GASFRAC Energy Services Inc.
TSX VENTURE : GFS

GASFRAC Energy Services Inc.

November 09, 2010 20:43 ET

GASFRAC Announces Third Quarter Results

CALGARY, ALBERTA--(Marketwire - Nov. 9, 2010) - GASFRAC Energy Services Inc. ("GASFRAC") (TSX VENTURE:GFS) achieved revenue of $26.6 million in the third quarter of 2010 as compared to $9.7 million in the third quarter of 2009. EBITDA was $5.3 million as compared to $2.4 million in 2009.

Dwight Loree, Chief Executive Officer commented, "I am very pleased with these results which demonstrate the increasing adoption of our technology, impact of our added equipment and strong execution by our operating team. During the third quarter GASFRAC achieved a 175% increase in revenues and more than doubled EBITDA to $5.3 million from $2.4 million in the third quarter of 2009.

We also continued to strengthen our senior team with the additions of Robert Lestz as Chief Technology Officer and Brian Lane as Manager of Sales. Robert Lestz, a petroleum engineer, brings 26 years of experience in the energy business including as head of Research and Development for a major production company. Brian Lane has 13 years of technical sales and business development experience in the fracturing industry, bringing a wealth of expertise and industry knowledge to GASFRAC.

I am also pleased to report that our capital equipment build program remains on schedule and we expect to have it substantially completed early in the first quarter of 2011. The completion of this build will significantly increase our revenue generating capacity"



Comparative Quarterly Financial Information

(000s) Three months ended Nine months ended
September 30 September 30
------------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Revenue 26,590 9,662 55,819 23,283
Operating expenses 18,077 4,712 40,512 14,708
Selling, general and administrative
expenses 3,089 2,488 7,255 5,381
EBITDA(1) 5,336 2,396 9,999 4,295
Net income 2,585 782 2,99 1 628
Net income per share - basic 0.06 0.02 0.08 0.02
Weighted average number of shares
- basic 41,244,816 32,500,000 35,821,806 32,500,000
Treatments 137 25 271 96
Revenue per treatment 194 386 206 243
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(1) Defined under Non-GAAP Measures


Third Quarter Highlights

Revenue for the quarter increased almost three-fold to $26.6 million from $9.7 million in 2009. The increase is a combination of a weak second quarter in 2009 and the Company's improved operating position and capacity in 2010. In 2009 the Canadian oil and gas industry experienced significantly reduced activity levels reflecting both the typical seasonal weakness and the overall global economic recession which resulted in many oil and gas producers reducing their capital programs. In 2010 the demand for fracturing services in Canada has improved significantly and the Company has participated in this improvement due to increased acceptance of its LPG fracturing technology and added equipment capacity.

During the third quarter, revenue generating activities commenced in the USA. Revenue of $5.6 million was earned from three customers including $5.1 million from a 14 well test program in the Tesnus formation in Pecos County Texas. The program resulted in enhanced production as compared to other fracturing technologies. However, the formation is a dry gas formation and the customer determined that it did not meet its economic hurdles at current natural gas prices. After the completion of the test program GASFRAC returned most of its US fracturing equipment to Canada to meet demand for its services there. During the fourth quarter of 2010 we intend to focus efforts in the USA on the marketing of our services in selected basins in the USA with the intent to move equipment back to the USA in the first quarter of 2011. By the first quarter of 2011 it is expected that our 2010 capital build will be completed adding three equipment sets, and additional fluid handling and proppant addition equipment, to our fleet. This added equipment will support anticipated additional demand for our services in both Canada and the USA.

Financial Overview

Revenues

Revenue for the quarter increased 175% to $26.6 million from $9.7 million in 2009. The increase reflects a combination of; added equipment capacity, additional demand for our services in Canada and commencement of revenue operations in the USA. In 2010 the demand for fracturing services in Canada has improved significantly and the Company has participated in this improvement due to increased acceptance of its LPG fracturing technology and added equipment capacity. During the quarter, three customers represented 67% of revenue. Two of these customers plus one other accounted for 56% of the revenue for the nine month period ended September 30, 2010.

