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GASFRAC Announces Fourth Quarter 2012 Results

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CALGARY, ALBERTA -- (Marketwire) -- 03/13/13 -- GASFRAC (TSX: GFS) announced fourth quarter 2012 revenues of $46.9 million resulting in EBITDA of $7.7 million, including $1.9 million of insurance proceeds. Sequentially this represented an increase from $40.9 million of revenue and $1.0 million of EBITDA in the third quarter of 2012. In the fourth quarter of 2011 EBITDA was $7.9 million on revenues of $59.3 million.

James Hill, Chief Financial Officer commented "I am proud of what our team accomplished during the fourth quarter. The impact of decisions made late in the third quarter are reflected in our fourth quarter results. Sequentially we have achieved a reduction in fixed costs of more than $3.5 million in the quarter and are on track to driving our breakeven quarterly revenue to $30 million from its $40 million level in the third quarter. With a more sustainable cost structure in place we are focused on expanding our customer and revenue base through targeted selling driven by providing customer solutions and value. In particular, the augmentation of our service portfolio to include hybrid delivery and tailored high reid vapour pressure fluids expands our market and enhances value for our customers.

Late in the quarter we completed our first hybrid frac and performed the second in early February. These jobs were very successful and augment the Company's service delivery with a premium process allowing us to pump up to 300 tonnes of proppant per day. We will continue to refine this hybrid process to further expand our daily tonnage delivery. In addition we now have added the ability to tailor our frac fluid for specific suitability to the customer's formation allowing for the use of local fluid sources and recovery of the fluid through flowback into pressure tanks or into the gathering system. Both of these initiatives reduce total service cost for our customers and enhance our seamless delivery of service (frac to production).

I am also pleased to announce that GASFRAC was awarded the Leading Technologies Award - Commercial Application at the Platts 2012 Global Energy Awards."

Pursuant to our operations review initiated in the third quarter, we have parked five sets of equipment and during the fourth quarter we have recorded an impairment to those assets of $45 million.

Two of the Company's key patents (Liquified Petroleum Gas Fracturing System - Gas Blanket and Proppant Addition System and Method) have now been issued/allowed in the USA. These patents cover the key intellectual property surrounding the process of safely fracturing using LPG.

The board of directors special committee has conducted a search for a CEO over the last several months, utilizing an executive search firm. A number of potential candidates have been identified and interviewed and the board plans to make a decision within the next 60 days.

MANAGEMENT'S DISCUSSION AND ANALYSIS

DECEMBER 31, 2012

Management's discussion and analysis ("MD&A") of the financial condition and the results of operations should be read in conjunction with the consolidated financial statements for the year ended December 31, 2012 of GASFRAC Energy Services Inc. ("GASFRAC" or the "Company"), together with the accompanying notes. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

Readers should also refer to the "Forward-Looking Statements" legal advisory at the end of this MD&A. This MD&A has been prepared using information that is current March 13, 2013.

All references to dollar amounts are in Canadian dollars. Figures are in '000s except share and per share data or as otherwise noted.

Unless the context otherwise requires, all references in this MD&A to "we", "us" or "our" mean the Company.

BUSINESS OF GASFRAC

GASFRAC Energy Services Inc. was incorporated on February 13, 2006 in Canada under the Business Corporations Act in the Province of Alberta. The Company is an oil and gas well fracturing company that has developed new technology, the "LPG Fracturing Process", to enable wells to be fractured safely with LPG, more specifically propane and butane. The Company operates in Canada and the United States through six wholly-owned subsidiaries, the GASFRAC Energy Services GP Inc., GASFRAC Energy Services Limited Partnership, GASFRAC Luxembourg Finance (a Luxembourg incorporated entity), GASFRAC Energy Services (US) Inc. (a U.S. incorporated entity), GASFRAC US Holdings Inc., and GASFRAC Inc. (a U.S. incorporated entity).

COMPARATIVE ANNUAL FINANCIAL INFORMATION

December 31 December 31 December 31 2012 2011 2010---------------------------------------------------------------------------- CAD$ CAD$ CAD$Revenue 149,442 161,363 96,906Operating expenses 127,673 127,821 72,023Selling, general and administrative expenses 22,487 17,405 10,823EBITDA(1) 573 13,374 15,068(Loss) Profit for the period (77,469) (2,853) 4,760(Loss) Earnings per share - basic (1.23) (0.05) 0.12(Loss) Earnings per share - diluted (1.23) (0.05) 0.12Weighted average number of shares - basic 62,886 61,469 38,879Total assets 275,456 322,508 278,705Total non-current liabilities 63,077 23,305 548Treatments 565 553 419Revenue per treatment 264 255 231Revenue days 321 282 300Revenue per revenue day 466 499 323----------------------------------------------------------------------------



(1) Defined under Non-IFRS Measures

OPERATIONAL REVIEW

Late in the third quarter, the Board of Directors announced management changes and an operational review. As of the date of this report, the board of directors is continuing a formal search for a new chief executive officer. The board is also considering augmenting its current board composition with additional experience and expertise as GASFRAC continues to grow.

The operational review assessed our infrastructure and ensured that it was being appropriately deployed to support operational efficiency, while ensuring long-term profitability, sustainably and the continued growth of GASFRAC's proprietary technology.

As a result of the operational review, we determined that it was prudent to refocus our operations on near-term growth opportunities in North America where we have demonstrated particular success. Specifically, in Canada we are targeting areas in the western Canada sedimentary basin. In the U.S., we are focusing on areas in South Texas and Colorado. To help support this initiative, we have established core sales and engineering teams in these regions that are focused on serving and growing our client base. By focusing on these areas we were able to reduce our overall U.S. field and support staff by 25% to a level to support two sets of equipment. Likewise, Canadian staffing levels were reduced by 20% to a level to support three sets of equipment. Additional changes have been made to reduce charges associated with facilities, staff housing, insurance and other fixed costs.

The impact of these reductions was realized during the fourth quarter with quarterly fixed costs being reduced sequentially by approximately $3.8 million and the resultant quarterly cash breakeven revenue being reduced to approximately $30 million from an estimated $39 million. Revenues for the quarter of $46.9 million resulted in EBITDA of $7.7 million. This compares to third quarter revenue of $40.9 million with an EBITDA of $1.0 million.

Operationally, the Company successfully completed its first hybrid fracturing treatment in South Texas. This new delivery system allows the Company to increase the daily tonnage of proppant pumped beyond the 100 tonne standard with our conventional system, opening the market opportunity for larger horizontal fracturing treatments being used in formations such as the Eagle Ford.

FINANCIAL OVERVIEW - FOR THE THREE MONTHS ENDED

December 31, 2012 ------------------------------------------------------- Canada U.S. Corporate Total ------------------------------------------------------- CAD$ CAD$ CAD$ CAD$Revenue 33,660 100.0% 13,228 100.0% 46,888 100.0%Cost of sales 17,263 51.3% 7,087 53.6% 24,350 51.9%Direct operating costs 7,064 21.0% 3,931 29.7% 10,995 23.4%----------------------------------------------------------------------------Operating expenses 24,327 72.3% 11,018 83.3% - 35,345 75.4%----------------------------------------------------------------------------Selling, general and administration 2,721 8.1% 1,975 14.9% 844 5,540 11.8%Number of revenue days 79 27 106Revenue per day 425 490 442---------------------------------------------------------------------------- December 31, 2011 ------------------------------------------------------- Canada U.S. Corporate Total ------------------------------------------------------- CAD$ CAD$ CAD$ CAD$Revenue 36,309 100.0% 22,995 100.0% 59,304 100.0%Cost of sales 20,337 56.0% 13,948 60.7% 34,285 57.8%Direct operating costs 7,724 21.3% 2,548 11.1% 10,272 17.3%----------------------------------------------------------------------------Operating expenses 28,061 74.3% 16,496 71.7% 44,557 75.1%----------------------------------------------------------------------------Selling, general and administration 3,502 9.6% 1,861 8.1% 262 5,625 9.5%Number of revenue days 54 43 97Revenue per day 672 535 611----------------------------------------------------------------------------



REVENUE

Revenue for the fourth quarter decreased 20.9% to $46.9 million from $59.3 million in the fourth quarter of 2011.

