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“Limitless Energy… From Bakken Waste!”

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This ad is a re-hash of one that the Macro Trader folks started running a bit over a year ago, when the stock was around a dollar a share — in the 15 or so months since then it shot up to over $2 briefly and then fell back down sharply, including another trop of 15% or so after they released earnings last week.

The ad pitch has changed a little bit since the first time they ran it, so I’ll intersperse some of our original article below along with a few excerpts from the current ad so you can get the flavor of it — the general spiel is still the same, that this company with its small generators that can run on natural gas or methane is the solution to the “flare gas” problem… no more wasted gas, plenty of extra electricity, etc. etc. (We’ve also attached the original article to this piece, so the original comments from readers are at the bottom — you can jump in and add yours as well if you like.)

So what’s the pick? Here’s what we learn:

“BURNING MONEY: The Untold Story of America’s Raging Oil and Gas Boom

“INSIDE: Why Oil Drillers Are Burning off Enough Natural Gas to Power Washington and Chicago…

“Plus, How You Could Make a Killing on the Breakthrough That’s Turning This Wasted Gas Into Big Profits….

“there’s a big problem with this new American oil and gas boom you’re not hearing about…

“Oil companies drilling in America’s huge new reserves are now deliberately burning natural gas.

“That’s right! They’re simply getting rid of it.

“And I’m not talking about just a little bit of natural gas, either.

“But gobs of it!

“As The New York Times reports, every day, they are wasting ‘enough energy to heat half a million homes for a day.’

“And the Daily Mail reports that oil drillers are ‘burning off enough gas to power Chicago and Washington.’”

That’s from the first ad, this is the intro to the current one:

“Imagine a technology that could immediately reduce the cost of electricity for EVERYONE on the planet.

“It would mint millionaires, right?

“Today is your rare chance to be one of them…

“In short, the breakthrough technology you’ll discover today could completely change the way the world gets its power!

“As The New York Times puts it, “History just might repeat itself, with [this company’s energy breakthrough] revolutionizing the power industry just as the microprocessor did the computer industry.”

“Imagine if you had gotten into Intel way back in 1989, when it traded for less than $1 per share…

“Right now, you’d have 22 times your initial stake!

“Well, this technology I’m telling you about today holds an even bigger promise.”

So they’ve gotten, if anything, more hype-y since last year.

But that’s the basic issue (and promise) — that oil wells, particularly in places like the Bakken formation, are flaring off a lot of natural gas because it’s not worth the effort or expense to capture the gas, connect to a pipeline, and sell it to someone at the current low prices. Oil is much easier to transport, so you can pipe it right out of the well into a truck even if you’re nowhere near a pipeline — not so with gas.

Which means a lot of it is wasted, and that environmental standards are getting to the point where these companies aren’t allowed to simply flare off the gas by burning it at the wellhead.

And that’s where our top secret teased company comes in …

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“A breakthrough technique for turning this excess gas into big profits has quietly emerged.

“For companies using this breakthrough technique, the results are astounding.

“And they could care less what the price of natural gas is.

“In fact, the cheaper natural gas, the better….

“Analysts agree that flaring wastes a valuable resource. Burned-off gas, after all, generates zero revenue.

“But imagine if there is a way for these drillers to turn all of that wasted natural gas into CASH…

“WITHOUT having to build expensive pipelines…

“WITHOUT having to build a processing plant…

“WITHOUT having to spend ANY money on infrastructure…

“Well, it’s now possible, thanks to a revolutionary technology….

“This unique tool converts the natural gas into precious electricity!

“Right at the drilling site. No power companies involved…

“And it does this cheaply, quickly and with little emissions.

“The drillers can then use this electricity to power their own operations.”

So that’s what we’re being teased about — a company that makes a little generator of some sort. In their words:

“It’s a tiny, portable electric power generator.

“These generators can burn several fuels, including natural gas, to generate electricity.

