,674,444
Treatments                                              139              78
Revenue per treatment                                   219             204
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(1) Defined under Non-IFRS Measures

First Quarter Highlights

Financial Overview

Revenues

Revenue for the quarter increased 91% to $30.5 million from $15.9 million in 2010. The increase reflects a combination of added equipment capacity as well as additional demand for our services in Canada. However, revenue for the quarter was below our expectations due to capacity constraints resulting from a well site incident on January 14, 2011. As the Company has previously described in press releases, the incident was caused by a premature mechanical failure. The Company took the precaution of discontinuing all fracturing operations until it determined the cause of the incident. As a result, operations for the quarter were shut down for a three week period. Further, as a result of its review, the Company added several data collection and monitoring systems to its operating procedures. This additional data monitoring capability exceeded the bandwidth of the data vans as currently configured thus requiring the use of two data vans per fracturing job. This requirement for two data vans per job effectively removed one fracturing set from operations until additional monitoring bandwidth was added to each equipment set. This was completed early in the second quarter. The net result of the shutdown and bandwidth limitation was to reduce the Company's effective revenue generation capacity during the quarter to 60% of that originally planned. In 2011, the demand for fracturing services in Canada has improved significantly and the Company has participated in this improvement due to increased acceptance of its LPG fracturing technology and added equipment capacity. During the quarter, three customers represented 56% of revenue.

During the quarter the Company completed 139 treatments at an average price of $219 compared to 78 treatments at an average job price of $204 during Q1 2010.

Operating Expenses

Operating expenses increased to $25.6 million (84% of revenue) during Q1 2011 from $11.9 million (75% of revenue) in Q1 2010. In addition to the increase related to revenue volume, the increase is comprised of three components. First, direct field costs increased by approximately 4 percentage points ($1.2 million) resulting from standby charges incurred during the shutdown and equipment rental costs. Second, repair costs incurred as a result of the January 14, 2011 incident were $0.5 million. Third, our US operation incurred fixed operating costs of $0.8 million during the quarter.

Selling, General and Administrative ("SG&A") Expenses

SG&A expenses increased to $3.7 million (12% of revenue) during Q1 2011 from $3.6 in Q4 2010 and $1.9 million (12% of revenue) in Q1 2010. The increase is primarily due to the hiring of administrative and operations staff to support the growth in both our Canadian and US operations.

Amortization

Amortization increased to $2.9 million during Q1 2011 from $1.5 million in Q1 2010. The increase is due to an increase in operating capital assets.

EBITDA

EBITDA decreased to $0.1 million during Q1 2011 from $4.0 million in Q1 2010. The decrease is largely due to the revenue capacity limitation experienced during the quarter without a reduction in the cost base built to support the higher revenue.

Net Income

Net income decreased to a loss of $2.5 million during Q1 2011 from net income of $1.7 million during Q1 2010.


Summary of Quarterly Results
                               MAR. 31  JUN. 30   SEP. 30  DEC. 31  MAR. 31
                                  2010     2010      2010     2010     2011
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Revenue                         15,906   13,323    26,590   41,087   30,452
Net income (loss)                1,729   (1,282)    2,318    1,995   (2,515)
Net income (loss) per share
 (basic)                          0.05    (0.04)     0.06     0.04    (0.04)
EBITDA (1)                       3,943      440     4,874    5,814       66
Capital expenditures             6,247    7,430    35,871   33,897   38,941
Working capital (2)             17,640   13,330    41,781  118,346   79,069
Shareholders' equity            85,957   85,758   151,606  259,445  258,217
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(1) Defined under Non-IFRS  Measures
(2) Working capital is defined as current assets less current liabilities


Liquidity and Capital Resources

As at March 31,                                         2011           2010
----------------------------------------------------------------------------
Cash Provided by (used in)
 Operating Activities                            $    26,327     $   (5,124)
 Financing Activities                                  1,050            341
 Investing Activities                                (38,632)        (6,247)
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                                                 $   (11,255)    $  (11,030)
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As at March 31, 2011 the Company had $79.1 million of working capital compared to $118.3 million at December 31, 2010. The decrease in working capital is primarily due to investing in capital assets offset by an increase is cash provided from operating activities.

The Company had approximately $101 million of capital commitments as part of the 2011 capital program. The Company anticipates being able to fund these capital expenditures through cash on hand, operating cash flows and current debt facilities.

Operating

The Company's funds provided by operations (as defined under Non-IFRS Measures) was $1.4 million for Q1 2011 compared to $4.1 million in 2010. The decrease is largely due to the loss for the quarter as compared to a profit in 2010.

Financing

Net cash provided by financing activities for Q1 2011 was $1.0 million compared to $0.3 million during Q1 2010. Both result from the exercise of stock options and warrants.

As at March 31, 2011 the Company had a $15 million demand revolving loan facility and a $35 million committed revolving facility (see Note 11 of the interim consolidated financial statements). No amounts were drawn on these facilities as at March 31, 2011 or as at the date of this MD&A. The Company is in compliance with all its debt covenants.

Investing

For Q1 2011 the Company's net cash used for investing activities was $41.3 million as compared to $6.2 million in Q1 2010. The Company invested $38.9 million in capital equipment to add revenue producing capacity. In 2010, The Company invested $6.2 million in capital equipment.

Accounting Policies and Estimates

Adoption of IFRS

The Company has prepared its March 31, 2011 Interim Consolidated Financial Statements in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with IAS 34, Interim Financial Reporting, as issued by the IASB. Previously, the Company prepared its financial statements in accordance with Canadian GAAP, or previous GAAP. The adoption of IFRS has not had a material impact on the Company's operations, strategic decisions, cash flow and capital expenditures.

The Company's IFRS accounting policies are provided in Note 3 to the Interim Consolidated Financial Statements. In addition, Note 15 to the Interim Consolidated Financial Statements presents reconciliations between the Company's 2010 previous GAAP results and the 2010 IFRS results. The reconciliations include the Consolidated Balance Sheets as at January 1, 2010, March 31, 2010 and December 31, 2010, and Consolidated Statements of Earnings, Comprehensive (Loss) Income and Changes in Shareholders' Equity for the three months ended March 31, 2010 and for the twelve months ended December 31, 2010.


The following provides summary reconciliations of GASFRAC's 2010 GAAP and
IFRS result.

                             MAR. 31   JUN. 30   SEP. 30   DEC. 31   Annual
                                2010      2010      2010      2010     2010
----------------------------------------------------------------------------
Net income (loss) -
 Previous GAAP                 1,672    (1,266)    2,585     2,062    5,053
Operating Expense re:
 leases                           33        62        32        42      169
Share Based Payments            (129)     (247)     (494)     (342)  (1,212)
Amortization                     159       174       200       239      772
Interest income / Expense         (6)       (5)       (5)       (6)     (22)
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Net income (loss) - IFRS       1,729    (1,282)    2,318     1,995    4,760
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Accounting Policy Changes

Leases

Previous GAAP will consider the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on the light vehicles were operating leases in nature.

