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GASFRAC Announces Third Quarter 2012 Results

CALGARY, ALBERTA -- (Marketwire) -- 11/07/12 -- GASFRAC Energy Services Inc. (TSX:GFS)

GASFRAC is pleased to present its third quarter, 2012 results. Although revenue for the quarter decreased 29% to $40.9 million from $57.2 million in 2011, revenue in the third quarter of 2011 included a $20.9 million sale of materials to Husky. Adjusting for this sale, revenues from service revenue increased approximately 12% in 2012 as compared to 2011. Revenue per operating day increased to $448 from $420. During the quarter, the Company earned revenues from 19 customers with the top three customers accounting for approximately 69% of the Company's revenue (2011 - 47%).

Revenue from the Canadian operations for the quarter was $26.8 million generated from 57 operating days at an average of $468 per operating day as compared to 57 operating days at an average of $419 per day in the third quarter of 2011. In the third quarter of 2011 revenues were $23.9 million from services and $20.9 million from the materials sale to Husky. Wet conditions throughout the quarter prevented operations in many areas. The most significant impact for our Canadian operations was the delay of recommencement of operations for Husky, due to these wet conditions, from an original early June start date into mid July. Revenue was earned from 8 customers during the quarter with three of these customers representing 85% of the total revenue earned from Canadian operations.

Revenue from the U.S. operations for the quarter were $14.1 million generated from 34 operating days at an average revenue per operating day of $415 as compared to $12.6 million in the third quarter of 2011 from 30 operating days at an average revenue per operating day of $420 . The work under the Blackbrush contract was delayed from September 8, 2012 as our customer assessed wells. Work under the contract recommenced on October 14, 2012.

As previously announced, on September 11, 2012 the board of directors of GASFRAC Energy Services Inc. ("GASFRAC") announced that they had commenced an operational review. The Company determined that it is prudent to focus its near term growth opportunities on North America and specifically in Western Canada and in South Texas and Colorado in the USA. Concurrent with this focused growth, cost control is equally important. As a result, cost reductions were undertaken through staff reductions and other fixed cost reductions. These actions were largely completed by early October and as a result, the impact of the cost reductions will be realized during Q4 and onwards.

The Company has engaged a search firm to assist with the identification and hiring of a new Chief Executive Officer. To date, a number of candidates have been identified and interviewed. The Company expects to be in a position to announce a new CEO by year end or early in the first quarter of 2013.

Subsequent to September 30, 2012 the Company's bank syndicate agreed to amend the Company's credit facility such that covenants relating to trailing twelve month EBITDA were suspended through to the end of the first quarter of 2013 and the Company's draws on the facility, during this period, was limited to $60 million. The Company is confident that these changes provide the necessary financial capacity and flexibility.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2012

Management's discussion and analysis ("MD&A") of the financial condition and the results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2012 and the audited consolidated financial statements for the year ended December 31, 2011 of GASFRAC Energy Services Inc. ("the Company" or the "Company"), together with the accompanying notes. The interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") including International Accounting Standard ("IAS") 34, "Interim Financial Reporting" 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 to November 7, 2012.

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 has 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).

COMPARITIVE QUARTERLY FINANCIAL INFOMRATION


For the three months ended       September 30    September 30   September 30
                                         2012            2011           2010
----------------------------------------------------------------------------
                                         CAD$            CAD$           CAD$
                                                                            
Revenue                                40,851          57,437         26,590
Operating expenses                     35,381          42,318         18,046
Selling, general and                                                        
 administrative expenses                5,786           4,423          3,202
EBITDA(1)                               1,060          10,960          4,874
(Loss) Profit for the period           (7,144)          5,911          2,318
(Loss) Earnings per share -                                                 
 basic                                  (0.11)           0.10           0.06
(Loss) Earnings per share -                                                 
 diluted                                (0.11)           0.09           0.06
Weighted average number of                                                  
 shares - basic                        63,043          61,567         41,245
Total assets                          323,748         287,632        182,280
Total non-current liabilities          35,794           2,123             48
Treatments                                175             191            137
Revenue per treatment                     233             191            194
Revenue days                               91              87             83
Revenue per revenue day                   448             420            320
----------------------------------------------------------------------------

