GASFRAC Energy Services Inc.

TSX : GFS


GASFRAC Energy Services Inc.

March 12, 2014 17:13 ET

GASFRAC Announces Fourth Quarter 2013 Results

CALGARY, ALBERTA--(Marketwired - March 12, 2014) - GASFRAC Energy Services Inc. (TSX:GFS) -

COMPARATIVE ANNUAL FINANCIAL INFORMATION

December 31 2013 December 31 2012 December 31 2011
CAD$ CAD$ CAD$
Revenue 121,823 149,442 161,363(2)
Operating expenses 96,555 127,673 127,821
Selling, general and administrative expenses 18,489 22,487 17,405
Adjusted EBITDA(1) 7,943 566 13,346
(Loss) for the period (24,429) (77,469) (2,853)
(Loss) per share - basic (0.38) (1.23) (0.05)
(Loss) per share - diluted (0.38) (1.23) (0.05)
Weighted average number of shares - basic 63,550 62,886 61,469
Total assets 242,797 275,456 322,508
Total non-current liabilities 35,026 63,077 23,305
Revenue days 235 321 282
Revenue per revenue day 518 466 499
(1) Defined under Non-IFRS Measures
(2) 2011 revenue included a $20.9 million sale of materials to a customer

OVERVIEW OF THE YEAR ENDED DECEMBER 31, 2013

During the past year GASFRAC has achieved a number of notable milestones designed to position the Company for successful achievement of field trials with new customers in 2014, ultimately resulting in a broadened customer base.

  • Fixed costs reduced year over year by $10 million
  • Service delivery reliability improved to 98%
  • Hybrid LPG service delivery platform introduced
    • Enables pumping of more proppant per day, reducing time on location and cost to customer
  • Initial engineered fluids system introduced
    • Enables recovery of frac fluid within production stream, providing monetary recovery for customer
  • First horizontal fracture in "black oil" window of EagleFord formation
    • Enabled commercial production in an area where other techniques have not shown success
  • Bank debt, net of cash, reduced to $16.6 million from $22.1 million
  • Superior safety record
    • Zero serious incidents, TRIF in top decile of industry

FINANCIAL OVERVIEW - FOR THE THREE MONTHS ENDED

December 31, 2013
Canada U.S. Corporate Total
CAD$ CAD$ CAD$ CAD$
Revenue 22,837 100.0% 6,544 100.0% 29,381 100.0%
Cost of sales 13,446 58.9% 2,241 34.2% - 15,687 53.4%
Variable operating costs 1,750 7.7% 964 14.7% - 2,714 9.2%
Fixed operating costs 3,482 15.2% 1,932 29.5% - 5,414 18.4%
Operating expenses 18,678 81.8% 5,137 78.5% - 23,815 81.1%
Selling, general and administration 3,484 15.3% 788 12.0% 493 4,765 16.2%
Number of revenue days 34 10 44
Revenue per day 672 654 668
December 31, 2012
Canada U.S. Corporate Total
CAD$ CAD$ CAD$ CAD$
Revenue 33,660 100.0% 13,228 100.0% 46,888 100.0%
Cost of sales 17,263 51.3% 7,087 53.6% - 24,350 51.9%
Variable operating costs 3,328 9.9% 1,223 9.2% - 4,551 9.7%
Fixed operating costs 3,736 11.1% 2,708 20.4% - 6,444 13.7%
Operating expenses 24,327 72.3% 11,018 83.2% - 35,345 75.3%
Selling, general and administration 2,721 8.1% 1,975 14.9% 844 5,540 11.8%
Number of revenue days 79 27 106
Revenue per day 425 490 442

Revenue

Revenue for the fourth quarter decreased 37.3% to $29.4 million from $46.9 million in the fourth quarter of 2012.

During the quarter, the company earned revenues from five customers with the top three customers representing 96.7% of the total revenue. During the fourth quarter of 2012, the top three customers represented 70.8% of the total revenue.

Canadian Operations

Fourth quarter revenue from the Canadian operations decreased 32.3% to $22.8 million from $33.7 million in the fourth quarter of 2012. The reduction reflects fewer smaller oil companies utilizing the Company's services due to capital constraints. The Canadian operations performed 34 revenue days in the fourth quarter of 2013 with an average daily revenue of $672 compared to 79 revenue days in the fourth quarter of 2012 with an average daily revenue of $425. The increase in average daily revenue is due to the increase in the price and cost of LPG.

During the quarter, revenue was generated from three customers. During the fourth quarter of 2012, the top three customers represented 86.6% of the total revenue.

U.S. Operations

Fourth quarter revenue from the U.S. operations decreased 50.8% to $6.5 million from $13.2 million in the fourth quarter of 2012. U.S. operations produced 10 revenue days in the fourth quarter of 2013 with an average daily revenue of $654 compared to 27 revenue days in the fourth quarter of 2012 with an average daily revenue of $490. The increase in average daily revenue is mainly due to an increase in treatment size.

During the quarter, revenue was generated from two customers. During the fourth quarter of 2012, the top three customers represented 96.4% of the total revenue.

Operating Expenses

Operating expenses consist of cost of sales (variable costs directly attributable to a fracturing treatment), variable operating expenses (variable costs not directly attributable to a fracturing treatment), and fixed operating costs (costs that do not fluctuate with the Company's level of activity). During the quarter, the Company's operating expenses decreased 32.6% to $23.8 million (81.1% of revenue) from $35.3 million (75.3% of revenue) in the fourth quarter of 2012.

As a percentage of revenue, cost of sales increased to 53.4% of revenue ($15.7 million) from 51.9% ($24.4 million) of revenue in the fourth quarter of 2012.

As a percentage of revenue, variable operating expenses decreased slightly to 9.2% of revenue ($2.7 million) from 9.7% of revenue ($4.6 million) of revenue in the fourth quarter of 2012.

Fixed operating costs decreased 15.6% to $5.4 million in the fourth quarter of 2013 as compared to $6.4 million in the fourth quarter of 2012.

Canadian Operations

Total operating expenses for the quarter were $18.7 million (cost of sales - $13.4 million, variable operating costs - $1.8 million and fixed operating costs - $3.5 million) as compared to $24.3 million (cost of sales - $17.3 million, variable operating costs - $3.3 million and fixed operating costs - $3.7 million) in the fourth quarter of 2012.

Cost of sales were 58.9% of revenue for the quarter as compared to 51.3% of revenue in the fourth quarter of 2012. The increase in cost of sales as a percentage of revenue was largely attributable to higher LPG margins during the fourth quarter of 2012.

Variable operating expenses decreased to 7.7% of revenue ($1.8 million) from 9.9% of revenue ($3.3 million) in the fourth quarter of 2012. This was primarily due to a decrease in repairs and maintenance expenses incurred in fourth quarter 2013. Fixed operating costs decreased to $3.5 million from $3.7 million in the fourth quarter of 2012.

U.S. Operations

Total operating expenses for the quarter were $5.1 million (cost of sales - $2.2 million, variable operating costs - $1.0 million and fixed operating costs - $1.9 million) as compared to $11.0 million (cost of sales - $7.1 million, variable operating costs - $1.2 million and fixed operating costs - $2.7 million) in the fourth quarter of 2012.

Cost of sales for the quarter decreased to 34.2% of revenue from 53.6% of revenue in the fourth quarter of 2012. The decrease in the cost of sales reflects the direct purchase of fracturing fluid by the customer. This process has the impact of reducing the Company's revenue and cost of sales by like amounts and effectively decreasing cost of sales as expressed as a percentage of revenue.

Variable operating expenses increased to 14.7% of revenue ($1.0 million) from 9.2% of revenue ($1.2 million) in the fourth quarter of 2012. Fixed operating costs decreased to $1.9 million from $2.7 million in the fourth quarter of 2012.

Sales, General & Administrative ("SG&A") Expenses

For the fourth quarter, SG&A expenses decreased 12.7% to $4.8 million from $5.5 million in the fourth quarter of 2012. The decrease is primarily due to decreased salaries and benefits associated with the reductions of the executive and administrative staffing levels that occurred in 2012.

