“A Bonus Ten-Bagger Playing Government Regulation … Cleaning Water at Half the Price”

Sleuthing out Christian DeHaemer's "Ring of Fire" fracking wastewater pick

I wrote a few weeks ago about Christian DeHaemer’s “Ring of Fire” teaser that was all about the revolution in hydrofracking and the huge natural gas profits that will come to folks who buy his favorite stocks.

And yes, if you remember, he wasn’t pitching the actual natural gas producers (that’s a bold and contrarian bet these days, with prices so low), he was pitching a few stocks that profit from the collapse of natural gas prices — including a couple firms who are helping to build the national fleet of trucks and cars that run on natural gas and the associated infrastructure those vehicles will need. So that was interesting, and it got a fair amount of attention from my readers (you can see that older article here if you missed it the first time around) …

… but why is the Gumshoe bringing up this old news, you ask? Because there was also a bonus pick teased in that ad, and that bonus pick apparently intrigued folks even more than the stocks we already uncovered, because eager Gumshoe readers keep asking me to sleuthify it up for them.

Ready? Here are some of the hints and clues from the ad:

“Every single energy company that’s got a stake in the Ring of Fire wants to avoid lawsuits and EPA sanctions like the plague.

It’s one trend you can always count on: big companies working hard to hold on to their money.

“The good news is for every problem, there’s always a profitable solution.

“And the best news is I’ve found a little gem trading under $1 a share that’s ready to reap huge gains by tackling the cleanup of the fracking process.

“This little beauty holds 13 patents for a process that eliminates the need to truck wastewater from the fracking wells to off-site holding ponds, saving the energy company millions in lost time and expense.

“Their process also renders the water 100% reusable.”

Sound intriguing? Yes, as you can imagine, the national hullabaloo over hydraulic fracturing and the heavy toll it might take on water has inspired many investing pundits to search for profitable solutions — including yours truly. We’ve seen Keith Schaefer tease one such company, a glorified maker of giant swimming pools with a huge dividend, and the Irregulars might remember that I was very close to profiling Heckman as our “Idea of the Month” in March but held off because something just wasn’t smelling right (thankfully — it’s down almost 25% since then … I still like the broad business plan of consolidating the energy waste water treatment sector, but I worry about the actual performance and their recent unrelated acquisition).

But this time around it’s a different company — so who is it?

A couple more clues:

“The best part is this company will clean water at half the price of its nearest competition.

“They have just started to get the word out…

“In the last few months, the share price has doubled. Once this story makes the mainstream press, it could easily hit $2-$5 a share.

“When you join Crisis and Opportunity, I’ll also send you the free bonus report called: ‘Water Profits: How a Tiny $0.75 Company Will Clean Up Fracking and Make You Rich.'”

Well, you don’t need to subscribe to DeHaemer’s newsletter in order to hear the Gumshoe answer — which comes out of the Thinkolator, nice and shiny: It ain’t a 75-cent stock anymore, but, as a few readers have guessed in recent weeks, this is Ecosphere Technologies (ESPH, trades over the counter).

And yes, it is very small — even smaller now than it was a few weeks back when the ad began circulating, actually. The shares now change hands at about 50 cents, making it a $75 million company.

Ecosphere’s primary technology/product, which they call Ozonix, is apparently used both to stop bacteria buildup in pipes (and therefore reduce some of the chemicals needed in fracking) and to clean water. Here’s how they describe themselves and their technology:

“Ecosphere is driving clean water innovation with its patented Ozonix® advanced oxidation technologies and its mobile, low maintenance water treatment systems. Ecosphere’s patented Ozonix® Technology is a high volume, advanced oxidation process designed to kill bacteria and control biofilms that are responsible for microbiologically induced corrosion (MIC) in industrial processes around the world. The Ozonix® Technology allows customers to recycle their water for re-use and reduces the costs associated with wastewater transport and disposal.