(1) Defined under Non-IFRS Measures

OPERATIONAL REVIEW

On September 11, 2012 the board of directors of GASFRAC announced that they had commenced an operational review and restructuring of the management team at GASFRAC. As part of the management restructuring, the management group comprising of Zeke Zeringue, Chief Executive Officer and Steve Batchelor, Chief Operating Officer, left the Company. Jim Hill, the current Chief Financial Officer of the Company, assumed the role of acting President and Chief Executive Officer until a replacement is found. Management is determined to focus its near term growth opportunities on North America and specifically in Western Canada and in South Texas and Colorado in the USA. Management is also focused on controlling costs and has taken the following actions:


--  The overhead staffing in the Houston office has been reduced from 16 to
    a sales and engineering team of six; 
--  US field and support staff levels have been reduced by approximately 25%
    to a level to support two sets of equipment; 
--  Canadian staffing levels have been reduced by approximately 20% to a
    level to support three sets of equipment; 
--  Costs related to facilities, staff housing, insurance and other fixed
    costs have been reduced. 

As a result of these actions, the Company accrued $1.0 million of severance costs in Q3. The impact of the cost reductions will be realized during Q4 and onwards.

The active five sets of equipment will provide sufficient revenue producing capacity to allow for growth through 2013 and additional sets can be manned as demand increases.

FINANCIAL OVERVIEW - FOR THE THREE MONTHS ENDED


                                         September 30, 2012                 
                         ---------------------------------------------------
                             Canada         U.S.     Corporate    Total     
                         ---------------------------------------------------
                            CAD$          CAD$            CAD$   CAD$       
                                                                            
Revenue                   26,746        14,105                 40,851       
                                                                            
Cost of sales             12,983  48.5%  9,200  65.2%          22,183  54.3%
Direct Operating costs     7,869  29.4%  5,329  37.8%          13,198  32.3%
----------------------------------------------------------------------------
Operating expenses        20,852  78.0% 14,529 103.0%        - 35,381  86.6%
----------------------------------------------------------------------------
                                                                            
Selling, general and                                                        
 administration            2,881  10.8%  1,593  11.3%    1,312  5,786  14.2%
                                                                            
Number of revenue days        57            34                     91       
Revenue per day              468           415                    448       
----------------------------------------------------------------------------
                                                                            
                                         September 30, 2011                 
                         ---------------------------------------------------
                             Canada         U.S.     Corporate    Total     
                         ---------------------------------------------------
                            CAD$          CAD$            CAD$   CAD$       
                                                                            
Revenue                   44,831        12,606                 57,437       
                                                                            
Cost of sales             26,583  59.3%  6,624  52.5%          33,207  57.8%
Direct Operating costs     6,701  14.9%  2,328  18.5%       82  9,111  15.9%
----------------------------------------------------------------------------
Operating expenses        33,284  74.2%  8,952  71.0%       82 42,318  73.7%
----------------------------------------------------------------------------
                                                                            
Selling, general and                                                        
 administration            2,330   5.2%    637   5.1%    1,456  4,423   7.7%
                                                                            
Number of revenue days                                                      
                              57            30                     87       
Revenue per day              419           420                    420       
----------------------------------------------------------------------------

FINANCIAL OVERVIEW - FOR THE NINE MONTHS ENDED


                                         September 30, 2012                 
                        ----------------------------------------------------
                            Canada         U.S.     Corporate     Total     
                        ----------------------------------------------------
                           CAD$          CAD$            CAD$    CAD$       
                                                                            
Revenue                  74,136        28,418               - 102,554       
                                                                            
Cost of sales            37,008  49.9% 18,205  64.1%        -  55,213  53.8%
Direct Operating costs   24,293  32.8% 12,822  45.1%        -  37,115  36.2%
----------------------------------------------------------------------------
Operating expenses       61,301  82.7% 31,027 109.2%        -  92,328  90.0%
----------------------------------------------------------------------------
                                                                            
Selling, general and                                                        
 administration           9,044  12.2%  3,665  12.9%    4,238  16,947  16.5%
                                                                            
Number of revenue days      148            67                     215       
Revenue per day             500           424                     477       
----------------------------------------------------------------------------
                                                                            