During the quarter the Company completed 137 treatments at an average price of $194 compared to 25 treatments at an average job price of $386 during Q3 2009. As compared to the second quarter of 2010, this is an 8% decrease in average treatment revenue, representing an increase in multi-zone jobs which tend to have a lower average per treatment price due to the efficiency achieved by performing several treatments in a single day.

For the nine month period ending September 30, 2010, revenue increased 139% to $55.8 million from $23.3 million in 2009 reflecting 271 fracturing treatments at an average rate of $206 compared to 96 treatments at an average rate of $243 in 2009. Comparable to the quarter, this decrease in average treatment price represents an increase in multi-zone jobs.

Operating Expenses

Operating expenses increased to $18.1 million during Q3 2010 from $4.7 million in Q3 2009. The increase is due to the opening of our US operation ($3.8 million) as well as direct operating costs associated with increased revenue activity in Canada. As a percentage of revenue operating costs were 68% in the third quarter down from 75.1% and 78.8% in the first and second quarters respectively. This reduction of operating costs as a percentage of revenues results from our ability to leverage fixed operating costs over an increasing revenue base. Operating costs consist primarily of product costs (propane, proppant, chemicals), cost of field staff, equipment costs and the cost for our two operational bases. Components of the current operational infrastructure have been developed to maintain and support a larger scale of operations than GASFRAC has experienced to date.

Operating expenses in the first nine months of 2010 were $40.5 million (73% of revenue) as compared to $14.7 million (63.2% of revenue in 2009). The increase reflects US operating costs of approximately $4.1 million as well as direct operating costs associated with increased revenue activity in Canada.

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

SG&A expenses increased to $3.1 million (11.6% of revenue) during Q3 2010 from $2.5 million (25.8% of revenue) in Q3 2009. The increase is primarily due to the hiring of administrative and operations staff to support the growth in both our Canadian and US operations. Sequentially SG&A costs of 11.6% of revenue are down from 12.2% in the first quarter and 16.5% in the second quarter of 2010. These costs represent the necessary costs of building a support infrastructure for the Company's added revenue base and are anticipated to be able to support future revenue growth without significant additional growth to this cost base.

For the nine months ended September 30, 2010 SG&A costs increased to $7.3 million (13% of revenue) from $5.4 million (23.1% of revenue).

Amortization

Amortization increased to $2.0 million during Q3 2010 from $1.4 million in Q3 2009. For the nine month period amortization increased to $5.5 million compared to $3.5 million in 2009 reflecting an increase in capital assets of $49.3 million during 2010.

EBITDA

EBITDA increased to $5.4 million during Q3 2010 from $2.4 million in Q3 2009. For the nine month period EBITDA increased to $10.0 million from $4.3 million in 2009. The increase is primarily due to an increase in revenue.

Other Income

Other income for the nine month period included $2.0 million for insurance proceeds related to a business interruption loss from an incident that took place in November 2009. The value of the business interruption is subject to interpretation and the actual amount of proceeds received may differ from the amount recorded. To date $1.0 million has been received.

Other income in the nine month period ended September 30, 2009 is comprised of $638 business interruption claim from 2008 which has been settled in full, $583 from Scientific Research and Experimental Development credits resulting from the Company's research activities that year and $185 of interest income relating to interest earned on short-term investments.

Net Income

As the Company has increased its activity and revenue levels the fixed costs (both operational and administrative) have reduced as a percentage of revenue. In addition, as equipment becomes more effectively utilized, the relative cost of amortization is reducing. As a result, the Company had net income for the nine months of $2,991 compared to net income in 2009 of $628 and for the third quarter, net income was $2,585 compared to $782 in Q3 2009.



