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GASFRAC Announces First Quarter 2014 Results

CALGARY, ALBERTA -- (Marketwired) -- 05/07/14 -- GASFRAC Energy Services Inc. (TSX: GFS) -

COMPARATIVE QUARTERLY FINANCIAL INFORMATION


                                March 31 2014  March 31 2013  March 31 2012
----------------------------------------------------------------------------
                                         CAD$           CAD$           CAD$

Revenue                                12,173         31,458         44,969
Operating expenses                     16,467         26,044         35,243
Selling, general and
 administrative expenses                4,319          4,643          5,997
Adjusted EBITDA(1)                     (6,468)           468          2,259
(Loss) for the period                 (14,169)        (7,884)        (4,926)
(Loss) per share - basic                (0.22)         (0.12)         (0.08)
(Loss) per share - diluted              (0.22)         (0.12)         (0.08)
Weighted average number of
 shares - basic                        63,610         63,472         62,496
Total assets                          219,509        257,002        331,130
Total non-current liabilities          36,908         35,625         35,828
Revenue days                               25             73             84
Revenue per revenue day                   487            431            535
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(1) Defined under Non-IFRS Measures

OVERVIEW OF THE QUARTER ENDED MARCH 31, 2014

While our two major customers were inactive during the quarter, activity for the Canadian customer recommenced in April. In the U.S., our customer has indicated its intent to recommence in early June with a six well pad. Highlights from the quarter were:


--  Six field trials completed with five new customers.
--  Hiring of a new President with a strong sales focus.
--  Sale of $9.3 million of equipment.
--  Winning Gold for the 2014 Edison Award in Energy & Sustainability.
--  Continued broadening of fluid offering.
--  Prototyping of our high reid vapour pressure ("HRVP") system for in-
    field fluids.
--  Bank debt, net of cash, reduced to $13.1 million.

FINANCIAL OVERVIEW - FOR THE THREE MONTHS ENDED


                                        March 31, 2014
                 -----------------------------------------------------------
                      Canada            U.S.       Corporate      Total
                 -----------------------------------------------------------
                   CAD$            CAD$              CAD$     CAD$

Revenue            12,159  100.0%      14   100.0%            12,173  100.0%

Cost of sales       8,719   71.7%      10    71.4%         -   8,729   71.7%
Variable
 operating costs    2,044   16.8%     232  1657.1%         -   2,276   18.7%
Fixed operating
 costs              3,627   29.8%   1,835 13107.1%         -   5,462   44.9%
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Operating
 expenses          14,390  118.3%   2,077 14835.7%         -  16,467  135.3%
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Selling, general
 and
 administration     2,392   19.7%     679  4850.0%     1,248   4,319   35.5%

Number of revenue
 days                  25               0                         25
Revenue per day       486             N/A                        487
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                                        March 31, 2013
                 -----------------------------------------------------------
                      Canada            U.S.       Corporate      Total
                 -----------------------------------------------------------
                   CAD$            CAD$              CAD$     CAD$

Revenue            28,462  100.0%   2,996   100.0%            31,458  100.0%

Cost of sales      14,590   51.3%   1,641    54.7%         -  16,231   51.6%
Variable
 operating costs    2,840   10.0%     819    27.3%         -   3,659   11.6%
Fixed operating
 costs              3,891   13.7%   2,263    75.5%         -   6,154   19.6%
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Operating
 expenses          21,321   79.4%   4,723   157.6%         -  26,044   82.8%
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Selling, general
 and
 administration     2,661    9.3%   1,187    39.6%       795   4,643   11.8%

Number of revenue
 days                  65               8                         73
Revenue per day       438             375                        431
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Revenue

Revenue for the first quarter decreased 61.3% to $12.2 million from $31.5 million in the first quarter of 2013. This decrease is primarily due to two major customers delaying projects from first quarter of 2014 to second quarter 2014. These two customers contributed approximately $18 million in revenue during first quarter 2013.

During the quarter, the Company earned revenues from six customers with the top three customers representing 86.1% of the total revenue. During the first quarter of 2013, the top three customers represented 83.1% of the total revenue.

Canadian Operations

First quarter revenue from the Canadian operations decreased 57.3% to $12.2 million from $28.5 million in the first quarter of 2013. The Canadian operations performed 25 revenue days in the first quarter of 2014 with average daily revenue of $486 compared to 65 revenue days in the first quarter of 2013 with average daily revenue of $438. The increase in average daily revenue is due to the increase in the price and cost of LPG. During the first quarter of 2014, a repeat customer provided $7.4 million in revenue compared to $6.4 million in the first quarter of 2013. The remaining $4.8 million in revenue was contributed by five new customers.