“Ecosphere has been a water industry innovator since 1998 when the company’s founders began developing eco-friendly technologies to solve major water remediation challenges on land and at sea. As a result, Ecosphere Technologies has an extensive portfolio of patents and trademarks that have been filed and approved in various locations around the world. The majority of its green technologies focus on the cavitating properties of water and eliminating the wide-spread use of toxic liquid chemicals through technologies like its patented, Ozonix® technology. This extensive portfolio of patented, clean technologies can be purchased and/or licensed for use in large-scale and sustainable applications
across industries, nations and ecosystems.”

Their current clients are primarily natural gas companies, and they are extremely reliant on just a couple contracts for most of their revenue, so those are both reasons for great fluctuation and probably reasons for the recent decline in the share price (though the stock leaped so quickly over the winter, when it hit the teased 75-cent level, that it could just be recovering from that fear of heights).

If you take just a quick look at the numbers for ESPH, which is all I’ve done, you’ll see that they had a substantial bump in revenue starting in the third quarter last year and continuing through this most recent quarter — that leap in revenues, from roughly $2.3 million per quarter to a bit over $8 million per quarter, gains of nearly 300%, is due pretty much entirely to one contract that has them delivering two of their Ozonix F80 units (water treatment trailers) each quarter to a single customer. That customer, Hydrozonix, which has an exclusive deal to provide these Ozonix services within the onshore oil and gas industry in the US, rebrands them as Hydrozonix F80.

Which is where I start to get a little bit confused — see, the president of Hydrozonix is the former president of Ecosphere (he left about a year ago, presumably to set up Hydrozonix and put this larger order for Oxonix F80s into place), and I don’t really know what the cross-pollination is or if there’s anything smelly in the relationships. You get a little flavor for this multi-layered corporate setup in their announcement recently of a deal to provide water treatment for hydrofracking on a reservation in Montana:

“Ecosphere Technologies, Inc. (OTCBB:ESPH), a diversified water engineering, technology licensing and environmental services company, today announced that the Company, its majority-owned subsidiary, Ecosphere Energy Services LLC, and its sub-licensee, Hydrozonix LLC (collectively, the “Ecosphere Partners”) have signed a Letter of Commitment with the Blackfeet Nation to provide Ecosphere’s Ozonix water treatment services to oil and gas companies conducting hydraulic fracturing (“fracking” or “fracing”) operations on the 3,000 square mile Blackfeet reservation in Montana. Ecosphere Partners will be the exclusive provider of water treatment services on the Blackfeet reservation.”

So I generally like the basic premise — their technology seems to work, insofar as it has been used by a few major companies (primarily Southern Newfield Exploration, where ex-president of Ecosphere, Aaron Horn, came from — he was a water operations guy there, then came to Ecosphere as president, then moved on to Hydrozonix as president). So it looks like a majority owned subsidiary licenses the technologies from Ecosphere, which is really, at the parent level, apparently mostly an R&D group, then that subsidiary gave an exclusive license for the core technology/product to Hydrozonix for U.S. onshore energy operations. It might be that the various minority partners or licensees are perfectly reasonable partners and paid good prices for their deals, but with a small company and “among friends” deals like Hydrozonix’s with Ecosphere I would want to read the deals carefully to see where the potential profit is rolling through and how much might be leaking out before it reaches public shareholders of Ecosphere. I haven’t done that close reading, just to let you know, it’s just something that befuddled me enough in looking at their basic filings that I thought I should note it for you.

The basic licensing agreement that provides for the majority of current revenue, the deal that requires Hydrozonix to purchase a certain number of their EF80 Ozonix units (well, at the time the deal was for the previous generation EF60 units), was made and announced about a year ago, and the first new-generation units rolled out of the factory last Summer to start their ramped-up revenue generation. The deal goes for 24 months, so as long as Hydrozonix keeps going along with the orders they have some visibility for five more quarters of this higher level of revenues, though I don’t know if there’s capacity for it to climb substantially beyond that level or not. The deal can keep going for years after that, it sounds like, as long as Hydrozonix is willing to keep up a consistent level of orders each quarter to maintain their exclusivity.