Summary of Quarterly Results

(000s)
DEC. 31 MAR. 31 JUN. 30 SEP. 30
2008 2009 2009 2009
----------------------------------------------------------------------------
Revenue $ 6,817 $ 11,326 $ 2,295 $ 9,662
Net income (loss) $ 3,420 $ 901 $ (1,055) $ 782
Net income (loss) per share $ 0.12 $ 0.03 $ (0.03) $ 0.02
EBITDA (1) $ 2,735 $ 2,376 $ (477) $ 2,396
Capital expenditures $ 11,922 $ 5,724 $ 9,739 $ 6,658
Working capital (2) $ 42,287 $ 39,156 $ 29,031 $ 25,430
Shareholders' equity $ 84,572 $ 85,555 $ 84,553 $ 85,970


DEC. 31 MAR. 31 JUN. 30 SEP. 30
2009 2010 2010 2010
----------------------------------------------------------------------------
Revenue $ 7,145 $ 15,906 $ 13,323 $ 26,590
Net income (loss) $ (2,838) $ 1,672 $ (1,266) $ 2,585
Net income (loss)
per share $ (0.09) $ 0.05 $ (0.04) $ 0.06
EBITDA (1) $ (1,322) $ 4,039 $ 624 $ 5,336
Capital expenditures $ 5,358 $ 6,247 $ 7,430 $ 35,871
Working capital (2) $ 19,513 $ 17,792 $ 13,484 $ 42,005
Shareholders' equity $ 83,731 $ 85,808 $ 85,379 $150,999
(1) Defined under Non-GAAP Measures
(2) Working capital is defined as current assets less current liabilities


Liquidity and Capital Resources

As at September 30, 2010 the Company had $42.0 million of working capital compared to $13.5 million at June 30, 2010. The increase in working capital is primarily due to $61.9 million raised through the Company's June private placement ($60.5 million) and the exercise of broker warrants ($1.4 million) and $5.5 million of funds provided from operations. Offsetting the receipts from this financing is $35.8 million of capital expenditures made to increase the revenue earning capacity of the Company and $5.3 million invested in increased working capital to support revenue growth.

The Company invested $35.8 million in capital equipment in the third quarter and $49.4 million for the nine month period to September 30, 2010 as compared to $6.6 million and $22.0 million respectively in 2009. The Company initiated a $100 million capital build at the end of the second quarter focused on adding fracturing treatment capacity through horsepower and LPG and proppant delivery and storage capacity. Upon completion of this capital program the Company will have 105 thousand horsepower. Equipment builds have commenced and delivery is expected to occur throughout the remainder of 2010 and be completed in the first quarter of 2011.

Operating

The Company's funds provided by (used in) operations (as defined under Non-GAAP Measures) was $5.5 million for the third quarter of 2010 and $10.3 million year to date as compared to $3.1 million and $5.3 million respectively in 2009. The increase is due to the Company's increased revenue. With the Company's growth, a large portion of these funds from operations was invested in added working capital ($5.3 million in the three month period ended September 30, 2010 and $8.0 million for the nine month period ended September 30, 2010).

Financing

As at September 30, 2010 the Company had a $15 million demand revolving loan facility and a $35 million committed revolving facility (see Note 3 of the interim consolidated financial statements). No amounts were drawn on these facilities as at September 30, 2010 or as at the date of this MD&A. The Company is in compliance with all its debt covenants.

Investing

The Company incurred $35.8 million of capital expenditures during the third quarter of 2010 and $49.5 million for the nine months ended September 30, 2010 as compared to $6.7 million and $22.1 million respectively in 2009. These capital expenditures represent investments in additional fracturing operating capacity for the Company.