During the quarter, revenue was generated from six customers with the top three customers representing 86.1% of the total revenue. During the first quarter of 2013, the top three customers represented 91.9% of the total revenue.

U.S. Operations

First quarter revenue from the U.S. operations was nil compared to $3.0 million in the first quarter of 2013. In the first quarter of 2013, GASFRAC performed 8 revenue days with average daily revenue of $375. The Company's major US customer contributed approximately half of the $3.0 million in revenue in first quarter 2013. This customer is expected to re-start in second quarter of 2014. The Company and the customer are currently negotiating a renewal to the contract that expired in first quarter of 2014. However, there can be no assurance at this time that such renewal will be obtained or, if obtained, what the terms of such renewal will be.

During the first quarter of 2013, revenue was generated from three customers with the top customer generating 52.6% of the total revenue.

Operating Expenses

Operating expenses consist of the following categories:


--  cost of sales (variable costs directly attributable to a fracturing
    treatment),
--  variable operating costs (variable costs not directly attributable to a
    fracturing treatment), and
--  fixed operating costs (costs that do not fluctuate with the Company's
    level of activity).

During the quarter, the Company's operating expenses decreased 36.8% to $16.5 million (135.3% of revenue) from $26.0 million (82.8% of revenue) in the first quarter of 2013. This is primarily due to the decrease in the Company's activity.

As a percentage of revenue, cost of sales increased to 71.7% of revenue ($8.7 million) from 51.6% ($16.2 million) of revenue in the first quarter of 2013. The increase in cost of sales as a percentage of revenue was largely attributable to lowering the price of our services in order to attract new customers.

As a percentage of revenue, variable operating expenses increased to 18.7% of revenue ($2.3 million) from 11.6% of revenue ($3.7 million) of revenue in the first quarter of 2013. The percentage increase in variable operating expenses is due to selling services at a reduced price.

Fixed operating costs decreased 11.2% to $5.5 million in the first quarter of 2014 as compared to $6.2 million in the first quarter of 2013. The decrease in fixed operating costs is due to a reduction in salaries and benefits realized from operating headcount decreases.

Canadian Operations

Total operating expenses for the quarter were $14.4 million (cost of sales - $8.7 million, variable operating costs - $2.0 million and fixed operating costs - $3.6 million) as compared to $21.3 million (cost of sales - $14.6 million, variable operating costs - $2.8 million and fixed operating costs - $3.9 million) in the first quarter of 2013.

Cost of sales were 71.7% of revenue for the quarter as compared to 51.3% of revenue in the first quarter of 2013. The increase in cost of sales as a percentage of revenue was largely attributable to lowering the price of our services in order to attract new customers.

Variable operating expenses increased to 16.8% of revenue ($2.0 million) from 10.0% of revenue ($2.8 million) in the first quarter of 2013. The percentage increase in variable operating expenses is due to selling services at a reduced price.

Fixed operating costs decreased to $3.6 million from $3.9 million in the first quarter of 2013. The decrease is due to a reduction in salaries and benefits realized from operating headcount decreases.

U.S. Operations

Total operating expenses for the quarter were $2.1 million (cost of sales - $nil, variable operating costs - $0.2 million and fixed operating costs - $1.8 million) as compared to $4.7 million (cost of sales - $1.6 million, variable operating costs - $0.8 million and fixed operating costs - $2.3 million) in the first quarter of 2013.

Variable operating costs of $0.2 million increased to 100.0+% of revenue from 27.3% of revenue ($0.8 million) in the first quarter of 2013. The variable operating costs primarily consist of repairs and maintenance, shop supplies and fuel incurred to maintain our fleet.

Fixed operating costs decreased to $1.8 million from $2.3 million in the first quarter of 2013. The decrease in fixed operating costs is due to a reduction in salaries and benefits realized from operating headcount decreases.

Sales, General & Administrative ("SG&A") Expenses

For the first quarter, SG&A expenses decreased 7.0% to $4.3 million from $4.6 million in the first quarter of 2013. The decrease is primarily due to decreased salaries and benefits associated with the reductions of the executive and administrative staffing levels. These savings were offset by approximately $0.3 million in severance costs incurred in the first quarter of 2014.

Gain on Disposition of Assets

During the first quarter of 2014, the Company sold certain parked equipment for proceeds of $9.3 million and a book gain of $1.6 million. The proceeds were used to pay down existing bank debt. The equipment sold was in excess of the Company's current needs and does not affect the Company's revenue generating capabilities. The Company did not have a formal plan to dispose of the equipment, however, when the Company was approached it made the decision to sell.