“So oil and gas drillers across the entire country can use these tiny generators to convert all the extra gas they find into precious electricity!”

Well, that sounds quite neat and tidy. Basic generator technology is certainly widespread and somewhat commoditized, including natural gas generators (though I’m sure most remote wells that aren’t near the grid are probably using Caterpillar diesel generators, since they’re the big stand-alone generator market leader), but it sounds like the teased company is doing something a little different.

“… these mini generators are quiet, clean and practically maintenance-free.

“They are eco-friendly. They can run 24 hours per day. They can be used individually or in bunches.

“They can burn a variety of different fuels to create electricity, including diesel, gasoline, methane and natural gas.

“The fact that it can run on a number of different fuels is something none of its competitors can claim.

“The generators don’t use oil, lubricants, coolants or even water. This eliminates transporting, storage and costly spill/leakage issues associated with other technologies.

“And the generators don’t require any power lines. They are portable, small and easy to transport. They have only one moving part.

“As Benjamin Rosen, founder of Compaq Computers Corp., explains, ‘The little [generator] has the same relationship to large power plants that the PC had to the mainframe… It puts the source of power at the user’s site.’”

That quote from Benjamin Rosen, by the way, is from 1997.

So without further ado, let’s release that feline from the bag and tell you that yes, they’re teasing Capstone Turbine (CPST).

And here’s that article about the promise of this distributed power generation capacity, from the New York Times of 12/2/97. Yes, 1997.

I’ve never looked into Capstone before — they’ve been public for a long time (they IPO’d in 2000, in the heat of stock market excitement, and tripled on their IPO day), and it’s mostly been a very, very quiet company since that initial surge of excitement. The product sounds very cool — miniature turbines that are easily portable, use “air bearings” to make them low-maintenance, and can burn everything from coal bed methane to raw sour natural gas and turn it into electricity. But it’s been more or less the same story since they got Bill Gates and lots of other investors excited before their IPO 14 years ago.

You can look at them as a cautionary tale for story stocks, since they went public with the expectation that they might become profitable within a year or so but have never posted even an operating profit (or even a gross profit, meaning you could sell the generators for more than it cost to build them, until last year) and have continued to fund themselves through equity offerings of various kinds. Or, if you’re more optimistic, you can look at them and see the persistent power of an idea that makes sense and should, someday, be able to make money.

If we ignore the long, long history of this story, as we probably should since we’re interested in the present and future Capstone and not in the potential promise Bill Gates was interested in way back when Microsoft was a growth stock, then there is at least a little string of hope that makes you want to pull on it. There’s a good note on the potential promise and the big addressable market from the Fool here. There has also been lots of insider buys, but a skeptic would say that it looks like it’s part of a coordinated campaign to try to create the impression of insider buying — lots of buys over the last several years, but almost all of them are for just a few thousand dollars, and not likely big enough for insiders to keep from diluting their own holdings due to the consistent equity offerings that they seem to use to raise working capital every year or so.

The company is still quite small, with a market cap of about $300 million (and that scary low sub-$1 share price, which if it remains this low will mean a real delisting threat — Nasdaq currently has them with a warning, they have to trade over a dollar for ten consecutive days before mid-June to avoid delisting).

They have been increasing revenue for quite a long time, which is nice, but those increases haven’t been enough to make them profitable — they have boosted revenues in many years by 30-50%, but costs have kept up with revenue pretty easily. It’s hard to see them jump-starting production (and demand) fast enough to abruptly become profitable and achieve some economics of scale, but I don’t know at what level of production and revenue they could potentially become profitable — gross profit has ticked into positive territory lately, so it’s possible that they’re getting closer, but you’d have to dig in and find a real reason to believe that the decline in operating losses could speed up. Operating expenses, including R&D and Selling, General and Administrative (SG&A) costs have been pretty consistent over the last seven or eight years, growing much less quickly than revenue, so if they can figure out how to raise revenue without raising the cost of revenue thought ought to be able to make a profit. Eventually. And that was an “if,” it has taken ten years for the cost of revenue to drop from 200% to slightly under 100%.

