“U.S. Oil Reserves Just Doubled … The Future of Fracking”

By Travis Johnson, Stock Gumshoe, December 22, 2010

This is the latest teaser ad from Brian Hicks for his $20 Trillion Report, which teases us about a new idea in fracking technology that will release more oil and gas with lower environmental costs … all you have to do to learn about his favorite small cap oil stock is to subscribe to his report for $99 … or, if you prefer, just read on and I’ll dig through the clues and tell you who this little company mus be.

This is one of those irritating video ads, one that doesn’t even spit back a lovely transcript when you try to click out of it as some do — so my quoting will be limited, but I’ll share the gist of the tease.

Hicks says this is …

“Used at 236 drill sites and counting…

“One company holds the key to 1.525 trillion barrels of oil and 900% profits for early investors!”

The technology is reportedly “quickly taking over drilling sites all over the US and Canada.”

And they tell us that some of the biggest drillers in the world use this company’s technology, they give us a list, most of whom I’ve heard of:

“Apache
Corridor Resources
Devon
Caltex
Husky Energy
Murphy Oil
Nexen
Paramount Resources
Trilogy”

We’re also told that this particular stock just went public in August, and it’s already up 67%. They’re already capturing market share and he says they’re not “pie in the sky”

We get some numbers, too — and unlike so many small cap teases, they’re actually profitable. They had revenue of $26 million in the last quarter ($55.7 million , versus $9.6 million a year ago. Market cap of $247 million.

As you can imagine, Hicks is convinced that the company is undervalued and unknown (why else would you pay him to learn about them), and has generated zero Wall Street interest.

Hicks has been around for quite a while and teased many stocks for us — he takes credit for being an early analyst to recommend Northern Oil & Gas (NOG), which had a huge run with the growth of the Bakken (I don’t know if he was first, but I can confirm that he was teasing it in ads almost three years ago when it was in the single digits, it’s closing in on $30 now). He compares the two in terms of valuation, which is obviously a bit off because NOG is an oil company and this is a drilling/service company, but apparently this teaser stock trades for far lower PE and Price/Sales numbers than NOG.

There’s even a quote from the CEO, which I can only assume was inserted to make your friendly neighborhood Stock Gumshoe’s sleuthifying a bit easier — here’s what he reportedly said about the last quarter:

“I am very pleased with these results, which demonstrate the increasing adoption of our technology…”

And

“we … more than doubled EBITDA to $5.3 million from $2.4 million in the third quarter of 2009”

So who is this little company? First a couple more details:

He tells us what the technology is — he calls it “Petro-frack Technology” and says that it “uses petroleum to produce more petroleum.”

This is a new technology that apparently enables the fracking “stuff” to be recovered much more fully than older technologies, and which is supposedly much friendlier to the environment than hydraulic fracturing. He includes the video, now gone viral, of the man whose water supply became flammable because of, I presume, the fracking going on in the Marcellus Shale (I haven’t researched the video details, but I’ve seen it a number of times). Having the water flowing into your sink catch on fire is an image that sticks with you, for sure.

So the argument is that although hydro fracking has given us a dramatic increase in natural gas reserves and helped to drive the price down over the last couple years, it is also facing some environmental pushback and it uses a lot of water and folks everywhere are now asking about what kind of chemicals are in the fracking fluid being used to release the natural gas trapped a half mile beneath their towns. And this new petro-fracking technology is, apparently, better because the stuff that’s injected into the hole to fracture the shale formation and release the gas, is also recovered when the gas is extracted. Now, the hydro-fracking complaints I’ve seen are mostly about shale gas, whereas this ad teases shale oil (like what’s being produced in the Bakken), but the technology is similar — and with prices so low, no one is writing a winning teaser about doubling gas reserves. Doubling oil reserves, however, is still sexy enough to get the subscription dollars flowing — and they do go into the gas part of the fracking business in the meat of the teaser video, once they’ve got our attention.

Petro frack technology apparently covers a much larger area underground as well, which helps — and we’re told that the best part is that it holds open the fractured area for longer to drill more efficiently, and uses a petroleum-based liquid that mixes with the gas or oil and is recovered.

So finally can we get at the name? Who is this company that’s at the center of a “new oil profit storm” and which he thinks will bring us 300% gains in the short term, and up to 900% in the long term?