Critical Accounting Policies and Estimates

This MD&A is based on the Company's annual consolidated financial statements that have been prepared in accordance with Canadian GAAP. Management is required to make assumptions, judgments and estimates in the application of GAAP. GASFRAC's significant accounting policies are described in note 2 of the December 31, 2009 audited 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 consolidated financial statements may change as future events unfold, additional experience is acquired or the environment in which the Company operates changes. The following accounting policies and practices involve the use of estimates that have a significant impact on the Company's financial results.

Revenue Recognition

Revenue is recognized for services upon completion and for products upon delivery.

Allowance for Doubtful Accounts Receivable

The Company performs ongoing credit evaluations of its customers and grants credit based upon a review of historical collection experience, current aging status, financial condition of the customer and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. In situations where the creditworthiness of a customer is uncertain, services are provided on receipt of cash in advance or services are declined. GASFRAC's management believes that the provision for doubtful accounts is adequate.

Amortization

Amortization of the Company's property and equipment incorporates estimates of useful lives and residual values. 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.

Income Taxes

The Company follows the liability method of accounting for income taxes, which evaluates the differences between the financial statement treatment and tax treatment of certain transactions, assets and liabilities. Future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of existing assets and liabilities and their respective tax bases. Estimates of the Company's future taxable income have been considered in assessing the utilization of available tax losses. GASFRAC's business is complex and the calculation of income taxes involves many complex factors as well as the Company's interpretation of relevant tax legislation and regulations. GASFRAC's management believes that the future income tax provision is adequate.

Stock based Compensation

GASFRAC provides stock based compensation to directors, officers, employees and consultants in the form of stock options. The fair value of stock options are estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the risk-free interest rate, average expected option life, estimated volatility of the Company's shares and anticipated dividends.

Recent Accounting Pronouncements

There have been no Canadian or US accounting pronouncements issued for the 2010 fiscal year which may have a material impact on the Company's financial statements.

Business Risks

A complete discussion of business risks faced by GASFRAC may be found under the "Risk Factors" section on page 58 of its Joint Information Circular and Proxy Statement dated July 7, 2010, which is available under GASFRAC's profile at www.sedar.com.

Internal Controls Over Financial Reporting

There have been no changes in the Company's internal controls over financial reporting during the period ended September 30, 2010 that have materially affected, or are reasonably likely to materially effect, the Company's internal controls over financial reporting.

International Financial Reporting Standards ("IFRS")

The Canadian Accounting Standards Board ("AcSB") published a new strategic plan that outlines the convergence of Canadian generally accepted accounting principles with IFRS over an expected five year transitional period. The changeover date for publicly-listed companies to use IFRS, replacing Canada's own generally accepted accounting principles is interim and annual financial statements for fiscal years beginning on or after January 1, 2011 with the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010.

The Company has completed a high-level review and preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to its accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight into what are anticipated to be the most significant areas of difference applicable to the Company. The next step is to perform an in-depth review of the significant areas of difference and formulate ongoing accounting policies. Key areas addressed will also be reviewed to determine any information technology issues, the impact on internal controls over financial reporting and the impact on business activities including the effect, if any, on covenants and compensation arrangements.

The Company will also continue to monitor standards development as issued by the IASB and the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.

The following IFRS standards are considered most relevant to the Company's conversion process:

IFRS 1 - First-time Adoption of IFRS, which generally requires that an entity apply all IFRS standards retrospectively, with specific mandatory exemptions, and a limited number of optional exemptions. A preliminary assessment of the available exemptions has been completed.

Elections made upon transition to IFRS can have a significant impact on the level of time and effort needed for the conversion to IFRS. The following optional exemptions are the most applicable to the Company:

a) Fair value as deemed cost - This exemption provides the Company with the option to elect specific fair values as the deemed cost of any qualifying item of property and equipment;

c) Business combinations - This exemption provides the Company with the option of not applying IFRS 3 Business Combinations to business combinations that took place before the date of transition; and

d) Share-based payments - This exemption provides the Company with the option of not applying IFRS 2 to equity-settled share-based payment transactions issued after November 7, 2002 and which have vested before the date of transition.

