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

by Travis Johnson, Stock Gumshoe | May 10, 2012 10:30 am

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

I wrote a few weeks ago about Christian DeHaemer[1]’s “Ring of Fire” teaser that was all about the revolution in hydrofracking and the huge natural gas[2] 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 oil[3]-gas-investments-bulletin/the-single-most-profitable-company-in-the-oil-patch-today-revealed/">Keith Schaefer[4] 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[5] 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[6], 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.”

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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[7], 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[8] (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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