                                         September 30, 2011                 
                        ----------------------------------------------------
                            Canada         U.S.     Corporate     Total     
                        ----------------------------------------------------
                           CAD$          CAD$            CAD$    CAD$       
                                                                            
Revenue                  87,606        14,453               - 102,059       
                                                                            
Cost of sales            52,059  59.4%  7,216  49.9%        -  59,275  58.1%
Direct Operating costs   19,018  21.7%  4,889  33.8%       82  23,989  23.5%
----------------------------------------------------------------------------
Operating expenses       71,077  81.1% 12,105  83.8%       82  83,264  91.8%
----------------------------------------------------------------------------
                                                                            
Selling, general and                                                        
 administration           7,112   8.1%  1,303   9.0%    3,365  11,780  11.5%
                                                                            
Number of revenue days      147            38                     185       
Revenue per day             454           380                     439       
----------------------------------------------------------------------------

REVENUE

Revenue for the quarter decreased 29% to $40.9 million from $57.4 million in 2011. Revenue in the third quarter of 2011 included a $20.9 million sale of materials to Husky. Adjusting for this one time sale, revenues from service revenue increased approximately 12% in 2012 as compared to 2011. Revenue per operating day increased to $448 from $420. During the quarter, the Company earned revenues from 19 customers with the top three customers accounting for approximately 69% of the Company's revenue (2011 - 47%).

Canadian operations:

Revenue from the Canadian operations for the quarter was $26.8 million generated from 57 operating days at an average of $468 per operating day as compared to 57 operating days at an average of $419 per day in the third quarter of 2011. In the third quarter of 2011 revenues were $23.9 million from services and $20.9 million from the materials sale to Husky. Wet conditions throughout the current quarter prevented operations in many areas. The most significant impact for our Canadian operations was the delay of recommencement of operations for Husky, due to these wet conditions, from an original early June start date into mid July. Revenue was earned from 8 customers during the quarter with three of these customers representing 85% of the total revenue earned from Canadian operations.

U.S. operations:

Revenue from the U.S. operations for the quarter was $14.1 million generated from 34 operating days at an average revenue per operating day of $415 as compared to $12.6 million in the third quarter of 2011 from 30 operating days at an average revenue per operating day of $420. The work under the Blackbrush contract was delayed from September 8, 2012 as our customer assessed wells. Work under the contract recommenced on October 14, 2012.

OPERATING EXPENSE

Operating expense (comprises of cost of sales and direct operating costs) for the quarter increased to $35.4 million compared to $42.3 million in 2011. Cost of sales was $22.2 million (54.3% of revenue) as compared to $33.2 million (57.8%) of revenue in the third quarter of 2011. Direct operating costs increased to $13.2 million in the third quarter of 2012 as compared to $9.1 million in the third quarter of 2011. Direct operating costs were comprised of fixed costs of $8.2 million and variable costs of $5.0 million as compared to fixed costs of $5.8 million and variable costs of $3.3 million in the third quarter of 2011. The increase in direct costs was comprised largely of added operational staff in Canada ($0.6 million) and the USA ($1.3 million).

Canadian operations:

Operating expenses from the Canadian operations for the quarter were $20.9 million, compared to the $33.3 million incurred in 2011. Cost of sales was $13.0 million (48.5% of revenue) as compared to $26.6 million (59.3%) of revenue in the third quarter of 2011. Direct operating costs increased to $7.9 million in the third quarter of 2012 as compared to $6.7 million in the third quarter of 2011. Direct operating costs were comprised of fixed costs of $4.9 million and variable costs of $3.0 million (11.2%) as compared to fixed costs of $4.1 million and variable costs of $2.6 million (10.9%) in the third quarter of 2011. The increase in direct costs was due to added operational staff.