With the absence of the quantitative criteria provided by Previous GAAP, we determined that qualitatively, the risks and rewards of the lease reside with GASFRAC and as such, treated it as a financing lease.

Depreciation

With the conversion to IFRS, GASFRAC broke out the field equipment into each of the separate components that made up field equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain depreciation rates were modified.

Stock based compensation

Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit.

For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 50%.

Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the share-based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the share-based payments that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent IFRS fair value adjustments are recorded through stock based compensation.

As part of the 2010 Kierland transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable transaction cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245.

Internal Controls Over Financial Reporting

During the first quarter, GASFRAC completed an evaluation of the Company's internal controls under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in National Instrument 52-109. Based on the evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were designed to provide a reasonable level of assurance over the disclosure of material information, and are effective as of March 31, 2011.

Off-Balance Sheet Arrangements

The Company is not party to any off balance sheet arrangements or transactions.

Non-IFRS Measures

Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures have been described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and ability to generate funds to finance its operations. These measures may not be comparable to similar measures presented by other entities, and are further explained as follows:

EBITDA is defined as net income before interest income and expense, taxes, depreciation, amortization and non-controlling interest. EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt.

EBITDA was calculated as follows:


Three months ended March 31                             2011           2010
----------------------------------------------------------------------------
Net (loss) income                                     (2,515)         1,729
Add back (deduct):
 Interest (income) expense                              (255)             6
 Amortization                                          2,885          1,490
 Deferred income tax (benefit) expense                   (49)           718
----------------------------------------------------------------------------
EBITDA                                                    66          3,943
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Funds provided by operations is defined as cash and cash equivalents provided by (used for) operating activities before the net change in non-cash operating working capital. Funds provided by operations is a measure that provides shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Management utilizes these measures to assess the Company's ability to finance operating activities and capital expenditures.


Funds provided by operations were calculated as follows:

Three months ended March 31                             2011           2010
----------------------------------------------------------------------------
Cash and cash equivalents provided by (used for)
 operating activities                                 26,327         (5,124)
Add back (deduct):
 Net changes in non-cash working
  capital                                            (25,670)         9,227
----------------------------------------------------------------------------
Funds provided by operations                             657          4,103
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Outlook

We expect the North American pressure pumping market will remain strong in 2011 due to the service intensity of the wells being drilled, energy demand and service supply levels. Although there is projected to be a significant amount of new horsepower being added to the market in 2011, it is still estimated that the market will be undersupplied based on projected rig activity. As natural gas prices continue to be soft we have observed customers targeting more of their capital budgets in oil and liquids-rich reservoirs. Further, development activity is focused on deep, unconventional and horizontal wells often requiring multi-stage fracturing.

As noted above, we expect that overall demand for fracturing services will continue to be strong for 2011 and this, combined with growing knowledge and acceptance of the Company's LPG fracturing technology, should support continued growth of our Canadian revenue base. While we experienced a constraint on revenue producing capacity in the first quarter of 2011 due to our voluntary three week operational shutdown, we do not expect to recapture that revenue during the second quarter of 2011 as the Canadian Spring breakup is expected to be longer than usual. As a result, second quarter revenues from Canada will reflect reduced revenue days. However, we anticipate four crews operating in Canada for the entire second half of 2011 which will allow a significant increase in revenue activity in the second half.

As in Canada, more drilling activity in the USA is being focused on oil and liquids rich gas. While industry dynamics are similar to Canada for GASFRAC, the key element of our initial growth in the USA will be obtaining customer acceptance of our LPG fracturing technology and on focusing on key basins where we can quickly reach sufficient mass to ensure high utilization rates. One set of equipment was deployed to Texas in April 2011 with a second set scheduled for later in the second quarter. The Company has identified a number of customers which plan to perform LPG fracturing operations to determine the efficacy of the technology on their formations. Revenue levels in the US will be a factor of the timing and results of these assessments and the resultant levels of customer adoption of LPG fracturing technology. We are confident that customers will experience positive results from LPG fracturing.

Forward-Looking Statements

This document contains certain statements that constitute forward-looking statements under applicable securities legislation. All statements other than statements of historical fact are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue", or the negative of these terms or other comparable terminology. These statements are only as of the date of this document and we do not undertake to publicly update these forward looking statements except in accordance with applicable securities laws. These forward looking statements include, among other things:

- expectations that GASFRAC's innovative technology will provide GASFRAC with opportunities to expand GASFRAC's market share in Alberta and British Columbia;

- estimates of additional investment required to complete ongoing capital projects;

- expectations of securing financing for additional capital expenditures beyond 2010;

- expectations of the duration of Spring breakup in Canada in 2011;

- expectations that GASFRAC has or can obtain sufficient funding to meet its capital plan;

- expectations that additional operating equipment will be delivered and provide GASFRAC the ability to service demand for large multi-stage treatments;

- assumption that environmental protection requirements will not have a significant impact on GASFRAC's operations or capital budget;

- expectations as to GASFRAC's future market position in the industry;

- expectations as to the supply of raw materials;

- expectations as to the pricing of GASFRAC's services;

- expectations as to the timing of additional capital equipment in Canada and the USA;

expectations as to the potential for GASFRAC's services in the United Sates;

- expectations of fracturing industry pricing and the pricing of GASFRAC services in North America in 2011;

- expectations of oil and natural gas commodity prices in 2011;

- expectations of the amount of net fracturing horsepower being added to the North American market in 2011 and its impact on GASFRAC's service prices;

- expected timing for completion of the assessment and implementation phases of GASFRAC's project plan for transition to IFRS;

These statements are only predictions and are based on current expectations, estimates, projections and assumptions, which we believe are reasonable but which may prove to be incorrect and therefore such forward-looking statements should not be unduly relied upon. In addition to other factors and assumptions which may be identified in this document, assumptions have been made regarding, among other things, industry activity; effect of market conditions on the demand for the Company's services; the ability to obtain qualified staff, equipment and services in a timely manner; the effect of current plans; the timing of capital expenditures and receipt of added equipment operating capacity; future oil and natural gas prices and the ability of the Company to successfully market its services.

By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These risks and uncertainties include: changes in drilling activity; fluctuating oil and natural gas prices; general economic conditions; weather conditions; regulatory changes; the successful development and execution of technology; customer acceptance of new technology; the potential of competing technologies by market competitors; the availability of qualified staff, raw materials and capital equipment.