Adjusted EBITDA

For the first quarter of 2014, Adjusted EBITDA decreased to a loss of $6.5 million from $0.5 million in the first quarter of 2013. The Adjusted EBITDA includes the gain on disposal of assets of $1.6 million. The decrease in Adjusted EBITDA was the result of a 61.3% decrease in revenue as well as an increase in the cost of sales.

Net Loss

For the first quarter of 2014, the net loss increased to $14.1 million compared to a net loss of $7.9 million during the first quarter of 2013. As discussed above, the decrease in revenue is the largest contributor to the increase in net loss. Depreciation and amortization decreased $0.3 million from first quarter 2013 to first quarter 2014 due to the sale of assets and minimal capital expenditures throughout 2013. Finance costs also decreased by approximately $0.4 million as a result of lower overall debt levels in first quarter 2014. The Company does not recognize any current tax expense as it has tax losses to offset any taxable income.

FINANCIAL OVERVIEW - SUMMARY OF QUARTERLY RESULTS


                                Jun 30,    Sept 30,     Dec 31,     Mar 31,
                                   2012        2012        2012        2013
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                                   CAD$        CAD$        CAD$        CAD$
Revenue                          16,734      40,851      46,888      31,458
(Loss) for the period           (16,949)     (7,144)    (48,450)     (7,884)
(Loss) per share - basic          (0.27)      (0.11)      (0.77)      (0.12)
(Loss) per share - diluted        (0.27)      (0.11)      (0.77)      (0.12)
Adjusted EBITDA(1)              (10,450)      1,081       7,676         468
Capital expenditures             15,404       4,955       6,593         509
Working capital
 (deficiency)(2)                  8,994      (1,092)     25,740      (4,384)
Shareholders' equity            247,519     237,201     190,444     184,266
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                                Jun 30,    Sept 30,     Dec 31,     Mar 31,
                                   2013        2013        2013        2014
----------------------------------------------------------------------------
                                   CAD$        CAD$        CAD$        CAD$
Revenue                          30,561      30,423      29,381      12,173
(Loss) for the period            (4,811)     (5,061)     (6,673)    (12,093)
(Loss) per share - basic          (0.08)      (0.08)      (0.10)      (0.22)
(Loss) per share - diluted        (0.08)      (0.08)      (0.10)      (0.22)
Adjusted EBITDA(1)                3,246       3,016       1,213      (6,468)
Capital expenditures              1,404         274         963       2,425
Working capital
 (deficiency)(2)                  2,627       4,108       7,070       4,679
Shareholders' equity            181,951     175,884     171,209     159,164
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(1) Defined under Non-IFRS Measures
(2) Working capital is defined as current assets less current liabilities

The Company's North American business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break-up weather conditions and access to well sites in Canada is reduced. Also, in certain areas of the U.S. in which the Company operates, access to work locations is limited or entirely banned during hunting season which typically occurs December through February.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

As at March 31, 2014, the Company had $4.7 million of working capital compared to $7.1 million as at December 31, 2013 and a working capital deficit of $4.4 million as at March 31, 2013. Included in the working capital as at March 31, 2014 is $16.3 million of inventory that primarily consists of ceramic proppant. The sequential decrease in working capital is due to cash used in operating activities and offset somewhat by an increase in inventory and the sale of surplus equipment.

The significant decrease in working capital from December 31, 2012 is primarily due to the reclassification of the Company's credit facility from non-current to current.

Debt

On May 17, 2013, the credit facility was amended and restated, with the major amendments being that the credit facility resized to $50 million and the maturity date extended to April 30, 2014. The credit facility has since been extended and now matures on June 30, 2014.

The credit facility consists of a $10 million revolving operating facility and a $40 million revolving facility. The facilities bear interest at prime plus 0.75% to prime plus 4.25%. Both facilities are secured by a floating charge over all of the assets (excluding leased assets). The amended and restated credit facility is subject to financial and non-financial covenants typical of this type of facility.