Impairment

The Company has determined that it has two Cash Generating Units (CGU). One CGU is its Canadian operations and the second CGU is its US operations. During the fourth quarter of 2013, the Company determined that the recoverable value of its assets exceeded the carrying value of its assets and therefore no impairment was required. During the fourth quarter of 2012, the Company determined that the carrying values exceeded the recoverable values in both CGU's. A $20.0 million impairment loss was recorded related to the Canadian CGU and $24.8 million impairment loss was recorded related to the US CGU.

Net Gain (Loss) on the Disposition of Assets

During the fourth quarter of 2013, a $0.5 million gain was recorded on the sale of property and equipment compared to a small loss in fourth quarter 2012. The majority of the gain related to the sale of chemical and data vans.

Adjusted EBITDA

For the fourth quarter, Adjusted EBITDA decreased to $1.1 million from $7.7 million in the fourth quarter of 2012. The decrease in Adjusted EBITDA was the result of revenue decreasing $17.5 million from $46.9 million in fourth quarter 2012 to $29.4 million in fourth quarter 2013.

Net Loss

For the fourth quarter of 2013, the net loss was $6.7 million compared to a net loss of $48.5 million during the fourth quarter of 2012. The net loss in 2012 is primarily due to the impairment of the assets in the Canadian and U.S. cash generating units as well as an increase in depreciation due to the deployment of additional frac equipment.

FINANCIAL OVERVIEW - FOR THE TWELVE MONTHS ENDED

December 31, 2013
Canada U.S. Corporate Total
CAD$ CAD$ CAD$ CAD$
Revenue 92,879 100.0% 28,944 100.0% - 121,823 100.0%
Cost of sales 51,299 55.2% 10,267 35.5% - 61,566 50.5%
Variable operating costs 8,502 9.2% 4,259 14.7% 12,761 10.5%
Fixed operating costs 14,268 15.3% 7,960 27.5% - 22,228 18.2%
Operating expenses 74,069 79.6% 22,486 78.2% - 96,555 79.3%
Selling, general and administration 11,579 12.5% 4,431 15.5% 2,479 18,489 15.2%
Number of revenue days 177 58 235
Revenue per day 525 499 518
December 31, 2012
Canada U.S. Corporate Total
CAD$ CAD$ CAD$ CAD$
Revenue 107,795 100.0% 41,647 100.0% - 149,442 100.0%
Cost of sales 54,272 50.3% 25,293 60.7% - 79,565 53.2%
Variable operating costs 13,916 12.9% 6,147 14.8% 20,063 13.4%
Fixed operating costs 17,441 16.2% 10,606 25.5% - 28,047 18.8%
Operating expenses 85,629 79.4% 42,046 101.0% - 127,673 85.4%
Selling, general and administration 11,763 10.9% 5,644 13.6% 5,080 22,487 15.0%
Number of revenue days 227 94 321
Revenue per day 475 443 466

Revenue

Revenue decreased 18.5% to $121.8 million from $149.4 million in 2012. Revenue per operating day increased to $518 from $466 in 2012.

The Company earned revenues from 14 customers with the top three customers accounting for 87.3% of the Company's revenue. During 2012, the top three customers accounted for 67.4% of the Company's revenue.

Canadian Operations

Canadian operations generated $92.9 million of revenue from 177 revenue days with an average daily revenue of $525. In 2012, Canadian operations generated $107.8 million of revenue from 227 revenue days at an average daily revenue of $475. The increase in average daily revenue is due to more volume pumped per day with operational efficiencies.

Revenue was earned from eight customers during the year with three of these customers representing 93.2% of the total revenue. During 2012, the top three customers from the Canadian operations accounted for 79.0% of the Company's Canadian revenue.

U.S. Operations

U.S. operations generated $28.9 million of revenue from 58 revenue days at an average revenue per operating day of $499. In 2012, the U.S. operations generated $41.6 million of revenue from 94 revenue days at an average daily revenue of $443.

Revenue was earned from six customers during the year with three of these customers representing 97.2% of the total revenue earned from U.S. operations. During 2012, the top three customers from the US operations accounted for 69.0% of the Company's US revenue.

Operating Expenses

Operating expenses consist of cost of sales (variable costs directly attributable to a fracturing treatment), variable operating expenses (variable costs not directly attributable to a fracturing treatment), and fixed operating costs (costs that do not fluctuate with the Company's level of activity). During the year, the Company's operating expenses decreased 24.4% to $96.6 million (79.3% of revenue) from $127.7 million (85.4% of revenue) in 2012.

As a percentage of revenue, cost of sales decreased to 50.5% of revenue ($61.6 million) from 53.2% ($79.6 million) of revenue in 2012.

As a percentage of revenue, variable operating expenses decreased to 10.5% of revenue ($12.8 million) from 13.4% of revenue ($20.0 million) in 2012.

Fixed operating costs decreased 20.7% to $22.2 as compared to $28.0 million in 2012.

Canadian Operations

Total operating expenses for the year were $74.1 million (cost of sales - $51.3 million, variable operating costs - $8.5 million and fixed operating costs - $14.3 million) as compared to $85.6 million (cost of sales - $54.3 million, variable operating costs - $13.9 million and fixed operating costs - $17.4 million) in 2012.

Cost of sales were 55.2% of revenue for the year as compared to 50.3% of revenue in 2012.

Variable operating expenses decreased to 9.2% of revenue ($8.5 million) from 12.9% of revenue ($13.9 million) in 2012. Fixed operating costs decreased to $14.3 million from $17.4 million in 2012. The decrease in the variable operating costs and fixed operating costs reflects the results of the initiative that the Company undertook in September 2012 to bring the Company's cost structure into alignment with the current revenue. This review resulted in a reduction of 25% in US field and support staff and a 20% reduction in Canadian field and support staff. Additional changes were made to reduce charges associated with facilities, staff housing, insurance and other fixed costs.

U.S. Operations

Total operating expenses for the year were $22.5 million (cost of sales - $10.3 million, variable operating costs - $4.3 million and fixed operating costs - $8.0 million) as compared to $41.6 million (cost of sales - $25.3 million, variable operating costs - $6.1 million and fixed operating costs - $10.6 million) in 2012.

Cost of sales decreased to 35.5% of revenue from 60.7% of revenue in 2012. The decrease in the cost of sales reflects the direct purchase of fracturing fluid by the customer. This process has the impact of reducing the Company's revenue and cost of sales by like amounts and effectively decreasing cost of sales as expressed as a percentage of revenue.

Variable operating expenses remained constant at 14.7% of revenue ($4.3 million) versus 14.8% of revenue ($6.1 million) in 2012. Fixed operating costs decreased to $8.0 million from $10.6 million in 2012 as a result of headcount reductions.

Sales, General & Administrative ("SG&A") Expenses

SG&A expenses were $18.5 million compared to $22.5 million in 2012. The decrease over 2012 is primarily due to decreased salaries and benefits associated with the reductions of the executive and administrative staffing levels that occurred in the third quarter of 2012 with subsequent severance costs of approximately $0.9 million accrued upon termination of executive and overhead staff in September 2012.

Impairment

The Company has determined that it has two Cash Generating Units (CGU). One CGU is its Canadian operations and the second CGU is its US operations. During the fourth quarter of 2013, the Company determined that the recoverable value of its assets exceeded the carrying value of its assets and therefore no impairment was required. During the fourth quarter of 2012, the Company determined that the carrying values exceeded the recoverable values in both CGU's. A $20.0 million impairment loss was recorded related to the Canadian CGU and $24.8 million impairment loss was recorded related to the US CGU.

Net Gain (Loss) on the Disposition of Assets

During 2013, a $2.2 million gain was recorded on the sale of fixed assets compared to a small loss in 2012. The gain related to the sale of excess pressure pumping equipment and chemical and data vans.

Adjusted EBITDA

Adjusted EBITDA was $7.8 million compared to $0.6 million in 2012. The increase is due to a decrease in SG&A and fixed operating costs.

