Zeke Zeringue is a man with a plan. But the new CEO of Calgary based GasFrac (GFS:TSX) says shareholders need to understand it's a long-term plan.
Zeringue took over as CEO of GasFrac in October 2011, 14 months after it went public on the Toronto Stock Exchange.
GasFrac is unique in the global fracking industry in that it uses no water, and there is now a growing database that shows its Liquid Propane Gas (LPG) technology dramatically improves the overall recovery of oil and gas out of wells.
The obvious environmental benefits, and promise of greatly improved well performance, made the stock a stellar performer in its first seven months. The share price moved up from its $5 Initial Public Offering (IPO) price to $14. The company gained coverage from many brokerage firms, national and regional.
But less than stellar sales growth throughout 2011 to back that up has now cost shareholders dearly, with the stock sitting at $5.50 after GasFrac announced its first financial guidance in Q1 2012—well below the market's expectations. Zeringue says an industrial accident in January 2011 and a perceived higher cost for LPG has hurt revenue.
The new plan, he says, is to get a critical mass of GasFrac's LPG fracking units—called "spreads" in the industry—into one or two basins in North America. And he is also educating customers—new and old—how using propane is actually very effective, over the long term.
"This is a critical part of the strategy," Zeringue said in a phone interview from Houston. "If you look at the price of propane in our jobs, and then the fact that we can re-use or sell that LPG, makes it more economic."
“I'll put that against the economics of water fracking production—where they get charged to haul water away for years—any day. That's why I think LPG can stand up against water fracking costs today.”
The disposal costs for water in both the Marcellus Shale in the northeast U.S. and in Texas are sometimes as much as $10/barrel—making water costs on a well $1–2 million or more.
“We used to talk to facility people, but now we talk to production people. We educate customers on how to produce an LPG fracking job. For example you can now sell the propane you recover. And there are other ways to get economics out of our process.”
Zeringue says another part of his plan is to have GasFrac be more vertically integrated around LPG on the jobsite.
"If you look at LPG technology, I want GasFrac to touch every part of that, from propane delivery to everything. That's a fundamental change.
"Recycling was mentioned in the previous strategy, but it wasn't realistic. You have to understand how a job works and the infrastructure around it. When you look at recycling and capturing propane, it's more than just putting a unit out there.
"We need to help clients understand how propane is different than a flowback of a fracking fluid. So we have to understand the surrounding infrastructure so we can sell that value-add service.
"In the past we have let the operator make most of the decisions regarding how they decide to handle the flow back. It many instances, GASFRAC has felt there have been better ways to do it—to get more value out of the LPG.
"We now analyze the job and recommend, based on the facilities available on job site, if the customer should flare, recapture or put it in their sales line if available."
Zeringue says the other change in sales is that GasFrac wants to get a "critical mass" of jobs in two or three basins. "Critical mass" means enough jobs that keep two frack spreads busy, as they only need that many to make mobile propane recycling available. Recycling the propane reduces costs significantly.
"Our partnership with Green Field services is a prime example. They're starting to use natural gas in their frack pumpers versus traditionally using diesel. If we can figure out how to tie in our gelling system, it will create an even more more environmentally friendly frack.
GasFrac spent the first 15 months of its life as a public company doing a lot of one-time jobs, making sure the technology got tested in as many different basins (e.g. Barnett, Permian, western Canadian) as possible. But that's very expensive, as it means a lot of downtime moving from job to job and amortizing all those costs over a small number of jobs—and over a small amount of revenue.
"We've done the market surveys now, and I felt we were still doing that," Zeringue says, explaining the change in strategy. "Now we will be focused in basins. We have to take the study of what we have learned, and go promote those results where we are having the best impact.
"In the North, that is the Cardium (formation along the foothills of Alberta). The Cardium has some big players, and we're now on the frack calendar of some of those people.
"In San Antonio, we have an early adopter with BlackBrush, so we now have a second operating area we can build on; it now gives us a base we can build from in south Texas. We're in discussion with an outfit in the Niobrara (Wyoming/Colorado), hoping to build a base there."
And the reason that GasFrac is continually getting initial interest, is the same reason I bought the stock in the first place—that LPG recovers more oil and gas (often a LOT more) than using conventional water or oil.
"This technology does make a fundamental difference when it's being used," Zeringue says, "and that is starting to gain us back entry into companies who were going to wait and see. The limited data we have clearly shows we make a fundamental difference in the production of these reservoirs."
In their corporate presentation, GasFrac says they can increase the Estimated Ultimate Recovery (EUR) by 20–30%. In the early days of a Cardium well they were able to more than double production over water in the first two years.
GasFrac signs Non-Disclosure Agreements (NDA) with clients, so they must wait until the client releases well data into the public domain before they can use as part of their library, and sales pitch.
"We explain the differentiation (between LPG and regular oil or water fracks) and the key ingredient has been the ability to have comparative data," says Zeringue. "This is first time I can go into a customer and show a material difference. Everybody else (in fracking) is the same, and the service is commoditized."
All right, I said. So how is this new sales strategy doing in the field since you came in as CEO?
"In the U.S., being a Canadian company, it has simply been a marketing effort. We've had a bevy of companies that we have introduced the technology to, and a significant amount of those have asked for quotes.
"That's a critical stage. It means we've gotten past the vetting and we've got real interest. We just got note from Chevron and that helps. Chevron spent two years vetting our process through numerous third party safety audits and we were finally able to perform our first jobs for them in Q4/11."
In Canada, he says, a January 2011 industrial accident has had a "lingering effect" on sales. Several workers had third degree burns in a flash explosion on a jobsite.
"In the operations community in Canada, (sales) has been affected by the "wait and see attitude" to deliver it (LPG) safely. And we have, working with Shell and Husky. So there is data that we now have that validates us and we use that in our business development."
Water has become a big issue in fracking—both the quality and the quantity. This should play right into GasFrac’s hands. But Zeringue says it’s still secondary for operators.
"Water has only been a BIG issue for last 6 months. The environment is not our lead punch, the science and economics are. I know this industry—"tell us what you’re doing for my neighbor"—that’s how they think. We’re saying we can have effect on your EUR—they say "Wow"; that’s my lead punch. If they’re under any pressure on water, that’s just a benefit."
Zeringue’s knowledge of the industry also makes him realize that industry adoption of LPG will take time.
"This is not a sprint, it’s a marathon," he says. "The adoption curve for this industry says it’s a marathon."
Keith Schaefer
Oil and Gas Investments Bulletin