As of the last quarter, they were continuing to get closer and closer to breaking even. Their revenue rose by about 15%, backlog kept going up, but that backlog doesn’t seem to move into “sales” that quickly — the backlog is almost twice their annual sales. They have been able to boost their gross margin a bit, but not so sharply that they can become profitable without some really substantial revenue growth — given their operating expenses of $35-40 million a year and a gross margin that might, charitably, get up to 20% if they continue improving, they need revenue of about $200 million to break even. They got to $133 million in the fiscal year that ended in March, and the losses keep getting smaller, but I’ll be a little surprised if they can turn a profit before 2016 or 2017 even if the current positive performance trend continues.

Analysts do seem to agree that they’re going to finally break even next year (their fiscal year starts on April 1), and most of them offer a “buy” recommendation for CPST (though not necessarily a “strong buy”). But I typed that last sentence in March of 2013 and it’s still true … analysts now expect that profit to come “next year,” which is now FY 2016. They see continuing growth of 25% a year, which, if they’re right, would be about the same revenue growth trajectory they’ve been on for ten years, but last year was only 15% so there’s some possibility that growth is tailing off — it looks to me like they really do need the 25% growth in revenues each year for a couple years to get to a profitable level unless they slash operating expenses. If you can convince yourself that they’re going to run that revenue growth down to the bottom line, hopefully improving gross profit margins further (they got as high as 15% last quarter and have been improving, which is important), then they might actually post a per-share profit sometime.

Sound like your kind of investment? If it was a new company today offering this product, without the specter of 10+ years of selling these mini turbines without ever being able to make money on them, I’d be a lot more enthused — so I don’t know if I’m coloring my expectations unfairly because of their long history of disappointing failure to hit critical mass, or if I’m wisely being cautious given the difficulty of building what sounds like a perfectly logical and appealing business. There are plenty of folks in the oil and gas business who seem excited about them, or at least about the potential they offer. I’ll have to research them a bit more before I can make up my mind, but if you’ve got any experience with Capstone, or an opinion to share, I’m all ears — shout it out with a comment below.

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48 Responses to “Limitless Energy… From Bakken Waste!”


  1. Like Travis I have run across this one numerous times but was never convinced it was a good investment in spite of repeated promotions from several sources. I agree the IDEA makes sense, so the question is what the problem is, bad management, selling the product too cheap, insufficient marketing efforts? Would sure make sense to turn what is otherwise wasted energy and obviously some level of pollution into electricity that is needed for what in many case are remote sites that have no easily accessible power otherwise.

    Like(1)

  2. CPST hs been around since 1997 and still cannot turn a profit on positive cash flow? WHY? What makes the current situation so much more favorable? I aksed my son to look up the Motley write-up as he is a “Fool” spending mucho on their hype.

    Like(0)

  3. I’ve been holding CPST for years: first -for its innovative & “idealistic” concept and product.
    I’ve seen it grow from an extremely reliable manufacturer of small in-field generators for hard to reach places to a maker of mega stand-alone, or in-line generators that can light-up and cool entire high-rise buildings. Internationally things are looking up for Capstone, as it’s bio-gas (for land-fills) to wattage convertibility is exploited. Fortunately, I haven’t lost any money on it, having been too stubborn to sell it after the repeated post-earnings sell-offs. I have certainly scratched my head over the pricing decisions that have left these innovators profitless.
    However, secondly, in the event that the company’s ROI doesn’t improve, I have hopes that the company will be bought out by the likes of a GE or Honeywell. I admit that I trade the interest I’ve lost on this puppy for the enjoyment I get in being the partial owner of such a green and practical product maker.