The Company has commenced a more detailed analysis of each of the specific areas identified in the high-level comparison of Canadian GAAP to IFRS.

GASFRAC does not anticipate that the transition to IFRS will require significant changes to its accounting systems. The most significant system changes relate to its fixed asset sub-system in order to separately track the components of its fixed assets.

The Company is preparing a draft template for its IFRS reporting which it expects to complete during the fourth quarter of 2010. During the fourth quarter of 2010 GASFRAC will prepare IFRS compliant quarterly financial statements for each of the first three quarters of 2010 as these comparatives will be required for 2011 reporting. In addition, during the fourth quarter of 2010 GASFRAC plans to complete; formal approvals and white-papers for accounting policies and IFRS 1 elections; preparation of required transition disclosures and schedules; January 1, 2010 IFRS opening balance sheet; and a detailed system change plan and testing.

Changes in Accounting Policies

There were no new or amended accounting policies issued for adoption in the current period.

Non-GAAP Measures

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

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



EBITDA was calculated as follows:

($000s) Three months ended Nine months ended
September 30 September 30
----------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Net income 2,585 782 2,991 628
Add back (deduct):
Interest income (29) (25) (36) (185)
Amortization 2,027 1,437 5,477 3,499
Future income tax provision 753 202 1,567 353
----------------------------------------------------------------------------
EBITDA 5,336 2,396 9,999 4,295
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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



Funds provided by operations was calculated as follows:

($000s) Three months ended Nine months ended
September 30 September 30
----------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Cash and cash equivalents
provided by (used for)
operating activities 285 (65) 2,322 (842)
Add back (deduct):
Net changes in non-cash
working capital 5,212 3,123 7,980 6,094
----------------------------------------------------------------------------
Funds provided by operations 5,497 3,058 10,302 5,252
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Outlook

The improvement in the global economy in the first quarter of 2010 resulted in increased capital budgets for Canadian oil and natural gas production companies. Although there has been some weakening of commodity price expectations the demand for fracturing services remains strong due to the service intensity of the wells being drilled. As natural gas prices continue to be soft we have observed customers targeting more of their capital budgets in oil and liquids-rich reservoirs. Further, development activity is focused on deep, unconventional and horizontal wells often requiring multi-stage fracturing.

We expect that overall demand for fracturing services, particularly in the areas noted above, will continue to be strong for the remainder of 2010 and into 2011. This combined with growing knowledge and acceptance of the Company's LPG fracturing technology should support continued growth of our Canadian revenue base as equipment is added throughout the remainder of 2010.

As in Canada, more drilling activity in the USA is being focused on oil and liquids rich gas. While industry dynamics are similar to Canada for GASFRAC, the key element of our initial growth in the USA will be obtaining customer acceptance of our LPG fracturing technology and on focusing on key basins where we can quickly reach sufficient mass to ensure high utilization rates. We are planning for deployment of two sets of equipment to USA locations early in 2011 and are optimistic that expected utilization rates will be achieved in the first quarter.

Forward-Looking Statements

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

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

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

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

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

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

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

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

- expectations as to the supply of raw materials;

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

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

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

- expectations with respect to the implementation phase of GASFRAC's project plan for transition to IFRS.

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

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



GASFRAC ENERGY SERVICES INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2010

GASFRAC ENERGY SERVICES INC.

Consolidated Balance Sheet
(000s, unaudited)
As at: Sep 30, 2010 Dec 31, 2009
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 47,040 $ 11,643
Accounts receivable 18,975 9,469
Inventory 5,295 5,499
Prepaid expenses 1,098 519
----------------------------------------------------------------------------
72,408 27,130

LONG TERM DEPOSITS 3,060 1,790
PROPERTY AND EQUIPMENT (Note 2) 105,270 61,295
OTHER ASSETS 454 358
FUTURE INCOME TAX (Note 4) 210 775
----------------------------------------------------------------------------
$ 181,402 $ 91,348
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 30,403 $ 7,617
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SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 5) 145,641 81,293
CONTRIBUTED SURPLUS (Note 6) 1,737 1,808
RETAINED EARNINGS 3,621 630
----------------------------------------------------------------------------
150,999 83,731
----------------------------------------------------------------------------
$ 181,402 $ 91,348
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See accompanying notes


On behalf of the Board: Dwight Loree, Director

Gerald Roe, Director


GASFRAC ENERGY SERVICES INC.