U.S. operations:

Operating expenses from the U.S. operations was $14.5 million, compared to the $9.0 million incurred in 2011. Cost of sales was $9.2 million (65.2% of revenue) as compared to $6.6 million (52.5%) of revenue in the third quarter of 2011. Direct operating costs increased to $5.3 million in the third quarter of 2012 as compared to $2.3 million in the third quarter of 2011. Direct operating costs were comprised of fixed costs of $3.3 million and variable costs of $2.0 million (14%) as compared to fixed costs of $1.7 million and variable costs of $0.6 million (5%) in the third quarter of 2011. The increase in direct costs reflects added operational staff. The increase in variable costs as a percentage of revenue resulted from accommodation costs incurred for field personnel in Southern Texas during the stoppage of work under the Blackbrush contract together with a one-time acceleration of equipment repair costs.

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

SG&A expense were $5.8 million in quarter three of 2012 compared $4.4 million in quarter three 2011. The increase over 2011 is primarily due to overhead staff increase in the corporate US office and severance costs of approximately $0.9 million accrued upon termination of executive and overhead staff in September 2012.

DEPRECIATION & AMORTIZATION

Depreciation and amortization increased to $7.1 million during quarter three of 2012 from $4.7 million in quarter three of 2011. The increase is due to an increase in operating property and equipment put in place to increase the Company's revenue generation capacity.

EBITDA

EBITDA for the quarter was $1.1 million during 2012 compared to $11.0 million in 2011. The decrease in the gain reflects the decrease in revenue of $16.5 million, the increase in fixed operating costs as a percentage of revenue to 86.6% from 73.7% and increased SG&A of $1.4 million.

LOSS FOR THE QUARTER

Net loss for the quarter was $7.1 million as compared to a $5.9 million profit during 2011. The Company's effective tax rate was 6.8% (2011 - 13.8%) compared to the statutory rate of 25% (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, at this time, for accounting purposes.

OTHER COMPREHENSIVE LOSS

Other comprehensive loss of $3.5 million represents exchange differences arising from translation of the financial statements of the Company's foreign subsidiaries which have U.S. dollar as their functional currency. During the third quarter of 2012 the Canadian dollar remained steady against the US dollar, however, it was 5.4% stronger than the same period in 2011, and the net effect was a decrease to the net asset position in the U.S dollar denominated subsidiaries in Canadian dollar terms.

SUMMARY OF QUARTERLY RESULTS


                             Dec. 31  Mar. 31    Jun 30    Sep. 30   Dec. 31
                                2010     2011      2011       2011      2011
----------------------------------------------------------------------------
                                CAD$     CAD$      CAD$       CAD$      CAD$
Revenue                       41,087   30,452    14,170     57,437    59,304
(Loss) Profit for the                                                       
 period                        1,995   (2,515)   (7,768)     5,911     1,519
(Loss) Earnings per share                                                   
 - basic                        0.04    (0.04)    (0.13)      0.10      0.03
(Loss) Earnings per share                                                   
 - diluted                      0.03    (0.04)    (0.13)      0.09      0.03
EBITDA (1)                     5,814       66    (5,566)    10,960     7,914
Capital expenditures          34,165   38,941    22,995     32,920    30,877
Working capital (2)          118,346   79,069    49,946     33,998    28,491
Shareholders' equity         259,445  258,217   251,374    262,436   264,713
----------------------------------------------------------------------------

                                                Mar. 31   Jun. 30   Sep. 30 
                                                   2012      2012      2012 
----------------------------------------------------------------------------
                                                   CAD$      CAD$      CAD$ 
Revenue                                          44,969    16,734    40,851 
(Loss) Profit for the                                                       
 period                                          (4,926)  (16,949)   (7,144)
(Loss) Earnings per share                                                   
 - basic                                          (0.08)    (0.27)    (0.11)
(Loss) Earnings per share                                                   
 - diluted                                        (0.08)    (0.27)    (0.11)
EBITDA (1)                                        2,259   (10,430)    1,060 
Capital expenditures                             22,162    23,315     3,878 
Working capital (2)                              27,894     8,994 (1,092)(3)
Shareholders' equity                            263,695   247,519   237,201 
----------------------------------------------------------------------------
(1) Defined under Non-IFRS Measures                                         
(2) Working capital is defined as current assets less current liabilities   
(3) Refer note 7 of the Condensed Interim Consolidated Financial Statements 
                                                                            
LIQUIDITY AND CAPITAL RESOURCES                                             
                                                                            
                                              September 30     September 30 
                                                      2012             2011 
----------------------------------------------------------------------------
                                                      CAD$             CAD$ 
Cash provided by (used in)                                                  
  Operating                                         (8,972)         (18,738)
  Financing activities                              15,604            1,151 
  Investing activities                              (3,879)         (20,200)
----------------------------------------------------------------------------
                                                     2,753          (37,787)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

As at September 30, 2012, the Company had approximately $5.3 million of capital commitments as part of the 2011 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 used in operating activities for the quarter was $9.0 million as compared to $18.7 million in 2011. During the quarter trade and other receivables of $20.7 million were collected, contributing substantially to the cash flow from operating activities.