Net Loss

The 2013 net loss was $24.4 million as compared to a $77.5 million net loss during 2012. The $53.1 million decrease in the net loss is due to a number of factors. Late in the third quarter of 2012 an operational review was undertaken that resulted in a reduction of 25% in US field and support staff and a 20% reduction in Canadian field and support staff. Additional changes were made to reduce charges associated with facilities, staff housing, insurance and other fixed costs. The result of these changes was improved profitability in fourth quarter 2012 and throughout 2013. The 2012 net loss included an impairment loss of $47.4 million. Depreciation and amortization in 2013 also decreased by $1.3 million primarily due to the reduction in the carrying value of the property and equipment.

The Company's 2013 effective tax rate was nil (2012 - 2.23%) compared to the statutory rate of 25.0% (2012 - 25.0%). The difference in effective tax rate as compared to the statutory tax rate results from tax losses not being recognized for accounting purposes at this time.

FINANCIAL OVERVIEW - SUMMARY OF QUARTERLY RESULTS

Mar 31,
2012
Jun 30,
2012
Sep 30,
2012
Dec 31,
2012
Mar 31,
2013
Jun 30,
2013
Sep 30,
2013
Dec 31,
2013
CAD$ CAD$ CAD$ CAD$ CAD$ CAD$ CAD$ CAD$
Revenue 44,969 16,734 40,851 46,888 31,458 30,561 30,423 29,381
(Loss) for the period (4,926) (16,949) (7,144) (48,450) (7,884) (4,811) (5,061) (6,673)
(Loss) per share - basic (0.08) (0.27) (0.11) (0.77) (0.12) (0.08) (0.08) (0.10)
(Loss) per share - diluted (0.08) (0.27) (0.11) (0.77) (0.12) (0.08) (0.08) (0.10)
Adjusted EBITDA (1) 2,259 (10,450) 1,081 7,676 468 3,246 3,016 1,213
Capital expenditures 22,162 15,404 4,955 6,593 509 1,404 274 963
Working capital (deficiency) (2) 27,894 8,994 (1,092) 25,740 (4,384) 2,627 4,108 7,070
Shareholders' equity 263,695 247,519 237,201 190,444 184,266 181,951 175,884 171,209
(1) Defined under Non-IFRS Measures
(2) Working capital is defined as current assets less current liabilities

The Company's North American business is seasonal. 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 weather conditions and access to well sites in
Canada is reduced. Also, in certain areas of the US in which the company operates, access to work locations is limited or entirely banned during hunting season which typically occurs December through February. (refer to "Business Risks - Seasonality" on page 18).

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

As at December 31, 2013, the Company had $7.1 million of working capital compared to $4.1 million as at September 30, 2013 and $25.7 million as at December 31, 2012. The sequential increase in working capital is due to cash generated from operating activities and improved accounts receivable collections offset somewhat by an increase in the inventory held at year end.

The significant decrease in working capital from December 31, 2012 is primarily due to the reclassification of the Company's credit facility from non-current to current.

Debt

During Q3 of 2012, the Company exceeded the debt ceiling in its credit agreement and the banking syndicate agreed to a suspension of the EBITDA related covenants effective November 6, 2012. This suspension was in place until June 30, 2013. In the interim, the facility was capped at $60 million with an Interim covenant that the Company would generate $6 million for each of the quarters ended December 31, 2012 and March 31, 2013.

On May 17, 2013, the credit facility was amended and restated, with the major amendments being that the credit facility was resized to $50 million and the maturity date extended to April 30, 2014. The credit facility has since been extended and now matures on June 30, 2014.

The credit facility consists of a $10 million revolving operating facility and a $40 million revolving facility. The facilities bear interest at prime plus 0.75% to prime plus 4.25%. Both facilities are secured by a floating charge over all of the assets (excluding leased assets). The amended and restated credit facility is subject to financial and non-financial covenants typical of this type of facility.

The amended and restated credit facility is subject to financial covenants as follows:

  • Funded debt (excludes convertible debentures) at balance sheet date to 12 month trailing earnings before interest, taxes, depreciation and amortization, and stock compensation expense (Bank EBITDA) does not exceed 3.00 to 1.00
  • 12 month trailing Bank EBITDA to 12 month trailing interest expense exceeds 3.00 to 1.00
  • Funded debt to capitalization (the aggregate of funded debt plus equity) does not exceed 0.50 to 1.00

As at December 31, 2013, the Company is in compliance with all covenants.

The facility, if not renewed, is due on maturity. Pursuant to IAS 1, the Company has presented the entire credit facility as current in the Company's consolidated financial statements as at the reporting date.

While the Company anticipates that the credit facility will be renewed, in the event it is not, funding options would include a renegotiated bank credit line, equipment based funding supported by the Company's asset base or term debt.

Consolidated Cash Flow Summary

Dec 31, 2013 Dec 31, 2012
CAD$ CAD$
Cash provided by (used in)
Operating activities (1,079) 19,006
Financing activities (11,494) 46,315
Investing activities 6,243 (62,343)
Net (decrease) increase in cash and cash equivalents (6,330) 2,978
Effects of exchange rate changes on the balance of cash held in foreign currencies 358 (77)
Cash and cash equivalents, beginning of year 7,927 5,026
CASH AND CASH EQUIVALENTS, END OF YEAR 1,955 7,927

Operating Activities

Net cash used in operating activities was $1.1 million as compared to cash provided by operating activities of $19.0 million in 2012.

The net change in non-cash working capital from operating activities at December 31, 2013 was ($2.1) million versus $22.0 million at December 31, 2012. Of the $22.0 million change at December 31, 2012, $18.7 million related to a reduction in receivables and $2.2 million related to a reduction in inventory levels. The ($2.1) million change at December 31, 2013 was primarily the result of an increase in inventory ($6.1) million and a reduction in accounts receivable $4.4 million.

The Company's ability to generate more earnings at reduced revenue levels from reductions in costs year-over-year has resulted in higher cash flows from operating activities before considering changes in working capital.

Financing Activities

Net cash used by financing activities was $11.5 million compared to $46.3 million of cash generated in 2012.

The financing activities during 2013 consisted of draws on the credit facility that were used primarily to fund the changes in accounts receivable balances. Other financing activities included finance lease payments and funds paid to buyout expired finance leases. The financing leases are primarily for light duty vehicles. A small amount of cash was received from the exercise of stock options.

During 2012 GASFRAC closed its public offering of 7% convertible unsecured subordinated debentures for net proceeds of $37,888. The proceeds from the debentures were used to finance the revenue generating property and equipment build undertaken in 2011 and 2012.

Investing Activities

Net cash generated from investing activities was $6.2 million compared to $62.3 million of cash used in 2012.

During the year, the cash generated was primarily due to the sale of excess pressure pumping equipment for proceeds of $10.8 million. Property and Equipment purchases of $3.0 were related to maintenance capital, leasehold improvements and additional assets under finance lease.

The Company invested $49.1 million and additional working capital for 2012 in property and equipment and intangible assets to add revenue generating capacity.

Contractual Obligations

The timing of cash outflows relating to financial liabilities are outlined in the following table:

Contractual cash flows Less than 1 year 1 to 3 years 4 to 5 years Greater than 5 years
CAD$ CAD$ CAD$ CAD$ CAD$
Trade payables and accrued liabilities 12,864 12,864 - - -
Provisions 742 742 - - -
Finance lease obligation (including expected interest) 2,367 1,465 902 - -
Credit facility (including expected interest) 19,241 19,241 - - -
Debentures (including. expected interest) 50,112 2,818 5,635 41,659 -
Operating lease payments 9,848 2,010 3,075 2,431 2,332
Commitment to purchase raw materials 65,381 10,314 38,671 15,574 822
Commitment to purchase plant and equipment 1,714 1,714 - - -
Total 162,269 51,168 48,283 59,664 3,154

To meet these financial obligations, the Company has available the following resources available within 1 year:

Dec 31, 2013 Dec 31, 2012
CAD$ '000 CAD$ '000
Cash and cash equivalents 1,955 7,927
Trade receivables 25,868 28,376
Unused credit facility - subject to applicable debt ceiling 31,427 30,000
59,250 66,303

OFF-BALANCE SHEET ARRANGEMENTS

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

RELATED PARTY TRANSACTIONS

Details of transactions between the Company and other related parties are disclosed below.