As of the last quarter, which was their first profitable one (at least recently), they got about 2/3 of their revenue from royalties and sales with the Hydrozonix deal and about 1/3 from services provided by their majority owned subsidiary Ecosphere Energy Services (I assume that’s mostly from the deals with Newfield and Southwestern Energy, the two firms who have been the guinea pigs and backers for Ecosphere’s technology since they got into the hydrofracking business a few years ago). Newfield renewed their contract for another two years late last year, and the Hydrozonix deal goes for at least another six quarters, so they do have at least some visibility for maintaining this level of revenue generation — and hopefully profit — for the next year or two.

Does that make it a great investment? Well, given the reliance on a couple key contracts it’s likely to be quite lumpy — any substantial new manufacturing deals (selling more of their trailers to Hydrozonix above the minimum number, or selling to new partners in other industries or geographies) should send the stock shooting higher if they occur, and, likewise, any trouble with their existing contracts could make the shares plummet. The current deals, assuming their natural gas clients don’t shut in production at wells where they’re working, would probably give steady growth, so just remember that the massive year-over-year growth of nearly 300% in revenues isn’t going to continue past the Summer unless they make larger deals, particularly if they sell more of those trailers at a couple million dollars each.

Interesting company, certainly has some great potential if they can keep it going — I’d want to read into the filings a bit more and understand them better before investing, but I’m intrigued. If you’ve invested in Ecosphere, or have a different favorite in the hydrofracking wastewater sector that you’d like to suggest, feel free to shout it out with a comment below. Thanks!

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17 Comments on "“A Bonus Ten-Bagger Playing Government Regulation … Cleaning Water at Half the Price”"

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Don Giles
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Don Giles
May 10, 2012 11:56 am

Please note that the “glorified maker of giant swimming pools”—Poseidon Concepts –reported 1st quarter earnings after the close yesterday which exceeded estimates and provided increased future earnings guidance. Stock priced jumped 10% so far today.

Bob Paglee
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Bob Paglee
May 10, 2012 12:27 pm

Thanks, Don Giles , for the heads up posted above re Poseidon Concepts — I’m up over 500% since my purchase of POOSF — is that possible? There must also been some sort of stock split because I now have an odd number of shares 883. Amazing.

Don Giles
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Don Giles
May 10, 2012 1:13 pm

Bob Paglee- 500% is possible if you bought Open Range a year ago or more before Posedidon Concepts was spun off. I did not start buying Open Range until June 2011 and continued buying (as I was selling Gasfrac) until just before the spin-off. So my adjusted cost for Poseidon Concepts is about $8.60/share. You made a great buy!

Robert
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Robert
May 10, 2012 11:57 am

Bought 1000 shares @.44 and watched them go up to .80
then drop to .36. On the way back up I bought 2000 more
@.41 and just sold all 3000 shares at .55. If they drop to .40
again I’ll buy them back. One of my few winners.

Henry Pope
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Henry Pope
May 10, 2012 12:42 pm
Gasfrac avoids the water contamination issue by using lng as its fracking medium. Apparently 90 some percent of the lng is recoverable. It’s a big operation/installation, more expensive than the water procedure, but according to the company, results in more gas or oil extraction. I’m long GSFVF. It’s a tuggy of war between buyers and sellers and is not for the faint of heart. I had a position in ESPH but quickly thought better of it. Sold to the highest bidder! Michael Filloon, on Seeking Alpha, has a note on ESPH. If you’re interested in energy co’s, especially in the… Read more »
MonV
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MonV
May 10, 2012 12:55 pm

What do we know about Sustainable Environmental Technologies(SETS)?