FINANCING

Net cash provided by financing activities for the quarter was $15.6 million compared to $1.2 million provided in 2011. The funds resulted from the utilization of the credit facility of $15.0 million. During 2011 the cash from financing activities was from the exercise of stock options and warrants.

The Company has a bank syndication for a $10 million operating facility and a $90 million revolving facility. As at September 30, 2012, the Company was not in compliance with the trailing twelve month EBITDA covenant. Although the Company has subsequently reached agreement with the bank syndication addressing this issue, pursuant to IAS 1, the Company has presented the entire credit facility as current as at the balance sheet date.

Subsequent to September 30, 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. Based on the terms of the agreement, this results in $5.5 million of the credit facility being current.

INVESTING

The Company invested $3.9 million in property and equipment and intangible assets for the quarter to add revenue producing capacity as compared to $20.2 million in 2011. The expenditures during 2012 represents expenditure on the 2011 capital build of four additional sets and added fluid management capacity.

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


                       Carrying                                             
                       value at                                      Greater
                   September 30 Less than 1     1 to 3     4 to 5     than 5
                           2012        year      years      years      years
----------------------------------------------------------------------------
                           CAD$        CAD$       CAD$       CAD$       CAD$
                                                                            
Trade payables and                                                          
 accrued                                                                    
 liabilities                                                                
 (excluding                                                                 
 performance share                                                          
 units and accrued                                                          
 interest on                                                                
 debentures)             25,871      25,871          -          -          -
Performance share                                                           
 units                      587         435         87         65          -
Provisions                  779         779          -          -          -
Credit facility          22,219      22,219          -          -          -
Convertible                                                                 
 debentures              34,473         235          -     34,238          -
Finance lease                                                               
 obligation               2,592       1,062      1,530          -          -
Operating lease                                                             
 payments                11,319       1,740      3,201      2,667      3,711
Commitment to                                                               
 purchase raw                                                               
 materials               68,935      68,935          -          -          -
Commitment to                                                               
 purchase plant and                                                         
 equipment                5,322       5,322          -          -          -
----------------------------------------------------------------------------
Total                   172,097     126,598      4,818     36,970      3,711
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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 significant accounting policies are described in note 2 of the December 31, 2011 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 nine months ended September 30, 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.

RELATED PARTY TRANSACTIONS

During the period the Company also paid $nil (2011 - $5) in consulting fees to two directors. These transactions were in the normal course of operations and have been measured at 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                      5,000              -      1,645,000 
  Issued / Exercised                1,063,167       (825,000)      (130,000)
  Forfeited                            (5,830)             -       (935,000)
----------------------------------------------------------------------------
Balance as at September 30,                                                 
 2012                              63,461,411              -      3,010,000 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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 September 30, 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 September, 2012. 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 September 30, 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 quarter ended September 30, 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:


                                              September 30     September 30 
                                                      2012             2011 
----------------------------------------------------------------------------
                                                                            
Net loss                                            (7,144)           5,911 
(Deduct) Add back:                                                          
  Interest expense (income) - net                    1,311              (31)
  Depreciation and amortization                      7,027            4,617 
  Income tax (benefit) expense                        (134)             463 
----------------------------------------------------------------------------
EBITDA                                               1,060           10,960 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

OUTLOOK

GASFRAC initiated an operational review in the third quarter of 2012 that has resulted in a reduction in manned sets of equipment to five (three in Canada and two in the United States), a reduction in other fixed costs and a focus of its sales efforts. The North American pressure pumping market has continued its transition from natural gas focused regions to activity driven by oil and liquids-rich basins. This change has resulted in pricing pressures with real and anticipated excess capacity of pumping equipment and downward pressure on oil prices, particularly in the United States. GASFRAC's cost reductions and sales focus better position it to provide positive cash flow during this period of uncertain activity levels in the pressure pumping market.