Trading Transactions

During the year, the Company entered into the following trading transactions with related parties that are not members of the Company:

Fracturing services
Dec 31, 2013 Dec 31, 2012
CAD$ '000 CAD$ '000
Fracturing services rendered to companies with shared directors - 297

Sales of goods to related parties were made at the Company's usual list prices. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognized in the current or prior years for bad or doubtful debts in respect of the amounts owed by related parties.

Compensation of Key Management Personnel

Dec 31, 2013 Dec 31, 2012
CAD$ '000 CAD$ '000
Salaries and other short term benefits 2,120 1,652
Post-employment benefits 78 73
Termination benefits - 809
Share based compensation 363 401
2,561 2,935

Key management personnel are those persons who have authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including directors and executive officers of the Company.

ACCOUNTING POLICIES AND ESTIMATES

This MD&A is based on the Company's audited annual consolidated financial statements that have been prepared in accordance with IFRS. Management is required to make assumptions, judgments and estimates in the application of IFRS. The Company's summary of significant accounting policies are described in Note 2 of the December 31, 2013 audited annual consolidated financial statements. The preparation of the consolidated financial statements requires that certain estimates and judgments be made concerning the reported amount of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management's judgment. Anticipating future events involves uncertainty and, consequently, the estimates used by management in the preparation of the audited annual consolidated financial statements may change as future events unfold, additional experience is acquired or the environment in which the Company operates changes.

Apart from the key source of estimation uncertainty disclosed below, all key assumptions concerning the future, and other key sources of estimation uncertainty made at the end of the last full reporting period were applied consistently for the twelve months ended December 31, 2013.

Useful lives of Plant and Equipment and Finite Intangible Assets

The Company reviews the estimated useful lives of plant and equipment at the end of each reporting period. These estimates may change as more experience is obtained or as general market conditions change, thereby impacting the operation of the Company's property and equipment. Amortization of the finite intangible assets also incorporates estimates of useful lives and residual values. During the current year, no changes were made to the economic useful life of plant and equipment.

Recognition of Deferred Tax Assets

The Company only recognizes a deferred tax asset when it is probable that taxable benefits would be received in the future. The probability of future taxable benefits is based upon the earnings history of the Company, management's best estimate of future earnings and expectations of future tax rates based on legislation in place in the relevant jurisdiction.

Share Based Compensation Estimates

The Company calculates the fair value of its stock options using the Black-Scholes option pricing model, which includes underlying assumptions, related to the risk-free interest rate, average expected option life, estimated forfeitures, and estimated volatility of the Company's shares. All share options are granted at the market value of the shares on grant date.

Performance share unit grants are linked to corporate performance and grants vest from one to three years from date of grant. The Company periodically assesses expectations as to the performance achieved as an input variable to the calculation of its liability pursuant to performance share units.

Deferred share unit grants vest evenly over the year from date of grant. The Company's obligation changes from fluctuations in the market value of the Company's shares.

Recoverability of Accounts Receivable

The Company performs ongoing credit evaluations of its customers and grants credit based upon a credit review and review of historical collection experience, current aging status, financial condition of the customer and anticipated industry conditions. Customer payments are regularly monitored and an allowance for doubtful accounts is established based upon specific situations and overall industry conditions affecting individual customers. The Company's management believes that the allowance for doubtful accounts is adequate.

Valuation of Debenture Holders' Conversion Option

In order to value the debenture holders' conversion option, management had to determine what interest rate a similar debt instrument will carry if it had no conversion privilege. Management reviewed similar issues within the Canadian debt market of unrated entities and concluded that such a similar debt instrument without conversion privilege will carry a 10% coupon interest rate.

Also, the Company's option to redeem the debentures before maturity is considered closely related to the host debt instrument and thus not separately valued.

Impairment of Non-Financial Assets and Intangible Assets

At the end of each reporting period, the Company assesses whether there are any indicators of impairment. If indicators are present, the Company determines the recoverable amount of the assets being the higher of fair value less costs of disposal (FVLCD) and the value in use (VIU). An impairment loss would be incurred to the extent that the recoverable amount exceeds the carrying amount.

Impairment is assessed at the cash-generating unit (CGU) level. A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or group of assets. The assets of the corporate head office, which do not generate separate cash inflows, are allocated on a reasonable and consistent basis to CGUs for impairment testing. The carrying amounts of assets of the corporate head office that have not been allocated to a CGU are compared to their recoverable amount to determine if there is any impairment loss.

If, after the Company has previously recognized an impairment loss, circumstances indicate that the fair value of the impaired assets are greater than the carrying amount, the Company will reverse the impairment loss by the amount the revised recoverable amount exceeds its carrying amount, to a maximum of the previous impairment loss. In no case shall the revised carrying amount exceed the original carrying amount, after depreciation or amortization, that would have been determined if no impairment loss has been recognized. An impairment loss or a reversal of impairment loss is recognized in the statement of comprehensive loss.

CHANGE IN ACCOUNTING POLICIES

The Company has applied the following new and revised IFRSs and International Financial Reporting Standards Interpretations ("IFRIC") that have been issued and are effective for financial periods commencing January 1, 2013:

IAS 1 - Presentation of Financial Statements

The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially classifiable to profit or loss subsequently (reclassification adjustments).

Management has assessed that the application of the new standard will not have a significant impact on amounts reported in respect of the Company's OCI however there are enhanced disclosures on the statement of comprehensive income.

IAS 19 - Employee Benefits

IAS 19 as issued in February 1998 was amended June 2011 to reflect (i) significant changes to recognition and measurement of defined benefit pension expense and termination benefits, and (ii) expanded disclosure requirements.

Management has adopted IAS 19 in the Company's consolidated financial statements for the annual period beginning January 1, 2013 and assessed that the application of the new standard does not have a significant impact on amounts reported in respect of the Company's financial results as it does not have a defined benefit plan.

IAS 36 - Impairment of Assets

The amendment to IAS 36 addresses the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. Early adoption is permitted.

Management has early adopted IAS 36 in the Company's consolidated financial statements for the annual period beginning January 1, 2013 and assessed that the application of the new standard does not have a significant impact on amounts reported in respect of the Company's financial assets and financial liabilities.

IFRS 7 - Financial Instruments

IFRS 7 as issued in August 2005 is amended to require additional disclosures on transition from IAS 39 to IFRS 9. These amendments are effective upon adoption of IFRS 9. The effective date for IFRS 9 has been changed to undetermined by the IASB. The amendment includes new disclosures to facilitate comparison between those entities that prepare IFRS financial statements to those that prepare financial statements in accordance with US GAAP.

Management has adopted IFRS 7 in the Company's consolidated financial statements for the annual period beginning January 1, 2013 and assessed that the application of the new standard does not have a significant impact on amounts reported in respect of the Company's financial assets and financial liabilities.

IFRS 10 - Consolidated Financial Statements

IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 supersedes IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation - Special Purpose Entities.

IFRS 10 requires an entity to consolidate an investee when it has power over the investee, is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through power over the investee. Under the existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Management has adopted IFRS 10 in the Company's consolidated financial statements and assessed that the application of the new standard does not have a significant impact on amounts reported in respect of the Company's consolidated financial statements.

IFRS 11 - Joint Arrangements

IFRS 11 establishes principles for financial reporting by parties to a joint arrangement. The IFRS supersedes IAS 31 - Interests in Joint Ventures and SIC 13 - Jointly Controlled Entities-Non-Monetary Contributions by Venturers.

IFRS 11 requires a venture to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of assets, liabilities, revenues and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures.

Management has adopted IFRS 11 in the Company's consolidated financial statements and assessed that the application of the new standard does not have a significant impact on amounts reported in respect of the Company's consolidated financial statements.

IFRS 12 - Disclosure of Interest in Other Entities

IFRS 12 establishes disclosure requirements for interests in other entities such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward existing disclosures and introduces significant additional disclosure that addresses the nature of, and risks associated with, an entity's interest in other entities.

Management has adopted IFRS 12 in the Company's consolidated financial statements. Management performed a detailed review of the impact of the additional disclosure requirements on its current and possible future interest in other entities and assessed that the application of the new standard does not have a significant impact on amounts reported in respect of the Company's consolidated financial statements.

IFRS 13 - Fair Value Measurement

IFRS 13 is a comprehensive standard for fair value measurement and disclosure across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosure.