During the quarter, the company earned revenues from 11 customers with the top three customers representing 70.8% of the total revenue. During the fourth quarter of 2011, the top three customers represented 54.2% of the total revenue.

Canadian operations:

Fourth quarter revenue from the Canadian operations decreased 7.2% to $33.7 million from $36.3 million in the fourth quarter of 2011. The reduction reflects fewer smaller oil companies utilizing the Company's services due to capital constraints. This was offset by improved revenues from the Company's core customers. The Canadian operations performed 79 operating days in the fourth quarter of 2012 with an average daily revenue of $425 compared to 54 operating days in the fourth quarter of 2011 with an average daily revenue of $672. The decrease in average daily revenue is due to the decrease in the price and cost of LPG as well as an increase in the amount of customers that supplied their own proppant.

During the quarter, revenue was generated from 7 customers with the top 3 customers representing 86.6% of the total revenue. During the fourth quarter of 2011, the top 3 customers represented 70.5% of the total revenue.

U.S. operations:

Fourth quarter revenue from the U.S. operations decreased 42.6% to $13.2 million from $23.0 million in the fourth quarter of 2011. While our core US client was active in October, hunting season restrictions prevented operations during November and most of December. They recommenced operations on these lands in February with the Company's second hybrid fracturing treatment. U.S. operations produced 27 operating days in the fourth quarter of 2012 with an average daily revenue of $490 compared to 43 revenue days in the fourth quarter of 2011 with an average daily revenue of $535. The decrease in average daily revenue is mainly due to the decrease in price and cost of LPG. In the fourth quarter of 2011, the Company was engaged by two customers to perform pilot projects in the Niobarra.

During the quarter, revenue was generated from 4 customers with the top 3 customers representing 96.4% of the total revenue. During the fourth quarter of 2011, the top three customers represented 95.6% of the total revenue.

OPERATING EXPENSES

Operating expenses (comprised of cost of sales and direct operating costs) decreased 20.9% to $35.3 million from $44.6 million in the fourth quarter of 2011. Cost of sales was $24.4 million (51.9%) as compared to $34.3 million (57.8%) in the fourth quarter of 2011. Direct operating costs were $11.0 million as compared to $10.3 million in the fourth quarter of 2011. Direct operating costs were comprised of fixed costs of $7.1 million and variable costs of $3.9 million as compared to fixed costs of $6.0 million and variable costs of $4.3 million in the fourth quarter of 2011 and fixed costs of $8.2 million and variable costs of $5.0 million in the third quarter of 2012.

Canadian operations:

During the fourth quarter, operating expenses decreased 13.5% to $24.3 million from $28.1 million in the fourth quarter of 2011. Cost of sales decreased to $17.3 million (51.3%) from $20.3 million (56.0%). Direct operating costs were $7.1 million as compared to $7.7 million in the fourth quarter of 2011 and $7.9 million in the third quarter of 2012. These were comprised of $4.3 million of fixed costs and $2.8 million (8.3%) of variable costs as compared to fixed costs of $4.3 million and variable costs of $3.4 million (9.5%) in the fourth quarter of 2011 and fixed costs of $4.9 million and variable costs of $3.0 million (11.2%) in the third quarter of 2012.

U.S. operations:

During the fourth quarter, operating expenses were $11.0 million compared to $16.5 million in the fourth quarter of 2011. Cost of sales decreased to $7.0 million (53.6%) from $13.9 million (60.7%). Direct operating costs were $3.9 million as compared to $2.5 million in the fourth quarter of 2011 and $5.3 million in the third quarter of 2012. These were comprised of $2.9 million of fixed costs and $1.0 million (7.6%) of variable costs as compared to fixed costs of $1.6 million and variable costs of $0.9 million (7.5%) in the fourth quarter of 2011 and fixed costs of $3.3 million and variable costs of $2.0 (14%) million in the third quarter of 2012.

IMPAIRMENT OF U.S. BASED ASSETS

The Company has determined that there is an impairment in the value of the assets of the U.S. cash generating unit. In assessing the potential impairment of assets, the Company considered both the fair value less costs to sell and the value in use. In making its assessment, consideration was given to the Company's current market position in the U.S. and to the overall pressure pumping market in the U.S. which is currently experiencing an over-supply of equipment which we do not expect to reverse during 2013. Management's forecast of expected cash flows does not support the four sets of equipment allocated to the region. Management has therefore concluded that while this oversupply is experienced, an impairment in the carrying value of the U.S. assets exists in an amount of approximately $24.8 million and has been recognized in these financial statements. The impairment of $24.8 million is based on management's estimate of the fair value less cost to sell as determined based on estimates of the amounts that could be obtained in a non-compulsory asset sale, with an arm's length willing third party.

IMPAIRMENT OF CANADIAN BASED ASSETS

The Company has determined that there is an impairment in the value of the assets of the Canadian cash generating unit. In assessing the potential impairment of assets, the Company considered both the fair value less costs to sell and the value in use. In making its assessment, consideration was given to the Company's current market position in Canada and to the overall pressure pumping market in the Canada which is currently experiencing an over-supply of equipment which we do not expect to reverse during 2013. Management's forecast of expected cash flows does not support the five sets of equipment allocated to the region. Management has therefore concluded that while this oversupply is experienced, an impairment in the carrying value of the Canadian assets exists in an amount of approximately $20.0 million and has been recognized in these financial statements. The impairment of $20.0 million is based on management's estimate of the fair value less cost to sell. Fair value was derived using an earnings multiple approach, in which an implied multiple was applied to the CGU's forecasted EBITDA. The implied multiple was based on a review of comparable company trading multiples. Additional consideration was given for the value that could be obtained for redundant equipment in a non-compulsory asset sale, with an arm's length willing third party.

SALES, GENERAL & ADMINISTRATIVE ("SG&A") EXPENSES

For the fourth quarter, SG&A expenses decreased 1.8% to $5.5 million from $5.6 million in the fourth quarter of 2011. The decrease is primarily due to decreased salaries and benefits associated with the reductions of the executive and administrative staffing levels that occurred in the third quarter of 2012.

EBITDA

For the fourth quarter, EBITDA decreased to $7.7 million as compared to $7.9 million in the fourth quarter of 2011 and $1.1 million in the third quarter of 2012. The increase from the third quarter of 2012 is due to the decrease in fixed direct operating costs as a result of the restructuring that occurred in September 2012.

NET LOSS

For the fourth quarter of 2012, the net loss was $48.5 million compared to a net income of $1.5 million during the fourth quarter of 2011. The creation of the net loss is primarily due to the impairment of the assets in the Canadian and U.S. cash generating units as well as an increase in depreciation due to the deployment of additional frac equipment.

FINANCIAL OVERVIEW - FOR THE TWELVE MONTHS ENDED

December 31, 2012 -------------------------------------------------------- Canada U.S. Corporate Total -------------------------------------------------------- CAD$ CAD$ CAD$ CAD$Revenue 107,795 100.0% 41,647 100.0% - 149,442 100.0%Cost of sales 54,272 50.3% 25,293 60.7% - 79,565 53.2%Direct operating costs 31,356 29.1% 16,752 40.2% - 48,108 32.2%----------------------------------------------------------------------------Operating expenses 85,628 79.4% 42,045 101.0% - 127,673 85.4%----------------------------------------------------------------------------Selling, general and administration 11,763 10.9% 5,644 13.6% 5,080 22,487 15.0%Number of revenue days 227 94 321Revenue per day 475 443 466---------------------------------------------------------------------------- December 31, 2011 -------------------------------------------------------- Canada U.S. Corporate Total -------------------------------------------------------- CAD$ CAD$ CAD$ CAD$Revenue 123,915 100.0% 37,448 100.0% - 161,363 100.0%Cost of sales 72,396 58.4% 21,164 56.5% - 93,560 58.1%Direct operating costs 26,788 21.6% 7,473 20.0% 82 34,261 23.5%----------------------------------------------------------------------------Operating expenses 99,184 81.1% 28,637 83.8% 82 127,821 91.8%----------------------------------------------------------------------------Selling, general and administration 12,521 8.1% 4,157 9.0% 727 17,405 11.5%Number of revenue days 201 81 282Revenue per day 513 462 499----------------------------------------------------------------------------



REVENUE

Revenue decreased 7.4% to $149.4 million from $161.4 million in 2011. 2011 revenue included a $20.9 million sale of materials to a customer. Adjusting for this one time sale, revenues from services increased 6.3% in 2012 as compared to 2011. Revenue per operating day decreased to $466 from $499 in 2011.