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 adopt to operational changes.

Our Canadian operations have seen an increase in customer activity in the third quarter from customers that have previously worked with us. We expect growth in Canadian revenues in Q4 2012 and Q1 2013 as weather conditions improve and the winter drilling season commences. We will continue to monitor the capital budgets and cash flows of the exploration & production companies in light of recent weaknesses in oil prices. We expect that many companies will construct capital budgets for 2013 within their cash flows rather than adding significantly to their debt positions. As such, both their outlook on commodity prices and realized prices will impact the extent of their capital expenditures in 2013. We expect that any reduction in capital spending by customers will result in pricing pressure as well as reduced activity levels. 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 U.S. our sales efforts are focused on independent operators in South Texas and Colorado. Subsequent to quarter-end our work with Blackbrush recommenced and we anticipate that 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 several customers planning to use our services in Q4 2012 and Q1 2013 however, the level of repeat activity with these customers can not 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.

The visibility of capital expenditures by exploration & production companies into Q4 2012 and 2013 is difficult given the current volatile commodity price conditions and the lack of finalization of capital budget plans by most companies at this time. The extent to which these budgets will impact the willingness of companies to trial and adopt new technologies such as ours is another factor that will impact our growth into 2013.

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 2012 and beyond; 
--  expectations as to the level of funding available under the Company's
    credit facility; 
--  expectations of the impact of weather on activity in Canada in 2012; 
--  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 volume of work pursuant to long-term contract with
    Husky; 
--  expectations as to volume of work under the Blackbrush contract; 
--  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; 
--  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 2012 and 2013; 
--  expectations of oil and natural gas commodity prices in 2012; 
--  expectations of the amount of net fracturing horsepower being added to
    the North American market in 2012 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.


Condensed Consolidated Statement of Financial Position                      
Unaudited                                                                   
                                                                            
As at:                                       September 30,           Dec 31,
                                                      2012              2011
----------------------------------------------------------------------------
                                                 CAD$ '000         CAD$ '000
ASSETS                                                                      
CURRENT ASSETS                                                              
  Cash and cash equivalents                          5,653             5,026
  Trade and other receivables                       33,146            49,206
  Inventory                                          7,910             8,891
  Prepaid expenses                                   1,600             1,178
  Assets held for sale                               1,352                 -
----------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                49,661            64,301
----------------------------------------------------------------------------
                                                                            
NON-CURRENT ASSETS                                                          
  Plant and equipment                              264,884           249,577
  Intangible assets                                  1,083               500
  Other assets                                       8,120             8,130
----------------------------------------------------------------------------
TOTAL NON-CURRENT ASSETS                           274,087           258,207
----------------------------------------------------------------------------
TOTAL ASSETS                                       323,748           322,508
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
LIABILITIES AND SHAREHOLDERS' EQUITY                                        
CURRENT LIABILITIES                                                         
  Trade payables and accrued liabilities            26,693            30,843
  Provisions                                           779               966
  Current portion of finance lease                                          
   obligation                                        1,062               832
  Current portion of credit facility                22,219             1,849
----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                           50,753            34,490
----------------------------------------------------------------------------
                                                                            
NON-CURRENT LIABILITIES                                                     
  Finance lease obligation                           1,530             2,264
  Operating lease obligations                           26                 -
  Credit facility                                        -            20,338
  Convertible debentures                            34,238                 -
  Deferred tax liability                                 -               703
----------------------------------------------------------------------------
TOTAL NON-CURRENT LIABILITIES                       35,794            23,305
----------------------------------------------------------------------------
TOTAL LIABILITIES                                   86,547            57,795
----------------------------------------------------------------------------
                                                                            
CAPITAL & RESERVES                                                          
  Share capital                                    259,043           257,235
  Contributed surplus                                5,630             3,185
  Foreign currency translation reserve                  50             2,796
  (Deficit) / Retained earnings                    (27,522)            1,497
----------------------------------------------------------------------------
TOTAL EQUITY                                       237,201           264,713
----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         323,748           322,508
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
Condensed Consolidated Statements of Comprehensive Loss                     
Unaudited                                                                   
                                                                            
