Gasfrac Energy Services Inc., which has been attempting to muscle into the hydraulic fracturing (fracking) market with its waterless technology, hit some roadblocks in 2Q2012, in part because the pressure pumping market is bursting at the seams, company officials said Thursday.

The Calgary-based operator reported a net loss of C$16.9 million (minus 27 cents/share) in 2Q2012, more than twice the C$7.8 million (minus 13 cents) in losses reported in 2Q2011. Revenue increased 18% year/year to C$16.7 million from C$14.2 million.

Revenues were “significantly below our expectations for the quarter,” said CEO Zeke Zeringue, but “we feel there were some positive inroads made that will help Gasfrac grow moving forward in 3Q2012 and 4Q2012.”

Zeringue and his management team talked about the company’s quarterly performance during a conference call. Gasfrac, which expanded into the United States last year, markets a proprietary waterless fracking stimulation system that uses gelled liquefied propane gas (LPG), which can be recycled (see Shale Daily, Nov. 14, 2011).

“Similar to 2Q2011 we had an extended [winter ice] breakup in Canada that was compounded by wet and rainy conditions preventing us from fulfilling our revenue targets for the latter part of the quarter,” the CEO said of the latest period. “We weren’t able to recommence operations in parts of our Canadian operations until late July.”

Problems surfaced in the latest period in South Texas. BlackBrush Oil and Gas LP, which signed a two-year contract with Gasfrac in February, uses the LPG system in the Carrizo Springs area of the Eagle Ford, where it has more than 900 drillable locations.

However, BlackBrush “spent most of 2Q2012 upgrading their field infrastructure and pipeline capacity in order to handle increased production that was created by implementing Gasfrac technology on their San Pedro ranch acreage,” Zeringue said. “Other substantial revenue projects were pushed back to 3Q2012 due to various factors that were out of Gasfrac’s control.”

Also hampering South Texas operations was a “significant project in the Eagle Ford was pushed back as the customer reassessed its capital budget upon the decline of commodity prices,” he said.

In Canada, “wet conditions throughout the quarter prevented operations in many areas” said Zeringue. “The most significant impact for our Canadian operations was the delay of recommencement of operations for Husky Energy Inc., due to these wet conditions, from an original early June start date into mid July. Revenue was earned from four customers during the quarter, with one of these customers representing 32% of the total revenue earned from Canadian operations.”

However, Gasfrac reported some successes in parts of Canada, as well as in the Niobrara formation’s Wattenberg field in Colorado. Gasfrac completed a “substantial” project in July in the Wattenberg field, and “by all signs so far we are seeing very positive results,” the CEO said. “Of the 20 different customers we have completed stimulation treatments for in 2012, 13 have committed additional jobs in 2012 giving us a 65% customer retention rate in North America.”

The company has to compete in a North American market that is saturated with water-based fracturing equipment and at a time when commodity prices have stagnated, Zeringue said. LPG is more expensive than water, but it can be recycled, which requires a bigger marketing effort, he said. And Gasfrac hasn’t been able to go head-to-head against the big 24 hour/seven day-a-week operators.

Although Gasfrac had planned to concentrate on obtaining more long-term contracts for its services, it’s been a tough row to hoe, the CEO said. Marketing efforts have been limited in part because of Gasfrac’s relatively small sales staff. Those issues are being rectified, he explained.

“We recognize that, with ongoing uncertainty around oil and natural gas prices, operators are assessing capital budgets and operating procedures. In this context, we have undertaken several initiatives to achieve this goal including hiring additional technical sales and engineering staff for the U.S., introducing new marketing materials that facilitate enhanced exposure, redefining many operational roles and duties and hiring seasoned hydraulic fracturing veterans to lead and train our crews in order to increase efficiency and quality of jobs performed.

“We have made a significant commitment to our supply chain and logistics division in order to combat increased pricing pressure we are starting to see in the U.S. Lastly we are still working diligently on building and growing internal data for all jobs performed in order to significantly shorten the sales cycles with potential customers, particularly in the U.S.”

Gasfrac plans to deploy its first “hybrid” spread of equipment for natural gas liquids production later this year, he said. “This will help our customers manage their third-party costs while increasing our utilization.”

Gasfrac is working to expand its customer base in the Permian Basin, the Niobrara and the Utica Shale, said the CEO. In Canada Gasfrac has plans to build operations in the Cardium play, “with a particular focus on the Montney [shale] and Viking,” he said. “That foundation is still in place and we are actively pursuing opportunities in those areas.”

Revenue from the U.S. operations in 2Q2012 was C$4.7 million, generated from 12 operating days at an average revenue rate of C$393/day, versus C$1.8 million in 2Q2011 from eight operating days at an average revenue rate of C$231/day. Canadian operational revenue totaled C$12 million, generated from 28 operating days at an average of C$429/day, compared with 24 operating days at an average of C$513/day in 2Q2011.

Operating expenses in the latest quarter increased to C$21.7 million, or 130% of revenue, compared with C$15.4 million (108% of revenue) in 2Q2011. Cost of sales was C$10.4 million (61.9% of revenue), versus C$8.1 million (57.3%). “The increase in the cost of sales as a percentage of revenue reflects one-time product costs incurred in the United States for propane,” said the company.

Direct operating costs increased year/year to C$11.3 million from C$7.3 million in part because of “staffing costs of C$2.4 million for additional crews, added facility and related costs of C$800,000 for infrastructure for the Husky and Eagle Ford work, and C$800,000 of equipment costs.”

At the end of June Gasfrac “had sufficient staffing to man seven sets of equipment, as compared to staffing levels for four sets of equipment” at the end of June 2011.