    Like(2)

  4. Those ‘Caterpillar diesel generators’, is a bit of a technical misnomer. They are diesel engines in operating principle but do burn the natural gas and use either spark plugs (yes – that’s right) or a pilot injection of diesel to ignite the mix of natural gas and air that is metered and supplied to the engines intake. In short the oil companies have been utilizing the natural gas in this fashion to my own certain knowledge since the 70′s. Diesel cycle engines also burn bunker C and other residual oils. The problem is the vast quantities of gas given off. It is a safety hazard to vent the gas to the atmosphere so it is burnt. Once the wells are in production of a reasonable size pipe lines are built and some gas can be sent with the oil. When pressure is reduced the gas expands, bubbles, froths – out of the oil stock much like an agitated bottle of soda foams over.

    Like(1)

  5. The energy wasted in a gas flare probably runs at a several hundred kilowatt level or more. They can be seen from outer space. The electricity requirement at a drilling site (I am guessing) probably is far less than this. You can’t flare off or easily store or transport the excess electricity. The problem thus shifts from flaring off excess gas to flaring off excess electricity. There is little or no cost associated with the flaring of gas, but the cost of a several hundred KW turbine-generator makes the flaring of excess electricity very costly. Especially when labor and maintenance costs are added in.
    To properly analyze this problem we need an estimate of the actual electric power requirements at typical drilling sites compared with the power released as heat in a gas flare. Another problem is that the gas flare releases a steady stream of power as heat, but the electricity requirements can fluctuate enough so that off-peak gas flaring would still be necessary. A Gumshoe with drilling site experience could fill us in on these information gaps…….

    Like(2)

    • Applied DNA Sciences, Inc. is the DNA marking company (APDN). I bought a few hundred dollars worth on the basis of published DoD requirements to use the technology on a variety of mission-critical items and components.

      Like(0)

      • This is another interesting company. It is growing, but far from a profit. Now they are planning a reverse stock split. I too put a few hundred into it and am wondering if I should take what is left out.

        Like(0)

  6. Drillers should be required to generate power or store the gas until it can be used or sold. Burning it off is a waste of the natural resource. So, it cuts their profit a bit, they won’t go broke.

    Like(0)

  7. I’m in the power industry and have worked with Capstone microturbines a (very) little bit.

    My utility has a site that was developed with microturbines a decade or so ago on a landfill as a political gesture; a private company lower down on the hill has turbines of their own, but I’m not sure if they’re Capstone. Anyway, they own the land and rights to the digester gas so we only were able to ever run the turbines when they weren’t using theirs, or with whatever “second-hand” gas they didn’t want, which had to be processed on-site before it could be burned in the things. From what I understand, the private company’s microturbines worked well enough. For various reasons, but primarily because of the less-than-ideal gas, ours never worked right and fell apart in fairly short order.

    Maybe there have been some leaps and bounds in their technology, but if it’s as finicky now as it was when they sold us the turbines I worked with, it costs nearly as much to run and maintain them as they produce in electricity, and often more.

    Like(3)

  8. Wilson’s experience offers good insight on why micro-turbines are not the glowing panacea hyped by the teasers. Statutorily requiring expensive storage tanks and unnecessary electricity generation can result in the spudding of remote wells until prices rise to make such operations profitable. If enough wells are shut in, petroleum prices could rise to levels justifying the additional capex from which CPST could begin to thrive.
    We still need more operational data from typical drilling sites to fully understand where we stand today.

    Like(0)

  9. I know that in the past (in Alberta, Canada) the ratio of gas to oil (crude) was used to determine how much gas could be flared…and if the ratio was too high the well could not be in production…until a pipeline could be built for the gas. The amount of electricity used to operate pumpjacks, for example, might allow use of a small amount of gas for electrical generation….but low producers are not going to get companies very excited. Generating wholesale electricity might work in some places…but the cost of electrical infrastructure is probably much higher than plastic pipe to just move the excess gas…so back to using the gas as gas.