                   For the three months ended     For the nine months ended 
                ------------------------------------------------------------
                 September 30,  September 30,  September 30,  September 30, 
                          2012           2011           2012           2011 
----------------------------------------------------------------------------
                     CAD$ '000      CAD$ '000      CAD$ '000      CAD$ '000 
                                                                            
REVENUE                 40,851         57,437        102,554        102,059 
----------------------------------------------------------------------------
                                                                            
EXPENDITURES                                                                
 Direct                                                                     
  operating                                                                 
  costs                 35,381         42,318         92,328         83,264 
 Selling,                                                                   
  general and                                                               
  administrative         5,786          4,423         16,947         11,780 
 Share based                                                                
  compensation          (1,320)           699            375          2,320 
 Depreciation,                                                              
  amortization,                                                             
  impairments                                                               
  and gains from                                                            
  disposals              7,027          4,617         20,789         11,092 
 Finance cost            1,339             62          3,333            102 
 Foreign                                                                    
  exchange                                                                  
  (gain) loss              (56)          (963)            15           (780)
----------------------------------------------------------------------------
                        48,157         51,156        133,787        107,778 
----------------------------------------------------------------------------
                                                                            
OTHER INCOME                                                                
 Interest income            28             93             51            518 
----------------------------------------------------------------------------
                            28             93             51            518 
----------------------------------------------------------------------------
                                                                            
(LOSS) INCOME                                                               
 BEFORE INCOME                                                              
 TAXES                  (7,278)         6,374        (31,182)        (5,201)
Income tax                                                                  
 benefit                                                                    
 (expense)                 134           (463)         2,163            829 
----------------------------------------------------------------------------
(LOSS) PROFIT                                                               
 FOR THE PERIOD         (7,144)         5,911        (29,019)        (4,372)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
OTHER                                                                       
 COMPREHENSIVE                                                              
 (LOSS) INCOME                                                              
 Exchange                                                                   
  differences on                                                            
  translating                                                               
  foreign                                                                   
  operations            (3,494)         3,597         (2,746)         3,450 
----------------------------------------------------------------------------
OTHER                                                                       
 COMPREHENSIVE                                                              
 (LOSS) INCOME          (3,494)         3,597         (2,746)         3,450 
----------------------------------------------------------------------------
TOTAL                                                                       
 COMPREHENSIVE                                                              
 (LOSS) INCOME                                                              
 FOR THE PERIOD        (10,638)         9,508        (31,765)          (922)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
(LOSS) INCOME                                                               
 PER SHARE                                                                  
 Basic (per                                                                 
  share)                 (0.11)          0.10          (0.46)         (0.07)
----------------------------------------------------------------------------
 Diluted (per                                                               
  share)                 (0.11)          0.09          (0.46)         (0.07)
----------------------------------------------------------------------------
                                                                            
                                                                            
Condensed Consolidated Statements of Cash Flows                             
Unaudited                                                                   
                                                                            
                   For the three months ended     For the nine months ended 
                ------------------------------------------------------------
                 September 30,  September 30,  September 30,  September 30, 
                          2012           2011           2012           2011 
----------------------------------------------------------------------------
                     CAD$ '000      CAD$ '000      CAD$ '000      CAD$ '000 
                                                                            
