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“The Google of Natural Gas, with a Game-Changing Innovation That Could Hand You a 157% Gain!”

Sean Brodrick's "Red-Hot Revolutionary Small Cap #1"

By Travis Johnson, Stock Gumshoe, February 27, 2012

A quick one for you today, as much to distract me from personal issues as to help sniff out an interesting investment idea for you.

The pitch is from Sean Brodrick for his Red-Hot Global Resources newsletter that’s published by Weiss, we’ve looked at some of his teaser picks before — most recently a bunch of mining-related picks — and this time around he’s talking about fracking, oil, and natural gas. Here’s an excerpt:

“This company is growing almost as fast as Google did in its early years, outpacing the leaders in an industry that’s growing like wildfire. And like Google, they are literally rewriting the way their industry works …

“Hydraulic fracturing — or “fracking” — is one of the new technologies I was talking about earlier and it allows miners to get at all the gas locked up in places like the Haynesville shale.

“But the process isn’t perfect.

“As you may already know, there’s been some backlash against fracking by environmental groups. And a good deal of this backlash is based on the massive amounts of water pollution that fracking currently creates.

“But this company has created a new kind of fracking technology — one that doesn’t result in a single drop of waste water!

“It’s a natural evolution to the process — and it’s something every miner, every well and every company need if they want to keep cashing in on the shale boom without drawing negative attention from the media.

“And this company has a lock on their new process. With ten patents issued and seven outstanding, this process can’t simply be copied or stolen away by a competitor.

“This isn’t some test-tube innovation, either — this company is already profitable in its first year of operation!

“They’re deploying their new fracking process in Canada and abroad.”

And Brodrick says that we’ve got a bit of a catalyst possible this year, too — always nice to see:

“And with Chevron already at the table, this company is planning to ink their first big deals in the United States this year … which is when I think their stock will start to soar.

“Heck, I figure an American fracking deal would more than double their potential revenues this year!

“So you can see why this company represents one of the greatest opportunities in natural gas today.

“I think its stock could rise 157% from current levels!”

So … who is it? Well, that’s not exactly an avalanche of clues but we take the number of patents, the water-free process, Chevron, new deals, throw that into the mighty, mighty, Thinkolator and find that this is … GasFrac (GFS in Toronto, GSFVF on the pink sheets)

GasFrac is not teensy, but it is certainly very small compared to the big oil services firms, with a market cap of just about $500 million. They are a fracking company, but with their own patents and their licensed patents for the basic process from Chevron they pretty much own the LPG fracking business (or fracing, or fraccing, or whatever you want to call it).

So what is LPG fracing? It’s basically using gelled propane (LPG) to fracture oil and gas formations instead of using water — the propane gets further into the reservoirs, fractures more of the formation, and reportedly gets much better production results than conventional hydrofracking, and without using any water.

So that’s the basic argument — it produces more energy, and it doesn’t use water or create wastewater. On the flip side, it means you’re trucking and using a lot of gelled propane, which is extremely flammable and has substantially higher up-front costs (they’ve had one bad fire accident that caused them to rethink their procedures and slowed down their development).

I’ve owned GasFrac in the past, but took taxable losses on my shares and don’t currently own the stock — this is one of those “story” stocks that has a great story, but is still new enough, even with more than 1,000 treatments under their belt, that lots of little things can derail them and it’s very hard to judge how their costs will change and how big orders or big accidents or regulatory changes (or other technological innovations) will impact their future business (to say nothing of low natural gas prices cutting into demand for projects that have high up-front costs — as far as I know GasFrac’s procedure makes sense mostly for natural gas production, in part because of their ability to recover the propane during gas production). They’ve had accidents and relatively small setbacks, they’ve had big orders (like the recent one from Husky Energy to do a lot of work in Alberta), but to me it’s still a company with a great logic behind their business but with plenty of challenges ahead.

There has been a lot of coverage of GasFrac in this space in the past, and there are a few folks who very actively follow them at SeekingAlpha, in addition to the several newsletters who’ve recommended the company in the past, so there’s plenty for you to read as you make your choices — I haven’t looked very closely at their recent deals or news, so if you’re a GasFrac shareholder or enthusiast and think they’re on the verge of a breakout, or think it’s a fad that will never get big, feel free to share your opinion with a comment below.

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pmredmonton
pmredmonton
March 24, 2012 3:54 pm

This is also a stock I own. It has been a bumpy ride this week with disappointing earnings due to underutilization of capacity due to 3rd party issues for a job they were doing for Huskey.

In the past month they signed a licencing agreement with Blackbush in the US. They also signed a MOU with eCORP in the EU to start doing some fracs in Europe.

Although revenue and earnings were disappointing this was mostly due to them showcasing the technology and some 3rd party issues that decreased utilization. Later this year they will have 10 sets going and expect an increased utilization rate of about 45%. When you combine the increased utilization with increased day rates they are extracting from companies and their recent expansion into the US and the plan for listing in the US in 2013 this stock could easily be a triple in one year’s time.

The other interesting tidbits from their most recent presentation was evidence of much improved flow rates from gasfracs compared to hydrofracs (about 50% more). They also have shown they may be able to extract 20-30% more oil from a well than with a hydraulic frac due to longer effective frac lengths. They can do this all with less water, no need for trucking of water, no water disposal, no hydraulic frac fluids, less need for pressure, equivalent safety record (costs same for insurance as hydraulic fracs) and the LPG can be recovered from the reserves extracted so it does not go to waste. This ability to recycle was always there for large players with their own refinineries but Gasfrac has almost finished a process to recycle solution for smaller players that don’t have access to this technology which will also lower their costs.

Earlier there was some confusion of the role of CVX and HAL in this company. HAL has nothing to do with this company but the current CEO is a former HAL executive. CVX has the patent on LPG and they have give Gasfrac the exclusive rights to use in in Canada and possibly the US. Gasfrac has applied for the patents related to LPG fracking and have developed the whole system and all the equipment needed for the process. They now appear to be in the process of entering into licencing agreements with other companies for use of their technology (Blackbush and eCORP).

They are profitable and there is evidence of some exponential growth potential for earnings upcoming. The street really blasted the stock this week for missing earnings but it turned into a golden opportunity to buy the dip and the stock quickly recovered 50% of the losses. The upside is that if they blow out earnings later this year there could be a parabolic spike in the stock price.

This technology appears to be more advantageous in some fracs compared to others. It also offers a huge advantage in drought areas and in areas where hydraulic fracs are banned. They also appear to be able to access reserves in some area where hydraulic frac and oil foam fracs have already failed which would suggest a huge premium they can extract from companies that own such non-economic reserves on their books.

I think this one is a winner with a huge bump to be expected by the end of the year. I think this is a moderate risk company but with huge rewards and potential from a highly lucrative buyout from a major (? BHI, SLB or HAL). Water scarcity is a huge issue in many of the areas where these oil shales exist (Alberta, Texas, Colorado) and the expense of trucking hundreds of millions of gallons of water is not cheap.

Disclosure: I am long about 3000 shares at ACB 7.50

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