GasFrac Energy Services Inc.
TSX : GFS

GasFrac Energy Services Inc.

November 14, 2014 08:00 ET

GASFRAC Announces Third Quarter 2014 Financial Results and Provides Operations, Corporate and Strategic Updates. GASFRAC to Evaluate Strategic Alternatives to Enhance Shareholder Value

CALGARY, ALBERTA--(Marketwired - Nov. 14, 2014) - GASFRAC Energy Services (the "Company") (TSX:GFS) today announced third quarter 2014 financial results and various corporate updates.

Mark Williamson, Interim CEO and Executive Chairman of GASFRAC, said, "The third quarter proved challenging from a revenue and earnings standpoint, however, we remain optimistic about our prospects going forward given the early success of our HOOD technology, LPG fracturing projects and key customer wins and contract extensions in the third quarter. We will continue to refocus our operations and keep costs in control in order to shore up our balance sheet, pursue high value projects and deliver increased returns to shareholders."

Mr. Williamson continued, "A Special Committee of our Board comprised of independent directors has retained CIBC World Markets Inc. ("CIBC") to explore and evaluate a range of strategic alternatives in an effort to maximize value for the Company and all of our stakeholders. While that process is still very much underway, possible outcomes could include equity offerings or equity investments, the pursuit of a joint venture, merger, sale of assets or of the entire Company, or the continued execution of our strategic plan."

OPERATIONAL AND STRATEGIC UPDATE

  • A Special Committee of independent directors has been formed to oversee a strategic alternative process on behalf of the Corporation.

  • This Special Committee of GASFRAC's Board has engaged CIBC to identify, examine and consider a range of strategic alternatives available to GASFRAC, with a view to enhance and maximize shareholder value.

  • During the quarter, GASFRAC successfully deployed its HOOD technology and commenced fracturing its first well in the Utica Shale formation.

  • GASFRAC's Board is continuing to pursue a search for the appointment of a permanent Chief Executive Officer; with an announcement anticipated by the end of second quarter 2015.

  • GASFRAC is not expected to be compliant with the terms of its Revolving Credit Facility at December 31, 2014, specifically the obligation to maintain a Fixed Charge Coverage Covenant Ratio of 1.15 to 1.00. GASFRAC is working with its lender to resolve the issue.

THIRD QUARTER HIGHLIGHT SUMMARY

During the quarter, GASFRAC successfully deployed its HOOD technology, used in conjunction with the Company's conventional blender that enables it to pump high reid vapor pressure ("HRVP") fluids above the IRP-8, 2.0 psi. The HOOD is capable of pumping fluids with HRVP up to 10 psi. This enables GASFRAC to use indigenous infield hydrocarbons as a primary component of the frac fluid, reducing the overall cost to the customer.

GASFRAC successfully completed an LPG fracturing project with a Canadian customer in New Brunswick. The Company also completed Hybrid LPG, Poly CO2 and nitrogen assisted water fracturing treatments in the third quarter.

GASFRAC signed a two year contract with a major US customer to provide fracturing services in south Texas. The contract provides for a minimum annual revenue commitment to GASFRAC of $7.2 million. During the quarter, the Company completed two wells for this customer and anticipates completing 24 wells annually.

The Company also announced a three year contract extension with a major multi-national legacy customer. GASFRAC has not been active with this customer during the year but anticipates commencing fracturing treatments in the first quarter of 2015.

THIRD QUARTER FINANCIAL HIGHLIGHTS

Three months ended Sept 30, Nine months ended Sept 30,
2014 2013 2014 2013
CAD$ CAD$ CAD$ CAD$
Revenue 11,252 30,423 30,751 92,442
Operating expenses 12,506 22,950 39,482 72,741
Selling, general and administrative expenses 6,754 3,922 15,064 13,665
Adjusted EBITDA(1) (8,069 ) 3,364 (23,989 ) 5,851
(Loss) for the period (15,200 ) (5,061 ) (61,058 ) (17,756 )
(Loss) per share - basic (0.24 ) (0.08 ) (0.96 ) (0.28 )
(Loss) per share - diluted (0.24 ) (0.08 ) (0.96 ) (0.28 )
Weighted average number of shares - basic 63,616 63,601 63,613 63,550
Total assets 192,068 253,489 192,068 253,489
Total non-current liabilities 65,976 35,958 65,976 35,958
Revenue days 35 59 82 191
Revenue per revenue day 284 516 359 484
(1) Prior period amounts have been adjusted to conform to the definition per the Company's new credit facility. Defined under Non-IFRS Measures

Revenue for the third quarter decreased 63% to $11.3 million from $30.4 million in the third quarter of 2013. This decrease is due to reduced activity with our legacy customers, partially offset by a fracturing project in eastern Canada and a $1.2 million sale of frac sand. GASFRAC reported a net loss for third quarter of $15.2 million or ($0.24) per share compared to a net loss for third quarter 2013 of $5.1 million or ($0.08) per share. Adjusted EBITDA was a loss of $8.1 million versus positive Adjusted EBITDA of $3.4 million.