CASH FLOW FROM                                                              
 OPERATING                                                                  
 ACTIVITIES                                                                 
  Net Income                                                                
   (Loss) for                                                               
   the period           (7,144)         5,911        (29,019)        (4,372)
  Adjusted for:                                                             
   Depreciation                                                             
    and                                                                     
    amortization         7,048          4,617         19,299         11,092 
   Gains from                                                               
    disposals &                                                             
    impairments            (21)             -          1,490              - 
   Equity                                                                   
    settled                                                                 
    share based                                                             
    compensation          (905)           699            152          2,320 
   Allowance for                                                            
    bad debt               335              -            796              - 
   Finance cost                                                             
    per income                                                              
    statement            1,339             11          3,333             11 
   Unrealized                                                               
    foreign                                                                 
    exchange                                                                
    loss                    (1)             -              4              - 
   Taxation per                                                             
    income                                                                  
    statement             (134)           463         (2,163)          (829)
----------------------------------------------------------------------------
                           517         11,701         (6,108)         8,222 
  Net change in                                                             
   non-cash                                                                 
   operating                                                                
   working                                                                  
   capital              (7,658)       (30,439)        21,407        (11,683)
----------------------------------------------------------------------------
Cash (used in)                                                              
 generated from                                                             
 operations             (7,141)       (18,738)        15,299         (3,461)
Interest paid           (1,831)             -         (2,242)             - 
----------------------------------------------------------------------------
NET (USED IN)                                                               
 CASH GENERATED                                                             
 BY OPERATING                                                               
 ACTIVITIES             (8,972)       (18,738)        13,057         (3,461)
----------------------------------------------------------------------------
                                                                            
CASH FLOW FROM                                                              
 INVESTING                                                                  
 ACTIVITIES                                                                 
  Purchases of                                                              
   plant and                                                                
   equipment            (4,357)       (28,196)       (41,736)       (89,208)
  Acquisition of                                                            
   intangible                                                               
   assets                 (598)          (418)          (785)          (511)
  Proceeds from                                                             
   sale of plant                                                            
   and equipment                                                            
   and assets                                                               
   held for sale             -              -          2,119            147 
  Net change in                                                             
   non-cash                                                                 
   investing                                                                
   working                                                                  
   capital               1,076          8,414        (10,663)         4,560 
----------------------------------------------------------------------------
NET CASH USED IN                                                            
 INVESTING                                                                  
 ACTIVITIES             (3,879)       (20,200)       (51,065)       (85,012)
----------------------------------------------------------------------------
                                                                            
CASH FLOW FROM                                                              
 FINANCING                                                                  
 ACTIVITIES                                                                 
  Proceeds from                                                             
   of common                                                                
   shares issued                                                            
   (net of share                                                            
   issue cost)             823          1,151          1,310          3,078 
  Finance leases          (171)             -           (482)             - 
  Credit                                                                    
   facility             14,952              -             32              - 
  Convertible                                                               
   debentures                                                               
   issued                    -              -         37,888              - 
----------------------------------------------------------------------------
NET CASH                                                                    
 GENERATED BY                                                               
 FINANCING                                                                  
 ACTIVITIES             15,604          1,151         38,748          3,078 
----------------------------------------------------------------------------
                                                                            
Net decrease in                                                             
 cash and cash                                                              
 equivalents             2,753        (37,787)           740        (85,395)
Cash and cash                                                               
 equivalents at                                                             
 beginning of                                                               
 period                  3,014         51,043          5,026         98,701 
Effects of                                                                  
 exchange rate                                                              
 changes on the                                                             
 balance of cash                                                            
 held in foreign                                                            
 currencies               (114)          (167)          (113)          (217)
----------------------------------------------------------------------------
CASH AND CASH                                                               
 EQUIVALENTS AT                                                             
 THE END OF THE                                                             
 PERIOD                  5,653         13,089          5,653         13,089 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company intends to release its third quarter 2012 results on Wednesday November 7, 2012 after the close of market. The Company will host a conference call on Thursday November 8, 2012 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the third quarter of 2012. To listen to the webcast of the conference call, please enter: http://www.gowebcasting.com/3879 in your web browser or visit the Investor Information section of our website www.gasfrac.com. To participate in the Q&A session, please call the conference call operator at 1-800-769-8320 or 1-416-695-6622 fifteen minutes prior to the call's start time and ask for "GASFRAC Third Quarter Results Conference Call".

A replay of the call will be available until November 15, 2012 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 4096897

GASFRAC is an oil and gas service company headquartered in Calgary, Alberta, Canada, whose primary business is to provide LPG fracturing services to oil and gas companies in Canada and the USA.

Requests for shareholder information should be directed to James Hill.

Contacts:
GASFRAC Energy Services Inc.
James Hill
Chief Financial Officer
403-237-6077
jhill@gasfrac.com
www.gasfrac.com

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