This article was originally published on May 25 as a Friday File for the Irregulars. It has NOT been updated or revised, and the original reader comments on the article are also included below.
Today we’ve got a couple things to share with you — first, a look at stock that Keith Kohl’s Energy Investor is calling a “Cleanfrack” play and that trades under five dollars; and second, as a bonus, a quick “reveal” of a tiny gold stock that’s being teased by Bryan Tycango over at Asian Growth Stocks.
Keith Kohl’s, it turns out, is a stock we’ve seen mentioned before a few times, and I actually owned it for a while before taking a tax loss last year (how’s that for a teaser?) — but things are changing there, so I thought it was worth a quick look.
For the full teaser-revealing experience, though, I’ll share a few of the current clues with you from Kohl:
“A $5 ‘Cleanfrack’ Stock to Buy Immediately
“Winner of the 2011 World Shale Gas Award for Technological Innovator, this $5/share company’s revolutionary drilling technique is producing so much oil and gas, its revenues went from $30 million in 2009 to over $160 million last year!”
Sounds compelling right off the bat, no? The reaction to hydrofracking and the potential damage it might do to groundwater — and, at the very least, the truly massive amount of water it requires — means a whole industry has sprung up to help solve those problems or mitigate any damage … and where new businesses crop up to build new businesses, newsletters won’t be far behind. The stocks we’ve seen teased or recommended in recent years for this little sector include Heckmann (HEK), Ecosphere (ESPH) and Poseidon (PSN in Toronto, POOSF on the pinks).
But those are all stocks that somehow handle or clean water — that’s not what Kohl is teasing today:
“this fracking company, still trading for less than $5-per-share, has a drilling technology so superior to current methods, it produces up to 80% more oil and gas than a conventionally-fracked well.
“It’s also why this tiny company’s annual revenue has taken off like a Roman candle… going from $30 million in 2009 to over $160 million last year — a gain of 433%.
“It produces so much more oil and gas from wells that some of North America’s major oil and gas companies have already partnered up with it to use their technology….
“But that’s only part of the story…
“The Cleanest, Safest Technology
“You see, this company’s fracking technology is safe.
“It doesn’t use water or nasty chemicals to fracture the shale to get the oil and gas out of the well.
“In fact, it uses natural fluids already found in the well itself.
“I like to say it’s ‘Mother Nature’s Drill Rig.’
- There’s no danger of contaminating drinking water…
- It saves millions of gallons of water per well…
- It reduces truck traffic and CO2 emissions (a typical frack well requires 70 tractor-trailer deliveries to the well site)…
- It reduces — and in some cases eliminates — damage to the well formation…
- Nearly 100% of the natural fluid that’s pumped into the well gets pumped out and recycled to be used in the next well…
“And check this out…
“It’s so safe, it’ll be used in New York!
“That’s right! New York has had a moratorium on fracking since August 2010.
“But this company’s fracking technology is so superior and safe — and uses no water or chemicals to do the fracking — that gas-rich Tioga County in New York has agreed to test it out on its 135,000 acres of Marcellus land.”
So that’s the basic spiel — and if you’ve been around these parts for a while you probably recognize that Keith Kohl is teasing … Gasfrac (GFS on Toronto, GSFVF on the pink sheets).
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Gasfrac is a fracking service provider that does something entirely different — instead of pumping water and proppants into the well, they pump in a gelled formulation of Liquefied Petroleum Gas (LPG — what you and I call propane) to fracture the shale formation, keep it open, and let the gas and oil escape up the drill shaft. Gasfrac’s contention is that the gelled propane can fracture a larger area, and that it keeps the formation open for longer, so the well can produce substantially more gas or oil.
Here’s Kohl’s description of that part, which basically jibes with the company’s statements:
“The Key to ‘Cleanfrack’s’ Success
“Cleanfracking increases the production area of traditional hydraulic fracturing by 50% to 80%.
“I don’t have to tell you that this increase in production is the key to cleanfrack’s success…
“How is this possible?
“Well, cleanfrack is brilliant in its simplicity.
“Instead of water, cleanfrack uses petroleum-based fluid to extract the oil and natural gas from the shale.
“And because the fracking fluid is just another petroleum product (not water or other chemicals) it’s 100% recoverable when it mixes with the oil and gas… no need for a costly separation of water and sand, which is required for typical fracking.
“The petroleum-based fluid that’s used in cleanfrack is a natural byproduct of oil drilling.
“And it’s able to hold the shale formations open longer than water and sand, which reduces potential formation collapse.”
So what’s going on with Gasfrac? Why, with this technology that seems so obviously compelling for several reasons, has the stock suffered so much? The shares are now in the $4 neighborhood, with a market cap of about $250 million, a far cry from when the shares were touted by this same newsletter at about $8-9 late in 2010 (though it had a different name then, it was called The $20 Trillion Report and edited by Brian Hicks before they brought in Keith Kohl last year), and the same stock has also been teased by Keith Schaefer for his Oil and Gas Investments Bulletin (at around $10.50 in early 2011) and, more recently, by Sean Broderick just about four months ago when it was in the neighborhood of $7.