The Company earned revenues from 32 customers with the top three customers accounting for 67.4% of the Company's revenue. During 2011, the top 3 customers accounted for 42.5% of the Company's revenue.

Canadian operations:

Canadian operations generated $107.8 million of revenue from 227 operating days with an average daily revenue of $475. In 2011, Canadian operations generated $103.0 million of service revenue and $20.9 million of revenue from a product sale for total revenue of $123.9 million from 201 operating days at an average daily revenue of $513.

Revenue was earned from 14 customers during the year with three of these customers representing 79% of the total revenue. During 2011, the top 3 customers from the Canadian operations accounted for 49.5% of the Company's Canadian revenue.

U.S. operations:

U.S. operations generated $41.6 million of revenue from 94 operating days at an average revenue per operating day of $443. In 2011, the U.S. operations generated $37.4 million of revenue from 81 operating days at an average daily revenue of $462.

Revenue was earned from 18 customers during the year with three of these customers representing 69% of the total revenue earned from U.S. operations. During 2011, the top 3 customers from the US operations accounted for 75.6% of the Company's US revenue.

OPERATING EXPENSES

Operating expenses (comprises of cost of sales and direct operating costs) decreased to $127.7 million compared to $127.8 million in 2011. Cost of sales was $79.6 million (53.2% of revenue) as compared to $93.6 million (58.1% of revenue) in 2011. Direct operating costs increased to $48.1 million in 2012 as compared to $34.3 million in 2011. Direct operating costs were comprised of fixed costs of $28.0 million and variable costs of $20.1 million as compared to fixed costs of $19.9 million and variable costs of $14.4 million in 2011. The increase in fixed costs was primarily due to an increased in the headcount of field personnel.

Canadian operations:

Operating expenses from the Canadian operations were $85.6 million compared to the $99.2 million incurred in 2011. Cost of sales was $54.3 million (50.4% of revenue) as compared to $72.4 million (58.4% of revenue) in 2011. Direct operating costs increased to $31.4 million as compared to $26.8 million in 2011. Direct operating costs were comprised of fixed costs of $17.4 million and variable costs of $14.0 million (13.0%) as compared to fixed costs of $14.2 million and variable costs of $12.6 million (10.2%) in 2011.

U.S. operations:

Operating expenses from the U.S. operations was $42.0 million, compared to the $28.6 million incurred in 2011. Cost of sales was $25.3 million (60.7% of revenue) as compared to $21.2 million (56.5%) of revenue in 2011. Direct operating costs increased to $16.8 million in 2012 as compared to $7.5 million in 2011. Direct operating costs were comprised of fixed costs of $10.7 million and variable costs of $6.1 million (14.7%) as compared to fixed costs of $5.7 million and variable costs of $1.8 million (4.8%) in 2011. The increase in direct operating costs was the result of the increased operational staff.

SALES, GENERAL & ADMINISTRATIVE ("SG&A") EXPENSES

SG&A expenses were $22.5 million compared $17.4 million in 2011. The increase over 2011 is primarily due an increase in executive and administrative that occurred in the first half of 2012 with subsequent severance costs of approximately $0.9 million accrued upon termination of executive and overhead staff in September 2012.

EBITDA

EBITDA was $0.6 million compared to $13.4 million in 2011. The decrease is primarily due to the increase in SG&A and fixed direct operating costs.

NET LOSS

Net loss was $77.5 million as compared to a $2.9 million net loss during 2011. The creation of the net loss is primarily due to the impairment of the assets in the Canadian and U.S. cash generating units in Q4 2012. The Company's effective tax rate was 3.25% (2011 - 6.24%) compared to the statutory rate of 25.00% (2011 - 26.55%). The difference in effective tax rate as compared to the statutory tax rate results largely from certain tax losses not being recognized for accounting purposes at this time.

FINANCIAL OVERVIEW - SUMMARY OF QUARTERLY RESULTS

Mar. 31 Jun 30 Sep. 30 Dec. 31 2011 2011 2011 2011---------------------------------------------------------------------------- CAD$ CAD$ CAD$ CAD$Revenue 30,452 14,170 57,437 59,304(Loss) Profit for the period (2,515) (7,768) 5,911 1,519(Loss) Earnings per share - basic (0.04) (0.13) 0.10 0.03(Loss) Earnings per share - diluted (0.04) (0.13) 0.09 0.03EBITDA (1) 66 (5,566) 10,960 7,914Capital expenditures 38,941 22,995 32,920 30,877Working capital (2) 79,069 49,946 33,998 28,491Shareholders' equity 258,217 251,374 262,436 264,713---------------------------------------------------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 2012 2012 2012 2012---------------------------------------------------------------------------- CAD$ CAD$ CAD$ CAD$Revenue 44,969 16,734 40,851 46,888(Loss) Profit for the period (4,926) (16,949) (7,144) (48,450)(Loss) Earnings per share - basic (0.08) (0.27) (0.11) (0.77)(Loss) Earnings per share - diluted (0.08) (0.27) (0.11) (0.77)EBITDA (1) 2,259 (10,430) 1,060 7,684Capital expenditures 22,162 23,315 3,878 11,278Working capital (2) 27,894 8,994 (1,092) 25,740Shareholders' equity 263,695 247,519 237,201 190,444----------------------------------------------------------------------------



(1) Defined under Non-IFRS Measures

(2) Working capital is defined as current assets less current liabilities

LIQUIDITY AND CAPITAL RESOURCES

December 31 December 31 2012 2011---------------------------------------------------------------------------- CAD$ CAD$Cash provided by (used in) Operating activities 19,006 (9,664) Financing activities 46,315 29,014 Investing activities (62,343) (113,085)---------------------------------------------------------------------------- 2,978 (93,735)--------------------------------------------------------------------------------------------------------------------------------------------------------



As at December 31, 2012, the Company had approximately $2.5 million of capital commitments as part of the 2012 capital program. The Company anticipates being able to fund these capital expenditures through cash on hand, operating cash flows and debt facilities.

OPERATING

Net cash generated from operating activities was $19.0 million as compared to a $9.6 million cash draw in 2011. During the year trade and other receivables of $15.2 million were collected that contributed substantially to the cash flow from operating activities.

FINANCING

Net cash provided by financing activities was $46.3 million compared to $29.0 million in 2011. The financing activities in 2012 consisted mainly from the issuance of convertible debentures ($37.9 million) and from the credit facility ($7.8 million).

The Company has a $10 million operating demand revolving loan facility and a $90 million committed revolving facility. In 2012, the bank syndicate approved amendments to the credit facility suspending the financial covenants relating to trailing twelve month EBITDA through to the end of Q1 2013 and limiting draws on the credit facility during this period to $60 million. As at December 31, 2012, the Company is in compliance with the covenants including the modified EBITDA covenant.

INVESTING

The Company invested $49.1 million in property and equipment and intangible assets for 2012 to add revenue producing capacity as compared to $125.7 million in 2011. 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 (excluding performance share units and accrued interest on debentures) 15,835 15,835 - - -Performance share units 544 344 200 - -Provisions 768 768 - - -Finance lease obligation (incl. expected interest) 2,587 1,500 1,087 - -Credit facility (incl. expected interest) 35,341 4,048 31,293 - -Debentures (incl. expected interest) 52,930 2,818 8,453 41,659 -Operating lease payments 10,722 1,809 3,081 2,609 3,233Commitment to purchase raw materials 74,930 14,041 56,269 2,428 2,192Commitment to purchase plant and equipment 2,523 2,523 - - -----------------------------------------------------------------------------Total 196,180 43,686 100,383 46,696 5,425--------------------------------------------------------------------------------------------------------------------------------------------------------



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

Dec 31, 2012 Dec 31, 2011---------------------------------------------------------------------------- CAD$ '000 CAD$ '000Cash and cash equivalents 7,927 5,026Trade receivables 28,376 48,206Unused credit facility - subject to applicable debt ceiling 30,000 26,383---------------------------------------------------------------------------- 66,303 79,615--------------------------------------------------------------------------------------------------------------------------------------------------------



During 2012 the Company incurred a significant EBITDA loss in the second quarter and had large capital expenditure commitments for the completion of its 2011 capital program. To fund these costs, the Company issued a convertible debenture and drew on its bank line of credit. The EBITDA loss in the second quarter negatively impacted trailing twelve month EBITDA amounts used in the calculation of certain of the financial covenants under its credit facility. Accordingly, the Company reached an agreement with its bankers to suspend these covenants until the measuring date for the second quarter of 2013. Additionally, the Company implemented reductions to its operating costs in September 2012 through staff reductions, facility consolidation and the parking of certain equipment. The Company also renegotiated commitments for the purchase of raw materials for operations reducing 2013 commitments to $14.1 million from $58.1 million. Capital expenditure commitments for 2013 are $2.5 million. As a result of these actions the Company anticipates that operating cash flow and its bank credit facility will be sufficient to fund ongoing operations.