Management has adopted IFRS 13 in the Company's consolidated financial and that the application of the new standard does not have a significant impact on amounts reported in respect of the Company's consolidated financial statements as the previous method of determining fair value is in line with the clarification set out in IFRS 13 but there are enhanced disclosure requirements.

Future Accounting Pronouncements

The Company has not applied the following new and revised IFRSs and International Financial Reporting Standards Interpretations ("IFRIC") that have been issued but are not yet effective:

IAS 32 - Financial Instruments: Presentation

IAS 32 as issued in June 1995 is amended to clarify requirements for offsetting of financial assets and financial liabilities. This standard is effective for annual periods beginning on or after January 1, 2014.

Management anticipates that IAS 32 will be adopted in the Company's consolidated financial statements for the annual period beginning January 1, 2014 and that the application of the new standard will not have a significant impact on amounts reported in respect of the Company's financial results.

IFRS 9 - Financial Instruments

The IASB has undertaken a three-phase project to replace IAS 39 Financial Instruments: Recognition and Measurement with IFRS 9 Financial Instruments. In November 2009, the IASB issued the first phase of IFRS 9, which details the classification and measurement requirements for financial assets. Requirements for financial liabilities were added to the standard in October 2010. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. In November 2013, the IASB issued the third phase of IFRS 9 which details the new general hedge accounting model. Hedge accounting remains optional and the new model is intended to allow reporters to better reflect risk management activities in the financial statements and provide more opportunities to apply hedge accounting. In July 2013, the IASB deferred the mandatory effective date of IFRS 9 and has left this date open pending the finalization of the impairment and classification and measurement requirements. IFRS 9 is still available for early adoption.

Management has not yet evaluated the impact on this new standard on the Company's financial statements measurements and disclosures. The Company does not anticipate early adopting this standard.

FINANCIAL INSTRUMENTS

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, convertible debentures and bank debt. The Company may occasionally need to increase its level of debt to total capitalization to facilitate growth activities.

The Company has a $10 million operating demand revolving loan facility and a $40 million committed revolving facility, both of which are subject to various financial and non financial covenants. The covenants are monitored on a regular basis and controls are in place to ensure the Company maintains compliance with these covenants. As at December 31, 2013, the Company is in compliance with all the covenants related with this facility.

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 operating line facility.

Financial risk management objectives

The Company monitors and manages the financial risks relating to the operations of the Company through internal risk procedures which analyze exposures by degree and magnitude of risks. These risks include market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk.

Currently, the Company does not use derivative financial instruments to manage any financial risks. Exchange rate risk is managed through foreign currency denominated invoicing by the Company's US subsidiary and reducing the timing between procurement and payment of foreign currency denominated payables.

Market risk

Foreign currency exchange rate risk

As the Company operates primarily in Canada and the United States of America ("U.S."), fluctuations in the exchange rate between the U.S. dollar and Canadian dollar can have a significant effect on the operating results and the fair value or future cash flows of the Company's financial assets and liabilities. The Canadian entities are exposed to currency risk on foreign currency denominated financial assets and liabilities with adjustments recognized as foreign exchange gains or losses in the consolidated statement of comprehensive income. The U.S. entities with a U.S. dollar denominated functional currency expose the Company to currency risk on the translation of these entities' financial assets and liabilities to Canadian dollars on consolidation. In addition, U.S. entities are exposed to currency risk on financial assets and liabilities denominated in currencies other than their functional currency (U.S. dollars) with adjustments recognized in the consolidated statements of comprehensive income. For the year ended December 31, 2013, a 1% fluctuation in the value of the Canadian dollar relative to the U.S. dollar would have impacted profit before tax by $35 (2012 - $Nil).

Interest rate risk

The Company is exposed to interest rate risk because the Company borrows funds at only variable interest rates. The sensitivity analyses have been determined based on the exposure to interest rates applicable to outstanding borrowings at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Company's profit before tax would be $121 lower/higher based on the borrowings outstanding at year end. (2012 - $46). All finance leases are concluded at fixed interest rates and a change in market interest rates relating to finance leases will not impact the Company's profit.

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company assesses the creditworthiness of its customers on an ongoing basis. The Company's exposure and the credit ratings of its counterparties are continuously monitored as are amounts outstanding and age of receivables.

Trade receivables are predominately with customers who explore and develop petroleum and natural gas resources mainly in Canada and the southern U.S. The Company is subject to normal industry credit risk. This includes fluctuations in oil and natural gas commodity prices and the ability of customers to obtain attractive debt and/or equity financing. These balances represent the Companies total credit exposure. During the year, the Company earned revenues from more than 10 (2012: > 40) customers with the top three customers representing 87% (2012 - 67%) of revenue.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has adequate credit facilities in place to meet its current commitments as they become due and further manages its liquidity risk by continuously monitoring forecasts and actual cash flows.

The Company has facilities with its bank for $50 million of debt financing. In the past the Company has been required to negotiate amendments to this facility due to actual or potential financial covenant breaches. The Company's customer concentration can result in volatile quarterly financial results that may cause future financial covenant breaches. The bank credit facility matures April 30, 2014. On March 7, 2014, the maturity of the facility was further extended to June 30, 2014. Should the Company be unable to renew these facilities in the amount it requires or on terms acceptable to it, liquidity issues could result.

Fair values of financial instruments

The fair value of the Company's financial instruments included on the consolidated balance sheet approximate their carrying amounts due to their short term maturity.

BUSINESS RISK

The business of the Company is subject to certain risks and uncertainties, including those listed below. Prior to making any investment decision regarding the Company, investors should carefully consider, among other things, the risk factors set forth below.

Volatility of Industry Conditions

The demand, pricing and terms for the Company's fracturing and well stimulation services largely depend upon the level of exploration and development activity for North American oil and natural gas. Industry conditions are influenced by numerous factors over which the Company has no control, including the level of oil and natural gas prices, expectations about future oil and natural gas prices, the cost of exploring for, producing and delivering oil and natural gas, the decline rates for current production, the discovery rates of new oil and natural gas reserves, available pipeline and other oil and natural gas transportation capacity, weather conditions, political, military, regulatory and economic conditions, and the ability of oil and natural gas companies to raise equity capital or debt financing. A material decline in global oil and natural gas prices or North American activity levels as a result of any of the above factors could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. Because of the current economic environment and related decrease in demand for energy, natural gas exploration and development in North America has decreased from peak levels in 2008. Warmer than normal winters in North America, among other factors, may adversely impact demand for natural gas and, therefore, demand for oilfield services. If the economic conditions deteriorate further or do not improve, the decline in natural gas exploration and development could cause a decline in the demand for the Company's services. Such decline could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Demand for Oil and Natural Gas

Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil and other hydrocarbons. The Company cannot predict the impact of changing demand for oil and natural gas products, and any major changes could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Seasonality

The Company's financial results are directly affected by the seasonal nature of the North American oil and natural gas industry. The first quarter incorporates the winter drilling season when a disproportionate amount of the activity takes place in western Canada. During the second quarter, soft ground conditions typically curtail oilfield activity in all of the Company's Canadian operating areas such that many rigs are unable to move about due to road bans. This period, commonly referred to as "spring breakup", occurs earlier in the year in southeastern Alberta than it does in northern Alberta and northeastern British Columbia. Consequently, this is the Company's weakest three-month revenue period. Additionally, if an unseasonably warm winter prevents sufficient freezing, the Company may not be able to access well sites and the Company's operating results and financial condition may therefore be adversely affected. The demand for fracturing and well stimulation services may also be affected by severe winter weather in North America. In addition, during excessively rainy periods in any of the Company's operating areas, equipment moves may be delayed, thereby adversely affecting revenues. Also, in certain areas of the USA in which the company operates, access to work locations is limited or entirely banned during hunting season which typically occurs December through February. The volatility in the weather and temperature and access limitations during hunting season can therefore create unpredictability in activity and utilization rates, which can have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.

Concentration of Customer Base

The Company's customer base in calendar year 2013 consists of fourteen oil and natural gas exploration and production companies, ranging from large multinational public companies to small private companies. The Company had three significant customers that collectively accounted for approximately 87% of the Company's revenue for the year ended December 31, 2013. One of these customers accounted for 46% of revenue. The Company's strong relationships with exploration and production companies may result in increased concentration of revenues during periods of reduced activity levels such as the first three months of the year. However, there can be no assurance that the Company 's relationship with its primary customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, would have a material adverse effect on the Company 's business, financial condition, results of operations and cash flows.