    Like(1)

  10. This is my first time commenting and I would like to personally thank you Travis!! The perspective you provide to the GUMSHOE community is very well written; analyzed (absolutely one of the best investments anyone can do for receiving such informative analysis).
    In regards to the CPST – based on their tenure; their product; their overall week trajectory in leadership; AND constant weakness in their share price – completely dysfunctional operation!! One of two choices in my opinion:
    -Easy takeover target – buy a GREAT product at an estimated discount of 30% from its current level of (around) $.93. Or put in an order for 30% less than the latest share price and try to catch the upside bounce, which we can’t really no for certainty when this entry point will occur… (Warning — this is for risk tolerant individuals – can go either way – but you can hedge on either direction).
    -Estimated discount of 30% = short the stock!
    Travis do you know of a broker that permits shorting OTC/Pink sheets securities?
    Travis what are some of the best ETF’, securities, instruments, etc… to hedge against the STUDENT LOAN BUBBLE?

    Like(0)

  11. Probably they’ll have to raise some more cash. Some business insider excited about the potential they offer thanks to a revolutionary technology. Seems like a new kind of investment.

    Like(0)

  12. If you want to invest in a company which will deal with surplus gas ( eventually), look at Oxford Catalysts.

    Like(0)

    • @PETERLIVINGSTONE: ar least mention the American trading symbol – OXFCF – some Ruski oligarch reportedly bought up about 3.5% in January 2013 – whole different scenario, IMHO

      Like(0)

  13. In 2009, Syracuse University built a new data center that uses 12 of these custom made Capstone microturbines. They burn natural gas to power the data center and the waste heat is used to heat the adjacent buildings and in absorbtion chillers to make cold water to cool the servers. There is also a propane backup tank in case the nat gas goes offline that the turbines can burn as well. Pretty neat stuff!

    Like(2)

  14. About a year ago I read on a news site that Vanguard bought 13 million dollars worth of CPST but I do not know the price they paid or if they are still holding the investment.

    Like(0)

  15. Is the uniqueness of each customer’s needs and size and other variances too diverse for them to turn a real profit, because they have no “pricing power” of mandated demand?

    Like(0)

  16. To Roger, APDN.OB is the Patrick Cox teaser about DNA marking. It’s an interesting company and I’ve owned it. I had to keep averaging down to finally see the day where the stars aligned and I could get out of it. Not to say it couldn’t be a winner. Due some reading up on it and draw your own conclusions.

    Like(0)

  17. Bought and sold CPST 5 or 6 times over the past few years. Bought @ .98 and sold @ 1.09 and up…………

    Like(0)

  18. Crazy run over the past week or so — driven, I guess, by continuing newsletter pushing to some degree … though more importantly, by a few strong-sounding orders and perhaps a short squeeze. This one’s still all about 2014 and 2015 and whether they can turn the corner to profitability, but they do at least toot their own horn pretty well whenever they get a big order or two.

    Like(0)

  19. It sounds like a great new technology. If it could generate power to homes and businesses. That would be great for world wide distribution. But i think management are doning a poor job at marketing this small generator. The sky is the limit.

    Like(0)

  20. The real plus is in a co-generation application, where waste heat is used.
    Then it is almost a slam dunk. Their turbines are multi stage efficient.

    Like(0)

  21. The company badly needs a good CFA to make it profitable. Its discounted free cash flow (DCF) fair value is (0.75) per share. Its technicals suggesting shorting. Every one of the indicators I use for buying the stock are reversed. The idea is a very good one. Now they need to become profitable.

    Like(0)

  22. A small (in HP but not weight) extremely thermally efficient engine is the Lister Diesel. Easily repaired, extracting 80 % or more of the BTUs it’s the favorite of many villages in third world countries for moving water and generating electricity. I am sure some engineer could figure out a way to make it burn waste gas.

    Like(1)

  23. Capstone sounds like the name of a company that makes markers for gravesites. Being profitless for so long, maybe that’s where they are headed.