While there exists uncertainty as to the Company's ability to meet all financial covenants for the all quarters during 2013, due to the limited amount drawn on the credit facility and the level of asset security, management does not anticipate that financing would be withdrawn. The bank credit facility matures August 31, 2013 and should it not be renewed is subject to repayment in seven quarterly repayments equal to 1/12 of the outstanding amount commencing in the second quarter following maturity with the remainder, including accrued interest, due with an eight payment two years following the maturity date. While the Company does not anticipate the credit facility not being renewed or called, in the event it is not, funding options would include a renegotiated bank credit line, equipment based funding supported by the Company's asset base or term debt.

IMPAIRMENT OF U.S. PLANT AND EQUIPMENT

The Company has determined that there is an impairment in the value of the assets of the USA cash generating unit. In assessing the potential impairment of assets, the Company considered both the fair value less costs to sell and the value in use. In making its assessment, consideration was given to the Company's current market position in the USA and to the overall pressure pumping market in the U.S. which is currently experiencing an over-supply of equipment which we do not expect to reverse during 2013. Management's forecast of expected cash flows does not support the four sets of equipment allocated to the region. Management has therefore concluded that while this oversupply is experienced, an impairment in the carrying value of the USA assets exists in an amount of approximately $24.8 million and has been recognized in these financial statements. The impairment of $24.8 million is based on management's estimate of the amounts that could be obtained in a non-compulsory asset sale, with an arm's length willing third party.

IMPAIRMENT OF CANADIAN BASED ASSETS

The Company has determined that there is an impairment in the value of the assets of the Canadian cash generating unit. In assessing the potential impairment of assets, the Company considered both the fair value less costs to sell and the value in use. In making its assessment, consideration was given to the Company's current market position in Canada and to the overall pressure pumping market in the Canada which is currently experiencing an over-supply of equipment which we do not expect to reverse during 2013. Management's forecast of expected cash flows does not support the five sets of equipment allocated to the region. Management has therefore concluded that while this oversupply is experienced, an impairment in the carrying value of the Canadian assets exists in an amount of approximately $20.0 million and has been recognized in these financial statements. The impairment of $20.0 million is based on management's estimate of the fair value less cost to sell. Fair value was derived using an earnings multiple approach, in which an implied multiple was applied to the CGU's forecasted EBITDA. The implied multiple was based on a review of comparable company trading multiples. Additional consideration was given for the value that could be obtained for redundant equipment in a non-compulsory asset sale, with an arm's length willing third party.

ACCOUNTING POLICIES AND ESTIMATES

This MD&A is based on the Company's annual consolidated financial statements that have been prepared in accordance with IFRS. Management is required to make assumptions, judgments and estimates in the application of IFRS. The Company's summary of significant accounting policies are described in Note 2 of the December 31, 2012 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.

Apart from the key source of estimation uncertainty disclosed below, all key assumptions concerning the future, and other key sources of estimation uncertainty made at the end of the last full reporting period were applied consistently for the twelve months ended December 31, 2012.

Valuation of debenture holders' conversion option

In order to value the debenture holders' conversion option, management had to determine what interest rate a similar debt instrument will carry if it had no conversion privilege. Management reviewed similar issues within the Canadian debt market of unrated entities and concluded that such a similar debt instrument without conversion privilege will carry a 10% coupon interest rate.

Also, the Company's option to redeem the debentures before maturity is considered closely related to the host debt instrument and thus not separately valued.

Useful lives of plant and equipment

The Company reviews the estimated useful lives of plant and equipment at the end of each reporting period. 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. Amortization of the finite intangible assets also incorporates estimates of useful lives and residual values. During the current year, no changes were made to the economic useful life plant and equipment.

Recognition of deferred tax assets

The Company only recognizes a deferred tax asset when it is probable that taxable benefits would be received in the future. The probability of future taxable benefits is based upon the earnings history of the Company, management's best estimate of future earnings and expectations of future tax rates based on legislation in place in the relevant jurisdiction.

Share based compensation estimates

The Company calculates the fair value of its options using the Black-Scholes option pricing model. Based on available information the Company estimates the fair value using the following weighted average assumptions to determine the fair value of the options at the date of grant. All share options are granted at the market value of the shares on grant date.

Performance share unit grants are linked to corporate performance and grants vest from one to three years from date of grant. The Company periodically assesses expectations as to the performance achieved as an input variable to the calculation of its liability pursuant to performance share units.

Recoverability of accounts receivable

The Company performs ongoing credit evaluations of its customers and grants credit based upon a credit review and review of historical collection experience, current aging status, financial condition of the customer and anticipated industry conditions. Customer payments are regularly monitored and an allowance for doubtful accounts is established based upon specific situations and overall industry conditions affecting individual. The Company's management believes that the allowance for doubtful accounts is adequate.

Impairment evaluation of plant and equipment and intangible assets

The Company evaluates the plant and equipment and intangible assets for possible impairment when impairment indicators exist. The Company allocated plant and equipment and intangible assets into cash generating units (CGU) based on the geographical area within which the assets operate. The impairment is determined based of the highest of the value in use or fair value less cost to sell of each CGU.

The value in use is based on the medium term budget, management estimates the future net cash flow expected to be generated by each CGU and determines the present value of these future cash flows by applying a weighted cost of capital that represents management's estimate of the return expected by each capital provider. Key assumptions in the calculation of future cash flows include; the number of fracturing sets operating, utilization rates for each set and the discount rate used for determination of net present value. The fair value is derived from an earnings before interest, taxes, depreciation and amortization (EBITDA) multiple with additional consideration of the value that could be obtained for redundant equipment in a non-compulsory asset sale with an arm's length third party. The EBITDA multiple is determined by looking at multiples of comparable public companies. EBITDA figures are based off normalized historical results of each CGU and adjusted for forecasted assumptions including expected utilization rates and headcount.

When assets that do not fall within a CGU have to be considered for impairment, management estimates the recoverable amount for each asset based upon current market value of such an asset between arm's length parties.

These assumptions and estimates are uncertain and are subject to change as new information becomes available. Changes in economic conditions can also affect the discount rate or EBITDA multiple.

RELATED PARTY TRANSACTIONS

Details of transactions between the Company and other related parties are disclosed below

Trading transactions:

During the year, the Company entered into the following trading transactions with related parties that are not members of the Company:

Fracturing services Dec 31, 2012 Dec 31, 2011---------------------------------------------------------------------------- CAD$ '000 CAD$ '000Fracturing services rendered to companies with shared directors 297 1,954--------------------------------------------------------------------------------------------------------------------------------------------------------



The following balances were outstanding at the end of the reporting period:

Amounts owed by related parties Dec 31, 2012 Dec 31, 2011---------------------------------------------------------------------------- CAD$ '000 CAD$ '000Companies with shared directors - 126--------------------------------------------------------------------------------------------------------------------------------------------------------



Sales of goods to related parties were made at the Company's usual list prices. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognized in the current or prior years for bad or doubtful debts in respect of the amounts owed by related parties

During the year, the Company also paid $nil (2011 - $62 thousand) in consulting fees to certain Directors. These transactions were in the normal course of operations and have been measured at the exchange amounts.