Competition

Each of the markets in which the Company participates is highly competitive. To be successful, a service provider must provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices. The principal competitive factors in the markets in which the Company operates are product and service quality and availability, technical knowledge and experience, reputation for safety and price. The Company competes with large national and multinational oilfield service companies that have greater financial and other resources. These companies offer a wide range of well stimulation services in all geographic regions in which the Company operates. In addition, the Company competes with several regional competitors. As a result of competition, it may suffer from a significant reduction in revenue or be unable to pursue additional business opportunities.

Equipment Inventory Levels

Because of the long-life nature of oilfield service equipment and the lag between when a decision to build additional equipment is made and when the equipment is placed into service, the inventory of oilfield service equipment in the industry does not always correlate with the level of demand for service equipment. Periods of high demand often spur increased capital expenditures on equipment, and those capital expenditures may add capacity that exceeds actual demand. This capital overbuild could cause the Company's competitors to lower their rates and could lead to a decrease in rates in the oilfield services industry generally, which could have a material adverse effect on the Company 's business, financial condition, results of operations and cash flows.

Sources, Pricing and Availability of Raw Materials and Component Parts

The Company sources its raw materials, such as proppant, chemicals, nitrogen, carbon dioxide and diesel fuel, and component parts, from a variety of suppliers in North America. Should the Company's suppliers be unable to provide the necessary raw materials and component parts at an acceptable price or otherwise fail to deliver products in the quantities required, any resulting delays in the provision of services could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Capital-Intensive Industry

The Company's business plan is subject to the availability of additional financing for future costs of operations or expansion that might not be available, or may not be available on favourable terms. The Company's activities may also be financed partially or wholly with debt, which could increase the Company's debt levels above industry standards. The level of the Company's indebtedness from time to time could impair the Company's ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise. If the Company 's cash flow from operations is not sufficient to fund the Company 's capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or, if available, on favourable terms.

Patents and Proprietary Technology

The Company's success will depend, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the rights of third parties. The LPG Fracturing Process patents for the U.S., Canada and International markets remain in examination. The international application has been deemed as "Patentable" showing novelty, inventiveness and industrial applicability. However, there can be no assurance that any issued patents will provide the Company with any competitive advantages or will not be successfully challenged by any third parties, or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition, there can be no assurance that others will not independently develop similar products, duplicate some or all of the Company's products, or, if patents are issued to the Company, design their products so as to circumvent the patent protection that may be held by the Company. In addition, the Company could incur substantial costs in lawsuits in which the Company attempts to enforce its own patents against other parties.

Operational Risks

The Company's operations are subject to hazards inherent in the oil and natural gas industry, such as equipment defects, malfunction and failures, and natural disasters which result in fires, vehicle accidents, explosions and uncontrollable flows of natural gas or well fluids that can cause personal injury, loss of life, suspension of operations, damage to formations, damage to facilities, business interruption and damage to or destruction of property, equipment and the environment. These hazards could expose the Company to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution, contamination of drinking water and other environmental damages. The Company continuously monitors its activities for quality control and safety, and although it maintains insurance coverage that it believes to be adequate and customary in the industry, such insurance may not be adequate to cover the Company 's liabilities and may not be available in the future at rates that the Company considers reasonable and commercially justifiable. Further, monetary damage to equipment or liability arising from an incident, such incident could negatively impact the adoption or rate of adoption of the Company's service.

Availability of Debt Financing

The Company has facilities with its bank for $50 million of debt financing. In the past the Company has been required to negotiate amendments to this facility due to actual or potential financial covenant breaches. The Company's customer concentration can result in volatile quarterly financial results that may cause future financial covenant breaches. The bank credit facility matures April 30, 2014. On March 7, 2014, the maturity of the facility was further extended to June 30, 2014. Should the Company be unable to renew these facilities in the amount it requires or on terms acceptable to it, significant liquidity issues could result.

Management Stewardship

The successful operation of the Company's business depends upon the abilities, expertise, judgment, discretion, integrity and good faith of the Company's executive officers, employees and consultants. In addition, the Company's ability to expand its services depends upon its ability to attract qualified personnel as needed. The demand for skilled oilfield employees is high, and the supply is limited. If the Company loses the services of one or more of its executive officers or key employees, it could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Regulations Affecting the Oil and Natural Gas Industry

The operations of the Company's customers are subject to or impacted by a wide array of regulations in the jurisdictions in which they operate. As a result of changes in regulations and laws relating to the oil and natural gas industry, the Company's customers' operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with applicable regulations could cause customers to discontinue or limit their operations and may discourage companies from continuing development activities. As a result, demand for the Company's services could be substantially affected by regulations adversely impacting the oil and natural gas industry. Changes in environmental requirements may negatively impact demand for the Company's services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements (including land use policies responsive to environmental concerns). A decline in exploration and production, in turn, could materially and adversely affect the Company.

Government Regulations

The Company's operations are subject to a variety of federal, provincial, state and local laws, regulations and guidelines in all the jurisdictions in which it operates, including laws and regulations relating to health and safety, the conduct of operations, taxation, the protection of the environment and the manufacture, management, transportation and disposal of certain materials used in the Company's operations. The Company has invested financial and managerial resources to ensure such compliance and expects to continue to make such investments in the future. Such laws or regulations are subject to change and could result in material expenditures that could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. It is impossible for the Company to predict the cost or impact of such laws and regulations on the Company's future operations. In particular, the Company is subject to increasingly stringent laws and regulations relating to importation and use of hazardous materials, radioactive materials and explosives, environmental protection, including laws and regulations governing air emissions, water discharges and waste management. The Company incurs, and expects to continue to incur, capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex, stringent and expensive to implement. These laws may provide for "strict liability" for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liabilities for remediation of spills and releases of hazardous substances.

The Company uses and generates hazardous substances and wastes in its operations. In addition, some of the Company's current properties are, or have been, used for industrial purposes. Accordingly, the Company could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require the Company to incur costs or become the basis of new or increased liabilities that could reduce the Company's earnings and cash available for operations. The Company believes it is currently in substantial compliance with applicable environmental laws and regulations.

The Company is a provider of hydraulic fracturing services; a process that creates fractures extending from the well bore through the rock formation to enable natural gas or oil to move more easily through the rock pores to a production well. Bills pending in the United States House of Representatives and Senate have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. Legislation has been enacted in some jurisdictions that require the energy industry to publicly disclose the chemicals used in fracturing processes. These regulations could lead to operational delays and increased costs. This legislation, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays and increased operating costs. The adoption of any future federal or state laws or implementing regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Customers

Customers are generally invoiced for our services in arrears. As a result, we are subject to our customers delaying or failing to pay invoices. Risk of payment delays or failure to pay is increased during periods of weak economic conditions due to potential reduction in cash flow and access to capital of our customers.

The Market Price of the Common Shares May Be Volatile

The trading price of securities of oilfield service companies is subject to substantial volatility. The volatility is often based on factors both related to and not related to the financial performance or prospects of the companies involved. The market price of the Company's Common Shares could be subject to significant fluctuations in response to our operating results, financial condition and other internal factors. Factors that could affect the market price that are not directly related to the Company's performance include commodity prices and market perceptions of the attractiveness of particular industries for investment. The price at which the Common Shares will trade cannot be accurately predicted.

Dilution from Further Equity Issuances

If the Company issues additional equity securities to raise additional funding or as consideration for the acquisition of a company or assets, as the case may be, such transactions may substantially dilute the interests of the Company's Shareholders and reduce the value of their respective investment.

Dividends

The Company has not paid dividends prior to the date hereof and there can be no assurance that GASFRAC will pay dividends in the future. Dividend payments are at the discretion of the Company's board of directors. Dividends depend on the financial condition of the applicable entity and other factors.