GASFRAC ENERGY SERVICES INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

FOR THE THREE MONTHS ENDED

MARCH 31, 2011

GASFRAC ENERGY SERVICES INC.

Consolidated Statement of Financial Position (unaudited) (000s)


As at:                          Mar 31, 2011    Dec 31, 2010    Jan 1, 2010
----------------------------------------------------------------------------
                                                    (Note 15)      (Note 15)

ASSETS
CURRENT ASSETS
 Cash and cash equivalents    $       87,446  $       98,701  $      11,643
 Accounts receivable                  21,374          24,500          9,469
 Inventory                            16,176           7,018          5,499
 Prepaid expenses                      5,545           6,839            519
----------------------------------------------------------------------------
                                     130,541         137,058         27,130

PROPERTY and EQUIPMENT (Note 4)      174,094         138,051         61,557
INTANGIBLE ASSETS (Note 5)               433             420            358
LONG-TERM DEPOSITS                     5,528           3,176          1,790
DEFERRED INCOME TAX BENEFIT                -               -             775
----------------------------------------------------------------------------
TOTAL ASSETS                   $     310,596  $      278,705  $      91,610
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LIABILITIES AND SHAREHOLDERS'
 EQUITY
CURRENT LIABILITIES
 Current portion of lease
  obligations (Note 6)         $         293  $          240  $         121
 Unearned revenue (Note 7)            20,871           3,485
 Accounts payable and accrued
  liabilities                         30,308          14,987          7,617
----------------------------------------------------------------------------
Total current liabilities             51,472          18,712          7,738
----------------------------------------------------------------------------

LONG-TERM LEASE OBLIGATIONS
 (Note 6)                                477             180            179
DEFERRED INCOME TAX LIABILITY
 (Note 8)                                430             368              -
----------------------------------------------------------------------------
Total non-current liabilities            907             548            179
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9)               252,843         251,573         81,293
CONTRIBUTED SURPLUS                    3,539           3,522          2,811
RETAINED EARNINGS                      1,835           4,350           (411)
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Total equity                         258,217         259,445         83,693
----------------------------------------------------------------------------

TOTAL LIABILITIES AND EQUITY   $     310,596  $      278,705  $      91,610
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.

On behalf of the Board:

 Dwight Loree, Director

 Gerald Roe, Director


GASFRAC ENERGY SERVICES INC.
Consolidated Statement of Comprehensive (loss) Income (unaudited) 
(000s)

Three Months Ended:                             Mar 31, 2011   Mar 31, 2010
----------------------------------------------------------------------------
                                                                   (Note 15)
REVENUE                                             $ 30,452       $ 15,906

OTHER INCOME
 Interest income                                         255              -
 Business interruption claim                               -          2,030
----------------------------------------------------------------------------
                                                      30,707         17,936
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EXPENDITURES
 Operating                                            25,567         11,913
 Selling, general and administrative                   3,670          1,932
 Stock based compensation                              1,047            166
 Amortization                                          2,885          1,490
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                                                      33,169         15,501

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(LOSS) PROFIT BEFORE INCOME TAX                      (2,462)          2,435

Foreign exchange loss (gain)                            102             (12)

Deferred income tax (benefit) expense                   (49)            718

----------------------------------------------------------------------------
NET (LOSS) INCOME / COMPREHENSIVE (LOSS)
 INCOME                                              (2,515)          1,729

(Loss) Earnings per share
Basic                                               $ (0.04)       $   0.05
----------------------------------------------------------------------------
Diluted                                             $ (0.04)       $   0.05
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See accompanying Notes to Consolidated Financial Statements.


GASFRAC ENERGY SERVICES INC.
Consolidated Statement of Changes in Equity (unaudited) 
(000s)

                           Share    Contributed    Retained
                         Capital        Surplus    Earnings    Total Equity
----------------------------------------------------------------------------
Balance at January 1,
 2010                 $   81,293  $       2,811  $     (411)  $      83,693
----------------------------------------------------------------------------
Total comprehensive
 income for the
 period:
Net income and
 comprehensive income          -              -       1,729           1,729
----------------------------------------------------------------------------
Total comprehensive
 income Jan - Mar 2010         -              -       1,729           1,729
----------------------------------------------------------------------------
Exercise of stock
 options                     406            (37)          -             369
SBC expense - options
 and warrants                  -            166           -             166
----------------------------------------------------------------------------
Balance at March 31,
 2010                 $   81,699  $       2,940  $    1,318  $       85,957
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total comprehensive
 income for the
 period:
Net income and
 comprehensive income          -              -       3,032           3,032
----------------------------------------------------------------------------
Total comprehensive
 income Apr - Dec 2010         -              -       3,032           3,032
----------------------------------------------------------------------------

Transactions with
 shareholders:
Issuance of common
 stock                   104,698              -           -         104,698
Issuance of
 restricted stock              -            354           -             354
Issuance of
 subscription receipts    61,551              -           -          61,551
Issuance on share
 exchange                    699              -           -             699
Issued for services          128              -           -             128
SBC expense - options
 and warrants                  -            730           -             730
Exercise of stock
 options                     991            (96)          -             895
Exercise of warrants       2,030           (629)          -           1,401
Released from
 restricted shares           329           (329)          -               -
Reclassification as
 restricted shares          (552)           552           -               -
----------------------------------------------------------------------------
Total                    169,874            582           -         170,456
----------------------------------------------------------------------------
Balance at December
 31, 2010             $  251,573  $       3,522  $    4,350  $      259,445
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total comprehensive
 income for the
 period:
Net loss and
 comprehensive loss            -              -      (2,515)         (2,515)
----------------------------------------------------------------------------
Total comprehensive
 income Jan - Mar 2011         -              -      (2,515)         (2,515)
----------------------------------------------------------------------------
Transactions with
 shareholders:
Stock based
 compensation expense
 - options                     -            185           -             185
Issuance of
 restricted stock              -            151           -             151
Exercise of stock
 options                     523            (46)          -             477
Exercise of warrants         839           (176)          -             663
Released from
 restricted shares            97            (97)          -               -
Common Stock -
 Deferred Tax Benefit       (189)             -           -            (189)
----------------------------------------------------------------------------
 Total                     1,270             17           -            1,287
----------------------------------------------------------------------------
Balance as March 31,
 2011                 $  252,843  $       3,539  $    1,835  $      258,217
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.


GASFRAC ENERGY SERVICES INC.

