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
----------------------------------------------------------------------------
(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
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 30,403 $ 7,617
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
23,281 8,703 53,326 23,708
----------------------------------------------------------------------------
OTHER INCOME
Business interruption claim - - 2,030 638
Scientific research and
experimental development - - - 583
Interest income 29 25 36 185
----------------------------------------------------------------------------
29 25 2,066 1,406
----------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 3,338 984 4,558 981
FUTURE INCOME TAXES EXPENSE (Note 4) 753 202 1,567 353
----------------------------------------------------------------------------
NET INCOME/COMPREHENSIVE INCOME 2,585 782 2,991 628
RETAINED EARNINGS
BALANCE, BEGINNING OF THE PERIOD 1,036 2,686 630 2,840
----------------------------------------------------------------------------
BALANCE, END OF THE PERIOD $ 3,621 $ 3,468 $ 3,621 $ 3,468
----------------------------------------------------------------------------
Income per share
Basic $ 0.06 $ 0.02 $ 0.08 $ 0.02
----------------------------------------------------------------------------
Diluted $ 0.05 $ 0.02 $ 0.06 $ 0.02
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
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
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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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 $62 was recognized.
Stock options
A summary of the status of the Company's outstanding stock options as of
September 30, 2010 is presented below:
Weighted
Average
Exercise Price
Options (#) ($)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 $5.00 per share with expiry dates ranging from 2012 to 2015.
Warrants issued and outstanding
Weighted
Average
Exercise
Warrants (#) Price ($)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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.
Gasfrac Energy Services (TSXV:GFS)
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