GENOIL REVISITED

By Alvin Bojar, February 2, 2017

It was three years ago this month that I first wrote fellow Travisites about a little known Canadian company, Genoil, that had developed, tested and patented its GHU process for reducing the high sulfur content of heavy oil from 5% (or 3.5%) to the 0.5% requirement that will be in force worldwide on all ocean going vessels by 2020. What made it so intriguing was the fact that prestigious Stone & Webster was guaranteeing the GHU technology and that both Conoco and Lukoil had done extensive testing on the process. Conoco and Genoil jointly conducted a 3 month pilot test run in Kerrobert, Saskatchuan, at their bitumen/oil fields, in which the GHU process desulfurized residue and heavier crude by over 95%. Genoil had also run a series of tests at their 147 acre site in Two Hills, Alberta, for Lukoil, which showed a 95% desulfurization rate and other benefits over standard fixed bed hydrotheating and hydroconversion processes. Both series of tests were highly acclaimed for their advanced technical proficiency.

Equally exciting, and even more remarkable, was the realization that the cost of Genoil’s GHU technology ($4/bbl) is just a fraction of the price being charged by competitive processes ($30/bbl.) for similar results. I suppose it was a combination of these factors that led Tobin Smith, in his newsletter ChangeWave Investing, to write “you can still pick it up under $1/share. And someday, I still believe we may see that $100 stock.” But that was then (2007) and this is now.

Admittedly, something went wrong, as the stock steadily declined, even despite a five year license signed in 2009 with South Korea’s DongHwa to build a Genoil Bilge Water Separator, which apparently has not yet been done. Gradually, over the next five years, the shares continued to slide, as interest waned, reaching a low of $0.04 at the time of my February 2114 Gumshoe letter.

I tend to think it was just a matter of too much technology, being too early in the game and not having access to enough money, as the cost of setting up a plant to implement the Genoil technology runs into nine figures. Still, the company moved forward, demonstrating enough allure to convince investors and debtors to come up with sufficient capital to keep it going. In December 2015, the company raised $622,000 for working capital by selling shares at $.05 and then settled a debt of $92,000, again in exchange for $0.05 shares. Certainly, some one realized and was showing confidence in what was going on.

As an old stock analyst and oil/gas lecturer to brokers and bankers, I suddenly sensed a change in fortunes starting in 2014. The stock price wasn’t moving, but a number of factors were maturing. One, of course, was the passage of the new international regs that proscribed all ocean-going vessels from burning bunker or heavy oil/high sulfur fuels starting in 2020. The sulfur level will be limited to a maximum 0.5% on the high seas, and reduced even further to only 0.1% for inland waterways and current ECA zones, a major diminution from the current level of 3.5%. The second was that by using the GHU conversion process shipping lines would save 90+% or more, compared to purchasing low sulfur fuel that was refined employing current methodology. In point of fact, the cost of using conventional methods for desulfurization often can exceed the price of the oil itself. Yet another item to stir into this pot is the knowledge that in a world of global warming, low sulfur fuel will soon be a must-have for the worldwide fleet of 86,300 ocean going vessels, to which we should add the ships of all the nations’ navies.

Then in April of last year (2016), Genoil and Beijing Petrochemical Engineering (BPEC), a division of the $43 billion Shanxi Yanchaqng Petroleum Group, received a $5 billion LOI for a 500,000 b/d upgrading project to be located in the Middle East. The LOI was issued by one of China’s largest banks to cover initial project costs. Final approval of all terms are currently in the last stages of negotiation, as the ultimate goal is to develop 3.5 million b/d of new oil production. For this project, the functional capability of the GHU process is being guaranteed by Beijing Petrochemical.

Recognition of the GHU’s potential was now picking up speed, and on November 2, 2016, at the Ships Efficiency Awards, hosted by Lloyd’s Register in England, Genoil was declared the Winner of the “One to Watch” category for its Hydroconversion Upgrader.