Consolidated Statement of Cash Flows (unaudited) 
(000s)


Three Months Ended:                             Mar 31, 2011   Mar 31, 2010
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CASH AND CASH EQUIVALENTS PROVIDED BY (USED
 FOR):
OPERATING ACTIVITIES
 Net (loss) Income / Comprehensive (loss)
  Income                                            $ (2,515)       $ 1,729
 Items not effecting cash:
  Amortization                                         2,885          1,490
  Deferred income taxes (benefit) expense                (49)           718
  Stock based compensation (Note 9)                      336            166
----------------------------------------------------------------------------
                                                         657          4,103
 Net change in non-cash working capital (Note
  13)                                                 25,670         (9,227)
----------------------------------------------------------------------------
                                                      26,327         (5,124)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
 Issuance of common shares (net of share issue
  costs)                                                 700            368
 Payment of finance lease liabilities                    350            (27)
----------------------------------------------------------------------------
                                                       1,050            341
----------------------------------------------------------------------------

INVESTING ACTIVITIES
 Purchase of property and equipment                  (38,728)        (6,243)
 Proceeds on disposal of property and
  equipment                                              147              -
 Purchase of intangible assets                           (51)            (4)
----------------------------------------------------------------------------
                                                     (38,632)        (6,247)
----------------------------------------------------------------------------

 Decrease in cash and cash equivalents for the
  period                                             (11,255)       (11,030)
 Cash and cash equivalents at beginning of
  period                                              98,701         11,643
----------------------------------------------------------------------------
BALANCE, END OF THE PERIOD                          $ 87,446        $   613
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.

GASFRAC ENERGY SERVICES INC.

Notes to the Consolidated Financial Statements (unaudited)

March 31, 2011

(Figures in text and tables are in 000s except share data and certain other exceptions as indicated)

1. CORPORATE INFORMATION

GASFRAC Energy Services Inc. ("Gasfrac" or "the Company") is an oil and gas well fracturing company that has developed the "LPG Fracturing Process" to enable wells to be fractured with LPG, more specifically propane and butane.

GASFRAC is a publically traded company, incorporated and domiciled in Canada. The address and registered office is Suite 1900, 801 - 6th Avenue S.W., Calgary, Alberta, Canada, T2P 3W2.

These interim Consolidated Financial Statements were approved and authorized for issuance by the Board of Directors on May 9, 2011.

The Company's Canadian business is seasonal in nature. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break up.

2. BASIS OF PREPARATION

In conjunction with the Company's annual audited Consolidated Financial Statements to be issued under International Financial Reporting Standards ("IFRS") for the year ended December 31, 2011, these interim Consolidated Financial Statements present GASFRAC's initial financial results of operations and financial position under IFRS as at and for the three months ended March 31, 2011, including 2010 comparative periods. As a result, they have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with International Accounting Standard ("IAS") 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). These interim Consolidated Financial Statements do not include all the necessary annual disclosures in accordance with IFRS. Previously, the Company prepared its interim and annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("previous GAAP").

The preparation of these interim Consolidated Financial Statements resulted in selected changes to GASFRAC's accounting policies as compared to those disclosed in the Company's annual audited Consolidated Financial Statements for the period ended December 31, 2010 issued under previous GAAP. A summary of the significant changes to GASFRAC's accounting policies is disclosed in Note 15 along with reconciliations presenting the impact of the transition to IFRS for the comparative periods as at January 1, 2010, as at and for the three months ended March 31, 2010, and as at and for the twelve months ended December 31, 2010.

Operating expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of direct salaries, materials, and other direct operating costs. Selling, general, and administrative expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of indirect salaries, head office expenses, insurance, professional fees and other indirect costs.

A summary of GASFRAC's significant accounting policies under IFRS is presented in Note 3. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1 as disclosed in Note 15.

These consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency. All financial information presented in dollars has been rounded to the nearest thousand except for share and per share amounts.

These interim Consolidated Financial Statements have been prepared on a historical cost basis except for financial instruments and share based payment transactions that are measured at fair value.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position at January 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.

The accounting policies have been applied consistently by Company's entities.

Basis of consolidation

These consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All inter-company balances and transactions have been eliminated on consolidation.

Measurement Uncertainty

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses. Actual results could differ from these estimates.

Foreign currency translation

Monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency at the rates of exchange in effect at the period end date. Non-monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency using the exchange rate at the date of the transaction. Exchange rate differences are recorded in the Consolidated Statement of Earnings.

For the accounts of the foreign operation, revenue and expenses are translated using average rates for the period. Monetary assets and liabilities of the foreign operation are translated into its functional currency at the exchange rate in effect at the period end date. Non-monetary assets and liabilities of the foreign operation are translated into its functional currency using the exchange rate at the date of the transaction.

Cash and cash equivalents

Cash and cash equivalents are held for the purpose of meeting short-term cash commitments and include bank balances and short-term investments with maturities of less than 90 days.

Inventory

Inventory consists of liquefied petroleum gas, chemicals, and proppants used to stimulate well production and is stated at the lower of cost and net realizable value. Cost is determined using the weighted average method.

Property and equipment

Property and equipment are recorded at cost and are amortized over their estimated economic useful lives using the straight-line method as follows:


Asset                                           Depreciation    Useful life
----------------------------------------------------------------------------
 Equipment                                     Straight line   3 - 20 Years
 Furniture & Fixtures                          Straight line        5 years
 Leasehold Improvements                        Straight line     Lease term
----------------------------------------------------------------------------

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Assets under construction are not amortized until put into service.

Management estimates the useful life and residual value of property and equipment on expected utilization, effectiveness of maintenance programs and expected impact of technological change. Although management believes the estimated useful lives of the property and equipment are reasonable, it is possible that changes in estimates could occur which may affect the expected useful lives and residual values of the property and equipment.

Major betterments are capitalized. Repairs and maintenance expenditures which do not extend the useful life of the property and equipment are expensed.

Intangible assets

Intangible assets including deferred development costs, patents and intellectual property that meet certain criteria related to technology, market and financial feasibility are deferred. Such costs are amortized upon commencement of commercial sales over the estimated economic life of the related product as follows:


Asset                                           Depreciation    Useful life
----------------------------------------------------------------------------
 Patents & Intellectual Property               Straight line        5 years
 Deferred Development Costs                    Straight line        5 years
 Other Intangible Assets                       Straight line        5 years
----------------------------------------------------------------------------

Costs that do not meet such criteria are charged to income in the period of expenditure.

Impairment of Long-Term Assets

Long-term assets include property and equipment and intangible assets. The carrying value are reviewed when events or changes in circumstances indicate that the carrying value of an asset or cash generating unit may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separate identifiable cash flows (cash generating units). If indicators of impairments exist, the recoverable amount of the asset or cash generating unit is estimated as the greater of the value in use or the fair value less cost to sell. If the carrying value of the asset or cash generating unit exceeds the recoverable amount, the asset or cash generating unit is written down with an impairment recognized in net earnings. The impairment loss is the difference between the amortized cost of the asset and the present value of the estimated future cash flows.