The technology sounds brilliant, the idea lends itself to storytelling and has been touted with some compelling spiels (“The Google of Natural Gas!” and “the Biggest Oil and Gas Advancement of the Last 151 Years”), but the stock has been unable to get out of it’s own way, it surged in its first six months or so as a public company, when it was all about the story and they were just building up capacity, but since then it’s been a pretty steady ride down — and now the shares are even below where they were when they went public at five bucks in the Summer of 2010.
What happened? Well, there are a few things that hurt the shares — they had an accident early in 2011 that led to several weeks of downtime and a revamping of their safety procedures; management expanded very aggressively and probably overpromised during that first year or so as they built up capacity on predicted demand without actually getting orders; they were shut in from operations in the first half of 2011 because of the unusually long Spring melt/breakup last year (that hit a lot of other companies, too); and, after a year of overpromise/underdeliver, they changed management last Fall, bringing in some executives from Halliburton.
The reality now is that the company, though they’re still growing revenues year over year, has come in with worse-than-expected results in each of the last two quarters under the new management team … which, after more than a year of disappointments, has left investors unwilling to give them much of the benefit of the doubt. You can see their announcement of the disappointing fourth quarter 2011 numbers here, then the preannouncement of the weak first quarter and the official confirmation of same.
Still, if you look at Gasfrac now, and forget about the fact that they were trading at $14 a little over a year ago and about the big promises that were in the air two years ago, there’s actually a lot to like going forward. They did a convertible bond fundraising for about $35 million earlier in the year and they appear to have plenty of capital available for their equipment expansion program (a program that was arguably a bit too aggressive, given the slowness with which change comes to the energy business), and they are continuing their focus on expansion to the US and trying to build on the test projects and established contracts with their first few customers.
They reportedly believe that the full fleet of fracking equipment that should be on hand by this Summer (10 “sets” for LPG fracking) should, with full utilization, enable them to reach $600 million in annual revenues … which would be roughly a quadrupling of the current revenue run rate. So it seems safe to say that new management’s biggest decision, and arguably their wisest one, was to stop capital expenditures until they start utilizing all of the capacity they now have.
What does that mean? Well, it means we’re back to finding out if oil and gas companies really like Gasfrac’s performance enough to pay the extra up-front expense of LPG fracturing. Their biggest deal so far has been with Husky Energy, and they recently announced a two-year contract with Blackbrush to continue working with them — Blackbrush was one of the first US companies to try Gasfrac last year, so it’s promising that they found it effective for their particular formation and have signed on for a longer-term deal (though I don’t know what the terms are). They are also working with a half dozen other companies in many of the major shale formations in the US, though part of the reason for weak quarters has been that some of those companies who’ve tested their gelled propane fracking process are taking a long time to assess the performance (and though they didn’t say as much, I suspect that cratering natural gas prices have also caused the companies who are drilling for shale gas to be slow and careful about all their decisions — I don’t know what the percentage is for their current work in gas vs. oil formations).
You can see the Gasfrac presentation from March here — it’s for investors, so it’s obviously intended to delight you and show off the most successful work they’ve done, but it does do a pretty good job of explaining the basic technology and the effectiveness, which does really sound impressive. I don’t have a handle on how much a Gasfrac job costs compared to a conventional hydraulic fracturing project, but they clearly can be much more effective, at least in some kinds of formations, and they do have that special bonus that they don’t require water or generate wastewater.
Right now, with the shares down around $4, Gasfrac is beaten down and trading at almost exactly book value, with limited debt (just that $30+ million convertible debt that they issued earlier this year) and growing revenues. The growth has disappointed, but they do have a couple substantial contracts and still several test projects that could turn into long-term contracts, and if they get their utilization rates up a bit they could easily become profitable this year. Analysts are predicting (once again — this is not the first time they’ve gotten optimistic about Gasfrac) that the company will generate four cents per share in profits this year and jump wildly up to better than 50 cents in earnings next year … which, if they’re correct, means that the stock is trading for about 100X this year’s earnings and 8X next year’s earnings. That forward PE of 8 is in line with lots of other smallish oil services companies, though many have PE ratios that are substantially lower (particularly if they’re exposed to natural gas in a significant way), and you can argue that Gasfras has much higher “shoot out the lights” potential given the uniqueness of their product and service … though, of course, they also had that potential two years ago and it hasn’t turned into reality yet.
I’d be inclined to think that the stock is getting to be worth a nibble again now that it has fallen so far, the downside has to be fairly limited given their capital assets and their ability to book enough test deals and generate enough interest among E&P companies that it seems their odds of signing more multi-year contracts must be improving … they’re very close — as they were last year — to turning that story into profits. Given the low valuations in the energy space, unfortunately, I’d guess that it’s possible we’ll see as much as another 30% downside potential in the stock even if they are going to approach 50 cents in earnings next year, if you want to look at the glass as half empty … and if they continue to report disappointing quarters, their few remaining fans might just give up. I am tempted to get back into these shares now as a bit of a bottom-fishing speculation (I sold at about $7 to book a tax loss last year), and I though I can’t easily buy the Gasfrac convertible debt that they issued earlier this year, if that were more widely available I might be interested (the conversion price is around $10 and it was issued at a 7% yield for five years, so I’d like to see it discounted a bit more … it last traded near par as far as I can tell).