Consolidated Statement of Operations, Comprehensive Income and Retained
Earnings
(000s, unaudited)
Three Months Ended Nine Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
2010 2009 2010 2009
----------------------------------------------------------------------------

REVENUE $ 26,590 $ 9,662 $ 55,819 $ 23,283
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EXPENDITURES
Operating 18,078 4,712 40,513 14,708
Selling, general and administrative 3,089 2,488 7,255 5,381
Amortization 2,027 1,437 5,477 3,499
Foreign exchange loss 87 66 82 120
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23,281 8,703 53,326 23,708
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OTHER INCOME
Business interruption claim - - 2,030 638
Scientific research and
experimental development - - - 583
Interest income 29 25 36 185
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29 25 2,066 1,406
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NET INCOME BEFORE INCOME TAXES 3,338 984 4,558 981

FUTURE INCOME TAXES EXPENSE (Note 4) 753 202 1,567 353
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NET INCOME/COMPREHENSIVE INCOME 2,585 782 2,991 628

RETAINED EARNINGS
BALANCE, BEGINNING OF THE PERIOD 1,036 2,686 630 2,840
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BALANCE, END OF THE PERIOD $ 3,621 $ 3,468 $ 3,621 $ 3,468
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Income per share
Basic $ 0.06 $ 0.02 $ 0.08 $ 0.02
----------------------------------------------------------------------------
Diluted $ 0.05 $ 0.02 $ 0.06 $ 0.02
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See accompanying notes


GASFRAC ENERGY SERVICES INC.
Consolidated Statement of Cash Flows
(000s, Unaudited)

Three Months Ended Nine Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
2010 2009 2010 2009
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CASH AND CASH EQUIVALENTS PROVIDED
BY (USED FOR):
OPERATING ACTIVITIES
Net Income/Comprehensive Income $ 2,585 $ 782 $ 2,991 $ 628
Items not effecting cash:
Amortization 2,027 1,437 5,477 3,499
Future income taxes expense 753 202 1,567 353
Stock based compensation 132 637 267 772
----------------------------------------------------------------------------
5,497 3,058 10,302 5,252
Net change in funds provided by
operations (5,212) (3,123) (7,980) (6,094)
----------------------------------------------------------------------------
285 (65) 2,322 (842)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Issuance of common shares (net of
share issue costs) 61,901 - 63,009 -
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Decrease in short term investments - 9,999 - 20,039
(increase) decrease in long term
deposits (3,006) 1 (1,270) 14
Purchase of property and equipment (35,838) (6,596) (49,351) (21,990)
Purchase of other assets (33) (62) (197) (131)
Net changes in non-cash working
capital 22,579 (1,028) 20,885 (1,441)
----------------------------------------------------------------------------
(16,298) 2,314 (29,933) (3,509)
----------------------------------------------------------------------------

Increase (decrease) in cash and
cash equivalents
For the period 45,888 2,249 35,397 (4,351)
Cash and cash equivalents at
beginning of period 1,152 11,353 11,643 17,953
----------------------------------------------------------------------------
BALANCE, END OF THE PERIOD $ 47,040 $13,602 $ 47,040 $ 13,602
----------------------------------------------------------------------------
See accompanying notes


GASFRAC ENERGY SERVICES INC.
Notes to the Consolidated Financial Statements
September 30, 2010
(Figures in text and tables are in 000s except share data and certain other
exceptions as indicated)


1. BASIS OF PRESENTATION

The Company's interim financial statements do not conform in all respects to the requirements of Canadian generally accepted accounting principles ("GAAP"). The Company's interim financial statements should be read in conjunction with the most recent annual financial statements. The Company's interim financial statements follow the same accounting policies and methods of their application as of the most recent annual financial statements, except where any change has been noted in the interim financial statements.