The Company evaluates impairment losses for potential reversals when events or changes in circumstances warrant such consideration.

Revenue recognition

The Company's revenue is comprised of services and other revenue and is generally sold on agreed upon priced purchase orders or contracts with the customer. Contract terms do not include provisions for significant post-service delivery obligations. Service and other revenue is recognized when the services are provided and collectability is reasonably assured.

Deferred income tax

Deferred tax is recognized in respect to temporary differences arising in tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantially enacted at the reporting date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.

Deferred tax assets and liabilities are recognized in the statement of income except to the extent it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.

Leases

Leases or other arrangements entered into for the use of an asset are classified as either finance or operating leases. Finance leases transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item. Finance leases are capitalized at the commencement of the lease term at the lower of the fair value of the leased asset or the present value of the minimum lease payment. Capitalized leased assets are amortized over the shorter of the estimated useful life of the assets and the lease term. All other leases are classified as operating leases and the payments are amortized on a straight line basis over the lease term.

Stock based compensation

The Company has a restricted share plan, performance share unit plan, stock options, and warrants granted to directors, officers, employees, and consultants as described in Note 9. All forms of stock based compensation treat each tranche as a separate award with its own vesting period with stock based compensation expense recognized on the graded vesting basis. For the restricted share plan, fair values are determined using prices at the grant date and are recognized as stock based compensation costs with a corresponding credit to shareholders equity. For the performance share unit plan, fair values are determined using prices at the market date and are recognized as stock based compensation with a corresponding credit to current liabilities. Stock options and warrants are accounted for using the fair value method under which compensation expense is recorded based on the estimated fair value of the options at the grant date using the Black-Scholes option pricing model. Under this method, compensation cost attributable to stock options granted is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus is recorded as share capital.

(Loss) Earnings per share

Basic earnings per share is calculated by dividing the net (loss) earnings for the period attributable to equity owners of GASFRAC by the weighted average number of shares outstanding during the period.

Diluted earnings per share is calculated based on the weighted average number of shares outstanding during the year adjusted by the weighted average number of common shares outstanding for dilutive instruments.

Financial instruments

Financial assets and liabilities are recognized when GASFRAC becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and GASFRAC has transferred substantially all the risks and rewards of ownership.

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

At initial recognition, GASFRAC classifies its financial instruments in the following categories depending on the purpose for which the instrument were acquired.

Financial assets

(i) Fair value through profit or loss. A financial asset can be classified as fair value through profit or loss only if it is designated at fair value through profit or loss or held-for-trading. GASFRAC's financial assets at fair value through profit or loss are held-for-trading financial assets. These assets are comprised of derivatives or assets acquired or incurred principally for the purpose of selling or repurchasing in the near term. GASFRAC's foreign exchange contracts are derivatives and are recorded at fair value with changes in fair value included in profit or loss. GASFRAC does not apply hedge accounting to its derivative instruments.

(ii) Held-to-maturity. These assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that GASFRAC has the positive intention and ability to hold until maturity. These assets are measured at amortized cost using the effective interest method. If there is objective evidence that the investment is impaired, impairment losses are included in profit or loss.

(iii) Loans and receivables. These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These assets are measured at amortized cost using the effective interest method. Any gains or losses on the realization of receivables are included in profit or loss.

(iv) Impairment of financial assets. All financial assets except for those at fair value through profit or loss are subject to review for impairment at each reporting date. Financial assets are impaired when there is any objective evidence that a financial asset or a group of financial assets are impaired. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.

Financial liabilities

(i) Fair value through profit or loss. These liabilities are comprised of derivatives or liabilities acquired or incurred principally for the purpose of selling or repurchasing in the near term. They are measured at fair value with changes in fair value included in profit or loss.

(ii) Other financial liabilities. They are measured at amortized cost using the effective interest method. Any gains or losses in the realization of other financial liabilities are included in profit or loss.

Fair values

Fair values of financial assets and liabilities are based upon quoted market prices available from active markets or are otherwise determined using a variety of valuation techniques and models using quoted market prices. GASFRAC uses the counterparty close out approach with regard to the entities own credit risk adjustment in fair valuing financial liabilities.


4. PROPERTY AND EQUIPMENT

                                         Furniture &     Leasehold
Cost:                          Equipment    Fixtures  Improvements    Total
----------------------------------------------------------------------------
January 1, 2010                   68,704          59            51   68,814
Additions                         83,412          97             4   83,513
----------------------------------------------------------------------------
December 31, 2010                152,116         156            55  152,327
----------------------------------------------------------------------------
Additions                         38,103         409           216   38,728
Dispositions                        (147)          -             -     (147)
----------------------------------------------------------------------------
March 31, 2011                   190,366         565           271  191,202
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated Depreciation:
----------------------------------------------------------------------------
January 1, 2010                    7,230          21             6    7,257
Amortization                       6,997          17             5    7,019
----------------------------------------------------------------------------
December 31, 2010                 14,227          38            11   14,276
----------------------------------------------------------------------------
Amortization                       2,542         335             8    2,885
Disposition                           53           -             -       53
----------------------------------------------------------------------------
March 31, 2011                    16,716         373            19   17,108
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net Book Value:
----------------------------------------------------------------------------
January 1, 2010                   61,474          38            45   61,557
----------------------------------------------------------------------------
December 31, 2010                137,889         118            44  138,051
----------------------------------------------------------------------------
March 31, 2011                   173,650         192           252  174,094
----------------------------------------------------------------------------

Assets under Construction included in cost:
----------------------------------------------------------------------------
January 1, 2010                    9,194           -             -    9,194
----------------------------------------------------------------------------
December 31, 2010                 47,392           -             -   47,392
----------------------------------------------------------------------------
March 31, 2011                    57,883           -             -   57,883
----------------------------------------------------------------------------
As at January 1, 2010, December 31, 2010 and March 31, 2011 assets
under construction are not subject to amortization as the assets are not
yet available for use.