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Seven bucks a share, 11 major clients … Toss all that info into the mighty, mighty Thinkolator, along with a couple tankers full of fracking fluid to dislodge the frozen synapses, and we learn that this must be:

GasFrac Energy Services (GFS in Canada, GSFVF on the pink sheets)

This is an oil service company that has indeed invented and produced the equipment for “fracking” that uses a petroleum product as a base instead of water — they add chemicals to Liquefied Propane Gas (LPG) and inject that into the well, which apparently covers a larger area, means no water is needed, does less geological damage, and has smaller environmental impact because the LPG is naturally present in these formations anyway, and mixes with the oil, gas or natural gas liquids and is extracted when they’re pumped out of the well.

I had never heard of the company before, but from their investor relations presentations it seems like a no brainer (that being, of course, the point of an investor relations presentation). The shares aren’t at $7 anymore, thanks in part, I’m sure, to Mr. Hicks — but they’re not that far away, just under $9 at the moment — and the market cap has climbed a bit due both to price improvement and another big equity financing at the end of November (they raised almost $100 million more for their capital program at $8.45/share), it’s now a bit over $400 million. The company went public on the Canadian Venture exchange at $5 in August, after which it remained pretty ignored until their news flow and revenue growth started to get attention back in October. They also had a private placement this summer in part to fund their capital investment program, which is bringing more equipment on line so they can market their services in new oil and gas fields and to more clients, it sounds like they were pretty maxed out with existing equipment even though this is an extremely new technology and small company (the company is only five years old, and they commissioned their first set of equipment just three years ago).

Things do look pretty good for GasFrac as far as I can tell, assuming that they are able to drive wide acceptance for their new technology (which may not be easy, even if it logically sounds better — you can see their last quarterly report, which does match the teaser clues precisely, right here. I have no idea what the difference in cost might be, change comes slow for many industries, and I imagine there are also lots of other folks coming up with and developing new fracking technologies to compete with hydro-fracking and with this newer petro-fracking). But that’s not to say their dramatic success is guaranteed — they are still largely reliant on the natural gas industry, and a big test with a US client for a natural gas field recently apparently went well, but with natural gas prices so low the client decided not to go forward with it for economic reasons. They’re trying to build up the business in natural gas liquids (which are in higher demand than gas) and in oil production so that the mix becomes roughly evenly divided between natural gas, natural gas liquids, and oil, but as of earlier this year they were still about half natural gas (which was an improvement over previous years).

I’ve only quickly checked out their (dated) investor presentation [pdf file]and their recent press releases to get a basic understanding, but it sounds like the keys for the company will probably be the continued level of deep and unconventional fracking demand in Canada, where they already have an established presence and some customer acceptance, and the driving of acceptance by US operators next year, which I assume will start by trying to target a couple specific fields so they can bring in equipment that doesn’t have to move around that much. They have been profitable in most of the past several quarters, but not overwhelmingly so — they’re still building up economies of scale, and have significant need to spend money on capital investment, geographic expansion, and client acquisition.

If you’re curious about the underlying technology and idea, they also have a pretty good section of their website that explains it — and yes, also matches the images and data from the teaser quite perfectly.

So … color me curious, though I have no idea how quickly their actual per-share profitability will ramp up — the business is seasonal and changing fast with the rapid growth from new equipment and a big jump from what were pretty weak numbers in 2009, and there has also been a lot of dilution this year to fund capital investment, so the per-share numbers might not look dramatic in terms of income for at least a little while, even as overall net income and EBITDA seem likely to continue growing if you believe management’s optimistic prognosis for the future. You can’t really peg a useful current PE on these shares right now, we can conclude that they’re profitable and in a capital-intensive growth phase, and not yet ready to be valued based on per-share earnings (the trailing PE would be at least 150). Your bet on GasFrac is essentially a bet that unconventional oil and gas drilling will continue to grow in the US and Canada (meaning, oil and gas prices don’t collapse), that GasFrac’s proprietary technology will continue to gain acceptance and drive higher revenue, and that management will steer this growth well over the next year or two — line that up with heavy fixed and equipment costs, and one can probably see a path to higher profit margins and meaningful per-share profitability in the future.

Does that sound likely? Sound like a technology you want to jump on, or do you think there’s a problem that I (and GasFrac and Hicks) haven’t mentioned? If you get a chance to dig into GasFrac a bit on your own, let us know what you think with a comment below.

Oh, and if you’ve ever subscribed to the $20 Trillion Report, please click here to let us know what you thought — we’ve received only two reviews on this one, and both are quite dated at this point. Thanks!

P.S. Stock Gumshoe HQ will be closing down for the holidays quite soon, and we may or may not be able to finish any more new teaser-iffic stories for you between now and the new year … in case I don’t catch you, have a wonderful Christmas if that’s your holiday of choice, and best wishes for 2011!

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