The amended and restated credit facility is subject to financial covenants as follows:


--  Funded Debt to EBITDA Ratio: Funded debt (excludes convertible
    debentures) at balance sheet date to 12 month trailing earnings before
    interest, taxes, depreciation and amortization, and share based
    compensation expense (Bank EBITDA) not to exceed 3.00 to 1.00
--  EBITDA to Interest Expense Ratio: 12 month trailing Bank EBITDA to 12
    month trailing interest expense to exceed 3.00 to 1.00
--  Funded Debt to Capitalization Ratio: Funded debt to capitalization (the
    aggregate of funded debt plus equity) not to exceed 0.50 to 1.00

As at March 31, 2014, the Company is not in compliance with its Funded Debt to EBITDA Ratio and EBITDA to Interest Expense Ratio. Subsequent to March 31, 2014, the Company received a covenant waiver from its bank. The facility, if not renewed, is due on maturity. Pursuant to IAS 1, the Company has presented the entire credit facility as current in the Company's consolidated financial statements as at the reporting date.

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. Generally the Company ensures that it has sufficient cash or available credit facilities to meet expected operational requirements. The Company's credit facility matures June 30, 2014. Should the Company be unable to renew these facilities in the amount it requires or on terms acceptable to it, liquidity issues could result.

The Company is negotiating with its current bank to structure a new credit facility prior to the current facility maturing. The Company has also hired an independent third party to assist the Company with possibly obtaining an asset backed loan ("ABL") facility. This facility would be longer term and supported by the value of the Company's property and equipment, accounts receivable and inventory. The Company is negotiating with a specific ABL lender. The outcome from either financing alternative is not certain.

The Company's borrowing requirements fluctuate with its level of working capital, particularly accounts receivable. Amounts borrowed are anticipated to be repaid through collection of accounts receivable, operating cash generated, the sale of assets and proceeds, if any, of a new credit facility being negotiated, as noted above.

During the first quarter of 2014, the Company sold certain parked equipment for proceeds of $9.3 million and a book gain of $1.6 million. The proceeds were used to pay down the existing bank debt. The equipment sold was in excess of the Company's current needs and does not affect the Company's revenue generating capabilities. In addition, the Company has planned minimal capital expenditures in 2014 and manages the timing of its capital expenditures based on the ongoing financial results.

Consolidated Cash Flow Summary


                                                Mar 31, 2014   Mar 31, 2013
----------------------------------------------------------------------------
                                                        CAD$           CAD$
Cash provided by (used in)
 Operating activities                                 (3,385)         3,776
 Financing activities                                 (3,768)        (6,366)
 Investing activities                                  6,896           (844)
----------------------------------------------------------------------------
Net decrease in cash and cash equivalents               (257)        (3,434)
Effects of exchange rate changes on the
 balance of cash held in foreign currencies              204            151
Cash and cash equivalents, beginning of year           1,955          7,927
----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD               1,902          4,644
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Operating Activities

Net cash used in operating activities was $3.4 million as compared to cash provided by operating activities of $3.8 million in the first quarter of 2013, an absolute change of $7.2 million. Two factors contributed to this change. The first was the net loss caused by the decrease in first quarter 2014 revenue and the second was the net change in non-cash working capital. The net change in non-cash working capital consisted of:


                                                Mar 31, 2014   Mar 31, 2013
----------------------------------------------------------------------------
                                                   CAD$ '000      CAD$ '000

Accounts receivable                                   17,794         12,238
Accounts payable (not including capital
 purchases)                                           (7,096)        (5,729)
Inventory                                             (3,634)        (1,920)
Performance and deferred share unit liability             22           (358)
Other                                                    (21)           620
----------------------------------------------------------------------------
Net change in non-cash working capital                 7,065          4,851
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Financing Activities

Net cash used by financing activities was $3.8 million compared to $6.4 million of cash used in the first quarter of 2013. The cash used in both the first quarter of 2013 and 2014 consists primarily of payments to the Company's credit facility.

Investing Activities

Net cash provided by investing activities was $6.9 million compared to $0.8 million of cash used in the first quarter of 2013. During the quarter, the Company sold excess plant and equipment for gross proceeds of $9.3 million partially offset by the purchase of property and equipment of $2.4 million. Included in the $2.4 million is $1.6 million for a field office and shop that was purchased by the Company due to the landlord selling the facility. At a future date, the Company may consider entering into a sale-leaseback transaction for this facility.

