By Alvin Bojar, March 17, 2017

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

While there are still voices claiming that global warming is a myth and that the burning of fossil fuels has no effect on the ozone layer, no one disputes the contaminating effect that the discharge of exhaust fuels from ships has on both our oceans and inland waterways. The seriousness of man-made water pollution, especially in the form of high sulfur content in fuel, has been recognized for some time. It was first addressed seriously in 1997 by MARPOL (Marine Pollution), the International Convention for the Prevention of Pollution from Ships, when the maximum sulfur content in bunker fuel was limited to 4.5%.

The inevitability of further reductions was the basis for Genoil’s decision to fund and test its GHU (hydroconversion upgrader) technology. These efforts were rewarded in 2001 by the issuance of patents in the U.S. and Canada. The technology offered a substantial economic advantage for users of heavy or residual oil in that it could lower the sulfur content at a cost far below that of current technology. To conclusively prove the feasibility of its GHU technology, Genoil proceeded to build a $15 million test facility on its 127-acre property in Two Hills, Alberta, Canada.

The first company to test Genoil’s patent was Conoco’s National Centre for Upgrading Technology, which conducted a highly successful three-month study in Kerrobert, Sascatchuan, refining Athbasca bitumen. The next test of significance occurred in June 2008, when China Petroleum Engineering Company issued a Feasibility Study Report of the Genoil Upgrader. One of the study’s goals was to determine the cost of lowering the sulfur level of medium heavy and sour crude to 0.50%, which was of vital importance, as there are 900 billion b/o in recoverable heavy oil reserves worldwide. The results came in at slightly under $3.00 per barrel, or 70% to 77% cheaper than competitive processes, giving Genoil a very significant market advantage over current conventional technology.

This became even more meaningful, when in October of 2008, MARPOL announced the sulfur content of bunker fuel was being lowered to 3.5%, effective immediately, to be followed by a further reduction to 0.5%, starting in January of 2020. As of that date, all ships will be prohibited from burning any fuel oil with sulfur content in excess of that limit.

The most recent testing of the GHU took place in 2010, when Lukoil flew in 100 barrels of crude from its Yarega oil field to Genoil’s upgrading pilot plant in Canada. The results were consistent, substantiating the claims that the GHU upgrader could desulfurize heavy crude/residual (bunker oil) by a factor of more than 99.5% at a savings of over 60% compared with current technologies. Due to other factors, Lukoil decided not to proceed with the building of a full scale GHU system at that time. However, more recently they have requested a new GHU presentation.

The excitement generated by the GHU technology and the cost benefits it offers can be better understood with a look at the numbers. According to MARPOL, total global consumption of maritime fuels in 2014 included 224 million tons of marine heavy fuel oil (HFO) with a 3.5% max sulfur content and 64 million tons of middle distillate oil (MGO), which has a sulfur content of less than 0.15%. By 2020, Global demand for fuel with sulfur content not to exceed 0.50% is projected at 272 million tons, of which HFO will constitute 233 million tons, with the remainder comprised of much more expensive MGO, which will be needed to meet ECA (Emission Control Areas) standards of 0.1%. ECA regs are much more strict, as they apply to ports and inland waterways, including the 37,000 km extending through 20 countries of the EU and the even larger waterways of China and Russia.

It takes about 6.7+ barrels to equal a ton of heavy or bunker oil. With an expected demand of 233 million tons in 2020, it will require a minimum of 1,500,000,000 barrels of desulfurized heavy and residual oil to meet this projected marine demand, which is expected to increase in the years going forward. There seems to be no disagreement over industry’s ability to meet this requirement. The issue comes down to one of cost, and that is the wick what will ignite Genoil’s flame.

The price of building a GHU unit capable of lowering the sulfur content of 100,000 barrels of heavy or bunker fuel daily to meet the fast approaching 0.5% regs is approximately $700,000,000. As GHU can refine a barrel of bunker oil to meet the 0.5% standard at a cost of less than $3.00, the expense of constructing a 100,000 b/d refinery can be repaid within a remarkably short three-year timeframe. This may be difficult to believe, so let’s look deeper into the numbers.

As of March 1, 2017, the average cost of 380 CST bunker fuel was around $290/ton, while the price of middle distillate, or light oil (MGO) oil was about $489/ton. As just mentioned, the GHU process reduces the sulfur content of CST 380 bunker fuel to the required 0.5% sulfur content at a cost of $3.00/barrel. As there are about 6.7 barrels in a ton, the cost (6.7 x $3) of refining bunker fuel to meet the new 0.5% sulfur standards, comes to $20.10/bbl, which added to the $290 market price stated above, gives us a total cost of $310/ton. The current price being paid by shipping lines for bunker oil desulfurization is $10/bbl, which computes to a cost of $357/ton. When this $47 difference is applied to the projected annual demand of 233,000,000 tons, you can readily understand why such great interest has been expressed in the potential of Genoil’s GHU future and why Lloyds Register in the UK called it the Winner in the “One to Watch” category at the Ship Efficiency Awards held on November 2nd of last year. Once the GHU can meet the 0.1% sulfur level, it could replace MGO, at a profit of over $175/ton. Incredible, but possible. By the way, the new MARPOL regs are considered by many industry insiders to be the most significant change in shipping since the conversion from coal to oil.