5. INTANGIBLE ASSETS

                               Patents &    Deferred         Other
                            Intellectual Development    Intangible
Cost:                           Property       Costs        Assets    Total
----------------------------------------------------------------------------
January 1, 2010                      312         198            31      541
Additions                            164          32             -      196
----------------------------------------------------------------------------
December 31, 2010                    476         230            31      737
----------------------------------------------------------------------------
Additions                             51           -             -       51
----------------------------------------------------------------------------
March 31, 2011                       527         230            31      788
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated Depreciation:
----------------------------------------------------------------------------
January 1, 2010                       82          84            17      183
Amortization                          82          46             6      134
----------------------------------------------------------------------------
December 31, 2010                    164         130            23      317
----------------------------------------------------------------------------
Amortization                          24          12             2       38
----------------------------------------------------------------------------
March 31, 2011                       188         142            25      355
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net Book Value:
----------------------------------------------------------------------------
January 1, 2010                      230         114            14      358
----------------------------------------------------------------------------
December 31, 2010                    312         100             8      420
----------------------------------------------------------------------------
March 31, 2011                       339          88             6      433
----------------------------------------------------------------------------

6. LEASE OBLIGATIONS

The Company leased certain of its light vehicles under finance leases. The average lease term is 3 years. The Company has options to purchase the vehicles at the end of the lease terms. The Company's obligations under finance leases are secured by the lessors' title to the leased assets.

Interest rated underlying all obligations under finance leases are fixed at respective contract dates ranging from 6.9% to 8.8% per annum.


                                                           Present value of
                               Future minimum                 minimum lease
As at:                         lease payments       Interest       payments
----------------------------------------------------------------------------
January 1, 2010:
 Less than one year                       135             14            121
 Between one and five years               183              4            179
 More than five years                       -              -              -
----------------------------------------------------------------------------
                                          318             18            300
----------------------------------------------------------------------------
March 31, 2010:
 Less than one year                       169             17            152
 Between one and five years               211              7            204
 More than five years                       -              -              -
----------------------------------------------------------------------------
                                          380             24            356
----------------------------------------------------------------------------
December 31, 2010:
 Less than one year                       261             21            240
 Between one and five years               186              6            180
 More than five years                       -              -              -
----------------------------------------------------------------------------
                                          447             27            420
----------------------------------------------------------------------------
March 31, 2011:
 Less than one year                       335             42            293
 Between one and five years               520             43            477
 More than five years                       -              -              -
----------------------------------------------------------------------------
                                          855             85            770
----------------------------------------------------------------------------


The finance lease obligation is analyzed as:

                                        Jan 1,   Mar 31,   Dec 31,   Mar 31,
As at:                                   2010      2010      2010      2011
----------------------------------------------------------------------------
Current                                   121       152       240       293
Non-current                               179       204       180       477
----------------------------------------------------------------------------
                                          300       356       420       770
----------------------------------------------------------------------------

7. UNEARNED REVENUE

As at March 31, 2011, a customer of the Company has prepaid for materials associated with fracturing treatments in the amount of $20,871. The Company expects that this unearned revenue will be used in the next 12 months.

8. DEFERRED INCOME TAX

The net income tax provision differs from that expected by applying the combined federal and provincial income tax rate of 26.55% (2010 - 28.65%) to taxable income for the following reasons:


Period ended:                                 March 31, 2011 March 31, 2010
----------------------------------------------------------------------------
Expected combined federal and provincial
 income tax(benefit)                                  $ (532)         $ 733
Non-deductible expenses                                   53             11
Valuation allowance                                      529             61
Statutory and other rate differences                     (99)           (87)
----------------------------------------------------------------------------
Effective                                             $  (49)         $ 718
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The components of the deferred income tax liability are as follows:

                                                                December 31,
As at:                                        March 31, 2011           2010
----------------------------------------------------------------------------
Property and equipment and intangible assets       $  (6,672)      $ (4,809)
Non-capital loss carry forwards                        3,507          1,476
Financing costs                                        2,341          2,571
Other                                                    394            394
----------------------------------------------------------------------------
Total deferred income tax (liability) benefit      $    (430)      $   (368)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company has $ 14,030 (2010 - $ 5,897) of tax pools related to non-capital losses available for carry forward to reduce taxable income in future years and expire between 2027 and 2030.

9. SHARE CAPITAL

Authorized

Unlimited number of common shares.

Unlimited number of preferred shares issuable in series with the designation, rights, privileges, restrictions and conditions of each series to be determined by the board of directors.


Issued Common Shares

                                             2011                2010
----------------------------------------------------------------------------
                                       Shares    Amount     Shares   Amount
----------------------------------------------------------------------------
                                           (#)       ($)        (#)      ($)
Opening Balance                    60,226,366   251,573 32,650,000   81,293
Issued on exercise of warrants        619,000       839          -        -
Issued on exercise of options         224,500       523    183,333      406
Common Stock - Deferred Tax                                      -        -
Benefit                                     -      (189)
Released from restricted shares        22,000        97          -        -
----------------------------------------------------------------------------
Balance - March 31                 61,190,577   252,843 32,833,333   81,699
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Restricted shares

                                                      Shares         Amount
----------------------------------------------------------------------------
                                                          (#)            ($)
Balance - December 31, 2010                          361,917          1,607
Released to common shares                            (22,000)           (97)
----------------------------------------------------------------------------
Balance - March 31, 2011                             339,917          1,510
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company has granted restricted shares for certain employees with an annual vesting period over five years from the date of the grant. During the period ended March 31, 2011, $150 of compensation expense was recorded (three month period ended March 31, 2010 - nil).

Performance share units

The Company grants performance stock units to officers and employees with the amount of the grant earned being linked to corporate performance and grants vesting over three years from date of grant. The performance stock units are settled either in cash or Company shares at the Company's discretion. During the three month period ended March 31, 2011, 160,000 performance share units were granted (three month period ended March 31, 2010 - nil) and 44,374 vested (three month period ended March 31, 2010 - nil). During the period ended March 31, 2011, $711 of compensation expense was recognized (three month period ended March 31, 2010 - nil). As at March 31, 2011, the company has granted 410,000 performance share units of which 82,569 performance share units have vested. As at March 31, 2011, the related liability is $1,062 (three month period ended March 31, 2010 - nil).

Stock options

The Company calculates the fair value of its options using the Black-Scholes option pricing model. The following weighted average assumptions were used to determine the fair value of the options at the date of grant.


----------------------------------------------------------------------------
Risk-free interest rate                                                 2.5%
Expected life                                                       4 years
Maximum life                                                        5 years
Volatility                                                               52%
Expected dividend                                                         0
----------------------------------------------------------------------------


A summary of the status of the Company's outstanding stock options is
presented below:

                                            2011                2010
----------------------------------------------------------------------------
                                                Average             Average
                                               Exercise            Exercise
                                      Options     Price   Options     Price
----------------------------------------------------------------------------
                                           (#)       ($)       (#)       ($)
Opening Balance                     2,746,208      3.48 2,966,000      2.89
Granted                                     -         -    15,000      2.00
Exercised for common shares          (224,500)     2.13  (183,333)     2.00
Forfeited and expired                  (9,000)     2.00  (146,167)     3.15
----------------------------------------------------------------------------
Balance - March 31                  2,512,708      3.61 2,651,500      2.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Stock options vest over three years and expire five years from the date of grant. The 2,512,708 options outstanding at March 31, 2011 had exercise prices ranging from $2.00 to $5.00 per share with expiry dates ranging from 2012 to 2015. When stock options are exercised the proceeds, together with the amount of compensation expense previously recorded in contributed surplus are added to share capital. During the period ended March 31, 2011, $185 of compensation expense was recorded (three month period ended March 31, 2010 - $142).