The Company's financial results are directly affected by the seasonal nature of the North American oil and natural gas industry. The first and fourth quarter incorporates the winter drilling season when a disproportionate amount of the activity takes place in western Canada. During the second quarter, commonly referred to as "spring breakup", soft ground conditions typically curtail oilfield activity in all of the Company's Canadian operating areas. In addition, during excessively rainy periods in any of the Company's operating areas, equipment moves may be delayed, thereby adversely effecting revenues.

On August 6, 2010, the Company amalgamated with Kierland Capital Corporation ("Kierland"). The amalgamation was accounted for as a reverse takeover of Kierland, an entity that did not constitute a business by the Company. Pursuant to the terms of the transaction: (i) all of the issued and outstanding common shares of Kierland were exchanged for 156,250 common shares of Amalco; and (ii) each of the 46,585,833 issued and outstanding GASFRAC shares were exchanged for one Amalco share. Upon completion of the transaction, the continuing entity changed its name to GASFRAC Energy Services Inc.



2. PROPERTY AND EQUIPMENT TABLE

September December 31,
Accumulated 30, 2010 Net 2009 Net
Cost Amortization Book Value Book Value
----------------------------------------------------------------------------
Equipment 78,151 12,383 65,768 52,018
Furniture &
Fixtures 74 31 43 38
Leasehold
Improvements 55 10 45 45
Assets Under
Construction 39,414 - 39,414 9,194
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$ 117,694 $ 12,424 $ 105,270 $ 61,295
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As at September 30, 2010 and December 31, 2009, assets under construction are not subject to amortization as the assets are not yet available for use.

3. LONG-TERM DEBT

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

4. FUTURE INCOME TAX

The net income tax provision differs from that expected by applying the combined federal and provincial income tax rate of 28.65% (2009 - 29.85%) to income taxes for the following reasons:



Three months ended Sept 30, 2010 2009
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Expected combined federal and provincial income tax $ 957 $ 293
Statutory and other rate differences 36 (9)
Non-deductible expenses 29 12
Future income tax rate reduction (115) (15)
Valuation allowance (136) -
Other (18) (79)
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$ 753 $ 202
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Nine months ended Sept 30, 2010 2009
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Expected combined federal and provincial income tax $ 1,306 $ 292
Statutory and other rate differences 44 34
Non-deductible expenses 164 18
Future income tax rate reduction 10 (15)
Valuation allowance 57 -
Other (14) 24
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$ 1,567 $ 353
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5. SHARE CAPITAL

Authorized

Unlimited number of common shares.

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



Issued common shares
Shares (#) Amount
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Balance - December 31, 2009 32,650,000 $ 81,293
Issued on private placement 13,000,000 61,562
Issued on exercise of options 433,333 716
Issued on share exchange (Note 1) 156,250 453
Issued upon exercise of warrants 702,500 1,802
Issued for services 30,000 128
Reclassified as contributed surplus (130,000) (552)
Released from restricted shares 54,000 232
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Balance - September 30, 2010 46,896,083 145,641
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On June 30, 2010 GASFRAC closed a private placement of 13,000,000 subscription receipts by the Company at a price of $5.00 per receipt for gross proceeds of $65 million (net cash proceeds of $60.6 million after broker fees and transaction costs and deferred tax recovery of $1.0 million) subject to completion of the amalgamation with Kierland. Each subscription receipt was exchanged, for no additional consideration, into one share of the Company.

