Keith Schaefer launched his Oil & Gas Investments Bulletin a couple years ago, and he has quickly ramped up to the kind of teaser prominence that I’m sure a hundred other startup newsletter dudes would love — whether it’s because of the mailing lists he has access to or the hypetastic nature of his teasers or the success of his picks, I don’t know. But every time he sends out a new pitch, I get a lot of questions.
And this one sounds very appealing (as do they all, of course — there are a lot of very good copywriters plying their craft, and investment newsletters are where the money is). So we’ll remember that the first pick of his that was teased earlier this year hasn’t done so well (“yet”, he might say — that was GasFrac, by the way, which I own), but let’s keep an open mind and see what he’s pitching thhttp://stockgumshoe.com/reviews/what-would-the-world-pay-for-10-more-oil/is time … because it’s got a lot going for it: great business model, appealing low-cost technology, high margins, and a definite need in the marketplace for this kind of service.
What Schaefer’s pitching now is a tiny company whose technology can bring incremental improvement to the water flooding of old oil wells, thereby extending the life of those wells and producing more oil with very little extra cost. As he puts it:
“Imagine you owned the one technology that could increase the world’s oil reserves by a FULL 10%.
“And you could make this incredible 10% jump start happening in a matter of weeks.
“What’s more – You’ll get all those extra barrels for the people of this energy-hungry world… at almost ZERO cost.
“I realize it sounds far fetched… maybe even impossible.
“But this technology exists. In fact it’s already commercial.
“And it’s quickly gaining acceptance around the globe. Early adopters on 3 different continents are using it now.
“It works so well – produces so much extra oil – that some customers are seeing paybacks of 40:1.
“At $80 oil, most of this company’s customers only have to produce ONE barrel a day extra, per well, to start pumping out higher profits.”
This isn’t hydrofracking or that kind of high cost/high environmental impact stuff — it’s much simpler and smaller and cheaper, they basically have a technology that can be “added on” to existing water flood projects (water flooding is the most basic kind of enhanced oil recovery, in use for decades now) or to similar non-fracking fluid flood projects (like CO2 flooding, etc.). He says it’s “like giving entire oil fields a brand-new heart.”
So what is this technology, and how do they do it? Here’s how he explains the discovery:
“It started by accident. A small group of oil industry scientists noticed a pattern, recurring over and over again…
“When small tremors hit a field – the sort that occur, imperceptibly, hundreds of times a day – oil wells would react with fresh life.
“Once could have been luck. Three times would have been suspicious. But this happened every time.
“The group immediately set out looking for the science behind this uptick in production – and how to safely replicate it.
“The initial reason was obvious: It happened whenever the ground shook.
“But how do you safely and reliably shake the ground like Mother Nature?
“Eventually they discovered the key. And after trying this technology out on well after well, they found that overall production often increases at least 10%… and sometimes as much as 50%.”
There are other companies that have explored how to replicate this kind of effect — the fact that earthquakes and tremors cause increased oil recovery for a brief period has apparently been well known for a long time (not by me, I’m afraid, but I’ll take their word for it). The question was how to replicate this effect without, well, having an earthquake.
This company’s solution was a water pulsing system that causes ripples in the underground reservoir, effectively letting the water get further into the capillaries and tendrils of the oil field where it wouldn’t have ordinarily flowed in a conventional flooding project. Here’s how Schaefer describes it:
“You see, instead of merely shooting a flow of water down a well (which is today’s conventional method), this new technology pulses it in, like a heartbeat.
Now why does that matter?
“By pulsing a liquid, you gently expand and contract the surrounding material. This technology literally opens and closes the pores in the rock, allowing a lot more oil to escape to the well.
“The liquid gets sucked out of small crevasses… and pushed into main passageways by the same movement.”
Assuming that this works like other water flood projects, you’d basically drill a bunch of collector wells in a circle, and drill an injector well at the center of the circle, push the water through, and then the collector wells can suck up the combined water and oil mixture. Apparently, using this pulsing method increases the amount of oil you get in that mixture — or the overall recovery rate of the wells. Which is good.
There are a lot of technologies used for enhanced oil recovery, and many of them have been teased as the “holy grail” of increasing output from existing wells, but the argument for this one is basically that it’s easy and cheap, and therefore effective and efficient enough to have a huge market potential. The market potential is described as being the 200,000 injector wells already in North America as a base case, with obviously thousands more drilled every year around the world. And compared to high pressure fracking or CO2 that has to be transported in by pipeline or specialized chemicals, it’s apparently a bargain. Here’s how Schaefer puts it:
“Now here’s the kicker. As transformative as this technology is, it’s also too cheap to fail.