Warrants

                                            2011                2010
----------------------------------------------------------------------------
                                                Average             Average
                                               Exercise            Exercise
                                     Warrants     Price  Warrants     Price
----------------------------------------------------------------------------
                                           (#)       ($)       (#)       ($)
Balance - December 31               1,757,500      1.20 2,602,500      1.32
Exercised for common shares          (619,000)     1.07         -         -
----------------------------------------------------------------------------
Balance - March 31                  1,138,500      1.28 2,602,500      1.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------

As part of an employment agreement with the founding officer of the Company, 1,500,000 share purchase warrants were issued effective May 10, 2006, entitling the founding officer to purchase common shares of the Company at $1.00 per share, vesting based on performance conditions and expiring on August 12, 2012. As at August 12, 2010 all of the purchase warrants were vested. As at March 31, 2011 825,000 (2009 - 1,500,000) founder warrants were outstanding.

In 2006, as part of the terms of a financing agreement, the Company issued 262,500 brokers warrants, entitling the holders to purchase common shares of the Company at $1.00 per share. In 2007, as part of the terms of a financing agreement, the Company issued 840,000 brokers warrants, entitling the holders to purchase common shares of the Company at $2.00 per share. As at March 31, 2011 313,500 (2009 - 1,102,500) broker warrants, expiring May 22, 2011, were outstanding. During the period ended March 31, 2011, no compensation expense was recorded (three month period ended March 31, 2010 - $24).

10. CONTRACTUAL OBLIGATIONS

The Company has operating lease commitments for office space as follows:


Year                           2011      2012      2013      2014      2015
----------------------------------------------------------------------------
Amount                      $ 1,104   $ 1,364     $ 786     $ 549     $ 549
----------------------------------------------------------------------------
----------------------------------------------------------------------------

As at March 31, 2011, the Company has commitments totaling approximately $101 million relating to the construction of fixed assets in 2011 and $77 million for the purchase of operating supplies over the 21 month period ending December 31, 2012.

11. CAPITAL MANAGEMENT

The Company's strategy is to maintain a capital structure to sustain future growth of the business and retain creditor, investor and market confidence. Recognizing the cyclical nature of the oilfield services industry, the Company strives to maintain a conservative balance between long-term debt and shareholders' equity. The Company's capital structure is currently comprised of shareholders' equity and undrawn long-term bank debt. The Company may occasionally need to increase its level of long-term debt to total capitalization to facilitate growth activities.

The Company has a credit facility with a Canadian chartered bank. The credit facility includes a $15 million demand revolving loan ("Operating Loan") and a $35 million committed revolving facility ("Revolving Facility"). The Operating Loan bears interest at prime plus 1.25% and is margined by the Company's accounts receivable. The Revolving Facility bears interest at prime plus 1.4% to prime plus 1.9%, shall not exceed 50% of the net book value of the Company's capital assets, may be extended annually, if not extended shall be repayable in eight equal quarterly instalments. Both facilities are secured by a floating charge over all of the assets of the Company and are subject to certain financial covenants. As at March 31, the Company is in compliance with all the covenants related to these facilities.

The Company monitors its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, issue new shares, issue new debt, or draw on its current short-term debt facility.

12. ENTERPRISE WIDE DISCLOSURE

As at March 31, 2011, the Company has two geographic segments being the Canadian segment and the United States segment. For the 3 month period ended March 31, 2011, 100% of the Revenue was incurred by the Canadian segment (Period ended March 31, 2010, 100%). As at March 31, 2011, the net book value of the property and equipment in the Canadian Segment was $149,910 and the net book value of the property and equipment in the United States segment was $24,184.


13. SUPPLEMENTAL CASH FLOW INFORMATION

Period Ended                                  March 31, 2011 March 31, 2010
----------------------------------------------------------------------------
Changes in non-cash working capital from
 Operations:
Accounts receivable                                 $  3,126      $  (7,448)
Inventory                                             (9,158)            21
Prepaid expenses                                       1,294             33
                                                           -          2,730
Current portion of lease obligations                      53              -
Unearned revenue                                      17,386              -
Accounts payable and accrued liabilities
 and other                                            15,321         (4,645)
Long-term deposits                                    (2,352)            82
----------------------------------------------------------------------------
Net change in non-cash working capital
 from Operations                                    $ 25,670      $  (9,227)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

14. RELATED PARTY TRANSACTIONS

During the three month period ended March 31, 2011, the Company paid $48 (2010 - $102) in consulting fees to two Directors.

15. EXPLANATION OF TRANSITION TO IFRS:

As stated in Note 2, these are the Company's first consolidated financial statements prepared in accordance with IFRS.

The accounting policies set out in Note 3 have been applied in preparing the financial statements for the three month period ended March 31, 2011, the comparative information presented in these financial statements for the three month period ending March 31, 2010 and in the preparation of an opening IFRS statement of financial position at January 1, 2010 (the Company's date of transition).

In preparing its opening IFRS statement of financial position, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Previous GAAP. An explanation of how the transition from Previous GAAP to IFRS has affected the Company's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.


Reconciliation of equity as previously reported under Canadian GAAP to IFRS

                                 1-Jan-10                  31-Mar-10
                   ---------------------------------------------------------
                     Canadian                   Canadian
                         GAAP     Adj.    IFRS      GAAP      Adj      IFRS

ASSETS
CURRENT ASSETS
 Cash and
  equivalents       $  11,643  $    - $ 11,643  $    613  $     -  $    613
 Accounts receivable    9,469       -    9,469    16,917        -    16,917
 Inventory              5,499       -    5,499     5,478        -     5,478
 Prepaid expenses         519       -      519       486        -       486
----------------------------------------------------------------------------
                       27,130       -   27,130    23,494        -    23,494
PROPERTY and
 EQUIPMENT             61,295     262   61,557    65,886      505    66,391
INTANGIBLE ASSETS         358       -      358       365        -       365
LONG-TERM DEPOSITS      1,790       -    1,790     1,708        -     1,708
DEFERRED INCOME TAX
BENEFIT                   775       -      775        57        -        57
----------------------------------------------------------------------------
TOTAL ASSETS        $  91,348  $  262 $ 91,610  $ 91,510  $   505  $ 92,015
----------------------------------------------------------------------------