OUTSTANDING SHARE DATA

Common Shares Warrants Share Options---------------------------------------------------------------------------- # # #Balance as at January 1, 2011 60,226,366 1,757,500 2,746,208 Issues / Granted - - 800,000 Issued / Exercised 2,172,708 (932,500) (1,073,875) Forfeited - - (42,333)----------------------------------------------------------------------------Balance as at December 31, 2011 62,399,074 825,000 2,430,000 Issues / Granted 55,000 - 1,645,000 Issued / Exercised 1,067,420 (825,000) (130,000) Forfeited (5,830) - (1,135,000)----------------------------------------------------------------------------Balance as at December 31, 2012 63,515,664 - 2,810,000--------------------------------------------------------------------------------------------------------------------------------------------------------



FINANCIAL INSTRUMENTS

The Company's strategy is to maintain a capital structure to sustain future growth of the business and retain creditor, investor and market confidence. Recognizing the cyclical nature of the oilfield services industry, the Company strives to maintain a conservative balance between long-term debt and shareholders' equity. The Company's capital structure is currently comprised of shareholders' equity and undrawn long-term bank debt. The Company may occasionally need to increase its level of long-term debt to total capitalization to facilitate growth activities.

The company has a $10 million operating demand revolving loan facility and a $90 million committed revolving facility, both of which are subject to various financial and non financial covenants. The covenants are monitored on a regular basis and controls are in place to ensure the Company maintains compliance with these covenants. As at December 31, 2011, the Company is in compliance with all the covenants related with this facility.

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.

Financial risk management objectives

The Company monitors and manages the financial risks relating to the operations of the Company through internal risk procedures which analyze exposures by degree and magnitude of risks. These risks include market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk.

Currently, the Company does not use derivative financial instruments to manage any financial risks. Exchange rate risk managed through foreign currency denominated invoicing by The Company's US subsidiary and reducing the timing of between procurement and payment of foreign currency denominated payables.

Market risk

Foreign currency exchange rate risk

As the Company operates primarily in Canada and the United States of America ("U.S."), fluctuations in the exchange rate between the U.S. dollar and Canadian dollar can have a significant effect on the operating results and the fair value or future cash flows of The Company's financial assets and liabilities. The Canadian entities are exposed to currency risk on foreign currency denominated financial assets and liabilities with adjustments recognized as foreign exchange gains or losses in the consolidated statement of comprehensive income. The U.S. entities with a U.S. dollar denominated functional currency expose the Company to currency risk on the translation of these entities' financial assets and liabilities to Canadian dollars on consolidation. In addition, U.S. entities are exposed to currency risk on financial assets and liabilities denominated in currencies other than their functional currency (U.S. dollars) with adjustments recognized in the consolidated statements of comprehensive income. For the year ended December 31, 2012, a 1% fluctuation in the value of the Canadian dollar relative to the U.S. dollar would have impacted profit before tax by $nil (2011 - $19 thousand.

Interest rate risk

The Company is exposed to interest rate risk because the Company borrows funds at only variable interest rates. The sensitivity analyses have been determined based on the exposure to interest rates for applicable to outstanding borrowings at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant, The Company's profit before tax would be $46 thousand lower/higher based on the borrowings outstanding at year end. (2011 - $111 thousand). All finance leases are concluded at fixed interest rates and a change in market interest rates relating to finance leases will not impact the Company's profit. The Company's sensitivity to interest rates has increased during the current year mainly due to the continued capital construction program leading to a draw on The Company's credit facility.

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company assesses the creditworthiness of its customers on an ongoing basis. The Company's exposure and the credit ratings of its counterparties are continuously monitored as are amounts outstanding and age of receivables.

Trade receivables are predominately with customers who explore and develop petroleum and natural gas resources mainly in Canada and the southern U.S. The Company is subject to normal industry credit risk. This includes fluctuations in oil and natural gas commodity prices and the ability of customers to obtain attractive debt and/or equity financing. These balances represent the Companies total credit exposure. During the year, the Company earned revenues from more than 40 (2011: greater than 50) customers with the top three customers representing 67% (2011 - 42%) of revenue.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has adequate credit facilities in place to meet its current commitments as they become due and further manages its liquidity risk by continuously monitoring forecasts and actual cash flows.

Fair values of financial instruments

The fair value of The Company's financial instruments included on the consolidated balance sheet approximate their carrying amounts due to their short term maturity.

BUSINESS RISK

The business of the Company is subject to certain risks and uncertainties, including those listed below. Prior to making any investment decision regarding the Company, investors should carefully consider, among other things, the risk factors set forth below.

Volatility of Industry Conditions: The demand, pricing and terms for The Company's fracturing and well stimulation services largely depend upon the level of exploration and development activity for North American oil and natural gas. Industry conditions are influenced by numerous factors over which the Company has no control, including the level of oil and natural gas prices, expectations about future oil and natural gas prices, the cost of exploring for, producing and delivering oil and natural gas, the decline rates for current production, the discovery rates of new oil and natural gas reserves, available pipeline and other oil and natural gas transportation capacity, weather conditions, political, military, regulatory and economic conditions, and the ability of oil and natural gas companies to raise equity capital or debt financing. A material decline in global oil and natural gas prices or North American activity levels as a result of any of the above factors could have a material adverse effect on The Company's business, financial condition, results of operations and cash flows. Because of the current economic environment and related decrease in demand for energy, natural gas exploration and development in North America has decreased from peak levels in 2008. Warmer than normal winters in North America, among other factors, may adversely impact demand for natural gas and, therefore, demand for oilfield services. If the economic conditions deteriorate further or do not improve, the decline in natural gas exploration and development could cause a decline in the demand for The Company's services. Such decline could have a material adverse effect on The Company's business, financial condition, results of operations and cash flows.

Demand for Oil and Natural Gas: Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil and other hydrocarbons. The Company cannot predict the impact of changing demand for oil and natural gas products, and any major changes could have a material adverse effect on The Company's business, financial condition, results of operations and cash flows.

Seasonality: The Company's financial results are directly affected by the seasonal nature of the North American oil and natural gas industry. The first quarter incorporates the winter drilling season when a disproportionate amount of the activity takes place in western Canada. During the second quarter, soft ground conditions typically curtail oilfield activity in all of The Company's Canadian operating areas such that many rigs are unable to move about due to road bans. This period, commonly referred to as "spring breakup", occurs earlier in the year in southeastern Alberta than it does in northern Alberta and northeastern British Columbia. Consequently, this is The Company's weakest three-month revenue period. Additionally, if an unseasonably warm winter prevents sufficient freezing, the Company may not be able to access well sites and The Company's operating results and financial condition may therefore be adversely affected. The demand for fracturing and well stimulation services may also be affected by severe winter weather in North America. In addition, during excessively rainy periods in any of The Company's operating areas, equipment moves may be delayed, thereby adversely affecting revenues. The volatility in the weather and temperature can therefore create unpredictability in activity and utilization rates, which can have a material adverse effect on The Company's business, financial condition, results of operations and cash flows.

Concentration of Customer Base: The Company's customer base consists of over thirty oil and natural gas exploration and production companies, ranging from large multinational public companies to small private companies. The Company had three significant customers that collectively accounted for approximately 72% of The Company's revenue for the year ended December 31, 2012. One of these customers accounted for 43% of revenue. The Company's strong relationships with exploration and production companies may result in increased concentration of revenues during periods of reduced activity levels such as the first three months of the year. However, there can be no assurance that the Company 's relationship with its primary customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, would have a material adverse effect on the Company 's business, financial condition, results of operations and cash flows.

Competition: Each of the markets in which the Company participates is highly competitive. To be successful, a service provider must provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices. The principal competitive factors in the markets in which the Company operates are product and service quality and availability, technical knowledge and experience, reputation for safety and price. The Company competes with large national and multinational oilfield service companies that have greater financial and other resources. These companies offer a wide range of well stimulation services in all geographic regions in which the Company operates. In addition, the Company competes with several regional competitors. As a result of competition, it may suffer from a significant reduction in revenue or be unable to pursue additional business opportunities.