On a year-to-date basis, revenue decreased 67% to $30.8 million from $92.4 million. The primary reason for the decrease in revenue is due to the level of activity from the Company's three major customers in 2013. These three customers generated $77.7 million of revenue for the nine-months ended September 30, 2013. Those same three customers generated $11.0 million of revenue for the nine-months ended September 30, 2014. GASFRAC reported a net loss for the nine-months ended September 30, 2014 of $61.1 million (including a $16.6 million impairment charge) or ($.96) per share compared to a net loss for the nine-months ended September 30, 2013 of $17.8 million or ($0.28) per share. Adjusted EBITDA for the nine-months ended September 30, 2014 was a loss of $24.0 million versus positive Adjusted EBITDA for the nine-months ended September 30, 2013 of $5.9 million.

During the third quarter of 2014, Canadian revenue was $6.4 million compared to $19.3 million in the third quarter of 2013. The top two customers generated 76% of the total Canadian revenue. During the third quarter of 2013, the top two customers generated 80% of the total Canadian revenue. Canadian revenue for the nine-months ended September 30, 2014 was $25.5 million versus $70.0 million for the same period in 2013.

During the third quarter of 2014, US revenue was $4.8 million compared to $11.2 million in the third quarter of 2013. The 2014 third quarter US revenue was generated by two customers and 2013 third quarter US revenue was generated by two customers.

As of September 30, 2014, the Company had drawn $30.4 million against its Revolving Credit Facility and therefore had available lending of $4.6 million. As at October 31, 2014, the Company had drawn $28.2 million against the facility and therefore had available lending of $6.8 million.

The Company had positive working capital of $9.7 million and Cash plus Accounts Receivable was less than current liabilities by $1.2 million as of September 30, 2014. Additional resources will be required to settle both short term liabilities and commitments of $22.8 million.

Uncertainty includes economic dependence on a small number of clients, market success of expanded product offerings, continued availability of financing from the existing credit facility and availability of alternative sources of financing result in material uncertainty about the Company's ability to continue as a going concern.

OUTLOOK

GASFRAC is expecting its fourth quarter to be active providing fracturing solutions for four new customers and continuing our work with a major US customer in Texas.

GASFRAC has just commenced fracturing its first well in the Utica Shale formation. A number of exploration and production companies have an ownership interest in this well and are closely monitoring the project with the potential for GASFRAC to perform fracturing services on other wells in the Utica Shale formation.

The Company's successful use of infield hydrocarbons with High Reid Vapor Pressure ("HRVP") which eliminates the need for supplemental frac oils has resulted in increased interest in GASFRAC services in both Canada and the US. This proprietary process significantly decreases the cost of fracturing wells with hydrocarbons. As well, the Company's expansion into conventional fluids along with its energized and waterless fluid options has created opportunities to attract customers to trial our technology and observe the specific impact on their wells and associated production.

GASFRAC operations in both Canada and the US remain concentrated with a few key customers and our revenues are subject to fluctuations 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, volatile commodity prices, operational difficulties, project scheduling, infrastructure limitations and budgetary priorities.

The Company believes that the Canadian pressure pumping market is showing signs that previous over capacity from prior years has been absorbed and the market is starting to show signs of being undersupplied resulting in industry price stability. The US equipment utilization has also improved during 2014 but not to the extent of Canada. As a result, the Company expects pricing to remain firm in the US with improvments in 2015.

As previously announced, the board of directors initiated a review of the business of the Company to reposition the Company to reduce expenses, improve performance, position for growth and create shareholder value. During the quarter, the Company has undertaken a number of initiatives to reduce costs and improve cashflow including:

  • Eliminating all discretionary expenditures, such as eliminating or postponing IT projects;
  • Compensating the Interim CEO with deferred share units;
  • Granting Directors deferred share units instead of paying director fees;
  • Implementing tighter controls on field operations spending;
  • Improving cost controls over purchases;
  • Reducing the excess supply of FTec proppant through third party sales and internal usage;
  • Undergoing an equipment and facility requirements rationalization in order to support the increased activity in other fluid systems including the sale of non-core equipment;
  • Reviewing the operating base structure with the intent to increase the operating bases responsibility for profitability.

The Board also identified the need for targeted hiring for specific field operating positions to increase the Company's service delivery capabilities. The hiring of additional field positions is supported by recent increased activity.

The executive search for the permanent appointment of a new Chief Executive Officer is ongoing with an announcement anticipated before the end of the second quarter 2015.

