Opening a Small GasFrac Position

Today I picked up a few shares in the propane-fracking business GasFrac Energy Services (GFS in Canada, GSFVF on the pink sheets) — this is a company that has been pretty aggressively teased in the last 6-8 months as the “future of fracking” leader, they essentially use gel propane instead of a water/chemical cocktail to fracture shale formations and release natural gas.

I still have some general concerns about GasFrac’s business — the stock went on a bit of a run after those teasers earlier in the year but is depressed at the moment, in large part because they missed earnings last quarter, but that’s not my concern … the miss was due largely to a huge cut in revenue because they took their equipment offline to upgrade it following a nasty explosion/fire, which, as you might imagine, is a big deal for a company that counts on trucks that are injecting high-pressure propane into wells. Their big capital investment in an expanded fleet should bring a very strong back-end revenue boost later this year as that fleet is put to work, especially now that most of their safety upgrades seem to be complete.

No, my concern is about the big picture — whether or not this expensive system will take off (fracking using this method is considerably more expensive than fracking with water). The preliminary indications are very good in terms of environmental impact (not polluting the water table or generating massive amounts of toxic water, since they don’t use water and the fracking substance can be extracted along with the natural gas), but I think most of the companies using their system right now would still say that it’s in the evaluation and experimental phase, I don’t expect this to become a “new standard” for fracking. Given that, and the “wait and see” attitude that investors are taking given their fleet expansion and safety upgrades, makes me feel safer starting with a small position here and following the company for a while to see how things develop — if I learn more that makes me confident in GasFrac over the long term, I’ll probably build on this holding.

As with Canyon Services Group, which I bought last week, this is a bet largely on a company that looks quite cheap based on forward earnings, and is in a fast-growing business with significant organic, company-specific ...

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