Equipment Inventory Levels: Because of the long-life nature of oilfield service equipment and the lag between when a decision to build additional equipment is made and when the equipment is placed into service, the inventory of oilfield service equipment in the industry does not always correlate with the level of demand for service equipment. Periods of high demand often spur increased capital expenditures on equipment, and those capital expenditures may add capacity that exceeds actual demand. This capital overbuild could cause The Company's competitors to lower their rates and could lead to a decrease in rates in the oilfield services industry generally, which could have a material adverse effect on the Company 's business, financial condition, results of operations and cash flows.

Sources, Pricing and Availability of Raw Materials and Component Parts: The Company sources its raw materials, such as proppant, chemicals, nitrogen, carbon dioxide and diesel fuel, and component parts, from a variety of suppliers in North America. Should The Company's suppliers be unable to provide the necessary raw materials and component parts at an acceptable price or otherwise fail to deliver products in the quantities required, any resulting delays in the provision of services could have a material adverse effect on The Company's business, financial condition, results of operations and cash flows.

Capital-Intensive Industry: The Company's business plan is subject to the availability of additional financing for future costs of operations or expansion that might not be available, or may not be available on favourable terms. The Company's activities may also be financed partially or wholly with debt, which could increase The Company's debt levels above industry standards. The level of The Company's indebtedness from time to time could impair The Company's ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise. If the Company 's cash flow from operations is not sufficient to fund the Company 's capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or, if available, on favourable terms.

Patents and Proprietary Technology: The Company's success will depend, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the rights of third parties. The LPG Fracturing Process patents for the U.S., Canada and International markets remain in examination. However, there can be no assurance that any issued patents will provide the Company with any competitive advantages or will not be successfully challenged by any third parties, or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition, there can be no assurance that others will not independently develop similar products, duplicate some or all of The Company's products, or, if patents are issued to the Company, design their products so as to circumvent the patent protection that may be held by the Company. In addition, the Company could incur substantial costs in lawsuits in which the Company attempts to enforce its own patents against other parties.

Operational Risks: The Company's operations are subject to hazards inherent in the oil and natural gas industry, such as equipment defects, malfunction and failures, and natural disasters which result in fires, vehicle accidents, explosions and uncontrollable flows of natural gas or well fluids that can cause personal injury, loss of life, suspension of operations, damage to formations, damage to facilities, business interruption and damage to or destruction of property, equipment and the environment. These hazards could expose the Company to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution, contamination of drinking water and other environmental damages. the Company continuously monitors its activities for quality control and safety, and although it maintains insurance coverage that it believes to be adequate and customary in the industry, such insurance may not be adequate to cover the Company 's liabilities and may not be available in the future at rates that the Company considers reasonable and commercially justifiable.

Availability of Qualified Staff: Attracting and retaining qualified workers is necessary for the Company to provide reliable services to its customers. With high industry activity there is also high demand for qualified workers and, as such, it is a challenge for the Company to add a significant number of workers to support its planned growth. The Company attempts to overcome this challenge by offering an attractive compensation package, providing an in-depth training program, and offering career growth opportunities.

Availability of Debt Financing: The Company has facilities with its bank for $100 million of debt financing. As discussed in Note 15 of the 2012 Consolidated Audited Financial Statements this amount is limited to $60 million during the period in which certain financial covenants have been suspended. During 2012 the Company incurred a significant EBITDA loss in the second quarter and had large capital expenditure commitments for the completion of its 2011 capital program. To fund these costs, the Company issued a convertible debenture and drew on its bank line of credit. The EBITDA loss in the second quarter negatively impacted trailing twelve month EBITDA amounts used in the calculation of certain of the financial covenants under its credit facility. Accordingly, the Company reached an agreement with its bankers to suspend these covenants until the measuring date for the second quarter of 2013. Additionally, the Company implemented reductions to its operating costs in September 2012 through staff reductions, facility consolidation and the parking of certain equipment. The Company also renegotiated commitments for the purchase of raw materials for operations reducing 2013 commitments to $14.1 million from $58.1 million. Capital expenditure commitments for 2013 are $2.5 million. As a result of these actions the Company anticipates that operating cash flow and its bank credit facility will be sufficient to fund ongoing operations. The bank credit facility matures August 31 and should it not be renewed is subject to repayment in seven quarterly repayments equal to one twelve of the outstanding amount commencing in the second quarter following maturity with the remainder due with an eight payment two years following the maturity date. Should the Company be unable to renew these facilities in the amount it requires or on terms acceptable to it, significant liquidity issues could result.

Financing of Future Growth: The Company's future growth strategy is subject to the availability of financing to support the acquisition of additional capital equipment. This growth may be fully or partially financed with debt which may or may not be available at the time required. Should such debt financing not be available as required it could result in a delay in The Company's ability to grow its operations. Should the Company obtain debt financing there are no assurances that debt levels may increase above industry standards due to the impact of seasonal or cyclical trends or other factors.

Management Stewardship: The successful operation of The Company's business depends upon the abilities, expertise, judgment, discretion, integrity and good faith of The Company's executive officers, employees and consultants. In addition, The Company's ability to expand its services depends upon its ability to attract qualified personnel as needed. The demand for skilled oilfield employees is high, and the supply is limited. If the Company loses the services of one or more of its executive officers or key employees, it could have a material adverse effect on The Company's business, financial condition, results of operations and cash flows.

Regulations Affecting the Oil and Natural Gas Industry: The operations of The Company's customers are subject to or impacted by a wide array of regulations in the jurisdictions in which they operate. As a result of changes in regulations and laws relating to the oil and natural gas industry, The Company's customers' operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with applicable regulations could cause customers to discontinue or limit their operations and may discourage companies from continuing development activities. As a result, demand for The Company's services could be substantially affected by regulations adversely impacting the oil and natural gas industry. Changes in environmental requirements may negatively impact demand for The Company's services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements (including land use policies responsive to environmental concerns). A decline in exploration and production, in turn, could materially and adversely affect the Company.

Government Regulations: The Company's operations are subject to a variety of federal, provincial, state and local laws, regulations and guidelines in all the jurisdictions in which it operates, including laws and regulations relating to health and safety, the conduct of operations, taxation, the protection of the environment and the manufacture, management, transportation and disposal of certain materials used in The Company's operations. The Company has invested financial and managerial resources to ensure such compliance and expects to continue to make such investments in the future. Such laws or regulations are subject to change and could result in material expenditures that could have a material adverse effect on The Company's business, financial condition, results of operations and cash flows. It is impossible for the Company to predict the cost or impact of such laws and regulations on The Company's future operations. In particular, the Company is subject to increasingly stringent laws and regulations relating to importation and use of hazardous materials, radioactive materials and explosives, environmental protection, including laws and regulations governing air emissions, water discharges and waste management. The Company incurs, and expects to continue to incur, capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex, stringent and expensive to implement. These laws may provide for "strict liability" for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liabilities for remediation of spills and releases of hazardous substances.

The Company uses and generates hazardous substances and wastes in its operations. In addition, some of The Company's current properties are, or have been, used for industrial purposes. Accordingly, the Company could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require the Company to incur costs or become the basis of new or increased liabilities that could reduce The Company's earnings and cash available for operations. The Company believes it is currently in substantial compliance with applicable environmental laws and regulations.

The Company is a provider of hydraulic fracturing services; a process that creates fractures extending from the well bore through the rock formation to enable natural gas or oil to move more easily through the rock pores to a production well. Bills pending in the United States House of Representatives and Senate have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process. This legislation, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays and increased operating costs. The adoption of any future federal or state laws or implementing regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse effect on the Company 's business, financial condition, results of operations and cash flows.

Customers: Customers are generally invoiced for our services in arrears. As a result, we are subject to our customers delaying or failing to pay invoices. Risk of payment delays or failure to pay is increased during periods of weak economic conditions due to potential reduction in cash flow and access to capital of our customers.

The Market Price of the Common Shares May Be Volatile: The trading price of securities of oilfield service companies is subject to substantial volatility. The volatility is often based on factors both related to and not related to the financial performance or prospectus of the companies involved. The market price of The Company's Common Shares could be subject to significant fluctuations in response to our operating results, financial condition and other internal factors. Factors that could affect the market price that are not directly related to The Company's performance include commodity prices and market perceptions of the attractiveness of particular industries for investment. The price at which the Common Shares will trade cannot be accurately predicted.