Contractual Obligations

The timing of cash outflows relating to financial liabilities are outlined in the following table:


                                                                     Greater
                            Contractual Less than   1 to 3   4 to 5   than 5
                             cash flows    1 year    years    years    years
----------------------------------------------------------------------------
                                   CAD$      CAD$     CAD$     CAD$     CAD$
Trade payables and accrued
 liabilities                      5,907     5,907        -        -        -
Provisions                          748       748        -        -        -
Finance lease obligation          2,138     1,211      927        -        -
Credit facility (including
 expected interest)              15,309    15,309        -        -        -
Debentures (including.
 expected interest)              48,703     2,818   45,885        -        -
Operating lease payments          8,875     1,797    2,739    2,138    2,201
Commitment to purchase
 proppant                        60,276     6,068   40,187   13,167      854
Commitment to purchase
 plant and equipment              1,273     1,273        -        -        -
----------------------------------------------------------------------------
Total                           143,229    35,131   89,738   15,305    3,055
----------------------------------------------------------------------------
----------------------------------------------------------------------------

To meet these financial obligations, the Company has available the following resources available within 1 year:


                                                 Mar 31, 2014   Dec 31, 2013
----------------------------------------------------------------------------
                                                         CAD$           CAD$

Cash and cash equivalents                               1,902          1,955
Trade receivables                                       8,477         26,037
Unused credit facility - subject to applicable
 debt ceiling                                          34,963         31,427
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                                                       45,342         59,419
----------------------------------------------------------------------------
----------------------------------------------------------------------------

OFF-BALANCE SHEET ARRANGEMENTS

The Company is not party to any off balance sheet arrangements or transactions.

RELATED PARTY TRANSACTIONS

There were no related party transactions for the period ended March 31, 2014 or March 31, 2013.

ACCOUNTING ESTIMATES

This MD&A summarizes GASFRAC's financial condition and results of operations and is based upon its Interim Financial Statements, which have been prepared in accordance with Canadian GAAP and comply with IAS 34 Interim Financial Reporting. The Interim Financial Statements require management to select significant accounting policies and make certain critical accounting estimates that affect the reported assets, liabilities, revenue and expenses. A description of critical accounting estimates can be found beginning on page 12 of the December 31, 2013 MD&A. As at March 31, 2014, GASFRAC's critical accounting estimates have not changed from such description.

CHANGE IN ACCOUNTING POLICIES

Effective January 1, 2014, the Company adopted IFRIC 21 - Levies and the amendments made to IAS 32 - Financial Instruments presentation.

IFRIC 21 established the principles under which the Company accounts for government levies. This standard provided guidance on when to recognize a liability to pay a government levy. The adoption of this standard did not have a material effect on the Company's financial results.

The amendments made to IAS 32 clarified existing requirements for offsetting financial assets and financial liabilities. The amendments made to this standard did not have a material effect on the Company's financial results.

BUSINESS RISK

A description of business risks can be found on pp. 17-22 of the December 31, 2013 MD&A. As at March 31, 2014, these business risks have not changed significantly from those descriptions.

COMMON SHARES AND CONVERTIBLE DEBENTURES

At March 31, 2014 and May 7, 2014, GASFRAC had 63,611,919 common shares outstanding (December 31, 2013: 63,607,668). At March 31, 2014 and May 7, 2014, GASFRAC had 3,435,834 share options outstanding (December 31, 2013: 3,295,000) at a weighted average exercise price of $2.15 per share (December 31, 2013: $2.31).

At March 31, 2014 and May 7, 2014, the Company had $40.25 million convertible debentures outstanding that were convertible to 3,833,334 common shares based on the applicable conversion price.

NON-IFRS MEASURES

Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS 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:

Adjusted EBITDA is defined as net income (loss) before interest income and interest expense, income taxes, depreciation and amortization. Net income (loss) includes gains and losses on the disposition of assets. Adjusted EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt. Bank EBITDA is defined as Adjusted EBITDA plus share based compensation. Bank EBITDA is used in the calculation of GASFRAC's financial covenants related to its credit facility.

Adjusted EBITDA and Bank EBITDA were calculated as follows:


Year ended:                                  March 31, 2014  March 31, 2013
----------------------------------------------------------------------------

Net loss                                (1)         (14,169)         (7,884)
(Deduct) Add back:
 Interest expense - net                               1,398           1,759
 Depreciation and amortization                        6,303           6,593
----------------------------------------------------------------------------
Adjusted EBITDA                                      (6,468)            468
----------------------------------------------------------------------------
(Deduct) Add Back:
----------------------------------------------------------------------------
 Share based compensation                                72             265
----------------------------------------------------------------------------
Bank EBITDA                                          (6,396)            733
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 (1) Net loss for March 31, 2014 includes $1,602 thousand gain on the
  disposition of assets. There were no gains or losses on asset dispositions
  at March 31, 2013.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

There have been no changes in the Company's internal controls over financial reporting during the quarter ended March 31, 2014, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