Recognition is accelerating. It started in October 2014, when Heibei Zhongjie Petroleum signed an agreement for a 1.2 million tons/year refinery, on which they have already expended over $4 million during the first stage of implementation. This was followed, on October 15, 2016, by receipt of a $5 billion LOI for an initial 500,000 b/d upgrading facility for the middle East, involving a division of Shaanxi Petroleum Group, which plans to eventually expend t $35 to $50 billion on further GHU refineries. Shaangxi boasts of assets in excess of $42 billion. Then, on November 16th, a consortium of Chinese banks offered Genoil and Grozneftegaz of Russia a $50 billion LOI to be used towards the development of oil fields in Chechnya, with the oil to be processed with the company’s fixed bed reactors and the refined light oil then shipped to China via pipeline.

Interest for maritime application continues to grow. Just last month, on February 13th, Genoil announced it had signed an MOU with the Bonnin Group, one of the world’s leading independent suppliers of marine fuel, with over 40 years experience, for the distribution of refined low sulfur oil for marine use. And then, on February 15, 2017, less than a month ago, came the surprise announcement that Raushan Telyashev, the General Director of Lukoil’s design and research institute, had joined Genoil as Vice President for the Middle East and Russia.

With all of this going on, what I find so inconceivable and incomprehensible is that the price of Genoil shares is sitting at $.08. It makes no sense whatsoever. It’s true that the price has doubled since I wrote my first article three years ago, but let’s look at some other factors. At that time, the average daily volume was around 65,000 shs, often less. By February of this year, when I wrote my most recent article about Genoil, this number had increased to 180,000 and there had been days when the stock traded over 1,000,000 shares. One day, the number even reached 2.2 million. Today, one month later, the daily trading volume is averaging around 360,000 shs. Yet the price has only moved marginally higher. It makes no sense.

I called the company to ask if any insiders were selling stock and was told that no one had reduced their holdings. Where then was the stock coming from? How could one to two million shares trade with little or no increase in price? This type of buying should have resulted in a marked increase in price. Remember, this is not a marginally capitalized overly-promoted recent wannabe. The capital account reflects almost $80 million in investment and yet the current market value of the company’s stock is $30 million. The share price, which was $2.00 over a decade ago, and which held firm at $1.00 or more for a period of years, has plummeted. Why? Especially as all aspects of the business have continued to improve, year-after-year, with a marked increase in positive activity over the past two years. When I spoke with the company, voicing my puzzlement, I was told they had been able to trace the cause of the price drop to over one hundred million shares sold by naked shorters.

When I first entered the world of finance, many years ago, with Bache & Company, short selling was permitted, but only if you could borrow the shares to cover your short position. However, gradually over the years, the concept of investing changed. With the advent of derivative trading, hedge funds and yes, naked shorting, the emphasis on Wall Street changed from productivity to profitability. Naked shorting, which permits selling a company’s stock short, without having to have the ability to cover your short position, led to major abuses. Now, stock scavengers scour the horizon for small companies, whose stock is rising briskly, but without major backing. The shorters descend and begin massive selling, driving the price of the shares down drastically, until often the companies are forced out of business for lack of ability to raise funds, which in the normal course of events whey would be able to do. Many have claimed this has provided an opening for many questionable interests, including the mafia, to grossly enrich themselves, while providing no economic benefit to the country The former Undersecretary of Commerce for Economic Affairs claims naked shorting has already cost investors $100 billion and driven thousands of companies into the ground.

This was recognized by Congress, which passed legislation in 2008 banning abusive naked shorting. The key word here is ‘abusive’, for there are admittedly sound economic bases for allowing naked shorting in the normal course of trading. There is no question that Genoil has been, and is still being victimized by abusive short selling. Mr. Lifshultz, the company’s CEO, believes the actual short position may even be as high as 125,000,000 to 150,000,000 shares. If it weren’t for the fact that he has had substantial business experience (one of the companies he ran years ago listed Donald Trump as a 10% partner), a number this great would have raised my eyebrows.

But what about the law Congress enacted in 2008, you ask. To the best of my knowledge, the SEC has never moved against any of the major abusive short sellers. I called them three times on this matter and never received a reply. If they didn’t move when they first received word of problems regarding Bernie Madoff, what chance do you think Genoil would have?

As the short sellers continue to offer hundreds of thousands, or even a million or more, shares per day, and the price remains constant, we have to wonder who is on the other side of this transaction. It might very well be the Chinese, as I believe, or even the Russians. In either case, I’d be extremely nervous, if I were on the short side today. There’s also the possibility the Chinese may be thinking of making an offer for the company. It makes sense, even if there is no indication of it just now. But either way, the noose on the short sellers is tightening and I have decided to buy more shares. Once the realization dawns that there’s a smiling face an ocean or two away, willing to buy every time a share is sold short, we may see the beginning of a squeeze that could well be memorable.

I haven’t seen a combination of factors this intriguing in many years. A couple of ways we can accelerate it, even if it’s only to a modest degree, is for investors to buy new shares in cash accounts only. These shares cannot be borrowed, as margin accounts allow. Another step is to call your brokerage house and request delivery of the shares you purchased. A third approach is to place limit sell orders (at, say, $.15), which would remove your shares from being available for short covering. These are minor, even insignificant steps. However, this, in addition to foreign buying and increased domestic purchasing, could ignite the start of a short covering nervousness, which could result in a fascinating run-up in prices for the shares, as they buy-in to cover a 100,000,000+ share short position.

Leave a Reply