LIABILITIES AND
 SHAREHOLDERS'
 EQUITY
CURRENT
 LIABILITIES
 Bank operating
  line              $       -  $    - $      -  $  2,730  $     -  $  2,730
 Unearned revenue           -       -        -         -        -         -
 Current lease
  obligations               -     121      121         -      152       152
 Accounts payable and
  accrued liabilities   7,617       -    7,617     2,972        -     2,972
----------------------------------------------------------------------------
Total current 
 liabilities            7,617     121    7,738     5,702      152     5,854
----------------------------------------------------------------------------
LONG-TERM LEASE
 OBLIGATIONS                -     179      179         -      204       204
FUTURE INCOME TAX           -       -        -         -        -         -
----------------------------------------------------------------------------
Total non-current
 liabilities                -     179      179         0      204       204
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
SHARE CAPITAL          81,293       -   81,293    81,699        -    81,699
CONTRIBUTED SURPLUS     1,808   1,003    2,811     1,807    1,133     2,940
RETAINED EARNINGS
(DEFICIT)                 630  (1,041)    (411)    2,302     (984)    1,318
----------------------------------------------------------------------------
Total equity           83,731     (38)  83,693    85,808      149    85,957
----------------------------------------------------------------------------
TOTAL LIABILITIES
 AND EQUITY         $  91,348  $  262 $ 91,610  $ 91,510  $   505  $ 92,015
----------------------------------------------------------------------------
----------------------------------------------------------------------------


                                                           31-Dec-10
                                             -------------------------------
                                               Canadian
                                                   GAAP       Adj      IFRS
ASSETS
CURRENT ASSETS
 Cash and equivalents                         $  98,701  $      - $  98,701
 Accounts receivable                             24,500         -    24,500
 Inventory                                        7,018         -     7,018
 Prepaid expenses                                 6,839         -     6,839
                                                137,058         -   137,058
PROPERTY and EQUIPMENT                          136,749     1,302   138,051
INTANGIBLE ASSETS                                   420         -       420
LONG-TERM DEPOSITS                                3,176         -     3,176
DEFERRED INCOME TAX
BENEFIT                                               -         -         -
----------------------------------------------------------------------------
TOTAL ASSETS                                  $ 277,403  $  1,302 $ 278,705
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
 Bank operating line                          $       -  $      - $       -
 Unearned revenue                                 3,486         -     3,486
 Current lease obligations                            -       240       240
 Accounts payable and
  accrued liabilities                            14,828       160    14,987
----------------------------------------------------------------------------
Total current liabilities                        18,314       400    18,712
----------------------------------------------------------------------------
LONG-TERM LEASE
OBLIGATIONS                                           -       180       180
FUTURE INCOME TAX                                   368         -       368
----------------------------------------------------------------------------
Total non-current liabilities                       368       180       548
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
SHARE CAPITAL                                   251,326       881   251,573
CONTRIBUTED SURPLUS                               1,712     1,176     3,522
RETAINED EARNINGS
(DEFICIT)                                         5,683    (1,333)    4,350
----------------------------------------------------------------------------
 Total equity                                   258,721       724   259,445
----------------------------------------------------------------------------
TOTAL LIABILITIES AND
EQUITY                                        $ 277,403  $  1,302 $ 278,705
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Reconciliation of comprehensive income as previously reported under Canadian
GAAP to IFRS

                            Three months ended                   Year Ended
                                March 31, 2010            December 31, 2010
                     -------------------------------------------------------
                      Canadian                  Canadian                   
                          GAAP     Adj.   IFRS      GAAP     Adj.      IFRS

REVENUE                 15,906       -  15,906    96,906       -     96,906

OTHER INCOME
Business
 Interruption claim      2,030       -   2,030     2,756       -      2,756
----------------------------------------------------------------------------
                        17,936       -  17,936    99,662       -     99,662
----------------------------------------------------------------------------

EXPENDITURES
Operating               11,940     (33) 11,907    72,190    (167)    72,023
Selling, general and
 administrative          1,932       -   1,932    10,579     244     10,823
Stock based
 compensation               37     129     166       708     967      1,675
Amortization             1,649    (159)  1,490     7,929    (772)     7,157
----------------------------------------------------------------------------
                        15,558     (63) 15,495    91,406     272     91,678

----------------------------------------------------------------------------
RESULTS FROM
 OPERATIONS              2,378      63   2,441     8,256    (272)     7,984
----------------------------------------------------------------------------

Finance income               -       -       -       107       -        107
Finance costs                -      (6)     (6)        -     (21)       (21)
----------------------------------------------------------------------------
                             -      (6)     (6)      107     (21)        86
----------------------------------------------------------------------------

PROFIT BEFORE INCOME
 TAX                     2,378      57   2,435     8,363    (293)     8,070

Foreign exchange
 gain / (loss)              12       -      12       (73)      -        (73)
Future income tax
 expense                  (718)      -    (718)   (3,237)      -     (3,237)

----------------------------------------------------------------------------
NET INCOME (LOSS)        1,672      57   1,729     5,053    (293)     4,760
----------------------------------------------------------------------------

Explanation of the effects of the transition to IFRS

Leases

Previous GAAP will consider the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on the light vehicles were operating leases in nature for previous GAAP purposes.

With the absence of the quantitative criteria provided by previous GAAP, the Company determined that qualitatively, the risks and rewards of the leases reside with GASFRAC and as such, should be treated as a financing lease.

Depreciation

With the conversion to IFRS, GASFRAC broke out the field equipment into each of the separate components that made up field equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain depreciation rates were modified.

Share based payments

Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit.

For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 50%.

Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the share-based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the share-based payments that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent IFRS fair value adjustments are recorded through stock based compensation.

As part of the 2010 Kierland transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable transaction cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245.

Adjustments to the statement of cash flows

The transition from Previous GAAP to IFRS had no significant impact on cash flows generated by GASFRAC except for stock based compensation and amortization. Any changes relating to net income would be offset by items not effecting cash such as amortization and stock based compensation or would result in a change in non-cash working capital.

The Company will host a conference call on Tuesday, May 10, 2011 at 10:00 a.m. MT (12:00 p.m. ET) to discuss the Company's first quarter 2011 results.

To participate in the Q&A session, please call the conference call operator at 1-866-226-1792 fifteen minutes prior to the call's start time and ask for "GASFRAC First Quarter Results Conference Call".

GASFRAC is an oil and gas service company headquartered in Calgary, Alberta, Canada, whose primary business is to provide LPG fracturing services to oil and gas companies in Canada and the USA.

Requests for shareholder information should be directed to James M Hill.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contact Information

  • GASFRAC Energy Services Inc.
    James M Hill
    Chief Financial Officer
    403-515-3387
    jhill@gasfrac.com