OUTLOOK

The North American pressure pumping market has been oversupplied during the last several years as a result of significant equipment builds in 2010 through 2012 and the addition of numerous small entrants during that period. This overcapacity has resulted in depressed margins during the last several years as capacity has been gradually absorbed. It is anticipated that 2014 industry activity will allow for sufficient increase in utilization levels to result in commencement of price increases in the second half of the year. In both Canada and the U.S. natural gas prices have increased due to low gas storage levels, driven by an unseasonably cold winter, as we enter the gas injection season. Further, in Canada, and to a lessor extent in the U.S., approvals of LNG facilities for export are increasing the likelihood of additional natural gas drilling to supply these facilities. In Canada, assuming commodity prices remain firm, it is expected that additional activity in the Duvernay and Montney will drive demand for additional horsepower in Canada for 2014. In the U.S. activity is much more regionally sensitive and continues to be strongest in oil rich areas. The current scarcity of equity capital for Exploration and Production ("E&P") companies and their more conservative use of debt cause the level of future capital expenditures to be highly leveraged to commodity prices. As such, anticipated 2014 E&P capital expenditures are highly dependent on commodity price assumptions for both oil and natural gas.

While the fundamentals of the overall pressure pumping market are an important factor in our operations, the most significant factor remains the pace of adoption of our technology by E&P companies. The industry as a whole has experienced significant change over the last decade with the emergence of multi-stage horizontal fracturing in resource formations. Although there have been positive production results, in some ways, the technology of fracturing in resource plays is just beginning. There are some indications that, as past results and economics are examined, the industry is beginning to examine methods to optimize fracturing operations and move away from simply using brute force along the horizontal section. We believe that the GASFRAC technology and resultant production benefits in targeted formations provide our customers an advantage and that the major challenge for the Company is increasing our market share through succinct demonstration of this benefit. The key barriers we have encountered impacting the pace of adoption are; demonstration of the cost/benefit, safety considerations, awareness and "inertia". Operators tend to be cautious in their adoption of new technologies, particularly given the significance of fracturing costs as a percentage of total drilling and completions costs. The current E&P market is very focused on cost efficiencies as they develop large resource plays. Free cash flow generation remains under pressure for a large segment of the sector with overall return on capital employed ("ROCE") down during 2013. As such, the higher up front cost of GASFRAC's service can be a key criteria in purchasing decisions. Thus, the keys on the cost/benefit side are:


 a) the collection of basin by basin production data to provide more case
    studies to potential customers showing the positive impact on production
    and net present values,
 b) continued reduction in the up-front costs of our service through
    enhancements such as engineered fluids,
 c) recruiting of strong technical sales and sales support staff and
 d) focus on areas where the GASFRAC technology creates the most benefit or
    is the enabling technology.

We expect that the service delivery initiatives we undertook over the last few quarters, particularly engineered fluids that allow significant recovery of frac load fluids, will reduce the net cost of our service to our customers. This change in our value proposition creates an opportunity to attract customers to trial our technology and observe the specific impact on their wells and production. Due to the significant investment by operators in fracturing services, the sales and trial process is relatively long. We would anticipate a time from of six to nine months from initial trial to ultimate adoption of our services. We have added and will continue to add technical resources to assist our sales team in demonstrating the production benefits of our technology. In addition we are actively recruiting strong technical sales staff that can work with our customers to demonstrate technical benefits as well as assist in demonstrating our service execution capabilities. While safety will always remain a key focus for the Company, the equipment and procedures put in place during 2011 have largely removed this as a barrier for most customers - although education and safety audits will remain part of the sales cycle. We have observed an increased awareness and expressed interest in GASFRAC services in the basins we are targeting. During the first quarter of 2014 we had six trials with customers who are still evaluating the results. While these have not resulted in converted customers at this time, the success in achieving these trials is a positive sign and a demonstration that our expanded delivery and fluid systems are attracting market interest.

During this period of adoption, our operations in both Canada and the U.S. remain concentrated with a few key customers and our revenues are subject to fluctuation dependent on the level of drilling operations by these customers in the areas in which we are servicing them. Their levels of drilling activity can be impacted by numerous factors including, but not limited to, operational difficulties, project scheduling, infrastructure limitations, weather conditions, hunting restrictions, and budgetary priorities. While our two major customers were not active during the first quarter, the Company has both a four well pad and two well pad programmed with Husky commencing in April and BlackBrush has indicated an intent to recommence operations in early June with a six well pad.