Additional Funding Requirements

The Company may need additional financing in connection with the implementation of its business and strategic plans from time to time. However, there can be no assurance that the Company will be able to obtain the necessary financing in a timely manner or on acceptable terms, if at all. The implementation of the Company's business and strategic plans from time to time will require a substantial amount of capital and the amounts available to the Company without seeking additional debt or equity financing may not be sufficient to fund such business and strategic plans. The Company may accordingly have further capital requirements to take advantage of further opportunities or acquisitions.

Merger and acquisition activity may reduce the demand for the Company's Services

Merger and acquisition activity may reduce the demand for the Company's Services. Merger and acquisition activity in the oil and gas exploration and production sector may constrain demand for the Company's services as customers focus on reorganizing the business prior to committing funds to exploration and development projects. Further, the acquiring company may have preferred supplier relationships with oilfield service providers other than the Company.

Direct and Indirect Exposure to Volatile Credit Markets

The ability to make scheduled payments on or to refinance debt obligations depends on the Company's financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain finance, business and other factors beyond its control. Continuing volatility in the credit markets may increase costs associated with debt instruments due to increased spreads over relevant interest rate benchmarks, or affect the ability of the Company, or third parties it seeks to do business with, to access those markets.

In addition, access to further financing for the Company or its customers remains uncertain. This condition could have an adverse effect on the industry in which the Company operates and its business, including future operating results. The Company's customers may curtail their drilling and completion programs, which could result in a decrease in demand for the Company's services and could increase downward pricing pressures. In addition, certain customers could become unable to pay suppliers, including the Company, in the event they are unable to access the capital markets to fund their business operations. Such risks, if realized, could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Market for Convertible Debentures

No assurance can be given that an active or liquid trading market for the Debentures will develop or be sustained. If an active or liquid market for the Debentures fails to develop or be sustained, the prices at which the Debentures trade may be adversely affected. Whether or not the Debentures will trade at lower prices depends on many factors, including the liquidity of the Debentures, prevailing interest rates and the markets for similar securities, the market price of the Common Shares, general economic conditions and the Company's financial condition, historic financial performance and future prospects. Further, the holders of the Common Shares may suffer dilution if the Company decides to redeem outstanding Debentures for Common Shares or to repay outstanding principal amounts thereunder at maturity of the Debentures by issuing additional Common Shares.

Repayment of Convertible Debentures

The Debentures are subordinate to Senior Indebtedness of the Company. The Company may not be able to refinance the principal amount of the Debentures in order to repay the principal outstanding or may not have generated enough cash from operations to meet this obligation. The Company may, at its option, on not more than 60 days and not less than 40 days prior notice and subject to any required regulatory approvals, unless an Event of Default has occurred and is continuing, elect to satisfy its obligation to repay, in whole or in part, the principal amount of the Debentures which are to be redeemed or which have matured by issuing and delivering Common Shares to the holders of the Debentures. There is no guarantee that the Company will be able to repay the outstanding principal amount in cash upon maturity of the Debentures. The likelihood that purchasers of the Debentures will receive payments owing to them under the terms of the Debentures will depend on the Company's financial health and creditworthiness at the time of such payments.

COMMON SHARES AND CONVERTIBLE DEBENTURES

At December 31, 2013 and March 12, 2014, 63,607,668 common shares of GASFRAC were outstanding (December 31, 2012: 63,515,664). At December 31, 2013, the Company had options outstanding to issue 3,295,000 shares (December 31, 2012: 2,810,000) at a weighted average exercise price of $2.31 per share (December 31, 2012: $3.07). At March 12, 2014 there were 3,604,167 options outstanding at a weighted average price of $2.22 per share.

At December 31, 2013 and March 12, 2014, the Company had $40.25 million convertible debentures outstanding that were convertible to 3,833,334 common shares based on the applicable conversion price.

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:

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

Adjusted EBITDA was calculated as follows:

Year ended: December 31, 2013 December 31, 2012
Net loss (24,429) (77,469)
(Deduct) Add back:
Interest expense - net 6,643 5,561
Depreciation and amortization 25,609 26,826
Impairments of property and equipment 120 47,412
Income tax recovery - (1,764)
Adjusted EBITDA 7,943 566

DISCLOSURE AND INTERNAL CONTROLS

Disclosure Controls and Procedures

An evaluation was performed under the supervision and with participation of the Company's Management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), 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 that 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 December 31, 2013.

Management's Report on Internal Control Over Financial Reporting

The Company's Management, including the CEO and CFO, have assessed and evaluated the design and effectiveness of the Company's internal control over financial reporting as defined in National Instrument 52-109 as at December 31, 2013. In making this assessment the Company used the criteria established by the Committee of Sponsoring Organizations ("COSO") in the "Internal Control-Integrated Framework". These criteria are in the areas of control environment, risk assessment, control activities, information and communication and monitoring. The Company's assessment included documentation, evaluation and testing of its internal controls over financial reporting. Based on that evaluation, the Company's Management, including the CEO and CFO, concluded that the Company's internal controls over financial reporting are effective and provide reasonable assurance regarding the reliability of the Company's financial reporting and its preparation of financial statements for external purposes in accordance with IFRS, as at December 31, 2013.

Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements.

Changes in Internal Controls Over Financial Reporting During 2013

There have been no changes in the Company's internal controls over financial reporting during the year ended December 31, 2013, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

OUTLOOK

The North American pressure pumping market has undergone a transition from natural gas based activity to activity driven by oil and liquids-rich basins over the last several years. With equipment capacity being added ahead of demand, the result was reduced pricing and margins in the North American pressure pumping industry over the last three years. Early indications are that activity levels will increase marginally in 2014 in both Canada and the USA. While this should result in improved equipment utilization and price stability, we do not anticipate any material price improvements to follow until into 2015. In Canada, assuming commodity prices remain firm, it is expected that additional activity in the Duvernay and Montney will drive demand for additional horsepower in Canada for 2014. In the US, the overall pressure pumping market has an oversupply of equipment which we do not expect to reverse until later in 2014. However, on a region by region basis, particularly in oil rich areas such as South Texas, activity remains strong. The current scarcity of equity capital for Exploration and Production companies and their more conservative use of debt cause the level of future capital expenditures to be highly leveraged to commodity prices. As such, anticipated 2014 E&P capital expenditures are highly dependent on commodity price assumptions.

While the fundamentals of the overall pressure pumping market are an important factor in our operations, the most significant factor remains the pace of adoption of our technology by E&P companies. The industry as a whole has experienced significant change over the last decade with the emergence of multi-stage horizontal fracturing in resource formations. Although there have been positive production results, in some ways, the technology of fracturing in resource plays is just beginning. There are some indications that, as past results & economics are examined, the industry is beginning to examine methods to optimize fracturing operations and move away from simply using brute force along the horizontal section. We believe that the GASFRAC technology and resultant production benefits in targeted formations provide our customers an advantage and that the major challenge for the Company is increasing our market share through succinct demonstration of this benefit. The key barriers we have encountered impacting the pace of adoption are; demonstration of the cost/benefit, safety considerations, awareness and "inertia". Operators tend to be cautious in their adoption of new technologies, particularly given the significance of fracturing costs as a percentage of total drilling and completions costs.
The current E&P market is very focused on cost efficiencies as they develop large resource plays. Free cash flow generation remains under pressure for a large segment of the sector with overall ROCE down during 2013. As such, the higher up front cost of GASFRAC's service can be a key criteria in purchasing decisions. Thus, the keys on the cost/benefit side are both a) the collection of basin by basin production data to provide more case studies to potential customers showing the positive impact on production and net present values and b) continued reduction in the up-front costs of our service through enhancements such as engineered fluids. We expect that the service delivery initiatives we undertook over the last few quarters, particularly engineered fluids that allow significant recovery of frac load fluids, will reduce the net cost of our service to our customers. This change in our value proposition creates an opportunity to attract customers to trial our technology and observe the specific impact on their wells and production. Due to the significant investment by operators in fracturing services, the sales and trial process is relatively long. We would anticipate a time from of six to nine months from initial trial to ultimate adoption of our services. While safety will always remain a key focus for the Company, the equipment and procedures put in place during 2011 have largely removed this as a barrier for most customers - although education and safety audits will remain part of the sales cycle. We have observed an increased awareness and expressed interest in GASFRAC services in the basins we are targeting. During the fourth quarter of 2013 we had two trials with customers who are still evaluating the results. Early in Q1 2014 we had trials with three new customers. While these have not resulted in converted customers at this time, the success in achieving these trials is a positive sign.

