From Scotia analyst • GasFrac (GFS, 3-SU) Sales Desk Does Not Recommend Buying the Equity Down to the Low-$1s (below our previous thoughts...high risk with uncertain reward)
Vladislav Vlad put together the following analysis on GFS, around the company's ability to pay off its converts if they were acquired. We would view the $/HP acquisition price shown below as conservative (estimates to build hydraulic HP being closer to ~$1.5 MM per 1,000 HP) but they do suggest a cons. bottom floor price. Accounting for the balance sheet and using $1 MM per 1,000 HP, we arrive at ~$80 MM in value or $1.24/sh, still well below yesterday's close of $2.07/sh. Using $1.5 MM per 1,000 HP, we arrive at $157 MM in value or ~$2.38/sh. A mid-point would suggest $1.81/sh would suggest still more weakness to come. Too risky for us...we do not recommend buying the equity.
We're Also Still Uncertain On the Commitments. Recall that GFS has $96 MM in commitments over the next 12 months (the big unknown being the raw materials of $69 MM with the remainder essentially already captured on the balance sheet). Our understanding is there is some flexibility in the work commitment (likely a small penalty to reduce the commitment or defer; however, it's another unknown). At Q2 2012, GFS had used $7.3 MM on its $100 MM line but covenants are violated at a draw >$41 MM (hence, the question around commitments is important). Without a pick-up in activity, financial flexibility could be a concern without a material reduction in raw materials spending.