These fluctuations add uncertainty to the timing of our cash flows, and can and have resulted in breaches to bank covenants. The Company does however have significant asset backing (receivables and capital equipment) providing support for its credit facility. Our Bank has historically worked with us during these periods, recognizing the near term fluctuations and the value of the supporting assets. The Company is negotiating with its current Bank to structure a new facility prior to the current facility maturing. The Company has also engaged an independent third party to assist the Company with obtaining an asset backed loan ("ABL") facility. This facility would be longer term and supported by the value of the Company's property and equipment, accounts receivable and inventory. The Company has had an independent third party appraisal of its equipment indicating that the asset value of its equipment, together with current assets is well above the amount of its current borrowing requirements. Although, the Company expects to be able to secure new financing the outcome from either financing alternative is not certain.

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 the Company's innovative technology will provide the
    Company with opportunities to expand the Company's market share in
    Canada and the U.S.;
--  expectations of securing financing for 2014 and beyond;
--  expectations as to the level of funding available under the Company's
    credit facility;
--  expectations as to the degree of activity by key customers;
--  expectations as to fluctuations in revenue due to customer
    concentration;
--  expectations of the impact of weather on activity in Canada in 2014;
--  expectations as to activity levels in North America;
--  expectations as to capital development programs of major customers;
--  expectations as to the rate of trials and adoption of the Company's
    technology by E&P companies;
--  expectations as to the Company's future market position in the industry;
--  expectations as to the supply of raw materials and timing of purchase
    commitments;
--  expectations as to the pricing of the Company's services in Canada and
    the U.S.;
--  expectations as to obtaining long term contracts with customers;
--  expectations of fracturing industry pricing and the pricing of the
    Company services in North America in 2014 and beyond;
--  expectations of oil and natural gas commodity prices in 2014; and
--  expectations of propane and other LPG prices in 2014 and forward.

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 services; 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 property and equipment.

Condensed Interim Consolidated Statement of Financial Position

Unaudited


As at:                                         Mar 31, 2014    Dec 31, 2013
----------------------------------------------------------------------------
                                                  CAD$ '000       CAD$ '000
ASSETS
CURRENT ASSETS
 Cash and cash equivalents                            1,902           1,955
 Trade and other receivables                          8,477          26,037
 Inventory                                           16,288          12,645
 Prepaid expenses                                     1,449           1,459
----------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                 28,116          42,096
----------------------------------------------------------------------------

NON-CURRENT ASSETS
 Plant and equipment                                184,376         193,612
 Intangible assets                                      691             780
 Other assets                                         6,326           6,309
----------------------------------------------------------------------------
TOTAL NON-CURRENT ASSETS                            191,393         200,701
----------------------------------------------------------------------------
TOTAL ASSETS                                        219,509         242,797
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
 Trade payables and accrued liabilities               6,715          14,352
 Provisions                                             795             742
 Current portion of finance lease obligation          1,115           1,359
 Current portion of credit facility                  15,037          18,573
----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                            23,662          35,026
----------------------------------------------------------------------------

NON-CURRENT LIABILITIES
 Finance lease obligation                               863             835
 Operating lease obligation                              90              79
 Convertible debentures                              35,955          35,648
 Commitments and contingencies
----------------------------------------------------------------------------
TOTAL NON-CURRENT LIABILITIES                        36,908          36,562
----------------------------------------------------------------------------
TOTAL LIABILITIES                                    60,570          71,588
----------------------------------------------------------------------------

CAPITAL & RESERVES
 Share capital                                      259,841         259,823
 Contributed surplus                                  6,491           6,461
 Foreign currency translation reserve                 7,177           5,326
 Retained earnings deficit                         (114,570)       (100,401)
----------------------------------------------------------------------------
TOTAL EQUITY                                        158,939         171,209
----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          219,509         242,797
----------------------------------------------------------------------------

Condensed Interim Consolidated Statements of Comprehensive Loss

Unaudited


                                               For the three months ended
                                            --------------------------------
                                             March 31, 2014  March 31, 2013
----------------------------------------------------------------------------
                                                  CAD$ '000       CAD$ '000

REVENUE                                              12,173          31,458
----------------------------------------------------------------------------

EXPENDITURES
 Direct operating costs                              16,467          26,044
 Selling, general and administrative                  4,319           4,643
 Share based compensation                                72             265
 Depreciation and amortization                        6,303           6,593
 Finance cost                                         1,400           1,770
 Foreign exchange (gain) loss                          (615)             38
----------------------------------------------------------------------------
                                                     27,946          39,353
----------------------------------------------------------------------------

