The latest teaser from Keith Schaefer for his Oil and Gas Investments Bulletin has spurred quite a bit of chatter among Gumshoe readers, including questions from Irregulars and some speculation about possible matches …
… so I thought it was high time to put the Thinkolator to work sniffing out this water-related oil services stock.
Schaefer says it’s the “single most profitable company” in the sector because they have massive margins, 85% profit margins or thereabouts (or as he puts it, they make $1,000 for every $150 they invest) — nothing to sneeze at, there (though something to be careful of: huge margins that don’t come with a natural or patent monopoly are catnip for competitors and usually don’t last long).
And perhaps more suprisingly, Schaefer says they pay a pretty remarkable dividend of 7%. Usually, companies that have 80%+ margins and pay large dividends are passive companies or firms with huge long-lived capital assets that are paid off, like royalty owners and the like, but that doesn’t appear to be the case here.
Here’s a taste from the ad to get you thinking:
“In 2010 alone, the EPA estimates water use for fracking nationwide DOUBLED in the U.S. – from 70 billion gallons to 140 billion.
“That’s why an entire new water services sector has emerged in the Oil Patch…
“A multi-billion dollar industry that is only going to get bigger. (Wall Street is just beginning to wrap itself around it.)
“One company knows the full profit potential of this industry perhaps better than any other.
“It has carved out – and now ‘owns’ – an entire market in the space.
“It has done this by expertly positioning itself to capitalize on the industry’s high demand and fast growth.”
Makes you jump up and down a little, no? Just wait ’til you read this bit:
“… its hyperbolic growth should continue for another 1-2 years… they’ve essentially cornered the market – with little threat of competition…. it’s my top trade of 2011-2012, with plenty of room to run, and … its already-strong dividend is likely to increase from here.”
OK, so there’s some sobriety there — that the “hyperbolic growth” might slow up soon — but still, yowza! Who is this little miracle company?
More from the tease, to get our clue hopper filled up to the brim:
“Huge – enormous – quantities of water are needed in fracking operations. All this water has to be sourced, transported, handled, treated, and finally hauled away and disposed of.
“Typically oil & gas producers set up temporary ‘farms’ or open pits to hold all the water that’s needed.
“The downsides here are many, and make for frequent headlines: pollution, waste, congestion, safety concerns – even flooding or seeping into local groundwater.
“The reality is – Nearly 50% of all oil wells in the U.S. use these open pits.
“So it’s no wonder a number of states in the U.S. are working to eliminate them… as are energy majors, the likes of Shell Oil and Chesapeake Energy.
“The upshot: This is only going to increase market share even more for my # 1 company here…
“What’s more – The company is even getting an ‘assist’ from regulators in the U.S.
“You see, regulators so badly want an environmentally friendly solution to these open pits and water farms…
“Some of them have actually handed out business cards to oil producers – on my # 1 company’s behalf!
“That’s correct – This company’s solution is so effective – and so necessary – state environmental agencies have strongly suggested producers contact my # 1 company for its win-win solution.
“After all, the process is clean. And it’s done in a way that quells local objections – such as:
- Water usage: This company reduces it.
- Groundwater contamination: This company reduces it.
- Endless line of trucks on the road: This company reduces them.
“How big an impact am I talking about?
“What used to take 50 – 100 trucks per wellsite – this company does in just 2.
“And it does all this for less than it costs to do it the dirty, old-fashioned way – saving producers anywhere from 30% to 70% of their water costs.
“In Short, this Single Company Gets Rid of One of Oil Producers’ Biggest Fracking Headaches… AND Saves them a Fortune at the Same Time
“The company is in fact growing so fast – more than doubling orders in the last 12 months – that it has become the dominant player in its corner of the market, in just one year.
“The company’s own guidance can’t even keep up with its hyper growth – with orders currently coming in four times faster than management originally expected.”
And apparently this company doesn’t just deal with the problem of storing dirty water or storing the water used for fracking, they also have some kind of solution to prevent the water from freezing (not that that’s been a huge problem in our neck of the woods during this tepid winter, but I can see how it’s an issue):
“It can be tough keeping liquid from freezing in the winter, in places like the Bakken, or Colorado, or all of Canada.
“And it’s expensive to handle once the water has been used to frack – and emerges dirty.
“That’s where this junior oil company comes in.
“They’ve figured out how to keep water heated – and in a liquid state – for 30% – 70% less cost than traditional methods…
“… there’s nothing in the market that measures up to it: A patented method that handles water more safely, cheaply, and easily than anything else available today.”
So … water handling and storage company, able to prevent icing up, uses fewer trucks, in huge demand, pays a big dividend. Who is it?
Toss all that into the Thinkolator, and out comes our answer lickety-split: This is Poseidon Concepts (PSN in Canada, POOSF on the pink sheets).
And they basically sell custom-built mega-size aboveground swimming pools that are used for onsite storage of fracking water. And they do pay a good dividend, which they started just in December, of nine cents per month (at the current price, that equals out to about 6.5%).
Other than their basic business model (replacing open pits and steel tanks for temporary water storage), I know very little about the company. The tank-replacement solution was developed by an E&P company called Open Range Energy for their own use, and when Poseidon showed huge growth potential they spun it off into a separate company back in November. They haven’t yet released a quarterly earnings report as a separate company, but they have dramatically increased their tank installations over the past year and the formerly combined company was generating most of its revenue from those tank rentals before the separation. You can see the basics in their recent press releases here.
The company has grown quickly to become quite large — they now have a market cap of closing in on $1.5 billion, have announced that they expect increased EBITDA of $170 million this year as they almost double their tank count by this Summer, and they just raised about $80 million in an offering a couple weeks ago that didn’t slow down the share price acceleration much at all. Investors are having a little love affair with this stock, it appears, combining momentum with big dividends tends to get folks awfully drooly.
To give you some of the bear vs. bull on this one, Keith Schaefer has talked about them publicly before, so you can see some of his argument in this interview, and you can see some of the “caution” argument in this Seeking Alpha article.
Hard to argue with the performance they’ve seen so far, or with that nice dividend, but before spending much time looking into the company, and before they’ve even filed a quarterly report as an independent company, I can see that they should have a lot of competition hurtling into their space that might cut into their margins … but, of course, “should” doesn’t mean “will” and it doesn’t mean “this year,” just something to be wary of.
The company seems to me to be aggressively “striking while the iron is hot” as they raise money and expand their fleet of gigantic heated swimming pools, but I haven’t researched enough to have a decent guess about how hot it will remain — Schaefer clearly seems to think that they’ll be growing rapidly for at least another year or two, and it sounds to me like he thinks the profitability should be sustainable even after that hyperbolic growth slows … but of course, he invests his money and you invest yours, so what do you think? Let us know with a comment below.
P.S. if you’ve ever tried out Schaefer’s Oil & Gas Investments Bulletin, please click here to review it for your fellow investors.