Further confirmation came just two weeks later, November 16th, when the other shoe dropped, as Grozneftegaz signed a huge $50 billion LOI with Genoil for oil production and refining in Chechnya. Grozneftegaz is owned 51% by Russia’s Rosneft and 49% by the Chechnan Republic. The project is to be financed by a consortium of Chinese banks. I found this to be fascinating, as China appears to be in short supply of energy for its growing industrial base, as well as the numerous civilian cities it has built, but which are unoccupied due to the lack of power for lighting, heating, a/c, factories, etc. Chechnya contains some of Russia’s largest petroleum reserves, but most of this is heavy oil. The object, insofar as I have been able to ascertain, is that China will finance the development of the Chechnyan oil fields, with the output being refined using Genoil’s GHU technology, which will then be transported to China through existing pipelines, and/or others yet to be laid. The dual benefit will be to give the Russian oil industry a much needed boost, financed by China, which in turn will then have access to this large and continuing source of energy. It’s a win-win situation for both and a huge win for Genoil, which is listed in the documents as being the coordinator of the entire project. This may seem hard to believe or understand, but it has been repeatedly touted in Russian newspapers, as well as being reported by periodicals in China and others worldwide. According to my understanding, all it will take before this ambitious project gets underway is the finalization of negotiations between Russia and Chechnya as to who gets what.

The above is but a short summary of what is currently transpiring. In ending, I leave you with the following thoughts:

(1) There is no doubt as to the GHU’s proficiency and profitability. The GHU technology has been tested by Conoco and Lukoil, as well as Chinese and Russian petroleum engineers and other experts. This is evidenced by the issuance of billion dollar LOIs by major Chinese banking institutions.
(2) GHU has a potential worldwide market of 434 billion barrels of heavy oil and 651 billion barrels of natural bitumen, of which 301 billion and 531 billion respectively are located in the Western Hemisphere. Thus, the market potential going forward, once the first plant comes on stream, is almost beyond calculation.
(3) Genoil has patents issued, both in the U.S. and Canada, and has an additional 20+ patent applications currently in the pipeline.
(4) The GHU fixed bed reactors are based on the company’s patented technology. The separators not only exceed the requirements of the new ocean regs, which come into effect in a short three years from now, but they can run continuously for years with no down time and at the lowest cost on the market, as certified by the US Coast Guard and the American Bureau of Shipping, which have attested the separators can operate 24 hours/day in any environment. In further confirmation of this reliability, Genoil was awarded an environmental license by the UAE, where it also has a contract pending. It’s important to keep in mind that the efficacy of the GHU process is guaranteed by both Stone & Webster and Beijing Petrochemical.
(5) In a prior article to Gumshoe, I mentioned that Genoil had signed a $700 million contract with Hebei Zhongje Petrochemical to build a refinery in the Zhongje Industrial Park in Heibi Province. I’m not sure, but I believe work on this has already begun and recall reading the Chinese have already expended $4 million on initial phases of construction. I’ll call the company to check further on this.

Despite all this positive activity, interest in Genoil’s shares remained minimal. No one seemed to have been following what was happening, altho a few Gumshoers wrote me to say they had picked up shares at around .045-.05/sh. Trading continued to be light, when suddenly, on Friday. December 23rd, volume spurted to 866,308 shares, the stock closing at .065. The following Monday December 27th, an additional 1,079,188 shs changed hands with the 50 day moving average bullishly crossing the 200 day MA. Since then, the daily average volume has been steady at around 180,000+ shs. In the old days, I could contact the trading houses and learn who was buying – but not today. The best I can come up with is that there appears to be a correlation between these purchases and a series of recent news articles published in Russian papers regarding the Chinese LOIs and the potential for developing the fields in Chechnya, with the refined output going to China. Without any means of verification, I believe it’s possible that Russians are probably the source of this buying activity, which just serves to further pique my interest.

I originally had mixed feelings about the urgency to buy shares, due to the overhang resulting from the $700,000 in financing from 2015, referred to above. But now I realize this may not be as big an issue. The stock is steadily inching upwards, although in a leisurely manner. But it’s been consistent and the price is now .075. With a total market capitalization of only $27 million, and a tax loss carry forward of $77 million, I would expect the risk factor to be so minimal, that a modest $5-$10,000 shot might be worth considering for almost everyone’s portfolio. If the company is bought out, the return could very well be in the nature of a 1500%+ windfall. And if the situation in Chechnya matures, which it gives serious indications of happening, Katey bar the door. In any event, I urge Gumshoe Regulars, Irregulars and just free-loaders, to keep on eye on this one. If it comes together, this might be a textbook study you’ll be gleefully relating to your grandchildren. But it will take time, so if you decide to proceed, just put the shares away and give your charts an occasional peek.

Alvin Bojar is a Stock Gumshoe Irregular. He can be reached directly at alvinbojar@gmail.com.

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.

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