OTHER INCOME
 Gain on disposition of assets                        1,602               -
 Interest income                                          2              11
----------------------------------------------------------------------------
                                                      1,604              11
----------------------------------------------------------------------------

LOSS BEFORE INCOME TAXES                            (14,169)         (7,884)
 Income tax expense                                       -               -
----------------------------------------------------------------------------
LOSS FOR THE PERIOD                                 (14,169)         (7,884)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

OTHER COMPREHENSIVE INCOME
ITEMS THAT WILL BE RECLASSIFIED TO PROFIT
 AND LOSS
 Exchange differences on translating foreign
  operations                                          1,851           1,502
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME                            1,851           1,502
----------------------------------------------------------------------------


TOTAL COMPREHENSIVE LOSS FOR THE PERIOD             (12,318)         (6,382)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(LOSS) PER SHARE
 Basic (per share)                                    (0.22)          (0.12)
 Diluted (per share)                                  (0.22)          (0.12)
----------------------------------------------------------------------------

Condensed Interim Consolidated Statements of Cash Flows

Unaudited


                                               For the three months ended
                                            --------------------------------
                                              March 31,2014   March 31,2013
----------------------------------------------------------------------------
                                                  CAD$ '000       CAD$ '000

CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES
 Net loss for the period                            (14,169)         (7,884)
 Adjusted for:
  Depreciation and amortization                       6,303           6,593
  Equity settled share based compensation                48             204
  Finance cost per income statement                   1,400           1,770
  Unrealized foreign exchange loss / (gain)            (707)             68
  Gain on disposition of assets                      (1,602)              -
----------------------------------------------------------------------------
                                                     (8,727)            751
 Net change in non-cash operating working
  capital                                             7,065           4,851
----------------------------------------------------------------------------
 Cash provided by (used in) operating
  activities                                         (1,662)          5,602
 Interest paid                                       (1,723)         (1,826)
----------------------------------------------------------------------------
Net cash provided (used) by operating
 activities                                          (3,385)          3,776
----------------------------------------------------------------------------

INVESTING ACTIVITIES
 Purchases of plant and equipment                    (2,410)           (468)
 Acquisition of intangible assets                       (15)            (41)
 Proceeds from sale of plant and equipment
  and assets held for sale                            9,324               -
 Net change in non-cash investing working
  capital                                                (3)           (335)
----------------------------------------------------------------------------
Net cash provided (used) by investing
 activities                                           6,896            (844)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
 Net finance lease repayments                          (232)           (224)
 Credit facility repayment                           (3,536)         (6,142)
----------------------------------------------------------------------------
Net cash used by financing activities                (3,768)         (6,366)
----------------------------------------------------------------------------

Net decrease in cash and cash equivalents              (257)         (3,434)
Cash and cash equivalents at beginning of
 period                                               1,955           7,927
Effects of exchange rate changes on the
 balance of cash held in foreign currencies             204             151
----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF THE
 PERIOD                                               1,902           4,644
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company will host a conference call on Thursday, May 8, 2014 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the first quarter of 2014.

To listen to the webcast of the conference call, please enter: http://www.gowebcasting.com/5471 in your web browser or visit the Investor Information section of our website www.gasfrac.com.

To participate in the Q&A session, please call the conference call operator at 1-800-769-8320 or 1-416-340-8530 and ask for "GASFRAC First Quarter Results Conference Call".

A replay of the call will be available until May 15, 2014 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 5684777. The Company will also archive the conference on its website at www.gasfrac.com.

GASFRAC is an oil and gas technology and service company headquartered in Calgary, Alberta, Canada, and the sole provider of LPG fracturing technology in North America.

This press release 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. Forward-looking statements 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; the general stability of the economic and political environment; effect of market conditions on demand for the Company's products and services; the ability to obtain qualified staff, equipment and services in a timely and cost efficient manner; the ability to operate its business in a safe, efficient and effective manner; the performance and characteristics of various business segments; the effect of current plans; the timing and costs of capital expenditures; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding environmental matters in the jurisdictions in which the Company operates; and the ability of the Company to successfully market its products and services. Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks and uncertainties include: fluctuating prices for crude oil and natural gas; changes in drilling activity; general global economic, political and business conditions; weather conditions; regulatory changes; the successful exploitation and integration of technology; customer acceptance of technology; success in obtaining issued patents; the potential development of competing technologies by market competitors; and availability of products, qualified personnel, manufacturing capacity and raw materials. In addition, actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth under the section entitled "Business Risks" in the Company's MD&A.

Requests for shareholder information should be directed to James M Hill.

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