“At $80 oil, it only has to produce ONE extra barrel of oil per day, per well, to pay for itself.”
“Too cheap to fail.” Now that I like, I might have to use that term myself.
The system installs in “4 to 6 hours.”
It costs something in the neighborhood of a few thousand dollars a month per well, according to these examples:
“Every 1,000 units of this company’s technology – at $3,000 per month – will earn $3 million in revenue, each month.
“5,000 units equals $15 million revenue, per month. (That would be a mere 2.5% of the total North American market.)”
The company has no debt, and Schaefer expects them to be “cash flow positive” in the first quarter of 2012. He also says it “controls all the patents” on this system.
They’ve had “four straight quarters of revenue growth.”
And, of course, we get a few financial specifics that will help us narrow down the search:
“This company, which trades at under $1 a share, has $20 million cash in the bank… and customers and revenue are growing each quarter.”
So who is it? Toss all those details into the mighty, mighty Thinkolator … and we learn that this must be Wavefront Technology Solutions (WEE in Canada, WFTSF on the pink sheets — click here for the free trend analysis, which looks pretty good from Marketclub, one of our advertising partners)
Wavefront’s “pulsing” downhole systems for enhanced oil recovery is called the Powerwave system, and they have a similar device using the same technology for environmental remediation (cleaning up groundwater) called the Primawave. They also sell and service pumping stuff, which is sort of the base revenue that hasn’t changed much over the past few years, but the company is really focused on boosting the Powerwave business right now and that’s where most of their revenue is now coming from.
Now, I should tell you right up front that these kinds of early stage technologies in established industries are often impressive sounding if you apply their numbers to a vast market … and that they often don’t work out, particularly on the kind of schedule that many small cap investors are comfortable with. As evidence, we have only to look at the history of Wavefront — they had a huge boost when they first developed this technology and looked like they could commercialize it half a dozen years ago, sending the shares from thirty or forty cents to five dollars in a matter of weeks. Back then, it was a collaboration with Halliburton called Deepwave that sounds like a preliminary version of this same basic product idea.
What happened to Deepwave? I dunno. There have also been some lawsuits back and forth with a company called Applied Seismic Research that seem to have been settled several years ago, those lawsuits and patent claims and counter-claims messed up some deals with Occidental for use of Powerwave (or Deepwave or whatever they called it at the time) in California.
But recent news seems to indicate that they really are picking up a wave of new customers who are at least testing the equipment and technology, and, importantly, that they are now confident enough that they’re able to stop offering discounts and special perks to encourage clients to try them (like providing personnel to set up and run the equipment for free). So that’s good. And yes, they do have more than $20 million in cash, much of it from a private placement last year, and they have a share price well under a dollar, down at about 58 cents as I type. The market cap is around $50 million today and the shares have shown a tendency to make huge moves — they were at 90 cents just back in September and have been as high as $1.25 in the last year or so — the attention from Schaefer seems to have helped to drive the last few cents of share price, it had been languishing down around 50 cents for the couple weeks before this ad ran.
So there you have it — an interesting story of a stock that has had several false starts. The promise is that it’s a very easily scalable business and can generate high margin service revenue from each well using the technology, with a huge addressable market if they can sell it effectively, and the revenue has finally hit what looks like a sustained growth rate (though profits seem to be still a ways away).
The risk is that you could have told a very similar story four or five years ago (as many did — including Jim Letourneau, a newsletter writer who loved the stock then, still appears to love it now, and has sometimes served as a consultant to Wavefront), so it’s very likely that they have a higher hurdle to clear now to please investors — there are a lot of folks who’ve bought the “story” before and feel burned, I’m sure.
The company is developing an international business, though most of their customers are still in the US and Canada — they do have deals this year in Oman and Argentina, which sounds a bit random but does satisfy the “three continents” part of the teaser.
If you’d like to read up on Wavefront, they make several industry publications available on their website that explain more about the technology and the history of their development, their financial reports are here (they also had a preliminary release that’s more recent about continuing growth in installations), and they have a recent investor presentation available here.
So there’s plenty to read. Will the promise play out favorably this time? That’s your call to make — it is, after all, your money. If Schaefer’s right about them bringing in positive cash flow in the first quarter of next year, then I imagine it will work out quite nicely … but of course, the outlook has been rosy before. Go forth then, my friends, and researchify to your heart’s content … and if this will make us all rich, well, please let us know with a comment below.
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