I know a lot of Gumshoe readers have been following Gasfrac and many of you own the stock, so if you’d like to update us on your Gasfrac thinking I’m sure we’d all be delighted to hear it.
But I also promised you a bonus today, didn’t I? Well, here’s the pitch letter we saw from Bryan Tycango:
“Tiny $20 million miner bringing back to life a legendary Canadian gold mine that had one of the highest-grade gold ore bodies in North America
“The gold mine’s ore body had an average gold grade of 16.14 grams per tonne. To put that into perspective, today’s mining giants will pop champagne corks for discoveries with ore bodies averaging between 1 and 4 grams per tonne.
“This mine operated in northern Canada from 1935 to 1966, producing 1.45 million ounces of gold.
“It closed down in 1966 because with gold fixed at $35 an ounce, it was losing money. It then lay dormant for more than 40 years.
“Then in 2008, a tiny mining company found the mine’s historical drilling record, which shows that the high-grade gold veins continues below the old mine AND elsewhere in the property.
“So it bought the mining rights and immediately drilled within the old mine and around the property. As soon as they drilled below the old works …
“They started discovering gold ore 27 times richer than the grades at some of the world’s most profitable gold mines!”
Well, it’s not a $20 million miner anymore — it’s even tinier now, following the collapse in pretty much all junior mining stocks, and the market cap is now $11 million … this is PC Gold, the PC stands for Pickle Crow, the old, long-closed (and justly famous) gold mine that they’re trying to restart in Ontario. Ticker is PKL (get it, pickle?) in Toronto, and PCGLF on the pink sheets.
Interestingly enough, they actually do have a resource statement for the mine, and have found several high-concentration veins in their exploratory drilling, though the attentino-getting high-concentration segments seem pretty small (a meter or two).
PC Gold released their resource statement last Summer indicating that 1.26 million ounces of resources in the old mine area (not reserves — as I understand the terms, resources means the geologists are pretty sure the gold is there, reserves would mean that they’re sure it’s there and they know they can produce it economically). They’ve also done a lot of drilling since then, and they excitedly announce each assay result with a press release, but there doesn’t seem to have been an economic assessment done yet — they hired someone to do one last Summer and said to expect it within months, but I didn’t see an indication that it was completed. Or, at least, that they told anyone about it if it was completed.
They have an investor presentation up now that was last updated in April, so it gives a pretty good picture of their goals — mining executives are always pathologically optimistic, but they see the need to raise another $26 million or so in cash for the work they have planned over the next 18 months, which includes an early stage that they’re supposedly beginning now of permitting and planning and surface preparation and then moves on to the big stuff — dewatering the existing underground mine and doing underground drilling to solidify a resource base and book some reserves, then coming out with a pre-feasibility study (in late 2014, according to their timeline). Their goal is to book at least a million ounces of reserves and expand the on-site infrastructure and mill to build a mine that can produce 100,000 ounces of gold a year for ten years.
My goal is to fix the towel bar in the bathroom, but it’s been broken for seven months now … so we all know that goals don’t always turn into reality, but it’s a nice target to shoot for.
So with all that, the company is going to have to get some pretty big (for them) funding, they’ll have to raise three times their existing market cap over the next year and a half under this plan — that’s not necessarily a crisis, of course, and they do have some cash and some good initial investors like the Sprott folks, but given the collapse in the share price I have no idea whether those institutional backers will want to add to their holdings at these prices. When they did their last large capital raise, of about $10 million back in late 2010, it was when the stock was at 90 cents — a far cry from the current 18-cent share price.
This company is absolutely teensy, so even mentioning it in this space to our limited number of Irregulars makes me nervous (Friday saw less than $3,000 worth of these shares traded in Toronto — admittedly a far-below-average volume day, but still that’s extremely illiquid and it means ONE buy order could easily double the price, or a big sell order could cut it in half), so if you do find this one interesting please be extra careful.
It was also apparently touted by the National Inflation “Association” folks about a year ago at around 80 cents (in my perhaps too jaded experience, the NIA are mostly stock promoters, so that “endorsement” is not necessarily a good thing). You can certainly decide for yourself whether or not you want to gamble on a teensy little guy like PC Gold, but as you check out the low market cap and fallen share price do keep in mind that there are a lot of junior exploration companies that are as beaten down or more so — that probably means that there’s some opportunity in this sector unless gold really collapses, and there are plenty of similarly-sized companies (market caps well under $100 million) to choose from. I don’t particularly have the skill set or the interest in picking these little tiny geology lottery tickets (that’s why I prefer the financiers, like Sandstorm Gold (SNDXD) or Sprott Resource Lending (SILU), both of which are major holdings of mine), but I know lots of my readers do — if you’ve got an opinion on PC Gold, or have a different tiny gold explorer that you think is better, feel free to let us know.