The Company's liquidity continues to be a significant risk. On June 19, 2014, the Company entered into a Revolving Credit and Security Agreement (the "Revolving Credit Facility"). The Facility is a five-year revolving credit facility of up to $60 million subject to a borrowing base. On June 19, 2014, the Company had total availability of $35 million under the facility, with availability to increase based on future performance of the Company. As of September 30, 2014, the Company has drawn $30.4 million against the facility and had available lending of $4.6 million. As of October 31, 2014, the Company had drawn $28.2 million against the facility and had available lending of $6.8 million.

The Revolving Credit Facility also requires the Company to maintain, as of December 31, 2014 and each quarter thereafter, measured on a rolling four quarter basis, a Fixed Charge Coverage Covenant Ratio of 1:15 to 1.00. It is expected that the Company will not be compliant with this covenant when it becomes effective December 31, 2014. Any failure or neglect of the Company to perform or keep any term, provision or covenant is considered to be an Event of Default under the Revolving Credit Facility. In the Event of Default and at any time thereafter, the Bank shall have the right to terminate the Revolving Credit Facility, to terminate the obligation to make advances, and to demand an acceleration of repayment thereunder. The Company's Bank is aware of the expected covenant breach at December 31, 2014 and management is regularly updating the Bank on business activity. Management anticipates it will be negotiating a covenant waiver with the Bank; however the outcome of those negotiations cannot be predicted at this time.

In the short term the Company will continue to minimize discretionary expenses and supplement its operating cash flow with sales of excess inventory and non-revenue generating assets such as land and buildings.

On November 13, 2014, the Company's board of directors formed a Special Committee of independent directors to identify, examine and consider a range of strategic alternatives available to GASFRAC, with a view to enhance and maximize shareholder value. This process could result in seeking a joint venture partner, or a sale of some or all of the assets of the Company, or a merger, amalgamation or sale of the Company with or to a larger, better financed entity. The Special Committee of the board of directors have also engaged CIBC World Markets Inc. to serve as financial advisor to GASFRAC in connection with this strategic alternative process.

NON-IFRS MEASURES

Certain supplementary measures 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 finance cost, income taxes, depreciation and amortization, equity settled share based compensation, unrealized foreign exchange, and gain or losses on disposition. Adjusted EBITDA is used in the calculation of GASFRAC's financial covenant related to its revolving credit facility.

Adjusted EBITDA is calculated as follows:

Three months ended Sept 30, Nine months ended Sept 30,
2014 2013 2014 2013
CAD$ CAD$ CAD$ CAD$
Net loss (15,200 ) (5,061 ) (61,058 ) (17,756 )
(Deduct) Add back
Finance cost 1,487 1,775 4,438 5,109
Depreciation and amortization 5,845 6,303 18,182 19,273
Impairments - - 16,600 120
Equity settled share based (recovery) compensation (7 ) 227 197 647
Unrealized foreign exchange (gain) loss (147 ) 68 (822 ) 204
(Gain) loss on disposition of assets (47 ) 52 (1,526 ) (1,746 )
Adjusted EBITDA (8,069 ) 3,364 (23,989 ) 5,851

The Company will host a conference call on November 14, 2014 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the third quarter of 2014.

To listen to the webcast of the conference call, please enter http://www.gowebcasting.com/6114 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 and ask for "GASFRAC Third Quarter Results Conference Call".

A replay of the call will be available until November 21, 2014 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 2559546. The Company will also archive the conference on its website at www.gasfrac.com.

GASFRAC is an innovative North American based well-fracturing Company headquartered in Calgary, Alberta. GASFRAC is the sole provider of fracturing services utilizing gelled LPG fracturing technology. In addition, GASFRAC has expanded its fluid offering to include conventional fluids, in addition to a complete range of energized and waterless fluid solutions. GASFRAC offers a full complement of fracturing services and consulting expertise, while focusing on providing innovative fracturing solutions for our clients.

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 or revise these forward looking statements whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws. These forward looking statements include, among other things:

  • expectations that the market focus is moving toward customized fracturing fluids;
  • 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 and beyond;
  • 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 U.S.;
  • 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 and beyond; and
  • expectations of propane and other LPG prices in 2014 and beyond.

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, 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, the Company's liquidity and financial capacity, the Company sourcing funding to meet ongoing obligations and foreign currency fluctuations. The Company's annual MD&A for December 31, 2013, Annual Information Form and other documents fled with securities regulatory authorities (accessible through the SEDAR website www.sedar.com) describe the other risks, the material assumptions and other factors that could influence actual results and which are incorporated herein.

Actual results, performance or achievement could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits the Company will derive from them.

Contact Information

  • Requests for shareholder information should be directed to:
    GASFRAC Energy Services Inc.
    Lori McLeod-Hill
    Chief Financial Officer
    403-515-3377
    lori.mcleod-hill@gasfrac.com