Dilution from Further Equity Issuances: If the Company issues additional equity securities to raise additional funding or as consideration for the acquisition of a company or assets, as the case may be, such transactions may substantially dilute the interests of the Company's Shareholders and reduce the value of their respective investment.

Dividends: The Company has not paid dividends prior to the date hereof and there can be no assurance that GASFRAC will pay dividends in the future. Dividend payments are at the discretion of the Company's board of directors. Dividends depend on the financial condition of the applicable entity and other factors.

Additional Funding Requirements: The Company may need additional financing in connection with the implementation of its business and strategic plans from time to time. However, there can be no assurance that the Company will be able to obtain the necessary financing in a timely manner or on acceptable terms, if at all. The implementation of the Company's business and strategic plans from time to time will require a substantial amount of capital and the amounts available to the Company without seeking additional debt or equity financing may not be sufficient to fund such business and strategic plans. The Company may accordingly have further capital requirements to take advantage of further opportunities or acquisitions.

Direct and Indirect Exposure to Volatile Credit Markets The ability to make scheduled payments on or to refinance debt obligations depends on the Company's financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain finance, business and other factors beyond its control. Continuing volatility in the credit markets may increase costs associated with debt instruments due to increased spreads over relevant interest rate benchmarks, or affect the ability of the Company, or third parties it seeks to do business with, to access those markets.

In addition, access to further financing for the Company or its customers remains uncertain. This condition could have an adverse effect on the industry in which the Company operates and its business, including future operating results. The Company's customers may curtail their drilling and completion programs, which could result in a decrease in demand for the Company's services and could increase downward pricing pressures. In addition, certain customers could become unable to pay suppliers, including the Company, in the event they are unable to access the capital markets to fund their business operations. Such risks, if realized, could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Merger and acquisition activity may reduce the demand for the Company's Services. Merger and acquisition activity in the oil and gas exploration and production sector may constrain demand for the Company's services as customers focus on reorganizing the business prior to committing funds to exploration and development projects. Further, the acquiring company may have preferred supplier relationships with oilfield service providers other than the Company.

Market for Convertible Debentures: If an active or liquid market for the Debentures fails to develop or be sustained, the prices at which the Debentures trade may be adversely affected. Whether or not the Debentures will trade at lower prices depends on many factors, including the liquidity of the Debentures, prevailing interest rates and the markets for similar securities, the market price of the Common Shares, general economic conditions and the Company's financial condition, historic financial performance and future prospects. Further, the holders of the Common Shares may suffer dilution if the Company decides to redeem outstanding Debentures for Common Shares or to repay outstanding principal amounts thereunder at maturity of the Debentures by issuing additional Common Shares.

Repayment of Convertible Debentures: The Debentures are subordinate to Senior Indebtedness of the Company and to Repayment of the Debentures: The Company may not be able to refinance the principal amount of the Debentures in order to repay the principal outstanding or may not have generated enough cash from operations to meet this obligation. The Company may, at its option, on not more than 60 days and not less than 40 days prior notice and subject to any required regulatory approvals, unless an Event of Default has occurred and is continuing, elect to satisfy its obligation to repay, in whole or in part, the principal amount of the Debentures which are to be redeemed or which have matured by issuing and delivering Common Shares to the holders of the Debentures. There is no guarantee that the Company will be able to repay the outstanding principal amount in cash upon maturity of the Debentures.

The likelihood that purchasers of the Debentures will receive payments owing to them under the terms of the Debentures will depend on the Company's financial health and creditworthiness at the time of such payments.

DISCLOSURE CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in National Instrument 52-109. Based on the evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were designed to provide a reasonable level of assurance over the disclosure of material information, and are effective as of December 31, 2012.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have assessed and evaluated the design and effectiveness of the Company's internal controls over financial reporting as defined in National Instrument 52-109 as at December 31, 2012. During the period beginning September 11, 2012 through December 31, 2012, the CFO also acted in the capacity of the CEO. In making this assessment the Company used the criteria established by the Committee of Sponsoring Organizations ("COSO") in the "Internal Control-Integrated Framework". These criteria are in the areas of control environment, risk assessment, control activities, information and communication and monitoring. The Company's assessment included documentation, evaluation and testing of its internal controls over financial reporting. Based on the evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's internal controls over financial reporting are effective to provide reasonable assurance regarding the reliability of the Company's financial reporting and its preparation of financial statements are effective as of December 31, 2012.

Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements.

There have been no changes in the Company's internal controls over financial reporting during the year December 31, 2012, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

OFF-BALANCE SHEET ARRANGEMENTS

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

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:

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:

December 31 December 31 2012 2011----------------------------------------------------------------------------Net loss (77,469) (2,853)(Deduct) Add back: Interest expense (income) - net 5,561 (109) Depreciation and amortization 26,826 16,526 Impairments and losses from sale of property and equipment 47,419 - Income tax recovery (1,764) (190)----------------------------------------------------------------------------EBITDA 573 13,374--------------------------------------------------------------------------------------------------------------------------------------------------------



OUTLOOK

While the fundamentals of the overall pressure pumping market are a key factor in our operations, the most significant challenge/focus remains that of accelerating the adoption of our technology and increasing the utilization of our equipment sets. We believe that the production benefits offered by GASFRAC provide our customers an advantage in this environment and that the major challenge for the Company is increasing our market share through succinct demonstration of this benefit than it is the overall market conditions. The key barriers we have encountered impacting the pace of adoption are; demonstration of the cost/benefit, safety considerations, awareness and "inertia". The key on the cost/benefit side is 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. In addition, we have undertaken a number of initiatives which will reduce the cost of our service to our customers. These initiatives include equipment configuration and fracturing program design. 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. Awareness of GASFRAC has increased over the past quarters in the basins we are targeting. Marketing at technical and industry forums as well as one-on-one meetings with key executives represent the key actions being taken by GASFRAC to continue to increase awareness of the Company and our technology. By "inertia" we refer to the tendency for operating companies to continue with their current processes in field developments where they are achieving acceptable returns. This tendency towards inertia drives GASFRAC to focus more on new field developments or identify opportunities which cause the return in current manufacturing processes to be interrupted - for instance reduction in commodity prices or increases in regulation or costs associated with water fracturing.

While we have experienced a positive trend in the adoption of our services in Canada, the "inertia" described above has been more prevalent in the United States market, particularly with larger operators. We believe the key to improving the adoption in the United States is to focus sales efforts on the independent operators who are able to more quickly assess new technologies and adapt to operational changes.

During this period of adoption, our operations in both Canada and the United States 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, infrastructure limitations, weather conditions, hunting restrictions, and budgetary priorities. While these fluctuations add a degree of uncertainty to the timing of our cash flows, our current cost structure allows us to remain cash positive at approximately $10 million of revenue per month. Further, our capital commitments and requirements for 2013 are minimal. As such, our draw on our bank credit facility is expected to remain at a level driven by the amount of our accounts receivable.

Overall demand for pressure pumping services in Canada is expected to be stable in 2013 as compared to 2012 with oil and liquids-rich gas activity remaining the predominate area of the market given the continued weakness in natural gas prices. The increase in pressure pumping equipment made available to the Canadian market during 2012 resulted in resulted in price declines for hydraulic fracturing during 2012. It is expected that pricing pressures will remain during 2013 but significant additional price declines are not expected at this time as the equipment supply/demand balance appears to be near equilibrium for 2013. We will continue to monitor the capital budgets and cash flows of the exploration & production companies in light of recent weaknesses in oil prices, particularly given the poor oil price differentials due to limited pipeline capacity in Canada. We expect that many companies will construct capital budgets for 2013 within their cash flows rather than adding significantly to their debt positions. This phenomenon will particularly put pressure on smaller operating company budgets. As such, both their outlook on commodity prices and realized prices will impact the extent of their capital expenditures in 2013. Specifically, due to this uncertainty, we expect budget expenditures to be delayed during the first half of the year until there is more certainty and thus will not be as proportionately strong as the first quarter of 2012. During the first quarter we have experienced some customer delays pushing work to the second quarter through planned pad fracturing work.

We also expect that adoption by new customers will be achieved during 2013 as more data becomes available and less robust commodity prices encourage use of more effective technologies.