Restricted shares

The Company has granted restricted shares for certain employees with an annual vesting period over five years from the date of the grant. During the period, the Company granted 100,000 restricted shares. The fair value of the restricted shares is $500 based on the per share price of $5.00 placed on the Company's shares on the grant date.

For the three month period ended September 30, 2010, restricted stock compensation of $62 was recognized.

Stock options

A summary of the status of the Company's outstanding stock options as of September 30, 2010 is presented below:



Weighted
Average
Exercise Price
Options (#) ($)
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Balance - December 31, 2009 2,966,000 $ 2.89
Granted 645,000 4.45
Exercised (433,333) 1.65
Forfeited (246,167) 3.14
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Balance - September 30, 2010 2,931,500 $ 3.39
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During the three month period ended September 30, 2010, the Company granted 225,000 options to employees at an average exercise price of $4.96. The 2,931,500 options outstanding at September 30, 2010 had exercise prices ranging from $2.00 to $5.00 per share with expiry dates ranging from 2012 to 2015.



Warrants issued and outstanding
Weighted
Average
Exercise
Warrants (#) Price ($)
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Balance - December 31, 2009 2,602,500 $ 1.32
Exercised 702,500 1.63
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Balance - September 30, 2010 1,900,000 $ 1.21
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As part of an employment agreement with the founding officer of the Company, 1,500,000 share purchase warrants were issued effective May 10, 2006, entitling the founding officer to purchase common shares of the Company at $1.00 per share, vesting based on performance conditions and expiring on August 12, 2012. As at August 12, 2010 all of the purchase warrants were vested.

In 2007, as part of the terms of a financing agreement, the Company issued 840,000 brokers warrants, entitling the holders to purchase common shares of the Company at $2.00 per share. The warrants will expire on May 22, 2011. During the quarter, 440,000 broker warrants were exercised at a weighted average exercise price of $2.00 per unit.



6. CONTRIBUTED SURPLUS

Amount
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Balance - December 31, 2009 $ 1,808
Stock options expensed 124
Warrants expensed 49
Exercise of stock options (73)
Exercise of warrants (586)
Restricted stock 415
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Balance - September 30, 2010 $ 1,737
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7. COMMITMENTS

Capital Commitments

The Company has entered into various agreements to purchase additional property and equipment. The total cost under these agreements is approximately $50.3 million.

Purchasing Commitments

The Company has entered into an agreement to purchase proppant over the next twenty seven months. The total cost under this agreement is approximately $99 million.

8. CAPITAL STRUCTURE

The Company's capital structure is currently comprised of shareholders' equity. The company also has a $15 million operating demand revolving loan facility at a variable interest rate set at prime plus 1.25%. The amount drawn under this loan is not to exceed 75% of the accounts receivable less priority claims. The company's capital structure also consists of a $35 million committed revolving facility at rates ranging from prime plus 1.4% to prime plus 1.9% with standby fees ranging from 0.25% to 0.75%. As at September 30, 2010, the Company is in compliance with all the covenants related with this facility. The Company's objectives in managing capital are (i) to maintain flexibility so as to maintain the Company's ability to meet its financial obligations, and (ii) to finance growth.

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.

9. RELATED PARTY TRANSACTIONS

During the period ended September 30, 2010, the Company paid $6 (September 30, 2009 - $135) in consulting fees to a Director. These transactions were in the normal course of operations and have been measured at the exchange amounts.

The Company will host a conference call on Wednesday, November 10, 2010 at 10:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the third quarter of 2010.

To participate in the Q&A session, please call the conference call operator at 1-800-769-8320 (North America) or 1-416-695-6616 (outside North America) 15 minutes prior to the call's start time and ask for "GASFRAC Third Quarter Results Conference Call".

A replay of the call will be available until November 17, 2010 by dialing 1-800-408-3053 (North America) or 1-416-695-5800 (outside North America). Playback passcode: 5541483.

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.

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

Contact Information

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