Myron Martin
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May 10, 2012 12:59 pm

Haven’t bought Poseidon yet but will look for a good entry point. I did on the other hand buy Gas Frac and so far it has been very volatile, may just average DOWN as it is currently at a very attractive buy point. Same may apply to Ecosphere which I was not aware of, will have to do some major due diligence before making an investment decision.

cfox
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cfox
May 10, 2012 1:05 pm

I’m with Henry Pope on Gasfrac. The guy who now runs the company, Zeke Zeringue, is ex-Halliburton and very well connected in the mainstream oil and gas business. My understanding is there is developing support for the Gasfrac process in the environmental lobby, specifically in New York State.

Mike
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Mike
May 14, 2012 9:35 am

The environmentalist are going to try everything they possibly can to make it hard to do any fracking in NYS. Our coalition just got a lease with a company that said they would use the liquid pretroleum instead of water for fracking and now the environmentalists are lobbying the EPA to do a complete study of this type of fracking. The last one stalled it 4 years and companies have started packing up and going to North Dakota and Ohio. Thank-you NYS liberals for your views. Like we couldn’t use 37K jobs and billions of dollars in revenue.

john tyrone
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john tyrone
May 10, 2012 2:16 pm

Appears OOIL.OB ($1.71) is also in this area of recovering fracking water.

timmuggs
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timmuggs
May 10, 2012 5:11 pm
An alternative to ESPH is Ridgeline (RLE, RGDEF), a Canadian company that trades at 80 cents, and cleans water at fraccing sites. Poseidon said in their conf call that they would be adding services, and one guess would be water cleaning services. So RGDEF might be a partner, or maybe ESPH, who knows. Or maybe POOSF will be addressing other markets that need huge tanks for storing waste water, like mining, municipalities or whatever. I think RGDEF has a contract with a municipal waste plant in California. Biioteq (BQE, BTWNF) is another Canadian company that cleans water. They are down… Read more »
timmuggs
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timmuggs
May 10, 2012 5:13 pm

Sorry, Bioteq is BTQNF on the pinks, BQE on Toronto exchange.

bill
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bill
May 10, 2012 9:34 pm
esph looks questionable. insiders have been net sellers over the past couple of years at higher prices. if this stock isnt being picked back up by them at its lows around .35/share or now even if it’s such a great prospect, then why should we buy it? very speculative. better plays look like keg or bas who are more stable. both have been beaten down near their 52 wk lows due to slightly than expected earnings over the last couple of quarters. both however seem to be attracting insider additions recently. also, like gummy said, things just seem a bit… Read more »
trautmann
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trautmann
May 10, 2012 11:45 pm

Any thoughts about Hekman ? Rode that pony up and down a few times now! HEK

sambino243
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sambino243
May 11, 2012 12:05 pm
esph, i have been following this co for about a year and have 2,000 shares. plan to hold as i think they are just about to go main stream in the oil/nat gas fracking industry. they arfe in the process of doing the same thing in the mining industry as they mentioned in their last 2 q reports. also not mentioned in this article here is they recently received a Frost and Sullivan award for their tech. do your own dd, this just my opinion. glta sambino
Chris Scherer
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Chris Scherer
May 12, 2012 4:55 pm

I have also been interested in Gas Frac Energy Services. I believe their fracking medium is liquified propane gel (LPG) which is initially more expensive than water, but does have a better recovery result, reduces the need for as much flaring and eliminates the need for piping infrastructure to remove waste water. I plan to watch this company closely because I also believe that it will become more popular with the environmental community due to the reduction and/or elimination of huge amounts of water. Hope you cover it in a future article.

Mary Richards
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Mary Richards
May 22, 2012 3:51 pm
Hello- As a TOTAL newbie to investing, I love reading Stock Gumshoe as it really seems to put a realistic view on all the glorified mumbo jumbo that is rampant in the many (too many) newsletters out there. I am learning daily, but my mind tends to go numb when it comes to fundamentals, however, there are a few companies my instincts tell me to put on my “favorite stocks” list. First and foremost is Hecla Mining (HL). Beaten down severely it seems, due to the deaths at the Lucky Friday mine and the resulting closure and lawsuits. I, in… Read more »
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