During this period of adoption, our operations in both Canada and the United States remain concentrated with a few key customers and our revenues are subject to fluctuation dependent on the level of drilling operations by these customers in the areas in which we are servicing them. Their levels of drilling activity can be impacted by numerous factors including, but not limited to, operational difficulties, project scheduling, infrastructure limitations, weather conditions, hunting restrictions, and budgetary priorities. During the first quarter of 2014 we have experienced such fluctuations with both Husky and BlackBrush utilizing pad drilling and having such projects delayed from Q1 into Q2. As a result we anticipate revenue for Q1 will be well below fourth quarter results, while second quarter revenue should exceed fourth quarter results.

While these fluctuations add uncertainty to the timing of our cash flows, our current cost structure allows us to remain cash positive at approximately $10 million of revenue per month. Further, our capital commitments and requirements for 2014 are minimal. As such, our draw on our bank credit facility is expected to remain at a level driven by the amount of our accounts receivable. However, these fluctuations in revenue, such as being experienced in the first quarter of 2014, can result in financial covenant breaches which would require waiver or forbearance. The Company does however have significant asset backing (receivables and capital equipment) providing support for its credit facility. At year end, working capital (excluding credit facility) of $25.6 million fully supported the credit facility of $18.6 million. In addition, the Company had $193.6 million of capital assets at year end. Based on this structure, the Company may consider a debt facility more structured to asset support and longer term in nature to its current facility.

FORWARD-LOOKING STATEMENT

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 the Company's innovative technology will provide the Company with opportunities to expand the Company's market share in Canada and the U.S.;
  • expectations of securing financing for 2014 and beyond;
  • expectations as to the level of funding available under the Company's credit facility;
  • expectations as to the degree of activity by key customers;
  • expectations as to fluctuations in revenue due to customer concentration;
  • expectations of the impact of weather on activity in Canada in 2014;
  • expectations as to activity levels in North America;
  • expectations as to capital development programs of major customers;
  • expectations as to the rate of trials and adoption of the Company's technology by E&P companies;
  • expectations as to the Company's future market position in the industry;
  • expectations as to the supply of raw materials and timing of purchase commitments;
  • expectations as to the pricing of the Company's services in Canada and the USA;
  • expectations as to obtaining long term contracts with customers;
  • expectations of fracturing industry pricing and the pricing of the Company services in North America in 2014 and beyond;
  • expectations of oil and natural gas commodity prices in 2014;
  • expectations of propane and other LPG prices in 2014 and forward.

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 property and equipment.

Consolidated Statement of Financial Position

As at: Dec 31, 2013 Dec 31, 2012
CAD$ '000 CAD$ '000
ASSETS
CURRENT ASSETS
Cash and cash equivalents 1,955 7,927
Trade and other receivables 26,037 30,529
Inventory 12,645 6,521
Prepaids and short term deposits 1,459 1,346
Assets held for sale - 1,352
TOTAL CURRENT ASSETS 42,096 47,675
NON-CURRENT ASSETS
Plant and equipment 193,612 219,056
Intangible assets 780 1,021
Long term deposits 6,309 7,704
TOTAL NON-CURRENT ASSETS 200,701 227,781
TOTAL ASSETS 242,797 275,456
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables and accrued liabilities 14,352 17,318
Provisions 742 768
Current portion of finance lease obligation 1,359 1,349
Current portion of credit facility 18,573 2,500
TOTAL CURRENT LIABILITIES 35,026 21,935
NON-CURRENT LIABILITIES
Finance lease obligation 835 1,035
Operating lease obligation 79 38
Credit facility - 27,500
Convertible debenture 35,648 34,504
Commitments and contingencies
TOTAL NON-CURRENT LIABILITIES 36,562 63,077
TOTAL LIABILITIES 71,588 85,012
CAPITAL & RESERVES
Share capital 259,823 259,551
Contributed surplus 6,461 5,810
Foreign currency translation reserve 5,326 1,055
(Deficit) Retained earnings (100,401) (75,972)
TOTAL EQUITY 171,209 190,444
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 242,797 275,456

Consolidated Statement of Comprehensive Loss

For the twelve months ended Dec 31, 2013 Dec 31, 2012
CAD$ '000 CAD$ '000
REVENUE 121,823 149,442
EXPENDITURES
Operating costs 96,555 127,673
Selling, general and administrative 18,489 22,487
Share based compensation 1,135 620
Depreciation and amortization 25,609 26,826
Impairments 120 47,412
Finance cost 6,661 5,623
Foreign exchange (gain) loss (24) 46
148,545 230,687
OTHER INCOME
Interest income 18 62
Insurance Income - 1,957
Net gain / (loss) on disposition of assets 2,275 (7)
2,293 2,012
LOSS BEFORE INCOME TAXES (24,429) (79,233)
Tax recovery - 1,764
LOSS FOR THE YEAR (24,429) (77,469)
OTHER COMPREHENSIVE (LOSS) INCOME
ITEMS THAT WILL BE RECLASSIFIED TO PROFIT AND LOSS
Exchange differences on translating foreign operations 4,271 (1,741)
OTHER COMPREHENSIVE (LOSS) INCOME 4,271 (1,741)
TOTAL COMPREHENSIVE LOSS FOR THE YEAR ATTRIBUTABLE TO THE OWNERS OF THE COMPANY (20,158) (79,210)
LOSS PER SHARE
Basic (cents per share) (0.38) (1.23)
Diluted (cents per share) (0.38) (1.23)

Consolidated Statement of Cash Flow

For the twelve months ended Dec 31, 2013 Dec 31, 2012
CAD$ '000 CAD$ '000
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Loss for the year (24,429) (77,469)
Adjusted for:
Depreciation and amortization 25,609 26,826
Impairments 120 47,412
(Gains) / losses on disposal of assets (2,275) 7
Equity settles share based compensation 773 342
Finance cost per income statement 6,661 5,623
Unrealized foreign exchange loss (422) (3)
Doubtful debt expense 528 1,306
Insurance income - (1,957)
Taxation per income statement - (1,764)
6,565 323
Net change in non-cash operating working capital items (2,121) 22,032
Cash provided by operating activities 4,444 22,355
Interest paid (5,523) (3,349)
Net cash provided (used) by operating activities (1,079) 19,006
INVESTING ACTIVITIES
Purchases of plant and equipment (2,995) (48,338)
Acquisition of intangible assets (155) (776)
Proceeds from sale of plant and equipment 10,780 2,124
Net change in non-cash investing working capital (1,387) (15,353)
Net cash provided (used) in investing activities 6,243 (62,343)
FINANCING ACTIVITIES
Proceeds from common shares issued (net of share issue cost) 150 1,310
Issue of debentures (net of debenture issue cost) - 37,888
Net change in credit facility (11,427) 7,813
Net change in finance leases (217) (696)
Net cash provided (used) in financing activities (11,494) 46,315
Net (decrease) increase in cash and cash equivalents (6,330) 2,978
Cash and cash equivalents, beginning of year 7,927 5,026
Effects of exchange rate changes on the balance of cash held in foreign currencies 358 (77)
CASH AND CASH EQUIVALENTS, END OF YEAR 1,955 7,927

The following results should be read in conjunction with the Management's Discussion and Analysis, the consolidated financial statements and notes of GASFRAC Energy Services Inc. for the three and twelve months ended December 31, 2013 which are available on SEDAR at www.sedar.com

The Company will host a conference call on Thursday, March 13, 2014 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the fourth quarter of 2013.

To listen to the webcast of the conference call, please enter: http://www.gowebcasting.com/5294 in your web browser or visit the Investor Information section of our website www.gasfrac.com.

To participate in the Q&A session, please call the conference call operator at 1-800-769-8320 or 1-416-340-8530 fifteen minutes prior to the call's start time and ask for "GASFRAC Fourth Quarter Results Conference Call".

A replay of the call will be available until March 20, 2014 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 7183220. The Company will also archive the conference on its website at www.gasfrac.com.

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.

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