In the US, the overall pressure pumping market remains with an oversupply of equipment which we do not expect to reverse during 2013. Equipment builds combined with reduced activity in natural gas basins has resulted in this over supply. However, on a region by region basis, particularly in oil rich areas such as South Texas, activity remains strong. Our sales efforts in the US are focused on independent operators in South Texas and Colorado. Subsequent to quarter-end we performed work with Blackbrush in February but were delayed in March as drilling operations were completed. We anticipate that upon recommencement of operations in April this work will continue through 2013. However, we have experienced interruptions to fracturing activity on this project for various reasons and such interruptions may recur in the future. In addition to the Blackbrush work, we have a number of customers planning to use our services during 2013 however, the level of repeat activity with these customers cannot be determined at this time. In addition, we anticipate that our sales focus in these areas on independent operators will result in additional customer activity over the coming quarters.

FORWARD-LOOKING STATEMENT

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.;-- estimates of additional investment required to complete ongoing capital projects;-- expectations of securing financing for additional capital expenditures for 2013 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 2013;-- expectations as to activity levels in North America and that oil and liquids rich gas drilling will offset declines in dry gas drilling;-- expectations as to capital development programs of major customers;-- expectations as to the rate of adoption of the Company's technology by E&P companies;-- expectations as to the number of manned fracturing spreads in Canada and the USA;-- assumption that environmental protection requirements will not have a significant impact on the Company's operations or capital budget;-- expectations as to the Company's future market position in the industry;-- expectations as to the supply of raw materials;-- expectations as to the pricing of the Company's services in Canada and the USA;-- 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 2013 and 2014;-- expectations of oil and natural gas commodity prices in 2013;-- expectations of the amount of net fracturing horsepower being added to the North American market in 2013 and its impact on the Company's service prices;



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.

Consolidated Statement of Financial PositionAs at: Dec 31, 2012 Dec 31, 2011---------------------------------------------------------------------------- CAD$ '000 CAD$ '000ASSETSCURRENT ASSETS Cash and cash equivalents 7,927 5,026 Trade and other receivables 30,529 49,206 Inventory 6,521 8,891 Other assets 1,346 1,178 Assets held for sale 1,352 -----------------------------------------------------------------------------TOTAL CURRENT ASSETS 47,675 64,301----------------------------------------------------------------------------NON-CURRENT ASSETS Plant and equipment 219,056 249,577 Intangible assets 1,021 500 Other assets 7,704 8,130----------------------------------------------------------------------------TOTAL NON-CURRENT ASSETS 227,781 258,207----------------------------------------------------------------------------TOTAL ASSETS 275,456 322,508--------------------------------------------------------------------------------------------------------------------------------------------------------LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIES Trade payables and accrued liabilities 17,318 30,843 Provisions 768 966 Current portion of finance lease obligation 1,349 832 Current portion of credit facility 2,500 1,849----------------------------------------------------------------------------TOTAL CURRENT LIABILITIES 21,935 34,490----------------------------------------------------------------------------NON-CURRENT LIABILITIES Finance lease obligation 1,035 2,264 Operating lease obligation 38 - Credit facility 27,500 20,338 Convertible debenture 34,504 - Deferred tax liability - 703----------------------------------------------------------------------------TOTAL NON-CURRENT LIABILITIES 63,077 23,305----------------------------------------------------------------------------TOTAL LIABILITIES 85,012 57,795----------------------------------------------------------------------------CAPITAL & RESERVES Share capital 259,551 257,235 Contributed surplus 5,810 3,185 Foreign currency translation reserve 1,055 2,796 (Deficit) Retained earnings (75,972) 1,497----------------------------------------------------------------------------TOTAL EQUITY 190,444 264,713----------------------------------------------------------------------------TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 275,456 322,508--------------------------------------------------------------------------------------------------------------------------------------------------------Consolidated Statement of Comprehensive LossFor the twelve months ended Dec 31, 2012 Dec 31, 2011---------------------------------------------------------------------------- CAD$ '000 CAD$ '000REVENUE 149,442 161,363----------------------------------------------------------------------------EXPENDITURES Direct operating costs 127,673 127,821 Selling, general and administrative 22,487 17,405 Share based compensation 620 2,816 Depreciation and amortization 26,826 16,359 Impairments and losses from sale of property and equipment 47,419 167 Finance cost 5,623 424 Foreign exchange (gain) loss 46 (53)---------------------------------------------------------------------------- 230,694 164,939----------------------------------------------------------------------------OTHER INCOME Interest income 62 533 Insurance income 1,957 ----------------------------------------------------------------------------- 2,019 533----------------------------------------------------------------------------LOSS BEFORE INCOME TAXES (79,233) (3,043) Tax recovery 1,764 190----------------------------------------------------------------------------LOSS FOR THE YEAR (77,469) (2,853)--------------------------------------------------------------------------------------------------------------------------------------------------------OTHER COMPREHENSIVE (LOSS) INCOME Exchange differences on translating foreign operations (1,741) 2,796----------------------------------------------------------------------------OTHER COMPREHENSIVE (LOSS) INCOME (1,741) 2,796----------------------------------------------------------------------------TOTAL COMPREHENSIVE LOSS FOR THE YEAR ATTRIBUTABLE TO THE OWNERS OF THE COMPANY (79,210) (57)--------------------------------------------------------------------------------------------------------------------------------------------------------LOSS PER SHARE Basic (cents per share) (1.23) (0.05)---------------------------------------------------------------------------- Diluted (cents per share) (1.23) (0.05)----------------------------------------------------------------------------Consolidated Statement of Cash FlowFor the twelve months ended Dec 31, 2012 Dec 31, 2011---------------------------------------------------------------------------- CAD$ '000 CAD$ '000CASH FLOW FROM OPERATING ACTIVITIES Loss for the year (77,469) (2,853) Adjusted for: Depreciation and amortization 26,826 16,359 Loss on sale of assets and impairment 47,419 167 Equity settles share based compensation 342 1,689 Finance cost per income statement 5,623 424 Unrealized foreign exchange loss (3) 2 Doubtful debt expense 1,306 - Insurance income 1,957 - Taxation per income statement (1,764) (190)---------------------------------------------------------------------------- 4,237 15,598 Net change in non-cash operating working capital 18,118 (24,871)----------------------------------------------------------------------------Cash generated from operations 22,355 (9,273) Interest paid (3,349) (391)----------------------------------------------------------------------------NET CASH GENERATED BY OPERATING ACTIVITIES 19,006 (9,664)----------------------------------------------------------------------------CASH FLOW FROM INVESTING ACTIVITIES Purchases of plant and equipment (48,338) (125,470) Acquisition of intangible assets (776) (263) Proceeds from sale of plant and equipment 2,124 103 Net change in non-cash investing working capital (15,353) 12,545----------------------------------------------------------------------------NET CASH GENERATED BY INVESTING ACTIVITIES (62,343) (113,085)----------------------------------------------------------------------------CASH FLOW FROM FINANCING ACTIVITIES Proceeds from common shares issued (net of share issue cost) 1,310 4,161 Issue of debentures (net of debenture issue cost) 37,888 - Net change in credit facility 7,813 22,187 Net change in finance leases (696) 2,666----------------------------------------------------------------------------NET CASH GENERATED BY FINANCING ACTIVITIES 46,315 29,014----------------------------------------------------------------------------Net (decrease) increase in cash and cash equivalents 2,978 (93,735)Cash and cash equivalents at beginning of year 5,026 98,701Effects of exchange rate changes on the balance of cash held in foreign currencies (77) 60----------------------------------------------------------------------------CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 7,927 5,026--------------------------------------------------------------------------------------------------------------------------------------------------------



The Company will host a conference call on Thursday, March 14, 2013 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the year and fourth quarter of 2012.

To listen to the webcast of the conference call, please enter: http://www.gowebcasting.com/4177 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 1-866-226-1792 or 1-416-340-2216 fifteen minutes prior to the call's start time and ask for "GASFRAC Fourth Quarter Results Conference Call".

A replay of the call will be available until March 21, 2013 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 6518709. 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 waterless gelled 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.



Contacts:
GASFRAC Energy Services Inc.
James M Hill
Chief Financial Officer
403-515-3387
jhill@gasfrac.com