    Like(1)

  24. More good? ideas for the fellahs here…

    Capstone Turban needs to develop a little natural gas compression station to match with its electricity-producing gas turbines. Split off a small amount of flared gas to produce electricity. Connect the electricity to the CNG machine to turn the remainder of the flare gas into compressed natural gas. When the tank is filled up, call the truckers to haul it to market. Sell a tank of CNG and a generator turbine to every farmer in the neighborhood. Or, Capstone could partner with Cheniere to make a pocket-sized LNG train to site at the flare. Call the trucks when the tank is filled. See, easy as pie, problem solved.

    Those little machines are cute as all heck too!

    Like(0)

  25. Anyone know what happened to the Bloom Box? That would be another solution for generating power from flare gas, but much lower maintenance–no moving parts.

    Like(0)

  26. Where is the moat? This company may make a very good product that is efficient and versatile but generators are nothing new or unique. What sort of fuel you use to turn the generator is nothing unique either – there are lots of natural gas engines running busses and forklifts. Seems like all sorts of companies could jump in were the market there. And no profits in 10 years trying. No thanks.

    Like(0)

  27. I went to their office three years ago to find out what they have and if it is worth having a dealership from them for an emerging country with a lot of natural gas and need for electricity. The guy who was in charge for the distribution in the country would not even call back. Their marketing is not so great at least in that part of the world. This is in Asia and the person in charge is an Asian, perhaps born in US in the LA Valley area. How can you improve sales?

    Like(0)

  28. I;ve been watching this nsail with curiosity for a few years and have been easily getting the teasers. That being said while I “THINK” it should be a good thing I don’t “SEE” any compelling reason to wait a few years when there are so many stocks ripe for picking. I’m also too old to have that kind of future forward looking hopeful thoughts that this will be a good investment for me. My curiosity was piqued at first so I watched it. …..never bought one share

    Like(0)

  29. Really an interesting article because it invoked some very good and very bad memories of a consulting firm for which I once worked – really, really bright founders, an astonishingly good product with a razor focus engagement delivery – we never lost an engagement bid to a BIG 8 CPA firm and worked in some of the premiere financial institutions in this country – but the four core members of the ownership group could not spell “business”, and they eventually failed. Sometimes genius or a great product just is not enough. Thank you Travis for the typical insightful analysis.

    Like(0)

  30. This is a real company with a real product that COULD have been (and still can become) profitable. However, it’s been plagued by the usual problems with small companies – poor management, lack of fiscal discipline, hedge funds trying to screw them….It’s another example of great technology and promise but poor execution.
    Management still seem to treat it as a cash cow and permanent employment… shareholder interests be damned. They keep diluting shareholders while promising that profitability is just around the corner…
    Who knows…. they may yet make it, but if they do, it would be the market rather than the management.

    Like(0)

  31. If the product was so good and these people so bad at running the company someone with eyes wide open for an opportunity would be taking them out. Thats not even being hinted at.

    Like(0)

  32. Aloha… I live on Kauai Hawaii. It makes me sick to think they waste and burn off that much fuel. On Kauai we have the most expensive electricity in the country. Average electric bills can be $300 and up depending on size and use.We have a co-op power company. We use diesel fuel to power it 24/7. Fuels all come from Indonesia to us. There is an extreme business opportunity to find a way to contain the burn off and instead bring it to the islands to generate electricity. Diesel fuel here is $5 a gallon and propane which we use for cooking, dryers, water heaters and bar-b-ques is riding at $7 a gallon. And to make matters worse we are a state in the u.s.a.

    Like(1)

  33. How much oceanfront land is undeveloped there that could be used to build a plant that uses seawater plus algae plus solar to make ethanol for $1.27/gallon? Look at the website of ALGENOL [www.algenol.com] to see what they are all abourt and how they could perhaps provide your residents with a locally-derived fuel source for your island’s needs? The have the technology in Florida and need a subtropic ocean water environment to make it work!

    Like(1)

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